Towards a simplified tax system, at last!
Hear ye! Hear ye! Payment of personal income taxes will soon be easy and simple. House Bill (HB) No. 4774, titled Tax Reform for Acceleration and Inclusion (TRAIN) and containing the Package 1 of the administration’s tax reform program, was recently filed in Congress by Quirino Rep. Dakila E. Cua, Chairman of the House’s Ways and Means Committee.
Another bill HB No. 4888, Tax Administration Reform Act (TARA) was filed by Albay Rep. Joey Sarte Salceda as an accompanying bill to address inefficiencies at the BIR. Taken together, the battlecry would be “TARA na sa TRAIN”.
The TRAIN will address problems in the tax system itself (we call this tax policy), and the TARA will address inefficiencies in administration and implementation.
But for now, let me focus first on HB 4774. I say, HB 4774 simplifies the tax system because of the following features:
1. It adopts a single tax exemption base of P250,000, in lieu of all exemptions such as personal and dependent’s exemption, tax-exempt bonuses and minimum wage earnings. Any citizen or resident (other than self-employed and professionals) whose income does not exceed P250,000 in a given year is automatically exempt from income tax without a need to show supporting evidence for exemption.
Unlike the current system, there will be no more need to submit birth certificate, marriage or death certificate. No more need to determine whether a child, or a parent is a dependent, or that one is a minimum wage earner (MWE), or that an income earned is tax exempt. No more need to track whether an income received does not exceed the tax exemption ceiling, and so on. All these will be a thing of the past.
2. It adopts a uniform tax rate applicable to all citizens and residents by removing special tax rates granted to certain individuals such as those working in regional headquarters of multinationals and offshore banking units who currently enjoy a reduced tax rate of 15%.
3. It unifies the tax on all transfers of property whether by sale, donation or inheritance, by imposing a uniform rate of 6% based on fair market value. This will not only remove tax arbitrage but it will also simplify tax compliance with the adoption of a single rate and base. It will be a straightforward tax that is imputed whenever a property is transferred regardless of the mode of transfer, i.e. sale or barter, donation or by death.
4. It unifies the taxation of all business income whether earned by corporations or by individuals. As proposed in the bill, self-employed and professionals will be taxed similar to corporations -- same tax rate, same imposition of minimum corporate income tax (MCIT), same deductions. This will remove the tax arbitrage between self-employment and corporations.
5. It adopts a flat rate tax of 8% for businesses whose annual sales do not exceed P3 million. Individuals earning business income, such as the self-employed and professionals whose yearly income does not exceed P3 million, will pay 8% of gross sales in lieu of income tax, VAT or percentage tax. In short, there will be only one kind of tax to be filed and paid. Likewise, this group will be allowed to use simplified form of bookkeeping.
6. It reduced the number of VAT exemptions, thus, making bookkeeping and tracking of input VAT credits simpler. The lesser the exemptions, the better for compliance.
At the same time, it will minimize exposure to tax risks. Under HB 4774, VAT exemption will be limited to unprocessed food, health and education only.
These are just some of the striking features I spotted. There could be more. I have likewise spotted items for further enhancement or correction, for the sake of tax simplification. One of them is the Optional Standard Deduction (OSD).
With the intent to unify the tax treatment of all income from business, the bill may have missed out not unifying the claim for OSD. HB 4774 reduced the OSD for individuals to 20%, while retaining the 40% OSD in the case of a corporations. Likewise, the 20% OSD is based on gross sales/revenue while the 40% is based on gross income. Such difference does not find a logical reason.
Besides, it would be unfair to tax small businesses (who are mostly self-managed) based on an assumed profit of 80% as no legitimate business would earn that much, not even professionals who apparently are the target of this 20% OSD. Professionals have to pay for their transport and gasoline expenses going to and from their clients, they pay salaries of drivers and secretaries, they rent offices and pay utilities, they use computers, internet and supplies and etc. Consider also that, professionals are but a small segment of the self-employed sector which are mostly traders, peddlers, sidewalk canteens, parlors, barbershops, dress shops and the likes.
Likewise, as the bill intends to simplify the taxation of small businesses through a flat rate tax, it should also reduce the frequency of filing and payment. Small businesses should be spared from the monthly filing and payment of returns, and instead, are allowed to pay on an annual basis. In relation to this, the P3 million threshold (or an average daily sales of only P8,220) for small business may be too low. Consider raising it to P5 million for sale of services and P10 million for sale of goods.
Overall, I could see the sincerity of the government to simplify the tax system. One participant in a tax reform dialogue said it clearly, “I do not mind paying a little higher in taxes as long as it is easy to comply and pay”.
This bill, HB 4774, deserves our support.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.
Atty. Benedicta Du-Baladad is the managing partner and CEO of Du-Baladad and Associates (BDB Law) and president of FINEX.