Bite the bullet

The Duterte government is committed to pursuing a tax policy reform program that will not only generate additional revenues, but will also provide for a more simple, fair and efficient system for taxpayers.

The program calls for a reduction in the personal income tax rate to 25 percent from the present 32 percent, except for the highest income earners bracket.

But to compensate for foregone revenues from lower personal income tax take, government will raise additional income from other sources, such as increasing the excise tax on petroleum products, limiting value-added tax exemptions, levying taxes on non-essentials, among others.

The Philippines has the second highest personal income tax rate in the ASEAN region at 32 percent, next only to Thailand and Vietnam’s 35 percent. Indonesia has 30 percent, followed by Malaysia with 25 percent and Singapore with 20 percent.

But note that other countries in Asia have lower personal income tax rates. Hongkong has 15 percent. Singapore has no capital gains or inheritance tax, and individuals are taxed only on income earned in Singapore.

Thailand has approved a restructuring in personal income taxes so that middle-income earners can spend more money. They have reduced personal income tax rates for high-income taxpayers to the same level as corporate tax rates to encourage business owners not to keep their money in the corporation to avoid paying higher personal income taxes. (bangkokpost.com)

Higher deductible expenses and personal tax allowances for low to middle-income taxpayers will ease their tax burden and encourage them to spend more, enabling the Thai government to collect more VAT, according to the same source.

Note also that in Thailand, the highest tax rate of 35 percent applies to those with net incomes of five million baht or more (around P7.06 million equivalent) while in the Philippines, the highest tax rate of 32 percent is imposed on those earning over P500,000.

In terms of corporate income tax rate, we have the highest at 30 percent, followed by Indonesia and Malaysia with 25 percent, Vietnam with 22 percent, Thailand with 20 percent and Singapore with 17 percent.

A high corporate income tax rate makes the Philippines unattractive to foreign investors, especially as other countries make it very inviting for investments to come in not only because of their incentive schemes, but also due to their more stable business environment.

I don’t see governments of other countries reducing tax rates while at the same time raising taxes from other sources.

This is because they have a different mindset from ours. They believe lower tax rates will give their citizens more money, thereby enabling them to spend more, which will result in their government being able to generate more income in the long run.

Countries like Singapore and Hongkong also believe that the key to a viable economy is to have citizens and residents who have higher purchasing power.

Our legislators and finance guys seem to want to impose taxes on everything — excise tax on diesel, higher taxes on sugary and vanity products, removing VAT exemption on the elderly and persons with disabilities, repealing the tax exemption on 13th month pay and other benefits — to make up for the loss of income attributable to lower personal income tax rates and even the increased SSS pension.

A number of solons have already warned the tax reform package being pushed by the Department of Finance (DOF) will only result in consumers carrying the burden.

In the end, Filipinos may only end up being in a far worse situation than they were in before the implementation of the tax reform.

In lieu of all these compensating taxes and measures, our government should instead focus on making tax collection efforts both at the Bureau of Internal Revenue and Bureau of Customs more efficient, plugging loopholes in the system, reforming our country’s investment incentives scheme to make it output or performance-based, reducing graft and corruption so that more public money is spent for the intended project/beneficiary instead of making public servants richer, to name a few.

How much revenues is our government giving up to grant corporate income tax holiday to local and foreign investors that do not deserve it. And to think that this government is even thinking of extending the ITH availment to up to eight years from the present six year maximum?

The DOF’s tax reform package proposal did not touch on ITH. It, however, proposed that the current five percent tax rate on gross income being given by the Philippine Economic Zone Authority (PEZA) and other investment promotion agencies be replaced by a reduced corporate income tax of 15 percent.

The proposal also called for additional incentives to investors, such as double deductibility, net operating loss carryover or NOLCO, and accelerated depreciation, among others.

It is about time that a change in mindset be adopted by our government in terms of dealing with tax matters. Instead of moving toward a progressive system of taxation as mandated by our Constitution, we are becoming more regressive in the sense that the lower to middle income earners are still bearing a bigger burden.

Just look at this whole thing about the Social Security System pensions and premiums. Yes, our pensioners take home an additional P1,000, but the members will have to pay additional premium so as not to deplete the funds of SSS.

Isn’t that being simplistic? Shouldn’t our government and the auditors look into how the past SSS administrations spent and managed the funds? If they are such great fund managers deserving of very huge salaries and per diems, then do the returns on SSS investments truly reflect their efforts? Shouldn’t we the pensioners be able to choose the members of the SSS board and commission, in the same way that stockholders get to elect their company’s directors?

Shouldn’t we as the members of SSS get to have a say on the salaries and per diems of the officers in the same way that shareholders have a say on executive compensation, just like the say-on-pay law in the US (Dodd-Frank Wall Street Reform and Consumer Protection Act) that allows public companies to give shareholders the opportunity to cast a non-binding advisory vote to approve or disapprove the compensation of the five highest paid executives at least once every three years (I say in the case of the SSS, let us make it binding and every year).

If the Duterte government is as radical and revolutionary as the Filipino people believes it is, for the sake of the needy, it should make radical and revolutionary measures, bite the bullet if necessary, to make the low and middle income earners of this country better off.

If more than 80 percent of Filipinos do not have bank deposits, according to one survey, then it is probably because they have nothing to save. In fact, many of them are already spending next month’s income today, pawning their ATMs, borrowing against their future crop harvests so that they will have something to spend today, even if that means paying 20 percent a month on interests.

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