BIR Tax Programs for Tax Evaders in the Philippines

By: Tax and Accounting Center Philippines

For quite some time, tax evaders had happily succeeded with their utmost objective to pay least taxes (or none at all) by all means and in varied faces of tax evasion. Name it, they came in various ways such as the following:

• arbitrary non-reporting of income,
• over-declaration of expenses,
• fictitious expenses,
• claiming personal expenses as business expense
• borrowing of invoices and receipts,
• non-filing of returns, and more.

Philippine tax system is on a pay-as-you-file system under voluntary compliance where taxpayers learn for themselves how, what and when to pay taxes. Unfortunately, tax evaders look at it as PAY-AS-YOU-LIKE. Philippines tax system employs a check-and-balance mechanism over the voluntary compliance through the exercise of the power to conduct tax examination of tax returns within certain period (say, 3 years or 10 years), but with the large number of taxpayers, some tax evaders get lucky in not being examined. But the game is not yet over, and their time is soon to come!

Bureau of Internal Revenue (BIR) is doing its best in improving the system that would enforce the tax laws, rules and regulations, and eventually hit hard tax evaders. Here are some of the programs and tactics that are geared towards strict tax compliance in the Philippines, discovering lapses, and track down tax evaders:

Run after tax evaders (RATE) in the Philippines

This is a joint program of the BIR and Department of Justice (DOJ) to investigate, prosecute and convict tax evaders for their criminal and other violations of the Tax Code that the BIR would deemed necessary (e.g. failure to file returns, failure to pay taxes, deliberate under-declaration of income or over-declaration of expense by more than 30%, non-remittance of withholding taxes, keeping more than one books of accounts, making false entries on book, and more). Under this, taxpayers alleged for tax invasion from routine audit examination of returns, confidential information, third-party information, and other sources shall be subjected to a preliminary investigation with the DOJ for determination of a probable cause. BIR on the DOJ resolution of probable cause, the tax evader will then be criminally charged before the regular courts. Finding the tax evader guilty may put them behind bars. As of this writing, the Philippine tax authorities had already filed more than hundreds of tax evasion cases and counting.

Oplan Kandado Program in the Philippines

This program started last January 2009 under Revenue Memorandum Order No. 3-2009 intended to punish erring taxpayers by temporarily shutting down business operations of taxpayers based on specific grounds such as the following:

• failure to issue VAT receipt/invoice,
• failure to file VAT return,
• understatement of VATable sales by 30% or more, or
• failure to register

A closure order shall be issued by the BIR and will be lifted only upon compliance as prescribed in the order (e.g. filing and payment of amended VAT return, registration and payment of compromise penalties, and payment of deficiency taxes with penalties).

Tax Compliance Verification Drive in Philippines

This is commonly known to many as “tax mapping” where BIR officers in the Philippines visits business establishments of taxpayers to verify compliance of taxpayers with registration, invoicing, and bookkeeping requirements under existing tax laws, rules, and regulations.  This is not in itself a detailed examination but a simple verification of minor tax compliance with administrative regulations. Each violation carries an amount of penalty and violators may end up paying a lot based on the number of violations. Failure to comply may force the Philippine tax authority to use courts to impose civil and/or criminal liabilities of taxpayers.

 Benchmarking in the Philippines

Benchmarking was implemented through Revenue Memorandum Order No. 4-2006. Under this, the BIR develops industry benchmarks based on the relationships of tax payments and gross sales declared on tax returns using its internal database for the purpose. This industry benchmarks shall be used as reference in determining the extent of compliance of specific industry members and taxpayers within the industry are ranked as follows:

• Low risk
• Medium risk
• High risk

Taxpayer-members of the industry with compliance percentage far from the industry percentage or high-risk will be required to explain its side through a formal letter the BIR will send them. Based on the evaluation of taxpayer’s explanation and other circumstance, Philippine tax authority may conduct tax assessment in the Philippines to further verify the details of its tax compliance. Notably, benchmarking in the Philippines is not in itself a tax audit in the Philippines but only a means that may lead to tax assessment in the Philippines.

Taxpayers Reconciliation System (TRS) in Philippines

Another way for the BIR to get caught tax evaders is through the use of tax returns , reports and attachments filed with them, and third-party information such as importation details from the Bureau of Customs (BoC). Here are some samples on how tax reconciliation in the Philippines works:

Monthly Alphalist of Payees (MAP) attached to the monthly expanded withholding tax return or BIR Form No. 1601-E which identifies taxpayers paid and withheld by the filer where failure of the payee to declare the income in his income tax return may put him in trouble for under-declaration of income.

Another is the reciprocal report on VAT under Revenue Regulations No. 16-2005, as amended, the summary list of sales for VAT seller and the summary list of purchases/summary list of importation of VAT buyer where failure of one to declare would trouble him because the BIR will use the summary provided by the other party. In importations, unrecorded or under-declared importation value for BoC purpose that does not tie-up with summary list of importations may trigger BIR tax examination for alleged under-declaration.

Transfer pricing in the Philippines

Under Revenue Regulations No. 2-2013 prescribing guidelines for transfer pricing, associated companies must transfer goods or services by and between among them at arm’s length transactions so that it will reveal the true amount of taxable income.  Material deviation from the arm’s length nature may entail tax examination. This would cover taxpayers who would mobilize goods or services from among its group of related companies to minimize the impact of taxation on the inter-company sales of good or services.

Summary

There are a lot more ways how BIR could get caught tax evaders in the Philippines and perhaps only time will tell and BIR will have them all, if not most. We commend BIR for its efforts in improving the tax system towards tax compliance and we would expect more improvements on the system and as such, strict tax compliance is much of an urgent need for taxpayers in the Philippines. Tax savings is a best set objective but achieving the same must be put in proper perspective and in accord with tax laws, rules and regulations in the Philippines. Tax compliance may prove to be a good tool towards tax savings because payments for unnecessary penalties will just be a waste of your hard earned business income. Taxpayers are advised to learn what, how, and when to comply.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@ta************.org, or you may post a question at Tax and Accounting Center Forum and participate therein.