President Duterte signed into law RA 10963 or the Tax Reform for Acceleration and Inclusion, referred to as TRAIN, last December 19, 2017. The TRAIN is the first package under the Comprehensive Tax Reform Program (CTRP) that the current administration is pushing to improve the current tax system of the Philippines and make it simpler and more efficient. The TRAIN policy details changes that take effect on January 1, 2018. Some details though are expected to take effect in the later years.
What does TRAIN include?
According to the primer released by the Department of Finance on their website, the TRAIN tackles 6 points:
- Lowering the Personal Income Tax;
- Simplifying the Estate and Donor’s Tax;
- Expanding the Value Added Tax (VAT) Base;
- Increasing the Excise Tax on Petroleum Products;
- Increasing the Excise Tax on Automobiles; and
- Implementing Excise Tax on Sweetened Beverages.
The vision of TRAIN is to reduce the poverty level from 26% to 17% by the year 2020. The grand vision of this tax reform is to eradicate poverty by the year 2040.
How does this affect the Real Estate market?
The portion of the policy that directly affects real estate is the simplification of the Estate and Donor’s Tax.
Estate Tax
The current estate tax in the Philippines is a complicated system that taxes the property of lawful heirs and descendants at a rate of between 5% and can actually reach up to 32% of the property value. Family homes with less than Php 1,000,000 are exempted from Estate Tax. There is also a standard deduction of Php 1,000,000. The deadline for filing is 6 months from the death of the property owner.
The TRAIN tax reform imposes a flat rate of 6% for the estate tax. Family home exemption increases to Php 10,000,000 while the standard deduction also increases to Php 1,000,000. The deadline for filing is extended to one year instead of only 6 months.
Imagine your Crown Asia home in Sucat. For your primary residence in Marina Heights worth Php 10,000,000, your heirs had to pay roughly Php 3.2M for the estate tax. If you had an additional property in Santorini in Lakefront worth Php 4,000,000, that property will be taxed an additional Php 575,000; bringing up your total tax to Php 3,790,000.
With the TAX REFORM, both of your Crown Asia properties will be exempted from paying tax.
NOTE: the computation above is based on the BIR table of rates for the current tax system and RA 10963z that are published on the BIR website. The actual computation may vary upon release of the Implementing Rules and would still need verification of the BIR.
Donor’s Tax
Donor’s Tax, on the other hand, is a progressive rate of 5% to 15% if the donee is an individual or 30% if the donee is an entity (corporation, organization, etc). The current TRAIN Tax Program is also a flat rate of 6%.
Personal Income Tax
For most citizens, the most exciting portion of the TRAIN tax reform is its lowering of the Personal Income Tax. This means that the net income of each Filipino Citizen increases. Those extra savings will probably allow you to be able to save and be able to purchase that Lakefront Condominium you are eyeing.
The TRAIN tax law was crafted to provide benefits for the Filipino people. While most citizens are still doubtful and awaiting the full implementation of this Reform Program, we should rejoice that the government is looking for ways to help achieve Filipinos achieve their dreams.