The Tax Reform Law is the 50-page House Bill No. 4774 sponsored by Congressman Dakila Cua. It's already on second reading and the government expects it to become a law this year. The target implementation is July 1, 2017. Realistically, at the pace it is being tackled in Congress and later on the Senate, I believe Jan. 1, 2018 would be the effectivity date.
The rationales for the law amending the internal revenue code are: to raise an additional 1 trillion pesos a year to fund government expenditures for infrastructures, social programs and the operating expenses of running the country. To make the tax reforms acceptable/palatable, it reduces the Estate/Donors tax rates, and the income tax rates. To compensate for the losses from these taxes, the excise taxes on all petroleum products, and the ad valorem tax on motor vehicles will be increased. The tax base for VAT will also be expanded by limiting exemptions. These tax reforms are to be pro-poor as the effects will be to create more jobs, add more funds to the government's social programs, at the same time exact higher taxes from those that can afford bigger cars and consumers of more petroleum fuels and non-basic goods.
For compensation income earners, the tax rates effective on the first year will exempt all those earning less than P250,000 a year, 20% for those earning between P251,000 to P 400,000, 25% for those between P401,000 to P800,000, 30% for those between P801,000 to P2,000,000, 32% for those between P2,000,100 to P5,000,000 and 35% for those earning over P5,000,000. Effective January 2020 the three lower brackets will be reduced by 5% and the upper brackets by 2%. Donors and Estate taxes are uniformly lowered to 6% with the possibility of long unsettled estate to be levied this new tax rates.
On the Value Added Tax, the exemptions will be limited to raw food and other basics like education and health. Many of the non-vatable goods will now be subject to the 12% VAT. The VAT exemptions of Senior Citizens and PWDs have been retained as the deletion would have made the passage of this tax reform bill more problematic.
The excise taxes on petroleum products which are specified in pesos per product will double over three years, and may increase by 4% every year thereafter if mandated by the Secretary of Finance unless the price of Dubai crude exceeds $100 per barrel.
On automobiles, an ad valorem tax based on the manufacturer's or importer's selling price, net of excise and VAT a 4% tax for vehicles priced up to P600,000; P24,000+40% of the value over P600,000 for vehicles priced up to P1,100,000; P224,000+100% of the value over P1.1 million; P1,224,000+200% of the value over P2.1 million.
How will these tax reform proposals affect us when it becomes a law? On the compensation income, there will no income tax for those earning P20,000 a month or less; earners up to P720,000 a year will save P20,000 to P48,000 a year in income taxes. For those earning P1,000,000 a year the tax savings will be negligible. Those subject to Donors and Estate taxes, the savings will be substantial and it would be the best time to finally settle the estate and properly divide and transfer the properties to the heirs. These will have a positive effect on the real estate taxes collected by the local governments, as the divided estates will now be more productive.
Prices of goods and services that will now be covered by VAT will increase and the higher cost of petroleum products will add to the higher prices. It is argued that these price increases will be affordable as there are income tax savings and the increasing economic activity will generate more jobs and income. To the automobile/car buyers, small cars will likely cost 10% more, medium cars will cost 20% more, while prices of high-end cars that cost over P2.1 million will likely double.
On the whole, these tax reforms proposals are good. The objectives cannot be faulted and there is an attempt to balance the tax burden. Implementation could be a problem if the right people like Dominguez and Diokno are out of the DU30 government. The temptation to politicians of the enormous additional tax revenues will be great to put them into pork barrels and other political perks.