The BIR Audit is a process dreaded by businesses. With just a letter, business owners begin to panic, wondering whether or not they have complied properly. It does not matter whether or not they are actually compliant, the BIR eventually finds something to assess. If they don’t find anything in their first audit, then they simply come again the following year. Again, and again, until they inevitably do.
But to what end?
To a mere 2.42% of the total revenue collection. That was the amount collected via Preliminary and Final Assessments for 2017. An additional 0.18% also came from Delinquent Accounts.
For a nation that collected P1.78 Trillion, these collections may be insignificant to the government. For the taxpayers affected, it could make or break their businesses.
Then, there is the actual fear when faced with the BIR Audit – the fear of being harassed. Taxpayers have all heard of the horror stories surrounding it.
Corrupt examiners offer an easy way to get rid of the BIR Audit.
Unfortunately, their offer is simply a “Pay Now, Pay More Later” scheme. The moment businesses agree to compromise, corrupt examiners simply find more reasons to audit them. They ask for higher and higher bribe money until the taxpayer realizes their mistake. By then, the taxpayers will be subject to much higher deficiency taxes and still be audited yearly.
An even worse scenario can arise from the appointment of a new Commissioner of Internal Revenue. The same taxpayers can be subject to tax evasion cases even if they were already audited for those taxable years. If these were already settled through illegal means, then it only doubles the expense, if not more.
Unfortunately, some accountants and/or lawyers act as fixers to settle BIR audit. These dishonest practitioners often receive a portion of the bribe money as their commission. In this, both the government (unable to collect the right taxes) and the taxpayers (payment of unnecessary compromises or bribes) suffer.
A recent report by the Presidential Anti-Corruption Commission (PACC) named the Bureau of Internal Revenue (BIR) as one of the most corrupt agencies.
It is no wonder then that some taxpayers are not registered with the BIR.
In its 2017 Annual Report, the BIR stated that there were 19,260,057 registered individual taxpayers throughout the country. Contrasting this with an estimated 40 million working population, as reported by the Philippine Statistics Authority, paints a clear image.
There is nothing wrong with auditing taxpayers and ensuring that they are paying their taxes. The problem lies in its implementation – a process which unfortunately is quite open to unscrupulous personnel.
If the BIR wanted to improve its collections, there are plenty of other ways to do so. The Comprehensive Tax Reform Program (CTRP) presents a solution that both improves revenue collection and unburdens taxpayers. Package 1B’s proposed amnesty will allow taxpayers to start anew and the BIR to collect some revenues from their backlog.
With that tax amnesty, it will then be important to also lift the Bank Secrecy Law. The amendment of such a law would ensure that the government will have the means to pursue the real and big-time tax evaders.
Unfortunately, the unintended consequences of the TRAIN Law have slowed down the entire tax reform initiative. Politicians running for reelection suddenly do not want to be associated with the tax reform.
Never mind that continuing the tax reform will actually solve some of the government’s problems.
Lowering the Corporate Income Tax, as presented by Package 2 (or TRABAHO Bill), will broaden the taxpayer base. Revenue collections do not have to be improved by high tax rates. In fact, the Philippines has the highest corporate income tax in the region yet there are others with better collections.
By having lower tax rates, more taxpayers are encouraged to open their own businesses. More businesses mean more corporations to collect from.
Alternatively, the government could improve its existing processes. A tax policy reform without tax administrative reform is pointless. Since the CTRP might be (unjustifiably) slowed down, the government should improve its tax administration in the meantime.
Improving the tax administration entails making it easier for taxpayers to comply. Tax compliance should already be automated, whether it is for the filing of returns, the payment of taxes, or recordkeeping. Yes, there is already the BIR’s eFiling and Payment System (eFPS) and the eBIRForms platform.
Unfortunately, it is unoptimized. According to a report by the Organisation for Economic Cooperation and Development (OECD), electronic filing and payment of taxes in the Philippines is minimal. Only 1% of personal income tax returns were filed electronically, with 14% for corporate income tax returns and 16% for VAT returns.
Bookkeeping should also be done electronically by default. Already, there are computerized bookkeeping systems in place, but it exists as an exemption. There are significantly more requirements to be able to use one even when, in practice, it will be the same. There is no point to having it done manually. Electronic bookkeeping would ease the burden on both the taxpayers and the BIR.
Then, there is the meat of the matter – the problematic nature of the BIR Audit.
There need to be stricter rules governing the revenue officers. For one, the government could take a cue from the recent Ease of Doing Business Act. Government employees found in violation of the law, on their second offense, will be criminally liable, permanently dismissed, and perpetually disqualified from all government positions.
The audit periods should be made significantly shorter to ensure that examiners will not have the means to harass taxpayers. To support this initiative, the BIR could even forego auditing microbusinesses. The BIR’s collection from these businesses are very minimal and the taxpayers only end up feeling harassed.
If they want to be regarded as a clean government agency, then they should implement policies that would not put them in questionable situations.
To protect themselves, taxpayers need to learn how exactly the BIR Audit works. Taxpayers are entitled to due process, even in the BIR Audit. Learning the process and what to look for is the key to avoiding harassment from corrupt revenue officers. Whether this means attending a tax seminar or an executive tax briefing, taxpayers have a variety of options to choose from.
The Philippines’ first Tax Hub promotes tax education as part of its initiatives. Lack of tax education is one of the leading causes of failed tax compliance and, inevitably, expensive fines.
(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is one of the 2017 Outstanding Young Persons of the World, a Move Awards 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), an Asia CEO Young Leader of the Year, and Founding President of the Asian Consulting Group (ACG) and the Center for Strategic Reforms of the Philippines (CSR Philippines). Feedback at <firstname.lastname@example.org> and <email@example.com>. For previous articles, please visit <map.org.ph>)