Shielding RP economy from the financial tsunami

May I again give way to a rejoinder which is actually a reaction to my previous weeks’ column. It came from Ramon P. Ereñeta Jr., executive vice president and chief operating officer of the Philippine Racing Club Inc. (PRCI). I am reprinting it verbatim for our readers’ appreciation of his claims as against the facts that I have presented in that particular column about a questioned grant of exemption from the payment of P500 million in value added tax (VAT) to a buyer of the PRCI’s crown jewel, the Sta. Ana racetrack in Makati City.

This is about the case where the Supreme Court (SC) issued a temporary restraining order (TRO) that was being referred to rather unfairly as a “TRO issued in the nick of time” because it came just days before the PRCI board meeting to ratify the transfer. That TRO pertains to the order slapped against a Court of Appeals (CA) injunction against a faction of the board of directors of the PRCI allegedly backed by Kuala Lumpur-based gaming firm Magnum Holdings.

The CA injunction had earlier stopped this PRCI board faction from consummating a move to transfer the ownership of the P12-billion Sta. Ana racetrack to a P25-million holding firm with no earning asset called JTH Davies. The Malaysian-backed faction led by Chinese-Filipino businessman Santiago Cua Sr. of Wincorp fame, of course, owns JTH Davies.

The TRO immediately opened the door for the Cua group-dominated PRCI board to ratify the transfer of PRCI’s crown jewel to the Cua-owned corporate shell. Finance Secretary Gary Teves stopped it following his discovery that the Bureau of Internal Revenue (BIR) had issued a resolution granting VAT exemption to the transfer of the Sta. Ana property to Cua’s corporate shell. Teves ordered then BIR chief Lilian Hefti to review the ruling after noting certain irregularities both in the process and in the ruling itself. Hefti subsequently made a turnaround and slapped the transfer with close to P500 million in VAT assessment.

The Cua faction, in its submission to the Securities and Exchange Commission (SEC), admitted to PRCI shareholders that it could not consummate the transfer of the racetrack to the Cua’s holding firm because the tax exemption was withdrawn by that BIR ruling.

The Cua group has engaged the services of a powerful accounting firm that is now reportedly working to reverse the BIR’s VAT assessment. The firm has written BIR an angry letter assailing the VAT assessment. Angry enough for newly appointed BIR chief Sixto Esquivias IV to reverse the tax assessment.

As I’ve stated in that column, the fear is that Hefti’s hasty departure from the BIR could just be the opportunity that the group was looking for. That sounds logical because it would have been difficult for Hefti to reverse herself twice. But it would be easier for the newly designated BIR chief to junk the wisdom of a predecessor. With that background, here is the PRCI’s rebuttal:

“Your column on 28 November 2008 carrying the heading ‘Ex-BIR chief to the SC?’ devoted considerable space to the revocation by former BIR chief Lilian Hefti of the previous rulings exempting the property-for-shares swap between PRCI and JTH Davies from taxes.

“I believe that for a balanced presentation to the public of the issues involving PRCI the explanation of the other directors and officers of PRCI must be presented as well.

“First of all, there was an insinuation in the column that PRCI’s request for tax exemption was accompanied by irregularities. Nothing could be farther from the truth.

“The ruling issued by BIR – and it still stands until now – is that the tax on the income arising from said transaction may be deferred. Recognition of the gain or income from said transaction may be deferred pursuant to Section 40 (CX2) of the National Internal Revenue Code as amended which reads as follows:

“Section 40. Determination of Amount and Recognition of Gain or Loss.-

xxx xxx

(C) Exchange of Property. -

(a) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation 

(b) A corporation, which is a party to a merger or consolidation exchanges property solely for stock in a corporation which is a party to the merger or consolidation;

“What the BIR revoked in its order is the exemption of the transaction from the Value Added tax (VAT). Our request for exemption is completely justified. It is based and pursuant to the following provisions of the National Internal Revenue Code:

“SECTION 7, Section 109 of the same Code, as amended, is hereby further amended to read as follows:

“SEC. 109. Exempt Transactions. - (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value added tax:

xxx xxx

“(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, house and lot, and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below: Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted by the National Statistics Office (NSO);

“Clearly, the VAT Law exempts from said tax the sale or exchange for shares of stock of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade of business.

“I hope this clarification will see its way into your column in the spirit of fair play.”

My reply: The full impact of the global financial crisis is projected to be felt in the Philippines early next year. The government needs to collect much-needed revenues and not to lose them through such tax leakages. The VAT collections have been shielding so far the Philippine economy from these public funds being spent by the government to turn around our country out of harm’s way from this financial tsunami.

To quote the language of lawyers, I rest my case.