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Republic of the Philippines /* RECEIVED @
HOUSE OF REPRESENTATIVES © are: 18 a

Quezon City, Metro Manila

SEVENTEENTH CONGRESS
First Regular Session

34

House Bill No.

Introduced by REP. KAKA BAG-AO

EXPLANATORY NOTE

It is quite commendable that minimum wage earners are exempt from the payment
of income tax.

However, even the overwhelming majority of employees who earn more than the
minimum wage have a very difficult time making both ends meet. Housing is expensive, and
families spend a lot on education. Full health insurance coverage, be it by the government
or through health maintenance organizations, is unheard of, even as we have the most
expensive medicines. Catastrophic medical bills are commonplace.

Thus, there is a need to reduce the tax burden for working people, many of whom
rely solely on compensation income.

According to the report of the National Tax Research Center (“Reform Options on the
Taxation of Compensation Income Earner and Self-Employed Individuals and Professionals,
May - June 2009"), for the period 1998 to 2007, compensation income earners contributed
an average of 85% of the collection while individuals engaged in business and practice of
professions shared only about 15% of the collection. The report explained that this scenario
may be traced to several factors, among which is the manner by which the individual
income tax due is computed. While both groups of individuals are subject to the same tax
rate schedule provided under Section 24 of the National Internal Revenue Code (NIRC), the
determination of their taxable income differs. For compensation income earners, their gross
income is reduced only by personal and additional exemption allowances as provided under
Section 35 of the NIRC and premium payments for health and hospitalization insurance as
allowed under Section 34(M), which is only PHP2,400 per year. For self-employed individuals
and professionals, their gross income is reduced not only by the personal and additional
exemption allowances enjoyed by compensation income earners but also by the deductible
expenses allowed under Section 34 of the NIRC.

Thus, the report mentioned that self-employed individuals and professionals are able
to further reduce their income tax liability. It further states that the substantial gap in the
tax collection between the two groups of taxpayers can also be traced to the number of
taxpayers in each group. Based on the 2007 income tax collection from compensation


income earners (P120.06 billion, or 87% of the total amount of taxes from individuals) and
self-employed and professionals (P17.67 billion, or only 13% of the total amount collected

* from individuals), the average income tax paid by the former was around P 15,000.00 while
in the case of the latter, it was only around P 13,000.00.

A reduction of income tax rates for individuals under Section 24 of the National
Internal Revenue Code will benefit primarily compensation income tax payers, even as there
is a dire need to compel professionals and self-employed individuals to pay the proper
amount of taxes.

It Is likewise necessary to provide additional deductions for compensation income
earners. Thus, in calculating their taxable income they should be allowed to deduct some of
their educational and medical expenses from their gross income.

Women income earners with at least one child less than eighteen (18) years of age
should be given tax credit since it is typically the mother who takes care of the children and
maintains and takes care of the household. Their uncompensated work should at least be
partially paid through tax credit.

In terms of efficiency of tax administration, the most efficient and effective mode of
income tax collection is through the withholding tax on compensation income of individual
employees - way far more efficient and effective than collecting from professionals, self-
employed individuals, and corporations. Due to their immense contribution to the economy
and society in general, with more reason then that compensation income earners deserve
reduction in income tax liability.

Also, compensation income tax payers, being the vast majority of individual income
tax payers also contribute immensely to society since they pay a lot in value-added taxes.

While indeed the reduction in the income tax burden of compensation income
earners would translate into foregone government revenue, albeit short term, it is
incumbent upon the government to recoup these reduction from more effective and efficient
exaction of the correct amount of income tax from professionals and self-employed persons,
including those operating single proprietorships.

More importantly, taxation is not a zero-sum game. Foregone revenue in terms of
reduced income taxes from employees and workers does not mean a definitive reduction in
government revenues. Additional take-home pay for individuals due to lower taxes would
mean improved capacity of workers to spend for goods and service and _ additional
employment for our people - thus translating into additional collection of VAT, personal
income taxes of employees and sole proprietorships and professionals, excise taxes,
corporate income taxes, etc.

It must also be mentioned that the government also foregoes revenue when it signs
free trade agreements and other economic partnership treaties at the mutilateral, regional,
and bilateral levels as these agreements invariably entail reduction or total elimination of
tariffs. Foregone revenues are also incurred when tax breaks and tax holidays are given in
order to attract foreign investors.

This bill proposes to remove the income tax on the first PHP350,000 taxable income
of all individuals and lower the over-all effective tax rates of individuals, even as it will


maintain permanent exemption of all minimum wage earners under the current law. This
was not arrived at arbitrarily; instead, it is an approximation of the PHP30,000 monthly
income that the new administration wishes to exempt.

It will also cushion the increase in income tax that will result from the initiative of the
administration to remove the PHP82,000 exemption on 13" month pay and any other bonus.

Under Section 35 (A) of the NIRC each individual is entitled to a basic personal
exemption of PHP50,000. Assuming that the person has a dependent, she or he will also be
entitled to PHP25,000 in additional exemption per dependent, capped at four (4)
dependents under Section 35 (8).

Assuming an individual has no dependent, her/his first PHP402,400 of taxable
income (350,000 + 50,000 + 2,400 in “Premium Payments on Health and/or Hospitalization
Insurance of an Individual Taxpayer” under Section 34 [M]). This amount divided by 12
months will amount to a monthly exemption of PHP33,533, on top of the exemption of the
13" month pay and bonus, the total of the last two capped at PHP82,000.

If the tax exemption for the 13" month pay is removed, the amount of PHP402,400,
when divided by 13 months would amount to almost PHP31,000 which is still higher than
the PHP30,000 amount of tax exemption proposed by the government.

More importantly, this bill provides for significantly lower marginal tax rates on
taxable income, except that those earning more than PHP1,000,000 in taxable income would
continue to have a marginal tax rate of 32%.

For these reasons, compensation income earners and honest self-employed and
professionals should benefit from a reduction of tax liabilities and tax rates under Sec. 24 of
the NIRC.

The immediate passage of this measure is earnestly sought.

(./

REP. BAG-AO
Loné-Bf6trict, Dinagat Islands


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

SEVENTEENTH CONGRESS
First Regular Session

4134

House Bill No.

Introduced by REP. KAKA BAG-AO

AN ACT
AMENDING SECTIONS 24, 34 AND 110 OF REPUBLIC ACT NO. 8424,
OTHERWISE KNOWN AS THE “NATIONAL INTERNAL REVENUE CODE OF
1997”, AS AMENDED, REDUCING THE INCOME TAX LIABILITIES OF
INDIVIDUALS AND FOR OTHER PURPOSES

Be it enacted by the Senate and the House of Representatives of the Philippines in Congress
assembled:

SECTION 1. Short Title. — This Act shall be known as “Individual Income Tax Reduction
Act of 2016.”

SEC. 2. Income Tax Rates. — Section 24 of Republic Act No. 8424, otherwise known as
the “National Internal Revenue Code of 1997”, is hereby amended to read as follows:

“SEC. 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within and
without the Philippines be every individual citizen of the Philippines
residing therein;

(0

On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines who is residing


outside of the Philippines including overseas contract workers referred
to in Subsection(C) of Section 23 hereof; and

(©) On the taxable income defined in Section 31 of this Code, other than
income subject to tax under Subsections (B), (C) and (D) of this
Section, derived for each taxable year from all sources within the
Philippines by an individual alien who is a resident of the Philippines.

(2) The tax shall be computed in accordance with and at the rates established
in the following schedule:

[Not over P10,000 5%

Over P10,000 but not P500+10% of the excess over P10,000
over P30,000

Over P30,000 but not P2,500+15% of the excess over P30,000
cover P70,000

Over P70,000 but not P8,500+20% of the excess over P70,000
‘over P140,000

(Over P140,000 but not P22,500425% of the excess over P140,000
‘over P250,000

‘Over P250,000 but not P50,000+30% of the excess over P250,000
‘over P500,000
‘Over P500,000 P125,000+34% of the excess over P500,000 in 1998.]

“NOT OVER P350,000 NONE

OVER P350,000 BUT 18% OF THE EXCESS OVER P350,000
NOT OVER P400,000

OVER P400,000 BUT —P9,000+20°% OF THE EXCESS OVER P400,000
NOT OVER P500,000

OVER P500,000 BUT —P29,000+22% OF THE EXCESS OVER P500,000
NOT OVER P600,000

OVER P600,000 BUT —P51,000+24% OF THE EXCESS OVER P600,000
NOT OVER P700,000

OVER P700,000 BUT —P75,000+26% OF THE EXCESS OVER P700,000
NOT OVER P800,000

OVER P800,000 BUT —P101,000+28% OF THE EXCESS OVER P800,000
NOT OVER P900,000

OVER P900,000 BUT —P129,000+30% OF THE EXCESS OVER P900,000
NOT OVER P1,000,000

OVER P1,000,000 P159,000+32% OF THE EXCESS OVER P1,000,000"

xx!


SEC. 3. Additional Deductions for Compensation Income Earners. - Section 34 of
Republic Act No. 8424 is hereby amended as follows:

“SEC 34. Deductions from Gross Income. —

xxx’
*(M) xxx"

“(N) DEDUCTION FOR EDUCATIONAL EXPENSES FOR COMPENSATION
INCOME EARNERS. — COMPENSATION INCOME EARNERS CAN DEDUCT
FROM THEIR GROSS INCOME AN AMOUNT OF NOT MORE THAN TWENTY
THOUSAND PESOS (PHP20,000) EACH PERSON FOR HERSELF OR HIMSELF
OR HER/HIS CHILDREN, PROVIDED THAT THE TAXPAYER CAN DEDUCT
FOR ONLY TWO (2) PERSONS, INCLUDING HIMSELF/HERSELF. THERE
SHALL BE NO AGE LIMIT OR CAP FOR THE TAXPAYER NOR FOR THE
CHILDREN.”

“(©) DEDUCTION FOR MEDICAL EXPENSES FOR COMPENSATION INCOME
EARNERS. — COMPENSATION INCOME EARNERS CAN DEDUCT FROM
THEIR GROSS INCOME AN AMOUNT OF NOT MORE THAN A TOTAL OF
TWENTY THOUSAND PESOS (PHP20,000) FOR HERSELF OR HIMSELF OR
HER/HIS DEPENDENTS.”

SEC. 4. Tax credit for women taxpayers with at least one child. — Section 110 of
Republic Act No. 8424 is hereby amended as follows:

“SEC. 110. Tax Credits. —

xXx’
“(Oxxx"

“(D) TAX CREDIT FOR WOMEN INCOME EARNERS WITH AT LEAST ONE
CHILD LESS THAN EIGHTEEN (18) YEARS OF AGE. — A TAX CREDIT OF
TWENTY THOUSAND PESOS (PHP 20,000) SHALL BE GIVEN TO WOMEN
INCOME EARNERS WITH AT LEAST ONE (1) CHILD LESS THAN 18 YEARS
OF AGE.”

SEC. 5. Implementing Rules and Regulations, - The Secretary of Finance, in
consultation with the Commissioner on Internal Revenue, shall promulgate rules and
regulations for the effective implementation of this Act

SEC. 6. Repealing Clause. — A\l laws, decrees, orders, issuances, rules and regulations
or parts thereof inconsistent with this Act are hereby repealed or modified accordingly.

SEC. 7. Separability Clause - If, for any reason, any section or provision of
this Act is be declared invalid or unconstitutional, other sections or provisions
not affected thereby shall remain in full force and effect.


SEC. 8. Effectivity. — This Act shall take effect fifteen (15) days after its publication in at
least two (2) newspapers of general circulation.

Approved,