This intent is also reflected in the Bureau of Customs (BoC), which has been equally aggressive in its drive against smugglers. It has also enhanced inter-agency cooperation, such as when the BIR and BoC worked together to strictly regulate importer accreditation.
These efforts of the local authorities reflect global trends in the indirect tax landscape, as identified in a recent publication by Ernst & Young (EY) titled Indirect Tax in 2015. (An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax.)
According to the EY report, there are at least four major worldwide trends on indirect taxation; these are:
INDIRECT TAXES CONTINUE TO GROW WHILE DIRECT TAXES STAGNATE. Many jurisdictions continue to impose Value-Added Tax (VAT) on transactions while some have increased their excise tax rates. In the Philippines, while VAT has remained at the same 12% rate since 2006, excise tax rates on alcohol and tobacco are steadily on the rise.
According to the EY report, this trend can be explained by international organizations such as the International Monetary Fund, the Organization for Economic Cooperation and Development (OECD) and the European Commission which advocate the shift from direct to indirect taxes. A number of international studies, such as the Economic Policy Reforms 2013: Going for Growth by OECD Publishing, indicate that VAT has the least impact on growth, while corporate income taxes have a negative impact on growth. This is seen as being due to the fact that indirect taxes are borne by the consumers and do not rely on profits. Thus, 28 European Union (EU) member states chose to increase their VAT rates but at the same time reduce their corporate and personal income tax rates.
One relatively new trend sees governments imposing excise taxes on “unhealthy food” such as snack taxes and sugar taxes.
INDIRECT TAXES ARE ADAPTING TO NEW ECONOMIC REALITIES. Tax authorities recognize the challenges in the growing Internet economy where consumers can, with just the click of a button, purchase a wide array of goods and services abroad without paying VAT. These challenges include, among others, incomplete legislation.
This is why the BIR, in Revenue Memorandum Circular No. 55-2013 dated Aug. 5, 2013, reiterated Taxpayers’ Obligations in Relation to Online Business Transactions by recognizing that the Internet has become the preferred medium for many consumers for sale transactions. This is due to its high level of convenience where online shopping can be done within the confines of one’s home or office or any public place where there is Internet access.
As bitcoin and other types of virtual currency gain more popularity, tax administrations will need to revise their thinking and policies to address tax and commerce in the digital age.
THE GLOBAL TRADE LANDSCAPE IS CHANGING FAST. Countries continue to negotiate measures to facilitate trade. In fact, the EY report says that the World Trade Organization currently reports 604 active and pending reciprocal regional trade agreements among its members. This number does not include non-reciprocal trade preferences granted to imported products from certain countries.
In the Philippines, the following Free Trade Agreements (FTAs) are under negotiation: (1) Regional Comprehensive Economic Partnership between the ASEAN and dialogue partners [China, Japan, South Korea, Australia, New Zealand and India to establish common rules among the 16 parties]; (2) ASEAN Hong Kong; (3) Philippines-EU; (4) Philippines EFTA -- with European countries which are not part of the EU [Switzerland, Norway, Iceland, Liechtenstein].
More FTAs may result in a decline in customs duty rates. Based on the latest Philippine Tariff Commission report for 2012, the Most Favored Nation (MFN) import duty rates in the Philippines range from 0% to 5% for 58% of our duty rates; 7% to 15% for 36% of our duty rates; and 20% to 65% for the remaining 6% of our duty rates.
Despite the growing number of FTAs, many businesses are still not able to benefit from them due to the inability to meet qualifying conditions. In addition, governments strictly enforce the FTA conditions and impose the general rate when importers are not able to substantiate their FTA claims.
TAX AUTHORITIES ARE FOCUSING ON ENFORCEMENT OF INDIRECT TAXES. Globally, tax administrations are becoming increasingly aggressive in terms of tax collection. Locally, we can see this trend in how the BIR and the BoC continuously issue regulations that seek to get more information on business and other relevant taxpayer transactions. They have also stepped up their tax audits and collection efforts.
Around the world, tax and customs authorities are making use of modern technology to access real-time data, share taxpayer information across agencies and jurisdictions, and implement electronic auditing of financial records and systems even without an on-site audit taking place.
This is also the direction being taken by Philippine revenue agencies in implementing its e-services. More tax audit findings arise from matching of third party information from the BIR’s Reconciliation Lists for Enforcement (RELIEF) System and from comparison with importation information captured by the BoC database. Likewise, specialized offices of the BIR were created to scrutinize the propriety of tax exemptions or incentives being enjoyed by PEZA locators, free trade zone enterprises and those registered with other incentive giving agencies.
WHAT DO ALL THESE MEASURES MEAN FOR US LOCALLY? In the context of an ever changing tax environment, the message is that it pays to be proactive in strategizing and managing indirect taxes. Taxpayers need to meet higher standards of reporting and compliance to avoid unexpected tax liabilities, disruption of business and adverse reputational risks. As economies continue to connect closely through technology, global trends are cascaded quickly for local application and implementation.