Measures to Improve Revenue Collections

February 21, 2006 BIR MEMORANDUM FOR : BIR Commissioner All BIR Deputy Commissioners All BIR Assistant Commissioners All BIR Heads of Revenue Executive Assistant All BIR Regional Directors All BIR Assistant Regional Directors All BIR Division Chiefs SUBJECT : Measures to Improve Revenue Collections Please find attached, a copy of privilege speech delivered by Congressman Herminio G. Teves, which outlines some measures that may be useful in our efforts to intensify revenue collections. We need to work harder to successfully hurdle the challenge of achieving our revenue goal, particularly this year as we fully implement the Reformed Value Added Tax. In this regard, we welcome your suggestions on how the DOF can better assist the BIR effectively implement these measures. Thank you. (SGD.) GARY B. TEVES Secretary ATTACHMENT A Personal and Collective Privilege Speech on Revenue Generation and On the Term-Sharing Agreement at the Committee on Ways & Means By: Cong. Herminio G. Teves February 13, 2006 Mr. Speaker, fellow members of this august body, I rise on a Personal and Collective Privilege on the matter of revenue generation and the term-sharing agreement of the Chairmanship at the Committee on Ways & Means. This representation served diligently as Senior Vice Chairman of said committee in the 11th, 12th and now the 13th Congress. I have always been passionate about revenue generation. I believe that it is only through higher revenues that we can balance the budget and reduce our dependence on borrowings. But the tax laws that we pass in this chamber are for naught because so much revenue per type of tax escape the tax net due to systemic failure and graft in the country's main tax collection agencies, the Bureau of Internal Revenue and the Bureau of Customs. SACHcD I have fervently proposed several measures that are designed to reduce or minimize corruption in our revenue collection as well as address several systemic errors at the BIR. I personally believe that with these proposed measures we will be able to maximize revenue take and thereby, achieve a balanced budget the soonest possible time. A cornerstone proposal from this representation is the deletion of the secrecy and confidentiality provisions in tax payments under the 1997 Tax Code. This will help institute transparency and reduce connivance between taxpayers and tax collectors. Said connivance is the biggest source of graft and has already been draining the government coffers for quite a long time. I also proposed to President Arroyo that an Executive Task Force be created to estimate potential revenue per type of tax, such as individual income tax, corporate income tax, value added tax, excise tax, etc., and another Task Force that will undertake audit on collection vis--vis potential revenues. Nobody is currently mandated to audit revenue collection, not even the Commission on Audit (COA). On the excise tax of sin products, the DOF advocated for the reclassification of brands based on current market prices to generate a revenue of P27.7 billion. The World Health Organization recommended that cigarettes must be taxed high (similar to other countries) to make it prohibitively expensive so as to generate revenue and curb smoking harmful to health especially among the youth. President GMA herself` made a public pronouncement that " there is need to address the harmful effects of the so-called sin products" by instituting an adjustment in the tax rates therein vis--vis the actual market retail price. Congress, however, watered down the proposed indexation of sin taxes and instead approved a mere 20% increase in the tax rates. This representation voted 'No' to this watered down version. Thus, he was excluded in the bicameral committee on the said tax measure, after which I published an article on the subject "How serious are we in raising revenue for our government" Mr. Speaker, respected colleagues, actual revenue collection from the Sin Tax Law registered at a dismal P2.96 billion last year, 80% short from the projected P15 billion additional revenue from this tax measure. (Business World, February 2, 2006) Chairman Lapus designated this Representation as Chair of the sub-committee on oversight. Immediately thereafter, said sub-committee undertook several inter-agency meetings and conducted in-depth studies on each type of tax and came up with estimates of potential number of taxpayers and expected revenue vis--vis BIR's collection. It was uncovered that there are loopholes in our tax system that needs to be addressed if the government is indeed serious in generating the much-needed revenues without resorting to borrowing. On the Individual Income Tax: 2004 Collection is P95.8 billion whereas the potential collection is estimated at P150 billion. It was uncovered that the potential number of tax payers on individual income tax alone is approximately P7.07 Million based on statistical data from NSO, LTO, DOF and Bureau of Local Government Finance, SSS and GSIS. On automatic withholding from compensation earners, the recorded number of employees, wages/salaries of over P5,000 monthly is 5,370,181 while actual number that paid under the substituted filing mechanism is 2,855,500, a difference of 2,514,681. This poses a shortfall in collection amounting to a minimum of P35.0 billion. The BIR nor the DOLE has no list of employers who could have withheld the income tax from their employees but failed to remit the same to the BIR. On self-employed individuals. The SSS database showed 5.28 million self-employed members but BIR's self-employed individual taxpayers only reached 433,876 or a mere 8.2% of the potential. If we compare this to the data of the LTO, there are approximately 3,583,000 privately owned cars and trucks registered. In 2004, the number of self-employed individuals who filed income tax returns totaled 694,305 and those who actually paid only totaled 291,601 with payments amounting to P4.854B and P7.553B as withholding at source, a total of only P12.40B or 12.29% of tax paid by employee on withholding. On the Corporate Income Tax: The 2004 Collection is P131.68 billion wherein the projected CIT would amount to P180 billion. The number of corporations registered with SEC is 304,070 while actual number that filed corporate income tax (CIT) is 115,582 or 38% of total number of SEC registrants. The number of companies that actually paid their CIT is 70,434 or 23.16% paid CIT amounting to P131.168 billion. The Securities and Exchange Commission (SEC) should be mandated to furnish the DOF and BIR the lists of corporations by location, primary purpose of business activity, capitalization, and major incorporators in order for the BIR and the DOF to be able to match information submitted to them by companies. Similarly, the net income after tax on each player of industries and corporations should also be given to the BIR. EDISaA Value Added Tax (VAT) the most abused form of tax by taxpayers. In 2004 total vatable sales of 161,536 players is P4.039 trillion while the zero-rated sales and exempt sales are P699.094B and P471.209B respectively. These are not included in the output VAT computation. The total VAT collected amounted to only P72.892B or 1.8% of sales whereas the projected VAT is P124.54 billion. The government used to collect 3% sales tax on most goods and services, however, this was replaced by a 10% VAT. It is sad to note though that because of certain loopholes in the VAT system coupled with abuses on input VAT deduction and corruption, the VAT revenue collected is very much lower than what could have been collected on the 3% sales tax. Bureau of Internal Revenue Summary of Quarterly VAT (2550Q) For Year 2004 Zero-rated Exempt Total Total VAT Effective No. of Site Taxable sales sales/receipts Output Input Tax PAID VAT Taxpayer Sales Tax Rates CEBU 50.90 B 4.625 B 583.64 M 5.09 B 4.92 B 855.80 M 1.68 8,565 LTS 1.525 T 564.65 B 447.40 B 152.55 B 110.22 B 42.24 B 2.81 1,046 MKT 392.21 B 28.99 B 9.02 B 39.22 B 32.33 B 9.70 B 2.47 34,434 MLA 207.22 B 66.69 B 4.19 B 20.72 B 20.95 B 5.99 B 2.89 41,354 QCY 692.99 B 34.14 B 10.02 B 69.30 B 60.21 B 13.51 B 1.95 76,137 TOTAL 2.868 T 699.09 B 471.21 B 286.88 B 228.62 B 72.89 B 2.54 161,536 ====== ======= ======= ======= ====== ====== ==== ====== The 1st half of 2005 (excluding Cebu) shows a total sales of P1,511.794B, the zero-rated is P294.051B and exempt sales is P234.72. The tax paid is only P14.739 B or 0.97% less than one percent (1%) of sales. On sales to exempt entities alone VAT deficiency is P47.12 B in 2004 and P23.47B in the 1st half of 2005. IAEcCa January-June 2005 Zero-rated Exempt Total Total VAT No. of Site Taxable sales sales/receipts Output Input Tax PAID Filed Sales Tax Returns CEBU DATA NOT YET AVAILABLE LTS 686.08 B 212.37 B 216.95 B 70.04 B 51.43 B 6.70 B 1,768 MKT 99.93 B 20.62 B 9.17 B 16.14 B 12.92 B 1.59 B 35,029 MLA 20.52 B 35.00 B 2.05 B 5.46 B 265.49 M 952 M 23,110 QCY 176.50 B 26.05 B 6.54 B 28.37 B 24.17 B 5.45 B 56,813 TOTAL 983.02 B 294.05 B 234.72 B 120.02 B 88.77 B 14.69 B 116,720 ======= ======= ======= ======== ====== ======= ====== In my letter to BIR Commissioner dated Nov. 21, 2005, I questioned why the BIR did not implement Revenue Regulation No. 2-88 Section 4 where the practice to allow VAT registered sellers to automatically deduct their sales to exempt and zero rated in their output VAT declaration is wrong. Similarly, I mentioned that under Revenue Regulation No. 9-89 provision on mixed transaction states that "when the tax payer is engaged in zero rated and effectively zero rated sales as well as taxable domestic and exempt sales of goods and services and the amount allowable, input tax paid cannot be directly and entirely attributed to anyone in the transactions. It shall be allotted proportionately to each category of transactions. BIR's consent to totally deduct all input VAT to the reduced output VAT is a double whammy to our government. The point that I raised in said letter was met with a deafening silence. The telecommunications is now the biggest and most profitable industry. The PLDT, the leading telecoms company, is expected to surpass P30B in net income for CY 2005. This industry has a huge potential VAT revenue if the BIR is not remiss in their tax collection effort. In a letter addressed to Her Excellency, Pres. Gloria Macapagal-Arroyo dated January 26, 2006 that was coursed through the Honorable Speaker Jose de Venecia, this Representation conveyed the tax payments of the three largest telecoms players. For PLDT, VAT payments as percentage to sales is quite low. For 1999 it was 1.28%, in 2000 0.82%; 2001 1.12%; 2002 1.64%; 2003 1.58%; and 2004 2.54%. For Globe telecoms, their VAT payments as percentage of their sales is as follows: 1999 negative 3.43%, 2000 negative 9.29%; 2001 negative 7.60%; 2002 negative 3.57%; 2003 negative 0.01% and 2004 positive 0.44%. For Globe in 2004 exempt sales is P419.1 M or 0.98% while sales to zero-rated entities is P3.105 B or 7.28%. A total of P3.524 B or 8.26% considered non-vatable. For Smart telecoms, their VAT payments as percentage to their sales is as follows: 1999 0.69%, 2000 negative 0.68%; 2001 positive 2.26%; 2002 positive 0.53%; 2003 positive 0.48% and 2004 negative 0.56%. In 2004, Smart's alleged sale to exempt entities is P6.734B or 8.2% to zero-rated entities P15.565B or 19.33% a total of P22.599 or 27.53% considered non-vatable. AIaSTE History on VAT payment of the Three (3) Major Telecom's Companies: PLDT Year Total Exempt Zero Output Input Input Tax VAT Deficiency Sales Sales Rated VAT VAT VAT Payable Paid as in VAT Sales Carried % to payments Over total sales 1999 P41.077 B P5.041 B P6.617 B P2.367 B P0.786 M none 0.527 1.28% 638,287,166.85 2000 44.270 B 5.246 B 8.950 B 2.706 B 1.547 B none 0.364 0.82% 1,054,757,186.35 2001 45.681 B 4.211 B 8.421 B 2.870 B 994.4 M (7.362 M) 0.513 1.12% 750,218,417.96 2002 35.246 B 2.914 B 9.982 B 2.988 B 620.4 M None 0.577 1.64% 711,916,885.99 2003 45.820 B 3.620 B 11.759 B 3.044 B 685.9 M none 0.724 1.58% 813,983,889.27 2004 58.240 B 3.826 B 14.942 B 3.947 B 658.7 M None 1.483 2.54% 393,498,053.20 GLOBE Year Total Exempt Zero Output Input Input Tax VAT Deficiency Sales Sales Rated VAT VAT VAT Payable Paid as in VAT Sales Carried % to payments Over total sales 1999 P6.475 B none none P647.5 M P0.876 M (351.05 M) (0.222) -3.43% - 2000 15.961 B none none 1.596 B 2.889 B (222.27) (1.483) -9.29% - 2001 25.773 B none none 2.577 B 4.531 B (1.276 B) (1.958) -7.60% - 2002 34.676 B none none 3.467 B 5.167 B (1.958 B) (1.237) -3.57% - 2003 39.915 B none none 3.991 B 3.986 B (1.237 B) (0.280) -0.01% - 2004 42.641 B 419.1 M 3.105 B 3.991 B 3.447 B (2.807 M) 0.190 0.44% 162,037,994.13 SMART Year Total Exempt Zero Output Input Input Tax VAT Deficiency Sales Sales Rated VAT VAT VAT Payable Paid as in VAT Sales Carried % to payments Over total sales 1999 P8.384 B none none P838.47 M P0.581 B (4.347 M) 0.583 0.69% - 2000 24.468 B none none 2.446 B 2.601 B none (0.167) -0.68% - 2001 31.597 B none none 3.159 B 3.871 B (167.53 M) (0.715) -2.26% - 2002 45.826 B 812.42 M 2.311 B 4.270 B 3.971 B (715.50 M) 0.244 0.53% 67,590,727.59 2003 57.802 B 4.834 B 5.722 B 4.724 B 3.198 B none 0.277 0.48% 778,272,758.38 2004 82.053 B 6.734 B 15.865 B 5.945 B 4.784 B none (0.461) -0.56% 393,498,053.20 It is apparent that from 1999-2001 Smart had no sales to exempt and zero-rated and for Globe only in 2004 that declared exempt and zero-rated sales, why? While consumers pay the whole of 10% VAT, it appears, however, that this is not being remitted to the government. What is far worse is that players do not declare sales to exempt and zero rated as vatable and over declare their input VAT thereby reducing amount of tax, disregarding BIR's Regulation RMC 17-96, Section 4 of RR-2-88 and RR 9-89 with regards to exempt and zero rated sales. Not only are the players of the telecommunication industry not declaring as output VAT on their sales to exempt and zero rated sellers. They are not paying VAT on the sales of cell cards that companies claim to be the biggest bulk of their sales. The reason given is that the payment of VAT shall be made upon the utilization of the card, contrary to the excise tax that is automatically collected upon withdrawal of the goods from the warehouse. As to why the BIR agreed to said argument is questionable. This representation is doubtful whether the projected additional revenue on the expanded VAT from 10% to 12% and the 12% VAT on fuel, power, air and water transport can be realized if the systemic errors in the VAT collection as practiced by the BIR will not be corrected. Firstly, the input VAT on operational vatable goods and services is 12%. Secondly, the input VAT on capital expense of the power, oil, air and water transport industries may not be totally utilized after few years as what happens to the telecommunication players where VAT on capital expense took several years to be utilized. Undertaking all these proposals to increase tax collection from individual income tax both from the withholding of employees and from self-employed individuals, increase number of corporate taxpayers corresponding increase in corporate income tax (CIT) and increase collection of value added tax based on existing BIR Circular and Regulations on the matter will more than generate revenue enough to achieve a balanced budget. aCTcDS If however, our leaders are anxious to have additional revenue to finance important projects and increase food productivity and similarly increase per capita income for our people, we need not impose a tax that is detrimental to progress in productivity health care and to consumers. Instead of VAT on fuel and power which caused so much suffering to our entrepreneurs and consumers as proposed by many sectors of our society freedom from debt consumers, party list representatives, civic and religious sectors. This representation proposes the tax on text messaging, not as additional VAT but direct tax on SMS messaging. Data shows that there are approximately 300 million text messages sent through the mobile networks every day. A tax of fifty centavos per text message would generate around P54.75 billion annually. This is more than double the amount of the expected collection from the VAT on petroleum products and electricity. The revenues that could be realized from this can be earmarked for food productivity. Further Mr. Speaker, I propose that the BIR vigorously collect VAT from the toll companies. Even if these toll companies are subject to VAT, they are not implementing it for the reason that the Toll Regulatory Board has not issued an order directing toll operators to include the VAT in their toll rates. If collected properly, the VAT from these toll companies could reach as much as P90 million per month since they have an aggregate monthly toll revenue of P900 million. Mr. Speaker, my esteemed colleagues, this Representation has consistently and diligently worked for the country's efficient revenue collection, which is parallel to the recommendations of Moody's. I have spearheaded an inter-agency task force to project potential revenue per type of tax long before my son was appointed as Finance Secretary. On matters concerning the term-sharing as Chairman of the Ways & Means Committee, there are a few things that have to be clarified. Before our Christmas adjournment, a signature campaign was undertaken among members of the NPC requesting the Speaker to retain Cong. Lapus as Chairman. I was requested by other members of LAKAS to undertake similar signature campaign. I refused for the simple reason that it is not necessary because the Speaker himself has forged a gentleman's agreement. A vigorous media campaign ensued, attacking this Representation vying for the Chairmanship of the Committee. The issues hurled against me were bordering along the lines of absurdity one of which is my being old, then conflict of interest since my son Gary is the Secretary of Finance. It was published that father and son tandem will not serve the country well. Conflict of interest exists when one of us is known to be corrupt, if one of us has business interests to protect. The House economist, Congressmen Joey Salceda once said "that if this Representation will be appointed as chairman on the Ways & Means Committee, it would serve as a bonus because the son is the DOF Secretary". Conflict of interest can happen not only between family members but, as what happened under the Marcos regime, among cronies engaged in corrupt practices. Congress is now proposing a Parliamentary form of government where the executive and legislative departments will merge hence eventually the Secretary of Finance will serve as the Chairman of Committee on Ways & Means. Now, on the term sharing of the Chairmanship of the Ways and Means Committee, Mr. Speaker, I want things to be on proper perspective for the record of this august body. When I brought up this matter on the agreed term sharing with the Speaker, he was willing to give me the chairmanship if and when my son Gary gives up his cabinet position as Secretary of Finance. "I said no way". In Business World column on outlook on RP mixed (dated Feb. 10-11, 2006) states "In a report Moody's already the most pessimistic among the three major credit raters said the government must first show "more progress" in improving tax collections, pass the 2006 budget, and make assurances that current economic policies will continue before the "downward pressure" on the country's credit ratings is relieved". However the Business World column of February 6, 2006 it was stated that the House Ways & Means Committee has shifted focus to tax compliance. This representation is of the belief that the Speaker and the House Committee on Ways & Means will now be implementing what I have long been advocating these past 3 terms. Tax collection efficiency must be made a priority to promote transparency in tax collection. Deleting the Secrecy and Confidentiality provision in our Tax Code will not just enhance Individual and Corporate Income Tax Collection it will address corruption problems as well. Input VAT and illegal deductions of exempt and zero rated sales on the Output VAT should also be scrutinized. The telecom industry players had experienced enormous gains yet they have huge amounts of questionable sales including outright declaration on vatable sales on cell cards. The over declaration of input vat and their reduced VAT liabilities is draining our government from the much-needed revenues. With respect to the VAT on the sales of these products, it needs to be immediately reconsidered so the consumers and the government are not placed in a disadvantaged position by the players. EcHAaS With these premises Mr. Speaker, It is not necessary for me to be Chairman of the Committee on Ways & Means considering that this administration in cooperation with the lower House under your leadership has now decided to impose tax collection efficiency instead of implement new tax that burden our consumers and entrepreneurs. To this end, let me be clear that I have no other interest but to protect the interest of our people mostly the poor consumers and the coffers of our government. Thank you.