Tax evaders, smugglers getting more sophisticated

By Iris C. Gonzales, The Philippine Star

Posted at Jan 02 2012 07:12 AM | Updated as of Jan 02 2012 10:29 PM

MANILA, Philippines - When President Aquino was elected into office, the nation wrapped itself in euphoria. Filipinos were filled with hope as Aquino promised that he would finally be that leader the country needed.

On June 15, 2010, under a gloomy weather, and as the whole nation listened in bated breath, Aquino took his oath at the Quirino Grandstand and promised that his administration would be free of corruption and would only tread the clean and right path - a governance framework he dubbed “Tuwid na Daan.”

He said the excesses of previous regimes had no room in his administration and that he would make the bold move of rectifying the bad practices.

There would be no new taxes as he stressed that he would focus on fixing the country’s tax leaks.

One year and five months into his term, the fight against tax evaders and smugglers remains an uphill battle.

Officials from both the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) and from the Department of Finance’s Revenue Integrity Protection Service (RIPS) told The STAR that the schemes of tax evaders and smugglers have become more sophisticated and as such more difficult to fight.

RIPS executive director Romeo Tomas said the modus operandi of public officials have become more sophisticated as anti-graft agencies have also become tougher.

Topping the list of schemes used by corrupt officials is the formation of dummies.

Often these individuals set up corporations, law offices and third persons for their properties so that they do not have to declare these properties in their statement of assets and liabilities management (SALM).

The dummies become the owners on paper of land assets, vehicles, and other accumulated wealth instead of the individuals themselves.

Along this line, the offenders also put the names of their illegally acquired wealth in their relatives’ names.

Tomas said there are many cases wherein the assets are listed under the names of a relative’s law office so that the link to the real owners is almost impossible to prove.

Those who declare their properties in their SALNs grossly undervalue their properties, which is another common scheme.

Based on the different cases it has filed, RIPS has found out that it is common for public officials to declare only a portion of their land properties in their SALN or reduce the value of the properties.

Wire transfers and money laundering are also common schemes used by public officials to conceal their wealth. These officials usually keep their money in banks in Hong Kong or Singapore.

“Some go out of their way to transfer money to other countries such as Hong Kong or Singapore,” Tomas said, adding that this makes it more difficult for authorities to trace the money.

For luxury vehicles, the practice among public officials is to put their fleet of expensive cars under the name of their children or trusted friends who are not from government.

Tomas cited an instance wherein a child was barely 23 years old and already has a number of luxury vehicles to his name.

Methods of tax evasion


The methods of tax evasion are also more sophisticated now, said BIR Deputy Commissioner for Legal and Inspection Group Estela Sales.

In a recent interview with The STAR, Sales said the BIR is trying to fight tax evasion every step of the way through the agency’s Run After Tax Evaders (RATE) program.

One common method of tax evasion is the non-issuance of receipts. This is the simplest form of evasion wherein the business owner or establishment does not issue receipts for the goods or services it has rendered.

Through non-issuance of receipts, the seller or business establishment is able to reduce the volume of declared sales as well as the tax liability.

Another common scheme is under-declaration of sales and over declaration of expenses so that the business would be able to deduct more through input value added tax (VAT).

Under BIR rules, a business establishment may deduct through input VAT the cost of its raw materials and supplies.

Under the amended VAT law of 2005, businesses can avail of tax credit on input purchases. These are the VAT paid for purchases of raw materials, supplies and capital goods. There is a cap on VAT credit for inputs up to 70 percent of output VAT. To claim the tax credits, companies must present to the BIR invoices, which would detail their purchases.

VAT is the tax slapped on consumption and is levied on the sales of goods and services at each stage of production and distribution process.

It is collected using the invoice of the tax credit method. In computing for one’s VAT liability, a VAT-registered taxpayer can deduct input tax from output tax. Output tax is the VAT due on the taxpayer’s sale of goods and services

The more glaring form of tax evasion, Sales said is the non-filing of returns. It is also one of the easiest forms of tax evasion, she said.

Going along with this is another glaring form of evasion, which is the non-registration of the business.

There are also more sophisticated forms of tax evasion, Sales said.

One such scheme is the use of non-existent suppliers. Some businesses use smuggled raw materials for their supplies to save on costs.

Sales said that when the BIR asks for receipts or proof of payment to suppliers, these businesses would have nothing to show and would instead say they paid in cash.

“For example, one taxpayer said he paid in cash amounting to P20 million for his company’s supplies. How can you pay P20 million in cash?” Sales said.

Tax evasion is usually made in connivance with BIR insiders, ranking deputy officials said.

This is why BIR Commissioner Kim Henares said that in the agency’s fight against corruption, it is doing two approaches - external and internal.

“Internally, it is changing 107 years of bad habits,” Henares said.

When she took over on June 30, Henares made it clear to her people that she would not tolerate the “bad habits.”

She put in place a so-called performance management system wherein BIR employees know exactly what is expected of them.

“There will be a contract between BIR as an institution and individuals as employees stating what the performance indicators will be. For me, what’s important is that everyone’s contract will be related towards our goal,” she said in an interview months after she took over the agency.

The government’s main revenue agency has a staff of 12,000 people, headed by Henares and six deputy commissioners for the different groups: -- the Information Systems Group; the Legal and Inspection Group; Operations; Resource Management; Special Concerns and Tax Reforms.

The list of internal reforms is endless but one critical area of reform is the audit system a deputy commissioner of the BIR said rampant corruption happens in the audit system.

Auditing a company happens at random. Officially, a BIR examiner audits a company’s books if he or she suspects that the company may be dodging its tax obligations.

However, the finance official said the examiner could also choose to audit the company simply to harass the owner - especially if he thinks they have the capacity to pay a substantial amount of “grease money.”

Explaining the audit process, Wendell Ganhinhin, senior tax manager at the auditing firm Punongbayan & Araullo said in an article that the purpose of an audit and investigation is to uncover violations against and non-compliance with laws and regulations.

“In the process, even compliant and law abiding taxpayers have to go through an ordeal to prove their innocence if they are under suspicion,” said Ganhinhin.

With the burden of proof generally resting on the taxpayer, long hours and many resources often need to be devoted to refuting findings of discrepancies.

He also maintains that there could be inefficiencies in the audit approach and the lack of necessary tools, such as computers, databases and online references which prolong the process.

“Hence, the audit period becomes a long agonizing process, which some taxpayers describe as a dreaded nightmare that they would not wish to experience again,” he said.

It is because of this that the taxpayer sometimes chooses to ‘settle’ or enter into ‘under the table’ deals with the examiner to make “things easier for his business,” a Department of Finance official said.

BIR Deputy Commissioner for Operations Nelson Aspe said that as part of the fight against tax evasion is concerned, the BIR also does regular rigodon or revamp of its examiners. Examiners or those who examine the books of companies are considered the front liners of the agency. They are the ones who deal with businesses.

There are different ways by which BIR examiners are co-opted so that they would turn a blind eye on the irregularities of tax evaders.

The bribes can range from P100,000 to a million, depending on the offense and the net worth of the company seeking to bend the rules, a BIR insider said.

No examiner accepted The STAR’s request for interviews. Aspe said it is difficult to prove connivance between examiners and businesses. He said there is usually no proof.

At the same time, he said there are dedicated and well-meaning examiners and BIR employees who fulfill their duties well.

Henares said it’s a long way to go in reforming the BIR but stressed that the situation is not hopeless.

Whether or not President Aquino’s Tuwid na Daan framework of governance would materialize and bear fruits remains to be seen.

To be continued