With the current administration, we are finally seeing steady developments on tax reform. On Jan. 17, the first package of the program, covering a proposed reduction in personal income taxes and an increase in consumption taxes, was filed with the House of Representatives. This would be the closest we have got to finally seeing progress towards a simplified, fair and more efficient tax system. Is change finally coming? Will this change truly reduce poverty and promote inclusive growth in the Philippines? Let us hope so.
Some of the positive updates on the new version of the bill include (1) the retention of the P82,000 cap as tax exempt 13th month pay and other benefits, (2) the retention of Value-Added Tax (VAT) exemptions for senior citizens and persons with disabilities, (3) removal of the proposed amendment disallowing the carry-over of excess input VAT to the succeeding taxable year, (4) adjustments to the personal income tax bracket by reducing the maximum rate of 32% to 25% for those earning income over P400,000 but not over P800,000 and imposing a new maximum rate of 35% for those earning over P5,000,000, (5) increase in the VAT threshold to P3,000,000 under Section 109, and (6) a lowering of the donor’s tax rate and estate tax rate to 6% on annual net gifts exceeding P100,000 and on the value of the net estate.
While the above revisions are looking good for the taxpayers, the government still needs to compensate for the estimated loss of revenue the income tax reduction will cause. Hence, the tax reform bill retained the proposed increase in excise tax on petroleum products and a reduction of the coverage of VAT-exempt transactions. That being said, we hope that the expected increase in the cost of consumer products does not overshadow the benefits we are expecting to receive from the reduced income taxes.
Further to the above revisions, the new version of the tax bill also introduced a separate provision on the income tax rate for self-employed and/or professionals. Under the proposal, the rate for self-employed and/or professionals earning gross sales or gross revenues below P3,000,000 shall be taxed at an 8% income rate on gross sales or gross revenue in lieu of VAT and percentage tax.
Those earning gross sales or gross revenues above the VAT threshold shall be taxed in the same manner as a corporation as to applicable tax rate, minimum income tax, and allowable deductions.
Although it is good that the income tax rate was reduced for those earning below the VAT threshold, it is meaningless if the expanded withholding tax (EWT) rate being withheld from the income is higher than the rate of income tax itself. This is true especially for income payments to professionals wherein a rate of 10% or 15% EWT is withheld, which in all probability, will exceed the income tax liability. Hence, in line with the tax reform, the government must also review the rates of our current EWT system which seems to generate large amounts of excess or overpaid creditable withholding tax for many taxpayers.
On the other hand, for self-employed and professionals earning gross sales or gross revenues below the VAT threshold, the reduced rate is definitely a welcome break. However, many are questioning whether or not the P3,000,000 threshold is reasonable and fair or if a higher gross sale or receipts should be considered. In addition, the jump from 8% to 30% once the threshold is crossed is a big leap. This may encourage taxpayers to keeping their sales within the threshold and discourage small businesses from expanding.
Last, in an effort to make a more effective and efficient collection system for the Bureau of Internal Revenue (BIR) and Bureau of Customs, the tax bill included additional proposed amendments such as a relaxation on the bank secrecy law for the purpose of facilitating its investigation, mandatory marking of fuel products to prevent smuggling, use of electronic receipts or electronic sales or commercial invoices, and mandatory electronic sales reporting system that will link or connect the sales and purchase data entered in the cash register/point-of-sale machines of VAT-registered taxpayers to the BIR’s servers.
Based on the above proposed tax reforms, the reduction of the tax rates seems fair. But as to whether or not the other proposed amendments will make our tax policy simple, fair, and more efficient, many are still debating over it.
If the tax reform is really aiming at helping to reduce poverty by increasing the take-home pay of individual taxpayers, we hope that the hike in prices of consumer products due to the increase in excise taxes and additional requirements being imposed is not too harsh and complicated, thus rendering the tax reform pointless.
Juvy H. De Jesus is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo.
As published in Business World, dated 31 January 2017