Tax reform undergoes birth pangs

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The road to a fairer tax system that at the same time will yield more revenues will not be a smooth one.

THE RECENTLY ENACTED first of up to five planned tax reform packages may help the government undertake an P8.44-trillion infrastructure development drive, but not before it weathers back-to-back blows on the legal and implementation fronts.

Three militant lawmakers in the House of Representatives asked the Supreme Court on Thursday to declare as “unconstitutional” President Rodrigo R. Duterte’s centerpiece tax law and stop its implementation on the grounds that their fellow legislators “railroaded” its passage.

The three — ACT Teachers Rep. Antonio L. Tinio, Bayan Muna Rep. Carlos Isagani T. Zarate and Anakpawis Rep. Ariel “Ka Ayik” B. Casilao — belong to the so-called Makabayan bloc, a coalition of party-list political parties at the House that had broken away from the majority in September last year due to policy differences.

In their 33-page petition for certiorari, they argued that Republic Act No. 10963, packaged by the Duterte administration as the Tax Reform for Acceleration and Inclusion (TRAIN) that overhauled the 1997 Philippine tax code to cut personal income taxes while raising the sales tax and levies of most consumer goods like oil and car purchases, is not a valid bill passed by Congress.

Their central argument has been that the House did not have the required numbers enough to make a quorum and vote on the night that the House ratified a bicameral conference committee report on the tax measure.

Petitioners Messrs. Tinio and Zarate said they raised their objection — but were ignored — when Deputy Speaker Raneo E. Abu as acting floor leader moved for the bicameral committee report’s ratification on Dec. 13 last year. Mr. Tinio claimed there were “barely 10 people on the floor” out of 295 House members in that Dec. 13 proceeding that the petitioners claimed lasted for just three minutes and “occurred simultaneously” with the Christmas party of the Partido Demokratiko Pilipino-Lakas ng Bayan (PDP-Laban), Mr. Duterte’s political party.

“[Q]uorum is a constitutional requirement for the enactment of laws. A House that lacks a quorum, with a sparse attendance at that, Petitioners submit, is a House that is in no position and has no power to act as a legislative body,” the petition read.

“The bogus ratification was slipped through when the members, especially its leadership, were not attending the session in Congress but outside its halls, with some even partying at a five-star hotel.”

Mr. Abu as well as Speaker Pantaleon D. Alvarez, Majority leader Rodolfo C. Fariñas and Deputy majority leader Arthur R. Defensor, Jr. were named respondents.

The President was also named a respondent, with the petitioners arguing that Mr. Duterte “committed grave abuse of discretion in enacting into law a bill which was not passed in accordance with the Constitution and the Rules of the House of Representatives.”

TRAIN was signed by Mr. Duterte on Dec. 19 last year and took effect on Jan. 1, driving pump prices higher as early as this month in gas stations with new inventories as well as electricity rates by February to reflect the increases in oil and coal taxes.

“No matter how many times he signs the BCC [bicameral conference committee] Report, he could not, in the eyes of the Constitution, enact such an invalidly ratified document into law,” the petition read.

“The foregoing considered, Petitioners pray: 1. That the Honorable court strike down as unconstitutional the signed Tax Reform for Acceleration and Inclusion for having been ratified by the House of Representatives and enacted by the President in violation of the Rules of the House of Representatives and the 1987 Constitution and 2. That it issue a restraining order against the implementation of the signed TRAIN.”

This is not the first time that a freshly minted tax law was questioned before the highest court of the land. In 2005, the ABAKADA Guro Party List and then opposition Senator Aquilino “Nene” Pimentel Jr., among others, sought the intervention of the high tribunal shortly after the Arroyo government passed the expanded value added tax law that raised the value added tax (VAT) rate to 12% from 10%. The high court that same year upheld the law’s constitutionality.

Yesterday also saw public consultations at the head office in Quezon City of the Bureau of Internal Revenue (BIR) for TRAIN’s implementing rules and regulations (IRR) which, BIR Commissioner Caesar R. Dulay told reporters afterwards, was attended by an estimated “over 1,000” tax practitioners who had tried initially to fit in an auditorium built for just 200 people.

The bureau thus opened the covered court to accommodate the bigger crowd.

Questions were on issues like the withholding of income taxes of existing employees of regional operating headquarters (ROHQs).

A TRAIN provision which Mr. Duterte had vetoed — on grounds of fairness — would have allowed them to continue enjoying the existing 15% preferential withholding tax rate rather than be subject to the new tax rates that will cover new ROHQ hires.

“We have to wait for the policy direction from the Department of Finance (DoF),” Mr. Dulay said during the consultation.

Maria Lourdes P. Lim, president of the Tax Management Association of the Philippines, had said earlier that Mr. Duterte’s veto effectively maintained the status quo.

“The President cannot just automatically remove the affected employees’ entitlement to the preferential rate as he is not the legislature. To effect the intention, Section 25 (C), (D) and (E) of the Tax Code needs to be specifically amended removing such incentive,” she had explained.

“While we laud the intention premised on fairness and equity, a process of amendment still needs to be followed.”

Euvimil Nina R. Asuncion of BIR’s Legal Group said during the same consultations that implementing the excise tax on cosmetic surgery and sugar-sweetened beverages (SSB) — the tax code’s newest levies — would also be challenging.

“The cosmetic procedures is a challenge to us but we’ve already formulated something to address that. Reversed withholding ‘yung procedure na gagawin,” Ms. Asuncion said, explaining that surgeons, hospitals and clinics will have to collect the tax directly from patients.

Pag sa SSB naman it is also a challenge to us because it’s a new tax,” she added.

“But most of our players — they are already within the LTS (Large Taxpayer Service), so medyo under our control na ‘yung kanilang taxation.”

The BIR official said that the bureau is working with the Food and Drug Administration in cross-checking beverage manufacturers’ declared excise tax payments.

“The first few months of course is transition… We have to be a bit lax but we will do post audit. We will check on their compliance… after a few months we will go back to those they declared to see if they declared correctly,” Ms. Asuncion said.

Other questions raised include whether employers should now impose the new withholding income tax rates even without the revenue regulations (RR) to be released by the BIR and the Department of Finance.

“The withholding agent has the obligation to withhold the correct amount. Some employers said they are waiting for the RR. They do not have to wait for the RR because we have released initial guidance while waiting for the formal RR,” BIR Assistant Commissioner Marissa O. Cabreros told reporters in Filipino, referring to revenue memorandum circulars the bureau issued before 2017 ended.

“We are appealing to employers to recalibrate their systems to reflect the correct tax rate.”

Mr. Dulay said that the bureau aims to finalize the required revenue regulations “before the end of the month,” but said withholding agents and taxpayers need to immediately follow provisions of the law.

Kailangan ma-implement nila. January 1 ang effectivity ng batas. (They have to implement the law, which took effect on Jan. 1). So they should be read,” he said.

Revenue regulations the BIR has to issue will focus on provisions like the lower estate and donor’s taxes rates; withdrawal of some value-added tax exemptions; increases of excise tax for petroleum, automobiles, mineral products, and tobacco; the excise levy and VAT on coal; as well as higher documentary stamp tax, among others. — with a report from Elijah Joseph C. Tubayan