The Government is embarking on a massive tax reform program, consisting of six (6) packages, with each package balancing trade-offs (e.g., lowering of some tax rates while broadening the tax base of other taxes). Each package will be presented as a bill to be filed in Congress over a period of time.
- The first package seeks to lower personal income tax, broaden the tax base of the Value-Added Tax (VAT), adjust the excise tax on petroleum and automobiles, and reduce the estate and donor's tax rates.
- The second package, or what is referred to as the health tax package, would levy taxes on sweetened drinks and further increase the excise tax on alcohol and tobacco products.
- The four (4) other packages would cover corporate income tax, property tax, capital income tax, and other taxes (i.e., carbon tax, lottery and casino tax).
The Department of Finance (DOF) has submitted to Congress its first package of tax reform measures, denominated as House Bill 4774, or The Tax Reform for Acceleration and Inclusion Bill Act (HB 4774), which is the subject of this Tax Alert.
Alongside the foregoing tax reforms, the DOF is also considering tax amnesty in four areas as part of its tax policy reform program: income tax, estate tax, property tax, and VAT. House Bill 4814, entitled An Act Granting Amnesty in the Payment of Estate Tax, has been approved by the House Ways and Means Committee. An income tax amnesty bill has also been filed in the Senate (Senate Bill No. 920). These tax amnesty bills will be the subject of a separate Tax Alert.
The tax reform package seeks to, among others, lower personal income tax. It is advocated that the reform measures will ease the tax burden on the middle class. The proposed tax system seeks to provide significant after-tax cash for most individuals that may be made available and allocated for investments, thereby creating opportunities for wealth planning.
HB 4774 also seeks to reduce the estate and donor's tax rates. The proposed measures provide avenues for new options and structures that may be considered for wealth management.
Under the current provisions of the National Internal Revenue Code of 1997 (NIRC), the personal income tax rates applicable to resident citizens, resident aliens and non-resident aliens engaged in trade or business on taxable employment income and from a business or exercise of profession are at graduated rates of 5% to 32%, with the top rate imposed on individuals earning more than P500,000.
Currently, the NIRC imposes the following income tax rates:
HB 4774 seeks to raise the floor for the imposition of the income tax. Income earners receiving P250,000 or below annually will be exempt. It also seeks to adjust the personal income tax brackets, where higher income tax rates are imposed on high income earners.
HB 4774 proposes the following revised schedule for compensation income earners:
Tax schedule effective 1 July 2017 and taxable years 2018 and 2019
Tax schedule effective 1 January 2020 and onwards
After 2020, the taxable income levels in the above schedules shall be adjusted once every five years through rules and regulations issued by the Department of Finance.
Estate tax is levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or non-resident of the Philippines. The value of the gross estate of the decedent is determined by including the value at the time of his death, of all property, real or personal, tangible or intangible, wherever situated. However, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate that is situated in the Philippines shall be included in his taxable estate.
Generally, the net estate is arrived at by deducting from the gross estate certain allowable deductions, such as expenses, losses, indebtedness, and taxes, property previously taxed, transfers for public use, the family home, a standard deduction equivalent to P1,000,000, medical expenses, and amounts received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee.
Currently, the estate tax is imposed at graduated rates of 5% to 20%, depending on the value of the net estate.
Under HB 4774, the estate tax will be reduced to a single rate of 6%, of the net value of the estate.
Under the NIRC, the applicable donor’s tax rate depends on whether the donee is related to the donor or is considered a stranger, and on the amount of the net gifts made by the donor during the tax year. Where the donees are considered “strangers”, the transfer is subject to donor’s tax at the rate of 30% of the net gifts. On the other hand, where the donees are not strangers, the applicable donor’s tax rates are graduated from 2% to 15%, in accordance with the schedule provided in the NIRC.
HB 4774 proposes to reduce and restructure the donor's tax to a single tax rate of 6% of net donations, for net gifts worth more than P100,000 annually, regardless of the relationship between the donor and done.
HB 4774 has not passed into law. However, it should be noted that this is a Government sponsored measure comprising the first package of the tax reform measures that Government has committed to put in place. The House of Representatives expects to pass the first package of the proposed tax policy reform program by June 2017.