Giving taxpayers the option to be taxed on their gross income in lieu of net income tax would streamline the country’s revenue collection system and would simplify doing business in the country, Gregorio Navarro, chief-executive-officer of Navarro Amper & Co. (Deloitte Philippines) told The Manila Times on Tuesday.
Navarro said that when income tax is based on gross income, it is an easy built-in business model not only for new enterprises but also even for existing ones.
“It is easier to comply with this kind of income tax [system]vis-à-vis net income tax [NIT] so long as you issue invoice with respect to goods or receipt for the sale of services,” he added.
Navarro foresees that the streamlining of the country’s taxation system would be a high priority of the next administration.
Navarro Amper & Company is the local practice of the Deloitte Touche Tohmatsu Ltd. Global Network, one of the country’s leading professional services firms providing audit, tax, risk, financial advisory and finance and accounting outsourcing services.
At present, the National Internal Revenue Code of 1997, as amended, provides that income tax in general are based on net income of taxpayers whether corporations or individuals.
NIT admits of certain deductions either itemized or optional standard deduction (OSD).
Itemized deductions, among others, allow ordinary, necessary trade, business or professional expenses as deductions, while the OSD slashes 40 percent of the gross income without any qualification to arrive at the net income tax at a rate of 30 percent.
Domestic and resident foreign corporations, however, may be compelled to pay income tax on the basis of their gross income if their NIT is lower than their gross income. In which case, a corporation is compelled to pay the “minimum corporate income tax” or 2 percent of their gross income in lieu of NIT.
“But that option lies with the tax authority, not with the taxpayers,” Navarro, a former president of the Management Association of Philippines, said.
Individual taxpayers, on the other hand, are taxed at a rate of 5 to 32 percent of their net income tax, while minimum wage earners are tax-exempt.
Further, the audit and tax firm chief explained that while under the NIT where taxpayers are entitled to claim certain deductions to arrive at their taxable income, there is always an element of uncertainty.
“Yes, there are certain deductions on the gross income to arrive at the taxable income. But these items of deductions are very erratic. It is always subject to scrutiny by the Bureau of Internal Revenue [BIR] and there is no assurance that what is deductible for this taxable year would still be deductible in the subsequent years. Businesses do not like uncertainty,” he said.
Navarro added that gross income taxation would also deter corruption on the part of tax collectors and at the same time simplify their work since there would be substantial reduction on “human interaction” between the taxpayers and the BIR examiners. Hence, it would prevent negotiations between the two parties that may lead to illegal settlement of income tax payments.
“Since the taxpayers would have an option to elect gross income as basis of their income tax, [the]BIR examiners would no longer have an opportunity to question the validity of the deductions because there would already be none. The BIR would check on gross [income], not on the deductions. Gross income being backed by receipts or invoices would [also]make the examiners’ job easier,” he said.
The option, according to Navarro, should be given to both taxpayers whether a corporation or an individual.
“When you are paying for NIT, there are many requirements that are imposed on the taxpayer by the BIR, like submitting the books and necessary documents, and thereafter keep them for the next 10 years to support the claimed deductions from tax payments.
There are many administrative works both on the part of the taxpayer and the BIR. “
“But giving the taxpayer the option to elect the tax treatment for their respective incomes would make our tax system efficient and would eradicate the bad practice of [taxpayers]hiding one’s income just to avoid these administrative works besides paying the higher taxes.”