Position Paper

(Amicus Curiae)

Topic:

Which is better to prioritize; the passage of Comprehensive Tax Reform

Package or focus first on the Law, Lowering Personal Income Tax Rate.

Introduction:

The problem is that governments are broke; the only reason that these nations
have not all failed is because they can still stay alive by borrowing money. For the past
several years, the Philippines have enjoyed strong economic growth which has been
validated by improved credit ratings.
However, in spite of the Governments successful economic management and
strong performance, a large tax gap continues. The Philippine Tax regime continues to
be overly complex and this is contributing to tax gap.
With the countrys income tax rates among the highest in the region, tax reform
became a hot campaign issues among voters, such that almost all who ran for the
presidency during the May 2016 elections committed to ease the Filipinos tax burden.

Comprehensive Tax Reform Package:

Before the Duterte Administration came into office in July, then outgoing
Finance Secretary Cesar V. Purisima turned over to his successor, Carlos G.
Dominguez III, a comprehensive tax reform proposal, which the former had pitched to
the previous administration, but to no avail.

Here are the key components of the package:

1. Lowering personal income taxes

Increasing the threshold of tax exemption from P10,000 to P250,000 per year,
while keeping the P82,000 tax-exempt 13th month pay and bonuses
Imposing 35% income tax on those earning over P5 million, to be classified as
"ultra-rich"

Lower income tax, higher take-home pay

The current laws on income taxes were drafted two decades ago in
1997. The Philippines currently has the second highest personal income tax
(32%) and highest corporate tax (30%) rates among ASEAN countries.
(READ: Why PH has 2nd highest income tax in ASEAN) This is the present
tax scheme in the country, according to the Bureau of Internal Revenue:
 The new proposal now seeks to exempt employees who earn P250,
000 or below annually from income taxes. On top of this, the mandated 13th
month pay of up to P82, 000 an d other bonuses will still be tax-free. The
"ultra-rich", who comprise 0.1% of taxpayers, will be levied a higher rate of
35%.

So far, no lawmaker has opposed the need to lower income tax rates.
The problem lies in the methods that should be used to counter its effects on
government revenue.
2. Broadening VAT base

Retaining VAT exemptions given to senior citizens and persons with

disabilities (PWDs)

Limiting VAT exemptions

One could not just lower taxes and not have plans to generate what would be
lost. For the Duterte administration, there are 3 ways to do that: limit VAT
exemptions, increase excise taxes on all petroleum products, and increase excise
taxes on automobiles.

The DOF, in its proposal, wants to remove the following VAT exemptions:

1. exemptions found in special laws except those covering senior citizens and
people with disability
2. cooperatives, except those selling raw agricultural produce
3. low-cost and socialized housing
4. power transmission
5. lease of residential units
6. domestic shipping importation
7. boy scouts and girl scouts

3. Adjusting fuel excise taxes

Imposing P6 excise tax on diesel by 2019 (starting with P3 this year)

Allocating 60% to 75% of excise tax collections to fund infrastructure projects
and social programs

Here are the proposed tax rates for fuel products:

This means that for a P32-per-liter of diesel, a P3 tax will be imposed this
year, should the measure be passed into law.
In 2018, the P32 will amount to P37 (with a P5 tax). It will then reach P38 per
liter (with a P6 tax) by 2019, and P38.24 (with P6.24 tax) by 2020.
 On the effect on passengers, there is only a minimal P0.21 increase in
jeepney fares for a P3 tax imposed on diesel. To help public utility vehicle
drivers adjust, the government is keen on giving out pantawid pasada
discounts similar to what former President Gloria Arroyo did. The government
will also implement jeepney modernization programs, the effectiveness of
which is yet to be seen, as this has been pushed in the past but to no avail.

4. Adjusting automobile excise taxes

Imposing 20% excise tax on automobiles with prices above P2.1 million
Exempted: Buses, trucks, cargo vans, jeeps, etc

Automobile taxes

The DOF said the tax rates on automobiles have not been adjusted or
updated for the past 13 years. As such, they decided to use the industry to
help gain revenue in exchange for workers lower income.

This is progressive, as the more luxurious cars will be imposed with higher
taxes. But he added that if the increase in take-home pay would be
considered, the prices would remain affordable to Filipinos.

Here are the proposed excise tax rates on automobiles:

Take the case of the Toyota Vios 1.3 Base. If the measure is signed into law,
the price of the vehicle will increase by nearly P13,000 from P599,000 to
P611,796.

For top of the line models, the increase in prices once the measure takes
effect is almost P1 million.
5. Reducing donor's and estate tax rates to 6%

To enhance efficiency yet retain equity in the transfer system, reduce the
highest marginal tax rates for the estate tax from the current 20% to 6% and donors
tax from the current 15% to 6% to equal the capital gain trax that imposed on
transfer of properties between buyers and sellers.
This would encourage greater frequency of transfers from the deceased to
heirs and perhaps also less evasion and avoidance, enhancing the efficiency of the
tax system.

6. Lifting the bank secrecy law

The above recommendation to dispense with bank secrecy for administration

of tax laws will make a considerable contribution to revenue .Misuse by a BIR officer
of access to bank records for administration of tax laws to be a criminal offense. Give
taxpayers and opportunity to voluntarily disclose income and bank information
without penalty before the BIR secure access to bank records.
Every interest or dividend payment must be assigned to an account holders
tax payer identification number (TIN) and reported to BIR.

7. Mandating establishments to issue electronic receipt or invoice

The Joint Foreign Chambers (JFC) has backed the proposal now forming part
of the Comprehensive Tax Reform Package requiring the use of e-invoices and e-
receipts in commercial transactions between registered companies, their customers
and the Bureau of Internal Revenue (BIR).
Implement electronic payment direct into BIR account would reduce
compliance and administrative cost, it also reduces opportunities for corruption and
lost tax payments that could occur under manual system.
Lowering of Personal Income Tax

At least three bills seeking to lower individual tax rates by as much as 15 percent
have been filed at the House.
Angara has filed a bill seeking to adjust individual income tax brackets
starting next year. By 2017, Angaras bill seeks to lower tax rates to 10 percent from
15 percent for those earning between P20,000 to P70,000 and to 25 percent from
the current 32 percent for those earning over P1 million. House Bill 4829 seeking to
adjust the levels of taxable income brackets and the corresponding base amount of
tax for compensation income earners based on updated Consumer Price Index
(CPI).

Long overdue reforms

Citing recent empirical data, only 15 percent of the total collection of individual
income taxes was paid by self-employed individuals and professionals, while the
bigger chunk of 85 percent comes from compensation income earners. Amending
the present tax system will make compliance by self-employed and businessmen
easier.
Putting a fair and equitable tax system in place was necessary if the
government sought to promote inclusive growth. He described the current tax system
as putt[ing] too much burden on working class taxpayers and little on well-off
individuals.

Sidetracked

What started out as our clamor for immediate income-tax relief for the salary
worker has been sidetracked and waylaid by the DOFs push for the imposition of
massive and substantial new taxes solely for the purpose of raising more revenue.
What is happening now is that the personal income-tax reform we have been
asking for is being held hostage by the DOF, who has promised to release it only if
Congress gives a ransom in the form of additional excise taxes on fuel and other
additional new taxes.
Let us not rush the imposition of these new taxes, some of which we have already
seen as failures in the Philippine setting today.
Phases

Adjusting the tax brackets to inflation is an instant tool for social justice, as it
seeks to immediately rectify the basic inequity of our system while we give time for
the more comprehensive reforms to be fine-tuned and polished. He said the Bureau
of Customs (BOC) loses an estimated amount of P200 billion a year, or P547 million
a day, in revenue due to smuggling while the Bureau of Internal Revenue (BIR) loses
P66 billion in foregone revenue due to low tax compliance of professionals and
entrepreneurs.
Currently, there are a lot of leakages in the BOC and the BIR. Unless we
improve tax administration first, new taxes will not be effective. The BIR has been
failing in its collection of the current taxes we have now, what more if they are tasked
to collect additional and more complicated ones.

Poor vs rich

For his part, Bayan Muna Rep. Carlos Isagani Zarate said the tax-reform
package of the DOF will hits more on the poor rather than the rich. Aside from
adding more excise taxes and expanding the value-added tax [VAT] base among
others, the DOF is also planning to tax money-remittance centers, which OFWs and
the common folk often use to send money to their poor family members and
relatives, he said. What is more appalling is the proposal to expand the VAT base
instead of doing away with antipoor taxes, like VAT on systems loss on electricity.

Blackmail

He added the DOF has not only taken hostage the lowering of income taxes
by tying it up with increase in excise taxes and VAT, it seems that they are also
blackmailing Filipinos with this tax-reform package. Finance Undersecretary Karl
Kendrick Chua said only with this sizable increase in revenues through tax can the
government meet its goal of drastically reducing poverty and transforming the
country into an upper middle-income economy in 2022 by spending big on
infrastructure, human capitaleducation, health, lifelong training and research and
developmentand social protection for the poor and other vulnerable sectors.
However, DOFs proposal also includes the imposition of excise tax on fuel as
compensatory measure for the foregone revenues due to the lowering of income tax.
DOF proposes a staggered increase of P6.00 per liter of diesel, kerosene, and LPG
to be imposed within a 3-year period.
The bill also includes the relaxation of the Bank Secrecy Act, imposition of
excise taxes on automobiles and taxing Philippine Charity Sweepstakes numbers
game and lotto winnings.
The tax reform package involves foregone revenue of around P200 billion but
at the same time will generate around P206.8 billion for the government in the first
full year of its implementation.

Conclusion

Tax reforms in the Philippines have always been exercises colored by both
politics and economics of the time period. While economics has usually provided the
rationale for reform, politics often shaped the outcomes. A review of recent
experiences with tax reforms suggests that incoming administrations often cannot rely
on previous tax reforms in order to finance new programs.
Tax reforms have generally not generated sufficiently persistent increases in
revenues over time for various reasons. This section identifies the lesson drawn from
the tax reform experience in the Philippines.
Based on its ability to achieve, some or many of the goals of a good tax
system. It would appear that the most major successful tax reform in recent Philippine
history has been the 1996 TRP. The 1997 CTRP fell short of generating sufficient
revenues over time and failed to rationalize tax incentives. Other reforms had relatively
lesser and varying degrees of success. This includes the opportunity to update
existing taxes, such as broadening of the VAT in 2005 and the indexation of sin taxes
in 2012.
The common aspects of successful tax reforms in the Philippines from the
Marcos era to present include the following:

* To ensure the best outcomes, tax reform should be done at the start, instead
towards the end, of any administration. With a fresh mandate from the voters.

* The economics of tax reform can also correlated with the politics. The
stronger the political positions of the personalities involved, the more likely have been
for tax reforms in the past to be more efficient and equitable. Conversely, weaker
administrations have allowed more nonstandard revenue-eroding measures.

* Strong support from the president and top executives in the cabinet and the
legislature is a critical component of any tax reform.
 * To ensure greater buoyancy and efficiency of the tax system and to ensure
the reliability and adequacy of flows of government financing over long run, future
reforms must be designed to include provision for annual indexation for inflation
(especially for excise taxes). Also nonstandard exemptions (from direct taxation and
the VAT system) and incentives should be minimized or avoided. This gain enhances
buoyancy of tax system.

* It is important to legislators to codify all laws that lead to tax expenditures to

enhance transparency and to continue to provide for competent bodies to vet new
proposals for review the outcomes of current tax laws on a regular basis, to set end
dates for laws providing tax exemptions and incentives (to force congress to vet
updates on such laws).