Is regressive tax unconstitutional?

In contrast with progressive tax which is proportional, a regressive tax is paid uniformly by taxpayers regardless of their ability to pay, and without due regard to their income. Hence, the poor pays the same tax as the rich. Indirect taxes such as Excise tax and Value Added Tax are examples of this. These taxes are passed on ultimately to the consumer of goods and services who bears the brunt of resultant price increase in prime commodities. What makes it unconstitutional is the fact the 1997 Philippine Constitution (Article VI, Section 28) calls for the evolution of the Philippine tax system into a progressive one, meaning a tax system that considers the taxpayer's ability to pay in relation to his income. Two decades had passed, but instead of evolving towards a progressive tax system, the Philippines has devolved deeper into a regressive tax system by increasing the excise tax on gasoline, grease, and lubricants. It now imposes an excise tax on diesel, and LPG's. Similarly, certain VAT exemptions were eliminated, subjecting more economic activity to VAT. While it is true that income taxes were lowered to hopefully mitigate the adverse effect of regressive taxes, it is also true that the cost of living is constantly and steadily on the rise, leaving the income earners decades behind. The projected benefit of income tax reduction may only be a means to partially cope with the soared and soaring prices, and frankly, it is way long overdue. Meanwhile, the cruel blow to the purchasing power of the ordinary Filipinos may have yet to come.

The Little Carrot and the Mammoth Stick

The proposal to reduce the rate of the Philippine income tax is now a pending bill for legislation. There are various version of the bill but all are aimed at slashing the Individual income tax and the corporate income tax from its current rate of 32 percent and 30 percent respectively. At a glance, the move is a welcome development and may be recognize as a pleasant milestone in history of taxation. But is it?

The initial package of reforms, the first of 4, includes the restructuring of the personal income tax system and the expansion of the value added tax (VAT) base by reducing the coverage of its exemptions, the DOF said in a statement.

The maximum rate of personal income tax will be reduced over time to 25% from the current 32%, except for the highest income earners.

Also included in the package is raising fuel excise tax, and restructuring the excise tax on automobiles with exceptions for buses, trucks, cargo vans, jeeps, jeepney substitutes, and special purpose vehicles.The DOF estimated that the overall loss of government revenue due to the proposed tax reforms would reach P173.8 billion, but said it would be offset by potential gains from revenue-enhancing reform. These include an estimated gain of almost P200 billion from raising fuel excise tax, P164.4 billion from broadening the tax base through VAT-based expansion, around P18 billion for an excise tax to be applied to sweets, and P33.8 billion from rationalizing fiscal incentives. The DOF noted that these estimates can still change.

Based on these estimates the government coffer would enjoy a net gain of P242.4 billion. As the saying goes “one cannot receive without taking”, and where do you think this P242.4 billion is to be taken from? VAT and Excise tax are indirect taxes, meaning they are eventually passed on to the consumers in the form of higher prices. Yes, the consumers of food, clothing, construction materials, shelter, gadgets, medicine and medical services, etc. , because broadening the VAT base through the elimination of exemptions will practically render almost everything vatable. The excise tax on fuel will definitely eat up a lot of ordinary man’s budget when transport companies and manufacturing companies start passing this ad valorem to the public at large. Without being over simplistic and for the sake of academic discussion, it would appear that theoretically the benefit of 7% reduction in personal income tax could easily be negated by a theoretical reduction of 71% in the purchasing power of the average consumer, which could translate into indebtedness. It would amount to indirect confiscation of the average workers hard earned income to the possible elimination of the middle class. On whose benefit then this proposed tax reform would redound to? Where did these proposals came from? Is it homegrown and as a result of an in depth research and study by a Filipino oriented technocrats? Maybe we can deduce the answers to these questions by exploring certain areas of related interest, to wit;

Let us start with the following quote;

“Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in … [a] healthy, well-fed, literate population … is the most intelligent economic choice a country can make.”

— Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235

Debt and poverty has proven to ensue by following IMF/World Bank policies of structural changes in banking, finance and taxation, among others. Changes that actually caters to the need of multi- national corporations, rather than the domestic need and priorities of subject countries. The changes was proposed in the guise of alleviating the lives of people in the hope of reducing poverty by introducing western style parameters, in this particular case on taxation. But historically and on the contrary those policies had only reduced the standard of living.

The International Monetary Fund issued on March 2012 an IMF Country Report No. 12/60 titled Philippines: Technical Assistance Report on Road Map for a Pro-Growth and Equitable Tax System. The report after the purported study encapsulated recommendations (impositions?) that would transform the Philippine Tax System at par in terms of competitiveness viz a viz the rest of the world. Among the recommendations (impositions?) I find relevant are the following:

Main Recommendations of the 2010 FAD Mission 

In the short term  

Corporate income tax 

 A reform plan for tax incentives should be announced before the end of 2010, for implementation over the medium term. Two options are possible, with a preference for the first: 

 Option 1—Low rate/broad base

 Remove all tax holidays and the 5 percent gross income tax—grandfathering existing investors for those incentives which are time-bound, and phasing out those incentives which are not time-bound within a reasonable time frame.

 Reduce the CIT rate to between 20–25 percent. To avoid sharp revenue decline, phasing of the CIT rate reduction should be considered.

 Increase the loss carry forward period to 5 years.

 If incentives are to be granted for investment, then provide accelerated depreciation or investment tax credits—specified in terms of proportionate rates on the amount of investment in the targeted activities or locations—that reward the actual act of investment; and

 In special economic zones, do not provide income tax incentives but restrict incentives to exemptions for import duties and zero-rating VAT on exports— removing the current VAT zero-rating for suppliers to zones—and limit the zones to designated areas which can be closely monitored (this does not limit the provision of other non-tax incentives such as waiver of fees or provision of infrastructure or services).

Option 2—Rationalize existing incentives

 Ensure the incentives are available to for all eligible taxpayers.

 Limit tax holidays to a few very specific investments/sectors, with clear criteria and a duration of no more than 5 years in total (with no extensions).

 Remove the 5 percent gross income tax; apply the standard corporate income tax when tax holidays expire. 

 Grandfather existing investors for those incentives which are time-bound, and phase out those incentives which are not time-bound within a reasonable time frame.

 Restrict tax incentives in special economic zones to exemptions for import duties (that is, no income tax exemptions)—removing the current VAT zero-rating for suppliers to zones—and limit the zones to designated areas which are able to be closely monitored.

 Authorize only one agency to grant tax incentives; once granted, the ongoing monitoring of the incentives would be the responsibility of the BIR and BOC.

 Ensure the DOF has a strong role in the granting of incentives, such as by being a member of the board of the approving agency, and ensure that the revenue costs of any new incentives are estimated.

 Legislate that the laws granting incentives be maintained in one law, preferably the National Internal Revenue Code (NIRC); and

 Impose a sunset clause for all incentive laws, of no more than 5 years, to ensure the incentives are achieving the purpose for which they were introduced.

No matter which option is adopted, require the DOF to keep records of the estimated cost and the actual cost of all concessions and publish these figures in the form of a tax expenditure statement.

VAT

 Announce in the next budget that exemptions that target directly individuals (e.g., the recently enacted senior citizens exemption and boy scouts exemption) will be reviewed in three years to determine whether they have achieved their objectives in helping low-income seniors and developing boy scouts, and at what cost. 

Excise taxes 

 Clarify the application of excise taxes on imported goods by specifying that the customs duty is included in the base of ad-valorem excises. 

Tobacco 

 Eliminate the practice of price categorization of cigarettes, and set specific rates (per unit or pack) to reach a certain revenue target (starting at the lower end of the most popular cigarettes, and gradually increasing the rates to meet the revenue target in the medium-term). Cigars, chewing and other bulk tobacco could be taxed at different rates based on units (for cigars) and kilograms (for other tobacco products). 

 Provide for full and automatic indexation of specific tax rates in the law. Such indexation should not call for Congress approval. 

Alcohol products  Eliminate price categorization and impose a three-rate specific structure based on alcohol content. For example, alcohol products could be grouped into three categories: beer and the like; wine and the like, including sparkling wine; and other alcohol products (which would include distilled alcohol, cocktails and other bottled or non-bottled products). 

 Provide for full and automatic indexation of specific tax rates in the law. Such indexation should not call for Congress approval. 

Petroleum products   Normalize tax rates at 5 pesos per liter for all gasoline and oil that are currently taxed. 

 Tax kerosene, diesel, gas and LPG, and fuel oil at 3.5 pesos per liter.

Automobiles  Set the lower tax rate at 5 percent instead of 2 percent.

 Consider imposing the three higher rates on the full value of the automobile rather than on the excess relative to the previous price bracket, and adjust the rates downward to 15, 25, and 50 percent (on the same price structure).

Taxation of the financial sector Withholding tax on interest

 Align the lower interest withholding tax rates on FCDUs and those dependent on the period to maturity with the standard interest withholding tax rate, but phase the alignment over a number of years.

Personal income tax

  Repeal the minimum wage earner exemption. 

In the medium term 

VAT

 Eliminate the exemptions for cooperatives. At a minimum, limit it to agricultural cooperatives. 

 Eliminate all exemptions for inputs that go into the production of exempt final consumption goods (e.g., fertilizers and animal feed). 

 Eliminate the exemption for social housing. 

 Terminate the practice of providing VAT exemptions or any other special treatment in other laws. The tax code should be the only law containing tax provisions.  

 Review the adequacy of the current threshold in light of the size and sectoral distribution of the VAT population, and the capacities of the BIR. Consider an increase in the threshold to between PHP3 and PHP5 million. 

 Eliminate the provisions for zero-rating of transactions paid for in foreign currency (other than direct exports). 

 Limit zero-rating to exports only, and eliminate zero-rating for supplies to export oriented enterprises and free-zone enterprises. 

 Consider re-establishing full deductibility of VAT on capital inputs after a careful consideration of its impact on the cost of capital and its impact on VAT revenues. 

 Terminate the practice of allowing trade in TCCs (as a first step towards the abolition of TCCs). 

 Establish a proper VAT refund mechanism by estimating current outstanding excess VAT credits, and developing a plan to pay such credits. This requires a strong administrative mechanism to prevent the abuse of input tax credit claims—one option could be to limit the credit to large amounts and to taxpayers known by the tax administration and whose tax standing has been in order for at least three years. 

Taxation of the financial sector

Gross Receipts Tax (GRT) and Documentary Stamp Tax (DST)

 Replace the different GRT rates applying to bank income with a single rate, of say 5 percent.

 Rationalize the DST rates on insurance products to 2 rates, with a distinction between life insurance and similar products, and property insurance and similar products.

 Remove the DST on recurrent transactions such as bank checks, bonds, drafts and certificates of deposits.

 Remove the DST on original share issues.

  

Taxation of Foreign Currency Deposit Units (FCDUs) 

 Apply the standard CIT rate to FCDU interest income from residents (replacing the current 10 percent rate), and consider increasing the CIT rate on FCDU foreign source income.

Personal income tax

 Overhaul the tax rate schedule to reflect inflation since 1997. Start with the lowest and highest brackets.

 Consider lowering the ceiling for entertainment expenses and broadening the scope of withholding taxes on payments to the self-employed.

 The Philippines should move to either the TEE or EET model of pension taxation. 

Revenue impact

 the rationalization of fiscal incentives has the potential to raise around 1 percent of GDP. The present mission‘s recommended approach is to eliminate fiscal incentives accompanied by a reduction in the CIT rate. Under this approach, a reduction to around 21 percent would be revenue neutral, while a smaller reduction, to say 25 percent, would be revenue positive.

 Excise tax reform would raise revenue of 0.8 percent of GDP.

 the reform of the VAT and PIT would be revenue neutral. However, if there is a need for a revenue increase, VAT rate increase could be considered.

 These revenue estimates are indicative; the present mission strongly suggests that the authorities undertake more analytical work in this area. This will require the DOF, BIR, and BOC to ensure the availability of better statistical information in support for tax policy development. 

 

Appendix 2. Regional Comparison of Investment Tax Incentives 

CIT Rate (in percent) Philippines 30 Sector or region, min. 50 percent of production exported, 70 percent foreign ownership.

3 to 8 years after start of commercial activity

5 percent tax on gross income earned after tax holidays indefinitely.

100 percent additional deduction in infrastructure spending in Less Developed Areas, 50 percent additional deduction of incremental labor cost, tax credit for duties and taxes for inputs of export products, exemption from VAT and duties on imported supplies, 10 year exemption from wharfage fee, 10 year exemption on taxes and fees on selected imported agricultural products. VAT and duty exemption on inputs;

Exempt from 1 percent turnover tax.

50 percent CIT rate reduction for 3 years.

15 percent rate for new/high technology.

Accelerated depreciation.

10 year loss carry forward in economic development zones or in priority sectors (standard carry forward is 5 years);

50 percent reduction in land and building taxes;

Investment tax allowance of 30 percent reduction in income tax (6 years maximum);

Maximum 5 percent import duty on imports of capital goods and raw materials for 2 years;

Accelerated depreciation. Special duty drawback and VAT exemption if export ratio above 65 percent; VAT, sales tax, duty, and excise exemption in bonded zones. Double deductions for approved training expenditure; Duty free raw materials and spare parts for exports;

Industrial capital allowance up to 100 percent of capital expenditure;

Import duty and sales tax exemption on machinery and equipment not produced domestically;

Tax exempt dividends out of exempt income;

Sales tax and excise exemptions on locally produced machinery and equipment.

One may not be able to recognize the oppressiveness in these proposals and how it intend to eliminate some protective layers in the tax code in favor of big capitalist, but it can be noted, that some of the recommendations are familiar, since they were test fed to the population over the years. Some including the Corporate Income Tax (CIT), the Personal Income Tax(PIT and VAT revisions are now all in for legislation and many are still being filtered progressively to the media in its subtlety, and likewise by gradualism, you will see this tax amendments being passed into law.

The negative effect of VAT on the lower social echelon is wide and atrocious since they spend more for their need; a large part of their income goes to taxes. An ordinary worker earning 12,000 a month would have to pay 1,200 in VAT or 12% in relation to his income, while a 120,000 worker who spend 12,000 for his needs will disproportionately pay only 1% in relation to his income. The expansion of VAT coverage will exacerbate the regressivity of VAT far from what it is already. The small and medium scale business will lose its competitiveness against big business and eventually they will close shop. The underground economy whereupon majority of Filipinos relied for livelihood will be wiped out, since capitalization and sales will become irreconcilable. The proposal to decrease income tax rate coupled with increase in indirect tax is pro-rich as it will benefit large and multinational companies, particularly the foreign ones. The influence of IMF/World Bank in Philippine legislature is obviously beyond imagined. Let us hope that there are members of Philippine government that is still sober to realize the brutal implication of this proposals. Let us not allow ourselves to trek the way of the Americans and the Europeans who fell victims to the onerous bank machinations such as the ponzi scheme that had caused dissipation of their middle class due largely to the policies imposed and dictated by the world’s richest banks. One may wonder if the advertised independent policy being advocated and purportedly being pursued by the present government is true?

Nevertheless, bear in mind that the IMF/ WB policies are good; but its goodness is not meant for you and me.

BIR Propaganda FADing… its White

There is this universal truth that man can never be alike. They may have the same physical characteristics endowed to humans but they differ in emotion, values and character among so many others. The manifestation of these human elements delivered by their subconscious and erstwhile training will necessarily and likewise vary. On this premise, to project via graffiti and visual art that all doctors, cpa’s, lawyers or internet sellers are collectively a burden to teachers and the people at large is making the contrary assumptions that all of them are alike. Here lies the fallacy and falsity that would now turn the propaganda into black. It is akin to brushing the mind of Joseph Goebbel into the caricature to achieve a noble objective through a precarious means. What could only be achieved by such display of arrogance is to drive a wedge between people. The breeding of suspicion and prejudice and thus eroding trust crucial to client/ patient and professional relationship. It is indicative of the BIR’s weakness and inability to implement its mandate via the conventional methods by resorting to tricks that is reserved only to covert and black operators. It projects the lost of civility and the dominance of frustration. What happened when the BIR and the Bureau of Customs were labeled as corrupt agencies? It is improbable that all the personnel of these agencies are also corrupt, but generalization had caused demoralization and lost of self-esteem among those who are not. They unwittingly detached themselves from the agency which they belonged thereby weakening the potency of the organization. Cohesiveness is destroyed and cooperation and teamwork is affected. This scenario could turn into grand and national scale which is defeatist of the government’s effort to promote national unity. One may label the fingers as part of the hand, but no fingers are alike.

BIR, Abuse and Human Rights

Revenue Regulation 15-012 issued on December 3, 2012 prescribed the regulation on the accreditation of printers of invoices/ official receipts and other commercial receipts.

I could merely guess that the purpose of this regulation is for convenience, and a means to indirectly pass some of the work that the Bureau of Internal Revenue (BIR) is supposed to be doing themselves consequently to the printers. But what is disturbing and apparent is it collides with the constitutional guarantee of liberty. The freedom to make a choice may have been impeded by this regulation. Business owners may have been effectively coerced by this regulation by subjecting them to the limitations listed therein.

We have to remember that after compliance to certain requirements, business licenses were awarded to, and the corresponding fees were paid by these printers to participate in the commercial activity of printing. The possible exclusion of most of them from the accreditation would amount to canceling that privilege to do business without due process, a sole authority that appropriately inures to the issuing agency. On the other hand, if there is anyone who has the right to accredit these printers, it should be the business owners that seek for their services. The BIR may have no legal ascendancy to unilaterally select printers for the taxpayer to utilize plainly because it negates freedom of choice and enterprise, an act that could be "void ab initio", as being defiant of the present constitutional constraint especially if the subjects are natural persons.

Similarly, BIR Revenue Regulations 11-2006, 4-2010 and 14-2010 prescribes the guidelines for the accreditation of tax practitioners. This would in effect bar even CPA’s and Lawyers not accredited by the BIR from making representation for their clients unless they submit to the requirements for accreditation. Again the BIR may not only be selecting for the taxpayer which professional a taxpayer can utilize but it may also be illegally and unethically disenfranchising licensed accountants and lawyers, and consequently preventing them to freely practice their profession through regulatory biases and discrimination. An actuation that cannot be appreciated by the licensing entities like the Professional Regulation Commission or the the Supreme Court. 

Moreso, these regulations for accreditation indirectly turns the BIR into a participant in the pre-selection of taxpayers service contractors by unilaterally endorsing them through the regulation. Which by any measure is highly questionable, irregular, even so, suppressive and dictatorial. 

No matter how noble, the end does not justify the means. 

Tax on Sinners

The Sin Tax Law is set to be sign by President Aquino anytime soon and it is suppose to take effect starting January 1, 2013. Through this new law the government expects to generate revenues of Pesos 34 billion on the initial year. Around 15 percent will be allocated to local tobacco farmers and the rest to national health care programs.

The Sin Tax Bill or Law was premised on the negative health and social impact of alcohol and tobacco consumption. It is by all measure a sumptuary tax, a tax on undesirable social habits like smoking and drinking alcoholic beverages. It is a non-discriminatory tax levied to all social classes, meaning regardless of one’s buying capacity, rich and poor will pay the same amount of tax. Theoretically, the poorest sector should necessarily reduce consumption of alcohol and tobacco, at least for products that have this tax.  But would it prevent the poorer class to stop or reduce consumption? Well, lets see!

Alternative means and sources will sprout like mushrooms. The olden days of La y ' Baena’s would probably come back to life. These are unfiltered cigarettes wrapped in brown papers. I remember my Lola’s on both sides smoked them inverted with the burning end inside their mouth while bathing in their  “batalans” or wringing “labadas “ by the waterwell, and do you know how long they wringed their clothes and took their bath on those days to include the “libagan“ session using a coarse stone? Well, make a guess! “Pinos” of Nasugbu, Batangas, distilled from sugar cane may have a grand future. What about the “Lambanog” of Quezon, the “Basi “of the Ilocos Region. Marlboro Lights may now be labeled “Mamburao Lights”. Let’s not forget the “Tuba” contained in a 4” x 3’ bamboo cane. They use to carry and peddle them outside schools. Now, what is the point? The point is the revenue objective may be met but not the prevention premise of this law, and that is all there is to it.

Authority and Discretion Overlap

The Commissioner of the Bureau of Internal Revenue (CBIR) is determined to meet her revenue collection targets by all means even at the expense of individual rights and the freedom of enterprise. She may have exceeded her authority by issuing regulations that interferes with taxpayers judgment and the free exercise of profession (Please see related Blog on this entitled “BIR, Abuse and Human Rights”). The recent move of the BIR that aims to require professionals to post in their offices their billing rates similar to a sari-sari store undermines a professional's sworn code of conduct and ethics.  Certified Public Accountants (CPA’s) by code of ethical standard are inhibited from making solicitations through the posting of their rates publicly, to do so otherwise would equate to a violation subject to certain disciplinary measures to the detriment of the professional and the profession as a whole. The same can be true for other professions which are required to abide to a set rules of ethics.

Similarly, the Commissioner of the BIR is working to introduce amendments to the professional laws and statutes by requiring through the Professional Regulation Commission (PRC) the submission of income tax return before a professional can renew his or her license.What makes this recent move of the BIR chief abusive is it selfishly ignores other existing laws, rules and standards. Let us bear in mind that the BIR cannot by its mandate interfere with the practice of enterprise, individual or otherwise, before income is generated and the corresponding expenses are matched. Efforts to influence a taxpayers conduct of his business even before a taxable income is realized would be tantamount to harassment and coercion. Only after a taxable income is realized that the BIR may legitimately concern itself and poke a nose on the privacy of business subject to the time frame and limitations provided in the tax code.

Revenue Regulations are made to further the existing statute provisions through clarifications in the implementing procedures. Revenue Regulations cannot be use to indirectly assume legislative function by effectively altering or adding provisions in the existing law. The BIR should instead intensify its intelligence effort on specific industry where it felt the deficiency exist and it is not collecting the right taxes. It should program and expand its post audit as well.

Professional and business organization must strive to protect themselves from abusive regulations and ruling such as those mentioned here, from those that recklessly subjugates individual rights and freedom as guaranteed by the constitution. Regulations that limits free judgement; is suppressive in character; and is a departure from the spirit of the tax code provision, must be challenge through the court to weed out those that could be borne out of caprices, personal and political ambitions and at times by incompetence.