The power of paper: Documenting tax compliance

As the Halloween season ends, the Philippines continues to be haunted by “ghosts,” manifested in the form of ghost projects or ghost receipts. While these issues may seem unrelated, they share a common challenge in ensuring that transactions are properly documented. Adequate documentation is crucial in preserving an audit trail that validates the construction of infrastructure and the payment of taxes, establishing transparency and accountability that are imperative for economic stability and governance.

- MARVIN JOSEPH MANUEL

The Bureau of Internal Revenue (BIR) has taken significant steps against ghost receipts through its Run After Fake Transactions (RAFT) program. This initiative has resulted in the filing of multiple criminal and civil cases against those who have allegedly bought and sold fake receipts to illegitimately inflate their expenses or claim undue input VAT credits. The proliferation of fake receipts unjustly reduces the income tax and VAT liabilities of those who use them. While cracking down on fake receipts addresses tax leakages caused by overstated expenses, it may not be as effective in tackling leakages through understated revenue.

There are multiple ways to fight understated revenue. Tax auditors usually compare the differences between financial statements and tax returns to help identify misstatements and under reporting. Since financial statements are presumed to fairly present the financial position of the taxpayer, any irreconcilable discrepancies in the revenue reported in the financial statements with that reported in tax returns are indications of possible understatement.