Tax reform under PGMA, Part II

Posted: January 3, 2011 in GMA, Legislatures, Philippine politics, Political economy, tax reform, Taxation, Uncategorized

In her first State of the Nation Address (SONA) after the inauguration of her second term, President Arroyo

asked Congress to pass some 8 tax measures designed to increase government revenues by at least P80 billion (PDI 2004a).  Even as the fiscal health of government was in bad shape, none among the top government officials and monetary authorities were prepared at the time to acknowledge the situation.  Bangko Sentral Governor Rafael Buenaventura

BSP governor Rafael Buenaventura

earlier rejected a proposal from Rep. Joey Sarte Salceda (Albay) to declare that the government was in “fiscal crisis” to be able to suspend the release of internal revenue allotments (IRA) to local government units (LGUs) under Republic Act 7160.  Buenaventura feared that such a declaration could be misconstrued as plans to default on the country’s debts.  The financial markets were spooked earlier by calls for debt restructuring made by opposition Presidential candidate Fernando Poe Jr. interpreting them as plans for debt default (Dumlao 2004a).

Rep. Joey Salceda

Before the 13th Congress was convened, President Arroyo ordered an increase in the tariff duties on crude and refined petroleum products to 5% from the previous 3 percent upon the recommendation of the Cabinet’s Tariff and Related Matters (TRM) committee. While the across-the-board increase in import levies on both crude and finished products will not be implemented until world oil prices started showing signs of a downtrend, Energy Secretary Vincent Perez explained that the measure was a temporary measure to help plug the budget deficit.  Once Congress passed a tax law on petroleum products, the executive order would cease to take effect.  Before the issuance of the said executive order, Rep. Danilo Suarez (Quezon) filed a bill that would increase specific taxes on petroleum products by P2.00 per liter (Ho 2004a, 2004b).

Among the measures proposed by President Arroyo in the July 2004 SONA included a shift to gross income taxation, additional taxes on petroleum and sin products, rationalization of fiscal incentives, a windfall tax on the income of telecommunications firms, a new tax amnesty, and the creation of a performance-based reward and punishment system for revenue agencies.  She also proposed to scrap the value added tax (VAT) to be replaced by a tax that is “simpler to administer and would increase compliance” (Dalangin-Fernandez 2004a).  This proposal was met with surprised reaction from the general public.  Finance Secretary Juanita Amatong

explained that the government proposed a two-step increase in the VAT rate from the current 10% rate, first to 12% and then to 14% to boost collection.  Initial government estimates project at least P19.9 billion in additional revenue annually if the VAT rate was raised.  Amatong said that if the target VAT collection was not achieved even if the rate was increased to 14%, then it could be replaced by a new tax.  The National Tax Research Center (NTRC) found that government had been losing an average of P30.7 billion yearly during the 1999-2002 period from VAT leakages (Remo 2004a).

Of the tax measures proposed by President Arroyo during the SONA, the one providing for a tax amnesty was first acted upon by the House.  House Bill 552 was filed by Rep. Danilo Suarez proposing condonation of tax

liabilities and granting immunity from penalties to taxpayers who have unpaid taxes for 2003 and prior years.  The bill suggested that tax delinquents pay only 2-3% of their net worth.  Specifically, resident citizens with tax delinquencies would be required to pay only twenty thousand pesos (P20,000) or 3% of their net worth as of 31 December 2003, whichever is higher.   Non-residents will pay either fifteen thousand pesos (P15,000) or 2% of their net worth.  Corporations classified as large taxpayers (or those with a subscribed capital of more than P50 million) shall be required to pay five hundred thousand pesos (P500,000) or 3% of their net worth, whichever is higher.  Medium-sized firms (or those with a subscribed capital of between P20 million and P50 million) shall be required to pay either two hundred fifty thousand pesos (P250,000) or 3% of their net worth.  Small firms (or those with a subscribed capital of P20 million or less) will only have to pay one hundred thousand pesos (P100,000) or 3 percent of their net worth.  The tax amnesty bill will, if passed by Congress, require corporations and individuals whose assets as of 31 December 2003 reach at least one hundred thousand pesos (P100,000) to submit statements of assets and liabilities (SALs), which will serve as the government’s basis for determining net worth (the difference between assets and liabilities).  However, HB 552 disallowed the following from availing of the tax amnesty: those with tax-related cases filed in court before the bill becomes a law and takes effect; those with final assessment notices from the BIR; and those that act as withholding agents, with respect to their withheld taxes (Remo 2004b).

Some members of the House were apparently unaware or unmindful of the country’s fiscal bind. Rep. Pedro Pancho (Bulacan) of the ruling party filed House Bill 2286 calling for a five-year ban on the imposition of new taxes.  Pancho and some of his colleagues argued that government should instead improve the collection of existing taxes and plug tax loopholes (Remo 2004d).  The Department of Finance (DOF) was batting for a higher amnesty tax rate to be set at 10 percent.  It also differed from the Suarez bill by computing the tax amnesty based on the increase in a taxpayer’s net worth from year to year rather than on accumulated net worth as of a given period.  Finance Undersecretary Grace Tan explained that accumulated net worth included incomes from previous years that may have been taxed and should therefore not be taxed anymore.  The DOF also recommended that the amnesty tax should not be used to spare delinquent taxpayers from penalties under the Anti-Graft and Corrupt Practices Act.  In contrast, the Suarez bill provided that the delinquent taxpayer availing of the tax amnesty shall be immune from civil and criminal penalties under the National Internal Revenue Code, the Revised Penal Code, and the Anti-Graft and Corrupt Practices Act.  Tan reasoned that failure to pay taxes is not an act of graft even if it may be a crime (Remo 2004c).

The House will disappoint finance authorities in the weeks to come.  The DOF eventually acceded to the lower amnesty tax rate proposed by Rep. Suarez at 3% of net worth.  However, it proposed requiring all taxpayers to submit their statements of assets and liabilities (SALs) every year.  Finance Secretary Juanita Amatong explained the end-goal of the proposed tax amnesty is to create a database of all taxpayers to monitor the accuracy of their tax payments and to plug tax leakages (estimated at P200 billion yearly) through the database.  The House Ways and Means Committee reported a bill that removed the provision requiring the annual submission of SALs.  Some legislators, including Reps. Exequiel Javier, Junie Cua, Salacnib Baterina, and neophyte Teofisto Guingona III, believed that requiring taxpayers to annually submit their SALs might be unconstitutional (HOR-CAD 2004).  Others, such as Ways and Means Committee chairman Rep. Jesli Lapus and opposition Rep. Jesus Crispin Remulla, thought that the SAL requirement was cumbersome and should be embodied in a separate bill and not combined with the tax amnesty measure so the appropriateness of making one’s assets and liabilities a matter of public record could be debated extensively.  The BIR on the other hand believed that course of action would just be fine as long as Congress passed the SAL bill at around the same time as the tax amnesty measure (Remo 2004e).

In late September 2004, the House Ways and Means Committee decided, through House Bill 2933, to include delinquent taxpayers whose unpaid tax liabilities have been assessed by the BIR and who have pending court cases.[1] In his sponsorship speech for the measure, Rep. Jesli Lapus (Chairman of the House Ways and Means Committee) explained that delinquent taxpayers with either pending or final and executory

assessments and pending tax cases in courts should be allowed to avail of the amnesty since “the very essence of an amnesty is the condonation of all wrongdoings made in the past” (HORJ 2004, 53).  DOF officials believed granting tax amnesty even to tax delinquents with outstanding BIR assessments and pending court cases would weaken government efforts to improve tax compliance.  They argued that the amnesty should be available only to taxpayers whose unpaid tax liabilities have yet to be detected by the BIR (Remo 2004f).  Notwithstanding the infirmities of the House tax amnesty bill, President Arroyo certified it urgent, thus ruling out the possibility of a Presidential veto (Dalangin-Fernandez 2004b).   The Senate Ways and Means Committee apparently agreed with its House counterpart.  It also provided that delinquent taxpayers with BIR assessments and pending court cases were eligible for amnesty in the Senate version authored by Committee Chairman Senator Ralph Recto (PDI 2004e).

Former Economic Planning Secretary Solita ‘Winnie” Monsod believed that with the House tax amnesty version, the costs far outweigh any benefits it can bring.  Monsod zeroed in on the provision allowing those with tax assessments and pending court cases to avail of tax amnesty.  She noted that this leniency was never done before by the country’s tax authorities (Monsod 2004a).

In late August 2004, the UPSE group warned that the Philippines faced a credit downgrade from international rating agencies (such as Moody’s, Standard and Poor, and Fitch) if Congress failed to pass several tax bills (especially the sin tax measure) before the year-end.  These developments were to be interpreted by the rating bodies as a sign of the country’s fiscal resolve.  A credit downgrade will have the effective effect of raising the interest rates on foreign loans contracted by the Philippines.  Rep. Jesli Lapus, chairman of the House Ways and Means Committee noted that a 1% increase in interest rates meant additional P30 billion in debt service payments.  The warning of the economists apparently spurred legislative efforts.  The sin tax measure (HB 3174) was passed in third reading by the House in late October 2004.  HB 2996, or the so-called Lateral Attrition Bill, which provides a system of rewards and punishment for officials and staff of revenue collecting agencies, was passed by a 133-28 vote on 16 November 2004.  The measure decreed that failure to reach revenue targets by 1 to 10% would either mean a concerned official’s demotion, transfer, or dismissal (Romero 2004).

As in the past, the ‘sin’ tax measure continued to court debate, controversy, and allegations of bribery and undue influence.  In its original plan, the Department of Finance proposed an initial increase of 30% in the specific tax rates of all cigarette brands.  This increase represented the inflation rate from 1997 to 2003.  It also provided for an automatic increase of the tax rates every two years to factor in inflation and reclassification of brands (Remo 2004g).  Counter-proposals were aired by the affected corporate groups.  On one hand, Philip Morris Philippines, manufacturer of mostly high-priced cigarettes, suggested the imposition of a flat-rate increase in lieu of indexing the tax to inflation.  Philip Morris Philippines managing director Chris Nelson, who met President Arroyo as part of a delegation of the US-ASEAN Business Council, suggested increasing the tax on all cigarette brands by a peso (P1.00) per pack in the first year and by fifty centavos (P0.50) in succeeding years.  Officials of Fortune Tobacco and Associated Anglo American Tobacco, manufacturers of mostly medium- and low-end brands predictably opposed the Philip Morris proposal since the tax increases would be disproportionately borne by their products.  Anglo American President Florante Dy said that most of his firm’s brands were handmade cigarettes that paid an excise tax of P0.40 per pack of 30 sticks.  Under the flat-rate increase proposal, the taxes on their products will increase by as much as 250 percent.  Fortune Tobacco spokesman Salvador Mison meanwhile noted that the average tax rates will increase by as much as 90% while Philip Morris products will only shoulder an 18% additional tax (PDI 2004b).

At some point, proposals to return to the ad valorem system for excise taxation of ‘sin’ products were aired by some members of the House, notably Rep. Exequiel Javier.   Lobbying pressure from the cigarette makers prompted Congress to ask government for a lower tax rate.  In turn, the economic managers agreed to a lower increase of 20% in specific taxes, foregoing revenues worth about P3.6 billion.  The compromise was made upon the instance of President Arroyo to prevent delays in the passage of the tax measure (Remo 2004h).  For its part, the Bureau of Internal Revenue expressed the need to remove any ambiguity in the law so the agency would not be subject to tax refunds claims in the future.  BIR Commissioner Guillermo Parayno Jr. noted vagueness in RA 8240, which simply said the tax rates on cigarettes should be increased by 12% in 2000 but did not clearly state the new tax rates in pesos terms, was the main argument used by Fortune Tobacco in asking for tax refunds.  The courts apparently agreed with Fortune and ordered the BIR to refund Fortune in the amount of P1 billion (Remo 2004i).

President Arroyo sought to facilitate the ‘sin’ tax bill’s passage by meeting privately on October 25 with key officials of sin product manufacturers (San Miguel Corporation, Philip Morris and Fortune Tobacco) in her Forbes Park residence.  Arroyo’s action was precipitated by successive warnings of a credit downgrade from various ratings agencies if Congress failed to enact new tax laws, specially the ‘sin’ tax bill (PDI 2004c).  The private meeting was called after the House Ways and Means Committee proposed raising sin tax rates by 20% in 2005 and by 3% thereafter in 2006 and 2007 instead of indexing the taxes to inflation.  Arroyo also certified the bill as urgent after the private meeting with the business tycoons (PDI 2004d).

In a grueling session that stretched to the early morning of October 28, the House approved HB 3174 with an impressive 144-10-1 vote despite charges of railroading from the opposition.  The chamber upheld the version reported by its Ways and Means Committee.  Opposition solons complained that the majority cut short the period of amendments during the plenary session.  For instance, Rep. Alan Peter Cayetano said he wanted to

include an amendment that would prohibit duty free shops from selling smuggled tobacco products (Avendaño and Pablo 2004; Ager 2004).  The House’s approval of the sin tax measure buoyed Malacañang’s spirits.  In early November, President Arroyo declared that although the country still had a fiscal problem, its situation could not be described as a fiscal crisis as she had acknowledged earlier “because the resolution is underway” (Cabacungan 2004c).  However, the President also gave signs of further amendments of the tax measure.  In her October 25 meeting with sin product manufacturers, President Arroyo said she proposed a compromise formula calling for a combined 12% and P0.40 increase in alcohol and cigarette products in 2005.  She claimed the compromise formula would bring in more additional revenue (at P4.5 billion in 2005) than HB 3174 (which will bring in P3.8 billion in 2005) (Cabacungan 2004a; Cabacungan 2004b).

Arroyo’s critics were not impressed.  Former Finance Undersecretary Milwida Guevara expressed

bewilderment at the effusive claims made by the Palace.  Guevara disputed claims HB 3174 would generate P26 billion in additional taxes in three years.  She calculated that the measure would only bring in P9 billion.  Apart from criticizing the failure to index tax rates with inflation, Guevara also complained about the retention of unevenly sized price tiers.  She claimed that the wide difference between the categories (P4.48 between medium-priced and low-priced brands, and P7.84 between high-priced and low-priced brands) induces manufacturers to misrepresent their products as ‘low-priced’ for a lighter tax burden.  She also noted that the ranges for each tax bracket (only P1.50 for medium-priced brands and P3.50 for high-priced brands) were uneven and arbitrary and “invite suspicion that they were tailored to ensure that favored cigarettes would be classified as either low or medium priced”.  She noted that this arbitrariness could explain the variance between tax and production shares.  More than half of cigarettes produced are low-priced; but since they pay only a tax of P1.12 per pack, they contribute less than 20% of total excise taxes collected on cigarettes.  In contrast, high-price brands that account for only about 30% of production, contribute about 60% to cigarette revenues (Guevara 2004; PDI 2004f).

The deficiencies of the House version of the ‘sin’ tax measure are absent in the counterpart Senate Bill 1815 proposed by

Senator Juan Ponce Enrile.  SB 1815 would do away with the four-tiered specific tax rate schedule and proposed a higher increase (a single tax rate of P13.50 per pack by 2010) so the sumptuary purpose of ‘sin’ taxation would be met.  In addition, the Enrile bill proposed earmarking 5% of revenues to fund cancer-related issues and another 5% to modernize regional hospitals in the country (Monsod 2004).  The committee report adopted by the Senate Ways and Means Committee chaired by Senator Ralph Recto provided for increases in ‘sin’ tax rates up to 2011 instead of just up to 2007 in the House version.  In the said committee report, excise taxes on tobacco products would increase by 30-112.5% in 2005 and by as much as 260% by 2011.  In a predictable response, the bloc of House members coming from tobacco-growing provinces defended the House version.  Rep. Eric Singson, acknowledged head of the Northern Luzon Alliance, vowed to fight the Senate version in defense purportedly of the tobacco farmers in his district (Romero 2004; Ubac and Pablo 2004).

What would make the pot boil over were allegations of a P1-billion lobby fund that may have flowed into the House to water down the ‘sin’ measure made by no less than Rep. Herminio Teves, vice chairman of the House Ways and Means Committee.  While Teves stopped short of categorically saying that his colleagues

were bribed, he noted that Fortune Tobacco would save a lot of money due to a lighter tax burden provided by HB 3174.  All the concerned parties, including Fortune Tobacco, dutifully denied the allegations.  Immediately, Teves revised his allegations and disclaimed knowledge of the lobby fund.  However, he continued to allege the existence of lobbying efforts over the ‘sin’ tax measure (Albano 2004; Balana, Avendaño, Cabacungan, and Nocum 2004; Pablo, Avendaño, and Labog-Javellana 2004).


[1] Section 6 of HB 2933 provides amnesty for taxpayers with pending tax assessment before the BIR. The person may avail himself of an amnesty equivalent to 10 percent of the basic tax assessed. Section 7 provides that taxpayers with a final and executory assessment and tax cases already pending before the courts are allowed to avail themselves of tax amnesty equivalent to 20 percent of the basic tax assessed, exclusive of interest, surcharges and penalties.

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Comments
  1. cav says:

    Interesting blog… Hope you can post your source articles/references

    • bongmendoza says:

      Cav: here are the sources for this blog entry listed in the order of their appearance:

      PDI 2004a. “Arroyo seeks tax reform, sale of power assets.” Philippine Daily Inquirer, 27 July 2004.

      Dumlao 2004a. “BSP chief bucks ‘fiscal crisis’ proposal.” Philippine Daily Inquirer, 6 July 2004.

      Ho 2004a. “Cabinet panel approves oil tariff hike to 5%.” Philippine Daily Inquirer, 22 July 2004.

      Ho 2004b. “Arroyo signs order raising oil taxes.” Philippine Daily Inquirer, 27 July 2004.

      Dalangin-Fernadez 2004a. “Arroyo moves to scrap VAT, propose new tax measures.” Philippine Daily Inquirer, 22 July 2004.

      Remo 2004a.”Gov’t eyes 2-step rise in VAT.” Philippine Daily Inquirrer 24 July 2004.

      Remo 2004b. “Gov’t pushes new tax amnesty program.” Philippine Daily Inquirer 31 July 2004.

      Remo 2004c. “Finance dep’t to press for 10% amnesty.” Philippine Daily Inquirer 6 August 2004.

      Remo 2004d. “Finance bucks 5-year moratorium on new taxes.” Philippine Daily Inquirer 15 August 2004.

      HOR-CAD 2004. House of Representatives-Committee Affairs Department. “Ways and Means Committee unveils tax amnesty program.” Committee News 13(9): 11 October 2004.

      Remo 2004e. “DOF upset over House rejection of taxpayers’ SAL.” Philippine Daily Inquirer 12 September 2004.

      HORJ 2004. House of Representatives-Journal of the House. Journal No. 20, 21 September 2004, p. 53.

      Remo 2004f. “Finance dep’t bucks House version of tax amnesty.” Philippine Daily Inquirer 25 September 2004.

      Dalangin-Fernandez 2004b. “Arroyo certifies tax amnesty bill as urgent.” Philippine Daily Inquirer 21 September 2004.

      PDI 2004e. “Senate version of tax amnesty differs from BIR’s.” Philippine Daily Inquirer 3 November 2004.

      Monsod 2004a. “Costs of tax amnesty outweighs benefits.” Philippine Daily Inquirer 13 November 2004.

      Romero 2004. “N. Luzon congressmen defend House version of ‘sin tax’ bill.” Philippine Star 17 November 2004.

      Remo 2004g. “Finance bucks ad valorem tax on ‘sin products’.” Philippine Daily Inquirer 28 September 2004.

      PDI 2004b. “Fortune Tobacco opposes Philip Morris’ proposal.” Philippine Daily Inquirer 17 September 2004.

      Remo 2004h. “Gov’t gives in to tobacco lobby, cuts proposed tax rate.” Philippine Daily Inquirer 22 October 2004.

      Remo 2004i. “BIR seeks to plug loophole in tax bill.” Philippine Daily Inquirer 23 October 2004.

      PDI 2004c.”Arroyo urges tobacco, alcohol giants to support sin taxes.” Philippine Daily Inquirer 26 October 2004.

      PDI 2004d. “Arroyo certifies ‘sin tax’ hike bill as urgent.” Philippine Daily Inquirer 27 October 2004.

      Avendano and Pablo. 2004. “House passes ‘watered down’ bill on sin taxes.” Philippine Daily Inquirer 29 Ocotber 2004.

      Ager 2004. “House passes bill to raise taxes on alcohol, tobacco.” Philippine Daily Inquirer 29 October 2004.

      Cabacungan 2004a. “Palace announces breakthrough on ‘sin tax’ bills. Philippine Daily Inquirer 28 October 2004.

      Cabacungan 2004b. “Palace bullish on ‘sin tax’ bill, improved credit rating.” Philippine Daily Inquirer 4 November 2004.

      Cabacungan 2004c. “We’re now out of fiscal crisis, says Arroyo.” Philippine Daily Inquirer 5 November 2004.

      Guevara 2004. “It is a Sin to Tell a Lie.” Attachment to an e-mail message of TAN Exeutive Director Vincent Lazatin to the Support NARA e-group, 2 November 2004.

      PDI 2004f. “House version of ‘sin tax’ bill seen as ‘deficient’.” Philippine Daily Inquirer 5 November 2004.

      Ubac and Pablo 2004. “Senators want higher ‘sin’ taxes.” Philippine Daily Inquirer 17November 2004.

      Albano 2004. “No lobby in approval of ‘sin taxes’–Lapus.” House of Representatives Press Release 12 November 2004.

      Balana, Avendano, Cabacungan, and Nocum 2004. “Solon recants P1-B tale.” Philippine Daily Inquirer 13 November 2004.

      Pablo, Avendano and Labog-Javellana 2004. “P1-B lobby for ‘sin’ taxes.” Philippine Daily Inquirer 12 November 2004.

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