Filing taxes – it’s one of the most pressing concerns of the Filipino people come tax season. From the high tax rates to the tedious filing process, the Philippine tax system is under plenty of scrutinies. Just recently, auditing and tax advising firm Pricewaterhouse Coopers (PwC) released its Paying Taxes 2015 study. The research provided tax-related information on 189 economies. Data included in the study are the total tax rate per country, the average number of hours taken to file taxes (for companies), and various case studies from different economies.
The Problems
The Philippines ranked 127th out of 189 economies when it comes to the ease of paying taxes. The country ranks behind even Iraq and Afghanistan, two countries plagued with war and political crises. In the Philippines, it takes 193 hours to pay 36 kinds of taxes (for companies) versus the 4 tax payments in United Arab Emirates (UAE) and Qatar, both tied in 1st place. For UAE-based companies, it takes 12 hours to pay the 4 taxes while it takes 41 hours for those in Qatar. Below are difficulties Philippine taxpayers and corporations encounter during tax season:
- difficult tax structure
- inefficient filing process
- inaccessibility of the online platform
- multiple documentary requirements (for self-employed individuals)
- outdated tax rates
With the problems above, it’s no surprise it takes almost 200 hours to file and pay taxes in the Philippines.
Just last April 15, during filing season, Filipinos expressed distress over the BIR’s e-filing system. A month before the deadline for filing taxes, the BIR issued a new regulation mandating that all taxpayers file their tax returns electronically. What about those who had no immediate access to a computer and internet connection?
Worse, non-compliance will be subjected to a fine of Php 1,000 plus a penalty amounting to 25% of the tax due. The e-filing system is a good start and is bound to make the process more efficient and convenient; however, during the last few days before the deadline, the BIR website experienced glitches and lags. When taxpayers attempted to file online, the website failed to load and during downtimes, they couldn’t complete the process and were at risk of paying the fine and penalty.
In relation to the PwC study, electronic systems for paying taxes have shown improvement in the processing time of tax filing. If the BIR’s e-filing system is free of bugs, lags, and glitches, then the 193 hours it takes to pay taxes will definitely improve. Aside from the processing time, another concern when it comes to taxes is the high tax rates. The Philippines’ total tax rate, at 42.5%, is 6.2% higher than the Asia-Pacific average. If you look at the chart below, you’ll see that the Philippines has the second highest tax rate in the region, trailing only behind Myanmar.
The Solutions
There’s a lot of room for improvement when it comes to the Philippine tax system. In recent months, leaders of Congress have continued to push for lower income taxes for both personal and corporate taxes. Speaker Feliciano “Sonny” Belmonte, Jr. stated that majority leaders of the House of Representatives would pursue the bill and continue to seek the support in both chambers of Congress when sessions resume in November.
“The value of money is going down pero ‘yung mga rates not only of income tax haven’t been resolved in a long time. So on that principle, yes, readjust them with the values they had,” said Belmonte in an August interview with the Philippine Daily Inquirer.
There are at least three bills (House Bill 4829, House Bill 5401, Senate Bill 2149) relating to the push for lower income taxes. Amendments in the tax reform bills include:
- Raise the tax exemption ceiling to Php 150,000. (Minimum wage earners are exempted from paying taxes. Minimum wages vary per region.)
- Lower the current 32% income tax rate
- Raising taxable income ceiling to Php 10 million from Php 500,000 (This is the amount of your income that is subject to income tax.)
- Lessen tax brackets to three or four from the current seven
- Lower corporate tax rate to 25% from 30%
Lower income taxes will be a breath of fresh air for Filipinos; however, decreasing tax rates will have repercussions on the government budget and its spending liquidity. If income rates are lowered, revenues from the government will decrease by Php 29 billion as pegged by the Department of Finance (DOF). To combat this, the DOF proposes to increase the value added tax (VAT) to 14% from the current 12% to make up for the losses from lowering income tax rates.
There is no doubt that reforming the tax system is an important priority. This would lighten up the burden on Filipinos not only when it comes to the filing process but to their financials as well. If the income tax reform bill is approved and the BIR improves its e-filing system, the Philippines may improve its ranking on the next Paying Taxes study.
A more efficient tax system will also translate to improvements in doing business in the country which can drive the economy. As stated in the PwC study, “Enabling businesses to spend less time on tax compliance and more time on building on the business and contributing to economic growth is clearly a valuable objective that is worthy of additional study and analysis.”
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