The National Internal Revenue Code of 1997 or Republic Act (RA) No. 8424 was enacted almost 20 years ago. There were amendments made here and there like the increase of the threshold exemption of bonuses and other benefits to P82,000 and the exemption from income tax of minimum wage earners. But the tax rates prescribed under Section 24 were last amended by RA No. 9504 in 2007; other than these, the income brackets have remained the same.
The current administration has consistently promised to effect a tax reform even during the campaign period. In relation to the same, the first tax reform package has been submitted by the Department of Finance (DOF) to the House of Representative in 2016, which is now known as House Bill (HB) No. 5636, which consolidates all pending tax measures. It was recently certified by the President as urgent, dispensing of the requirement of readings in separate days, which paved the way for its passage as of writing.
But what does HB No. 5636 entail aside from the lower tax rates and how would it affect the Filipinos, in general, and the accounting profession, in particular?
The proposed amendments
The most publicized amendment would be the long-awaited adjustments in the tax brackets and schedular rates of income tax for individuals, with those earning not over P250,000 in a year being exempted while those earning more than P5,000,000 will now be subject to a base tax of P1,450,000 plus 35% in excess of the P5,000,000, with reduced rates beginning 2020 ranging from 15% to 30%.
HB No. 5636 likewise provides for automatic adjustment of taxable income levels and their corresponding base every 3 years beginning 2021 based on a 5-year cumulative Consumer Price Index inflation rate – a welcome provision not present in the 1997 Tax Code which caused the tax brackets to remain unchanged for the past 20 years.
In addition, the threshold amount of exempt bonuses and other benefits will be increased to P100,000.
The above-mentioned rates, however, only apply to compensation income earners, not to all individuals. Self-employed individuals/professionals whose gross sales/receipts fall below the proposed VAT threshold of P3,000,000 will be levied a tax of 8% on gross sales/receipts in lieu of percentage tax. While those whose sales/receipts exceed the said VAT threshold shall be subject to the tax imposed on corporations.
Moreover, the proposed amendment requires professionals to present, at their option, a certificate of tax payment from the BIR or a certified true copy of their income tax return (ITR) upon renewal of their respective professional license.
Likewise, the bill removes the exemption of minimum wage earners from income tax and the personal and additional exemptions and deductions for premium on health and/or hospitalization insurance, amending Sections 24, 31 and 34 of the Tax Code.
The preferential tax treatment of aliens employed by multinational companies, offshore banking units and petroleum service contractors and subcontractors are similarly to be removed. Also, the bill proposes the removal of the exemption of PCSO and Lotto winnings and will now be subject to the 20% Final Tax.
As to fringe benefits, the rate is lowered from 32% to 30% for the first three years. Thereafter, the value of the benefit will form part of the gross income of the employee subject to the graduated rates.
Estate Tax and Donor’s Tax
The tax rate will be fixed at 6% on net estate and annual net gift removing the schedular rates for both taxes.
The deduction for Family Home will be increased from P1M to P3M includes an automatic adjustment of the ceiling every 3 years beginning 2018.
Value Added Tax
The zero-rated sale of service to persons engaged in international shipping or international air transport operations, including leases of property for use thereof now requires that the services are exclusively for international shipping or air transport operations.
Previously considered zero-rated sales to export-oriented enterprises and export sales under the Omnibus Investment Act will no longer be treated as such.
The VAT exemptions of the following have been qualified:
- Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations will now require that the said fuel, goods and supplies shall be used for the said activity;
- Importation of professional instruments and implements for persons coming to the Philippines to settle or resettle now requires proof of such intent to the Bureau of Customs.
The following VAT exemptions are proposed to be removed:
- Real property used for low-cost and socialized housing;
- Lease of residential property with rentals less than P10,000 (now P12,800)
As earlier mentioned, the VAT threshold is proposed to be increased to P3,000,000.
Gradual increase in the excise taxes imposed on petroleum is proposed by the bill with an allocation of 40% from the said increment to fund a social benefits program and granting of fuel vouchers to qualified transport franchise holders; while the remaining incremental revenue shall be allocated for infrastructure, health, education and social protection expenditures.
Sugar sweetened beverages are now subject to excise taxes with a yearly 4% increase in the rates thereof, with the proposed allocation of 85% for government priority programs and the remaining 15% for the welfare and benefit of sugar planters/farmers.
Larger excise tax rates are likewise proposed to be imposed on vehicles with the exemption from excise tax of hybrid vehicles which can run at least 30km under one charge.
Effect of the proposed amendment
The provision providing for adjustment in the income tax rates and brackets is a welcome development which will possibly avoid encountering the same dilemma of having 20-year old brackets and rates. While the lowered income tax rates benefit the low and middle-income earners, the removal of VAT exemptions and increased excise taxes are feared to surge the prices of basic necessities and/or cost of transportation. Deputy Speaker Quimbo, in an interview, said that the effects of the other taxes may even offset the increase in spending power under the proposed bill. He further pointed out that other individuals such as farmers, minimum wage earners and fisherfolk who will not directly benefit from the amendment, considering that they are already tax-exempt, will now suffer the increased taxes, like that on fuel, which will affect the costs they incur in the conduct of their trade.
However, Finance Secretary Dominguez, in a rappler article, said that “the benefits to be derived from the tax reform measure will sustainably finance the government’s envisioned massive investments in infrastructure thereby encouraging economic activity and job creation, as well as fund the desired increase in the public budget for health, education, and social programs to alleviate property.” All things considered, the Secretary believes that it is more beneficial to all than it is harmful to some.
Also, in the Department of Finance (DOF) website tackling “tax myths”, they clarified that the increase in oil excise taxes do not necessarily result in booming prices, considering that historically, the price of oil already increased by 50% where the headline inflation was only 2.6%. Moreover, they clarified that if the price of the Dubai crude oil exceeds $100 per barrel, they will stop increasing the excise taxes to provide relief to everyone. Furthermore, they pointed out that historically the increase of VAT from 10% to 12% and the expansion of the VAT base by the Reformed VAT (RVAT) Law only resulted in an additional 1.7% in inflation which was short-lived. Food, transport and electricity inflation also followed the same manageable trend and the GDP remained strong. In addition, the government aims to provide a “Pantawid Pasada cash card program” which will target public utility vehicles in order to offset potential increase in fares and expects it to indirectly benefit the commuting class.
The imposition of the taxes on sugar-sweetened beverages is in order to discourage the consumption of the same making it more of a health measure and is backed by the Department of Health.
The proposed increase in excise tax on cars can be seen to discourage would-be buyers despite the discomfort they encounter as commuters with the current mass transport system. Although there is a feared decrease in car sales, directly affecting the manufacturers and financing companies negatively, the increase in excise tax can be seen to prevent the worsening of traffic. It is a better alternative to upgrade the current mass transport systems or add additional infrastructure, but the goal of increased revenue collections is precisely to enable the government to provide the same. Secretary Dominguez, in a post in the DOF website, said that the local automotive industry will continue its “healthy” growth rate despite the adjustments to car excise taxes given that the manageable price hikes in mass-market vehicles would be readily absorbed by the buyers considering the increase in the take home pay and through financing schemes available given the country’s low interest-rate regime
The service providers and seller of materials to export-oriented enterprises and cooperatives, as well as those engaged in the sales of low-cost housing will be negatively affected by the removal of their VAT exemptions. However, the government clarifies that the goal is to limit the VAT exemptions to basic essentials in line with international good practice. Meanwhile, the tax exemptions will be replaced with the most targeted, transparent and accountable benefits for vulnerable sectors such as through unconditional cash transfers.
The bill is seen to negatively affect the industries hiring alien expatriates for their expertise which would have to incorporate a higher income tax in the fixing of their salaries absent the preferential tax of 15% and this includes, in a large chunk, the Business Process Outsourcing industry.
The fixing of the estate and donor’s tax rate to 6% would ease the computation of the said taxes and removes any distinction, tax-wise, in transferring properties mortis causa rather than inter vivos or vice versa. Moreover, like the income tax brackets, the deduction for family home has long been overdue for adjustment.
Finally, the increase in revenue collection would benefit the economy in a grander scale by decreasing budget deficit, enabling the government to fund the numerous infrastructure projects it seeks to implement and provide more funding for social projects of the government.
Effect to the Accounting Profession
As earlier stated, those individuals engaged in the practice of profession will now be taxed differently than those earning compensation income, particularly, they are no longer covered by the graduated income tax rates. Likewise, any personal or additional exemptions has been removed by the proposed amendments, even the very minimal deduction allowed for premiums on health and/or hospitalization insurance.
If an individual engaged in the practice of profession has receipts below the revised VAT threshold of P3M, he will be subject to an income tax of 8%, which is in lieu of the percentage tax. While at a glance this is a lower rate compared to the lowest rate in the proposed amended graduated rates, this would only be beneficial if the operating expenses of the professional in earning such receipts are minimal considering that the tax base of the 8% is the GROSS receipts without accounting for any such expenses, compared to the previous tax base of TAXABLE income, which is the amount after the gross income has been reduced by deductible business expenses. As such, it would have been a possibility that the professional would not have been subject to income tax if the taxable income is P250,000 under the revised brackets and rates, but with the new tax scheme imposed, regardless if the professional incurs a net loss in his practice, an 8% tax is still imposed on his gross receipts.
This, in effect, would entail closer scrutiny of expenses to keep them at a minimum considering the absence of any tax benefit that may be derived therefrom. Moreover, budding professionals who dream of starting their own practice would be at a disadvantage with the reality that the first year of operations require cash outflows for registration and licenses which would no longer be deductible for income tax purposes.
On the other hand, if the gross receipts breached the P3M VAT threshold, an individual is taxed like a corporation, i.e., at 30%, regardless of the level of taxable income. Similar to the above, a net taxable income of P250,000 would not have subjected the professional to any income tax under the revised brackets and rates, but with the new tax scheme, he will be subject to the 30% corporate income tax.
Apart from the above, a direct provision affecting those in the practice of their profession is the additional requirement of presenting a certificate of tax payment or a certified true copy of the ITR for purposes of renewing their licenses.
While the proposed tax reform has its advantages, note must still be taken on its negative effects even to those who would benefit from the same. We hope that the voucher system proposed to negate the effect of the removal of some exemptions and increase in the excise tax on petroleum, be efficiently administered and, all things considered, the inflation rate remain manageable so as not to offset or altogether remove any benefit that may be derived by low and middle-income earners.
A better, not an alternative, but an imperative concurrent move of the government would be to increase efficiency in collection and assessment and cork any leak in revenue collection; remove the Bureau of Internal Revenue from the coverage of the Salary Standardization Act to discourage corruption even in the rank and file level; increase competence levels amongst the personnel through technical training and assessments; hire more personnel not only for assessment purposes but also for the efficient and effective implementation of the administrative provisions of the Tax Code and its implementing regulations and altogether remove or lessen the costs of compliance with the numerous reports the BIR requires to ease assessment procedures.
While the bill may have passed the House of Representatives with flying colors, some Senators have expressed opposition to some of its supposed “anti-poor” provisions.
Article VI, Section 28(1) of the 1987 Constitution provides that “[t]he rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation,” we hope the Congress will do just that.