A week ago, on May 9, we cast our votes to decide on the future of our nation. Election Day occurred also a week after we honored the sacrifices and contributions of the working class to the growth of our economy. With a huge chunk of the voting population belonging to the working class, it is not surprising that all the presidential candidates wooed the labor sector with proposals aimed at increasing their disposable income.
In the last presidential debate, all candidates vowed to end contractualization and agreed to reduce the tax burden of workers by revising/updating the income tax bracket and/or increasing the income tax exemption threshold.
Tax reforms are not alien to us: the country undertook a comprehensive tax reform in 1997. But seeing as how that happened nearly two decades ago, many consider tax reform long overdue. In fact, one of the chief matters raised to leading presidential candidates was whether they would prioritize and institute moves for a genuine tax reform program if they won the election.
During the campaign period, while the candidates all agreed that a wide-ranging tax reform program was overdue, they differed in their approaches.
Of the campaign promises that were openly debated during the past few months, one that has caught the attention of many is the proposed exemption from income tax of individual taxpayers who are earning P30,000 or less per month. Some say this will lead to the country’s financial ruin; others say it is feasible. To better understand this proposal, one must appreciate the rationale behind the idea of increasing the tax exemption threshold.
Interestingly, the concept of exempting individuals in the low-income bracket is already embodied in Republic Act (RA) No. 9504, which exempts Minimum Wage Earners (MWE) from income tax. Under RA 9504, MWEs are exempt from withholding tax on compensation if they are paid the Standard Minimum Wage (SMW). Thus, since the passage of RA 9504 on June 17, 2008, an individual receiving the minimum wage in the amount of P481 in NCR, which is equivalent to a monthly minimum wage of P14,631, is automatically exempt from income tax and, consequently, from withholding tax. In other words, MWEs receive their salary totally tax-free.
More recently, RA 10653, which was approved on February 12, 2015, increased the tax-exempt ceiling of 13th month pay and other benefits from P30,000 to P82,000. Thus, beginning 2015, employees receiving 13th month pay and other benefits shall receive such 13th month pay and other benefits up to the amount of P82,000 totally tax-free or without tax deduction.
While it can be said that both RA 9504 and RA 10653 intended to increase the take-home pay of the working class, the impact on the intended beneficiary is remarkably different.
RA No. 9504 is effective in increasing the disposable income of the largest group in the working class (i.e., minimum wage earners) by exempting their salaries from income tax. At first glance, RA No. 10653 seems to be a more generous tax relief to the working class because it added P52,000 of non-taxable 13th month pay and other benefits. Those who are affected by this law are most likely being taxed already at the top rate of 32 percent. Hence, there is an immediate relief of P16,640 (P82,000-P30,000 x 32 percent), which is huge. But, if we take a closer look, the actual beneficiary of RA 10653 are those whose basic pay is higher than P30,000. Hence, these are the employees who most likely belong to the managerial group.
It is clear from the above that while RA 9504 provided smaller tax relief compared to RA 10653, the former is more effective because it made an impact on the largest group in the labor force, the group that needed it most. These two laws show how important it is for tax relief measures to have a clear focus on the intended beneficiaries, given the rigorous process and length of time it takes for a tax reform bill to be passed into law.
Meanwhile, under the proposed income tax exemption on monthly earnings of P30,000 or less, there will be an additional P5,666.67 take-home pay for the employees, which is the equivalent of the monthly tax due on the P30,000 monthly earning. Given our learning from RA 9504 and RA 10653, this proposed income tax exemption on monthly earnings of P30,000 or less will certainly have an impact similar to what we have observed under RA No. 9504, albeit on a wider scale.
Now, the question that needs to be asked is whether the proposed income tax exemption for those earning P30,000 monthly is feasible or not. Would such action be sustainable for the country? There are, of course, differing reactions.
Most would argue that this would strengthen the purchasing power of ordinary Filipinos. On the other hand, the concern of our fiscal managers is that the proposal will lead to the narrowing of the income tax base, thereby causing revenue loss. For their part, advocates of income tax reform believe that any revenue loss in the short term will be recovered through increased collection from consumption taxes.
What is worth noting is that most of us agree that a tax reform should be a priority of the next Administration. During the presidential debates, our incoming President expressed openness to proposals to reduce the tax on worker’s pay. However, it should be pointed out that any reform in the individual income tax system should go beyond merely increasing the tax exemption threshold. It should involve a comprehensive review of our individual income tax system, including that of the prevailing graduated income tax rates. Note that it has been 18 years since the graduated individual income tax rates were last updated and, thus, it is high time that our government considered reforming our outdated income tax structure.
Over the last decades, it should be noted the income tax rates in neighboring Asean countries have fallen sharply, so that the Philippines now has one of the highest personal and corporate income tax rates in the region. With the expected increase in labor mobility under Asean regional integration agreements, the government should consider lowering the income tax rates to ensure the country’s competitiveness and achieve tax harmonization.
The incoming government must speed up tax reforms to improve the plight of the Filipino worker. By giving priority to tax reform, the new government has the opportunity to prove that change in the standard of living of the average working class is coming in the Philippines.
The author is a Senior Manager 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.