Simpler tax administration that matters to all taxpayers
The tax season is over and almost all taxpayers who were able to file within the deadline yesterday, April 17, are now wondering what’s next in the pipeline of the Bureau of Internal Revenue (BIR) in so far as tax reforms are concerned.
A welcome development has come in the BIR’s pursuit of a simplified tax administration system. On April 5, the BIR issued a memorandum for business taxpayers claiming income tax exemption under the Barangay Micro-Business Enterprise (BMBE) Act of 2002 (Republic Act No. 9178). Under the law, all BMBEs are exempt from income tax for income arising from the operation of the enterprise.’
Under Department Order (DO) No. 17-2004 dated April 20, 2004, a taxpayer availing of the tax incentives under the BMBE Act shall first register the BMBE with the BIR Revenue District Office where the principal office or place of business of the BMBE is located; and the registration should be supported by various documents including but not limited to a Certificate of Authority duly authenticated by the Office of the City or Municipal Treasurer.
Pursuant to the BIR memorandum, returns to be filed by the taxpayers claiming to be covered by the BMBE act shall be accepted whether taxes are paid or not, subject to post audit/verification of their compliance with Section No. 3 of DO No. 17-04.
On one hand, the lowering of tax rates and simplifying of provisions of the current National Internal Revenue Code (the Tax Code) are both important and pertinent aspects of the tax reform. On the other hand, the administrative function of the BIR to collect taxes through voluntary compliance is a different story, especially because we follow the self-assessment method of filing and paying taxes in the Philippines.
The general principles of taxation tell us that “administrative feasibility” is one of the characteristics of a sound tax system, providing that tax laws should be capable of convenient, effective and just administration. Administrative feasibility assures us that the tax system should be as simple as possible, clear, concise and capable of enforcement and convenient as to time and manner of how taxes are assessed, collected and complied with.
Indeed, various international studies show that one of the metrics used in assessing the regulatory environment of a particular country is the administrative work required to prepare a tax return and pay the correct taxes.
A tax return is a sworn statement used by a taxpayer to report his taxable income and allowable deductions to determine the nature and extent of the tax liability using the prescribed format of the government.
In the Philippines, tax returns are currently filed manually or electronically using electronic filing and payment system (e-FPS) facility and electronic BIR forms (e-BIRForms) package under existing BIR issuances. This has been the manner of filing tax returns for the past three years since the introduction of the e-BIRForms platform. The good news is that this year’s filing deadline for the annual income tax return proved to be less complicated as compared to previous years because the current rules were merely reiterated through the issuance of Revenue Memorandum Circular (RMC) No. 28-2017. Nonetheless, taxpayers have to deal with a different set of rules as to who are required to file income tax returns via e-FPS, e-BIRForms, or manually.
Why is there a different set of rules for taxpayers who need to file tax returns via e-FPS, e-BIRForms, or manually? Can BIR make it simpler and also provide incentives to taxpayers filing electronically such as the privilege to file on a later date?
Research shows that the Philippines pales in comparison to its neighbors not only in regard to high individual and corporate income tax rates but also in terms of complicated tax administration. For example, in Singapore and Thailand, a taxpayer who files electronically is given more time to file on a later date. We are already familiar with this practice with respect to other types of tax returns. However, the extended deadline is not applicable to our income tax returns.
Also, in a survey of doing business in the Philippines (2017) conducted by the World Bank (WB) group, it is estimated that a corporate taxpayer needs approximately 39 hours of time or roughly more than 1.5 days to prepare, file, and pay the corporate income taxes. Currently, the Philippines is ranked 115th out of 190 countries in terms of the length of time in paying taxes. Meanwhile taxpayers in Singapore and Malaysia, for example, require at least 24 and 26 hours, respectively, to prepare, file, and pay corporate income taxes.
What if a taxpayer doing business in the Philippines is not organized as a corporation? An example is an individual practicing his or her profession or one who is engaged in business as a sole proprietor. Certainly, such professionals or small- and medium-sized businesses would have to comply with our complex tax rules on their own or engage the services of an experienced tax accountant to prepare their income tax returns. Some are willing to try despite the high cost of compliance while others are simply indifferent out of sheer frustration. Paying taxes has always been a struggle for these groups of taxpayers. The government should be able to assist them in complying with our changing tax laws, rules and regulations without the additional burden apart from remitting enforced contributions.
If the time required to prepare, file and pay the individual income tax of persons engaged in business is included as a metric in the survey conducted by the World Bank Group, would the Philippines still rank 115th in terms of paying taxes?
Despite all these flaws, the government in its best efforts to keep its promise of reform has started by presenting tax reform proposals to Congress. The proposed reforms include lowering and simplifying personal income tax. For one, individuals engaged in business earning more than the VAT threshold (P3 million) will be taxed like a corporation while those earning less than the VAT threshold will be taxed at a flat rate of 8% on gross revenue.
Reforms to tax administration and compliance are also in place, particularly on the simplified bookkeeping requirements. Simplified bookkeeping will be allowed if the quarterly sales do not exceed P250,000 while the requirement for an external auditor will apply if the quarterly sales exceed P750,000. Can we also include a simplified tax form and filing system to go along with a simplified personal income taxation? These twin requirements of a good tax system should be addressed simultaneously by the government.
It is not so hard to tell that the true challenge of the government is to amplify the level of tax consciousness and the number of taxpayers-believers who will voluntarily surrender their hard-earned money in exchange for a so-called “civilized society.” It is with this hope that we leave the past behind and include a simpler tax administration in the proposed tax reforms that matter to all taxpayers.
Daryl Matthew A. Sales is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.