Tax Reform for individuals: Fairer, but is it simpler?

Various portions of the Tax Code of 1997 will be deemed obsolete once the President approves the first package of the Tax Reform and Acceleration and Inclusion Act (TRAIN) which is scheduled to be implemented by January next year. Anytime soon, we would be needing a new version of the Tax Code.

With the President declaring TRAIN an urgent measure to finance government’s massive expenditure program, it did not come as surprise that the Senate Ways and Means Committee submitted its version of the TRAIN, Senate Bill No. 1592, on Sept. 20.

Will TRAIN indeed correct inequity, inefficiency and complexity of our tax system?

The most popular feature of TRAIN is the reduced personal income tax (PIT) rates. Based on interviews with legislators, this benefits up to 99% of the individual taxpayers who will be bringing higher take-home pay. TRAIN is a welcome move for poor and middle-class families who were perceived as shouldering the tax burden of the rich who escape the withholding tax system.

Taking a closer look on the proposed PIT rates, we can’t help but to compute for possible savings we can derive from it. Thus, we compare the PIT rates under the current Tax Code and the proposed rates under the Senate Bill. At the far right column is the range of annual savings as a result of the proposed lower PIT rates.

Based on the table, an employee earning P400,000 a year, with a monthly salary of P33,000 can save P50,000 a year or P4,000 per month. Annually, the tax savings translate to an additional one-and-a-half-month salary. The proposed PIT rates alone bring hope to all the individual taxpayers to improve their financial standing next year.

Still in relation to individual taxpayers, TRAIN provides options for the self-employed and professionals to be subjected to either the proposed PIT rates or 8% tax based on gross sales or receipts in excess of P150,000. The 8% is in lieu of the 3% gross receipts tax applicable to those with gross sales/receipts of not more than three million pesos.

We then start to ask, is the 8% flat rate, in all cases, more beneficial than the PIT rates?

At first glance, our proficient minds tell us that the 8% is beneficial in all cases. However, we have to take into consideration that the self-employed or professional may avail of the 40% optional standard deduction (OSD), in addition to the cost of sales/service (COS), in lieu of itemized deductions. TRAIN provides that OSD is based on the gross income instead of gross sales/receipts under the current rule.

Thus, it is recommended that the self-employed or professional compare which tax regime is more beneficial, especially if he has a significant COS. If he avails of the 8% flat rate, he should have a reasonable forecast of his income not only in the succeeding year but for the next two years. Under the package, once the taxpayer signifies in his income tax return the choice to be taxed at 8%, it would be irrevocable for a period of three years.

Based on the above proposed changes, everyone can conclude that the changes have been aimed to make taxes fairer for all Filipinos. The next question is whether the tax system was also simplified for easier compliance.

Reading through the Senate’s TRAIN version, some items which have already been abolished in the House of Representative’s version of TRAIN have been restored. In the Senate’s version, an annual income of P150,000 is exempt from PIT but the individual can avail of the additional exemption of P25,000 for every dependent with maximum of P100,000 per year. In comparison, the House version exempts P250,000 totally from PIT and removes the need to claim for additional exemption. In another portion of the bill, the Senate retained the 15% special tax rate to current employees of Regional or Area headquarters and Regional Operating Headquarters but subjects to PIT those hired starting January 1, 2018. The House version, however, totally removes the 15% special rate.

In the coming weeks, the Senate will debate TRAIN at the plenary level. We hope the Senate is able to approve the bill on third reading before going into recess in mid-October. The bicameral conference on the other hand, is expected to reconcile the House and Senate versions before the President sign the bill into law by December. Having said that, our two-decade-old Tax Code is indeed ready to be freshened up with a simpler, fairer and more efficient tax system.

Marie Fe L. Fawagan-Dangiwan  is a manager  with the Tax Advisory and Compliance division of P&A Grant Thornton.

As published in BusinessWorld, dated 26 August 2017