THE Philippines is reputed to have the longest Christmas season in the world, an observation borne out by the onset of gift shopping as of this writing, just under 50 days from the actual holiday itself.
This is also around the time workers start thinking about what to do with their 13th month pay and other bonuses -- thoughts which become more elaborate if the bonuses come free of tax.
On Sept. 26, House Bill No. 4970 -- “An Act Increasing the Ceiling for the Total Exclusion from Gross Income of 13th Month Pay and Other Benefits to Seventy Thousand Pesos (P70,000), Amending for the Purpose Section (32)(7)(E) of the National Internal Revenue Code of 1997, as Amended” -- was unanimously approved by all 250 lawmakers present on third and final reading. This is a consolidation of twelve bills filed by various authors at the Congress.
If passed into law, all private and public employees will be receiving the full amount of their bonuses, if these total less than P70,000.
Section (32)(7)(E) of the National Internal Revenue Code of 1997, if amended, will then read as follows:
“(e) 13th Month Pay and Other Benefits-Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Seventy thousand pesos (P70,000) which shall cover:
• Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
• Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Seventy thousand pesos (P70,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.”
While the proposed bill is intended to bridge the gap between the cost of living and the current salary of employees in the public and private sectors, especially those whose salary is classified as grade 18, as well as to update the Tax Code which was passed 17 years ago, the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) have weighed in against the measure, claiming the potential loss of billions of pesos in foregone tax collections.
It is noteworthy that the increase in the tax exemption ceiling on bonuses like performance incentives, 13th month pay, Christmas bonuses and other benefits as stated in the Tax Code, will effectively increase the take-home pay of employees (both public and private) receiving such by P40,000 at the most which is the difference between P70,000 proposed ceiling compared to P30,000 current threshold for exemption on bonuses. Needless to say, the increase in the take-home pay of employees will effectively decrease the annual income tax due of an employee by P12,800 maximum (32% of P40,000). The tax savings of an employee will vary depending on which tax bracket he or she falls into. The income tax rate applicable to individual tax payers using the present graduated income tax table ranges from 5% to 32% annually.
The BIR argument of lost tax failed to convince the House of Representatives as it remained firm on its position that the increase in the take-home pay of employees will ultimately increase their purchasing power, pointing to the possibility that the lost taxes on income will be offset by taxes on spending.
This theory hinges on people being encouraged to spend more, thereby encountering the 12% Value-Added Tax on their purchases.
The move to initiate relevant and beneficial laws supporting the morale of employees is encouraging. After all, the inherent powers of the state do not only include taxation and eminent domain but also the power to protect its citizens and promote the welfare of the broader society. While the bill will have to wait final approval from the President after the Senate passes a similar bill, for now we can say, “Merry Christmas!” somehow.
Marvin L. Madrigalejo is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
marvin.l.madrigalejo@ph.pwc.com
source: Businessworld
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