Improving the quality of tax assessments

Recently, I had a meeting with a client regarding pending tax assessments. He was flying in from his office in another Asian country and had scheduled his quarterly meeting with me so we can discuss various tax issues.

Of the many items on the agenda, the biggest item for discussion was various tax assessments. I had both good news and bad news. Some of the pending assessments have been resolved and the cases have been terminated. The bad news, however, is that one case remains pending and is promising to be an uphill battle. This one has been pending for quite some time and of course, the regional CFO wants to understand why the tax assessment is not yet resolved. I had a long explanation of why the process is taking so long. Too many circumstances contributing to the delay left both of us frustrated just discussing them.

We covered all types of reasons from the very basic like the examiner is overloaded to the very challenging like examiner thinks the issue is a gray area. I saw the CFO raise one brow and shake his head when I said that one of the items in the assessment is the disallowance of fees paid to designers based in Singapore.

The CFO then asked me if there was anything we can do to force the Bureau of Internal Revenue (BIR) to see some sense into our arguments and close this assessment as soon as possible. I said I would be keeping my fingers crossed and hope that our plan of action will actually make a difference.

After he left, I once again looked at the items in the tax assessments. There were some items which were valid and we have already agreed that those items will be paid to the BIR together with all the penalties. However, a big chunk of the assessment was from factual and legal issues for which we have already submitted documents and legal arguments. My client has asked and requested for advice — if the BIR examiner is being unreasonable and the assessment is without basis, what can a taxpayer do?

The taxpayer can file an administrative complaint against the employee. But filing a case to address issues in another pending case hardly seems to be a rational solution. It will just exacerbate an already tense situation.

The assessment process does have procedural steps that a taxpayer can follow so he can elevate his case to the Court of Tax Appeals (CTA). Those steps, however, will incur more time and expense for the taxpayer. Bringing the case to court is not the first choice of a taxpayer as it will redirect efforts to the court case instead of allowing the taxpayer to concentrate on daily operations and growing the business.

On top of the enormous effort required, the taxpayer is not allowed to recover his costs should he, later on, prove that the assessment had no legal and factual bases, to begin with.

Hence, the BIR has nothing to lose and everything to gain if the assessment is challenged before the CTA. Not surprisingly, I have had various meetings where I was informed that the taxpayer’s only recourse is to challenge the decision before the Court of Tax Appeals.

With the Philippines sliding several notches in the competitiveness ratings, the government should look at various issues to improve the ease of doing business in the Philippines. High on the agenda is improving the tax system. In this regard, the administration is active in proposing changes to the Tax Code, with the objective of making tax compliance simpler and rates fair and competitive compared to our ASEAN neighbors. This is indeed a welcome development for taxpayers. Yet changes in the tax rates and compliance requirements alone will not improve our competitiveness and make the Philippines a sought-after investment destination.

The government also has to look at improving the tax assessment process. It has to put systems in place which will make the process more efficient and reliable. I once had an opportunity to observe a Senate Committee Hearing where the BIR presented its proposals aimed at improving the agency’s efficiency. The BIR said it is operating with less than 50% of the manpower needed. It was reported that there are about 21,000 approved plantilla positions but only about 10,000 are currently filled. With this huge manpower shortage, it is no wonder that tax assessments are taking a long time. If all examiners are overloaded, we can hardly expect them to judiciously study the protests and documents submitted by the taxpayers.

Thus, it is important that most vacant positions be filled as soon as possible. Yet one wonders why the BIR cannot fill up those positions? Is the salary too low? Is the job too demanding? In the same hearing, the BIR sought an exemption from the salary standardization law. It said that an exemption will allow the bureau to hire more employees. The Department of Budget Management was reported to have misgivings about the proposal saying that it will be too costly for the government. However, greater is the cost if we continue with the BIR operating at a subpar level. As the main tax-collecting agency, the government must deploy adequate resources to operate the BIR at an optimum level.

Increasing the salary and filling up the vacant positions will not be a panacea for some of the inefficiencies in the tax assessment process. If the BIR employees will be receiving salaries comparable to the private sector, then they should also be evaluated like employees in the private sector. The BIR should emphasize meritocracy for salary increases. While the ability to improve collection is an important aspect of the BIR’s mandate, the employees should also be properly evaluated on the quality of tax assessments they issue and how often such assessments have been found to be baseless.

I have frequented some government offices where customer evaluation forms are ubiquitously in place. For example, in the Bangko Sentral ng Pilipinas, a customer evaluation form is sent to me electronically every time I complete a transaction. Perhaps, the BIR should also consider this mode of tracking their employees’ performance.

To be fair, despite all the limitations they face within the BIR, most examiners I have dealt with are highly competent, dedicated and efficient. They are true examples of selfless government service. Putting in a customer evaluation system will allow the BIR to recognize who among its employees deserve the highest commendation and, perhaps, the higher pay increases.

As in most organizations, employees are one of the most important assets and one of the greatest determinants of whether an organization will succeed or fail. Retaining the best talent by rewarding competence and efficiency is a basic factor in ensuring that employees are moving towards the same goal as the organization itself. An efficient BIR is every taxpayer’s dream and perhaps, this is the most opportune time to make that dream a reality.

Eleanor Lucas Roque is a principal and head of the Tax Advisory and Compliance division of P&A Grant Thornton.

As published in BusinessWorld, dated 07 November 2017