The proposal of Sen. Sonny Angara to reduce the top income tax rate for individuals, which is currently 32 percent, to 25 percent by 2017 has surprisingly been welcomed by Malacañang, at least for the matter to be thoroughly studied and to possibly include as well the regular corporate income tax rate, which stands at 30 percent.
Among the Asean countries, the Philippines has the third highest rate for the top individual income tax bracket, behind Thailand at 37 percent and Vietnam at 35 percent. In the other Asean countries, the top income tax rate is 30 percent for Indonesia, 26 percent for Malaysia, 24 percent for Laos, and 20 percent for Singapore, Cambodia and Burma (Myanmar). It should be mentioned that not only is the Philippines’ income tax rate relatively high compared to those of our neighbors, but there are also significant restrictions on the tax deductibility of expenses, including caps on certain expenses. The noose, so to speak, is getting even tighter, with failure to deduct, collect, and remit the expanded withholding tax on many expenses being a ground for automatic disallowance of the expense.
While a reduction in tax rates would be most welcome from the taxpayers’ standpoint, it is understandable if the Department of Finance would prefer the status quo. Reduced tax rates will, after all, mean reduced tax revenues for the government, at least temporarily. But some argue that in the long run a reduction in tax rates will result in more disposable income for taxpayers, which they would invest or spend, thus spurring more economic activity which in turn would translate to higher tax collections.
In addition to lower tax rates, the government should also look at the total tax structure with the objective of simplifying and making the tax regime more equitable, fair, and pro-economic activity. For example, what should be taxed are incomes rather than transactions. In this regard, the government should seriously consider doing away with the documentary stamp tax and the gross receipts tax, which are taxes on transactions. A more efficient and effective way of collecting value-added taxes (VAT) should be instituted. A number of countries, including Korea, are quite good at collecting VAT, and we should try to copy their model if possible.
The Philippines’ ratio of tax collections to gross domestic product, which peaked at 17 percent during the Ramos administration and dropped to as low as 12 percent, has inched up over the recent years to around 15 percent. The DOF will likely cite this fairly low ratio as a reason for keeping tax rates at their current levels. This ratio is, however, understated because it fails to capture certain burdens that are the equivalent of taxes but are not labeled as such and are thus not reported as taxes.
These hidden or quasi-taxes include the 20-percent discount for senior citizens and persons with disability (PWDs) that most, if not all, commercial establishments absorb. Easily, this burden could run in the tens of billions of pesos, which is an additional cost to companies for something that the government itself should be providing its senior citizens and PWDs.
Other hidden taxes include the stranded cost and inefficiencies in the power sector, including past corruption in the National Power Corp., that are built into the electricity rates and passed on to consumers. These, combined with direct taxes on power generation, transmission and distribution, contribute to making our electricity rates among the highest in the region. The privatization of key utilities and services, including power, water, airports, seaports, and roads that the government should be providing to its citizens, has also led to hidden taxes. While these basic services should be provided at cost to the citizenry, their privatization has led to the element of profit, and tax on the profit to be passed on to consumers.
The court filing fees that are collected by the judiciary and which go directly to the Supreme Court are likewise not captured and reported as taxes. Not to be outdone, even the Securities and Exchange Commission has significantly raised its fees, fines and penalties, which do not go directly to the National Treasury and are thus likewise not captured as taxes.
In addition, the poor peace and order conditions and the proliferation of loose firearms have made security services a must for most corporations. This failure by the police force has created a burden for businesses and the citizenry that could be considered quasi-taxes. The village association and condominium dues are actually also quasi-taxes since these represent costs for basic services such as security, garbage collection, street maintenance, and streetlights that should have been provided by the government.
Furthermore, the Bureau of Internal Revenue has even declared these village and homeowners’ associations as taxable entities, imposing VAT on the dues and income taxes on their income. This is ironic because these costs would not have been necessary had the government itself been able to provide these basic public services.
Quotable quote heard from an expatriate working through the maze of constantly changing rules and regulations: While it is true that “it is more fun in the Philippines,” it is equally true that “nothing is what it seems in the Philippines.”
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