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Lowly pawnshops show lofty banks the way

(Article published in the Dec  10,2004 issue of TODAY, Business Section)

Revenue Memorandum Circular No. 73-2004 marks the eventual end of the pejorative connotation attached to the term “pawnshop mentality”.  For so long, people who worked in banks have looked down on their brothers who worked in pawnshops for the latter’s almost exclusive reliance on the  collateral as the determinant factor when lending to customers.  Lending money that way (and making one’s money by lending that way) was, the bankers scoff, a no-brainer and showed not only lack of sophistication in making credit decisions but also inferior understanding of nature of the lending business.  But with RMC 73-2004 in their pockets, pawnbrokers have clearly shown, at least in the matter of how to put their tax worries behind them, they are smarter than bankers.

An RMC is a internal communication from the Commissioner of Internal Revenue directed at his minions in the field giving them his instructions on how to deal with specific collection issues with taxpayers.  They constitute their marching orders, some sort of a battle plan.

RMC 73-2004 is, however, instead of being a revenue officer’s plan of attack, lays down a modus vivendi that has been mutually agreed upon between the tax collectors and the pawnshop industry.  It is not exactly the Isaiah’s vision of the wolf living with the lamb, the leopard lying down with the kid, and the calf and the lion and the fatling together, but it does approximate swords being turned to plowshares.  At the very least, it allows the pawnshop industry to disengage from its deadly litigation grappling with the Bureau of Internal Revenue and permits both of them to move forward, go their separate ways, and focus on their respective businesses. 

The casus belli used to be the question of whether pawnshops are subject to the value-added tax or not, as a “non-bank financial intermediary”, whose gross sale of services was included in the VAT net by R.A. No. 7716 effective 1996.  As of 31 August 2004, almost 40 cases had been filed with the courts on that issue, 4 are presently with the Supreme Court, 12 were with the Court of Appeals, and the rest with the Court of Tax Appeals.  Six cases were won by the Bureau in the lower courts, but since the issue was raised in the Supreme Court, the victory is tentative, if not tenuous.

The issue was further complicated in 2003, when Congress passed and the President approved R.A. No. 9238, upon the lobby of the banking industry, re-imposing the gross receipts tax on banking income as well as the receipts of “non-bank financial intermediaries”. 

The Commissioner of Internal Revenue invoking the definition of what a pawnshop is in Presidential Decree No. 114, i.e. “a person or entity engaged in the business of lending money” and the classification of pawnshops in Bangko Sentral Manual of Regulations, considered them as “non-bank financial intermediaries”.  The pawnshop industry, like everyone else subjected to a new tax burden, screamed in pain.  Hence, the cases.

This year, however, the Chambers of Pawnbrokers of the Philippines, Inc. and the BIR talked peace, and on 04 June, entered into a memorandum of agreement allowing the pawnbrokers a less bloody way of settling their VAT liabilities from 1996 to 2003.  This was operationalized in RMC 37-2004.  The atmosphere of peaceful co-existence continued and last month,  RMC 73-2004 set up the orderly transition from the VAT regime to the gross receipts tax system under R.A. No. 9238.

The broad lines of the armistice are very simple.

To effect a meaningful impact on the government’s efforts to narrow the deficit, pawnshops are induced to settle their VAT liabilities for the tax years 1996 to 2002, times when there was really great doubt spawned by conflicting rulings and decisions on whether pawnshops are subject to the VAT, up to 15 December of this year.  Following RMC 37-2004, they are to pay 25% of their liabilities based on the pawnshops own self-assessment. Subject to verification, of course.

For the years 2003 and 2004, the pawnshops concede their being subject to the VAT.  Accordingly, in the interest of those who are not big players, pawnshops with not more than P550,000.00 in annual gross receipts or gross sales are subjected only to a 3% percentage tax. 

And beginning next year, 2005, all sales of goods and services of pawnshops will be subjected to the gross receipts tax “re-imposed” by R,.A. No. 9238 that amended Section 122 of the Tax Code.

For a smooth transition, the process of converting from a VAT-registered into a non-VAT taxpayer, the disposition of unused VAT receipts, the treatment of collections received before the end of this year, and the utilization of excess input tax credits are dealt with in the final provisions of RMC 73-2004.

Only time will tell whether the peace will hold.  If it does, pawnbrokers shall have served their country well, not only by contributing to its treasury in this great time of great need, but, more significantly, by declogging the courts of the nearly pending 40 VAT cases and freeing executive time and government efforts for more productive enterprise than seeing each other in court or exchanging nasty assessments and protests.

The bankers, in the meantime, are still stymied by the overhang of their long-standing quarrels with the Bureau of Internal Revenue concerning the documentary stamp tax on their product called “special savings accounts” and the FCDU tax.  The choice is theirs, of course, whether to keep on fighting the revenue authorities or burying the hatchet in a mutually satisfactory manner.

From where I sit, however, my friend Topper Coronel and his banker constituents could use, in this regard, some “pawnshop mentality”.