Tax amnesty could be a double-edged sword — Fitch

THE PLANNED general tax amnesty could yield additional revenues that will help fund development projects, but the government should make sure it does not embolden more people and businesses to cheat the state of its rightful levies, Fitch Ratings said.

Stephen Schwartz, head of sovereign ratings for Asia Pacific at Fitch, said bigger tax collections would bode well for the Philippines’ credit rating, but cautioned that the planned general amnesty could undermine efforts to instill discipline among Filipinos when it comes to paying the right taxes.

“If the tax amnesty is successful in raising revenues, it could contribute to the overall improvement in the fiscal outlook,” Mr. Schwartz said in an e-mail when asked for comment on the government’s plan.

“However, the gains from the tax amnesty could prove to be temporary if the tax payment culture is undermined by expectations of more tax amnesties in the future, and if accompanying measures are not implemented to improve tax compliance.”

House Bill No. 7105 now pending in Congress looks to grant qualified amnesty applicants immunity from charges, but will require them to pay a rate of eight percent of their net worth as of taxable year 2017.

The measure also carries a provision that will relax deposit secrecy restrictions to enable the Bureau of Internal Revenue (BIR) to look into applicants’ bank accounts and check the accuracy of their declarations during the amnesty period.

The Finance department has estimated that a general tax amnesty could add P26 billion to state coffers, which — according to BIR data — would be bigger than collections under each of the 18 previous programs since 1972.

The last time the Philippines introduced a tax amnesty program was in 2008. Back then, foreign credit analysts doubted whether such a measure will be effective given the state’s poor track record in bringing more tax cheats into the fold.

Finance Secretary Carlos G. Dominguez III said last week that the government is looking to offer a general tax amnesty in April 2019 to coincide with the annual filing of income tax returns, noting that this means it will have to hurdle Congress by next quarter.

He has repeatedly stressed that the amnesty will be a “one-time” offer so as not to encourage tax evasion.

Mr. Schwartz, however, acknowledged that any additional tax collections would be welcome.

“Low government revenues have been a long-standing weakness in the Philippines’ fiscal profile in Fitch’s view,” the credit analyst said.

“The tax reforms are likely to contribute to the maintenance of fiscal stability during the implementation of the government’s ambitious public investment program.”

Fitch in December upgraded the Philippines to a “BBB” rating — one notch above minimum investment grade status — with a “stable” outlook shortly after the enactment of Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act.

Mr. Schwartz said strong revenue performance would be a “positive” rating driver for the Philippine economy, as he anticipates succeeding tax reform packages to be implemented over the coming years.

Fitch expects the Philippine economy to grow by 6.8% this year, faster than 2017’s 6.7% although short of the state’s 7-8% goal. Philippine GDP expanded by 6.8% during the first quarter.

The government’s tax think tank separately cited advantages and disadvantages of various methods of calculating tax amnesty payments.

“It is pointed out that in designing an effective tax amnesty program, there must be a credible threat to the taxpayers that the tax amnesty is their last chance to come forward and start with a clean slate, otherwise they will be prosecuted to the full extent of the law,” the National Tax Research Center (NTRC) said in the latest issue of its monthly Tax Research Journal.

“There must be a sense of urgency on the part of taxpayers, and their procrastination and reluctance to avail is risky on their part as their delinquency will be sooner detected or discovered.”

NTRC also said that while using net worth as basis for amnesty fee calculations may be “equitable,” the scheme may be manipulated by taxpayers who may underdeclare assets in order to pay a lower amount. “This will therefore pose a challenge to the tax authority in verifying the accuracy of the base of tax amnesty payment,” the journal read.

At the same time, use of total assets as a basis may prevent bloating of liabilities in order to reduce net worth, but this scheme may not reflect the actual financial capacity of the applicant.

However, total assets would be “simpler and easier to determine… resulting in better compliance and tax administration.”

The use of incremental increase in net worth from previously filed statement of assets, liabilities and net worth (SALN), meanwhile, is expected to be “inconvenient” for amnesty applicants since they will have to look for old records that may no longer be available.

NTRC also said that using a basic tax delinquency amount could be “productive” and would “facilitate the administration of tax amnesty,” but possible unavailability of needed data would be a “problem”.

Moreover, tax amnesty payment determined by value of undeclared assets “is reasonable,” as they are “the ones that escaped taxation in the past.”

Moreover, the NTRC also noted that the amnesty could be better implemented by granting a preferential rate or a bigger discount for early payment, similar to Indonesia’s program in 2016.

The tax amnesty bill now pending in Congress proposed that SALNs be considered true and correct only after one to two years from the amnesty offer period in order to give enough time to verify accuracy, but the NTRC said such a “longer period will hold the availers hostage under threat of prosecution for perjury, or other appurtenant civil, criminal, or administrative liabilities.”

“This may also serve as a deterrent in the availment of the amnesty,” the NTRC said. — with