Tax on non-essential goods & wealth (House Bills 6993 & 258)

Taxing the rich has become quite a controversial topic in recent months. The issue of a tax on wealth as well as a tax on luxury items has been the subject of much debate among policymakers, economists, and pretty much anyone in the know.

The idea of taxing wealth rather than income or consumption has gained traction in recent years, as a way to address growing income inequality and to generate revenue for government programs.

Tax on wealth would work by levying a percentage on the total value of an individuals’ assets including stocks, bonds, real estate, and other investments. This tax would only be applied to individuals whose net worth exceeds a certain threshold, and the rate of tax would increase as the net worth of the taxpayer increases.

Luxury taxes, on the other hand, are taxes levied on goods and services that are considered non-essential or luxury items. These include high-end cars, yachts, jewelry, private jets, and other luxury goods.

The idea behind a wealth tax and tax on luxury goods is to increase revenue for the government, redistribute wealth and income, and address inequality, as well as to discourage conspicuous consumption and excessive wealth.

In the Philippines, there are two pending legislations in Congress proposing a tax on wealth and non-essential goods.

House Bill 6993

House Bill 6993 introduced by Rep. Joey Sarte Salceda proposes to amend Section 150 of the National Internal Revenue Code (Tax Code) by increasing the tax on non-essential goods from 20 percent to 25 percent. The bill estimates that the tax will generate an additional P15.5 billion in collection annually.

Currently, Section 150 of the Tax Code imposes a 20 percent tax on non-essential goods which are identified as jewelry, goods made of or ornamented, mounted or fitted with precious metals or imitations thereof or ivory, opera glasses and lorgnettes, perfumes and toilet waters, and yachts and other vessels intended for pleasure or sports.

HB 6993 increases the tax to 25 percent from 20 percent and, in addition to the goods already covered by the existing Section 150, adds the following items as non-essential goods which are to be covered by the 25 percent tax.

1. Wristwatches, bags, wallets and belts valued at more than P50,000
2. Sale of residential properties above P100,000 per square meter
3. Beverages which are valued at above P20,000 per liter
4. Paintings above P1,000,000 sold by persons other than the artist
5. Antiques valued at P100,000
6. Automobiles, whether brand new or second hand, valued at P10,000,000
7. Private aircraft and parts except those for use by the Philippine government or by airlines and logistics companies

The 25 percent tax is proposed to be levied on top of any other taxes already imposed on the transaction or goods. For example, for the tax on luxury cars, on top of the existing automotive excise tax an additional tax of 25 percent will be imposed. For sales of residential properties above P100,000 per square meter, there will be an additional tax of 25 percent to the capital gains tax or withholding and value added tax.

House Bill 258

House Bill 258 or the Super Rich Tax Act of 2022, introduced by ACT Teachers Party List, Gabriela Women’s Party and Kabataan Party-List, is also pending before Congress.

The bill seeks to impose, effective January 2022, a wealth tax of 1 percent to 3 percent on the net value of taxable assets of taxpayers for wealth above P1 billion derived in each taxable year from all sources within and outside of the Philippines by every individual citizen, including Overseas Contract Workers (OCW). It also includes in its coverage non-Filipino citizens who are residents of the Philippines.

The bill proposes to distribute the tax collected to medical assistance and health facilities enhancement program, to social mitigating measures and investments in: education,  social protection, employment, and housing that prioritizes and directly benefits both the poor and near-poor households.

There are other countries that have passed laws imposing additional taxes on high-end or luxury items, special stamp duty taxes on the sale of property, where the value exceeds a certain amount, and some form of wealth tax.

Switzerland, France, Norway, Spain, Uruguay, and even Columbia have imposed a tax on wealth ranging from 0.5 percent to as high as 3.5 percent for net worth ranging from US$130,000 (Uruguay) to more than US$3million (Spain).

While a tax on wealth to raise revenue and money is seen as effective, this form of tax measure might be a good idea only if the money is properly and effectively used to achieve the purpose of the proposed laws, which for HB 6993 and 258 are to fund anti-poverty measures and close the wealth divide and address inequality. Without the proper safeguards to ensure the proper use of the tax collected, they may just contribute to inefficiencies, loss, and corruption as well as being an additional burden on the taxpayers.

It is noteworthy that HB 6994 includes in the coverage an additional 25 percent tax on the sale of residential properties above P100,000 per square meter.

Notably, most residential condominium units sold by developers today are already priced over P100,000 per square meter. Needless to state, this 25 percent additional tax on the sale of residential property will have a negative effect on the property sector, particularly residential property developers.

For the year 2021, it is estimated that the real estate industry was a key driver of the Philippine economy, having generated gross value added of nearly P529 billion to the economy. A big chunk of this was due to the growing middle-class population and sustained remittances of Filipinos overseas who invest their money in real estate.

As the legislative process on HB 6993 and 258 proceeds, there will be debates in Congress and the Senate, and it is expected that during this process, adjustments and fine-tuning of the provisions will be made by our legislators, before approval by Congress and the Senate. Any approved bill will then land on the table of the President for his approval or veto.

A tax on wealth is a complex issue that has both supporters and opponents. While it could help address income inequality and generate revenue for government programs, it could also discourage investment, entrepreneurship and innovation as well as be seen as an unfair burden on those who worked hard and saved their money. Moreover, any decision to implement a tax on wealth and non-essential goods would need to carefully consider these factors and ensure that it is administered fairly and efficiently.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)