Monday, December 20, 2010
Taxing matters
Business World
Introspective
The Bureau of Internal Revenue has posted in its Web page the list of its top 500 individual taxpayers. It is unclear to me what public purpose is achieved by posting such a list. What is clear is that it may have caused unfair and unnecessary unease for both those on and out of the list.
For those on the list, continuing public Web page access to the information is cause for worry that this provides easy reference for every donation seeker, scam artist, or even worse.
Those affluent but absent were not spared, for most undeservedly, as the list provided fodder for gratuitous speculation. One broadsheet asked provocatively in its front page why this or that prominent top executive or businessman was not on the large taxpayer list; as did at least one priest's Sunday sermon I heard about.
There can be several reasons why one who is rich or earning well may not appear on the list, none having anything to do with lack of fidelity in paying one's taxes. For many top executives, the company withholds and pays their individual income taxes directly to the BIR under a procedure known as substituted filing.
Provided the individual has only that single source of still taxable income, he does not need to file an income tax return. These substituted filings were likely not captured by the BIR's top 500 list.
Then there are cases of individuals who have incorporated their business, such that the income is earned by the corporation, which then pays the appropriate corporate income taxes. Additionally, the dividend income the individual derives from the corporation is levied a final tax collected at source. There is no requirement that this be subject of an individual income tax filing. This is true as well for those whose income is passive, i.e., derived primarily from interest and dividends, which are imposed final taxes withheld at source. These are not captured in BIR's top 500.
These limitations in the data were not adequately explained by the BIR, either in their post or in public pronouncements. Thus rather than shaming tax evaders which may have been the object of the top 500 exercise, the issuance of such a list without qualification may have just provoked people to unfairly rail against those prominently known but absent from the list but who are already in BIR's tax net and faithfully paying their taxes.
One has to question the wisdom of continuing with such a list, which achieves no apparent public purpose, but just puts listed large individual taxpayers at risk from criminal elements, and unlisted law- abiding ones at risk of unfair shaming by the uninformed. If the BIR insists on continuing with this practice, the least it can do is to remove the amount of taxes paid in the interest of safety of the taxpayer and his family. For my part, I truly doubt that the large tax evaders and smugglers, who are completely outside the tax agencies' data base as they do not issue receipts or file returns, can be shamed into paying proper taxes. The current leadership truly needs to break away from the past practice of simply hunting in the zoo and go after voracious wildlife - not an easy tax at all.
To be fair, the new leadership in the DoF and the BIR is demonstrating amazingly admirable determination to raise revenue collections through various programs. I applaud them vigorously. Their work is made difficult by structural erosion in the revenue base due to non-indexation of excise taxes, as well as the passage of tax-eroding laws in the last two years, by one estimate costing over 1 % of GDP annually (P80 billion).
Administrative measures, however, can only do so much, based on both our own and international experience. It does not help that the new administration came in under a campaign promise of no new or increase in taxes even as it is under pressure to do catch-up infrastructure and social spending.
Perhaps in an effort to help increase revenues while staying faithful to the administration campaign promise, Rep. Dodong Mandanas, chairman of the House Ways and Means Committee is pushing hard for a Value Simplified Tax ( VAST) at 6% to replace the 12% VAT. Despite opposition from the Department of Finance and known experts in the field, this has recently passed his committee. I share the reservations of critics of VAST, a multi-stage turnover tax that cascades, i.e., imposed on a product several times depending on the number of stages involved throughout the production and distribution chain. As the DoF position paper states: adopting a lower rate of 6 % for VAST can be deceiving and the poor who is largely limited to purchasing goods from a retail store could end up paying more than the rich. The paper also argues persuasively that in addition to being not transparent (which could actually be its major selling point) it distorts production and resource allocation, as well as impacting unfavorably on exports. (The public can derive comfort from the pronouncements of Senate Ways and Means Committee Chairman Sen. Ralph Recto that he does not favor the VAST for the reasons cited. )
If not VAST, what then to improve the fiscal picture and finance needed development spending? UP Professors Canlas, Diokno, and Medalla, in a fiscal road map, they drew up before the presidential elections, put forward the following measures: a) reform of fiscal incentives, b) reform of excise taxes on cigarettes and liquor, c) increase in VAT to 15 % while lowering personal and corporate income taxes to 25%, d) a higher taxes on fuel products. (See my column, Fiscal imperative for next administration, Oct 5, 2009)
Even as the fiscal leadership perseveres in trying to collect more from the existing tax base, it should perhaps quietly constitute an experts study group to do a comprehensive review of our tax system and recommend reforms adapted to changing complexion of the Philippine economy and its financing needs.
Mr. Romeo Bernardo is managing director of Lazaro Bernardo Tiu & Associates, Inc. (a consultancy firm), board member of The Institute for Development and Econometric Analysis, Inc, and was undersecretary of Finance during the Aquino1 and Ramos administrations.
Monday, December 6, 2010
Did peace bonds disadvantage gov't?
Business World
Introspective
The Peace Bonds have become a live issue again with the 10-year bonds maturing early next year. The analysis (below) of the Foundation for Economic Freedom in 2002 came to the conclusion that taxpayers were not disadvantaged. This paper is an abridged version of what was drafted by former FEF President Francis Varela, FEF Chairman Philip Medalla, and myself.
Critics have alleged that there was an anomaly involved in the sale of the P1.4-billion Peace Bonds, allowing CODE-NGO to generate a fantastic windfall and leading to significant losses on the part of government. To our mind, the key question toward developing a dispassionate and rational perspective on the whole issue is:
What was the appropriate value of these bonds when they were issued in October last year?
First, the pertinent facts:
The Bureau of Treasury sold (through a bidding process) 10-year zero- coupon bonds with a face value of P35 billion to a bank (RCBC) which acted on behalf of CODE-NGO. The bonds were sold at a total price of P10.2 billion, thus implying a yield of 12.75% per annum. The bonds are effectively tax exempt and eligible as liquidity reserves for banks and quasi-banking institutions. Simultaneously, or within a very short period of time, CODE-NGO sold the bonds to RCBC Capital at a gross profit of P1.8 billion or a total consideration of P12.0 billion. At this price, the implied yield of the bonds to the end-buyer (RCBC Capital) goes down from 12.75% to only 11 percent.
Was the appropriate value of the bonds upon issuance P10.2 billion or P12.0 billion? Or, alternatively, was the appropriate yield of the bonds 12.75% or 11%?
We have to note that the difference between the two yields is very significant and non-trivial in a reasonably efficient financial market. Thus, if this wide a yield movement takes place without the occurrence of a major market-shaking event, then the conclusion is that either the issuer paid too high a yield or the final buyer overpaid for the bond and is now suffering below-market yields. As the Philippine financial market was relatively calm when the Peace Bonds were auctioned, clearly, therefore, one of the yields was wrong.
If 11% was indeed the appropriate yield for the bonds, then the Department of Finance/Bureau of Treasury committed a serious mistake in the sale of the bonds and were remiss in their duty to protect the interests of government. Notwithstanding the openness of the auction and without having to allege that it was rigged, one could nevertheless argue that they should have devoted more time and effort explaining the features of the bond to more market participants in order to achieve the lower yield. If this were the case, then the critics are right and we, as taxpayers, should all join in condemning the issue as a major anomaly.
On the other hand, if the appropriate yield of the bonds was 12.75%, then clearly there could have been no anomaly involving government funds and the only logical conclusion is that RCBC overpaid for the bonds, and the extraordinary profit enjoyed by CODE-NGO could not have come from government.
We now proceed to analyze the features of the bond to determine its appropriate value. First, we would like to note that the main features that enhanced the value of the bond were the tax exemption and the liquidity reserve eligibility. Second, we also wish to note that the zero-coupon feature did not add any value to the bond. Normally, a zero-coupon bond issued by the same issuer and with the same tenor would trade at a slightly higher yield than an ordinary coupon-bearing bond.
Thus, conservatively (from the issuer's standpoint) we can compare the Peace Bonds with the regular 10-year Treasury note. At the time of the auction, the regular 10-year T-notes were trading in the secondary market at a yield of 16.9%. Since the regular 10-year T-note is subject to the 20% final withholding tax, the after-tax yield of the 10- year T-note was 13.5%. Thus, if the Peace Bonds had no other enhancement aside from the tax exemption, then it should have traded at around 13.5% or higher, not 12.75% and DEFINITELY NOT 11%. On the other hand, considering that the difference between the regular T-bills and the reserve eligible ones is only 0.5%, then the fair yield of the Peace Bonds was approximately 13%.
Based on the foregoing, it is our conclusion that the 12.75% original yield of the Peace Bonds was favorable to government and that it was RCBC, not government, that bore the cost of the P1.8-billion windfall that was enjoyed by CODE-NGO by suffering an inordinately low yield on this instrument when they bought the bonds on a secondary basis from CODE-NGO. Whether this resulted from philanthropy and social spirit, miscalculation or contractual constraints that required RCBC to provide fees to CODE-NGO even in a transparently bid auction where they would have been entitled to participate anyhow, or a combination of the above, is a private matter.
Now, looking at this issue in its entirety, we believe that it was inappropriate, if not outright wrong, for CODE-NGO to have attempted to conduct this transaction on a negotiated basis, as they themselves have admitted. We believe it is fair to surmise that, if there was no auction, the government would have ended having to bear the cost of the CODE-NGO windfall. Thus, instead of being pilloried and maligned, the DOF and the BTr deserve our congratulations and commendation for having resisted the strong overtures of CODE-NGO to conduct a negotiated sale. In particular, we have to thank Treasurer Sergio Edeza for having been so clear and unswerving in his position on the matter, and for taking only the highest interest of the Republic into account in his actions. Clearly, the government did not lose a single centavo in the transaction, thanks to their efforts.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
Introspective
The Peace Bonds have become a live issue again with the 10-year bonds maturing early next year. The analysis (below) of the Foundation for Economic Freedom in 2002 came to the conclusion that taxpayers were not disadvantaged. This paper is an abridged version of what was drafted by former FEF President Francis Varela, FEF Chairman Philip Medalla, and myself.
Critics have alleged that there was an anomaly involved in the sale of the P1.4-billion Peace Bonds, allowing CODE-NGO to generate a fantastic windfall and leading to significant losses on the part of government. To our mind, the key question toward developing a dispassionate and rational perspective on the whole issue is:
What was the appropriate value of these bonds when they were issued in October last year?
First, the pertinent facts:
The Bureau of Treasury sold (through a bidding process) 10-year zero- coupon bonds with a face value of P35 billion to a bank (RCBC) which acted on behalf of CODE-NGO. The bonds were sold at a total price of P10.2 billion, thus implying a yield of 12.75% per annum. The bonds are effectively tax exempt and eligible as liquidity reserves for banks and quasi-banking institutions. Simultaneously, or within a very short period of time, CODE-NGO sold the bonds to RCBC Capital at a gross profit of P1.8 billion or a total consideration of P12.0 billion. At this price, the implied yield of the bonds to the end-buyer (RCBC Capital) goes down from 12.75% to only 11 percent.
Was the appropriate value of the bonds upon issuance P10.2 billion or P12.0 billion? Or, alternatively, was the appropriate yield of the bonds 12.75% or 11%?
We have to note that the difference between the two yields is very significant and non-trivial in a reasonably efficient financial market. Thus, if this wide a yield movement takes place without the occurrence of a major market-shaking event, then the conclusion is that either the issuer paid too high a yield or the final buyer overpaid for the bond and is now suffering below-market yields. As the Philippine financial market was relatively calm when the Peace Bonds were auctioned, clearly, therefore, one of the yields was wrong.
If 11% was indeed the appropriate yield for the bonds, then the Department of Finance/Bureau of Treasury committed a serious mistake in the sale of the bonds and were remiss in their duty to protect the interests of government. Notwithstanding the openness of the auction and without having to allege that it was rigged, one could nevertheless argue that they should have devoted more time and effort explaining the features of the bond to more market participants in order to achieve the lower yield. If this were the case, then the critics are right and we, as taxpayers, should all join in condemning the issue as a major anomaly.
On the other hand, if the appropriate yield of the bonds was 12.75%, then clearly there could have been no anomaly involving government funds and the only logical conclusion is that RCBC overpaid for the bonds, and the extraordinary profit enjoyed by CODE-NGO could not have come from government.
We now proceed to analyze the features of the bond to determine its appropriate value. First, we would like to note that the main features that enhanced the value of the bond were the tax exemption and the liquidity reserve eligibility. Second, we also wish to note that the zero-coupon feature did not add any value to the bond. Normally, a zero-coupon bond issued by the same issuer and with the same tenor would trade at a slightly higher yield than an ordinary coupon-bearing bond.
Thus, conservatively (from the issuer's standpoint) we can compare the Peace Bonds with the regular 10-year Treasury note. At the time of the auction, the regular 10-year T-notes were trading in the secondary market at a yield of 16.9%. Since the regular 10-year T-note is subject to the 20% final withholding tax, the after-tax yield of the 10- year T-note was 13.5%. Thus, if the Peace Bonds had no other enhancement aside from the tax exemption, then it should have traded at around 13.5% or higher, not 12.75% and DEFINITELY NOT 11%. On the other hand, considering that the difference between the regular T-bills and the reserve eligible ones is only 0.5%, then the fair yield of the Peace Bonds was approximately 13%.
Based on the foregoing, it is our conclusion that the 12.75% original yield of the Peace Bonds was favorable to government and that it was RCBC, not government, that bore the cost of the P1.8-billion windfall that was enjoyed by CODE-NGO by suffering an inordinately low yield on this instrument when they bought the bonds on a secondary basis from CODE-NGO. Whether this resulted from philanthropy and social spirit, miscalculation or contractual constraints that required RCBC to provide fees to CODE-NGO even in a transparently bid auction where they would have been entitled to participate anyhow, or a combination of the above, is a private matter.
Now, looking at this issue in its entirety, we believe that it was inappropriate, if not outright wrong, for CODE-NGO to have attempted to conduct this transaction on a negotiated basis, as they themselves have admitted. We believe it is fair to surmise that, if there was no auction, the government would have ended having to bear the cost of the CODE-NGO windfall. Thus, instead of being pilloried and maligned, the DOF and the BTr deserve our congratulations and commendation for having resisted the strong overtures of CODE-NGO to conduct a negotiated sale. In particular, we have to thank Treasurer Sergio Edeza for having been so clear and unswerving in his position on the matter, and for taking only the highest interest of the Republic into account in his actions. Clearly, the government did not lose a single centavo in the transaction, thanks to their efforts.
Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of Finance during the Aquino and Ramos administrations.
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