The Tax Reformation for Acceleration and Inclusion (TRAIN) bill was signed into law late last year, and took into effect on 1 January 2018.
Industry observers believe the law allows for a simpler and more efficient tax system for the Filipinos.
In general, the Train law aims to reduce personal income tax while imposing higher tax on certain products like sweetened beverages, oil, petroleum, and fuel products, coal, stocks, automobiles, and others. While the spotlight has been focused on personal tax income reduction and increased fuel prices of fuel products, The Manila Standard takes a look on how the real estate system is faring aboard the Train.
In the previous system, estate tax, or the tax imposed on inherited properties, was computed based on a schedule wherein properties worth P200,000.00 and more are taxed between 5 to 20%. Under the TRAIN, lawful heirs and beneficiaries would only have to settle a flat rate of 6%.
Another significant change is that Train law exempted the following from estate tax: estate properties with a net value of P5 million and below; and family homes worth P10 million and below. Previously, only family homes worth Php1 million and below are exempted from tax.
Estate tax deductions
The new system also imposed changes on the allowable deductions on the gross estate of an individual. The train law removed: funeral expenses, judicial expenses, and medical expenses from the allowable deductions.
To make up for the removal of these, Train increased the standard deduction to P5 million, which was pegged at only P1 million in the previous system.
Also, the standard deduction can now only be enjoyed by citizens (resident and non-resident) and resident aliens. Non-resident aliens may still avail standard deductions but only up to a maximum of P500,000.00.
Estate tax settlement
Certified Public Accountant (CPA) certifications are now required for estate tax returns exceeding a gross value of Php5 million.
The Train law also amended the allowed period for filing of estate-tax returns from 6 months from the decedent’s death to 1 year.
The Train implies that full estate-tax liability must be settled within two years – this limit was not included in the previous tax system.
Real estate transactions, VAT
Train imposed the following on VAT exemption provisions regarding real estate transactions:
Real properties not primarily held for sale to customers or for lease in the ordinary course of trade or business, and properties utilized for socialized housing is now exempted from the VAT.
Previously at P1,919,500, Train lowered the VAT exemption of residential lots to P1,500,000. This means residential lots that were previously tax exempt (worth Php1,500,001 to Php1,919,500) are now subject to VAT. Further, residential lots will no longer be qualified for VAT exemption.
Train also lowered the VAT exemption of residential dwellings (house and lots, condominiums) from Php 3,199,200 to P2,500,000. This means houses and condos that were previously tax exempt (worth P2,500,001 to P3,199,200) are now subject to VAT. Further, the exemption was lowered again from P2,500,000 to P2,000,000, and every three years thereafter, the amount stated will be adjusted to its present value using the Consumer Price Index (CPI), as published by the Philippine Statistics Authority (PSA).
Lease of a residential unit with a monthly rental not exceeding P15,000, is now exempted from VAT.
From a macro perspective, industry observers believe the Train will usher in “real positive change beginning in 2018.”
The Train would be giving back “almost P150 billion” to the people in the form of tax relief, while raising “significant revenues” to fund the President’s priority and social infrastructure programs to reduce poverty from 21.6 percent to a targeted 14 percent by 2022, ” according to the Department of Finance,
Pronove Tai International Property Consultants shared this optimistic view, noting that while corporate and commercial property taxes were not included in the first package, several provisions would encourage growth across industries including real estate.
The retention of tax exemption for the IT-business process management firms (IT-BPM) in Philippine Economic Zone Authority accredited buildings and zones is also seen to sustain the growth of an industry that is currently one of the biggest drivers for the office property market.
A Pronove study noted that once the Train is implemented, “socialized housing transactions worth P450,000 and below as well as low cost housing worth P3 million and below will be exempted from value added tax (VAT). This is an improvement from the previously exempted low cost housing sales worth P1.9 million.”
“This translates to savings of up to P360,000 for starting families due to the VAT exemption,” Pronove explained.
The provision exempting from the 12 percent VAT the sale of residential dwellings worth P2 million and below outside of the National Capital Region, supports the move to decongest Metro Manila,” It added.
This should help in the government’s efforts to address the rising mass housing backlog in the country, estimated to have reached some 5.7 million units, and in the private sector’s move to provide the market with affordable, decent housing.
“Getting the horse to drink”
According to Pronove, young members of the workforce, who are likely to rent condominiums or apartments near their workplaces, “will benefit the most in the VAT exemption for lease of residential units being raised from P12,800 to P15,000 as well as the removal of VAT on association dues for condominiums.”
“Train simplified the tax policy by removing the 2 to 15 percent tax table as previously used,” It added.
“Twenty years is a long time. The tax code was definitely in need of a simplification to encourage compliance and increase generation. We remain hopeful that implementation will be done smoothly and efficiently,” Pronove concluded.
But Attorney Lorna Kapunan urged caution on deciding whether the the amendments on estate taxes , such as more simpler and filer-friendly procedures, would indeed improve collection of estate taxes in the long run.
“As the saying goes, “you can bring the horse to the water, but you cannot force the horse to drink,” she said.