TRAIN Law Summary

State policy and declared intent

Section 2 declares State policy:
- To enhance the progressivity of the tax system through rationalization of the Philippine internal revenue tax system to promote sustainable and inclusive economic growth.
- To provide, as much as possible, equitable relief to a greater number of taxpayers and their families to improve disposable income and increase economic activity.
- To ensure government can provide for the needs of persons under its jurisdiction and care through better infrastructure, health, education, jobs, and social protection.

Bureau of Internal Revenue authority expanded

Section 3 amends Section 5 of the NIRC to authorize the Commissioner, in ascertaining correctness of returns, making returns when none have been made, determining liability, collecting, or evaluating compliance, to:
- Obtain on a regular basis information from persons other than the taxpayer whose liability is subject to audit or investigation and from national and local government offices, officers, agencies, instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations.
Information that may be obtained includes, among others, costs and volume of production, receipts or sales and gross incomes, and names, addresses, and financial statements of specified entities.
Section 3 requires the Cooperative Development Authority to submit to the Bureau a tax incentive report including information on the income tax, value-added tax, and other tax incentives availed of by cooperatives registered and enjoying incentives under Republic Act No. 6938, as amended.
Section 3 provides that the Cooperative Development Authority’s submitted information shall be submitted to the Department of Finance and included in the database created under Republic Act No. 10708 (the Tax Incentives Management and Transparency Act (TIMTA)).

Tax administration and property valuation rules

Section 4 amends Section 6 of the NIRC:
- After a return is filed, the Commissioner or a duly authorized representative may authorize examination of any taxpayer and assessment of the correct amount of tax notwithstanding any law requiring prior authorization of any government agency or instrumentality.
- Failure to file a return does not prevent the Commissioner from authorizing examination.
Section 4 amends Section 6(E) to authorize the Commissioner to divide the Philippines into different zones or areas and, upon mandatory private and public sectors and with prior notice to affected taxpayers, determine the fair market value of real properties located in each zone or area.
Real property zonal valuation must be automatically adjusted once every three (3) years, through rules and regulations issued by the Secretary of Finance based on current Philippine valuation standards.
No adjustment in zonal valuation is valid unless published in a newspaper of general circulation in the province, city or municipality concerned, or in the absence thereof, posted in the provincial capitol, city or municipal hall, and in two (2) other conspicuous public places.
The basis of valuation, including consultation records, must be treated as public records open to inquiry of any taxpayer.
For computing any internal revenue tax, property value is whichever is higher:
- The fair market value as determined by the Commissioner; or
- The fair market value as shown in the schedule of values of the Provincial and City Assessors.

Income tax changes for individuals and passive income

Section 5 amends Section 24 of the NIRC by imposing income tax on taxable income (defined in Section 31) for individual citizens, individual resident aliens, and individuals described by the amended subsections.
Section 5(A)(2)(a) provides graduated tax schedules for taxable income for:
- January 1, 2018 until December 31, 2022:
  - Not over P250,000: 0%
  - Over P250,000 but not over P400,000: 20% of the excess over P250,000
  - Over P400,000 but not over P800,000: P30,000 + 25% of the excess over P400,000
  - Over P800,000 but not over P2,000,000: P130,000 + 30% of the excess over P800,000
  - Over P2,000,000 but not over P8,000,000: P130,000 + 32% of the excess over P2,000,000
  - Over P8,000,000: P2,410,000 + 32% of the excess over P8,000,000
- January 1, 2023 and onwards:
  - Not over P250,000: 0%
  - Over P250,000 but not over P400,000: 15% of the excess over P250,000
  - Over P400,000 but not over P800,000: P22,500 + 20% of the excess over P400,000
  - Over P800,000 but not over P2,000,000: P102,500 + 25% of the excess over P800,000
  - Over P2,000,000 but not over P8,000,000: P402.500 + 30% of the excess over P2,000,000
  - Over P8,000,000: P2,202,500 + 35% of the excess over P8,000,000
Section 5 requires married individuals to compute separately their individual income tax based on their respective total taxable income, and mandates equal division for income that cannot be definitely attributed or identified as exclusively earned or realized by either spouse for taxable income determination.
Section 5 exempts minimum wage earners, as defined in Section 22(HH) of the NIRC, from income tax on their taxable income, and also exempts holiday pay and pay received by such minimum wage earners from income tax.
Section 5 allows self-employed individuals and/or professionals an option to avail of an 8% tax on gross sales or gross receipts and other non-operating income in excess of P250,000, in lieu of the graduated income tax rates under Section 24(A)(2)(a) and the percentage tax under Section 116, when applicable under Section 109(BB)’s VAT threshold structure.
Section 5 provides a rule for mixed income earners:
- Compensation income is taxed at the rates under Section 24(A)(2)(a).
- Business or practice of profession income is taxed either at the graduated rates or at 8% option in lieu, depending on whether total gross sales and/or gross receipts and other non-operating income do not exceed or exceed the VAT Threshold under Section 109(BB).
Section 5(B) imposes final tax on certain passive income derived from sources within the Philippines:
- 20% final tax on interest from currency bank deposits and yield/monetary benefits from deposit substitutes and from trust funds and similar arrangements; and royalties at 10% (except royalties on books).
- Prizes are taxed under Section 24(A) except prizes amounting to P10,000 or less.
- Other winnings are exempt when winnings are P10,000 or less from Philippine Charity Sweepstakes and Lotto.
Section 5(B) provides:
- Interest income from a depository bank under the expanded foreign currency deposit system is taxed at 15% final income tax for an individual taxpayer (except nonresident individuals).
- Interest income from long-term deposits/investments in specified forms evidenced by BSP-prescribed certificates is exempt from this subsection’s tax.
- Pre-termination before the fifth (5th) year triggers a final tax on the entire income, deducted and withheld based on remaining maturity.
Section 5(B)(2) imposes 10% final tax on cash and/or property dividends actually or constructively received by an individual from specified entities and arrangements.
Section 5(C) imposes 15% final tax on net capital gains realized during the taxable year from sale, barter, exchange, or disposition of shares of stock in a domestic corporation not traded through the stock exchange, notwithstanding Section 39(B).

Nonresident alien employment tax treatment

Section 6 amends Section 25 of the NIRC by providing:
- A 15% income tax on gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters in the Philippines by multinational companies, as salaries, wages, annuities, compensation, remuneration, and other emoluments.
- The same tax treatment applies to Filipinos employed and occupying the same position as those aliens.
Section 6 defines “multinational company” for this chapter as a foreign firm or entity engaged in international trade with affiliates/subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.
Section 6 imposes 15% tax on gross income of alien individuals employed by offshore banking units established in the Philippines; the same applies to Filipinos in the same positions.
Section 6 imposes 15% tax on gross salaries, wages, emoluments, honoraria, and allowances received by an alien employed and assigned in the Philippines by a foreign service contractor or subcontractor engaged in petroleum; the same applies to Filipinos in the same positions.
Section 6 states that income from all other sources within the Philippines by alien employees in these categories is imposed under the NIRC.
Section 6 restricts preferential tax treatment:
- The preferential tax treatment in these subsections does not apply to RHQs, ROHQs, OBUs, or petroleum service contractors and subcontractors registering with the SEC after January 1, 2018.
- Existing entities presently availing of preferential tax rates keep entitlement for qualified employees for present and future qualified employees.

Corporate income tax and passive income

Section 7 amends Section 27 of the NIRC:
- Government-owned or -controlled corporations, agencies, or instrumentalities, except GSIS, SSS, PHIC, and local water districts, must pay the rate of tax on their taxable income as imposed by Section 27 upon corporations or associations engaged in similar business, industry, or activity, notwithstanding existing special or general laws to the contrary.
Section 7(C)(D)(1) imposes final tax:
- 20% final tax on interest on currency bank deposits and yield/monetary benefits from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and on royalties derived from sources within the Philippines.
- 15% for interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system.
Section 7(C)(D)(2) imposes 15% final tax on net capital gains realized during the taxable year from sale, exchange, or other disposition of shares of stock in a domestic corporation except shares sold or disposed through the stock exchange.

Taxable income definition and gross income adjustments

Section 8 amends Section 31: taxable income means gross income items specified in the NIRC less deductions authorized by the NIRC or other special laws.
Section 9 amends Section 32(B)(7)(e) regarding exclusions for 13th month pay and other benefits:
- Excludes gross benefits received by officials and employees of public and private entities, subject to a total exclusion cap of P90,000.
- The cap covers benefits received pursuant to Republic Act No. 6686, Presidential Decree No. 851 as amended by Memorandum Order No. 28 dated August 13, 1986, and benefits for those not covered by the same decree, including productivity incentives and Christmas bonus.

Fringe benefit tax and gross-up method

Section 10 amends Section 33 on fringe benefits:
- Effective January 1, 2018 and onwards, imposes a final tax of 35% on the grossed-up monetary value of fringe benefits furnished or granted to the employee (except rank and file employees), whether by an individual or a corporation.
- The employer pays the tax in the same manner as Section 57(A).
- Grossed-up monetary value is determined by dividing actual monetary value by 65% effective January 1, 2018 and onwards.
Section 10 provides that fringe benefits taxable under Section 25(B), (C), (D), and (E) are taxed using the applicable rates imposed thereat.
Section 10 provides an adjusted gross-up rule for those taxable under Section 25(B), (C), (D), and (E): grossed-up value is determined by dividing actual monetary value by the difference between 100% and the applicable income tax rates.

Deductions and Optional Standard Deduction

Section 11 amends Section 34:
- Allows deductions except for taxpayers earning compensation income arising from personal services under an employer-employee relationship where no deductions are allowed under this section.
- For individual taxpayers subject to income tax under Sections 24(A), a new Optional Standard Deduction (OSD) is available.
Section 11 provides OSD rules:
- Individuals may elect OSD in an amount not exceeding 40% of gross sales or gross receipts.
- Corporations subject to tax under Sections 27(A) and 28(A)(1) may elect OSD in an amount not exceeding 40% of gross income as defined in Section 32.
- A taxpayer who does not signify intention to elect OSD in the return is considered to have availed deductions allowed in the preceding subsections.
- The election in the return is irrevocable for the taxable year for which the return is made.
Section 11 relieves record submission:
- An individual electing OSD is not required to submit with the tax return financial statements otherwise required.
Section 11 provides a rule for general professional partnerships:
- A general professional partnership and partners may avail OSD only once, either by the partnership or the partners.
Section 11 requires recordkeeping unless the Commissioner permits otherwise:
- The electing individual must keep records of gross sales or gross receipts; the corporation must keep records of gross income during the taxable year, as required by rules and regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner.

Income tax filing by individuals and employees

Section 12 repeals Section 35 of the NIRC.
Section 13 amends Section 51 on individual returns:
- Certain individuals with taxable income not exceeding P250,000 under Section 24(A)(2)(a) are not required to file income tax returns.
- A Philippine citizen and an alien individual engaged in business or practice of profession within the Philippines must file an income tax return regardless of gross income.
- The income tax return (ITR) must consist of a maximum of four (4) pages in paper form or electronic form and must contain only:
  - Personal profile and information
  - Total gross sales, receipts, or income from compensation for services rendered/doing business/exercising profession, excluding income subject to final tax
  - Allowable deductions
  - Taxable income as defined in Section 31
  - Income tax due and payable.
Section 14 inserts Section 51-A:
- Individuals receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, with correct withholding (tax due equals tax withheld), are not required to file an annual income tax return.
- A certificate of withholding filed by the employer, duly stamped “received” by the BIR, is tantamount to substituted filing of the income tax return.

Corporate quarterly returns and tax payment scheduling

Section 15 amends Section 52:
- Every corporation subject to tax (except foreign corporations not engaged in trade or business in the Philippines) must render in duplicate a true and accurate quarterly income tax return and final or adjustment return under Chapter XII of the Title.
- The corporate income tax return must consist of a maximum of four (4) pages in paper or electronic form, be filed by the president, vice-president, or other principal officer, and be sworn to by that officer and by the treasurer or assistant treasurer, containing only:
  - Corporate profile and information
  - Gross sales/receipts or income from services rendered/doing business, excluding income subject to final tax
  - Allowable deductions
  - Taxable income as defined in Section 31
  - Income tax due and payable.
- These rules do not affect implementation of Republic Act No. 10708 (TIMTA).
Section 16 amends Section 56:
- Installment payment applies when tax due exceeds P2,000.
- Tax is payable in two (2) equal installments:
  - First installment at the time the return is filed
  - Second installment on or before October 15 following the close of the calendar year.
- If any installment is not paid on or before its fixed payment date, the whole amount becomes due and payable with delinquency penalties.

Withholding tax ranges and quarterly remittance timing

Section 17 amends Section 57(B):
- The Secretary of Finance may, upon recommendation of the Commissioner, require withholding on specified income payments at a rate of not less than 1% but not more than 32%, credited against the taxpayer’s income tax liability for the taxable year.
- Beginning January 1, 2019, the withholding rate range is not less than 1% but not more than 15%.
Section 18 amends Section 58(A):
- Returns for final and creditable withholding taxes must be filed and payment made not later than the last day of the month following the close of the quarter during which withholding was made.

Real property zones, estate tax, donor tax, and VAT

Section 20 amends Section 74 on declaration of income tax for individuals:
- Individuals receiving self-employment income, on or before May 15 of the same taxable year, must file an estimated income declaration for the current taxable year.
- Estimated income tax is paid in four (4) installments:
  - First at the time of declaration
  - Second on August 15
  - Third on November 15
  - Fourth on or before May 15 of the following calendar year when the final adjusted income tax return is due.
Section 22 amends Section 84:
- Estate tax on transfer of the net estate of every decedent (resident or nonresident) is imposed at 6% of the value of the net estate.
Section 23 amends Section 86 on computation of net estate:
- Standard deduction equals P5,000,000 for citizen or resident estates.
- Deduction rules include specified claims against the estate with notarization requirements and timing limits; losses from fires/storms/shipwreck/other casualties or robbery/theft/embezzlement not compensated by insurance or otherwise, subject to timing and non-claim as income tax deduction; property previously taxed with step-down percentages based on how long before death the prior decedent died or the gift was made within five (5) years; transfers for public use for exclusively public purposes; family home valuation with an excess threshold; and amounts received by heirs under Republic Act No. 4917, subject to inclusion in the gross estate.
- Property previously taxed uses these percentages based on timing:
  - 100% if prior decedent died within 1 year, or gift made within same period prior to death
  - 80% if more than 1 but not more than 2 years
  - 60% if more than 2 but not more than 3 years
  - 40% if more than 3 but not more than 4 years
  - 20% if more than 4 but not more than 5 years
- Family home deduction equals current fair market value, but if it exceeds P10,000,000, the excess is subject to estate tax.
- Nonresident estate deductions and tax credit for estate taxes paid to a foreign country are provided with proportional limitations.
Section 25 amends Section 90:
- Estate tax returns must be filed under oath in duplicate in transfers subject to estate tax where estates consist of registered or registrable property requiring BIR clearance for transfer of ownership.
- Estate tax returns with gross value exceeding P5,000,000 must be supported by a statement certified by a Certified Public Accountant.
- Estate tax returns must be filed within one (1) year from the decedent’s death for determining estate tax under Section 84.
Section 26 amends Section 91:
- Where available cash is insufficient to pay total estate tax due, installment payment is allowed within two (2) years from the statutory date for payment without civil penalty and interest.
Section 28 amends Section 99 on donor tax:
- Donor tax is 6% computed on total gifts in excess of P250,000 exempt gift made during the calendar year.
- Contributions in cash or in kind to candidates, political parties, or coalitions for campaign purposes follow the Election Code, as amended.
Section 29 amends Section 100:
- For transfers for less than adequate and full consideration, the excess of fair market value over consideration is treated as a gift and included in computing calendar-year gifts for the chapter.
- Sales/exchanges in ordinary course of business made bona fide, at arm’s length, and free from donative intent are treated as made for adequate and full consideration.
Section 30 amends Section 101 to exempt certain gifts/donations:
- Gifts made to or for use of the National Government or entities created by any of its agencies not conducted for profit, or to political subdivisions.
- Gifts in favor of enumerated non-profit educational/charitable/religious/cultural/social welfare entities and research institutions and organizations, subject to a cap that not more than 30% of such gifts may be used by the donee for administration purposes, and subject to the described nonstock governance/dividend and devotion-of-income requirements.
Section 31 amends Section 106 on VAT:
- Imposes 12% VAT equivalent of gross selling price or gross value in money on sales, barter, or exchange of goods/properties.
- Provides 0% VAT rate for export sales and enumerates export sales categories, including shipments to foreign countries, sales to registered enterprises in separate customs territories and tourism enterprise zones, sales of raw materials/packaging to certain nonresident/export-oriented buyers under conditions, supplies to international shipping/air transport operations, and other export sales under Executive Order No. 226 and special laws.
- Provides transitional conditions that subparagraphs (3), (4), and (5) regarding certain zero-rated export sales are subject to 12% VAT unless an enhanced VAT refund system grants refunds within 90 days, with applications from January 1, 2018 processed and decided within 90 days and all pending VAT refund claims as of December 31, 2017 fully paid in cash by December 31, 2019.
- Requires establishment of VAT refund centers in the BIR and BOC to handle processing and cash refunds; appropriates annually 5% of total VAT collection from the immediately preceding year as a special account or trust receipts for VAT refunds; unused funds revert to the General Fund; and BIR/BOC must submit quarterly reports to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP).
Section 32 amends Section 107 on VAT on imports:
- Imposes 12% VAT on importation of goods based on customs valuation plus customs duties, excise taxes, if any, and other charges, paid prior to release.
Section 33 amends Section 108 on VAT on sale of services and use/lease of properties:
- Imposes 12% VAT on gross receipts from services and from use or lease of properties.
- Defines “sale or exchange of services” broadly and includes use or right to use enumerated intellectual and industrial/commercial/scientific property rights and similar rights, technical knowledge/information, ancillary assistance, leases of films and licenses, radio/TV/satellite transmission and cable, and other services enumerated, including lease of properties being subject regardless of where the lease contract is executed if the property is leased/used in the Philippines.
- Defines “gross receipts” as total contract price/compensation/service fee/rental/royalty including materials supplied with services and deposits/advanced payments actually or constructively received during the taxable quarter, excluding VAT.
- Provides 0% VAT rate for specified services performed in the Philippines by VAT-registered persons, including services related to processing/manufacturing for export where goods are exported; services paid in acceptable foreign currency; services to parties whose exemptions effectively subject supply to zero rate; services for international shipping/air operations; services by subcontractors for enterprises whose export sales exceed 70% of total annual production; domestic air/sea transport of passengers and cargo to a foreign country; sale of power or fuel generated through renewable sources using specified technologies; and services rendered to enterprises within separate customs territory and tourism enterprise zones under RA 9593.
- Provides transitional conditions for (B)(1) and (B)(5) regarding enhanced VAT refund system and the 90 days refund approval rule, with applications from January 1, 2018 and pending claims paid by December 31, 2019, plus the same VAT refund center, 5% appropriation, unused fund reversion, quarterly reporting, and submission to COCCTRP.
Section 34 amends Section 109 on VAT exemptions:
- Provides exemptions from VAT for listed transaction categories, including:
  - Importation of specified items for personal use of persons coming to settle in the Philippines and overseas Filipinos, with Bureau of Customs ability to