Final Requirement

Philippines Tax Reforms Proposal

By:

John Byron Jakes T. Lasam

2015-2604
Public Fiscal Administration
Philippine Christian University
July 2, 2016

Philippines Tax Reforms Proposal

The Philippines ranked a poor 127th among 189 economies
reviewed by international audit firm PricewaterhouseCoopers (PwC) in
terms of ease of paying taxes for business, while its neighbors, Thailand
and Malaysia landed on 62nd and 32nd respectively.
The study, called Paying Taxes 2015, is an annual research done
by PwC and is included in the Doing Business project by the World
Bank Group. It measures the ease of paying taxes across economies by
assessing the time it takes for a medium-size company to prepare, file
and pay its taxes; the number of taxes that a company has to pay; the
method of payment; and the total tax liability as a percentage of its
commercial profits.
In the Philippines, according to PwC, it takes 193 hours for a
business to comply with 36 required payments. It put the average taxes
and contributions paid by a Philippine employer at 42.5 percent, or 6
percent higher than the average tax rate in the Asia Pacific.
Steve Forbes, chair and editor-in-chief of Forbes Media, said the
Philippines needed tax reforms and improved infrastructure if it were
to sustain the stability and growth it has achieved in the last five years.
Forbes, who spoke on the sidelines of the Forbes Global CEO
Conference in Manila, said the key was to simplify, not raise, taxes to
encourage more entrepreneurs to do business. He said the
Philippines can study and imitate the tax system of Hong Kong.
Hong Kong ranked fourth in the PwC study, with only three tax
payments, while Singapore ranked fifth, with five tax payments.
The PwC study measured corporate income and other profit
taxes, labor taxes, property taxes, dividend taxes, capital gains taxes,
road and vehicle taxes, waste collection taxes, and other fees and
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social contributions required from employers.

According to PwC, the results of Paying Taxes 2015 illustrate
both successful tax reforms and reform challenges and provide a
platform for government and business to engage in constructive
discussion around tax reform across a broader range of issues.
The United Arab Emirates and Qatar shared the top spot for ease
of payments, requiring only four payments that can be done in 12
hours in the UAE and 41 hours in Qatar. Saudi Arabia ranked third with
three payments that can be accomplished in 64 hours.
Bolivia had the worst tax payment procedure with 42 tax payments
requiring 1,025 hours.
Based on this study, there is a need to tweak or change the
structure of the BIR. We are just ahead of war-torn countries in terms
of the efficiency of our tax system as well as the ease in making tax
payments. As Einstein aptly said, stupidity is doing the same thing and
expecting a different result.
Philippines tax system is anchored on voluntary compliance
under pay-as-you-file as it is the taxpayer who is responsible for its tax
compliance determining which tax should be paid, how to comply with
various reports, and when to pay the same. It has a check and balance
mechanism where the tax authority (Bureau of Internal Revenue or
BIR) has the right to conduct tax assessment or examination within
three (3) years from required filing or late filing (or 10 years, for
fraudulent returns or if no tax return filed) to determine the extent of
compliance of taxpayers, Under this, the BIR is clothed with such
power to require taxpayers to submit to it authority for the purpose of
determining such tax compliance and do such acts for collection of
taxes due from taxpayers.

The National Internal Revenue Code (Tax Code) of the Philippines

was last amended in 1997 or almost twenty (20) years. What was it like
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20 years ago? To give you an idea, the peso and dollar rate was still less
than 10 pesos, there was limited internet access and we were in the
verge of economic boom under the Ramos administration. And I was
still in the elementary. A lot of things have happened between 1997
and 2016 and yet the Tax Code remained the same.

Inflation rates have steadily increase for several years. In turn, the
value of peso now compared to 1997 is much lower. And yet, the tax
bases and tax rates for income remained unchanged. First and
foremost, tax bases and rates should be flexible enough to counter the
changing times and environment. Although, taxes are the lifeblood of
the government, it is imperative for the government to imposed taxes
that are reasonable and just. As the saying goes, dont kill the goose
that lays the golden egg.
That being said the government should look to increase the tax
base and decrease the percentage. By doing this, people shall have
more discretion on their hard earned money. There are more
opportunity for consumption and investment. This will help the
economy as there are more people willing to spend or engage in
proprietary activity.
The 32% income tax is the highest in Asia. This would have been
tolerable if people could actually feel that the taxes they are paying
went to valid government programs, infrastructures and the like. Its
difficult to automatically give up 1/3 of your income without getting
any in return. Lowering the rate to 25% is a reasonable amendment as
it eases the burden to the general public. Let the public decide where
to consume the 7%.

I have been working for the BIR for six (6) years. I can honestly say
that our tax code is one of the most complicated and difficult to
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understand. Sometimes it feels that it was designed to confuse. We

have so many rates and so many provisions that an ordinary person
would be required to hire an accountant. This should not be the case.
Understanding taxation should be easy for an ordinary person.
Since they are the ones being burdened, they should at least have basic
knowledge in taxation. We should try to emulate the taxation system
of New Zealand which prides itself as one of the simplest tax system in
the world.
In New Zealand, they have almost a flat rate. It is not progressive
but proportional. Theres no need to hire any accountant or read
complicated materials. It is simply multiplying your gross income by a
certain rate. You are only required to submit your summary list of
sales. That is it. Almost anyone could do it.
Compliance comes with simplicity. It is but logical that if a
procedure was easy, more people would do it. Furthermore, it
diminishes the possibility of corruption as the tax policy is clear cut.
The problem with this tax system though is that it is too
simplified. It does not consider the source or nature of income. This
is clearly a choice between simplicity and technicality. Here, in the
Philippines, we are very technical on the nature and source of the
income that sometimes we are compromising compliance. The
Philippines has barely 40% compliance.
One of the great frontier in taxation in my opinion is how to
capture the real value with respect to on-line selling. It is no secret that
the business world has evolved from the traditional shopping to webshopping. The consequence in foregone taxes could only be imagined.
The reality is there is no active campaign or focus to dwell in such
industry. As we become more and more of a no-contact society, it is
but necessary to put all efforts in regulating and monitoring every
transaction in the industry. Instead of focusing on the traditional
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sellers, it is high time to shift the spotlight to web-based

entrepreneurs.
The BIR should keep pace on its taxpayers. It cannot afford to be
dormant and expect that things will still be the way they are. Learn
from the mistakes of Nokia and Kodak. If it fails to recognize the trend
as early today, there might come a time that it would be too late.
Opportunity lost could comprise billions of taxes. The BIR should
acquire or develop technology that could monitor this type of
transactions. Each peso lose is equivalent to each dream being
discounted. If hackers can be caught through web linkages and codes,
the same could be done to on-line sellers. Accreditation of on-line
sellers should also be considered. This will help in the monitoring and
regulating such industry. Time to shift the resources to the real
business centers in the future.
Amending the Minimum Wage Law is also a concern. In the law,
minimum wage earners are exempted from income tax and
withholding taxes. However, in any part of the year wherein they
exceed the minimum wage, the y become automatically taxable. This
creates a scenario wherein a person who exceeds the minimum wage
by a peso shall be taxed. In effect, the take home pay is relatively lower
than those that never exceeded the minimum wage. It is like punishing
those that tend to work harder and rewarding those that do not exert
the effort to be in a better position than they are now. It simply
degrades the value of labor.
It is also recommended that audit for companies should not be done
consecutively as it disrupts with operation of the company. The only
exemption to this is if there is reason to believe the existence of fraud
or bad faith. Conducting an audit to a company year in and year out
entails unnecessary expenses for both the company and the taxpayer.
The first audit should have already corrected the flaws of the company.
In case, the same assessment was made for both taxable years, then
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the deficiency tax should be subjected to 50% surcharge. It serves as a

deterrent for those who fail to correct their mistakes the first time.
As any government agency, the BIR is a political institution. Its
Commissioner is an appointee of the President. The tax platform of
the current president shall be the guideline in which future
regulations and programs of the BIR shall be based.
The trend right now is towards a paperless Bureau. This is being
manifested by various programs of the BIR such as e-filing, epayment, efps, e-sales and MRCOS. However, this programs are
more of a frontline service assistance (if at all) to the taxpayers. The
expectation was to make the circumstances for the taxpayers better
and simpler. The taxpayer no longer needs to queue in line in order
to file returns, he may simply do it in the confines of his home.
Although, the sudden shift proved to be a burden to some taxpayers,
it cannot be discounted that this is the new frontier that the agency
is heading towards.
This unfortunately fails to address the structure of the agency
with respect to the audit, reportorial requirements and quality of
review of dockets in the agency.
No significant changes has been made in this aspect since the time
of Commissioner Liwayway Vinzons Chato. It is no wonder why when
you go to BIR offices you usually see piles and piles of papers. It
could be mistaken for a Paper factory.
There must be a review-specific sections under the Assessment
Section.
There are different types of dockets or reports that
are being forwarded in the Assessment Division every
day. These ranges from closure cases, reinvestigation,

refunds, estate, transfer of property, letter notice and the

like.
Each reviewer are given these types of cases
randomly every day. It is not only inefficient but
extremely difficult for a reviewer to address every
situation given the volume and intricacies of the review
that need to be made.
Every type of docket requires a different approach.
Hence, the time requires to submit the docket per rules
and regulations varies. By having a specific section for
each type of docket, the more efficient the processing
and the review will be. Furthermore, monitoring on the
status of the docket shall be improved. Accessibility of the
taxpayers to know the status of its cases will be easier.
The experience of taxpayers being given the turnaround
will be lessened. Finally, it will help reviewers to have
specialize skills in particular cases. This will greatly help
them offer better services to the public at hand.
However, implementing this will mean added costs for the BIR.
And it does not help that the budget for BIR is limited. There is also
the problem of receptiveness among the employees itself. It is but
natural for the employees to fear the unknown. As such, there will be
an adjustment period before the realization of such changes.
Furthermore, we must take in mind the saying familiarity breeds
contempt, personnel must be rotated within a certain period so as
to avoid any undue compromises and influence-peddling from
taxpayers and examiners alike.

These are just some of the changes I hope to see in the future within
the organization I belong to. It would be take years to institutionalize
these reforms but I am positive that it is worthwhile. Change is coming.

Reference:
R.A. No. 8424, The Internal Revenue Code of 1997 as amended by R.A. No.
10653.