TRAIN Hits and Misses

 Image credits: Interaksyon.com

Happy New Year!

It has been sometime since this personal blog on taxes was updated. Thought it would be confusing  to discuss the different versions of the tax reform bill until it was clear what the likely outcome would be. 

There were various versions filed in the House of Representatives before they came out with a committee report that was later on approved by the Lower House and endorsed to the Senate.  In the Senate, its various bills metamorphosed into its own committee report that was much different from that of the Lower House version. And true enough, up until the Bicam, the bill that was endorsed to both houses of Congress for approval still contained some new provisions.

TRAIN is the current Government's first attempt to reform the country's tax system. Under its declaration of policy, it is meant to enhance the progressivity of the tax system, provide as much as possible equitable relief to a greater number of taxpayers and their families, and ensure that the Government is able to provide for the needs of the people.  

So how did the final TRAIN Law look like and measure up to these objectives? There were hits and misses.

The reduction of personal income tax rates and updating of the individual income tax table is a done deal from the very start. As early as 2014, tax advocates, like the Tax Management Association of the Philippines (TMAP), had long pointed out the need to adjust the tax table to address the bracket creep issue and reduce the tax rates to make us competitive within the ASEAN region. It is something that our Government owes to the working class. Thus, its passage under the TRAIN, while much welcome after the long wait, was something that people had expected as a matter of course.

So what went right with the TRAIN?

HIT #1: Simplification of Tax System for Self-employed and Professionals (SEPs)

The option to avail of 8% flat tax for SEPs with gross sales/receipts below P3M is one step to encouraging tax compliance from this sector. Making it lieu of income tax and 3% percentage tax is already good incentive. We should hold them accountable and report them to the BIR if they still fail to comply, 

Meanwhile, moving the tax deadlines for individual income tax filers by a month later for the 1st quarter is also much welcome. This way, individuals will no longer have an excuse for late quarterly ITR filing since this deadline would no longer coincide with the annual ITR filing deadline.

HIT #2: Single Tax Rate for Property Transfers

Under TRAIN, transfer of properties will be subject to a tax rate of 6%, regardless of the mode of transfer -- be it via sale, donation or as part of the estate.  This way, people need not think of ways to try to minimize or avoid tax payment on these transfers.

In fact, the most tax-efficient mode of transfer under the TRAIN will be via the estate -- i.e., simply allowing properties to be transferred at the time of death rather than pro-actively doing something about it beforehand. This is because of some generous deductions allowed in computing the net estate, which will practically protect low and middle class families from this tax.

HIT #3: Taxpayer-friendly Administrative Provisions

TRAIN has several provisions that aims to ease compliance requirements -- e.g., audited FS requirement, ITR form pages, VAT registration, invoice/receipt issuance. 

It also settled some contentious taxpayer issues, which arose during the previous BIR administration -- e.g., interest on interest, VAT on tax-free exchanges, donor's tax on business transactions, VAT on condominium and association dues.


Even with these hits, TRAIN could have been a much, much better law if not for these misses.

MISS #1: Continued/Expanded VAT Exemptions

The removal of numerous VAT exemptions was needed to widen the VAT base and make the VAT system more efficient (i.e., avoid leakages).

While TRAIN repealed the VAT exemption privilege of a good number of specific entities, it failed to remove or limit the VAT exemption of broad sectors, such cooperatives and real estate.

What's worse, it even provided for additional VAT exemption on the sale of drugs and medicines prescribed for diabetes, high cholesterol and hypertension starting January 1, 2019. This runs counter to the principle of providing for Government support and subsidy directly to intended recipients rather than using the tax system to dispense blanket subsidies to everyone, including the rich, that are hard to account for later on.  

MISS #2: Regressive New Auto Excise Tax Rates

The imposition of higher excise tax rates was meant to generate more revenues from the purchase of automobiles. 

Under the current system, the rates are graduated based on the net manufacturer's price or importer's selling price. It is a progressive tax system since the more expensive the car, the higher the taxes one has to pay.

Unfortunately, under TRAIN, the top statutory tax rate for luxury cars was reduced from 60% to 50%. Thus, the most expensive cars will actually pay lower taxes under the TRAIN compared with the old tax system.  Simply unbelievable!  With this, the burden of higher auto excise taxes will be shouldered by lower and mid-range priced cars, which is utterly regressive.

Meanwhile, instead of graduated tax rates, TRAIN imposed fixed tax rates.  Thus, there are some distortions on the taxes to be paid as the price transitions from lower to the higher tier.

MISS #3: Missing Indexation Provisions

The initial TRAIN draft bills had various indexation provisions all over the place. This is to ensure that the peso values indicated in the Tax Code gets to be automatically updated for inflation, without need for Congress to legislate it. It was a painful lesson learned from the personal income tax table, which got stuck with old tax bases subject to high tax rates that facilitated the bracket creep over the years.

When the final TRAIN law was signed, all the indexation provisions were suddenly gone. While the law provided for some changes in tax rates in 5 years time, tax bases will still remain the same.  Hopefully it would not take us another 20 years or so to address this important item.

MISS #4: Preferential Tax Rate for ROHQ Qualified Employees

Under the TRAIN bill that was passed by legislators, it was provided that existing ROHQs, OBUs and petroleum service sub/contractors will continue to avail of the preferential tax rate for their qualified ROHQ employees. Meanwhile, all newly-registered entities by January 1, 2018 shall no longer avail of this preferential treatment.

This provision runs counter to the principle of equity wherein those with the same ability to pay taxes should pay the same amount of taxes. To be fair with employees of entities that were granted this incentive and other individual taxpayers, legislators could have provided for a sunset provision to facilitate transition until they eventually become subject to the regular tax system.

When the bill was sent to the President for signing, this provision was among the items he vetoed. Unfortunately, however, there seems to be some legal question on the effect of the veto -- on whether existing entities can no longer avail of the preferential tax rate as the President intended or will it simply be back to status quo considering the way that the provision was crafted into the law. People are now awaiting the DOF implementing regulations regarding this matter.

MISS #5: "Surprise Taxes" without Public Consultation

There were several new tax provisions included in TRAIN, which were not part of the bill approved by the Lower House that was subject to extensive public hearings. These include the doubling of DST rates, tax on cosmetic procedures, and increases in tax rates for sale of shares of stocks, coal and tobacco taxes.

While we understand that the Senate and Bicam were looking for additional sources of revenues, there were no in-depth studies on the impact of these "surprise taxes." There was also lack of consultation with affected groups.

What's the Verdict?

Success can be best measured against its set objectives. 

While TRAIN has made some inroads in progressivity and equity, particularly for the personal income tax system, a lot still needs to be done in VAT and excise tax systems to ensure that are tax laws are not mangled by legislators and derailed by special interests.  We should hold our legislators accountable and remain vigilant so that we do not experience the same in the subsequent tax reform packages.  

While TRAIN will be able to raise much-needed revenues, Government must ensure that collections are maximized from those who have the ability to pay the tax, particularly the SEPs and the rich. Now that we have a more taxpayer-friendly tax law, those who refused to pay taxes before no longer have an excuse not to pay them this time. The Government must do its job in gathering taxpayer data and smartly analyzing them in order to check if they properly report and pay their taxes. Government must also enforce the necessary penalties in cases of non-compliance. 

On the other hand, the impact on the poorest of the poor -- i.e., those who did not benefit from the reduction in personal income taxes but had to share in the increase in consumption taxes, must be sufficiently protected by the Government.  This must be done through proper implementation of social welfare programs identified under the TRAIN Law, such as the pasada vouchers, unconditional cash transfers and the like. We must hold the Government accountable in ensuring that these programs reach their intended beneficiaries and provide whatever necessary support to cushion the impact of the TRAIN Law.  Otherwise, TRAIN will be one big failure if the Government forgets to protect this hardest hit sector. 

Philippine tax reform still has a long way to go. TRAIN is just the first station along its journey. It may not exactly be where we would have wanted it to go. It could have done a whole lot more in reforming our tax system. 

But, with the next stations ahead, let us remain vigilant and actively participate, whenever we can, along the way so that we, as one Filipino nation, will reach our end-destination -- a tax system that is truly fair, simple and just.

TAXREFORMNOW SERIES #2: Other Personal Income Tax (PIT) Reforms You Probably Didn't Know

NOTE: Tax For Every Juan (TFEJ) will run a series of commentaries on significant proposed tax reform measures submitted to Congress. This is to contribute to the country's tax reform discussion and enable ordinary taxpayers to understand more what is being proposed and how it will impact them when passed into law. First among these would be the DOF Tax Reform Proposals, which will come in several packages.  

Aside from changes in the personal income tax brackets, the DOF also introduced a list of other reforms affecting personal income taxes (PIT).  Most of these proposals have not been discussed nor tackled yet in public.   

DID YOU KNOW THAT...

• PCSO and Lotto winnings are currently exempt from tax? 

DOF proposes to subject these to the usual 10% final tax on winnings, which I think is but fair and equitable.

• Certain employees of Regional Operating Headquarters (ROHQs), Offshore Banking Units (OBUs) and petroleum service sub/contractors currently enjoy a preferential income tax rate at 15%? 

DOF proposes to remove this preferential tax treatment given to alien individuals and Filipinos occupying a similar post as those of the aliens. Instead, DOF intends to subject them to the same income tax table as other employees. This is also but fair and equitable. 

• Fringe Benefits Tax (FBT) is currently imposed on fringe benefits given by employers to managers and supervisors? 

This tax is shouldered by employers and is computed by grossing-up the value of fringe benefits given (e.g., company car, housing, interest-free loan, etc.) by the maximum tax rate of 32%. The DOF proposes to lower the rate from 32% to 30% by 2019, consistent with the cut in tax rates by that time. 

While this cut in FBT rate is most welcome (consistent with the income tax cuts), the imposition of this kind of tax on employee benefits can be further improved with the following suggestions:

a) There should be no distinction on the type of employees to be covered by this tax. Currently, fringe benefits received by rank and file employees, if any, are not covered under the FBT system.  Thus, these are subject to compensation withholding tax, instead.  This is disadvantageous to rank and file employees since the FBT on fringe benefits given to managerial and supervisory employees is shouldered by the employer. 

b) FBT should be imposed only on non-cash fringe benefits. If there are cash-based fringe benefits, these should be subject to the usual compensation withholding tax to avoid confusion in compliance and administration. 

c) De Minimis Benefits should be re-defined to include only those which are given in kind. Currently tax-exempt De Minimis Benefits include both cash and non-cash benefits. To avoid confusion in compliance and administration, cash-based De Minimis Benefits should be included among those compensation items subject to the usual withholding tax.  

TAXREFORMNOW SERIES #1: A Closer Look at the Personal Income Tax Brackets

Courtesy of: Manila Bulletin

NOTE: Tax For Every Juan (TFEJ) will run a series of commentaries on significant proposed tax reform measures submitted to Congress. This is to contribute to the country's tax reform discussion and enable ordinary taxpayers to understand more what is being proposed and how it will impact them when passed into law. First among these would be the DOF Tax Reform Proposals, which will come in several packages.  

The Department of Finance submitted to the House of Representatives last September 26, 2016 the package one of its proposed tax reform measures, which it has called 'Tax Reform for Acceleration and Inclusion." 

The proposed measures in draft bill format covers the following taxes:

1. Personal Income Tax (PIT)
2. Value Added Tax (VAT)
3. Excise Tax 

This post will tackle the most anticipated part of the package -- the proposed new PIT brackets.

Salient features of the change in PIT bracket proposals are as follows:

• 1st P250,000 income is tax-exempt. The following exemptions are deleted to simplify tax compliance and aministration:
  - P50,000 personal exemption;
  - P25,000 additional exemption for each dependent (up to a maximum of 4);
  - tax-exempt bonuses and other income up to P82,000; and
  - tax-exemption for minimum wage earners (MWEs).

• Lowest statutory tax rate starts at 20%. Highest statutory tax rate of 35% kicks in for income over P5,000,000.
• Proposed timing for 1st phase is 2017. Statutory tax rates will be lowered starting 2018, with 15% being the lowest.
• Taxable income values will be indexed to inflation once every five (5) years based on the 5-year cumulative inflation rate.

WILL THE PROPOSED CHANGE IN PIT BRACKETS EQUITABLY RE-DISTRIBUTE IN A PROGRESSIVE MANNER THE TAX BURDEN AMONG INDIVIDUAL TAXPAYERS? 

A close look at the resulting effective tax rates (i.e., tax divided by gross income)  for taxpayers with different levels of income would show the following:

1st Year: 2018 

• Highest drop in ETR (at 8%) will be felt by those with income P250,000 and below.
• Those with income up to about P6.9M will have reduced or no change in tax burden, compared to the current tax system.
• 25% ETR is computed at P2M level. 
• 5M income level has ETR of 29%, or a 1% drop from current ETR. 
• 35% ETR kicks in for those with income of about P60M.

2nd Year: 2019

• Highest drop in ETR of 8% will extend to those with income up to P1M.
• Those with income up to about P11.8M will have reduced or no change in tax burden, compared to the current tax system.
• 2M income has 20% ETR for Year 2. Down by 5% from initial year.  This income level has the biggest drop among the sample gross income. 
• 26% ETR is computed at P5M level.
• 35% ETR kicks in for those with income of about P90M (not shown anymore).

Based on the above simulations, it would appear that many individual taxpayers, especially the low and middle-income salaried workers, will benefit from the DOF proposal. Even upper middle-income taxpayers will benefit from the proposal, especially when the rates are further lowered on the 2nd year. 

While the reduction in taxes would not seem to be that significant (i.e., no double-digit reduction from the current ETR), the extent of taxpayers to be covered by this tax reform measure is a good indicator of the DOF's attempt to broaden the impact of tax reform while, being prudent with the resulting revenue loss from the tax cut.  The phasing of the tax rate cuts into two (2) years will also enable the Government to transition its fiscal position.  

However, the proposed changes in tax brackets can be further improved on the following areas to address the issues of equity and progressivity:

TIMING

Since the tax brackets have remained unchanged, at the very least, for 20 years, delaying the effectivity of the new tax table implementing the tax cuts will continue to deny tax justice for the low and middle-income salaried workers, who have been bearing the tax burden among individual taxpayers. The reform is something that was needed yesterday.  Thus, the earlier it is implemented, the better.  

If the DOF is concerned with immediately contending with revenue loss on the proposed PIT cuts, then it can soften the blow by having an interim solution -- that is, to simply index to inflation the current PIT table, without effecting any reduction in tax rates yet. 

As last proposed by the Tax Management Association of the Philippines (TMAP) and some legislators, this would mean adjusting the top income threshold subject to the maximum 32% rate from P500,000 to about P1.1M. Except for the change in tax table, this would entail no other change to the existing tax system. This interim proposal is estimated to result to ETR reduction for most low and middle-income taxpayers of about 4% to 6%, depending on the income level.      
Per estimates released by the DOF in the previous administration, this simple indexation proposal would result to around P30B to P60B in revenue losses. Assuming we take even the higher range of estimated loss of P60B, this will be a lot less than the P170B+ the DOF is prepared to lose under the package come 2018.  

Thus, it will be best if the DOF introduces a separate bill indexing the current tax table to inflation and make it effective come January 1, 2017.  

BROADENING THE TAX BASE

Except for the lowering of tax rates, there is nothing in the draft bill that introduces changes in the way self-employed and professionals (SEPs) are taxed that will help broaden the very narrow tax base. 

To aggravate the situation, the top statutory rate is even increased to 35% at the P5M income level and the rate for Optional Standard Deduction (OSD), which is meant to simplify tax compliance and administration, is even lowered from 40% to 20%.  These two features of the draft bill will not encourage SEPs in changing their behavior.  

35% Top Statutory Rate

The following are some reasons to consider lowering the proposed 35% top statutory rate:

1) While per DOF, only about 6,000 taxpayers are affected by the increase in tax rate, this does not yet consider the potential number of additional taxpayers (mostly SEPs) that are currently not paying the correct amount of taxes. Lowering the top statutory rate will help encourage them to declare more income; thus broadening the tax base. 

2) Given that the Corporate Income Tax (CIT) rate is proposed to be lowered to 25%, a 10% variance against the PIT rate appears to be significantly wide. There is a need to close the gap so that taxpayers are indifferent as to whether they remain sole proprietors or decide to incorporate.  

3) The DOF proposes the 35% tax rate for the ultra-rich. However, the P5M income threshold appears to be low in order for one to be considered ultra-rich.  Meanwhile, efforts to tax the ultra-rich will be more effective if done through capital or wealth taxes, rather than the PIT. The most that the PIT can capture are high-income salaried executives, who are not necessarily the ultra-rich. 

Thus, the DOF may consider lowering the top PIT rate to 30%. This is still 5% higher than the corporate tax rate but, the gap is no longer too wide. The 2% tax cut in the top statutory rate will also contribute to greater perception that the PIT system is now more fair and equitable; thereby, encouraging more SEPs to be part of the system.  

OSD Rate

Reducing the OSD rate from 40% to 20% means lesser incentive to avail of the OSD option. This will encourage individual taxpayers, instead, to use the itemized deduction method to minimize their tax liabilities.  

Instead of doing this, the DOF can choose to promote more the OSD option in order to help SEPs simplify their tax compliance and for the BIR to simplify tax administration. Aside from retaining the OSD rate at 40% or maybe just lowering it to about 30% due to the tax rate cuts, the DOF can prescribe OSD as the default method for individual taxpayers, with the itemized method being the exception.  

Once availed, the following benefits may be given to taxpayers using the OSD method:

• No need for audited financial statements;

• Simplified bookkeeping and invoicing requirements (except if VAT-registered);

• Express lane for BIR taxpayer service; and

• Last priority in audit.

CONCLUSION

The DOF proposed tax brackets, which effectively lower the tax burden over a period of two years starting 2018, will benefit many of the salaried taxpayers, who are currently bearing the brunt of the tax burden.

However, the DOF may have to consider providing immediate tax relief to address the long-standing issue of bracket creep. This can be done by introducing an interim solution of indexing the current tax tables while, the various tax reform packages are being discussed.  

The other alternative is for the DOF to implement the revised tax brackets come taxable year 2017, simultaneous with the implementation of the proposed increase in excise taxes and removal of certain VAT exemptions. 

Meanwhile, the DOF may also have to reconsider lowering the top statutory tax rate from 35% to 30% in order to broaden the tax base and remove an unintended tax incentive for self-employed to incorporate. 

Lastly, the DOF has to maintain the OSD rate at 40% or at the most, reduce it to 30%, in order to encourage SEPs to use this deduction method. Making the OSD a default method and providing incentives for its use will help attain simplification and contribute to broadening the tax base.   

DOF NEW TAX TABLE PROPOSAL AND WHAT IT MEANS FOR YOU

The Department of Finance (DOF) recently released to the public the inflation-adjusted income tax brackets and revised rates under its proposed tax reform package. 

News reports mentioned that this will involve "the adjustment of the tax brackets to inflation, lowering of personal income tax rates to 25%, except for the highest income earners." 

See proposed personal income tax table by the DOF below.

Offhand, it appears that those with income P250,000 and below will just be subject to a fixed tax of P2,500. Meanwhile, the proposed top taxable income threshold will now be pegged at P5M, instead of of just P500,000.  However, the topmost income tax rate at this threshold will be increased from 32% to 35%.   

So, what does this proposed new tax table by the DOF actually mean for YOU? 

Let us find out to see if you are among those who will benefit from this proposal. 

Since this is a graduated tax table and there is both a fixed and percentage component of the tax imposed, we need to first determine the Effective Tax Rate (ETR), which is the resulting tax payable expressed as a percentage of the taxable income. 

A comparison of the ETR under the existing tax table versus that of the DOF proposal would show the following:

Based  on this comparison, we can conclude the following:

• The biggest tax cut in terms of percentage will be for those with income of P250,000 -- i.e., at 19%.
• Those with income of P1M and below will experience a significant double-digit percentage reduction in tax rate. 
• Those with income of P2M will have an ETR of 25%, which was the rate initially promised by the DOF. 
• Those with income above P5M but, below P10M will have a slight reduction in tax rate. 
• Those with income of P10M and above will experience an increase in ETR from the current maximum rate of 32%.

From this, we can say that, indeed, the low and middle-income earners -- i.e., those with taxable income of P2M and below, will significantly benefit from the proposed new tax table. As for those with taxable income above P2M but, below P10M, they will still benefit although, not as much. Meanwhile, those with P10M taxable income will be taxed even more. 

The DOF proposal appears to be progressive and equitable since it seeks to provide relief for the low and middle-income taxpayers while, minimizing revenue losses by imposing higher tax rates on taxpayers who significantly earn the most.

However, since the DOF proposal did not disclose pertinent details yet, we would like to raise certain concerns and clarifications. 

This proposal presupposes that there is no change in the personal income tax system and that existing exemptions are retained -- i.e., tax exemption for minimum wage earners and overseas Filipino workers, personal and additional exemptions? 

Note, in particular, that the minimum wage earners' taxable income fall below the P250,000 income threshold which is subject to the fixed tax of P2,500.

What does the DOF mean by "lowering personal income tax rates to 25%"? 

Based on the tax table, the highest tax rate will be pegged at 35% and the 25% tax rate is imposed on income in excess of P400,000 but, below P800,000. Meanwhile, the 25% ETR will be at the P2M taxable income level. 

How can the proposed new tax table encourage self-employed and professionals to completely declare their taxable income and properly pay their income taxes?

Optically, it would appear to them that they will be subject to income tax from 20% to 35% tax rates. With them realizing the actual ETR, they may get discouraged and remain averse to declaring their true income. 

Note that, the TMAP Proposal (which was discussed in this blogsite previously) indicated a P300,000 tax-exempt threshold, which already covers all existing exemptions in order to simplify administration and compliance. This will also help minimize the revenue losses since the existing exemptions are already factored-in prescribing said tax-exempt threshold. More importantly, this would optically show lower tax rates in the income tax table, which will help encourage the self-employed and professionals to declare their true taxable income. 

Why is the top individual tax rate of 35% higher than that of the proposed reduced corporate income tax rate of 25%? Would not this just lead to individuals incorporating themselves in order to avail of the lower tax rate? 

There are countries wherein the individual tax rate is higher than those of corporations. Meanwhile, there are those countries which ensure parity between individual and corporate tax rates to avoid any differentiation. 

Note that, in the Philippines, individual shareholders of corporations get to be hit twice by income taxes -- one via corporate income tax and the other via dividend final withholding tax, which is at 10%.  It could be that the DOF considered the 35% top rate for individual taxpayers to level-off the taxes imposed on individual shareholders -- i.e., 25% corporate income tax plus 10% dividend income tax.  The 35% tax rate will also make the Philippines at par with Vietnam in terms of having the highest personal income tax statutory rate in the ASEAN region. 

Maybe this is something that the DOF can still look further into. It somehow needs to balance the need to minimize revenue losses and the impact of lower tax rates in encouraging tax compliance. 

Despite the foregoing, we can say that the DOF proposal is one great initial step in making the personal income tax system more progressive and equitable. While it will hurt those with income of P10M and above, the low and middle-income taxpayers will benefit most from it.  It will also be good if it considers optically lowering the tax rates to encourage greater tax compliance, especially among self-employed and professionals. 

At this point, we, taxpayers, are definitely looking forward to knowing more about the details of the DOF's comprehensive tax reform package, which will hopefully result, not only to lower income tax payments but also better lives through greater consumption or savings. 

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. 

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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!