TAX COMPLIANCE

Relationship

Taxpayer Tax Authority

(Bureau of Internal Revenue)
Type (Sole Proprietor or RDO 132
Professionals) compensation RDO 113
income earners?
Capitalization
Number of years in
business/profession
Incentives
Susceptibility to Bribery
Level of Supervision
Legal/Administrative Tax Cost-Benefit of
Determinants Compliance
Enforcement Programs
Moral Rules &
Sentiments Income Tax
Perceived Fairness VAT
OPT
WHT
 Tax Compliance

Legal/Administrative Determinants Income Tax

Moral Rules & Sentiments VAT
Perceived Fairness OPT
WHT

Profile of Respondents:

Type (Sole Proprietor or

Professionals)
Capitalization
Number of years in
business/profession
Conceptual Framework. There are two parties in the dynamics of tax

compliance whose roles and relationship is formally dictated by the law in the

form of the 1997 National Internal Revenue Code, as amended, also known as

the Tax Code. These parties are the Taxpayers and the Tax Authority. Section

(22)(N) of the Tax Code, as amended, defines the taxpayer as any person

subject to tax as imposed by the Code. The Philippine tax authorities, in

particular the Bureau of Internal Revenue (the Bureau), is responsible for the

efficient collection of taxes in return for financing public expenditures. Hence,

it is continuously improving its endeavors to enforce the rules and laws of

taxation with emphasis on the facilitation of taxpayer compliance as well as

curbing tax evasion.

As such, it is important to understand the taxpayers view on this mandatory

civic function and how these views affect their attitudes and behaviors with

regard to tax compliance based on the assumption that tax morale is an

intrinsic motivation for people to pay taxes.

This study will be carried out in an attempt to measure aspects of the attitudes

and behavior of a sample of the target population on tax compliance, with a

particular emphasis on (1) Legal/Administrative Determinants; (2) Moral Rules

and Sentiments; and (3) Perceived Fairness.

This study pays particular interest in the tax behavior of individual taxpayers

both whether self-employed (sole proprietors and professionals) or

compensation income earners. Based on National Tax Research Center (NTRC)

and Department of Finance (DOF) estimates over different periods, income

earned by professionals has been consistently observed to be the highest

source of tax leakage as shown in the graph below (Philippine Tax Leakage,

2016 Francis Xavier M. Vicente. In another study conducted by the NTRC in

2016 to assess the income tax profiles of self-employed individuals (SEPs),

SEPs contributed only 14% of taxes among individual taxpayers in the past

decade including withholding tax at source.

1986 TRP: 1997 CTRP:
Shift from scheduler to global in taxing individual income from compensation and
Uniform rate schedule for compensation income and professional
business/exercise of profession; marginal tax rates harmonized at 0-35 percent.
income as SNITS for Professionals scrapped.
Ceilings on allowable business deductions introduced to minimize revenue decline from
the uniform schedule and to preserve relative tax burdens of individuals. But, the Rate structure reduced to 7 brackets.
measure was not implemented due to strong lobbying of various professional groups. Personal and additional exemptions increased.
Personal exemptions raised to cushion effects of inflation and to remove from the tax net Deduction of premium payments for health and/or hospitalization
the poverty threshold income. insurance from gross income allowed.
Separate filing and taxation of spouses to reduce the tax burden of married couples.

SNITS of Professionals legislated

Action Centered Transformation Program launched

5-year Tax Computerization Program launched

Tax Mapping Program; Selective Audit Program

The results of this study will be given an objective analysis, which if successful,

can provide the Bureau with useful data against which to monitor trends in the

future and which will assist in evaluating and developing Bureaus compliance

and enforcement programs.

Research Hypothesis: The taxpayers behavior and attitude with regard to tax

compliance is significantly influenced by socioeconomic factors regardless of

the legal and administrative determinants.

The figure depicts the relationship between taxpayer and tax authority taking

into account several factors on both sides which potentially influence the

degree of tax compliance in the city.

Introduction

Why do we pay taxes? Taxes are the lifeblood of society (_______________).

Government expenditures are financed by the taxes that are being collected

from and paid by the people.

Types of Taxes. Taxpayers are grouped into two major categories namely

individual which may be a person, a trust or an estate and corporate taxpayers

which include partnerships (Section 22 of the 1997 NIRC1, as amended) and

from which the taxes are grouped further into (1) Income Taxes; (2) Business

Taxes; (3) Local Taxes; and (4) Local Taxes.

1
National Internal Revenue Code
What are our taxes used for?
Can you tell me what the taxes, duties and social insurance contributions that you pay are used for?

And for which items listed on this card do you think the taxes, duties and social insurance
contributions that you pay are used?

Have You Contacted the Bureau?

Reasons Why People Do Not Pay Their Taxes

The risk of getting caught is low.

There is a culture of tax evasion in Philippines everyone who has the opportunity to evade
tax does so.

The taxes collected are used poorly.

The potential consequences (e.g. fines and penalties, public naming, prosecution) of getting
caught are not serious enough to stop people evading paying their taxes.

People think they pay too much tax on what they earn already.

People feel they do not get paid enough for the work that they do.

Tax evasion is not a problem in Ireland as people generally report all of their income to
Revenue.

Attitudes about Tax Evasion (Agree or Disagree)

Deliberate tax evasion is not considered acceptable by Philippine society.

Those who evade paying tax repeatedly should receive a jail sentence.

The Bureau has been successful in dealing with tax evasion over the last 5 years.

The more successful Bureau is at dealing with tax evaders the less likely citizens will be to
evade their taxes.

Deliberate tax evasion is on the increase.

It is every taxpayers civic responsibility to pay his or her correct taxes.

Deliberate tax evasion is a minor crime.

 The Bureau is able to detect people not paying the right amount of tax.

Few people report all of their income to the Bureau.

Moral Questions (Acceptable or Unacceptable)

The compliance behaviors presented were as follows:

To drive while using a mobile phone without using a hands-free kit.

To claim credits or reliefs from the Bureau that you are not entitled to.
To use public transport (for example, buses, trains, LRT) without a valid ticket.
To deliberately not pay the taxes you are supposed to pay.
To buy services knowing that the income from them will not have been declared to the tax
authorities.
To have a TV at home without a valid TV license.
To deliberately claim social benefits from the Department of Social and Family Affairs that
you are not entitled to.
To legally avoid paying taxes by using loopholes in legislation.
To knowingly buy stolen goods.
To knowingly buy counterfeit goods (e.g. clothing, handbags).
To knowingly buy pirate goods (CDs, DVDs).
To purchase goods abroad, and where above the limit, not declare them to Customs when
they are brought into Philippines.
To declare some income but not all of your income for tax purposes.
To drop litter on the street.

Tax Morals (Acceptable or Unacceptable)

Exaggerating business expenses to reduce the amount of personal taxes you pay.

Putting in place complicated financial arrangements in order to minimize or eliminate your

tax bill.

Using loopholes in legislation to minimize or eliminate your tax bill.

Not fully reporting all of your income to reduce the amount of tax you pay.

Making payments to staff without deducting and paying the appropriate PAYE and PRSI
contributions.

Not reporting all income from rental property.

PAYE taxpayers not reporting all income earned in their spare time.
Personal Motivation to Pay Taxes (Influential or Non-Influential)

Concern that Revenue will contact you about your tax affairs

Revenue treats all taxpayers fairly

Your taxes are used to pay for public services

Concern that your name will be published on Bureaus Quarterly List of Defaulters.

Because it is the law.

Concern that someone might report you to Bureau.

Belief that other taxpayers are declaring and paying honestly.

Concern that you will have to pay interest charges for late payment of tax.

Knowing that the Bureau has the power to receive certain information about you from 3rd
parties (e.g., wages, interest, dividends).

Your personal belief that you should do the right thing.

Concern that you will be prosecuted.

The Bureau will generally accept that your return or claim is correct.

Concern that you will be audited by Bureau.

The Bureau makes it easy for you to pay your taxes.

You have no opportunity to evade taxes on your wages.

Tax Returns and Relief Forms

1. Have you or have you not?

2. If yes, is it easy to complete?

How well informed would you consider yourself to be regarding your tax affairs
and tax entitlements?
Self-Completion Section: Behaviour
 Have you been offered services?
Have you used the services offered?
Have you engaged in undeclared work?
three key factors that seem to be important for understanding tax morale: moral rules and

sentiments, fairness, and the relationship between taxpayer and government. These three key

elements in this survey will be important determinants in the empirical part of this book.

The first part focuses on social norms and discusses the four sentiments guilt, shame, duty

and fear. A false declaration will generate anxiety, guilt or, if caught, shame, and will thus

prejudice the taxpayers self-image. It is assumed that a taxpayer feels these moral costs,

which act as a restriction of the possibility set. On the other hand, if someone believes that the

tax system is unfair for example, that the tax burden is too high the moral costs to behave

honestly decrease and tax evasion can be seen as a sort of self-defense. The analysis of social

norms in general will be one of the most demanding challenges in the future research agenda.

One of the main shortcomings is the limited amount of empirical evidence. The shared

conviction of how people ought to behave is part of a societys social norms (see, e.g., Elster,

1989). Adapting to the tax compliance literature, it means that individuals will comply and pay

taxes as long as they believe that compliance is a social norm (see Alm et al., 1999).

The second section of Chapter 2 presents two interesting econ