Legal but not moral
One of the reasons for the denial of ABS-CBN’s franchise application is the issue of tax avoidance viewed by the Technical Working Group (TWG) of the House Committee on Legislative Franchises through its moral lense.
The tax saving practices of the country’s biggest network were put under a strict scrutiny when it claims, during the committee hearings, that it is merely taking advantage of fiscal incentives and remedies provided for by law and that is how it was able to minimize payment of taxes. From 2017 to 2019, ABS-CBN paid only a total of P563.01 million in income tax compared to GMA7’s total income tax payment of P3.13 billion. Such a big disparity begs the question: How was ABS-CBN able to lower its income taxes without being charged of tax evasion by the BIR?
The answer seems to be complex for an ordinary mind to comprehend. It takes a tax genius to craft tax avoidance strategy used by ABS-CBN with the aid of complex tools to traverse the borderline between the legal and the illegal tax saving measures.
On the spotlight was the network’s use of its wholly-owned subsidiary Big Dipper which took advantage of the tax incentives and income tax holiday enjoyed by PEZA-registered enterprises. Instead of paying 30% of its net taxable income like other ordinary corporations, Big Dipper managed to get the incentive of paying only 5% tax on gross income in lieu of all national and local taxes. Big Dipper’s net incomes were then transferred to ABS-CBN through the declaration of tax-exempt dividend. The practice, according to the TWG’s computation, results in an average of P650 million per year of income tax revenue foregone by the government. The same report finds that Big Dipper’s creation and registration with the PEZA does not comply with the objectives for which the latter was created for. Big Dipper has not brought in any other investor aside from ABS-CBN and it only employs 164 employees, a situation which does not serve PEZA’s objective of promoting the flow of investors and generation of employment. Moreover, Big Dipper does not stimulate repatriation of Filipino capital since its only client is ABS-CBN Luxemborg which is also owned by ABS-CBN Corporation.
The giant network is likewise able to minimize taxes with the use of wholly-owned subsidiaries established in countries known worldwide as tax havens such as Hungary, Luxembourg and Cayman Islands.
ABS-CBN claims that it is merely taking advantage of fiscal incentives and remedies provided for by law, which is how it was able to minimize payment of taxes. It maintains that its actions and corporate structures are all legal. The TWG concedes that ABS-CBN is entitled to incentives and remedies provided by law to maximize its profits. Unable to pin down ABS-CBN with tax evasion, the TWG now gauges the network’s worthiness for franchise approval using the standard of morality on the premise that as a franchise holder, it cannot completely disregard the effect and impact of its practices.
In imposing morality as a benchmark for franchise application, the TWG overlooks the fact that the power to levy taxes is an exclusive power of Congress and this power includes the power to choose the subjects and the objects of taxation. The tax perks enjoyed by PEZA-registered enterprises are the creations of Congress itself which can withdraw the exemptions anytime barring constitutional limitations. Substantive due process under the Constitution requires that taxes may only be collected under a valid law that levies the tax. Beyond what is required by law, the TWG cannot dictate to any taxpayer to pay more taxes out of a sense of moral duty. It should have enacted a law that plugs the loopholes and seals off all the tax leakages which were never hidden from the prying eyes of our tax collection agencies in the first place.
The TWG criticizes the media network’s practice using the theory of harm. ‘If we focus on the harm of tax avoidance to society, rather than how it is legally defined, then we can see that it contributes to growing inequality, increases tax burdens on resident taxpayers and undermines state legitimacy. Although legal, the employment of tax avoidance schemes could undermine the integrity of a tax system.’
This legal sophistry suffers a constitutional infirmity since taxes must be levied by the lawmaking body of the state. Congress must enact laws to justify the taking of a person’s hard-earned money from him. It cannot simply implore morality as basis for a taxpayer’s obligation to pay taxes. How much amount of tax is considered moral? The determination of the amount of tax alone using the standards of morality is already problematic. Worst, this proposition opens the floodgates of corruption and extortion by corrupt tax collectors.
Several studies have shown that for decades, the Philippines incurred tax leakages courtesy of Congress’ magnanimous act of giving tax incentives. Although initially, the incentives were given in exchange for some economic considerations, Congress has never been so diligent enough in reviewing these incentives which no longer serve its purpose. The bill for the CREATE Act (Corporate Recovery and Tax Incentives for Enterprises Act) supposedly introduces a reform of the incentives scheme by putting a sunset provision to these incentives and requiring companies applying for an incentive to showcase to the government that they can make measurable economic contributions, such as through the creation of high-quality jobs, promoting quality exports, development of pioneer industries, and use of modern technology. The CREATE Act will promote a fair and accountable tax incentive system. Unfortunately, the bill for the CREATE Act formerly known as the CITIRA (Corporate Income Tax and Incentives Rationalization Act) has gathered dust in Congress since September, 2019 although the need for reform is urgent.
Instead of just looking into ABS-CBN’s compliance with its legal obligation to pay taxes, the TWG imposes a problematic and undefined standard of morality in saying that it is not worthy of renewal for navigating through the loopholes of the system and our tax laws. How can Congress exact accountability when it was the one which created the opportunity in the first place?
Although what is legal may not necessarily be moral, the primary duty to find ways of increasing revenues through enactment of laws still rests with Congress. It cannot make itself appear holier-than-thou by demonizing taxpayers who spend time and resources to legally reduce their taxes. – By Atty. Greg Borja Austral, CPA