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More on Makati City’s tax increase

(Article published in the January 28, 2002 issue of TODAY, Business Section)

Atty. Rogelio Marasigan, city secretary of Makati, wrote me two days after the publication of my January 14, 2002 column talking about a plan of the city to tax typewriters, passbok printers, microfilm machines, fax machines, personal computers, photocopies and similar equipment of banks.

Said my compaņero: "There is no such plan by the city government of Makati, most especially by the city council. As you know, the city council, as the duly constituted legislative body of the city government, is solely responsible for the drafting and approval of all tax measures. Let me reiterate that the council does not intend to impose a tax on equipment of banks, since it is fully aware of the opinion of the Bureau of Local Government Finance and the decision of the Supreme Court on the matter."

That’s good news for the banks in Makati (as well as other business in that city). Although a city council resolution would have been more reassuring to the banks, that unequivocal statement from the city secretary should be enough to stop those who were flirting with the idea of taking advantage of the broad definition of "machinery" in the Local Government Code of 1991 to collect a tax on the fax. I suggest Makati takes the lead in getting the assessor’s manual which the Bureau of Local Government Finance in the Department of Finance (DOF) is presently preparing to categorically list those items which may be excluded from the assessment of the real property tax. There is nothing like a clear listing of those generically useful instruments to clarify the so-called "gray areas" in the law which darkened minds want to exploit for their benefit.

But the banks in Makati are not yet through with being nervous. A draft ordinance is now being exposed for comment which, among others, seeks to drastically increase the cost of doing business in Makati, not just for banks but other enterprises, such exporters (despite the national drive to earn foreign exchange), hotels (never mind the decline in foreign arrivals), and even retailers.

For banks, the proposal is to increase the current business tax rate of 15 percent of 1 percent to 50 percent of 1 percent for the years 2002 to 2004 and to 70 percent of 1 percent starting the year 2005. The "gradual" increase, which multiplies the current rate by 3.3 for the first two years of effectivity, and by 4.6 starting the third year, is a very clever circumvention of Section 191 of the Local Government Code of 1991. Obviously intended to shield businessmen from the scourge of constantly changing (which uniformly means increasing) tax rates, Section 191 limits the authority of the local governments to adjust their rates not oftener than once every five years.

It can be argued that the City of Makati did not "adjust" its rates within the five year period. One can even go further to say that city, out of the goodness of its council’s heart, mercifully postponed the full rate of 70 percent for the years 2002 to 2004 and condescended to collect only 50 percent for the first three years.

The tax thinkers of Makati, however, may be to clever for their own, at least for Makati’s, good. Other business may just have to grin and bear the proposed increases, but banks are of a different kind. Banks are under extreme pressure from their client to reduce their total cost of intermediation and if only to keep their clients, banks in Makati might have no choice but to migrate their business to areas with lower tax rates. To do this, there will be no need for them to move their bricks and mortar out of Makati; all they would have to do is book their transactions in lower tax jurisdictions. Just one click of the mouse would divert from Makati not just the increase in revenues that the proposal wants to capture but even most, if not all, of the revenues that the city is currently collecting.

In fact, the seemingly smart graduation of rate increase within the five year period from 50 percent to 70 percent, gives the rival cities around Makati ample notice to impose lower tax rates and undercut Makati. The Local Government Code deliberately set the stage for the local governments to compete for business, and in these hard times, Quezon City, Pasig, and Mandaluyong just might rise to the challenge.

So, get real Jojo. Let Makati increase its tax revenue by increasing the pie and not by increasing its cut of the pie. In that way, you will be collecting more money, with less bitching and more smiles even from those who are taller, palers and gentler than us.