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One rule for us, another for the big boys

(Article published in the Apr 25,2012 issue of Manila Standard Today)  

When we lowly folks, not knowing that they are fake, use counterfeit bills to pay our taxes, the Bureau of Internal Revenue through its authorized agent banks, spotting the forgery, correctly rejects our payment.  Our taxes remain unpaid; and we are left to our own devices to settle our problem with those who passed the Mickey Mouse money to us.  Not so with the big boys, like Petron Corporation.

In the recently decided case of Commissioner of Internal Revenue v. Petron Corporation, G.R. No. 185586, promulgated March 21, 2012, the Supreme Court, with Associate Justice Maria Lourdes P.A. Sereno as ponente, ruled that, because Petron Corporation is an innocent transferee for value of the Tax Credit Certificates (TCCs) which were, on post-audit determined to have been fraudulently issued to their original owners, the tax liability that Petron Corporation paid them with, was, nevertheless, extinguished. 

To understand what the TCCs are, we need to step back a bit for a quick backgrounder on the types of taxes that we pay.  There are two major taxes in the Philippines which are on the generation of wealth: first, the tax on the earning of income, known as the “income tax”; and second, the tax on the conduct of business, hence the name “business tax.”  The first is imposed on the right to earn income from any source, or any activity, regardless of whether the source is legal or not, and of whether the activity is a business or not. The other is levied on the privilege of conducting a business, regardless of whether or not, as a result of that activity, the one engaging in the business generates income.   


Among those “business taxes” are a special kind called “excise taxes.”  The law describes the excise taxes as those applying “to goods manufactured or produced in the Philippines for domestic sale or consumption, or for any disposition and to things imported.”  Among those subject to the excise tax are petroleum products, like refined or manufactured mineral oils and motor fuels.  Hence, the involvement in this case of Petron Corporation (“Petron”) which is engaged in the production of petroleum products.

It is important to realize that while the excise tax is levied on the first instance on the manufacturer or producer, generally when the goods leave the factory or, if imported, the customs house, and enters into the domestic commerce, the real person who bears the economic burden of the tax is the person who buys the product.  Why? Because the excise tax is made part and parcel of the selling price which the buyer must pay the seller.  Hence, the excise tax is called an indirect tax.  Indirect because it is legally collected from the manufacturer or producer (or importer); but the manufacturer or producer or importer is expected to pass the cost of the tax onwards to the buyer of the goods.  In effect, it is the consumer of the goods who absorbs the excise tax, even if, from all appearances, the excise tax is initially an obligation of the seller.

When the buyer of the goods, instead of consuming them in the Philippines, either exports the goods or uses them as part of goods that he exports, an anomaly occurs: A tax that is intended to be a tax on the domestic consumer is in effect paid by the foreign buyer who consumes the goods abroad.  Moreover, this puts on the price of the goods a component which was not meant to be there; it jeopardizes the ability of the exporter to compete in the international market where, in most cases, the countries of origin do not impose a tax on goods that are exported from them.

To remedy that anomaly, the government, after a tedious process of application and verification, issues TCCs to the exporter for the excise tax that had been passed on to him when he bought the goods that he later sold abroad, for consumption abroad.  These TCCs can then be used by the exporter to pay for his other tax liabilities.  In effect, by issuing the exporter TCCs, the government refunds to the exporter the tax that he had absorbed when he bought the goods from the manufacturer or producer.  

Because it is possible (in fact even very likely) that the exporter’s other tax liabilities are less than the amount of the taxes that were covered by his TCCs, the TCCs are, by law, permitted to assigned or sold to other persons who may in turn use those TCCs as payment for his own taxes.  In effect, the exporter who has more than TCCs than can be absorbed by his other tax liabilities is able to monetize, or convert into cash, the unused amount of his TCCs.

Obviously, to enable that complicated system to work both efficiently and honestly, a sophisticated structure need be set up to make sure that the TCC’s issuance, verification and utilization are all above board.  After all, what is involved are taxes, which admittedly are “the lifeblood of the government.”  A leakage in the tax system, if left unattended and without any remedy, would likely lead to fatal haemorrhaging for the country.

To safeguard the integrity of the system, Administrative Order No. 226 was issued in 1992 creating the  One-Stop-Inter-Agency Tax Credit and Duty Drawback Center which is made up of a representative from the Department of Finance as its chairperson, and, as members, representatives from the Bureau of Investments, Bureau of Customs, and Bureau of Internal Revenue.  They are “tasked to process the TCC and approve its application as payment of an assignee’s tax liability.”

In  the Petron case, the initial owners of the TCCs were Alliance Thread Co., Inc., Allstar Spinning, Inc. Diamond Knitting Corp., Fiber Technology Corp., Jantex Philippines, Inc. Jibtex Industrial Corp., Master Colour System Corp, and Spintex International, Inc.. They all were, in the period between 1995 to 1998, inclusive, exporters and were so registered with the Board of Investments. They were, by virtue of their being exporters whose own tax liabilities were less than the face value of the TCC, holders of certain TCCs.  They decided to sell these TCCs to Petron. And Petron used those TCCs to pay for its own tax liabilities.

It turns out, however, that the TCCs were fraudulently issued to the foregoing companies.  An audit made by the Department of Finance uncovered the fact that the TCCs were issued to the aforesaid corporations on account of their purported purchase of fuel and other petroleum products from Petron Corporation, the same Petron that bought the subject TCCs from them.  It was further discovered that, in truth and in fact, no such sale of fuel and other petroleum products was made to them by Petron Corporation.  Therefore, the TCC’s were indeed fraudulently issued.  They were certificates supposedly of taxes paid to the government; but the contrary is true, no sale was made and therefore no taxes were paid. 

The inevitable conclusion ought to be that the payment by Petron Corporation of its taxes using the said fraudulently issued TCCs was not a valid payment at all.  Petron was in exactly the same position as you and I who at the start of this item was unknowingly paying our taxes with counterfeit bills.

          But wonder of wonders, the rule that applies to us does not apply to Petron.  Better put, Petron, who may be conceded to have acted, like us, without knowing of the forgery is treated better than us.  Its tax liability was extinguished by a forged instrument of payment an instrument that had to underlying value at all.  That is the rule for the big boys.  We, in contrast, must scrounge around for  real cash to pay our taxes even if we too are in good faith.  We are left to fend for ourselves in seeking redress from those who gypped us.