DOF says ‘super-rich tax’ bill to lead to capital flight, tax avoidance

The Department of Finance (DOF) has cautioned legislators that a measure in the House of Representatives seeking to impose a “super-rich” tax on individuals with assets exceeding P1 billion would encourage aggressive tax avoidance schemes and drive out capital and investments from the Philippines.

Finance Secretary Carlos Dominguez III wrote in a letter to Speaker Lord Allan Jay Velasco that the tax proposal outlined in House Bill (HB) No. 10253 would defeat its purpose of generating more revenues. While this wealth tax could initially lead to gains in tax collections, 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.

“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 the Speaker.

Under HB 10253, individuals with taxable assets that exceed P1 billion should pay a 1 percent tax, while a tax of 2 percent is imposed on taxable assets over P2 billion, and 3 percent for over P3 billion.

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

He pointed out 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 said.

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.

Dominguez noted 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. According to the study, 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, he said.

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 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, 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, 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.

Dominguez 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.

He pointed out that taxpayers classified as “super-rich,” but have limited realized and available income, may have to sell some of their assets in order to pay their assessed wealth taxes.

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, Dominguez said.

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). (DOF)