Taxed to death

Most countries today encourage investment in the private sector to grow the economy and create jobs.

The Philippine government is apparently an exception to this trend.

Businessmen invest in a business to make money, and any sensible government encourages them to do so and be successful. Then other investors will come.

In the Philippines, however, the new rule seems to be: If you are successful, we will impose a new tax on you to reduce your profits. This is part of the failed concept of socialism. Would Microsoft have been anywhere near as successful as it has been if the United States government had imposed a “windfall tax” on it?

Of course not. And think how far the computer world would be behind today. I’m talking, of course, about the new tax proposed for telecommunication companies. Government can now call it a franchise tax, but that’s just a name. It admitted at the beginning this tax was meant to capture some of the “excessive” profits of the telecom companies.

Why not a sin tax on retail and food? those industries made more profit than Smart and Globe last year.

Then Congress adds to the absurdity by mandating in a proposed law that the tax on texting cannot be passed on to consumers. This would then legislate something the Supreme Court so peculiarly did when it said taxes couldn’t be considered a business expense that can be passed on—so Meralco must refund income taxes collected from 1994 to 2003 to all its customers. I’ve studied and run businesses for decades so I must have some understanding of how they work. Power and tax are a cost of business consumers must pay for.

I still find it impossible to understand how the Supreme Court could rule that taxes are not a business expense that can be passed on to the consumer. I don’t know any business that doesn’t include its tax payments in calculating the cost of goods. If it’s not an expense to business, what on earth is it? Where is the payment for taxes supposed to come from?

To make any violation (as determined by the court) of a law retroactive is quite unacceptable in any sensible society. How can you possibly do business and account for your business if the rules might change later—and penalize you from the beginning? If it’s provable that you willfully knew you were committing a violation, okay. But if you were acting in good faith, then the change should start from the time of the ruling, not from some time back in history.

It’s like asbestosis, a dreadful disease that sticks needle-like asbestos into your lungs so you die of cancer early. Companies were taken to court and the claimants won despite that no one knew of or even suspected asbestosis existed in those earlier days (I know since I worked for an asbestos company for nine years).

Mind you—today anyone who produces or sells asbestos products should be prosecuted, because now we know. Yet, strangely, a law that would now ban asbestos products because of its deadly effect is just sitting there in Congress, not being acted upon. I can’t imagine how anyone would object to it, so why doesn’t it get passed more rapidly? Asbestos panel boards are being imported into the country putting Filipinos at risk—and Congress seems not to care.

Perhaps the Senate president and Speaker of the House could apply some urgency to this.

If the non-inclusion of tax in your selling price is now made part of a law for one industry, it can’t be long before other sectors get included. If this were strictly applied, the profitability of companies would fall so far behind world norms that no one, no one at all would bother to invest here. And many that are here (Filipino and foreign) would just give up. One of my clients, British American Tobacco, just did. A US$50-million investment it intended here was canceled, and now it has withdrawn altogether because of an absurd tax ruling that requires it to pay four times more tax than their competitors do.

I am not aware of any country anywhere in the world where such an absurdity exists, or is even considered. If politicians want to tax texting, fine, go ahead—and lose the next election. But if you still insist on imposing the tax, then leave the companies to decide how they’ll treat it in an open, competitive economy that currently works. But remember we have one of the best, possibly best, mobile systems in the world with almost universal coverage across the nation and some of the most imaginative—and cheap—services anyone is offering. That will be destroyed by this tax.

President Ramos’ far-sighted decision to deregulate worked. So leave it alone.

It would be better to focus attention on the too many areas where the Philippines is not a leader, is not even in the same class, and introduce laws or regulations (or “de-regulations”) to make them successful too.

Let me suggest just one law that would revolutionize business: Mandate that business registration can be done through only one government office, with just a maximum of two signatures, two forms within two hours: Business Registration 2:2:2. Or, much better, do it online if we truly want to be part of the modern world. It shouldn’t need a law, but it hasn’t happened despite the President’s promises.

Another is to remove the security of tenure clause in the Labor law and scrap the proposed one as being anti-worker. Fewer workers are hired because of this law and fewer businessmen invest because of this law. If the new one is passed, many industries will collapse as they become uncompetitive.

Getting NPC privatized fast would help too, so power prices could be deregulated and set competitively. The Power Sector Assets and Liabilities Management has done a good job here but it is hampered by less investor interest in a world recession and a policy that requires that plants go to the highest bidder. Which, of course, adds to the cost of electricity.

Why not just parcel out the remaining plants to those existing players who’d be interested, and have proven their competence here or internationally at a fair price (that’s a pretty well-known number)?

Maximizing up-front revenues is not the best overall financial deal when looked at over a 10-year period. Just one point—lower capital cost equals lower power rates equals more competitive businesses equals more sales equals more jobs equals more taxes for government. Not a bad deal.

But instead of thinking such imaginative, positive ideas (and I could be quite wrong on them but at least they should be brought out and tested), Congress and the administration seem to want to hamper business even more.

So the message is loud and clear: Don’t invest in the Philippines. And no one is—we had US$ 892 million in the first half. When Malaysia garnered $4 billion, Vietnam got $8 billion, and China attracted $43 billion.

Yes, the government desperately needs money. But this idea on taxing texting is a short-term gain for a much bigger long-term loss.

Mrs. President, it’s not worth it. If you want taxes, get Congress to pass a draconian tax on cigarets—a product that kills people (including my best friend—so if that’s a bias I admit it). And put some big fish in jail so the other big fishes will pay their taxes. You’ll make a lot more money that way if you do. –Peter Wallace, Manila Standard Today

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