The SC weighs in on alphalists

Justice Holmes once declared that “the power to tax is not the power to destroy, while this Court sits”. This puts emphasis to a basic principle that although considered vast and comprehensive, the power to tax is not without restriction. Similar to the other powers of the State, the power of taxation is subject to the judicial review of the Supreme Court, the ultimate arbiter of all questions of law in the Philippines.

The Supreme Court’s power of judicial review has been recently demonstrated when the Court, on Sept. 9, 2014, upon petition of the Philippine Stock Exchange Inc., Bankers Association of the Philippines, Philippine Association of Securities and Brokers and Dealers Inc., Fund Managers Association of the Philippines, Trust Officers Association of the Philippines, and Marmon Holdings Inc. (“the petitioners”), issued a temporary restraining order (TRO) against the implementation and further enforcement of Revenue Regulations No. 01-2014 (RR 01-14), Revenue Memorandum Circular No. 05-2014 (RMC 05-14) and SEC Memorandum Circular No. 10 series of 2014. These regulations disallowed the use of Philippine Central Depository (PCD) Nominees to be named as taxpayer or income payees in the Alphabetical List of Employees/Payees of Income Payments (alphalists). More particularly, the Court prevented the Bureau of Internal Revenue (BIR), among others, from “further enforcing or implementing RR 01-14 and RMC 05-14 where these prohibit the naming of the PCD Nominee (or any other securities intermediary designated and allowed under Section 43.1 of the Securities Regulation Code) as the payee for the dividend payments made by listed companies.”

RR 01-14 was issued by the Secretary of Finance on Dec. 17, 2013 for the purpose of ensuring that information on all income payments paid by employers/payors are monitored by and captured in the taxpayer database of the BIR. The regulation amended the provisions of Revenue Regulations No. 10-2008 (RR 10-08). In particular, it provided that the submission of the prescribed alphalist where the income payments and taxes withheld are lumped into one single amount (e.g. “PCD Nominees”) shall not be allowed. Further, where the submission does not conform with the prescribed format, it shall not be deemed received and it shall not qualify as a deductible expense for income tax purposes. Moreover, RR 01-14 prescribes a penalty under the pertinent provisions of the National Internal Revenue Code (NIRC), as amended and applicable regulations, for any violation thereof.

On the other hand, RMC 05-14 was issued by the BIR on Jan. 29,  2014 as a clarification of the provisions of RR 01-14. The RMC provided, among others, that in order that the concerned taxpayer’s alphalists to be considered as successfully uploaded and duly received by the BIR, it must specify the complete name of the taxpayer/payee with the corresponding amount of income and withholding tax. It concluded that the words PCD Nominee and other similar words, where the total taxes withheld are lumped into one single amount, are not allowed. 

The petitioners, who are members of the banking and financial community, thereafter filed on Sept. 4,  2014, a Petition for Certiorari and Prohibition with Application for Issuance of the TRO and/or Writ of Preliminary Injunction against the Secretary of Finance, the Commissioner of Internal Revenue and the Chairperson of the Securities and Exchange Commission (SEC) in order to enjoin them from further enforcing the assailed regulations and to declare them as unconstitutional. 

Among the grounds cited by the petitioners is that the BIR, SEC and Department of Finance (DOF) had exercised grave abuse of discretion in issuing the regulations without regard to their right to privacy. The petitioners claim that the BIR and SEC violated the right to privacy by requiring the disclosure of sensitive personal information regarding an investor to a third party which is not a government or public authority. According to them, this disclosure may compromise the safety of the investors if they are identified by unauthorized third parties. They further alleged that the integrity of the market could be affected by information on the investors buying or selling the shares of stock in a listed company.

The petitioners also alleged that requirement for listed companies and broker-dealers to disclose the payee of dividends is vague and is therefore void.  It was also asserted that to comply with the assailed regulations would entail that the listed companies and broker dealers violate the Bank Secrecy Laws as compliance require disclosures of confidential information. On the other, non-compliance with the assailed regulations would expose the petitioners to penalties prescribed under the NIRC, as amended.

The Supreme Court En Banc, without giving due course to the petition, issued a TRO effective immediately and until further orders, enjoining the respondents from further enforcing and implementing the assailed regulations. By issuing the TRO, the Court prevented the BIR and the SEC from enforcing their directive of prohibiting the naming of PCD Nominee as payees of dividends from listed companies. The dispositive portion of the Resolution granting the TRO made mention of Section 43.1 of the Securities Regulation Code which allows corporations whose securities are listed on a securities exchange to issue shares to, or record the transfer of its shares in the name of securities intermediaries. This includes the PCD Nominee Corp.

In normal circumstances, once a dispute reaches the court, it shall remain within the court’s authority until it is finally settled. It would have been safe to assume that since the issue on alphalists has been raised before the Supreme Court, there would be no new development.

However, the Commissioner of Internal Revenue on Sept. 12,  2014, issued Revenue Memorandum Circular No. 73-2014 (RMC 73-14) clarifying the withholding tax rates on dividend payments to PCD Nominees by the issuers of securities. The circular prescribes presumptions as to the nationality of the income recipients in order to apply the pertinent provisions of the NIRC, as amended. In case the PCD Nominee is Filipino, the income recipient is deemed to be an individual subject to final withholding tax (FWT) of ten percent (10 percent) under Section 24 (B) (2) of the NIRC. This is, however, subject to the exception that it is satisfactorily shown that the actual equity investor is a domestic corporation. On the other hand, where the PCD Nominee is non-Filipino, the payee is deemed to be a nonresident foreign corporation subject to FWT of 30 percent under Section 28 (B) (1) of the NIRC, as amended. This is likewise subject to an exception that it be satisfactorily shown that the actual equity investor is a resident alien, resident foreign corporation, or a non-resident alien whether or not engaged in trade or business in the Philippines.

In essence, in order to defeat the presumptions provided under RMC 73-14, the nationality of the income recipient must first be disclosed or otherwise satisfactorily proven by the PCD Nominees. Otherwise, a higher tax rate may be imposed especially in the case of dividend payees who are domestic corporations or resident foreign corporations whose dividend payments are not subject to income tax as provided under Sections 27 (D) (4) and 28 (7) (D) of the NIRC, as amended.

In light of the foregoing, the pronouncements of Justice Bengzon in the case of Roxas vs. CTA G.R. No. L-25043 dated April 26, 1968 is instructive, to wit:

“The power of taxation x x x should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the “hen that lays the golden egg”. And, in order to maintain the general public’s trust and confidence in the Government this power must be used justly and not treacherously.”

The issuance of RMC 73-14 subsequent to the issuance of the TRO may yet again lead to another series of debates as to whether the BIR can legally issue these regulations pursuant to the authority given by Sections 244 and 245 of the NIRC, as amended.

Hana Kamille A. Escueta is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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