Taxing professionals

Posted: September 16, 2011 in BIR, BIR Commissioner Kim Henares, Bureau of Internal Revenue, income taxation, Taxation

The Bureau of Internal Revenue (BIR), the country’s premier revenue collection agency, announced today that tax evasion charges were filed against a well-known election lawyer and three other professionals.

The lawyer purportedly earned only P1.38 million in 2010 but was able to purchase a condo unit in Makati City valued at P53.3 million, according to BIR commissioner Kim Henares.

BIR Commissioner Kim Henares

Levying the proper taxes on the income of professionals (lawyers, doctors, accountants, engineers, architects, and entertainers, among others) has been a problem for quite a while.  These professionals do not, as a matter of default, issue receipts to their clients.  If there was proper documentation, then the BIR can properly audit their income and collect correct taxes.

Why don’t professionals issue receipts?  Because their clients do not, as a matter of default, ask for these same receipts.

There’s an alignment of interests on both sides.  When the professional does not issue a receipt, he can understate his income and reduce his tax obligation.  If the client does not ask for a receipt, she will pay a lower professional fee.

Tax authorities estimate that there are 1.7 million professionals in the country who paid only P9.8 billion in taxes in 2010 or an average of only P5,764.00.  Commissioner Henares estimated that based on their income levels, each professional should be paying P100,000 in taxes on the average.  The bulk of income taxes and profits were collected from fixed wage and salary earners.

The new cases filed today against the professionals resulted after BIR investigators posed as patients or clients and observed that no receipts were issued.  This approach is too micro.  A better macro approach is to convince and mobilize citizens to demand receipts from professionals.  Left to their own devices, the latter will not voluntarily issue receipts.

How do we break the alignment of interests between clients and professional regarding receipts?  First, we can encourage clients to ‘shop’ and compare professional fees so the threat of fee increases in case receipts are asked could be moderated.  Second, clients can be educated that the non-issuance of receipts by professionals is actually detrimental to their welfare.  Understatement of professionals’ income ultimately leads to lower tax revenues that in turn mean a smaller volume of public goods and social services.

Of course, the better clincher for ordinary citizens to demand receipts is the timely and palpable conversion of tax monies into public goods.  Absent that, they will continue to behave as before.

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