POSTSCRIPT / January 18, 2005 / Tuesday


Philippine STAR Columnist

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Higher VAT on telcos better than franchise tax?

HIKED VAT COMING: Congress appears to agree with Malacanang that the franchise tax, based on a percentage of the gross sales of telecommunications firms, is a bad revenue idea. Is it?

Their thinking is that in slapping the money-making cellular giants Smart and Globe with a franchise tax, Congress will end up killing the rest of the industry, especially the small telephone companies in the provinces.

Setting aside the franchise tax in favor of a VAT (value added tax) increase after a recent meeting with telecom executives, President Arroyo must have concluded that the franchise tax would be counter-productive.

Government is going all out to pass new taxes and raise an additional P180 billion each year to persuade foreign credit risk agencies not to subject the Philippines to another downgrade.

(There is actually another kind of downgrade that could be just as scary. Slapping huge taxes on companies for the simple reason that they are profitable is likely to drive away investors.)

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TAX BURDEN: Some of us relate tax payments to gross sales, but this is not the best way to determine the proper “tax burden.” Some companies may have high gross sales but with minimal net income or even losses, resulting in low or zero income tax payment.

As a rule, the “tax burden” is better arrived at by comparing income tax payment with net income.

What looks like a better proposal, which is pending in Congress, is an additional 2-percent VAT from the existing 10 percent — or a new total of 12 percent to be paid by the telecoms for the coming year.

This will be a parallel move to removing tax exemptions currently enjoyed by professionals such as lawyers.

Finance Undersecretary Grace Tan has said that lifting VAT exemptions for several products and services, including petroleum, would improve the government’s efficiency in raising VAT collections.

The finance department expects P25 billion in additional revenues a year from the reduction of the list of VAT exemptions and another P30 billion from the 2-percentage point increase in the VAT rate. This yields a total of P55 billion in additional revenues from the twin VAT measures.

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RISKY BUSINESS: Given the rapid pace of technological advances, investment in telcos is under constant risk of being wiped out.

Competition in the industry is tough, as can be seen in the number of telcos that have folded up, where shareholders ended up wet or are in distress over the years (e.g., Easycall, Piltel, Islacom, Bayantel).

If tax is for public facility and utility (i.e., bandwidths), why not also a special franchise tax on shipping, TV/radio stations, bus lines and power utilities?

There is a perception that the telecom industry is paying less tax than it should. This stems from lack of appreciation of the incentives given by the government to provide the population a fast and modern communication system.

For instance, the government has lined up income tax holidays for the industry in connection with its substantial investments in network roll out. But this tax holiday, which was in line with incentives administrated by the Board of Investments, expired earlier last year.

In other words, the industry would be paying a lot more taxes in the coming years without the incentives it used to enjoy.

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ADVANCED V.A.T.: It is not generally known that when a telco imports capital equipment, it pays VAT to the customs bureau. This then forms part of its input VAT credits.

Unlike a regular company, which pays VAT at the time it generates revenues by selling its goods and services, the telcos in effect pay VAT in advance at the time the imported capital equipment goes through Customs instead of the Bureau of Internal Revenue.

This means that Customs has already collected the VAT by the time the telco reports its net VAT to the BIR. In 2003, one company paid almost P4 billion in VAT, 62 percent of which was collected by Customs.

Its exponents say that the VAT system is beginning to work. As more exemptions are removed and the VAT trail becomes more extensive, the system improves, according to them.

Even without additional taxes, the industry says that its tax payments would rise significantly beginning in 2004. Tax payments are expected to rise by 40 percent in 2004 compared to the previous year, and go up another 40 percent in 2005.

The tax collections grow mainly because the industry is growing, and the tax holidays granted as investment incentives have been lapsing.

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PASS-ON BURDEN: The telcos tell us that a franchise tax will impose an additional burden on users of telecommunications services, including:

  1. Businesses that use telecommunication services as intermediate inputs, e.g., current growth sectors such as information technology and call centers.
  2. The poor who will be hurt more than the rich with every additional centavo price increase, especially those who are at the margin of telephone access and will be screened out by the additional cost.

Incidentally, the Foundation for Economic Freedom says that VAT is better than franchise tax and looks at the recent agreement between the Executive and Legislative leaders for a VAT increase as a positive development.

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U.P. PAPER CITED: The FEF says it supports the resolve of Rep. Jesli A. Lapus, chairman of the House ways and means committee, to wrap up the VAT measure soonest.

The private think tank says that a 2-percentage increase in VAT can raise as much as P30 billion in revenues even without factoring in the removal of existing exemptions.

It cites a University of the Philippines paper on the budget deficit arguing that a simple strengthening of the VAT system through an expansion of its coverage and a slight increase in its rate is superior to such proposed revenue measures as a tax on text and a franchise tax on telecoms.

The UP paper says that VAT is superior because it is uniform and transparent in application, reduces discretion and the scope of corruption. It adds that VAT is “neutral in its incidence, which minimizes the inevitable economic distortion caused by any tax.”

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DIRTY MESSAGES: Still on telcos, the National Telecommunications Commission is moving to regulate the sending of unsolicited promotional, junk text, image, video and audio messages being denounced by irate mobile telephone users.

“We welcome the draft NTC circular,” Rep. Joseph Santiago (NPC, Catanduanes), a former NTC chief, said. “This shows the commission’s sensitivity and responsiveness to subscriber complaints.”

Santiago warned earlier that the unchecked spread of uninvited messages via “text pushes” could expose minors to materials that promote gambling as well as to obscene and undesirable materials through unsolicited image, video and audio feeds.

The NTC order would cover all telecommunications firms, including mobile telephone operators Smart Communications Inc., Globe Telecom Inc., Pilipino Telephone Corp. and Digitel Mobile Philippines Inc. Third-party information or content providers would be covered also.

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STRICTER RULES: Under the draft rules, promotional messages may be sent only to subscribers who have given prior consent to receive them, and may be sent to them only from 7 a.m. to 9 p.m.

Subscribers who gave prior consent to receive the materials should not be charged any amount. A subscriber who does not respond to a promotional message should be automatically considered to have rescinded his prior consent, and must not be sent similar messages in the future.

All promotional messages must show the name of the telecommunications firm and/or the content provider.

Some 25 million Filipinos, or about 30 percent of the population, own mobile telephones.

Industry analysts project that by mid-2007, an additional 10 million Filipinos would own mobile telephones, bringing the market penetration rate to as high as 40 percent of the population.

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(First published in the Philippine STAR of January 18, 2005)

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