Trouble with Tax Compliance

Tax collection agencies use hard and soft approaches to boost revenue performance, but they have to be supplemented by other measures from Congress

By Michael B. Mundo

BIR Commissioner Guillermo Parayno hit hard on prominent tax evaders

Of eight priority revenue measures proposed by President Gloria Macapagal-Arroyo to Congress last year, Congress has enacted only three laws thus far—the sin tax law, the lateral attrition law, and the new expanded value-added tax law. The impact of these measures, however, remains to be felt in the second half of 2005.

Dual Surpluses

In the first half of the year, the national government’s fiscal deficit narrowed to P67.5 billion from P80.1 billion a year ago. This strong fiscal performance was attributed to record fiscal surpluses in April and June. Even the primary surplus, an indicator of a country’s ability to stem a financial crisis, widened to P74.5 billion from P40.6 billion a year ago.

At the same time, revenue collections also reached a record-high of P384.4 billion, P1.2 billion above target. The public-sector deficit likewise shrunk a bit in the first quarter to P51.1 billion from P51.3 billion. At end-2004, the growth of the public-sector debt also slowed down to 4.4% from 16.1% in end-2003.

While the Bureau of Internal Revenue and Bureau of Customs missed collection targets, both agencies nevertheless posted gains over their year-ago performances on the back of three major administrative revenue-raising measures—Operations RATE, RATS, and RIPS—initiatives against tax evasion, smuggling, and corruption.

High-Profile Chase

Since March, the BIR has stepped up the filing of 26 tax evasion cases against prominent personalities under its RATE (Run After Tax Evaders) program. The high profile individuals and companies included a member of the Cabinet (Agriculture Secretary Arthur Yap), a military general (Major General Carlos Garcia), three celebrities (actor Richard Gomez, singer Regine Velasquez, and actress Judy Ann Santos), a talent manager (Douglas Quijano), a basketball player (Paul Asi Taulava), a fitness trainer (Tina Aboitiz Juan), a plastic surgeon (Dr. Joel Mendez), and a pre-need company (College Assurance Plan). Their cases stem from nonfiling of income tax returns, failure to declare income and assets, and underdeclaration of income, to nonremittance of taxes due and withheld. Outside this program, meanwhile, the BIR continues to pursue a P25-billion tax evasion case against tobacco tycoon Lucio Tan and 69 others before a Marikina City trial court.

Last May, the BoC kicked off its RATS (Run After the Smugglers) campaign. Smugglers, as well as BoC officers, have been charged, as in the case of a fuel importing company, Petroline Resources Inc., which was registered as a customs bonded manufacturing warehouse in the port of Davao.

Since its creation in December 2003, the Department of Finance’s RIPS (Revenue Integrity Protection Service) has likewise gone after corrupt personnel of the revenue collection agencies. As of 10 May, the Ombudsman has dismissed 11 BIR officials (including Assistant Commissioner Edwin Abella) and preventively suspended 5 others. The Ombudsman has also dismissed 7 officials (including Deputy Commissioner Gil Valera) and suspended 8 others (including Deputy Commissioner Reynaldo Nicolas) from the BoC. Most of them flunked lifestyle checks on their properties and other assets. In June, Customs police chief Jose Brigido Yuchongco (assigned to South Harbor Manila) even claimed that he won the lotto to justify his assets.

Amnesties Without End

Aside from hard-hitting approaches to ensure tax compliance, the BIR has implemented a No Audit Program (NAP) since January. The agency even extended the deadline for taxpayers to avail of NAP until end-July. Those who qualify under the program are exempted from audit and investigation of their tax, save for overseas communication tax and all withholding taxes for the applicable taxable year. Those who fail to qualify under the program can still make voluntary payments of deficient taxes.

Last 9 June, the BIR also initiated a program for taxpayers who wanted to rectify the returns they previously submitted and pay their deficiencies with no or lower surcharges until yearend.

But the above legislative and administrative measures may not be enough to sustain the growth of tax collections. In the first half, growth in BIR and BoC collections actually slowed down to 7.3% and 13.0%, from 9.6% and 14.2%, respectively. Even then, the government is still confident of meeting its programmed fiscal deficit of P150 billion to P180 billion this year.

According to the Department of Finance, the amended EVAT will generate P28.75 billion more revenues in the second half of 2005. However, four pending petitions have questioned the constitutionality of the EVAT law before the Supreme Court prior to its 1 July effectivity.

Although they acquiesced to the increase in corporate income tax to 35% from 32%, business groups have protested the 70% ceiling on creditable input VAT. To remedy this problem, a Senate bill has been filed to raise the limit on the creditable input VAT to 90%. In the meantime, BIR’s implementing regulations on the new EVAT law only apply the 70% ceiling on creditable input VAT to the last quarter of 2005.

The Senate, meanwhile, has yet to act on two other priority revenue bills already passed by the House of Representatives—the rationalization of fiscal incentives and a tax amnesty measure. Collections from tax amnesty programs from 1972 to 2003 accounted for only 14.4% share at most to BIR collections.

Leakage

But the magnitude of tax leakage remains high. The National Tax Research Center reports that from 1998 to 2001, income-tax evasion rates among corporations was 38%; among professionals, 69%; and among wage and salaried workers, 7%. The average income-tax evasion rate across all sectors is 35%. Fiscal expert Rosario Manasan of the Philippine Institute for Development Studies estimates individual income-tax evasion at 61% and evasion from VAT on domestic sales at 63% in 1999.

Based on NTRC figures, government lost an average of P127 billion a year in uncollected taxes—P85.4 billion from income taxes and P41.6 billion due to VAT. Representative Herminio Teves, on the other hand, claims that BIR failed to collect some P107 billion in individual income taxes each year. According to BIR, there were only six million registered individual and corporate income taxpayers in the country as of 2003. Thus, there is a need to broaden the tax base, which is partly addressed by the new EVAT law. And a need to run after tax cheats and delinquents.