Keep us from a bumpy TRAIN ride
The government, particularly the Transport department, reportedly made significant progress at the close of last year in addressing the woes of the commuting public with respect to the Metro Rail Transit (MRT) Line 3.
In his desire to bring the country to a brighter destination, President Rodrigo R. Duterte also ended 2017 by paving the way for the other TRAIN ( Tax Reform for Acceleration and Inclusion).
On Dec. 19, the President signed Republic Act 10963, or the TRAIN law, which amends certain provisions of the 1997 National Internal Revenue Code (NIRC). To make the ride smoother for taxpayers, the President made some repairs to the TRAIN as assembled by the legislature by vetoing some parts of the law.
The Constitution grants the President the power to veto any item of legislation. This is an integral part of the law-making process. It is said that while the legislature has the affirmative power to enact laws, the President has the negative power in which he may defeat the will of the legislature by objecting or vetoing any bill passed (Benzon vs. Secretary of Justice, G.R. No. 42821, Jan. 18, 1936).
Of course, the legislature can override the President’s veto by a two-thirds vote by the House, and also a two-thirds vote of the Senate. However, given that the President enjoys Congressional support, it is unlikely that the latter will override the veto. One of the items vetoed is the preferential tax rate of employees of Regional Headquarters ( RHQs), Regional Operating Headquarters (ROHQs), Offshore Banking Units ( OBUs) and petroleum service contractors or subcontractors. The President particularly vetoed the following proviso of Section 6(F) of the TRAIN:
“Provided, however, that the existing RHQs/ROHQs, OBUs or petroleum service contractors or subcontractors presently availing of preferential tax rates for qualified employees shall continue to be entitled to avail of the preferential tax rate for present and future qualified employees.”
Notably, the President did not veto the first part of the Section 6(F) which states that the preferential tax treatment provided in Subsections (C), (D) and (E) of this section shall not be applicable to RHQs/ROHQs, OBUs and petroleum service contractors registering with the Securities and Exchange Commission after Jan. 1, 2018. Clearly, as far as newly formed RHQs/ROHQs, OBUs and petroleum service contractors are concerned, the 15% special compensation tax rate is no longer available.
The President explained in his veto message that the above proviso violated the Equal Protection Clause of the Constitution, as well as the rule on equity and uniformity in the application of the burden of taxation. According to the President, the overriding consideration is the promotion of fairness of the tax system for individuals performing similar work. Given the significant reduction in the personal income tax, the employees of these firms should follow the regular tax rate applicable to other individual taxpayers.
A cursory reading of the President’s veto message on this item may lead one to immediately think that the veto effectively removed altogether the 15% special tax rate on qualified employees. This has created some confusion and differing views as to the real effect of this veto.
However, looking more closely at the President’s veto can lead to only one conclusion (assuming it is not overridden), and that is, retaining the status quo for qualified employees of existing RHQs/ ROHQs, OBUs and petroleum service contractors. In other words, such employees would still enjoy the 15% preferential tax rate unless an amendment to the NIRC is passed categorically removing such a tax regime and subjecting them to the regular tax rate.
This is because the President specifically vetoed only the proviso under Section 6(F) of the TRAIN without vetoing Subsections (C), (D) and (E) which contain the existing 15% special tax rate of qualified employees of these firms. Thus, if the vetoed provision is adopted by our lawmakers, the 15% tax regime would still subsist because Subsections (C), (D) and (E) would remain intact.
To take the President’s veto of Section 6(F) of the TRAIN as a withdrawal of the 15% special tax rate altogether and to subject the qualified employees to the regular tax rate would, I believe, allow the President to make an affirmative act of legislation which is beyond his power. A scenario that would likely create complications and legal controversies. This brings to mind the incident that occurred sometime in August 2014 where one MRT train overshot the track causing injuries to the passengers. Thus, in taking this direction, the ride could be very bumpy, if not dangerous.
On the other hand, the status quo view would admittedly represent a glitch in the TRAIN law since this would leave behind the intended amendment of the taxation of qualified employees of RHQs/ROHQs, OBUs or petroleum service contractors or subcontractors. Nonetheless, given that this is just the first of five tax reform packages, there is always the next trip, another opportunity to amend the NIRC to give way to the desire of the President.
This one line-item veto alone is an indication that the TRAIN ride could be a bumpy one. I hope that those who will implement the TRAIN (the Department of Finance and the Bureau of Internal Revenue) will conduct a thorough study of how the veto should be effected with minimal complications so as not to disrupt the entire journey of the TRAIN. Let’s just hope that, as drivers of the TRAIN, they will hold on firmly to the wheel and deliver us to our final destination safely. Most important, let us pray that God blesses our trip.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.