Twenty years after the 1997 comprehensive tax reform program and we are embarking on the next big one.
It is heartwarming that this reform is generating more interest and more voice from the taxpaying public -- not just from the legislators, the executive branch, organized advocacy groups or big businesses. And through both the traditional and social media.
However, while we are advocating towards the achievement of our higher goals such as equity, social justice, economic growth, simplification, and revenue, we should also be vigilant that the laws are crafted in a manner that will leave little room for misinterpretation. If the law is not clearly written or there are aspects that are not thoroughly evaluated, the reforms and goals that we fought for may not work in the manner intended, whether for the interest of government or the taxpaying public. As a consequence, the transparency and consistency of the tax system which businesses need to grow, is dented.
We have seen this happen in the recent Supreme Court decision on the tax exemption of minimum wage earners and the adjustment of personal exemptions. Lessons learned. The law should be clear on when it is intended to take effect. It should also be clear on the coverage of the exemption being granted.
The PEZA law is another case in point. More than 20 years after it was enacted, interpretations are still changing. What is the coverage of the income tax exemption? What are the deductible expenses? What is the extent of LGU taxing jurisdiction? Even the courts flip flop on some decisions involving similar issues.
The change in interpretation on the VAT on real properties came out as a surprise. The VAT law clearly provides that sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business is under the list of exempt transactions. Businesses have been planning and implementing their transactions on this basis. A 2007 regulation, however, clarified that the exemption does not cover real properties used in business.
Section 27(B) of the Tax Code speaks of a 10% preferential tax on “proprietary educational institutions and hospitals which are nonprofit.” This, too, is confusing, whether “proprietary” and “nonprofit” should apply for both educational institutions and hospitals. Does the 10% cover proprietary educational institutions or only nonprofit proprietary educational institutions? Should there have been a comma or a semi colon somewhere?
A 161-word sentence in the Tax Code enumerates the donee institutions that qualify for the limited deductibility of donations. It has been a challenge deciphering to which entity the dangling qualifier applies.
The VAT exemption on medical services which exclude those rendered by professionals is also sometimes being strictly read to the effect that any service rendered by a professional is VATable. By its very nature, medical services are generally rendered by medical professionals. So, which medical services were intended to be exempt from VAT by the law?
There are actually tax relief provisions that were never officially implemented. For example, Section 42 of the PEZA law allows that 50% of training expenses of PEZA companies be deductible from the national government’s 3% share. The implementing regulations for this incentive were never issued. Hence, the incentive was never officially implemented. There were apprehensions that the deductibility of the expense from the 3% tax is too generous and can easily wipe out the 3% tax due to the BIR. Was this really the intent of the law? Was there an oversight in drafting the provision?
The law expanding the privileges of persons with disabilities (PWDs) was passed on March 23, 2016. However, the provision allowing PWDs to be treated as tax dependents has not been implemented. It would have been clear if the law mentioned that the additional exemption privilege for benefactors of PWDs shall be effective for taxable year 2016. Is this potentially another case that will be challenged at the SC for which refund will be belatedly mandated. Since the repeal of personal and additional exemptions is being proposed in the tax reform bills, will this be a case of a provision that will be repealed even before being implemented?
There are more examples and actual cases questioned or resolved in court which could make another tax reform package, if pursued.
In the tax reform bill as filed, I’ve read questions raised on when exactly the relaxation of the bank secrecy law can be applied. The bill speaks of “any taxpayer against whom a criminal case is initiated” under Sections 254 or 255 of the Tax Code. When exactly is a criminal case deemed initiated? What is the intent of the proponent?
In the process of overhauling the VAT law and limiting the coverage of zero-rated sales, there is mention that sale of export products to an export trader can be considered zero-rated export sale with a condition that exports of export traders shall only be deemed export sales when actually exported. How will this work? Further, it is expected that the direct exporters, such as the PEZA entities, will be liable to refund their unutilized input VAT. But PEZA entities can either be VAT zero-rated (while under ITH) or exempt (under the 5% regime). A VAT-exempt entity cannot refund input taxes. Is the differing treatment intended?
The base of the excise tax on automobiles is the net manufacturer’s or importer’s price net of excise and VAT. Yet, there are questions arising from the DoF’s briefings on the intended base. Will it be cost, or will it include profit? This tax base is critical in the tax structure, yet much of the details are provided only in the regulations. Maybe the excise tax base should be properly defined in the law itself to avoid being subjected to changing interpretation.
While questioning tax interpretations in court can enrich jurisprudence and make legal discourse more exciting, in the process, either the government or the taxpayers are disadvantaged.
The legislative teams have their own limitations in performing a thorough review and documentation of all amendments. Maybe we could do with a little help from everyone to ensure that the laws that will be passed leave no room for misinterpretation: a. ambiguous terms should be defined; b. intent should be clear in the wordings; c. date or period of effectivity should be specified; d.intent should also be documented so that legislative records/transcripts can be relied upon when differing interpretations arise.
Lina P. Figueroa is a principal with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
As published in Business World, dated 28 February 2017