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Lower income tax in three years

...but higher tax rates on softdrinks, fuel; reduced incentives to investors, seniors, PWDs…

GraphLessen the tax burden on wage earners and businesses while removing the unnecessary tax exemptions being enjoyed by some enterprises and individuals, that’s how the Duterte administration envision its tax reform proposal to Congress.

With this directive, Finance Secretary Carlos G. Dominguez III in a series of public speeches also trumpeted the administration’s economic plans.

In President Rodrigo R. Duterte’s first State of Nation Address, the chief executive pointed out that his administration will pursue tax reforms toward a simpler, more equitable, and efficient tax system that can foster investment environment and jobs creation.

The ultimate goal is to stimulate businesses and let Filipinos have more money to spend on their families.

Filipino workers currently pay the highest income tax in the entire Association of Southeast Asian Nations (ASEAN) region. Now, the administration plans to reduce the rates gradually over the next three years from 32 percent to 25 percent.

Along this line, the administration also wants to revisit and update the government’s tax tables on personal income which were put in place in 1997 when the Comprehensive Tax Reform Program was passed.

The current tax tables needed to be updated to reflect current economic conditions by adjusting it with inflation. The proposal is to raise the tax bracket to R1-million annual personal income from the present R500,000. This means that only those earning R1 million will be taxed the highest rate of 25 percent.

Likewise, the Philippines currently has the highest corporate income tax systems among its ASEAN peers, and the Duterte administration plans to lower this levy to attract investments and ultimately generate more jobs.

Like wage earners, the Duterte government wants to reduce the corporate rates on a staggered basis over the next few years to 25 percent from 30 percent.

 

REVENUE LOSS

However, the planned reduction comes with a cost to state coffers. If Congress passed the proposal into law, and enacted by the President, the government will incur revenue losses because of the lower tax collection. It will be hard pressed to look for other sources of revenues to compensate the losses. The Department of Finance has no official estimate yet as to revenue losses that the government will endure as a result of the reduced tax rates.

This is where the balancing act comes in between the interest of the Filipino people and taxes used to fund the government’s social services and projects, including the badly needed infrastructure.

The government needs taxes to finance its health program as well as other measures in ensuring children will spend more time in school and raise their chances of getting a good job in the future. All these initiatives rely on people’s hard-earned taxes.

 

The Department of Finance (DOF) has to come up with other tax measures to recover revenue losses. Among these measures include the increase in excise tax on petroleum products, fiscal incentives rationalization, and the easing of the bank secrecy law.

Finance Sec. Carlos G. Dominguez III (MB File/2016.mb.com.ph)

Finance Sec. Carlos G. Dominguez III (MB File/2016.mb.com.ph)

While the current government is against the proposed increase in value-added tax (VAT) rate, the finance department, however, is amenable to the planned removal of some unnecessary exemptions listed in the law.

There are several exemptions given to some individuals, goods and services under the VAT law, including senior citizens, persons with disability (PWDs), fresh produce food, education, exports goods, among others.

Likewise, the current administration is looking at imposing excise tax on sweetened-beverages.

For oil, an increase in taxes is justifiable because their current rates have already been eroded by inflation after nearly two decades of zero adjustment.

Under the National Internal Revenue Code of 1997, the government imposes a fixed excise rate for fuel products. Unleaded gasoline is taxed R4.35 per liter, while leaded gasoline has a R5.35 per liter levy. Diesel, on the other hand, is zero rated.

The finance department now plans to adjust the excise tax rates on petroleum by indexing the present fuel pump prices to average inflation since 1997. This plan could generate R101 billion in fresh revenues for the government.

However, the indexation to inflation will push the current fuel levies to R10 per liter of gasoline from R4.5. Diesel products, meanwhile, will be taxed R6 a liter, removing its excise tax exemption status.

Another source of revenue is by clamping down on the tax incentives granted to investors.  The government is losing an average of R43.08 billion in income tax perks annually due to its incentives program given to several investors.

While it is sometimes necessary to provide tax relief, the finance department believes these incentives are revenue-eroding and that the country is offering too much than what it gets back from tax exemptions.

Now, the Duterte administration plans to rationalize this investment scheme to lessen the revenue losses.

Another source for the government but a controversial one is the proposed easing of the strict bank secrecy law in the country. There were attempts in the past to relax the restrictions, but they all failed because the past presidents did not support the bill.

Amid plans to intensify the campaign against tax cheats and smugglers, President Duterte himself is now supportive of the planned lifting of the bank secrecy law for tax purposes.

The International Monetary Fund (IMF) had said the country’s strict bank secrecy law hampered the ability of the government to collect more taxes and prevented the enforcement of “modern” tax system.

To date, the Philippines is one of only three countries in the world where the tax administration cannot access bank transactions for tax evasion purposes.

Another controversial proposal is the planned rationalization of VAT exemptions, which include privileges given to senior citizens and PWDs.

While the present administration was not seeking an adjustment in the VAT rate currently pegged at 12 percent, the government, however, is pushing for the lifting of various exemptions granted under the law.

Among the exemptions the administration is looking at lifting are agricultural products in its original state, livestock, export and those granted senior citizens and PWDs.

Lastly, the government is looking at imposing sin taxes on sugar-sweetened beverages to offset possible losses brought by the proposed reduction in individual income and corporate taxes.

The proposed imposition of taxes on sweetened beverage could include softdrinks and juice drinks, which are being considered “unhealthy” products.

The House of Representatives now awaits President Duterte’s tax reform program, which is expected to be submitted by September this year.

While the administration is confident that it could easily overcome hurdles in Congress, some sectors are also preparing for a fight to oppose the new tax plan.

Like any other tax measures proposed by the previous administrations, protecting some business interest would come along the way that will drag down the legislative process and ultimately delay the programs of the incumbent administration.