• Changing tax status and why it may not matter anymore



    I got married earlier this month and being the tax professional that I am, my immediate concern was accomplishing all the necessary updates to my legal documents, i.e., changing my last name, changing my status from single to married, etc.

    While the Bureau of Internal Revenue (BIR) requires that I change my status, I can’t help but question the rationale behind it. And considering the current tax system and the provisions of the proposed tax reform, I think it doesn’t even matter. Here’s why:

    Personal exemption from single to married has no impact
    Prior to the enactment of Republic Act 9504, the Tax Code provided for different amounts of personal exemptions depending on the personal status of the taxpayer. A single individual was allowed a basic personal exemption of P20,000, while each married individual was allowed P32,000. Hence, being married used to mean you would be entitled to an additional P12,000 personal exemption.

    In 2008, the amount of personal exemption was increased to a uniform amount of P50,000 regardless of a taxpayer’s personal status. Since then, the allowable personal exemption has been unchanged. So whether I update my status or not, the amount of my personal exemption remains P50,000.

    It’s also worth mentioning that updating one’s tax status is not an easy process.

    Although BIR Form No. 2305, or Certificate of Update of Exemption and of Employer’s and Employee’s Information, is now the responsibility of the employer and can now be electronically filed, employees are still required to submit the accomplished BIR Form No. 2305 together with the required documentary requirements to their employer. Employers are then required to submit the supporting documents manually to the BIR every 10th day of the following month, resulting in additional procedures.

    Perhaps the BIR should consider streamlining its process, especially if the update won’t have any effect on the employee’s tax anyway.

    Proposal to abolish the personal and additional exemption
    On May 31, 2017, House Bill No. 5636, the substitute bill for the Tax Reform for Acceleration and Inclusion Act, was approved by the House of Representatives on third and final reading.

    Under the proposed tax system, the personal exemption of P50,000 and additional personal exemption of P25,000 per qualified dependent, up to a maximum of four, shall no longer be deductible. Accordingly, taxpayers earning compensation income – whether single or married with qualified dependents – would be paying the same amount of tax regardless of their living conditions. Updating the tax status, then, would be even more irrelevant if this proposal pushes through.

    Trade-off between equity and simplicity
    While the proposed tax reform aims to bring relief to employees by simplifying the tax computation and adjusting the tax brackets, it can conflict with the principle of equity in taxation. Clearly, the removal of exemptions favors single over married individuals with dependents.

    It is essential for a tax system to be perceived as equitable, meaning the circumstances of the taxpayer should be considered when crafting the tax system. Two individuals may be earning exactly the same income but may not be similarly situated, hence affecting the ability to pay tax. A married individual with dependents, for example, needs to set aside a bigger chunk of his income to provide for the basic needs of his family.

    Tax exemptions or deductions are designed to minimize differential treatment and achieve equality of treatment among taxpayers.

    In one case, the Supreme Court stated that personal exemptions are the theoretical personal, living, and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer. These are arbitrary amounts that have been calculated by our lawmakers to be roughly equivalent to minimum subsistence, taking into account the personal status and additional qualified dependents of the taxpayer.

    If the additional exemptions are eliminated under the proposed new tax system, the same would be violating the concept of fairness.

    I hope the lawmakers review and evaluate further the proposed tax system so that they can address the issues of tax equity and fairness – soon, before the President signs the proposal into law.

    The author is a manager at 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.


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