MAPping the Future

Approximately 24 million (M) out of 110M Filipinos are registered taxpayers. That is only 22% of the total population or 50% of the 48M total labor force in 2021.

 

Around 20M are employees or compensation income earners and at least 6M are earning P250,000 and below who are exempted from personal income tax under the TRAIN law.

 

Less than 1M are registered professionals while 3M single or sole proprietors are registered businesses according to the annual report of the Bureau of Internal Revenue (BIR) in 2020.

 

The first challenge is to further broaden the taxpayer base. In the recent May 2022 elections, COMELEC reported more than 65M registered voters. If at least 48M Filipinos in the labor force will be registered, it will help increase tax collections notwithstanding their income level.

 

Further, the BIR must work closely with the Department of Foreign Affairs (DFA) given the increasing number of foreigners or resident aliens who are either gainfully employed or doing business in the Philippines through their business partners, resident agents and/or common law partners who are Filipino citizens. This is owing to the fact that failure to register and pay taxes are criminal violations of the Tax Code which may result in immediate deportation of foreigners who are found guilty.

 

More than 98 percent of total tax collections are from voluntary payments while large taxpayers contribute more than 65% of the total collections by implementing office followed by Makati, South NCR and East NCR regions.

 

Tax revenues are mainly from Income Taxes contributing more than 50% of the total collections followed by value-added tax (VAT) and excise taxes by more than 15% each.

 

The second challenge is to broaden the tax base by limiting exemptions and fixing tax leakages caused by tax evasion and smuggling. Implementing General Tax Amnesty and lifting the Bank Secrecy Law will help the BIR increase tax collections without the audit and investigation which contributes less than 2% of the total collections.

 

With more than 1,000 tax evasion cases filed by the BIR from 2016 to 2021, less than 1% have been decided and most big cases have been dismissed due to lack of prima facie evidence or due process. The new administration must empower the BIR to file tax evasion cases directly to courts without going through the Department of Justice (DOJ), and grant them access to bank accounts for fraudulent cases so they can prosecute big-time tax evaders, including corrupt politicians who are also not paying taxes.

 

Lifting of bank secrecy will further enhance collections from the General Tax Amnesty owing to the fact that the Amnesty Act (Delinquency and Estate Tax Amnesty) generated only P8.8 Billion for 2019-2020.

 

The third challenge is to increase the budget of the BIR given the P2.445 Trillion target revenue for 2022. While the Congress appropriated P1 Billion for the digital transformation (DX) programs of the Bureau, the overall budget of the BIR must also be further rationalized to fund modernization and recruitment of more tax experts, lawyers and data analytics specialists to operationalize the DX programs. Exemption from salary standardization law and revisit of the Attrition Law, which aims to provide incentives to performing revenue officers, must also be considered.

 

The next Commissioner of Internal Revenue will have to resolve and settle the Marcos family’s estate tax case. This may be the biggest challenge as filing criminal charges as the last remedy of the BIR may not be possible given that it involves President-elect Ferdinand Marcos, Jr. as one the heirs/administrators.

 

The tax administration under the leadership of Commissioner Caesar Dulay has achieved the highest tax effort ratio in the past decade  pre-pandemic at 11.2% which dropped to 10.91% in 2020 due to a series of lockdowns which led to closure of many micro and small enterprises.

 

Outgoing Commissioner Dulay attributed its improved collection performance and broader taxpayer base in 2021 to the Bureau’s DX programs enhanced by its growing workforce of young and skilled professionals. The BIR’s collection steadily grew from P1.58 Trillion in 2016 to P2.19 Trillion in 2019. Although collections went down to P1.96 Trillion at the height of the pandemic, it climbed back to P2.08 Trillion in 2021.

 

The nomination of incoming Commissioner Lilia Guillermo, who’s an IT expert and a former Deputy Commissioner of Internal Revenue for Information Systems Group, further reassures the public that the government will continue the modernization and digitalization of the BIR.

 

With the full implementation of eInvoicing in 2023 as provided by the TRAIN Law, the BIR will have real-time access to the sales of large taxpayers, exporters and eCommerce businesses.

 

Its DX programs, especially with the implementation of the eInvoicing System will help the BIR broaden its tax base and collect more VAT.  Hopefully, the Bureau of Customs will realign and automate its system to stop smuggling which is the biggest tax leakage in the collection of VAT and excise taxes.

 

This is definitely a good opportunity for the new administration to increase its collection without imposing new taxes.

 

Further, the plan of incoming Commissioner Lilia Guillermo to do a lifestyle check on influencers and professionals will also be an opportunity to encourage them to register and pay their taxes.

 

Hopefully, this lifestyle check will be extended to government officials and politicians who are also flaunting their wealth and luxurious lifestyle but are not reporting it in their Statement of Assets, Liabilities and Net Worth (SALN).

 

Aside from the SALN, the Bureau can also audit all the Statement of Campaign Contributions and Expenditures (SOCE) of individual candidates, political parties and party-list groups, whether they won or not in the recent elections. Given the billions of pesos spent during the campaign, it should increase tax collections as they’re required to withhold 5% from all their income payments and pay donor’s tax and/or income tax for campaign donations spent or unspent before or after the official campaign period.’

 

Government officials and politicians must set a good example. Section 253 of the Tax Code also provides that if they fail to pay their taxes correctly, they may be dismissed from office and be disqualified perpetually from holding any public office, to vote and to participate in any election.

 

Finally, if President-elect Ferdinand Marcos, Jr. really wishes to help and support the Micro, Small and Medium Enterprises (MSMEs), his economic team should study a 10% flat tax system for MSMEs with net worth of P100 Million and below, and annual sales of less than P1 Billion.

 

This will further simplify tax compliance and encourage more voluntary compliance from all sectors, including startups and those in the digital and gig economy. The audit and investigation can now focus on high-risk and big-time tax evaders and smugglers rather than its random audit of small taxpayers.

 

As the advocacy partner of the Bureau, the Center for Strategic Reforms of the Philippines (CSR Philippines) will continue to educate and inform the taxpaying public while working together with the BIR in promoting honest tax payments and compliance.

 

With the new administration comes new policies and regulations. CEOs and business owners must adopt and comply with them to avoid unnecessary taxes, penalties and compromises.

 

While it is a challenge, it can also be an opportunity to save from taxes. If you want to be ready with new strategies, you may email us at consult@acg.ph or contact 0917 627 8805 to attend the Executive Tax Management Program (ETMP) of the Asian Consulting Group. This is exclusive for CEOs and business owners who want to get rid of their BIR problems.

 

(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 Member of the MAP Ease of Doing Business Committee, Founding Chair and Senior Tax Advisor of Asian Consulting Group and Co-Chair of Paying Taxes – EODB Task Force. He is Trustee of CSR Philippines – the advocacy partner of the BIR, Department of Trade and Industry (DTI), and Anti-Red Tape Authority (ARTA) on ease of doing business and tax reform.)