{oust OF REPRESENTATIVES
Republic of the Philippines teen
HOUSE OF REPRESENTATIVES RECENVED

Quezon City

SEVENTEENTH CONGRESS,
First Regular Session

RECISTRATION UNIT

House Bill N&?_"_39 BILLS AND INDEX SERVICE

[_

Introduced by REPRESENTATIVE 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
government must create the necessary mechanisms to enable the vast majority
of Filipino 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.
It 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 earners, 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 P500+10% of the excess over
P30,000 P10,000

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

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

"Over P140,000 but not P22,500+25% of the excess,
ever P250,000 over P140,000

"Over P250,000 but not | P50,000+30% of the excess

over P500,000 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 ear
around P150,072, per annum (P48/ 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, ¢. g. P481 per
day, his annual gross income would increase to P150,384. However, his net
take home pay would be drastically reduced to P125,288 (P150,384 —
[P22,500 + 25% of 10,384)). By earning an additional P312 per year, his net
income or take home pay was reduced by P25,096

This absurdity negates any increase that would be granted to an
employee. It effectively discourages an employee to ask for a salary that is
only 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 amended by 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, The reform will also ensure that the government will be able to collect
a larger share of income from those who can afford to pay more. For both
objectives, no additional financial burden is needed to be imposed on
employers.


Effectively, the reform will create a more equitable and just tax system.
for a majority of Filipino taxpayers while ensuring that the government is still
able to raise revenues for its important programs.

For the foregoing reasons, the immediate consideration and approval of
the bill, which was filed as House Bill No. 4849 in the Sixteenth Congress by
the undersigned, is earnestly urged.

z—™

JR C. YAP
Representative


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City

SEVENTEENTH CONGRESS
First Regular Session

a
House Bill No. 39

Introduced by REPRESENTATIVE 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


6

without the Philippines by every individual citizen of

the Philippines residing therein;

(b) xxx

(0) xxx

The tax shall be computed in accordance with and the rates

established in the following schedule:

MINIMUM WAGE

EXEMPT

MINIMUM WAGE PLUS
P1 BUT NOT OVER
P100,000

2%

[Not- over P10,000] P100+5% OF THE EXCESS
MINIMUM WAGE PLUS | OVER MINIMUM WAGE
P100,000 BUT NOT PLUS P100,000

OVER P300,000

[Over P10,000-but not P500+10% of the excess over
over P30,000] MINIMUM | [240,000] MINIMUM.
WAGE PLUS P300,000 WAGE PLUS P300,000
BUT NOT OVER

P500,000

[Over P30,000-but- not P2,500+15% of the excess
ever P70,000] MINIMUM | over [30,000] MINIMUM
WAGE PLUS P500,000 WAGE PLUS PS500,000
BUT NOT OVER

P1,000,000

[Over-P70,000-but not
over P140,000]
MINIMUM WAGE PLUS
P1,000,000 BUT NOT

P8,500+20% of the excess
over [P76;000] MINIMUM.
WAGE PLUS P1,000,000

MINIMUM WAGE PLUS
PS,000,000 BUT NOT
OVER P10,000,000

OVER P5,000,000
| [Over-P140,000-but not P22,500+25% of the excess,
over P250;000] over [P440,000] MINIMUM

WAGE PLUS P5,000,000



[Over-P250,000-but not P50,000+30% of the excess
over P509,000] over [P250,000] MINIMUM.
MINIMUM WAGE PLUS | WAGE PLUS P10,000,000
P10,000,000 BUT NOT

OVER P50,000,000

[Over-P500,000] P125,000+32% of the excess

MINIMUM WAGE PLUS over [P500,000] MINIMUM

OVER P50,000,000 WAGE PLUS P50,000,000
XXX

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 (§) YEARS AFTER THE

EFFECTIVITY OF THIS AC

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 (CPT 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.