Applauding the economy’s giant 7.8-percent leap for the first quarter of the year, the World Bank and the Management Association of the Philippines (MAP), the organization of top business executives of the country, called for the conversion of this naked growth to inclusive growth, one that alleviates poverty and creates jobs for our masses.
FDIs and hot money. To do that, MAP joined the Joint Foreign Chambers (JFC) in urging our government to honor its commitments to regain its credibility and trustworthiness. In this space two weeks ago, I opined that trustworthiness is the reason foreign direct investments (FDIs) have come in trickles to the Philippines but have been poured massively on Malaysia, Thailand, Singapore, Indonesia and other neighbors.
FDIs are desired everywhere because, unlike “hot money,” they are rooted in and stay for many decades in basic industries that spur inclusive growth. Yes, inclusive growth, not just naked economic growth, is the goal of all countries because it promotes the prosperity of both the rich and the poor, both capital and labor, both the entrepreneurs and the masses.
Hot money is invested short term, like in the stock market, bonds or bank deposits that can flee as fast as they come in. FDIs are long-term commitments. Once invested, they cannot be withdrawn instantly. Hot money is not necessarily bad; it helps in the expansion of existing businesses and normally precedes the more desirable FDIs.
To attract FDIs, the JFC’s solution is simple and has been successfully used by other countries: Honor commitments. Don’t change rules midstream. MAP added that if rules are changed, the new ones should be applied prospectively so as not to prejudice existing investments.
San Roque Power. To help solve the electric power outages in the 1990s, Japanese investors led by Marubeni formed San Roque Power Corp. They invested a huge amount of capital in the company, which imported machinery to generate about 400 megawatts of electricity, on the government’s promise of exemption from the payment of value-added taxes (VAT). At that time, it took $1 million to generate one megawatt. Now the cost has doubled to $2 million per megawatt.
The benefits of VAT exemption are enjoyed not just by the investors but also by the power consumers. Without the exemption, the VAT paid to the government would be passed on to the consumers who would thus have to pay higher power rates.
Procedurally, San Roque was first required by the government to pay the VAT and then to apply for refund in the Bureau of Internal Revenue (BIR). The devil, as the saying goes, is in the details. And here’s where JFC’s lament starts.
Under the law (RA 8424), an application for VAT refund is required to be filed in the BIR. If the BIR rejects the application, or fails to act on it within 120 days, the applicant has 30 days to appeal to the Court of Tax Appeals (CTA). Otherwise, the VAT refund would be forfeited.
San Roque filed its refund application with the BIR on March 28, 2003. But even before the lapse of the 120 days, it filed a judicial claim in the CTA on April 10, 2003. This was the accepted practice at that time—to undergo both the administrative refund process in the BIR and the judicial process in the CTA simultaneously, instead of successively.
The simultaneous filing was justified because at that time, the law also required judicial claims for refund to be filed within two years from the submission of the VAT returns.
This time-saving practice of simultaneous processing was allowed by both the BIR and the CTA in at least 20 previous refund cases. But once simultaneous recourse to the CTA was availed of, the BIR suspended its own processing.
After appropriate hearings, the CTA granted San Roque the VAT refund. But unlike in the previous cases in which the BIR simply accepted the CTA decisions, the BIR appealed to the Supreme Court, arguing that San Roque filed its judicial claim prematurely because it did not wait for the 120 days to lapse before going to the CTA.
On Jan. 12, 2011, the First Division of the high court unanimously dismissed the appeal and ordered the BIR to refund the VAT, holding that simultaneous processing was legally justified.
Reconsideration. However, the BIR moved for reconsideration. This time the court en banc, in a split decision last Feb. 12, reversed the First Division and held that San Roque was not entitled to the VAT refund because it should have first waited for the lapse of the 120 days in the BIR before filing its judicial claim in the CTA. To this decision, San Roque filed its own motion for reconsideration that is still pending.
I think JFC and MAP are not contesting the wisdom of the new decision; they are merely asking that it be applied prospectively to new refund applications, but not to San Roque and other similarly situated companies, which followed the old practice of simultaneous processing of refund applications sanctioned earlier by the BIR and the CTA.
I believe this stance is reasonable, fair and equitable. New rules in processing applications for VAT exemptions should be applied prospectively. Art. 4 of the Civil Code states: “[L]aws shall have no retroactive effect, unless the contrary is provided” in the law itself.
To show good faith, earn the confidence of investors and ultimately spread the fruits of our stunning economic growth with the poor, the government should heed the call of the World Bank, MAP and JFC.
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