Easing tax compliance

To use a common millennial word, viral among the talks in the business community at the onset of the current administration is its tax reform agenda.

It was a much anticipated package and the first of the three sets—primarily covering the taxation of individuals—was already submitted by the Department of Finance to the Congress.

Included in the first set are the restructuring of the income tax brackets and adjustment of tax rates for individuals; widening of the tax base through the removal of tax exemptions for certain types of incomes; deletion of the personal and additional exemptions for dependents otherwise granted to individual taxpayers; and the reduction of the optional standard deduction, in lieu of the itemized deductions, from 40 percent to 20 percent for individuals and scrapping of such privilege for corporations.

Simplification

First, the openness of the current administration to consider amendments for our tax system is laudable.

But it is observed from the first package that it lacks the resolve to simplify tax compliance—a long-expressed clamor since it has been observed that the current tax system imposes very complex and tedious compliance rules which hamper business and cause additional expenditures on the part of taxpayers, particularly entrepreneurs.

The onerous requirements had been a huge factor driving the increasing level of tax evasion.

It also seems evident that the initial proposals retain the principles of our current income tax system that provides for the same set of rules for all taxpayers, regardless of income or size.

This is understandable since, for tax policymakers, neutrality of a tax system is one of the principles that were generally considered.

However, I take the view that this policy is just one of the considerations in designing a good tax system.

It should not hinder government from considering other reforms that will address differences in the situations of taxpayers and their ability and capacity to comply with the already complex tax rules if doing so will result in a more effective tax collection.

To insist on a “one-size-fits-all” tax system is an ineffective and futile exercise as actual collection is not boosted even as the administrative cost rose.

Indeed, various groups have already raised the need for tax reforms to ease compliance and, therefore, make Philippine businesses competitive with their peers in neighboring countries.

In the 2017 Doing Business Study of the World Bank (based on June 2016 survey covering evaluated indicators for calendar year 2015), in the area of “Paying taxes,” the Philippines ranked 115th out of the 190 countries surveyed.

The Philippines requires 28 tax payments within a year and tax compliance takes about 185.6 hours per year.

In comparison, Malaysia, Indonesia and Thailand ranked 61st, 104th and 109th, respectively.

Not surprisingly, Singapore placed among the top 10 at 8th.

As the World Bank study explains, compliance with tax laws is important to keep the system working smoothly for all.

One way to encourage compliance is to keep the rules as clear and simple as possible. High tax compliance costs are associated with larger informal sectors, more corruption and less investments.

But what does it take to ease compliance?

Best practices in other countries involve simplification of tax forms and administrative requirements, reduction in the frequency of tax filings and payments of taxes, and shortening of the time involved in making those payments.

Examining how we presently do these things in the Philippines may provide opportunities to achieve improvements in these areas.

Suggestions

Here are some of my personal suggestions.

1. Simplify information required in tax returns.

The government may reduce the information presently required to be declared in the quarterly income tax returns (ITR), such as the revenues earned and expenses incurred during the period.

After all, the main purpose for the filing of the quarterly ITR is to enable the taxpayer to advance payments of their income tax obligation for the year, using as basis the estimated taxable income for the period.

Actual revenue and expense information, of course, will have to be declared in the Annual ITR, which is the report subjected to audit.

2. Provide different compliance rules that are appropriate for SMEs.

The government may consider providing, for easier compliance, separate rules for small and medium-sized enterprises (SMEs) as these are generally unfamiliar with more detailed tax rules and these usually lack adequate resources to obtain professional advice or employ experienced assistance.

Government should also recognize that, for most of these SMEs, their transactions are not evenly distributed throughout the year and, therefore, do not require regular and frequent reporting.

For example, the following may be considered:

2.1 Lessen the frequency of tax filings.

The frequency of tax filings may need to be reduced. Instead of quarterly filings, the government may consider semi-annual filing: one at the middle of the accounting period and a final one for the full year.

2.2 Provide longer period for deadline of annual tax filing.

Present tax rules require the annual tax return to be submitted within 105 days from the end of the accounting period. This may be appropriate and needs to be retained for public and large private companies, but for SMEs, a longer period for tax filing, say six months from the close of their accounting period, will provide them ample time to complete their books and have them audited, if required.

3. Re-examining requirement for audited financial statements.

The government may have to revisit the provision of our tax laws requiring individuals and corporations to have their books of accounts audited and examined yearly by independent Certified Public Accountants and for them to attach audited financial statements to their tax returns if their gross quarterly sales, earnings or receipts exceed P150,000.

This threshold was set in 1997 and is clearly no longer in harmony with current levels of earnings.

The government may either adjust the earnings threshold or provide for other criteria to define the entities that will be required to submit audited financial statements.

In some countries, this requirement is imposed only on public companies and private companies with assets having an aggregate value exceeding a defined threshold.

Electronic systems

4. Reduce the time to pay taxes.

Shortening of the time to file and pay taxes is accomplished in most countries through the use of state-of-the-art technology.

Hence, the initiatives of BIR to require certain groups of taxpayers to comply with their tax obligations using electronic systems developed and provided by BIR is a step in the right direction.

Such facilities need to be expanded and improved to widen usage coverage.

Moreover, local government units should also provide state-of-the-art technology facilities to ease the compliance by taxpayers, particularly SMEs.

The introduction of the PAYBIR system where taxpayers are able to pay their due amounts using a mobile phone application provides added convenience to taxpayers since they can pay their taxes anytime, anywhere.

Expanding this mobile tax payment app to cover all service providers will increase the number of taxpayers that can avail of this mode of payment.

5. Provide flexible tax payment schedules.

With electronic tax payment facility now available, the government may consider giving taxpayers flexibility in scheduling their advanced tax payments.

This will allow them to manage their tax payments based on cash-flow situation.

There are taxpayers who may prefer to make smaller but more frequent payments, while others may find it more convenient to pay taxes when their collections reach peak levels.

For most of these changes, amendments to our existing tax laws must be made to enable BIR to implement them.

One of the important indicators of the success of the government’s tax reforms is the increase in the number of taxpayers.

Easier and reasonable compliance rules will greatly help in achieving this result and consequently add to the total efforts in increasing tax collections to meet the country’s pressing budgetary needs at lower administrative costs.

We must take advantage of this golden opportunity to introduce appropriate and effective changes to reach a significant yet untapped pool of taxpayers.

We hope the next packages of tax reform will include simplification of tax compliance. This will surely make the talks in the business community more viral.

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is the Chair and CEO of the P&A Grant Thornton. Feedback at <[email protected]> and <[email protected]>. For previous articles, please visit