BIR Provides ”rich broth” for Corruption

Santos says the meeting, which took place several years ago, was his first encounter with a BIR examiner. To this
day, he insists, "We were paying taxes honestly." But he says he still found himself haggling with the examiner. In the
end, his firm agreed to pay a pared down "assessment" of P320,000. Of this, only P20,000 appeared on the receipt handed
to Santos; the rest ended up with the examiner and his friends.

Paying taxes is a chore no one relishes doing, which is partly why many people usually wait until the deadline to file their
income tax returns - today, for tax year 1999 - and why no one expects the BIR to reach its target collection of P387.8
billion for this year.

But even BIR insiders say a major reason why taxpaying has become so onerous a task in this country is because of the
widespread perception that the bureau is corrupt, and that much of the money a taxpayer hands over goes not to the
government but into the pockets of unscrupulous BIR officers. The insiders also say tax audits such as the one undergone
by Santos' former employer provide one of the lucrative opportunities for corruption in the bureau, and have become tools
of harassment by BIR personnel.

Several BIR officials, both past and present, interviewed for this series by the PCIJ confirm that too many flaws in the
system have made the practice of rigging tax assessments all too common. For instance, they say, the procedure for the
conduct of tax assessment is unclear.

There is also too much discretion left in the hands of BIR examiners. "There's a lot of expenses that they can disallow,"
says one businessman, referring to the alleged arbitrary manner by which examiners forbid certain company expenses
from being deducted from the taxable income, raising the tax due. "That's why," he adds, "you negotiate."

The delineation of functions among various BIR units is vague as well, which means a company can be audited by the tax
fraud division of the national office and a revenue district office for the same taxable period - supposedly a no-no based
on BIR guidelines.

Worse, there is hardly any monitoring being done to check any abuse. Not by the Commission on Audit or by Congress
anyway, much less by BIR top officials, some of whom may even be accomplices to this malfeasance. And while there
have been attempts to reform the system and at least limit the abuses, there is apparent resistance from within. Remarks
Romulo Neri, director-general of the Congressional Planning and Budget Office (CPBO): "It is a very rich broth for
corruption to thrive."

Collection defects
A recent study by the Transparency International (Philippines) in fact shows that for every P2,000 tax collectible,
only P1,000 is actually collected because P500 goes to corruption and collusion, while the remainder goes to "defects" in
collection.

But these figures may even be generous. According to an examiner at the Bureau's tax fraud division, 50 percent of
assessed deficiencies or tax liabilities going to public coffers is already considered huge. Other BIR insiders confirm this,
saying that whenever there is collusion between revenue personnel and business taxpayers in particular, the liabilities
could be reduced by as much as 90 percent, which leaves a measly 10 percent for the government purse.

The irony is that tax audits are supposed to be conducted precisely to enhance voluntary tax compliance and encourage the
correct reporting of taxes.

Not all tax returns, of course, are supposed to be subjected to audit. Under BIR's 1999 Audit Program for revenue
district offices (embodied in Revenue Memorandum Order No. 67-99), which took effect on Sept. 1, 1999, there are two
categories of selection criteria for the 1998 internal revenue tax returns to be audited: mandatory and priority target
taxpayers. Included in the first category are estate/donors tax returns with a gross estate/gift above P5 million, and claims
for tax credit/refund exceeding P20,000 and with gross sales/receipts exceeding P5 million.
 Tax audits can only proceed upon the issuance of a Letter of Authority (LA) to pre-selected taxpayers by
authorized BIR examiners within 30 days from its release. LAs are letters issued by the BIR Commissioner authorizing
revenue district officers (RDOs) to examine certain taxpayers' records in relation to their tax liabilities for a specified
taxable year.Where there are indications of fraud, RDOs are required to transmit the records of the case to the Special
Investigation Division (SIDs) at their respective regional offices. The SIDs, in turn, can refer certain cases to the Tax
Fraud Division at the national office, which also has jurisdiction over cases referred to it by the BIR Commissioner.In
other words, several units within the Bureau are authorized to serve LAs on taxpayers. But "to preclude multiple issuance
of LAs to the same taxpayer for the same taxable year," the BIR also has another set of

Overlapping functions

Says another former top BIR official: "Their functions overlap because they don't want to go by the rules."One
result of this is described in a 1998 letter sent by retired BIR examiner Socrates Aguinaldo to then Finance Secretary
Edgardo Espiritu. According to Aguinaldo, a taxpayer had told him of being issued three LAs for the same tax period.
One came from "the Tax Fraud (Division), another from the SID, and the third from the district," wrote Aguinaldo, who
worked in the BIR for 33 years and who has come to be known in the Bureau for his "self-imposed" crusade to rid it of
corruption. "The taxpayers are confused," he also noted in the letter.

Even the US Agency for International Development (USAID) has been prompted to comment in a report on the
Philippine Tax Administration Project it did jointly with the Internal Revenue Service of the United States: "The current
situation is that various organizational units... within the Bureau are fighting over the jurisdiction to audit taxpayers." The
result, according to USAID, "is inequitable treatment of taxpayers, even less control about how taxpayers are selected for
audit, and the potential for integrity compromises."

A former BIR top official who declines to be named admits that not only are there overlapping functions among
the auditing units, but there is also "competition" among these units or divisions to issue LAs. "They race against each
other," he says.The "winner" gets to set the rules in "auditing" the taxpayer. While the BIR's own handbook on audit
procedures stipulates the "examination of a taxpayer's books and records in sufficient depth," Bureau employees and
businessmen say there are instances when no examination takes place at all. Says an examiner at the national office.
"Pinag-uusapan na lang (The terms are just discussed.)"

Former BIR Commissioner Liwayway Vinzons-Chato says there are some examiners who do make an effort of at
least looking at the gross sales on which to base the business taxpayer's tax liabilities. But then, says Chato, "examiners
would say, 'No opening of books, just give one or two percent of your gross'."He also says many businesspeople do not
keep systematic records -- if at all -- of their transactions. Indeed, some do not even have accountants, he says. With no
records or incomplete data to justify their tax returns, these people are almost always forced to yield to extortion, if not
initiate settlements."Besides," says the accountant, "he (the business taxpayer under audit) knows he also cheated the
government, so why should he dispute the examiner's assessment?" These, he says, are the kinds of business taxpayers
corrupt examiners like to audit, because they can finish their "work" in no time at all.

Corrupt examiners

Chato, though, sees the situation this way: "The justification is that they will give to the (BIR tax) auditor
anyway."But the truth is that the more scheming the business taxpayer, the more vulnerable he is to corrupt examiners.A
case in point is a Makati-based company where Edgar Mariano (not his real name) works as finance manager. In 1998,
Mariano's firm was assessed P600,000 in tax deficiencies, which he says was intended for delayed payment of certain
taxes in 1997. Mariano says his company's cash position was low at the time, so it could not pay the supposed tax
liabilities. Besides, he says, the firm had a "history" of paying off BIR examiners.

"Thus your bargaining point weakens," he says, "kasi alam na nila eh (because they already know)." So even if a company
has every reason to dispute an assessment, says Mariano, it usually would not do so, fearful of being subjected to further
harassment.
Knowing this, some revenue officers will not even wait for the taxpayer to come across, but will initiate a settlement. This
was exactly what the examiner assigned to audit Mariano's company at the time did; he cut to the chase and offered to
lower his assessment to P150,000, of which only P50,000 would appear on the official receipt.

As soon as Mariano, who had his boss's blessings, handed the money inside the examiner's office, he got the tax
certificate that cleared his company of any tax deficiency. "It's Binondo-style, kaliwaan (a quick exchange),"  he says.
"You give me the money, I'll give you the tax certificate. No more questions asked.

Tax and Corruption:

Challenges and Solutions for the Bureau of Internal Revenue- Philippines

TAX CORRUPTION CHALLENGES

A . Prevalence

Every year, the BIR’s collection goal has been increasing. In order to attain its collection targets, the bureau
adopts various programs. Most often, implementing these programs requires direct contact with taxpayers. Such
transactions pose high probability of collusion between revenue officers and taxpayers. In several occasions, President
Rodrigo Duterte expressed his negative perception of the BIR, citing the bureau along with the Bureau of Customs and the
Land Transportation Office as the top three most corrupt agencies in the country (Romero, 2016). Upon his assumption
into office, BIR Commissioner Caesar R. Dulay acknowledged that corruption indeed exists in the BIR. The Duterte
appointed tax commissioner described his job as an uphill battle. In fact, Commissioner Dulay highlighted “cleaning up”
the BIR from corruption as the other mandate that he got from the president, aside from the NIRC mandate of raising
revenue to support government operations.

Corruption by the numbers in the Philippines can be gleaned from several surveys and studies. Bloomberg
Business in 20013, stated that the Philippine government is losing more than US10 billion dollars per year due to tax–
related corruption. In 2003-2007, Dante Canlas, our former NEDA Director-General cited frequency in irregular payment
of tax collections as the main reason for the Philippine’s dismal ranking of 97 out of 102 countries in the Global
Competitiveness Index. For 2014 – 2015, the Global Competitive Index, ranks the Philippines at 52 out of 144 countries
(World Economic Forum, 2014). The considerable gain in ranking since 2010 was attributed to the reforms instituted from
2010 to 2014. In the same report, the Philippine economy was considered as transitioning economy from stage 1 to stage
2 along with other Asian economies like Iran, Kuwait and Mongolia. The same index ranks corruption as first, tax
regulation as third and tax policy as fifth among the problematic factors for doing business in the country. In other surveys
like the 2016 Corruption Perception Index Report of the Transparency International, the Philippines was ranked 101 out
of 176 countries alongside Asia Pacific countries like Thailand and Timor-Liste, Peru, Trinidad and Tobago from the
Americas. Quoting from the website, citizens of such countries “…face the tangible impact of corruption on a daily
basis.”

Local think tanks also conduct corruption related surveys. Table 1 shows that from 2005 to 2016, the Social
Weather Stations’ (SWS) Survey of Enterprises on Corruption, consistently rated the BIR as “Very Bad” in the years 2005,
2006, 2008 and 2009; “Bad” in 2007 and “Poor” in the years 2012, 2013, 2015 and 2016 in terms of sincerity in fighting
corruption. The 2016 Survey was conducted from February 2 to May 6 involving face to face interview with executives
randomly drawn from large, medium and small enterprises. Seven sites were considered all over the country – Metro
Manila, Angeles, Cavite-Laguna-Batangas, Iloilo, Cebu, Davao and Cagayan de Oro. From the same survey and with
increasing number of respondents from year to year, it identified assessment and payment of income taxes as areas
where their companies were solicited for bribes.