Individuals, SMEs next focus for BIR

BY JUDY T. GULANE, BusinessWorld Senior Reporter After large corporations, the Bureau of Internal Revenue (BIR) will be going next after professionals and self-employed individuals who have been cheating the government of billions in taxes. Small and medium enterprises (SMEs) and minimum wage earners will not be exempted either. In particular, SMEs which have claimed losses yet continue to operate and minimum wage earners who failed to pay or file income tax returns can expect a call from the tax bureau. Corazon C. Pangcog, assistant commissioner for collection service, on Monday said the tax bureau has decided to focus on professionals and self-employed individuals after noting how this group has been largely freed from audits. Without the tax bureau nipping at their heels, professionals and self-employed individuals have managed to underdeclare their income and pay the incorrect amount of taxes. A recent study by the National Tax Research Center pegged the tax leakage from individuals at an average of P35.74 billion a year, with professionals and self-employed individuals accounting for 73% of this total. While the leakage attributable to this group, as measured against potential income, slid to 57.6% in 2005 from 73.5% in 2000, the gap remains wide. The tax bureau, the study suggested, should "audit and detect" the following: non-reporting of second or third employment income of some individuals; under-declaration of business or professional income and/or overstatement of expenses; and non-filing of returns among self-employed individuals and professionals. The bureau should also check fictitious personal and additional exemption claims and invalid health insurance premium deductions claims. Ms. Pangcog said payment of correct taxes by professionals and self-employed individuals would greatly boost the tax bureau’s collections. In going after this group, the bureau will use information from other agencies such as the Land Transportation Office and the Land Registration Authority to check income taxes paid by professionals and self-employed individuals. It will also compare its data on withholding taxes and data in income tax and value-added tax returns. In the case of doctors, the tax bureau will match income taxes withheld by hospitals from their professional fees and the actual taxes paid. "If the amounts match, that is, if the withheld taxes match the income taxes, then this means that the doctors did not declare the consultation fees they charged in their clinics," Ms. Pangcog said. "This information will now serve as our guide in our audits." Beyond withholding tax-income tax matching and the use of third party information, the tax bureau will also conduct surveillance on professionals and self-employed individuals. Dermatologists, who perform a slew of physical enhancements and maintain their own clinics, will be specially monitored, Ms. Pangcog said. Politicians will also get special focus, she claimed. "We will check their assets and compare these to the income taxes they paid." Also on Monday, Internal Revenue Commissioner Jose Mario C. Buñag said the bureau would scrutinize firms that continue to pay the minimum corporate income tax (MCIT). Under the law, firms must begin paying the MCIT or the normal income tax, whichever is higher, on their fourth year of operation. Firms that continue to operate at a loss by their fourth year normally pay the MCIT. The MCIT is computed as 2% of gross income. The normal income tax is computed as 35% of the net income before tax, which is derived by deducting operating expenses from gross income. Mr. Buñag said many firms, mostly small- and medium-sized, keep paying the MCIT when logically they should have closed. A firm’s insistence on paying the MCIT may indicate excessive claims of operating expenses to deliberately reduce the net income before tax. He said the tax bureau would also go after minimum wage earners, who are required to pay their income taxes and file their returns by April, even if they are exempted from withholding tax. "[Revenue Region 5] Valenzuela City, for one, has said it stands to collect a lot from minimum wage earners," Mr. Buñag said. The tax bureau released Revenue Regulations (RR) 1-2006 last year that covers individuals whose compensation income does not exceed the statutory minimum wage or those earning no more than P5,000 a month, whichever is higher, as well as government workers belonging to salary grades one to three. These workers are no longer subject to withholding tax each pay day but will still have to pay income tax and file tax returns not later than the April 15 annual deadline. RR 1-2006 was passed as part of a package of non-wage benefits Malacañang promised workers in late 2005 to provide relief from anticipated price increases arising from a new value-added tax law. The Finance department had estimated that exempting these workers from income tax meant P596.04 million in foregone revenues each year, broken down into P445.34 million from minimum wage earners in the private sector and P150.70 million from government workers.