Taxwise Or Otherwise
Floredee T. Odulio
On Sept. 20, the Senate Committee on Ways and Means filed its version of the Tax Reform for Acceleration and Inclusion (TRAIN) bill. There are differences between the House (House Bill No. 5636) and the Senate (Senate Bill No. 1592) versions and I will tackle some differing provisions specifically affecting employees.
COMPENSATION TAX
In the Senate version, though the P25,000 annual additional exemption for each dependent (up to a maximum of four children) was retained, the threshold amount for tax-exempt compensation income was lowered to P150,000 from P250,0000 in the House version. Consequently, this increased the effective income tax rate from 7.5%-29% to 11.25%-29.3% for annual compensation amounting to P400,000-P5,000,000. Further, the non-taxable 13th month pay and other benefits remained at P82,000 compared to the P100,000 increased threshold in the House version. Even with the maximum number of qualified dependents, employees would get more tax benefits under the House version.
MINIMUM WAGE EARNERS (MWES)
The tax exemption of the MWEs was removed in the House version while the Senate retained the current tax rules. The current minimum wage in the National Capital Region (NCR) for the non-agricultural sector is P512 per day. If we assume 313 working days in a year, this will translate into an annual gross income of P160,256 which is non-taxable under both the House and Senate versions.
But what if the employee is earning a little more than the minimum wage, say P515 or about P161,195 a year, and does not have any qualified dependent children? Under the House version, the entire amount will not be taxable. In contrast, a tax of P1,679.25 will be imposed under the Senate version which would result in a lower take home pay (P159,515.75) compared to that of MWEs. It does not seem fair for an employee to be better off earning minimum wage. I hope the Senate and Congress can further evaluate the appropriate amount of tax-exempt compensation income and consider the NCR’s current minimum wage in the process.
FROM 35% TO 32% FOR THE ‘ULTRA RICH’
When the House version was approved on May 31, majority of Filipino employees were pleased, except those considered ‘ultra rich’ or employees earning an annual income of more than P5 million. In the House version, these ‘ultra rich’ are to be taxed at P1,450,000 for their compensation income up to P5 million, and 35% on anything in excess of P5 million. This provision did not sit well with affected employees.
The Senate version was a welcome development to the ‘ultra rich’ since they will instead be taxed at 32% in excess of P2 million. The Senate version is deemed to be the better version for the ‘ultra rich’ but not entirely.
Let’s take for example a married employee with two (2) qualified dependent children who earns PHP5,200,000 in annual gross compensation income.
Based on the above calculation, despite the 35% tax rate on compensation in excess of P5 million, the House version will be beneficial for those employees who have no or fewer qualified dependents and whose income is just a little above the P5 million mark. This is because the effective tax rate of a P5 million compensation package under the House version is just 29% while it is at 29.30% under the Senate version. Although the difference is just minimal, it goes to show that sometimes things are not always what they seem to appear, so better make those calculations.
15% PREFERENTIAL TAX RATE ON RHQ, ROHQ AND OBU EMPLOYEES
Another significant difference is on the 15% preferential tax rate on the gross compensation income of qualified employees of Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) of multinational companies, and Offshore Banking Units (OBU).
Readers may be aware of the clamor raised by the removal of the 15% preferential tax rate in the House version because of its impact not only to the employees but primarily in the operations of the RHQ, ROHQ and OBUs.
It seems that the Senate heard the affected stakeholders’ appeal but only with one ear. In the Senate Bill, RHQ, ROHQ and OBU employees employed prior to Jan. 1. 2018 shall still enjoy the 15% preferential tax treatment until the end of their current employment. The preferential tax rate, however, will not apply beginning Jan. 1, 2018 which means there will be employees in the same tax classification but under a different tax system.
Is the partial granting of the 15% preferential tax rate the answer to the appeal of those affected or will it just create more drawbacks? Although this incentive was conferred by special law which the government can revoke at any time, should we not consider the uniformity of the law? It is possible that employees who are hired after the cut-off date may be granted salary adjustments to compensate for the impact of this provision on their net take home pay, but this is left to the discretion of the employer.
The above are just some of the differences between House Bill No. 5636 and Senate Bill No. 1592. Despite the TRAIN’s objective of a fair, simple and efficient tax system, it will definitely not be the case for all. I just hope that in the coming bicameral conference sessions, Congress and Senate will choose the TRAIN provisions that are most beneficial to the majority of the Filipino people and will be able to support the current administrations’ economic and social development projects. I hope it will no longer be the House or the Senate TRAIN but the Filipino TRAIN that is worth the wait.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Floredee T. Odulio is a director at the Client Accounting Services group of Isla Lipana & Co., the Philippine member firm of the PwC network.
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