Interest and tax rates

We are supposed to be a democracy, but our officials in the three branches of government like to keep things mysteriously opaque for us. There is little to no transparency in how they make decisions that impact our lives.

P-Noy promised us freedom of information as a candidate, but refused to give that to us once he was elected. He talks about “alternative truth,” ignoring the fact the truth can only be the truth, no ifs, buts or alternative versions. Supreme Court Justices don’t want to be criticized, not even by one of them, as if they enjoy Papal infallibility.

Now there is that Supreme Court decision on the Piatco NAIA 3 case that boggles our minds. We, the government and the Filipino people, won that case twice in arbitration in Washington and once in Singapore. But we lost the case at our own Supreme Court.

Indeed, even during the past administration, those familiar with the case told me they wondered why our government officials tried so hard to lose a case they were winning.

P-Noy’s Daang Matuwid administration is no different. I heard one of his trusted officials wanted the Solicitor General to get rid of the foreign counsel even if their experience and expertise were helping us win the case. Don’t pay them, the Palace official was said to have advised the Sol-Gen, and they will go away.

Now the SC decision couldn’t be more adverse to the interest of the Filipino taxpayers. The SC computed just compensation to Piatco for the cost of the NAIA-3 project at $326,932,221.26 less the government’s advance payment in 2006 of $59,438,604 plus an interest rate of 12 percent per annum from Sept. 11, 2006 until June 30, 2013 and six percent per annum from July 1, 2013 thereafter.

Question: why did the SC compute interest at 12 and six percent when interest rates have been a lot lower during those years? The average rate for all maturities of Philippine Treasury Bills (a good indicator of interest rate used by both government and private sector) was just at 3.689 percent.

And if we are talking US Dollars, it had been one to two percent or even less than one percent for the period. 

Any retiree dependent on interest income knows how pitifully low interest rates have been for both the peso and the dollar. Have the SC justices been hibernating in some isolated cave or desert island in the middle of nowhere oblivious to world financial developments?

The Supreme Court Justice who wrote the decision should have sought the advice of the Bangko Sentral on the proper interest rate to use in this case. It is embarrassing for the Supreme Court to be so out of whack on interest rate movements, hopefully not intentionally.

By computing the interest rate government must pay at six percent or worse at 12 percent, PIATCO gets a windfall profit. I agree PIATCO should be given just compensation. But PIATCO should not be making an outrageous profit out of that unfortunate project. That morally amounts to plunder as it unjustly raids the National Treasury on a wrong and excessive assumption of the interest rate.

I am hoping SC Justices listen to their conscience and do the right thing here. Otherwise, we will have the right to speculate what gives. 

The law may be what the Supreme Court says it is, but the right interest rate to use for a past period involves historical numbers. Supreme Court justices cannot just pick numbers out of thin air and say that’s it.

Government officials should protect the public the way MWSS regulatory officials did when they reviewed rate increases sought by Maynilad and Manila Water. Both concessionaires justified increases by citing interest rates higher than what should be. MWSS regulators, a bunch of young, idealistic and technically savvy people, objected and saved all of us water consumers a lot of money. But MWSS is an exception.

P-Noy must be another hermit who thinks the peso’s buying power almost two decades ago is the same as it is now. That’s how it looks with P-Noy’s refusal to consider income tax reform.

For someone with a degree in economics, it is embarrassing for P-Noy to not know the P500,000 top tax bracket when the current tax brackets were designed in 1997 is not the same P500,000 today. The peso then is only worth 43 centavos now.

Because the tax rate and brackets remained the same, the working class is unjustly squeezed resulting in non-inclusive growth. I know...it is again former President Arroyo’s fault… she was P-Noy’s economics teacher.  

I agree with Sen Sonny Angara and Rep Miro Quimbo that our current tax system is “outdated” and “inequitable”. A supervisor for one of our larger corporations earning about P500,000 a year or a little over P40,000 a month is paying income tax at the same rate as Henry Sy, Lucio Tan or Jaime Zobel de Ayala.      

We have to take inflation into account in our income tax rates and brackets. Otherwise, government is stealing from its taxpayers… a legal hold-up… an abuse of state power. A sense of fairness in the tax system will go far in encouraging better tax compliance.

It seems P-Noy bought the position of Finance Secretary Cesar Purisima that tax reform will endanger the country’s investment grade rating, this administration’s crowning glory, largely meaningless to an ordinary Pinoy. I get it that P-Noy does not want to lose that. So, to hell with being fair and equitable to his bosses!

But Angara and Quimbo don’t think our fiscal position will be endangered by income tax reform. Indeed, we should not worry too much about an initial decline in tax collection, estimated by the BIR at P30 billion. Increased spending capacity of our people will boost economic activity thereby enlarging the potential tax collection base.

As Sen. Ralph Recto pointed out, the P30 billion estimated tax collection loss is easily covered by deleting the proposed P30 billion “budgetary support” next year for the Land Bank and Development Bank of the Philippines. Both Recto and Angara believe, and I think they are correct, there is no urgent need to give the government banks a P30 billion windfall.

Recto also pointed out the DOF’s proposed budget contained another P30 billion for risk management fund. That’s the same fund DOTC’s Sec Jun Abaya is looking at to finance penalties arising from their failure to live up to commitments in their PPP contracts.

Removing both these allocations already produce P60 billion or twice the amount BIR claims would be lost by doing income tax reform. As Angara and Recto observed, for sure, 5 million people could benefit from the reduction of income taxes…”

Additionally, as political analyst Malou Tiquia observed on the subject: “There is no correlation between investment rating and high tax rates in an era of underspending (five years and counting)... Give the cuts as money in pocket of Juan and you expand the economy...”

I suspect P-Noy’s intransigence on tax reform also explains why Trade Secretary Greg Domingo resigned abruptly, but was only prevailed upon to leave after the APEC conference.

Days before he resigned, Greg called for tax reforms to attract investors. I suppose he got fed up with Sec Purisima who refuses to see what foreign investors have been saying about our tax laws.

It must be frustrating for Greg to see our Foreign Direct Investments or FDI remain pitifully low compared to Asean peers, notably Vietnam, a former war torn country. The once reclusive Myanmar is also threatening to overtake us. FDI is Greg’s responsibility and he wants to see the fruits of his hard work or what’s the use of staying?

The foreign chambers issued a joint statement last Tuesday supporting Greg’s position on tax reform. “There clearly is a pattern to reduce corporate and individual income tax rates in competing Asean economies to make their countries more competitive,” the Joint Foreign Chambers said, “The Philippines should not fall behind the regional trend.”

The foreign chambers also noted “the Philippines imposes the second highest personal income tax and the highest corporate income tax among the Asean-6 countries. The personal income tax in the Philippines is 32 percent, while Thailand is 35 percent (reduced from 37 percent in 2010), Vietnam is 35 percent, Indonesia is 30 percent, Malaysia is 26 percent (to be reduced to 25 percent in 2016), and Singapore is 20 percent.

“The Philippine corporate income tax is 30 percent, while Indonesia and Malaysia are 25 percent, Vietnam is 22 percent (reduced from 35 percent in 2010), Thailand is 20 percent (reduced from 35 percent in 2010), and Singapore is 17 percent.”

It is all about being fair and competitive. That’s how to make being “investment grade” meaningful to our people. It is also about being truthful on the real value of money.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco