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Industry tax benchmarking

New strategy in tax enforcement: Industry benchmarking

by:  EDWARD L. ROGUEL

Did you know that taxpayers may be questioned or examined by the Bureau of Internal Revenue (BIR) if their tax payments do not fall within the industry benchmarks set by the BIR?

Early this year, the BIR issued Revenue Memorandum Order (RMO) No. 4-2006, which prescribes the guidelines and procedures in benchmarking. 

Benchmarking is the process of setting industry standards and determining the performance level of taxpayers in a given line of industry in comparison with such standards.  For purposes of BIR’s benchmarking program,  averages and ranges of net VAT due and income tax due in relation to gross sales/ receipts and profit margins will be derived from information within and outside the BIR to set the industry standards.

Initially, the top 200 taxpayers (based on gross sales) of each industry per Revenue District Office (RDO) will be covered by the benchmarking.  This number will eventually be increased until all taxpayers of all industries are fully covered by year 2008. 

The priority industries for initial benchmarking are manufacturing (flour, softdrinks, sugar, cement and plastic), hardwares, restaurants, shipping, IT providers, telecommunications, call centers, logistic providers, construction, and petroleum. 

Tax payments will be monitored and evaluated through the use of benchmarking to identify taxpayers within the industry group who are not performing at par with the other members of the industry.  In other words, taxpayers who fall below the benchmarks set by the BIR may be subjected to audit and investigation. 

While the BIR’s intention of “instituting a systematic program that would level the playing field among taxpayers engaged in similar line of industry” may be laudable, due care should be taken to ensure that this is not abused.  Nor should such a program be used as a means to compel honest taxpayers to pay more taxes than what is actually due.  A taxpayer’s non-achievement of the benchmark should not be prima facie taken to mean that he had not paid the correct amount taxes.

There are many factors affecting the performance of a business, both on the supply side and the demand side.  Even economic models acknowledge that businesses at different stages of commercial operation would exhibit differences in profitability and cost structures.  Hence, even taxpayers in the same industry  can be under different  circumstances  For this matter, non-achievement of the benchmarks should not necessarily be taken to mean that deficiency taxes are due. 

At most, benchmarking should only serve as an indicator of an industry’s over-all performance, and not necessarily a particular taxpayer’s tax compliance.  Otherwise, taxpayers who religiously pay the correct amount of taxes but were unable to achieve the industry benchmarks because of their peculiar circumstances would be faced with a problem of proving that they have not underpaid their taxes. 

This would mean additional administrative costs to be incurred by such taxpayers in collating documents, preparing the reply, and even hiring consultants to justify the deviation from the benchmark.  The BIR should continue to adhere to the existing audit procedures.  Benchmarking should never give rise to a presumption of tax evasion!

Benchmarking may indeed help the BIR to increase its collections.  However, for this program to work effectively, due care should be observed in gathering data and establishing the ratios/ benchmark.  Safeguards should also be in place to ensure that this program will not be abused by some BIR officers, i.e., be used as a tool for harassment of honest taxpayers.  

The taxpayers, for their part, would do well to ensure proper tax compliance since the BIR is committed in devising programs to improve its collections.

(The author is a senior tax manager at Punongbayan & Araullo, me mber of Grant Thornton International.  For comments and inquiries, e-mail the author  or call 886-5511.)