Why we don’t want to pay taxes

The Philippines has one of the highest tax rates in the world, whether for corporate, personal, or total percentage of tax paid. However, collection efficiency is well below how much the government should be collecting theoretically.

Without getting into a lot of data and convoluted explanations, I would rather posit conventional wisdom and common sense to explain why this is so:
1. People don’t want to pay taxes
2. People cannot pay taxes

For purposes of simplicity, let us define “people” as organizations and individuals who are required to pay tax. For this article, we will not also get into the second reason, because it is rooted mostly in poverty, which is a larger discussion.

People don’t want to pay taxes because the government makes it too difficult to file your income tax AND people think that they are not getting value for their money.

Furthermore, even if people don’t pay their taxes, the government is ill equipped to catch tax cheats. This leads to selective and unjust application, and likely corruption. Thus, the tax system should be overhauled, along with the tax organization in the country.

The burden of complexity
The average citizen finds it difficult to follow tax laws precisely because the task is arduous, time-consuming and is a costly exercise. Even lawyers and doctors have to get advice from accountants for them to be able to figure out how to pay the government a share in their hard-earned income.

If intelligent professionals have a hard time figuring out how to accomplish and submit the proper tax forms and attached documents, what more the street vendors and farmers who are most likely not as educated? The argument can then be made that the tax system is actually anti-poor.

The complexity of compliance actually makes any individual or company more likely to be guilty of non-compliance. Thus, the tax authority can reliably expect that there is a 90 percent chance that they will find fault with the taxpayer’s compliance. Should a taxman want to give anyone a hard time, he is likely to be able to do so.

By making tax compliance difficult, the government is, in effect, incentivizing non-compliance. This encourages the status quo, which keeps a thin veil between tax avoidance and tax evasion. Just take the example of the commonly accepted practice of the tax shield. It may be legal or illegal, depending on who views it (the regulator or the taxpayer), but it is a gray area and the regulators generally look the other way. Why? Because apart from giving us a hard time to comply (with all those forms and procedures), they are also taxing us too much, not just relative to other countries but because of the low-value proposition.

Let me touch on paying taxes as a commercial proposition, which involves value for money.

The BFO reason
I propose the BFO (blinding flash of the obvious) reason: people know that the tax rate is too high and they feel justified in minimizing it. According to an article from MoneyMax.ph, there have been at least three bills (House Bill 4829, House Bill 5401, Senate Bill 2149) pushing for lower income taxes and easing the process to encourage tax compliance among Filipino taxpayers.

Why do they find the rates “too high?” Another BFO: People expect value when they pay for a product or service. When people pay taxes, the service they expect in return is an effective government. But people are more likely to find the government lacking in its delivery of effective services, so they feel they are not getting value for their money.

I think that the tax authority is doing the Filipino people a disservice when they assume that we are a nation of tax cheats. I believe a reasonable person will pay reasonable tax, an idea that may even be applied to a great majority of our taxpaying population. If a particularly wealthy cultural segment of society is prone to tax avoidance practices, it is likely because they do not see value in paying their dues. This does not justify the illegal act of non-compliance but gives consideration to the context of what is actually happening and the reason for it.

So what is the consequence of not paying taxes? Let us first accept the premise:

There are scant resources to actually execute the laws in taxation.

Given that the tax rates are too high, compliance is, thus, minimal as people resort to illegal means to lessen or avoid their tax liabilities (misreporting double books, tax evasion, bribery). If compliance is minimal, that means many people are not paying the correct taxes, or are not paying any, at all.

Theoretically, the tax authority can go after and prosecute all tax evaders. However, this would (in my assessment) involve the overwhelming majority of the population. The bureau of internal revenue does not have the number of people and systems to go after all of them (not even a majority). Thus, they resort to random audits and selective methods. That is where bribery, politicking, favoritism and other forms of corruption can come in.

As a finance educator, we have an old saying: If a few of the students fail, then there is a problem with those students. If most of the students fail, then there is a problem with the teacher.

If most citizens cannot comply with the tax requirements, there is something wrong with the system.

Conclusion: we should change the system so that taxes are brought to a level where people are willing and are made capable to pay them in a simplified manner that can be monitored effectively by the government.

How? Well, here are some of my off-the-cuff recommendations:
1) Lower tax rates and grant exemptions and incentives.

2) Simplify the laws and regulations to make them more easily understood and complied with.

3) Make them transparent (technology can make this happen) to minimize corruption.

4) Craft a strategy in the intermediate timeline – because government funds will be low due to lower tax rates (government bonds will have to be issued to offset the lower tax collections, parallel to the overhauling of the tax organization).

5) Low-income members of society should be given significant tax exemptions and tax cuts. It costs the government more money to collect from low-income earners than the actual revenues collected.

6) In fact, the entire paradigm of the tax code should be converted; it should move to voluntary tax compliance, which is based on trust, instead of the current system, which is based on distrust.

7) Further, penalties should be rationalized so as not to incentivize corruption and bribery. It might be a good idea to include community service and projects to penalties for non-compliance (in addition to penalties of cash, shutting down of businesses, or confiscation of assets).

8) As part of the solution, the government should embark on a national finance information campaign to ensure that the citizenry will not only understand the tax processes but acquire a positive mindset regarding taxes (case in point: South Korea, whose youth are introduced to tax payment at an early age. Kids in school are told they should be responsible citizens and pay correct taxes on time so that the government can provide services that will help improve the quality of their lives).

These solutions could take 5-10 years. However, even if the tax revenues of the government suffer in the near future, that will be offset by the benefits of a lower tax regime, which in the long term may be expected to boost tax collection because it will encourage tax payment from a wider tax base, as well as foreign investment, and will have a huge multiplier effect on the economy.

With these reforms, we can start traveling on the long road to transforming our country from an image of a nation of tax evaders into a nation of responsible taxpayers.

Anton Mauricio is the Country President of the Chartered Institute for Securities & Investments (CISI), the largest certification authority in financial services, headquartered in the UK. He is a board trustee and a two-term director of FINEX. He is the convenor of the Financial Literacy Partners, the largest group of professionals, educators, and students of finance in the country, and the first Filipino and only Asian in the board of AIESEC Alumni International (AAI).

source:  Manila times

Give to Caesar what is due to Caesar

The upcoming national and local elections remind us to exercise our right of suffrage, or the right to elect officials who will best serve the country. It is not only a right but also a responsibility that is entrusted to every eligible citizen in the country. However, as responsible citizens, we should also pay our share of taxes.

This year, the theme of the Bureau of Internal Revenue’s (BIR) Large Taxpayers Service (LTS) is the “Power of Possibilities”, as it tries to achieve a collection target of P1.3 trillion, or roughly 65% of the BIR’s total revenue target of about P2.1 trillion.

Achieving a goal that exceeds by 47% the actual collections last year appears to be more like wishful thinking on the part of the LTS. The same dilemma shadows the Bureau as a whole, which is also tasked to exceed by more than 40% of last year’s collections. In fact, the BIR’s assigned goal this year is so overwhelming that the BIR Commissioner was quoted as saying that the P2.1-trillion target is unrealistic and unattainable.

To be fair, the BIR has so far been very successful in its mandate as reflected in its unprecedented collection performance (i.e., collection for 2015 has doubled compared to the P457.32B in 2010). Such success may have been due to the BIR’s approach of scaring taxpayers to pay the correct taxes and shaming those who do not. Improvement in tax compliance also appears to have trickled down to the ordinary citizen as manifested in more buyers demanding invoices/official receipts and more sellers (even small ones) willingly issuing them, even if not asked. This is a welcome sight because the issuance of duly registered invoices/receipts helps ensure proper declaration of income by the sellers.

To realize the LTS goal this year, the LTS Assistant Commissioner proposes the following initiatives: 1) expansion of the tax base (i.e., more taxpayers under the LTS); 2) creation of a 2nd tier LTS of high net worth individuals; 3) use of technology (e.g., enhancement of the electronic filing and payment system); and 4) hiring of more revenue officers.

The BIR has also been issuing various directives to plug loopholes in the system and encourage compliance. Mandating electronic filing of tax returns and allowing tax payments through credit and debit cards are also welcome developments for taxpayers. 

However, the BIR does not always have its way as some of its previous directives were stopped by the courts through the issuance of Temporary Restraining Orders (TROs) or decisions rendering the directives as invalid.

As reported in the news, the Inter-agency Development Budget Coordination Committee had remarked that the various TROs issued by the Supreme Court (SC) have hindered government’s fight against tax evaders.

For example, in 2014, the SC ruled in favor of lawyers, doctors, and accountants by issuing a TRO against the implementation of Revenue Regulation (RR) 4-2014 or the “Guidelines and Policies for Monitoring of Services Fees of Professionals.” The RR requires all self-employed professionals to submit an affidavit indicating the rates, manner of billings, and the factors they consider in determining their service fees, upon registration and every year thereafter on or before Jan. 31. 

Likewise, the SC has indefinitely stopped the implementation of RR No. 1-2014 and Revenue Memorandum Circular No. 5-2014 with a TRO issued on 9 September 2014. These issuances require agents to submit the alphalist of payees on income payments subject to creditable and final withholding taxes and prohibit the lumping of various payees into a single amount or line item. The SC’s TRO came after six business groups lodged a petition questioning the validity of said issuances and asking the high court to declare the orders void and unconstitutional.

Given BIR’s tall order of meeting its collection target, we can only empathize with its challenge of generating the much needed funds for public expenditure. On the other hand, from the perspective of taxpayers, the BIR’s implementation of tax laws should be fair, just and equitable. According to the Supreme Court, this is so, lest the tax collector kill the goose that lays the golden egg. 

Thus, while “taxes are the lifeblood of the government,” the power to tax has its limits. For this is how the mechanism of democracy grinds to establish a well-oiled system of checks and balances. As the taxpayer has every right to question the validity of any revenue issuance, the BIR also stands to benefit by laying to rest all issues arising from the challenge of its directive and quelling all hindering factors for its implementation. 

In any case, all three branches of the government must support the fiscal efforts of the BIR. In the judiciary, parties stand to benefit when courts act expeditiously in resolving disputes and matters involving revenue issuances. A delayed court decision is detrimental not only to the BIR but also to taxpayers, especially those whose business activities may be suspended or may inconveniently suffer from losses in productivity and entail substantial costs while the appeal remains pending.

Congress should also do its share by passing tax laws that are simpler and easier to implement. Congress should also pass laws that would insulate the BIR from politicians and then make the compensation/benefits of its tax officers at par or even higher than the private sector. These will not only curb corruption but also attract the best and the brightest to the BIR, which will ultimately lead to a more efficient tax administration.

The executive department must also spend wisely, frugally and stamp out corruption, so more citizens will be benefitted and encouraged to correctly pay their taxes. 

One hopes that more Filipinos pay their taxes correctly as this will translate to more voices demanding better services from the government and heightened vigilance in government affairs, including choosing the right leaders.

As in the oft-quoted proverbial verse, “Give back to Caesar, what is Caesar’s...” citizens have the obligation to contribute to public expenses. Like Roman taxes, the BIR’s issuances and collection efforts are needed to carry out much-needed government spending, relieve national debt and establish a financially stable government. If we intend to attain economic sustainability, let us heed the call for social responsibility. 

Please pay your taxes and vote wisely this May!

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
carlos.mateo@ph.pwc.com

source:  Businessworld

Taxability of service fees received by non-resident foreign online advertising companies from the Philippines

The use of the Internet for the promotion of goods and services, particularly social media (Facebook, Twitter, and Instagram to name a few), has grown in the recent years. Companies in the Philippines have resorted to this medium of advertising, as it is accessible to more Filipinos.

Internet or online advertising has helped increase the revenues of local companies, be it seller of goods or seller of services, and of advertising companies. This trend, of course, has caught the attention of the Bureau of Internal Revenue (BIR) for potential sources of government revenue.

In 2013, the BIR issued Revenue Memorandum Circular No. 55-2013 (RMC 55-13) which provides for the definition of, and the tax obligations of persons involved in, various online business transactions. As regards Internet or online advertising, the BIR defined the same as “a form of promotion that uses the Internet to deliver marketing messages to attract customers.” Among others, RMC 55-13 provides for the obligation of: 1) the advertising company to issue official receipt; and 2) the advertiser to withhold and remit to the BIR 2% tax. However, while RMC 55-13 gave fairly detailed rules on the obligations of online advertising companies and advertisers, it failed to consider that most online advertising companies are foreign corporations located abroad.

Generally, whenever a transaction involves foreign corporations, the situs of taxation of the income or transaction becomes an issue. As in the case of Internet or online advertising, the usual questions are: if all the services of the foreign advertising companies are performed, and all the facilities used for such services (i.e., computers, servers, among others) are located, outside the Philippines, are the service fees taxable in the Philippines? Does the fact that the online advertisements are viewable and accessible in the Philippines by the intended market/customer make the service taxable in the country?

Recently, other countries have taken steps in taxing online advertising transactions.

Japan, for example, imposed consumption tax to recipients located in Japan of cross-border digital services performed by offshore providers (i.e., reverse charge mechanism). India, likewise, intends to impose six percent (6%) equalization levy to non-resident online advertising companies which do not have permanent establishments in the country.

At present, no Philippine law categorically imposes tax on online advertising services rendered by non-resident foreign corporations. Admittedly, however, the provisions of the National Internal Revenue Code (Tax Code), a number of BIR rulings and the existing jurisprudence may provide for bases to either exempt or subject such transactions to Philippine taxes.

Possible bases to exempt from Philippine taxes -- Under Section 42 (C)(3) of the Tax Code, payments for services performed outside the country are considered income from sources outside the Philippines. In ITAD Ruling No. 014-01 (16 February 2001), the BIR ruled that if the editing, programming, designing and dissemination of the advertisement are done using the facilities located abroad, the situs of the income is abroad.

It may be argued that views or access within the Philippines do not make advertising service taxable in the country. In BIR Ruling No. 009-05 (2 August 2005), services rendered abroad through the Internet (i.e., registration and maintenance of domain names), even if the same are for clients located in the Philippines (i.e., domain name holders in the Philippines), are considered rendered outside the country. The BIR used the Supreme Court’s decision in CIR v. British Overseas Airways Corporation (G.R. No. 65773-74, 30 April 1987) where it was held that the situs should be where the activity which produced the income happened -- in case of service, where the services are performed. Further, in CIR v. American Express International, Inc. (G.R. No. 152609, 29 June 2005), the Supreme Court held that, for value-added tax (VAT) purposes, the service is different from the product or output that arises from the performance of the service. What determines jurisdiction is the place where the service is rendered, not the place where the output of the service will be ultimately used.

Possible bases to subject to Philippine taxes -- The Supreme Court’s decision in CIR v. British Overseas Airways Corporation, may likewise be used to argue that the display and/or viewing of the advertisements in the Philippines may be considered as the activity which produces the income. Considering that advertising companies are paid for the promotion of products in the Philippine market, it is the visibility of the advertisement in the country which makes the transaction taxable in the Philippines. Moreover, consumption, in the context of a service, means the performance or completion of a contractual duty, releasing the performer from future liability. If the advertising company will not be paid unless advertisements are viewable or accessible in the Philippines, then consumption, arguably, happens in the Philippines.

In addition, the local companies have to consider whether or not the advertising companies are residents of countries with existing tax treaties with the Philippines; if not, whether they, for other reasons, may be considered as doing business in the Philippines. These considerations are important, at least, for income tax purposes.

Unless a new law is passed or a Supreme Court decision covering the above issues is promulgated, the taxability of the service fees received by non-resident foreign online advertising companies from the Philippines will remain unsettled. As such, local companies availing of these services are constantly exposed to the risk of being pursued by the BIR. In case the BIR will take the strict position, the exposure may include the assessment of: a) deficiency 30% final withholding income tax; b) 12% final withholding VAT; c) 30% income tax on the disallowed advertising expenses due to failure to withhold taxes; d) 20% per annum interest for late payment; and e) 25% surcharge for non-filing of return and non-payment of taxes.

The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

Aila May S. Alvarez is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices [ACCRALAW].

830-8000

asalvarez@accralaw.com

source: Businessworld

Favorable developments in deficiency and delinquency interest

Taxpayers may have finally been given two rays of hope by the Court of Tax Appeals when it comes to the applicability of deficiency and delinquency interest in tax assessments.

Taxpayers under assessment are often faced with two types of interest under the Tax Code. The first, deficiency interest, is imposed on any deficiency tax due from the date prescribed for its payment until the full payment thereof. The second, delinquency interest, is imposed on the deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the BIR. Interest rates for both are at 20%.

A cursory reading would give the impression that both forms of interest may simultaneously run. In fact, the simultaneous applicability of both types was affirmed by the Supreme Court as early as the year 2000. The latest decision affirming the interpretation was promulgated in 2013 where the Supreme Court ruled that tax laws must be strictly interpreted, hence, the only interpretation is that both types of interest may concurrently run.

Notably in the 2015 case of Liquigaz Philippines, Inc. v. CIR, Court of Tax Appeals En Banc introduced a novel ruling that may change the course of an otherwise steady flight.

In that case, the Court En Banc ruled that the imposition of deficiency interest under the Tax Code extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof; and that the imposition of the delinquency interest shall commence from the time when the concerned taxpayer failed to pay the assessed tax within the time allowed as stated in the formal letter of demand.

In essence, the decision converted what was once a duet into a relay race. As the Court of Tax Appeals interpreted the provisions, deficiency interest stops when delinquency interest begins. It might be an innocuous change at first but a shift in interpretation can potentially save taxpayers hundreds of millions of pesos given the amount involved in tax assessments.

Another novel ruling introduced by the same decision is the limited applicability of deficiency interest on deficiency income tax, deficiency estate tax, and deficiency donor’s tax. The Court noted that an examination of the Tax Code shows that there are only three instances where it defines the term “deficiency”, and this relates only and respectively to three types of internal revenue taxes, namely, income tax, estate tax, and donor’s tax, pursuant to Sections 56 (8), 93 and 104. For this reason, no deficiency interest can be imposed on deficiency Expanded Withholding Tax, Value Added Tax and Withholding Tax on Compensation.

While there is still a pending Motion for Reconsideration on the decision of the Court of Tax Appeals En Banc, taxpayers can hope that the case reaches the Supreme Court and a ruling affirming the decision be promulgated. It is about time our Courts revisit an age-old doctrine that has been imposing an unnecessary burden on taxpayers

Jantzen Joe C. Chua is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld