Tonypet J. Rosales | Editor
NOTHING is certain but death and taxes.
But here in the Philippines, death and taxes are almost synonymous—with the country having the highest taxes in the region and with no apparent way for the average Filipino to avoid its heavy burden.
In a paper submitted to both houses of Congress, the Tax Management Association of the Philippines (TMAP) provided data for lawmakers who are looking for individual income tax reform to reduce tax burdens.
The TMAP paper revealed that Filipino individual taxpayers are subject to the highest effective income tax rates among all the countries within the Association of Southeast Asian Nations (ASEAN).
In comparison, TMAP points out that in the Philippines, an employee that earns an average of PhP40,000 a month (or Php500,000 annually) is already in the highest 32 percent income tax bracket.
In other countries such as Vietnam, Malaysia and Thailand, workers earning the same annual income pay only 20 percent; 11 percent; and, 10 percent respectively. In Singapore, employees are taxed 2 percent—one of the lowest in the region.
TMAP recommended that the top tax rate should be reduced, that the tax threshold for lower incomes be raised and that tax brackets be realigned. With a more equitable individual tax code and a reduction in tax burdens, it was also suggested that overall compliance could be enhanced and the tax base widened, particularly if the code could also be simplified for those entrepreneurs and professionals subject to individual income taxation.
Calls to amend the tax grid have snowballed in recent weeks with several proposals aimed at protecting the purchasing power of employees against the increasing cost of living concurring with the TMAP recommendations.
Over at the Senate, the chairman of the Senate ways and means committee Juan Edgardo Angara stressed that current Philippine income tax rates hurt middle-income earners, and has introduced a bill that aims to adjust and compress income tax brackets so as to reflect, to a greater extent, taxpayers’ ability to pay.
Angara’s bill (Senate Bill 2149) also includes proposals to gradually reduce the country’s top rate of income tax from the current 32 percent to 25 percent over the period from 2015 to 2017, together with an increase, from PhP30,000 to PhP75,0000, in the tax exemption cap on annual benefits such as 13th month pay and Christmas bonuses.
The Department of Finance (DOF), however, expressed its opposition of the Angara measure claiming that government stands to lose at least PhP43 billion in revenues by 2017 if the bill was to be passed. Later, the DOF would admit that the PhP43 billion was only a rough estimate, but it added that any revenue loss would be harmful given the country’s present fiscal deficit situation, foreign debt and with some PhP130 billion needed to fund reconstruction following typhoon Yolanda.
As of 2006, the Philippine government was spending a third of its annual budget on debt interest payments alone, thereby crowding out vital expenditures on social services and infrastructure. The budget shares of education and health had, in fact, been falling from 17.1 and 2.1 percent in 2000, respectively, to only 13.9 and 1.3 percent in 2006.
The Aquino government is now faced with the same prospect of a mounting debt service burden that could severely tie its hands in providing for the ever-growing needs of education and health services. As a solution, PNoy and his economic managers simply want to raise taxes even when an estimated PhP250 billion is lost yearly to tax evasion. Raising taxes would be unjust as it puts the burden on the average wage earner and on the shoulders of obedient taxpayers.
Problems with the Philippine tax system appear to have more to do with collections than with the rates. Estimates of individual income tax compliance in the late 1980s ranged between 13-27 percent. Assessments of the magnitude of tax evasion by corporate income tax payers in 1984 and 1985 varied from as low as PhP1.7 billion to as high as PhP13 billion.
Tax evasion is also compounded by mismanagement and corruption. A 1987 government study revealed that 25 percent of the national budget was lost to graft and corruption. With the Priority Development Assistance Fund (PDAF) controversy and the Disbursement Acceleration Program (DAP), this 1987 figure appears to be a gross underestimation.
Low collection rates have, in effect, reinforced the regressive structure of the tax system. The World Bank calculated that effective tax rates (taxes paid as a proportion of income) of low-income families were about 50 percent greater than those of high-income families in the mid-1980s. Middle-income families paid the largest percentage. This situation was caused in part by the government’s heavy reliance on indirect taxes.
Individual income taxes accounted for only 8.9 percent of tax collections in 1989, and corporate income taxes were only 18.5 percent. Taxes on goods and services and duties on international transactions made up 70 percent of tax revenue in 1989, about the same as in 1960.
The country’s outdated” and inequitable taxation system makes middle-income earners pay the same taxes as billionaires and needs to be updated immediately.
“Updating our tax system is an issue of equity. It’s not an issue anymore of macroeconomics. That’s all meaningless if the average person has nothing left for his family,” Angara said.
For its part the Bureau of Internal Revenue (BIR) said it is considering draft proposals to lower income taxes by 2015. But like the mixed signals from the DOF, the BIR said it would be willing to lower income taxes if it would be replaced by a revenue raising mechanism elsewhere.
Aside from lowering individual income taxes, the BIR should also consider lowering the corporate income tax rate, which currently stands at 30 percent. A lower corporate tax rate would enable the Philippines to be more competitive tax-wise in ASEAN, and attract more foreign investments. At present, the country’s corporate tax rate is the highest in ASEAN (except where a company in Myanmar is not registered under its Foreign Investment Law). Indonesia, Malaysia and Vietnam have the second-highest tax rates at 25 percent – a whole 5 percentage points lower than the Philippines.
Simply put, lowering individual income taxes would mean additional purchasing power for the average Filipino. More money in their pockets means an increased capacity to make purchases and satisfy the need for basic goods and services. This additional empowerment can thus translate to a stronger local economy with money flowing in the direction of local manufacturing.
Otherwise, taxes will continue to make a killing.