Archive for the ‘Taxation’ Category


By several standards, the Philippines has fallen behind her East Asian neighbors and suffer from predictable consequences. It is often said (and bragged) that the per capita income in the Philippines was second only to Japan in the 1950s.

Rosa Maria Alonso i Terme, an economist from the World Bank who was also recently a visiting professor at the University of the Philippines School of Economics (UPSE), reported that almost 60 years later, in 2012 it had slipped down the rankings of the region behind all the by-now-developed countries, such as South Korea, Taiwan, and Singapore, and all the upper middle-income countries, such as China, Thailand, and Malaysia. In addition, Vietnam and Indonesia had overtaken the Philippines in education results (Program for International Student Assessment tests), and were fast approaching it in income levels.

This drop down the rankings is not unique to the East Asian context. I Terme also observed that the Philippines is now also below the income per capita level of almost all Latin American countries, ranking below Guatemala. The World Bank meanwhile noted that the country also exhibits the highest level of income inequality and the lowest rates of poverty reduction in East Asia during the 1980-2010 period. Even more worrying, despite increasing growth in the 2000s poverty increased steadily from 2003 to 2009 and only registered a statistically insignificant decline from 28.6 to 27.9 percent between 2009 and 2012. The country also exhibits the highest tuberculosis prevalence rate in the region, and infant and maternal mortality rates that are significantly higher than the region’s average.

 

For the rest of the article, please click on the link below:

 

http://www.interaksyon.com/business/96758/reversing-downward-trend–ph-needs-new-politics-with-a-new-tax-culture-at-its-core


In theory, taxation is essentially coercive because taxes are never paid voluntarily. However, taxes are supposedly collected not only for purpose of collecting them but to finance public goods. Thus, consensual taxation is possible since private taxpayers desire public goods (the reason why they left the state of nature in the first place).

Prof. Michael Moore of Sussex University

Prof. Michael Moore of Sussex University

In comparing coercive and consensual or negotiated taxation, Michael Moore of the University of Sussex, not the controversial film-maker, argued that the latter constituted a better institutional technology. Coercive taxation (largely in agrarian societies) is relatively ineffective since it tends to generate resistance and because coercive tax collectors were well placed to pocket a large part of the proceeds for themselves. In contrast, consensual taxation offers (within the boundaries of individual states) joint gains for both rulers and taxpayers.

Adam Smith

Adam Smith

In the late 18th century, the idea that citizens must contribute to the upkeep of a state was developed.  On of the political economists of the time, Adam Smith forwarded four maxims of taxation (equity, certainty, convenience, and efficiency).  These maxim were also supported subsequently by David Ricardo and John Stuart Mill:

1. “The subjects of every state ought to contribute to the support of the government, as nearly as possible in proportion to their respective abilities: that is, in proportion to the revenue which they respectively enjoy under the protection of the state. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation.

2. “The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even when they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance, that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil, as a very small degree of uncertainty.

3. “Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at a time when it is most likely to be convenient for the contributor to pay; or when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient to him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconvenience from such taxes.

4. “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people.” Secondly, it may divert a portion of the labour and capital of the community from a more to a less productive employment. “Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have derived from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression:” to which may be added, that the restrictive regulations to which trades and manufactures are often subjected to prevent evasion of a tax, are not only in themselves troublesome and expensive, but often oppose insuperable obstacles to making improvements in the processes.

To Adam Smith’s mind, bad governance is excessive taxation of capital and property. Not taxation per se, as he recognized the need for public goods and the role of the state in the provision of such goods. Bad governance discourages investment and owners of transportable assets can readily change domiciles to jurisdictions with acceptable tax burdens. Smith argued that a tax burden is acceptable to businessmen if the state is able to provide an equally acceptable bundle of public goods.

The views of David Ricardo and John Stuart Mill on taxation will be discussed in future blog posts.


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?


The Bureau of Internal Revenue (BIR), the country’s premier revenue collection agency, announced today that tax evasion charges were filed against a well-known election lawyer and three other professionals.

The lawyer purportedly earned only P1.38 million in 2010 but was able to purchase a condo unit in Makati City valued at P53.3 million, according to BIR commissioner Kim Henares.

BIR Commissioner Kim Henares

Levying the proper taxes on the income of professionals (lawyers, doctors, accountants, engineers, architects, and entertainers, among others) has been a problem for quite a while.  These professionals do not, as a matter of default, issue receipts to their clients.  If there was proper documentation, then the BIR can properly audit their income and collect correct taxes.

Why don’t professionals issue receipts?  Because their clients do not, as a matter of default, ask for these same receipts.

There’s an alignment of interests on both sides.  When the professional does not issue a receipt, he can understate his income and reduce his tax obligation.  If the client does not ask for a receipt, she will pay a lower professional fee.

Tax authorities estimate that there are 1.7 million professionals in the country who paid only P9.8 billion in taxes in 2010 or an average of only P5,764.00.  Commissioner Henares estimated that based on their income levels, each professional should be paying P100,000 in taxes on the average.  The bulk of income taxes and profits were collected from fixed wage and salary earners.

The new cases filed today against the professionals resulted after BIR investigators posed as patients or clients and observed that no receipts were issued.  This approach is too micro.  A better macro approach is to convince and mobilize citizens to demand receipts from professionals.  Left to their own devices, the latter will not voluntarily issue receipts.

How do we break the alignment of interests between clients and professional regarding receipts?  First, we can encourage clients to ‘shop’ and compare professional fees so the threat of fee increases in case receipts are asked could be moderated.  Second, clients can be educated that the non-issuance of receipts by professionals is actually detrimental to their welfare.  Understatement of professionals’ income ultimately leads to lower tax revenues that in turn mean a smaller volume of public goods and social services.

Of course, the better clincher for ordinary citizens to demand receipts is the timely and palpable conversion of tax monies into public goods.  Absent that, they will continue to behave as before.


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).