Rock and rule

The Supreme Court, in a recent landmark decision, seemed to have scolded the Bureau of Internal Revenue over its practice of imposing its rules over and above international agreements such as tax treaties.

The decision involved a case filed by Deutsche Bank contesting the BIR ruling on its income tax payment in 2003, saying it was entitled to tax breaks under a treaty between the Philippine and the German governments.

Last year, the Supreme Court ruled that, in effect, any international agreement always tramps BIR rules and procedures on tax payments and, a few weeks ago, the court affirmed its ruling with “finality.”

It seems that in 2003, Deutsche Bank remitted to the BIR P67 million in income taxes of its local branch—an amount based on the assessment by the BIR.

The bank contended that its tax payment should have amounted to only P45 million, citing a treaty between the Philippine and German governments that reduced the tax rate on its branch profit from 15 percent to 10 percent.

The bank thus asked the BIR for a refund of P22 million. It, however, failed to sway the BIR in its solid rock stand, claiming that the bank failed to follow one simple BIR rule covering the tax treaty. And that was the bank should have applied for the tax break at least 15 days prior to the transaction.

In the past 10 years, Deutsche Bank  pursued the case with tenacity, although the amount involved in the case would seem like chicken feed to the bank which, as of 2013, posted total assets of some $3.2 trillion (about P150 trillion).

In the past 10 years, that P22 million should have already more than doubled.

The bank seemed to have pursued the case out of principle, since for many years now the BIR has always denied tax breaks to foreign banks, citing their failure to follow BIR procedures, such as the 15-day reporting rule.

In the fast world of banking, 15 days may be a long time. In the funding market among banks, called interbank lending, the banks set interest rates by the minute, with the rates changing everyday.

The Supreme Court noted that the practice of the BIR in ignoring tax treaties could harm the country’s foreign relations and, worse, discourage foreign investments.

There—even the Supreme Court worries over some inconsistencies in our tax regulations, perhaps in the same way that foreign investors have cited them as one of the hindrances in doing business in the country.

Such an observation was evident in the Global Competitiveness Report 2013-2014, done by the prestigious World Economic Forum, which the Aquino (Part II) administration often cites, particularly when the Philippines goes up several notches in the competitiveness standings of some 148 countries.

According to the report, the top four problems in doing business in the Philippines are poor infrastructure, corruption, inept bureaucracy and tax regulations. Take note that those are all the areas of the government! And the BIR is number four!

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We all know that our leader Benigno Simeon (aka BS) just ordered the abolition of three government corporations linked to the P10-billion pork barrel scam in Congress, allegedly courtesy of ma’am Janet Lim-Napoles.

Shut down for good were Philippine Forest Corp. (PhilForest), ZNAC Rubber Estate Corp. (ZREC) and National Agri-Business Corp. (Nabcor), which were reportedly used as conduit in the pork scam for ghost projects and programs.

The Governance Commission for GOCCs, nicknamed GCG, said more bad GOCCs would be abolished mainly because they were useless.

Local officials in the progressive province of Camarines Sur—tourism hot spot CamSur— also called on our leader, BS, to get rid of another government corporation called PDA, or Partido Development Authority.

At the height of the pork scandal last year, news reports cited a separate COA report that showed that PDA had incurred more than P100 million in losses.

Closely associated with the Fuentabella dynasty in CamSur, headed by former House of Representatives Deputy Speaker Arnulfo Fuentabella, PDA was supposed to stimulate economic development solely in the 4th district of the province—one single district made up of 10 municipalities, and not the entire province.

The area (known as Partido) has been known in CamSur to be under the political control of the Fuentebella family.

Based on its audit report, the COA found out that PDA had been suffering from cash problems, with its debts of more than P1 billion earlier absorbed by the government.

In fact, the PDA was already included in the list of government corporations that, under House Bill 2867, Rep. Rufus Rodriguez has been recommending for abolition. Among government corporations in the Rodriguez list were Nabcor and ZNAC.

According to the COA, the current liabilities of PDA already reached about P600 million in 2009, mainly amortization due on loans guaranteed by the government. Those were the 7.8-million euro loan and a $7.6-million loan obtained by PDA in 1999.

The COA report noted that, because of the poor cash position of PDA, the government had to advance payment for those foreign credit facilities that PDA used to finance the Partido Water Supply System (PWSS) project.

PDA secured these loans from the Danish International Development Agency (Danida), EKF Guarantee and ABN AMRO Bank.

Here is the thing: Based on the poverty incidence report of the National Statistical Coordination Board (NSCB) for 2006 to 2008, five of the poorest towns in CamSur were in the Partido area.