Tax Reform Package 1: What you need to know


Members of the Inquirer Business had a sitdown with Department of Finance Undersecretary Karl Kendrick Chua to talk about the Duterte administration’s tax reform program package one (there are five). Here are some important takeaways you need to know, which are directly lifted from Usec. Chua’s presentation:

  1. The first package is a tax reform for acceleration and inclusion, or the TRAIN. This was filed in the House of Representatives in January and was approved as House Bill 5636 last May 31, 2017. It covers the reduction of the personal income tax, the simplification of the donors and estate tax, the expansion of the value added tax base, the increase in the oil excise and automobile excise, and the introduction of the sugar sweetened beverage tax. We’ll be tackling all these later on.
  2. Everything that will be collected from this tax reform will be used for five programs ONLY: infrastructure (both rural and urban), health, education, housing and social protection. It will also be a major aid to continue the previous and the current administration’s programs such as the K-12, ‘Build, Build, Build,’ and the ten-point social economic agenda.
  3. In reality, we do not need the tax reform if our main goal is just to raise revenueBut in reality, this government wants to reduce poverty significantly from 22% today to 14% by 2022, which is doable if we follow this tax reform. And if we continuously follow it for one generation, 23 years from today (2040), we expect to eradicate extreme poverty of this country to join the ranks of other developed nations or high-income countries like South Korea or Malaysia.
  4. Some people say that there’s no need for a tax policy reform because the key problem lies in our agencies. We need to address corruption and defficiency in the Bureau of Internal Revenue and the Bureau of Customs. That is very correct, however, the problem is not only in the way the tax administration is being run, the problem is inherent to the law itself. The new tax reform package will correct the inequity, the complexity, and the efficiency of the tax system. Here are solid examples:
    • We lose 145 billion per year by not adjusting oil excise, money that could have been spent for uplifting the education system.
    • We’ve been granting a lot of exceptions, special treatments and incentives to various sectors. According to Usec. Chua, we lose around 433 billion per year because of these.
    • The BIR cannot open bank accounts or be granted permission to open bank accounts when someone is subject to an impeachment case, making it difficult for the government to exact justice.

Here are highlights of the most important provisions of the tax reform package one:

  1. It will significantly lower personal income tax rates. Did you know that we haven’t adjusted our tax rates for 20 years? Someone who used to earn 500,000 in 1997 is a rich person back then, but today, he’s just a low-level manager who pays one-third of his income in taxes. So what’s going to happen with the new reforms?
    • The first 250,000 of taxable income will be exempted, which will benefit 83% of taxpayers. Just to give an example, a call center agent with a 22,000 monthly salary with thirteenth month and a few bonuses currently have to pay 22,000 per year in taxes. Under the reform, he will have to pay zero taxes since his income falls below the 250,000 threshold. 
    • For those whose taxable income are below five million, they will receive lower income tax rates. For instance, someone who has an annual taxable income of 500,000 currently faces a 32% marginal tax rate. In the reform, that will fall to 25%. And after three years, it will become 20%.
    • Those who earn more than five million a year will pay 35% because the Constitution mandates that we have a progressive tax system. It is not anti-poor as critics would like to say.
  2. It will expand the VAT base. The Philippines has the highest VAT rate in the region at 12%, but we have so many exemptions. In the tax code, we have 59 kinds of exemptions compared to other countries that have very few. Why is this? Because they limit it only to agriculture, education and health, while we’ve been using VAT as a fiscal incentive to attract investments and protect certain groups or industries. With our system, half of the economy does not pay VAT, half of the economy gets slapped with the 12% tax. The best practice? One that is low-rate and broad-based where everybody pays.
  3. It will increase the oil excise. What is oil excise? It is the excise tax rate for gasoline, diesel and all other fossil fuels. Many consider this provision as anti-poor and anti-progressive, but according to Usec. Chua, it is the opposite. How come? According to the family income expenditure survey, 51% of all oil product consumption and transportation costs are consumed by the richest 10% of families. This means the rich will carry most of the burden of the tax, as opposed to those who commute to and from work everyday. From the eight pesos jeepney fare that we pay, only P2.40 actually reflect the oil price. The rest goes to the driver’s salary, the driver’s income if he’s paying boundary, and the maintenance. So if you’re paying 20 pesos for your jeepney fare everyday back and forth for six days including Saturday, that’s 120 pesos, as opposed to someone who owns a car with a tank that needs to be filled every week for 2,000 pesos. The increase will be six pesos over three years, three pesos in January, two pesos the following year, then one peso after 2020 of January.
  4. The final tax that will raise revenue is the automobile excise tax. We have not adjusted it for 13 years. Contrary to what critics of the tax reform say, it’s not true that cars’ prices will double. Cheaper cars like a Vios or a Mirage which are often bought by starting families will see a 10-13 thousand increase, while The Land Cruiser, a luxury car which is around four million, will see an additional 900 thousand increase. You might ask, how does the government expect us to afford cars with the added automobile excise tax? A family will actually have more savings from the lower income tax than the increase that they have to shell out.
  5. The introduction of sugar sweetened beverage tax. More than being part of the provision, it is actually more of a health measure to be implemented with the help of the Department of Finance. According to health experts, there are a million dialysis patients today, and Philhealth spends 78 billion per year for dialysis treatments, not counting the patients that pay for themselves. There will be a P10-a-liter excise tax in the reform’s first implementing year, and will increase by 4% annually. An additional P47 billion could be generated from these taxes.

There are three key messages that Usec. Chua would like us to remember and memorize and share with our family and friends:

  1.  Let’s look at this tax reform as a package, and not choose our own provisions. We cannot say that we like the income tax but we don’t like the oil excise. Why? Because only when we treat it as a package do we see the benefit immediately being felt by 99% of Filipinos and 100% over the long term. The stock market grew by more than 1.5% when the tax reform bill was passed, so there’s strong indication that people are waiting for this to happen.
  2. The tax reform is like a wedding ceremony. The true test of this reform is how it will be spent, and it will be spent as I said only for health, education, housing and social protection.
  3. This tax reform is an investment for our future. No investment is easy, we all start with difficulties and this tax reform is similar. There will be short-term challenges but the gains are going to be big if we push through this reform.

Note that all these provisions are just part of the first package. Over time, the rest of the packages will also be discussed. Here’s the whole video of the roundtable, including the Q&A:




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