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. 

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. 

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! 

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. 

WHY TAX REFORM NOW?

A lot has happened since August of this year on the Tax Reform issue.  

We have seen how our legislators, particularly Cong. Miro Quimbo and Sen. Sonny Angara, pushed hard for their Tax Reform proposals on the adjustment of income tax brackets and the lowering of income tax rates.  We also read about the House Leadership strongly backing them initially on the passage of such Tax Reform proposals.

Then, we heard the President reject outright the calls for Tax Reform by echoing the arguments of the DOF and the BIR, particularly on the budget deficit that will lead to a downgrade by credit rating agencies. In response, TMAP and 17 other broad-based organizations banded together and issued a Unity Statement in support of calls for Income Tax Reform. 

After which, there was a meeting called by the President with Tax Reform champions Cong. Quimbo and Sen. Angara, wherein the President subsequently asked the DOF and BIR to re-study their proposals.  

Suddenly, there was a glimmer of hope that finally, the President might actually listen and heed the call of his bosses. 

But, just very recently, it was disconcerting to hear the House Speaker seemingly having a sudden change of heart by saying that there is no time anymore for the 16th Congress to pass the proposed tax reform measures.

So, where do we go from here? 

There is no denying that everybody agrees that our country badly needs Tax Reform. Even the DOF and BIR oftentimes profess their support for a comprehensive and holistic Tax Reform. Unfortunately for us, this simply means that they agree to Tax Reform in the long-term (when they are no longer around) but, definitely, not now (under their term). 

But then, we ask them, given that we are seeking a comprehensive and holistic Tax Reform -- WHY NOT START NOW?  

To answer this, we have to first acknowledge three (3) Basic Truths on the issue of Tax Reform.

1) The Personal Income Tax (PIT) system is inherently unfair because of unadjusted tax brackets for the past 19 years. 

There is no denying that taxpayers, particularly salaried workers, have long suffered from the issue of "bracket creep" due to failure of previous administrations to index the income tax table to the Consumer Price Index (CPI).   

2) The BIR heavily relies on salaried workers for PIT collections. Self-employed and professionals contribute very little.

80% of PIT collections come from salaried workers.  While the BIR has tried to run after self-employed and professionals with its shame campaign, it still has little success in expanding the tax base and generating more collections from them.  

3) In this age of ASEAN Integration, our income tax system (both for personal and corporate) has lagged behind our ASEAN neighbors in terms of lower income tax rates. 

Through the years, the staggered reduction of income tax rates has become part of the tax policy of our ASEAN neighbors. This has promoted tax competition within the region in order to attract foreign investment and stimulate the economy.  

Given these three (3) Basic Truths, why do Tax Reform advocates, like me, push for Tax Reform NOW? Can we just not wait for the next Administration to come in?  

First of all, Tax Reform advocates do NOT really expect all reform measures to be passed this year. That would be unrealistically impossible!  

Secondly, Tax Reform advocates do support the need for comprehensive and holistic Tax Reform measures to ensure that, at the end of the day, we will have a more fair, progressive and simplified tax system.  A reformed tax system will help ensure inclusive economic development for our country and people.

Lastly, Tax Reform measures which seek to address the issues of broadening of the tax base (through simplification of the tax system) and tax competition (through lowering of tax rates) can come along later.  These measures do require further extensive study and discussion. 

HOWEVER, the call for #TAXREFORMNOW is deemed urgent in addressing the issue of FAIRNESS, particularly in terms of indexing the tax brackets to inflation.

If we already know that there is inherent unfairness in the PIT system because of unadjusted tax brackets, why not act on it at the soonest by indexing them to inflation NOW?  Why continue to perpetuate the unfair tax system and leave it up to the next Administration?  

Also, the proposed adjustment in the tax brackets due to inflation will not change the existing PIT system.  It will remain under "status quo," which is what the DOF and BIR wants until a comprehensive, holistic reform is made. 

The only change is for the underlying tax bracket values in the income tax table. This is no different from what the BIR did under Commissioner Kim Jacinto-Henares at the start of PNoy's term, wherein the BIR adjusted for inflation the VAT-exempt threshold amount.

Under RR 16-2011 dated October 27, 2011, the BIR adjusted for inflation the value of goods and services considered exempt from VAT.  The BIR updated the values just after 5 years -- i.e., from its 2005 values to its 2010 present values at that time. This resulted to reduced VAT collections for the Government AND the BIR did NOT make any fuss about the foregone revenues resulting from the higher VAT-exemption. 

Why then does BIR not do the same in supporting proposals to adjust the tax brackets for individual taxpayers, which will benefit mostly low and middle-income salaried workers? Surely, 19 years of unadjusted values should have merited its attention and quick support.

#TAXREFORMNOW is not an unreasonable populist call, as some would like to paint it. It is not there just for "pogi" points of legislators who have been pushing for it right at the start of the 16th Congress, not just in time for this 2016 elections. It is a real response to the plea for justice and mercy on behalf of millions of salaried workers who have long been overtaxed in this inherently unfair tax system.  

Having said this, the Tax Reform measure of indexing the tax brackets to restore fairness in the system could NOT simply wait anymore. Napapanahon na ang pagtatama ng sistema ng pagbubuwis.  Hindi na ito puedeng ipagpaliban pa.  

As the saying goes, "Justice delayed is justice denied."  

And if our Government would knowingly chooses to ignore this plea, then rest assured that we, the salaried workers, will always remember this Administration for its grave sin of omission, especially this coming elections. 

There is still time to pass a tax reform law, Mr. Speaker.  Pag gusto, may paraan.  Pag ayaw, maraming dahilan.  You just need to enact into law the indexation of tax brackets. That is what is most important at this point.  The other reforms can be handled by the 17th Congress, which hopefully will be more supportive and courageous in pushing for Tax Reform. 

There is still time, Mr. President, to change your mind and heed the voice of your people. Let their cry not be drowned out by the usual rhetorics of the DOF and BIR, which prioritizes short-term revenue collections over long-term equity and growth. Let this single act of Tax Reform be your greatest legacy towards "Tuwid na Daan."

Fellow taxpayers, this Tax Reform advocacy presents to us a once-in-a-lifetime opportunity to realize meaningful changes in the Philippine tax system. It is NOT yet too late. If we let this chance pass us by, it will take at least another two (2) years before we get another crack at Tax Reform. 

Let this be the time to make our voices heard -- #TAXREFORMNOW. May we all never ever give up!