(Second of a series)
Note: House Bill No. 5636 discussed in this article refers to the version approved on 3rd and final reading by the House of Representatives on 31 May 2017. The proposal has yet to be passed by the Senate. This article does not take into account the provisions of the Senate version of the Bill, where deliberations are still ongoing.
House Bill (HB) 5636 is the first of several tax reform packages aimed at rationalizing the Philippine internal revenue tax system. The proposal seeks, among other reforms, to mandate the real-time e-invoicing and sales reporting to the Bureau of Internal Revenue (BIR). It will be the Philippines’ first attempt to codify digital tax administration nearly 20 years after the passage of the 1997 Tax Code. However, the concept of digital tax administration is not entirely new. Digital tax administration already exists at varying levels around the world. With respect to real-time — or near real-time — sales and/or sales tax reporting, several countries already have such mechanisms in place.
WHAT IS ‘DIGITAL TAX ADMINISTRATION?’
While numerous definitions exist, common themes would include the “use of digital information” and “technology” by a Government to administer its tax collection, compliance and monitoring functions. The level of “digitalization” of tax administrations varies significantly around the world — some countries, such as some Latin American nations, are leading the pack, while others are years away from going digital. Based on the 2016 Ernst & Young study, Tax Administration is going digital:
Understanding the challenges and opportunities, the levels of digitalization of tax administrations across the globe may be summarized into the following five levels of advancement:
• E-Filing — allowing or requiring taxpayers to submit returns and supporting reports in electronic form;
• E-Accounting — requiring submission of electronic source data and documents in a defined electronic format, and at a defined frequency;
• E-Matching — requiring submission of additional accounting and source data, and/or allowing tax authorities to access to such data; submissions are real-time or near real-time, and tax authorities match source data to look for discrepancies and risk areas across different tax types;
• E-Audit — real-time or near real-time matching of e-accounting data and electronically filed returns; real-time electronic audit assessments are sent to taxpayers;
• E-Assess — electronically submitted data is used to prepare tax assessments without the need to file returns; taxpayers are given the option to audit taxes pre-computed by the government. Estonia, for example, already provides its citizens with pre-populated tax returns, to be electronically approved and signed by the taxpayers.
SO WHERE DOES THE PHILIPPINES STAND?
For many corporate taxpayers, and extent of coverage notwithstanding, the Philippines is primarily at the first level of digital tax administration — i.e., “e-Filing” using either the Electronic Filing and Payment System (e-FPS) or the e-BIRForms Online Filing system. The e-FPS platform allows taxpayers to file returns and pay the corresponding taxes online. The e-BIRForms system is a return preparation software allowing taxpayers to file tax returns online, although payments are still made through authorized agent banks.
For e-FPS taxpayers, e-BIRForms also links certain returns to e-FPS, allowing the taxpayers to encode the returns offline before submission and making corresponding payments online. Some elements of the more advanced levels of digital tax administration can already be seen on a limited scale. These include the submission of alphabetical lists and summary lists in electronic format as in the BIR’s Reconciliation of Listings for Enforcement (RELIEF) Data Entry and Validation Module, which lists are supposedly used for “e-Matching” of taxpayer data and the submission of books of accounts in electronic (i.e., DVD) format for taxpayers using Computerized Accounting System.
We have also recently expanded our digital tax coverage through the submission of Certificates of Withholding Tax (Form 2307) and Withholding Tax on Compensation Certificates (Form 2316) in electronic (PDF) format for large taxpayers and their employees. While the PDF format of some of these submissions does not easily allow matching or verification of these documents, these submissions are already a step towards “e-Accounting.”
While e-FPS and e-BIRForms already exist, the extent of the BIR’s reach with e-Filing is still an issue. In the absence of a legislative requirement for taxpayers to e-file, the administrative requirement to use either the e-FPS or e-BIRForms platforms only covers certain groups of taxpayers, including large taxpayers, taxpayers registered under the Philippine Economic Zone Authority, and those closely monitored by the BIR through its Taxpayer Account Management Program.
Many small and medium enterprises, sole proprietors and individual professional practitioners are not yet required to submit returns via either electronic platform, and the BIR continues to rely heavily on the withholding tax system to collect income taxes. Digital tax methods have not even touched some small enterprises, such as sari-sari stores, home businesses, and taxpayers in far flung areas with limited internet connectivity, where the level of digital exclusion remains high.
The e-invoicing and real-time sales reporting provisions of HB 5636 may perhaps allow the Philippines to level up in terms of digitalization. The real-time submission of invoices and sales data would hopefully put the Philippines at “e-Matching,” of the level 3 of digital administration, the extent of coverage notwithstanding. Moreover, codifying this e-requirement of centrally recording transactions at the point of sale and mandating the BIR to set up an appropriate system will force both the tax authorities and the taxpayers to actually step up to the plate and make digital tax reporting the norm.
In order, however, to implement the planned e-invoicing and real-time sales reporting, and thus level up our digital tax administration capabilities, the BIR will still be required to come up with an entire system of software and hardware. With issues such as a National Broadband Network and other infrastructure requirements, such as budget and procurement, as well as other constraints to consider, there are several obstacles that the BIR faces. We remain optimistic, nonetheless, and look forward to seeing how technology will significantly improve the efficiency of our tax collection system.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Lee Celso R. Vivas is a Tax Partner of SGV & Co.