A proposal in the Lower House seeking to slap a “super-rich” tax on individuals with assets exceeding P1 billion would encourage aggressive tax avoidance schemes and drive out capital and investments from the country, the Department of Finance (DOF) said over the weekend.
Carlos Dominguez, DOF secretary, in a letter to speaker Lord Allan Jay Velasco said the tax proposal in House Bill (HB) No. 10253 would defeat its purpose of generating more revenues.
Under HB 10253, individuals with taxable assets that exceed P1 billion should pay a one percent tax, while a tax of two percent is imposed on taxable assets over P2 billion, and three percent for over P3 billion.
Dominguez said a super-rich tax on top of the current tax regime and the proposed reforms may no longer be necessary.
While this wealth tax could initially lead to gains in tax collections, it could also discourage growth and investments in the long haul, the DOF said.
Diminished investments will result in far greater revenue losses and fewer new jobs to help Filipinos recover from the pandemic, it added.
According to Dominguez, HB 10253 is prone to aggressive tax avoidance because the so-called “super-rich” will find ways of avoiding tax by transferring their assets to different accounts where they can seek tax relief and exemptions, as what happened in other countries that had imposed a similar tax.
While the bill’s authors estimate their proposal will generate P236.7 billion per year, and the DOF projects a more conservative P57.6 billion in revenues, losses incurred from other taxes are far more substantial.
“There is a risk of capital flight if the wealth tax is passed in the Philippines. Currently, only four countries continue to implement the wealth tax — Belgium, Norway, Spain and
Switzerland. Many countries that had wealth taxes before ended up repealing the said measures particularly because of the increased capital mobility and access to tax havens in other countries,” Dominguez said in his letter to the speaker.
“Thus, wealth taxes fail to significantly promote economic equality or create additional fiscal space. Moreover, net wealth taxes often failed to meet their redistributive goals as a result of their narrow tax bases, tax avoidance and tax evasion,” he added.
Dominguez said he acknowledges the intent of the measure to improve the progressivity of the country’s taxation and generate more revenues for medical assistance and social programs, especially at this time of pandemic, but he cannot support the bill because it would likely scare away investors.
He said the bill is not consistent with the current thrust of the administration to attract more investments in the country, as evidenced in the passage of the Corporate Recovery and Tax Incentives for Enterprises Law, which reduced the corporate income tax.
The proposed wealth tax will also discourage businesses from undertaking less profitable and riskier ventures that are beneficial to the public, Dominguez said.
Even when they generate low or even negative profits during the start of their operations, they will still be subject to tax liabilities because of the high capital value of their assets, he said.
Dominguez noted a study in Germany which suggests wealth taxes reduce income from wealth and savings, so potential taxpayers will tend to invest or save less.
The tax reforms such as the now-enacted Tax Reform for Acceleration and Inclusion (TRAIN) Law, as well as the proposed real property valuation and assessment reform and the proposed Passive Income and Financial Intermediary Taxation Act are addressing the inequities in the system, Dominguez said.
For instance, TRAIN imposed a higher tax rate of 35 percent from the previous 32 percent for the top individual taxpayers whose annual taxable income exceeds P8 million, he said.
Dominguez added existing provisions of the Tax Code and the Local Government Code already provide for a form of wealth tax through the estate and real property taxes, respectively.
“Existing literature regards real property tax as a perfect tax because land, in particular, being a capital asset, is visible and immovable, which is an important fiscal tool in this time of globalization and competition,” Dominguez said.
He also said a wealth tax will be costly and complex to implement because this would require additional manpower and costs, not to mention the need to relax the Bank Secrecy
Law and forge exchange of information agreements with other countries, to determine the various aspects of a “super-rich” taxpayer’s wealth.
He also cited the lack of a reliable database to identify the wealthiest individuals in the country. While the Bureau of Internal Revenue has a list of its large taxpayers, this is only based on taxes paid and does not include the net worth of the total accumulated wealth of taxpayers.
Dominguez said the viability of assessing all the assets held by the wealthy for subsequent taxation would be highly difficult as in the case of Austria, which repealed its wealth tax because it became too costly to maintain.
He pointed out taxpayers classified as “super-rich,” but have limited realized and available income, may have to sell some of their assets to pay their assessed wealth taxes.
