On January 17, 2017, House Bill (HB) No. 4774, or the proposed Tax Reform for Acceleration and Inclusion (TRAIN) bill, was filed at the House of Representatives, moving President Rodrigo Duterte’s tax reform program forward. It will be recalled that the first version of the proposed tax reform package was submitted back in September 2016.
One of the significant features of this long-awaited tax reform package is the restructuring of the existing individual income tax rates. Below is a table of the proposed individual income tax rates beginning July 1, 2017. The proposed individual income tax schedule for the second phase of the implementation will start in 2020.
Under the proposed tax reform bill, the current exemption of minimum wage earners (MWEs) will be incorporated into the revised tax brackets by exempting individuals whose taxable income do not exceed P250,000. Thus, there is a proposal to eliminate the Tax Code provision exempting MWEs.
This proposed graduated tax rates address the long-felt need to adjust the current income tax rates for inflation to avoid bracket creep. Bracket creep occurs when taxpayers are pushed to higher income tax brackets because of wage increases over time.
To ensure that the proposed graduated individual income tax schedules will not result in further bracket creep, an added feature of HB No. 4774 is the indexation scheme for individual income tax rates, which stipulates that after 2020, the secretary of Finance will adjust income levels once every five years for inflation.
On the other hand, the imposition of an increased income tax rate of 35 percent from the existing 32 percent on the income of employees earning P5 million or more may be counterproductive to the objective of making our tax rates at par with other Asean countries. This may, instead, impair the Philippines’ competitiveness in view of the Asean economic integration. The imposition of a higher tax rate could act as a deterrent for workers belonging to the P5 million and above bracket to work in the Philippines and may prompt them to take on assignments in other countries where taxes are lower.
Additionally, the strategy to shift the tax burden to those belonging to the highest income tax bracket may not result in the desired increase in revenue as these high-income earners place their money mainly in investments, producing passive income subject to final taxes.
The bill also intends to scrap the basic exemption of P50,000 and an additional P25,000 for every qualified dependent, up to a maximum of four. If this passes, taxpayers earning compensation income – whether single or married with qualified dependents – would be paying the same amount of tax regardless of their living conditions. This would be a glaring deviation from the principle of equity in taxation.
For a family of six where there are four dependents, this would mean a total of P150,000 of foregone exemptions. As illustrated in the table below, it is clear that the proposed individual income tax rates and the elimination of the personal exemptions would be more beneficial to a single individual earning P1 million, compared with a married individual with four qualified dependents receiving the same income.
Overall, the proposed income tax reform may be considered holistic in approach and aggressive enough to bring about the ‘positive change’ promised by the President. It certainly has some elements that need a closer look, but taking into account that Filipinos have been burdened by an inequitable tax structure for two decades too long, this significant revamp in our tax system is highly anticipated by the people.
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.