SENATE BILL

OCT
05
2015

SBN-2974: Instituting Income Tax Reform for Individual and Corporate Taxpayers

An Act Instituting Income Tax Reform for Individual And Corporate Taxpayers, Amending for This Purpose Sections 24(A)(2), 27(A) and 35(A) of the National Internal Revenue Code of 1997, As Amended, and for Other Purposes

Explanatory Note

One of the inherent powers of the State is the power of taxation. However, there are limitations on the exercise of such power. Section 28, Article VI of the 1987 Philippine Constitution provides that the rule of taxation shall be uniform and equitable and that Congress shall evolve a progressive system of taxation.

Jurisprudence is replete with cases explaining that uniformity of taxation and the equal protection clause require that all subjects or objects of taxation similarly situated are to be treated alike both in privileges and liabilities. A progressive system of taxation as well as the concept of equity in taxation suggest that the tax rates should be based on the taxpayer’s ability to pay. Therefore, a tax system is progressive when the tax rate increases as the tax base increases.

The steady increase in the prices of consumer goods and services in the country over the years hinders most Filipinos in meeting the demands of daily living. The rise in commodity prices has undoubtedly weakened the purchasing power of our people’s hard-earned money.

Individuals earning compensation income not only have to deal with the weakening effects of inflation but also with the huge deductions in their salaries, one of which is due to income tax.

This bill seeks to amend Section 24(A)(2) of the National Internal Revenue Code of 1997 (NIRC), as amended, by adjusting the levels of net taxable income and the nominal tax rates for purposes of computing the individual income tax. It also seeks to amend Section 35(A) of the NIRC, as amended, by adjusting the basic personal exemption for each individual taxpayers from P50,000 to P150,000 to counter the steady increase of prices of consumer goods and services and to help our hardworking middle class in meeting the demands of daily living.

Furthermore, in the case of married individuals, under the bill, the taxpayer spouse may claim an exemption for his or her spouse even though the latter did not earn any gross income for the taxable year and did not file a return for as long as the said spouse is living exclusively with the taxpayer spouse. This, however, does not categorize the said spouse as a dependent, but merely as a recognition of his or her efforts in the care and maintenance of the family and of the household which is akin to the recognition accorded by the Family Code in cases contemplated under Article 147 thereof. In short, all married individuals may claim a maximum amount of allowable personal exemption up to P300,000 whether the other spouse is employed or not.

The adjustments come almost two decades after the amendments were last introduced in 1997 and with the Consumer Price Index moving upward in steady fashion. Without a CPI-adjusted tax levels and rates, the increases in income enjoyed by salaried individuals to keep them in step with inflation every year push these taxpayers into higher tax brackets, leading them to pay more taxes. This “bracket creep” is a result of income taxes growing faster than income does despite the fact that Congress has not legislated laws increasing income taxes, and despite the fact that Congress has even enacted a law in favor of minimum wage earners.

With the passage of this bill, a government employee occupying a Salary Grade 11 position or its equivalent (Teacher 1, Police Officer III, etc.) earning a basic salary of P18,549.00 per month or an annual income of P222,588.00 will have to pay annual income tax of P7,258.80 only as compared to P30,647.00 under the existing income tax bracket as provided under the NIRC, as amended.

Also, this bill seeks to amend Section 27(A) of the NIRC, as amended, to replace the unitary or single income tax rate with a graduated income tax rates for corporate taxpayers similar to those provided for the individual taxpayers and exempt from income tax the taxable income not exceeding P150,000.00. The basis for adopting this tax system is to align income taxation for corporation with the constitutional mandate of a progressive system of taxation and the rule on uniform and equitable taxation.

Under the Corporation Code, a duly organized corporation is clothed with a personality separate and distinct from the persons composing it. Therefore, being a juridical person, a corporation is recognized by law as a person similar to a natural person. Thus, a corporation can sue and be sued in its corporate name, and it can also purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with real and personal property. Therefore, it is but proper that for purposes of taxation, a corporation should be treated like an individual. Like an individual taxpayer, a corporate taxpayer should be afforded a system of income taxation based on its ability to pay.

It is noteworthy that this proposed measure seeks to provide a uniform graduated income tax bracket for individual and corporate taxpayers. The intent is to simplify income taxation for all taxpayers and to make the same easier to comprehend. A tax is a burden on the taxpayer, it being an enforced proportional contribution to finance the operation of the government and other public needs. To ease the burden, a simplified system for the payment of taxes should be provided.

This bill also proposes to automatically index the taxable income levels and nominal tax rates to inflation every six years without need for legislative action. This would perpetuate equity in the tax system and help ensure that the tax system treats individual and corporate taxpayers the same way from year to year.

The purpose and intent of this bill is to make taxation more equitable and uniform, and to ease the burden of the taxpayers in complying with the requirements of the law for the payment of taxes. The objective is to broaden the tax base and this can be done by encouraging more businessmen, self-employed individuals, professionals, enterprises, corporations and other income earners to voluntarily file their income tax returns (ITRs) and pay the corresponding correct taxes thereon.

In view of the foregoing, immediate approval of this bill is earnestly sought.

RALPH G. RECTO

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