Reading this article just gives me greater confidence that there is a need for tax reform in the Philippines. One way of helping do this successfully is by establishing a tax institute that will help provide some academic perspective to the process.
From BusinessWorld Philippines
December 23, 2014
My Christmas wish list for the tax system
WITH BARELY two days before Christmas, many of us are still not done with their shopping lists. Walking through aisles at a department store has never been as frantic as during holiday rush. Armed with the Christmas wish lists of friends and family, I braved the throngs of last-minute shoppers.
While deciding between a box of chocolates and a basket of fresh fruits, I noted that the 12% VAT can actually tip my purchasing decision. I started thinking of the high tax rates in the Philippines and my need to stretch my shopping budget. If the VAT rate is lower or if my bonus is tax free, I would be able to buy more gifts for my family and friends. My musings on how taxes affected my Christmas shopping led me to compile my Christmas wish list for our tax system. So here are my top three wishes with the hope that, in the spirit of Christmas, the powers that be would see fit to grant these wishes to taxpayers very soon.
First on the wish list is a lowering of income tax rates. Philippine tax rates remain one of the highest in the region. Our 30% corporate income tax, 12% VAT and 32% personal income tax are astoundingly high compared to our ASEAN neighbors. The high corporate tax and VAT rates drive the prices of commodities higher.
Conversely, high personal income tax decreases the take home pay of individuals, thereby depriving them of capacity to purchase essential products and services.
I often hear government representatives rationalize the high tax rates with the need to generate more funds which are crucial in delivering public services and building much-needed infrastructure. While public service is definitely important, the government should be able to balance the taxes it imposes on its citizenry with the latter’s capacity to pay such taxes and still live decently.
The high tax rate in a poor country such as ours is almost confiscatory. It discourages compliance when one has to choose between paying the correct taxes and being able to send children to good schools. It deprives citizens of the power to provide for themselves because their take home pay is substantially diminished. This diminished purchasing power then forces them to depend more on the government, creating a vicious cycle of increased dependency and pressure on government to generate more funds.
We should always remember that our tax system should be progressive. The poor and the middle class should never be taxed at the same level as the upper class. Unfortunately, our tax rates have remained stagnant for several decades blurring the lines between the poor, the middle class and the wealthy. The result is that a regular worker pays the same 32% personal income tax rate as that paid by the president of the company.
Second on my list is the simplification of the tax compliance requirements for small businesses and single proprietors. Our tax compliance rules do not differentiate between billion peso companies and small sari-sari stores. Both are subject to the same record keeping requirements, annual statutory audit and substantiation requirements.
We need to recognize that small entrepreneurs do not have the capacity to hire consultants and accountants just to keep their books and take charge of their tax compliance requirements. In fact, most small businesses are self-managed with hardly any employees. Imposing a myriad of confusing requirements for these small entrepreneurs discourages compliance. Small business owners desire to pay taxes. The need to legitimize springs from not just the aspiration to help in nation building but also from a personal desire to remove the constant fear of being raided or assessed because of non-compliance.
However, small business owners admit that they just don’t know where to start and how to comply with the multitude of requirements.
Often, small business owners are so focused on growing their business that they cannot keep up with the constant changes in the tax rules and various requirements. Hence, it is crucial to adopt simplified compliance requirements for small businesses to allow them to pay their taxes and comply with the rules. We should consider gross income taxation and simplified record keeping requirements.
Third on my list is the simplification of our complex and ever-changing creditable withholding tax system. The requirements to withhold taxes for payments to local suppliers of goods and services have become so complicated that even seasoned accountants find it difficult to identify the type of payment and the applicable rates.
Our rates are from 1% to 20%, and all possible rates in between. The types of payments subject to withholding taxes include most types of payments such as lease payments, payments to contractors, and payments to consultants. One needs to be a very savvy withholding tax expert just to be able to identify the type of transaction and the applicable withholding tax rates. It is a wonder how regular business owners can cope with constantly watching their payments and ensuring that the correct withholding taxes are paid.
To simplify the system, we should adopt a uniform rate of withholding tax for payments to local suppliers of goods and services, for example 1% for suppliers of goods and 2% for suppliers of services. The uniform rates minimize the guess work in our withholding tax system and simplify the process.
I am hopeful that my wish list will be granted. Our lawmakers seem to be receptive to change, and some have even acknowledged that the high tax rate is now a social justice issue. Buoyed by the optimism and cheerfulness of the holiday season, let me greet you a very Merry Christmas and a Happy New Year!
Eleanor L. Roque is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
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