#AskTheTaxWhiz: Advice on tax reform for our lawmakers
Dear Mr Tax Whiz,
It's all over social media that the Senate plans to have the Tax Reform for Acceleration and Inclusion (TRAIN) bill passed on 3rd and final reading before Congress goes on recess on October 12.
Will the TRAIN bill exempt ordinary employees like me from paying taxes? How about the senior citizens and persons with disabilities (PWDs) enjoying value-added tax (VAT) exemptions? Will they continue to enjoy the same benefits? Is there a chance to lower the interest and penalties being imposed by the Bureau of Internal Revenue (BIR) to make these affordable?
Have you read both the House and Senate versions of the tax reform bill? Please help us know if this TRAIN bill will really unburden us from paying high taxes.
Furthermore, is it true that there are anti-poor provisions in the bill? How can we make sure that as promised by President Rodrigo Duterte, those of us earning P30,000 and below per month will be exempted from paying income tax? How about the micro, small, and medium enterprises (MSMEs)? Will they benefit as well?
Are you still proposing to overhaul the BIR and the Bureau of Customs (BOC)? How can we stop corruption in these two agencies? Isn't it ironic that we cannot collect the right taxes from the existing set of taxes we have and yet the Department of Finance (DOF) wants to impose new taxes like tax on sugary beverages?
Let us know how we can support your tax advocacy to make sure the rich will pay more, and that corruption in BIR and BOC will stop!
P.S. Is it true that you're migrating to Canada? Are you giving up on your advocacy to push for genuine tax reform, to empower the next generation of game-changers through entrepreneurship? Just asking.
It's good to know that you are concerned about the passage of the proposed comprehensive tax reform package. After more than two decades, we are finally revising our tax code.
We have to give credit where credit is due. First, to the hardworking, dedicated, and competent tax reform team from the DOF led by Secretary Sonny Dominguez and Undersecretary Karl Chua, including BIR Commissioner Billy Dulay, Deputy Commissioner Nestor Valeroso, and the revenue officers who participated in all committee hearings. Second, to our tax reform champions from both chambers of Congress led by the ways and means committee chairs, Senator Sonny Angara and Quirino Representative Dax Cua. Third, all our fellow tax advocates from various civic groups and associations, especially the Tax Management Association of the Philippines (TMAP).
Did I forget to thank the President? No. But not yet.
After the bicameral session, which is happening once the Senate passes its version of TRAIN, President Duterte has to sign it into law for its immediate implementation in January 2018.
As I always say, lowering personal income tax is both urgent and necessary.
It is an injustice on the part of the government to rely on the fixed income earners who are mostly earning a little more than minimum wage but are paying the same tax rate as the big corporations and less than its wealthy business owners.
However, for the comprehensive tax reform package to genuinely promote inclusive growth, the reform has to be inclusive as well. This means we cannot keep on passing tax-eroding measures to exempt different sectors in society. The system has to be simple, fair, and efficient for all, regardless of age, status, or gender, to encourage everyone to pay taxes correctly and on time.
Regarding the amount of interest and penalties, it may really be exorbitant but the point is we have to be compliant and pay our taxes to make sure we all contribute to nation-building, regardless of how much we earn.
I have read and understood fully both the Senate and House versions, especially the 70-page, 48-section Senate Bill 1592 submitted by Senator Angara on (my birthday) September 20, 2017. Although I am in Canada up to the writing of this article, I am closely following the progress of the tax reform bill.
I will gladly give you a summary of my comments on various provisions of both versions of the tax reform bill and my advice as well for our legislators. As I have mentioned in my recent interviews, I laud the commitment of both chambers to pass the proposed tax reform bill of the Duterte administration. However, it fails to address the inefficiency of our tax system which resulted in high tax rates and high compliance costs but low compliance from a very narrow taxpayer base (for both income tax and VAT).
I refuse to tag the tax reform bill as anti-poor, but there are some provisions which need to be reviewed further or be removed to make sure we deal first with the most urgent concerns so as not to inadvertently delay the measure's passage.
Nonetheless, we have to let our lawmakers know about our personal opinion, and express our support for the proposed tax reform bill. Tag lawmakers on social media!
Our voices are more important at this point, especially the ordinary employees and MSMEs who have been unjustly and overly burdened by outdated, high income tax for more than 20 years.
With the unresolved smuggling cases involving BOC officials and hundreds of tax evasion cases pending before the Department of Justice, including the cases of more than 400 erring BIR examiners, the more that we have to overhaul our two revenue agencies before passing new taxes.
Genuine tax reform which we are advocating is where the rich pays more taxes while the poor and underprivileged are protected by the government, where honest tax payment is rewarded while tax evasion and smuggling are not tolerated.
In view of ongoing efforts to revamp our tax system, let's support the campaign of BIR Commissioner Dulay in instituting a culture of honesty and integrity in the BIR and in paying taxes in the country. To do this, he issued RMC 60-2017 to officially launch the Seal of Honesty Certification Program, which encourages voluntary compliance without penalties and compromises. Taxpayers, individuals, and corporations who will be awarded the seal will not be included in the BIR's priority audit. For more details, visit www.sealofhonesty.ph.
To our lawmakers, who I know have heard a lot of opinions and recommendations from various sectors and tax advocacy groups including CSR Philippines, I hope the following insights will help you as you deliberate on the final version of TRAIN Package 1:
1. Keep the P250,000 income tax exemption without additional exemptions for dependents, and the P5,000,000 and above income level but subject to 25% salary tax rate exclusive to employees (same as the proposed 25% corporate income tax in Package 2).
2. Implement a lower flat tax of 5% based on gross, in lieu of income and percentage tax, for startups and small businesses with less than P5 million annual gross sales (or P14,000 or less daily gross sales) subject to mandatory audit every 3 years to verify if they haven't exceeded the sales threshold.
This is to encourage even sari-sari stores to register and start paying lower tax. However, provisions of the Barangay Micro Business Enterprise (BMBE) law have to be amended as it exempts micro businesses with less than P3 million worth of total assets or capital without cap on gross sales.
3. Implement a higher flat tax of 15% based on gross, in lieu of income and VAT, for all licensed professionals, owing to the fact they have higher margin, lower costs, but very low tax compliance.
4. Fixed individual and corporate income tax rate at 25% for both self-employed and corporations with more than P5 million annual gross sales, with 40% standard deduction as default (or 15% effective rate similar to licensed professionals + 12% VAT) and optional itemized deduction subject to mandatory audit every 3 years.
5. Automate business registration and simplify tax compliance. Rather than relying on audit which is prone to corruption, computerize all processes and provide online access and options for taxpayers to pay their taxes. For startups and small businesses, make the filing and payment of taxes annual only, instead of monthly and quarterly, while allowing quarterly filing and payment for licensed professionals. In general, we have to make bookkeeping and tax compliance simple and with an option to computerize, making manual writing in the Books of Accounts optional instead.
6. Tax policy and administrative reforms must complement each other to broaden taxpayer base as well as to lower rates but increase voluntary compliance for high-earning taxpayers, both individuals and corporations.
- Using shared database with other government agencies, total registered taxpayers must be increased drastically as follows: employees from 13 to 30 million; SMEs from 2 to 5 million; licensed professionals from 200,000 to at least 2 million; large taxpayers from 2,300 to 5,000.
- VAT taxpayer base must also be broadened by limiting VAT exemptions to agriculture, health, banks, education, and the purchase of medicines by senior citizens and PWDs.
7. Other provisions which may not necessarily be part of Package 1:
- Lowering estate tax from 20% to a flat 6% is okay but this will benefit the rich more, not the poor – although an estate tax amnesty will greatly benefit our farmers and poor countrymen who inherited land but cannot afford to pay estate tax. I prefer increasing the estate tax-exempt threshold to P10 million to make sure those who will inherit properties (and are not necessarily rich) will not be burdened by unnecessary tax.
- Lowering donor's tax from 30% (donation to strangers) or 15% to a flat 6% will further erode the income tax base as more corporations and professionals can choose to claim charitable contributions to reduce their taxable income. This is definitely favorable for the rich and businessmen, not the employees.
- Imposing 20% tax on passive income like dividends, foreign currency deposits, and sale of shares of stocks not publicly listed is one of the best provisions in SB 1592, as this is truly taxing the rich and not the poor. But how about the exemption granted to long-term deposits which are obviously maintained only by the rich?
- Increasing excise tax on cars is also necessary if we really want to collect from the rich, but I prefer the 200% rate originally proposed by the DOF.
- Imposing excise tax on diesel is also necessary as long as the government can provide subsidy to protect public utility vehicles (PUVs) at least in its first 3 years of implementation, to make sure we collect from the SUV owners and not from the poor again.
- Imposing excise tax on cosmetic procedures is also a good source of additional revenue, but how about imposing tax and penalties on erroneous Statements of Assets, Liabilities, and Net Worth (SALNs) of government officials?
- Instead of imposing tax on sweetened beverages as a health measure, why don't we just increase tax on alcoholic beverages and cigarettes?
- How about increasing tax on mining, aside from the P10 increase per metric ton for coal, if the government is really determined to collect more taxes without hurting the poor?
In the end, we all need to do our share. If we want a better Philippines, we need to be better citizens, better taxpayers!
With every good wish,
The Philippine Tax Whiz
P.S. I don't have any plans of migrating. I just love traveling and learning how other countries do their taxation. I am not giving up but I cannot do it alone. Like you, I hope we enjoy the benefits of the taxes we pay. Just remember, we get the government we deserve.
Mon Abrea, popularly known as the Philippine Tax Whiz, is one of the 2016 Outstanding Persons of the World, a Move Awards 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), an Asia CEO Young Leader of the Year, and founder of the Abrea Consulting Group and Center for Strategic Reforms of the Philippines (CSR Philippines). He currently serves as Adviser to the Commissioner of Internal Revenue of the Philippine government on tax administration reform in promoting inclusive growth. Follow Mon on Twitter (@askthetaxwhiz) or visit his Facebook page. You may also email him at email@example.com.