EVAT and emergency rule

There’s so much pressure from foreign creditors and international financing agencies for this government to raise revenues so much so that no one and nothing will remain unscathed from the whiplash of the desperate search for new sources of revenues.

It seems that even the measly returns of our savings bank deposits will be subjected to value-added tax.

You heard that right. The paltry one percent yield on most savings bank deposits (especially true for deposits between P5,000 to P500,000) may end up being subjected to VAT.

This after the Bureau of Internal Revenue had gone knocking on the doors of the Philippine Deposit Insurance Corp. (PDIC) for value-added tax (VAT) charges against the government financial institution’s deposit insurance premium collections from banks.

All banks are mandated to pay insurance premiums to PDIC for the insurance of bank deposits up to P250,000 per depositor. Banks pay one fifth of one percent of their total deposit liabilities semi-annually, and the premiums collected by PDIC are the ones the BIR is now after.

In value, BIR has slapped tax charges of over P5 billion against the annual assessment collections of PDIC for years 1996-2004. Not only will PDIC have to fork over the tax surcharges currently slapped on them, but will also have to make provisions for VAT on its future premium collections.

PDIC options

To cover this additional unforeseen cost, PDIC has two options, either to pass on the tax to the banks or charge the banks additional premium for the depositors’ insurance coverage. Either way, the depositors will definitely wind up shouldering the additional tax burden.

On the other hand, for PDIC to absorb the tax assessment estimated to run up to P8 billion and tax charges for future premium collections would be – foolhardy. Threats of bank failures remain real considering the track record of the existing banking system. And the tax imposition will definitely impact on the deposit insurance fund’s capability to provide coverage to innocent victims of these anticipated bank failures.

Pass-on effects

The passing on by PDIC of this additional tax will result in the increased intermediation cost of banks.

The higher intermediation cost, in turn, will translate to lower interest rates paid to depositors – for their deposits and increase the lending rates for borrowers.

The thrift banking industry has already responded to this development by declaring, albeit to the dismay of clients, that the banks would pass on the VAT to depositors. Likewise, the Rural Bankers Association of the Philippines (RBAP) expressed disappointment over the tax move and said this would be disadvantageous to the 26 million depositing public.

RBAP president Gen. William K. Hotchkiss III (Ret.) said that the VAT would not only raise intermediation cost but also squeeze bank earnings. Rural bankers pressed on BIR to reconsider its position in view of the harmful effects that a VAT on deposit insurance may have on the banking public, particularly small rural bank clients.

Vulnerability of savings

Taxing deposit insurance premiums will only add to the long list of disincentives for the public to save in banks. The Philippines is already criticized for its low savings rate compared to other developing countries in the region.

Many fear that with the additional charges reducing further the relatively low returns on bank savings deposits, many existing small depositors may just pull out their money and place these amounts elsewhere in search for higher yielding investments. Thus, they again become vulnerable targets for questionable investment activities like pyramiding and multi-level marketing.

There were more than 400 cases of complaints filed with the Securities and Exchange Commission and the Dept. of Trade alleging fraud on pyramiding and multi-level marketing investments in 2004.

The profile of complainants is largely made up of OFW families, and retirees from the government, military, and private sector who placed their retirement money on spurious investments that give higher yields than banks. Some of them even pre-terminated their time deposits to cash in on pyramiding gains.

Already, the few Filipinos who can afford to set aside some money in savings accounts are penalized by the low interest rates. The only thing that holds them to keep their money in the bank is the security offered by the PDIC depositors‚ insurance coverage, although only for limited amounts.

EVAT perils

But with additional tax charges looming, temptations for higher returns outside the banking system may become more attractive. Once the VAT on deposit insurance premiums is passed on, it could also raise lending rates, thereby throttling small thriving businesses that rely on banks for financing.

Of course, this consequence is still minimal compared to the whipping that we will endure if the Supreme Court relents and orders the lifting of the TRO on the new EVAT law clearing the way for its full implementation.

The impact on everyday living costs will be felt by everyone – higher gasoline and diesel prices, more increases in electricity rates, fare hikes, lower savings interest income, etc., etc. The vaunted patience of the Filipino will be put to an acid test.

Perhaps it is time to consider taking our case to our foreign creditors, and with frankness and openness admit that we are a nation in need of some form of debt relief as we strive to put our economic and political house in order.

That, or be faced with steep rise in prices fueling more street demonstrations. Or, is there confidence that the "emergency rule" would be sufficient to maintain the servility of the Filipinos?

‘Breaking barriers’ with Parañaque City mayor

We are continuing our series of episodes in ‘Breaking Barriers’ featuring the chief executives of key cities in Metro-Manila area. In the city of Parañaque, local officials led by a neophyte mayor are going back to basics as they focus on achieving the platform of government that was promised during the last elections.

What was the platform of government presented by the new leadership to the Parañaque electorate? What were the campaign promises made? How does the new Mayor of Parañaque City rank the different challenges now actually facing his administration?

Join us in ‘Breaking Barriers’ on Wednesday, 19th October 2005, IBC-TV13 (12 p.m.) and gain insights into the views of Parañaque City Mayor Florencio "Jun" Bernabe on issues related to the growth and development of the city and its surrounding areas. Watch it.

Non-wager poker tournaments

The Poker Club of the Philippines announced that the 5th leg of the ongoing Poker King Challenge, a series of non-wager poker tournaments, is set on 5th November 2005 at Casino Filipino, Tagaytay City.

Prize certificates with cash value of up to P60,000 await the Leg Champion, in addition to trophies and valuable gift items from tournament sponsors namely the Poker Club of the Philippines, Philippine Gaming Corp. (Pagcor), Jack Daniels, Miller Genuine Draft Beer, Bicycle Playing Cards/Star Paper, Hyatt Hotel and Casino, Ralph’s Wine, and MyReviewerOnline, the Internet knowledge-builder. Together with other leg winners, the top three in the Tagaytay leg qualify for the Grand Finals scheduled later this year.

Poker players, old and new converts, who would like to test their skills or gain experience in tournament competition, are enjoined to visit www.PokerClubofthe Philippines.com to get the latest news about non-wager poker tournament schedules to be held in various places. Watch out, too, for announcements regarding the biggest tournament being organized, the Texas Hold’Em Philippine Championship. Details are available on the website or from the Club Secretariat (c/o Cindy) at 817-9092.

Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com or at reygamboa@linkedge.biz. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.