Taxing Self-Employed and Professionals

President PNoy pointed out in his State of the Nation Address (SONA) that many professionals and businessmen understate their income in order to evade taxes. Tax compliance  is difficult to achieve for them because their income is irregular and receipts are seldom given. Most lawyers, doctors, dentists, architects and businessmen pay income tax based on what they declare; and they declare very little.

In the SONA,  PNoy said that 1.7 million self-employed and professionals paid a total of P9.8 billion income tax in 2010.  This comes out to an average of P5783 income paid last year per person, meaning that they earned an average of only P8500/month (which is lower than the minimum wage). There is obviously a lot of tax evasion going on here.

I would suggest that the government take the following steps to enforce tax compliance among professionals:

* doctors, lawyers, architects, businessmen etc. should be required to file a Statement of Assets, Liabilities and Net Worth (SALN). Exempted from this requirement would be General Practitioner doctors who work in 3rd class or poorer municipalities. The SALNs should include all property, including those abroad (including bank balances). If they declare liabilities, they should waive their bank secrecy – so that the government could also check their deposits and investments;

* all professionals should be assessed a taxable income on the basis of the minimum income of a government employee of the same skill level;

* businessmen should be taxed on their personal income from their business.  If their business is a single proprietorship or partnership, the amount they received from the business, as profits (or withdrawals) should be declared as income. The tax paid by the business (divided accordingly if partnership) should then be credited as taxed paid, avoiding double taxation.  If they manage a corporation in which they also own shares in, their taxable income should be their salary from the corporation, or a salary equivalent to a national government supervisory position of an equivalent level (i.e. supervising a similar number of people), whichever is higher.

* conduct regular life-style checks to see whether the SALNs and Income statements are correct;

* exempt the services of professionals (but not businessmen) from other taxes like documentary stamps, receipt tax, VAT, etc. (they are difficult to enforce anyway, so just get rid of the requirement to simplify administration).

The rules have to be changed to encourage tax compliance. If all the government does is to preach about it, and perhaps sue a number of tax evaders, it will not push professionals to pay more taxes.

Tax compliance among self-employed professionals could only be achieved by fixing the rules. With these new rules, full disclosure of income and the payment of proper taxes will become the norm, rather than the exception.