The inefficient tax system in the Philippines imposed a very burdensome tax rate and high compliance cost to taxpayers. This, however, didn’t result to a high tax collection as the existing taxpayer base remains very narrow with very low voluntary compliance from professionals and businesses.
Audit and investigation continued to generate an insignificant contribution with less than 3% of the total collections. Meanwhile, corruption in the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) continued to proliferate. This meant that tax evasion and smuggling cases remained unresolved.
This problem would not be fixed with simple tweaks and revisions. The outdated tax system needed an overhaul.
The government’s solution to this is the Comprehensive Tax Reform Program (CTRP). At its core, the initiative seeks to create a simpler, fairer, and more efficient tax system.
The CTRP’s first package was passed in December 2017, which aimed to impose progressive rates on the personal income tax. However, the Tax Reform for Acceleration and INclusion (TRAIN) Law has also imposed new taxes and increased existing ones.
Moreover, as TRAIN Law would not benefit the poor, the first package also contained provisions on social mitigating measures.
Over the year, the BIR released various regulations, circulars, and orders to implement these changes. The regulations implementing TRAIN’s major provisions have already been released.
Since its legislation, TRAIN Law has grown controversial. The Law coincided with persistently-high inflation rates and rising global prices.
In more recent discussions about TRAIN Law, what’s discussed is not how lower personal income tax helped taxpayers. Most news about TRAIN Law are about its supposed inflationary impact by increasing the prices of basic goods and services.
Certainly, some blame can be passed to unlucky timing. However, the rushed implementation of TRAIN Law is not without its flaws.
The social mitigating measures, for one, experienced extreme delays.
The Unconditional Cash Transfers which should have been finished by the start of the year was not released immediately. The same goes for the fuel vouchers which were only doled out starting August. At that time, the oil prices were still rising and inflation was already at a nine-year high.
Then, there are the supposed fare discounts and skills training that have not been heard of. In fact, instead of fare discounts, what the Filipino people got were fare hikes.
This is not to say that TRAIN Law is a bad law or that it’s anti-poor, only certain provisions of it and its poor implementation.
Before TRAIN, the personal income tax was unfair and most of it was carried only by employees.
In fact, 82% of the individual income tax collections come from withholding taxes on compensation income.
Unfortunately, TRAIN’s offsetting measure simply turned out to be passing the tax burden from one type to another. What you would have paid as personal income tax, you paid for with higher prices.
However, TRAIN Law is not the entirety of the CTRP contrary to how much it takes the spotlight. Other packages have seen progress as well, fueled by the President’s urgings during his third State of the Nation Address.
Recently, another package of CTRP had been passed. As of December 13, 2018, the tax amnesty has been approved by both the House of Representatives and the Senate. The two chambers produced different versions of the tax amnesty which were then reconciled in a bicameral conference.
The tax amnesty program contained an estate tax amnesty, general tax amnesty, and tax amnesty on delinquencies.
The amnesties cover the period ended December 31, 2017.
For the General Tax Amnesty, the reconciled version proposed two options. The first option is based on the House version, which notes that the rate shall be based on total assets. The second is based on the Senate version which proposed a rate based on net worth.
The bill, however, is missing certain provisions from the Department of Finance (DOF)’s proposal. Even before its reconciled version, the tax amnesty bill did not contain lifting of the Bank Secrecy Law. Legislators noted that it would violate the Constitution which states that every bill must only have one subject.
Previously, the Secretary of Finance noted the importance of lifting the Bank Secrecy Law in implementing the tax amnesty. Without lifting it, the government could lose out on as much as P15-B. The DOF remains adamant that they would continue advocating the lifting of the Bank Secrecy Law.
The second package of CTRP has gotten some traction during the mid-year, especially in the House of Representatives. The Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) Bill has already cleared the third reading in the lower house.
However, it has seen a significantly slower progress in the Senate.
Since it was submitted to the Senate Committee on Ways and Means on August 6, the bill has not progressed at all.
Several organizations claimed that, contrary to its namesake, TRABAHO Bill would actually result in massive job losses. Wary of what hasty implementation can result to, legislators are urging further study of the proposed bill.
TRABAHO Bill is supposed to lower the corporate income tax from the current thirty percent. By 2029, the Philippines would have 20% corporate income tax rate. To offset this, the government is seeking to rationalize fiscal incentives to make it more targeted.
The proposed rationalization of incentives is what organizations are foreseeing would cause massive job losses. For this reason, TRABAHO Bill is unlikely to be passed this year.
This, however, is an injustice to the majority of corporations, which are subject to the regular income tax. These entities who never availed of any tax incentives would have to wait until the issue on rationalization is resolved.
The government needs to remember that lowering the corporate income tax to 20% is indispensable if we want to remain competitive. In fact, the government should have immediately reduced the corporate income tax to the ASEAN average, 25%. From there, they could gradually decrease it to 20% depending on the collection performance.
Package 2 Plus
The next package is 2 Plus which seeks to provide funding to universal healthcare. Among the tax rates to be increased are those on mining, alcohol, and tobacco products. The proposed increase in rates are scattered through different bills and have seen varying progress.
House Bill (HB) No. 8400, which contains a new fiscal regime for the mining industry, was passed on November 12.
In the Senate, the DOF has expressed support for Senate Bill (SB) No. 1979. Unfortunately, the bill has not seen progress since it was referred to the Committee on Ways and Means.
For the excise tax on alcohol, the lower house has prepared HB 8618 which has recently been approved on December 3. So far, there has been no counterpart in the Senate.
The DOF supported SB 1599 for the increased excise tax on tobacco products, which was been introduced back in 2017.
Recently, the lower House has also proposed their own version, HB 8677. While filed much later, the House version has shown faster progress. On December 3, HB 8677 was approved on its third and final reading.
In a recent Cabinet meeting, the President has already expressed his support for the proposal to increase the excise tax on tobacco and alcoholic products.
CTRP’s Package 3 has already breezed through Congress. On November 12, the House of Representatives approved HB 8453 containing provisions on real property valuation. The bill also contained provisions on the reorganization of the Bureau of Local Government Finance.
In the Senate, the only bill on real property valuation is SB 44, but it has not yet been updated. The DOF has proposed several revisions to the SB in its Package 3 proposal.
Lastly, Package 4 has only recently garnered the attention of the lower House. Despite that, it was already approved in less than a month. The package will focus on capital income taxation and is designed to be revenue neutral.
HB 8645 or the “Passive Income and Financial Intermediary Taxation Act of 2019” was passed on December 3. Unlike the House’s swift action on the last package, there has not yet been any progress in the Senate.
It is important to note that tax policy reform without tax administrative reform is pointless. No matter how fair and simple the policies are, if the bureaucracy remains corrupt, then it would be ineffective.
The tax reform imposes more responsibilities on the BIR which, as it stands, are currently undermanned. This lack of manpower hinders the implementation of tax laws and opens the BIR to corruption. The government needs to increase their budget, along with the compensation of examiners.
This measure will allow the BIR to hire a more honest and technocratic administration. It will also allow the bureau to modernize their systems and implement, by default, paperless bookkeeping.
There should also be measures against corruption in the BIR audit by making it more risk-based and targeted. Under the current system, the same taxpayers are being audited over and over again.
With the current administration’s support behind CTRP, it will only be a matter of time before these packages are passed. These sprawling changes impact every taxpayer and learning about them beforehand could help businesses grow.
The alternative is, at best, not to miss out on opportunities and, at worst, be burdened with failed compliance. Preparing beforehand by attending tax seminars, tax coaching, or an executive tax briefing could arm you with the appropriate knowledge to face the tax reform.
(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is one of the 2017 Outstanding Young Persons of the World, a Move Awards 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), an Asia CEO Young Leader of the Year, and Founding President of the Asian Consulting Group (ACG) and the Center for Strategic Reforms of the Philippines (CSR Philippines). Feedback at <firstname.lastname@example.org> and <email@example.com>. For previous articles, please visit <map.org.ph>)