THE government will never hit, much less surpass, its annual collection targets unless it indexes taxes to inflation and modernize fiscal incentives given to certain industries that account for over P100 billion in foregone revenues, The Department of Finance (DOF) said.
In a statement on Tuesday, Finance Undersecretary Karl Kendrick Chua said anew that alongside these reforms, the government also needs to relax the country’s bank secrecy laws that are among the most restrictive in the world and which prevents the Bureaus of Internal Revenue (BIR) and of Customs (BOC) to conduct the proper tax audits and subsequently run after tax dodgers and money launderers.
The Philippines is one of the only three countries in the world that still keeps bank accounts out of the scrutiny of tax officials, he said.
Chua said the Philippines has to improve its current tax-to-GDP ratio of 13.6 percent to 16.6 percent, which means the government has to raise some P600 billion per year in new tax revenues, to enable the Duterte administration to fund its planned investment in infrastructure, human capital and social protection for the vulnerable sectors.
Citing the failure to index taxes to inflation as one of the reasons for the country’s low revenue collection rate, he pointed out as an example the case of fuel excise taxes, which have not been adjusted since 1997, although the peso value of the tax rate has eroded and incomes have increased over the past two decades.
Another major reason why revenue collection targets are never met is the numerous incentives given to protected industries, which violate any or all of the four principles of why these had been given to them, Chua said.
He said fiscal incentives in other countries follow these four principles: they must be time-bound, performance-based, transparent and targeted for specific beneficiaries.
These principles, Chua noted, are seldom practiced in the Philippines, where incentives are given with no time limits, are neither transparent nor based on performance, and never target specific areas that need investments to spur economic growth.
“[Incentives] should be targeted, typically to those investing in the provinces, if you want to make development in the provinces, if you are an exporter, or if you can create jobs. But not all are targeted,” Chua said.
“Not all are performance-based. There are many instances wherein firms that are underperforming are still getting incentives without limits,” he added.
Chua said the country’s outdated fiscal incentives program has resulted in foregone revenues totaling P100 billion, of which half are from income tax holidays and the rest from special tax rates given to companies.
There are over 200 laws granting incentives to various industries that were approved and enacted without amending the Tax Code.
“And finally, our bank secrecy law. We are one of only three countries in the world wherein there’s no way to open bank accounts except when you give your consent or when you die. So there’s no way to audit. That is the reason why we are not able to recover (from a low revenue collection rate),” Chua said.
He said such lapses can be corrected by instituting reforms in tax policy, alongside reforms in tax administration that can be implemented by the Executive Branch without any need for prior congressional approval.
Such reforms include simplifying tax forms, setting up a “small” and “medium” taxpayers division in the Bureau of Internal Revenue, improving the electronic tax payment system, mandating more active data sharing, and expanding the coverage of the Large Taxpayers Service, Chua said.