Taxing the super rich | Manila weather
Will the new House Bill 10253 or the Wealthy Tax Bill follow the various tax reforms introduced by the Duterte administration and become law? The bill aims to levy an annual tax as of January 1, 2022 on citizens (residents and non-residents) and resident foreigners at the rate of 1% on wealth over 1 billion pesos, 2% on wealth over 2 billion pesos and 3% on wealth over P3 billion.
About 236.7 billion pesos are expected to be collected each year from the richest 50 Filipinos, to help the government pursue poverty reduction measures and other social programs aimed at bridging the growing divide between the rich. and the poor, according to the explanatory note to the bill. The initial comment by Finance Secretary Carlos Dominguez III was that the wealth tax would drive capital out of the Philippines. Is this justified?
The wealth tax is nothing new. In 2018, the Organization for Economic Co-operation and Development (OECD) published a tax policy study focusing on wealth tax. It showed that 12 OECD countries that had wealth taxes repealed them in the 1990s and 2000s and that the number of OECD countries that continued to impose wealth taxes fell to just four. in 2017. According to the OECD study, many factors have been cited to justify the repeal of taxes on net worth, one of which is the risk of capital flight, particularly due to mobility increased capital and access to tax havens. Therefore, Dominguez’s concern over the proposed super-rich tax may be valid.
Another factor that contributed to the repeal of the wealth tax – which could apply in the Philippines – is the high cost of tax administration compared to limited income. In the Super Rich Tax Bill, the net worth of all taxable assets is defined as the market value of assets owned by a taxpayer, real or personal, tangible or intangible, wherever located, less the taxpayer’s debts. . Although the definition may be straightforward, assessing the market value of all assets will be a very difficult exercise.
While the market value of real estate, traded stocks, and other similarly traded assets can be easily obtained, difficult-to-value assets such as intangibles, works of art, etc. may be more difficult to assess. This is because it will take part of the resources on the part of the tax office and the individual to determine the correct valuation – and this has to be done on an annual basis. This is a huge challenge in terms of tax administration and compliance.
In addition, taking into account the calculation of net taxable assets in which debts are deductible, the OECD study mentions that wealth tax encourages borrowing to lower the tax base and can thus encourage tax evasion. and, in fact, reduce the revenue that should have been levied on the wealth tax.
Let’s look at some of the merits of imposing a wealth tax as a result of the OECD study:
First, the wealth tax aims to tackle inequalities in wealth and will help promote equal opportunities following the most important point of the OECD study. Although the Philippines levies taxes on both passive and active income, since the ultra-rich already have a high value of accumulated wealth to begin with, the after-tax income (also substantial because proportional to capital / investment) they will only perceive to be added to their total wealth, thus increasing their wealth over time.
That is what the bill says. Based on the Forbes 2021 list of the 50 richest in the Philippines, these people increased their wealth by 30% to P4 trillion despite the Covid-19 pandemic. This against the backdrop of 29% of Filipinos, or more than six million families, living on a monthly income of 10,000 pesos or less for two decades, with wages and wages of workers nationwide increasing slightly just to keep up. inflation account. This yawning divide has resulted in 50 Filipinos having more wealth than the poorest 71 million Filipinos combined.
The second argument supporting wealth tax, according to the OECD study, is that wealth provides benefits beyond income. Wealth can confer social status, power, greater opportunity, satisfaction or provide insurance value against unforeseen future needs and it has been argued that these benefits should be taxed (Meade, 1978). This is true in the Philippines where it is the rich who generally hold power and have access to better opportunities.
With public debt rising to 11.64 trillion pesos in August 2021 and the Covid-19 pandemic still an ongoing battle, lawmakers are looking for ways to generate more taxes. This can be seen in the various tax measures proposed, including the Super Rich Tax bill. In deliberating on the proposed measure, Congress will undoubtedly consider the pros and cons of levying a wealth tax. Hopefully our lawmakers will be able to make additional provisions if necessary for this proposal to be an effective tax-generating measure.
The author is a senior executive in the Tax and Corporate Services division of Navarro Amper & Co., a member of the Deloitte Asia Pacific Network. For comments or questions, send an email [email protected]
Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of Deloitte Touche Tohmatsu Ltd. Members of Deloitte Asia Pacific Ltd. and their related entities, each separate and independent legal entities, provide services in over 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur , Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei, Tokyo and Yangon.