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Brace for impact: The future of taxation

In a span of three months, we have published a series of articles based on carefully curated topics from the first-ever SGV Tax Symposium held on Aug. 7. These articles covered pivotal areas and emerging developments in taxation significantly affecting the business landscape in the Philippines.

In this last article of the 1st SGV Tax Symposium publication series, we are putting a spotlight on the proposed digital transformation in tax administration so that readers can better brace for the impact of the future of taxation in the Philippines.

PROPOSED DIGITAL TRANSFORMATION IN TAX ADMINISTRATIONDigital agility was never more pivotal than during the pandemic. Globally, businesses are finding themselves on the frontlines of rapid digital transformation.

Following suit, tax regulators are harnessing digital tools to automate tax invoicing and reporting, simplifying tax policies and compliance for a more seamless taxpayer experience, and automatically integrating taxation processes into taxpayer systems for accelerated tax revenue collection.

Regulators are likewise leveraging information from digital analytics tools and data shared by global tax administrations to extract errors and inconsistencies, enabling them to automate checks and audit selection processes. The digitalization of multi-jurisdiction reports filed by companies further enables regulators to access, assess and compare tax loopholes, trends and risks, thus enhancing the efficiency of tax revenue programs.

In the Philippines, the Department of Finance (DoF) is adopting a Medium-Term Fiscal Framework (MTFF) as the government’s economic blueprint to enhance the efficiency of the tax system. The Bureau of Internal Revenue, in particular, has been improving its online filing and payment systems, introducing mandatory e-invoicing in pilot programs and deploying an automated tax registration system for selected taxpayers (i.e., Online Registration and Update System).

The MTFF is further accelerating priority tax measures to catch up with the digital economy, such as the imposition of VAT on digital service providers and reinforced tax collections from online content creators, which are expected to bring significant additional tax revenue. With efficient tax administration through digitization, the DoF is optimistic that the economy will continue to bounce back to its pre-pandemic high-growth trajectory.

FUTURE OF TAX AS A DOUBLE-EDGED SWORDThe future of tax can be a double-edged sword. With the digital revolution already transforming tax administration around the world and rapidly becoming sophisticated and agile, it cannot be ignored that it will also deliver sharp, costly and taxing changes in the way we navigate the tax ecosystem.

Critical to businesses is whether they have the right technology, infrastructure and upskilled talent who are fast enough and prepared to ensure that their tax functions are ahead of the regulators, and that they are digitally ready for an advanced level of scrutiny. Without a future-ready tax function, companies may be exposed to new tax risks.

Therefore, with the ascendance of technology, the tax function can no longer remain a mere support system in business organizations. The tax function must transform into a key business and strategic partner of operating units. In essence, the value of the tax function to companies has never been as important as it is now.

An important assessment that needs to be made in a future-proof tax function is the choice of automation tool such as robotics and artificial intelligence (AI). These solutions can be fast, systematized and less prone to errors, but they can fall short in areas where human insight, experience and judgment are required.

Without a doubt, rapid technological change can also play a massive part in identifying shadow economies and curbing any informal activities and interactions among the players, which in turn, will create opportunities for regulators to recover missed tax revenue arising from under-reporting of sources of income or non-registration of businesses. However, with the sudden growth of various business models (e.g., e-commerce, e-banking, e-education, e-health), and the proliferation of shadow economies, it will be no surprise if regulators eventually utilize these digital platforms as extended agents to carry out the tax administration processes within their jurisdictions.

However, it is also important for regulators to understand the need to strike a balance between increasing government coffers through greater tax collection efficiency and sustaining local entrepreneurship by strengthening taxpayer morale while also increasing taxpayer confidence in a progressive tax system.

PRIORITY SOLUTIONSOrganizations should continuously re-assess their operating model and functions to identify gaps in data, technology and people, as well as to meet the heightened level of tax and regulatory compliance brought about by the pivotal shift towards the future of taxation in the Philippines.

To achieve this, companies can prioritize the following solutions to brace for the impact against the future of taxation:

1. Meet compliance obligations by upgrading the tax function, either by investing in advanced digital technology for accurate tax reporting, or outsourcing it to expert tax advisers who can leverage high-end technology solutions that may otherwise be too costly for companies to acquire on their own;

2. Reshape human resource functions through a well-designed global mobility program with comprehensive employment, tax and immigration solutions ahead of any modern workforce disruption;

3. Prepare a well-developed transfer pricing framework that is globally cohesive and aligned with contemporary international tax rules governing cross-border transactions;

4. Provide internal tax teams with adequate support from tax advisers who have relevant expertise in dealing with multi-jurisdictional tax controversies; and

5. Revisit indirect tax compliance and customs reviews focusing on disruption to globalization and digital trade.

With the rapid use of technology to make tax administration more advanced, efficient, seamless and integral to the natural systems of businesses, it is imperative for companies to stay at the forefront of these changes. Those that do not keep up could find themselves left behind and exposed to new tax and reputational risk.

Indeed, the future of taxation in the Philippines has begun. Whether it is viewed as positive or negative, it is here to stay. The question to companies now is — are you ready?

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Margaux A. Advincula is a lawyer, tax partner and the head of the SGV Clark Office and Donna Frances Ylade-Torres is a lawyer and tax senior director.

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