Senate Bill on Tax Reform for Acceleration and Inclusion

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1 Tax Alert No. 26 Senate Bill No Senate Bill on Tax Reform for Acceleration and Inclusion In brief Last 20 September 2017, the Senate Committee on Ways and Means has filed its version of the Tax Reform for Acceleration and Inclusion bill. Senate Bill No proposes amendments on several provisions of the National Internal Revenue Code of 1997 ( Tax Code ), as amended, specifically on individual income tax, donor s and estate tax, value added tax ( VAT ), excise tax for automobiles, petroleum products, sweetened beverages and mineral products, and certain administrative procedures. Differences between the House and Senate versions will be harmonized in a bicameral conference committee before it will be transmitted to the Office of the President for signing into law.

2 Commissioner s power to obtain information, and to summon, examine, and take testimony of persons Sec. 5 (B) Commissioner s power to obtain information from any person other than the person whose internal revenue tax liability is subject to audit or investigation or from any office or officer of the national and local governments, government agencies and instrumentalities. Additional provisions on a. The establishment of electronic interconnectivity by and among the Bureau of Internal Revenue ( BIR ) and other national government agencies, local government units, and government agencies and instrumentalities that will allow relevant exchange of information; b. Compliance with current rules on disposition of income tax returns ( ITRs ), publication of lists of taxpayers and filers in case data requirements consists of information found in ITRs; and With similar provisions as House Bill No However, it also mentions that bank account information may only be disclosed in line with the Commissioner s authority to make assessments and prescribe additional requirements for tax administration and enforcement Commissioner s authority to prescribe real property values Sec. 6 (B) The Commissioner is authorized to determine the fair market value of real properties. c. Submission of a tax incentive report by Cooperatives Development Authority to the BIR and the Department of Finance. The determination of the fair market value of real properties requires public and private appraisers consultation and prior notice to affected taxpayers. No adjustment in zonal valuation shall be valid unless published or posted. There is an automatic adjustment of the zonal valuation once every three years through the issuance of Rules and Regulations by the Secretary of Finance. The basis of valuation, as well as records of consultation, shall be available for inquiry of any taxpayer. 2

3 Commissioner s authority to inquire and receive taxpayer s information held by financial institutions Adjustments in the personal income taxation On minimum wage earners ( MWEs ) provisions Sec. 6 (F) Commissioner s authority to inquire and receive information on bank deposit accounts held by financial institutions over the following: a. A decedent to determine his gross estate; b. Any taxpayer who has filed an application for compromise of his tax liability; and c. A specific taxpayer or taxpayers, subject to a request for the supply of tax information from a foreign tax authority. Sec. 22 (GG) and (HH) on the definition of statutory minimum wage and statutory MWE Sec. 24 (A) (2) MWEs are exempt from income tax on their compensation, holiday pay, overtime pay, night shift differential pay and hazard pay. Revised/additional coverage of Commissioner s authority over the following: a. A specific taxpayer or taxpayers, upon an obligation to exchange tax information to a foreign tax authority, whether on request or automatic; and b. Any taxpayer upon order of any competent court in cases involving tax evasion offenses. Deletion of the definitions Removal of tax exemption provisions on earnings of MWEs Revised/additional coverage of Commissioner s authority over the following: a. A specific taxpayer or taxpayers, upon an obligation to exchange tax information to a foreign tax authority, whether on request or automatic; and b. Any taxpayer upon order of any competent court in cases involving tax evasion offenses, and failure to file return, supply correct and accurate information, pay tax, withhold and remit tax, and refund excess taxes withheld on compensation. 3

4 On personal income tax table Sec. 24 (A) (2) Personal income tax table for both compensation-income earners, and selfemployed and/or professionals: A. For compensation income earners Effective 1 January 2018 A. For compensation income earners Effective 1 January 2018 to 2020 Not over PHP10,000 5% Over 10,000 but not over 30,000 Over 30,000 but not over 70,000 Over 70,000 but not over 140,000 Over 140,000 but not over 250,000 Over 250,000 but not over 500,000 Over 500,000 PHP % of the excess over 10,000 2, % of the excess over 30,000 8, % of the excess over 70,000 22, % of the excess over 140,000 50, % of the excess over 250, , % of the excess over 500,000 Not over PHP250,000 0% Over 250,000 but not over 400,000 Over 400,000 but not over 800,000 Over 800,000 but not over 2,000,000 Over 2,000,000 but not over 5,000,000 20% of the excess over 250,000 30, % of the excess over 400, , % of the excess over 800, , % of the excess over 2,000,000 Over 5,000,000 1,450, % of the excess over 5,000,000 Effective 1 January 2021 Not over PHP250,000 0% Over 250,000 but not over 400,000 Over 400,000 but not over 800,000 Over 800,000 but not over 2,000,000 Over 2,000,000 but not over 5,000,000 15% of the excess over 250,000 22, % of the excess over 400, , % of the excess over 800, , % of the excess over 2,000,000 Over 5,000,000 1,302, % of the excess over 5,000,000 Not over PHP150,000 0% Over 150,000 but not over 250,000 Over 250,000 but not over 400,000 Over 400,000 but not over 800,000 Over 800,00 but not over 2,000,000 Over 2,000,000 15% of the excess over 150,000 15, % of the excess over 250,000 45, % of the excess over 400, , % of the excess over 800, , % of the excess over 2,000,000 The taxable income levels and base shall automatically be adjusted every three years starting

5 On personal income tax table After 2022, the taxable income levels and base shall be adjusted once every 3 years based on the Rules and Regulations issued by the Secretary of Finance. B. For self-employed and/or professionals Basis Gross sales or gross receipts do not exceed VAT threshold (i.e., PHP3,000,000) Gross sales or gross receipts exceed VAT threshold Tax Renewal requirement for professional license 8% income tax on gross sales or gross receipts in excess of PHP250,000 (in lieu of percentage tax) Shall be taxed in the same manner as corporations as to the applicable tax rate, minimum income tax and allowable deductions Professionals shall be required to present either a certificate of tax payment from the BIR or a certified true copy of their latest ITR upon application for renewal of their respective license. Purely self-employed and/or professionals engaged in the exercise of their profession has the option to be taxed either as compensation income earners or at 8% of their gross sales or receipts and other non-operating income in excess of PHP150,000. Mixed income earners shall be taxed: - as compensation income earners for their compensation income; and - either as compensation income earners or at 8% of gross sales or receipts and other non-operating income from self-employment or practice of profession in excess of PHP150,000 By default, an individual taxpayer is taxable as compensation income earner unless he signifies in his income tax return his choice to be taxed at 8%. Such election shall be irrevocable for three taxable years. 5

6 On passive income from interest, royalties, prizes and other winnings On cash and/or property dividends On capital gains from sale of stock not traded in the local stock exchange On alien individuals and qualified Filipinos employed by specific employers On definition of Taxable Income On exemption of 13th month pay and other benefits Sec. 24 (B) (1) Philippine Charity Sweepstakes Office ( PCSO ) and lotto winnings are exempt from the 20% final withholding tax. Interest income from a depository bank under the expanded foreign currency deposit system is subject to a final tax of 7.5% Sec. 24 (B) (2) Cash and/or property dividend received by an individual from a domestic corporation is subject to the 10% final tax. Sec. 24 (C) Capital gains tax of 5% on the first PHP100,000 and 10% in the excess thereof is imposed on sale of shares not traded in the local stock exchange. Sec. 25 (C), (D) and (E) A rate of 15% final withholding tax on the gross compensation income of alien individuals and qualified Filipinos employed by the following employers: a. Regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) of multinational companies; b. Offshore banking units (OBU); and c. Petroleum contractors and subcontractors. Sec. 31 Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. Sec. 32 (B) (7) Exempt 13th month pay and other benefits amounting to PHP82,000 Removal of the tax exemption of winnings from PCSO and lotto Removal of 15% income tax Taxable income means the pertinent items of gross income specified in the Tax Code, less deductions, if any, authorized for such types of income by the Tax Code. Amount of income tax exemption of 13th month pay and other benefits is increased to PHP100,000. PCSO and lotto winnings exceeding PHP10,000 is subject to the 20% final tax. Interest income from a depository bank under the expanded foreign currency deposit system is subject to a final tax of 20%. Cash and/or property dividend received by an individual from a domestic corporation is subject to the 20% final tax. Capital gains tax on sale of shares not traded in the local stock exchange is increased to a flat rate of 20% Preferential tax treatment for RHQ, ROHQ, and OBU employees shall not apply to individuals employed beginning 1 January RHQ, ROHQ, and OBU employees prior to 1 January 2018 shall enjoy preferential tax treatment until the end of their current employment. Taxable income means the pertinent items of gross income specified in the Tax Code, less deductions and/or additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. 6

7 On fringe benefit tax given to non-rank and file employees On optional standard deduction ( OSD ) On deduction for premium payments on health and/ or hospitalization insurance Sec. 33 (A)(1)(a)(i) Fringe benefits given to non-rank and file employees are subject to 32% final tax rate. The grossed-up monetary value is determined by dividing the actual monetary value by 68%. Sec. 34. (L) In lieu of the itemized allowable deductions, an individual subject to tax, other than a nonresident alien, may elect an OSD of 40% of gross sales or gross receipts. Sec. 34 (M) Allowed deduction of PHP2,400 per year or PHP200 per month worth of premium payments on health and/or hospitalization of an individual provided that the family has a gross income not exceeding PHP250,000 for a taxable year Effective 1 January 2018, fringe benefits given to non-rank and file employees are subject to 30% final tax rate. The grossed-up monetary value is determined by dividing the actual monetary value by 70%. In 2022 onwards, the fringe benefit shall form part of the gross income of its recipient employee subject to regular income tax rates and the actual monetary value (not the grossedup monetary value) of the fringe benefit will be considered as allowable deduction. Deletion of OSD for individuals Note however, that self-employed and/or professionals whose gross sales or gross receipts exceed the VAT threshold shall be taxed as corporations which are allowed OSD of 40% based on gross income. Removal of allowed deduction for premium payments on health and hospitalization insurance OSD shall be fixed in an amount not exceeding 40% of the gross income, whether for qualified individual or corporate taxpayers. The 40% OSD may be availed of only once by either the general professional partnership or the partners comprising such partnership. Allowed deduction of PHP6,000 per year or PHP500 per month worth of premium payments on health and/or hospitalization of an individual provided that the family has a gross income not exceeding PHP500,000 for a taxable year Amount of premiums and family gross income thresholds shall automatically be adjusted beginning 2021 and every 3 years thereafter. 7

8 On personal and additional exemptions On filing of individual tax return Adjustments in estate taxation On estate tax rates Sec. 35 and 79 (D) Exemptions on the following: PHP50,000 worth of personal exemption PHP25,000 worth per qualified dependent child PHP20,000 exemption from income of the estate or trust In case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of child/children. Sec. 51 (A) (2) (a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents are not required to file an income tax return. Sec. 84 Estate tax table: Over But not over This tax shall be PHP200,000 Exempt Plus Of the Excess Over 200, , % 200, ,000 2,000,000 15,000 8% 500,000 2,000,000 5,000, ,000 11% 2,000,000 5,000,000 10,000, ,000 15% 5,000,000 10,000,000 And Over 1,215,000 20% 10,000,000 Removal of the exemptions enumerated in the preceding column Removal of the personal exemption of PHP50,000 but retained the PHP25,000 annual additional exemption for each dependent not exceeding 4. The amount of additional exemption shall be automatically adjusted beginning Removal of requirement of legal separation for the additional exemptions to be claimed by the spouse who has custody of the child/ children An individual subject to 0% tax based on the tax table for compensation income earners shall not be required to file an income tax return. Removal of the estate tax table Estate tax rate fixed at 6% based on the net estate Removal of the estate tax table Estate tax rate fixed at 6% based on the net estate. 8

9 On estate tax deductions Sec. 86 (A) Citizens or residents are allowed the following deductions, among others: On filing a notice of death a. Expenses, Losses, Indebtedness, and taxes (among others, funeral expenses not to exceed PHP200,000 and judicial expenses) b. Property previously taxed c. Transfers for public use d. Family home not to exceed PHP1,000,000 e. Standard deduction of PHP1,000,000 f. Medical expenses not to exceed Php500,000 Sec. 86 (B) Nonresident estates are allowed to deduct expenses, losses, indebtedness and taxes from the value of the gross estate. Sec. 89 Written notice of death is required for gross estates exceeding PHP20,000 Increased the ceiling amount of deductions from family home allowed for citizens and residents to PHP3,000,000 with proposed indexation every 3 years starting For nonresident estates, expenses, losses, indebtedness and taxes are removed from the list of allowable deductions from gross estate. Removed allowance for deductions for funeral expenses, judicial expenses, family home, and medical expenses; Increased the standard deduction to PHP5,000,000 (which shall automatically be adjusted beginning 2023 and every 5 years thereafter); Added a family farm deduction equal to the fair market value of the decedent s family farm up to three hectares of agricultural land, subject to the following conditions: a. The land must be owned, occupied, and used for 3 years prior to the death of the decedent; b. The farm must be owned and actually tilled or directly managed by the decedent for 3 years prior to his death; c. The land must pass to an heir who must continue to till or directly manage the land for agricultural purposes for 3 years from the death of the decedent; d. The land must not be sold, transferred or conveyed except through hereditary succession or donation to another heir, or to the government for a period of 3 years following the decedent s death; e. The land may not be converted to residential, commercial or industrial for the same period. For nonresident estates, expenses, losses, indebtedness and taxes are removed from the list of allowable deductions from gross estate. Repealed provision 9

10 On estate tax returns On payment of tax antecedent to the transfer of shares, bonds, or rights Adjustments in donor s taxation On donor s tax rates Sec. 90 (A) (2) Estate tax returns showing a gross value exceeding PHP2,000,000 must be certified by a CPA. Sec. 90 (B) The estate tax return must be filed within 6 months from the death of the decedent Sec. 97 The administrator of the estate or any one of the heirs may, when authorized by the Commissioner, withdraw an amount not exceeding PHP20,000 even without the certification from the Commissioner that the estate taxes have been paid. Sec. 99 (A) and (B) Donor s tax rates are as follows: a. Not stranger Over But not over This tax shall be PHP100,000 Exempt Plus Of the Excess Over 100, , % 100, , ,000 2,000 4% 200, ,000 1,000,000 14,000 6% 500,000 1,000,000 3,000,000 44,000 8% 1,000,000 3,000,000 5,000, ,000 10% 3,000,000 5,000,000 10,000, ,000 12% 5,000,000 10,000,000 1,004,000 15% 10,000,000 Retention of the tax exemption on PHP100,000 annual net gifts; Removal of the donor s tax table; Donor s tax rate fixed at 6% based on total gifts, regardless of whether the donee is a stranger or not Estate tax returns showing a gross value exceeding PHP5,000,000 must be certified by a CPA. The estate tax return must be filed within one year from the death of the decedent. The allowed amount to be withdrawn absent the certification from the Commissioner that the estate taxes have been paid is increased to PHP500,000 Retention of the tax exemption on PHP100,000 annual net gifts; Removal of the donor s tax table; Donor s tax rate fixed at 6% based on total gifts, regardless of whether the donee is a stranger or not b. Stranger 30% based on net gifts On transfers for less than adequate and full consideration On exemption of certain gifts Sec. 100 The amount by which the fair market value exceed the value of the consideration for a transfer of property shall be deemed a gift. Sec. 101 (A) PHP10,000 amount of dowries or gifts made on account of marriage are exempt from donor s tax. A sale, exchange, or other transfer made in the ordinary course of business (i.e., bona fide, at arm s length, and free from donative intent) shall be considered as made for an adequate and full consideration. Removed the exemption 10

11 Expansion of the VAT base On zero-rated sale of goods Sec. 106 (A) (2) Export sales include the following: 1. Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and 2. Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. Other zero-rated sales of goods are as follows: a. Foreign currency denominated sale; and b. Sales to persons or entities exempted under special laws or international agreements. Sale of gold to BSP is reclassified from export sales to other zero-rated sales. Item 2 will qualify as export sales provided that the goods, supplies, equipment and fuel shall be used for international shipping and air transport operations. Foreign currency denominated sales are removed from zerorated sales. Upon the establishment and implementation of an enhanced VAT refund system that gives the taxpayer the actual refund or denial of his application within 90 days from filing of the VAT refund application, the following are no longer considered export sales: a. Sale of raw or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise; b. Sale of raw or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; and c. Export sales under Executive Order No. 226 and other special laws. Sale of gold to BSP is reclassified from export sales to other zero-rated sales. Item 2 will qualify as export sales provided that the goods, supplies, equipment and fuel shall be used for international shipping and air transport operations. Expressly added sales and actual shipment of goods to special economic zones and freeport zones as export sales Foreign currency denominated sales are removed from zero-rated sales. Upon the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from filing of the VAT refund application with the BIR (i.e., all applications filed from 1 January 2018 shall be processed and must be decided within 90 days from the filing of the VAT refund application) and all pending VAT refund claims as of 31 December 2018 shall be fully paid in cash (provided that the BIR shall be required to submit a quarterly report of all pending claims for refund to the Congressional Oversight Committee on the comprehensive tax reform program), the following shall no longer be subject to 0% VAT: a. Sale of raw or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise; b. Sale of raw or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production; and c. Export sales under Executive Order No. 226 and other special laws. 11

12 On the scope of sale or exchange of services On zero-rated sales of services Sec. 108 (A) provides the definition of sale or exchange of services. Sec. 108 (B) Zero-rated sales of services include: Inclusion of sale of electricity by electric cooperatives in the definition of sale or exchange of services. 1. Services rendered to persons engaged in international shipping or international air transport operations; 2. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and 3. Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed 70% of total annual production. Item 1 will qualify as zero-rated sale of services if these services are exclusively for international shipping and air transport operations. Zero-rating for transport of passenger and cargo shall apply for domestic air or sea vessels. Item 3 shall be subject to the 12% VAT upon the establishment and implementation of an enhanced VAT refund system that gives the taxpayer the actual refund or denial of his application within 90 days from filing of the VAT refund application. Expressly provided and added services rendered to entities registered with the special economic zones and Freeport Zones Authority as zero-rated sales. Item 1 will qualify as zero-rated sale of services if these services are exclusively for international shipping and air transport operations. Zero-rating for transport of passenger and cargo from the Philippines to a foreign country shall apply for domestic air or sea vessels only. Item 3 shall be subject to the 12% VAT upon the successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within 90 days from filing of the VAT refund application with the BIR (i.e., all applications filed from 1 January 2018 shall be processed and must be decided within 90 days from the filing of the VAT refund application) and all pending VAT refund claims as of 31 December 2018 shall be fully paid in cash (provided that the BIR shall be required to submit a quarterly report of all pending claims for refund to the Congressional Oversight Committee on the comprehensive tax reform program). 12

13 On VAT exemptions Sec. 109 (1) VAT exemptions include the following transactions: On refunds or tax credits of input tax 1. Importation of professional instruments, etc. belonging to persons coming to settle in the Philippines, for their personal use, accompanying such persons or arriving within 90 days before or after their arrival; 2. Sale of real property utilized for lowcost housing, sale of residential lot valued at PHP1,500,000 (as adjusted by Revenue Regulations ( RR ) No , PHP1,919,500) and sale of other residential dwellings valued at PHP2,500,000 (as adjusted by RR No , PHP3,199,200); 3. Lease of residential unit with monthly rental of PHP10,000 (as adjusted by RR No , PHP12,800); 4. Importation of fuel, goods, and supplies by persons engaged in international shipping of air transport operations; and 5. Other sale of lease of goods or properties or the performance of services, the amount of which does not exceed PHP1,500,000 (as adjusted by RR No , PHP1,919,500). Sec. 112 (C) The Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from submission of complete documents. Expansion of the importation exemption on professional instruments, etc. to include those belonging to overseas Filipinos, and their families and descendants Removal of exemption of items 2 and 3 Exemption of the importation of fuel, goods and supplies shall only apply if such are used for international shipping or air transport operations Additional exemption of sale or lease of goods and services to senior citizens and persons with disabilities VAT threshold is increased to PHP3,000,000 with proposed indexation every 3 years starting 2021 Sale of real property utilized for socialized housing shall be subject to the 12% VAT upon establishment of housing voucher system which shall benefit buyers of socialized housing. Expansion of the importation exemption on professional instruments, etc. to include those belonging to overseas Filipinos, and their families and descendants who are now residents or citizens of other countries Removal of exemption of item 2 Exemption of sale of house and lot and other residential dwellings located outside Metro Manila with selling price of not more than PHP2,000,000 (provided that not later than 31 January 2021 and every 3 years thereafter, amounts shall be adjusted) Exemption of the lease of residential unit with monthly rental not exceeding PHP12,800 (provided that not later than 31 January 2021 and every 3 years thereafter, amounts shall be adjusted) Exemption of the importation of fuel, goods and supplies shall only apply if such are used for international shipping or air transport operations Added the exemption of sale or lease of goods and services to senior citizens and persons with disabilities Added the exemption for transfers of property under Section 40 (C)(2) of the Tax Code VAT threshold is increased to PHP3,000,000 with proposed indexation every 3 years starting 2021 Decrease of the period to grant the refunds to 90 days Should the Commissioner find the grant of refund improper, the Commissioner shall state in writing the legal and factual basis for the denial. Removal of Tax Credit of Input Taxes 13

14 On VAT returns and payment Other percentage taxes Tax on persons exempt from VAT No existing provision Payments for purchase of goods and services arising from Official Development Assistance funded projects shall not be subject to final withholding VAT. Sec. 116 Any person whose sales or receipts are exempt under Sec. 109 (V) from the payment of VAT and who is not a VATregistered person shall pay a tax of 3%. Cooperatives are exempt from the 3% gross receipt tax. Self-employed and/or professionals whose gross sales or gross receipts do not exceed the VAT threshold shall also be exempt from the 3% gross receipt tax. Self-employed and/or professionals whose gross sales or gross receipts do not exceed the VAT threshold and who opt to pay the 8% tax shall also be exempt from the 3% gross receipt tax. 14

15 Adjustments in excise taxation On excise tax of petroleum products Sec. 148 The following items have the corresponding excise tax rates: The following are the revised excise tax rates effective corresponding periods: The following are the revised excise tax rates effective corresponding periods: Manufactured Oils and Other Fuels Excise tax rates Manufactured Oils and Other Fuels 1 January 2018 Effective 1 January January 2020 Manufactured Oils and Other Fuels 1 January 2018 Effective 1 January January 2020 Lubricating oils and greases Processed gas Waxes and petrolatum Denatured alcohol PHP4.50 per liter 0.05 per liter 3.50 per kglll 0.05 per liter Lubricating oils and greases (per liter) Processed gas (per liter) PHP7.00 PHP9.00 PHP Lubricating oils and greases (per liter) Processed gas (per liter) PHP6.00 PHP8.00 PHP Naphtha, regular gasoline and other similar products of distillation 4.35 per liter Waxes and petrolatum (per kg) Waxes and petrolatum (per kg) Leaded premium gasoline Aviation turbo jet fuel Kerosene Diesel fuel oil Liquefied Petroleum Gas Asphalt Bunker fuel oil 5.35 per liter 3.67 per liter 0.00 per liter 0.00 per liter 0.00 per liter 0.56 per kgll 0.00 per liter Denatured alcohol (per liter) Naphtha, regular gasoline and other similar products of distillation (per liter) Leaded premium gasoline (per liter) Aviation turbo jet fuel (per liter) Kerosene (per liter) Diesel fuel oil (per liter) Liquefied Petroleum Gas (per liter) Asphalt (per kg) Bunker fuel oil (per liter) Denatured alcohol (per liter) Naphtha, regular gasoline and other similar products of distillation and PYROLYSIS GASOLINE (per liter) UNLEADED premium gasoline (per liter) Aviation turbo jet fuel (per liter) Kerosene (per liter) Diesel fuel oil (per liter) Liquefied Petroleum Gas (per liter) Asphalt (per kg) Bunker fuel oil (per liter)

16 On excise tax of petroleum products On mandatory marking of petroleum products No current tax rules on the same Imposition of PHP0 excise tax on LPG & naphtha that is used as raw material in the production of petrochemical products or as a replacement fuel for natural gas fired-combined cycle power plant, in lieu of locally-extracted natural gas during unavailability thereof. Excise taxes paid on the purchased feedstock (bunker) used in the manufacture of excisable articles and forming part thereof shall be credited against the excise tax due therefrom. Scheduled increase in the excise tax on fuel for period covering 2018 to 2020 shall be suspended if the Dubai Crude Oil price reach US$80 per barrel or more. All petroleum products shall be marked with the official marking agent designated by the Department of Finance. Leaded gasoline excise tax was removed. Imposition of Php0 excise tax on LPG that is used as raw material in the production of petrochemical products and on naphtha and pyrolysis gasoline when used as a replacement fuel for natural gas fired-combined cycle power plant, in lieu of locally-extracted natural gas during unavailability thereof Excise taxes paid on the purchased feedstock (bunker) used in the manufacture of excisable articles and forming part thereof shall be credited against the excise tax due therefrom. Scheduled increase in the excise tax on fuel for period covering 2018 to 2020 shall be suspended if: a. the average Dubai Crude Oil price for the first 15 days of the month based on Mean of Platts Singapore (MOPS) reach or exceeds USD80 per barrel cost, insurance and freight; or b. the inflation rate exceeds the higher end of the annual inflation target range set by the Development Budget and Coordination Committee and the BSP. The Secretary of Finance may require the use of fuel marking or similar technology on petroleum products before removal from the place of production or before its release from customs territory. 16

17 On excise tax on automobiles Sec. 149 Excise tax imposed on automobiles are as follows: Imposition of the following increased excise taxes: Imposition of the following increased excise taxes: Effective 1 January 2018 Effective 1 January 2018 Automobiles Over Up to Excise tax rate 0 PHP600,000 2% 600,000 1,100,000 12, % in excess of 600,000 1,100,000 2,100, , % in excess of 1,100,000 2,100, , % in excess of 2,100,000 Automobiles Over Up to Excise tax rate 0 PHP600,000 3% 600,000 1,100,000 18, % of value in excess of 600,000 1,100,000 2,100, , % of value in excess of 1,100,000 2,100,000 3,100, , % of value in excess of 2,100,000 3,100,000 1,468, % of value in excess of 3,100,000 Effective 1 January 2019 Automobiles Over Up to Excise tax rate 0 PHP600,000 4% 600,000 1,100,000 24, % of value in excess of 600,000 1,100,000 2,100, , % of value in excess of 1,100,000 2,100,000 3,100, , % of value in excess of 2,100,000 3,100,000 1,824, % of value in excess of 3,100,000 Automobiles Over Up to Excise tax rate 0 PHP600,000 4% 600,000 1,100,000 24, % of value in excess of 600,000 1,100,000 2,100, , % of value in excess of 1,100,000 2,100,000 3,100, , % of value in excess of 2,100,000 3,100,000 1,649, % of value in excess of 3,100,000 Buses, trucks, cargo vans, jeepneys/ jeepney substitutes, single cab chassis, special purpose vehicles, and vehicles purely powered by electricity or hybrid vehicles shall not be subject to excise tax. 17

18 On excise tax on automobiles On non-essential goods and services No current provision on non-essential services Removed provisions for indexation Automobiles shall also include motive powered vehicles but not the following: (1) those purely powered by electricity and (2) hybrid vehicles. A pick-up shall be considered a truck, and hence not an automobile. Imposes a 20% tax based on gross sales or receipts from cosmetic procedures, surgeries and body enhancements for aesthetic reasons. Cosmetic procedures subject to excise tax are those entirely focused on altering and enhancing a patient s appearance, improving aesthetic appeal, symmetry, and proportion. Reconstructive surgery or the repair, reconstruction, and restoration of facial and bodily functions due to congenital disorders, trauma, burns, infections, disease, and those intended to correct dysfunctional areas of the body are exempt from excise tax. 18

19 On excise taxes on sweetened beverages No current tax rules on the same Effective 1 January 2018 Basis Beverage containing purely locally produced sugar Other sugar sweetened beverages Tax (Per Liter of Volume Capacity) PHP Rate of tax shall be adjusted once every 3 years. Basis January 2018 January 2020 Sweetened beverages using purely caloric sweeteners Sweetened beverages using purely high fructose corn syrup or in combination with any caloric or non-caloric sweetener Sweetened beverages using purely non-caloric or a mix of caloric and non-caloric sweetener PHP5.00 per liter of volume capacity per liter of volume capacity 3.00 per liter of volume capacity PHP0.05 per gram of sugar per liter of volume capacity 3.00 per liter of volume capacity Sweetened beverages using purely coconut sap sugar and purely steviol glycosides shall be exempt from excise tax. On excise tax on mineral products On having mandatory counting devices for importers of excisable products On authority of BIR in searching for and testing taxable articles Sec. 151 (A) (1) Excise tax of PHP10 per metric ton on coal and coke Sec. 155 Manufacturers of excisable products are required to have suitable counting or metering devices for determining volume, quantity or number of such articles. Sec. 171 BIR may enter any house, building, or place where articles subject to excise tax are produced or kept. Importers of finished petroleum products are also required to provide themselves with metering devices to accurately measure the volume of such articles imported by them. The BIR Commissioner or his authorized representative may conduct periodic random field tests on fuels required to be marked found in warehouses, gas stations and other retail outlets, and in such other properties of persons engaged in the sale, delivery, trading, transportation, distribution, or importation of fuel intended for domestic market. Excise tax on coal and coke is increased to PHP20.00 per metric ton. Importers of finished petroleum products are also required to provide themselves with Bureau accredited metering devices to accurately measure the volume of such articles imported by them. The BIR Commissioner or his authorized representative may conduct periodic random field tests on fuels required to be marked found in warehouses, gas stations and other retail outlets, and in such other properties of persons engaged in the sale, delivery, trading, transportation, distribution, or importation of fuel intended for domestic market. 19

20 Adjustments in documentary stamp tax On stamp tax on deeds of sale and conveyances of real property Administrative provisions Keeping of Books of Accounts Sec. 196 Sale and conveyance of real property is subject to 1.5% DST Sec. 232(A) Those whose quarterly sales, earnings, receipts, or output do not exceed PHP50,000 shall keep and use simplified set of bookkeeping records. Those whose gross quarterly sales, earnings, receipts or output exceed PHP150,000 shall have their books of accounts audited and examined yearly by independent Certified Public Accountants (CPAs) and their ITRs accompanied with a duly accomplished Account Information Form (AIF). No proposed adjustments Those whose quarterly sales, earnings, receipts, or output do not exceed PHP250,000 shall keep and use simplified set of bookkeeping records. Those whose gross quarterly sales, earnings, receipts or output exceed PHP750,000 shall have their books of accounts audited and examined yearly by independent CPAs and their ITRs accompanied with a duly accomplished AIF. Donations of real property shall also be subject to the 1.5% DST. However, donations made to or for the use of the government and gifts in favor of education and/or charitable, religious, cultural or social welfare corporation, among others, shall be exempt from DST. Those whose quarterly sales, earnings, receipts, or output do not exceed Php250,000 shall keep and use simplified set of bookkeeping records. Those whose gross quarterly sales, earnings, receipts or output exceed PHP750,000 shall have their books of accounts audited and examined yearly by independent CPAs and their ITRs accompanied with a duly accomplished AIF. 20

21 Electronic Receipts (e-receipts) or electronic sales or commercial invoices (e-invoices) Sec. 237 For each sale of merchandise or service rendered valued at PHP25 or more, a receipt or invoice shall be issued, prepared at least in duplicate. E-receipts shall be required and shall contain the following: For each sale of merchandise or service rendered valued at PHP25 or more For sales, receipts or transfers in the amount of PHP100 or more; or Regardless of amount, where the sale or transfer is made by a person liable to VAT to another person also liable to VAT Where the e-receipt is issued to cover payment made as rentals, commissions, compensations or fees, e-receipts or e-invoices shall be issued E-receipts shall contain the date of the transaction, quantity, unit cost and description of merchandise or nature of service E-receipts shall also contain the name, business style, address, and the Taxpayer Identification Number of the purchaser The issuance to the buyer of an e-receipt or e-invoice shall be accomplished either electronically or by tendering a printed copy thereof. A digital record or the printed copy of the e-receipt or e-invoice shall be kept by the issuer, purchaser, customer or client in his place of business for a period of 3 years from close of the taxable year in which the same invoice was issued. The e-receipt or e-invoice shall be transmitted directly to the BIR at the same time and same date of each transaction. For each sale of merchandise or service rendered valued at Php100 or more, duly registered receipts or invoices shall be issued containing the date of the transaction, quantity, unit cost and description of merchandise or nature of service. Within 5 years after the effectivity of this Act, and upon establishment of a capable system of successfully storing and processing the required data, e-receipts or e-invoices shall be required in lieu of manual receipts or invoices. The Commissioner of Internal Revenue shall pilot test the issuance of electronic receipts or invoices on such business or industries, which in the Commissioner s discretion, have the financial capacity to adopt this electronic system. A digital record or the printed copy of the e-receipt or e-invoice shall be kept by the issuer, purchaser, customer or client in his place of business for a period of 3 years from close of the taxable year in which the same invoice was issued. 21

22 Electronic Sales Reporting System Penalties Interest No current tax rules on the same Taxpayers are required to electronically report their sales data to the BIR s electronic system through CRM/POS machines. The BIR shall establish the system within 3 years from effectivity of the Act. Sec. 249 Interest of 20% per annum on any unpaid amount of tax. Taxpayers are required to electronically report their sales data to the BIR s electronic system through CRM/POS machines. The system shall undergo a pilot test to be applied to selected taxpayers within 3 years from effectivity of the Act. No proposed amendment Interest imposed shall be twice the legal rate as set by the BSP. Deficiency interest is due from the date prescribed for its payment until full payment thereof. Deficiency interest is due from the date prescribed for its payment until full payment thereof, or upon issuance of a notice and demand by the Commissioner, whichever comes earlier. 22

23 Penalties Sec. 254 on attempt to evade or defeat tax. Increase in penalty for attempt to evade or defeat tax and failure or refusal to issue receipts or sales or commercial invoices Sec. 264 on failure or refusal to issue receipts or sales or commercial invoices, etc. Printing of other fraudulent receipts or sales or commercial invoices as an additional violation to the Tax Code Introduction of new penal provisions for the following: a. Failure to transmit sales data entered on CRM/ POS machines to the BIR s electronic sales reporting system (for each day of violation, penalty of 1/2 of 1% of annual gross sales reflected in the audited financial statements for the 2nd year preceding the current taxable year or PHP10,000, whichever is higher); b. Purchase, use, possession, sale or offer to sell, installment, transfer, update, upgrade, keeping or maintaining of sales suppression devices; and c. Offenses relating to fuel marking. Introduction of new penal provisions for the following: a. Failure to transmit sales data entered on CRM/POS machines to the BIR s electronic sales reporting system (for each day of violation, penalty of 1/10 of 1% of annual net income reflected in the audited financial statements for the 2nd year preceding the current taxable year or PHP10,000, whichever is higher), except if failure to transmit is due to force majeure or causes beyond the control of the taxpayer; b. Purchase, use, possession, sale or offer to sell, installment, transfer, update, upgrade, keeping or maintaining of sales suppression devices; and c. Offenses relating to fuel marking. 23

24 Earmarking of incremental revenues No current tax rules on the same Petroleum fund For 4 years from the effectivity of this Act, 40% of the yearly incremental revenues generated from the proposed petroleum excise tax shall be allocated to fund a social benefit program (e.g., poorest 50% to receive targeted cash transfers, discounts on public utility vehicle fares and medicines, etc.) and grant fuel vouchers to qualified transport franchise holders. For the same period and succeeding years, the remaining yearly incremental revenues shall be allocated to infrastructure, health, education and social protection expenditures. Health promotion fund 85% of the tax collection shall be allocated for government priority programs 15% of the tax collection shall fund programs for the welfare and benefit of sugar planters/ farmers Petroleum fund For 5 years from the effectivity of this Act, annual incremental revenues shall be allocated to fund social mitigating measures and investments in education, health, social protection, employment, housing, and flagship infrastructure that prioritize and directly benefit both the poor and near-poor households. 24

25 Repealing Clauses Not applicable All laws, including special laws covering VAT exemptions, VAT zero-rating and personal income tax exemption, acts, presidential decrees, executive orders, issuances, presidential proclamations, rules and regulations or parts thereof, which are contrary to or inconsistent with any provision of this Act are repealed, amended or modified accordingly. List of laws or provisions of laws that are repealed are expressly provided. The persons and/or transactions affected are fully made subject to VAT or personal income tax provisions of the Tax Code. The persons and/or transactions affected are made subject to the VAT provisions of Title IV of the Tax Code. 25

26 Let s talk For a discussion on how these proposed changes may affect you and your business, please contact: Alexander B. Cabrera Chairman & Senior Partner, concurrent Tax Partner T: +63 (2) alex.cabrera@ph.pwc.com Malou P. Lim Tax Managing Partner T: +63 (2) malou.p.lim@ph.pwc.com Fedna B. Parallag Tax Partner T: +63 (2) Lawrence C. Biscocho Tax Partner T: +63 (2) Carlos T. Carado II Tax Partner T: +63 (2) Roselle Y. Caraig Tax Partner T: +63 (2) Harold S. Ocampo Tax Principal T: +63 (2) Geraldine E. Longa Tax Partner T: +63 (2)