Administration and compliance are tax reform’s game changers

The comprehensive tax reform package, an integral part of the 10-point economic agenda of Mr. Duterte, could be his saving grace. If administered and implemented properly, the tax reform package could free the Philippines from poverty and help it achieve inclusive growth long after his six-year term ends.

It is not the first time that the Philippine tax system has had to be reformed. In 1997, Congress passed Republic Act 8424 or the Tax Reform Act of 1997. However, the adoption and implementation of RA 8424 has not brought about the expected substantial revenue increase to support massive infrastructure and human resource expenditure. It can be said that tax reform will benefit the whole nation if its effects are felt by the people. Proficient tax administration and compliance, therefore, play a crucial role in the success of tax reform.

The fundamental role of tax administration is to render quality taxpayer service and to encourage voluntary compliance with tax laws and to detect and penalize non-compliance. The 2015 BIR annual report shows that the largest chunk of the Bureau’s 2015 collections consisted of voluntary payments, which accounted for about 97.83% of the total. Final assessments brought in 1.94% of collections while only 0.23% was raised from delinquent accounts.

The challenge, therefore, of the proposed tax reform is to devise administrative measures to streamline the procedures and process that will make tax compliance more straightforward and easy.

House Bill No. 4774 or the “Tax Reform for Acceleration and Inclusion Act” (TRAIN) offers various administrative measures to ensure that the correct taxes are paid by the taxpayers and correct taxes are collected by the BIR. These administrative measures were inserted in the bill to address the need for collection efficiency prior to resorting to new taxes.

Among the administrative measures proposed under the bill are the mandatory issuance of electronic official receipts and invoices for sales above P25.00 which must be simultaneously transmitted to the BIR upon sale and the issuance to the buyer of electronic receipts or invoices for every sale or receipt in the amount of P100 or more or when the sale or transfer is made by a person liable to VAT to another person (also liable to VAT) or when payments cover rentals, commissions, compensations or fees. Another measure proposed is the mandatory use of cash register machines/point of sale terminals (CRM/POS) by VAT-registered taxpayers which then must be linked to the BIR’s servers.

Even as the BIR has put in place some programs to address the practice of some individuals and business establishments who refuse to issue official receipts and invoices (such as the “no official receipt complaint project”), the proposed administrative measures will still add more safeguards for non-compliance and will also greatly discourage the practice of non-reporting of sales and under-declaration of sales. The knowledge that the BIR can readily determine the actual sales/purchase transactions of a certain taxpayer with just a click may create more pressure on taxpayers to be more diligent in compliance.

Further, the proposal for the BIR to create an electronic system that will link sales and purchase data to the Bureau’s servers may dampen the tendency of the BIR to issue exorbitant assessments to taxpayers. If this becomes operational, it will be an immense relief for taxpayers as we are all aware of the enormous compliance costs that taxpayers are already burdened with, not to mention the stress that the taxpayer deals with in an assessment.

Experience has shown that assessment through the matching of sales data of the seller against the purchase data of the purchaser produces discrepancies mainly due to the timing of the recognition of sales and purchases. Often, the seller recognizes the sale upon issuance of an invoice while the purchaser may recognize the purchase belatedly when it pays for its purchase. There could be other factors behind the discrepancies but if the proposed administrative measures can limit the tax assessment to a reasonable minimum and this message is properly communicated, this proposed measure will generate strong support and cooperation from taxpayers.

Although the proposed administrative measures have positive benefits, they also have some drawbacks.

Changes in business taxation may have a disruptive effect on businesses. Thus, the timing of the implementation is critical. The period of one year and six months from the effectivity of the law to implement these measures may be revisited to determine reasonableness and viability.

Further, as the proposed measures will entail investment in hardware, systems and people, taxpayers may want some payoff for the costs that they will incur, possibly in the form of reducing the BIR filing requirements. BIR forms that require duplicated information may be consolidated or information that is unnecessary and not used by the tax authorities may be done away with. In sum, BIR forms must not be too complex for laymen. Voluntary compliance may not be achieved if the taxpayer is confronted with onerous and ambiguous filing requirements. 

Another administrative measure being considered in TRAIN is the establishment of electronic interconnectivity by the BIR with appropriate government agencies within one year and six months from the effectivity of the law.

We have seen the various efforts of the BIR to establish interconnection with various agencies as early as 2000 by requiring these agencies to provide specific data to them on a regular basis. Examples are the Department of Trade and Industry’s production and sales of manufacturing companies per industry; the Department of Transportation and Communication’s gross receipts of land, sea and air transport firms and revenue of telecommunication/ telephone/telegraph/radio firms per company; Bangko Sentral ng Pilipinas reports on interest and royalty income, profits from foreign exchange transactions, rental of properties of banks and their branches; and Securities and Exchange Commission data on names and addresses of all active registered corporations and partnerships with their financial statements. All departments including Government Owned and Controlled Corporations (GOCCs) are also required to list their contracts with private contractors. 

The proposed electronic interconnectivity with appropriate government agencies will likely speed the gathering and collection of data to enhance revenue generation. The challenge, however, of an efficient tax administration does not depend solely on the interconnection of these agencies but on how the data can be translated into meaningful information that will assist in evaluating non-compliance and utilizing this information to collect tax in the fairest and most efficient way.

The BIR’s Reconciliation of Listing for Enforcement (RELIEF) initiative supports efforts to utilize third-party information through the cross referencing of data sources like the taxpayers’ Summary List of Sales and Purchases and the use of data generated by the Bureau of Customs. These are the current tools of the BIR in detecting non-compliance. With the proposed administrative measure of electronic interconnectivity with government agencies, it is expected that more sophisticated tools will be devised to help increase the level of tax compliance.

The tax reform package has a long way to go. The economic team of the current administration, the House of Representative, various agencies, the private sector and organizations which have toiled to put this TRAIN in motion deserve our highest commendation. But at the end of the day, these reforms may just be a vision if these are not administered and implemented properly and effectively. Good administration and compliance are still the game changers in the process of tax reform. 

Farrah Andres-Neagoe is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.

As published in BusinessWorld, dated 14 March 2017