Simplify tax system for efficiency

The problem with our tax system, a tax lawyer once told me, is that it is too complicated… even for tax lawyers. The lawyer explained that the BIR issues countless rulings and interpretations of tax laws that only they know about. This makes it difficult not to negotiate with BIR examiners because the window for discretion is quite large.

Former BIR Chief Jojo Buñag agrees. In many breakfast conversations I have had with him at the Tuesday Club, I get the impression that Jojo shares the view that we need to simplify the tax system if we want to cut corruption and increase collections.

Businessman Ed Yap who occasionally contributes articles for the Business section of PhilStar, told me and Jojo that he drafted such a proposal for a simple tax system under the auspices of the Management Association of the Philippines. I sure hope people will listen to his proposals.

Yap sneered at so-called administrative measures to increase collections. At best, he said, this will yield, per most estimates, about one percent of GDP or less than P100 billion. Over time or change in administration, these measures may fall victim to ningas cogon.

New taxes or higher tax rates, on the other hand, will break P-Noy’s no- new-tax pledge and will meet heavy resistance from the public. The other risk of higher taxes is that it will impose added burden on the people, businesses and the economy, and may drive many to the underground economy.

There is no choice, Mr. Yap thinks, except to simplify the tax system. In a position paper he drafted for MAP, Yap suggests revamping the existing complicated tax system by replacing the gamut of taxes with just two domestic taxes.

“All other taxes (excise, percentage, capital gains, etc.) and different tax treatments that clutter the tax code be repealed and replaced with either of the two domestic taxes.” Jojo Buñag agrees. Yap said simplifying the tax system will “absolutely” result in higher tax revenues as “it has been the constant experience in other countries.”

The two domestic taxes MAP is proposing are: an alternative income tax and consumption tax. To complement these two domestic taxes will be the external tax on international trade (customs duties and taxes) to complete the domestic and external tax line-up. These three types of taxes shall comprise the revenue generators of the government.

The alternative income tax, as proposed, shall be a tax on income at a lower rate than what we have now. For this, a tax on gross revenue is proposed to serve as an alternative to the present income tax for both businesses and individuals. It will be a final and direct tax on the top line, instead of the bottom line, to be made available as an option for taxpayers to elect in lieu of the present complicated and leakage-prone tax on net earnings.

The proposed alternative income tax will simplify the process as it will eliminate the malleable cost of sales and operating expenses, which are required in calculating the present income tax. Business start-ups, loss-making businesses, multi-line businesses with widely varying margins operating under one reporting entity and multi-national corporations subject to tax treaty where their home country requires the tax on net earnings, shall be allowed the option to elect the present income tax. To prevent tax-method shopping, migration from one tax method to another shall not be allowed until the lapse of at least three taxable years.

The second domestic tax, a consumption tax, may take the form of the present value-added tax (VAT) with the input tax deduction maintained to prevent a tax cascading effect that would contribute to higher inflation.

Yap points out that the concept of a simplified tax system has been tested abroad. He cited the New Zealand experience, where tax revenues soared 20 percent from voluntary compliance after radical tax system reform that abolished and replaced all taxes with two taxes – income and consumption, as he is proposing.

Tax reform was undertaken as part of its wide-ranging deregulation thrust, designed to achieve zero-sum result – no decrease or increase in tax revenues. Income tax rates were cut by 50 percent and consumption tax set at 10 percent. Instead, the result was an unexpected large rise in revenues because of voluntary compliance.

“If tax rates are low, taxpayers won’t employ high-priced lawyers and accountants to find loopholes” according to NZ’s former minister Maurice McTigue’s remarkable lecture “The Conditions of Free-Market Capitalism” which narrated NZ’s experience with reforms. Indeed, that makes sense but bad news for tax lawyers.

I was telling Mr. Yap that the problem with his proposal is that I do not believe our Congress and the revenue collection agencies really want reform. The present structure is beneficial to those who are involved in the formulation and implementation of tax policy.

The only pressure that may prove irresistible is global competition. If investors, local and foreign, continue to stay away from anything more complicated than putting money in the stock market and buying government securities because of our complicated tax laws, then maybe we will be forced to reform and simplify.

That day isn’t going to come any time soon.

Top 500 taxpayers

Someone sent me a copy of the 2009 top 500 taxpayers but since it didn’t come from official sources, I am checking out its authenticity. Initial checks with some of the names on the list however, indicate that the numbers are accurate… from taxes paid to tax account number.

The good news is, the government apparently collected more taxes from the top 500 in 2009 compared to 2008. The entry level of taxes paid to get on the list is now P3.4 million compared with just about P2.2 million in 2008. I also saw more names of prominent rich people on the 2009 list compared to the 2008 list. But two unknowns, a Gardiola and a Bandong are in number one and two positions, dislodging Manny Pacquiao and Willie Revillame.

Pacquiao slid to 133, probably because he didn’t get as many lucrative local endorsement deals as in the past. His fight income is taxed in the US but probably not here. I guess his income earned abroad is treated like OFW income… tax free. Revillame is however, in number three.

The prominent rich are led by SMC’s Ramon Ang at number 6, Oscar Lopez at 7, Henry Sy Sr at 8. Felipe Gozon of GMA7 is at number 12, BPI’s Aurelio Montinola III, who may be BSP Governer next year, is at number 14. Walter Brown is 16, GMA7’s Gilberto Duavit Jr is 17, Sharon Cuneta is 18, Manolo Lopez is 19, Manny Pangilinan is 20.

Bobby Ongpin is number 25 a big jump from 306 in 2008. I e-mailed him about this and he e-mailed back that “this is principally due to the exercise of options in Philex during 2009 when I was Vice Chairman and Director, before I sold out to MVP.” Doy Vea of Smart Telecom is 26. Doy’s colleague at PLDT, lawyer Ray Espinosa who now runs ABC5 is 33.

First Holding’s Piki Lopez is number 35, Joey Cuisia is 37, Kris Aquino is 39. Ricky Razon is 46th. Piolo Pascual is 50th. Metro Bank’s Arthur Ty is 55th. Henry Sy Jr is 72nd. Lucio Tan is 76th. Actor John Lloyd Cruz is 86th, BDO’s Tessie Sy is 90th. PLDT’s Napoleon Nazareno is 91st. Actress Judy Ann Santos is 97th. Jollibee’s Tony Tan Caktiong is 100th.

Bulletin’s Emilio Yap is 138th, Erramon Aboitiz is 142nd. Actor Jericho Rosales is 153rd, Makati Business Club’s Ramon del Rosario is 155th. Vic Sotto is 158th. Former National Treasurer Omar Cruz is 168th. Former ABS-CBN News head Maria Ressa is 173rd and TV Patrol anchor Julius Babao is 175th. ABS-CBN Chair Gabby Lopez is 242nd.

Construction magnate Sid Consunji is 413rd, estranged Lucio Tan brother Mariano Tanenglian is 465th, former BSP Gov. Gabby Singson is 483rd and Mercedes Benz dealer Felix Ang rounds up the list at 500th. No politician in the list… no Manny Villar and no Ed Angara. –Boo Chanco (The Philippine Star)

Boo Chanco’s e-mail address is bchanco@gmail.com