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Modernizing Tax Administration

Instead of increasing excise taxes on fuel and coal which has inflationary impact on consumer goods, the government must prioritize modernizing tax administration to broaden taxpayer base and increase voluntary compliance.

The Tax Reform for Acceleration and Inclusion (TRAIN) law aims to make our tax system simpler, fairer and more efficient but has included only a few administrative changes to complement the policy reforms. Despite its noble intention to unburden the middle class by lowering personal income tax, the offsetting measures introduced seem to have countered any expected benefit.

TRAIN’s goal was further compromised by the delayed implementation of the social mitigating measures. These assistances were intended to protect the ten million poorest households which did not benefit from TRAIN.

Increasing the excise tax on non-essential goods and services such as alcohol, cigarettes, casino, and mining is an acceptable offsetting measure. Excise tax that burdens the poor is not. What the tax reform should aim for as an offsetting measure instead is improving the revenue collection efficiency.

The second package of the tax reform program proposes administrative changes that will do so.

Overshadowed by the more significant portions of TRABAHO Bill are its propositions that aid the Bureau of Internal Revenue (BIR) in going after tax evaders, and more importantly, modernizing the revenue collection agency.

TRABAHO implements provisions that authorize electronic record keeping for receipts and sales reports, filing via electronic channels, and implementation of electronic sales reporting.

These modernization measures ensure that taxpayers will find it easier to file and pay their taxes. Still, how the changes are implemented would be crucial.

The filing via electronic channels should authorize electronic channels created by third-party software. More electronic channels would mean more options for taxpayers to file and pay their taxes. Taxpayers would then be able to choose which method will be most convenient for them.

For the electronic record keeping, it only authorizes the records for receipts and sales reports. However, it needs to include electronic bookkeeping as well. Manual books of accounts are tedious to accomplish and, with recent developments in technology, outdated. Electronic bookkeeping is already allowed, but only as an exemption when, on the contrary, it should be the norm. Manual bookkeeping should be the exemption, such as for the computer illiterate or those that cannot afford computer systems.

Modernizing Tax Administration - Proposed Reforms

While already commendable, more can still be done to improve collection efficiency. The government needs to implement a comprehensive administrative reform.

The BIR’s budget needs to be raised in order for it to have the capability to modernize. Despite its increasing year-on-year revenue collection, its budget has decreased for 2018. As the administration’s tax reform initiative broadens the taxpayer base, the revenue collection agency would require more personnel to administer taxpayers.

A higher budget would also help in raising the salaries of BIR examiners. The current compensation system, bound by the Salary Standardization Law, is inflexible. Exempting the BIR from this regulation would create a more competent and less corrupt bureaucracy.

Thereafter, there needs to be provisions that govern a risk-based audit. Under the current system, audits are done on a yearly basis and to the same taxpayers over and over again. This is a costly and redundant approach. Quality needs to be sought for audits, not quantity. All the violations of the taxpayer should already be addressed during the first audit. This can be done by targeting high-risk business per industry, instead of targeting every single business.

In line with the policies on audit is the implementation of a no contact policy as much as possible. Moreover, examiners need to be made accountable for their assessments. If they are unable to collect at least half of their assessed deficiencies, then it should be a demerit on their performance. This should stop examiners from issuing large assessments with no bases.

Improving the tax administration is key in ensuring taxpayers will find it easier to comply with rules and regulations. Once taxpayers can easily comply, then it will be up to them to avoid unnecessary fines and penalties. Tax education is an important factor in tax compliance. While large seminars help in providing a general idea of the regulations, a more exclusive tax coaching will be suitable for answering questions specific to your business.

This article was originally published in BusinessWorld.

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