First tax reform plan: Restructuring personal tax rates

Taxwise or Otherwise

By Theresa Redencion San Diego, 27 October 2016

On 26 Sept., the Department of Finance (DoF) submitted to Congress the first package (out of four) of its proposed
tax reform program, the purpose of which is to create a tax system that is simpler, fairer and more efficient,
characterized by low rates and a broad base.

This is a huge change in our tax system, and one that took a long time coming, I must say, since our National
Internal Revenue Code has been in existence for almost two decades, and yet no major reforms (at least not of this
magnitude) have been formally passed, until last month. Also, with the ASEAN integration, and the Philippines
having one of the highest personal income tax rates and one of the narrowest tax bases within the Asia-Pacific
region, it is high time that a major revamp of our existing tax system be considered.

The highlight of this first package, especially for employees like me, is the restructuring of the personal income tax,
which includes adjustments to the income tax brackets and a shift to a gross taxation system.

Adjustment in the Income Tax Brackets

Currently, the highest tax rate of 32% applies to persons earning an annual income of more than PHP500,000. The
proposed tax table has an increased tax base, applying the higher rates on those earning annual income of
P800,000 to P5 million. Thus, those earning between PHP500,001 and PHP800,000 will be taxed only at 25%
under the new tax brackets, as opposed to the current 32% top rate.

The proposed tax tables which will be implemented in two phases (in 2018 and 2019) are shown at the bottom.

Shift to a simpler, modified gross taxation system

The proposed shift to a gross taxation system aims to streamline or simplify the tax computation. The bonus
exemption (PHP82,000) and the basic personal (PHP50,000) and additional (PHP25,000 per qualified dependent
child) exemptions shall no longer be used to reduce the tax base. Also, the final tax rate of 15% for qualified
employees of regional operating headquarters, regional headquarters, offshore banking units and foreign petroleum
service contractors shall be withdrawn.

With these tax reforms, I can’t help but ask if the proposed restructure would be beneficial to all employees. For
those enjoying the preferential tax rate of 15%, the answer seems obvious because of the huge rise in the rate. For
most employees, the answer would depend on the amount of their income. I believe this can best be answered
through illustrative examples.

A qualified employee of an ROHQ earning P980,000 a year including bonuses is currently taxed at the rate of 15%,
giving rise to an annual tax of PHP134,700. Since the first tax reform package does away with this preferential rate,
the same employee’s income under the proposed tax table would result in total taxes of PHP184,000 and
PHP147,500 for taxable year 2018 and 2019, respectively, as shown in the table below:

Current 15% Proposed Tax

Tax Rate Rates 2018
Gross income
PHP980,000 PHP980,000 PHP980,000
(with bonus)
Less: Tax-
PHP82,000 - -
exempt bonus
Gross taxable
PHP898,000 PHP980,000 PHP980,000
income
Tax due PHP134,700 PHP184,000 PHP147,500
Regardless of the income amount, the withdrawal of the special 15% rate for ROHQ employees would result in
higher taxes on these employees due to the higher tax rate on any income in excess of PHP250,000. It is hoped,
however, that since the program also proposed a review and adjustment of the tax schedule every five years,
ROHQ employees would incrementally recover their “lost revenue.”

But how about those employees not enjoying any preferential rates and currently subjected to the existing
graduated tax rates? Would the new proposed rates be beneficial? Or will it depend on the level of income received
by an employee?

Taking for example an employee with four qualified dependent children, and earning PHP750,000 a year including
bonuses, the proposed tax rates would result in lower taxes for the next two taxable years, as shown below:

Current
Proposed Tax Proposed Tax
Graduated Tax
Rates 2018 Rates 2019
Rates
Gross income
PHP750,000 PHP750,000 PHP750,000
(with bonus)
Less: Tax-
PHP82,000 - -
exempt bonus
Gross taxable
PHP668,000 PHP750,000 PHP750,000
income
Less: basic
PHP50,000 - -
exemption
Less:
additional PHP100,000 - -
exemption
Net taxable
PHP518,000 PHP750,000 PHP750,000
income
Tax Due PHP130,760 PHP117,500 PHP92,500
As shown above, the proposed tax rates would benefit mid-income earners since it provides lower tax rates on a
broader tax base. But this effect may not be the same for high-income earners, particularly those earning way
above P5 million since the tax rate at this income level would be 35%, as compared to the current tax rate of 32%.

That said, given that most Filipinos are currently earning less than P5 million annually, the proposed tax rates are
certainly a welcome development. Also, hugely beneficial or not, due credit must be given to the current
administration in coming out with these proposed reforms.

As I end this, allow me to invite you on Nov. 25, as our Firm holds a tax seminar entitled “Navigating the Waves of
Change” where representatives from the DoF and the BIR will share their expertise and insights on these reforms.
Interested persons may register online at www.pwc.com/ph/2016-tax-seminar or check our Web site for further
details.

Tax Base Tax Rates for 2018 Tax Rates for 2019
Not over
0% 0%
PHP250,000
Over PHP250,000
20% in excess of 15% in excess of
- Not over
PHP250,000 PHP250,000
PHP400,000
Over PHP400,000 PHP30,000 fixed tax PHP22,500 fixed tax
- Not over + 25% in excess of + 20% in excess of
 PHP800,000 PHP400,000 PHP400,000
PHP130,000 fixed tax PHP102,500 fixed tax
Over PHP800,000
+ 30% in excess of + 25% in excess of
- Not over PHP2m
PHP800,000 PHP800,000
PHP490,000 fixed tax PHP402,500 fixed tax
Over PHP2m -
+ 32% in excess of + 30% in excess of
Not over PHP5m
PHP2m PHP2m
PHP1,450,000 fixed PHP1,302,500 fixed
Over PHP5m tax + 35% in excess tax + 35% in excess
of PHP5m of PHP5m