The paper discusses and analyzes the possibility of extending charitable contributions and donations as allowable expense to compensation income earners with the end view of improving the equity feature of the individual income tax system. Section 34 of the NIRC of 1997 provides that individuals earning compensation income is only allowed to claim as deduction their premium on health or hospitalization insurance not exceeding PhP200.00 per month of PhP2,400.00 per year subject to the condition that the aggregate family income does not exceed PhP250,000.00 per year. They are not allowed to deduct from their gross income any charitable contributions or gifts made by them during the taxable year. On the other hand, self-employed individuals and professionals are allowed to claim such deduction from their gross income.
The study points out that at the onset, the deductibility of charitable and other contributions from the gross income of individual income earners, without regard to the source of income was originally allowed under Section 30 of Commonwealth Act No. 466. It was only in 1982 when the Modified Gross Income Tax (MGIT) was adopted for compensation income earners that deductions ceased to be allowed. The paper notes that the income tax collection from compensation income earners for 2009 was PhP111.8 billion while that from business and professionals was only PhP18.8 billion, giving a ratio of 86% to 14% in favor of wage earners. Hence, to even out the substantial gap in the tax collection between the two groups of individual taxpayers and make individual income taxation more equitable, the paper suggests reform options such as the passage and implementation of the Simplified Net Income Taxation Scheme (SNITS) currently pending in Congress and the possibility of allowing compensation earners to deduct donations and charitable contributions from their income.
Compensation income earners and professionals, as individual taxpayers, are comparable in the sense that both of them earn income through the provision of services, talents or skills. Just like their self-employed counterparts, compensation income earners may also be asked/requested by certain institutions to give donations which the latter may use to pursue their activities. Allowing compensation income earners to deduct donations and contributions from their gross income will encourage philanthropy which will ultimately redound to the benefit and welfare of the less fortunate citizens of the country. Thus, in a way, the amount of donations deducted from gross income of wage earners may be viewed as a form of government subsidy or revenue directly appropriated from its coffers to help the less fortunate citizens. Also, extending the privilege of deducting charitable contribution from gross income will further strengthen the provision of the Constitution encouraging non-governmental, community based or sectoral organizations that promote the welfare of the nation. Donations or contributions to nonprofit sector is of critical importance in poor countries like the Philippines as it provides urgently needed basic services to the poor as a complement to government programs especially in times of calamity. Furthermore, charitable contributions in the countries of Asia Pacific region are generally deductible from taxable income. Also, several countries in the Central and East European region provide incentives for donations by individuals to charity in the form of tax deductions or tax credits.
The study pointed out that while there are sufficient arguments to allow deduction of charitable donations from gross income, there are also arguments to disallow the deduction, as follows: 1) allowing deductibility of donations will lead to a lower tax base/net taxable income ultimately resulting in revenue loss on the part of the government; 2) distorting or weakening the MGIT system presently applied on compensation income earners and will entail additional workload on the part of the BIR which will then be tasked to verify items of deduction claimed by a taxpayer as said claim can be a source of tax abuse and leakage; and 3) the deduction of contribution will render it impractical or difficult to implement as compensation income earners are subject to a withholding tax scheme.
