Taxing the gig economy

President Duterte has thrown a hot potato on the laps of his policymakers at the DOF with his strong advocacy for a gross income taxation system. The President has a good reason for wanting it: eliminate corruption at the BIR.

As a basic concept, gross taxation is simple. For free lancers, take gross income and compute the gross tax due… no more negotiating with a BIR examiner on what is allowable deduction. No cumbersome record keeping.

Of course, it doesn’t have universal appeal. Some businesses have thin margins, while others have more leeway. 

Many businesses, specially those already employing an army of accountants, would rather stay with the current system. They have also budgeted for the BIR examiner… just another item in the cost of doing business.

I know where President Duterte is coming from and I am solidly behind him. He wants to eliminate the contact between taxpayers and tax collectors. He thinks gross taxation will render the jobs of BIR examiners redundant. Our tax laws stupidly assume BIR examiners are honest.

My beef with the current system is its inability to distinguish between big and small taxpayers. Guys like me who get paid per column written or per project completed are forced to get accountants to comply with complicated tax reporting rules.

I prefer a system where whoever contracted me withholds the tax due so that I don’t have to do anything every quarter or yearend. They do withhold now, but self- employed professionals still have to file complicated forms throughout the year.

True, TRAIN 1 allows an eight percent gross income tax for self employed professionals with incomes below P3 million a year. That is too low. Any self employed professional with income of less than P3 million a year is probably not worth hiring. Raising that ceiling to P8 million to 10 million is probably more like it. Extend the privilege to SMSEs too.

In the meantime, I choose the 40 percent optional standard deduction just so I minimize the chance of having to justify expenses to an examiner. I understand DOF even tried to remove that, but Sen Sonny Angara fought for it.

The thing is… the more complicated the tax system, the more discretion BIR folks have and the more corruption there is. Government loses because over half of our potential taxable base stay below the BIR radar in the underground economy.

That will only grow worse with the increasing power of the so-called “gig economy”. Young people today do not think like the old people who design our tax laws. The millennials prefer not to stay in fixed jobs, but work when they want, where they want. They want short term engagements or gigs.

For example, a daughter of a business editor had a nice job with Citibank, but decided to ditch it because she wanted to be a barista in Ilocos. People of my generation will not understand that kind of career decision making, but I hear more and more cases like that these days.

Gig is slang meaning a job for a specified period of time. Gig workers include freelancers, independent contractors, project-based workers, temporary or part time hires. A study by Intuit predicted that by 2020, 40 percent of American workers would be independent contractors.

That has been going on here for decades among creative workers. Telenovela scriptwriters, musicians, production workers and technicians in the entertainment industry have been working on gigs for a long time now.

The digital age has seen the rise of more gig workers because the workforce is increasingly mobile and work can now often be done from anywhere. Freelancers can select among temporary jobs and projects around the world.

Tony Steadman, Ernst and Young Americas People Advisory Services Organizational Transformation Leader thinks that “By the year 2030, about half of the workforce, half of the supply of talent, will actually be giggers.”

The gig economy raises problems for the tax collector. Aside from “giggers” not caring about bureaucratic rules, how do you track tax due when a contingent worker lives in one country, electronically provides services on behalf of a company in a different jurisdiction for a client located in a third jurisdiction?

How should our tax planners at DOF adjust our tax laws to account for the attitude and circumstances of taxpayers in a gig economy?

With more workers preferring to work as “giggers” or independent contractors, how can the tax system be made conducive for compliance? Right now, it is so complicated and unfriendly it is too much trouble complying. Those “giggers” will just stay underground.

The ridiculous system that now requires a make-up artist in a television program to issue a receipt for her talent fee is not sustainable. Neither can these “giggers” be expected to bother filing income tax returns.

Of course, there are other ways of dealing with corruption at the BIR which is President Duterte’s headache. Duterte has urged citizens to shoot corrupt officials, but not kill them. Better yet, Duterte can legitimize the kidnapping of tax examiners. That’s apparently happening for a while now.

Somehow, a criminal gang knows when an examiner is bringing home a bagful of bribe money. He is followed and as he opens his house door, gang members relieve him of his loot. It is the perfect crime… the examiner can’t complain to the police because he can’t explain where he got the bagful of money.

The gang can turn around and make a deal with government, 50/50 on the loot and immunity from prosecution. I know this is sheer fantasy, but so is trying to clean the BIR of corruption under present rules.

The best thing to do is to make tax rules as simple as possible… leave no room for discretion by examiners. That sounds like gross taxation to me. Hope President Duterte convinces his DOF experts.

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