Sustainable reform of tax administration will require a firm commitment at the highest political level, complemented by sound strategic management at the bureaucratic level. It will also require facing corruption head-on. Given the depth of the governance problems currently affecting BIR and BOC, an effective institutional reform needs to be accompanied by a broader anti-corruption campaign; one that goes beyond BIR to encompass other public sector institutions, including the justice system. Congressional support may also be necessary. A continued focus by civil society, the private sector and the media on good governance in tax administration is also likely to be critical for sustaining the reform process. Furthermore, the commitment to reform needs to be complemented by sustained leadership in implementation. A major problem that has bedeviled previous reform efforts has been the frequent turnover of BIR Commissioners. This needs to be avoided.
In addition to being properly focused, prioritized and sequenced, the reform program needs to be complemented by a detailed implementation plan and monitored through a set of agency-level key performance indicators. The BIR is currently working on such a set of agency-level indicators. These indicators should be stable through time and serve as a management tool within the agency. Also, individual performance indicators and BIR programs should be closely aligned with these key performance indicators. To maximize the likelihood of successful implementation, the key performance indicators could be made public and monitored by Congress, the private sector, civil society and the media.
As in the case of tax policy reform, there are some immediate actions that the government can take to improve tax administration. Focusing on improved performance and integrity, these actions would send a strong signal of its commitment to reform. They include:
Appointing a BIR Commissioner for a minimum (renewable) period of time (e.g., three years), with performance evaluations based on the agency’s key performance indicators,
Adopting a set of agency-level key performance indicators, to be agreed between BIR and DOF, and present them to Congress to amend the Attrition Law,
Requiring public disclosure of all assets, liabilities and net worth of BIR personnel; commencing lifestyle checks of all BIR managers and disciplining corrupt officials, and
Approving the BIR’s rationalization plan, so that additional personnel can be hired.
The preceding institutional reforms provide a necessary foundation for introducing measures to strengthen the technical capacity of the BIR over the medium term. Among these measures, priority should be given to the development of a taxpayer compliance strategy focused on large taxpayers and the improvement of taxpayer services. In the medium term, the following set of measures is considered essential:
To improve the registration process,
improve access to third-party information, which may require a law mandating all government agencies and selected private sector organizations to provide timely and accurate information to BIR free of charge, and
finalize the computerization of LGUs, which would greatly facilitate BIR’s registration and third party information cross checking.
To strengthen the large taxpayers service (LTS),
introduce a system of automatic listing, de-listing, and notification of firms meeting LTS eligibility criteria based on a threshold according to which around 1,000 firms would qualify,
increase the number of staff at the LTS to comparable international levels, particularly in the audit function,
ensure proper functioning of the e-filing system and remove the requirement for dual accounting (manual and electronic), and
diagnose the poorly-functioning VAT refund system and prepare an action plan to improve its efficiency;
To improve the audit function,
introduce a risk management approach linked to a national risk-based audit plan,
increase the staff and strengthen the capacity of the internal audit unit and improve overall audit supervision, and
enforce existing rules (e.g., EO 38 series of 1998) that allow the Commission on Audit to audit BIR’s assessment function and adherence to its own audit regulations.
To strengthen tax enforcement,
implement a comprehensive compliance strategy, including strengthened capacity in the audit, investigations and VAT compliance functions and better preparation of cases sent to the DOJ, and
set clear targets for number of cases filed, processing time and other relevant indicators of effectiveness (such as conviction rates).
To improve tax collections,
develop a strategy to improve taxpayer services so as to enhance voluntary compliance,
develop an improved arrears management system, including an agreed definition of arrears and reporting all presently unreported arrears, and
introduce a risk-based collection strategy, accompanied by a collections manual to guide implementation.
xxiii.D. Is the Philippines Ready for Reform?
Policymakers often believe measures such as an increase in petroleum taxation are widely unpopular. However, recent regional experiences suggest that this is not the case. For example, Indonesia sharply increased the retail price of gasoline and diesel by reducing tax subsidies on two occasions (twice in 2005 and then in June 2008, raising the price by 100 percent in 2005). The Indonesian government announced that a substantial share of the savings from this measure would be allocated to a cash transfer program targeted at the poor. Contrary to initial expectations, the popularity of President Yudhoyono’s government did not suffer, and he was re-elected in 2009. The Philippines could take a similar approach by using part of the revenue generated from higher petroleum excises to improve pro-poor spending (e.g., through a scale up of the conditional cash transfer program), while reducing the fiscal deficit. Similar considerations would also apply to the other proposed structural tax reforms. Since these reforms aim to raise both tax efficiency and equity, they should be politically popular if properly designed and packaged. Some of these reforms may require a further incidence analysis to identify the taxpayers most affected by the reforms and possible compensatory measures.
Tax administration reform is an equally complex process, both politically and technically. Nevertheless, the Philippines is well-placed to deliver on such a challenge. Unlike in some other countries, BIR staff is technically competent and the agency has reform champions and units within which reforms are ongoing. Also, it can count on democratic institutions, a dynamic civil society and a vocal media to support such reforms. A resolute approach to systemic reform could build on these strengths and achievements. Here too the international experience shows that reform is possible with sufficient political will, as attested to by recent examples of successful tax administration reform, including in Bolivia and Indonesia (Box 1).
The payoff of such reforms can be enormous, in terms of improved governance, fiscal sustainability, public and private investment, economic growth, and popular support for the implementing government. As noted earlier, the Philippines exhibits a huge gap vis-à-vis its faster-growing East Asian neighbors in public infrastructure and social sector spending, and the improvements in tax policy and administration envisaged here are critical for closing that gap.
