Close to 4.7 million taxpayers who earn P250,000 or less per year will no longer have to pay personal income taxes by 2018 under Package One of the comprehensive tax reform program that the Department of Finance (DOF) has submitted to the Congress for its approval.
Another half-million plus taxpayers earning between P250,000 and P400,000 will pay taxes equivalent to only 20% of their incomes in excess of P250,000, under the same DOF-proposed tax plan.
These beneficiaries of the DOF tax plan represent four out of every five taxpayers, according to BIR data as of 2013.
The tax plan’s Package One covers cuts in personal income tax (PIT) payments under a simplified, modified gross income system, plus revenue measures to offset losses from such PIT reductions.
The DOF submitted to Congress its proposed Tax Reform for Acceleration and Inclusion Act last month in keeping with the Duterte administration’s 10-point socioeconomic agenda.
Finance Secretary Carlos Dominguez III said the DOF tax bill was completed after the department consulted with members of the Cabinet, legislators, former Secretaries of Finance, prominent economists, stakeholder and business groups, and with various foreign embassies, global financial institutions and joint foreign chambers signifying their support for the tax reform proposal.
“Without reforming our tax system so that it becomes fairer, simpler, and more efficient, government cannot undertake the volume of spending required in achieving our goals of reducing poverty from 26 percent to 17 percent in six years and elevating the Philippines to the status of a high-income country in one generation,” Dominguez said.
Reducing the personal income tax rate from 32 percent to 25 percent would be done over a two-year period benefiting most taxpayers except the “ultra-rich,” who are defined as individuals earning P5 million or more annually, Dominguez said.
Dominguez said the general rule behind the Duterte administration’s income tax reform plan is that the rich will have to pay more while poor and low-income Filipinos will pay less or none at all.
Data from the Bureau of Internal Revenue (BIR) show that almost 40 percent of the 4,659,173 taxpayers who will benefit from income tax exemptions beginning 2018 are minimum wage earners.
Of the total tax base for individuals totaling 5.6 million, minimum wage workers comprise a little more than a third of the taxpayers.
The reformed personal income tax system of the DOF proposes six brackets in which those earning zero to P250,000 would pay zero tax beginning 2018, the planned first year of its implementation.
Of the total tax base for individuals numbering 5,612,777 taxpayers, 1,752,009 or 31.2 percent of them are minimum wage earners, BIR data show.
In the second bracket of the DOF-proposed income tax system are another half-million taxpayers earning P250,000 to P400,000 per year, who will pay only 20 percent of their annual gross income in excess of P250,000.
They comprise 10 percent of the total tax base for individual taxpayers.
From 2019 and onwards, those in the second bracket would have to pay a personal income tax of only 15 percent.
A total of 539,465 individual taxpayers would benefit from this lower tax rate under the second bracket.
The third bracket covers those earning P400,000 to 800,000 who will pay P30,000 in tax plus 25 percent of their annual gross income in excess of P400,000. This bracket consists of 232,232 taxpayers representing 4 percent of the total tax base for individuals.
The tax would be adjusted in 2019 and onwards so that those belonging to this bracket would pay a lower rate of P22,500 plus 20 percent in excess of P400,000.
Those earning P800,000 to P2 million per year would pay a tax of P130,000 plus 30 percent in excess of P800,000. These taxpayers belong to the fourth bracket comprising 148,215 individuals or 3 percent of the tax base.
In 2019 and onwards, the rate would be reduced to P102,500 plus 25 percent in excess of P800,000.
Some 28,000 individuals earning P2 million to P5 million or 1 percent of the tax base would be taxed P490,000 plus 32 percent of their annual gross income in excess of P2 million.
They would benefit from a lower tax rate of P402,500 plus 30 percent in excess of P2 millionfrom 2019 and onwards.
The last bracket of ultra-rich taxpayers comprising less than 6,000 individuals earning over P5 million would have to pay a tax of P1.45 million plus 35 percent in excess of P5 million.
From 2019 and onwards, the tax rate would be dropped to P1,302,500 plus 35 percent in excess of P5 million.
After 2019, the taxable income levels shall be adjusted every five years through rules and regulations issued by the Secretary of Finance upon the recommendation of the BIR commissioner, taking into account among other factors, the effect of the five-year cumulative inflation rate.
Dominguez said the DOF envisions its comprehensive tax reform plan to be the catalyst of an ambitious government program to raise an extra P1 trillion yearly for unparalleled public investments meant to free some 10 million Filipinos from poverty in six years’ time and eventually transform the Philippines into a high-income state by 2040.
“To raise the additional P1 trillion per year, the government needs to adopt a fairer, simpler and more efficient tax system with low rates and a broad base that can promote investment, job creation and poverty reduction,” Dominguez said, “and at the same time effect tax administration reforms at our major revenue-generation agencies, the BIR and the Bureau of Customs (BOC).”
Also, budget reforms must go hand-in-hand with tax reforms “to improve spending, transparency and efficiency as a way to generate savings that could then be invested in infrastructure, human capital and social protection,” he said.
In one of his sectoral dialogues on the DOF-proposed tax reform plan, Dominguez said that, “by the time the Duterte presidency bows out of office in 2022, we aspire to reduce the nation’s poverty rate from the current 26 percent to just 17 percent. We seek to achieve peace within the country and with our neighbors by finally ending the insurgencies that festered for decades.”
“We look forward over the next six years to achieve a law-abiding country with capable and reliable law enforcement,” he said. “In the medium term, we see the country achieving high middle-income status with investment-led and inclusive growth.