The Department of Finance (DOF) bucked the proposal seeking to impose a “super-rich” tax on Filipino billionaires as its negative impacts outweigh any potential revenue gains for the government.
In a letter to House Speaker Lord Allan Jay Velasco, Finance Secretary Carlos G. Dominguez III said a wealth tax, once passed into law, would encourage aggressive tax avoidance schemes and drive out capital and investments from the Philippines.
While the tax proposal outlined in House Bill (HB) No. 10253 could initially lead to gains in tax collections, Dominguez said it could, at the same time, discourage growth and investments in the long haul.
Diminished investments will result in far greater revenue losses and fewer new jobs to help Filipinos recover from the pandemic, Dominguez added.
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.
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 3 percent for over P3 billion.
Dominguez acknowledges the intent of the measure is to improve the progressivity of the country’s taxation and generate more revenues, but he cannot support the bill because it would likely scare away investors.
He added that the bill is not consistent with the current thrust of the administration to attract more investments in the country, as it will discourage businesses from undertaking less profitable and riskier ventures that are beneficial to the public.
A super-rich tax on top of the current tax regime and the proposed reforms may no longer be necessary, Dominguez said.
He noted, for instance, that tax reform for acceleration act (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.
Dominguez said 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 said 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/
While the bill’s authors estimate that 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.
“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,” Dominguez said.