Most Filipinos complain that the government collects too much tax from them, and with good reason. It has been almost 20 years since the passage of the Tax Reform Act of 1997, then the Comprehensive Tax Reform Programme (CTRP). Obviously, it is outdated, and hence Congress, upon the prodding of the Department of Finance, is deliberating on the initial package of revisions. According to the Department of Finance, the proposed Tax Reform for Acceleration and Inclusion (TRAIN) is intended “to correct a number of deficiencies in the tax system to make it simpler, fairer and more efficient”.
True to the TRAIN’s objective, the initial package seeks to revisit the income taxation regime of individual taxpayers. To make it simpler, it introduces a gross income taxation system as an alternative to net income taxation that is currently in place under the CTRP. However, this will only be available to the self-employed and professionals.
While progressivity has been the system of taxation, its essence has somehow been diluted with the passage of time. The tax brackets of the CTRP are unable to adjust to inflation. The distinction between low and high-income earners was stark some 20 years ago, but has now been effectively obliterated, making the system unfair.
Thus, the proposed schedule of tax rates seeks to restore the distinction, but now with an indexation system. In this way, there will be a periodic adjustment of different taxable income levels without going through tedious legislative amendments. The Bureau of Internal Revenue’s powers will be expanded in order to make its tax collection more efficient. This includes an increased, albeit still limited, authority to inquire into bank deposits.
As expected, there is divergence in the versions of the two houses of Congress. For example, in the lower house version, the gross income taxation system is only available to those who will not be subject to VAT (i.e., low-income earners, the self-employed and professionals). The Senate proposes to make such a system available to all self-employed and professionals. This is also fair in the sense that the proposed tax rate takes into account the ordinary taxpayer’s direct costs and other deductions.
In this manner, the taxpayer will be able to pay approximately the same amount of tax that he or she would otherwise pay under the net income taxation regime. This will spare him or her the trouble of the technical requirements of deductibility.
The top rate is likewise an issue. The lower house proposes a new top rate of 35%, while the upper house wants to retain the current rate of 32%. Of interest to multinational companies (MNCs) is the proposed removal of the 15% preferential tax rate for certain officers and employees of their regional headquarters (RHQs) and regional operating headquarters (ROHQs).
The lower house thinks that such an incentive has outgrown its intended benefits. MNCs counter that stripping the incentive would severely impair their ability to keep these highly specialized talents from transferring to other headquarters in the region. Thus, the Senate proposes to retain the incentive to officers and employees of existing RHQs and ROHQs, but not to those employed in the future. There are also other related issues that can be easily resolved at the bicameral conference committee level.
Ideally, package one should be in place before, and made effective at, the start of 2018. This will simplify the administration of the proposed revisions. It will be complicated and contentious if made effective on some other date. In the latter case, the issue of whether the changes could retroactively apply to income earned prior to the amendatory law’s effectivity could arise. It may be justified for low-income earners up to the extent the changes are favourable to them.
However, it may be contentious with regard to high-income earners, who are meant to pay higher under the current proposal. There is a limited window for the government to avoid this complication. Congress must submit its enrolled bill to the president soonest, so he can approve it before 15 December, just enough to comply with the 15-day publication requirement for a tax law to become effective.
In any case, it is inevitable the TRAIN will come to pass. The only question is when and in what shape. Hopefully, we will have one that is truly simple, fair, and more efficient.
Eric R Recalde is a partner and head of the Tax Department at ACCRA Law Offices
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