DOF chief bucks proposed ‘super rich tax,’ warns of capital flight

Finance Secretary Carlos Dominguez III is thumbing down the proposed measure seeking to impose tax on the wealthiest individuals in the country, warning that it would scare away investors and encourage tax avoidance schemes.

In a statement, the Department of Finance (DOF) said Dominguez III wrote a letter to Speaker Lord Allan Jay Velasco saying that the proposed House Bill (HB) No. 10253 would defeat its purpose of generating more revenues.

The HB 10253 seeks to mandate the collection of individual wealth taxes of 1% to 3% from billionaires with taxable assets of P1 billion or more.

Under the bill, the tax shall be computed based on and at the rates established in the tax schedule that would become effective January 1, 2022 onwards:

Wealth Above P1 billion – 1%
Wealth Above P2 billion – 2%
Wealth Above P3 billion – 3%
“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 Velasco.

The Finance chief 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.

However, he cannot support the bill because it would likely scare away investors.

Dominguez noted that 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 (CREATE) Law, which reduced the corporate income tax (CIT) to bring in more foreign capital, encourage innovation and expansion of domestic enterprises, and generate more jobs.

The proposed wealth tax will also discourage businesses from undertaking less profitable and riskier ventures that are beneficial to the public, Dominguez claimed.

“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.

The Finance chief said that a study in Germany suggests that wealth taxes can have a significant adverse impact on economic activity by stunting economic growth, investment, and employment.

He said that wealth taxes reduce income from wealth and savings, so potential taxpayers will tend to invest or save less.

The tax reforms pursued by the Duterte administration, 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 (PIFITA) are already addressing the inequities in the system, Dominguez said.

“A super-rich tax on top of the current tax regime and the proposed reforms may no longer be necessary,“ he said.

The TRAIN law, for instance, imposed a higher tax rate of 35% from the previous 32% 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, as proven by what happened in other countries that had imposed a similar wealth tax.

While the bill’s authors estimate that their proposal will generate P236.7 billion per year, he said the DOF projects a more conservative P57.6 billion in revenues.

“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.

The Finance chief 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 (BIR) 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.

A study done by the Organization for Economic Cooperation and Development (OECD) showed that the collection performance of wealth tax is relatively low, partly because of the high administrative and compliance costs, according to the Finance chief.

Several OECD countries used to have wealth taxes but eventually repealed them.

These include Austria, which repealed their wealth tax law in 1994; Denmark in 1997; Germany in 1997; the Netherlands in 2001; Finland, Iceland and Luxembourg all three in 2006; Sweden in 2007; and France in 2017.

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