Fight corruption, simplify tax rules!

The accountant doing my returns informed me that the new tax rules under the tax reform package removes the optional standard deduction of 40 percent and requires the filing of itemized deductions. I thought that was bad news so I checked.

Apparently, that was the intention of the DOF technocrats. But the House kept the 40 percent OSD. The DOF technocrats are unhappy about it and hope to convince the Senate to reduce the OSD from 40 to 20 percent.

The senators, however, have other things in mind. Sen Sonny Angara, chairman of the Senate ways and means committee and at least two other senators want to simplify the tax system. According to Angara, simplification is needed to increase tax compliance and plug loopholes.

Among others, Sen. Angara wants to take up a proposal to amend the estate and donor’s tax, and the imposition of eight-percent gross-receipts tax on self-employed and professionals in place of the value-added tax and percentage tax. The consensus of the senators, Angara said, favors a simplified tax-collection system to boost business growth.

Sen. Sherwin Gatchalian, economic affairs committee chairman, agrees. He told Business Mirror “tax reform is needed to plug leakages, so we will simplify everything,” adding that under a simplified tax system “mas madali makakakolekta at mas malaki ang (it is easier to collect and there will be higher) revenue collection.”

I am glad the senators are not taking the tax reform package presented by the DOF hook, line and sinker. I am in general supportive of the tax reform package. But it needs some tweaking here and there to make sure it will be simple enough and fair enough to encourage a wider participation from among the potential tax base.

Our current tax laws and the implementing rules on filing taxes are so complicated that ordinary taxpayers are confused and discouraged. If you are a self employed professional, you need an accountant to file VAT returns every month and income tax return every quarter.

You can be a housewife who freelances as a writer or a retired manager who gets occasional consultancy assignments, you have to go through a tedious series of procedures if you want to be law abiding. Many, however, figure it is too much trouble and just not pay any tax at all.

Former finance secretary Cesar Purisima once briefed me on how he was using analytics to ferret out tax dodgers. Whenever he visits a revenue district, he gets hold of data from the Professional Regulation Commission and the Supreme Court on the number of professionals (doctors, accountants, lawyers) in the area. He compares that to the actual number of tax filers by profession.

Almost always, he said, compliance is abysmally small. He confronts revenue district officers with his numbers. He challenges them to increase the number of self employed professionals filing their tax returns. I don’t think he made a difference.

I think it’s because Cesar didn’t see the whole picture. It is the complexity of the tax rules that keeps self employed professionals from filing tax returns. Complexity, plus the resulting fear of harassment by revenue examiners, keeps potential taxpayers on the sidelines.

Let us face it. Having to deal with a tax examiner is worse than getting a root canal and more personally invasive than a colonoscopy. You could have been as honest and fastidious about your record keeping, but the examiner will still find a reason or excuse to impose an unreasonable tax liability. He has a personal agenda or quota to collect.

An examiner will present an outrageous figure as your tax liability. Then he will give you an option: pay a lower amount, but prepare two or more envelopes with cash – 10 to 20 percent for the government and the rest split among the boys at the revenue district. Many will just agree to avoid trouble and the corruption story lives on.

This is why tax reform isn’t just about revising tax rates and including new taxable items. It is about collecting more by making it easy for more people to pay taxes to the government, not the revenue examiners.

The complicated current system (starting with the forms) gives too much opportunity for corruption. We should have something like the tax systems in Singapore and Hong Kong – simple, straightforward and easy for taxpayers to comply.

Tax reform should reduce the opportunity for revenue examiners to interact with taxpayers. What we need is the BIR’s version of the no contact apprehension system of MMDA for traffic violators.

A photo of the violation captured by CCTV is mailed to the registered car owner and the penalty must be paid within a number of days. There is no opportunity for the traffic enforcer to collect “kotong.”

Unfortunately, our tax planners are largely theoretical and are only focused on crunching numbers in their tax models. They are not giving as much thought to social psychology of implementation.

The optional standard deduction is a good example of how to do things right. The proposal of DOF to do away with or reduce OSD and require taxpayers to do itemized filing is a step in the wrong direction. Even the objective of raising more revenues may not happen as revenue examiners and taxpayers “compromise.”

Indeed, a gross tax that takes the place of everything, including VAT, will encourage more self employed professionals to file tax returns. Set the gross rates in a way that there will be little or no revenue loss as long as it is fair. But please, save us the ordeal of having to meet a revenue examiner.

No one wants to have anything to do with a tax examiner, if they can help it. I am sure someone as experienced in these matters like Sec. Carlos G. Dominguez knows that.

I respect Usec. Karl Kendrick Chua as a bright young economist with impeccable credentials. But he has to spend time in BIR field offices, talk to tax payers and see for himself how the rules they write get implemented.

Karl had been working in the World Bank with tax free privileges all these years and has probably not experienced having to comply with tax laws like a self employed professional. In this regard, I think Senators Angara, Gatchalian and Drilon get it more than Usec. Chua.

Sec. Dominguez was saying that a flat tax is attractive, but it does not meet the constitutional mandate of a progressive tax system. If they consider OSD a flat tax, it should be easy enough to tweak it to come out with two or three tiers with graduated rates.

But the more important consideration is not being required to file an itemized deduction claim and be hassled by a revenue examiner. That eventually forces you to participate in institutional corruption.

 The DOF cannot talk of tax reform and not do enough to simplify the tax filing process and minimize corruption. No finance secretary or BIR commissioner can claim they can tame corruption deeply embedded in the tax system.

 I am not saying all tax examiners are corrupt. But it should be easy to say that a large number are. 

Tax examiners are capable of reform. But it may take a second coming to turn them into a reincarnation of Matthew, a tax collector who became one of the greatest disciples of Jesus Christ.

Genuine tax reform means a simplified system – a tax form that can be filled up in less than an hour. And auditing it only involves checking the arithmetic which a computer can do. Anything less than that perpetuates a rotten and corrupt system and that is no tax reform at all.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco