Tax compliance and administrative challenges

Tax compliance in the Philippines is deficient. It was rated poorly at 1.83 in an assessment, where in a scale from 0 to 6 higher scores indicate higher compliance. ¹ Based on data for 1995 for thirty countries including Australia (score = 4.58), New Zealand (5.00) and the South East Asian countries of Indonesia (2.53), Malaysia (4.34), Singapore (5.05) and Thailand (3.41), the Philippines scored worst in the Asia-Pacific region. The tax gap arising from evasion and avoidance is also massive. Measured as the size of the underground economy, the gap is estimated at 50% of Philippine Gross Domestic Product (GDP) from 1989 to 1990. ² The levels of tax evasion from individual income tax and value added tax (VAT) on domestic sales for 1985–99, in particular, are reported at an average of 60% and 59%, respectively. ³ It is a widely held view that corruption is deeply entrenched in the Philippines’ tax authority, the Bureau of Internal Revenue (BIR), and that the Philippine Congress once considered abolishing the BIR and starting a new agency. Tax revenues in the Philippines accounted for only 14.5% of its GDP, ranking it behind every nation in Asia but Laos and Cambodia. In 2003 the BIR collected only US$1.6 billion in personal income taxes from fewer than 2 million individuals in a country with a population of about 86 million. ⁴ The International Monetary Fund (IMF) confirms that tax compliance in the Philippines continues to be low. To illustrate, in 2005 the IMF noted that for ‘households with expenditure in excess of 600,000 Philippine pesos (the top 1 percent) income tax payments constitute only 4.7 percent of their total spending, despite the fact that the tax code would typically call for average taxation of over 20 percent’. ⁵ Despite different approaches to measure tax evasion ⁶ and the many difficulties in quantifying tax evasion, the verdict is consistent: the level of tax compliance in the Philippines is unsatisfactory.