Tax exchange information

They say that the only way to survive the 21st century is to become part of the knowledge train—by knowing where to get the right information and being able to use it. Information is now a source of power.

A businessman gathers information and finds out whether an endeavor is feasible or not before investing in a foreign country. He will calculate the political as well as business risk, including of course the taxes he has to pay. This is where information sharing can be useful as it can be both important in the local and international arenas of taxation. Taxation is a mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate objectives.

The Bureau of Internal Revenue (BIR) has once again reached another milestone in its campaign to enhance tax administration in the Philippines. While the BIR intensifies its local efforts, it also addresses international issues regarding Philippine taxation. The Organization for Economic Cooperation and Development (OECD) has found the Philippine legal framework aligned with the global standard on tax information sharing, save for a few concerns. The OECD briefly blacklisted the Philippines in April 2009 as an uncooperative tax haven. The review, conducted under the auspices of the Global Forum on Transparency and Exchange of Information for Tax Purposes, lauded Republic Act (RA) 10021, or the Exchange of Information on Tax Matters Act, which was signed into law on March 8 of last year. What are the implications of this to the Philippines? More importantly, what does this mean for the common Juan de la Cruz?

Tax information sharing

RA 10021, which governs information sharing on tax matters, is based on the declared policy of the State to promote and pursue a tax environment that contributes in sustaining a favorable international investment climate. Moreover, as further provided in the said Act, its purpose is to instill confidence in the adequacy and capacity of the country’s tax administration to comply with its commitments under existing international conventions or agreements on tax matters.

As it is, RA 10021 is a good law. It aims to help combat international tax evasion and tax avoidance. This law addresses tax concerns that affect international trade and investment. With globalization and capital mobility, this law places the Philippines in a competitive vantage point in the international arena. Aside from authorizing the BIR to exchange information on tax matters with foreign counterparts to help fight international tax evasion, it also authorizes the BIR Commissioner to inquire into bank deposits and other related information held by financial institutions for the purpose of supplying information to a requesting foreign tax authority.
Tax authority

While comity is observed internationally, RA 10021 allows requesting foreign tax authority to study the income tax returns of taxpayers upon order of the President, subject to certain limitations. It also penalizes BIR personnel for unlawful divulgence of information obtained from banks to persons other than the requesting foreign tax authority. RA 10021 amended Section 6(f) of the RA 8424, otherwise known as the National Internal Revenue Code (NIRC) and authorizes the BIR to inquire into information such as bank deposit accounts and other related information on those held by financial institutions. Bank officers who refuse to supply requested tax information shall also be sanctioned by this law. The requesting foreign tax authority likewise is mandated to maintain confidentiality of the information received.

Pat on the back

What are the implications of a positive peer review from the OECD? First, it is a compliance with the internationally agreed tax standard which requires exchange of information pertaining to all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. The concept of “domestic tax interest” as detailed in The OECD Manual on the Implementation of Exchange of Information Provisions for Tax Purposes approved by OECD Committee on Fiscal Affairs on Jan. 23, 2006, describes a situation where a contracting party can only provide information to another contracting party if it has an interest in the requested information for its own tax purposes. A refusal to provide information cannot be based on a domestic tax interest requirement and a contracting party must use its information gathering measures even though invoked solely to obtain and provide information to the other contracting party.

Second, given that the OECD is composed of 34 member countries from North to South America to Europe and the Asia Pacific Region including emerging players, this widens the scope of information dissemination of the adequacy and capacity of the Philippines’ tax administration. This gives a multiplier effect to the improved international image of the Philippines. India, for example, has forged a partnership with the OECD for a three-year interactive program of tax cooperation which includes high-level policy dialogue on tax; India-OECD technical development program centered in Nagpur; and, India’s further involvement in the Committee on Fiscal Affairs, subsidiary bodies and OECD’s Global Relations Programme on Tax.

While nations are sovereign equals, to be blacklisted by many co-equals is not a good scenario for the Philippines. With the positive peer review, 34 member countries might also perceive the Philippines in the same light. Except for some concerns, such as the unavailability of information for companies incorporated outside the Philippines to which Commissioner Kim Henares pledged to address, the Philippines can be seen as progressing as regards internationally agreed tax standards. Hopefully, this positive review may translate to more investments and more jobs for Juan de la Cruz.

Third, with the passage of the law and a positive peer review, the Philippines can now help in the fight against tax avoidance and tax evasion which as they say threaten government revenues worldwide. All things being equal, reduced government tax revenues will mean poor social services, poor roads, poor education, and many others. To give a clearer picture, international tax avoidance may happen when big companies shift their profits into low-tax foreign subsidiaries or individual investors who are able to establish confidential bank accounts in tax haven countries (such as the Philippines before).

Lastly, this positive review can be seen as a model to improve the local taxation through information sharing.

Local efforts

Meanwhile, in the local tax arena, Executive Order (EO) 646 (Accessibility of Information on Taxpayers between the BIR and the Local Government Units for Tax Collection Purposes) issued on Aug. 3, 2007, is a model for tax information sharing. It was issued based on two premises. First, it was argued that information on taxpayers is vital to the effective collection of taxes by both the national government and the local government units. Second, the BIR and the Local Government Units (LGUs) can help each other in their collection efforts through accessibility of information that they have on record as regards their respective taxpayers.

The EO requires LGUs to provide the BIR and/or vice versa, with a soft copy of master list of taxpayers based on certain criteria of the preceding year on specified schedules/timelines depending on the master list specified in the guidelines. Also, upon written request of either parties’ authorized representatives, the requested party shall provide tax returns or list of contractors/suppliers, operators, vendors and such other matters enumerated in the guidelines, provided that these information shall be exclusively utilized to ascertain, assess, and collect the correct amount of internal revenue taxes or local taxes, as the case may be, and that it shall not be disclosed to any unauthorized person.

It is obvious that the aim of issuing this order is to improve tax administration, particularly the collection of taxes. The intent of the law is good but different opinions have surfaced when the EO was issued. The DILG expressed that through this directive, tax collection will certainly be improved and, eventually, the delivery of basic services to the people will be better. The BIR, for its part, welcomed such regulation, hoping that it will increase revenues not for the short term, but for the mid to long term. It expands the BIR’s authority to check for businesses that have applied for mayor’s permit to operate but came short of registering with the BIR.

The enactment of the law on tax information sharing as well as the accessibility of information on taxpayers between the BIR and the LGUs can be seen as complementing each other. It is up to the BIR, however, to reconcile conflicting provisions of these laws and synchronize them with the existing NIRC with the appropriate legislative efforts. While we exchange information with our foreign counterparts, this same initiative must be localized through laws, statutes, and ordinances in the LGUs. While we strive to comply with international standards, the same effort must be given to improve local taxation system.

Synchronized effort

While a pat on the back from the OECD is promising, it remains to be seen whether these laws will be implemented properly so that tax administration will be improved. A synchronized effort to improve international taxation and local taxation will be necessary. However, until Juan de la Cruz is able to enjoy the benefits of an improved tax administration or even taxes per se through delivery of social services, roads, improved education, all of these will remain vague and unpopular to him.

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is a senior partner of the tax offices of Romero, Aguilar & Associates and member of the MAP National Issues Committee. Feedback at [email protected]. For previous articles, visit map.org.ph.)