Tax financing a bankrupt state

Ninth part

TO minimize the irritants and problems that perenially arise in Bureau of Internal Revenue-taxpayer tax audit related engagements, institutional or structural solutions should be instituted by the BIR and other government agencies, with the assistance of taxpayers, advocacy groups, and tax professionals.

The BIR has long been exercising this coercive tax audit function. The problems attendant to this have also long been in existence. Though there have been improvements on the part of the BIR in terms of its performance in  recent perception surveys on curbing corruption and irregularilites in its operations, including in the tax audit process, these problems continue to persist.

The key to instituting reform in these situations is to enhance the governance in the system. These include promoting transparency and accountability; limiting BIR and taxpayer discretion and intervention in tax audit related matters; and strengthening the oversight and monitoring activities.

A structural reform that can be instituted towards this outcome is the adoption of  innovative digital measures. This includes an automated audit selection system. With a data-driven and risk based audit selection process in place, the determination of the taxpayers to be audited will be based more on the potential for increasing tax revenues and pinpointing tax issues, rather than discretionary judgement by the BIR official tasked to oversee the tax audit system.

Equally important is implementing an effective  monitoring of the tax audit processes and engagements, such as the electronic Letter of Authority monitoring system. When I was the BIR Commissioner in 2010, I instituted an electronic monitoring and administration of the Letter of Authority processes. In Revenue Memorandum Order No 44-201 and 62-2010, the first digital system on Electronic Letter of Authority Monitoring system (e-LAMS) was adopted. This was intended to automate the issuance of the LOAs and to secure the integrity and credibility of the BIR tax audit process. To date, this e-LAMS continue to be operationalized by the BIR.

I note, however, that after more than 12 years in use, the e-LAMS should be upgraded to include other functionalities, such as more data driven decision making and even the use of artificial intelligence in the pinpiointing of audit issues to be investigated and assessment of examination results. Presently, there have not been so much applications put in place to enhance the post audit monitoring and assessment process.

This phase is important in the tax audit cycle to ensure that an adequate tax audit has been carried out that brings in the commensurate tax audit revenues; tax loopholes are identified and plugged; data are compiled for preparation of future risk based and data driven audit selection criteria; the recommendations for tax assessments are reasonable and reduce cases of arbitrary or frivolous findings; and be the basis for the performance evaluation of BIR officials and examiniers involved in the process.

These recommendations are doable. There are available best practices in digital technology and tax audit practices that can provide inputs for the BIR to effect these much needed innovative digital solutions to its tax audit system. With these immediately put into place, the BIR can alleviate the precarious situation of a bankrupt state requiring tax financing.

To be continued.

Joel L. Tan-Torres is the Dean of the University of the Philippines Virata School of Business. Previously, he was the  Commissioner of the Bureau of Internal Revenue, the chairman of the Professional Regulatory Board of Accountancy, and partner of Reyes Tacandong & Co. and the SyCip Gorres and Velayo & Co. He is a Certified Public Accountant who garnered No. 1 in the CPA Board Examination of May 1979.

This column accepts articles from the business and academic community for consideration for publication. Articles not exceeding 600 words can be e-mailed to jltantorres@up.edu.ph.