#AskTheTaxWhiz: Can we really stop corruption in BIR?

Dear Mr. Tax Whiz,

When President Duterte called the Bureau of Internal Revenue (BIR) as one of the most corrupt government agencies, I told myself, “Yeah right! We already know that!” But after hearing his plan to abolish BIR, I asked myself, “Is he serious? Can we abolish BIR?”

Then I saw this Facebook post from Salve Duplito of ANC On The Money, “This is a question that has haunted me all these years: Is it possible to fix our tax system? We might need superhuman strength to do that and people who are not quite right in the head to take on this reform! Haha, good thing someone like Mon Abrea is willing to throw himself in front of the tax bullet train. Peace Mon! ‪#‎SalveSays”

Can we really stop corruption in BIR? Are you for real or are you just being optimistic? Don’t get me wrong. I have supported and voted for President Duterte hoping for a real change, but corruption in BIR seems to be a hopeless case.

As a former BIR examiner, I am sure you are very much aware how the corruption works in all Revenue District Offices (RDO). Somebody told me you have published an article about corruptions in BIR, but this is what I got when I tried searching the Manila Bulletin archives to share the link: page not found.

I hope you can share again the content of that article entitled, “If the price is right” and “Grave reform.” President Duterte needs to know this. The new BIR Chief must be really honest and good to stop corruption in BIR. Please help BIR. Please help us stop corruption in BIR!

I have been paying taxes for more than 30 years. I have been harassed several times by BIR examiners until I learned the trick and started setting aside budget for BIR examiners. Almost everyone I know does the same thing, so I guess it’s the best thing to do.

DU30

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Dear DU30,

To be honest, I cannot stop corruption in BIR. And I don’t have intentions of being the superhero to put down the “bad guys” and save the day. But the new BIR Chief can consider suspending audit to focus on broadening the taxpayer base and improving the voluntary compliance without harassing the taxpayers with penalties and compromises.

I felt bad for the honest BIR employees I know who were never recognized for their hard work but now have to cover their faces for the shame of being part of the most corrupt government agency according to President Duterte.

But this seems to be an open secret. Like you, everybody knows how corruption works in BIR. I was honestly surprised when a lot of BIR examiners reacted when Manila Bulletin published my article in February 2014.

Sorry but you are part of the reason why there is corruption in BIR. Not paying the right taxes is absolutely wrong! Bribing BIR examiners makes it worse. There is nothing good or right about it.

Here’s the excerpt of the article you were mentioning:

“Corruption transpires during the investigation of businesses by the revenue officers. Examiners, supervisors (assessment section), assistant RDO, revenue district officers (RDO), directors, and some commissioners—these are the specific revenue officers involved in the scheme. No examiners, supervisors, RDOs and directors can claim he was never involved in this scheme. Is there any policeman who has never touched a gun? Is there any fisherman who has never tasted the fresh or sea water?

Every year, the BIR conducts tax examinations to most business establishments. Initially, the BIR issues a letter of investigation.

The main source of corruption is the Letter of Authority (LA) because this is the normal way of authorizing the audit.

In the eyes of the revenue officers, LA means money. With LA, revenue officers are like stockholders of every corporation. In some cases, when a revenue officer receives an LA, he is already borrowing money for the casino because he is sure that on or before 120 days, he would have money, specifically from that LA.

LA is like a certificate of deposit. It’s like a check. It reeks of money. It is money. Revenue officers call it “the bread and butter.”

Examiners and group supervisors quarrel for LA. Each lobbies, some even make advance payment to their RDO just to get the taxpayer they desire to audit.

The LA is assigned to the examiners with a group supervisor. An examiner can have several LAs at the same time, more or less 10 LAs per examiner, depending on the number of examiners in a district. A group supervisor can have more than one group of examiners.

The transaction is straightforward and simple. The audit is conducted by the examiners. The findings are presented to the taxpayers, often with the supervisor. The taxpayer arranges schedules with the supervisors to discuss the settlement, which includes the amount to be shown on the receipt and the amount that goes to “the boys”—the bribe money.

The supervisor discusses the settlement with the RDO. If approved, the payment form is prepared and signed by the RDO, and the taxpayer pays with the bank. The taxpayer returns to the supervisor; with him are the payment form and the money for “the boys”. In some cases, the taxpayer just gives the whole amount to the examiner or supervisor and lets them pay the bank. The revenue officer will just send the original copy of the payment form to the taxpayer after payment with the bank.

The supervisor divides the money among himself, the examiners, and the RDO. The RDO divides the money given to him by the supervisor. He gives to the assistant RDO and to the director. And finally, the director distributes the money to the commissioners of his choice.

These are the common scenarios that you would see almost everyday at the BIR. There are some districts where the supervisor reports the money to the assistant RDO. The reason why the usual distribution of money is from the supervisor to the RDO and not to the assistant is because of “Bukol”. This is a common word inside the BIR which refers to the amount of money not reported by one to another.

At first, I couldn’t believe what I saw. I knew all this was illegal, but if it’s illegal, then why was it happening plainly and nobody seems to care? Regardless of age—from the youngest revenue officers to the retirees—everyone is engaged in the scheme. I see even those appearing to be religious individuals involved in the scheme. They conduct masses at the office, and they themselves are involved in this detestable scheme of corruption.”

Part 2

“But the main issue here is that no one can prove it except through entrapment. There are no audit trails. How can anyone prove it? Money transfers from one hand to another in seconds. Transactions occur anytime and anywhere. It happens inside the BIR office. It happens at the lobby. Transactions take place at the revenue officers’ car. It happens at the restaurant near the BIR offices. Anywhere, the transactions transpire.

That’s why I think the only way to address this issue is to pass a law requiring all personnel in that position to be subjected to regular audit of their bank accounts and lifestyle checks. It must be on regular basis and not on random or special occasions.

The government’s loss from this scheme is tremendous. There are about 2,000 examiners, including supervisors across the country. If each gets P1,000,000 each month, in a year the total loss of the government must be P24,000,000,000. This is every year. It happens every year.

Internal revenue agents at work on some 600 stalls in Manila’s Binondo and Divisoria districts, on suspicion that the establishments failed to pay the proper taxes.

But, take note that this is not the actual loss by the government. It is just a portion of the total amount of tax that must be collected for the government.

It’s not surprising that majority of the taxpayers intentionally don’t pay the correct taxes simply because of this environment.

Let’s take for instance the case of the contractors, particularly, the government contractors.

There are expenses that cannot be deducted from the gross income. That’s bad for the business because it leads to overpayment of taxes. An example of this expense is the kickbacks. It’s common knowledge that most government projects have kickbacks. The contractor cannot deduct this, resulting to higher taxes.

Another problem of the contractors is that they cannot transact with the government unless they have tax clearance. One of the requirements for the clearance is that a taxpayer must not have a pending case with the BIR.

This can be done through an “assessment”. Arbitrary assessment or not, it is still an assessment. The taxpayer must prove it wrong first before it can be put aside. If a taxpayer refuses an offer of the revenue officers for settlement, they will issue an assessment. Whether or not it’s valid, the taxpayer is obliged to deal with it first before he can secure a clearance. Consequently, the taxpayer needs to secure the services of a lawyer. That means additional expenses.

It is, therefore, wise for a contractor to under-declare transactions either by decreasing his gross income or increasing his expenses or both.

A 50% or more under- declaration is not surprising. This makes businessmen feel safe. When the BIR comes, they settle for the 50 to 75% of the under-declaration. If you are the businessmen, why file your taxes correctly? You will just put yourself in trouble. This has become the attitude of the taxpayers towards taxation.

Let’s set an example. If the total amount of tax to be paid is P100, the taxpayer will declare P60 resulting under-payment of tax amounting to P40. The examiners will settle for P20 and out of this, P10 goes to the government and the other P10 goes to the revenue officers.

While the agency urges Filipinos to pay the right taxes, its officers themselves are involved in corruption.

The amount shown at the beginning amounting to P24 billion represents the P10 stolen by the revenue officers. Can you imagine how much the actual loss of the government is? That P10 represents 25% of the total loss by the government. The 100% must be P96 billion.

But it doesn’t end there: How about the amount that goes to the assistant RDO, RDO, assistant director, director, and some commissioners? The amount taken by these officers are not yet included in the above computation. This is how serious this problem is.

The salary of Revenue Officer I, including the examiners, is just about P13,000 gross of deductions. But look around the BIR offices and notice the brand new cars in the parking lot. Who owns them? How can an examiner with such salary be capable of buying these kinds of cars?

Recently, the BIR has been going after the big issues. When the case of the chief justice broke out, there was the BIR. When the PDAF scandal broke out, there was the BIR. There’s also the case of Manny Pacquiao. That’s the magic trick—leading the eyes of the audiences to one direction, as the other hand performs the trick. It’s okay to ride with these issues, after all there’s a legal and factual basis, but it must be assured that the real issues are being addressed—and that’s the corruption at the BIR.

The BIR has filed tax evasion cases against countless taxpayers. They are the ones who refuse to settle with the revenue officers. Some of them are just sacrificial lambs. Others are the enemies of the administration. That’s sad.

I cannot undo the past. I want the country to prosper—the real kind and not the kind that’s determined by figures, nonsense surveys, standards used by the government which are far from the truth. Is this the kind of environment the next generations shall receive? Until this issue is properly addressed, the country will never kick off.

Taxes, the main source of revenues of the government, is like the engine of a car. How can a car run fast with a wrecked engine? You can beautify the body by painting it, changing the seat covers, and so on and so forth, but they are all useless if the car won’t run properly.

The corruption at the BIR cannot be eradicated alone by the Commissioner, the Secretary of Finance, not even by the President. It requires law. It requires the coordination of the Congress, Senate, and the Executive. There must be a law that would strictly monitor the revenue officers, and the President must exert the effort because he is the highest authority.

The connivance is within and outside the bureau. This is a call for challenge for the Professional Regulation Commission (PRC). Most accountants don’t value the “Auditor’s Independent Report” anymore. There are those who express an “unqualified opinion” that even the financial statements are incomplete. They don’t care whether the financial statements are totally distorted. They connive with the revenue officers because they get five to 10 percent commission for every settlement; consequently, it does not matter to them whether the financial statements are fairly presented or not.

This is also a call for the Board of Accountancy. The time will come that our “Auditor’s Independent Report” will lost its credibility. Who will rely on the works of the accountants in the future?

“Kung walang korap, walang mahirap; tuwid na daan” are more than words. They require actions. The fruits of those words should be beneficial to the people; not just to the leaders and their political party.

If the taxes collected are insufficient, the normal course of the government is to either increase tax rates or the coverage. Electricity and gasoline used to be VAT-exempt. The most basic commodities that the poorest among us can’t almost afford were included among the VATable commodities. The real issue is not the tax but the proper collections.

Increases in tax rates and coverage are useless if the actions of the revenue officers are still the same.

I love the BIR. This is not to destroy it but rather to clean it. The current culture at the BIR is like termite in a house.

The BIR says, “Run after the tax evaders,” but the real tax evaders are inside the BIR. All revenues, whatever the source—legal or illegal—is subject to tax. How much of what the revenue officers have declared on their income tax return really is compared to their bank accounts and properties? They are the root of tax evasion. They teach the taxpayers to evade taxes. More often than not, the issuance of Letter of Authority (LA) is just for formality. A taxpayer is informed in advance that an LA will be issued, and the amount of settlement is already arranged.

LA is not just the source of corruption. Corruption takes place even in Tax Verification Notice (TVN) and Letter Notice (LN). LA and TVN, in process, are just the same. They are both authority to investigate. Even in LN, corruption takes place. The revenue officers tango with the taxpayers. They even fake the supporting documents to cover up the discrepancy. Often, the money involved with LN is bigger than LA, especially if it is the first time a taxpayer received a notice from the BIR.

Another source of corruption at the BIR is the transfer of property mostly by way of deed of sale. The taxpayers under-declare the amount of sale and connive with the revenue officers. This is almost impossible to resolve. One must really audit the buyer or the seller if they have businesses to see how much really came in and out of their bank accounts. There’s also a need to look into the lawyer’s records. But the point here is, it’s almost impossible to uncover. The only remedy is to really look into the bank accounts of the revenue officers.

During the time of, I think Erap, some revenue officers made a rally against this scheme. They shouted against the connivance of these revenue officers with the taxpayers and accountants. It was in the news. Nobody cared. Until now, I see no action from the government.

Those who went against this scheme were displaced. Most of those who went to the rally were displaced. Some are still Revenue Officers while those who went with the scheme became RDOs, promoted several times.

And what about “compromise”? The BIR can enter into compromise agreements with the taxpayers. “Compromise” simply means that instead of filing a case against a taxpayer, the BIR and the taxpayer agree that the latter will pay, aside from the basic tax, surcharge, and interest, a compromise penalty so that the former will no longer file a case.

Sadly, the term is used by the revenue officers in bad way. It is the word used by the revenue officers to offer illegal settlements with the taxpayers. The taxpayers think that they are doing a compromise with the BIR. They are not. They are doing illegal activities with the revenue officers.

I hope this information enlightens everybody, especially the lawmakers, to understand, why, despite so much effort, it seems very difficult for the government to move forward. I further hope that, with this, they can make laws to address these concerns.

I hope the people will also fight against this scheme at the BIR.

Who I am is not important. The issue is not about me but the corruption at the BIR. How will this be addressed?”

Now, it’s up to the next administration to challenge the corrupt system that is not exclusive to BIR examiners. The corruption in BIR is embedded in the system where everyone participates and benefits.

Unless we decide to stop it and to do what is right, it will remain in our system.

Got a question about taxes? #AskTheTaxWhiz! Tweet @rapplerdotcom or email us at business@rappler.com. – Rappler.com

Mon Abrea is a former BIR examiner and an advocate of genuine tax reform. He serves as chief strategy officer of the country’s first social consulting enterprise, the Abrea Consulting Group, which offers strategic finance and tax advisory services to businesses and professionals. Mon’s tax handbook, Got a Question About Taxes? Ask the Tax Whiz! is now available in bookstores nationwide. Follow Mon on Twitter:@askthetaxwhiz or visit his group’s Facebook page. You may also email him at consult@acg.ph.