I ntr ntr oducti ucti on Fiscal policy refers to the "measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations o f taxes and government expenditures. expen ditures. Fiscal measures are frequently used in tandem with monetary mone tary policy to achieve certain goals." g oals."1 In the Philippines, the Philippines, this this is characterized by continuous and increasing levels of debt and budget deficits, though there have been improvements in the last few years.2 taxes, with some non-tax some non-tax The Philippine government’s main source of revenue are taxes, with revenue also being collected. To finance financ e fiscal deficit and debt, the Philippines relies on both domestic and external sources. The fiscal policy of the Philippine Government is dependent on its incumbent administration. As a broad overview, the fiscal policy during the Marcos the Marcos administration was primarily focused on indirect tax collection and on government spending on economic services and infrastructure development. The first The first Aquino administration inherited a large fiscal deficit from the previous administration, but managed to reduce fiscal imbalance and improve tax collection through the introduction of the 1986 Tax Reform Program and the value the value added tax. The Ramos administration experienced budget surpluses due to substantial gains from the massive sale of government assets and strong foreign investment in its early years. However, the implementation of the 1997 Comprehensive Tax Reform Program and the onset of the Asian financial crisis resulted to a deteriorating fiscal position in the succeeding years and administrations. The Estrada The Estrada administration faced a large fiscal deficit due to the decrease in tax effort and the repayment of the Ramos administration’s debt to contractors and suppliers. Through the Arroyo the Arroyo administration, the administration, the Expanded Value Added Tax Law was enacted, national debt-to-GDP ratio peaked, and under spending on public infrastructure and other capital expenditures was observed. Finally, during the early tenure of Philippine President Benigno Aquino, most development projects were shelved or deferred, which resulted in an anemic GDP growth rate of the country in 2011. In response, he instituted fiscal stimulus package consisting of cash transfers (called Conditional Cash Transfer program) to boost the weak economy and stagnant consumer spending. The government had a budget surplus in 2011 due to deferrals in infrastructure spending. This policy contributed to the decline in GNP during the year. The Aquino administration’s fiscal policy revolves around it proactive liability management agenda. This meant more prudence and control in government borrowing. In this paper, it aims to define and explain major issues that have confronted and have been continuously confronting Philippine fiscal Administration.
1
"Fiscal Policy." Britannica Academic Edition . n.d.. Web. 19 May 2011 "Fiscal Rules: The Way Forward?." Senate Economic Planning Office. Senate Economic Planning Office; August 2005. Web. 20 May 2011.
2
Corporate Tax E vasion We have already mentioned that one of the main sources of revenue of the government are taxes. Because of the certainty of its existence and its permanence in our government, so are ways and means to minimize if not eliminating altogether one's tax liabilities. One of which is tax evasion. Fortunately, the Bureau of Internal Revenue (BIR) appears to have stepped up its filing of tax evasion charges. In the case of Commissioner v. Estate of Toda, Jr., G.R. No. 147188, 14 September 2004, tax evasion was defined as a scheme used outside of lawful means to avoid the payment of taxes, and when employed, it subjects the taxpayer to civil or criminal liabilities. Tax evasion connotes the integration of three factors: (1.) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2.) an accompanying state of mind which is described as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental”; and (3.) a course of action or failure of action which is unlawful. Common practices of tax evasion include: under-reporting of income, over-statement of expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries in books, fictitious transactions in the name of dummies, non-recording of sales, and others. The law has already laid down the legal consequences of tax evasion on a professional taxpayer on top of his basic tax liabilities, namely: (1.) the period to assess the taxpayer is 10 years from the discovery of fraud; (2.) a surcharge of 50% of the tax or of the deficiency tax; (3.) 20% per annum interest; and (4.) jail term in case of conviction plus fine. Evidently, the impacts of tax evasion are, increase in taxpayer's after-tax income, and perverse effects on the equity and efficiency goals of the tax system and most importantly, loss of government revenue. From the administrative and policy perspective, determining the magnitude of tax evasion and an analysis of tax evasion levels are imperative, particularly if undertaken in a disaggregative fashion where the type of tax evaded as well as the group of taxpayers with high propensity to evade are identified. This exercise will be useful in evaluating the success or failure of the enforcement mechanism. It may indicate to the policy-maker the manner by which tax evasion impairs the distributional quality of the tax system, skew the allocation of resources towards less productive activities in the economy, decrease tax revenue and, consequently, undermine fiscal and monetary policy. The top 5 most controversial cases of Corporate Tax Evasion for the year 2012 with their corresponding liabilities were Gammon Metal Products Inc. (1693.5M), JDBec Inc. (146 5.1 M), Abante Industries (1278.5 M), China State Engineering Corp. (712.7M) and All P Drugstore and General Merchandise (516.9 M). According to the report, the top 10 developing countries with the highest illicit financial outflows were China ($2.74 trillion), Mexico ($476 billion), Malaysia ($285), Saudi Arabia ($210 billion), Russia ($152 billion), Philippines ($138 billion), Nigeria ($129 billion), India ($123 billion), Indonesia ($109 billion ) and the United Arab Emirates ($105 billion). The same report also said that of these illicit cash flows, 60%-65% was for tax avoidance and 30%-35% from criminal activities. Illicit cash flows from corruption, bribery and
theft among government officials accounted for 3%-5%. The most depressing news for us is that the Philippines ranked 6th in the list of developing countries in terms of illicit cash flows. We can only dream of the positive effect on our economy and on the number of jobs that would have been created if the Philippine elite had decided to keep and invest the $135 billion here instead of stashing them abroad. Taxes are the charges that the government imposes on citizens and corporate businesses. The charges collected by the government are used to fund different government projects that would in the end benefit the citizens of the country as a whole. It also plays a key role in building up institutions, markets and democracy through making the state accountable to its taxpayers. Paying taxes plays an important role for the benefit of the society and businesses by providing funds for the projects of the government and unexpected events like recession and turmoil. In the view of economics, tax evasion take away money that could be invested in productive resources needed to diversify the economy and address urgent social problems. Tax evaded money is not spent on productive investments that can have a multiplier effect on an economy and benefit the significant majority of a population, rather than just a select few. The government must spend resources attempting to recoup taxes it is owed, which is wasteful to society. If no one underpaid taxes, more money could be attributed toward beneficial programs instead of being spent on collecting it. Also compare a corporation that pa y its tax liability correctly to the one that evade taxes, it creates an artificial advantage for the company evading taxes. This could lead to companies with less business practices outlasting those with more efficient practices, which would be detrimental to the economy because those companies that evade taxes outlasted which means lower national funds and the companies closed would result to unemployment.3
Corruption and Plunder Under the administration of former president Benigno Aquino III, the campaign on good governance was hinged on the slogan, "Pag walang kurap, walang mahirap (if there is no corruption, there is no poverty)." A research conducted and posted by an online news site based in the Philippines, 4 shows the devastating impact of corruption in the economy of the Philippines. A 2014 report by Global Financial Integrity,5 the Philippines lost about $410.5 billion between 1960 and 2011 on illicit financial flow. In current exchange rates, the amount is about P19.34 trillion (without accounting for inflation). The vast majority of mon ey flowing illegally into and out of the Philippines over the 52-year time span was done mostly through misinvoicing of trade. In effect, the P19.34 trillion lost to corruption could have been used for education, health or infrastructure
3
http://blogs.worldbank.org/governance/how-corruption-and-tax-evasion-distort-development http://www.rappler.com/move-ph/issues/corruption/141391-impact-corruption-philippines 5 http://www.gfintegrity.org/report/illicit-financial-flows-from-developing-countries-2004-2013/ 4
According to Global Financial Integrity, money flowing illicitly into the country takes away 25% of the value of all goods as $1 in every $4 goes unreported to Customs officials. Since 2000, illicit financial flows have cheated the government of an average of $1.46 billion in tax revenue each year or about P68.8 billion in current rates. To put that amount into perspective, the Philippines lost $3.85 billion in tax revenues in 2011 (P166.74 billion in 2011 rates) which is about 10% of the national budget that same year. Apart from grave impact on the fiscal arena, corruption affects the business climate. According to anti-graft watchdog Transparency International (TI), the Philippines slid in its annual corruption perception ranking. With a score of 35 out of a possible 100, the country currently ranks 95th among 168 countries surveyed, according to expert opinion. As a result, corruption continuously places the Philippine Government in a bad light in the International arena, reducing foreign investments and trades. It is clear that corruption and Plunder it reduces the tax revenue raised from households, it inflates the volume of government spending, and it reduces the productivity of ‘effective’government expenditure. All in all, an issue that needs to be addressed by the Government in order to have a more effective Fiscal Adminstration.
Malversation of Public F unds Malversation of public funds is defined and penalized in Article 217 of the Revised Penal Code, which reads: “Art. 217. Malversation of public funds or property; Presumption of malversation. - Any public officer who, by reason of the duties of his office, is accountable for public funds or property, shall appropriate the same, or shall take or misappropriate or shall consent, or through abandonment or negligence, shall permit any other person to take such public funds or property, wholly or partially, or shall, otherwise, be guilty of the misappropriation or malversation of such funds or property…” In all cases, persons guilty of malversation shall also suffer the penalty of imprisonment and a fine equal to the amount of the funds malversed or equal to the total value of the property embezzled. The failure of a public officer to have duly forthcoming any public funds or property with which he is chargeable, upon demand by any duly authorized officer, shall be prima facie evidence that he has put such missing funds or property to personal use. Malversation may be committed by appropriating public funds or property; by taking or misappropriating the same; by consenting, or through abandonment or negligence, by permitting any other person to take such public funds or property; or by being otherwise guilty of the misappropriation or malversation of such funds or property. The essential elements common to all acts of malversation under Article 217 of the R evised Penal Code are: a.
That the offender be a public officer;
b. That he had the custody or control of funds or property by reason of the duties of his office; c. That those funds or property were public funds or property for which he was accountable; and d. That he appropriated, took, misappropriated or consented, or through abandonment or negligence, permitted another person to take them. The recent pork barrel scandal of P10B (the amount involved could be much more) has rocked the nation and exposed the extent of the systemic nature of corruption and its various modalities in the various levels of government bureaucracy. The demand for transparency and accountability was so potent as to draw millions of people to the streets demanding the rechanneling of the pork barrel allocation or the outright abolition of the pork barrel system. Added to this is the latest scandal involving the unconstitutional Disbursement Acceleration Fund (DAF). With the ongoing government investigation and the progress of the plunder cases already filed against the initial list of accused legislators, every Filipino ho pes for the restoration of transparency, accountability, decency, and rationalized use of peoples‟ money as pillars in public governance and to breathe more life and meaning to the Constitutional provision that a “Public office is a public trust.” (Gamela, 2013). The Philippine Center for Investigative Journalism (PCIJ) reported that according to Sen. Panfilo Lacson the pork barrel fund is a “…big, big mafia or syndicate involving the executive and legislative branches of the government.” This grand conspiracy of executive and legislative agencies, according to Lacson, has involved various agencies “in circles of kickbacks, corruption, patronage politics, and wasteful spending.” (Gamela, 2013) In the same PCIJ report, Malou Mangahas also mentioned that Sen. Lacson said that “less than 50 percent actually went to the programs of work. And more than 50 percent went to the many deep pockets of corruption.” Based on his personal experience, Lacson said that “the standard commission of a legislator is 20 percent. Depending on the insatiability of the legislator concerned, it could go as high as 50 percent, that is, for the greediest really.” The only po r tions of pork barrel funds that are perfectly legally applied, according to Lacson, are the taxes and profit due the project contractor which do not go beyond 14 percent. He further emphasized that in a worst-case scenario, all the taxpayers get are ghost projects because everything else is just paper work. (Gamela, 2013) The legislators‟ pork is used for both “soft” and “hard” projects. “Hard” projects refer to infrastructure, while “soft” projects include, among others, the purchase of school and health supplies, livelihood assistance, scholarships and the like. Under the p resent pork barrel system, according to the Lacson experience with “hard” projects,“ at least half goes to the lawmaker” as commission while “soft” projects are “the worst…. The commission (is) from here to eternity, without limits.” Lacson estimates that only 50 percent of the legislators‟ pork barrel is translated into projects, the good portion of the pork. The recent revelations on the Janet Lim-Napoles transactions with some government agencies confirm this figure is confirmed. In fact, the sharing formula is 50-40-10, in which 50 percent goes to the legislator against whose PDAF a certain project shall be charged, 40 percent to the JLN-owned bogus NGOs, and 10 percent to the implementing agency. (Gamela, 2013)
In summary, an estimated 10 Billion pesos was lost which were supposed to be used in improving the economy. Malversation which is technically a form of corruption has a overwhelming effect on the fiscal administration of the Government and the issue needs to be addressed head on. Corruption destroys the hope of progression and development in a certain institution. It does not create betterment but downfall and extreme poverty. It does not entertain lives, it kills not only the economy but as well the future of a family.
H igh Taxes and E -VAT The Philippine government generates revenues mainly through personal and income tax collection, but a small portion of non-tax revenue is also collected through fees and licenses, privatization proceeds and income from other government operations and state-owned enterprises. Tax collections comprise the biggest percentage of revenue collected. Its biggest contributor is the Bureau of Internal Revenue (BIR), followed b y the Bureau of Customs (BOC). Tax effort as a percentage of GDP has averaged at roughly 13% for the years 2001-2010. Income tax is a tax on a person's income, wages, profits arising from property, practice of profession, conduct of trade or business or any stipulated in the National Internal Revenue Code of 1997 (NIRC), less any deductions granted. Income tax in the Philippines is a progressive tax, as people with higher incomes pay more than people with lower incomes. In 2008, Republic Act No. 9504 (passed by then-President Gloria Macapagal-Arroyo) exempted minimum wage earners from paying income taxes. The Expanded Value Added Tax (E-VAT), is a form of sales tax that is imposed on the sale of goods and services and on the import of goods into the Philippines. It is a consumption tax (those who consume more are taxed more) and an indirect tax, which can be passed on to the buyer. The current E-VAT rate is 12% of transactions. Some items which are subject to E-VAT include petroleum, natural gases, indigenous fuels, coals, medical se rvices, legal services, electricity, non-basic commodities, clothing, non-food agricultural products, domestic travel by air and sea.6 The E-VAT has exemptions which include basic commodities and socially sensitive products. Exemptible from the E-VAT are: 1. Agricultural and marine products in their original state (e.g. vegetables, meat, fish, fruits, eggs and rice), including those which have undergone preservation processes (e.g. freezing, drying, salting, broiling, roasting, smoking or stripping); 2. Educational services rendered by both public and private educational institutions; 6
"Impact of RA9337 (RVAT) Actual." Department of Finance (DoF). Department of Finance; n.d.. Web. 10 May 2011. Web.
3. 4. 5. 6.
Books, newspapers and magazines; Lease of residential houses not exceeding P10,000 monthly; Sale of low-cost house and lot not exceeding P2.5 million Sales of persons and establishments earning not more than P1.5 million annually.
In an article posted by the Rapler,7 according to the principles of Taxation, high income taxes could discourage firms from producing more goods or employees from working more hours. Hence, a good tax system makes sure that income tax rates are not too high so as to discourage economic activity. The problem is - the Philippine tax system currently has some of the highest income tax rates in this region. Compared to our major ASEAN counterparts, our corporate income tax is the highest at 30%, a rate that "turns off" foreign investors who prefer to do business in our low-tax neighbors. Meanwhile, our maximum personal income tax rate of 32% is not the highest (it’s 35% in Vietnam and Thailand), but we certainly don’t want the government to eat away P32 for every P100 earned by ordinary workers.
A good way to reduce high tax rates is to expand the tax base, or the set of goods and services which are taxed. The same (or even a larger) tax revenue can be collected as before by imposing a lower tax rate on as many goods and services as possible. However, in the Philippines, too many goods and services are exempted from taxes. For instance, our valueadded tax (VAT) law has 59 lines of exemptions – more compared with the VAT laws of our neighbors. The plethora of exemptions partly explains the relatively low tax revenues we get. If only fewer goods were exempted – or if only the exemptions were limited to essential goods like raw food and medicines – then the government could boost its revenues. Tax policy is essentially a balancing act between efficiency and equity. We want to impose progressive taxes to make society a fairer place to live in. But at the same time, we want to make sure that such taxes do not reduce economic activity so much. 8 Unfortunately, the Philippine tax system is currently deficient in both respects. Not o nly do our taxes disproportionately burden the poor and benefit the rich, but they also yield too little revenue given the distortions they create. Needless to say, both problems need to be resolved soon. Comprehensive tax reform in the country is long overdue.It so happens that the early days of the Duterte administration – when political capital is fresh and popular support is robust – offer a crucial window of opportunity to pursue tax reform.
7
http://www.rappler.com/thought-leaders/159027-philippine-tax-system-problems-effects-filipinos
Conclusions and Recommendations As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or a bloated public sector — is our responsibility. Just imagine that the failure of government to curb smuggling and tax evasion could be something more than depriving the national treasury with funds for the country’s development needs. It could be a serious security threat and may end democracy as we know it. We proposed probable solutions to the issue of corporate tax evasion. First, is the revision of the tax code that could address to the issue of the loopholes on the law and a much stricter penalty on those people who attempt to evade their taxes. In line with this, proper and stricter implementation of the tax code should be maintained. Also, the system should be free from corruption. Government has a special responsibility to make proper rules and promote good governance. Increased transparency could also contribute to encourage citizens and businesses to pay their taxes correctly. Let them know the budget allocation percentage and the evident projects that their money spent on taxes were used for. Fair taxes not necessarily lower tax rates should be implemented in our country. This could lessen the number of tax evaders and could also entice investors to come in our country. Private enterprise drives growth, reduces poverty and creates jobs and prosperity for people around the world. Fair taxes, and open trade are vital drivers of this. 9
9
http://blogs.worldbank.org/governance/how-corruption-and-tax-evasion-distort-development
