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Why government cannot collect enough taxes

(Article published in the Oct 11, 2006 issue of Manila Standard Today)  

         Three major pieces of tax news that came out last week, though capable of being ingested independently, are, in my view, most profitably digested interconnected.  Taken together and in the sequence they hit the media, they instruct us on why, perhaps, my classmates, Secretary of Finance Margarito B. Teves, and Commissioner of Internal Revenue Jose Mario C. Buñag, working hard and trying hard as they both are, continue to be unable to collect the amount of taxes they had targeted.

 The first was a reminder, if not an initial announcement, from the Bureau of Internal Revenue (BIR), of a one-time administrative abatement of all penalties, surcharges and interest on delinquent accounts and assessments as of 30 June 2006 (Rev. Regs. No. 15-2006).  The second was reportage of Buñag’s statement made to the members of the Congressional Oversight Committee on Comprehensive Tax Reform that about half of the business establishments examined by his bureau as of July, this year, appear to have committed at least one violation of the National Internal Revenue Code of 1997.  The third was headline news: Lucio Tan, one of, if not the, country’s richest, won an acquittal from the lower court of the tax evasion charges initiated against him by then BIR Commissioner, Liwayway Vinzons-Chato.

The BIR’s Rev. Regs. No. 15-2006, apparently finalized for the higher-ups as early as 18 August 2006 but approved and released to the public only about a month later, projects itself as “another step towards the collection and reduction of the Bureau’s Accounts Receivables and pending assessments.”  It comes at the heels of the latest enhancements introduced by Reg. Regs. No. 14-2006 to the “No Audit Program” which was greeted by lukewarm reception by taxpayers from the time it was inaugurated on 17 January 2005 by Executive Order (E.O) No. 399 and amended barely three months after on 26 April 2005 by E.O. No. 422, and until now.

Together, the two internal revenue regulations give the clear signal that taxes were not pouring in as heavily as the rains unloaded recently by typhoon “Milenyo.”  In fact, the tax collection authorities appear to remain in the draught of “El Niño” even as the rest of the country is already wading in the floods of “La Niña”. The inevitable question is “why”?

 A partial answer was given by the Buñag report on the Bureau’s Tax Mapping Verification Drive (TCVD).  He told the Congressional Oversight Committee on Comprehensive Tax Reform that of the 49,225 business establishments visited by the BIR personnel as of July, about half, or 24,656, appear to have committed in some form or another a violation of the Tax Code.   Of these alleged violators, 6,619 were not even registered with the Bureau. 

 The violations noted appear to be petty and not as serious sounding as “tax evasion”. They include not issuing receipts, not keeping books of account, not registering the business or cash register machines, and, among those registered, not posting the registration in “in a conspicuous place”.  Thus, assuming that all the business establishments that appear to have violated the tax code agreed to pay all the fines due on their respective failings, the amount that would be collected could hardly make a dent on the Php 6.1 billion shortfall in the bureau’s collection target as of August.

Still, the TCVD is a useful exercise, not only because the mapping raises a bit the public’s consciousness of the earnestness of the Bureau to collect, but more, important, the findings point to the roots of poor tax collection record of the government. Like smoke emissions from a volcano’s crater that are indications of cataclysmic activity underneath the surface, the violations are “preliminaries” to the more significant event, i.e., non-payment of taxes.  Judging from long list of violations and prevalence of the violations, it appears that, as general proposition, the market figures that the benefits of not complying with the tax code on the surface and of, possibly, not paying the right amount of tax, outweigh the consequences of being found out by the authorities and suffering, if at all, the proper penalties that could be meted out.

A quick scan of the benefits promised by Rev. Regs. No. 15-2006 easily justifies the taxpayer’s tepid reception of the bureau’s olive branch.  In exchange for the taxpayer’s paying one hundred percent (100%) of the “basic tax assessed”, the BIR will cancel the assessment for “penalties/surcharge and interest”.  Section 4 states in conclusion, “Thereafter, the docket of the case shall be forwarded to the Office of the Commissioner, thru the Deputy Commissioner for Operations Group, for issuance of Termination Letter.” 

 The “basic tax assessed” is defined by Section 3 as any of (a) the unpaid tax shown on the return filed; (b) the tax due shown on the Assessment Notice and Letter of Demand, excluding surcharge and interest; (c) unpaid second installment income tax, for those who opted to pay their income tax for the year 2005 on installments; and (d) the amount of dishonored checks for those who “paid” their taxes with bouncing checks.  It thus is thus essentially the amount previously determined by the BIR or confessed by the taxpayer in his tax return or in his payments, where the BIR has not yet assessed. 

 Almost everyone who has a mind to will be extended the benefits of Reg. No. 15-2006, except the limited circle of people involved in cases where the Presidential Commission on Good Government “has an interest and/or there is a need to coordinate with the PCGG”, those who had earlier made compromises with the Bureau or had partially or fully paid the compromise amount; and in cases “already filed in court involving criminal tax fraud, the RATE, fraud cases resulting from confidential information, “unless allowed to avail by the Commissioner or his representative on meritorious grounds.”

As mentioned earlier, the main benefit is termination of the tax case at whatever level they are in, a ceasefire of sorts.  But then, there is no explicit assurance of absolute closure.  Reopening of cases terminated under Rev. Reg. No. 15-2006 could, conceivably, be foreclosed by a court order dismissing the case and putting it under the purview of res judicata.  But, how about the cases at the administrative, or BIR, level?  Their fate depends on the faith that this administration, or a subsequent one, will not renage on its word. 

To the market’s assessment of those prospects come the lessons of the Lucio Tan acquittal.  The government is reported to be thinking of what avenues to take to appeal it (despite protestations of double jeopardy by Mr. Tan’s attorney) and so not much may be said at this point on the merits of the decision.  But one thing is very clear from that case.

The case, which involved the question of whether Mr. Tan’s Fortune Tobacco Corporation, for the years 1990 to 1992, evaded the payment of the correct amount of taxes on its cigarettes through the use of dummy corporations, took about thirteen (13) years to resolve.  Within that period the case went up to the Supreme Court and down again. 

Regardless of whether it is Mr. Lucio Tan or the government who is correct, the case per se demonstrates that tax litigation does take a long, long time.  Since the lapse of time is, as a general rule, in favor of the defendant, which in tax deficiency cases, is always the taxpayer, the option of not paying the correct amount of taxes and waiting for the government to successfully prove its case, if it can, is a tempting alternative if the difference could be profitably used in the meantime. 

        Thus, for the monied, not correctly paying one’s taxes is a risk worth taking.  As for the less monied, not paying correctly is for them too an attractive option.  After all, it is unlikely, so they argue, that the government would devote time and effort to collect from them the minuscule fruits of their tax evasion.  Besides, there is not enough jails to keep them in, assuming the government could in time catch them all.  For the haves and the have-nots, therefore, not correctly paying one’s taxes is a viable option.