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Pros and cons of raising tax exemptions for bonuses

Posted at | Updated as of 01/29/14 9:20 AM

DOF: Potential revenue loss in the billions

MANILA - Congressmen on Tuesday urged the Department of Finance (DOF) and Bureau of Internal Revenue (BIR) to meet lawmakers halfway as proposals to increase the tax exemptions for the bonuses like the 13th month of salaried workers gained ground in the House of Representatives.

At the hearing of the House Committee on Ways and Means, the DOF and BIR opposed 9 bills seeking a higher ceiling for tax exemptions for bonuses.

The 8 bills are proposed by Congressmen Christopher Belmonte, Antonio Tinio, Abigail Binay, Bellaflor Angara Castillo, Anthony Bravo and Cresanto Paez, Neri Colmenares and Carlos Zarate, Raneo Abu and Jerry Treñas.

Binay, daughter of Vice-President Jejomar Binay, also has a bill making "overtime pay" tax exempt.

During the committee hearing, House and Ways committee chairman Miro Quimbo said Belmonte's bill wants to exempt from tax payments bonuses amounting to P50,000; Binay, bonuses amounting to P75,000; Bravo, bonuses amounting to P40,000; Colmenares and Zarate, bonuses amounting to P50,000; Abu and Trenas, bonuses amounting to P75,000.

Currently, only bonuses of up to P30,000 and below are tax exempt.

In his sponsorship statement, Tinio said the tax exemption ceiling has not been adjusted by the Secretary of Finance since the National Internal Revenue Code came into effect in 1997.

"It's now 2014. We're talking about a ceiling in 1994. That's 14 years ago. The benefits intended for workers in terms of exemptions for certain allowances and bonuses are no longer being felt by majority of the work force because of inflation. It has practically rendered this exemption of much less value now to the workers," he said.

The lawmaker said that in 1996, the entry level salary Grade 1 was set at P4,400 while the entry level for teacher 1, salary grade 10 was P8,605.

"Salary grade 10 covers the bulk of public sector employees, teachers, nurses which occupy this level. Salary grade 10, P8,605 per month. The P30,000 [tax-exemption] ceiling was set a year later," he said.

In comparison, the entry level of salary grade 1 as of 2014 is P9,000.

Salary grade 10 is P17,255 while salary grade 11 is at P18,549.

"Just from these figures, we already see how the nominal values of salaries have eaten significantly into the exemption level," he said.

In his example, Tinio said the average total for bonuses is P36,049.

"Because the ceiling hasn't been adjusted, portion of it is taxable. The average inflation rate for each year, except for years 2000, 2001 2002, given the inflation rate, the 30,000-peso ceiling in 1997 should now be at least 63,426 pesos. In that case, the package of benefits would fall below the exemption...," he said.

The lawmaker said Congress needs to address the situation and give additional relief to workers who have seen their bonuses affected by the low tax-exemption ceiling.

DOF sees loophole in higher tax ceilings

Speaking for the government, Finance Undersecretary Jeremias Paul Jr. opposed the measure and said the legislative branch needs to look at the bigger picture.

"While it is true there has been no recommendation from the BIR to adjust the ceiling, Congress has enacted laws which exempted minimum wage earners from income tax ,increased personal tax exemption status to P50,000, increased deduction per dependent from P8,000 to P25,000 under Republic Act 9504. The salary of public sector employees have been significantly increased," he said.

The official said that from a tax administration standpoint, "it can become a loophole by which you restructure salary as bonus so you won't be subjected to tax."

Paul said if the tax exemption ceiling is raised to P30,000-P40,000, the loss is P10.3 billion. If the ceiling is raised to P75,000, the potential revenue loss of government would be P43.6 billion.

BIR Assistant Commissioner Marissa Cabreros said the bureau will defer to the position of the DOF.

Meanwhile, National Tax Research Center Executive Director Trinidad Rodriguez cited the additional funding requirements for disaster rehabilitation as another reason against the exemptions.

"We cannot afford to have substantial revenue loss. I'd like to mention right now - the government is expected to have additional expenditures on repair and rehabilitation of Leyte and other provinces and cities damaged by [super typhoon] Yolanda not to mention Bohol which has been affected by the earthquake," the official said.

Speaking for workers, Jocelyn Martinez of the Alliance of Concerned Teachers said some teachers would "pawn " their ATM cards with loan sharks when they lack cash.

"Nakukuha sukli na lang. Bonus namin, may kaltas. P3,000 to P4,000 sa school ko pa. Nag-iiyakan ang mga teachers, kung kailan magpapasko, nun pa ginawa ng BIR na kinaltas napakalaking tax," she said.

Offsetting lost revenues

For his part, Quimbo said the revenue loss will be offset by tax collections from the purchasing power of workers.

"It has always been our position it's something you can recover with higher wages and increased purchasing power. We can generate more taxes from VAT. Direct taxes from deposits. There has been zero over the last 17 years. Tignan rin ano potential increase in revenue sa VAT if you increase the purchasing power. Tignan natin both sides of the coin na tingin naming di niyo nakikita," he said.

Paul also asked Congress for an alternative revenue stream to offset the losses.

"We would like to somehow appeal if you're bent on deciding on this. Grant us a new revenue measure to cover the possible loss. I'm just thinking aloud if we can get funding from the fiscal incentives that we're granting to the big corporations then whatever we can generate there would be channeled. We certainly would prefer, instead of reducing revenues why can't the assistance be through a direct targeted expenditure which would be more transparent," he said.

Colmenares said imposing a higher tax exemption ceiling is a social justice measure.

"You don't even have to create a new revenue source. You have to invent a new argument against the new workers who will suffer because of your opposition to the bills," he said.

The hearing concluded with the creation of a technical working group (TWG) to consolidate the measures into one bill. The TWG will also seek a compromise amount that will be covered by exemptions.