Proposed Senate Bill 2021-1 (Tax Reform Act for the Masses and the Middle Class/TRAMM)

Proposed Senate Bill 2021-1

TAX REFORM ACT FOR THE MASSES AND THE MIDDLE CLASS (TRAMM)

Explanatory note:

As poverty thresholds in the Philippines are notoriously low, the actual number of poor Filipinos is understated. Segments of those classified in government databases as low-income-but-not-poor or middle-income households are actually poor, especially if multidimensional perspectives on poverty will be used as metrics.

The establishment of a progressive tax system – a declared State policy in the Philippine Constitution – could help achieve the goals of redistributing wealth among broader segments of the population, by shifting the tax burden away from personal incomes/compensation & poor and middle-class consumption, and towards corporate income and wealthy people’s expenditures.

Unfortunately, past tax “reform” laws – namely, TRAIN and CREATE – offered little benefits to poor and middle-class families while giving away further bonanzas for the very wealthy few. As a result, the Philippines remains among the most unequal/inegalitarian societies in the world, with the income shares of the poorest and richest segments of the population almost stagnant for decades now.

This proposed “Tax Reform Act for the Masses and the Middle Class (TRAMM)” would help address such imbalance, in favor of poor and middle-class households in the country that bear most of the tax burden but are unable to reap benefits from the economic system, while the richest clans gobble up much of the wealth that the former have mostly created.

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

Section 1. Short Title. This Act shall be known as the “Tax Reform Act for the Masses and the Middle Class (TRAMM).”

Section 2. Declaration of Policy. The Philippine Constitution’s declared policy on progressive taxation (Article VI, Section 28) and the goals of the national economy towards a more equitable distribution of opportunities, income, and wealth (Article XII, Section 1) are hereby reiterated and implemented.

Section 3. Maximum Personal Income Tax Rate. The maximum personal income tax rate is hereby capped at 15% of the taxable income.

Section 4. Progressive Personal Income Tax Rate. The Bureau of Internal Revenue shall release an updated progressive personal income tax schedule with rates ranging from 1% to 15% of the taxable income.

Section 5. Personal Income Tax Exemption. The first 500,000 pesos of every citizen’s individual income is exempted from the personal income tax.

Section 6. Tax-Free Status of 13^th Month Pay. Every citizen’s 13^th month pay below the amount of 120,001 pesos is hereby exempted from any tax.

Section 7. Additional Exemption. Subject to the law’s implementing rules and regulations, the following citizens can apply for additional exemption at 25,000 pesos per instance: a) qualified dependent child and/or adoptee (capped at 5 children and/or adoptees); b) benefactor of a senior citizen – a parent or relative – with no pension or who is just receiving the basic social pension (capped at 2 per taxpayer).

Section 8. Value-Added Tax (VAT)-Exempt Transactions. On top of current exemptions, the following transactions shall be also exempt from VAT:

Purchase of all food items (except junk foods, soft drinks and other similar products to be listed in the implementing rules and regulations), medicines, and utilities for household use such as water, electricity, and internet;
All first home purchase – house and lot, residential condominium or any similar housing unit – of every citizen;
Lease of a residential unit with a monthly rental not exceeding 20,000 pesos;

Section 9. Regular Corporate Tax Rates. The regular corporate tax rate for large corporations is hereby restored to 30%, and retained at 20% for small businesses.

Section 10. Special Corporate Tax Rate Reduction for Profit-Sharing Firms. Large corporations and small businesses can apply for a special 5% reduction in the applicable regular corporate tax rate, provided that they establish and implement a functioning profit-sharing mechanism in favor of their workers/employees, subject to annual application and approval by BIR and DOLE.

Section 11. Minimum Corporate Income Tax Rate. The minimum corporate income tax rate is hereby restored to 2% for domestic and resident foreign corporations.

Section 12. Final Tax on Sweepstakes and Lottery Prizes. The final tax on sweepstakes and lottery prizes above 1,000,000 pesos is now pegged at 20%.

Section 13. Improperly Accumulated Earnings Tax (IAET) Rate. The IATET is hereby restored to 10% of net taxable income.

Section 14. Cash and Property Dividend Tax. The following rates are hereby implemented:

For an individual shareholder who is either a Filipino citizen or alien resident of the Philippines, cash and property dividends received are subject to a final withholding tax rate of 12%
Cash and property dividends received by another domestic corporation or by a resident foreign corporation shall be subject to a 20% tax.

Section 15. Tax on Stock Trade Transactions. The following rates are hereby implemented for transactions beyond 100,000 pesos:

2% sales tax on gross selling price
1% stock buyer’s tax on gross purchase price
Double the regular rates for transactions beyond 1,000,000 pesos
Triple the regular rates for transactions beyond 1,000,000,000 pesos

Section 16. Progressive Estate Tax Rate. The progressive estate tax rate ranging from 5% to 20% is hereby restored for every estate worth 3,000,001 pesos and above, while an estate worth below 3,000,001 pesos will be exempted from the estate tax.

Section 17. Withholding Tax on Interest Earned From Local and Foreign Currency Deposits. Tax on interest earned beyond 100,000 pesos (or its foreign currency equivalent) shall be pegged at 25%.

Section 18. Citizenship Milestone Cash Awards. On top of existing programs and grants, a special one-time cash payment will be given to every citizen who reaches the following milestones:

For every citizen who reaches 18 years of age: 500,000 pesos, provided that he/she has registered to vote, is enrolled in or was able to complete senior high school studies, to be retroactively implemented from 2014 onwards.
For a citizen seeking to buy his/her first home: 500,000 pesos or 20% of the total contract price (whichever is higher) upon signing of the contract to sell, to be retroactively implemented from 2000 onwards;
For an agrarian reform beneficiary: 500,000 pesos or 20% of the total assessed value of the land awarded (whichever is higher) upon receipt of CLOA or any similar document, to be retroactively implemented for all land reform beneficiaries and/or their direct heirs from 1988 onwards.
250,000 pesos for every citizen who reaches 60 years of age, provided that he/she has worked in the country for at least 15 years and is projected to receive only a pension equivalent to any amount below the maximum SSS monthly pension upon retirement, to be retroactively implemented from 2000 onwards (not for heirs).
250,000 pesos for every citizen who reaches the mandatory age of retirement, provided that he/she has worked in the country for at least 15 years and that he/she will be receiving only a pension equivalent to any amount below the maximum SSS monthly pension, to be retroactively implemented from 2000 onwards (not for heirs).
Subject to the consultation with concerned groups and individuals, those tasked with writing the implementing rules and regulations of this law will devise a cash award similar to 4 and 5 for those not employed in the formal sector.

Section 19. Implementing Rules and Regulations. The Bureau of Internal Revenue and the Department of Labor and Employment will lead the crafting of the IRR which will be finalized with the help of concerned groups such as consumer advocacy groups, labor unions/federations, NGOs, people’s organizations, civil society organizations and the like, within 100 days after the president has signed the law.

Section 20. Separability Clause. If any of the sections or provisions of this Act is held invalid, all the other provisions not affected thereby shall remain valid.

Section 21. Repealing Clause. All laws, decrees, orders, resolutions, instructions and rules and regulations or parts thereof which are inconsistent with this Act are hereby deemed repealed or modified accordingly.

Section 22. Effectivity. This Act shall take effect 15 days following its complete publication in the Official Gazette or in at least one (1) newspaper of general circulation.

Further readings:

This article features a short critique of official poverty statistics, and emphasizes that poor and middle-class households’ budgets are heavily taxed (e.g. VAT on their typical expenditures on food and utilities): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3571402

News on US Treasury Secretary’s call for a global minimum corporate tax: https://apnews.com/article/janet-yellen-minimum-global-corporate-income-tax-0a839a4705566a8b9f8bd5411bfe62d5

IBON Foundation’s critique of the corporate tax reduction in the Philippines: https://www.ibon.org/duterte-govt-giving-up-php667-b-in-potential-covid-response-funds-to-boost-corporate-profits/

On the necessity of higher corporate tax, tax on wealth, and cash grants to combat inequalities, Thomas Piketty’s books Capital in the Twenty-First Centuryand Capital and Ideology are instructive

A European study that proves “Reducing VAT rates drives down prices and boosts demand”: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/rates/study_reduced_vat.pdf

News article on IMF’s recent call for a tax on wealth: https://www.theguardian.com/business/2021/apr/07/imf-wealth-tax-cost-covid-pandemic-rich-poor

Sen. Sonny Angara’s article on the Philippine middle class’ over-taxed situation: https://opinion.inquirer.net/77762/overtaxing-working-middle-classes