Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

SIXTEENTH CONGRESS
Second Regular Session

4849

House Bill No.

Introduced byREPRESENTATIVE ARTHUR C. YAP

EXPLANATORY NOTE

The government generates revenue mainly through personal and
income tax collections. Income tax is a tax on a person’s income, wages,
profits arising from property, practice of profession, conduct of trade or
business, less any deductions granted.

Article VI, Section 28 of the 1987 Constitution provides that the rule
of taxation shall be uniform and equitable, and that Congress shall evolve a
progressive system of taxation. Income taxation is progressive if people with
higher incomes pay more than people with lower incomes. Personal income
tax rates vary as such.

Today, the Philippines has the status of an emerging economy. In
recent years, the country has been steadily growing with the government
expecting a full-year GDP (Gross Domestic Product) growth of 6.5 to 7.5
percent in 2014. As the national economy moves towards inclusive growth,
the governm must create the necessary mechanisms to enable the vast
ino wage-earners to share and enjoy the fruits of economic
growth. However, ordinary Filipinos are still reeling from the pinches of
rising prices of commodities and high income taxes.

In December 2013, inflation rate in the Philippines accelerated to
4.1%, the highest rate since 2011, as all commodity prices recorded higher
annual increases. The Consumer Price Index (CPI) indicates that a basket of
goods worth P 100.00 in 1998 is now worth P 200.00 by the end of 2013,
almost doubling in a span of 15 years.

On the other hand, wages have always lagged behind. Recently, the
minimum wage rate in Metro Manila has been increased to P466.00 a day.
Still, a far cry from the minimum daily cost of living of P 1,200 a day for a
family of 6 members.It should be noted that in other regions, although the
cost of living does not really vary as compared to Metro Manila, the
minimum wages are even much, much lower.


On the other hand, while private enterprises have a social
responsibility to ensure that their workers are properly compensated, they
also have to struggle with the financial requirements of their undertakings to
remain afloat.lt is very difficult to burden employers with higher State
mandated floor wages.

Thus, the government is always faced with the dilemma of satisfying
the growing demands of the labor sector while at the same time not pushing
businesses, particularly the small and medium enterprises which comprise a
larger portion of the economy, into bankruptcy.

So as not to place the burden of increasing the net salary or “take
home pay” of workers in the hands of the struggling businesses, Republic
Act No, 9504 was passed. Under the said Act, minimum wage earers, or
those with ‘statutory minimum wage’ as fixed by the Regional Tripartite
Wage and Productivity Board in their respective jurisdictions, are exempt
from paying income tax. The exemption covers not only the basic pay but
also overtime pay, holiday pay, night shift differential and hazard pay.

Under the said law, while the State suffered a temporary setback, in
terms of decrease in collection, such can be offset by an increase in the
purchasing power of these workers. As the economy is stimulated, additional
tax revenues are generated.

One big issue, however, against Republic Act No. 9504, is that it was
not able to review and update the decades old income tax rates under Section
24 (A) (1) of the National Internal Revenue Code. This created a very absurd
scenario wherein an employee, who graduates from earning minimum wage,
or earns only a little over said floor wage, jumps to paying a very high rate
of tax payable,

To appreciate this issue, below is the table of income tax rates under

said provision:

"Not over P10,000

5%

"Over P10,000 but not over
P30,000

P500+10% of the excess over
P10,000

"Over P30,000 but not over
P70,000

P2,500+15% of the excess
over P30,000

"Over P70,000 but not over
P140,000

P8,500+20% of the excess
over P70,000

[

"Over P140,000 but not
over P250,000

P22,500+25% of the excess.
over P140,000

"Over P250,000 but not
over P500,000

P50,000+30% of the excess
over P250,000



"Over P500,000 P125,000+32% of the excess
over P500,000

To illustrate, a minimum wage earner in Metro Manila would earn
around P145,392 per annum (P466 x 26 working days x 12 months). Under
the old tax rates, said person is liable to pay taxes at the rate of P22,500 +
25% of the excess over P140,000. Now, under R. A. 9504, he is exempt
from paying taxes.

If said person earns just a peso higher than the minimum, e. g. P467
per day, his annual gross income would increase to P145,704. However, his
net take home pay would be drastically reduced to P121,778(P/45, 704 —
[P22,500 + 25% of 5,704]). By earning an additional P312 per year, his net
income or take home pay was reduced by P23,926.

This absurdity negates any increase that would be granted to an
employee. It effectively discourages an employee to ask for a salary that
isonly a little higher than the minimum.

If there really is a need for an incremental increase in the wages, it
may even make the employee and the employer prone to tax evasion. The
increase in wages may just be hidden so that taxation can be evaded.

More important, this scenario creates an unprogressive rate of taxation
among income earning Filipinos. There becomes an inequitable distribution
of wealth among the citizens that is not in accord with the above-cited
Constitutional mandate. This is because the highest rate for taxable income
remained pegged at a very low amount of P500,000.

Again to illustrate, a person, who may be a senior rank and file
employee, a supervisor, low level manager, or even a micro entrepreneur,
who merely earns P41,670 per month (over P500,000 per annum) will suffer
the same taxation as the executive, senior manager, or the professional, or
businessman who earns hundreds of thousands or even millions of pesos per
month.

There is thus an urgent need for the government to reform the current
personal income tax system.

This bill seeks to amend Section 24 of Republic Act No. 8424, also
known as the National Internal Revenue Code of 1997, as amendedby R. A.
9504. This is by adjusting the levels of net taxable income and reducing the
nominal tax rates in the computation of individual income tax.

The amendment will effectively lower the taxes on the low-income
earners and allow them a higher net income, thus increasing their purchasing
power.

Effectively, the reform will create a more equitable and just tax
system for the Filipino taxpayers.


For the foregoing reasons, the immediate consideration and approval
of the bill is earnestly urged.

ARTHUR C. YAP
Representative


Republic of the Philippin
HOUSE OF REPRESENTATIVES
Quezon City

SIXTEENTH CONGRESS
Second Regular Session

4849
House Bill No,_4°4

Introduced byREPRESENTATIVE ARTHUR C. YAP

AN ACT

CREATING A MORE EQUITABLE, PROGRESSIVE
AND JUST TAX SYSTEM, BY ADJUSTING THE LEVEL
OF NET TAXABLE INCOME AND NOMINAL TAX
RATES OF THE INDIVIDUAL INCOME TAX,
AMENDING FOR THE PURPOSE SECTION 24 (A) (1)
OF REPUBLIC ACT NO. 8424, OTHERWISE KNOWN
AS THE NATIONAL INTERNAL REVENUE CODE OF
1997, AS AMENDED BY REPUBLIC ACT NO. 9504, AND
FOR OTHER PURPOSES

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


SECTION 1. Section 24 (A) (1) of the National Internal Revenue
Code of 1997, as amended, is hereby further amended to read as follows:
Section 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 by every individual citizen of
the Philippines residing therein;

(b) xXxxx

(€) XXxXx

The tax shall be computed in accordance with and the

rates established in the following schedule:

i
MINIMUM WAGE EXEMPT

MINIMUM WAGE PLUS 2%
P1 BUT NOT OVER

P100,000 BUT NOT
OVER P300,000

P100,000
[Net-over-P10,000] P100+5% OF THE EXCESS
MINIMUM WAGE PLUS OVER MINIMUM WAGE

PLUS P 100,000

BUT NOT OVER

[Over P10,000-but-not P500+10% of the excess over
ever P30,000] MINIMUM |  [P40,000] MINIMUM
WAGE PLUS P300,000 WAGE PLUS P300,000
BUT NOT OVER

500,000

[Over P30,000-but not P2,500+15% of the excess
ever P70,000] MINIMUM | over [230,000] MINIMUM.
WAGE PLUS P500,000 WAGE PLUS P500,000



v

XXX

P1,000,000 ]
[Over P70,000-but-not P8,500+20% of the excess
over P140,000] over [P70,000] MINIMUM

| MINIMUM WAGE PLUS | WAGE PLUS P1,000,000
P1,000,000 BUT NOT
OVER P5,000,000 |
[Over P140,000-but-not P22,500+25% of the excess |
over P250,000] over [P140,000] MINIMUM
MINIMUM WAGE PLUS | WAGE PLUS P5,000,000
P5,000,000 BUT NOT
OVER P10,000,000
[Over P250,000-but-not P50,0004+30% of the excess
over P500,000] over [P250,000] MINIMUM
MINIMUM WAGE PLUS | WAGE PLUS P10,000,000
OVER P10,000,000

Provided, That minimum wage earners as defined
in Section 22 (HH) of this Code shall be exempt from the
payment of income tax on their taxable income:
Provided, further, That the 13" MONTH PAY,
EARNED SICK, VACATION AND OTHER LEAVE
CREDITS CONVERTIBLE TO CASH, holiday pay,
overtime pay, night shift differential _ pay,
SEPARATION PAY, RETIREMENT PAY and hazard
pay received by such minimum wage earners shall
likewise be exempt from income tax.

PROVIDED, FINALLY, THAT NOT LATER
THAN FIVE (5) YEARS AFTER THE
EFFECTIVITY OF THIS ACT AND EVERY FIVE
(5) YEARS THEREAFTER, THE NET TAXABLE
INCOME LEVELS AND NOMINAL TAX RATES
HEREIN STATED SHALL BE ADJUSTED TO ITS

PRESENT VALUE USING THE CONSUMER


PRICE INDEX (CPI) AS PUBLISHED BY THE
NATIONAL STATISTICS OFFICE (NSO).
XXX

SECTION 2. Implementing Rules and Regulations - The
Department of Labor and Employment, Department of Budget and
Management (DBM) and the Bureau of Internal Revenue (BIR) shall
promulgate the rules and regulations necessary for the effective
implementation of this Act not later than thirty (30) days from the effectivity
of this Act.

SECTION 3. Separability Clause - If any of the provisions of this
Act is declared invalid or unconstitutional, the remaining parts or provisions
hereof not affected thereby shall remain in full force and effect.

SECTION 4. Repealing Clause. - All laws, decrees, executive
orders, proclamations, rules and regulations, and issuances, or parts thereof,
inconsistent with the provisions of this Act are hereby repealed or modified
accordingly

SECTION 5. Effectivity Clause. - This Act shall take effect fifteen
(15) days after its publication in at least two (2) national newspapers of
general circulation.

Approved.