A dangerous precedent
Right after the Holy Week, 20 banks filed a petition with the Regional Trial Court of Makati to declare null and void Revenue Regulation 4-2011 (RR).
The RR mandates, among others, the allocation of common expenses incurred by a bank’s regular banking unit among its tax-exempt income, tax-paid income and income subject to ordinary income tax. Deductibility of these expenses is determined by the proportion that tax-exempt and tax-paid income bear to the gross income of the bank. For example, Roco Bank has P10 billion gross income during the taxable year. Half (P5 billion) of this income comes from the sale of tax-exempt government securities and sale of listed stocks which are subject to final withholding tax (tax-paid income). Roco Bank spends P3 billion as general administrative expenses. It can deduct only 50 percent (P1.5 billion) of the P3 billion GAE from its gross income during that taxable year. The net effect of the RR is that the net taxable income of Roco Bank is P8.5 billion instead of P7 billion. Hence, Roco Bank will have to pay an income tax of P2.55 billion instead of only P2.1 billion, or P450 million more.
The petition challenges the validity of the RR principally on the following grounds: (1) Congress withheld from the DOF plenary power to issue rules and regulations to implement the Tax Code. The Tax Code and other special laws specifically enumerate the instances for which the DOF can issue an implementing regulation and this kind of allocation is not among the instances. In fact, unlike other revenue regulations, the RR does not cite the section of the Tax Code pursuant to which the RR was issued; it unlawfully deprives the banks of the right granted them by the Tax Code to deduct in full legitimate business expenses; it unduly interferes with the right granted by the Tax Code to taxpayers to choose their own accounting method, provided that the chosen method accurately reflects their taxable income.
After summary hearing conducted following the filing of the case, the RTC issued a 20-day temporary restraining order lasting until April 28 against the implementation of the RR. Last Monday, the court conducted a hearing on the application for preliminary injunction. If the court grants the application, the BIR will be prohibited from issuing any tax assessment for any taxable on the basis of the RR for as long as the main case is pending.
During the injunction hearing, I highlighted the following:
- The RR sets a dangerous precedent in that it lays the basis for similar revenue regulations. I pointed out that, if the court upholds the RR, what will stop the DOF and BIR from issuing a revenue regulation that would disallow persons (like retired government employees) who practice their profession after their retirement from deducting full legitimate business expenses (e.g., office rental, office supplies) only because part of their gross income during the taxable year came from tax-exempt and tax-paid investments.
- The RR is unreasonable and oppressive. For example, a bank gets lucky in the capital markets during the taxable year and earns fifty percent of its gross income from the sales of tax-exempt and tax-paid investments which it made three years ago. It sends a messenger three times during the year to pick up the checks representing the sales proceeds of the investments. The messenger devotes the rest of his time to the other messengerial requirements of the bank. Similarly, the president of the bank sits as a member of the investment committee that made the investment. He attends monthly meetings of the committee lasting two hours each and spends the rest of his time to the other activities of the bank. What the RR means is that the bank can claim only 50 percent of the salary of the messenger and president as tax-deductible expenses. In other words, even if employees devote relatively little time to passive investments (e.g., tax-exempt and tax-paid investments), the RR prohibits full deduction of their salaries by benchmarking their deductibility solely against the percentage contribution of tax-exempt and tax-paid income to gross income without regard to other factors (e.g., time devoted, floor area occupied, number of transactions) affecting business.
- The RR is unfair. The petitioning banks have advanced payments of taxes for tax-paid investments by way of final withholding tax, yet the RR disallows deduction of expenses pertaining to this tax-paid income.
- The RR goes against the basic principle of laissez-faire, a sacrosanct policy in our system of government that allows businesses to operate with very little interference from the government. It imposes a particular accounting method based solely on gross income, and in total disregard of the Philippine Financial Reporting Standards (which takes into account factors other than gross income) that the Bangko Sentral ng Pilipinas mandates banks to adopt for financial reporting.
- It threatens much-needed support for the development of capital markets from banks, which are key players in the industry. By limiting the deductibility of common expenses (like general administrative expenses) to the proportion that tax-exempt and tax-paid income bear to the gross income of the bank, the RR serves as a deterrent for the banks to invest in our capital markets.
Of course, as counsel for the banks, I’m keeping my fingers crossed that we have made our point. Whether or not the court will agree with our arguments remains to be seen.
Abangan ang susunod na kabanata!
(The author is the former president and CEO of the Philippine Stock Exchange. He is now the president of the Shareholders’ Association of the Philippines (SharePHIL) and a senior partner of the ACCRA Law Offices. His views in this column are strictly personal. He may be contacted at [email protected])
