CITIRA vs. EODB
The Philippines made remarkable progress in the ranking of the World Bank’s Doing Business (DB) 2020 Report, from ranking 124th rising by 29 notches and landing at 95.
According to the DB 2020 Report, the Philippines has made significant improvements in three areas: starting a business, dealing with construction permits, and protecting minority investors.
Package 1a or the TRAIN (Tax Reform for Acceleration and INclusion) Law was supposed to improve as well our scores in paying taxes with the reduction of the number of income tax return pages from 12 to only four. But such an improvement was offset by the 100% increase in the DST (Documentary Stamp Tax) which means higher costs in doing business.
Unfortunately, the reduction in personal income tax didn’t make an impact as the DB Report monitors ease of doing business for corporations, particularly SMEs. Also, while TRAIN gave some tax relief to middle income earners, it penalized individuals with compensation or taxable income above P8 million by imposing the highest personal income tax rate of 35%.
The Comprehensive Tax Reform Program of the Duterte administration made its goal very clear — to have a simpler, fairer, and more efficient tax system. Although being competitive was not explicitly mentioned, with the amount of time and effort spent in improving ease of doing business and the passage of Ease of Doing Business (EODB) Law or RA 11032 in 2018, the government is committed to really making sure it’s easy and competitive to do business in the Philippines.
But it seems that our Senators and Congressmen overlooked EODB or our competitiveness ranking in drafting Package 2 or CITIRA (the Corporate Income Tax and Incentives Reform Act) as it proposes a reduction of corporate income tax (CIT) from 30% to 20% by 1% every year until 2029. This means improving our ranking in paying taxes will take 10 years — that is if other countries will not decide to further reduce their CIT, as Singapore’s is currently at 17% and the average tax rate in the Asean region is around 24%.
Since most business organizations and sectors have expressed their support for CITIRA, the following proposals will be in addition to existing provisions of HB 4157 and SB 1357. It may take another Congress to revise and pass CITIRA if the goal of making our tax system simpler, fairer and more efficient will be the basis of discussion or argument:
1. If the TRAIN Law included a small business provision, why not consider allowing the same optional 8% for small corporations but with a higher annual sales threshold, e.g., from P3 million to P10 million, so more small corporate taxpayers will declare true profit and pay the right taxes? This is far better than the 5% threshold of the Bureau of Internal Revenue (BIR). If we fail to consider this, a small corporation with annual sales of P3 million will be paying P86,000 more in total taxes since it will be subject to both business and income tax, 3% and 30% respectively, without the benefit of the P250,000 exemption which an individual or a sole proprietor enjoys under the TRAIN Law.
2. Instead of removing the Optional Standard Deduction (OSD) entirely, why not make it available to SMEs only so they will no longer be subject to the usual and costly BIR audit where most of their expenses are disallowed anyway? At the current 30% CIT, the effective rate of a corporation with 60% gross income rate which will use OSD is at least 10% versus the 2% threshold of BIR for income tax payment.
More than improving our competitiveness ranking, this will also help BIR collect more voluntary payments without the need for regular audit and investigation which is the usual suspect or window for corruption.
3. Inevitably, we need to legislate a VAT refund system which will allow at least small corporations to claim a cash refund for unused input tax. The World Bank DB Survey clearly requires this as it gives 50 points to countries with a VAT refund system. This is a big leap for the Philippines since we continue to get zero points in this aspect every year.
The government may have apprehensions about this considering the impact on the budget, but since the priority is to provide a VAT refund to small businesses, we can put a ceiling or threshold on it, e.g., a P100,000 refund per year and make it available only to small businesses. This will definitely favor start-ups and small businesses which will have to invest on truck or equipment during their first two years in operations but will not yet have enough sales to use the input tax. Instead, they may be given an option to avail of a VAT refund.
4. Although the TRAIN Law mentioned simplified bookkeeping, it didn’t address the overly burdensome and costly maintenance of Books of Accounts. For small businesses that will not avail of optional 8% tax, they should be given one book only to record their daily sales and expenses.
But for those who wish to use Excel or spreadsheet, they should be allowed to do so provided they e-mail a PDF copy upon filing of their quarterly income tax return to make sure they will not be able to alter the data provided. This will simplify the bookkeeping requirements, especially since as VAT taxpayers, they are already required to submit the Summary List of Sales and Purchases (SLSP) electronically.
At present, the BIR has three bookkeeping methods: manual, loose leaf, and computerized accounting systems. For the computerized accounting system, the BIR already allows the immediate use of it provided it is subject to post-audit. However, most taxpayers are required to use manual bookkeeping as a default method. This consumes much time and effort for small businesses since they have to manually record what their accountant has encoded using Excel or spreadsheets.
Therefore, making the spreadsheet a default bookkeeping method and having only one book as an option for small businesses will definitely improve EODB, and hopefully improve tax collections.
5. Although preparation of financial statements is management’s responsibility, the accountant and external auditor must be held accountable and equally liable for erroneous and material misstatement that unduly reduces profit and tax payments.
It’s quite ironic that most financial statements are audited but BIR will still find huge tax assessments. This is only possible if the revenues are understated or expenses are overstated which should have been detected by the independent auditor.
The five major points which can be added in the existing CITIRA bill will definitely make a major impact in our competitiveness ranking. It will be best though if reduction of CIT will go from 30% to 25% immediately, and then gradually to 20% rather than go down by 1% every year. This is not just about revenue collections, but fair and efficient taxation.
This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Raymond A. Abrea is a member of the MAP Tax Committee and MAP EODB Committee. He was recognized as one of the 2017 Outstanding Young Persons of the World, 2016 Digital Mover, one of the 2015 The Outstanding Young Men of the Philippines (TOYM), and an Asia CEO Young Leader because of his tax advocacy. Currently, he is the Chairman and Senior Tax Advisor of the Asian Consulting Group (ACG) and founding Trustee of the Center for Strategic Reforms of the Philippines (CSR Philippines).
