Every 15th and 30th of the month, taxes are foremost on the minds of ordinary employees. This is the time of the month when an employee gets hold of his pay slip, sees the take-home pay, and usually gets disappointed upon seeing the amount of taxes withheld or deducted.
Taxpayers in the Philippines have been clamoring for income tax reform for years. Individual income tax rates have not been adjusted since 1997, despite the inflation rate increasing year after year. These persistent calls for lower income tax rates have, however, remained unheeded. As a result, even a low-income earner, whose net pay may not be enough for him and his family’s day-to-day needs, is not spared from heavy taxation.
The Philippines has one of the highest tax rates in the Southeast Asian region. Our top marginal rate stands at 32 percent for taxable income of more than P500,000, compared with Thailand’s 35 percent (for taxable income of THB4,000,0001 and up), Vietnam’s 35 percent (for taxable income of VND960,000,001 and up), Malaysia’s 28 percent, and Singapore’s 20 percent.
In view of the Asean economic integration—which aims to establish a single Asean market and production base characterized by the free-flow of goods, services, investments, capital, and skilled labor within the region—there is a need to amend the internal tax laws of each member state. With the Philippines seemingly having the most unattractive tax system among its Asean neighbors, the country risks being left behind in the race to take advantage of the opportunities that come with integration.
To address this concern, the present administration proposed a tax reform program with the goal of creating a tax system that is fair, simple, and efficient; one that is characterized by low rates and a broad base, thereby promoting investment, job creation, and poverty reduction.
One of the components of the said tax reform program is lower personal income tax. For the middle and lower income earners, this would mean more disposable income to spend and more savings.
Under the proposed personal income tax reform, those earning up to P250,000 a year will be exempt from tax; those earning more than P250,000 and up to P400,000 will be taxed at 20 percent on the amount exceeding P250,000; those earning anywhere from P400,000 to P800,000 will be charged P30,000 plus 25 percent on the amount exceeding P400,000.
Employees earning between P800,000 and P2,000,000 will pay P130,000 plus 30 percent on the amount exceeding P800,000; those earning between P2 million and P5 million will be levied P492,500 plus 32 percent on the amount exceeding P2 million; and those earning more than P5 million will be charged P1.45 million plus 35 percent on the amount exceeding P5 million.
If and when these new income tax rates take effect, the tax rate for individuals earning P250,000 and below will be retained on the second year onwards, while the tax rates for the other income brackets will have downward adjustments every year until these are brought to 25 percent.
While the new tax rates will be reduced, the personal and additional exemptions and the non-taxable bonuses will be removed. Currently, an individual taxpayer is entitled to a personal exemption of P50,000, an additional exemption of P25,000 per dependent child, and non-taxable bonus of up to P82,000. Nonetheless, the new tax rates will be beneficial to individual taxpayers, especially the medium and low-income earners.
Assuming a taxpayer earns a monthly income of P60,000, which totals P780,000 annually, including the 13th month pay, and has one dependent child. After deducting personal exemption of P50,000, additional exemption of P25,000 and non-taxable 13th month pay of P60,000, we will arrive at a net taxable income of P645,000. Under the current income tax schedule, he will incur a total income tax due amounting to P171,400.
Taking into consideration the proposed new tax rates, he will only incur income taxes amounting to P125,000 in 2018, and P98,500 in 2019.
The proposed structure will definitely provide tax relief to the majority. This will enable an ordinary employee to spend on basic necessities without difficulty. Heads of families will be better able to provide for their family. Overall, this would mean more money in the pockets of every employee.
On another note, employees will not be burdened with the process of filing the BIR Form 2305 every time there are changes to the number of dependents, as this will no longer be relevant when computing income tax. More disposable income, less hassle for the taxpayers.
However, despite the apparent benefits to be derived by individual taxpayers from this proposed tax rates, the government is expected to incur a P139 billion revenue deficit. This may delay infrastructure projects and hamper the economic development of the country.
As a counterbalancing measure, revenue losses from the personal income tax reform will be offset by 1) expanding the VAT base by limiting exemptions to raw food and other necessities; 2) increasing excise tax rates on all petroleum products; and 3) restructuring and increasing the excise tax on automobiles.
While it is true that taxes are the lifeblood of a state, these should not be applied to the detriment of the people. The present administration clearly understands this predicament. After 19 years, someone has finally taken the lead in pushing for much-needed reform.
The author is a senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd., a member firm of Deloitte Touche Tohmatsu Limited —comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.