A NEW DAY AT THE BIR

Today is a brand new day at the BIR.

July 1 marks the changing of the guards at the BIR with the new Commissioner of Internal Revenue (CIR) Caesar Dulay assuming the post after the six-year term of CIR Kim Jacinto-Henares. 

And what a welcome change! 

On his very first day of office, CIR Dulay signed three (3) important BIR issuances:

• Revenue Memorandum Circular (RMC) 69-2016: suspension of all "midnight" issuances signed by CIR Henares from June 1 to 30, 2016; 
• RMC 70-2016: suspension of all BIR audits effective July 1, 2016 and submission of inventory of all pending Letters of Authorities; and
• Revenue Memorandum Order (RMO) 38-2016: revocation of previous RMOs 24-2016 and 25-2016, which prescribes the investigation of parties involving the transfer/sale of real properties.

These tax issues were raised by the Tax Management Association of the Philippines (TMAP) with the  outgoing and the incoming CIRs during the last few weeks.  It is heartening to know that the new CIR actually listened to the woes of taxpayers and tax experts alike and took immediate action on them on his first day of office.

This act by the new CIR is highly commendable and sparks hope among taxpayers that a new day has dawned in the BIR.  

So, what do taxpayers hope for in the new BIR administration under CIR Dulay? 

1) That gone are the days when new regulations will be issued without any public hearing or discussion with stakeholders.  

2) That  rulings and other issuances will be made in accordance with what the law provides -- nothing more and nothing less. 

3) That fewer and simpler requirements will be asked from taxpayers to make filing and payment of taxes easier. 

4) That there will be less contact and minimal discretion given to BIR personnel to prevent corruption. 

5) That the tax base will be expanded to include more and more self-employed/professional individual taxpayers, SMEs and VAT-registered taxpayers. 

The first two (2) things are just an offshoot from the term of CIR Henares.  Restoring these things or rather, reversing what happened for the last six years will be easy to do. These are quick-wins for CIR Dulay and his team. 

The last three (3) items are really what the new BIR administration should work hard on.  These things will enable the Duterte Government to have a more taxpayer-centric, corrupt-free and revenue-efficient tax agency. 

Indeed, change has come to the BIR. Here's to seeing many more welcome changes at the BIR in the coming days!  

The Curious Case of DOF Tax Reform Proposals (and What They Mean to Individuals Like Me)

Last week, outgoing Secretary Cesar Purisima shared with the public the DOF's comprehensive tax reform proposal, which he hopes to pass-on to the incoming DOF team under President-elect Rodrigo Duterte. 

Many could not help but wonder -- WHY ONLY NOW?

After two (2) years of discussing tax reform proposals in the halls of Congress, it is unfortunate that the DOF decided to release its own version of proposals with just a little more than 30 days before the new administration steps in. While they may say that the best time to pursue tax reform is at the start of a new President's term, I would say that the DOF lost a rare opportunity to initiate and lead discussions on tax reforms, which would help consolidate the position of various stakeholders in preparation for the next administration. At this point, the new leadership team under incoming DOF Secretary Carlos Dominguez can just take these recently released proposals (which seem to be overly generous compared with the previous hard stance of the DOF) with a grain of salt and embark on preparing its own set of proposals.   

In any case, is there anything within the DOF comprehensive tax reform package, that will help address the concerns of individual taxpayers, like you and me? 

The following are the proposed major changes in the tax system under the DOF package, which we need to know as individual taxpayers:


REDUCED INCOME TAX RATE OF 25%

Both individual and corporate taxpayers will be subject to a maximum tax rate of 25%. HOWEVER, this is pre-conditioned on the DOF achieving certain tax-to-GDP ratios (i.e., 14% to 16.5%) over 6 years. 

As of November 2015, tax-to-GDP ratio stood at 13.72%. With this, the DOF's proposed reduction of income tax rate to 25% is NOT guaranteed. It will all depend on the BIR's collection efficiency, together with taxpayers doing their fair share in paying the right taxes on time. 


P1M TAX EXEMPTION FOR WAGE EARNERS

This proposed generous amount of tax exemption was a big, big surprise, especially coming from the DOF's hard stance during the Congress hearings. Note that this is way above the Tax Management Association of the Philippines' (TMAP's) proposal at P300,000 and that of Bayan Muna Party-list at P396,000, which was based on the family living wage.

While this all-in tax-exemption is definitely most welcome, it is disconcerting to know that this proposal might NOT immediately address the long-standing issue of bracket creep. Since this generous proposal is part of a comprehensive tax reform package, which will definitely take some amount of time to be approved by Congress, wage earners will continue to be unjustly taxed with high tax rates based on the current tax brackets, which have not been indexed to inflation for the past 20 years, at the very least.


FIXED TAX RATE FOR SELF-EMPLOYED AND PROFESSIONALS (SEPs) 

Under the proposal, wage earners and SEPs will be subject to different and separate tax systems. Similar with corporations, SEPs will be subject to fixed income tax rate, which will be reduced to 25% from the current maximum rate of 32%, subject to the same tax-to-GDP conditions mentioned above. 

This seems to be a good move to help simplify taxation for this sector, which has failed to contribute significantly to BIR collections. However, to make this work for SEPs, the same corporate income tax provisions on Optional Standard Deduction (OSD) and Minimum Corporate Income Tax (MCIT) should be applied. 

The only downside in having a fixed tax rate for SEPs is that it makes the tax system regressive since those earning a little will be taxed at the same rate as those earning a lot.  


INCREASE IN VAT RATE FROM 12% to 14% 

To help offset the resulting revenue losses from its proposals, the DOF proposes to increase the VAT rate by 2%. This means that the DOF will impose higher taxes based on consumption, rather than on income. Conceptually, this appears to be fair since the more one consumes, the more one has to pay taxes. 

However, one major concern with this proposal is that the country's VAT effort ratio is still quite low at only 2.2% of the GDP.  This means that there is still much room for improvement in terms of VAT administration and collection efficiency. Simply increasing the VAT effort by an additional 1% of GDP will translate to additional revenues of P126B, which is way above the P82B that the DOF hopes to collect by a 2% increase in VAT rate. 

Also, it is important to note that, while the reduction in income tax rate is pre-conditioned on achieving certain tax-to-GDP ratios, the increase in VAT rate is automatic under the tax reform package.  Thus, once enacted, we, consumers, will immediately feel the impact of the 2% VAT rate increase while we all wait for the conditional gradual reduction of income tax rates over 6 years or more. 


REMOVAL OF VAT EXEMPTIONS FOR SENIORS AND PWDS

To expand the VAT base, the DOF proposes to remove or minimize the grant of VAT exemptions, including those granted to senior citizens and persons with disabilities (PWDs).  While this may sound politically dangerous, this is actually a sound tax proposal. 

For the VAT system to effectively work, there must be as little or no exemption at all so that exchanges of goods and services can be properly monitored.  Meanwhile, giving such preferential VAT exemptions makes tax compliance difficult for sellers subject to VAT. Most importantly, providing VAT exemption to certain sectors of society benefits only those in the middle and high-income families since they have the ability to consume more compared with their indigent counterparts. 

Thus, in the case of senior citizens and PWDs, it would be best if direct subsidies and targeted financial support (e.g., higher pension benefits, medical allowances, etc.) will be given to them (more especially to those from the poor families), rather than merely providing general support by way of VAT exemption.    




They say it's better late than never. 

The DOF comprehensive tax reform package is a welcome addition to the ongoing public discussion on tax reform.  It is just unfortunate that the outgoing DOF leadership chose to forego its chance to chart the course of tax reform in this country at the time that it can garner support from various stakeholders. It is now up to the incoming DOF leadership team to make history and implement much-needed reforms in our outdated and unfair tax system. 

I just hope that real change will indeed come to the DOF this time. 

TAX WISHLIST FOR 2016

Happy New Year, fellow Taxpayers!

At the start of 2016, it is good to reflect and draw up a list of our aspirations as Filipino taxpayers for this New Year. This list is something that we can all share with other taxpayers and demand from our Government, both from the current administration and the candidates for the upcoming 2016 elections. 

Here's how my wishlist goes!  

Wishlist #1: INFLATION-ADJUSTED TAX BRACKETS

This is basic and elementary. Simply a no-brainer. 

Everyone knows that, with inflation, the value of income you earned in 1997 will translate to even higher income value this 2016. For example -- your P500,000 salary in 1997 is now equivalent to about P1.1 million this 2016. In 19 years, you have become a millionaire but, in terms of "real" value, they are really just the same. 

Unfortunately, the personal income tax table has remained unchanged since 1997. The taxable income values in the tax table have not been adjusted to inflation.  Thus, as your income goes up with the simple passage of time, you naturally get pushed up to the higher tax bracket. No wonder your effective tax rate goes higher and higher each year!

And here's my simple wish -- that the Government, through Congress, muster the courage to correct this defect and act swiftly within the next few weeks to amend the Tax Code with the new tax table below:

There should also be a provision for the automatic indexation of the tax table against inflation to avoid the same problem in subsequent years. 

With this top wish on my list, the Government will be able to increase the take-home pay of many salaried workers, including Government workers who will receive salary increases starting this year under the 2015 salary standardization law. 

I continue to pray that the Government finally comes to its senses to see the truth and decide in favor taxpayers rather than technocrats, who keep on warning about budget deficits and yet underspending the budget anyway. 


Wishlist #2: LOWER TAX RATES

This is not just a populist proposal.  It is something that the next Congress should continue pushing for since it makes a lot of sense, especially being part of the ASEAN region. And this applies to both individual and corporate taxes.

Aside from making our country more competitive in terms of attracting foreign investments, lower tax rates will also encourage greater tax compliance among individual and corporate taxpayers. 

As it is, the Philippines effectively has the highest tax rates in the ASEAN region and quite a limited number of taxpayers in the current system -- most of them, unfortunately, are mere salaried workers, like you and me. 

With lower tax rates (but with a tighter system for monitoring and penalizing non-compliance), we hope to get into the "Tax Net" more and more taxpayers who ought to do their fair share in nation-building. 

When we have low tax rates, we have every right to put to shame those who still refuse to pay their correct taxes -- Ibinaba na nga ang tax rates, ayaw pa ring magbayad ng tax...That is really such a disgrace! 


Wishlist #3: SIMPLIFIED TAX SYSTEM

Complexity breeds non-compliance. 

I personally believe that there are many Filipinos out there who would want to do the right thing and pay their taxes. Unfortunately, the current system somehow prevents them from doing so.  

First, blame it on the complex Philippine Tax Code, which is largely based on the American Tax Code. It is high time that we do a comprehensive review of the Tax Code to simplify four (4) important areas:

1) Tax Types

We need to reduce and/or aggregate the many different type of taxes being imposed on taxpayers. We also need to check if certain taxes, like documentary stamps taxes, are still relevant today. This will give focus both for taxpayers and the BIR. Taxpayers will have fewer but, more significant taxes to comply with and pay for. Meanwhile, the BIR will be able to concentrate its efforts in collecting these taxes from taxpayers. 

2)  Exemptions and Deductions

We need to minimize and/or eliminate the various forms of exemptions and deductions.  Having too many of these generous provisions in the Tax Code makes the taxpayer prone to confusion and even evasion. Paring them down or taking them out altogether will also make the BIR's job easier.

3) Frequency of tax return filings

Most of the taxes imposed under the Tax Code are required to be filed and paid on a monthly basis.  This makes compliance burdensome and costly on the part of ordinary taxpayers. Administrative costs of the BIR are also higher because of this. Thus, we need to lessen the prescribed tax return filing deadlines during the taxable year.  

4) Various administrative requirements

Given that we are now in a digital age, there should be more flexibility in the administrative requirements prescribed under the Tax Code, such as invoicing/receipting, bookkeeping, submission of audited financial statements and various tax reports. 

These admin requirements should also not be specified under the Tax Code since we have to enact a new law just to update it.  Rather, the BIR, as the tax administrator, should be given the power to prescribe most of these requirements. 

However, just like any power, this power given to the BIR should be subject to certain limitations and regular review by Congress. This is an important point, especially since the current BIR administration has the tendency of making tax compliance even more difficult for taxpayers with its burdensome rules and regulations. 

With the intent of catching tax evaders, the BIR sadly ends up strangling those who are already complying within the system. Meanwhile, those who would like to "legitimize" themselves to become part of the tax system get to be overwhelmed by too many requirements that they turn around disheartened, seeing that it would not be worth their time and effort in the end. 


Wishlist #4: RESPECT FOR TAXPAYER RIGHTS

The Tax Code provides so much power to the Commissioner of Internal Revenue (BIR) but, there is there is nothing much on taxpayers' rights, except for taxpayer remedies in case of BIR examination and assessment. 

I strongly believe that we need a Magna Carta of Taxpayer Rights (and Responsibilities, as well, to balance it off!) to provide for certain basic rights which must be accorded to taxpayers by tax authorities. 

Examples of these taxpayer rights, as provided by the OECD Centre for Tax Policy and Administration, are as follows: 
- The right  to be informed, assisted and heard; 
- The right of appeal; 
- The right to pay no more than the correct amount of tax; 
- The right to certainty; 
- The right to privacy; and 
- The right to confidentiality and secrecy.

Educating the taxpayers on their rights and providing measures to uphold these rights will help prevent abuses by tax authorities in their use of administrative powers. 


Wishlist #5: FAIRER TAX SYSTEM

Last but definitely not the least, I am sure that we all dream of a fairer and more equitable tax system -- wherein those who have more in life really pay more and those who have less in life get to pay less. 

There have been studies that the more fair a taxpayer perceives the tax system to be, it is more likely that the taxpayer will comply.  

If we get to address the first four (4) wishlist items, then we will achieve more fairness in the current tax system. However, the system must also be re-designed to effectively tax, not only those who earn more (in terms of income), but also those who have more (in terms of wealth). 

It has been noted by the World Bank that there is growing inequality in the Philippines with the wealth of the 50 richest Filipinos being equivalent to 1/4 of the country's GDP! 

It is really about time that we make our tax system a tool for redistributing wealth in this country.  It is not just about getting more and more collections for the Government. But, getting those increase in collections more from the wealthier taxpayers in this country, rather than from salaried workers belonging to the lower and middle-class. 

------------------

With my 2016 Tax Wishlist, I sincerely hope that we will commit to support and work towards Tax Reform this year and in the years to come. Government and Congress will have much work to do but, we must also do our share. 

How? By fulfilling our tax obligations as Filipino taxpayers, voicing out our concerns as Filipino citizens, and monitoring where our taxes go as our Government's bosses. 

Here's to a great year for #TaxReformNow ahead of us! 

BUWIS SERYE #2: SINGLE PARENT MARILEN

Marilen Reyes, 30 years old, is a single mother to her 10-year old daughter, Sheila.  She got married right after college to her high school sweetheart, Ben, but after 5 years of marriage, she discovered that Ben was having an affair with another woman.  Though she tried to work it out with him, Ben decided to leave her and her daughter.   At the start, he was sending some money regularly for Sheila’s schooling but, lately, his financial support has stopped.

It is a good thing that Marilen has been a working mother from the start of their marriage. She was able to save some money when they were still a double-income family but, ever since she became a single parent, finances became tight, especially during enrollment time. It is then a blessing for her to belong to a company which provides for interest-free education loan for dependents. However, she is quite anxious about the future when Sheila goes to college.  

Marilen currently works for one of the top Business Process Outsourcing (BPO) firms in the country as a business performance analyst.  She has a monthly salary of P50,000 and with this, she earns an annual income of P700,000, broken down as follows:

Annual salary       P600,000

Bonuses                 100,000

Total                     P700,000

She has heard about the tax reform issue from a young team mate of hers, Kiko.  He has a college buddy, JAL, who shared with him a template for computing the amount of over-collected taxes from his annual salary.  Kiko then shared the template with the rest of his team mates, including Marilen. 

Using the template from Kiko, this is what she came up with:

She noted that, under the current tax system, her Effective Tax Rate (ETR) is 26%.  This means that a little more than ¼ of her pay goes to taxes!  

Based also on the template, had the tax brackets been adjusted from their 1997 level, her ETR should just be 20% -- which means a huge tax savings of 6%, equivalent to P30,410 per year.  How she wished that the amount of over-collected taxes could have gone instead to a college fund for Sheila!

That is why when Kiko shared with their team the #BlackPaydayFriday protest last October 30, she did not hesitate to wear black that day in work and joined her team mates for a groufie while holding #TaxReformNow signs. By joining that protest, her one big hope is that she will be able to put aside more of her take-home pay for Sheila’s future, rather than simply overpaying for taxes to a Government which never really gave much support to single parents, like her.  

May magagawa kayang pagbabago sa tax system ang Gobyerno para sa mga single parent katulad ni Marilen?

Abangan!  

BUWIS SERYE #1: SINGLE YOUNG PROFESSIONAL JAL

Jose Anton Luna, or JAL to friends, is a 23-year old employee in a telco company.  After finishing a management course in college 2 years ago, he started working with the company as a Financial Analyst.  He is single and lives with his parents in Bulacan, where he commutes daily to and from work. 

He loves going out with friends from time to time but, is also a prudent in spending his hard-earned money.  He wants to save and invest some of it in mutual funds but, is finding it hard.  His net take-home pay is barely enough for his daily food and transportation costs. He also gives part of it to his mom to contribute to expenses at home.

His current fixed monthly basic salary is P17,500 and with this, he earns an annual income of P295,000, broken down as follows:

Annual salary     P210,000

Bonuses                 35,000

Overtime pay          50,000

Total                   P295,000

He has read about the proposed tax reforms in Congress and wondered to himself –

“How will the proposed updating of tax brackets to inflation impact his net take home pay?”

So, he decided to use his financial analytical skills to find out.  This is what he came up with:

He calculated his tax and noted that he is taxed at the 4^th bracket level with an effective tax rate (ETR) of 19%.  That is quite high for a young working professional like him! He knows that, in Singapore, the highest tax rate is just 17%.

Since the tax brackets are not adjusted to inflation, he worked back his pay to 1997 level and was shocked to find out that he should have been taxed only at the 3^rd bracket level with an ETR of 14%!  Applying the same level with adjusted bracket values to his current pay, he calculated that he is overtaxed by 5% or by P10,050 annually!

Wow! He could have already invested that amount in mutual funds!  Since he has been working for 2 years now, that would have been easily P20,100 in savings plus interest.  

With this, he realized the importance of the tax reform issue and decided to support the #TaxReformNow cause.  Last October 30, 2015, he joined the #BlackPaydayFriday protest by wearing black at work and posting a picture of himself in his Instagram account. He really would like to see Congress, coming back from its recess, to #PassTaxReformNow.  

Now he eagerly waits for Congress leaders to talk with the President on Monday, October 9, to finally convince him to change his mind in supporting tax reform, even just the proposed updating of tax brackets to inflation. He does not see any reason why such a measure should not be passed. It is but right to correct what is inherently wrong and unjust in the tax system for the past 19 years. What further study does the DOF need to fully understand that?

And if the Government fails to do something about it in this term, he knows as a duly-registered voter, who even took a day off his work for COMELEC biometrics,  that this will be an important election issue for him come 2016.

Papakinggan na kaya ng Gobyerno ang hinaing ng mga single young professionals gaya ni JAL? 

Abangan! 

WATCH OUT FOR "BUWIS SERYE!"

To realize the impact of unadjusted tax brackets for the last 19 years, Tax for Every Juan will run a "Buwis Serye" starting tomorrow, November 3, 2015, to highlight the amount of taxes "over-collected" from taxpayers through the years.  

The start of "Buwis Serye" will coincide with the opening of Congress, coming from its recess. 

For this series, REAL stories of salaried workers (although with fictitious names for confidentiality purposes) will be featured. The series will share their present work and family circumstances,  the amount taxes they pay under the current system, and the amount of taxes over-collected from them because of the Government's failure adjust the tax brackets with inflation. 

This series aims to show actual victims of "Bracket Creep" and, hopefully, this can help seek justice for them.  Our hope is for the Government come to see people for who they are and not merely as taxpayer statistics in the current tax collection system. 

With this, Tax for Every Juan joins the call for President Aquino and legislators to immediately act on pending tax reform proposals in Congress, particularly the indexation of tax brackets to inflation. 

This tax reform measure clearly does NOT require any further study. It simply requires our Government to give back to taxpayers what it has unduly collected from them by way of higher taxes through inflation for the past 19 years. 

Regardless of the estimated loss of revenues from this proposal, this measure should NOT also bear any cost on the part of Government. This is because taxpayers have borne for the longest time the burden of higher taxes and, consequently, lower take-home pay.

NOW is the time to give back to taxpayers what rightfully belongs to them. Ngayon ang #TamangPanahon para sa Tax Reform.

So, to the President and our Legislators -- Time to #PassTaxReformNow! 

P.S. - If you would like to have your story featured in the "Buwis Serye," 

please send a pm through our Facebook page 

https://www.facebook.com/taxforeveryjuan 

or post a message in this blog post. 

We'll get in touch with you for the details. Thank you.

ARE FILIPINOS REALLY UNJUSTLY OVERTAXED?

The call for #TaxReformNow has two-parts.  

First, it is all about FAIRNESS.  Filipino taxpayers are calling for the immediate indexation of the existing personal income tax brackets based on movements of the Consumer Price Index (CPI) from the time the 1997 Tax Code was enacted . This is to address the "bracket creep" phenomenon, which has practically raised tax collections for the Government simply through inflation, rather than better tax administration.  Add to this the fact that bulk of individual tax collections have always been borne by salaried workers, who are easy prey to this condition.  

Second, it is about COMPETITIVENESS.  Filipino taxpayers are calling for the lowering of tax rates both for personal and corporate income tax to ensure our country's continued growth and not lag behind our ASEAN neighbors. Lower tax rates, together with the simplification of the tax system, will greatly encourage tax compliance and broaden the narrow tax base. 

The second one we can definitely set aside for now for the next Administration to act on. This will require a comprehensive and holistic approach, as the DOF often puts it. However, we definitely cannt allow the present Administration of President Aquino to just turn a blind eye and stubbornly refuse to address the unfairness of the current tax system.  

Passing a new tax law to simply adjust the existing income tax brackets to inflation would not be that difficult.  They just need to update the income tax table with inflation-adjusted tax base values.

This is how an inflation-adjusted tax table would look like.

And to prove the point about the unfairness of the current tax system, let us check the sample computation below.

Given: Juan used to receive P10,000 monthly basic salary in 1997. He received salary increases to adjust for inflation and his monthly pay is now worth P22,000.

Assuming 13th month pay, Juan's annual salary increased by 115% from 1997 to 2015 (from P130,000 to P286,000) because of inflation.

Under the current tax table, Juan's 2015 income is subject to a higher rate of tax because of the unadjusted tax brackets. Everything has already been adjusted to inflation, except for the tax brackets.  Thus, Juan is clearly overtaxed by P5,350 under the current unjust tax system! 

What else do we need to prove more?

The #TaxReformNow Movement proposes that the inflation-adjusted tax brackets be enacted in this 16th Congress to immediately address this long-standing unfairness in the personal income tax system. This is a simple act of justice that we MUST demand NOW from our leaders in both the Executive and Legislative branches of government.

The P30 billion price tag they put to it will all be worth it... if only to ensure that each and every working Filipino will continue to be taxed at the same rate and receive the same value of net take-home pay in 2015.  Otherwise, Filipino taxpayers will continue to suffer from this injustice until another 2 years when the new Administration comes in and settles down.  And we definitely cannot wait that long anymore.  

Tama na. Sobra na. Income Tax Ibaba! 

Time for #TaxReformNow.

PS - If you believe in this cause by the #TaxReformNow Movement, join the #BlackPayday protest on October 15, 2015. Wear black or change your social media profile pic to black to mourn the unjust, sad state of our current tax system. It's about time for our silent voices to be heard.