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Not the culprit

(Article published in the May 7, 2008 issue of Manila Standard Today)  

Hardly have the members of  Trust Officers Association of the Philippines’ 2008 board of directors warmed their seats when they were confronted by what appears to be the first test of their individual and collective mettle.  They, together with other major players in Philippines banking,  were invited by their regulator, the Bangko Sentral ng Pilipinas, to a meeting last April 11.

In attendance, they found out, would also be Bureau of Internal Revenue Commissioner Lilian Hefti.  While I would have jumped with glee at the opportunity of being in the same room as the good tax collector (I have not met with her personally since she took over the reins of the Bureau from classmate Jojo Buñag), the bankers viewed their prospects that morning with fear and trembling.  Fresh in their minds were the images of Mike Andaya and the lot of their according to the BIR, certificate-less time deposit, or as the bankers would want it, savings account with a twist, or rather, with a maturity date.  

I was not at the meeting but my unimpeachable sources say that a major topic of discussion was the record of tax collections from the banking industry.  The good commissioner had reasons to be concerned.  Figures from the Large Taxpayers Service (LTS) indicated that tax payments from banks went down in 2007 and the tendency to look south seems to have spilled over into 2008.  Before the situation reached crisis (or panic) proportions, the Bureau wants to find out why (of course, it had a suspect), and what could be done to reverse the trend.


Banks pay two major taxes: like everybody else, they are subject to the general tax on income that is imposed for the most part on the net taxable; and, for the privilege of doing banking business, they are also liable for the percentage tax, this time on gross receipts.  In addition, they also remit to the government, as involuntary conscripts to the state’s tax collection service, the taxes withheld from the income of its clients, principally the final withholding tax on interest their earn from deposits and similar financial arrangements. 

LTS reports that total collections from banks of the first three months of 2008, amounted to Php8,747,637,777.39 less by Php199,242,559.67, or 2.23%, compared to the collections for the same period of 2007.  The percentage tax component seemed to have caused the great damage: from Php952,719,398.32 in 2007 down to Php677,730,305.87, a whooping 28.86% decrease amounting to Php274,989,092.45.  This behavior of the percentage tax collection is not new.  In 2006, percentage tax collected to Php5,437,681,708.20, but in 2007 it was only Php4,445,455,693.58; that translates into a decrease by 18.25% to the extent of Php992,266,014.62.

 The bank’s remittances of the final withholding tax moved, in sinc with the percentage taxes.  For the first quarter of 2008, the Bureau got only Php933,394,402.29 compared to the Php1,536,161,314.49 of 2007, less by 39.24%.  Looking at the yearly figures, the 2007 yielded only Php8,442,806,713.31 whereas it was Php11,291,311,957.63; thus 25.23% lower by Php2,848,505,244.32.

 The revenue take, however, is not all bleak.  The BSP, like the banks, are also withholding agents of the Bureau, and like them remits the 20% collected from banks earning interest from it.  For the first quarter of 2008, final withholding taxes remitted by the BSP, when compared with the remittances for the same period last year, increased by235%, roughly Php1,456.64 million, i.e. from only Php618.97 million to Php2,075.61.

 Still, the good commissioner had a valid question: if banking business is expanding, why were the related taxes shrinking?  For the trust industry, the one significant event that affected its business was the access given to it by the BSP in May 2007 to the SDA facility theretofore available to the banks.  Lest, its SDA direct access be victimized by the illogical but tempting adage of post hoc, ergo propter hoc, the trust industry is now challenged to demonstrate that its direct line to the SDA did not contribute to the decrease in tax collections, but on the contrary, counter-intuitively, in fact was even responsible for increasing it in the industry’s humble way.

 The key to such a position is an understanding of the investment dilemma facing trust clients prior to BSP Memorandum M-2007-011, trust clients could have their money invested in the usual outlets, i.e. stocks, money market instruments, direct loans, or deposits in banks.  The last one is the most unpalatable, not only because the rates were low, but also because, though BSP permitted if authorized by the trustor, there is always an inherent conflict of interest when a clients’ trust funds are deposited with the bank’s commercial banking department. Ideally, deposits with the trust bank’s own cash department ought to be for temporary parking, not an investment proposition.

 To access the SDA, trust clients had two options: first, to ask their trust officers to deposit their funds with their bank which in turn placed the money in BSP’s SDA.  This resulted in the client being hit by a triple whammy: first, the income of the bank from the BSP is subjected to 20% final withholding tax; second, the income of the trust from its deposit with the bank is again subject to 20%; and third, the interest it earns is reduced by the cost of the necessary regulatory reserves.  This made the net returns to the trust client unattractive.

 The other way was for the trust department to go indirectly to the SDA using the bank’s money market department as agent.  This method, however, was fraught with dangers, if not with deception and deceit.  It necessitated the bank’s treasurer to go to the BSP as the trust department’s agent without telling the BSP that part of the money placed was not the bank’s.  Trust money, contrary to traditional trust duties of segregation, had to be commingled with bank funds.  And the pricing of that service by the money market department to the trust department of the same bank is murky waters. 

 Trust clients thus shied away.  The 20% that arguably would have been collected had their money been forced to stay in deposit accounts was never there at all.  Clients simply kept their money and plowed it elsewhere, in consumption, in their own unsophisticated outlets (rendering them vulnerable to scams like the PIPC), but certainly not in trusts.  Significantly, this consumer response impaired the effectivity as a tool of the BSP in titrating the money supply.  While not all the assets managed by the trust departments, which amounted to, according to Deputy Governor Nestor Espenilla, Jr. as equivalent to about 30% of bank deposits, are not money, still a big portion of it is, and leaving that huge chunk out of the radar screen is simply not the proper way to track the money supply.  To feel the pulse directly, BSP’s hand had to be right on top of the beating artery, and giving the trust department direct access to the SDA did just that.

With the SDA as an available investment outlest, trust clients are back into the fold of the trust departments.  The result is a greater bulk of money being placed with the BSP since the SDA is not volume limited.  More principal earned means more interest paid.  More interest paid means more 20% final withholding tax payments to Commissioner Lilian Hefti. 

I am not saying of course that it is indubitable that the banking industry has been, is now, and will forever be paying the right amount of tax.  That is Mike Andaya’s thing.  For today, all I say, is that direct access of the trust departments to the SDA, Madame Commissioner, was not responsible for ruining your day.  In other issues of this column, I, in fact, will indicate how the trust industry could make it.