Designing Presumptive Tax Regimes

1. Designing Presumptive Tax Regimes Milwida M. Guevara www.synergeia.org.ph

2. Presumptive Taxation dates back to the 17th century in Milan • Agricultural activities were taxed on the value of land instead of actual income. • Presumptive taxation stimulated work effort

3. Eiunadi on Presumptive Tax • A tax on “effective income” is technically impossible and economically disastrous • A presumptive tax based on average income does not discourage work efforts since the marginal tax on income that exceeds the average is 0.

4. Role of Presumptive Taxation • Ease tax administration and tax compliance of small taxpayers • Address tax avoidance and evasion • Improve tax assessment • Prepare taxpayers to become “bigger” and “more efficient” • Minimize disincentive effects of taxation

5. Weaving Presumptive Taxation into the Tax System • Exempting the very small taxpayers • Presumptive taxes for small firms • Presumptive taxes for larger hard-to-tax taxpayers

6. Presumptive Taxes for Small Firms • Fixed amount for everybody  Simpler but unfair • Differentiated tax rates based on trade and level of sales Tax rate can be differentiated based on profit margin Fair Requires research on turnover and profit margin • Entry point for small firms to become more organized

7. Best Practices on Presumptive Taxation for Larger Hard-to-tax Groups • Tachshiv Estimating average sales per worker, average ratio between inventory and sales, relationships between water consumption and sales Using indicators to estimate turnovers Deducting presumptive/documented expenses to estimate gross income

8. Best Practices on Presumptive Taxation for Larger Hard-to-tax Groups • French Forfait Taxpayer and tax authority agree to base tax liability on “estimated income” Taxpayer submits information on sales, purchases, inventories, number of employees, wages paid Forfait applies for two years but can be extended  Taxpayer can opt for regular tax system but bound to use it for 3 years Requires extensive research, guidelines and honest tax officers

9. Best Practices on Presumptive Taxation for Larger Hard-to-tax Groups Minimum Income Tax • Strengthens regular income tax • Enhances fairness and efficiency of the tax system by taxing businesses with the same taxable income equally • Helps ensure that businesses do not avoid paying income tax

10. Minimum Income Tax • Based on indicators that are systematically related to income and are hard to conceal • Market value of assets is equivalent to the net present value of cash flow from their productive use • Not an additional tax; assets tax is creditable against the income tax

11. Use of Proxies for Income • 2 ½ percent Gross Philippine Billings on international transport companies • 7.5 percent of gross freight of ship in India • Payments for execution of contracts for non-residents in Pakistan

12. Concluding Notes • Second best in a less ideal world • Continuing effort of government to make the tax system more fair, productive and efficient • Instill responsibility of citizenship Presumptive taxation should be driven by research, standard processes and procedures for redress