Benefits and Impact of the Proposed Income Tax Reform

(House Bill 20) to the People and the Philippine

Government

Gretchen B. Caedo
College of Law
Jose Maria College

Atty. Resci Angelli Rizada

Legal Research (LS 109)
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 2

September 26, 2016

TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................ 3

INTRODUCTION ....................................................................................................... 4

MAIN BODY OF THE PAPER .................................................................................. 5

A. Fiscal Policy
B. Sources of Government Revenues
I. Taxes

a. Individual income tax

d. Expanded Value Added Tax (E-VAT)
c. Sin Tax
b. Corporate Tax

IV. The Bureau of Treasury

III. Non-Tax Revenue
V. Privatization
VI. PAGCOR
II. Tariffs and Duties

C. Tax Reform Bills List

D. Benefits of the Proposed Tax Reform to the Filipino workers
1. Increased Purchasing Power
2. Encourage Tax Payers to pay correct taxes
3. Stricter Tax Collections
4. Inclusive growth and social justice
5. Automatic Tax Adjustment schedule

E. Impact of the Proposed Tax Reforms to the Government

ADVANTAGES
Increased Tax Collection
Increased E-VAT
Economic Growth

DISADVANTAGES
Reduced Revenue
Bigger Deficit
Lower Credit Rating

CONCLUSION ...................................................................................................... 11
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 3

REFERENCES ...................................................................................................... 12

EXECUTIVE SUMMARY

Taxation is the inherent power of the state, exercised through the legislature,
which imposes burdens upon subjects and objects within its jurisdiction for the purpose
of raising revenues to support the government and all public needs. In other words,
taxes are what we pay for to maintain a civilized society and sustain the operations of
the government. But since taxes are considered to be the lifeblood of the nation, the
efforts of lawmakers in the past government administrations who have been pushing for
income tax reforms, have proved futile.

The Constitution mandates that the rule of taxation shall be uniform and
equitable and that the Congress shall evolve a progressive system of taxation wherein
the tax rates imposed must be based on the person's ability to pay. However, the
countrys income tax brackets set almost two (2) decades ago without provisions for
peso devaluation, is a clear indication of the governments lack of interest in the call for
taxation reforms. Leaving the income tax brackets without provisions for indexation or
automatic adjustment despite an increase in the salaries will leave the workers with less
money because of inflation.

19 years have passed yet the unfair and oppressive system of taxation of the
country remains to be the common sentiment of the people particularly those in the
working class. In the current tax system, individuals are taxed at progressive rates
which mean that people with higher incomes pay more than people with lower incomes.
Indeed an income tax reform is long overdue but the government is consistent in its
stand that the lowering of the income tax rates will also result in lower revenue
collections for the government.

Oppositions to the income tax reform including Former President Benigno C.

Aquino III cited that the goal of the proposed reform would be negated by the higher
value-added tax (VAT) that would have to be imposed on basic goods and services to
offset the losses from lower taxes. A raise from the current 12 percent to 14 percent was
considered by the Department of Finance to compensate for the revenue loss.

Economists and experts however disagree with the governments stand and
attribute its lack of interest in passing the income tax reform with political rather than
economic reasons. This is because the accompanying measures such as higher VAT
rates and rationalization of fiscal incentives, although economically sound, both are hard
to implement. Then again, with the inclusion of the proposed income tax reform in the
new administrations 10-point socioeconomic agenda, lawmakers supporting such
reform will once again appeal to Congress and could only hope for a favourable
response this time.

With the subsequent failures of the previous income tax reform bills, this paper
seeks to identify the legal impediments, social and economic reasons preventing the
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 4

government from passing the bill particularly its benefits and impact to the people and
the government.
INTRODUCTION

Almost two decades have passed since the enactment of the National Internal
Revenue Code of 1997 (NIRC) or the 1997 Tax Code, but its obsolete and unfair
provisions continue to burden the Filipino workers. It must be noted that in the present
tax system, people earning more than P500,000 a year (P41,000 / month) are generally
being taxed in the same bracket as those earning millions and hundreds of millions per
year. Several House and Senate bills were filed in the last two (2) years seeking to
amend Section 24 of the Tax Code yet up to this date; there have been no substantial
developments since the bills were filed despite the overwhelming support of the majority
from both Houses of Congress.

Calls for income tax reforms in the past government administrations were met
with skepticism and were subsequently denied; however, such may not be the case with
the present administration of President Rodrigo Roa Duterte. The economic managers
of the Duterte administration have put tax reform on top of the 10-point socioeconomic
agenda. Such action implies that the president together with economists and experts
acknowledges the urgent need to address the Tax Codes shortcomings easing the tax
burden of the Filipino workers without posing risk to the countrys fiscal health.

Loss in government revenue is inevitable with the proposed reduction of income

tax rates however; economic studies show that allowing individual taxpayers to keep
more of their income to spend on their choice stabilizes the purchasing power of
taxpayers in the economy. Such purchasing power will result in transactions that will
boost the value-added tax, capital gains tax, and documentary stamp tax, among
others, ultimately redounding to the benefit of the government. Increased purchasing
power contributes to the stimulation of the Philippine economy which could, in turn,
attract more foreign investments, providing more tax revenue to the government.

With the new income tax bill filed as House Bill 20 in the 17th Congress,
lawmakers and hopeful Filipino workers are once again faced with the possible
oppositions which might lead (hopefully not) to yet another failure in its passage. Thus,
knowing the possible challenges to the success of the bill is essential to help lawmakers
pushing for the reforms to secure a favourable response from the majority of the
members of Congress and ultimately from the President of the Philippines.

HB00020: AN ACT RESTRUCTURING THE INCOME TAX IMPOSED ON

INDIVIDUALS, AMENDING FOR THE PURPOSE SECTION 24 OF THE
NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED

Principal Author/s: QUIMBO, ROMERO "MIRO" S.; ABAYA, FRANCIS

GERALD A.; BIAZON, ROZZANO RUFINO B.;

Main Referral: WAYS AND MEANS

Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 5

Status: Pending with the Committee on WAYS AND MEANS since 2016-07-26
A. Fiscal Policy

Fiscal policy refers to the measures employed by the government to stabilize the
economy by manipulating the levels and allocations of taxes and government
expenditures. In the Philippines, the governments main sources of revenue are taxes,
with some non-tax revenue being likewise collected.

Table 1. Summary of the Fiscal Policies of the Previous Administrations

ADMINISTRATION TAX COLLECTION STATUS

Ferdinand E. Marcos Indirect tax collection and government spending on
economic services and infrastructure development
Corazon C. Aquino Improved tax collection through the introduction of the
1986 Tax Reform Program and the value added tax
Fidel V. Ramos Massive sale of government assets and strong foreign
investment years and administrations.
Joseph E. Estrada Faced a large fiscal deficit due to the decrease in tax effort
and the repayment of the Ramos administrations debt to
contractors and suppliers
Gloria M. Arroyo Enacted the Expanded Value Added Tax Law (E-VAT)
National debt-to-GDP ratio peaked, and underspending on
public infrastructure and other capital expenditures was
observed.
Benigno C. Aquino III Revamped the budgeting system and exercised fiscal
prudence and massively increased focus on social
services (conditional cash transfer program)

B. Sources of Government Revenues

Revenues are mainly generated through personal and income tax collection. A
small portion of non-tax revenue is also collected by the government through fees and
licenses, privatization proceeds and income from other operations and state-owned
enterprises.

I. Taxes

a. Individual Income Tax

Individual income tax is a tax on a person's income, wages, profits

arising from property, practice of profession, conduct of trade or business
or any stipulated in the Tax Code, less any deductions granted. Income tax
in the Philippines is computed using progressive rates.
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 6

Table 2. Individual Income Tax Brackets.

Annual Taxable Income Income Tax Rate

Less than 10,000 5%
Over 10,000 30,000 500 + 10% of the excess over 10,000
Over 30,000 70,000 2,500 + 15% of the excess over 30,000
Over 70,000 140,000 8,500 + 20% of the excess over 70,000
Over 140,000 250,000 22,500 + 25% of the excess over 140,000
Over 250,000 500,000 50,000 + 30% of the excess over 250,000
Over 500,000 125,000 + 32% of the excess over 500,000

b. Corporate Tax

Under the Philippine Tax Code, the term "corporation" includes

partnerships, joint-stock companies, joint accounts, associations, or
insurance companies excluding general professional partnerships and
joint ventures pursuant to a consortium agreement under a service
contract with the Government.

There are three (3) types of taxable corporations:

1. Domestic Corporation a corporation created or organized

under Philippine law. A domestic corporation is taxable on all
income derived from sources within and without the Philippines.

2. Resident Foreign Corporation a corporation engaged in

trade or business in the Philippines.

3. Non-Resident Foreign Corporation a corporation not

engaged in trade or business in the Philippines.

c. Sin Tax

The Sin Tax aims to restructure the existing taxes imposed on

alcohol and tobacco goods. Duties on these products are a potential
revenue source that will help fund the Universal Health Care Program of
the administration. Likewise, higher taxes and consequently higher costs
are seen as a deterrent to the consumption of sin products, whose
adverse effects are mostly borne by the poorer segments of the society.

d. Expanded Value Added Tax (E-VAT)

The Expanded Value Added Tax (E-VAT) is a form of sales tax that
is imposed on the sale of goods and services and on the import of goods
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 7

into the Philippines. It is a consumption tax. People who consume more

are taxed more. The current E-VAT rate is 12% of transactions. Some
items which are subject to E-VAT include petroleum, natural gases,
indigenous fuels, coals, medical services, legal services, electricity, non-
basic commodities, clothing, non-food agricultural products, domestic
travel by air and sea. The E-VAT has exemptions which include basic
commodities and socially sensitive products.

II. Tariffs and Duties

Second to the Bureau of Internal Revenue (BIR) in terms of revenue

collection, the Bureau of Customs (BOC) imposes tariffs and duties on all items
imported into the Philippines. According to Executive Order 206, returning
residents, Overseas Filipino Workers (OFWs) and former Filipino citizens are
exempted from paying tariffs and duties.

III. Non-Tax Revenue

Non-tax revenue makes up a small percentage of the total government

revenue which is roughly less than 20% and consists of collections of fees and
licenses, privatization proceeds and income from other state enterprises.

IV. The Bureau of Treasury

The Bureau of Treasury (BTr) manages the finances of the government,

by attempting to maximize revenue collected and minimize spending. The bulk of
non-tax revenues come from the bureaus income. Under Executive Order
No.449, the BTr collects revenue by issuing, servicing and redeeming
government securities, and by controlling the Securities Stabilization Fund which
increases the liquidity and stabilizes the value of government securities through
the purchase and sale of government bills and bonds.

V. Privatization

Privatization in the Philippines occurred in three waves. The first wave was
in 1986-1987, the second was in 1990 and the third stage is presently taking
place. The governments Privatization Program is handled by the inter-agency
Privatization Council and the Privatization and Management Office, a sub-branch
of the Department of Finance.

VI. PAGCOR

The Philippine Amusement and Gaming Corporation (PAGCOR) is a

government-owned corporation established in 1977 to stop illegal casino
operations. PAGCOR is mandated to regulate and license gambling particularly
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 8

in casinos, generate revenues for the Philippine government through its own
casinos and promote tourism in the country.
C. Tax Reform Bills List

The table below shows the bills filed since the 15 th to the present congress all for
income tax reforms. The number of bills indicates the relentless pursuit of the
lawmakers to reform the current tax system of the Philippines.

HOUSE BILLS
Congress No. Of Pending Income Tax Reform Bills
Bills
17th Congress 38
HB00020, HB00035, HB00036, HB00039, HB00057, HB00103,
HB00261, HB00333, HB00363, HB00403, HB00466, HB00569,
HB00947, HB01000, HB01002, HB01496, HB01536, HB01537,
HB01601, HB01604, HB01658, HB01664, HB01742, HB01945,
HB01950, HB02154, HB02293, HB02379, HB02391, HB02427,
HB02544, HB02599, HB02600, HB02601, HB03259, HB03297,
HB03360, HB03470

16th Congress 49
HB00118, HB00210, HB00241, HB00565, HB00589, HB00738,
HB01017, HB02286, HB02567, HB02835, HB02836, HB02953,
HB03245, HB03330, HB03370, HB03521, HB03629, HB03670,
HB03824, HB03974, HB04039, HB04294, HB04464, HB04600,
HB04682, HB04829, HB04849, HB04941, HB04951, HB04953,
HB04992, HB04996, HB05092, HB05113, HB05213, HB05215,
HB05246, HB05400, HB05401, HB05484, HB05496, HB06120,
HB06258, HR00016, HR00039, HR00100, HR00103, HR00283,
HR00294

15th Congress 15
HB00551, HB00695, HB01413, HB01722, HB02310, HB02948,
HB02987, HB03510, HB03816, HB03856, HB03927, HB03992,
HB04361, HB05700, HB06768

SENATE BILLS
Congress No. Of Pending Income Tax Reform Bills
Bills
17th Congress 24 SBN-1109, SBN-1062, SBN-919, SBN-857, SBN-832, SBN-826,
SBN-825, SBN-821, SBN-698, SBN-697, SBN-426, SBN-388,
SBN-317, SBN-267, SBN-247, SBN-179, SBN-151, SBN-147,
SBN-130, SBN-129, SBN-124, SBN-121, SBN-67, SBN-10

16th Congress 20
SBN-3003, SBN-2994, SBN-2974, SBN-2970, SBN-2437, SBN-
2353, SBN-2250, SBN-2228, SBN-2227, SBN-2223, SBN-2163,
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 9

SBN-2149, SBN-1944, SBN-1942, SBN-1238, SBN-1213, SBN-

1072, SBN-453, SBN-716, SBN-335

15th Congress 8 SBN-3343, SBN-3065, SBN-2879, SBN-2855, SBN-2443, SBN-

2139, SBN-1848, SBN-1344

D. Benefits of the Proposed Tax Reform to the Filipino workers

A study presented by the Tax Management Association of the Philippines (TMAP)

revealed that the Philippines has the second highest individual income tax rate at 32
percent in the ASEAN region, next to Thailand and Vietnam's 35 percent. However,
since most of the taxpayers agree that the government is not really giving good and
high returns in terms of services which are mostly targeted for social beneficiaries, a
reform on the current tax system would greatly appease the undue frustration of the
people.

Here are some of the benefits that the proponents of the tax reform bill consider:

1. Increased Purchasing Power Earners with higher incomes should not be

penalized for being productive and earning more money. Higher take home pay
gives the Filipino workers the choice whether or not and how to spend the
money. Readily collecting their taxes through the current system is a cause of
frustration. If the government allows them to spend the money on things they
want, E-VAT will be the least of their consideration.

2. Encourage Tax Payers to pay correct taxes The proposed income tax reform
will encourage more people to comply and pay their dues instead of resorting to
tax evasion. Filipinos are responsible enough to pay their dues; however if the
amount is exorbitant, it is impossible and ridiculous to pay more than what they
actually bring home to their families.

3. Stricter Tax Collections With the proposed income tax reform, the
government is expected to be more proactive and aggressive in collecting the
proper dues from the other sources of revenue such as corporate taxes, sin
taxes, tariffs, privatization proceeds and income from other government
operations and state-owned enterprises.

4. Inclusive growth and social justice When income taxes are lowered, it will
give everyone equal and equitable opportunities for growth, not only the
concerns of Filipinos in general, but also those of the senior citizens, war
veterans, persons with disabilities (PWDs), solo parents and others who have
special needs.

5. Automatic Tax Adjustment schedule At present, middle-income earners, who

were mostly taxed at 25 percent in 1997, are now pushed into the top tax bracket
at 32 percent together with the billionaires of our country because of the
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 10

countrys outdated and inequitable tax system. The proposed income tax reform
on the other hand provides for an automatic adjustment in the tax schedule every
three (3) years using the consumer price index so that inflation will not result in
tax increases.

E. Impact of the Proposed Tax Reforms to the Government

ADVANTAGES

1. Increased Tax Collection Exhaustive research analyses and discussions

revealed that the governments failure to adjust the income tax brackets to
inflation and the failure of a large number of the self-employed to pay the right
amount of taxes resulting to low tax participation made the current income tax
system grossly unfair and inequitable. The proposed income tax reforms will
reduce the tax burden of the workers as most of them will be pulled back to their
original tax brackets in 1997 and will encourage higher tax participation.

2. Increased E-VAT Studies in big countries such as the United States and
Australia show that any revenue loss could be recovered, particularly through the
E-VAT on goods because of the additional spending of the people brought by
higher take-home pay.

3. Economic Growth - Lower income tax rates put money into the hands of
taxpayers, who then spend it. That creates more business activity to meet
consumer demand. Companies then hire more workers, who spend their
additional income. This boost to economic growth generates a larger tax base
that eventually replaces any revenue lost from the lowering of the income tax
rate. A faster growing economy reduces government spending on social welfare
programs.

DISADVANTAGES

1. Reduced Revenue The tax reform risks a possible revenue loss of up to P30
billion during the first year of enactment.

2. Bigger Deficit Consequently, reduced revenue because of the tax reform

would result in bigger deficits.

3. Lower Credit Rating The income tax reform is expected to increase deficit
which is considered to be a negative factor affecting the credit rating of the
country. A credit rating downgrade will cause the yield on the governments
bonds to rise which means that that it will cost more for the government to pay
back its debt.
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 11

CONCLUSION

Dura Lex Sed Lex, yet the law is not infallible. Passing the Income Tax Reform
Bill is not merely an economic, legal, or a political issue. Income tax reform is an issue
of social justice, fairness and equity. It is the prime duty of both Houses of Congress to
do whatever it takes to follow the mandate of the Constitution that the rule of taxation
shall be uniform and equitable and that the Congress shall evolve a progressive system
of taxation wherein the tax rates imposed must be based on the person's ability to pay.

Taxes are the lifeblood of the economy, has always been the argument of
the government. In fact, the Former President Benigno C. Aquino III provided his own
interpretation of the Constitutional provision on the rule of taxation. PNoy said that what
he thinks the Constitution asks is progressive taxation. If the heads of state will keep on
turning at every point when the subject of income tax reform is brought up in the houses
of congress, then the ordinary Filipino workers will forever be burdened, all because
they work very hard and thus they earn more and therefore have to be taxed more by
the government.

The governments stand is not at par with its peers in the Southeast Asia
Regions. Contrary to what the previous administrations claim, a decrease in taxes has
the opposite effect on income and spending. When the government decreases taxes,
disposable income increases. That translates to higher spending and increased
production. With the overwhelming support in the passage of the bill, it is difficult to
comprehend how and why would a comprehensive income tax reform be turned down?
Considering the number of bills filed and subsequently denied since the 15 th Congress,
the government is very clear in its message that it will not be an easy fight to change
what the law already prescribes.

The nation can only hope that the Duterte administration could find the light and
see the benefits that the income tax reform offers to the Filipinos. Based on the
analyses and studies conducted by the proponents of the bill, the tax reform will yield a
more positive impact to the economy, the people and the government rather than risk.
The government should understand that the basis of the 1997 Tax Code no longer
applies to the current situation of the country. Why should a low-income or a middle-
income earner, who is normally taxed at 25 percent or lower in 1997 is forced into the
higher bracket of up to 32 percent together with the millionaires and billionaires of the
country? One needs not to be an expert in order to understand how the current tax
system works.

Since time immemorial, the Filipino workers have live up to the mandate of the
Constitution when it comes to taxation. The people are not asking for exemptions which
Benefits and Impact of the Proposed Income Tax Reform (House Bill 20) 12

the law readily prohibits, they are asking for a remedy to the injustice and inequity that
the current tax system is continuously doing. The governments problem in revenue
generation can be addressed through policy and system changes without necessarily
keeping the income taxes at the current rates. There are ways to generate more
revenues without having to impose a huge tax burden on the honest working people.
REFERENCES

Fiscal Policy of the Philippines Wikipedia. Web. 21 September 2016

Progressive Tax Wikipedia. Web. 21 September 2016

Tax Increases Reduce GDP The National Bureau of Economic Research. Web. 24
September 2016

Tax Cuts Moneychimp. Web 24 September 2016

House of Representatives Legislative Documents Congress of the Philippines. Web.

25 September 2016

House of Senate Legislative Documents Congress of the Philippines. Web. 25

September 2016

New govt plans tax cuts, loose fiscal policy Manila Bulletin. Web. 25 September 2016

Hannah Torregoza. Angara vows to push income tax reform bills Manila Bulletin . 19
June 2016. Web. 22 September 2016

Maricel Cruz. Alvarez: Tax cuts ready by yearend Manila Standard. 28 July 2016.
Web. 23 September 2016