THE Department of Finance wants Congress to restore the simplified net-income tax scheme (Snits) for professionals and the self-employed and expand the tax scheme to include corporations as well.
In a draft bill, a copy of which was faxed to The Manila Times, the finance department said reviving Snits, which was abolished when the Tax Reform Act of 1997 took effect on January 1, 1998, would broaden the income-tax base and boost tax revenues.
To deal with the structural weaknesses that plague the current system, the DOF said there is a need to limit the deductible expenses that can be claimed by businesses, because these are often abused.
“Only direct costs incurred in the production of goods and services shall be allowed as deductions from gross revenues in order to arrive at the tax base which is simplified net income,” the finance department said in its explanatory note to the draft bill.
“Certain items of expense that are currently allowed as business deductions under the net-income tax system shall be disallowed,” it added.
To “compensate” for the reduction in deductible expenses, the DOF is looking into lowering the corporate income-tax rate.
In justifying the shift to Snits, the DOF pointed out that corporate income- tax revenues grew by only 8.84 percent after the Comprehensive Tax Reform Package (CTRP) took effect, compared to 16.54 percent before the package was carried out.
It noted that income-tax collections from the self-employed merely grew 6.77 percent in the post-CTRP years, compared to 19.86 percent in the pre-CTRP period.
Buoyancy estimates for the corporate income tax dropped to 0.82 from 1.3, it further stated.
Describing the country’s corporate income tax as “underperforming,” the DOF said that the corporate income tax effort of 2.59 percent in 2000, which is the ratio of revenues to the gross domestic product, trails those of other Asian countries including Thailand (8.58 percent), Malaysia (5.99 percent), Indonesia (8.39 percent) and Singapore (6.88 percent).
At 32 percent, the Philippines has the second-highest corporate income tax rate in the Asean region.
The finance department lamented that several business expenses are overstated, noting that even nonbusiness-related expenditures are being claimed as deductible expenses.
It cited data from the Bureau of Internal Revenue, which show that in 2003 total deductions claimed by large taxpayers narrowed gross revenues by 98 percent. This meant that only 2 percent was left as taxable income.
“Despite limitations on certain business deductions, the income-tax base remains constricted. This gives rise to the issue of inequity between compensation and business income earners,” the finance department said.
On Monday, the International Monetary Fund criticized government’s plan to shift to gross income taxation, saying this “ill-advised” proposal would have an uncertain revenue impact, discriminate against certain industries and allow for more tax evasion.
It urged a hike in value-added tax rate of 10 percent, an increase in contribution rates for the Social Security System, and implementation of new tax measures starting next year.
By Armie Margaret Lee