MAPping the Future

There is a recent surge of proposed legislations related to the ease of paying taxes. One such proposed legislation is Senate Bill No. 1346, or the Ease of Paying Taxes Bill, which is presently pending with the Committee on Ways and Means.

Among the salient features of SB 1346 are allowing the filing and payment of returns electronically, requiring only VAT invoices instead of official receipts, and removing the requirement for payment of the annual registration fee.

However, while the said bill is already admirable in its goals, we can be more ambitious with our proposed solutions.

In improving the ease of paying taxes, we need to always keep in mind ways to keep the compliance burden down – while also maintaining the government’s goal of increasing its revenue collections.

Moreover, it must also be balanced with the government’s goal of increasing its revenue collections.

Usually, these two goals go hand-in-hand insofar as reducing the compliance burden increases the efficiency of the tax administration which, in turn, leads to increases in revenue collections.

One of the solutions we discussed in our Science of Behavior Change class with Prof. Todd Rogers at the Harvard Kennedy School is the implementation of data-driven tax systems.

Data-driven systems, outside of taxation, have been used by businesses in personalizing advertisements and product recommendations. If used in the tax system, we can make tax filing more personalized.

One of the ways data-driven systems have been employed in the tax administration is through the use of “pre-populated tax returns” or, sometimes, pre-filled tax returns.

As a broad overview, a pre-populated tax return is, simply put, a tax return that the revenue collection agency fills out on behalf of a taxpayer based on data it has gathered from third parties or even the taxpayers themselves. In essence, the taxpayer’s role would be limited only to confirming or, if the data indicated is inaccurate, informing the tax agency of the correction.

So, how exactly does this help taxpayers and tax agencies?

In a study by Prof. Bankman, a professor of tax law at Stanford University, he observed the benefits of using pre-populated tax returns. He noted that, by removing irrelevant questions from tax returns, the taxpayers will feel that whatever questions are left would be important and tailored specifically for them. According to him, this generally leads to taxpayers being more honest in their tax filings.

For taxpayers, the compliance burden is lessened because they no longer need to fill out each detail and their role is simply reduced to reviewing the pre-filled tax returns. Taxpayers would no longer need to worry about the filing and payment of their taxes since the tax agency would, for the most part, handle it.

It would likewise result in a faster process and, in the case of overpaid taxes, quicker refunds since the information is already at the hands of the revenue collection agency.

For the tax collection agency, the improved efficiency would result in greater collections. For one, there would be a greater certainty that taxpayers are reporting their real income, especially since the tax agency can countercheck the taxpayer’s information with data from third parties. There would also be less risk of tax evasion since every taxpayer would, by default, already have their tax returns pre-filled.

Having pre-filled tax returns would also result in less voluntary and involuntary errors.

Moreover, another benefit observed by Prof. Bankman is that utilizing pre-populated tax returns essentially combines the audit and the filing process into one. Here, the tax agency already does its audit at the point of filing. This leads to less resources being used and dedicated solely for audit purposes.

Based on a 2022 study by the OECD and Congressional Research Service, 83 administrations and 36 out of 195 countries in 2020 have used pre-filled tax returns in their jurisdictions. Examples of countries that have adopted pre-populated tax returns are Australia, Singapore, and Colombia.

In the United States, the State of California had adopted pre-populated tax returns in their tax administration through the CalFile program.

How different is this from our current tax administration in the Philippines? Presently, we have adopted a voluntary system of paying taxes. This means that taxpayers would have to go and fill in the tax returns on their own, submit it to the Bureau of Internal Revenue, and pay the taxes due. To ensure that taxpayers are paying the right taxes, they can be subjected to a BIR audit. If the taxpayer paid the right taxes, then there would be no issues. If the taxpayer did not, then they would be imposed deficiency taxes, penalties, and compromises.

The difference between our present voluntary system and having pre-populated tax returns is immediately apparent. Having pre-populated tax returns lessens the need for BIR audit, reduces the likelihood that taxpayers would misdeclare their taxable income, and almost entirely removes the possibility that taxpayers would not file any returns at all.

The time to talk about and consider effective reforms like this is now. In recent times, the discussion about improving the ease of paying taxes has become more active. Legislators have proposed bills seeking to improve the ease of paying taxes or to institute a taxpayers’ bill of rights. These proposed reforms must also consider making tax compliance easier for all taxpayers, especially the SMEs and the individual taxpayers. Implementing pre-populated tax returns must be considered as a salient feature of these proposed legislations.

(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 a MPA/Mason Fellow at Harvard Kennedy School. He is a member of MAP Tax Committee and MAP Ease of Doing Business Committee, Co-chair of Paying Taxes on Ease of Doing Business Task Force, and Chief Tax Advisor of Asian Consulting Group. Feedback at <map@map.org.ph> and <mon@acg.ph>.)