Is your company ready for tax reform?

Tax reform has been in the headlines lately. After almost two decades, we are about to see more concrete action towards the much-awaited comprehensive reform of the 1997 National Internal Revenue Code.

While the two versions of tax reform are still being debated, as there are a number of differences between the version of the House of Representatives and the version of the Senate, companies are already wondering how tax reform will particularly impact their businesses. So many businesses, so many industries, and we can only surmise that there could be numerous implications that will be created by the tax reform — and we are only at the Package One, of five packages, of the proposed comprehensive tax reform program. Nonetheless, here are some of the implications.

ON EMPLOYEE COMPENSATION
The most popular among the provisions in the proposed tax reform bills is the income tax table. Using the current tax table, an employee earning taxable income of P600,000 per year (or P50,000 per month) falls under the maximum tax rate of 32%. Under the proposed new income tax table (both at the House and Senate), the amount of P600,000 per year falls under the bracket of 25%, two income tax brackets below the maximum tax rate. This would allow the companies to evaluate the salary structure of employees (either for new hires or for giving a salary raise) in computing their intended take-home pay, by carefully considering the borderlines defined by the income tax brackets. The evaluation becomes more meaningful if the calculation considers the allowed non-taxable de minimis benefits for the employees.  The difference might not be that material to the companies, but to a hardworking employee, every penny counts.

For fringe benefits tax (FBT), under the present rules, the monetary value of the benefits given to a supervisory or a managerial level employee is taxed by dividing the monetary value by 68% and then by multiplying the grossed-up monetary value by 32%. Thus, for a P100,000 monetary value of fringe benefits granted by an employer, the latter should pay and remit tax worth P47,059. Under the proposed rule by the House (up to the taxable year 2019), the FBT shall be computed by using 70%-30% (instead of 68%-32%). Thus, for a P100,000 monetary value, the FBT to be paid will be reduced to P42,857. This difference could be magnified depending on the total actual monetary value of fringe benefits granted by the companies and depending on the number of affected supervisory/managerial employees. Thus, certain compensation planning can also be done by an employer specific for its supervisory/managerial employees.

TRANSPORTATION EXPENSES AND PRICES OF GOODS
Also covered in a long debate is the proposed imposition/increase in excise tax on automobiles and on oils and fuels.  The increase in excise tax on transportation would lead to a domino effect, increasing your company’s transportation expenses; this increment would, in turn, result in your company passing the burden to the ultimate consumers in terms of raising the prices of goods for sale. If your company is in trading/manufacturing, the purchase of materials/goods at a higher cost would normally result in a higher product price for consumers.

Considering the above, your company might want to assess alternative measures to cut costs on other expenditures to keep your product price competitive.

Needless to say, those in the automobile industry are the ones most affected by the excise tax, and this should be considered when formulating a business strategy or business model to cope with the changing tax environment. Nevertheless, innovation could be a positive consequence.

ON DIVIDENDS TO BE DECLARED TO INDIVIDUAL STOCKHOLDERS
At present, the final tax to be withheld by corporations on dividends to a Filipino citizen or to a resident alien individual is 10%. Under the proposed Senate bill, the rate will be increased to 20%. Thus, subject to when the proposal will be finalized into a law, corporations might be thinking about the timing of declaring dividends, or on converting its retained earnings to additional equity or to certain valid business appropriations, which are all dependent on the corporation’s business objectives.

ON SELLING DOMESTIC EQUITY INVESTMENTS
With regard to the sale of investments in domestic stock, if these are not listed or not traded in the Philippine Stock Exchange, the sale of these by a company not engaged in the ordinary course of trading/dealing investments is subject to 5%/10% tax.  This is the current rule. A 5% rate is imposed on the first P100,000 gain, while the 10% rate is imposed on the excess of the P100,000 gain.

Under the proposed Senate bill, the 5%/10% rate will be increased to 20%. Hence, the tax impact on gain would double in selling investments in domestic stocks that are not listed or not traded in the Philippine Stock Exchange. Would this lead to investing and trading in listed domestic shares instead? Well, we are all on the lookout on whether there will also be an increase in the tax rate on trading listed domestic shares.

The above discussion merely presents a basic analysis, and more comprehensive ones can be done depending on the specific business operations of your company. Let us also be cautious in case more changes are introduced to the proposed tax reform bills. The prudent course of action for your company would be to keep abreast of the tax reform developments and to be proactive in evaluating the possible impact of these developments on your company’s business. Is your company ready for tax reform?

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of P&A Grant Thornton.

As published in BusinessWorld, dated 17 October 2017