Experts caution as Duterte pushes shift to gross-based corporate income tax by 2022

PRESIDENT Rodrigo R. Duterte wants a shift to gross earnings as base for businesses’ income tax, but experts were cautious, saying such a base may make the tax simpler to enforce but unfair.

“You know what, I suggest to you — in all honesty — let us go to sa ating taxation gross. Maski sinong tanungin mo walang daya sa gross (Anyone will tell you it is more difficult to cheat when computations are based on gross revenues),” Mr. Duterte said in his speech on Wednesday night at the inauguration of the P550-million Tumingad Solar Power Project in Romblon.

“Pag mag-gross ka… nandiyan na lahat. Magkano ang binebenta mo? Magkanong kinita mo sa araw na ‘yan? Wala ‘yung minus na sweldo ng tao mo. Dito tayo sa gross (When you use gross revenues as base, everything is there. How much did you sell and earn in a day? No more deductions of your workers’ salaries. Let us shift to gross),” he added.

“Before I leave, gross tayo (Let us shift to gross earnings as base).”

Sought for comment, Albay 2^nd District Rep. Joey S. Salceda, who heads the House of Representatives ways and means committee, said in a mobile phone message: “A flat tax on business looks tempting for its simplicity but is unfair to low-margin businesses and favors firms with high gross margins.”

“The next feasible option to a flat tax is tax on gross income earned. But even this may tilt against some that have high big indirect expenses on marketing and advertising,” he explained.

“Thus, the only way to do a flat tax is to use different rates per sector or industry, but that would be messy and would be an open arms, open legs invitation to lobbying in its most dysfunctional aspects,” he added.

“The current tax system is not perfect, but the way forward is to reduce tax rates, expand the tax base and run after tax cheats.”

For Alexander B. Cabrera, chairman and senior partner at PwC Philippines, the proposal could hit personal income tax collections since businesses will not have any incentive to report salaries of their employees as part of the withholding tax system which makes them collectors of this levy.

“Pag ginawa mo ’yang taxation based on gross, lalo lang hindi magde-declare ’yung mga companies (If you shift to taxation based on gross, all the more that companies will not declare salaries),” Mr. Cabrera said by phone.

“Kailangan talaga ng deductions kasi maaring lugi ka, tapos pinababayad ka pa ng tax, so that’s confiscatory di ba? (You really need to make deductions because it would be confiscatory if you are taxed even if you are unprofitable, wouldn’t it?)” he added, saying it would increase cost of doing business especially for those just starting out.

He also said that it could make the Philippines less competitive, noting that “[s]o far, no ASEAN country is based on gross, all on net income.”

For Eleanore L. Roque, principal and head of Tax Advisory and Compliance Division at P&A Grant Thornton, “[t]he problem with putting gross taxation for corporations is that not all corporations have the same gross margin or net margin.”

“It’s doable, but you have to calibrate the rate, because some corporations would be earning income at a much higher… rate than others… so you cannot impose one tax rate on all types of corporations and then impose it on gross,” she explained.

And while the change could “probably make it easier for administrative purposes because you don’t have to check expenses anymore” it “may not be fair for most corporations because corporations are not created equal.” — Arjay L. Balinbin