Tax financing a bankrupt state

Fifth part

One of the most detested interactions that taxpayers have with the Bureau of Internal Revenue is dealing with the BIR examiners in the course of the audit of their tax liabilities. It has been a regular ritual for some taxpayers, who have been sampled to be audited, to undergo this oftentimes contentious engagement with the BIR.

Conducting tax audits is one of the essentials of an effective tax administration. While the greater percentage of tax collections of a country comes from the voluntary compliance of taxpayers, good tax administration policy dictates that effective compliance of taxpayers will arise and be maintained if the tax-collecting agency is able to instill an environment where tax audits are conducted to instill a mindset from taxpayers that non-compliance will be monitored and uncovered with such audits.

But in the Philippines, as well as in other countries, the environment prevailing in these taxpayer-tax enforcer engagements has not been the most ideal. Complaints abound that tax audits take too long and are a tedious exercise for all parties involved. Problems of corruption involving bribery on the part of taxpayers offering and tax auditors soliciting these bribes abound.  Instances of jeopardy or arbitrary assessments of tax obligations continue to pester taxpayers. Is there hope or solutions to address these negative issues on tax audits?

It is imperative that the enhancement of this tax administration process be pursued during these trying times when bankrupt states face the challenges of dwindling revenues, including from tax collections, and increasing public expenditures.

Culling from my more than 40 years of experience in tax practice and consulting and tax administration, including being the Commissioner of the BIR from 2009 to 2010, I put forth several suggestions to enhance the tax audit system. These solutions include the tweaking of present tax procedures and processes, as well as innovative measures that utilize the advantage of technology and best international practices adopted in the Philippine setting.

The tax audit process can be divided into phases. These include the submission by taxpayers of tax-related data and information; the processing of these data into usable information; the audit selection process; conduct of the audit by the BIR;  responses and remedies of taxpayers on the results of the audit; and oversight of the tax audit engagements. There are already many rules, procedures, and guidelines for each of these processes.

The solution toward enhancement of the tax audit process and environment is not necessarily done by adding more of these rules, but by instilling a strategic and perhaps a new mindset. There is also the need to add the advantages of readily available technology and global best practices to be able to finally overhaul the contentious tax audit system.

I suppose it is high time to pursue these to bring about the much needed reform on taxpayer-tax examiner engagements, as well as contribute to increasing the funds from tax audit-related activities to provide relief to the bankrupt state of our government that I perceive will be a matter of time in the making, or in substance, already prevailing.

To be continued

Joel L. Tan-Torres is the Dean of the University of the Philippines Virata School of Business. Previously, he was the  Commissioner of the Bureau of Internal Revenue, the chairman of the Professional Regulatory Board of Accountancy, and partner of Reyes Tacandong & Co. and the SyCip Gorres and Velayo & Co. He is a Certified Public Accountant who garnered No. 1 in the CPA Board Examination of May 1979.

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