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Are We Collecting the Right Taxes?

In its 2017 Annual Report, the Bureau of Internal Revenue (BIR) stated that its year-on-year collection has improved again. Despite this, it has missed its annual collection target, mainly due to missing its income tax targets. A question that warrants asking then is where the high revenue collection draws from. Does it come from better performance, or is it simply because of the high tax rates?

The BIR’s performance for the first half of 2018 suggests that even lower tax rates can contribute high revenue collections. TRAIN Law, which took effect at the start of the year, imposed lower tax rates for plenty of taxpayers. Despite this, the BIR exceeded their revenue targets and had a better year-on-year performance for the same period.

In other words, when it comes to revenue collections, what matters the most is how taxes are collected.

Improving the tax administration should be considered an offsetting measure, and the burden of collecting more taxes needs to fall to the BIR. Currently, the government is squeezing taxpayers dry by imposing higher tax rates in other goods or services.

TRABAHO takes a step in the right direction. Under the proposed bill, filing via electronic channels will be authorized and electronic receipts will be accepted for the purpose of sales reporting.

There need to be legitimate attempts toward broadening the taxpayer base. The BIR continues to deliver year-on-year growth, but it consistently misses its revenue targets.

A possible factor for this disparity is the barrenness of the BIR’s ranks. According to the Department of Budget and Management’s Staffing Summary for 2018, the BIR is authorized to have 21,644 permanent personnel. The report also showed that the BIR only employs 10,044 personnel, less than half of the authorized number.

To hire more personnel, the BIR needs to present a more attractive option to potential employees. Unfortunately, they are still bound by the Salary Standardization Law which prevents them from offering higher salaries.

Higher compensation will attract significantly more applicants, and the agency will have the pick of the litter.

Moreover, the BIR needs to continue developing its infrastructure and hardware to support modern methods of tax compliance. Already, the tax reform is beginning the initiative, but more still needs to be done.

TRABAHO’s proposed authorization of filing via electronic channels needs to cover other third-party software. If the electronic channels were simply up to the BIR, then it will just be one additional choice. If the development of other software is authorized, taxpayers will have multiple methods of filing and payment of taxes.

TRAIN Law also reinstated the simplified bookkeeping, but it simply meant fewer books of accounts for certain taxpayers. What the BIR needs to implement instead is paperless bookkeeping.

Already, computerized bookkeeping exists as an accepted format, but it is not a convenient method. Manual bookkeeping remains to be the default format and taxpayers need to submit significantly more requirements if they wish to avail it.

Further, the burden of providing the application’s features also lie with the taxpayers. This is a redundant process. Even if a software is already widely-used, taxpayers still need to submit the application’s technical specifications.

The BIR should just accredit the application itself, not the taxpayers separately. Computerized bookkeeping also needs to be the default format. Exceptions can still be made for the computer-illiterate or those that cannot afford their own computers.

Both these drives – higher salaries and modernization of BIR – need to be supported by an increased budget.

Despite a higher national budget for 2018, the BIR’s budget decreased by roughly P500-M. This is also in light of a year-on-year collection growth in the year prior.

To broaden the taxpayer base, the BIR needs to be primarily responsible for offsetting the lower tax rates. But with this additional responsibility comes the need for more resources.

However, not all administrative reforms need an increased budget. Under the current system, the BIR audit is costly, not only for the taxpayers but also for the revenue collection agency.

The current BIR audit is done yearly and to all taxpayers, when it should in practice be risk-based. Even after being audited, taxpayers are still found with the same violations, paying the same compromise penalties. A quality audit should mean that the violations have already been addressed during the first audit, subject only to consequent monitoring by revenue officers.

Improving the revenue collection performance requires the cooperation of both the BIR and the taxpayers. Even if these administrative reforms were implemented, taxpayers need to ensure their timely compliance. Failure to do so is a gateway to fines and penalties that could easily be avoided.

Creating a tax plan is necessary for businesses to maximize their profits. The Asian Consulting Group offers the Citizen Tax Planning program which will ensure taxpayers can do business without fear of compromises.

To learn more, contact us at consult@acg.ph or via (02) 622-7720.

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