Beruflich Dokumente
Kultur Dokumente
Alvin Ang
Rachel Follosco
August 2007
DISCLAIMER
“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of
the United States Agency for International Development (USAID) and the Ateneo de Manila University”.
MAIN REPORT
I. Introduction
Despite undergoing two major tax reform programs, one in 1986 and another
in 1997, the Philippines revenue efforts remain low. While there are various concerns
that contributed to this low revenue effort, low tax compliance and the inability to
expand the tax base continue to be the major causes of this drawback. In general, tax
base can be expanded if the registration process is simplified as not to constitute a
barrier to entry into the tax system. Low tax compliance can similarly be addressed
by simplifying the requirements. In both cases, the present difficulty can be
summarized into time and monetary costs.
This report consists of four (4) parts: the main report, a comprehensive review
of literature, a detailed process of tracking the registration and compliance
requirements and a summary of a short key informant interview. This paper is
organized into six (6) parts: introduction and objectives, summary of major findings
from the review of literature, framework, unbundling and counting the costs,
summary of the short key informant interview, the last part recommends and
concludes.
To facilitate our analysis, we have drawn in Chart 1 the approach that we took
in preparing this report. It is a general conceptual flowchart and what we had
expected in each part of the task we have identified. It should be noted that in the
course of the study, a number of assumptions have to be made in order to arrive at the
objective of determining the costs and their attendant concerns. Difficulties were
mainly in reconciling standards as there is no one official publicised procedures for
the registration and compliance processes. This is due to the number of agencies
involved and specific requirements in each local government.
The extent of the income tax gap had been studied by the NTRC. In two studies
covering the period 1995-97 and 2001-06, the NTRC used different approaches in
estimating the tax gap. The collection rate was 13% during the study period 1995-
97 and this improved to 29% in 2004. Though not directly comparable due to
differing approaches used in estimation, these numbers nonetheless show that a
large potential income tax remains to be collected both from compensation and
from business/professional income segments. Similarly, in both cases, latter
segment is often claimed to account for a higher percentage of the uncollected
income taxes. Part of the source of the income tax gap had been identified in a
number of other studies, notably that of the International Monetary Fund (IMF),
World Bank, and the Philippine Institute of Development Studies (PIDS).
The IMF, in a 2005 paper, suggested that the issue of revenue collection in the
Philippines can be improved by rationalizing tax incentives and improving tax
administration especially on the personal income side, among others. It suggested
that even if statutory tax rates on personal income are increased, it will have no
significant effect on revenue because of the low compliance rate. It therefore
recommended that, instead of a rate adjustment, it would be better to improve tax
administration. Another study of the IMF and the World Bank in 2006 pointed
out that one of the weaknesses of tax administration in the Philippines is the focus
of the Bureau of Internal Revenue (“BIR”) on voluntary compliance of existing
taxpayers, instead of strict compliance enforcement.
These recent findings are not new because these have been considered in previous
efforts to improve the overall taxation system in the country. The 1986 Tax
Reform and the 1997 Comprehensive Tax Reform Program attempted to identify
distinct segments/classes within the category of individual taxpayers. Thus, the
classification of individual taxpayers into compensation income earners, taxpayers
engaged in the practice of profession, and individuals engaged in business. While
both initially improved collection in the individual income tax segment, the
improvements under both tax reform efforts were not sustained. This led experts
like Dr. Rosario Manasan of the PIDS to suggest that it is not the revision of the
tax structure that could sustain revenue growth, but sustained improvement in tax
administration. She suggested some administrative solutions to capture evasion
and non-compliance, among which are: a) improved monitoring of stop-filers, b)
installation of selective audit policy and procedures, and c) use of third party
information. Likewise, suggestions have been made to improve personnel image
Main Report: Determining the Costs of Registration 2
and Compliance For Sole Proprietorships
and Professionals in the Philippines
and capacities of the BIR which include performance evaluation system for
revenue officers, training of personnel for computerization, and the creation of
data centers. Most of these recommendations are already being implemented
through the Tax Administration Strategic Plan (TASP), though possibly lacking in
depth and in breadth.
In regard to compliance, the Doing Business Study suggests that there are certain
countries that have generally lowered their tax rates but still managed to improve
their tax revenues significantly. This can be explained by the entry of more
businesses into the formal sector. Ease of collections is explained by ease of
compliance and less complications for those entering and those already in the
system. The overarching lesson for the Philippines from the study is the
importance of streamlining and simplifying procedures, thus: a) procedures
should be cut down to only the basic steps required; b) one-stop shops for
registration should be created as much as possible; c) standard application forms
and a single business application process should be adopted; and d) the number of
filings and returns required to be made during the year and the time spent to
comply with such requirements should be reduced.
Two groups of studies have shown the link between revenue generation and the
need for a sustained compliance. This is not without theoretical basis and neither
is this finding unique to the Philippines. In a seminal paper by Nagin in 1990, he
already pointed out that there are major policy instruments available to the
government to curb non-compliance. In general, these are consistent with the
recommendations on tax administration improvement and focused on decreasing
the cost of compliance because increases in compliance cost reduce the incentive
to file a tax return. Another paper by Feige in 1998 focused on the problems of
accurately defining the informal sector. He cautions that a large and growing
informal sector will dilute information on the actual state of development of a
country based on official statistics and more importantly, it shifts the burden of
taxation from the dishonest to the honest, increasing the cost of compliance to any
Main Report: Determining the Costs of Registration 3
and Compliance For Sole Proprietorships
and Professionals in the Philippines
system of rules and regulations, especially those concerning taxes. Thus, it is
equally important to expand the tax base by improving the registration process of
businesses and professionals while finding ways to improve the compliance
processes for those already within the formal system.
It may likewise be worthwhile to note that the respondents in Erard’s 1999 study
in Canada on the tax compliance of firms, were mostly firms that have been in
operation for about 20 years and employing at least 15 employees. This suggests
that small firms are most likely having difficulty complying. In policy-setting
therefore, some focus will have to be given to the compliance concerns and
challenges of smaller businesses.
In the US, this finding is consistent and showed that smaller firms are paying 30%
more on the average cost to comply and this is believed to have caused the failure
of about 40% of small firms to comply with regulations. In the UK, the same is
true with small firms having to spend five (5) hours more a month to complying
with taxation requirements than larger firms. These same small firms list taxation
as causing more work. These findings were also found to be the same in Australia
and New Zealand.
Lastly, the latest US Internal Revenue Service (“IRS”) study in 2003 showed that
the average time and cost burden on a taxpayer to comply with taxation
requirements is 25.5 hours and US$149, respectively. This increases significantly
for those in the self-employed sector where compliance time increases to 59.5
hours and US$163.
TASK OUTCOMES
The registration process will be discussed in general and thereafter a sample of the
process involved in four major cities in Metro Manila, namely, Quezon City,
Manila, Makati and Pasig, will be compared to give a clearer distinction of how
the process differs from one locality to another. Three (3) main sub-processes are
involved in registration, these are: business name registration, local government
business permit, and registration with the BIR. A fourth sub-process may be
included which is the registrations in compliance with social welfare laws,
specifically with the Social Security System (“SSS”), Home Development Mutual
Fund (“Pag-IBIG”), and PhilHealth (hereinafter collectively referred to as “Social
Welfare/Insurance Agencies”).
To simplify our discussion, we will limit our scenario to those who register at
the DTI whether as a business or a professional. DTI registration is a rather
simple process and can be completed with the issuance of the certificate of
registration within a day. The registration fee is Php300.00 and the
documentary stamp tax on the certificate that will be issued is Php15.00.
The detailed procedures and relevant fees differ across cities and
municipalities but the general requirements are almost the same and they are
as follows:
- barangay clearance;
- lease agreement/TCT of place of business;
- application form;
- DTI Certificate of Registration; and
- payment of fees.
For the application for the Mayor’s permit, the following are usually required:
Each of the items listed above may require separate fees and the time needed
to secure each item varies. For the cities of Manila, Quezon City, Makati, and
Pasig, these processes may differ slightly. The summary of the registration
process and related costs in each of these LGUs is presented in Annexes “H-
1”, “I-2”, “J-1”, and “K-3” of Attachment B, respectively.
The differences among the local governments are likewise subject to other
factors that cannot be standardized. These may include the quality and
attitude of service providers and the location of each of the different offices
with which a registrant needs to get clearances.
Using these, we apply it to the four (4) different cities to arrive at the cost
estimates below. Table 1-A indicates the estimated number of days to
complete the new business registration process, with the waiting time on the
part of the applicant separately indicated while Table 1-B details the cost
items. For purposes of costing, only the man days needed to actually complete
the registration/Mayor’s Permit requirements of the LGU concerned were
included. Waiting time was not assigned any corresponding cost/value.
The amounts indicated in Row 6 above were based on actual assessments paid
in connection with an initial registration involving different businesses but
with comparable area of office premises (see Annexes “H-1”, “I-2”, “J-1”, and
“K-3” of Attachment B). It is observed that size of the office may affect the
amount of garbage fee assessed, public liability insurance (although for
purposes of the table above, only the minimum premium for such insurance is
assumed), among other minor fees.
The Quezon City government recently had a press release (July 21, 2007,
Philippine Star) indicating that the number of days to register a business in
Quezon City government is at a minimum of two (2) days during slack periods
and up to a maximum of seven (7) days during peak periods. It is not clear if
this includes the time needed to secure the barangay clearance, but it certainly
excludes registrations with the DTI, BIR, and Social Welfare/Insurance
Agencies. Moreover, while it appears that the 2-day registration period that it
has indicated still appears to be quite optimistic, it is evident that their
estimates are based on only the actual number of days that the applicant has to
Main Report: Determining the Costs of Registration 9
and Compliance For Sole Proprietorships
and Professionals in the Philippines
be in the Quezon City Hall to process the required documents and excludes the
waiting periods for the issuance of the required permits, conduct of inspection,
and the release of the Mayor’s Permit and registration tin plate. If these
assumptions for their estimates are correct, then the findings of our Study
would be fairly consistent with what is in the press release in certain LGUs
such as Quezon City.
Though not included in our representative cities, we tried to validate the good
reviews we have heard from the experience of Marikina. Based on our field
visit, we found that business permit will be released in Marikina at a
maximum of five (5) working days. This is at least one day faster than our
estimate of the process in Makati. Similarly, they have simplified the process
for renewal by establishing a Barangay One-stop shop window within the
Business Permits office. This could be a process that can be emulated by
other cities in the National Capital Region (NCR).
After the business permit, the registrant has to go to the BIR to register his
business and for the appropriate taxes that his business/profession is subject.
This process requires that the registrant must have the proof of payment of the
registration fee amounting to Php500.00, copy of the business permit, and
proof of attendance of the tax briefing. After this, the registrant will be issued
a BIR Certificate of Registration (“COR”). This process is usually completed
within two (2) days.
As these agencies may be located in different areas and possibly even outside
the municipality, the registration with these agencies may take more than a
day to complete.
For purposes of estimating compliance costs, this Study focuses only on a general
estimated baseline that we assume will be widely similar among
businesses/professionals, without taking into account some cost differentials
attributable to the fact that service/labor costs outside Metro Manila are relatively
lower since the difference is not projected to be materially significant.
Assumptions
Similar to the registration costs, we have to build on a number of assumptions as
the same difficulties of differing nature of business and different registration
options taken will lead to different results.
c. The sole proprietor/professional is registered with the BIR for the following
minimum tax types:
f. The cost of preparation and filing of tax returns is estimated to cost Php500 for
the simpler and more routine returns but more complicated returns such as the
quarterly income tax return and the annual income tax return (which require
the preparation of additional forms and schedules), were given higher costs;
h. Official fees are only deemed included if specifically stated; in general, taxes
are excluded from the estimates as taxes are generally computed on the basis
of either taxable income or gross receipts, but the applicable tax rate, tax base,
and whether or not the taxes are borne by the taxpayer or simply remitted in
his capacity as withholding agent are indicated on the last column;
i. Assessed renewal fee of the local government business permit will increase by
P1,000 from a minimum of P2,500 paid on initial registration due to expected
increase in business activity since local business tax is imposed at a rate
depending on the nature of the business and the gross receipts of the business
during the immediately preceding year; and
j. Monthly (Table 2), quarterly (Table 3), and annual compliance costs (Table 4)
are accumulated in computing the aggregate annual compliance cost (Table 5).
With these assumptions, the different tables below show the estimated costs
broken down into monthly, quarterly and annual. The approximations we arrived
at should serve only as a guide and for a more accurate estimate, we believe that a
survey for existing firms needs to be accomplished. This will be able to show
how significant or not are the fees and compliance cost in relation to the total
revenues and performance of firms.
For annual cost estimates, there are still additional filings that the entity needs to
submit and it also needs to renew its Mayor’s Permit with its LGU and its
registration with the BIR. Thus, these activities are considered separate from the
monthly and quarterly compliance requirements that the business
entity/professional has to accomplish. In addition, there is also an annual audit of
books that needs to be complied with and per current market standards this is
estimated to cost Php7,500, usually quoted net of withholding tax and exclusive of
VAT. There remains to be independent auditors who can charge as low as
Php5,000, exclusive of VAT and net of withholding tax, but such auditors would
normally qualify their engagement to be without the conduct of an actual audit.
Thus, they would just sign off on the financial statement prepared internally as
long as they are satisfied with the apparent consistency of the financial statements
with generally accepted accounting principles.
The estimate of compliance cost for the entire year is summarized below.
The costs presented above are baseline and, as previously mentioned, there is
some degree of arbitrariness/reliance on assumptions in arriving at these numbers.
The information presented above support the following conclusions: (1) while it
is true that registration costs serve as barriers to entry, specifically, into the tax
net, all told, the estimated registration costs for all the four cities appear to be
acceptable and the time involved is not as long as generally perceived; and (2) the
estimated cost for compliance seems to be quite high for a multitude of small
business.
While it may be true that the administrative cost of compliance diminishes or even
becomes negligible as the size of the business increases, the full cost of
compliance does not necessarily follow the same trend. It should not be
overlooked that compliance requires the payment of taxes, both to the national and
It has to be emphasized that the full cost of compliance is still not yet fully
captured in the amount of Php80,950 indicated above, since the said amount
basically captures only the administrative cost of compliance. To the
businessman/professional, the cost of compliance will definitely have to include
the taxes that he will in fact be paying in the course of his compliance. The
amount of taxes payable were no longer estimated for purposes of this Study as it
will require us to over simplify the illustration by assuming a fixed amount of
income; nonetheless, the applicable tax rates and tax base are indicated where
applicable.
Hence, in real cases, this estimation may prove to be on the high side for small
and medium firms, but may be low for large ones. Since most new entrants to
business start small, this could serve as a barrier to entry. Therefore on the whole,
it is not only the registration process that can serve as barrier to entry but equal
resistance to formalize one’s business and bring it within the tax net can be traced
to the fact that aside from the administrative cost of compliance, there are
significant amount of taxes that will become due and demandable from the
business once it is in the tax net. Between the difficulty and cost of registration
as barrier to entry into the tax net and the cost of full compliance once in the tax
net, it is the latter which may in fact be the source of resistance to get one’s self
into the tax net. Thus, if enforcement of the requirement to register and comply
with all continuing requirements is weak, whether it is an individual or a juridical
entity that is conducting business, there is definitely a lot of cost savings and
financial incentive to remain outside the tax net for as long as the system allows
them to get away with non-registration.
Lastly, the cost of defective compliance once the business is already in the tax net
is likewise potentially prohibitive. Given that for smaller businesses competent
professional services are rather costly and inaccessible and the fact that
proprietors of smaller businesses are also generally less sophisticated, there is
increased chance of defective (late, incomplete or erroneous) compliance and the
need to incur its related costs. When such is the case, their cost of compliance
can be greatly increased and can even be doubly prejudicial on their part since
such incremental cost would constitute unanticipated or unprogrammed costs
unlike the periodic taxes that are due which are arbitrarily factored into the pricing
scheme of the business.
To validate the findings above, we tried to elicit ideas and find concerns of
self-employed and professionals in complying with the initial registration and periodic
compliance requirements of local government units and the Bureau of Internal
Revenue (BIR). Taking into consideration the limited timeframe and the possibility
of a high level of non-response, we employed a purposive/convenience sampling
method. Thus, we caution that there is no general scientific generalization that can be
arrived at. We tried to get a mixed group of 30 respondents, equally divided into self-
employed and professionals and was conducted in the Quezon City area. The
questionnaire employed was non-structured type and solicited open-ended responses
and was implemented through face-to-face interviews.
1. What can you say in general about the business/professional registration process
for the self-employed and professionals
2. If your business/practice of profession is registered,
a. Did you personally apply for your business permit/professional license
b. In your estimate, how long did it take to complete the registration process?
c. How much did you spend?
d. In the course of registration did you encounter any difficulty?
e. Can you specifically identify the part of the process where you encountered
difficulties?
f. What can you recommend to improve the process?
3. As regards your periodic compliance requirements with the LGU and BIR, do you
encounter any difficulty in meeting them?
4. Did you personally take care of your periodic requirements
5. If No, did you hire any professional to assist you?
6. Can you identify the problems with the periodic compliance process?
7. Could you suggest ways of improving it?
8. If you business is not registered,
a. What is the reason why you did not register?
b. Do you know that the process takes only 4 weeks and that the cost depends on
the type of business?
c. What can you recommend to improve the process?
Hence following this perspective, what we can pick from this result will help
identify the parts of the compliance process which registered businesses and
professionals are finding difficult to comply with or cumbersome. Hopefully,
policy changes will be able to simplify and correct the same to make compliance
easier.
The following are our assessment of the information that can be culled from the
survey:
There seems to be a consensus that the process of applying for a business and
professional registration is a long, difficult, and tedious process. Nonetheless,
majority comply with it because they believe it is necessary for regulation of
business and profession. It is also noted that due to the differences in the
operational set-up of local governments, there seems to be a perception that
some LGUs are more organized than the others.
The time involved in the process is one of the reasons that turn off registrants.
It should be noted that the range of time involved goes to a low of five (5)
working days or one (1) week to a high of eight (8) weeks. However,
considering that this survey was done in one city, findings here may not
necessarily be consistent with those in the other cities. To have an average
viewpoint, we can assume that not all registrants diligently pursued their
registration from day 1. It is possible that some deferred the instruction on
when to return thus leaving their process hanging. Thus, those that diligently
waited for their papers completed the process within a week’s time.
Nonetheless, this gives us a clear idea that registration should be facilitated
and possibly be completed within a day. There are transaction costs involved
and these differ from person to person and from the type of business being
applied.
Most respondents gave the minimum amount spent for registration as around
Php3,000 and the highest to approximately Php15,000. Respondents tried to
recall the total amount they had spent for registration as some of them had
been in operation for some time now. There are many factors to consider in
aggregating the actual cost incurred by the respondents. For instance, some
impliedly considered in their cost – facilitation expense and early release
through fixers, though they did not specify how much they gave. But,
considering that a number of the respondents gave their expenses to be around
Php5,000, it is possible that the facilitation fee of fixers could have gone as
high as PhpP10,000. Similarly, it is important to note that the cost we
This Study has generally shown the need to simplify registration and
compliance procedures. Our baseline estimates show that compliance requirements
are the same regardless of the size of business, profit or even nature of business or
profession. This uniformity of requirements seems to be one area where the difficulty
arises particularly for the small and/or start-up businesses. Consistent with the
findings of studies in the US, Canada, and other developed countries, it is the small
businesses or start up professional services that are severely affected by compliance
processes in terms of time and costs. In relation to this, we similarly support the need
for further simplification of the registration and compliance requirements as well as
more intensive efforts to disseminate basic information regarding compliance
requirements and procedures to small businesses to reduce and possibly eliminate the
risk of costly defective compliance.
1. Creation of one-stop shops by LGUs which will allow the applicant to just
proceed to one office window, submit one (1) set of requirements (instead of one
(1) set of documents for every office where a permit or clearances is required to
be obtained), and pick up the Mayor’s Permit upon payment, after the lapse of a
definite period of time. Barangays, at least during the month of January when all
renewals are scheduled to be completed, should likewise already send
representatives to the LGU’s one-stop shop to issue the requisite barangay
clearance. This practice is already being implemented in Marikina.
2. Make the forms simple and make available instructions in the vernacular. In the
LGUs, if the applicant is simply renewing its Mayor’s Permit, the application
form, requirements, and procedures should be substantially simplified or reduced,
particularly if the applicant will not be transferring its place of business or there is
no material change in its business and/or place of business. In particular, LGUs
which have computerized data base of applicants’ information should be able to
reduce information/documentary requirements from the applicants to the extent
that the applicant represents that there are no changes in its circumstances. At the
least, an applicant for Mayor’s Permit renewal only needs to disclose the gross
revenue of the business during the preceding year as the same serves as basis for
the local business tax assessment.
b. Allow less frequent periodic compliance for small businesses, for example,
monthly periodic requirements should be submitted quarterly instead. SSS,
Philhealth, and Pag-IBIG should likewise issue guidelines allowing quarterly
instead of monthly remittance for employees’ and employers’ contribution if
the number of employees is ten (10) or less. Percentage tax return for
businesses that do not meet the threshold of Php1,500,000 for purposes of
VAT coverage should be allowed to file and pay their percentage tax on a
quarterly basis instead of filing and paying monthly.
In the same way that the BIR has special rules for taxpayers which it has
determined to be “Large Taxpayers”, it is may also be worthwhile for the
BIR to consider creating a new class of taxpayers, “Small Taxpayers”,
which will be subject to more reasonable periodic compliance
requirements.
d. Waiver of compromise penalties for failure to file tax returns where no tax is
due from the business particularly if there is no fiscal prejudice on the part of
the government. They should, as much as possible, except on the grounds of
wilful, fraudulent or repeated violations, be shielded as much as possible from
fear of tax audits and assessments for each and every violation that they
commit.