Entry-level workers above the minimum wage would effectively enjoy significant increases in their take-home pay because they will only pay lower taxes under the proposed tax reform package that the Department of Finance (DOF) recently submitted to the Congress for its approval.

In the sample computations that the DOF made, Finance Undersecretary Karl Kendrick Chua said “entry-level employees, such as office clerks who are most probably in their early 20’s and single with no dependents, earning a monthly salary of P13,378 would see an increase in their take-home pay by around P12,673 per year.”

This is because their personal income tax (PIT would be reduced to zero under the DOF-proposed tax plan.

On the other hand, a call center agent in his or her mid-30’s earning P21,000 a month with four dependents, who may be currently paying P9,209 in income tax will only have to pay around P1,567 per annum because of the proposed restructuring of the tax brackets.

“This represents an 83 percent decrease in their tax due, which translates into annual savings of P7,642,” said Chua, who is the DOF’s chief economist.

“The proposed income tax reform would also give an incentive to minimum wage earners, who are currently exempt from income tax, to aspire for a higher pay and improved work status without losing their tax privilege. Right now, some MWEs admit not wanting to move beyond the minimum wage for fear of losing their income tax exemption so they would rather remain in the low income bracket and enjoy the exemption. But as you can see, even non-MWEs in our proposal may become tax exempt,” said Chua at last week’s Tax Reform Forum of the Financial Executives Institute of the Philippines (FINEX) at the Marriot Hotel in Pasay City.

Breaking down the figures, Chua explained that entry-level workers such as government clerks under Salary Grade 6 with a monthly income of P13,378 get an additional P36,756 a year in the form of non-taxable 13th month pay and other benefits, along with de minimis benefits such as the Personnel Economic Relief Allowance (PERA) and other non-taxable income totaling P34,000.

This brings their annual gross income to P231,292. If they deduct their non-taxable benefits, mandatory contributions of P19,669 and personal exemption of P50,000, their NTI is only P90,867 under the current system.

However, they still have to pay P12,673 in taxes.

But under a simplified gross income tax table proposed by the DOF, their NTI would be P177,623, but the tax due is zero, Chua said.

Chua also said that 4.7 million Filipinos earning P250,000 or less per year, which represent 83 percent of the current tax base for individual taxpayers, would be exempted from paying income taxes under the DOF tax reform plan.

In the government, this would include utility workers, messengers, clerks, drivers, carpenters, electricians, teachers, among others.

This figure already includes some 1.7 million minimum wage earners who are currently exempted from paying taxes, which means the remaining 3 million taxpayers earning above the minimum wage but not over P250,000 per year would automatically increase their take home pay by paying less taxes.

Another half-million plus taxpayers earning between P250,000 and P400,000 will pay taxes equivalent to only 20 percent of their incomes in excess of P250,000, under the same DOF-proposed tax plan.

Some public school teachers, cashiers, geologists and public attorneys will enjoy this lower rate.

The tax plan’s Package One covers cuts in PIT payments under a simplified, modified gross income system, plus revenue measures to offset losses from such income tax reductions.

The DOF submitted to the Congress its proposed Tax Reform for Acceleration and Inclusion Act last month in keeping with the Duterte administration’s 10-point socioeconomic agenda.

Finance Secretary Carlos Dominguez III said the DOF tax bill was completed after the Department consulted with members of the Cabinet, legislators, former Secretaries of Finance, prominent economists, stakeholder and business groups, and with various foreign embassies, global financial institutions and joint foreign chambers signifying their support for the tax reform proposal.

“Without reforming our tax system so that it becomes fairer, simpler and more efficient, government cannot undertake the volume of spending required in achieving our goals” of reducing poverty from 26 percent to 17 percent in six years and elevating the Philippines to the status of a high-income country in one generation,” Dominguez said.

Reducing the personal income tax rate from 32 percent to 25 percent would be done over a two-year period benefiting most taxpayers except the “ultra-rich,” who are defined as individuals earning P10 million or more annually, Dominguez said.

Dominguez said the general rule behind the Duterte administration’s income tax reform plan is that the rich will have to pay more while poor and low-income Filipinos will pay less or none at all.

The reformed personal income tax system of the DOF proposes six brackets in which those earning zero to P250,000 would pay zero tax beginning 2018, the planned first year of its implementation.

Of the total tax base for individuals numbering 5,612,777 taxpayers, 1,752,009 or 31.2 percent of them are minimum wage earners, 2013 data from the Bureau of Internal Revenue (BIR) show.

In the second bracket of the DOF-proposed income tax system are another half-million taxpayers earning P250,000 to P400,000 per year, who will pay only 20 percent of their annual gross income in excess of P250,000.

They comprise 10 percent of the total tax base for individual taxpayers.

From 2019 and onwards, those in the second bracket would have to pay a personal income tax of only 15 percent.

A total of 539,465 individual taxpayers would benefit from this lower tax rate under the second bracket.

The third bracket covers those earning P400,000 to 800,000 who will pay P30,000 in tax plus 25 percent of their annual gross income in excess of P400,000. This bracket consists of 232,232 taxpayers representing 4 percent of the total tax base for individuals.

Government positions with salary grades between 18 and 25 which include senior economist, IT officer, Assistant Division Chief and Division Chief, among others, are within this bracket.

The tax would be adjusted in 2019 and onwards so that those belonging to this bracket would pay a lower rate of P22,500 plus 20 percent in excess of P400,000.

Those earning P800,000 to P2 million per year would pay a tax of P130,000 plus 30 percent in excess of P800,000. These taxpayers belong to the fourth bracket comprising 148,215 individuals or 3 percent of the tax base.

In 2019 and onwards, the rate would be reduced to P102,500 plus 25 percent in excess of P800,000.

Some 28,000 individuals earning P2 million to P5 million or 1 percent of the tax base would be taxed P490,000 plus 32 percent of their annual gross income in excess of P2 million.

They would benefit from a lower tax rate of P402,500 plus 30 percent in excess of P2 million from 2019 and onwards.

The last bracket of ultra-rich taxpayers comprising less than 6,000 individuals earning over P5 million would have to pay a tax of P1.45 million plus 35 percent in excess of P5 million.

From 2019 and onwards, the tax rate would be dropped to P1,302,500 plus 35 percent in excess of P5 million.

After 2019, the taxable income levels shall be adjusted every five years through rules and regulations issued by the Secretary of Finance upon the recommendation of the BIR commissioner, taking into account among other factors, the effect of the five-year cumulative inflation rate.

Dominguez said the DOF envisions its comprehensive tax reform plan to be the catalyst of an ambitious government program to raise an extra P1 trillion yearly for unparalleled public investments meant to free some 10 million Filipinos from poverty in six years’ time and eventually transform the Philippines into a high-income state by 2040.