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How gross can taxation be?

(Article published in TODAY, Business Section)  

Indicative of how touchy we are about taxes is the intensity of the reaction to the latest presidential suggestion of gross taxation for corporate income.  In an interview aired soon after her proclamation as the winner of the May 10 elections, Gloria Macapagal Arroyo observed that “our problem in revenue generation is corruption.  If we simplify the system, there will be fewer loopholes” and proceeded to say that  “ultimately, I would like to change our tax system from net income to gross income because it is more simple.”  These remarks immediately conjured up the ghost of a proposal past when she stepped into office in 2001 and agitated the spirits of otherwise sober and often somber souls.

Nene Guevara, reputed to be the architect of the Comprehensive Tax Reform Program of the Ramos Administration (and hence, to be blamed for its defects?), quickly warned that gross income taxation could result in “cascading” taxes, since, raw materials are expected to be taxed as they pass from the hands of the producer or manufacturer, to the wholesaler and the retailer.  Her assumption is, obviously, the cost of goods sold will be considered part of the base of the tax.

Ronnie Concepcion, for his part, jumped up and said he believes that the gross income tax scheme, though seemingly simple, “may eventually prove unwieldy because of the deductions”.  Apparently, his assumption is contrary to Nene’s and that certain deductions, like cost of goods, will not be considered part of the base of the tax.

The tax experts of usually unflappable foreign institutions were themselves also not in unison.  The International Monetary Fund hastened to say that it was not sure whether in the end more revenues would be collected but was certain that the transition would be confusing. PricewaterhouseCoopers, on the other hand, was immediately definite that gross income taxation will not solve the problem of deductions. 

The obvious reason for all these disparate and desperate wailing and flailing is that no ear has heard, no eye has seen and no mind has yet conceived precisely what form this new presidential aspiration will take.  Hence, what everyone commented on, or more precisely commented against, was gross taxation in his or her own mind; hence, their remarks of diverse disconsolation.

It is clear from what the President had said that simplification of the tax system is the end and gross taxation is the means.  The end obviously takes priority over the means and therefore it is going to be more productive if we are to all focus on the end and, in a common effort, form a consensus on the means.  I thus suggest, as a talking draft, the approach taken some ten years back by R.A. No. 7496 which instituted, for professionals and the self-employed, the simplified net income tax scheme, or “SNITS” for short.

Essentially, the SNITS limited the deductions which professionals in the practice of their profession and the self-employed to seven types of direct costs: (a) raw materials, supplies and direct labor; (b) salaries of employees directly engaged in the profession or business; (c) telecommunications, electricity, fuel, light and water; (d) business rentals; (e) depreciation; (f) contributions to the Government and to accredited institutions; and (g) interest on business loans from accredited financial institutions. 

For those whose cost of goods sold and direct costs were difficult to determine, a maximum 40% of their gross receipt was allowed as deduction. No questions asked, because they are difficult to answer.

With a concrete form of a bill before us, we, who are crazy enough to earn their living from tax practice, may now delve into details.  It is true the devil dwells in the details, but so also the angels, but, of course, in separate quarters like representatives and senators, of one Congress, holding having their own separate offices in separate buildings in separate cities.  Some quick answers can be made of certain knee-jerk objections earlier hurled the President’s way.

For instance, some are concerned that foreign businesses, if placed under a  gross income tax system in the Philippines, would not be able to claim a tax credit usually granted by their home governments to net income tax paid off-shore.  A SNITS-like law will most likely be upheld by our courts as an income tax, following the ruling in Tan v. Del Rosario, Jr., 237 SCRA 324.

Anxiety about how to determine the “cost of goods sold” can be by-passed by corporations finding difficulty by claiming 40%, which under the SNITS operated much like the optional standard deduction for individuals.

A general sieve for expenses claimed as “direct costs” could be the simple, “if the amount is taxable income actually reported by the payee (or, in the alternative, subjected to the value added tax), then it is presumed cost to the payor corporation whose only burden is to prove that it went into the production of its goods or services (or, in the alternative, incorporated in the output VAT)”.  This harnesses the cross-checking feature that was one of the reasons why the country adopted the value-added tax system.

And so forth, and so on.

        Please do not get me wrong.  I am worried, like everybody else, about the impact, particularly on my own pocketbook, of changes in our tax system.  But I am just as worried, if not more so, when otherwise rational people rant and rave against their own fears projected to what can essentially be objectivized and calmly discussed.  And most worrisome, of course, is prospect of our pitiful revenue collections pitted against the seemingly unstoppable swell of the budget deficit and our leaders not mindful of it.