LAOAG CITY, ILOCOS NORTE — Tobacco production is not expected to dwindle almost five years since the Sin Tax reforms became law, with the government intending to discourage smoking, a mayor from the Ilocos region, a key growing area, said.

“Tobacco is considered a high-value crop. Farmers won’t walk away from it because it’s a cash crop,” Batac City Mayor Albert D. Chua said in an interview with the local media on Friday.

“There are suggestions to reduce the area planted to tobacco and shift to other crops, the problem is that farmer will always plant what is competitive,” he said.

“At the end of the day, will the farmer earn from the alternative crop?” he added.

According to farmers interviewed separately, there is still strong demand for tobacco from cigarette manufacturers and distributors, as companies continue to offer them production contracts, despite incentives that will aid the farmers to expand their farming portfolio.

“Tobacco won’t be abandoned by Ilocanos. We have long earned our living from tobacco,” said Agnes Asuncion, speaking in Filipino. Ms. Asuncion is a tobacco farmer who diversified into dragonfruit after the Sin Tax reform.

Some 52% of the total tobacco farmers in the country are based in four Ilocano-speaking provinces of Abra, Ilocos Norte, Ilocos Sur (60%) and La Union (17%), according to the National Tobacco Administration (NTA).

Despite diversifying into other crops, Ms. Asuncion said that tobacco is still a better crop, as the plant can be harvested up to 12 times.

Republic Act No. 10351 raised excise taxes on “sin” products such as cigarettes and alcohol, in a bid to temper public demand from those hazardous products. It also required that 15% of the additional revenue gained from the increase in levies will be earmarked to “programs that will provide inputs, training, and other support for tobacco farmers who shift to production of agricultural products other than tobacco including but not limited to spices, rice, corn, sugarcane, coconut, livestock and fisheries.”

Still, data from the NTA show that the law may have been effective, as tobacco production declined from 67.665 million kilograms in 2013 to 51.947 million in 2015.

The farmers on the other hand said that their livelihood improved after the implementation of the Sin Tax law, as some even noted that their income grew as much as 100%.

“Our incomes rose. To be honest we have received no assistance from the government. Instead we are earning,” said Ms. Asuncion.

Yet, the farmers rejected the idea of shifting totally to high-value crops, as they still rely on incentives from the Sin Tax reform law.

“The law has a lot of incentives,” said farmer Edmond Montanez, also speaking in Filipino.

The incentives under the Sin Tax reform law are in the form of farm equipment, agri-transport, and improvement of farm-to-market roads, and kick in for farmers engaged in “multi-cropping,” under which other crops are planted while they await for the tobacco planting season to return.

For example, Ms. Asuncion said that they plant high-value crops such as rice, corn, and dragon fruit during July to December, and plant tobacco in January to June.

“Many farmers have shifted to (multi-cropping), but the season here is wet and dry. Palay cannot be a year-round crop. So we still plant tobacco,” she said.

In 2016, the province of La Union received the largest share from excise taxes at P220.38 million, followed by Ilocos Sur at P84.29 million, Abra P66.56 million, and Ilocos Norte P11.12 million. — Elijah Joseph C. Tubayan

Let’s Talk Tax
By Richard R. Ibarra

Some taxpayers have reported receiving Benchmarking Notices from the Bureau of Internal Revenue (BIR). As in most cases, any letter or notice from the BIR is received with great trepidation and uncertainty. Generally, taxpayers should keep calm and not be unnecessarily anxious about the benchmarking notice.

Industry benchmarking is not a new program. This was originally instituted in 2006 through the issuance of Revenue Memorandum Order No. (RMO) 4-2006. However, it was not fully implemented at that time. Six year after, RMO 5-2012 was released to prescribe the revised guidelines and procedures in the conduct of industry performance benchmarking but on limited scale.

In January, the BIR issued Revenue Memorandum Circular No. 5-2017 prescribing the 2017 BIR Priority Programs. One of its main aims is the nationwide implementation of a Comprehensive Taxpayer Profiling and Industry Benchmarking. The return of the program is expected to contribute to this year’s target revenue collection of P1.829 trillion. Hence, it is not surprising if taxpayers are now receiving Benchmarking Notices from the BIR.

The program seeks to implement, on a nationwide basis, comprehensive taxpayer profiling and industry benchmarking activities to cover an expanded list of industries for all type of taxes and to monitor inputs as prescribed in RMO No.5-2012. Under the program, if a taxpayer is found to be below the industry benchmark, he is susceptible to receive a Benchmarking Notice from the BIR.

Let us revisit the program and assess how the taxpayer should handle the benchmarking notice.

WHAT IS BENCHMARKING?
Benchmarking of taxpayers refers to the process of setting standards to determine the performance level of taxpayers in a given industry or sector.

The BIR adopts the Performance Benchmarking Method as one of the modes of enhancing voluntary compliance pursuant to Section 5(E) in relation to Section (C) of the National Internal Revenue Code. Under this method, taxpayer data are captured in the Integrated Tax System (ITS). Such data are profiled and analyzed to determine the standard performance or tax compliance during the taxable period.

The objective is to measure and detect tax leakages and improve collections specifically on particular tax types such as VAT and income tax. It is also believed that the program can increase the voluntary compliance of the taxpayers.

HOW IS THE BENCHMARKING PROCESS IMPLEMENTED?
Benchmarking starts with the gathering of the taxpayers’ VAT returns, income tax return, and financial statements. The tax returns are sorted according to the specific industries or based on the Philippine Standard Industry Code (PSIC). PSIC is commonly used to identify and classify the specific business categories in business. From the chosen industry, a number of taxpayer are chosen to represent the industry population and their gross profit rate are computed. Computation of the gross profit is derived as follows:

Income Tax ratio = Income Tax Due divided by Total Sales or Revenue
VAT ratio = VAT Payment / VATable Gross Sales

Once the benchmark figures are established, a taxpayer will be tested based on its actual gross profit rate. The taxpayers who are more than 30% below the industry average ratio are classified as high risk taxpayers. Hence, they are prioritized to receive the Benchmarking Notices from BIR.

WHAT SHOULD THE TAXPAYER DO UPON RECEIVING A BENCHMARKING NOTICE?
Stay calm. The Notice is not automatically a tax audit. It is a request to explain fully in writing the reason for the taxpayer’s failure to measure up with set industry benchmark. Hence, the taxpayer must never ignore the Notice as failure to properly explain the difference may lead to a tax audit investigation or other enforcement activities.

In replying to the Notice, the taxpayer may either refute the findings or amend his tax returns and pay the correct taxes.

If the taxpayer chooses to refute the findings, he is given 15 days from receipt of the Notice to explain why his actual performance ratio falls below the benchmark. Note that the results of the findings on the Benchmarking Notice are not conclusive. The taxpayer can explain that even if the company belongs to the same industry, there are bound to be differences in terms of gross profit for various reasons such as business model, lifecycle, differences in functions or differences in risks assumed. For example, a taxpayer with a captive market will have different cost and pricing models as compared to a taxpayer without. Differences in business lifecycles can also influence the gross profit ratio. A start-up may use a lower gross profit ratio to penetrate the market while an established player may have the luxury of a higher gross profit ratio.

Considering that the benchmarking notice is not an audit notice, the taxpayer is not precluded from amending his tax returns. Hence, another alternative for the taxpayer is to amend the tax return and pay the VAT and/or Income Tax due if there were corresponding omissions or errors in the tax reporting.

The benchmarking notice is also designed to allow the taxpayer to realize its earning potential within the industry range. Hence, the result of the industry benchmark may possibly raise red flags on various operational issues such as cost models, inefficiencies in operations or transfer pricing issues on interrelated party transactions.

There are two sides to every coin and a benchmarking notice is no exception. On the one hand, it alerts the taxpayer that the BIR is probing as to its tax reporting. On the other hand, the taxpayer is also given precious information about gross profit ratios in his industry. He can use such information in improving his business and hopefully, reach if not surpass such gross profit ratio in the future.

Richard R. Ibarra is a tax manager with the
Tax Advisory and Compliance division of
P&A Grant Thornton.