TRAIN-2: The Sequel Makes Things Worse

tax reforms
TRAIN wreck. Bulatlat FILE Photo as Tax Reform for Acceleration and Inclusion (TRAIN) begins to be implemented. (Photo by A. Umil/Bulatlat)

TRAIN-2 worsens the regressiveness of the tax system on top of what TRAIN-1 has done by reducing corporate income tax collections to increase corporate profits … The fiscal incentives scheme should most of all be grounded in a strategic vision of national industrialization.


The Tax Reform for Acceleration and Inclusion Package 2 (TRAIN-2) recently passed by the Ways and Means Committee of the House of Representatives (HOR) increases corporate profits at the expense of Filipinos. TRAIN-2 was renamed Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) to distance itself from the controversial TRAIN-1, but it is very much a twin measure to TRAIN-1 in the Duterte administration’s scheme to craft a tax system that favors the rich at the expense of the poor.


The centerpiece tax change of TRAIN-2 is to reduce the corporate income tax (CIT) rate from the current 30 percent to 20 percent by 2029.

This is done in stages starting from a cut to 28 percent in 2021 with a two (2) percentage point cut every other year until it reaches 20 percent in 2029. The Department of Finance (DOF) reportedly estimates a CIT revenue loss of Php62 billion just in 2021, corresponding to an increase in corporate profits by that same amount. Note that CIT collection reached Php534 billion in 2016 mostly paid by large corporations and not micro, small and medium enterprises (MSMEs).

This CIT cut in TRAIN-2 is a parallel measure to the significant personal income tax (PIT) cuts benefiting mostly higher-income families in TRAIN-1. Thus, this also means that the resulting revenue losses are in effect made up for by taxing consumption including by the poor.

Bureau of Internal Revenue (BIR) collections consist of direct and indirect taxes. Direct taxes are progressive because they are imposed on individuals and corporations according to their wealth, income, or property. CIT, PIT, estate and donor taxes are the most important direct taxes. Indirect taxes meanwhile are generally regressive because they are imposed on transactions heedless of the wealth, income, or property of the individual or entity involved. Value-added tax (VAT) and excise taxes are the most important indirect taxes.

In 2015, the BIR’s tax collection consisted of corporate income taxes (34 percent), individual income taxes (21 percent), other income taxes (3 percent), VAT (21 percent), excise taxes (11 percent), and percentage and other taxes (10 percent). TRAIN then in effect erodes at least 55 percent of the BIR’s revenue base consisting of the corporate and individual income taxes.

TRAIN-2 worsens the regressiveness of the tax system on top of what TRAIN-1 did by reducing CIT collections to increase corporate profits.

At the heart of TRAIN’s tax reforms are huge cuts in direct taxes especially on CIT and PIT and also in estate and donor taxes. This will increase the wealth, income and property of the rich. The Duterte administration compensates for the revenue losses from those tax cuts by indirect taxes which tax consumption including by the poor – regardless of their lack of wealth, income, and property.

To illustrate, TRAIN-1 lowers PIT, estate taxes and donor taxes paid by the country’s richest families by a total of Php199.3 billion in 2021; this is more money in their pockets. TRAIN-2 cuts corporate income taxes by Php62 billion in 2021; this is more money in their bank accounts. This is a total Php261.3 billion revenue loss from cuts in direct taxes.

TRAIN makes up for these revenue losses, among others, Php215.6 billion in additional taxes paid by consumers on oil and sugar-sweetened beverages under TRAIN-1 in 2021. A portion of these consumption taxes are paid by the rich but they are able to offset this with their gains from the direct tax cuts. But the country’s poorest, who can ill afford any income losses from having so little as it is, have to pay higher consumption taxes and suffer higher inflation without any offsetting benefits from cuts in direct taxes.

TRAIN’s erosion of the government’s revenue base in corporations and wealthy families is grossly insensitive to current country conditions.

More tax cuts for the rich

Income and wealth are distributed very unevenly with a few extremely rich families, a narrow middle class, and huge poverty for the majority with varying degrees of vulnerability. Out of some 23 million Filipino families, the country’s richest 550,000 families or top 2.4 percent have annual family incomes of at least Php1 million to even 100 million pesos or more. Next is a middle class of around 4.1 million or some 18 percent of families with annual incomes from a lower middle class of Php365,000 to an upper middle class of up to Php1 million. These income figures do not capture accumulated assets and wealth which are actually distributed even more unevenly.

The overwhelming number of those 20 percent or so higher-income families are the biggest beneficiaries from the PIT cuts of TRAIN-1. As provided by the TRAIN-1 law, the income taxes they pay will be reduced in 2018-2022 and then reduced further in 2023.

The lowest income 18.1 million or 80 percent families, meanwhile, have annual incomes of at most Php365,000 to as low as a miserable Php17,300 or even less. A huge number of these families are low-earning and in the informal sector. The structure of the economy also has to be considered. There is a large agricultural sector with much activity beyond the tax system and at any rate is still quite backward. There are also very many informal and small-scale enterprises not just in agriculture but also in industry and services.

The situation of gross inequity immediately points to how the rich should be taxed more heavily than the poor. They can afford to pay much more taxes than they do without in any way diminishing the level of welfare of their families and even of their future generations. The informality and small scale of so many enterprises meanwhile point to how high-earning large corporations are an important revenue base. They can afford to pay taxes especially considering how many, through a host of legal and illegal devices, are actually paying much less corporate income tax than the 30 percent nominal rate.

The corporations of the country’s 16 richest oligarchs – covering SM Investments Corp, SM Prime Holdings, JG Summit Holdings, Aboitiz Equity Ventures, LT Group Inc, GT Capital Holdings, Ayala Corp, Ayala Land, ICTSI, DMCI Holdings, Alliance Global Holdings (AGI), Cosco Capital Inc, Vista Land, Coyuito Group of Companies, Filinvest Devt Corp, and Top Frontier Investment Holdings – each make tens of billions of pesos in profit every year.

IBON’s initial estimates, however, find that the effective tax rate (ETR) of individual corporations varied widely from as low as 12.2 percent (JG Summit) to 25.9 percent (Ayala Land). Worse, they cumulatively only paid an ETR of 20 percent on their combined income. This is much less than the supposed 30 percent corporate income tax rate.

Looked at regionally, with TRAIN-2 the Duterte administration gleefully participates in a race-to-the-bottom with other governments in Southeast Asia to give foreign investors the most favorable tax environment for increasing their profits.

Yet foreign investors have never been for development and have always been, and always will be, for themselves. Foreign manufacturers are for instance already the biggest investors in the country yet the share of Filipino manufacturing of the economy is likely its smallest in history.

Incentivizing development

The reforms in fiscal incentives under TRAIN-2 in a way serve the same purpose as the temporary unconditional cash transfers (UCTs) for the poorest 10 million families of TRAIN-1. They are both smokescreens to divert from how the Duterte administration is making the tax system even more pro-rich and anti-poor than it already is.

Reforms in fiscal incentives are necessary especially to take away the redundant incentives and hidden subsidies that the DOF has been pointing out. Only a few benefit as it is with apparently just 2,844 firms availing of incentives out of almost a million enterprises (915,726) of all sizes in the country. The proposed criteria for assessing the performance of recipients of incentives are however insufficient.

According to the DOF, TRAIN-2 works on the general principle that the incentives will be performance-based. This is understood in terms of investments, job creation, exports, countryside development, and research and development. The incentives will also be targeted as specified by the Investment Priorities Plan (IPP). These parameters are however not enough for assessing contributions to national development.

The fiscal incentives scheme should most of all be grounded in a strategic vision of national industrialization. This means developing Filipino industry that harnesses Philippine human and natural resources for national development, and should not be confused with foreign transnational corporations (TNCs) and manufacturers merely located in the country.

Foreign firms do not augment Filipino industrial capacity and, if anything, they are averse to this because that just means competition for them.

Enterprises applying for incentives should be assessed according to how far they build national industrial capacity in terms of: increasing Filipino firms’ productivity and value-added; promoting domestic linkages with other Filipino producers and service-providers; and generating employment on a wide scale. Agricultural and rural development is also important but needs to be framed according to the wider context of advancing national industrialization.

In practice, this means that incentives should be given to firms that increase opportunities for Filipinos by: sourcing locally from Filipino enterprises; developing or transfer production and other technologies for Filipino firms; prioritizing and training local hires; and setting up joint ventures between foreign capital and Filipinos. Incentives to encourage sustainable production technologies and environmentally-friendly production processes are also important and have long-term development benefits.

Without establishing and operationalizing such parameters, any supposed reforms in fiscal incentives are really no reform at all. These will just result in the same sort of service-dominated economy with shallow foreign-dominated manufacturing that exists today. So-called accelerated growth and inclusiveness will also just be mere rhetoric.

TRAIN delusions

Pres. Rodrigo Duterte made a pitch for TRAIN-2 in his last state of the nation address in July 2018. he dutifully repeated what must have been fed him by his economic managers:

“The enactment of the Package 2 is what stands between today and millions of jobs in the near future.” TRAIN-2 does no such thing.

As it is, foreign and domestic corporations are already sitting on hundreds of billions in pesos in profits and all TRAIN-2 does is give them more money. TRAIN-1 was the Duterte administration’s “biggest Christmas and New Year’s gift” to wealthy families and to themselves last year. TRAIN-2 is set to become the same to foreign TNCs and oligarch corporations this year. Reposted by (

IBON Foundation, Inc. is an independent development institution established in 1978 that provides research, education, publications, information work and advocacy support on socioeconomic issues.

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