Interview: Marivic Españo
How can the tax code be modified to make the Philippines a more attractive investment location?
MARIVIC ESPAÑO: Modifications to the Philippines’ tax code should take into account its adaptability to current business trends and structures. The government can simplify the tax framework, considering practical issues in implementing the laws. Take the issue of small business, for example. Presently, the same tax rules apply to corporations, medium to large-scale businesses and small entities, despite the fact that in reality, the latter are not in a position to comply. This situation promotes corruption as small business owners are forced to cut corners to meet their tax duties and responsibilities.
The government should also consider the possible reduction of income tax and the strengthening of the value-added tax (VAT) system. Individual income is taxed at 32% and consumption is taxed further at 12%. This burden may encourage avoidance among individuals.
One current trend that is fast gaining popularity is e-commerce. In line with this, there is a need to review tax rules on international and e-commerce sales transactions – including those involving intangibles – to ensure they are still relevant. Companies are hesitant to explore new business models based on e-commerce because the tax rules and documentation requirements are unclear. Administrative obligations may also need to be rationalised. For example, given that transactions can be done through the internet, the physical issuance of invoices may no longer be relevant. Another example is the requirement for newly registered companies to have manual books of accounts and to go through the process of applying for computerised books.
How can the government efficiently address the issue of low tax collection rates?
ESPAÑO: Simplifying tax rules and transaction processes, promoting performance-based compensation of tax administrators and refining performance measures are some ways to help address this. The government could outsource or privatise certain functions of tax administrators so they can focus on their core functions. These ideas are not new. They have been part of the reform measures in tax administration, but have been met with strong opposition. Several bills have previously been filed seeking to establish a semi-autonomous revenue administration. The bills emphasised performance-based budgets and a compensation scheme for employees. Performance measures should be aligned toward accomplishing the ultimate goal of tax collection. In assessments, for example, perhaps personnel should concentrate on cases where they have a strong basis for assessment. Time and effort goes into the tax audit process, delaying the collection of real tax liabilities. Focusing on cases with strong basis may secure a quick resolution and the collection of taxes due.
How has regulatory focus on corporate governance and transparency affected financial reporting?
ESPAÑO: The administration has sent the message that this government wants to institute changes. However, it has to demonstrate that it intends to seriously implement these policies. Together with the vigilance of regulatory and stakeholder organisations, businesses have realised the risks associated with non-compliance are increasing. As a result, they have enhanced their compliance and reporting processes and have increasingly demonstrated their abilities to observe good corporate governance.
The government may further these initiatives by considering the costs of compliance in doing business, and simplifying administrative procedure. In some instances, the procedures and requirements imposed are complex, tedious and require the submission of various reports and information possibly already in government hands. Improvements in taxation practices and processes also affect good governance on financial reporting. Simplifying government processes, consistently applying requirements, efficiently collecting taxes and making the tax code attractive for investors are all ways to strengthen governance and transparency.
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