Revenue Administration Reform Project
- $54,300,000Original Compact Project Amount
- $30,280,930Total Disbursed
Estimated benefits correspond to $30.2 million of project funds, where cost-benefit analysis was conducted.
|Time||Estimated Economic Rate of Return (ERR) over 20 years||Estimated beneficiaries over 20 years||Estimated net benefits over 20 years|
|At the time of signing||40.3%||125,000,000||$224,500,000|
|At compact closure||34.7%||125,000,000
The beneficiary count for the Project is under review by MCC and may change in the future.
|Activity and Sub-Activity||Time||Estimated Economic Rate of Return (ERR) over 20 years||Estimated beneficiaries over 20 years||Estimated net benefits over 20 years|
|Bureau of Internal Revenue (BIR) Reform Activity||Automated Audit Tools Sub-Activity (AATS)||At the time of signing||74.9%||$6,000,000|
|At compact closure||74.9%||$6,000,000|
|Electronic Tax Administration Sub-Activity (eTIS)||At the time of signing||37.5%||$171,000,000|
|At compact closure||32.4%||$112,500,000|
|Revenue Integrity Protection Service Activity||At the time of signing||50.2%||$47,500,000|
|At compact closure||50.2%||$47,500,000|
The Revenue Administration Reform Project ERR declined from 40.3 percent at the time of signing to 34.7 percent at closure, as the eTIS activity achieved 75 percent of its original target 1 by the compact end date. The 34.7 percent ERR assumes a persistent commitment to policy reform and continued investment in the staff and infrastructure of BIR after compact closure.
One consequence of the Philippines’ tight fiscal situation was a limited ability of the Government to fund its growing needs for basic infrastructure and social programs. Tax-related patterns of non-compliance and tax administration inefficiencies contributed to a poor business climate, and ultimately impacted the rate of both domestic and foreign-direct investment. 2 One of the most pervasive embodiments of corruption in the Philippines was the low rate of taxpayer compliance and alleged active collusion of revenue agents in the negotiation of tax assessments. 3
Through its earlier threshold program, MCC provided extensive training; support for inter-agency collaboration; and IT equipment to investigators, lawyers and prosecutors in charge of pursuing corruption, tax evasion, and smuggling cases. The Revenue Administration Reform Project built on these efforts by increasing and improving the Philippines’ ability to sustain higher collection of tax revenues and helping to reduce tax-related graft and malfeasance.
Project activities and sub-activities included:
- The Bureau of Internal Revenue (BIR) Reform Activity included three sub-activities:
- The Electronic Tax Administration Sub-Activity (eTIS) computerized the business processes of the BIR, modernizing the Bureau and providing an enhanced tax administration system expected to cover 95 percent of taxpayers in the country. It increased the operational efficiency in registering taxpayers and processing tax returns and accounting payments. These enhanced business processes also worked to improve compliance, audit, and enforcement and increased tax revenue collection. Additionally, MCC co-financed technical assistance to the Bureau of Internal Revenue with the International Monetary Fund’s Fiscal Affairs Department to implement reforms in basic tax administration at the procedural and technical levels, with the objective of improving core business processes for different taxpayer segments.The technical assistance redesigned procedures and identified key risks and compliance objectives in each core functional area and measures needed to address them. Through cross-project coordination, these procedural improvements were integrated with eTIS.
- The Automated Audit Tools Sub-Activity (AATS) supplied the Large Taxpayer Unit of BIR with software tools for use in auditing taxpayers who have automated records. These tax auditing tools significantly reduced the amount of time needed to complete an audit and addressed taxpayer concerns about fairness of tax audits based on sampling rather than a review of all transactions. The reduction in person days per tax audit helped BIR reduce its backlog of unfinished audits, promoted taxpayer satisfaction, and led to increased revenue collection of 30 percent per audit.
- The Public Awareness Campaign Sub-Activity educated the public on BIR services and programs. It disseminated information on the reforms, modernization and enforcement initiatives of BIR to support increasing tax revenues over time. The Public Awareness Campaign promoted greater understanding of tax obligations and increased the ability of taxpayers to access tax information, which is expected to lead to better tax compliance. Greater utilization of online services also led to improved compliance by reducing taxpayer errors, such as those that might result from the introduction of a new form or new regulations.
- The Revenue Integrity Protection Service Activity strengthened revenue agency surveillance and discipline of Department of Finance staff. Through the acquisition and customization of case management software, a data repository system, training, reinforcing its surveillance capacity, and instilling discipline in Department of Finance agencies, the activity advanced the detection and punishment of forms of malfeasance that allowed revenue agents to reap financial rewards from taxpayers. By increasing the likelihood of detection and punishment, the frequency of such incidents was expected to decline, thereby improving the image of revenue generating agencies, increasing tax collection in the country.
The Revenue Administration Reform Project also facilitated an improved understanding of key gender and taxation issues through learning sessions on gender, taxation and corruption for government counterpart agencies; a study on gender and tax administration; and collection and analysis of sex-disaggregated data on taxation and corruption issues.
The goal of the Project (as reflected in the ERR) was to increase the share of government revenues as a share of GDP by 0.3 percent, which is too small an effect to measure statistically. MCC and MCA-Philippines instead tracked whether government revenue collections continued their robust growth trend, which they did — by the end of the compact, revenue from new and existing business registrants had increased from 822,624 million PhP to 1,441,571 million PhP. The project contributed to this effort by narrowing the gap between potential and actual collections and reducing the discretion of individual revenue collection officers. It also helped improve the predictability and impartiality of revenue laws and regulations enforcement. Other outcomes related to BIR efficiency generally improved, such as shorter processing times and more automated audits 4 . The Public Awareness Campaign received Araw Values Advertising awards from the Advertising Foundation of the Philippines for its effort to increase awareness of taxpayer obligations and provide information regarding how to file returns. The Automated Auditing Tools Sub-Activity reported substantial gains in tax audit and arrears management programs. Additionally, as part of the Revenue Integrity Activity, 220 people were charged with graft, corruption, lifestyle and/or criminal offenses. 5
While the Revenue Administration Reform Project achieved impressive results, MCC and the Government of the Philippines did encounter significant challenges implementing the two systems development and systems infrastructure components of the project: (i) the new Revenue Integrity Protection Service automated system to help detect possible illicit financial gains by employees of the government’s revenue agencies; and (ii) eTIS, the tax administration system intended to eventually replace the BIR’s legacy tax administration system, ITS. While the Revenue Integrity Protection Service activity consisted of the design and implementation of a new software application to sit on a new, stand-alone hardware infrastructure within a refurbished and secure office space, eTIS was the continuation of a project started by the BIR several years before the compact. The primary hurdles that had to be overcome had to do with, respectively, the newness of the Revenue Integrity Protection Service activity’s automated system and linking eTIS to past systems. Both represented the first significant systems development efforts funded by an MCC compact.
As initially envisioned, eTIS would complement broader reform efforts with technical assistance from the IMF that would help incorporate improved policies and procedures regarding tax administration at BIR. This involved expanding the level of effort and cost to customize the auditing and compliance modules of the system, cleaning up the existing registration data base and making the data more accessible, secure, and trustworthy. It also required the BIR to shift its organizational resources to focus on large taxpayers and VAT collection efforts. These ambitious objectives required intense collaboration with BIR to ensure ownership of the direction and implementation of the activity. MCC and MCA-Philippines had to refine procurement preferences and expectations to accomplish the activity’s objectives, which significantly differed from the methodology that was intended in the original design. As a result of implementation challenges, including difficulties in procurement, project management and delays in decision-making, the original target for the number of Revenue District Offices (RDOs) to be covered by eTIS was revised from 128 down to 13 BIR offices, covering 73 percent of taxpayer revenue. Following compact closure, the BIR committed to rolling out eTIS to cover 95 percent of taxpayer revenue and to developing and implementing five additional modules of eTIS. Post-compact, the Government of the Philippines has submitted three Annual Summary Reports. As of the last Annual Summary Report, from 2019, no additional BIR offices had received eTIS. Additionally, the 2019 Annual Summary Report notes that, in July 2018, eTIS broke down due to a hardware issue. BIR restored eTIS in August 2018, but technical issues persist.
A performance evaluation of the Revenue Administration Reform Project was completed in March 2017. The RARP evaluation aimed to measure changes brought about by the project on: (1) efficiency of tax administration, (2) tax revenue, and (3) perceptions of corruption in the tax administration. Findings include:
Five of the nine modules of the electronic Tax Information System (eTIS) were implemented within 13 pilot offices. BIR staff had limited exposure to the eTIS modules in terms of time (months) and number of staff, but BIR was committed to this new system, as the current system was failing. Approximately 344,000 taxpayers were registered into the new eTIS. Although automated auditing tools have been used in the Large Taxpayer Service office since 2005, the project provided 10 BIR offices with laboratories to train staff and conduct audits, increasing the percentage of Large Taxpayer cases using automated auditing tools from 3 percent to 100 percent. An additional auditing tool, the new ‘transfer-pricing’ database, had not been acquired at the time of the evaluation.
The case management system at the Revenue Integrity Protection Service (RIPS) faced numerous implementation delays. Even so, the capacity building and case management system seems to have improved the efficiency of RIPS investigations: the average number of days between Investigative Authority to Complaint Affidavit decreased from 892 to 194 and between Investigative Authority to Case Resolution decreased from 2582 to 1119.
The project’s Public Awareness Campaigns won awards and were deemed effective in improving taxpayers’ understanding of their tax obligations, per the evaluation. Even so, the impact on tax compliance was not measured by either the PR firm or the evaluation. In the future, each campaign should be analyzed in relation to the desired behavioral change (in this case, tax compliance) to better inform which campaigns should be continued and which should be closed.
This project was the first time that MCC engaged the IMF as a project resource for technical assistance. The IMF was allowed the flexibility to independently identify problems and recommend timely measures to address them. As a result, the IMF advisory activities were free to focus on several critical topics including Value-Added Tax audit and arrears management.
Tax Revenue Levels
Tax revenue from new and existing businesses registered with the BIR rose from approximately $17.5 billion (822,624 million Philippine peso (PHP) using 12/31/2015 exchange rate) to approximately $31 billion (1,441,571 million PHP), but tax revenue was increasing before the project.
Revenue collected per audit increased from $53,000 (2.5 million PHP) to $1.6 million (74.6 million PHP) surpassing the compact target. The percentage of automated audits increased from 3 percent at baseline to 100 percent by compact end.
Taxpayers’ Perception of Corruption
The percentage of taxpayers believing there is a great deal of corruption in the DOF and BIR decreased significantly between 2014 and 2015: DOF from 48 percent to 38 percent and BIR from 52 percent to 46 percent. On the other hand, the percentage of taxpayers believing there is a great deal of corruption in the BOC barely changed: from 74 percent to 72 percent.
Perceptions of corruption in the DOF, BOC, and BIR differ greatly between taxpayers and agency personnel. A far higher percentage of taxpayers, compared to personnel, believed corruption in all three agencies to be extensive. Agency personnel’s perception did not change significantly from 2014 to 2015.
Approximately one-third of the taxpayers surveyed faced bribe solicitation during 2014 and 2015. Compared to other taxpayers, Large Taxpayer Services taxpayers were more frequently approached for bribes by the BIR personnel. A smaller percentage of Large Taxpayer Services taxpayers were solicited for bribes by BIR personnel in 2015 as compared to 2014. Despite this decrease, the reported incidence of paying bribes by the Large Taxpayer Services respondents did not change between the two rounds.
Learning from the Evaluation
- A primary contributor to the successes realized during the compact was the strong support of RARP at the highest levels within the Philippines Government, most notably, the President, the Secretary of the Ministry of Finance, and the Commissioner of the BIR. It is questionable whether a similar project as ambitious as RARP would be possible without such support. The sustainability of RARP’s outputs and outcomes will now depend on whether the new administration has a similar level of commitment and a similar sense of urgency.
- An important lesson for MCC on projects involving major IT systems installation and adoption is that project design must ensure no more than a manageable level of customization to off-the-shelf software systems. The volume of modification and customization of software in the eTIS system was one of the primary sources of implementation delays which ultimately reduced the scope and reach of the final product.
- The development of eTIS software was started by BIR prior to the beginning of the compact by a software consultant engaged by BIR. Shortly after the compact began, it became clear that software development work needed to be restarted almost from scratch. Dealing with procurement issues, redefining user requirements, and implementing new organizational measures within BIR to take primary ownership of the project all contributed to delays in the first two years of the compact. Continued due diligence on the eTIS development effort might have allowed MCC, MCA-P and BIR to identify and deal with these issues sooner.
- At two of the government agencies (BIR and DOF), procurements and decision making were hampered because government employees, who approve a procurement or accept a product as complete, fear that they might be subject to financial loss or charges of misconduct. This reluctance to take ownership and be proactive in implementing projects slowed both the eTIS and RIPS activities. MCC had not identified this risk during due diligence.
- Any complicated information system reform, such as eTIS and AATS, relies on the institutional ability to provide guidance to software designers and train all appropriate staff.
- In terms of staff acceptance of eTIS and AATS, use of current licenses and the Transfer Pricing database should be closely monitored by BIR management to ensure that auditors have access to and use these systems in the conduct of their audit cases. Those auditors who are reluctant to embrace modern audit practices and tools and to use the new eTIS modules (especially CMS) should be counseled and subject to transfer or other sanctions in appropriate cases.
- On the project’s Public Awareness Campaign (PAC), the campaigns were locally well-received, won awards in the local PR industry for their innovative messaging and were deemed effective in improving taxpayers’ understanding of their tax obligations, per the evaluation. Even so, the impact on tax compliance was not measured by either the PR firm or the evaluation. In the future, MCC should track public awareness efforts in relation to the desired behavioral change (in this case, tax compliance) to better inform which campaigns should be continued and which should be closed. This strategy will require close coordination between implementers and M&E.
- This project was the first time that MCC engaged the International Monetary Fund (IMF) as a project resource for technical assistance, and, it was viewed as a successful partnership. Rather than to follow a narrow, prescriptive scope of pre-identified services, the IMF was allowed the flexibility to independently identify problems during the compact period and to recommend timely measures to address them. This flexibility allowed for a range of activities that were not identified initially but were responsive to the prevailing circumstances and the current operational environment. As a result, the IMF advisory activities were free to focus on several critical topics including VAT audit and arrears management.
- In terms of RIPS, despite the fact that the case management system was not fully operational until toward the end of the compact, the project succeeded in improving that investigative unit’s ability to bring cases to the point of prosecution as cited in the report: the average number of days from Investigative Authority (IA) to Complaint Affidavit went from 892 to 194. Even though case resolution went from 2582 to 1119 days, it still takes, on average, more than 3 years to resolve a case, because of other entities in the judicial system, and even the Department of Finance, which refused to establish internal mechanisms for dealing with administrative cases. To assess this issue, the RIPS should track response time by agency and highlight both the problematic and responsive agencies. In addition, MCC should address this risk by including other entities in the project, assuming buy-in can be obtained.
|Endline Report||Reports, Questionnaires and datasets are public.|
Key performance indicators and outputs at compact end date
|Activity/Outcome||Key Performance Indicator||Baseline||End of Compact Target||Quarter 1 through Quarter 20 Actuals (as of Dec 2012)||Percent Compact Target Satisfied (as of Dec 2012)|
|Bureau of Internal Revenue (BIR) Reform Activity||Number of BIR offices using the: Tax Registration System (TRS) module, the Returns Filing and Processing (RFP) module, the Collection, Remittance, and Reconciliation (CRR-1) module, the Case Management System module, and the Audit module of the electronic Tax Information System (eTIS)*||0||13||13||100%|
|Number of new business registrants||1,821,599||N/A||2,405,133||N/A|
|Number of tax returns (eTIS) captured in the system||0||N/A||343,748||N/A|
|Percentage of audit cases performed using Computer-Assisted Audit Tools (CAATS)*||3%||95%||100%||105%|
|Percentage of audit completed in compliance with the prescribed period of 180 days*||1%||50%||4%||6%|
|Revenue collection per audit*||2,500,000||4,300,000||74,556,854||4,003%|
|Revenue from new and existing business registrants (millions of Philippine Pesos)*||822,264||1,969,999||1,441,571||54%|
|Revenue Integrity Protection Service Activity||Number of personnel investigated||110||330||475||166%|
|Number of successful case resolutions||28||140||100||64%|
|Personnel charged with graft, corruption, lifestyle, and/or criminal cases||67||250||220||84%|
|Time taken to complete investigation (days)||120||60||266||-243%|
Explanation of Results
All indicators with an asterisk have data from Quarter 18 (October to December of the final compact year) of the compact instead of Quarter 20, which corresponds to annual data from the Bureau of Internal Revenue, which has a year end of December. There are no targets for many of the indicators, because the ERR for this project did not provide targets.
A major component of the eTIS Sub-Activity was replacing the failing software at BIR with a new software package. Although 96 percent of audits still take longer than the proscribed period of 180 days, the increase in revenue collected per audit demonstrates the new focus on auditing large taxpayers.The Automated Audit Tools Sub-Activity enabled auditors to automate time-consuming tasks such as matching transactions based on third-party databases and validating taxpayer identification numbers, but reconciliation, as part of taxpayers’ rights, tends to lengthen the audit process.
While the Revenue Integrity Protection Services (RIPS) have investigated more people than targeted, charging personnel and resolving these cases has been complicated because many components of that process are outside the control of RIPS. In terms of charging personnel, a significant number of cases were closed due to insufficient evidence and the large volume of on-going cases. In terms of case resolutions, the end-of-compact target was not reached because decisions in these cases are made by the Ombudsman or Civil Service Commission and not RIPS. The target was not met for time taken to complete an investigation because RIPS must request documents and wait for replies from agencies within Department of Finance such as BIR and Bureau of Customs and from agencies in other ministries, such as the Bureau of Immigration and the Land Transportation Office.