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