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President Duterte vetoes five provisions of Republic Act 10963 or TRAIN Law

On 22 December 2017, it was announced that President Duterte had vetoed the following
line items:
1. Proviso continuing the 15% preferential income tax rate for present and future qualified
employees of existing Regional Headquarters (RHQs), Regional Operating Headquarters
(ROHQs), Offshore Banking Units (OBUs) and Petroleum Service Contractors and
Subcontractors;
2. Value-Added Tax (VAT) zero-rating of the sale of goods and/or services to registered
enterprises within a separate customs territory and/or tourism enterprise zone;
3. Exemption from percentage tax beginning 01 January 2019 of self-employed and
professionals with total gross annual sales/receipts not exceeding Php500,000;
4. Exemption of various petroleum products from excise taxes when used as input,
feedstock or as raw material in the manufacturing of petrochemical products or in the
refining of petroleum products, or as replacement fuel for natural gas fired combined cycle
power plants; and
5. Earmarking of incremental revenue from tobacco taxes.

Why this matters

With the presidential veto, employees of existing RHQs, ROHQs, OBUs, and Petroleum
Service Contractors and Subcontractors shall be subject to the new income tax rates of 20%-
35% beginning 01 January 2018 and 15%-35% beginning 01 January 2023.
Further, the sale of goods and/or services to registered enterprises within economic and
tourism enterprise zones may be treated as subject to the 12% VAT. However, it is noted
that the TRAIN Law still treats the following transactions, among others, as VAT zero-rated
sales:
• Sale of goods treated as export sales under the Omnibus Investments Code and other
special laws 1
• Sale of services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to 0%.
The veto notice of the President to the House of Representatives did not contain any exact
reference when the exemption of various petroleum products from excise taxes will take
effect.

Key Points to Consider

It remains uncertain whether Congress will override the veto made by the President on the
five items. Congress is still in recess and session will resume only on 15 January 2018.
Notwithstanding the possibility of the override by Congress, the TRAIN law will take effect on
01 January 2018 following its complete publication in the Official Gazette on 20 December
2017. The TRAIN Law states that it shall take effect on 01 January 2018 following its
complete publication in the Official Gazette or in at least one newspaper of general
circulation.
The Bureau of Internal Revenue needs to clarify the implementation of the vetoed items,
especially the first two items. With respect to the VAT, the BIR may have to evaluate if zero-
rating is still applicable under the other provisions of the TRAIN Law.