Lower income tax

OF THE reforms promised by President Duterte, the campaign pledge to lower the income tax rate has generated much interest. Ordinary taxpayers had long clamored for tax relief, given that the Philippines has one of the highest corporate and individual income tax rates in the region, but all their pleas had fallen on deaf ears.

This time looks different as Mr. Duterte’s economic team has already drawn up a comprehensive tax reform package, with the lowering of income tax rates an integral part of it. By 2019, it is also expected that there will be a simpler, fairer and more efficient system for all taxpayers.

The importance given to the lowering of income tax rates is manifested in the fact that it will be the first of the four components of the tax reform package to be implemented starting 2017. Targeted for passage in January, or just five months away, the first tax policy package will adjust personal income tax brackets, reduce the maximum rate for personal income tax to 25 percent from the current 32 percent over a number of years (except for the highest income earners), and eventually shift to a simpler, modified gross system.

The proposal is that those earning up to P250,000 a year will be imposed an income tax of just P2,500. Under the current system, those earning P250,000 a year are taxed P22,500 plus 25 percent of P110,000 or P27,500, for a total of P50,000. This is because the P250,000 taxable income falls under the “more than P140,000 but not over P250,000” income bracket, which is slapped a tax of P22,500 plus 25 percent of the excess over P140,000. This will translate to tax relief of P47,500.

Those earning more than P250,000 to P400,000 will pay P2,500 plus 20 percent of the excess over P250,000; more than P400,000 to P800,000 will be charged P32,500 plus 25 percent of the excess over P400,000; more than P800,000 to P2 million will pay P132,500 plus 30 percent of the excess over P800,000; more than P2 million to P5 million will be levied P492,500 plus 32 percent of the excess over P2 million; and more than P5 million will be charged P1.45 million plus 35 percent of the excess over P5 million.

This proposed structure provides tax relief to the majority who get P400,000 and lower a year, and this will include the millions of minimum wage earners. Under the present system, those with a taxable income of P400,000 pay P95,000 in taxes because they fall under the income bracket “more than P250,000 but not over P500,000,” which is levied P50,000 plus 30 percent of the excess over P250,000. Under the proposed reforms, the tax will be P2,500 plus 20 percent of the excess over P250,000 (or P30,000), for a total of P32,500. This will translate to tax relief of P62,500.

Actually, the tax break is for most income brackets. For instance, the current system is such that those earning, say, P1 million is taxed P125,000 plus 32 percent of the excess over P500,000 (or P160,000), for a total tax of P285,000. Under the new system, this will be reduced to P132,000 plus P50,000 (25 percent of the excess over P800,000), for a total of P182,000.

The other good news is that the reduced tax rate for people earning P250,000 and below annually, which accounted for 83 percent of all taxpayers in 2013, will be kept in the second year onward, while the tax rates for the five other income brackets will have downward adjustments every year until these are brought down to 25 percent (for those earning up to P5 million a year).

The government is expected to incur P139 billion in foregone revenues from this tax component, but it has lined up compensating measures. These include the expansion of items to be subjected to the value-added tax mainly by limiting exemptions to raw food and other necessities like education and health. The excise tax on gasoline and other petroleum products will also be increased and a new tax on so-called “sugary” products will be imposed. The proposed excise tax on sugary products—domestic raw sugar, refined sugar, as well as imported sugar and sugar substitutes—at P5 a kilo will generate P18.1 billion. In terms of revenue impact, the first package will actually result in a net gain of P220.7 billion.

Given the fact that President Duterte’s allies control the majority in both chambers of Congress, we see no reason why lowering the income tax rates will not be implemented this time around.