A quick guide to the proposed comprehensive tax reform

President Rodrigo Duterte made a promise and commitment of real positive change to the Filipino people. This includes building an economy that promotes inclusive growth which the government hopes will reduce poverty incidence to 14 percent by 2022, raise the country to upper middle income status by 2022 and eventually join the ranks of advanced nations by 2040. Thus, government needs to make huge investments to substantially improve public infrastructure and the delivery of social services: a gargantuan effort that requires sustained funding in the coming years. Government hopes to achieve this by implementing, among other things, a comprehensive tax policy and administration reform that is high up in the Duterte administration’s 10-point socioeconomic agenda. It will be recalled that the last time reform was introduced to the Philippine tax system was in 1997 when Congress enacted Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997.

In late 2016, the Department of Finance submitted to Congress the first of six packages that make up its comprehensive tax reform plan. This tax reform plan proposes significant changes to the tax system that will reduce tax rates, the impact of which will be compensated by measures that will broaden tax base. These include:

• Lowering the maximum personal income tax rate to 25%, except for the highest income earners to maintain progressivity, broadening of the VAT base by removing many of the VAT exemptions, and adjusting the excise tax on automobiles and petroleum products and lowering of estate and donor’s tax to a uniform rate of 6%

• Reduction of the corporate income tax rate to 25% over time

• Improvement of tax administration

• Indexing to inflation of the excise tax on alcohol, tobacco and sweetened beverage products

• Centralizing and rationalizing the valuation of real properties

• Reduction of taxes on passive or investment income like interest income to encourage growth in capital markerts while increasing the percentage tax on sale of shares listed in the stock exchange

• Imposition of carbon tax and tax on fatty foods, increase of taxes on luxury items such as yachts and jewelry as well as gaming revenues from casino operations

On January 17, 2017, Representative Dakila Carlo E. Cua, Chairman of the House Ways & Means Committee, has sponsored and proposed House Bill No. 4774 (Tax Reform for Acceleration and Inclusion Bill) that will essentially legislate package one of the DOF’s tax reform plan. In parallel, Representative Joey Sarte Salceda has introduced House Bill No. 4688 that has many commonalities with the Cua bill. The key common features of these bills are the adjustment of the personal income tax brackets to correct for “income bracket creeping” and the reduction of the personal tax rate to 25% over time; expansion of the VAT base as an offsetting measure, limiting the exemptions to raw food and other necessities; increasing and restructuring the excise tax rates on petroleum and automobiles. Rep. Cua additionally proposes the reduction of estate and donor’s tax to 6%.

Last May 3, 2017, after several marathon meetings, the House Ways and Means Committee (HWMC) approved a Substituted Bill and endorsed the same to the Committee on Appropriations of the Lower House for further comments. The substituted bill will undergo further refinements when it is returned to the HWMC. Some of the changes introduced by the Substituted Bill from the original HB 4774 are:

• Retaining the VAT exemption given to senior citizens and persons with disabilities (PWDs);

• Retention of zero-rating on the supply of goods to export enterprises until an enhanced VAT refund system is put in place;

• Increase on excise tax on petroleum products will start on January 1, 2018 instead of July 1, 2017; and

• Introduction by January 1, 2018 of a five-tier bracket on the increase of excise tax on vehicles instead of only four tiers and with another round of increase by January 1, 2019.

Tax policy reform will be complemented by much-needed reform in tax administration. Thus, Rep. Salceda has likewise introduced House Bill No. 4888 (Tax Administration Reform Bill). The Substituted Bill also maintained the bold proposals for tax administration reforms that hopefully will ensure proper collection of taxes, namely, a) mandating the use of electronic invoices and receipts that will be directly generated and transmitted to the BIR upon sale; b) the mandatory interconnection of certain books of accounts to the BIR system, as well as c) the creation of an electronic system that will link sales and purchase data by VAT-registered taxpayers to the BIR’s servers for simultaneous reporting of said data.

The government’s near term goal is to generate an additional 400 billion in revenues out of this tax policy and administration reform. With Presidente Duterte enjoying broad support among the members of Congress, it is expected that the proposed reform will pass in the next year or so. Politics usually come into play in legislation but our sincere aspiration for true prosperity will hopefully prevail.

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