How to avoid taxes in the Philippines

Wonder how to pay minimal tax in the Philippines? Don’t get paid a salary. Just become a shareholder and get paid from cash dividends declared by your company. You pay only 10% tax.

Andrew Tan raises tax equity issue

DEMAND AND SUPPLY By Boo Chanco (The Philippine Star) | Updated April 22, 2013

Megaworld founder Andrew Tan has complained he paid more taxes than the President’s sister but was ignored in the top taxpayers list released by the BIR. Tan, the chairman of Alliance Global (AGI) and Megaworld, claims to have paid P60.1 million in taxes for 2011. It’s unfair.

Tan’s business empire in AGI alone includes Emperador Distillers Inc., Travellers International Hotel Group Inc. (which partnered with Genting to operate Resorts World Manila), Golden Arches Development (Philippine franchise holder for McDonald’s) and Global Estate Resorts Inc.

I can understand Tan’s hurt feelings. How can an actress, no matter that she is the President’s youngest sister, be paying more taxes than him? It’s embarrassing.

But wait a minute… Tan seems to be protesting before he understood the basis of the BIR list. The list covers only those who actually filed income tax returns like me and others who are not awesomely successful entrepreneurs like he is. Maybe the BIR should have released a consolidated list covering all sources of income and all manners of tax payments. But that’s not the case.

Tan’s P60-million tax payment and Kris Aquino’s P49.87 million are apples and oranges as far as the BIR is concerned. Let us see why.

The bulk of Mr. Tan’s income is his very impressive dividend earnings of P518 million for which he paid a 10-percent final tax. He need not report this kind of income the way salaries and other income must be reported in an income tax return filed every April 15.

Nevertheless, I am glad Mr. Tan made a fuss because he raised a good tax policy issue. Why should the hoi polloi like you and me who sweat it out daily to earn a salary being made to pay as much as 30 to 32 percent in income tax? That’s like working for government for close to four months every year compared to a little over a month for Mr. Tan.

Rich folks can do nothing more than play golf the whole year but only have to pay a 10-percent tax on the dividends they earn. Even the minimal interest earnings on our puny savings accounts are charged a 20-percent tax.

Of course I know that Tan is no idle rich. He works hard and earned his riches the hard way. But still, the dividend income he earned should be taxed the same rate our salaries are taxed. The tax laws should be framed so that income is income and every one must pay at the same tax rate.

It is bad enough that the working class is already paying its unfair share of value added and other consumption based taxes on basic necessities including food, energy, water and yes, cell phone bills. Alan Peter Cayetano told PhilStar editors last week that 70 percent of what we earn end up as taxes if you add up direct and indirect taxes.

Indeed, everyone knows the rich employ the best tax lawyers and accountants and are using so called tax avoidance practices. Commissioner Kim Henares mentioned in an interview that she is aware of their ploy of creating a personal holding company where the salaries and bonuses of high earning executives are paid.

Henares warned the wealthy not to “incorporate” even their personal expenses under separate companies just to minimize their tax liabilities. “You cannot book groceries for your household under a separate corporation, or the salaries of your helpers, or your mobile phone bills,”

I understand that “tax planning” is also why the Zobel de Ayala brothers are not on the big tax payers list. Fernando Zobel told my colleague Ichu Villanueva they are covered by “substituted filing” for the salaries they earn in much the same way as their clerks and janitors are.

That means their companies, Ayala and Ayala Land, withhold taxes on their salaries each payday. At the end of the year, their tax liabilities on their salaries are fully paid and they don’t have to file a return on April 15.

But I wonder if “substituted filing” applies to the Zobel brothers. I am sure that at least in the case of JAZA, he gets compensation from Ayala, Ayala Land, BPI, Globe, among many others. “Substituted filing” is only allowed if there is a single source of income. How are all the other compensation income accounted for?

Maybe that’s where the personal holding company mentioned by Commissioner Henares comes into the picture. But on top of that, I am told the Ayalas also have a holding company called Sonoma where the nine cousins hold equal shares.

I am told the way it works, all the profits declared by the Ayala companies for the family’s shares go to this company which has a policy to declare 80 percent dividend each year. Like Andrew Tan, the Zobel cousins only get taxed 10 percent on their dividend earnings.

This tax disclosure problem for the captains of business and industry is not going to go away. And particularly for the Zobels who are active in the Makati Business Club, the MAP and other self righteous business organizations that constantly demand transparency from government, the same level of transparency is expected from them too. How do they pay their taxes and how much?

It is a pity not too many people, not even Mr. Tan himself, realized that he opened a can of worms. Until Mr. Tan protested, few were aware how atrociously our tax law discriminates against the poor wage earners.

An inequitable tax system is bad for the economy, Warren Buffet, America’s best and wealthiest investor had been saying for years. Buffett said that he was taxed at 17.7 percent on the $46 million he made in one taxable year, while his secretary, who earned $60,000, was taxed at 30 percent.

Mr. Buffett believes a tax policy that favors the rich over everyone else accentuates a disparity of wealth that hurts the economy by stifling opportunity and motivation. See… we can’t even blame this tax policy on the workings of capitalism because a big practicing capitalist is saying this works against the economic system.

As one blog puts it (The Unofficial Stanford Blog) America has a huge disparity in income between its richest and its poorest citizens. If America has a big wealth disparity problem, I don’t know what we can call ours. Studies show that income disparity makes a huge difference in a person’s health and happiness… An unfair tax policy is apparently a violation of human rights.

Buffett has been advocating a minimum tax on top earners – like himself. His proposal is popularly known as the Buffett rule, something we need here too.

Here, we can also make the tax rule more equitable by bringing the top income tax rate down and bringing the tax on dividend incomes up. That should also be good for the economy. Ordinary folks will spend the extra cash and boost the economy while rich folks only tend to hoard it as the trillion pesos in SDA accounts prove.

Now that the government is embarking on an all out drive to get people to pay the proper taxes, our legislators must also review the tax code and make sure it is fair specially to the ordinary wage earners.

Alas, Mr. Andrew Tan… you complained too much. Confucius might have said there is wisdom in keeping one’s mouth shut when one is already so much ahead. But thank you anyway. By opening our eyes to tax inequity, you inadvertently did something good.

Tax time

Mel Amado sent this one.

A woman walks into an accountant’s office and tells him that she needs to file her taxes.

The accountant says, “Before we begin, I’ll need to ask you a few questions. He gets her name, address, social security number, etc. and then asks, “What’s your occupation?”

“I’m a Lady of the night,” she says.

The accountant is somewhat taken aback and says, “Let’s try to rephrase that.”

The woman says, “OK, I’m a high-end call girl”.

“No, that still won’t work. Try again.”

They both think for a minute; then the woman says, “I’m an elite chicken farmer.”

The accountant asks, “What does chicken farming have to do with being a prostitute?”

“Well, I raised a thousand little peckers last year.”

“Chicken farmer it is.” replied the accountant

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

3 thoughts on “How to avoid taxes in the Philippines

  1. rockstar0007 says:

    nice article! i have a question.. what if i’m earning 9 million pesos a month and all that money is directly deposited to my bank account. my question is are the government or BIR is going to look after me? or are my bank is going to ask questions why i have a huge of money deposited monthly? FYI my business actually is not doing illegal or something, i just don’t like to register my business because most of our government officials are corrupt i’d rather gave it directly to foundation.

    i’m sure 3 to 4 years from now i will be earning like that. just an example: let’s just say my business is limousine rentals and i’m earning php150,000 monthly, all my limousines is under my name and not with a company.. am i still need to pay for the taxes?

    thanks in advance!

  2. Tok C. Kado says:

    Very informative read, but the content is a bit worrisome. Taxing dividends as much as regular income will reduce the incentive for private individuals to invest in businesses or the stock market and might have a negative effect on our economy as a whole. More taxes on investments might result in less investments (especially from smaller players) that might result in less jobs that might result in higher unemployment. Unless there is a case against people investing their money on shares, taxing investors more goes against the current economic structure. Then again, I’m not an economist. I’d be happy to be proven wrong.

    • ideasman88 says:

      Hi Tok,

      I am no economist too but when you see how an ordinary wage earner pays more taxes than someone who earns an income as a shareholder something is not fair. And this is the point I am making. In Australia where I live, any dividends made from the stock market has to be declared in your income tax return. And the Australian stock market and the many companies listed continue to grow even this practice.

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