What you need to know about Duterte’s Tax Reform Package 1

DOF undersecretary Karl Kendrick Chua
—Photos by LEO M. SABANGAN II

Members of Inquirer Business had a sitdown with Finance Undersecretary Karl Kendrick Chua to talk about the Duterte administration’s tax reform program package one (there are five).

BACKSTORY: Poster boy of tax reform

Here are some important takeaways you need to know, which are directly lifted from Usec. Chua’s presentation:

1. The first package is a tax reform for acceleration and inclusion, or the TRAIN. This was filed in the House of Representatives in January and was approved as House Bill 5636 last May 31, 2017. It covers the reduction of the personal income tax, the simplification of the donors and estate tax, the expansion of the value added tax base, the increase in the oil excise and automobile excise, and the introduction of the sugar sweetened beverage tax. We’ll be tackling all these later on.
2. Everything that will be collected from this tax reform will be used for five programs ONLY: infrastructure (both rural and urban), health, education, housing and social protection. It will also be a major aid to continue the previous and the current administration’s programs such as the K-12, ‘Build, Build, Build,’ and the ten-point social economic agenda.
3. In reality, we do not need the tax reform if our main goal is just to raise revenue. But in reality, this government wants to reduce poverty significantly from 22% today to 14% by 2022, which is doable if we follow this tax reform. And if we continuously follow it for one generation, 23 years from today (2040), we expect to eradicate extreme poverty of this country to join the ranks of other developed nations or high-income countries like South Korea or Malaysia.
4. Some people say that there’s no need for a tax policy reform because the key problem lies in our agencies. We need to address corruption and deficiency in the Bureau of Internal Revenue and the Bureau of Customs. That is very correct, however, the problem is not only in the way the tax administration is being run, the problem is inherent to the law itself. The new tax reform package will correct the inequity, the complexity, and the efficiency of the tax system. Here are solid examples:
   • We lose 145 billion per year by not adjusting oil excise, money that could have been spent for uplifting the education system.
   • We’ve been granting a lot of exceptions, special treatments and incentives to various sectors. According to Undersecretary Chua, we lose around 433 billion per year because of these.
   • The BIR cannot open bank accounts or be granted permission to open bank accounts when someone is subject to an impeachment case, making it difficult for the government to exact justice.

BACKSTORY: DOF urges House to pass tax reforms

Here are highlights of the most important provisions of the tax reform package one:

• It will significantly lower personal income tax rates. Did you know that we haven’t adjusted our tax rates for 20 years? Someone who used to earn 500,000 in 1997 is a rich person back then, but today, he’s just a low-level manager who pays one-third of his income in taxes. So what’s going to happen with the new reforms?
  • The first 250,000 of taxable income will be exempted, which will benefit 83% of taxpayers. Just to give an example, a call center agent with a 22,000 monthly salary with thirteenth month and a few bonuses currently have to pay 22,000 per year in taxes. Under the reform, he will have to pay zero taxes since his income falls below the 250,000 threshold.
  • For those whose taxable income are below five million, they will receive lower income tax rates. For instance, someone who has an annual taxable income of 500,000 currently faces a 32% marginal tax rate. In the reform, that will fall to 25%. And after three years, it will become 20%.
  • Those who earn more than five million a year will pay 35% because the Constitution mandates that we have a progressive tax system. It is not anti-poor as critics would like to say.
• It will expand the VAT base. The Philippines has the highest VAT rate in the region at 12%, but we have so many exemptions. In the tax code, we have 59 kinds of exemptions compared to other countries that have very few. Why is this? Because they limit it only to agriculture, education and health, while we’ve been using VAT as a fiscal incentive to attract investments and protect certain groups or industries. With our system, half of the economy does not pay VAT, half of the economy gets slapped with the 12% tax. The best practice? One that is low-rate and broad-based where everybody pays.

Read more highlights on the tax reform program at Hodge Podge