One final look at personal income tax reforms



TAX reform in the Philippines is finally seeing some light.

From its early days in 2014 when the Tax Management Association of the Philippines (TMAP) first publicly cited data that the Philippines has the highest effective personal income tax (PIT) rate in the Asean region, the House of Representatives approved House Bill (HB) 5636on third and final reading last May 31, 2017. The bill, however, is expected to face some rough sailing in the Senate.

While everybody agrees that the PIT system must be reformed to provide much needed relief to salaried workers and encourage more self-employed/professionals to do their share, the passage of the bill has been slowed down by other tax reform measures, which seek to generate additional revenues for the government. Many have raised issues on their social and economic impact, especially on the poor and underprivileged whom the Duterte government has promised to protect.

But even without these other controversial measures, PIT reforms still have its own issues that warrant Senate deliberations.

PIT reforms under HB 5636
The bill proposes a different tax regime for self-employed/professionals, who will be subject to either one of two types of taxation:

• With gross sales/receipts of P3million and below: in excess of first P250,000, presumptive income tax of 8 percent on gross sales/receipts, which is also in lieu of 3 percent percentage tax.

• With gross sales/receipts above P3million: similar with corporations (30 percent income tax rate) based on net taxable income, subject to minimum income tax and entitled to itemized or optional standard deduction.

This measure is to simplify and encourage greater compliance from this sector.

For salaried workers, while the top income threshold will be increased from P500,000 to P5 million and graduated tax rates will be reduced, the top tax rate is proposed to increase from 32 percent to 35 percent. This is to tax the “ultra rich” taxpayers, according to the DOF.

On separate individual tax regimes
The principle of equity and fairness has spurred the Philippine tax reform movement. Lest we forget, the foremost objective of tax reform from the outset was to provide tax justice to salaried workers and encourage greater compliance from the self-employed/professionals.

While the bill entices self-employed/professionals to comply with a simplified tax system and low tax rates, they, under a separate tax regime, will have a lower tax burden than salaried individuals who have long been compliant with their tax obligations.

For example, assuming the same gross receipts of P3million, a salaried worker will have an effective tax rate of about 27 percent, while a self-employed/professional will be taxed at a flat rate of 8 percent. It may be argued that they are not similarly situated individuals – that is, self-employed/professionals incur cost and take risks, but the huge disparity in tax rates puts the salaried worker at a great disadvantage.

Given this, it will be best to retain a unified income tax table for salaried workers and self-employed/professionals but, with variations in determining their net taxable income.

For salaried workers, the tax may be based on gross earnings while, for self-employed/professionals, it may be based on gross income with limited or standard deductions. With this, the resulting net disposable income of the salaried worker and self-employed/professional will be subject to the same tax rate.

On proposed top PIT rate of 35%
The proposed tax reforms should also make our tax system competitive with those of our Asean neighbors.

Personal income tax rates in other Asean countries have been on a downward trend, except for higher taxes in the upper brackets. This may have been the rationale for the proposed measure to increase the top PIT rate from 32 percent to 35 percent. However, with the DOF Tax Reform Package 2 proposing to lower the corporate income tax (CIT) rate to 25 percent, individuals in the higher tax brackets will end up being taxed at a much higher rate than corporations.

Alternatively, it may be best to just retain the 32 percent top rate based on a top income threshold of P2million. With this, those earning P10million will have an effective tax rate of about 30 percent, which is the same as corporations under the current Tax Code. Another option would be to have a top tax rate of 35 percent, but with a much higher income threshold of P10 million. Thus, those earning P10 million will have an effective tax rate of about 30.5 percent.

Under both proposals, even if the corporate income tax rate is eventually lowered, the top personal income tax rate at certain levels of income would not be that far off.

Despite the foregoing, we can say that HB 5636still largely addresses our desired PIT reforms, especially for low- and middle-income salaried workers. By calibrating the tax brackets, lowering the tax rates and introducing periodic indexation, we will be able to avoid the current predicament wherein salaried workers end up being taxed at unjustly high rates with unchanged tax brackets for the past 20 years.

However, the 17th Congress must act swiftly in passing a fair and equitable comprehensive tax reform law that will finally render tax justice to workers, while protecting the poor and underprivileged from any adverse impact of the trade-off with higher consumption taxes.

Rina Manuel is a CPA and a tax executive in one of the country’s top corporate taxpayers, and served as president of the Tax Management Association of the Philippines (TMAP). She took the Comparative Tax Policy and Administration Executive Education Program at the John F. Kennedy School of Government at Harvard University in 2015.


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