The tax challenges and opportunities for the next administration
About 24 million out of 110 million Filipinos are registered taxpayers. That is only 22 percent of the population or 50 percent of the total labor force in 2021.
Around 20 million are employees or compensation income earners and at least 6 million are earning P250,000 and below who are exempted from personal income tax.
Less than one million are registered professionals while three million single or sole proprietors are registered businesses, based on the 2020 report of the Bureau of Internal Revenue (BIR).
The first challenge is to further broaden the taxpayer base.
In the recent elections, the Commission on Elections reported more than 65 million registered voters. If at least 48 million Filipinos in the labor force will be registered, it will help increase tax collections notwithstanding income level.
Further, the BIR must work closely with the Department of Foreign Affairs given the increasing number of foreigners or resident aliens who are either gainfully employed or doing business here through their business partners, resident agents and/or common law partners who are Filipino citizens. Failure to register and pay taxes are criminal violations of the Tax Code, which may result in immediate deportation.
More than 98 percent of tax collections are from voluntary payments while large taxpayers contribute more than 65 percent, followed by Makati, South National Capital Region (NCR) and East NCR regions.
Tax revenues are mainly from income taxes contributing more than 50 percent of total collections, followed by value-added tax (VAT) and excise taxes accounting for more than 15 percent 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 audit and investigation, which contribute less than 2 percent of total collections.
With more than 1,000 tax evasion cases filed by the BIR from 2016 to 2021, less than 1 percent 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 at courts without going through the Department of Justice, and grant them access to bank accounts for fraudulent cases so they can prosecute big-time tax evaders, including tax-evading and corrupt politicians.
Lifting of bank secrecy will further enhance collections from the Tax Amnesty Act, which 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 BIR’s digital transformation (DX), it must also fund the modernization and recruitment of more tax experts, lawyers and data analytics specialists to operationalize DX. Exemption from salary standardization law and review of the Attrition Law, which aims to provide incentives to performing revenue officers, must be considered.
The next BIR chief will have to resolve the Marcos family’s estate tax case—which may be the biggest challenge given that it involves President-elect Ferdinand Marcos Jr. as one of the heirs/administrators.
The tax administration under Commissioner Caesar Dulay achieved the highest tax effort ratio in the past decade at 11.2 percent, which dropped to 10.91 percent in 2020 due to a series of lockdowns that led to closure of many micro and small enterprises.
Dulay attributed the improved performance to the DX programs, enhanced by its growing workforce of young and skilled professionals. 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.
Opportunities
The nomination of Lilia Guillermo, an IT expert and a former BIR Deputy Commissioner for Information Systems Group, as new BIR chief reassures the public that the government will continue modernization and digitalization.
With the full implementation of e-invoicing in 2023, the BIR will have real-time access to the sales of large taxpayers, exporters and e-commerce businesses. Its DX programs will help broaden the tax base and collect more VAT.
Hopefully, the Bureau of Customs will realign and automate its system to stop smuggling, the biggest tax leakage in VAT and excise tax collection. This is definitely a good opportunity for the new administration to increase collection without imposing new taxes.
Further, Guillermo’s plan to do a lifestyle check on influencers and professionals will be an opportunity to make them register and pay their taxes. Hopefully, this will be extended to government officials and politicians who are flaunting their wealth and luxurious lifestyle but not reporting it in their Statement of Assets, Liabilities and Net Worth (SALN).
Aside from the SALN, the BIR can also audit all the Statement of Campaign Contributions and Expenditures of individual candidates, political parties and party list groups, whether they won or not. It should increase tax collections as they are required to withhold 5 percent from all income and pay donor’s tax and/or income tax for campaign donations.
Government officials and politicians must set a good example.
Section 253 of the Tax Code provides that if they fail to pay their taxes correctly, they may be dismissed and disqualified perpetually.
Finally, if Marcos really wishes to help and support the micro, small and medium enterprises (MSMEs), his economic team should study a 10 percent 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 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 BIR, the Center for Strategic Reforms of the Philippines will continue to educate and inform the taxpaying public while working together with the BIR to promote 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.
If you want to be ready with new strategies, email us at [email protected] or contact 0917627 8805 to attend the Executive Tax Management Program of the Asian Consulting Group, exclusive for CEOs and business owners. INQ
This article reflects the personal opinion of the author and not 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.
