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NTRC TRJ-3: Proposed Reforms on the Personal Income Tax

This paper presents and evaluates the proposals under various bills filed in Congress with the end view of coming up with a comprehensive reform package for the personal income tax (PIT) system. a. On the Proposed PIT Schedule ??On the Indexation to Inflation of Taxable Income Brackets and Retention of the 5%-32% Tax Rates Various bills are filed in Congress which intend to address the bracket creep issue by adjusting to inflation the present taxable income brackets while retaining the 5%-32% tax rates. The proposed inflation-indexed amounts for the taxable income brackets are adjusted to varying levels ranging from PhP20,000 to PhP25,000 on the first bracket and from PhP1 million to PhP1.1 million for the top bracket. However, by just merely indexing the present taxable income brackets to inflation, the Philippines will still impose the highest marginal tax rate of 32% among its ASEAN peers. When compared to other ASEAN countries, the proposed top taxable income levels of PhP1 million or PhP1.1 million are subject to lower income tax rates of: (a) 2% or 3.5% in Singapore; (b) 10% in Cambodia; (c) 15% in Laos; (d) 15% or 20% in Thailand; (e) 20% in Myanmar; (f) 21% in Malaysia; and (g) 25% in Indonesia and Vietnam. Consequently, the Philippines' PIT will remain uncompetitive and may encourage tax-induced migration by Filipino workers. It may be worth mentioning that while the PIT tax schedule was last revised in 1998, the PhP500,000 highest taxable income on which the top marginal rate is imposed was set way back in 1950 pursuant to RA 590. Thus, mere doubling of the taxable income may not be sufficient if the real value of the amount in 1950 is to be retained. ? On the Proposed Exemption of Certain Income Threshold All ASEAN member-countries, except for Indonesia, Vietnam and the Philippines impose 0% on certain income threshold in their respective personal income tax schedules. There are various proposals as to the amount of tax-exempt threshold to be incorporated in the tax schedule. One proposal is PhP396,000 which is based on the family living wage of PhP1,086 per day multiplied by 365 days. The income tax exemption of minimum wage earners (MWEs) shall be repealed and shall be subsumed to the said threshold. Another proposed exempt threshold amounts to PhP360,000, net of personal and additional exemption (PAE), and other allowable exemptions and deductions. However, this will exempt a number of compensation income earners (CIEs) and consequently result in huge revenue loss on the part of the government. On the part of the SEPs, the proposed exempt threshold will likewise significantly erode the already narrow tax base since many of them will be tax-free. At present, they are contributing less income tax to government coffers than the CIEs. Others propose a tax-exempt threshold of PhP250,000 along with the repeal of MWEs' exemption, PAE and certain exclusions and deductions and integrate them all in the exempt threshold. Also, deductions under special laws, e.g. 13th month pay and other benefits not exceeding PhP82,000.00, premium payment on health and/or hospitalization insurance are proposed to be removed. This proposal will greatly simplify the present PIT system and is therefore supported. ??On Gradual Reduction of Income Tax Rates over Two or Three Years The proposed gradual reduction of income tax rates over a two or three-year period will cushion the revenue impact of the proposal than an outright reduction from revenue viewpoint and is therefore supported. ??On Incorporating the Minimum Wage Level into the Income Tax Schedule One proposal seeks to restructure the PIT schedule by replacing the net taxable income brackets with "minimum wage plus X amounts", exempting the amount of "minimum wage," and subjecting to the tax the excess of the minimum wage plus X amount in the lower end of the income bracket. The proposed tax schedule is very complicated and will perpetuate the inequities in the tax treatment of individual taxpayers as a result of the exemption of MWEs. Thus, it is recommended that the exemption of MWEs be lifted and minimum wage be integrated into the exempt threshold in a progressive PIT schedule. ? On Proposed Taxation of SEPs The proposed imposition on SEPs, with gross sales/receipts (GS/R) below the proposed VAT threshold of PhP3 million, of a tax of 8% of GS/R in lieu of the income tax and percentage tax, is simpler and easier to administer than the net income tax system where the cost of goods sold or cost of services, deductions and exemptions need to be determined and substantiated. In 2015, there were only 647,505 SEPs tax filers or 26% of 2,497,698 BIR-registered SEPs. With the simplified tax system, it is anticipated that more SEPs will be encouraged to file and pay the income tax. However, it is suggested that all SEPs be given the option to select between the 8% tax on GS/R and the progressive PIT schedule with exempt threshold. Small entrepreneurs will remain exempt while other SEPs will be taxed based on their ability to pay. b. On Proposed Amendments on Basic PAE Allowance The proposed claim for personal exemptions of non-working spouse or including financially incapable parents and legal guardians of persons with disabilities (PWDs) or children with special needs (CSNs) in the definition of dependents for purposes of claiming additional exemption allowances, may complicate the PIT system and lead to tax leakages if not efficiently monitored. The additional work for the tax machinery will also increase administration cost; hence, the proposal is not supported. Moreover, the proposed increase in the age ceiling of qualified dependents from 21 to 23 years old in view of the K to 12 Program pursuant to RA 10533, otherwise known as the "Enhanced Basic Education Act of 2013", may become irrelevant with the proposed integration of the PAE into the tax-exempt threshold in the proposed PIT schedules in a number of bills. c. On the Indexation of Taxable Income Brackets and PAE Allowances to Present Value Using CPI The rationale of inflation indexation is to remove from the purview of taxation the effect of inflation on income. It can be applied to all the parameters of the PIT structure such as taxable income brackets, PAE and other fixed deductions because inflation erodes their value in constant terms. The proposal to adjust the taxable income levels once every three, five or six years as proposed based on the three, five or six-year cumulative inflation rate as the case may be is laudable. In the light of the "bracket creep" phenomenon, the proposed inflation adjustment provision on the PIT structure is supported as it relieves Congress from revising the same from time to time. On the adjustment to inflation of PAE levels, it may be noted that this was introduced in 1981 by virtue of Presidential Decree (PD) 1773 which provided for the adjustment of not more than once every three years, the amount of PAE, taking into account, among others, the movement of CPI, level of minimum wage and bare existence level. This provision, however, was later repealed under Republic Act (RA) 8424 or The Tax Reform Act of 1997. The PAE amounts were last adjusted in 2008 through RA 9504 to a uniform amount of PhP50,000 regardless of the status of the taxpayer. The additional exemption allowance, on the other hand, was increased from PhP8,000 to Php25,000 for each qualified dependent not exceeding four (4). d. On Proposed Exclusion from Gross Income of Certain Income of Taxpayers The proposed exclusion of overtime and night shift differential pays from gross income of all salaried taxpayers, thus, exempting them from the income tax will further erode the tax base and affect the progressivity of the tax system. The proposal may also pose administrative burden on the part of taxing authority especially in ascertaining the amount of night shift differential pay that will be entitled to the incentive in the case of workers in airline and navigation companies, manufacturing companies, security agencies and health workers as they alternately work on day and night shift. The proposed exclusion of 13th month pay and other benefits regardless of amount will erode the tax base and will only benefit high salaried taxpayers. Hence, the status quo on putting a cap on the exemption is recommended. The proposed exclusion of performance-based bonus (PBB) from gross income of the taxpayer may be considered on the ground that this is given by the government in recognition of the exemplary work of its personnel in carrying out their duties. e. On Additional Allowable Deductions from Gross Income of Taxpayers The proposal to allow qualified taxpayers to deduct from their gross income for income tax purposes interests paid from any loan obtained for purposes of acquiring first family home will have adverse revenue implication and may not actually benefit low income taxpayers but rather the high and middle income earners. If the intention is to help Filipino families acquire their first family homes, it may be in the form of direct assistance through various housing assistance programs of different government agencies. Similarly, allowing educational expenses as deduction from individual taxpayer's gross income would complicate the existing tax system especially among CIEs who are subject to the withholding tax. The provision of grant-in-aid and scholarships to poor but deserving students enrolled in public and private higher education institutions (HEIs) or the increase in budgetary support of the government for state universities and colleges (SUCs) are deemed more beneficial. Likewise, the proposal to allow medical expenses incurred by individual taxpayers as deduction from gross income is not supported. The provision of the government for 100% Philhealth coverage is seen to be a more direct way of providing the taxpayers access to health benefits rather than through taxation. The proposed exemption of all allowances and benefits granted to public school teachers, including those in SUCs from income tax will constitute "class legislation" and will run counter to the policy of taxing similarly situated taxpayers equally. The proposal is also biased against the teachers in the private educational institution and individuals. f. On Lifting of Exemption of Lotto Winnings The proposed lifting of the exemption of Philippine Charity Sweepstakes and lotto winnings from 20% final withholding tax (FWT) under Section 24(B)(1) of the NIRC of 1997, as amended, is deemed appropriate. If hard earned money are taxable, the more that these easily earned money should be taxed. Using 2016 payouts by the Philippine Charity Sweepstake Office (PCSO) to its lotto games amounting to PhP16.12 billion, estimated revenue gain from imposing a 20% final tax on such winnings or earnings would amount to around PhP3.2 billion. However, under RA 1169 or the PCSO Charter, a 5% prize fund tax is being paid to the BIR in lieu of the income tax. Hence, with the proposed imposition of the 20% FWT on lotto winnings, the 5% prize fund tax is recommended to be withdrawn. g. On Lowering the FBT Rate to Thirty Percent (30%) and Making Fringe Benefits part of Gross Income of Employees The proposal will be most welcomed by employers as there will be a reduction in the FBT liability. Consequently, the amount of deductions from their gross income for such ordinary and necessary business expense shall be reduced. The proposal to make fringe benefits a part of the individual taxpayer's gross income subject to regular income tax rates for CY 2020 and onwards will free employers from the tax while employees receiving such form of incentives shall shoulder the tax liability corresponding to such benefit. Such inclusion will push taxpayers to higher income tax brackets. h. On Preferential Tax Treatment of Employees of RHQs/ROHQs, OBUs and Petroleum Contractors and Subcontractors The proposal to remove the preferential income tax of 15% of gross income of employees of regional headquarters (RHQs)/regional operating headquarters (ROHQs), offshore banking units (OBUs) and petroleum contractors and subcontractors is supported for simplicity and uniformity in the tax treatment of nonresident alien individuals not engaged in trade or business in the Philippines. This will enhance revenue productivity of the income tax.

National Tax Research Center
Authors Keywords
NTRC; Personal Income Tax;
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