Tax restructuring 101

Promoting honesty and integrity in paying taxes must be at the core of the genuine tax reform in the Philippines—a simpler, fairer and more efficient tax system as described earlier by Finance Secretary Carlos Dominguez III.

The convenience of taxpayers must also be the highest priority of the government. Stopping corruption and ending bureaucracy in the Bureau of Internal Revenue (BIR) by simplifying business registration and tax compliance as mandated by President Duterte is clearly the focus of BIR Commissioner Caesar Dulay.

However, corruption is already embedded in the system. Full automation of the tax system is a must—from online registration, real-time point-of-sales reporting to risk-based computerized audit.

It is also necessary to restructure the tax system and make a gradual shift from direct taxation to indirect taxation, which is easier to monitor.

At present, more than 60 percent of total collection is from income tax collections followed by VAT collections at 20 percent. The goal is to shift toward 40 percent collection through indirect taxes.

Here are some key strategies in restructuring our tax system:

1. Broadening taxpayer base. Increase registered employees from 13 million to 30 million; small and medium enterprises (SMEs) from 2 million to 5 million; professionals from 200,000 to 2 million; and large corporations from 2,000 to 5,000;

2. Lower income tax for employees. Almost 20 percent of total collections are from withholding taxes from employees, representing more than 80 percent of contributions from individual taxpayers while the rest of self employed and professionals conveniently underdeclare or not report any income at all.

Further, only 20 percent of registered employees have more than P500,000 taxable compensation income, while 60 percent remain as minimum wage earners. It will make sense if we separate a graduated income tax table exclusive for employees, and focus on high value executives who should be declaring at least P1 million annual compensation income.

3. Flat single tax for small businesses. As proposed by Sen. Bam Aquino, to support and help small businesses grow, the government must make a sacrifice and be more lenient to small business or those with less than P50 million gross sales. Instead of requiring tons of tax compliance and collecting many taxes, imposing a flat 10 percent tax might improve and encourage voluntary compliance from the fast growing micro and small enterprises;

4. Fixed personal and corporate income rate for medium and large businesses. Whether a sole proprietor or an incorporated enterprise, medium to large businesses must be imposed a lower fixed income tax from 32 percent (for sole proprietors) and 30 percent (for corporations) to 25 percent income tax rate, which is the average Asean income tax rate.

5. Rationalize fiscal incentives. This has been long overdue. We need more political will to cut tax holidays of big foreign corporations that are unnecessarily enjoying incentives while local startups are burdened by high tax rates and costly tax compliance requirements.

6. Automate business registration, tax compliance and risk-based audit. We have around 3,000 BIR examiners who will never get to audit more than 15 million registered taxpayers and two million SMEs. Large taxpayers must be subject to a risk-based audit per industry.
7. Incentivize honest tax payment. This month, we will propose and discuss with BIR a certification program that incentivizes individuals and enterprises who wish to pay the right taxes, but are discouraged due to annual recurring audit and assessment including significantly high penalties and compromises.

This can also support the proposed big time tax amnesty program to give all taxpayers fresh start to declare their true profits and assets sans penalties and compromises.

For more information about this scheme, called the “Seal of Honesty” certification program, e-mail us at [email protected].—Contributed
The author is adviser to the Bureau of Internal Revenue on tax administration reforms in promoting inclusive growth.