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At what cost, gross income taxation?
Nov 13, 2001
 

A conference held last month called Forum on the Macapal-Arroyo Tax Reform Program, participated in by the business community headed by the Makati Business Club as well as by the NGOs, such as the Action for Economic Reforms, highlighted the stiff resistance the government is meeting in its proposal to shift the income tax on business from net income taxation to gross taxation. But more interesting though is the variance in the primary objections respectively articulated by the two groups. The difference demonstrates how far apart they are coming from.

The NGO position, as expressed by Nepomuceno A. Malaluan, is that "with adjustments here and there, I would agree that substantively, a case may be built to support the shift to gross income taxation based on the standards of fiscal adequacy, administrative feasibility, and theoretical justice". He insists, however, that the compelling argument against the government proposal is that "the insistence on the measure at this time is counterproductive and distracts all of us from focusing on the problem which we now all recognize, namely tax administration".

The business community position was crafted by a Taxation Reform Tax Force under the leadership of former secretary of finance, now President of AIM and Trustee of the Makati Business Club, Roberto F. De Ocampo (you cannot get a higher falluting icon than that) but was read by MBC’s Bill Luz. In true academic fashion, the paper gave several arguments running the whole gamut from the sublime "constitutional infirmity" to the no-brainer "there is no country in the world that taxes corporations based on gross/modified gross income", the most serious of which is tricky problem of determining the "cost of goods sold".

The administration’s proposal was to limit the deductions against gross income to direct costs. To this the De Ocampo paper replies, "new incentives and opportunities for tax avoidance will be created. Firms will have an incentive to present all costs, including administrative and marketing, as costs of goods sold. The negotiations, harassment, and arbitrariness that this proposal will bring are humongous." The paper also points out that different sectors will have different "costs of goods sold", saying that "different rules need to be prescribed for service firms like banks, insurance companies, and utilities with very large costs that cannot be classified as costs of goods sold".

With due respects to the MBC, chaired by my boss, Ricardo J. Romulo, I do not find myself impressed by the position of the business community. True it is that "costs of goods sold" is difficult and may vary from one type of business to another. That does not mean it is impossible to determine. The Asian Institute of Management, for example, could gather the business sector, and, based on reliable data (which need not necessarily be the data appearing in the income tax return of business), determine for each major sector a reasonable level of cost of goods sold (as a percentage of the gross income) which can then be "presumed" conclusively to be the entities cost of goods sold.

There should be no serious objection to the concept of "presumed" cost. Witness the ready acceptance that business accorded to the Comprehensive Tax Reform Act’s imposition "on the gains presumed to have been realized" on the sale of real property not actually used in the business of the corporation and treated as capital assets of a final tax of 6 percent.

My gut feel is that the more humongous problem of the business community with the shift to gross income taxation is the inevitable upsetting of the comfortable relationships they have established with revenue examiners and tax auditors. With a new tax regime, new dynamics will necessarily come into play threatening the already established systems they had set up under the present net income tax system.

But that is precisely what Rene Banez and his superiors want to break. Comfort between taxpayer and tax collector breeds inefficiency if not corruption. Unwittingly, the business community, by its opposition to gross income taxation, dressed in respectable arguments, is in effect perpetuating the milieu of dishonesty that its leaders are so earnestly condemning in public.

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