Professional Documents
Culture Documents
ON PHILIPPINE SMEs
TAX PROFILE
Gerlin Catangui
July 2005
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”.
Abstract
This issue paper presents a profile of small and medium enterprises as well as the
issues surrounding tax policy, administration and compliance of SMEs. It summarizes
findings of the World Bank/International Finance Corporation ‘Doing Business 2006:
Creating Jobs’ that are relevant to SMEs and enumerates reforms to be considered for
improved SME tax compliance.
ATENEO-ECONOMIC POLICY REFORM & ADVOCACY
TAX ADMINISTRATION SECTOR
TIERG-USAID
Data/Statistical Deficiencies
Statistics on the census of establishments (done every 5 years) and the annual survey of
establishments are usually released 15-24 months after the year.
The scope and coverage of SME statistics are limited to 1) the number of establishments, 2)
employment contribution, 3) regional distribution, and 4) industry classification.
There are confidentiality clauses in census for firm level data, which the NSO has to honour.
The Philippines has a large section of small business constituting the so-called underground
or informal economy. This refers to the small-scale units in the national economy, which
produce and distribute goods and services without the benefit of official sanction or control.
Most do not register, do not keep books and do not pay taxes. They operate beyond the reach
of the law. The nature of this sector makes it very difficult to gather and process statistics on
them.
Evasion continues to be a major source of the leakage in revenues, however closer analysis
indicates that weaknesses in tax structure (non-indexation of excise taxes and proliferation of
tax incentives) also contribute.
Lack of a comprehensive SME strategy by the tax agency result in weak processes, and
hence high inefficiency and administration costs.
Small businesses face many different compliance obligations, but taxation is by far the most
critical. It has been estimated by the WB/IFC Doing Business study that taxation accounts for
roughly 94 hours per annum, involving 62 separate tax payments or interaction with tax
administration.
Economic theory suggests that stricter enforcement would significantly affect the economic
response of individuals in the underground economy - some firms would go bankrupt,
taxpayers would modify their labour supply, prices and income would change, and so on.
The tax base would clearly be altered because of stricter enforcement. Thus, even the
imperfect measures of tax gaps must be interpreted cautiously. (Brooks, 2001)
Payments
(number per
year)
Time to comply 94 249.9 197.2 431.5 529.3 241.9 331.7 394
(hours per year)
Total tax payable 46.4 31.2 45.4 50.2 52.8 35.1 35.3 58.1
(% gross profit)
Despite having high tax rates and fees the government still suffered from weak tax revenue
and a chronic fiscal deficit. This suggests that the government should strongly pursue
initiatives to improve tax collection efficiency, widen the tax base and plug tax leakages.
The Doing Business study suggests four ways to start reform:
Consolidate the number of taxes;
Cut back special exemptions and privileges;
Simplify filing requirements; and,
Broaden the tax base by keeping rates moderate.
Singapore 16 30 19.5
Thailand 44 52 29.2
Burdensome taxes are associated with more informality, less investment. They breed
corruption. Every point of contact between a bureaucrat and an entrepreneur is another
chance for a bribe. Confusion on voluminous, often contradictory rules creates room for
discretion. Faced with this, many entrepreneurs avoid the system altogether, operating in the
informal economy.
Firms in 90% of surveyed countries rank tax administration among the top five obstacles to
doing business.
Arguments for business tax reform usually emphasise rates, especially corporate income tax
rates. That is misleading on three counts:
1) Corporate income taxes are only a small share of the total business tax burden;
2) The complexity of tax compliance matters too; and,
3) Businesses care about what they get for their taxes.
distributes 50% of its profits as dividends to the owners at the end of the second year, among
others.
D. Other Reforms
Consider classifying SMEs as formal or informal on the basis of their potential ability to
comply with administrative procedures, and be subject to formal accounting and enforcement
principles.
Because SMEs are not homogeneous and non-compliance is not always synonymous
with size, a rigid grouping of taxpayers as small, medium, and large on the basis of
income may be deceptive from an enforcement viewpoint.
Indeed, some small taxpayers like corporate and professional entities are capable of
complying with the law. They are structured and have the capacity to keep the records
that conform to the accounting standards and corporate or tax laws.
SME-formal entities can be assisted to comply with voluntary or self-assessment
programs for all taxes.
Semiskilled staff in many small offices can be upgraded to implement simplified
audits and enforcement programs.
The task is to take the VAT record-keeping and simple control or audit programs
beyond the invoicing stage and apply them to a simple set of financial records for all
taxes and all taxpayers, especially SME-formal entities.
Consider using a well-managed presumptive tax regime for vulnerable SMEs to improve
compliance. Presumptive taxes are policy measures but may also be used as a feasible
administrative option for controlling SMEs. A summary of approaches to improving SME
administration and compliance is appended as Annex 1.
Consider using modified procedures or simple accounting, audit and enforcement rules to
SME-formal entities. This will make SMEs comply better and improve procedures in tax
offices.
Consider developing clear SME tax accounting guidelines to decrease compliance costs and
encourage them to meet their tax obligations.
SOURCES:
Berry, A., and Rodriguez, E. (2001) ‘Dynamics of Small and Medium Enterprises in a Slow-
Growth Economy: The Philippines in the 1990s’. Washington, D.C.: The International
Bank for Reconstruction and Development/The World Bank.
www.worldbank.org/wbi/publications/wbi3718.pdf
Brooks, N. (2001) ‘Key Issues in Income Tax: Challenges of Tax Administration and
Compliance’. ADB 2001 Tax Conference. Manila: Asian Development Bank.
Chan Robles Virtual Law Library Republic Act No.8289 Amending Republic Act
No.6977; R.A. 6810. The ChanRobles Group.
http://www.chanrobles.com/republicactno8289.htm
PricewaterhouseCoopers (2005) Doing Business and Investing in the Philippines. Makati City:
PricewaterhouseCoopers. (www.pwc.com.ph)
Social Weather Station (2005) ‘2005 SWS Survey of Enterprises on Corruption’. Quezon City:
Social Weather Station.
Tamangan, R., Josef, F and Habito, C. (2004) ‘Small and Medium Enterprise Development
Experience and Policy in Japan and the Philippines: Lessons and Policy Implications’.
PIDS Discussion Paper Series: 2004(30).
World Bank/International Finance Corporation (2005) Doing Business 2006: Creating Jobs.
Washington, DC: The International Bank for Reconstruction and Development/The
World Bank.