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.