Among the less talked about provisions of Republic Act No. 10963 or the TRAIN Law are perhaps the amendments to Section 237 of the Tax Code, and the insertion of Section 237-A. Within the next five years, these two changes will require large taxpayers, exporters, and taxpayers engaged in e-commerce to electronically issue their invoices/receipts, as well as report their sales data to the Bureau of Internal Revenue (BIR) at the point of sale (i.e., “eSales reporting”).
In the final copy of RA 10963, Section 237-A thereof only includes as among those mandatorily required to report sales “taxpayers engaged in the export of goods and services, and taxpayers under the jurisdiction of the Large Taxpayers Service”; however, in the proposed additional revision to Section 237-A under the draft bill for Package 2 of TRAIN, the phrase “taxpayers engaged in e-commerce” is already included therein. Pending clarity on the matter, and in the absence of indications to the contrary, we will assume for discussion purposes that taxpayers engaged in e-commerce are also already covered by the mandatory e-sales reporting requirement.
The upcoming e-invoicing and eSales reporting requirements are part of the Philippines’ current tax reform program — and with these new digital tax reporting requirements, the Philippines looks to mature to another level in terms of Digital Tax Administration. But what makes a digital tax administration a “good” one? How can the BIR measure the success of e-invoicing and eSales reporting? Here are some possible indicators.
INCREMENTAL INCREASE IN TAX COLLECTED
Point-of-sales reporting provides the BIR with transactional level data that — in theory — since already reported to the BIR, should also be consistent with what is being included in the periodic tax returns. In other words, BIR will gain more visibility over taxpayer compliance, with a greater ability to match each transaction reported at the point of sale vs. total sales. This will be a vast improvement on its current capabilities under the RELIEF (Reconciliation of Listing for Enforcement) system that the BIR has adopted for quite some time now.
Real-time (or near real-time) submission of sales data at the point of sale leaves the taxpayer little room (if at all) to adjust the corresponding periodic amounts to be reported in the tax returns (e.g., VAT or income tax returns). Taxpayers can no longer retract the information already provided to the BIR, and any discrepancies between the transactional level data and the periodic returns may be indications of fraud or error.
A case in point for this is South Korea — where in addition to being required to issue an Electronic Tax Invoice (ETI), taxpayers are also incentivized to use credit cards and other electronic payment methods. The data collected by the South Korean tax authorities from the mandatory use of the ETI — when paired with the information obtained through credit card usage — made it virtually impossible to engage in certain tax fraud schemes, such as the use of fraudulent tax invoices to claim tax credits or deductions. By simultaneously incentivizing the use of credit cards, South Korea had increased the amount of available purchase data that could be matched and validated against sales data from ETI, and reduce opportunities for taxpayers to claim fictitious deductions or tax credits against sales or sales/revenue taxes. In 2009, the year after the ETI became mandatory, South Korea estimated an increase in tax collections of about 880 billion won (about P40 billion). South Korea also estimated a reduction of 57% in cases of invoice seller fraud. [Can Electronic Tax Invoicing Improve Tax Compliance? A Case Study of the Republic of Korea’s Electronic Tax Invoicing for Value-Added Tax; World Bank Group Policy Research Working Paper No. 7592].
It is interesting to note that the draft bill for Package 2 of TRAIN (i.e., draft as of Jan. 15, 2018, as introduced by Reps. Dakila Cua and Aurelio Gonzales, Jr.) further proposes to incentivize the use of Electronically Traceable Payments (ETP) through additional deductible expenses for taxpayers using ETPs — much like the South Korean ETI model. The Package 2 draft bill also proposes to incentivize the adoption of e-Invoices/receipts and transmission thereof through the designated channels by offering tax credits to those who will adopt these systems.
IMPROVED AUDIT SELECTION PROCESS
In theory, the availability of transactional-level sales and purchase data will allow the BIR to better identify the taxpayers who should be prioritized for audits. For example, instead of simply matching one buyer’s purchases (e.g., Summary list of Purchases or Alphalist of Payees) vs. the sales data of a particular vendor (e.g., Summary List of Sales), the BIR may be able to employ more sophisticated data tools and techniques to consolidate transactional level purchase data across multiple tax payers (i.e., various customers of a specific vendor) to determine the expected sales of a particular vendor (even if sold to multiple customers). Any discrepancies in the sales and purchase data may then be used by the BIR to flag potential audit targets.
IMPROVED TAXPAYER EXPERIENCE
Naturally, any new or additional compliance requirement will raise some concern from covered taxpayers who may view this as an added burden. However, on the positive side, transitioning to a digital tax system is also expected to significantly enhance the tax filing experience itself.
On social media, we sometimes see a mix of rants and raves about our tax filing system. Rants are about system downtime, or connectivity issues; and raves are about how filing a return this time around took “only” a certain number of hours. By contrast, in Estonia, the process for filing personal tax returns takes less than five minutes on average – i.e., the apparent “norm,” and owing to pre-populated tax returns that leverage data obtained through the national e-ID system [Digitalisation of Tax: International Perspectives, ICAEW, 2016]. With this in mind, taxpayers will certainly be observing how smoothly the e-invoicing and eSales reporting will be implemented, i.e. without being disruptive of operations. Taxpayers will also want to see whether the overall implementation will bring about IT infrastructure improvements, as well as simplify the periodic reporting requirements.
Taxpayers may also be gauging how real-time or near real-time submission of transactional-level data can improve the audit selection process for the audit itself. Having provided the BIR with so much information, taxpayers can be expected to look for more scientific methods of selecting audit clients, and more “black-and-white” issues being raised during the actual examinations. As it is, there are taxpayers who still hope to experience the benefits of more rationalized BIR audit target identification methods. For example, even with the current RELIEF System, some taxpayers still claim to receive Letters of Authority every year even after they have explained/reconciled any supposed discrepancies between sales (or purchase) data with the customers’(or vendor’s) reported purchases from (or sales to) them. With a digital tax system, remote and electronically executed tax audits (or portions thereof) may even be a possibility – such as in the case of Brazil, where most tax audits are performed remotely and electronically, without contact with the taxpayer. After all, a “no contact” system of auditing has always been an aspiration for tax authorities and stakeholders.
Overall, the shift of the BIR to a digital tax administration holds much promise. Just last week, the BIR reported that it exceeded its first-quarter goal by 16.8% and by 14% year on year. It is expected that this level of performance can be sustained with the transition to the digital tax administration that has now been legislated. The challenge now is for the BIR to clearly demonstrate how this shift can benefit both tax authorities and taxpayers alike.
This article is part of a series on digital tax. The links to the previous articles are:
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Lee Celso R. Vivas is a Tax Partner of SGV & Co.