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An

ANALYSIS OF

PHILIPPINE INCOME

TAXATION: INDIVIDUAL

INCOME TAX

Crizedhen N. Vardeleon December 1, 2015

1A- Legal Research and Writing


I. The Problem

1. Introduction

One of the Inherent Powers of the State is the Power of Taxation. It refers to the

inherent power of the state to exact an enforced contribution upon persons, property

or rights for the purpose of generating revenues for the use and support of the

government. This power is exercised only by the government or its political

subdivision. In taxation, there is generally no limit to the amount of tax that may be

imposed.

The Basic Principle of Sound Tax System are Fiscal Adequacy, Equality or Theoretical

Justice and Administrative Feasibility.

Fiscal Adequacy means that the sources of revenue as a whole must be adequate to

meet the expenditures of the government regardless of business or economic

conditions. The revenue should be elastic or capable of expanding annually in

response in variations in public or government expenditures.

Equality or Theoretical Justice means that there must be an equitable or

proportionate distribution of the tax burden, which means that the tax burden shall

be shouldered by those who have the ability to pay. The ability to pay is gauged by
the income received by the taxpayer. Those with greater income must pay more as

they have greater ability to pay than those with lesser income.

Administrative Feasibility means that the tax laws must be capable of reasonable and

convenient enforcement, just/ effective administration. The tax laws must be capable

of being conveniently enforced by the administrative personnel and complied with

by the taxpayers as to the time, manner and procedures of filing tax returns and

payment of taxes.

Ordinary individual taxpayers are those required to file their individual income tax

returns and are normally taxed at the graduated income tax rates of 5% to 32% based

on their taxable net income.

The main source of Philippine Taxation is the National Internal Revenue Code.

Republic Act (RA) No. 8424, otherwise known as the National Internal Revenue Code

of 1997, as amended (Tax Code) became effective on Jan. 1, 1998 and for the past 16

years, despite the effects of inflation the levels of individual income tax brackets and

tax rates have remained essentially the same, albeit with very few changes. Really, 16

(going on 17) years for individual income tax rates.

According to the Section 28, Paragraph 1 of the 1987 Philippine Taxation, The rule of

taxation shall be uniform and equitable. The Congress shall evolve a progressive

system of taxation.
Essentially, progressive taxation reduces the tax incidence of people with a lower

ability to pay, and instead shifts this to those with a higher ability to pay.

There are currently 10 bills filed in the House of Representatives and 3 in the Senate

seeking to lower income tax rates or initiate re-bracketing.

House Bills

There are ten (10) measures filed by the House of Representatives and here are some

snippets on what to expect from 5 of these proposed bills.

House Bill 4278 – Rep. Angelina Tan, M.D. (4th District, Quezon)

To fully benefit from the ASEAN Integration in 2015, Tan seeks to reduce the income

tax rate for individuals from 32% to 15%.

House Bill 4372 – Rep. Rodrigo Abellanosa (2nd District, Cebu City)

Abellanosa seeks to modify further Section 24 (A) (2) of the National Internal

Revenue Code of 1997, as amended, to lower income tax rates at unchanged salary

levels.

He proposed to lower the tax rates from 32% to only 15% for those earning P20,000 to

P70,000 starting Jan. 1, 2015, then 13% beginning Jan. 1, 2016, and 10% starting on

Jan. 1, 2017.

House Bill 4099 – Rep. Magtanggol Gunigundo (2nd District, Valenzuela City)

Gunigundo proposes to lower individual and corporate income tax rates to 15% from

the current 32% and 30%, respectively. He’s expecting this to result to a reduction on

the number of Filipinos not paying taxes, as lower taxes mean higher levels of

compliance.

House Bill 4829 – Marikina City Rep. Romero Quimbo

This bill proposes a flat rate of 25% income tax and a 5% minimum income tax rate
for self-employed individuals and professionals, a reduction in the corporate income

tax rate from 35% to 25%, and an increase in the minimum corporate income tax rate

from 2% to 5%. Additionally, it also seeks a 5% income tax on individuals earning

below P20,000 and a 35% income tax for those making over P500,000, but not over P1

million.

House Bill 4849 – Bohol Rep. Arthur C. Yap

Under this bill, minimum wage workers will continue to be exempt from income tax.

It seeks to revise Section 24 (A) (1) of Republic Act No. 8424 (National Internal

Revenue Code of 1997), as amended by Republic Act No. 9504 to lower the taxes on

the low-income earners, allowing them to have a higher net income, thereby

increasing their purchasing power.

Senate Bills

SB 716 – Senate President Pro Tempore Ralph Recto

This bill proposes a new schedule that would impose no taxes on net income below

P20,000, a 10% tax for a net taxable income below P60,000, 15% for P60,000-P140,000,

20% for P140,000-P280,000, 25% for P280,000-P500,000, and 30% for P500,000-

P1,000,000.

It also proposes to index the net taxable income levels and nominal tax rates

automatically to inflation every six years, without the need for legislative action.

SB 1942 – Senator Paolo Benigno Aquino IV

According to this bill, tax rates should be adjusted every six years “to its present

value using the Consumer Price Index, as published by the NSO”. Those earning

below P60,000 a year are exempted from tax.

A 15% tax will be imposed for those who have earned over P60,000 up to P140,000 a

year, 20% for P140,000-P280,000, 25% for P280,000-P500,000, 30% for P500,000-P1

million, 32% for P1 million-P12 million, and 35% for those earning over 12 million.
SB 2149 – Senator Juan Edgardo Angara

The bill seeks to reduce the country’s individual income tax rate from the current

32% to 25% by 2017.

The tax rate for those earning between P20,000-P70,000 will be lowered to 10% from

15%, 15% for P70,000-P200,000, 20% for P200,000-P500,000, 22% for 500,000-P1

million.

Analysis of Senate Bills

Senator Aquino’s proposal could have the lowest revenue loss at 1 percent of the

estimated total revenue under the existing tax regime. (The main reason is that they

also propose to increase the tax rate of the wealthiest.) This is followed by Senator

Recto’s proposal (at 5 percent of the total revenue under the existing tax regime).

Initially, Senator Angara’s proposal could decrease total revenue by only 3 percent.

In 2016, the decrease could rise to about 15 percent. In 2017 (and onwards, once the

new regime is made permanent), the decrease in revenues compared to the baseline

(2012) revenues, could increase to 25 percent for the Angara proposal. This is largely

because his proposed tax cuts are the deepest, and they also apply (at least in part) to

some of the wealthiest in the country.

All these measures acknowledge the unfairness and inequality of the prevailing

income tax system, wherein the burden falls on the middleclass.

2. Statement of the Problem

Main Problem: Does the National Internal Revenue Code as amended or RA No. 8424

needs amendment in order to be fair to taxpayers and in compliance to 1987


Philippine Constitution that the tax system should be progressive and subject to

change?

Sub-Problems:

1. When is the tax burden too much for a taxpayer to bear?

2. Does our tax system keep in step with global corporate trends?

3. Is there any legal way to avoid or at least minimize the tax liabilities of

individual?

4. How heavy is the tax burden of one taxpayer compared to others’ tax

burden?

5. What is the effect of the rising of inflation rate? Does it means that

income tax rate should be reform?

3. Definition of Terms

4. Objectives and Significance of the Study

4a. Objective
The objective of the study is to study the current individual income tax whether it

complies on what is in our 1987 Constitution which is the tax system should be

progressive. In specific terms the study is designed to:

1. Determine the effectiveness of individual income tax;

2. Identify whether our contry needs an income tax reforms;

3. Identify whether the middle class are over tax.

4b. Significance of the Study

This research will be for the benefits of taxpayers, students, researchers,

government and to the Bureau of Internal Revenue, Department of Finance.

This study will help the legislators, the individuals and groups in the Philippines on

whether to push through the pending income tax reforms or not.

The government can use this study to identify on what will be the effect on the

approval of those pending billings on income tax reduction.

5. Scope and Limitation

5a. Scope
This study is premised at analyzing the effectiveness of current income tax. This

study will focus on the middle class workers, those who are currently paying an

income tax rates of 5%-32%.

This study is restricted also in identifying the possible causes of ineffective tax

system and reasons on inputs behind the oending bills on income tax reforms.

5b. Limitation

Critical reflection on the present recorded a number of limitations that could be

addressed by future researh to augment and enhance the findings of the present

study.

The first limitation is that the present research did not analyze all the income tax

payers but only focus on the middle class. It will only limited on the income tax rates

imposed on the middle class. Hence, it is possible that in general, when we consider

the effects of income tax reforms as an overall including the upper class and lower

class will not have the same result.

The second limitation is that the analysis will only focus on the individual income tax

and will not consider the effect of other kinds of taxes that are currently imposed in

our country like the estate tax, donation tax and corporation.

II. Review of Related Literature

1. Review of Related Studies


A casual analysis of tax policies in the ASEAN suggests that the Philippines

has the second highest average tax rate (after Vietnam and Thailand). On the

other hand, Singapore has the lowest marginal tax rate at both ends of its tax

bracket spectrum, at 20% for the wealthiest and 2% for the lowest qualifying

income tax payers. (Compare this with 32% and 5% for the Philippines.) If we

also consider the value-added taxes in ASEAN, the Philippines comes on top

(or near the top) of the most taxed in the region.

Table 1: Marginal

Tax Rates for

ASEAN Countries

Tax Rate for Lowest Income


Tax Rate for Highest Income
Country
Bracket
Bracket

Vietnam 35% 5%

Thailand 35% 5%

Philippines 32% 5%

Indonesia 30% 5%

Malaysia 26% 2%

Myanmar 25% 5%

Laos 24% 5%

Cambodia 20% 5%
Singapore 20% 2%

Source: AIM Policy Center compilation of tax structures for ASEAN

If we focus on the Philippine middle class, Virola et al (2013) provide a handy

description based on their statistical analysis of the distribution of incomes in the

country. In order to be considered part of this group, one’s annual gross income

should range from about P64,317.00 to P787,572.00. That’s roughly P5,359.75 to

P65,631.00 in income a month. We acknowledge that many of you will find this range

too large. But if we take this to be a useful illustrative guesstimate for now, then that

study indicates that there are 4.66 million families (roughly 25% of the total

population) in the middle class. (Compare this with roughly 14 million families (or

75% of the population) belonging to the lower class, of which over 4 million families

fall below the poverty line.)

In a recent study at the AIM Policy Center, they turned the data from the Bureau of

Labor and Employment Statistics (BLES) in order to analyze 362 occupations

spanning 41 industries, comparing their average gross annual wages for 2008 and

2012. The comparison also took note of the change in the applicable marginal tax rate

for each occupation. Of the 362 occupations,101 occupations (28%) indicated higher
applicable marginal tax rates in 2012, implying that more taxpayers probably shifted

to higher income tax brackets since 2008.

In the USA, the tax burden is a hotly debated topic and has been the subject of

numerous studies. One study done in Boston, Massachusetts, set out to establish the

beliefs of one segment of society about the poor and how that view differed from the

views of other segments of society in relation to taxburdens (Williamson, 1976).

Fullerton and Rogers (1993) investigated the question (originating from the debates

around tax policies) of who bears the ultimate tax burden. Lav (1998) focused on the

question of how much tax a typical family pays. Other studies in the USA include

one by the National Bureau for Economic Research (NBER) on the question of

whether it pays to work. (Gokhale, Kotlikoff and Sluchynsky, 2002) Another is a

survey by the tax foundation on the attitudes of taxpayers, asking questions such as

whether respondents consider the amount of federal income tax they pay as too high,

about right or too low (Chamberlain and Hodge, 2006)

2. Conceptual Framework

The income tax reform is one of the current issues in our country on these days. The

conceptual framework was then applied in a real-life context using multiple

households as case studies. The purpose of the case study research was to assess the

validity of the theoretical constructs underpinning in the conceptual framework in a


real-life environment. The validity of these theoretical constructs was confirmed by

the results of the data analysis in this study.

III. Methodology and Procedure

IV. Presentation, Analysis and Interpretation of Data

V. Summary of Findings, Conclusions and Recommendations

References

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