Top Tax Evasion Schemes in the Philippines and How the BIR Is Fighting Back

Tax evasion is a pervasive problem in the Philippines, costing the government billions of pesos in lost revenue every year. While some evasion schemes are more obvious, others are more subtle, making it harder for the Bureau of Internal Revenue (BIR) to detect and prevent. In recent years, the BIR has ramped up its efforts to combat tax evasion, using a combination of technology, audits, and stricter enforcement.

In this article, we will take a closer look at the most common tax evasion schemes in the Philippines, how these methods affect the country’s economy, and what the BIR is doing to crack down on tax cheats.

1. Underreporting Income

One of the most common tax evasion schemes in the Philippines involves underreporting income. Businesses, particularly those in cash-based industries like retail and food service, often fail to report the full extent of their earnings. This allows them to pay lower taxes than what they actually owe.

How it works:

Sales underreporting: Business owners might report only a portion of their total sales, particularly in cash-heavy sectors where transactions aren’t always documented properly.

False invoicing: In some cases, companies create fake invoices or understate the value of sales to reduce their taxable income.

How the BIR is fighting back:

The BIR's Tax Intelligence Division has been more aggressive in tracking down businesses that underreport their income. The agency now uses data matching techniques to compare sales figures across various sectors, identifying discrepancies. They also monitor transactions through digital records like e-invoicing and online point-of-sale systems. In some high-risk sectors, the BIR requires businesses to use electronic sales reporting, which links sales directly to the BIR’s systems in real time.

2. Inflating Business Expenses

Another popular scheme to evade taxes is inflating business expenses. Taxpayers may claim expenses that were never incurred or exaggerate the amounts to lower their taxable income. This tactic is common in businesses with large operating expenses, such as construction, retail, and manufacturing.

How it works:

Fake expenses: Businesses may create fake receipts for expenses such as materials, services, or overhead costs that never actually existed.

Overstating legitimate expenses: Even legitimate expenses may be overstated to artificially reduce taxable income.

How the BIR is fighting back:

The BIR has become more vigilant in auditing and cross-referencing expenses. The agency is increasingly using data analytics to flag businesses that claim expenses far above industry standards. They also use third-party information, such as supplier records, to verify that expenses claimed by a business are legitimate. With the introduction of electronic invoicing, the BIR can cross-check the authenticity of business transactions, making it harder to inflate expenses without detection.

3. Misclassifying Employees as Independent Contractors

In an attempt to avoid paying payroll taxes and social security contributions, some businesses misclassify employees as independent contractors. This enables them to sidestep obligations like Withholding Tax (WT) and Social Security System (SSS) contributions, which would otherwise be required for regular employees.

How it works:

Businesses may reclassify workers who are, in fact, employees (based on the level of control the company has over their work) as independent contractors, thus avoiding tax and social security contributions.

How the BIR is fighting back:

The BIR has been taking action to address this issue by conducting employee-employer audits. The agency cross-checks the working arrangements of businesses with their tax filings to ensure that proper payroll taxes are being withheld. The BIR also works closely with other government agencies like the Social Security System (SSS) and PhilHealth to monitor compliance with employee benefits and tax contributions.

Additionally, the Department of Labor and Employment (DOLE) enforces labor laws, ensuring that employees are correctly classified and entitled to benefits, further discouraging businesses from misclassifying workers.

4. Fake or Altered Tax Documents

Some businesses engage in tax evasion by creating fake tax documents, such as invoices, receipts, or tax returns. This is one of the more sophisticated schemes and involves forging documents to support false claims of tax payments or deductions.

How it works:

Fake invoices and receipts: Businesses create fake documents to justify non-existent expenses or to underreport their sales. These documents may be presented during tax audits or to financial institutions as proof of compliance.

Altered tax returns: Tax returns may be modified to show lower income or inflated deductions.

How the BIR is fighting back:

The BIR is combating this issue by increasing the use of digital records and e-filing systems that make it harder to alter documents. Additionally, the BIR conducts random audits and checks the authenticity of documents submitted by businesses. They also work with banks and other institutions to ensure that the documents provided are legitimate. In some cases, the BIR has also formed special task forces to crack down on syndicates involved in producing counterfeit documents.

5. Non-Filing or Late Filing of Tax Returns

Some businesses and individuals evade taxes simply by failing to file tax returns. This is a common scheme among small businesses or those operating in the informal economy, where there is less oversight. In some cases, taxpayers may also file their returns late, avoiding immediate penalties or interest.

How it works:

Non-filing: Some businesses simply fail to file their returns, often assuming they won’t get caught.

Late filing: Others file late, hoping to delay payment or avoid penalties by taking advantage of the time it takes for the BIR to process returns.

How the BIR is fighting back:

To combat non-filing and late filing, the BIR has increasingly relied on automation and real-time monitoring. The agency’s digital tax filing system, eBIRForms, makes it harder for taxpayers to miss deadlines or submit incomplete returns. The BIR also uses automated systems to track businesses and individuals that fail to file or pay on time. Those who continuously evade taxes by not filing can face severe penalties and criminal charges.

6. Use of Shell Companies and Offshore Accounts

Some businesses use shell companies or offshore accounts to hide income and evade taxes. These entities may be set up with little to no actual business activity, but they can help individuals and businesses shift profits abroad to jurisdictions with lower taxes.

How it works:

Shell companies: These are businesses created to mask income or assets, often set up in other countries to evade Philippine taxes.

Offshore bank accounts: Some individuals and businesses use these accounts to park earnings outside the reach of the BIR.

How the BIR is fighting back:

The BIR has increased collaboration with international organizations, such as the OECD and the Financial Action Task Force (FATF), to track and monitor offshore transactions and international tax evasion. Additionally, the BIR is improving its capacity to investigate and trace money laundering activities and has started targeting businesses that use shell companies to avoid taxes.

7. Digital Platforms and E-Commerce Fraud

With the rise of e-commerce in the Philippines, some online businesses are taking advantage of the lack of regulation in the digital space. E-commerce businesses may evade taxes by underreporting income, failing to issue receipts, or operating without proper registration.

How it works:

Underreporting sales: E-commerce platforms may hide or understate their earnings to evade VAT or income tax.

Lack of registration: Some online businesses operate without registering with the BIR, bypassing tax obligations.

How the BIR is fighting back:

The BIR has been focusing on digital businesses in recent years, establishing clearer guidelines for online entrepreneurs. The agency is requiring e-commerce platforms to register with the BIR and comply with tax laws. Additionally, the BIR is working with platforms like Lazada, Shopee, and Facebook to identify and monitor online sellers and ensure that they are paying the appropriate taxes.

Conclusion: Fighting Tax Evasion with Transparency and Technology

Tax evasion is a serious problem in the Philippines, but the BIR is making significant strides in using technology and data-driven tools to combat it. Through initiatives like electronic invoicing, real-time monitoring, and international cooperation, the BIR is improving its ability to detect and prevent tax evasion schemes. However, it is crucial for businesses and individuals to also play their part by adhering to tax laws and maintaining transparency in their financial dealings.

For businesses, compliance with tax regulations not only helps avoid penalties and legal consequences but also contributes to the overall well-being of the country by supporting the funding of essential public services.