Tax amnesty to widen the tax net

The term “tax net” refers to “the mechanism for ensuring that people and companies pay their taxes.” A wider tax net means better revenue for a government to support its projects and improve its public services. But achieving a wider net is always a challenge, especially for developing countries.

Widening the tax net may be achieved by implementing a simplified taxation system, having efficient and effective tax enforcement, and building trust in the government, among others. A tax amnesty program may also help widen the tax base, if it is implemented properly.

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. Amnesty involves an absolute waiving its right to collect what is due and giving tax evaders who wish to relent a chance to start with a clean slate. (G.R. No. 178797, Aug. 4, 2009)

A tax amnesty program is now being pushed for legislation in order to raise P26 billion in revenue to support infrastructure projects. Both the House of Representatives and the Senate are now drafting the Amnesty Bill.

One of the draft bills on tax amnesty in the Senate covers all national internal revenue taxes, including value-added and excise taxes collected by the Bureau of Customs (BoC), for the taxable year 2017 and prior years. The amnesty amount is 5% of net assets as of Dec. 31, 2107 or the minimum amount which ranges from P40,000 to P250,000 for individuals and P120,000 to P500,000 for corporations, whichever is higher. The proposed Amnesty Bill, however, shall not cover withholding agents with respect to their withholding tax liabilities; those with pending cases with the Presidential Commission on Good Government (PCGG); those with pending cases with Sandiganbayan involving unexplained or unlawfully acquired wealth under the Anti-Graft and Corrupt Practices Act; and those with pending cases in appropriate courts involving violations of the Anti-Money Laundering Law, among others.

Tax amnesty programs are not new to the Philippines. There have already been several tax amnesty programs implemented during previous administrations.

During the Marcos administration, there were 10 Presidential Decrees (PDs) issued on tax amnesty. Six of these PDs were issued for previously untaxed income and wealth. The total collection for all these PDs amounted to P1.88 billion. (NTRC Tax Research Journal, Vol. XXVIII.5, September-October 2016)

In 1986, Executive Order (EO) No. 41 was also issued to grant a one-time tax amnesty covering unpaid income taxes for the period 1981 to 1985. Another EO was issued to expand the coverage of the said amnesty to include estate and donor’s taxes. The total revenue collected from this program amounted to around P1.3 billion. (NTRC Tax Research Journal, Vol. XXVIII.5, September-October 2016)

The last general tax amnesty was on May 24, 2007 under Republic Act (RA) No. 9480, otherwise known as the “Tax Amnesty Act of 2007.” RA No. 9480 provided amnesty on all unpaid internal revenue taxes for the taxable year 2005 and prior years, and covered income tax, estate and donor’s tax, capital gains tax, value-added tax, other percentage taxes, excise taxes, and documentary stamp taxes. The total collections from this amnesty amounted to around P5.9 billion. (NTRC Tax Research Journal, Vol. XXVIII.5, September-October 2016)

While previous amnesty programs helped the government raise the needed revenues to fund its projects, the question is, “Did the government capture and process the information of the taxpayers who availed the programs and ensure their compliance going forward?”

The objectives of the tax amnesty programs are to improve tax compliance by giving errant taxpayers the opportunity to comply with tax laws and enter the tax system on a clean slate, to reduce the administrative backlog of tax enforcement agencies, to increase the level of public tax consciousness, and consequently, to raise additional revenue. Such a program should widen the tax net as tax evaders are brought into the tax system.

In a paper on “Best Practices in Tax Amnesty and Repatriations Programs” released by International Transparency, it is suggested that, in implementing a tax amnesty, tax authorities should be adequately equipped to handle tax cases professionally and expeditiously. This is to ensure that tax investigations and enforcement of tax laws are not tainted. The government should also have a robust data management system to capture and analyze information received during the amnesty period. Such information should also be used to determine noncompliant taxpayers. It is also important that, after the amnesty period, tax authorities should strictly enforce tax laws and impose higher penalties to tax evaders who did not avail of the program.

Moreover, the amnesty program should not be regularly implemented, as this may result in a decrease in the level of compliance of taxpayers who expect the government to offer another amnesty. Tax amnesty programs should be the exception rather than the norm, because they may negatively affect revenue collection and compliance in the long run.

Implementing a tax amnesty program this year may be helpful to both the government and the taxpaying public. A tax amnesty would help the government raise the needed revenues to fund its Build, Build, Build program and, at the same time, put to rest any unresolved issues that taxpayers may have in previous years. The amnesty will also give taxpayers more time to focus on the impact the TRAIN law has on their business operations. Lawmakers, however, should ensure that the amnesty law includes provisions that will attain its objectives, i.e., it should improve tax compliance by giving errant taxpayers the opportunity to comply with tax laws and enter the tax system on a clean slate, reduce the administrative backlog of tax enforcement agencies, increase the level of public tax consciousness, and consequently, raise additional revenue through the widening of the tax net.

Edward L. Roguel is a partner of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.