In the Philippines if you are a hard working employee receiving at least P30,000 monthly salary, your income will be subject to 30% personal income tax same as the corporate income tax. And if you work harder to earn more than P500,000 a year, you will pay the highest income tax rate at 32% while the billionaires who own the corporation where you are working will pay only 10% final tax for the dividend income they receive annually.
If you compare your income here and abroad, Overseas Filipino Workers (OFWs) may be doing the same work abroad for a higher pay and a lower tax e.g., an OFW earning P500,000 in Singapore will pay only 2% income tax while those working in Middle East countries will not pay any income tax at all.
The injustice in our tax system is widespread but not irreversible. We need to restructure our income tax system by broadening the taxpayer base and making our tax administration more efficient in collecting right taxes to support the comprehensive tax reform.
A genuine tax reform is where the rich pays more taxes while everyone else gives their fair share.
This means we need a big shift to restructure our income tax system:
- from collecting 60% of total revenues from income tax to consumption tax (VAT & Excise);
- from collecting 85% of personal income tax from employees to self-employed and professionals (SEPs);
- from less than 15 million registered individual taxpayers to at least 30 million with less than 60% minimum wage earners;
- from 200 thousand registered professionals to at least 2 million with at least 200% increase in total contributions;
- from 2,000 large taxpayers to at least 5,000 large taxpayers to contribute more than 60% of the total revenue collections.
The proposed comprehensive tax reform package of the Duterte Administration aims for a simpler, fairer and more efficient tax system. It contains the promise of President Duterte to lower personal income tax from 32% to 25% to unburden the ordinary employees, while exempting those with P250,000 and below income.
However, this may be perceived by some as anti-poor as it will broaden the VAT base by removing some VAT exemptions and also impose higher excise tax on fuel and automobiles.
Some argue that we don’t need to increase excise tax or remove VAT exemptions if only the Bureau of Internal Revenue (BIR) will be able to collect the right taxes. So why impose higher taxes to offset the revenue losses from lowering personal income tax if BIR cannot collect the right taxes?
Before studying the comprehensive tax reform package prepared by the Department of Finance (DOF), I honestly have the same argument, and probably still to some extent. But even if we make BIR efficient, if it’s even possible without overhauling or abolishing the agency, it may still not be enough to fund all the ambitious infrastructure projects of the Duterte Administration.
But regardless of our arguments, I feel delaying the passage of House Bill 4774 or Tax Reform for Acceleration and Inclusion (TRAIN) is like imposing death (penalty) by taxes to the hard working middle class in our country.
We may need to further study the inflationary impact of higher excise tax but not to cause further delay on the most anticipated and long overdue lowering of personal income tax.
Personally, I have reservations on the 35% highest income tax rate to be imposed on the “ultra-rich” individuals defined by DOF as those earning P5 Million and above, and the lowering of Optional Standard Deduction (OSD) from 40% to 20% as both will further discourage voluntary compliance and honest declaration which is extremely low at present among SEPs.
I feel it is a disincentive to individuals who earn P5 Million and above, who are not necessarily “ultra-rich” as claimed by DOF. Further, lowering of OSD rate will force professionals to choose itemized deductions which is more complicated and subject to BIR audit.
But if only 0.1% of our population will be affected by this, I am giving my full support to HB 4774 whether they consider my reservations or not. Our ordinary employees deserve this tax break from the overly burdensome income tax.
We urge our legislators both in the House and Senate to expedite the deliberations and passage of HB 4774 for every hard working Filipino who have contributed one third of their hard earned money for the last 2 decades.
Immediately after lowering of personal income tax, we need to increase the compensation of our tax collectors by exempting their salary from Salary Standardization Law (SSL).
This is to professionalize our tax collection agency, both BIR and Bureau of Customs, and attract more competent and honest accountants and lawyers to help collect the right taxes and run after big time tax evaders and smugglers.
Once we have started bringing tax evaders and corrupt tax collectors to jail, we can declare general tax amnesty to start fresh and promote a culture of honesty and integrity in paying taxes.
If we want a better Philippines, let’s all be better citizens, better taxpayers.
If you want to understand better the ongoing tax reform initiatives, you can join the TAX FORUM: A Dialogue on the Proposed Comprehensive Tax Reform at the Ateneo Graduate School of Business on May 17, 2017 at 6PM. For details, email: [email protected] or call (02) 6227720.