There are not many things in life as certain as taxes. Taxes are one of the many responsibilities individuals and businesses share to help improve the country’s economy. But just as they are essential, they also come off as quite complex.
For one, not all taxes are alike. Corporate taxation in the Philippines includes common taxes such as withholding taxes, percentage taxes, and others that you need to familiarize yourself with to avoid issues during filing season. Staying updated on any tax changes is also the duty of every citizen to adhere to the law.
Recently, taxation in the country shifted when the Duterte administration introduced the Comprehensive Tax Reform Program (CTRP). Business owners must learn the basics of the CTRP, including the tax packages that come with it, to understand its implications.
If you want to learn more about the comprehensive tax reform package in the Philippines, this article will serve as your guide. First, let’s define CTRP and what it’s set out to do.
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What is the Comprehensive Tax Reform Program?
The Duterte administration and the Department of Finance (DOF) initiated the CTRP to achieve the former president’s promise of “Tunay na pagbabago.”
The program’s goals are to expedite poverty reduction and tackle inequality sustainably. By 2022, the administration hopes to lift the poverty rate from 22% to 14%, or some 6 million Filipinos out of poverty. By 2040, it aims to eradicate extreme poverty and achieve a high-income country status.
Attaining these goals entails making the tax system fairer, simpler, and more efficient. With this reform, the Philippines can establish an environment more conducive to high growth and investment, strong job creation, and fast poverty reduction.
The 4 Major Tax Reform Packages in the Philippines
As part of the CTRP’s long-term vision for the Philippines, there are four major tax reform packages that small business and SME owners should be aware of.
- Tax Reform for Acceleration and Inclusion (TRAIN) Act
The TRAIN Act—known as Package 1 and passed as law in 2018—seeks to modernize and enhance the Philippines’ tax system and provide fair tax relief to 99% of income tax earners in the country.
Notable provisions of this tax reform package include the following:
- Individuals earning ₱250,000 annually are exempt from personal income tax.
- Small- and micro-self-employed professionals now have the option to pay a flat tax of 8% on their gross sales if it’s below ₱3 million.
- Value-added tax (VAT) threshold increases from ₱1.9 million to ₱3 million.
- Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act
The CREATE Act or Package 2 aims to grant businesses reliefs totaling ₱1 trillion over the next decade. This was initially known as TRAIN 2 or the Tax Reform for Attracting Better and Higher-quality Opportunities (TRABAHO) bill prior to the pandemic. The CREATE Act was passed into law on March 2021 and took effect on April 2021.
The primary beneficiaries of the law are MSMEs because of the considerable reduction of the corporate income tax (CIT) rate to 20% from 30%. Other significant points of the act are the following:
- Minimum corporate income tax is lowered to 1–2%.
- Foreign-sourced dividends received by domestic corporations are exempt from tax and subject to reinvestment of earnings in the Philippines.
- An incentive system based on industry and location tiers.
- Real Property Valuation Reform
The Real Property Valuation Reform package, also known as Package 3, aims to create a more equitable real estate property evaluation system. According to the DOF, this reform will improve tax collections without increasing tax rates while broadening the tax base used for property and related taxes.
As of writing, this reform is still pending in the Committees on Ways and Means, Local Government, and Finance of the Senate.
The provisions of this tax reform package include the following:
- Adopting international standards while valuing real estate properties.
- Establishing a single valuation base for taxation of real property.
- Forming the Real Property Valuation Service to oversee and manage valuation-related concerns from local governments.
- Passive Income and Financial Intermediary Taxation Act (PIFITA)
The PIFITA complements the TRAIN Act since it makes passive income and intermediary financial taxes more straightforward, effective, and competitive in the Association of Southeast Asian Nations (ASEAN) region.
The House of Representatives approved it in September 2019, making it House Bill 304, but there are ongoing committee hearings for PIFITA in the Senate.
The PIFITA includes the following provisions:
- A single rate of 15% will be imposed on interest income, dividends, and capital gains.
- Removal of initial public offering (IPO) tax.
- Removal of documentary stamp tax (DST) levied on nonmonetary transactions.
How Can These Tax Reform Packages Affect Small Businesses and SMEs?
The tax reform packages have effects that individuals and businesses alike will experience for years. Below are some ways these packages can benefit your company:
- Improved spending power
The tax reform packages offer some of the largest corporate income tax cuts in the country’s history. Since less of your earnings are going to taxes, you’ll have more funds to allocate towards growing your business.
- Better chances of attracting foreign investors
Previously, the country had the highest CIT rate in the ASEAN region, making it challenging for foreign investors to do business in the Philippines. Through this tax reform package, the significantly reduced CIT can entice foreigners to work with the Philippines again, creating new opportunities for local businesses to meet with international investors.
- Guaranteed transparency
The uniform standards of the Real Property Valuation Reform package ensure enhanced transparency in how properties will be evaluated. If you’re a small business or SME owner in the real estate industry, this can give you greater confidence about the value of properties.
- More favorable tax rates for small businesses and SMEs
Small businesses earning less than the new VAT threshold of ₱3 million have the option to pay a flat tax rate of 8%. This, coupled with the lower corporate income tax of 20%, can give your business the much-needed relief from taxes to grow faster.
- Encourage hiring efforts
Part of the CTRP is to create more job opportunities for Filipinos. With the reduction of corporate income taxes for small businesses, you may allocate it towards opening up new positions in your company and expanding your workforce.
If you’re self-employed but looking to hire your first employee, understanding the mandatory deductions and contributions is a must.
CloudCfo—Expert Tax Compliance Services in the Philippines
The previous administration initiated the CTRP to reduce poverty and inequality faster and strengthen the nation’s economy through four significant tax reform packages.
These changes in the tax system affect small businesses and SMEs in various ways, which is why staying up to date on your business’ tax obligations is important to manage your finances better and adhere to the law.
However, corporate taxation can still be complex, and it will not always be clear how CTRP can affect your operations. If you need professional assistance with your tax compliance and other regulatory tasks, consider partnering with CloudCfo.
CloudCfo is a cloud accounting firm for startups and small businesses in the Philippines that can help you build and scale your company’s finance functions through professional accounting, bookkeeping, tax services, and more! Contact us to learn more about how we can support your business today!
