“MAPping The Future” Column in the INQUIRER – 24 January 2011
It’s Complicated
by Anthony Alden S. Aguilar
Last year, I posted a question on whether flat taxes will make the Philippine taxation system fair.
Flat tax rate is one way of simplifying the system. The flat tax system offers a marginal rate, instead of
income brackets that the progressive tax system prescribes. Simply put, flat taxes ask everyone to pay
just one amount regardless of income and social class. This system offers a much simpler kind of tax
code and rate, unlike the one we have now which offers complicated loopholes and clauses.
I floated the question because it seemed to me and to most of us that the current tax system is
failing in terms of generating enough income for the government. Precisely because taxation is one of
the three inherent powers of the state, there is a need to make it work for the state. As many tax scholars
would put it, it is the lifeblood of the nation. I happen to come across a portion of a Supreme Court
decision in Commissioner of Internal Revenue v. Algue, Inc (158 SCRA 9 [1988]) which captures the
perception towards taxes. According to the case, “Without taxes, the government would be paralyzed for
lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of
one’s hard earned income to the taxing authorities, every person who is able must contribute his share in
the running of the government.” The decision captures the very essence of why we need to pay taxes.
For the most part, we do not understand the taxation system and the truth is, most of us do not
bother to understand it because it is a mere obligation, a burden. It is a concept found in Mount Olympus
which only the gods can understand and only them who bother.
For the past few months, there has been a clamor in Mount Olympus (where there are e-mails
and e-groups) regarding a new proposal to simplify the taxation system of the Philippines. For many,
including myself, a simplified tax system will be easier for both taxpayers and tax administrators. It will
vastly facilitate and improve administration while providing a simpler system for taxpayers to comply. It
will greatly diminish areas for discretion, confusion and arbitrary interpretation. Voluntary compliance
will thereby be encouraged resulting in more tax revenues for the perennially cash-strapped government.
But what really is the current system? Let me start with the complications. The current taxation
system is mainly governed by the National Internal Revenue Code (NIRC) or Republic Act No. 8424.
Under the Code, the following taxes, fees and charges are deemed to be national internal revenue taxes:
1) income taxes; 2) estate and donor’s taxes; 3) value added taxes; 4) other percentage taxes; 5) excise
taxes; 6) documentary stamp taxes; and, 7) other taxes as may be imposed and collected by the Bureau
of Internal Revenue (BIR).
Income tax alone comes in various forms. These are gross income tax, net income tax, final
income tax, minimum corporate tax on gross income, improperly accumulated earnings tax, and the
optional corporate income tax. Furthermore, you have to distinguish whether the income is derived from
sources within or outside the Philippines. Then you have to identify the kind of taxpayer. If it is an
individual, you have to find out whether he is a resident citizen, a non-resident citizen, a resident alien or
a non-resident and so on and so forth. The same goes with corporations. Simply put, the NIRC is one
complicated law.
Why do we need to simplify? Businessman Eduardo Yap of MAP has an answer for that. He has
been a passionate advocate of the move to simplify the taxation system. He argues that the current
system does not yield sufficient tax revenues for the government. This and other factors result in the
depletion of national patrimonial assets while debt keeps soaring. He adds that there is failure in the
delivery of social services and construction of infrastructure.
Aside from Yap’s reasons for his advocacy to simplify the taxation system, legislators should
consider that with globalization and the mobility of capital, the Philippines will find it hard to compete
with other countries given its complicated taxation system. Investors and international companies will
not get easily attracted with the complicated system that we have.
Yap mainly espouses the idea of an ultimate tax reform - by drastically simplifying the system
and limiting it to just two major classifications of domestic taxes – a direct final percentage tax on gross
receipts or earnings, similar to a gross receipts tax (GRT), to replace the complicated and leakage-prone
tax on net earnings or income tax. The other will be an indirect tax – the consumption tax, in the form
of the present value-added tax (VAT). All other taxes that clutter the tax code is to be discarded and
replaced by either of the two taxes. Complementing these two domestic taxes will be the tax on
international trade to complete the tax line-up. These three types of taxes shall comprise the revenue
generators of the government.
Come to think of it, maybe the NIRC is complicated for a reason. For instance, improperly
accumulated earnings tax is imposed on corporations to discourage the practice of accumulating
earnings and profits in avoidance of the payment of taxes. The NIRC was written in such a way that
there are plenty of safety nets in order to avoid illegal practices of taxpayers, which is actually the
reverse of what is happening. It is so complicated that somehow even lawyers, accountants and tax
administrators seem to be lost in the woods.
Accounting and law students will surely rejoice in case this initiative should push through. The
question that remains, however, is how do we simplify? To start with, an amendment of the NIRC must
be done and consequently, other statutes such as the Local Government Code or RA 7160 as well as the
Tariff and Customs Code or the PD 1464 as amended to synergize with the simplification of the taxation
system. But what provisions will be placed? Surely, it will be an overhaul of the whole NIRC and other
statutes related to it.
Yap proposes that to lessen resistance and for prudence sake, the change may be gradually eased
into the system in stages. Initially, he said, the final GRT may be introduced to individual taxpayers and
businesses with gross receipts up to a prescribed threshold. All others, including startups, may remain
with the net income tax and migrate to the GRT after three years as he proposes. The switch to the VAT
from the percentage and other excise taxes may follow.
As experts would argue, the current system is very comprehensive and all-encompassing with a
large tax net. It is designed for a perfect world but we do not live in a perfect world, and this is also the
reason why we should study this proposal very well. It worked in New Zealand and Ireland and I know,
it will work for us too but we may be two different worlds. We should consider the differences (e.g.,
culture, government, politics, etc.) between these countries and ours. A serious planning and evaluation
mechanism should be placed to ensure that any move to simplify the tax system will be feasible and
effective, one that will work. There should be a clear roadmap outlining and calculating the risk, cost,
consequences (especially the revenue) of each step of the way.
It is easy to propose ideas and I applaud and support people like Eddie Yap. The hard part,
however, comes with the implementation. As he puts it, it will be a difficult and painful process. While
there is an advantage because of the renewed faith in government, careful steps should still be taken.
Taxation is a complex matter. It is not shocking that only a few understand it. For Juan de la
Cruz, however, it can be easily explained if it were translated into social services, good roads,
etc. People are obligated to pay taxes, the more reason that they should not be deprived of taxes’
benefits. At the end of the day, the final determining factor of the acceptability of a simplification of tax
system (whether in the form of flat tax rates or GRT) is if it can benefit the people. I would suggest,
however, that while the initiative is still in the melting pot, we should support the current initiatives of
BIR Commissioner Kim Henares to effectively collect taxes and improve the tax administration.
Whether we like it or not, taxes will be there simply because they are necessary for the survival
of the government. That is our relationship with taxes, it is complicated. It is something we can’t live
with and we can’t live without, so why not make it work for us once and for all?
(The article reflects the personal opinion of the author and does not reflect the official stand of the
Management Association of the Philippines. The author is a Tax Partner of Endriga, Manangu, Aguilar
& Associates, CPA's, Tax and Management Consultants. Feedback at map@globelines.com.ph. For
previous articles, please visit <map.org.ph>
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