5-yr income tax losses reach P179B – study

A study by the National Tax Research Center (NTRC) showed that over P179 billion in income taxes were lost over a five-year period since 2001 from tax evasion by fixed-income earners, professionals and self-employed individuals.

The NTRC said in its latest study covering the period between 2001 and 2005 that the government lost P178.7 billion in potential revenues due to gaps in the collection of income taxes.

The NTRC is the research arm of the Department of Finance (DOF) and in its study called Estimate of the Individual Income Tax Gap, it was indicated that the government lost an average of P35.74 billion a year in potential income tax collections.

Although the tax leak among fixed-income earners was considered within normal range, the study revealed that 73 percent or P130.43 billion of the potential individual income tax was lost because professionals and self-employed individuals were particularly delinquent in their income tax payments.

According to the NTRC, the business and professional income group scored the highest high tax gap of 67.5 percent, indicating that the Bureau of Internal Revenue (BIR) was only able to capture 32.5 percent of the potential income tax from the group.

Over the five-year period, the NTRC said the BIR lost about P26.09 billion per year due to tax evasion by professionals and small businessmen who were considered self-employed.

Fixed-income earners whose income taxes are withheld by employers had a higher tax payment rate, accounting for only 27 percent of total losses over the five-year period, estimated to amount to P48.26 billion.

According to the NTRC, this meant that BIR was able to collect 89.1 percent of the potential income tax from compensation income earners and only 10.9 percent or about P9.65 billion per year were lost to tax cheats.

The NTRC said this highlighted the critical role of tightening the BIR’s tax collection process to ensure that collection would not be skewed in favor of professionals and self-employed individuals who could avoid paying income taxes by taking advantage of the weaknesses in the collection system.

The use of third party information for validation and tax audit should alleviate this problem, the NTRC said. There was also a need to intensify enforcement through the DOF’s Operation RATE (Run After Tax Evaders), which was intended to match individual lifestyles and assets against the taxes they were paying.

The NTRC also said the BIR should aggressively audit and detect non-reporting of second and third party employment income as well as fictitious claims of personal and additional exemptions and invalid claims of health insurance premium deduction.

The NTRC said the under-declaration of business or professional income and overstatement of expenses should be validated as well as non filing of income tax returns among self-employed individuals and professionals.

The agency said there were also cases of non-remittance of withholding tax of employers and withholding agents that should be ferreted out by the BIR.

In 2006, the BIR collected P129.87 billion in individual income taxes, 12 percent higher than P115.94 billion in 2005. The amount, however, was P131 million short of the P129.74 billion goal set for 2006.

Pending in Congress was the bill intended to revive the Simplified Net Income Tax Scheme (SNITS) that was scrapped in 1997 when the Comprehensive Tax Reform Program (CTRP) was implemented.