Saturday, 6 December 2014

Who Benefits from the Increased Tax Exemption Cap (Senate Bill No. 2437)?

Amended Tax Code Section
Tax Code Section to be Amended by the Ratified Senate Bill No.2437

The Senate Bill No. 2437 seeking to increase the Exclusions from Gross Income cap, amending Section 32(B)(7)(E) of the National Internal Revenue Code of 1997 has been ratified on 1 December 2014 and is currently awaiting the President's approval. If signed, the cap on tax exemptions for 13th month pay and other benefits will increase from PhP 30,000.00 to PhP 82,000.00 At first glance, this looks like great news, but are you really going to benefit from this bill?


Let's Break it Down


The computation for the mandatory 13th month pay is the total of all income for a 12 month period from January to December of any given year divided by 12. If this is the only bonus you receive that year, you will have to be earning over PhP 360,000.00 for that given year to realize any benefit from this exemption cap increase.

As illustrated in the table below, if you are earning PhP 360,000.00 or under for the given year, there will be no change to your take home pay. Why? Because you are already enjoying the full exemption under the current tax code. If you earn PhP 360,000.00 for the year then your 13th month pay will be PhP 30,000.00 and that is already exempted under the existing law. That holds true for annual pay below PhP 360,000.00 as well.

Table 1-Who Benefit from the Increased Tax Exemptions
This table shows the income levels that would benefit from the new exemption caps, shown in red letters.
Table 1-Who Benefit from the Increased Tax Exemptions

There is a caveat to this, though. If you are earning PhP 360,000.00 or under, and you get additional bonuses and/ or incentives throughout the year, on top of your 13th month pay, you may see an increase in your take home pay, if the additional benefits (bonuses, incentives and other exempted benefits.) that you normally receive exceed PhP 30,000.00. If these benefits are expected to be PhP 30,000.00 or less, there will be no effect to your take home pay, for the same reason. You are already enjoying the full exemption under the current law.

In short, if your total expected bonuses for the year are already currently above PhP 30,000.00 then you will feel the effects of this bill. The amount of extra cash you can expect is the amount of bonuses you receive in excess of PhP 30,000,00 up to a maximum of PhP 52,000.00. If you are already currently receiving PhP 82,000.00 or higher in bonuses annually you will enjoy an additional PhP 52,000.00 in extra cash.  Referring to Table 1, cases shown in red, the amount in the 'additional taxable income' column becomes covered under the new law and this will be the additional amount in take home pay you can expect receive. If your bonuses for the year total PhP30,000.00 or lower, there will be no extra money for you.

Are you still jumping for joy, or did I burst your bubble? If you are among the lucky few (1.5 million out of the 26 million or 5.8% of the total wage earners) who will benefit from this bill, pray really hard that the President will sign it into law, because you will share in what Kim Henares (Head of the Bureau of Internal Revenue) estimates to be PhP 30 Billion in added employee benefits. Everybody else should just carry on with their lives as usual because nothing will change for them.


How to Make this Bill Work for You


If you are among the 24.5 Million workers who will not get any extra cash, there might still be a way you can take advantage of this bill, that is if the President decides to sign it. Negotiate with your employers to restructure your salary package so that a portion of your pay is given as a guaranteed bonus or incentive, instead of basic salary. That way your bonuses, up to a maximum of a maximum of PhP 82,000.00 can enjoy a tax free status. This will translate into added benefits for you, the employee, without any additional cost your employer.

Some employers might be reluctant to implement this with your current pay structure. They might be red flagged because of the company's decreased withholding tax remittance for the same employees. Labor laws prohibit a diminution of benefits. Technically however, it can be argued that benefits have not been reduced, simply reclassified. It has in fact increased. And it cannot be considered a violation of the labor code unless an employee files a complaint. But again, why would an employee complain if it translates to added benefits for him. It will make Kim Henares very unhappy because this will result in even less taxes. My advise to her, is to reduce the tax money lost to corruption and bad practices (massive by their own reports) and the government should do fine.

Still, if for any reason your employer refuses to implement this with your current pay structure, you can still ask them to apply this to all succeeding pay increases. Instead of adding the pay increase to your basic salary, propose that the increase be classified as a guaranteed bonus instead. That way you can maintain your current tax bracket, and the entire pay increase you receive will enjoy a tax-free status as long as the annual total is within the PhP 82,000.00 exemption (including your 13th month pay). 

If you manage to convince your employer to do this though, you should know that the increase in salary will not be included in the computation of your 13th month pay. But this should be fine because if your pay increase is added to your basic pay, it becomes part of your taxable income and part of that increase will go to taxes, more so if your pay increase bumps you up to a higher tax bracket. This could offset the increase you get in your 13th month pay. It may not work in all cases, so to be sure it works for you, do a mockup for your own case before you propose it. 


Tax Trivia


Trivia # 1: Because of the skewed taxation system, some pay increases will actually take money out of your pocket.


You may already know that minimum wage earners are exempt from personal income tax. A minimum wage earner in the NCR without any dependents woking 6 day a week will automatically get a PhP 143,324.00 exemption or possibly higher annually (because his overtime, night differential, holiday premium pay and hazard pay are all equally exempted). This is roughly equal to the exemption for any wage earner with 4 dependent children. (PhP 150,000.00). 

But what you probably didn't realize is, if you were to add even PhP 1 to his daily wage, or a total of PhP 314.00 to his annual wage, his taxable income would jump 4 brackets up to the 20% tax bracket. A pay higher than the minimum wage, does not enjoy tax exemption. He would be taxed PhP 12,181.20 and his actual take home pay will decrease by PhP 11,867.20 for that year. (See Table 1 below, Summary of Tax Scenarios). In fact, it is only when he is given an annual pay increase of PhP 14,984.08 will his take home pay will increase by PhP 29.66. Almost the entire amount of his increase will go to taxes. So if you are a minimum wage earner, with a Single or ME (married with no children) status, do not accept any pay increase under PhP 15,000.00 for the year, unless you can receive it as a tax free benefit, otherwise you might actually end up making less money after taxes.

This is the result of haphazard patch work on the tax code. When they introduced the minimum wage exemption, they did not adjust the bottom brackets to reflect the change. This left that wide gap in taxes between the minimum wage earners and the non-minimum wage earners. The minimum wage rates has since been increased several times but the brackets remained the same creating an ever increasing skew in income taxes.

Table 2-Summary of Tax Scenarios
This table shows your tax profile at different levels of pay (coded by color) for all tax status
Table 1-Who Benefit from the Increased Tax Exemptions

*Qualified for Minimum Wage Exemption

**Gross annual increase from the minimum wage, currently set at PhP 466.00 in the NCR region (Shows how much was added on top of the current minimum wage for 1 year.)

***Net increase from the minimum wage (Shows how much actual additional take home pay is received annually from the gross annual increase on top of the current minimum wage. Negative figures show a decrease in take home pay.)

Trivia # 2: Did you know that the top tax bracket for taxable income of PhP500,0000.00 and over used to be 34% in 1998? It was reduced twice, first to 33% in January 1, 1999 then to 32% in January 1, 2000.


My guess is most people didn't know that, because it didn't really affect most people. Unless you were already earning more than PhP 500,000.00 annually in 1999 or in 2000, these changes didn't affect you one bit. Before you go ballistic about the inequity of this reduction, these reductions in taxes result in very minute benefits, For an annual income of PhP 1M, even with the maximum exemptions, the benefit would be something like PhP 3,000.00 plus. Not a lot for someone already earning PhP 1M. Besides, trust that people in the upper income brackets have the resources to masterfully 'manage' their taxes. 

It is only people in the middle bracket incomes that are at the mercy of the tax system. The government has made sure that your taxes are safely sequestered and that you will never ever get a chance to touch that money.


Trivia # 3: Did you know that you may have to pay up to nearly 3 months of your salary in taxes, depending on your tax bracket?


Especially, in the brackets with no exemptions for dependents, you could be working up to nearly 3 months in a year just to pay your taxes (See Table 3). In progressive countries, they pay even higher, but these people don't mind too much, because the government provides in return very relevant services like education, healthcare and reliable public transport. In the Philippines however, that is not the case. After paying your taxes you still have to struggle with the cost of education and, God forbid, healthcare which are both extremely expensive in this county compared to other countries. And using the public transport can literally be a daily life threatening pursuit.



Table 3-How Many Months Salary You Pay in Taxes 
The last row shows how many month in salary you pay per income bracket
Table 3-How Many Months Salary You Pay in Taxes



You are funding the government through the taxes you pay with your own blood, sweat and tears.


Trust me when I say, it is in your best interest to take an active involvement in the government's policies and activities. You are funding it with months of your pay, so you have every right to dictate how it is runned. You need to know what's going on and understand how all of that is affecting you. If you were to keep the money you pay in taxes and spend it yourself, how would you use it to improve your life? 1, 2 or 3 months of your salary, could buy you decent health care for your family or pay for your kids schooling. It could also go to a fund invested to purchase a house or make your life comfortable upon retirement.

The SSS, Philhealth and PAGIBIG Funds


You should also remember that on top of the taxes you pay, you are also paying mandatory contributions for retirement (SSS), healthcare (PhilHealth) and housing (PAGIBIG/ HDMF Fund) If you refer to Table 2 above, the 'Deductions' column shows the aggregate annual amount paid for those income levels. It does not reflect your employer's contribution which is roughly the same amount (slightly higher for SSS) and is essentially part of your compensation package. It is considered tax-free income, but really if you factor in the loss in yield due to poor fund management and corruption, you actually pay a huge tax. That money is taken, and spent without your say in it. You just have to make do with whatever they dish out when your benefits become due.

Many funds offered on the market are performing far better than the SSS, PhilHealth and PAGIBIG funds have achieved with our money. Earlier this year, there was news that the SSS gave out bonuses to their executives and employees, amounting to PhP 276 million. This they claim, was for good performance. How they define good performance is a mystery to us all. They also said it was necessary to make their compensation package more competitive, so they can attract fund managers in the private sector to work at the agency. But if their pay is at par with the market, shouldn't the funds' performance be at par with the market as well?

All contributors to these government-managed funds should, demand full transparency for its spending and activities. Aside from the contribution they collect, they also receive additional funding from the national budget. The only information we are given right now is a statement of how much we contributed, but no account on how it was invested, what the yield is, how much is spent on overhead, how much is the current fund value relative to our contribution, much like any fund is required to do, if investments are solicited from the public.

Better still, we should push for the implementation of the PERA Act at the soonest possible time. The Personal Equity and Retirement Account (PERA) Act is a retirement plan somewhat similar to the 401 (k) plans in the US but not quite, It was passed in 2008 and is still on hold pending implementation structures and guidelines. Many people have forgotten that it exists. More on PERA later.

Assumptions for the tax scenarios presented above:

  • In all cases the person has worked all 12 months of that year.
  • The person does not receive any non-taxable benefit other than the mandatory 13th month pay. If he did this would be added to his exemption up to the maximum allowed limit.
  • The person works six days a week.
  • There is no over time, no undertime, no night differential pay, no  holiday pay, and no absences. All these would affect the computations slightly.
  • It uses NCR minimum wage rate set a PhP 466.00 per day.
  • 13th month pay is not included in the annual income shown, but the taxable portion of the 13th month pay, when applicable was added back to the taxable income. It uses the current cap of PhP 30,000.00. If the new cap is used the 13th month pay in all scenarios will be completely tax-free except for the last ME4 case and the taxable income in affected scenarios will be slightly lower.

Disclaimer:

The tax scenarios presented here have been simplified to make the cases easier to compare and understand. Actual tax computations will differ from case to case, depending on such factors as overtime, undertime, absences, holiday premium pay and night differential pay. It will also differ based on the actual compensation package and applicable policies and processes specific to each company. To get a more accurate computation for your own particular case, you will need to input the data provided in your payslips. The HR in your company should be able to clarify any questions you may have regarding your pay and tax deductions.


Info Sources:
  • http://www.gmanetwork.com/news/story/390755/economy/finance/henares-
  • only-1-5m-workers-to-gain-govt-to-lose-p30b-from-tax-exemption-bill
  • http://www.bir.gov.ph/index.php/tax-code.html#tIIcXIII

Sunday, 23 November 2014

The Battling the Government for Better Commute



If you are a commuter in Metro Manila, you know all too well the hassles of getting around by public transport especially during rush hour. There are the long treks to the bus stops  that are constantly being relocated, the endless queues of commuters waiting for a ride along heavily polluted thoroughfares, the crushing crowds in buses or train cars, the pickpockets and the molesters all add up to make your daily commute a living hell.

The Case of the Shuttle Service

Shuttle Terminal at Park Square Makati
Shuttle Terminal at Park Square Makati
Like a Godsend, something comes along to make things considerably better. Years ago some people had the brilliant idea of offering a shuttle service. Seeing the opportunity to provide a better commute, a group of van owners got together with commuters to organize the service. They asked commuters where they usually needed to go, how much they would usually pay and what time they needed to get there. And the shuttle service was born.

Basically they offered a comfortable ride when you needed it most at a very reasonable price. So naturally these shuttles thrived. This service was precious. The drivers were polite and very responsive to the commuters' needs. When more people needed a ride at a certain time, they would find new van owners to fill in the schedules. Many of the drivers were office employees themselves, who were also on their way to work and they would take along a van-load of commuters with them for a single trip. There was a dispatcher to coordinate with drivers and commuters to make sure, drivers would be available or if not to inform the commuters that there are no more vans available. It was community spirit at it's finest. Commuters did not really fear for their safety because they mostly knew all drivers and the dispatcher by name. The drivers even gave out their cell numbers so it was easy to coordinate schedules with them, if needed.

Then after a few months of this relatively blissful commute, government comes in and starts swooping down on these vans because they were 'colorum'. It might be reasonable to presume that this is a government code name for milking cow, because from that time on, all the driver would talk about is the 'lagay' or bribes they constantly had to pay the MMDA or LTFRB officers when they were flagged down. So naturally they had to increase their rates to cover for this added expense. On a bad day, you would be riding in one of these vans when it happens, and you would have to suffer a considerable delay, because of the haggling process. On a really bad day, you would have to get off and find a different ride because the officer would impound the vehicle, forcing you to pay additional fare. And your commute hell begins all over again.

You would think that from all the money the government earns from these fees and fines they collect, that they would improve the traffic and public transport system, but really it has only gotten worse over time. And you would think that because there is such a dire need for more and better transport, that they would find a way to expedite the processing of the permits of these vehicles, which these van drivers desperately sought to avoid being bled by unscrupulous officers, but it took months and months before they were finally granted permits. In the meantime, the drivers and the commuting public suffered. The Shuttle service drama did end at some point when all the vans where issued permits, however talk persisted about how some people made money because only a few people were granted franchises and everyone else had to go through these few 'lucky franchise owners'. If you do a web search you will find vehicles with such a franchise being sold openly on the internet. It makes you wonder what exactly is being regulated here.

The Case of Uber

Uber Website
Uber Website
Just recently, the same thing is happening to another one of those commuter gems, Uber. I found out about Uber from friends who were raving about the service. Naturally I was skeptical at first, a private car available at your beck and call, seemed iffy. But I tried them once, and WOW!. It was everything they said it was. The driver was polite, the car was awesome, the ride was more than pleasant and the fare was better than a cab's.

A side note, I say the fare is better because there was no moaning from the driver how far he has to go to take me or how he can't get a fare coming back and that I have to add like 50 up to 300 bucks extra before the driver agrees to take me. The fare you actually pay will depend on how desperate you are to get a cab. This is just to mention one of the many annoying things you have to put up with, just to get a cab to take you, if the driver finally decides to take you. We all know the drill. Uber does not charge any add on fees for the pick up service unlike the Grab Taxi service which adds PhP 70 to your metered fare.

My Uber driver, Bonifacio (with a 4+ rating displayed in the Uber app along with his name, picture , car make and license plate nmber), simply loaded my luggage in his trunk and drove me all the way home, with a friendly chat along the way. He explained to me in detail how Uber works. He also explained why he took longer to arrive at the pick up point. When at last we arrived at my house, he informed me how much my fare was, conveniently charged it to my credit card. Easy Peasy. He even refused a tip.

Uber Refund Notice
Uber Refund Notice
On one of my trips with Uber, we instructed the driver to take the SLEX and then handed him the toll fee. Later I found out through a confirmation email, that we had been billed PhP 72.00 for Skyway toll. I promptly emailed Uber informing them of the error and requested them to reverse the charge. In Uber's email reply, I was informed that all transactions should be cashless, meaning the driver should take care of all the cash transactions and charge fare plus any additional fees to the passenger's credit card at the end of the trip. They then informed me that they have reversed the charges, with apologies for the mistake. They also said that they will inform the concerned driver to prevent this from happening again. I checked my credit card records and indeed they had reversed the charges.

Then I hear that the government was at it again. They were coming after Uber as 'colorum'. When I heard it, I blew my top, especially when I read that the reason they claimed they need to do this is to 'protect the people'. WHAT???? Why does the public need to be protected from excellent private service? The only reason I can think of is because it is another golden opportunity for them to bleed the car owners dry, especially now that they have begun implementing the *Joint Administrative Order No. 2014-01 (JAO 2014-01), increasing the fines and penalties for traffic 'violations', Kerching! Kerching!. The officers on the street will have a heyday, every time they hit the Uber jackpot. At PhP120,000.00 a pop. There will be plenty of room for them to haggle a bribe. A news report mentioned that Uber was fined PhP 200,000.00 per car. Go figure.

The Problem with Government Regulations


Protest against JAO 2014-01
Protest against JAO 2014-01
(image source mb.com.ph)
Based on many online discussions and news feeds on the issue of Uber, government is again taking the stand that there is an urgent need for 'regulations' to 'protect the public'. The public response to this position is outrage at the government's unwelcome intervention. The primary reason being that rarely, if ever, has government intervention ever translated to any substantial benefits to the public. The more likely effect of regulations are inconvenience, harassment, oppression and more opportunities for corruption. Any public benefit rarely ever materializes as a consequence therof.

In the case of the Shuttle Service, for instance, a lot of effort and resources were allocated to stop the 'colorum' vans from offering the service, but since the public transport system could not fill-in the slack, it was the commuting public that suffered from that campaign. Even now that the vans have acquired the permits, very little has changed in terms of the safety of these shuttles. And since these franchises are openly peddled on the internet, there is still very little control over who operates these vans anyhow. It begs the question, who really benefits from these regulations? Certainly not the public.

From the onset, the private shuttle system had organic mechanisms in place to protect the commuters' safety. The commuters knew the operators personally, and the commuters knew each other. There were designated people to whom you could complain or raise concerns to and these concerns were promptly addressed, If you, accidentally leave something in the van, you could always contact the driver to advise him about it. It wasn't perfect but the system worked quite well, sometimes even better without government regulation. Uber is proving to be the same. There are feedback and rating systems that collect reviews from the users themselves, which commuters are very inclined to trust more so than they would any government issued certification. Impeccable service delivered time and again, plus personal recommendation from friends trumps any guarantee that a government permit can offer.

The fact is, despite all the regulations already in place, the public still regularly fall prey to abusive drivers, substandard vehicles, unethical practices, reckless driving and criminal activity within the bounds of the 'regulated transport', And the government with all its regulatory bravado, has managed to regulate merely the fees and paperwork of transport with very little positive impact on on public safety and welfare. Unlike trusted private organizations, many regulating agencies, along with many unscrupulous transport operators are persistently in breach of public trust. Their track record in 'serving public interest' is so dismal that any of its attempts to intervene on behalf of the public is viewed with utter disdain and suspicion.

If the government is really serious about protecting public interests, it should begin with that end in mind. It should constantly assess the actual impact of its policies and actions on the public; if indeed they are actually contributing to public welfare or simply adding a needless burden. They should regularly monitor if special favor is somehow given, whether intentionally or unintentionally, to undeserving entities that thrive only when awarded monopolistic advantages. Often times, policies are created and implemented without any real grasp of the actual situation. Public policies created by people who are so removed and shielded from any real life knowledge or experience in the field, are severely flawed by poor perspective. The resulting policies would then tend to aggravate the issues more than they can alleviate them. They end up protecting a few favored sectors who deliver substandard services while the frazzled public is hung out to dry. The public is outraged by the knee-jerk reaction to the Uber issue. And why not? Government cannot seem to recognize what is the common good, Unlike these service providers, who have worked hard to earn their customer's trust, the government has done nothing to repair the badly fractured trust of the public.

Before the government starts messing with the few transport services that are working well in this country, they should first fix the rotten public transport system as well as their own broken agencies. They are pushing the people into a corner with no other option but to fight back. Government should stop penalizing the service providers in society who actually fill an unmet need and instead find ways to help them deliver the much craved for services. If the government wants to regain public trust, it should start providing meaningful service or at least facilitate the delivery of such services.

Where do our Taxes Go?


Jeane Napoles 21st Birthday Party
(Daughter of Janet Lim Napoles, implicated in the Pork Barrel Scam)
Every Filipino must have realized this by now. Before a he even gets his pay, anywhere from 5% to 32% of his taxable income (if he earns over PhP10,000/ month) will be withheld at source for taxes. Someone who earns PhP 25,000.00 a month, will have to work up to nearly **2 months per year just to pay his taxes. 12% of most of your purchases will go to EVAT (Expanded Value Added Tax). And if you save in a bank, 20% of your minuscule interest will  be withheld for taxes.

Running a small or medium sized business is not any easier, unless you have access to 'special privileges'. For the small business owners, who cannot afford 'expert facilitation' (a.k.a, fixers) they will be made to run around repeatedly trying to comply with vague and conflicting instruction that change with every elected incumbent. They will be asked to process and pay for redundant and sometimes unnecessary paperwork. And they will most likely be bullied into paying more fees and taxes than they really need to after being threatened with even more fees, paperwork and an indefinite extension of business processing period.

So far, by the government's own reports, a great deal of our taxes have either been plundered or spent on unauthorized advances, sizable bonuses, salaries of people who can't think of enough ways to extort money from us and threaten us with more regulation. Despite all we are made to pay in taxes, we still need to pay for education (if we want quality education for our children), We have to pay dearly for our own (and our aging parent's) healthcare as PhilHealth will only cover a minor portion of it. The SSS and PAGIBIG contributions, deducted monthly from  pay and held in trust by the government, will earn you a measly flat rate of 4% per year for the entire paying period until maturity, while the executives of these agencies grant themselves big fat bonuses every year. We on the other hand, have to struggle daily with, traffic, floods, obsolete infrastructure and scarce substandard public transportation. We as a nation, pay more for food, electricity, fuel, cars, housing and internet than our Asian counterparts.

With all the Senate investigations conducted, and all the evidences presented, still no one has been held accountable. An ex-President was tried and convicted for plunder but he managed to evade his prison term through a pardon issued by another ex-President who is now herself facing plunder charges. To add insult to injury, the pardoned plunderer is now back in office as a city mayor. And his son, who was acquitted also for plunder, is now under trial for plunder all over again along with 2 other Senators. The Vice President, who is already campaigning for President, along with, his son, the mayor and his wife the ex-mayor are all facing plunder charges. This is the very same government, that is claiming it has public interest at heart, in seeking to impose more regulations and steeper penalties. Really?

THIS IS ABSOLUTELY UNACCEPTABLE! 

If this is all the government can give back in services for our taxes, then maybe we should seriously consider NOT paying our taxes. No doubt. we can put all that money to far better use that will actually serve greater public interest.


Notes:

  • *Apologies for the horizontal scanning of the JAO 2014-01 document. It was that way when I downloaded it from the government site. One of those strange government practices, perhaps.
  • **Annual Income tax will vary depending on the number of dependents. The example assumes the taxpayer has no children.


Information sources:

  • https://ph.news.yahoo.com/mmda-asks-ltfrb-to-spare-uber-commuters-094335786.html
  • http://www.interaksyon.com/motoring/ltfrb-now-impounding-uber-vehicles-uber-stands-by-their-drivers
  • http://www.rappler.com/nation/75284-philippines-uber-taxi-regulation
  • http://www.mb.com.ph/calls-for-strike-fail-to-cripple-transport-system/