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| Reference Material |
| Expanding and Enhancing the Usage of the TIN (Tax Identification Number) System in the Philippines by Jorge Baviera and Amado M. Mendoza, Jr. Version as of: 5 July 2004 Background Tax collection in the Philippines is poor principally because of the weakness and corruption of its tax collection agencies and the equally criminal propensity of wealthy taxable economic sectors to evade taxation. In a report of Morgan Stanley published by the Far Eastern Economic Review during the second half of 2002, it was estimated that the country loses 10% of its gross national product (GNP) to tax evasion each year�or about $7.6 billion in nominal 2001 US dollars. This adds up to $205 billion from 1965, the year when late dictator Ferdinand Marcos started his first term as Philippine president. According to Morgan Stanley, �this sum is enough to retire all debt�foreign and domestic�in the combined government and private sector and render the country a strong net creditor nation.� On an annual basis, the Philippines collects around 10% of its GDP in revenue, compared with 25% in Malaysia and 17% in Thailand. TAN and De DIOS (2002, 10-12) observed that one of the most obvious reasons for weak economic performance in the Philippines is �the obvious shortfall in public infrastructure� that in turn is related to �the government�s perennial inability to raise internal resources�. Most Philippine governments, especially after Marcos had struggled with a fiscal dilemma: �on the one hand, they recognize that long-term growth requires the provision of critical infrastructure and therefore greater spending. On the other hand, with taxation performing poorly, however, and an annual budget that is almost 90 percent pre-empted by payrolls and operating expenses, there is little room to expand infrastructure spending without risking a growing budget deficit. With the latter, however, comes the ire of multilateral lending institutions like the IMF and private foreign lenders, who then threaten to raise the premium on further borrowing. Recent Philippine administrations have taken the modest option of limiting spending rather than risking a yawning deficit. Clearly, however, while this may earn the applause of a gallery of foreign investors and bondholders in the short run, it represents no solution for Filipinos in the long term to spend only 2-3 percent of GNP annually on public infrastructure. The obvious solution�namely to work for a drastic improvement in tax collections�has been a sonorous mantra for every administration. Yet none has succeeded in developing the will to confront the resistance of corrupt revenue bureaucrats or the courage to displease rich and well-connected tax evaders who are potential contributors to political campaigns.� We argue that the key towards enhancing the tax collection effort in the Philippines is to reduce the scope and/or size of the criminal and informal sectors of the Philippine political economy and enlarge its formal sector. [1] The simplest definition of the formal economic sector is that it issues receipts and therefore is amenable to proper tax assessment. [For this reasons, licensed professionals such as lawyers, accountants, physicians, etc. who do not issue receipts for their professional fees are engaged in quasi-formal, quasi-informal or even quasi-criminal activity.] The informal sector engages in economic activities that are quite similar to those in the formal sector such as petty manufacturing, trade, financial (think 5/6 moneylending) and other services. But they do not issue receipts for monies received and do not pay corresponding income taxes to the authorities. However, they actually pay implicit taxes to criminals both in and out of government for protection and/or toleration. Thus we can say that they may want to pay the proper taxes to the proper government agencies provided they enjoy the security and legal protection given to economic actors in the formal sector. In short, 'informals' ultimately want to be members of the formal sector. While the criminal sector also does not issue receipts, it is different from the informal given the anti-social nature of its activities. The key difficulty in the Philippine political economy is the inter-penetration of the all three sectors. While formal, informal, and criminal economic activity may be conceptually distinct, a particular economic actor can engage in all three types of activity. Formal economic actors like banks and stock brokers can also be employed for criminal activity such as money laundering and insider trading. Public school teachers can sell tocino (cured meat products) and RTW clothes on the side to supplement their incomes in the formal sector. Criminals may want to legitimize their ill-gotten wealth by investing in legitimate enterprises such as restaurants. Or these restaurants could still serve as fronts for criminal activity. Informal street vendors, i.e., siopao (dumpling) vendors, are now the latest 're-sellers' of shabu (ephedrine-based drugs also known in the streets as �crack�, �ice�, etc.). Despite this inter-penetration, what is crucial is the strategic direction of each economic actor. It is argued that: � Formal actors generally want to remain in the formal sector even if they engage in informal and criminal activity. They want to enjoy the security and legal protection of their status as formal economic actors. � Criminal actors, especially the 'die-hards' as opposed to the 'reluctants' (poor people who turn to crime) want to remain in the criminal sector because they are enamored by the fantastic incomes earned in that sector. � The swing vote will be supplied by the informal actor. We believe that the informal actor wants to join the formal sector in the long run provided he gets legal protection and security of tenure. He does not want to continue paying implicit taxes (the bribe) and still be insecure because of the informal nature of his livelihood. The criminal sector could be pushed back by the alliance between the formal and informal sectors through innovative policy and program interventions. � Ultimately, the strength and stability of a democratic republic depends upon the resources it can mobilize to provide crucial public goods and services to tax-paying and law-abiding citizens and non-citizens doing business within the national territory including property rights and police protection, national defense and preservation of peace and order, justice, dispute-settlement and contract-enforcement systems, among others. [2] It will also have resources to provide for playing-field leveling resources and programs for the poor in the rural areas and in the urban ghettoes all over the country, such as farm-to-market roads, post-harvest facilities, schools and hospitals, ports and airports, telecommunications, power, irrigation systems, low-cost housing, solid waste management systems, and the like. Concept Every Filipino 18 years and above is required to/or should have a Tax Identification Number (TIN). The assumption is that he/she is or will be gainfully employed and must therefore pay the appropriate direct taxes. The TIN system however could be used for a number of other purposes beyond mere identification of a particular taxpayer. In fact, it can be used to enhance tax collection itself especially if the TIN is used not only for purposes of identifying the taxpayer not only for tax-related transactions but all other transactions with public and private agencies. In short, the TIN can serve as the national ID. In addition, it could be used as such without being encumbered with the political problem of selling it as an anti-terrorism device. The TIN system can therefore be seen as evidence of membership in a particular nation-state, of citizenship in a given republic. The citizen exercises his rights and performs his responsibilities through his TIN. He likewise accesses public goods and services through the TIN. It is also a device to ensure compliance with the Republic's laws, including tax and penal codes. To illustrate a point, if a person habitually travels abroad but evades payment of taxes, monitoring his behavior on just these two fronts can possibly yield a tax evader, a corrupt public official, a smuggler, a money launderer, a terrorist, or any law breaker. Traveling abroad requires a certain level of taxable income. If a habitual international traveler does not pay his taxes, this either means that he does not really pay his taxes (the crime of tax evasion) or he could be engaged in either criminal, informal, or sub-rosa economic activity (crimes other than tax evasion) to support his international travels. Using the TIN of an individual also as his passport number will yield these results. Self-employed professionals (doctors, lawyers, accountants) who do not issue receipts for their professional fees could be also 'captured' with this system especially if the TIN could also serve as the credit card number. A professional who splurges using his credit card but does not pay the appropriate taxes will trigger 'red flags' within the TIN system. Subject to some modifications, the TIN system can cover non-citizens who are either permanent or transitory residents of the Philippines, who also are subject to Philippine tax laws and other municipal laws applicable to the Philippine jurisdiction. Elements of the Concept 1. The TIN can serve as: a. passport number b. voter's identification number c. social security number (especially if Social Security System and Government Service Insurance System pension systems are unified); including health insurance (PhilHealth) d. residence tax certificate number (a.k.a. cedula) e. driver's license f. professional regulation number g. with some modification and negotiation with private banks and other business firms, credit card number and cell phone number 2. If the TIN is used for these various purposes, the following advantages could be reaped: a. the efficiency gains with the use of a single number for a diverse range of transactions with public (government agencies) and eventually, private agencies; b. its positive impact on tax collection c. its positive impact on law enforcement and the fight against criminality/terrorism d. its positive impact on the provision of public services to citizens e. its positive impact on the integrity of elections Implementation Plan 1. The starting point for the TIN system is an authenticated birth certificate. For every authenticated birth certificate, a unique TIN will be issued to an individual. For non-citizens, a passport will be required for the issuance of a unique TIN. When an individual dies, his TIN is expunged from the national data bank. 2. For this reason, the lead agencies for the TIN system are the National Statistics Office (NSO) and the Bureau of Internal Revenue (BIR). 3. Each individual (citizen and non-citizen) will be issued a swipe-able, machine-readable 'smart' TIN card with an imbedded data chip (that can include the individual's photograph, fingerprints, retina, blood type, allergies, etc.). In this manner, the TIN cardholder cannot easily alter his particulars; he carries with him his relevant medical information that could be used during medical emergencies, among others. Furthermore, the information imbedded in the card should be update-able so that if a card holder contracts a communicable disease or is confirmed to be HIV-positive, he is automatically disqualified from donating blood or any other internal organ. 4. The TIN system, even if used as the national ID, should not be sold politically as an anti-terrorism or anti-crime measure. It should be sold first as a means to efficiently provide public goods and services to citizens; second, as a means to enhance tax collection; and, third, as a tamper-proof voter's identification card to ensure integrity of elections, including casting and counting of votes. To illustrate, a Filipino seafarer can vote even if he is out at sea using his TIN card through e-mail. His vote could be authenticated by computers using a public key encryption technology and other safeguards (e.g., retina matching/verification). Accordingly, votes could be counted efficiently and the time distance between the actual act of voting and declaration of winner could be drastically reduced. In this manner, the possibilities for electoral fraud could likewise be reduced. 5. The enhanced TIN system will be implemented by an inter-agency body to be led by the NSO and the BIR subject to the oversight of an independent multi-sectoral citizens� commission that is accountable in turn to the Supreme Court of the Philippines. Proper safeguards will be instituted to ensure the integrity of the data-bank and provide a measure of protection to the privacy of each and every individual TIN cardholder. Access to an individual's databank/personal records/data will be restricted and could be accessed by third parties under circumstances to be defined by law through a court order. |