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Stealth attack on the freedom to choose

(Article published in the May 19, 2010 issue of Manila Standard Today)   

 In these waning hours of the Gloria Macapagal-Arroyo administration, coincident with the fading minutes of my former classmate Margarito Teves’ membership in her official family, the good Finance Secretary would do the country good, as well as to spare himself some last minute legal hassle, to right the wrong he had wrought by issuing Revenue Regulations No. 2-2010. 

Revenue Regulations No. 2-2010 (“RR 2-2010), dated 18 February 2010, alters the then prevailing rule on how partners in a general professional partnership may avail themselves of a right granted to them, as well as to other taxpayers, by Republic Act No. 9504 (“RA 9504”).

RA 9504, for purposes of tax simplification leading to better efficiency in tax collection, drastically altered the then current rules on what most of us avail ourselves of year after year when we file our income tax returns, namely, the optional standard deduction.  Three changes were introduced by RA 9504 which took effect on 06 July 2008.

The first improvement was to extend the option to elect the standard deduction from just individuals, such as (a) citizens, whether residing in the Philippines or not, (b) aliens residing in the Philippines, and (c) taxable estates and trusts, to even corporations which are considered either domestic or resident foreign.

The second was to increase the amount that may be claimed as a deduction from 10% to 40%. And the third was to (a) to change for individuals the base of such optional standard deduction from “gross income” to “gross sales or gross receipts” and (b) to provide, for the newly benefited corporations, “gross income” as such base.


Individuals were in 1950 given by R.A. No. 590 the option to elect, in lieu of claiming itemized deductions, the standard deduction which was then fixed at one thousand pesos or in amount equal to 10% of his gross income, whichever is lesser.  Since then such optional standard deduction has substantially stayed in the income tax law.   For a good reason.  Because deductions allowed to be taken from gross income have the effect of shrinking the base, called net taxable income, on which the income tax is to be imposed, the law demands, as a general rule, that each and every item of deduction claimed to be fully documented.  Records and books must be kept; receipts and other pieces of evidence of expenditures preserved. 

However, the law had also long recognized that strictly imposing the documentation requirement was an unreasonable burden to impose on individuals, most of whom have very simple means of earning income as well as just a meager amount of accounting know-how and financial sophistication. 

Thus, the individual was given the choice of (a) either accepting only a limited amount of deduction in exchange for the opportunity to dispense with the obligation to submit financial statements, or of (b) claiming each and every item the law permits but charged with the obligation to be ready to prove when called upon. 

What is most important to note is that it is the nature of the individual taxpayer and not the kind or quality or source of his income that gave rise to the option.  In other words, regardless of whether the individual received his income from one who had paid tax on it or from one who had not, the individual taxpayer had the option to either choose the standard deduction or to itemize.  And since it is the individual who is the best judge of his own capability and inclination for detail and documentation, the government never tried to interfere with his choice. 

For reasons impossible to divine, save possibly the desperate need to search and every crany in the tax system from which to extract the last ounce of revenue,  BIR Commissioner Joel Tan-Torres recommended and Sec. Margarito Teves approved, invading the sacrosanct sanctum of choice of an individual partner concerning his share in the net income of the general professional partnership to which he belongs. 

I leave for another day the merits (in fact, the lack thereof) of such intrusion.  For now, I raise a howl on how it was done, namely stealthily and with neither warning nor consultation, uncivilized and uncaring for the people affected.  Contrary to the publication requirement under Section 9 of the Administrative Code of 1987, the Bureau did not publish or circulate notices of the proposed changes thereby deprived interested parties of the opportunity to submit their views.  It is even contravened the Bureau’s own assurances of transparency embodied in Revenue Memorandum Circular No. 20-86 issued by one of the more venerable heads of that office, then Commissioner Bienvenido A. Tan, Jr. 

In that issuance, the Bureau recognized that “one of the problem areas bearing on compliance with internal revenue rules and regulations is lack or insufficiency of due notice to the tax-paying public.  Unless there is due notice, due compliance therewith may be reasonably expected.”

Revenue Regulations No. 2-2010 was issued in open defiance of those well-respected principles of good tax collection and administration.  No wonder, nary a tear is being shed for the inexorable exit and departure of Gloria Macapagal-Arroyo’s regime.