'Soli Pera' looks better than possible total loss
DELIBERATELY WRONG: As expected, a number of readers emailed us to point out my erroneous computation (POSTSCRIPT, 19 April 2005) of the Value-Added Tax due on goods and services.
I deliberately computed the VAT at 10 percent of the tag price or the invoice amount. For the succeeding transaction, I simply added the latest markup and added another 10-percent VAT to get the new gross price.
This is not the correct way, I know, but this is how many sellers actually compute the VAT with the buyer unaware that he is being cheated. I used this wrong, but prevalent, computation to show how VAT is unfairly tacked on to the price of goods.
I also wanted to highlight the fact that, in the real world, the ultimate buyer or consumer absorbs all the markup and the taxes added to the price at every stage as the goods pass from one businessman to another.
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VAT CREDIT RACKET: The process shows that VAT is a pass-on tax. The tax is not shouldered by the merchants, but is passed on to the consumer, who is the least prepared in the marketing chain to absorb the additional tax burden.
While consumers take it all, many businessmen get off not paying VAT. In fact some of them have been reportedly cashing in on VAT by collecting false tax credits or refunds.
What is Congress doing by way of legislation to make sure the tax burden is spread more equitably and to make sure the correct tax is collected by sales clerks from unsuspecting buyers?
(I wanted to identify the readers who sent email on VAT computation, but my Eudora mailbox was damaged beyond repair yesterday. Unless sent again, the missing email is lost forever.)
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HOW TO COMPUTE VAT: But back to the question: How is VAT correctly computed? I already answered this in POSTSCRIPT way back on Feb. 27 when I wrote about VAT-registered businessmen claiming credit or getting a refund for VAT paid.
In the law, there are an “input VAT” and an “output VAT” that come into play. “Output” tax is the VAT applied on the sale of the taxable goods or services. It is computed by multiplying the total invoice amount in sales by 1/11 (or simply dividing it by 11).
On the other hand, “input” tax is the VAT paid by a VAT-registered businessman on his importation or local purchase of goods and services from another VAT-registered person. It is computed by multiplying the total amount in purchase invoices/receipts by 1/11 (or dividing it by 11).
Then the correct VAT to be paid is arrived at by deducting the “input VAT” from the “output VAT.”
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CONFUSING CONFUSION: This complicated process is simplified (actually distorted) by many sales clerks who — instead of multiplying the amount by 1/11 — compute the VAT by getting 10 percent of the tag price or the invoice amount.
(To get 10 percent of an amount, you multiply the amount by .1, or you multiply it by 10 and then divide the product by 100.)
What’s the difference? If the invoice amount is P1,000 and you multiply that by 1/11 to compute the correct output VAT, you get P90.91. But if you use my wrong formula, as many sales clerks do, the output VAT on P1,000 comes out P100 (or 10 percent of P1,000).
Whew, wow! Sorry if you find the confusion, huh, rather confusing.
Come to think of it, is it possible they make it confusing so we would not dare examine it anymore? Just like I suspect that lawmakers, who are mostly lawyers, deliberately make the law confusing otherwise we would not find any need for them lawyers anymore.
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PRE-NEED DOSRI: Going back to one of his favorite topics, Sen. Mar Roxas is proposing a law penalizing trustees or officers of pre-need companies who engage in “self-dealing” to the detriment of thousands of planholders under their care.
In Senate Bill 1896, Roxas wants up to 12 years in prison plus a fine of up to P1 million for a pre-need company trustee or officer found using money from the trust fund to extend any loan to, or invest in any other entity directly or indirectly controlled by, the pre-need firm’s directors, officers, stockholders or related interests (DOSRI).
This is the same strict prohibition on DOSRI loans and investments that governs banks. Why not?
This law should have been passed 10 years ago, but better late than never.
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SEC NAPPING: An oversight committee of the Securities and Exchange Commission had attributed the financial distress of the College Assurance Plans Inc. (CAP), the largest pre-need provider with over one million planholders, to the alleged self-dealing of its controlling owners and officers.
The SEC panel said: “CAP made unprofitable and dubious investments in real estate, shares of stock and other long-gestation ventures of a related company. These investments, later contributed to the trust fund, failed miserably to realize the desired rates of return.”
“The wrong mix of investments was aggravated by CAP’s acquisition from related parties of some investments at apparently questionable prices,” the panel added.
So what else did the SEC do aside from merely pointing out the problem? Let the SEC answer that one.
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BIGGER RESERVE: The Roxas bill also requires pre-need firms to deposit in the trust fund up to 60 percent of the money collected from planholders. At present, pre-need firms are required to deposit only 45 percent to 51 percent. The trust or reserved fund guarantees that benefits are paid when due.
Due to a severe liquidity problem, some P150-million worth of CAP checks had bounced. CAP has started issuing vouchers instead of checks.
In the Senate hearing in February, CAP promised to secure a $150-million collateral-free loan from a large US investor “within 60 days.” This self-imposed deadline has since lapsed, without CAP getting the loan.
Roxas said the problems hounding CAP and recently, Pacific Plans Inc., have underscored the need for Congress to pass new legislation strengthening regulation of the pre-need industry.
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BACKGROUND: In 1986, Pacific Plans started selling open-ended educational plans that guarantees tuition payment regardless of the amount due. This is opposed to the fixed-value plan that specifies a fixed amount the beneficiary would get come maturity.
The government removed in 1990 the 10-percent cap on tuition increases for college and high school provided the students/parents were consulted. In 1994, full deregulation took effect. The requirement to consult was removed.
A year after, tuition soared by as much as 36 percent in some schools. Since then, a tuition runaway was a foregone conclusion. It was just a matter of time for the cancer to gobble up the pre-need industry.
In 1992, pre-need firms stopped selling open-ended plans after seeing the widening gap between earnings and tuition payments. The SEC belatedly suspended the sale of these plans in 2002.
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TUITION SUPPORT: Early this month, Pacific Plans filed in court a petition for suspending payments under a rehabilitation plan. But it asked to be allowed to pay the tuition of its beneficiaries in the current enrollment period. It added it would likely have no cash for the next one since its trust funds consist of government bonds maturing in July 2010 yet.
The court issued an order suspending payments except for the current tuition needs of beneficiaries. Saying it has only P341 million in cash, just enough to pay the full amount assessed by schools, it could only give tuition support.
Tuition support, it said, meant that money for students in non-exclusive schools like UE and FEU would be roughly the same amount as their last benefit claim. Students in exclusive schools would get much less than their last claim since their tuition is two or four times that in non-exclusive schools.
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SOLI PERA: Pacific Plans also offered to return the payments of planholders plus a compounded interest of 7 percent net per year from date of full payment. This translates to a gross interest of about 9 percent per year, which is better than bank rates.
Under the refund (“Soli Pera”) idea, open-ended plans would be replaced with fixed-value plans reflecting the amount that the planholders would get in July 2010 when government bonds in its trust funds mature.
It said that since plans usually mature 10 years from full payment, the 7 percent net or 9 percent gross offered would almost double the planholders’ money by July 2010.
Faced with the alternative possibility of losing all my money, if I were a planholder, I would seriously consider taking this compromise offer of Pacific Plans.