A legal confrontation on RR 1-2014 in the offing?

On December 17, the Department of Finance (DOF) and Bureau of Internal Revenue (BIR) issued Revenue Regulation No. 1-2014 which took effect last Jan. 1.

RR 1-2014  is supposed to simply amend a 15-year-old regulation (RR 2-98).

So why is there a  brouhaha over its issuance?

The regulation requires withholding agents to submit an alphabetical list (alphalist) of all employees/payees of income payments exclusively through the following means: a) as attachment in the Electronic Filing and Payment System (eFPS); b) through electronic submission using the BIR’s website (eSubmission); or c) through e-mail at dedicated BIR addresses using a prescribed CSV file format (e-mail).

More importantly, the new RR 2-98 requires withholding agents to submit the names, together with their respective tax identification number and other details, of each and every person (employee and non-employee) to whom they make payments.

By the express terms of the new regulation, the submission of alphalist where the income payments and taxes withheld are lumped into one single amount (e.g., “various employees,” “various payees,” “PCD nominees,” “others,” etc.) shall not be allowed.

The introductory paragraph of RR 1-2014 contains this phrase: “…except on cases prescribed under existing international agreements, treaties, laws and revenue regulations.”

Does this mean that RR 1-2014 will not apply to cases where the relevant law or treaty does not require the submission of the names of the income payees?

Another question is whether the new regulation applies where compliance will violate any confidentiality provision of existing laws. For instance, there is a provision in the General Banking Law penalizing a bank officer or employee for disclosing any information regarding a bank account. Does this mean that the new regulation need not be complied with in cases where the submission of the names of payees exposes the payor to criminal liability?

If the answers to the foregoing questions are that the new RR must still be complied with, is the disallowance of business deductions a valid exercise of the BIR’s rule-making powers? Some sectors posit it is not. They argue that the Tax Code only requires the taxpayer to show that the income tax required to be withheld has actually been withheld and paid to the BIR.  More telling is that the new regulation may violate substantive due process as being unduly oppressive for disallowing legitimate deductible expense merely for non-compliance with the format and mode of submission required.

For the banking industry, will the new requirement compelling banks to disclose the names and other details of their clients not violate the secrecy provisions of the General Banking Act and Secrecy of Bank Deposits?

For the stock brokerage industry, will the new requirement not violate the confidentiality provisions of their written contracts which they entered into with their clients in compliance with  the Securities Regulation Code?  Will the new rule not violate the sanctity of contracts protected by the non-impairment clause of the Constitution?

Note the new prohibition on using “PCD nominees” as payees.  This has been an internationally accepted convention in the stock market system.  Investors are paid their dividends through this nominee system  instead of the listed companies individually paying them.  It saves the parties a lot of effort, expense and time. Considering the billions—or at least millions of investors in the stock market—imagine the havoc that would result to the stock market without this system. Under this system, investors receive their dividends either from their brokers or custodian banks. As far as these investors are concerned, they are able to keep their identity and investments private and  confidential, which is so essential to maintaining stability and public confidence in our capital markets.

My friends in the PSE claim that the new requirement is wreaking havoc on the stock market. I understand that some listed companies are requiring esoteric things from their investors like consularized articles of incorporation and certificates of tax residence from their home countries to comply with the new regulation. If true, these are definitely a turn-off to these investors who are not subjected to same requirements in other countries they have investments in.

In legal parlance, this may mean that the new issuance violates the Securities Regulation Code that mandates the development of the capital markets.

The question is: will the affected industries take the DOF and BIR to court on this issue? Well, I am told that no less than a retired justice of the Supreme Court is being consulted.

My guess may still be wrong, though!

(The views of the author expressed in this column are exclusively his.  They should not be attributed in any way to the institutions with which is is currently affiliated.)