Monday, December 20, 2010

Taxing matters


Business World 
Introspective

The Bureau of Internal Revenue has posted in its Web page the list of its top 500 individual taxpayers. It is unclear to me what public purpose is achieved by posting such a list. What is clear is that it may have caused unfair and unnecessary unease for both those on and out of the list.

For those on the list, continuing public Web page access to the information is cause for worry that this provides easy reference for every donation seeker, scam artist, or even worse.

Those affluent but absent were not spared, for most undeservedly, as the list provided fodder for gratuitous speculation. One broadsheet asked provocatively in its front page why this or that prominent top executive or businessman was not on the large taxpayer list; as did at least one priest's Sunday sermon I heard about.
There can be several reasons why one who is rich or earning well may not appear on the list, none having anything to do with lack of fidelity in paying one's taxes. For many top executives, the company withholds and pays their individual income taxes directly to the BIR under a procedure known as substituted filing. 
Provided the individual has only that single source of still taxable income, he does not need to file an income tax return. These substituted filings were likely not captured by the BIR's top 500 list.

Then there are cases of individuals who have incorporated their business, such that the income is earned by the corporation, which then pays the appropriate corporate income taxes. Additionally, the dividend income the individual derives from the corporation is levied a final tax collected at source. There is no requirement that this be subject of an individual income tax filing. This is true as well for those whose income is passive, i.e., derived primarily from interest and dividends, which are imposed final taxes withheld at source. These are not captured in BIR's top 500.
These limitations in the data were not adequately explained by the BIR, either in their post or in public pronouncements. Thus rather than shaming tax evaders which may have been the object of the top 500 exercise, the issuance of such a list without qualification may have just provoked people to unfairly rail against those prominently known but absent from the list but who are already in BIR's tax net and faithfully paying their taxes.

One has to question the wisdom of continuing with such a list, which achieves no apparent public purpose, but just puts listed large individual taxpayers at risk from criminal elements, and unlisted law- abiding ones at risk of unfair shaming by the uninformed. If the BIR insists on continuing with this practice, the least it can do is to remove the amount of taxes paid in the interest of safety of the taxpayer and his family. For my part, I truly doubt that the large tax evaders and smugglers, who are completely outside the tax agencies' data base as they do not issue receipts or file returns, can be shamed into paying proper taxes. The current leadership truly needs to break away from the past practice of simply hunting in the zoo and go after voracious wildlife - not an easy tax at all.

To be fair, the new leadership in the DoF and the BIR is demonstrating amazingly admirable determination to raise revenue collections through various programs. I applaud them vigorously. Their work is made difficult by structural erosion in the revenue base due to non-indexation of excise taxes, as well as the passage of tax-eroding laws in the last two years, by one estimate costing over 1 % of GDP annually (P80 billion). 

Administrative measures, however, can only do so much, based on both our own and international experience. It does not help that the new administration came in under a campaign promise of no new or increase in taxes even as it is under pressure to do catch-up infrastructure and social spending.

Perhaps in an effort to help increase revenues while staying faithful to the administration campaign promise, Rep. Dodong Mandanas, chairman of the House Ways and Means Committee is pushing hard for a Value Simplified Tax ( VAST) at 6% to replace the 12% VAT. Despite opposition from the Department of Finance and known experts in the field, this has recently passed his committee. I share the reservations of critics of VAST, a multi-stage turnover tax that cascades, i.e., imposed on a product several times depending on the number of stages involved throughout the production and distribution chain. As the DoF position paper states: adopting a lower rate of 6 % for VAST can be deceiving and the poor who is largely limited to purchasing goods from a retail store could end up paying more than the rich. The paper also argues persuasively that in addition to being not transparent (which could actually be its major selling point) it distorts production and resource allocation, as well as impacting unfavorably on exports. (The public can derive comfort from the pronouncements of Senate Ways and Means Committee Chairman Sen. Ralph Recto that he does not favor the VAST for the reasons cited. )

If not VAST, what then to improve the fiscal picture and finance needed development spending? UP Professors Canlas, Diokno, and Medalla, in a fiscal road map, they drew up before the presidential elections, put forward the following measures: a) reform of fiscal incentives, b) reform of excise taxes on cigarettes and liquor, c) increase in VAT to 15 % while lowering personal and corporate income taxes to 25%, d) a higher taxes on fuel products. (See my column, Fiscal imperative for next administration, Oct 5, 2009)

Even as the fiscal leadership perseveres in trying to collect more from the existing tax base, it should perhaps quietly constitute an experts study group to do a comprehensive review of our tax system and recommend reforms adapted to changing complexion of the Philippine economy and its financing needs.

Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.

No comments:

Post a Comment