POLICY BRIEF POLICY ISSUE: COLLECTION OF TAXES FROM THE GREY ECONOMY I.

EXECUTIVE SSUMMARY The Bureau of Internal Revenue, as we know, is the agency of the government handling tax collection. Tax collection of the Bureau comes from the different transactions held by individuals and businesses within the vicinity of the country, Philippines, by citi en, a resident and!or a non" citi en and outside the country as done by a citi en and!or a resident of the nation. Thus each and every individual should be collected taxes there into. This is as to do the mission of the Bureau, to collect taxes for nation" building through excellent, efficient and transparent service, #ust and fair enforcement of tax laws, uplifting the life of every $ilipino. %ne sector that the BIR had been trying to collect taxes with is the gray economy. The gray economy is a system involving the secret but not illegal sale of goods. This is what we $ilipinos commonly known as the tiangge. The tiangge is one of the areas in the business sector that the Bureau of internal Revenue seems to not handle proper imposition and!or collection of re&uired and deemed taxes. This tiangge's are said to be the Philippine version of the (merican thrift shops and flea market, but whereas items sold are those that have seen better days or we could simply say vintage items. Items at tiangge are presumed to be imported and )branded) &ualities that appeal to our colonial mentality. But commonlt this tiangges are stalls or shops that provides us with cheap and sometimes second hand branded goods that are appeti ing to consumers with tight budgets. *hich basically makes them a great part in economy since the category they provide services or better said, goods to are the biggest portion of the economy, the middle and!or masa class. Being seen as a permanent part of the nation+s economy, the tiangge+s showcases a huge economic potential and benefits that only if handled properly can be utili ed by the Philippine government for purposes it is thoroughly needed. But in moments like now, where this gray economy is unmanaged its potentials will never be unleashed and

only its negative effect as a hindrance for the country+s economy to take a leap onto the take off stage of betterment. This tiangge occasionally provide complaints, the most recogni ed among all is the non"issuance of receipts for purchases. (ll businesses " and tiangge are of no exceptions " are re&uired by law to issue sales invoices or official receipts. (nd non"issuance of receipts seems to be a custom in the daily business transactions of tiangge's. Tiangge retailers that don't issue invoices or receipts are presumed to be either under declaring their taxable sales or are unregistered with the BIR. Tax collection in tiangge+s seems to be lax and as if they are privilege stores, due to their almost non"taxed business. *hich is a big loss for the taxing system due to scattered tiangge in almost anywhere in the Philippines. Thus, it is now a matter of &uestioning, where is the BIR lacking and what efforts can they give to finally resolve this problem. %ne great step for the Bureau could do is to make a standard and firm system pertaining to tiangge's. This system will be used and implemented to avoid non"collection of taxes due from them, the gray economy. The Bureau must not disregard the gray economy, since whether it may be small they are still business governed by the Philippine territory laws.

II.

PROBLEM/ ISSUE STATEMENT -. .ow should BIR address the grey economy/ 0. 1hould BIR strengthen ties with local government/ 2. 1hould BIR consider restructuring of collecting personnel/

III.

BACKGROUND OF PROBLEM/ ISSUE The BIR or the Bureau of Internal Revenue an agency of the government which is primarily in charge of the administration and enforcement of tax laws under -334 Tax 5ode. The Bureau regularly releases regulations, memorandums circulars, and rulings to clarify or change certain areas of the law. This Bureau is marked as one of the most controversial departments of the government due to money and political issues intertwined.

(mong tons of issues the Bureau had been tasked with, all in its most sense pertains to non"collection of taxes. (nd one issue the Bureau is facing about collection is the non"collection of taxes from tiangge's arising from the events of flea markets lasting for more than a month, #ust like in the time of holiday seasons. There had been news regarding the issue stating why tiangge taxing seems to be lax. 1tarting from non" issuance of receipts, and another is their under declaring of taxable sales or could also be, unregistering with the system of the Bureau. $irst things first, how do this tiangge or gray or underground or what others also call and the most common or familiar term for is, informal economy started/ There are said to be two ways in conducting a business, the formal and informal way. The formal is a business that conforms to what is stated in the legal process, taking each step by step. (nd as expected the informal way pertains to businesses legal in nature, meaning not criminally inclined, but doesn+t follow the formalities established by the legal framework. (nd the members of the gray economy are considered as such, because they don+t conform to the process provided by the law. *hat this section of the economy usually violates is the registration to designated and re&uired government departments, which one of the most affected is the Bureau of Internal Revenue or what we simply call BIR. 6ue to non registration they are usually unregulated by the government. Thus they are not accounted in the state income account. They say that the reason for this portion of the economy to not comply is high cost they needed to pay before even putting up the business they intended for them to generate income. 1ome other reason for the rising of the gray economy aside from high cost for compliance is the complicated regulations, bureaucratic hurdles, and corruption. But in a study it was said that one of the most real reason behind this issue is ignorance of the formal order thus non"compliance follows through.

IV.

SIGNIFICANCE OF PROBLEM/ ISSUE The issue about the gray economy had been running around for ages. They were given not much of the attention they needed for they can be considered a small part of the whole economy of the country but shall

we remember the saying 7maliit man ay nakakapuwing din. 1ome say this informal economy is so small they won+t affect the stand of the economy of the Philippines to date. But the truth is they stifle the economic growth the country had been trying to achieve for decades. This gray economy causes obstacles for the economy to bloom and be at its best potential. 1hould we enumerate reasons why we need to address this issue as fast as we can/ 8ow, first as said by a recent study of 9c:insey ;lobal Institute, <$irst, the powerful incentives and dynamics that tie companies to the gray economy keep them subscale and unproductive. 1econd, the cost advantages of avoiding taxes and regulations help informal companies take market share from bigger, more productive formal competitors.) The same study also concluded that )Informal companies become trapped in a self"reinforcing dynamic that confines them to subscale, inefficient, low"productivity work. (round the world, this research shows, they operate at #ust half the average productivity level of formal companies in the same sectors and at a small fraction of the productivity of the best companies.) (nd to add more, a report from Bertelsmann 1tiftung+s Transformation Index =BTI> says that <The informal sector, which employs about 4?@ of the labor force, is still significant to this medium"developed national economy.A *hich causes the lag as stated awhile ago of the economy. If this be not addressed to date, the Philippine economy will only experience the smallest growth from the supposedly big leap the government had been trying to point out to the $ilipino public.

V.

PRE EXISTING POLICIES To answer the existing issue about the gray economy, and of that the tiangges are privilege stores in tax parlance BIR had released a regulation regarding them. (ccording to Bureau of Internal Revenue, Revenue Regulation 8o. -B"0CC2 =as amended by RR 8o. 0D"0CC2> issued on (pril 03, 0CC2 advance payments of Ealue"(dded Tax =E(T> or

Percentage Tax and of Income Tax should be imposed to operators of tiangge+s. The RR states that <( fixed amount of Ealue"(dded Tax =E(T> or Percentage Tax, as the case may be, of Php -?C per day =or Php D,?CC per month> and Income Tax of Php ?C per day =or Php -,?CC per month>, shall be imposed and collected in advance on a monthly basis from <privilege storeA operators during the entire duration of their business operations. Provided, however, that if the duration of operation of the privilege store is less than one month, then the advance payment shall cover only said lesser period. 1aid advance payments shall be credited against the actual business tax and income tax due from such persons for the taxable period for which such payments were remitted to the Bureau. %n the part of the organi ers or exhibitors, their obligations shall cover the following, -> deduction and withholding of the ?@ Fxpanded *ithholding Tax on lease payments to the lessor of real propertyG 0> posting in a conspicuous place of their 5ertificate of Registration =5%R> issued by the BIRG 2> providing the Revenue 6istrict %ffice =R6%> with the list of names, Taxpayer Identification 8umbers (nd 5%Rs of persons!entities participating in the event and the specific dates and duration when such operations shall be conductedG D> ensuring registration with the BIR as well as the remittance of actual withholding tax liabilities and advance tax payments by the <privilege storeA operatorsG and ?> reporting to the BIR of non"compliance by the <privilege storeA operators with their obligations and responsibilities. In addition to their obligation to pay advance business tax and income tax, <privilege storeA operators are also re&uired to deduct and withhold the ?@ Fxpanded *ithholding Tax on rental payments made to exhibitor!organi er for sub"leased spaces. The advance payment of business tax and of income tax shall be evidenced by the duly validated copy of BIR $orm 8o. CBC? and the %fficial Receipt!6eposit 1lip issued by the (uthori ed (gent Bank =((B> or the Revenue 5ollection %fficer =R5%>, in the absence of an ((B, of the R6% having #urisdiction over the place where the <privilege storeA operates. $or purposes of claiming the advance payments as credits against the actual taxes due, the applicable tax returns to be filed must be

accompanied by a duly filed Payment $orm =BIR $orm 8o. CBC?> and by %fficial Receipts! 6eposit 1lips issued by the ((Bs or R5%, if applicable, which shall constitute as the proof for the advance payment of taxes. *ithout such proof attached to the tax returns, any claim on account thereof shall be disallowed and the assessment of deficiency taxes shall correspondingly be made.A This is what the Bureau at present is using to address the issue of non"collection and of non"compliance of the gray economy.

VI.

POLICY ALTERNATIVES -. Improvise the manner of taxing. Improvising the manner of taxing pertains to standardi ation of payment of the said taxes. (t the current law provided payments of Ealue" (dded Tax =E(T> or Percentage Tax, as the case may be, of Php -?C per day =or Php D,?CC per month> and Income Tax of Php ?C per day =or Php -,?CC per month>. But what if the tiangge+s store are selling only of cheap non"necessity goods. .ow should they be taxed/ %ne reason why a lot of small business owners escape the payment of the said taxes is its costliness. 5ostly in terms that it is not reasonable for what income they produce from conducting such business. .ere is where #ustifiable considerations should be brought about by the Bureau. They should take into consideration the other side of this story. The BIR may take second thoughts in reanaly ing the current value of payment they had released to regulate the sector. They might not notice that the current regulation that they ought to solve the problem may be the exact regulation to make those small businessmen cringe and escape the law. There are bases the Bureau should consider, prices of the product sold, type of products being sold, the range of the average income daily, the space occupied by the business and!or where the business is situated, etc. If the following be taken into consideration taxing for the said sector of the economy will be more concrete and #ust.

(dding into the issue is corruption in the country which is another concern the entire government should address, to give more reasons for taxpayers to pay what they are due with. If all this be settled taxpayers will see the importance of paying their taxes and also their importance in the economy they belong in. 0. 5oordination with the local official and other concerned agency. 1ince most of this small scale kind of business are renting spaces. This spaces that they occupy are usually a free government space. Thus, managing the renting or usage of the space properly will help avoid the following business to evade taxes. (lthough the BIR in their current regulation provides collection of pre"rent or taxes #ust to make sure that tiangges will not escape the law, it do seems that the hand in enacting the law is not firm. Thus the Bureau should strengthen ties with governing officials in the vicinity for better enactment of the revenue regulation. This move will re&uire a huge help from local officials. The H;I are the first hand persons that will be at or near the vicinity. Thus, the Bureaus coordination with the H;I officials is a must to keep a firm watch on the gray economy. (long with the coordination with the H;I, is the implementation of the system that already exists in the BIR but with more firm application and #ust decisions. 2. Restructuring of collecting employees. Restructuring of the collecting employees is a must for the proper implementation of any policy directed to solve the issue of collection of taxes in the gray economy. (long with the employment of collecting staffs are the regular flows of reports to and from the tiangge. Fmploying collectors who are trust"worthy and diligent in working is an ace in solving the issue. Trust"worthy employees are the ones whom would regularly check the tiangge+s and remind for payments of due taxes. They will also regularly update the status of the business.

These employees would also be the security personnel. They will be the ones detecting falsify documents. (side from detection of false documents they will also safeguard the Bureau from loses of revenue for they will be the ones checking for compliance of small scale businesses in the areas designated to them.

VII.

PROS/CONS OF EACH POLICY ALTERNATIVES -. Improvise the manner of taxing. Pros The pros for this policy is that implementation of taxes is not a new #ob to the agency. (nd only improvements or amendments for the currently existing law pertaining to the collection of the taxes in the gray economy are to be performed. (nother pro for this policy is that it is not costly to apply this policy since only a memorandum is needed and the memorandum will be set as a policy in the whole of the country to abide with. Cons The primary hindrance in this policy is the compliance of its taxpayers. If they still continue to evade the system, it is another problem for the agency to face. This hindrance may bring about rally+s or legal complaints that may arise from existing critics of the agency. 0. 5oordination with the local official and other concerned agency. Pros The pro for the said policy is that there is already an existing relationship between the BIR and the H;I. *hat is needed is the strengthening of the said working relationship for the betterment of implementation of policies. (nother pro is that in every H;I there is already designated office for the agency personnel thus no extra charges will be inputted by H;I for staying in their premises. Cons

The only hindrance visible for this policy is the existing political issues between the agency and H;I officials. 1ometimes it is hard to separate work from personal life thus existing rivalries may hinder the implementation since relationship status had already been ruined from the start.

2. Restructuring of collecting employees. Pros The pro for this policy is that they only need to screen possible employees and screening is not a tiring #ob. (ll that is needed is dedication of screening staffs to make this policy possible. Cons ( hindrance available in the policy is the existence of reliable employees and the compliance of the taxpayers to the said work designated to the field staffs.

VIII.

RECOMMENDATION (s stated in 1ection 0 of the Republic (ct 8o. JD0D, known as the Tax Reform (ct of -334, It is hereby declared the policy of the 1tate to promote sustainable economic growth through the rationali ation of the Philippine internal revenue tax system, including tax administrationG to provide, as much as possible, an e&uitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activityG and to create a robust environment for business to enable firms to compete better in the regional as well as the global market, at the same time that the 1tate ensures that ;overnment is able to provide for the needs of those under its #urisdiction and care. Thus, it is the role of the state to implement and collect whatever tax is due so at the same time they could provide good service to the people. The task of collecting and implementing laws concerning the issue is the Bureau of Internal Revenue as mandated by the 8ational Internal Revenue 5ode of -334. This states that the Bureau of Internal Revenue shall be under the supervision and control of the 6epartment of $inance

and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of #udgments in all cases decided in its favor by the 5ourt of Tax (ppeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this 5ode or other laws. Thus, the Bureau has the power to implement, create and impose laws or regulation for taxpayers to follow. *hich makes the first policy alternative, implementing the manner of taxing, a move that will not violate their mandate and a work they are not new at and will not bring the BIR at s&uare one with. Improvising the manner of taxing is one of the #ob of the Bureau thus, it is #ust right for the agency to focus on this policy. 5reating a better and firm taxing system will not only benefit the BIR but also the taxpayers. The Bureau with a better manner of taxing can then provide a more trusting assessment to the tiangges that in vise versa will make strong owners believe that they really should pay taxes due to them. 1ince there had already been existing policy and only further study and analysis is needed for the BIR to come up with a better and #ust taxing system for the gray economy. The agency will then face amendments of existing policy which is a start for a better taxing system. If this policy would push through, BIR will be having more income collected thus it will be a domino effect. 9ore income from the taxing system will bring about better services offered by the Philippine government or even lesser borrowings from the outside market. *ith better services come higher trust from the $ilipinos thus, they may be given more reasons to pay taxes due if they see the effect of good collection and good governance. In addition, the Bureau of Internal Revenue may also take into consideration making better coordination with the H;I and restructuring of collecting employees as next step for a more clean work in the collection of taxes of the Bureau.

IX.

SOURCES CONSULTED

Bureau of Internal Revenue. Revenue Regulations 8o. -B"0CC2. (vailable online at ftp,!!ftp.bir.gov.ph!webadmin-!pdf!-0C4RR@0C-B"0CC2.pdf Retrieved Kanuary 0B, 0C-D Bureau of Internal Revenue. Revenue Regulations 8o. 0D"0CC2. (vailable online at ftp,!!ftp.bir.gov.ph!webadmin-!pdf!B33rrC2L0D.pdf Retrieved Kanuary 0B, 0C-D $arrell, 6. =0CCD> The hidden dangers of the informal economy. McK ns!" G#o$%# Ins& &'&!, The 9c:insey Muarterly, The online Kournal of 9c:insey N 5o. (vailable at (&&)://r!#oon!".*%&co+.co,/--.N!+./0-1.)2* Retrieved $ebruary -, 0C-D ;arcia"Bolivar, %. Informal economy: is it a problem, a solution or both? The perspective of the informal business. 8orthwestern Iniversity 1chool of Haw. Haw and Fconomics Papers. (vailable at (&&)://+++.$34 cons'#& n3.co,/2ocs/ n*or,%#)%)!r.)2* Retrieved $ebruary -, 0C-D 5hanco, B. =0CCD, Kune D> Underground economy dragging us down? Phil1tar. (vailable at http,!!www.philstar.com!business!0??CC?!underground"economy" dragging"us"down Retrieved $ebruary -, 0C-D Toyoken, 9.(, =0C-0, %ctober 00> n !verview of the "urking #conomy: The Underground #conomy and the $ational ccounts of the %hilippines. (vailable at https,!!www.academia.edu!DD?B0B3!(LResearchLonLtheLPhilippineLIndergroun dLFconomy Retrieved $ebruary 0, 0C-D A&&". 1ingson, R. =0C-0, 6ecember 0J> &etailers in and organi'ers of (tiangges( should issue receipts. (vailable at http,!!www.entrepreneur.com.ph!business" ideas!retailers"in"and"organi ers"of"23tiangges23"should"issue" receipts!page!Bertelsmann 1tiftung, BTI 0C-D O Philippines 5ountry Report. ;Ptersloh, Bertelsmann 1tiftung, 0C-D. 9uQo , (. )eyond survival * !rgani'ing the informal economy. International Habour %ffice ;enevaG Bureau for *orkers+ (ctivities I1B8 30"0"--0CB?"-

$arrell, 6. =0CCB> Tackling the informal economy. B's n!ss 5!!6 Petalbero, T. Bureau of Internal Revenue, 9anila, Fxaminer =through &uestionnaire communicated through mail, $ebraury 03, 0C-D>