Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Abolish the Capital Gains Tax

Posted by butalidnl on 6 November 2010

The tax system in the Philippines is quite complicated. And the capital gains tax is one of the most complicated part of it. While people are required to pay a capital gains tax,  the procedure for paying such a tax is quite complicated, and they will be terribly complicated for anyone who is active in the market for stocks, bonds and other financial instruments.

I suggest that we simplify this part of the tax system, while retaining the level of tax income of the government. And this is simple: abolish the capital gains tax. In its place, the government could simply impose a wealth tax. This will simplify the administration of the tax, and encourage investments in Philippine financial instruments.  And this will also close a lot of practical loopholes in the implementation of the law.
[The Netherland’s government implemented such a tax on wealth in 2001, and it has simplified the collection of taxes.]

Simple
A capital gains tax involves the taxpayer providing documents proving the initial price of land or a financial product, and then also documentation on the price this piece of land or financial product was sold.  And, if these products were sold at a loss, this would be able to offset tax due for sales that resulted in a profit.

This is not only tedious, but it would be difficult of the tax authorities to check. And, when it comes to land, the documentation to prove the price a land was bought is extra difficult because a lot of land is simply inherited.

On the other hand, a wealth tax is simple.  The basis would be something like a statement of assets and liabilities. And then, a tax (for example, at a rate of 1%) of wealth (which is the net of assets minus liabilities) would be imposed. Land will be valued at its declared value at the end of the year; but the owner should be careful not to under-declare the value, because thie declared value would be the basis for government buying this piece of property, and also serve as the basis for banks counting it as collateral for loans.

Specifics
Let us now describe our proposal in more detail:

  • the tax on capital gains is abolished.
  • the wealth tax will be 1% of declared wealth; the first Php 1 million of wealth is exempted from this tax. The tax includes all wealth: land and other real estate; bank deposits, stocks. Deducted from the taxable wealth would be loans owed.
  • the value of land and other real estate will be its zonal value
  • the value of shares of stock will be their market value at the end of the year.
  • the tax on dividends and interest will be withheld at the rate of 10% at the source (i.e. by the company or bank); those who file for wealth tax could deduct the tax collected from the amount due in wealth tax. Thus, foreigners who receive interest income or dividends pay the tax; residents end up not paying tax.

People who have previously paid the wealth tax, but have not filed their tax for a given year will be assessed by the BIR for the wealth tax at 110% of their previous wealth (thus, assuming that their wealth increased by 10%).

The declaration for the wealth tax will be submitted at the same time as the income tax.

Increased Tax Compliance
One thing about wealth, is that it is relatively constant. So, a given taxpayer would be paying generally the same amount every year, increasing gradually every year.  And, since the wealth tax would replace the tax on dividends and on interest income, there will be no need for the BIR to monitor these, since they will be automatically collected. It will be the taxpayer who will declare their interest and dividends, since they want to use the tax withheld to offset the tax on their other assets.

The government would not even need to find out exactly how much money people have in bank accounts.  Tax will be withheld from them anyway; and  if the depositor does not declare their bank balance, then they will not be able to get part of the withheld tax back – it’s his problem.

The advantage of a wealth tax is that all wealth of citizens will be taxable. Thus, theoretically, also the wealth in the form of foreign bank deposits. And, Swiss bankers (for example) are amenable to withholding tax from their foreign depositors, on the condition that their identities are not revealed. This means that the Philippine authorities can collect taxes even from “secret” Swiss bank accounts (even without knowing whose accounts these are).

If, for any reason, a person’s wealth is less than the previous year’s, then they should prove this by showing documentation.

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