Archive for the ‘tax reform’ Category


Department of Finance (DOF) logo

From government’s point of view, the ideal excise tax on sin products is an ad valorem or a percentage tax of the manufacturing price of a pack of cigarettes or a bottle of beer or whiskey.  Failing that, it can accept a specific tax on these products indexed to the inflation rate.  Of course, it goes without saying that government will prefer the highest tax rate, be it specific or ad valorem.

Through  these specifications, government can collect the maximum possible sin tax revenues.

Additionally, the national government believes that high sin tax rates will dampen consumption and consequently have positive effects not only on people’s health.  It could also improve peace and order and reduce crime rates.

Department of Health (DOH) seal

What about the tax preferences of the manufacturers of sin products?  Of course,  they will prefer low rates; specific rather than ad valorem; and unindexed (to inflation) tax rates.  Low tax rates will ultimately lead to lower prices of sin products which will ultimately mean greater demand for the same.  Nonetheless, the demand for sin products is generally inelastic–meaning demand for the same is not very sensitive to changes in product prices except in the long run.  Some tax experts report that beer is the most inelastic among alcoholic beverages while others opine that the nicotine content of cigarettes make demand for tobacco products also inelastic.

Local sin product manufacturers have predictably opposed the government-proposed 1000% increase in specific taxes on beer and alcoholic beverages and tobacco products.  The huge increase is proposed given the relative freezing of specific tax rates since 1996.  The tax law approved at the time did not approve indexation to inflation of the tax rates and provided only for minimal tax increases.

 

San Miguel beer

How will consumers of sin tax react to government’s tax proposals?

Filipino beer drinkers

It does not take one to be a rocket scientist to figure out that consumers will oppose government’s plans.  In his column at the Philippine Daily Inquirer yesterday, Prof. Cielito Habito pointed out that the poor consume sin products in a greater proportion compared to middle income and rich people.  Thus, they will oppose increases in tax rates that translate into higher retail prices.  

Colt 45, one of the beer brands of Asia Brewery Inc.

And higher retail prices for these ‘indispensable’ products means lower real incomes for the poor.

This might not register well with a public already reeling with high prices of oil products and an increase in transport fares.  

What we have here is a case where the interests of sin tax manufacturers and consumers largely coming from the ranks of the poor are aligned and ranged against that of government.

Obama and Noynoy smoking

It is incumbent upon government to gather political support for its tax plans within and without Congress.

 

Will it be a good idea to appeal for support from the wives and children of smokers and drinkers who may be concerned about the health of their relatives?  To those who are worried that  the money  spent for sin products is money that should spent for the dining table and other household necessities?  Or will that be seen as an invasion of privacy and curtailment of individual freedoms? Or will it encourage strife within households?

Will examples from role models help?

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It’s the season to consider taxes on so-called sin products such as cigarettes and alcoholic drinks.

There is no better evidence for this than the full-page advertisements that came out during the past weeks in the major dailies paid by concerned manufacturers.

British American Tobacco logo

The first blast was fired by a company (obviously British American Tobacco Philippines through its public relations company) seeking entry into the cigarette industry with the proviso that the tax regime should not be discriminatory.  Under the current regime, cigarettes were classified  and taxed using a four-tiered schemeHowever, cigarette brands introduced after 1997 were taxed at a higher rate relative to older brands. BAT Philippines, which manufactures Lucky Strike among others,  wants the discrimination against new brands to be done away with.  It adds that it will bring in $200 million in fresh investments if a level playing field will ensue after the tax reform.

Philip Morris Fortune Tobacco Corp. logo

The Philip Morris Fortune Tobacco Corp. (PMFTC) opposed the abolition of four-tiered scheme as well the higher tax rates on newer brands.  This is understandable since PMFTC benefits from the existing tax regime and is willing only for minimal tax increases over five years.

Rep. Joseph Abaya

Authored by Rep. Joseph Abaya, House Bill No. 5727 incorporates features, such as a unitary tax regime, that are to BAT Philippines’ liking and is opposed by PMFTC. 

However, HB 5727 contains a feature that finds favor with both corporations.  The excise tax on cigarettes (of packs of 10s and packs of 20s) are specific rather than ad valorem or percentage taxes.

An ad valorem tax is a percentage levy imposed on the monetary value (i.e., the manufacturers’ price) of a product.  For example, if the tax rate is 10% and the manufacturers’ price of a 20-stick pack of ciga­rettes is P30.00, then the excise would amount to 3 pesos (or P3.00).  If all cigarettes regardless of retail price were slapped with a uniform tax rate, more expensive cigarette brands would pay a higher amount on a per unit basis compared to cheaper brands.    On the other hand, a spe­cific tax is a monetary levy on the quantity (or specified unit) of the product in question.  To illustrate, if the tax base is the cigarette pack (of 20 cigarette sticks), then a specific tax of P3.00 can be collected on each pack produced.

The ad valorem tax is regarded as superior to the specific tax since it is inflation-proof.  When manufacturers’ costs go up and retail prices would consequently increase, the revenue to be collected would increase in a like manner without any change in the ad valorem tax rate.  Sup­pose the manufacturers’ price of the cigarette pack increased from P30.00 to P35.00, the cor­responding excise would now be 3 pesos and 50 centavos (or P3.50).  To remedy its inferiority, tax technicians advise indexation of the specific tax rate; that is, the specific tax should automatically increase as an agreed-upon indicator, say the consumer price index, increases.

The supposed advantage of the specific tax over the ad valorem lies in its simplicity.  As wags would put it, tax bureaucrats must understand a company’s financial statements in or­der to impose an ad valorem tax.   With a specific tax, the tax bureaucrat needed only to know how to count how many of the product in question was produced during a taxable period.  With the ad valorem, the tax official must not only know how to count but also how to ac­count, that is, to understand complicated accounting and financial statements.   A further disadvantage of the ad valorem system is that it invites transfer pricing and other schemes at tax evasion.  The tax must necessarily be levied on the manufacturer; if it were imposed on the retailers, the administration of the tax would be more complicated.  There are obviously many more re­tailers than manufacturers and there would a great number of retail prices to reflect differing market conditions.  If the ad valorem was levied on the retail price of a product, then there would as many effective tax rates as the number of retail prices for a given product.  Of course, the situation is complicated by the existence of many brands of a given generic sin product since cigarettes of Brand A would sell at a retail price different from cigarettes of Brand B or Brand C.  In addition, Brand A cigarettes would sell at different retail prices in different parts of the country.

Sin product manufacturers would thus face the incentive of under-declaring their manufacturers’ price so that their ad valorem tax bites would be lower.  They would then sell their output to affiliated marketing arms that would sell the products at retail price levels that were many degrees removed from the declared tax base.  In this manner, they deprive the public treasury of revenues the amount of which is determined by the difference between the retail and the manufacturers’ price.   Tax evaders would face this incentive if there was a great differen­tial between the ad valorem and the VAT rates (where the ad valorem is greater than the VAT rate).  Furthermore, if the tax base for the VAT is the manufacturer’s net price plus the ad valorem excise tax, then the incentive to under-declare costs at the manufacturer’s level be­come more robust.  The under-declaration would have a cascading effect; under-declaring manufacturing costs would lower the VAT base, which it would lower the income tax base.  If the tax code provides different ad valorem rates for differently priced generic products, then the manufacturer also faces the incentive to mis-classify his product in order to be taxed at a lower rate.  The corporate group can cheat the public treasury many times over.  For this to happen, the marketing arms must also cheat on their value-added tax (VAT).  They can avoid paying the VAT altogether.  If they were scrupulous in paying this tax, what the manufacturer avoided paying by under-declaring his price would be captured by the internal revenue service from the marketing firms.  Then all of these companies (manufacturer and marketing arm) would doctor their profit-and-loss statements to be assessed lower income taxes.



Last week, I wrote about a possible chink in the armor of the Northern Luzon Alliance NLA), a group of congressmen from the tobacco-growing parts of Northern Luzon, including the Ilocos.  This was when Ilocos Sur Governor Luis ‘Chavit’  Singson joined a press conference sponsored by the Department of Health regarding the hazards of smoking.

Governor Chavit Singson

Apart from being a poster boy for healthy living, Singson surprisingly expressed support for an administration- sponsored tax bill after decades of dodging tax hikes on tobacco products.  Displaying economic acumen, Singson explained that the merger of Philip Morris and the Lucio Tan-owned Fortune Tobacco Corp. created a monopoly big enough to depress tobacco farmers’ selling prices.  In effect, he said, only the manufacturers were benefiting from the transactions.

Fortune cigarettes

During that same press conference, Singson said he will talk to his NLA colleagues to get them to his point of view.

However, it seems that it was Singson who was convinced to come back to the fold.

A report of Tempo last 19 March 2012 read:

La Union Rep. Victor Ortega, president of the Northern Luzon Alliance (NLA), said he expects members of the organization, dubbed the “Solid North,” to maintain this stance after learning of Ilocos Sur Gov. Luis “Chavit” C. Singson’s clarification of media reports claiming that he has thrown his support to House Bill (HB) No. 5727 that contains the DoF version of the sin tax measure.

In a meeting with Ortega last week, Singson, an influential political leader in the Ilocos region, has made clear that he would support the bill that will protect the interests his constituents, the tobacco farmers, and other stakeholders in the affected industries.

“Definitely, it will not be the unitary tax system, we will vote against it,” Ortega said a day after he and several Northern Luzon lawmakers held a dialogue with Singson last week. He added, “Buo ang Northern alliance, we intend to vote as one bloc if that is what it takes to protect our industries.”

Rep. Victor Ortega

Ortega said HB 5727 is considered by many congressmen as “prejudicial to the interest of our constituents and the tobacco industry.”

What we have here is somebody, Ortega, claiming that Chavit will ‘vote’ against HB 5727.  Technically, Chavit cannot vote against the bill since he is not a member of the House of Representatives. 

However, if he indeed changed his mind and will cast his lot against the bill’s opponents, Chavit’s opinion will carry a lot of weight.


Early in PGMA’s full term, a new sin tax law (that again failed to index tax rates to price changes) was passed together with a reformed VAT law (which increased the VAT rate from 10% to 12% and

President Gloria Macapagal Arroyo

 expanded VAT coverage) and a lateral attrition law (which provided a stick-and-carrot system to spur revenue collection) by the 13th Congress from late 2004 up to the first half of 2005.  The political crisis that ensued after the surfacing of tapped telephone conversations between President Arroyo and a high-ranking election officer (which alleged vote padding in her favor during the 2004 presidential elections) precluded the possibility of subsequent tax reforms.  Several conclusions could be made after a careful assessment of the tax reform initiatives undertaken since Arroyo became the country’s President in January 2001.

  • Initiatives to improve tax administration are comparatively the most difficult to enact into law, as shown in the IRMA-NARA episodes.  Legislators, especially members of the House of Representatives, apparently do not see any possibility of extracting divisible policy favors in this arena.  For this reason, tax administration reforms continued to wither on the vine even if the country faced formidable fiscal problems.   In fact, some of them behaved as if they were oblivious to these difficulties and proposed a moratorium of new taxes.

 

  • The alacrity of legislators to provide divisible policy favors to constituents, supporters and financiers alike continue to be illustrated by the primary attention accorded to and the immediate passage of the tax amnesty measure.  In this occasion, members of the House outdid its predecessors when they made tax delinquents with pending or final tax assessments and with pending court cases eligible for the tax amnesty.  The almost give-away amnesty rates (a standard rate 2-3% of net worth; 10% for those with pending assessments; and 20% for those with final assessments and pending court cases) approved by the House members is another indication of readiness to cater to special interests.

 

  • The pronounced difference in the private-regardedness in policy preferences of the House compared to the Senate can be seen in the ‘sin’ tax measure. 

 

  • The salience of individual legislators and legislative committees noted during the Ramos presidency continued during the Arroyo presidency.  This is to be expected since the institutional parameters and structures of Philippine tax policy making remained unchanged.  The House Ways and Means Committee continued to be instrumental in watering down the tax reform proposals of the Executive, particularly the Department of Finance, even if said measures were certified urgent by the President. 

 

  • Familiar individual legislators, such as Reps. Exequiel Javier, Eric Singson, Raul del Mar and

    Raul del Mar

    Rep. Eric Singson

    Catalino Figueroa continued their predisposition to champion the needs of special interests.  Javier, Singson and del Mar separately authored bills providing for tax amnesty.  In addition, Javier spearheaded efforts to question the constitutionality of the provision requiring every taxpayer to submit a statement of assets and liabilities (HOR-CAD 2004a).  Javier also sponsored HB 2653 that proposed a shift in the excise taxation of tobacco products alone (excluding alcohol) back to the ad valorem system. In another coincidence, Fortune Tobacco also favored a shift back to the ad valorem tax system for cigarettes (HOR-CAD 2004b).  The veteran lawmaker also sponsored HB 2456 aptly titled “An act to recapture the power over tariffs,” which proposed to amend Section 401 of the Tariff and Customs Code.  This particular section empowers the President to set tariff rates for imported products when Congress was not in session.  The thrust of Javier’s proposed bill is to limit the powers of the President in this regard (HOR-HM 2004b). For his part, Figueroa filed HB 2509 that sought to abolish the value-added tax (VAT) (HOR-HM 2004a).


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.


Through a rigorous analysis of the tax reform efforts of President Fidel Ramos (1992-1998), the tax policy process is revealed as a bargaining game between various veto players.  An accommodation of some sort is pre-ordained since even as the players have veto powers, everyone has an interest in making sure that a new tax policy emerges from the policy mill.  This is true for President Ramos who initiated the reform.  The desire to get the reform process going is also shared by legislators who, even if satisfied with the status quo, welcomed another opportunity to rewrite tax laws in order to secure divisible policy favors for constituents and supporters.  As a product of bargaining, the resultant tax laws were adulterated versions of their original versions and a mix of public-regarding (e.g., the expanded value added tax law) and private-regarding (e.g., the excise tax on ‘sin’ products law) policies.  The study of the tax policy process affirmed the propensity of lower-level legislators House members) to cater to special and private interests while the Senate was the natural ally of reforming President Ramos.  It also revealed the inordinate influence of several powerful individual legislators in tax policymaking.  The institutional players also included the Supreme Court, which at one point declared a tax law as unconstitutional.  This raised the transactions costs of tax legislation as a new and acceptable law had to be crafted.

 
 

 

 

 

 

 

 

President Fidel Ramos

 

The robustness of the conclusions and findings we had arrived at so far can be further tested if we change the decision-makers with the institutional parameters in place.  For this purpose, we examine in this section the tax reform initiatives undertaken during the presidency of Gloria Macapagal-Arroyo.  As revealed in subsequent paragraphs, this exercise would reveal continuities in tax policy and bolster our previous conclusions regarding tax policymaking in a candidate-centered democratic polity like the Philippines.

 

Arroyo’s tax reform initiatives evolved from her first term to the early months of her second term.  While the state of the country’s public finances was not in a pretty shape upon her take-over in January 2001, a greater sense of urgency was espoused during the start of her second term.  This was largely due to the alarm bells raised by a group from the University of the Philippines School of Economics (UPSE) [that included several former cabinet members from previous administration] who warned of an impending fiscal meltdown.  In her 2004 State of the Nation Address (SONA), Arroyo asked Congress to pass eight tax measures designed to raise some P80 billion in revenues.  However, Arroyo did not communicate a sense of necessity in this front.  She in fact did not replace her economic management team; in contrast, she appointed new men for the national defense and security portfolios.  The UPSE economists did a signal service for warning the nation of the fiscal dangers awaiting a polity that would continue to not fix its public finances.

 

 

 

 

 

 

 

 

President Gloria Macapagal-Arrooyo

 

During her first term, Arroyo initiated moves to reform the Bureau of Internal Revenue (BIR), the country’s premiere revenue collection agency.  The thrust of the reform was to convert the BIR into a corporate-like public organization that would operate (as well as rewarded and punished) under performance-based parameters.  Officers and staff of the new revenue authority were supposed to be paid at salary scales competitive to the private sector and shielded from political influence.   In her first SONA, Arroyo cited unprecedentedly the sitting BIR commissioner, a mere bureau chief, who spearheaded the reform effort.

 

An interview with Romulo Miral, Jr., then deputy director of the Congressional Planning and Budget Office (CPBO) at the House of Representatives, indicated the radical extent of the proposed BIR reform.  Miral, who was consultant to Bañez at the time, revealed that the plan was to abolish the BIR and establish a new and independent revenue body called the Internal Revenue Management Authority (IRMA) in its place.  None of the former officials and employees of the BIR were to be automatically or preferentially absorbed into IRMA.  There were plans to sub-contract private head-hunters to hire the officials and staff of IRMA and former BIR personnel had to apply with a screening board if they wanted to be employed by IRMA.   Anybody with a derogatory record was deemed ineligible for employment until her name was cleared.  IRMA officials and staff were to enjoy competitive salaries so quality personnel from the corporate sector could be attracted.  In addition, the pay and tenure of senior IRMA officers were to be linked with revenue collections (Miral 2004).   

 

Of course, the BIR officials and employees were against the planned reform.  At first, opposition to Bañez’ initiatives (including the transfer of revenue officials who had overstayed at a particular revenue district office to another locale) was confined to the filing of court suits. However, they obtained support from Courage, the left-leaning union of government employees.  The alliance between Courage and anti-reform BIR elements initiated a massive walkout and picketing at the BIR headquarters against Bañez. Almost immediately after this demonstration of popular resentment, he resigned in August 2002.  Bañez, who wanted to be able to fire corrupt and incompetent tax collectors, accused opponents of reform of stirring up trouble among the agency’s employees and undermining tax collection to thwart changes at the agency (MB 2002). President Arroyo admitted in her State of the Nation Address two weeks earlier in July 2002 that tax collections were running far behind target, while government spending is increasing as planned, so that chances are diminishing of reaching the 3% deficit target she had imposed for this year (Mendoza 2002). 

 

Arroyo could have clearly demonstrated her support for the embattled BIR chief and the IRMA reform by refusing to accept his resignation and supporting the IRMA reform.  However, the planned reform of the tax agency apparently found little support even among her chief allies.  The corrupt mafias within the BIR apparently sabotaged the reform effort by slowing down tax collections.  The drop in revenues was cited by reform opponents to call for Bañez’ resignation and no less than Speaker Jose de Venecia made the first call. 

Houser speaker Jose de Venecia

The speaker was seconded by other House members including Aniceto Saludo, Jr. (Southern Leyte) and Prospero Nograles (Davao).  Saludo even threatened to file charges of economic sabotage against Bañez for the poor revenue collections (Diaz 2002).  Notwithstanding President Arroyo’s optimism during her 2001 SONA, Bañez’ reform efforts apparently did not earn him friends within Congress, especially in the House of Representatives.  While House Bill 5054 calling for the establishment of a National Authority for Revenue Administration (NARA, a new name used in lieu of the much-maligned IRMA) was introduced, the measure languished in the House Committee on Appropriations (HOR 2003).  During the third and last regular session of the 12th congress, a similar measure (HB 6435) was also introduced.  While it fared better than HB 5054, it only managed to be reported by committee and did not pass the second reading stage.  In the Senate, a counterpart measure (Senate Bill 2463) was introduced by Senator Ramon Magsaysay, Jr.  However, the 12th Congress closed with SB 2463 pending in the Senate Committees on Ways and Means (headed by Senator Ralph Recto), Civil Service and Government Reorganization (headed by Senator Aquilino Pimentel), and Finance (headed by Senator Manuel Villar) (HOR 2004).

 

Miral (2004) explained the proposed BIR reform did not gain ground during the 12th Congress for several reasons.  First, the proposed reform was “mistakenly packaged” as either a ‘privatization’ or ‘corporatization’ of revenue collections.  Miral believed these were unfortunate labels that unduly raised alarums and red herrings among the affected parties.  Second, he noted that the authors of the IRMA measure (which included Speaker de Venecia, Rolando Andaya, Jr., Neptali Gonzales II, and Julio Ledesma IV) were actually not well versed in the technical aspects of the proposed agency reform.  Miral intimated that the less-senior champions of the reform, Reps. Florencio Abad and Joel Villanueva (a party-list representative) were the ones who seriously studied the IRMA proposal and even traveled to countries like Mexico and New Zealand that had reformed their revenue agencies

Rep. Joel Villanueva

(Miral 2004).  Rep. Florencio 'Butch' AbadBut they apparently could not offer much contest to the reform’s opponents.  After Bañez’ resignation, the reform was softened through a proposal to form a National Authority for Revenue Administration (NARA).  A key compromise was the inclusion of a ‘preferential absorption of BIR employees’ provision in the proposed NARA measure.  

 

 

During the same 12th Congress, other tax reform measures similarly rotted within the legislative mill.  At the end the second regular session, the status of measures to index and update so-called ‘sin taxes’ (HB 4765 and HB 5057) was reported as for ‘further Committee deliberation’ (HOR 2003).  During the third regular session, similar measures (HB 1728 and HB 4765) remained pending at the House Committee of Ways and Means chaired by Rep. Julio Ledesma IV (HOR 2004).  In contrast, measures that provided tax relief for several sectors and groups were either enacted into law or were approved by the House in third reading.  These included RA 9238 (which exempted certain services from the VAT), RA 9243 (which eliminated the imposition of the documentary stamp tax on secondary trading of financial instruments), RA 9294 (which clarified the tax exemption of offshore banking and foreign currency deposit units, authored by Rep. Exequiel Javier), HB 5713 (which granted tax incentives on capital equipment imports of new and expanding firms registered with the Board of Investments), HB 6344 (which restored the fiscal incentives to enterprises engaged in agriculture and fisheries (HOR 2004). 


This blog entry will illustrate the inordinate power and influence of legislative committees and powerful individual legislators in the policy process.  In the case of tax policymaking, the officials and members of the House and Senate Ways and Means Committees would wield this disproportionate power relative to their respective legislative majorities.  Comparatively speaking, officials of the House Ways and Means Committee wield disproportionate power vis-à-vis ordinary committee members and non-committee members on tax policy matters relative to the Senate Ways and Means Committee.  Because of the small number of senators (24), the Senate Ways and Means Committee may already constitute a built-in super-majority than can ensure passage of the committee report in the Senate plenary floor.  On the other hand, the larger number of House members and the larger size of the House Ways and Means Committee allow committee officials greater leeway in the tax policy making process.

Table 1

 Number of ‘bicam’ conferees that were not Ways and Means Committee members, major tax laws of the Ramos presidency

 

  RA 7654 RA 7716 RA 8184 RA 8240 RA 8241 RA 8424
House of Representatives 0/11 1/10 3/10 2/13 5/12 5/20
Senate 0/7 1/7 0/8 1/6 0/5 2/7
Percentage share of non-members 0 11.7% 16.7% 15.8% 29.4% 25.9%

 

 As shown in Table 1, members of the Ways and Means Committees of both chambers numerically dominated all of the Bicameral Conference Committees formed to reconcile the differences on all major tax laws passed during the Ramos presidency.  The dominance of Ways and Means Committee members in the bicameral conference process was not uniform across the six major tax laws.  Their influence was relatively weakest during the deliberations of the more controversial tax measures, RA 8241 (or the improved VAT law) and RA 8424 (on individual and corporate income taxation).  Though also contentious, the influence of committee members was stronger for RA 8184 (on petroleum product taxes) and RA 8240 (on ‘sin’ taxes) and almost dominant during the 9th Congress that deliberated on RA 7654 (on cigarette taxes) and RA 7716 (or the expanded VAT law).

 

If we consider the identities of the bicameral committee conferees (as shown in Table 2), the influence on individual legislators on the tax policy process would be clearly perceived.  This influence is most perceptible for individual members of the House of Representatives.  Playing key roles were the officers of the House Ways and Means Committee who served in that capacity in both the 9th and 10th Congress.  They include Rep. Exequiel Javier, who served as Committee Chairman during the entire Ramos presidency, and Reps. Renato Diaz, Mariano Tajon, Catalino Figueroa, and Jerome Paras, who were committee vice chairmen during the same period.  Rep. Ramon Bagatsing, Jr., Raul del Mar, and Eric Singson were committee members for both Congresses.  Singson, for one, may appear to be an ordinary member of the Ways and Means Committee. He however brings with him the clout of being vice chairman of the powerful Appropriations Committee. In addition, he was the acknowledged leader of the Northern Luzon Alliance, a powerful voting bloc composed of legislators from the tobacco-producing provinces.  Tajon is also a key figure in the tobacco alliance.  The particularistic activism of Singson on behalf of the tobacco industry and his constituents was alluded to earlier in Chapter 5 when he tried to remedy RA 8240’s infirmities harmful to Fortune Tobacco.  In addition, his only attendance and active participation in the bicameral process for RA 8424 was his plea that a new section be inserted in the National Internal Revenue Code (NIRC), which shall embody a section in RA 7171 on special financial support to beneficiary provinces producing Virginia tobacco (Bicam TCM, 29 October 1997).

 

Some individual legislators served as conferees despite being non-members of the Ways and Means Committee.  For instance, Rep. James Chiongbian was not a member of the Ways and Means Committee but he was a conferee to both the expanded and improved VAT laws.   It is apparent that he participated in the bicameral deliberations as an interested and affected party.  The Chiongbians were heavily involved in the inter-island shipping industry and shipping was one of the sectors debated by lawmakers for VAT exemption.  The participation of other non-members of the Ways and Means Committee could also be explained.  Rep. Marcial Punzalan, Jr. joined the Bicameral Conference Committee for RA 8184 since he was the principal author of HB 72, the original House measure on petroleum product taxation that was eventually substituted by the final House version, HB 5550.  Rep. Enrique Garcia, Jr., who was a former official of a petroleum product company, expressed great interest and expertise in oil industry deregulation and the related taxation issues, and was therefore drafted for the bicameral committee of RA 8184 that governed taxation of oil products.  Garcia was also a key member of the powerful House Appropriations Committee and he most likely brought that clout to the bicameral conference of RA 8424. 

 

The same is true for Rep. Arnulfo Fuentabella, who was a conferee for RA 8241 and RA 8424 even if he was no longer an official of the Ways and Means Committee during the 10th Congress.  Fuentebella, however, was a Ways and Means Committee vice chairman during the 9th Congress and was a key member of the Appropriations Committee during the 10th Congress.  His seniority and expertise were the most likely reasons why he became a bicameral conferee in two occasions during the 10th Congress despite his non-membership of the Ways and Means Committee.  Expertise in tax matters appears to be the strongest suit for Rep. Margarito Teves.  Teves served as member of the House Ways and Means Committee during the 9th Congress.  However, he did not become a conferee to the bicameral process during that period.  During the 10th Congress, he was no longer a member of the House Ways and Means Committee.  However, he still managed to become a conferee in three occasions during the same period.  Reps. Antonio Diaz and Amadeo Perez, Jr. bring with them the cachet of being vice chairman of the House Appropriations Committee during the 10th Congress.  In effect, the only featherweights who became conferees were Reps. Leopoldo San Buenaventura and Zoilo de la Cruz, Jr.  De La Cruz, who was sectoral representative for labor during the 10th Congress, attended the Bicameral Conference Committee meetings for RA 8424 only once.  The only time he attended was on 17 November 1997; however, the meeting was cancelled because Sen. Juan Ponce Enrile was rushed to the hospital.  De la Cruz’ participation was therefore effectively limited to affixing his signature to the Bicameral Conference Committee report.  San Buenaventura, meanwhile, had a slightly meatier role than De la Cruz.  He co-authored House Bill 5881, an innocuous bill that sought to promote tax consciousness; HB 5881 was among the several bills that were substituted by HB 9077, the House’s final version of the income tax bill.

 

The populist predispositions of some legislators were revealed during the bicameral process for RA 8424, the tax law for individual and corporate income.  Reps. Manuel Roxas, Felicito Payumo and Raul del Mar initially dissented with the bicameral conference committee report as they insisted for a higher personal exemption level.  However, other conferees that were initially absent during the initial signing of the committee report began signing the same such that it was deemed approved.  The three started changing their minds fearing they would be associated with an unpopular and losing position.  Defeat of the committee report would mean return to a status quo of a much lower exemption level.  Their change of heart was no longer necessary at the time it was made since a sufficient number of signatures were gathered to approve the committee report.  The three however found it necessary to change their votes and be on the winning side.  Roxas even delivered a privilege speech to explain his turnaround.  These changes were accepted even as opposition legislators questioned if they were allowed by the House rules.