Is BIR killing the spirit of RA 9504?

Is BIR killing the spirit of RA 9504?

by Dick Du-Balabad

Republic Act (RA) 9504, which took effect last July 6, exempts minimum wage earners from income tax. In addition, it increased the personal exemption for individuals as follows: single — from P20,000 to P50,000; head of family — from P25,000 to P50,000; each married individual — from P32,000 to P50,000; and each qualified dependent (not exceeding four) — from P8,000 to P25,000.

RA 9504 was meant to alleviate the pitiful condition of the low income group — especially laborers — who find it difficult to cope with the skyrocketing cost of living. By exempting their compensation from income tax and by providing increased exemptions, the government, in effect, gives them a direct cash subsidy equivalent to the tax due on their earnings which the government has waived to collect.

For a family with four (4) dependents, for example, the increase in tax exemption amounts to P104,000 resulting in a tax benefit of up to P33,280, depending on the tax bracket applicable to the individual. A married individual with four dependents falling within the tax bracket under the 20% marginal rate will have a savings of P16,400 per year or P1,367 per month.

This is almost three times the P500 dole-out being given by the Office of the President to poor families.

And, come to think of it, isn’t this a far more decent way of giving relief to the poor than the P500 dole-out system? It is a direct cash subsidy free from the claws of political intervention.

The bad news, however, is that the BIR does not seem happy with RA 9504. In the latest draft regulations that was released Thursday last week, taxpayers will not be given the full benefit of the increased exemption for this year 2008. The BIR said, since RA 9504 became effective only last July 6, the increase in exemption should only apply to the second half of the year. Thus, the draft regulations adopted a pro-rated exemption — the old exemption will apply to the first half of the year and the new exemption will apply only to the second half.

For this year 2008, therefore, the pro-rated personal exemption of individuals will effectively result in reduction from rates provided in RA 9504 by: for single individuals, P15,000; for head of family, P 12,500; for each married individual, 9,000; and each qualified dependent, not exceeding four (4).

For a family with four (4) dependents, the reduction in tax exemption amounts to P52,000 or a reduction in tax benefit of P10,400 (using a 20% marginal income tax rate). For a low-income family, P10,400 will go a long way. It can buy 10 sacks of rice or it can send three kids to school (if fare per trip is P8.50) for the whole school year.

The system of pro-rating of personal exemption has never been introduced in the past. From a technical point of view of taxation, pro-rating may be difficult to justify. An income tax, unlike other taxes such as VAT and percentage tax, is determined on an annual basis, and not on a quarterly or semi-annual basis. The quarter returns filed for income tax are only informational returns and not final returns. Any payments made in the quarter returns are considered advanced payments for the year. The tax on the income will not become due until after the year has ended and the true taxable position of the individual or entity is determined.

Therefore, it follows that any relief available at the end of the year, especially as it pertains to personal exemptions, should be applied to the whole taxable year, a taxable year being indivisible.

In the case of RA 9504, since it became effective last July, the increased exemptions are already available at the end of 2008, and individuals should be able to claim the increased amounts for the whole year of 2008.

Added to that is the basic principle that personal exemptions, these being used to promote social justice and equity, are to be favorably construed in favor of the beneficiary individuals. In fact, the Tax Code pr ovides a favorable provision on claims of personal exemptions. For example, a child born before December 31 of the year can be claimed as an additional dependent entitled to additional personal exemption for the year as if it was born at the beginning of the year. Likewise, a married individual widowed before December 31 of the year can still claim the full personal exemption as a married individual.

The Supreme Court, in the case Reynaldo V. Umali vs. Hon. Jesus P. Estanislao, Secretary of Finance, and Hon. Jose U. Ong, Commissioner of Internal Revenue, supports this theory of "favorable interpretation" as it applies to personal exemptions.

The Supreme Court ruled that the law then increasing personal exemptions (RA 7167) is a social legislation which must be construed favorably for taxpayers and thus, allowed taxpayers to claim the increased exemptions for the whole preceding year.

There are other provisions in the draft BIR regulations which restrict the clear intent of RA 5904 as a social legislation. These will be presented next week as a sequel to this article.

By the way, the final regulations are expected to be officially released anytime this week.

Watch out for it.

(The author is head of the Tax Advisory and Compliance Division of Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail the author or call 886-5511.)