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How our super-rich enjoy low tax rates

The Manila Times, April 22, 2013

I CERTAINLY admire property magnate Andrew Tan’s forthrightness and audacity for disclosing his income and the taxes he paid on these. In contrast, magnates Oscar and Manuel Lopez got their hacks to report the deniable “sources within the Lopez group of companies on Tuesday pointed out that family patriarch Oscar Lopez and his brother Manuel had paid P37 million and P11 million in taxes, respectively, for 2011.”

Still, Tan’s unprecedented disclosure reveals how our super-rich manage to avail of very low tax rates just a bit higher than 10 percent, or the effective rate for those earning, believe it or not, just P20,000 a month.

Tan in 2011 earned P22.3 million in salaries and P3.8 million in director’s and consultant’s fees, on which he paid taxes of P7 million and P1.2 million for a tax rate of about 32 percent—which is the maximum for income earned from an employer or a contractor.

The bulk of Tan’s income is P518.1 million in cash dividends, or earnings from his stocks in his companies, on which he paid a tax of P51.8 million, or exactly 10 percent, which is the rate on such income. Tan’s total earnings amounted to P544.2 million, on which taxes paid totaled P60.1 million, or effectively at an 11 percent tax rate.

The 10 percent rate on cash dividends was lowered from 15 percent by President Marcos through Presidential Decree No. 1800 in January 1981. Ironically, the lowering of the rate was in order to “raise capital to hasten the industrialization of our developing country.”

On the contrary though, most of the industrialized countries of the world have much higher tax rates on dividend income, with the average among industrialized countries of Organization for Economic Cooperation and Development at 36 percent.

The US has what could be the most equitable tax rates on dividend income, which is a graduated scale depending on the taxpayers income level. That is, if one is in the two lowest income brackets, no taxes are imposed on his cash dividends, which likely would be from his few holdings of shares listed in the stock market. However, if a taxpayer is in the top income bracket, the tax rates on his cash dividends is 35 percent. (Most Southeast Asian nations as well as India also have a 10 percent tax rate on dividend income, with Cambodia and Vietnam imposing no taxes in their bid to attract more foreign capital. China has a 20 percent rate. )

Such income from dividends was termed in Marcos’ decree as “passive income.” However, this has become our magnates’ main form of income to skirt the 30 percent tax on corporate income, and explains the surge in the establishment of corporations in the past decade, and the decline of the single proprietorship as magnates’ preferred enterprises even if they or their families are practically the sole shareholders. Incorporation also had become a generator of income when they do list their stocks in the bourses.

The fact that dividend income has become the preferred tax haven for our magnates explains why 30 of the 40 Philippine billionaires in Forbes’ magazine’s listing aren’t in the Bureau of Internal Revenue’s top 500 taxpayers. The tax on dividend income (like the taxes on capital gains and bank savings) are final taxes, which means that no other taxes are imposed on these kind of income and therefore, need not be reported.

While magnates like Lucio Tan, John Gokongwei, and Andrew Gotianun are earning hundreds of millions of pesos yearly from cash dividends from their conglomerates, none of these three are among their firms’ officials, and therefore do not get “income from compensation” on which the maximum 32 percent tax rate is imposed, and which requires the filing of tax returns either individually or through the corporation in its “substituted filing.”

No wonder then that out of the BIR’s top 500 taxpayers,384 or 76 percent are professional executives, and about a dozen are movie and TV celebrities. The majority or 237 taxpayers were foreign executives. The tax rate on dividend income is a pillar of the country’s inequitable tax system and reflects the rule of the elite in our country. Surprisingly, even the latest studies of the World Bank and the International Monetary Fund did not even discuss the tax rates on dividend income, and instead proposed to government increases in excise taxes on tobacco, liquor and petroleum and even a new tax on SMS usage.