Surfing on the side of the TRAIN

This Sunday, allow me to go back to my bread and butter, and point out or remind everyone of some of the benefits that come with the Tax Reform for Acceleration and Inclusion (TRAIN) law that should be maximized:

1. The REIT law can now be implemented.

The Real Estate Investment Trust law passed almost a decade ago, which was to allow the public the opportunity to invest in income-generating real properties and of course create alternative source of funds for the owners of these properties, never got implemented.

The biggest hindrance is the VAT that would apply to these real properties when they are transferred to the REIT – an unintended material cost that the authors of the law unwittingly overlooked.

The TRAIN law now provides the opening as it specifically exempts from VAT those properties transferred via a tax-free exchange. Thus, if real estate lessors, for instance, transfer their real properties to the REIT using the tax-free exchange route, they can avoid the VAT. To complete the correction, the Bureau of Internal Revenue (BIR) should revoke the administrative legislation that increases the required public ownership of the REIT before it can enjoy incentives.

2. Idle property can now be developed or sold.

Lowering the estate tax rate to six percent paves the way for an estate tax amnesty at the same rate applied to the value of the property at the time of death of the decedent. When estate taxes are not paid, the title to the property cannot be transferred to the one who inherits. When title is at issue, it limits the potential of the property to be invested in, developed, or sold. Now this can happen.

To speed up the process of passing the estate tax amnesty, this can be done separately from the general tax amnesty being crafted. The general tax amnesty (on income tax, VAT, and other national taxes) is slowed down because that proposed legislation requires a waiver of the secrecy of bank deposits on the part of the one who avails of the amnesty.

This is not an issue for estate tax, however, because the TRAIN law now allows the heirs to withdraw from the bank the money of the deceased subject to a six percent (estate) tax to be withheld by the banks. So for estate tax, we are really only talking about real properties.

3. The other spouse can have business income subject to only eight percent tax.

The TRAIN law allows for spouses to separately file their tax returns instead of consolidating. If the husband, for example is earning compensation income, and he has income from leasing of properties, his entire income can easily exceed the P3-million threshold and thus be subject to regular higher rates.

However, under the new law, even if the husband has a high compensation income, it is possible for the wife to own a condo unit, for instance, lease it out, and be subject to a flat rate of eight percent, provided her annual lease income is not more than P3 million. She also enjoys the P250,000 exemption or deduction. (The same is true for an income-earning child.)

4. No need to pretend that you’re selling the property to your children to avail of lower capital gains tax.

In the past, donor’s tax and estate taxes were at prohibitive rates. So the cheapest way used to transmit property to children was a farce sale because capital gains tax was only at six percent. I say farce because the children don’t pay for the properties they have supposedly bought anyway, making the unpaid price technically a donation to them that is still subject to donor’s tax under the law.

With donor’s tax down to six percent, no need for “fake” sales: simply donate. Thus, use a deed of donation, and not a fake deed of sale. It’s better on the conscience, too.

5. You can get lucky nowadays and get a tax refund.

One of the aspirational features in the TRAIN law is for the BIR to come up with a system that will allow them to process and grant a tax refund claim for VAT at a turnaround time of 90 days. Wishful thinking, you might say. And while they are beginning to try, it’s still a long way to go – but it is already producing positive effects. The BIR now processes and grants some claims for refund administratively without the need for the taxpayer to go to court (and pay filing fees based on the amount of the refund). It may not be within 90 days, but hey, if you get the refund, you can’t complain.

How about you? Have you maximized the fringe benefits of your TRAIN ride?