By Eric Chan, RFP®
Let’s face it. None of us, in general, enjoy paying taxes. Aside from biting a huge chunk out of our take home pay, it doesn’t do us any good hearing and reading stories of mismanagement of funds (read: North Rail Pillars). I hardly feel it working for me, if I even feel it working at all; and I don’t think I’m the only one who’s saying this. As long as there are taxes to be paid, people since the beginning of time, had thought of ways not to pay it. (As I have said, nobody enjoys paying taxes).
Although pay we must, it doesn’t mean we can’t find ways to reduce this liability. Tax avoidance and tax evasion are two different things. While their objective is the same: to pay the least possible amount of tax; the former is legal while the latter, well, let’s just say can land you in jail, and if you’re somebody, you might even headline the news.
Severo Marano, a Certified Public Accountant, defines tax avoidance as, “Tax avoidance uses technicalities such as loopholes in the tax laws to reduce the taxes payable.”
Seriously, there are loopholes? And we thought everything is as clear as day and night when it comes to taxes. You’d think the government had managed to plug all holes by now to increase its collections.
“Tax evasion, on the other hand, is the wilful attempt to evade the payment of taxes either misrepresenting or concealing their actual income, or non-issuance of official receipts even if there was a sale transaction in order to avoid paying lower income tax,” Marano clarifies.
He cites an example of tax avoidance: “If the company is to choose between straight line method of depreciation or double declining method, our tax laws are silent as to which method you should adopt. This is an opportunity for tax avoidance.” Tax avoidance allows us to go around the law and minimize the taxes payable.
Corporations can also maximize the allowable deductions under the National Internal Revenue Code, which also includes premium payments on health and/hospitalization insurance, pension trust and charitable contributions. These deductions benefit the company, its employees and even the society. It’s hitting two (or even three) birds with one stone!
Individuals can also do the same. Unfortunately, not all of us know what exemptions we are entitled to just as we are clueless to what our rights are. The law allows P50,000 exemption for single individuals, head of the family and even married individual. The law also allows additional exemption of P25,000 for each child or dependent (maximum of four), which by definition include senior citizens. So if your parents or even grandparents are dependent on you, then you may even add those to your exemptions. Add them altogether, a single individual can have a maximum exemption of P150,000.
It’s also worth knowing that parents of special children will be entitled to a P50,000 deduction once Bill No. 5100, authored by none other than former President and now Pampanga Rep. Gloria Macapagal Arroyo, and co-authored by her son, is passed into law. The bill seeks to ease the burden of the parents who have special children.
And once the Implementing Rules and Regulations (IRR) of the Personal Equity Retirement Account (PERA) are approved, the employees can avail a 5% tax credit for their contributions. This can further encourage the public to maximize their contributions. There are ways to for us to lower our tax obligations, but evasion is not one of them. But as much as it is the duty of every citizen to pay the proper taxes, it is also our right to find ways of legally avoiding it.
Eric Chan, RFP is a Registered Financial Planner (RFP) of RFP Philippines. He is financial advisor for one of the leading financial institutions in the country. To learn more about the RFP program, visit www.rfp.ph or inquire at email@example.com or call 6342204.