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Friday, March 29, 2024

Proposed wealth tax likely to spark capital flight – DOF

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Finance Secretary Carlos Dominguez III warned that a proposal in Congress seeking to impose a “super-rich” tax on individuals with assets exceeding P1 billion will result in capital flight and aggressive tax avoidance.

Dominguez said in a letter to House Speaker Lord Allan Jay Velasco the proposal outlined in House Bill No. 10253 would defeat the purpose of generating more revenues. He said while the wealth tax could initially lead to gains in tax collections, it could also 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, he said.

“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 the letter.

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.

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Dominguez said while the measure was intended 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, he could not support the bill because it would likely scare away investors.

He said the bill was not consistent with the current thrust of the government to attract more investments, as evidenced in the passage of the Corporate Recovery and Tax Incentives for Enterprises Law, which reduced the corporate income tax 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 cited a study in Germany showing that wealth taxes could 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.

He said the tax reforms, such as the now-enacted Tax Reform for Acceleration and Inclusion Law, the proposed real property valuation and assessment reform and the proposed Passive Income and Financial Intermediary Taxation Actwere already addressing the inequities in the system.

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

He said the TRAIN law 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 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 also said HB 10253 is prone to aggressive tax avoidance because the so-called “super-rich” might find ways of avoiding tax by transferring their assets to different accounts where they could 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 would 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 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 said taxpayers classified as “super-rich,” but have limited realized and available income, may have to sell some of their assets to pay their assessed wealth taxes.

A study done by the Organization for Economic Cooperation and Development 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).

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