Why the Philippines must catch up with Asean

In the increasingly integrated and competitive Southeast Asian region, taxation has become a key factor that influences investment decisions, job creation and national economic resilience. A comparative look at the Philippines’ tax structure vis-à-vis Singapore and extended to other Asean countries reveals several glaring disparities that place the country at a relative disadvantage, both in attracting foreign direct investments and in achieving sustained gross domestic product (GDP) and gross national income (GNI) growth.

Personal income taxes are up to 35 percent in the Philippines compared to only 22 percent in Singapore. In Thailand these are up to 35 percent but come with more exemptions and are also at 35 percent in Vietnam but tiered. Cambodia and Laos have simplified schemes, with top rates capped at 20 percent.

The Philippines imposes a 6-percent tax on real estate capital gains and 15 percent on the net gains from the sale of shares not traded on the stock exchange. In contrast, most Asean peers, including Singapore, Malaysia and Thailand, offer exemptions or zero capital gains tax for individuals and long-term investments. Sales of listed shares in the Philippines are not subject to capital gains tax but are covered by a separate stock transaction tax of 0.6 percent.

The Philippines still levies a 6-percent estate tax while countries like Singapore, Malaysia, and Thailand have abolished estate duties entirely to encourage intergenerational wealth transfer.

Dividend tax rates in the Philippines, meanwhile, are 10 percent to 20 percent, higher than Singapore’s 9 percent and Malaysia’s tax-exempt system for domestic shareholders under its single tier system.

And at 12 percent, the Philippines has one of the highest value-added tax (VAT) rates in the region compared to 9 percent in Singapore and 7 percent in Thailand.

The impact of these disparities spans several critical economic dimensions:

– Foreign direct investments (FDI). High taxes on income, dividends and capital gains reduce after tax returns, discouraging investors who have more favorable options in the Asean region.

Singapore, with its low and transparent tax regime, continues to be the top recipient of FDI in Southeast Asia. According to the Unctad World Investment Report 2024, Singapore captured over 30 percent of Asean’s total FDI inflows while the Philippines lagged behind at less than 5 percent. This not only reflects investor sentiment but also leads to fewer jobs and slower technology transfer.

– Employment and enterprise development. Investment decisions directly impact job creation. The more capital flows into productive sectors like manufacturing, technology, and services, the more employment opportunities become available. A burdensome tax regime slows business expansion and startup activity, especially for capital intensive ventures. In contrast, Indonesia’s tiered corporate tax reliefs and Malaysia’s SME-focused incentives have stimulated strong employment growth and entrepreneurship, while the Philippines struggles with underemployment and informality.

– GDP and GNI growth. The Philippine tax structure, while aimed at revenue generation, may actually be hampering GDP growth by discouraging consumption, savings and reinvestment. High VAT and income taxes lower disposable income, suppressing domestic demand. Moreover, capital flight and reduced reinvestment due to dividend and capital gains taxation limit national income generation. Singapore’s GDP per capita remains over five times higher than that of the Philippines, a gap exacerbated by taxation and business environment differences.

– Revenue efficiency vs. equity. While the government needs revenues to fund social services and infrastructure, high and inefficient taxes often result in evasion, loopholes and administrative burdens. For instance, the 12-percent VAT is poorly enforced at the informal sector level and corporate tax incentives under the Create Act are still not enough to offset the weight of other taxes. Asean neighbors have demonstrated that broadening the base and reducing rates can actually improve collections by enhancing compliance and formalization.

The call to remove or reduce taxes on savings and investments has become more urgent with the passage of Republic Act 12214 or the Passive Income and Financial Intermediary Taxation Act. This law eliminated the longstanding tax exemption on interest income from long-term time deposits held for at least five years.

Under the revised rules, all interest earnings, regardless of maturity period, are now subject to a 20-percent final tax. Although the rate remains the same, the removal of the exemption is a substantive change that affects conservative savers, including retirees, overseas Filipino workers and middle income earners who prefer secure bank placements over speculative investments.

RA 12214 also maintains the 10-percent dividend tax on domestic shareholders and 20 percent for nonresidents, while flattening taxes across other passive instruments.

However, unlike neighboring Asean economies that encourage long term financial inclusion through favorable tax treatment of interest and dividends, the Philippines has now removed such incentives. This shift risks discouraging capital formation, and may ultimately result in lower long term savings, investment growth, and tax compliance.

To remain competitive in the Asean region, the Philippines must consider the following reforms:

– Cap personal income tax at 25 percent to align with regional averages and attract professionals and investors alike.

– Remove or reduce taxes on savings and investments such as interest and dividends to stimulate long-term financial inclusion and capital formation, especially in light of the adverse impacts of RA 12214.

– Abolish estate and donor’s tax to allow smoother intergenerational transfer of assets and reduce flight of family wealth abroad.

– Simplify VAT and consider lowering the rate with stricter enforcement and digitization to improve compliance.

– Unify social contributions across the Social Security System, PhilHealth and Pag IBIG to reduce redundancy, improve efficiency and lower the payroll burden on employers.

– Introduce a regional tax competitiveness index to benchmark policies annually and ensure the country is not being left behind.

Taxation is more than just a domestic fiscal tool. It is a powerful signal to the global market. The Philippines must rethink its tax policy as not merely for compliance or collection but also as a strategic lever for growth, competitiveness and social mobility. The experiences of Singapore and other Asean neighbors show that simpler, fairer and more efficient taxation can unlock inclusive development. The challenge is not to raise more taxes, but to tax smarter.

Source: Manila Times

The UK hates stamp duty. What’s the alternative?

When it emerged last week that the chancellor was considering scrapping stamp duty, many will have started celebrating. However, the jubilation was short-lived as a host of alternative property tax suggestions began to surface. The Treasury is said to be contemplating a shake-up as it looks to raise billions of pounds in the autumn budget.

Stamp duty brought in £13.8 billion over the past tax year, while capital gains tax (CGT), which is charged on the sale of second homes, shares and art, raised £13 billion. Rachel Reeves, the chancellor, is now understood to be considering charging CGT on the sale of high-value homes, with the limit being mooted at £1.5 million. At the moment you do not pay CGT when you sell your main home, although it is applied to sales of second or additional properties.

Critics have long warned that high stamp duty charges stifle the housing market, but have now said that charging people when they sell their main home could cause even more damage. Is there really a better way to tax property than the present system; one that is fair and effective? We look at how the rest of the world does it.

WHAT IT’S WORTH

Taxes on property, such as council tax, stamp duty and CGT, make up 12 per cent of the total tax take in the UK. This is on a par with the US and Canada and is one of the highest percentages among the 38 wealthy nation members of the Organisation for Economic Co-operation and Development (OECD).

The average across the OECD was 6 per cent in 2022. “The fundamental problem with property taxation is that what makes sense in economic terms isn’t easy in practical terms,” said Anna Clarke from the Housing Forum, a trade body. “You ideally want to tax the value of the asset annually to encourage people to vacate higher-value homes if they don’t need them. And you don’t want to tax moving, because that deters downsizing and people moving for work. But annual taxes will add to the bills of those who may not have a lot of income — such as asset-rich, cash-poor pensioners

THE VARIATIONS

Buyers pay 2 per cent stamp duty on between £125,001 and £250,000 of a purchase price; 5 per cent between £250,001 and £925,000; 10 per cent between £925,001 and £1.5 million; and 12 per cent on anything above that. There is a 5 per cent surcharge on the purchase of additional or second homes. First-time buyers pay only 5 per cent of purchase price between £300,001 and £500,000. Barring the odd stamp duty holiday, those rates have been frozen since December 2014, even though the average UK sold price has risen 52 per cent. Other countries have far lower rates of tax.

The US equivalent, property transfer tax, varies by state and 12 states don’t have one at all. The highest charge is in Delaware — 4 per cent of the sale price with the bill split equally between buyer and seller. French property transfer taxes vary by region but can be up to 5.81 per cent of the purchase price whereas in the Netherlands the rate for someone buying a main home is 2 per cent and in Sweden it is 1.5 per cent.

In Canada it varies by region but all are lower than the UK. The most populous province, Ontario, has a top rate of 2.5 per cent of purchase price, charged on homes worth more than CAN$2 million (£1.07 million). An average of 4 per cent of UK homes have changed hands every year since the 2008 financial crisis, according to the investment bank Jefferies. About 25 per cent of 2,000 homeowners polled by Barclays in April said the tax was the biggest barrier to moving house. Jonathan Pierce from Jefferies said: “Most economists agree it is a bad tax that clogs up the market and weakens growth.” One big problem with council tax, which was introduced in 1993, is that it is based on out-of-date property valuations.

Council tax bands in England and Scotland, which range from A (the lowest) to H (the highest), are still based on April 1991 house prices, with Scotland’s bands set at two thirds of the value of those in England. In Wales, where bands range from A to I, values are based on 2003 prices. Northern Ireland uses the rates system instead, with what you pay linked to property values in 2005.

This means that areas where house prices have risen most since 1991, especially London and the southeast, pay less council tax relative to their property value than those where house price growth has been more sluggish. In Blackpool a band D property will pay £2,392 in council tax, which works out at 1.52 per cent of the average property price of £157,368 for the area. This makes Blackpool the area with the highest tax rate, proportionally, in England, according to the estate agency Hampplus don, the band D bill is the lowest in the UK at £990 a year — 0.15 per cent of the average property price of £652,287.

John Muellbauer, a professor of economics at the University of Oxford, said it was “probably the most regressive property tax in the world. In each local authority the poorest homes pay the highest tax as a percentage of their property value.” In the US property taxes are usually regularly revalued — sometimes annually or every two to three years. Homeowners pay a percentage tax made up of as many as 14 separate levies set by states, counties and school boards to fund them.

Yet a UK revaluation could be divisive because those in London and the southeast, where property values have increased most since 1991, could be hit with much higher bills. “I remember chatting to someone a few years back who’d just spent the last two years of her life working on the government’s revaluation of council tax only for that to be abandoned as too political,” Clarke said. “The longer we leave the system the more out of date it gets and the bigger the shock — to Londoners mainly — of reform would be.”

SHOULD WE TAX SELLERS INSTEAD OF BUYERS?

 Applying CGT to the sale of your main home would mean that you would be taxed twice — once when you bought it, and again when you sold it, assuming that it had gone up in value. CGT is charged at 24 per cent for higher-rate taxpayers and 18 per cent for basic-rate taxpayers.

Main homes are exempt from any kind of CGT in 19 of the OECD countries, excluding the UK, while another 16 offer some kind of relief, depending on how long someone has lived in their home, so charging capital gains on main homes would be unusual. Taxing sellers’ gains might sound like a good idea, as they would have the funds from a property sale to pay the bill, and the Treasury could cash in on soaring house prices.

HM Revenue & Customs says that not charging CGT on someone’s main home costs it £31 billion a year. Yet changing the rule may not necessarily raise that much because homeowners would simply not sell. Jonathan Brandling-Harris from the estate agency House Collective said: “If you knew that selling your home would trigger an additional tax bill on top of the cost of moving and buying, you simply would not move unless you absolutely had to. That means fewer transactions, less choice, and a market that grinds to a halt.”

WHAT’S THE ANSWER?

While the government cannot afford to make tax cuts, Pierce said halving stamp duty rates for those buying their main home, which would lose the Treasury about £3.5 billion a year, could pay for itself. That’s because there would be more sales, while homeowners would free up housing wealth that they could then spend by downsizing. He said there was as much as £5 trillion of trapped wealth in privately owned homes. During the stamp duty holiday from July 2020 to June 2021, when purchases of up to £500,000 incurred no tax, Pierce said house sales rose 25 per cent.

Reductions of housing equity, either through downsizing or remortgaging, exceeded mortgage repayments for the first time since the financial crisis. “When a chain completes it tends to release equity from the stock, as those trading down often have less debt than is needed to purchase the same property by those trading up,” he said. “Older homeowners releasing equity might deposit the money in the bank, but some of that would almost certainly find its way into the real economy.”

Other suggestions are more radical. Muellbauer proposed replacing the top two council tax bands G and H, which cover 1.4 million of the highest-value properties in England and Wales, with a 0.5 per cent a year tax on their value. Foreign and second homeowners would pay 1 per cent. This would raise about £10 billion a year, he said. In turn higher rates of stamp duty for more expensive homes would be cut, which could boost sales. A proportional property tax similar to the US is something several campaign groups have called for.

The Treasury is reportedly looking at proposals from the centre-right think tank Onward, which would involve homeowners with properties worth more than £500,000 paying a 0.54 per cent annual tax on any value above £500,000 to replace stamp duty. Any home worth more than £1 million would pay 0.81 per cent on the portion over that threshold. The 5 per cent stamp duty surcharge on second homes would remain and those owners would also pay the annual property tax. It would also scrap council tax and replace it with a 0.44 per cent annual tax levied by councils on house value between £800 and £500,000 (a maximum of £2,196 a year). Someone with a £650,000 home would pay £3,006 a year — 0.44 per cent of £499,200 (the maximum £2,196) to their council and then another £810 a year — 0.54 per cent of the £150,000 portion above £500,000 to the government.

The annual tax would be paid by anyone who bought a home after it was introduced. Clarke suggested this transition could help to get round the political difficulties caused by some households suddenly paying a lot more — although the suggestion is you could avoid a new tax by not moving. Any changes would come with tradeoffs, and it is possible there is no perfect way to tax property that would leave everyone satisfied — simply piling more taxes on already stretched households will certainly not do that. 

Source: The Sunday Times

Are the earnings of an Overseas Filipino Worker (OFW) subject to tax?

For most Overseas Filipino Workers (OFWs), their earnings from abroad are exempt from Philippine income tax under the National Internal Revenue Code (NIRC) and BIR regulations, as long as:

1. You are a non-resident citizen – An OFW is classified as a non-resident citizen if they work and derive income outside the Philippines.

2. The income is from abroad – Only income from sources within the Philippines is taxable. Salaries/wages earned from foreign employers abroad are not considered Philippine-sourced.

   
   

What is NOT taxed:

• Salaries, wages, and allowances received from a foreign employer abroad.

What can still be taxed:

• Income earned within the Philippines (e.g., rental income from property in PH, business in PH).

• Passive income from PH sources (e.g., bank interest, dividends, royalties) – subject to final tax.

Important Notes:

• OFWs are not required to pay income tax on foreign earnings, but if they earn in PH (side business, investments, rentals), they must file and pay for that income.

• OFWs still need to pay PhilHealth, Pag-IBIG, and SSS contributions (if voluntary or mandatory for OEC processing).

Source: Ziggurat Real Estate