TAX NEWS - June 2010

Philippines Tax: Tax collection efficiency

Is it just wishful thinking or can P-Noy's Plan A really do the trick in achieving the acceptable level of tax collection efficiency?

While key officials of the Department of Finance in the Arroyo administration, along with some University of the Philippines economists, are convinced that raising the expanded value-added tax (EVAT) rate to 15% from the current 12% is the Plan B that P-Noy should have, it seems that P-Noy is not giving up on his campaign promise not to raise EVAT rate, at least not without a fight.

And rightly so. For even if P-Noy ends up raising the EVAT rate, Pinoys may be more forgiving to him if they see that P-Noy fought hard stop the EVAT-increase trap.

And what a fight will that be.

Definitely, the only way to stop the EVAT-increase trap is to improve the country's tax collection effort.

As we have heard only of the general objectives of Plan A, that is -- of plugging the leakages in the tax system and curbing graft and corruption -- many are wondering about the specifics of P-Noy's Plan A.

What would make P-Noy's Plan A succeed?

If Plan A is to succeed, it must have more than what President Gloria Macapagal-Arroyo (GMA) had put into her administrations' tax collection efforts (except for the EVAT increase, of course).

GMA appointed very competent and technically good commissioners at the Bureau of Internal Revenue (BIR) and pushed for the passage of the Attrition Law to motivate tax collection agencies.

She even held regular command conferences with key BIR officials.

Notwithstanding all these, there has been no marked and consistent improvement in our tax collection efforts.

What should be the focus of Plan A?

Preventing corruption before it happens is closer to raising tax collection efficiency than going after tax evaders. Besides, landing a big fish in jail may take years of legal maneuvering.

Also, the equation for successful tax evasion is usually: cooperative government tax agent + corrupt taxpayer = Evidence of tax evasion becomes harder to find. Take away a cooperative BIR examiner from the equation, and the battle against corruption is already half won.

Thus, Plan A must focus on the government agency tasked to collect more than half of the country's taxes, the BIR.

This focus should not end with the appointment of an honest and capable BIR commissioner. Institutional reforms within the BIR are equally important, if not more important.

Plan A must start with the premise that the BIR has long been neglected by the National Government, both in terms of resources and capacity-building.

First, the BIR, as an institution, must be able to attract, develop, and retain highly competent BIR examiners. Second, the BIR, as an institution, must be able to resist the influence of those out to prevent the impartial, fair collection of taxes.

For Plan A to achieve these institutional reforms, it must consider freeing the BIR from the clutches of the Salary Standardization Law. We have exempted the Bangko Sentral ng Pilipinas and some government-owned and -controlled corporations from that wage restriction; the BIR deserves no less.

Plan A must accept the fact that tax collection efficiency will not come with the appointment of one good, competent BIR commissioner. It is now time to attract the best and the brightest Pinoys to the tax collection pursuits of P-Noy.

Once the BIR is manned by the best and the brightest Pinoys, Plan A must ensure that these people will be able to do their job without interference from parties with vested interests. The more powerful of these meddling people are the politicians who are into business, and businessmen with politicians backing them.

Plan A must assist the BIR, institution-wise, deal with these obstacles.

The BIR, as an institution, must cease to be perceived as being used by those in power to favor those who are on their side of the fence, and keep at bay those who are on the opposite side.

So, how would Plan A achieve all these?

Plan A cannot hope to accomplish institutional reforms within the BIR without a legislative agenda. A law must be passed to have the BIR exempted from the Salary Standardization Law.

Giving a degree of independence to the BIR to enforce tax laws without fear nor favor may require institutional changes that can only be done through the enactment of a law.

Plan A must work into place a landmark piece of legislation that will overhaul the BIR as an institution, and make it fit to allow P-Noy to escape the EVAT-increase trap.

What is the time frame for Plan A?

Compared to raising the EVAT rate under Plan B, the benefits of institutional reforms under Plan A may not be felt immediately, thus, the sooner we get these institutional reforms in place, the better it is for P-Noy's Plan A.

Unless the legislative agenda on Plan A is certified by P-Noy as urgent, the EVAT-increase trap might catch up with P-Noy. The EVAT-increase trap is real, and all roads will lead to it, unless P-Noy's Plan A succeeds.

Don't we all want it to succeed?