Many Filipinos who listened to the inaugural speech of President Benigno Aquino III, or “PNoy,” were teary-eyed and full of hope. PNoy promised to uplift the lives of Filipinos through honest and effective governance. He emphasized the need for the government to deliver basic services such as quality education, health services and homes for every family. He pledged to improve the infrastructures for transportation, tourism and trade.
The average Filipino is now full of hope that the new President will bring in the much needed help and improvement in his life.
Yet, despite all these plans and promises, the resounding questions pervading everybody’s mind are: Where would PNoy get the funds to implement all his projects? What is the direction of the Bureau of Internal Revenue (BIR), the country’s main collecting agency, under the PNoy administration?
One of PNoy’s campaign promises that stuck with a lot of the voters is his promise not to impose new taxes. PNoy emphasized then that he believed new taxes are an additional burden to the Filipinos. In his inaugural speech, he reaffirmed such promise by saying that there will be no turning back on pledges made during the campaign.
No imposition of new tax is, of course, good news to everybody. But how can the new administration finance all of these proposed programs without new sources of funding?
PNoy mentioned in his speech that he will strengthen the collections made by the BIR. Based on the news reports, such statement is clarified with the pronouncement of Finance Secretary Cesar Purisima that his immediate goal is to increase the collection efficiency of the tax collecting agencies of the government.
As tackled in last week’s issue, increased tax collection, which does not involve new taxes or increases in existing tax rates, can only come from more efficient tax administration and more compliant taxpayers. This will definitely be a very challenging job for the new BIR Commissioner Kim Henares.
In keeping with the tradition of previous administrations, some taxpayers expect tax amnesty programs to be offered during the initial year of a new president. The issue is whether PNoy will offer this program to give a clean slate to non-compliant taxpayers before the BIR will vigorously enforce the tax laws.
Secretary Purisima mentioned during the press conference that the new administration will encourage tax evaders to settle their obligations with the government. He added that the bureaucrats will have to step up on tax collections.
It initially appears that the plan is to enforce the law, but it remains unclear if a tax amnesty or voluntary assessment programs will be offered. If offered, however, the amnesty will be most appreciated by taxpayers who want to comply and pay the correct taxes for the sake of contributing to the lofty and laudable promises of PNoy.
The new president said that the new administration will make the country attractive to investors by cutting red tape dramatically and implementing stable economic policies. In the past, our government promoted investments in business process outsourcing (BPO), tourism and other industries. PNoy will continue to promote these areas of investments.
However, the BIR and other government agencies like the Philippine Economic Zone Authority (PEZA) can make our country more attractive to investors by updating some of their regulations or aligning the implementation with the true spirit and intention of the laws.
For companies registered with PEZA, for example, the direct costs or allowable deductions are enumerated under the rules and regulations of PEZA. However, this list of deduct
ions is designed mainly for manufacturing companies which were the booming industry at the time the PEZA law was enacted. However, with the shift from regular brick and mortar manufacturing business to IT intensive export services, the regulations have become almost irrelevant to the new types of businesses. For example, the direct costs of BPO companies like communication costs, software expenses, and other items are not included in the list of allowable deductions based on the existing regulations.
To remove the ambiguity of the regulations and to avoid future dispute with the BIR during examination, some BPO companies had to incur additional costs in getting a ruling from the BIR to confirm its allowable deductions. The investors will be more impressed if our government will not just market our country as a good location for investments but will really take care the investors from the first to the last step of their operations through enhanced rules and regulations which are responsive to their business concerns.
Further, this administration must espouse stable policies particularly those applicable to businesses and investments. There were instances in the past where the rules were changed at the middle of the game. Such practice is not attractive to investors. For instance, sale of goods and services to PEZA-registered companies were considered zero-rated sales without the need to get an application for zero-rating by the seller prior to 2006. However, in 2006, such rule was changed and the seller to PEZA-registered companies was required to get a prior approval for zero-rating. Due to the protests made by investors, the BIR made another turn in 2007 by removing the requirement to get prior approval for zero-rating.
The same thing for the BIR and PEZA tax treatment on sale of scrap or reject items that underwent the registered production activity of a PEZA-registered company. It should still be treated as part of the registered activity.
Under the administration of PNoy, the Filipinos are now optimistic and armed with a new hope. We anticipate that the actions of the BIR and other government agencies in updating the regulations that would be responsive to the current investments will attract more investors and help improve the Philippine economy. Although the BIR is pressed to increase tax collection, we expect that the rules will not be changed at the middle of the game just to collect more taxes at the expense of existing investors. We applaud the plans of the BIR to collect more taxes by running after tax evaders and other non-compliant taxpayers.
This article is not intended to be a substitute for professional advice. For comments and inquiries, you may e-mail the author at Wendell.Ganhinhin@ph.gt.com. For other tax concerns, please check out our other tax services.