Monday, 8 April 2013

Big Data to flush out tax evaders

We have come to the point when everything we do is somehow recorded somewhere. It is now possible to trace money movements some of us thought were private. Just ask Imee!
Actually, private companies, notably those in consumer marketing, have been mining Big Data for decades. Now in the age of Google and its algorithm, and with cause-oriented computer hackers like Wikileaks, you can be sure your secret financial transactions will not remain a secret.

A recent article in The New York Times related the story of how the city government traced the culprits who were disposing of restaurant cooking oil gunk into the city sewers. A geek squad of computer savvy analysts working in a backroom dug up data from an obscure city hall agency that certifies all local restaurants have a carting service to haul away their grease.
Comparing restaurants that did not have a carter with geospatial data on the sewers, the geeks were able to hand over to inspectors a list of statistically likely suspects. That resulted in a 95 percent success rate in tracking down the dumpers. As the NYT puts it, “with nothing grander than public data, the Case of the Grease-Clogged Sewers was solved.”

That is also how Finance Secretary Cesar Purisima intends to zero in on the folks who have been fooling around with their tax returns. In a lively conversation I had with him a week ago, Sec Purisima said he has put up a special geek squad of his own working in a DOF backroom collating and analyzing data from various government agencies as well as private sources.
Thus, Sec Purisima told me, when he visited the BIR District office responsible for the Binondo Chinatown area, he had with him among others, data from the Bangko Sentral on bank deposits in the area. As he sat down with the BIR District head, Sec Purisima said he confronted him with the fact that bank deposits in Binondo have increased which seems to indicate improved business activity. So why is the tax collection not keeping up with the pace?

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And when Sec Purisima visited a Customs office in a key port, he had with him data from the Philippine Ports Authority on the number of ships that have called on the port and the cargo unloaded and loaded. So, why, Sec Purisima wanted to know from the Customs collector, is the collection record of that port not reflecting the frenzy of the port’s business?
I guess it helps that Sec Purisima is one helluva good numbers cruncher himself. His years spent with SGV must have sharpened his skills. He knows what numbers to ask for and what those numbers mean in terms of tax collection targets.

His geek squad working in the anonymity of his back office is currently building capacity to undertake data triangulation - using third party information to validate data from BIR and BOC - down to the smallest administrative unit.  They are also building capacity for more advanced statistical software to compare larger data sets to help track smuggling and tax evasion activity.

Sec Purisima told me they are now reconciling trade statistics, and cross checking records from LGUs, DTI, PRC and other regulatory agencies. They are preparing a scorecard of indicators to monitor BIR regional offices and BOC ports. An IMF mission is helping them in this tax collection effort.
They are also now starting to use third-party data from AC Nielsen, NSO, BSP, SEC (or other relevant private companies and government offices) to capture major industry and commodity data and compare these with tax collection results. Thus, when Sec Purisima visits the Top 11 revenue regions, and 7 district ports, he is already armed with the relevant data and information by which to measure collection performance.

Sec Purisima seems to be brimming with a sense of mission. Our tax effort is at 12.8 percent, he pointed out to me, and he wants to bring this up to 16 percent. To do this, he said he must focus on three key items.
One is income tax from self-employed individuals. It is sad, he told me that between 2011 and 2012, the share of this sector to total individual income taxes paid decreased to about 6.5 percent, from over  eight percent the previous year. This is unbelievable, he said, because we can all see this sector has never had it so good.
There were over 404,000 professionals/self employed who filed an average income tax payment of P33,000 last year. “I want to increase that to 1.8 million filers and we’re basing this on data from the Professional Regulation Commission that there are over 2 million practicing professions in its database.
“The NSO says there are over three million of them and the SSS has over 600,000 voluntary registrants who declare themselves as self-employed. We want to increase the average annual tax payment from P33,000 to P200,000 minimum which is reasonable as this means a monthly income of just around P50,000. If we’re able to increase the 400,000 tax filers to 1.5 million and the average payment to P200,000, that’s P300 billion pesos. At our current GDP, that’s three percent of GDP.”

Sec Purisima’s geeks will also help him fight corruption in the ranks of the BIR and Customs. The difference in his current tax drive, the Secretary said, is really in the use of information to drive performance.
“People will continue to abuse their position if they know they can get away with it. But now that they know I’m not just focusing on macro data but I’m also zeroing in on data from the ground, it will be harder for them to get away with it. So we’re putting the pressure on them by telling them we know.”
For example, Sec Purisima said that during his visits, he asks the RDO heads to name their top 20 taxpayers in each of the different categories. “And even they are shocked when they see lawyers paying P200, doctors P400 pesos a year. This is ridiculous.”

Sec Purisima has also rallied other government offices to help. The PRC now makes the income tax return a requirement for renewal of license.
“The DPWH now requires an income tax return as the basis for determining contractual capacity. So if all government agencies work together just on those who contract with government, it will improve our ability to increase compliance.”
One other pet peeve of Sec Purisima is estate taxes because of a notoriously low compliance. “Our goal here is to increase the collection to P50 billion from an average of P1 billion the past 10 years. Again, we’re going to use data from other sources to help us improve compliance.”

Sec Purisima warned that the secrecy of bank deposits does not go beyond death. “Once you file your estate tax return, the BIR has the right to check with the banks. So I have instructed the BIR to go back 5 years on all those estate tax returns. We will know if you moved money just before or just after death. It doesn’t help withholding publication of the obituary.”
And the third area is curbing smuggling, Sec Purisima said, “specially the technical variety that under declares the value of goods. We collect an average of P60,000 per container today. It should be easy to increase that to P200 to P300 thousand.
“If we just hit the lower number of P200,000 at 2 million containers per year… that’s P400 billion. That’s almost 40% increase on customs take last year, without break bulk, without oil, without the other big ticket items.

“Then there is VAT. We collect about a P180 billion to P200 billion in VAT. If our economy’s P10 trillion, at 12%, that should be P1.2 trillion. But obviously there are exemptions. But I believe the P200 billion collection is still very far from the potential of P1.2 trillion.”
Indeed, there is no hiding from Big Data. The secret records obtained by the International Consortium of Investigative Journalists used by PCIJ to trace secret accounts in the British Virgin Islands of Imee Marcos, Manny Villar, JV Ejercito and others show there are no more secrets today.
“The leaked files provide facts and figures — cash transfers, incorporation dates, links between companies and individuals — that illustrate how the wealthy and the well-connected dodge taxes and fueling corruption and economic woes in rich and poor nations alike.”
Everything will now be exposed to the light of day. For too long, death was the only certainty for the rich because they had good accountants. Hopefully, everyone is or will soon be like every one of us… taxes will be certain for them too.


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