Tax reform and its impact on Filipinos’ pocket, wallet, wealth

This week, we yield our column to our resource person for one of our continuing professional development courses (CPD), Mark Fajiculay, whose expertise is on tax management, audit and other accounting functions. He shares his thoughts and insights on the ongoing tax reform initiatives of the government:

Currently, we experience “taxing” rules and systems on all forms of taxes across all types of taxpayers. Undeniably, taxes are essential. In fact, the Supreme Court mentioned in a June 4, 2014 decision on G. R. No. 197525, Visayas Geothermal Power Company vs. Commissioner of Internal Revenue, that taxes are a nation’s lifeblood through which government agencies continue to operate and with which the State discharges its functions for the welfare of its constituents.

Since the passage of Republic Act No. 8424, known as Tax Reform Act of 1997, it has remained unchanged for almost two decades. No adjustments to inflation were made. But this will soon change as the Department of Finance has undertaken a Tax Reform bill which it considers simpler, fairer and more efficient. We refer to the Tax Reform for Acceleration and Inclusion (TRAIN) Bill.

The House executed its own version with some similarities and differences. The House of Representatives approved House Bill No. 5636, a better version of House Bill No. 4774 while the Senate has created Senate Bill No. 1592.

The TRAIN Bill will alter the taxation landscape as it impacts several types of taxes, transactions and taxpayer profiles.

The following are three relevant areas where the impact will most likely be felt: Taxpayer’s Pocket, Wallet, and Wealth.

1. More money in people’s pockets

Compensation income earners were being beaten by income tax due to a graduated rate as high as 32 percent. The tax exemption for minimum wage earners, application of personal and additional personal exemptions, P82,000 ceiling for nontaxable benefits and lists of De Minimis Benefits cannot offset the effect of personal income tax on their hard-earned money.

Supplemental compensation and additional remuneration arising from work are taxed as hard as these were earned. It impacted poor and middle-class earning individuals.

The TRAIN Bill rationalizes the “Ability to Pay” principle of a progressive tax system and prevents “Ability to Lose Hard-Earned Money” by expanding taxable income levels and lowering the tax base.

The current tax system imposes the highest rate of 32 percent on persons earning over P500,000 a year with a current tax base of P125,000. Under the TRAIN Bill, individuals earning the same will enjoy a 25 percent tax rate over the excess of P400,000 with a tax base of P30,000 for the Lower House version, while the Senate version has a P45,000 tax base.

Interestingly, tax rates under House Bill No. 5636 surge to 35 percent starting 2021 while adjustments are mandated by Senate Bill No. 1592. This is welcome news for compensation income earners as they will take home more of their hard-earned money for personal expenditures than what the current tax system enacts.

2. Thinner wallets as consumption costs rise

Broadening income levels and lowering the tax base from the viewpoint of tax collections and government budgeting are challenges since these result in lower tax payments. The government must find ways to augment the personal income tax alterations. For example, business taxes such as value-added taxes, or VAT.

The Lower House removed VAT exemptions on certain transactions such as the lease of residential units with monthly rentals not exceeding P12,800. However, the Senate restored this and other key provisions on VAT exemptions. Other interesting features of the TRAIN Bill are adjustments to excise taxation. Fuel and oil consumption costs may rise as excise taxes on petroleum products increase.

For example, lubricating oil and greases currently taxed at P4.50 per liter can be taxed as high as P10 starting Jan. 1, 2020 under the TRAIN Bill. Petroleum products such as liquefied petroleum gas (LPG), kerosene and diesel fuel oil enjoying P0 per liter shall now be taxed as high as P6 per liter. These are part of operating costs incurred by businessmen for their operations that will certainly be passed on to consumers.

Sweetened beverages are also included. The current tax system does not impose sugar taxes, but the proposed bills add from P5 to P10 per gram or per liter of volume capacity excise tax on sweetened beverages. Nonessential goods are eyed also in Senate Bill No. 1592 for excise taxes—cosmetic procedures, surgeries and body enhancements.

In short, the extra cash in your wallet may be spent on consumption—depending of course on what taxable products or services you enjoy.

3. Differing effects on individual wealth and corporate wealth

Interestingly, individual wealth will be impacted by certain reforms such as donor’s taxation while minimal changes were made in estate taxation. The TRAIN Bill removes the graduated table for donor’s tax fixing the rate at 6 percent. Estate taxation, on the other hand, alters the requirements for CPA certification and filing date of the return.

Automobiles will be imposed a higher excise tax starting Jan. 1, 2018 under the TRAIN Bill. Businesses’ net worth and financial performances are clearly affected by the changes relative to the VAT and excise taxes as well as income taxes. The impact will be felt from the upper line (gross sales) down to the bottom line (net income).

The House of Representatives approved its version under House Bill No. 5636 with overwhelming support from 246 solons, while nine solons voted against it and one abstained. On the other hand, the Senate Committee on Ways and Means has filed its version under Senate Bill No. 1592 last Sept. 20, 2017.

But the Tax Reform Package Bill has a long “railroad” to go since it still has to pass various “rail stations” such as the Senate Committee, the Senate, harmonizing the Lower and Upper House versions through Bicameral Conference Committee before it will be transmitted to the Office of the President for signing into law.

The bill will probably be passed into law early next year as the administration has the numbers in Congress (both Lower and Upper House).

(Fajiculay will facilitate a workshop titled “Tax Reform for Acceleration and Inclusion: Balancing Trade-off or Burden Shifting” on Dec. 11, 2017 at the Inquirer Academy. CPAs can earn continuing professional development (CPD) units from the workshop.)

The Inquirer Academy is at 4168 Don Chino Roces Ave. corner Ponte St., Makati City. For more information about the workshop or if you would like to add your input on the article, you may email [email protected], call (632) 834-1557 or 771-2715 and look for Jerald Miguel or Judy Bondoc, or visit the website at www.inquireracademy.com.