Paying taxes as easy as 1-2-3

Aside from automating tax registration and compliance, digital transformation of the tax administration must narrow the gap between those who register, declare or file their taxes correctly and on time, and those who simply don’t do anything at all.

Under the voluntary tax system, the Bureau of Internal Revenue (BIR) relies on what taxpayers declare, file and pay voluntarily. To determine whether the income declared and taxes paid are correct, BIR conducts regular (and supposedly random) audits and investigations every year. It seems pretty easy and efficient, but it’s costly and definitely, not efficient — owing to the fact that collections from tax assessments contribute less than 3 percent of the total revenue collections.

With the proposed Senate Bill No. 1346 or Ease of Paying Taxes (EOPT), Senator Sherwin Gatchalian wants taxpayers to improve ease of paying their taxes by putting in place a tax administration system that is effective and expedient to encourage taxpayers to pay their taxes truthfully and timely.

Among the salient features of SB 1346 or EOPT are: requiring only value added tax (VAT) invoices instead of official receipts; removing the requirement for payment of the annual registration fee; and allowing the filing and payment of returns electronically or manually in any authorized agent banks by removing venue restrictions.

We have been working with Sen. Gatchalian, who chairs the Senate Ways and Means Committee, in discussing how to further simplify and improve tax compliance to unburden our taxpayers, help our micro, small and medium enterprises (MSMEs), and increase voluntary compliance.

Influencing taxpayers’ behavior

One of the concepts I have learned in my Science of Behavior Change course with Professor Todd Rogers at the Harvard Kennedy School is libertarian paternalism. Policymakers can influence taxpayers’ behavior in a positive way i.e., filing and paying their taxes correctly and on time, while still respecting their freedom of choice. This approach aims to nudge taxpayers toward making better decisions without taking away their ability to choose.

One of the successful interventions on tax compliance was a study by Joe Bankman, professor of tax law at Stanford University, who observed the benefits of using pre-populated tax returns. He noted that, by removing irrelevant questions from tax returns, the taxpayers would feel that whatever questions are left would be important and tailored specifically for them. According to him, this generally leads to taxpayers being more honest in their tax filing as the questions are more direct and focused.

In improving the ease of paying taxes, we need to keep in mind ways to keep the compliance burden down – while also maintaining the government’s goal of increasing its revenue collections. Usually, these two goals go hand in hand insofar as reducing the compliance
burden increases the efficiency of the tax administration which, in turn, leads to increases in revenue collections.

Who are the target beneficiaries? What will be the cost to the government?

This would benefit the more than 26 million individual taxpayers who are either employed, self-employed, professionals or mixed-income earners. While the 23 million are employed or compensation income earners, most of them are qualified under Substituted Filing Tax System where the employers file on behalf of the qualified employees. At least 90 percent of the total tax collections from individuals are collected through the withholding tax system. Again, it seems simpler and convenient, but it’s not.

Since most employees are no longer required to file their tax returns, they don’t review their withholding taxes and whether their employers remitted the correct amount to the BIR. The burden now is on BIR to assess whether employers are declaring and remitting the correct amount of income taxes withheld from employees.

Compliance burden

The high-risk taxpayers are the self-employed and professionals. They are said to be the least compliant, both in terms of registration and filing/payment of taxes. Simply comparing the total number of licensed professionals and registered businesses with the Department of Trade and Industry and/or local government, we see the huge gap that is even increasing every year.

The cost to the government is the integration of a shared database with other government agencies to cross-check registration, as well as sending out pre-populated tax returns for individual taxpayers like a credit card bill so they would simply check if the tax information and amount due are correct or not. This can be done electronically or through mail. This will significantly increase registration and compliance.

There are two interventions in the proposal:

1. Pre-registration — automatically registering all licensed professionals and individuals
doing business that register either with the DTI or local government. Instead of separately registering, they would automatically be registered with the BIR and they could update it online

2. Pre-populated returns — generate pre-populated returns based on the shared data based and withheld taxes from employees and/or self-employed and professionals. If no sufficient data is available, the BIR could use a presumptive tax i.e., a predetermined percentage increase of income or tax payment based on previous year e.g., 20 percent increase from last filing.

As a broad overview, a pre-populated tax return is a tax return that the BIR fills out on behalf of a taxpayer based on data it has gathered from third parties or even the taxpayers themselves. In essence, the taxpayer’s role would be limited only to confirming or, if the data indicated are inaccurate, informing the tax agency of the correction.

So, how exactly does this help taxpayers and tax agencies? For taxpayers, the compliance burden is lessened because they no longer need to fill out each detail and their role is simply reduced to reviewing the pre-filled tax returns. Taxpayers would no longer need to worry about the accuracy and timeliness of filing and payment of their taxes since the tax agency would, for the most part, handle it.

For the BIR, the improved efficiency would result in more collections. For one, there would be a greater certainty that taxpayers are reporting their correct income, especially since the tax agency can countercheck the taxpayer’s information with data from third parties. There would also be less risk of tax evasion since every taxpayer would, by default, already have their tax returns pre-filled.

Having pre-filled tax returns would also result in less voluntary and involuntary errors.

Moreover, another benefit observed by Bankman is that utilizing pre-populated tax returns essentially combines the audit and the filing process into one. Here, the tax agency already does its audit at the point of filing. This leads to less resources being used and dedicated solely for audit purposes.

Elsewhere in the world

Based on a 2022 study by the Organization for Economic Cooperation and Development and Congressional Research Service, 83 administrations and 36 out of 195 countries in 2020 have used pre-filled tax returns in their jurisdictions. Examples of countries that have adopted pre-populated tax returns are Australia, Singapore and Colombia.

In the United States, the State of California has adopted pre-populated tax returns in their tax administration through the CalFile program.

The difference between our present voluntary system and having pre-populated tax returns is immediately apparent. Having pre-populated tax returns lessens the need for BIR audit or at least focus on high-risk taxpayers; reduces the likelihood that taxpayers would misdeclare their taxable income; and almost entirely removes the possibility that taxpayers would not file any returns at all.

The time to talk about and consider effective reforms like this is now. In recent times, the discussion about improving the ease of paying taxes has become more active. Legislators have proposed bills seeking to improve the ease of paying taxes or to institute a taxpayers’ bill of rights.

These proposed reforms must also consider making paying taxes as easy as 1-2-3 for all taxpayers, especially the MSMEs and the individual taxpayers. Implementing pre-populated tax returns must be considered as a salient feature of SB 1346 or the Ease of Paying Taxes bill, which the Senate Ways and Means Committee is deliberating now.