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Give to tax credit certificates their credit due?

(Article published in the July issue of WEALTH magazine)

     Nothing demonstrates more clearly how officialdom easily forgets the basics than last month’s cacophony of comments concerning tax credit certificates (TCC).  Lost in the din of disputation and discourse are the historical whys and practical wherefores that then gave birth, and up to the present continue to perpetuate the TCC system.

     Sometime in mid-May, the broadsheets reported a decision by the 16th Division of the Court of Appeals on the purely procedural  question of whether Pilipinas Shell, had gone to the Court of Tax Appeals within the permissible period of 30 days within which an importer may contest a final ruling of the Bureau of Customs.  Pilipinas Shell went to the Court of Tax Appeals to question the refusal by the Bureau of Customs to consider as paid the multinational’s Php 220 million tax liability which it settled through the use of certain TCCs bought, apparently in good faith, from various corporations. It turned out that the subject TCCs were fraudulently acquired by the original grantees; hence, the Bureau of Customs insisted that Pilipinas Shell had not paid its taxes.  The Court of Appeals ruled after counting the days that elapse from Pilipinas Shell’s receipt of the “final” order to the time it sued at the Court of Tax Appeals, that Pilipinas Shell’s resort to the Court of Tax Appeals was made beyond the 30-day period allowed for appeal. End of case.

     The Government gloated with its victory and, ravenously eyed the prospect of being able to collect Php 220 million or so from a taxpayer with deep pockets.  Forgotten is the shameful fact that it was the lapse in the country’s system of issuing tax credit certificates that made possible the fraud that enabled its perpetrators to inflict the misfortune on an innocent victim.  A taxpayer who, in accordance with law and regulations, in good faith purchased and paid good money for genuine TCCs that were unfortunately procured by grantees it had no relation to, is being made to suffer for putting its trust in the system.

     Soon thereafter, media reported that the Bureau of Internal Revenue, headed by my valedictorian classmate Jose Mario “Jojo” Buñag, missed its target for April by about Php 7.2 billion.  Among the reasons offered was taxpayers’ observed “higher utilization of tax credit certificates for their tax payments.”  I assume, to gain public sympathy, the head of the Large Taxpayers Service, Merlinda Ordoyo, admitted that, in an effort to register higher cash collections, “we were personally asking taxpayers to delay the use of the TCCs, but of course we did not have any legal backup to force them to do so because claiming tax credits is a right of taxpayers.” 

     Hon. Joey Salcedo immediately asked for Jojo Buñag’s head for what to him was poor performance that could only have been due to either corruption or negligence.  Other legislators, among them House representatives Exequiel Javier and Jesli Lapus who apparently are more knowledgeable of the tax collection milieu than the presidential adviser rose to Jojo’s defense.  They maintain, and rightly so, that a month of shortfall does not a season of poor performance make and that the incumbent Commissioner ought to be given more time before his ability to collect the right amount of tax money can be properly assessed.  

     Apparently, both the Bureau’s detractors and defenders have accepted the unsaid premise that a taxpayer’s use of TCCs is not as good as cash collection.  Seemingly forgotten is the fact that, if tax credit certificates are indeed what they purport to be, then the civil law concept of set-off when put in operation by the legitimate settlement of tax liabilities through the use of TCCs ought to argue favorably for Jojo in the matter of assessing his performance in that thankless job.

     My other classmate (who in grades was not close to Jojo’s straight first honors while we were at the Ateneo), Dept. of Finance Secretary Margarito Teves added his insult to the tax credit certificate’s injury by ordering an audit of tax credit certificates issued and still to be used.  Exhibiting the same naivete that made him the debutantes’ darling when we were in high school, Gary explained that “we need to know the stock of certificates floating and how this is allocated among taxpapers.  We have to improve our database and monitoring system.”

     What? This Government does not know how much it owes its subjects in terms of monies collected as taxes but which monies were in fact not due?  How come the Hon. Jesli A. Lapus was able to say that as much as Php 8 billion worth of issued certificates are still out there somewhere floating and have yet to be used?  Indeed, the picture is so murky that it is not easy to determine whether Gary was just being transparent about an opaque subject or Cong. Lapus was simply guessing. Or, what I fear, both.

     At any rate, it is not easy to resist the temptation of agreeing with the wisdom of the Hon. Ralph G. Recto of the Senate, that endangered institution which (if still President Gloria Macapagal Arroyo’s will is divine and/or can be divined) is purportedly headed for extinction. He believes that the present tax credit certificate system has got to go.

     Before we throw it way, however, let’s pause to find out what, if any, went wrong.  Perhaps, even at this stage of public hysterical condemnation, the TCC is worth keeping and could be fixed.

     A TCC as the last “C” says, is first and foremost a certificate.  The root of “certificate” is the Latin “certus”, meaning “certain”.  The TCC therefore is a document that makes certain, not one that makes dubious or one that is, like the presidential Garci apology neither this nor that.  That which is made certain by a certification, in the rough language of the people of Gagalangin, Tondo (where I spent my best years of my hopeful life) is something that could be considered as written in stone. Something that is, with the declarant’s assurance of veracity behind it, akin to the Ten Commandments etched in the tablets of Moses.  “Itaga mo sa bato” as we say in the vernacular. 

     What is a TCC supposed to be a compelling witness to?  As the “T” and “C” suggest, a tax credit. But then, like the ambiguity that attends many legal terms couched in English, it is not clear whether “credit” in “tax credit” refers to the nature of the payment that gave rise to it (as in overpayment of taxes) or to the nature of the obligation that it can extinguish (as in TCCs being used to settle tax liabilities). Correctly, the FAQs section of the website of the One-Stop Shop Tax Credit and Duty Drawback Center at the Department of Finance confesses to the absence of an exact legal definition of “tax credit”.

     What is very clear, though, is that a tax credit refers to an amount, in pesos and centavos, which the Government considers it owes.  The amount is recognized as owed for many and various reasons.  For one, it might have been collected over and above what was due from the taxpayer, e.g. under the income tax, the excess amounts withheld from an employee by his employer as a result of the mindless application of the withholding tax table on compensation for services.  For another, it could have been collected, rightfully and correctly at the time of payment, but, due to subsequent processing and disposition of the product, it in hindsight turns out to an amount that should not have been collected after all.  An example is, under the Value-Added tax regime, the input tax paid by a zero-rated taxpayer in purchasing the raw materials for his product.  And a still third reason, it is something promised by the Government, often to investors, as an incentive and by way of attracting foreign and domestic capital or involvement in Philippine enterprises.  This is the philosophy behind the myriad of tax perks which revenue authorities now, in view of perennial budget deficits, frantically want to “rationalize”.

     But whatever might be the reason, a tax credit is something that is legally and morally owed by the government.  Why then does the Government not simply return what it does not rightfully own?  The reason, as admitted by the same FAQs, “the inability of the government to give cash refund to its tax payers.”  In other words, the government had already spent the money.

     Thus, a TCC is, no more and no less, the written acknowledgement of that liability. It is an I.O.U.  Hence, it differs not much in nature from that other mass of government liability, namely, the Philippine peso.  In fact, were it not for the law that makes it legal tender, your peso bill is lower in legal dignity than the TCC.  Your peso bill is a direct liability, not of the Government which is the case of a TCC, but of the Bangko Sentral ng Pilipinas only.  The Government simply guarantees it.  Under Philippine law, generally, a guarantor can be held liable only after the creditor has exhausted the assets of the primary obligor.

     Read and weep: “Ang salaping ito ay bayarin ng Bangko Sentral at pinanagutan ng Republika ng Pilipinas.”  And weep some more as you see that, in most of the bills now in circulation, the Government’s guarantee is signed by still President Gloria Macapagal-Arroyo.

     Since a TCC is an acknowledgement of debt and very much akin to money, it ought not be too outlandish to suggest that its management be transferred, from the Department of Finance, to say, the able managers of Philippine debt, such as Gov. Say Tetangco, who is on top of the money supply, and National Treasurer Omar Cruz, who is in charge of the Treasury.  Of the two options, however, the more logical is the National Treasurer since he is the country’s chief borrower.

     I am not, of course, suggesting that the people at the Department of Finance be cut off their bread line.  They have to make their money, I know. And by that I mean, they ought to be permitted to continue with their task of determining whether an application for tax credit is meritorious or not. They ought to keep their jobs and get paid a honest day’s wage for an honest day’s work.

     But once a taxpayer is determined to be entitled to a TCC, the processing of the debt ought to be in the hands of the country’s debt servicers. If, as a consequence of lack of cash, the payment to the taxpayer has to be made with a money-like instrument, so be it.  But the issuance of the debt paper, its control and trading in the sea of commerce, and eventual retirement should be under the control of the Bureau of Treasury. 

     After the immediate recognition of a tax credit as a Government debt, we ought to do away with the morally indefensible restrictions that now encumber a TCC.  At the root of these restrictions is really the unexcusable failure or unwillingness of the Government to recognize the tax credit as a true debt.  Indeed, I submit, that the government’s obligation to pay back a tax credit is more morally compelling than the need to pay back a debt that the government contracts when, for instance, issuing treasury bills.  In most cases of tax credits, the amounts were initially extracted from the taxpayer contrary to his will, unlike a voluntarily contracted debt. Hence, there is no moral justification for limiting the period of validity or conversion to cash to five years, unless revalidated; for the need of prior government approval of its transfer, which in any case is good only for one transfer; prohibiting the use of the TCC for any tax other than the direct internal revenue tax liability of the transferee, loss of the right of conversion when the TCC is in the hands of the transferee, etc.  The government got money forcibly and must return it in money or, at the very least, in money-like instruments, without any limitation.

     Only by giving the TCC the credit that is due it, as a bona fide government debt, will the TCC gain acceptance as fair method of settling the government’s obligation to the taxpayer.  Only then will it be seen as something valuable and worthy of respect by both issuer and holder. As it now stands, because the Government does not give the TCC the credit it is due, the TCC remains fair game to forgers and scammers out to take advantage of its ill-repute.  In much the same vein that many are tempted to defy an administration that is unable to unequivocably establish the legitimacy of its holding office.