Warning: Low Ceiling

By Jessa Mary Ann Cedeño, 16 January 2014

Where did all the hard-earned Christmas bonuses go? Perhaps, this has become a common concern for most employees in light of the recently concluded holidays. Amidst the generous pouring of cash gifts and bonuses last Christmas season, even the most grateful of employees most likely ended up pondering its insufficiency for keeping up with the festivities. How they wished they had received more.

In response to such clamor, which, in all likelihood, has been going on for years, Senate President Pro Tempore Ralph Recto filed Senate Bill (SB) 256, which seeks to amend the Tax Code by increasing the ceiling on income tax exemptions covering the 13th month pay, Christmas bonus, and other cash bonuses from P30,000 to P75,000.The current ceiling has been in place since 1994, following the effectivity of Republic Act No. 7833, which exempts the mandated 13th month pay and other cash bonuses from taxation, but only to the extent of P30,000. Two decades have passed, and yet the same threshold is implemented vis-a-vis the volatile Consumer Price Index (CPI) and inflation rate. In essence, inflation is a sound justification for the passage of SB 256. With the erosion of the purchasing power of real wages due to increasing prices of commodities and the cost of living in general, the present threshold is rendered unrealistic.

To illustrate this point in concrete terms, Sen. Recto cited the salary of government personnel. In 1994, the monthly salary of a government employee with the lowest salary grade was P2,800 while that of the President of the Philippines stood at P25,000. Currently, the monthly salary of the former is P9,000 while that of the latter stands at P120,000. Although there have clearly been increases in the legislated pay scale, the subject ceiling on tax exemptions has remained the same.

As cited in the explanatory note of the bill, findings of the National Tax Research Center (NTRC) and National Economic Development Authority (NEDA) show that the purchasing power of P30,000 in 1994 could range from P72,000 to P75,000 in 2011, after adjusting for inflation. With the mounting disparity between nominal and real wages, Sen. Recto is pushing to increase the subject ceiling from P30,000 to P75,000 to be more responsive to the needs of the times.

In addition, the bill also proposes a periodic adjustment of the ceiling every three years, starting from its effective date, using the CPI published by the National Statistics Office (NSO) as reference. The Thirteenth Month Pay Law (Presidential Decree No. 851, as amended by Memorandum Order No. 28) was enacted to afford protection of real wages from erosion due to worldwide inflation. It serves as a means for the working masses to aptly celebrate Christmas and New Year. In this regard, the proposed increase in the ceiling on the income tax exemption of 13th month pay and other cash bonuses of the same nature will go a long way in carrying out the purpose for which the law was formulated.

Since taxation generally involves the power to destroy, it must be carefully and justly exercised; otherwise, the “hen that lays the golden egg” shall cease to exist (SC Case G.R. No. L-25043, dated April 26, 1968). Based on this, it is only fair to adjust the tax exemption of these employment benefits because the working masses also deserve protection from the destroying powers of taxation, in consonance with the Constitutional mandate of social justice.

In a nutshell, SB 256 is a sound remedial measure that may restore the purchasing power of wages to its historical level, and consequently, reinforce an equitable tax system that promotes social justice, which is one of the founding principles of our democratic tradition. Though an ideal standard, it is something we aspire to achieve, if not at least approximate.


The author is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 


Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.