Co

Repubhe of the Philsppancs
HOUSE OF REPRESENTATIVES
Queron Cy

Fitch Congress

Fuest Regular Session,

COMMITTEE REPORT nxo.6 78

Submitted by the Committee ou Ways and Means on _Q4 MAR 2054 —

RE Hiouse Bilt No. 4802
Recommending iis approval in substitution of House Bill No, 3928
Sprmsos Rep. Hermilauda 1, Mandanas -

Mr, Speaker:

The Committee on Ways and Means to which was referred House Bill No. 3
introduced by Rep. Iermilando I. Mandanas. entitled

©AN ACT RECOGNIZING THE TAX EXEMPTIONS UNDER TAX
TREATIES AND INTERNATIONAL AGREEMENTS RELATED TO
INTERNATIONAL CARRIERS 10 WHICH THE PHILIPPINES IS A
SIGNATORY, AND FOR OTITER PURPOSES”

hag considered the same and recommends that the allached House Bill No.
entitled,

“AN ACT RECOGNIZING THE TAX EXEMPTIONS UNDER TAX
TREATIES AND INTERNATIONAL AGREEMENTS RELATED TO
INTERNATIONAL CARRIERS TO WHICH THE PHILIPPINES IS A
SIGNATORY, AND FOR OTHER PURPOSES”

be approved in substitution of House Bill No 328 with Representative Hermilando |
Mandanas as author thereo!.

Respectlully submitted

P. HERMILANDO I, MANDANAS:
Chairman
Committee an Ways and Means



The HONORABIE SPEAKER
HOUSE OF REPRESENTATIVES
QUEZON CITY

REP. GLORGIDI B. AGGABAO,
Senior Vice-Chairman

REP. RODOLEO C. FARINAS,
Vice-Chairman

REP.VINCENT P, CRISOLOGO
Vice Chairman

REP. REYNALDO V. UMALT
Vice-Chairman

B

REP. RODOLFO W. ANTONINO
Vice Chairman

REP. ERIC G. SINGSON
Vice-Chairman

REP. ALFREDO D. MARANON IIT
Vice Chairman

REP, PAOLO S. JAVIER
Vice-Chairman


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

FIFTEENTH CONGRESS
First Regular Session

HOUSE BILL No.4302
{in substitution of House Bill No. 3928)

Introduced by the Honorable Henmilando !. Mandanas
[Second District, Batangas]

AN ACT
RECOGNIZING THE TAX EXEMPTIONS UNDER TAX TREATIES AND
INTERNATIONAL AGREEMENTS RELATED TO INTERNATIONAL
CARRIERS TO WHICH THE PHILIPPINES IS A SIGNATORY, AND FOR
OTHER PURPOSES,

Be it enacted by the Senate and the House of Representatives of the
Philippines in Congress assembled:

SEC. 1. Section 28 (A) (3) of the National Internal Revenue Code of 1997, as
amended, !s hereby further amended to read as follows:

“SEC. 28. Rates of Income Tax on Foreign Corporations. —

“(A) Tax on Resident Foreign Corporations. —

“(NK

“(2) xxx

“(3) International Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (21/2%) on its
‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings' refers
to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in


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a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another intemational airline form part of the Gross
Philippine Billings if the passenger boards a plane in a port or point
in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on anather airline,
only the aliquot portion of the cast of the ticket corresponding to the
leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

{b) International Shipping. - ‘Gross Philippine Billings’ means
gross revenue whether for passenger, cargo or mail from the
Philippines up to tinal destination, regardless of the place of sale or
payments of the passage or freight documents.”

(C) RECOGNITION OF TAX EXEMPTIONS UNDER TAX
TREATIES AND INTERNATIONAL AGREEMENTS ~ AN
INTERNATIONAL CARRIER DOING BUSINESS IN THE
PHILIPPINES SHALL NOT PAY THE TAX HEREIN PROVIDED
WHERE, PURSUANT TO THE PRINCIPLE OF RECIPROCITY,
TAX TREATIES AND INTERNATIONAL AGREEMENTS
ENTERED INTO BY THE PHILIPPINES PROVIDE FOR SUCH
EXEMPTION.

SEC. 2. Section 118 of the National Intemal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:

“Sec. 118. Percentage Tax on Intemational Carriers. —

(A)__ International air carriers doing business in the Philippines shall pay
a tax of three percent (3%) of their quarterly gross receipts

(B} _ International shipping carriers doing business in the Philippines.
shall pay a tax equivalent to three percent (3%) of their quarterly gross
receipts.

INTERNATIONAL CARRIERS DOING BUSINESS IN THE
PHILIPPINES SHALL NOT PAY THE TAX HEREIN PROVIDED WHERE,
PURSUANT TO THE PRINCIPLE OF RECIPROCITY, TAX TREATIES
AND INTERNATIONAL AGREEMENTS ENTERED INTO BY THE
PHILIPPINES PROVIDE FOR SUCH EXEMPTION.


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SEC. 3. Implementing Rules and Regulations. - The Secretary of Finance shall,
upon the recommendation of the Commissioner of Internal Revenue, promuigate
not later than 30 days upon the effectivity of this Act the necessary Rules and
Regulations for its effective implementation.

SEC. 4. Separability Clause. - if any provision of this Act is subsequently
declared invalid or unconstitutional, other provisions hereof which are not
affected thereby shall remain in fult force and effect

SEC. 5. Repealing Clause. - All laws, acts, presidential decrees, executive
orders, issuances, presidential proclamations, rules and regulations or parts
thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.

SEC. 6. Effectivity Clause. - This Act shall take effect fifteen (15) days after its
complete publication either in the Official Gazette, or in at least two (2)
newspapers of general circulation.

Approved,


Section 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation
organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: provided, That
effective January {, 1998, the rate of income tax shall be thirty-four percent
(34%); offective January 1, 1999, the rate shall he thirty-three percent (33%), and
effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
32%)

In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales,
purchases and other transactions occur. Their income and expenses for the fiscal
year shall be deemed to have heen earned and spent equally for each month of the
period.

The reduced corporate income 1ax rates shall be applied on the amount computed
by multiplying the number of months covered by the new rates within the fiscal
year by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option
to be taxed at fifteen percent (15%) on gross income under the same conditions,
1s provided in Section 27 (A).

(2) Minimum Corporate Income ‘ax on Resident Foreign Corporations. - A
minimum corporate income tax of two percent (2%) of gross income, as
prescribed under Section 27 (kt) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under paragraph (1) of this
Subsection

V’ (3) Intemational Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross
Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings' reters to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating trom the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sule or issue and the
place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another intemational airline
form part of the Gross Philippine Billings if the passenger boards a plane
in a port or point in the Philippines: Provided, further, That for @ flight


which originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline, only the
aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.

(b) Intemational Shipping. - ‘Gross Philippine Billings' means gross
revenue whether for passenger, cargo or mail originating from the
Philippines up (© final destination, regardless of the place of sale or
payments of the passage or freight documents.

(4) Offshore Banking Units, - The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by che
Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking
units, including any interest income derived from foreign currency loans granted
to residents, shall be subject to a final income tax at the rate of ten percent (10%)
of such income,

Any income of nonresidents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its
head office shall be subject to a tax of fifteen (15%) which shall be based on the
total profits applied or cacmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in dhe
same manner as provided in Sections 57 and 58 of this Code: provided, that
interests, dividends, rents, royalties, including remuneration for technical services,
salaries, wages premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual yains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.

(6) Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. -

(a) Regional or area headquarters as defined in Section 22(DD) shall not
be subject to income tax.

(b) Regional operating headquarters as defined in Section 22(1:L) shall pay
a tax of ten percent (10%) of their taxable income,


(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

{a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes, Trust Funds and Simitar Arrangements and Royalties.
- Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust fonds and similac
arrangements and royalties derived from sources within the Philippines
shail be subject to a final income tax at the rate of twenty percent (20%) of
such interest: Provided, however, That interest income derived by a
resident foreign corporation from a depository bank under the expanded
foreiga currency deposit system shall be subject to a final income tax at
the cate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit
System. - Income derived by a depository bank under the expanded
forcign currency deposit system from foreign currency transactions with
local commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with foreign currency deposit system units, including interest income from
foreign currency loans granted by such depository banks under said
expanded foreign curreney deposit system to residents, shall be subject to
a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system shall be
exempt from income tax.

{c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
Corporation except shares sold or disposed of through the stock exchange:

Not over P100,000....

cesses 5%
On any amount in excess of P100,000.

10%

(d) Intercorporate Dividends. - Dividends reecived by a resident foreign
corporation from a domestic corporation liable to tax under this Code shall
not be subject to tax under this Title

8) Tax on Nonresident Foreign Corporation. -

(1) dn General. ~ Except as otherwise provided in this Code, a foreign comporation
not engayed in trade or business in the Philippines shall pay a tax equal to thirty-
five percent (35%) of the grass income received during each taxable year from all
‘sources within the Philippines, such as interests, dividends, rents, royalties,


salaries, premiums (except reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual gains, profits and income,
and capital gains, except capita} gains subject to tax under subparagraphs (C) and
(d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(83%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%),

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor, - A
cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five
percent (25%) of its gross income from all sources within the Philippines.

lanresident Quner ar Leevnr al Veccels. hartered hy Philionine Narianale,-
RIALS ME Se ESOT OT CESSES Bhatt BE ARSE IG A EAR OF FOUE BAM one

half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters
to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.
- Rentals, charters and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.

(9) Tax on Certain incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans, - A final withholding tax at the rate of
twenty percent (20%) is hereby imposed on the amaunt of interest on
foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of
fiftecn pervent (15%) is hereby imposed on the amount of cash and/or
property dividends received from a domestic corporation, which shall be
collected and paid as provided in Section 57 (A) of this Code, subject to
the condition that the country in which the nonresident foreign corporation
is domiciled, shall allow a credit against the tax due from the nonresident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997, nincteen percent (19%) for
1998, eighteen percent (18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between the regular income tax
of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998,
and thirty-three percent (33%) in 1999, and thirty-two percent (32%)
thereafter on corporations and the fiftcen percent (15%) tax on dividends
as provided in this subparagraph;

(©) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - A final tax at the rates prescribed below is hereby imposed


upon the net capital yains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock
exchange:

‘Not over P100,000..

5%
10%

On any amount in excess of P100,000.

Xxx
Section 118, Percentage fax un International Carriers. -

(A) Intemational air carriers doing business in the Philippines shail pay a tax of three
percent (3%) of their quarterly gross receipts.

(B) International shipping carriers doing business in the Philippines shall pay a tax
equivalent (o three percent (3%) of their quarterly gross receipts.


a

FACT SHEET

HOUSE BILL NO. 3928

“AN ACT RECOGNIZING THE TAX EXEMPTIONS UNDER TAX TREATIES AND
INTERNATIONAL AGREEMENTS RELATED TO iNTERNATIONAL CARRIERS
TO WHICH THE PHILIPPINES IS A SIGNATORY, AND FOR OTHER
PURPOSES”

Introduced by: REP. HERMILANDO I. MANDANAS

Committee Referral. WAYS AND MEANS
Committee Chairperson: REP. HERMILANDO I. MANDANAS

OBJECTIVE:

To provide the means through legislation by which the Philippine government through the Bureau
of Internal Revenue can recognize, nonor and respect the principle of reciprocity in relation to
other countries based on tax treaties and intemational agreements related to international
carriers.

KEY PROVISIONS:

* Mandates that international carriers operating in the Philippines whose respective
countries of domicile/registry have tax treaties and/or international agreements with the
Philippines shall, pursuant to the principle of reciprocity, be exempt from the payment of
the two and one-half percent ( 2 14%) tax on its gross Philippine billings

+ Mandates that intemational air carriers as well as international shipping carriers doing
business in the Philippines whose respective countries of domicile/registry signed tax
treaties and/or international agreements with the Philippines shall, pursuant to the principle
of reciprocity, be exempt from the payment of a tax equivalent to three percent (3%) of
their quarterly gross receipts,

RELATED LAW:

+ Sections 28 and 118 of the National Internal Revenue Code (NIRC) of 1997, as amended.


FIFTEENTH CONGRESS
First Regular Session

HOUSE BLLNOSY28

Introduced by Honorable Hermilando 1, Mandanas
Second District, Batangas

EXPLANATORY NOTE

International air and sca transport connectivity plays an important role in a
country's economic growth. Material economic benefits from increased tourism and
export trade activities are, without a doubt, among the consequences of a vibrant air and
sea transport industry. For one, it allows for the much needed flow of the country’s
overseas workers, who are atnong its economic assets, to their destinations abroad.
Another boon it gives is the accessibility to business travelers and investors of the
Philippine market. Particular of these are those in service export business such as
business process outsourcing (BPO) customers whose primary requirement is the easy
entry and exit from the host country.

Notwithstanding these perccived gains, however, the Philippines has not done
much to cultivate a conducive climate for these sectors. At present the taxes the country
levies on the international air and sea transport sectors are the 2 1/2% Gross Philippine
Billings Tax (GPBT) and the 3% Common Carmier's Tax (CCT), which are both levied
on all revenues, passenger, cargo and excess baggage leaving the Philippines,
irrespective of the point of sale or payment of the ticket, passage or freight document
whichever is the case. However, the Philippines is the only country that charges these
taxes on international civil aviation and sea travel; and from the viewpoint of
international carners, such impositions violate the non-discrimination principle of the
World Trade Organization (WTO) which states that a member state such as the
Philippines should not discriminate between its own and foreign products and services
Also, the GPBT and CCT are perceived to be in contravention of the International Civil
Aviation Organization (ICAO) resolution, to which the country is a signatory, on the



waiver of taxation on international air transportation. And this has so far caused at least
four countries to take reciprocal actions against Philippine carriers. To make matters
worse, the lamentable economic result of such a policy is that i{ makes other countries
like Malaysia and Thailand more attractive to foreign carriers. This, in turn, provides
meager economic opportunities for the country's tourism and export trade sectors as
compared to its neighbors in the region,

Given these considerations, it is high time that this inequity be addressed. Doing
so will convincingly and uncquivocally demonstrate the country’s willingness to
rightfully honor its commitments and obligations under treaties and intcrnational
agreements it has entered into. As data analysis shows, having a more fair treatment with
regard to GPBT and CCT on international air carriers alone would mean a potential gain
for tbe revenue-generating efforts of the government in the amount of US$38-78 million
from rejuvenated (ourism, and an additional US$1 billion on account of boosted export
eamings resulting from lower cargo transport costs, And, expectedly, more revenucs
would flow with international shipping carriers being taken into account.

Accordingly, passage of the bill is earnestly sought.



Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

FIFTEENTH CONGRESS
First Regular Session

3928

HOUSE BILL NO._°*

introduced by the Honorabie Hermilando |. Mandanas
Second District, Batangas

AN ACT
RECOGNIZING THE TAX EXEMPTIONS UNDER TAX TREATIES AND
INTERNATIONAL AGREEMENTS RELATED TO INTERNATIONAL
CARRIERS TO WHICH THE PHILIPPINES IS A SIGNATORY, AND FOR
OTHER PURPOSES

Be it enacted by the Senate and the House of Representatives of the
Phitippines in Congress assembled

SEC. 1. Section 28 (A) (3) of the National Internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:

“SEC. 28, Rates of Income Tax on Foreign Corporations. —

~(A} Tax on Resident Foreign Corporations. —

*(1) 0K

*(2) 0x

“(3) international Carrier. - An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (21/2%) on its
‘Gross Philippine Billings’ as defined hereunder:

{a} International Air Carrier. - ‘Gross Philippine Billings’ refers
to the amount of gross revenue derived from carriage of persons,
excess baggage, cargo and mail originating from the Philippines in
a continuous and uninterrupted flight, irrespective of the place of



sale of issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross.
Philippine Billings if the passenger boards a plane in a port or point
in the Phitippines. Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger
takes place at any port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket corresponding to the

Jeg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.

(b) International Shipping. - ‘Gross Philippine Billings’ means
gross revenue whether for passenger, cargo or mail from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.”

(C) RECOGNITION OF TAX EXEMPTIONS UNDER TAX
TREATIES AND INTERNATIONAL AGREEMENTS — AN
INTERNATIONAL CARRIER SHALL NOT PAY THE TAX HEREIN
PROVIDED WHERE TAX TREATIES AND INTERNATIONAL
AGREEMENTS ENTERED INTO BY THE PHILIPPINES PROVIDE
FOR EXEMPTION FROM SUCH.

SEC. 2. Section 118 of the National internal Revenue Code of 1997, as
amended, is hereby further amended to read as follows:

“Sec. 118. Percentage Tax on Intemational Carriers. —

(A) _ Intemational air carriers doing business in the Philippines shall pay
a tax of three percent (3%) of their quarterly gross receipts.

(B) Intemational shipping carriers doing business in the — Philippines
shall pay a iax equivalent to three percent (3%) of their quarterly gross
receipts.

(C) RECOGNITION OF TAX EXEMPTIONS UNDER TAX TREATIES
AND INTERNATIONAL AGREEMENTS — INTERNATIONAL CARRIERS:
SHALL NOT PAY THE TAX HEREIN PROVIDED WHERE TAX
TREATIES AND INTERNATIONAL AGREEMENTS ENTERED INTO BY
THE PHILIPPINES PROVIDE FOR EXEMPTION FROM SUCH


SEC. 3. Implementing Rules and Regulations. - The Secretary of Finance shall,
upon the recommendation of the Commissioner of Internal Revenue, promulgate
not later than 30 days upon the effectivity of this Act the necessary Rules and

Regulations for its effective implementation

SEC, 4. Repealing Clause, - All jaws, acts, presidential decrees, executive
orders, issuances, presidential proclamations, rules and regulations or parts
thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.

SEC. 5. Separability Clause. - If any provision of this Act is subsequently
declared invalid or unconstitutional, other provisions hereof which are not

affected thereby shall remain in full force and effect

SEC. 6. Effectivily Clause, - This Act shall take effect fifteen (15) days after its
complete publication either in the Official Gazette, or in at least two (2)
newspapers of general circulation

Approved,


Ee
Republic of the Philippines
House of Representatives
Quezon City, Metro Manila

Fifteenth Congress
First Regular Session
MINUTES OF THE MEETING OF THE COMMITTEE ON. WAYS AND MEANS
HELD ON FEBRUARY §, 2011, 930 A.M., ROLANDO ANDAYA HALL, HOUSE OF
REPRESENTATIVES, QUEZON CITY

I. GUESTS/RESOURCE PERSONS

1, Ms, Elsa Agustin - DOF

2. Ms. Rowena Sta. Clara - DOF

3. Ms. Yolanda Delos Santos - DOF

4. Ms. Teresa Mendoza - DOF

5. Exec, Dir. Dante Sy - NERC

6. HRFA Conrado Florendo - BIR

7. Mr. Conrado Item - BR

8. Atty. Erwin Mendinueto - BIR

9. Atty. Theresa Geneveve N. Co - | BR

10. Atty. Vicente Lasam - NTA

14. Mr. Rex Teoxon -  ONTA

12, Dr. Asuncion M. Anden - DOH

13. Mr. Javier Alvarez - Embassy of Spain

14. Atty. Bim Galicia - DIAGEO

15, Mr. Nestor Mendones - Tanduay

16. Mr. Blake Dy - Anglo-American

17. Atty. Raul Academia = PMFTG, Inc.

18. Ms. Carmen Herce -  PMFIC, Inc.

19. Atty. Mike Ocampo - Mighty Corp.

20. Mr. Julian Linsangan - Mighty Corp.

21, Ms. Amparo Villafranca - Framework Convention of Tobacco Control
22, Mr. Alexander Obillo -  FCAP

23. Dr. Maricar Limpin - Phil. Coitege of Physicians
24. Dr. Imelda Mateo - Phil. College of Chest Physician
25. Ms. Joan Larna - Health Justice

26, Mr. Ralph Degollacion - Health Justice

27. Mr. Michael Ocampo - Action for Economic Reforms
28. Mr. Rolando N. Santiago - Board of Airlines Representatives
29. Mr. Jojo Veneracion - BAR

30. Mr. Cees Ursem - KLM

31. Atty, Enrique Antonio Esquivel == = PAL

32. Mr. Josen Perez de Tague - PAL


Il CALL TO ORDER/PRELIMINARY REMARKS

The meeting was called to order by Chairman Hermilando 1. Mandanas at 9:45
a.m.. Upon motion of Rep, Tomas V. Apacible, the roll cail was dispensed with. Copies
of the minutes held on February 1, 2011 was not available yet, however, upon motion
of Rep. Apacible, the minutes of the meeting on the said date was approved subject to
amendment if the same is not in order.

Chairman Mandanas requested for a one minute silence to pray for the soul of
Ret. Gen. Angelo Reyes.

The Chair then declared the presence of a quorum. The Committee Secretary
proceeded to acknowledge the presence of the guests and resource persons.

The Chair also informed the body that scheduled meetings on the measures
referred to the Committee on Ways and Means are posted in the website of the House
of Representatives and that deliberations are open to the public but the Committee
Secretary in addition thereto send invitations to those specifically needed.

TL. FIRST DELIBERATION ON HB NO. 3928 RF: RECOGNIZING THE TAX
EXEMPTION UNDER TAX TREATIES AND INTERNATIONAL
AGREEMENTS RELATED TO INTERNATIONAL CARRIERS TO WHICH
THE PHILIPPINES IS A SIGNATORY

Initially, Chairman Mandanas explained House Bill No. 3928 that effectively as
the litle of the bill indicates the country has to recognize, honor and respect the tax
exemptions under tax treaties and international agreement related to international
carriers referring both to air and sea, to which the Philippines is a signatory like the
WTO, and other bilateral or multilateral agreements. And to put them into effect, he
added, this bill seeks that the Bureau of Internal Revenue, the Bureau of Customs and
all other taxing agencies under the Department of Finance be authorized to amend
existing laws or provisions related to international carriers in the National Internal
Revenue Code and to issue rules and regulations to make the Philippines compliant to
the said agreements.

Chairman Mandanas added that this bill is not regarding increasing revenue or
Preventing graft and corruption nor promoting tourism, but more an omnibus authority
so that the country will be compliant with the international treaties or agreements to
which the Philippines is a party. And as a member of the international society and
slobal business community, we, therefore, participate and sign agreements. But then,
he continued, these agreements require some amendments and thus, this bill recognizes
that we have all the desires and intentions to put things into éffect. He concluded by
saying that this is the advantage of Congress being open to suggestions/comments to
public where this matter is one of those things brought to his attention. To put all the
spirits into action, he sought the approval of the bill.

2


Given the floor, Executive Director Dante Sy of the National Tax Research Center
representing the DOF manifested that we have to first classify the carriers whether off-
line or on-line because it is only the on-line carriers (one that has flight operations to
and from the Philippines) that is subject to the Gross Philippine Billings Tax (PGBT) and
the common carriers tax (CCI). An off-line carrier (one that has no flight operations to
and from the Philippines) are not subject te PGBT and CCT. In any case, he added, that
if there are exemptions provided for in the treaty, it is incumbent upon the Philippine
government to recognize the exemptions provided in the tax treaty and the BIR honors
what is in the treaty.

Exec. Director Sy confirmed the clarificatory statement of the Chair that DOF has
ail the intentions to respect and recopnize international treaties and agreements that
have been signed. He took exception, however, to tax treaties that have provisions on
income taxation and very likely that what may be waived in the tax treaty is the income
tax or its equivalent where in the Philippine setting is the GPBT and that CCT is not
included in the tax treaty. Thus, he said, the on-line carrier will still be subject to CCT
and that the NIRC recognizes only the exemption on the tax on petroleum used for
international carriers to the extent that the country of origin of that international carrier
allows the same treatment to a Philippine based carrier under the principle of
reciprocity.

Mr. Jojo Veneracion representing the Board of Airlines Representatives (BAR)
which is the group of international carriers operating in the Philippines where the
association includes the Philippine Airlines and Cebu Pacific, manifested apologies for
non-attendance of Mr. Steven Crowdey who has urgent matters to attend overseas.
Nevertheless, he expressed gratitude to the imvitation sent to them. to comment on the
matter. One concern though of the BAR members is the timing on the potential relief of
the proposed legislation to the international carriers. He added that there is urgency on
the part of the international airlines operating in the Philippines as exemption from
these taxes would be a good incentive to airlines to continue its operations in the
Philippines. He said the current structure of the proposed legislation requires the
negotiation of the treaties, and this might take time before suchdreaties are agreed upon
by two states.

On the point raised by Rep. Danilo Suarez regarding the treatment of the
neighboring, countries, Mr. Veneracion who is also from Delta Airlines replied that they
are not required to pay income tax in Australia. In addition thereto, Mr. Rolando
Santiago of BAR said that as far as Singaporean or Malaysian models are concerned, if
there is no double taxation treaty, the basis of taxation is the gross margin for sales in
that country which means that they are deducting from the gross turn-over the
operational expenses to arrive at the gross margin multiplied by 5% or 2%. In the
Philippines, the tax is based on flown revenue regardless of where it is sold. In other
countries, they use maritime formula or Californian formula, for Asean, it is based on
focal sales and for the Philippines the same is based on worldwide sales or for tickets

3


originating in Manila to their final destinations. Also other Asean countries. do not
imposed CCT which is-a business tax. Another aspect is that Philippine carriers are not
paying percentage tax on international operations while international carriers are
subject to percentage tax on their operations, thus, the discrimination.

Mr. Cees Ursem of KLM, the only airline that flies directly to Europe, pointed out
that when passengers are leaving for Amsterdam, they pay the narmat departure tax
but not CCT or GPBT. He added that the tax has a huge impact in the profitability of
their operations. In other countries they do not pay the same tax because of the tax
treaty agreenient while in the Philippines, they pay the GPBT and the CCT. The tax
issue was the reason why all European carriers have left the Philippines.

Rep. Suarez then commented that in the consideration of some of the measures to
make the Philippines an attractive investment destination by making the industry
financially viable for some airlines that will be bringing in passengers; the Committee
must also consider the tax laws.

On the query of Rep. Suarez regarding the annual revenue of the government on
these taxes, Executive Director Sy said that based on the available data on international
air carrier, the 2007 collection was P1.1 billion where landing, take-off rights, parking
fee, etc. are reported separately as other revenues of the concerned government agency.
He added that in 2009 for airlines industry alone, the collection for GPBT is P1.05
billion, and P1.86 billion for CCT.

Atty, Erwin Mendinueto of BIR acceded to the manifestation of the Chairman
that there is only one airline going to Europe from the Philippines at present and that
the collection data mentioned meant that there were higher revenues on GPBT and CCT
before coming from the industry. And that if KLM decide not to fly direct to Europe, the
tax collection will go down. Domestic carriers are covered by the 30% income tax and
the VAT but not the CCT because both are business taxes. Atty. Mendinueto also
welcomed the filing of the house bill. He opined that BIR, BOC and the DOF even
without the bill, have been honoring the principle of reciprocity.

At the instance of the Chairman, Mr. Jojo Veneracion of BAR agreed with the
observation of BIR that the principle of reciprocity in the tax being imposed now on
internationat carrier is being applied, specifically with the United States, considering
that there is a double taxation treaty between the two countries. Mr. Veneracion also
confirmed that there is reduction in GPBT rate from 2.5% to 1.5%. However, the
existence of other taxes like GPBT and CCT per se, are not consistent at least with our
agreement with the US since they are not imposed in the US and not being applied to
Philippine carriers operating in the US.

On the question of Chairman Mandanas, if Delta Airlines is being charged GPBT
and CCT, Mr Veneracion replied in the affirmative.


On the query of the Chairman if PAL is being charged in the US of the 3% CCT
and on the gross billing, the Philippine Airline representatives confirmed that they pay
similar taxes in all the points they operate like China, Saudi Arabia, USA, etc., though
not exactly the same as what is being imposed in the Philippines but in accordance with
the provisions of the tax treaties that we have in those countries and in some cases they
pay even other business taxes. She added that there should be reciprocity to level the
playing field. So if foreign airlines are exempted from taxes in the Philippines, they
would like to see that Philippine carriers are also exempted from paying such taxes in
the home country of the foreign airlines concerned. Hence, they support the language
of the bill. She then suggested that the word “reciprocal” be added in the proposed
amendment.

AS a rejoinder, Rep Suarez said that the principle of reciprocity should be applied
‘in equal footing. He then asked the reasons why almost all international airlines left the
Philippines.

Mr. Ursem of KLM replied that indeed, Alitalia, British Airways, Lufthansa,
Swiss Air, Egypt ‘Air, among others, had left the Philippines. KIM is the only one
operating in the Phils. PAL is always welcome to fly to Amsterdam but it was for
commercial reasons thal it stopped its operations a couple of years ago. He added that
KLM is very interested to fly to the Phils. and aims to stay here for 60 years more.

Chairman Mandanas added that there are various reasons why other foreign
carriers loft the Philippines like commercial which include taxation, political and force
majeure. He further said that KLM, the only one flying direct to Europe at present, will
cease its operations, transfer its office in other part of the region if we do not honor and
recognize these treaties‘and agreements in the WTO, Mr, Ursem replied in a lighter
note, that they might reconsider their operations in the Phils. considering that they have
increased destinations in China, Vietnam, Cambodia and Indonesia except
unfortunately in the Phils.

Atty. Theresa Geneveve Co of the International ‘Tax Affairs Division of the BIR
manifested that the bill is in recognition of the fax exemptions in tax treaties. Tax
treaties cover only taxes on income and capital, and not CCT and if the bill is passed
into taw we do not have exemptions to CCT, The Explanatory Note of the bill also
mentions Convention about Civil Aviation Organization, the Chicago Convention of
1944 which the country has already applied as provided in Sec. 135 of the NIRC on
Petroleum Tax and the only tax exemption provided in Art. 24 of the said convention.
She emphasized that the Phils. is compliant with the international agreements that we
have entered into.

On the query of the Chair that Atty. Co. shifted from tax treaty to international
agreement, Atty. Co replied that tax treaty covers only taxes on income specifically
dividends, royalties, capital gains, etc. and as to international agreements referred to in
the Explanatory Note, the Convention on Civil Aviation only speaks of exemption on

5


fuel tax which the Phils. has already recognized in the Tax Code. As the Chairman
requested, Mr. Veneracion of Delta Airlines confirmed the statement that they needed a
tax treaty or international agreement regarding common carriers to benefit if the bill
becomes a law.

Deputy Speaker Remulla manifested that there is no level playing field in the
international airlines. He then asked what other aspects are skewed against
international airlines in favor of domestic carriers.

Mr. Santiago replied that the issue of level playing field is on the CCT, that while
the Philippine carriers flying internationally do not pay VAT on their international
operations, foreign carriers for international operations pay 3%CCT. He added that
under the NIRC they have an option to register under the VAY system to which they
applied and BIR has riot acted on their application since 2006.

On the observation of Deputy Speaker Remulla that BIR is acting in favor of local
airlines to the detriment of the international airlines operating in the Philippines, the
BIR representative replied ihat they are just following the law. Domestic carriers are
covered by the VAT system while the international carriers are covered by the
percentage tax as provided in Sec. 118 of the NIRC. He said that the law is clear, there
is no option and that there is no discrimination.

Deputy Speaker Remulla then requested that a position paper be submitted by
all concerned airlines based on the issue so that the Committee will be guided and to
determine where the fineline is drawn regarding tax incidence.

The Chair then reiterated that said issues are not within the intentions of the bill
because the bill's objective is to recognize, honor and respect the tax exemptions under
tax treaties and international agreement related to international carriers to which the
Philippines is a signatory like the WTO, and other bilateral or multilateral agreements.

The Chair declared that, upon motion of Rep. Suarez duly seconded by Deputy
Speaker Crispin Remulla, there being no objection, House Bill No. 3928 was approved
subject to style. A Technical Working Group was tasked to drafl the substitute bill.

1V, DELIBERATION ON THE FOLLOWING MEASURES

|. HOUSE BILL NO. 2484 entitled “AN ACT PROVIDING FOR AN ADDITIONAL
EXCISE TAX OF TEN PERCENT (10%) ON ALCOHOL PRODUCTS, AMENDING
FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED BY RA 9334, TO GENERATE FUNDS*FOR THE INFORMATION
COMMUNICATION TECHNOLOGY (ICT) PROGRAM OF PUBLIC
ELEMENTARY AND SECONDARY SCHOOLS AND CONSTRUCTION OF NEW
SCHOOL BUILDINGS, HIRING OF NEW TEACHERS PREFERABLY WITH ICT
PROFICIENCY, ENGLISH, MATH AND SCIENCE MAJORS, AND FOR OTHER

PURPOSES” by Rep. Frico B. Aumentado

6


2. HOUSE BILI, NO. 2485 entitied “AN ACT PROVIDING FOR AN ADDITIONAL
TAX OF P3.00 PER PACK ON CIGAR AND CIGARETTES, AMENDING FOR THE
PURPOSE THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED BY RA 9334, TO GENERATE FUNDS FOR THE PHILHEALTH
UNIVERSAL COVERAGE OF INDIGENT FAMILIES, BARANGAY OFFICIALS,
HEALTH AND DAY CARE WORKERS, AND FOR OTHER PURPOSES” by Rep.
Aumentado

3. HOUSE BILL NO. 2687 entitled “AN ACT RESTRUCTURING THE EXCISE TAX ON
ALCOHOL AND TOBACCO PRODUCTS” by Reps. Limkaichong, Arnaiz and
Teves

4. HOUSE BILL NO. 3059 entitled “AN ACF TO PROMOTE EQUITABLE SHARING
OF COSTS AND BENEFITS IN THE ALCOHOL AND TOBACCO INDUSTRY,
AMENDING FOR THE PURPOSE SECTIONS 141, 142, 143 AND 145 OF THE
NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED” by Rep,
Mandanas

5. HOUSE BILL, NO. 3183-entitled “AN ACT AMENDING SECTIONS 141, 142, 143
AND 145 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED” by Rep. Suaréz

6. HOUSE BILL NO, 3332 entitled “AN ACT INCREASING THE EXCISE TAX RATES
IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS, AMENDING FOR THE
PURPOSE SECTIONS 141, 142, 143, 144 AND 145 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997, AS AMENDED” by Rep. Singson (E.)

7. HOUSE BILL NO. 3465 entitled “AN RESTRUCTURING THE EXCISE TAX ON,
TOBACCO PRODUCTS AND AMENDING FOR THE PURPOSE PERTINENT
SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED.”
by Rep. Abad

8. HOUSE BILL NO. 3489 entitled “AN RESTRUCTURING THE EXCISE TAX ON
TOBACCO PRODUCTS AND AMENDING FOR THE PURPOSE PERTINENT
SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED.”
by Rep. Tupas

9. HOUSE BILL NO. 3666 entitled “AN ACT INCREASING THE EXCISE TAX RATES
IMPOSED ON TOBACCO PRODUCTS, AMENDING FOR THE PURPOSE
SECTIONS 145 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED" by Rep. Javier

: Chairman Mandanas declared, to apprise the Committee on the status of the
deliberation, that the excise tax rates on alcohol and tobacco products will definitely be

7


increased, He officially took note of the submission by the Bureau of Internal Revenue
of the results of the survey on the current retail prices of alcohol and tobacco products
which will be the basis of the amendment. He said, all Members of the Committee will
be provided copies of the results of the survey. As the basis of the excise tax law on
alcohol and tobacco products is the net retail price (less the excise tax and the value-
added tax) he requested BIR to submit the current net retail prices of the surveyed retait
prices directly to the Subcommittee on National Internal Revenue.

In the computation of the net retail price, Mr. Conrado Item of the BIR
manifested that he personally has apprehension in calculating the NRP because of the
VAT component as it is difficult to ascertain the true VAT at the point of the
manufacturer's sale. The Chair commented that said statement should be retracted
because it is an admission that there is discretion. He added that if the main
administrator of the law finds it difficult to comply, then the same is an admission that
the taxpayers are placed in a tremendous burden and exposed them to harassment and
possible corruption. As the Chair prodded, BIR will submit the NRP.

Mr. Item of BIR affirmed the statement of Rep. Suarez that adopting the
provisions of House Bill No. 3183 will address the arbitration issue of the WTO.
Chairman Mandanas added that the bill of Rep. Henedina Abad also addresses the
same issue. The Chair then requested BIR to submit a comparative study on the effects
of the bills filed and how much revenues will be generated on February 15, 2011.

On the query of Rep. Eric G. Singson, Jr, Mr. Item replied that BIR used the
weighted average retail price of the 20 supermarkets in Metro Manila and 5
supermarkets outside Metro Manila, He then requested that they be given 2 to 3 weeks
to comply with the request.

Rep. Paolo Everardo S. Javier inquired if there is something wrong with the
existing tax system given the fact that the actual collection of BIR on cigarettes in 2010 is
P31.6 billion exceeded its target of P258 billion. Mr. Item replied that there is a
significant increase both in collections and removals because of frontloading as
manufacturers anticipated the 2011 increase in the excise tax rates.

Given recognition, Mr. Michaet Ocampo from non-government organization of
Action for Economic Reforms who work both on expenditures and fiscal policy in
response (o the query of Rep. Javier manifested that the trends over the years must be
looked-up to analyze the effectivity of the current four-ticred tax system as against the
growth of the economy or compute the tax effort. An increase in the tax effort is good
for the government as it increases taxes. He then stated that one of the problems in the
Present excise tax system is the multi-tiered tax rate classification.

___On the query of Chairman Mandanas on what tax classification will be left if we
will use the current net retait price as the basis of classification, Ms. Joan Latuja of
Health Justice stated that in their computation using the NSO data, three-tiers will be

8


left. The lowest priced category will be eliminated. She echoed that their position is to
remove the price classification freeze because they also have health target to reach. If
the three-tiered tax system will remain there will only be shifting to low-priced
Cigarettes, thus, she said, it is not an effective measure to stop cigarette consumption.
She recommended that we should adopt a uniform tax rate system.

Rep. Javier cautioned the Committee to be sensitive in changing the rules in the
middie of the game as the objective of generating revenue may be compromised
considering that the business community will be wary. He then suggested that in due
time, the Committee will come-up with a tax system that is efficient, effective, address
the health concerns, and generate revenues for the government. Chairman Mandanas
subscribed and agreed to the point raised by Rep. Javier, that an abrupt change in the
system would have an impact on other elements of the economy.

Rep. Singson suggested that in the analysis of the system based on GDP or GNP,

the growth rate of both the alcohot and tobacco and its relation to tax rate must also be

" considered. He added that if we are going to remove the multi-tiered tax classification

we have to have a price sensitivity analysis of the consumers. He said that other factors

contribute to the health’ issue and not solely to blame on the tobacco or alcohol
consumption.

Mc. Blake Dy of Associated Anglo American Corporation echoed that the multi-
tiered tax system helps as it serves competition. A shift to a single tax system wilt only"
benefit one company which wilt effectively eliminate the three smaller cigarette
manufacturers which is contrary to the provisions of the Constitution. He then reacted
to the points raised by Health Justice Representative regarding alternative livelihood for
the farmers. He said that a farmer cannot be convinced to shift to another crop if he is
able to sell tobacco produce at a much higher price.

Mr. Dy also challenged the efficacy of the usc of retail price as an indicator for
tax because under the Civil Code by contract of safe you transfer ownership of an item
to another person for consideration. He shared that the caurt has reiterated that when
you have ownership you can do whatever you want with the product including selling
it at a price you want, How can the manufacturer expect to pay the tax for a retailer
whom they have'no legal remedy to control. Any person can sell at any price as long as
he can find a buyer. He then expressed his opposition to the use of retail price as the
gauge for the tax.

Dr. Asuncion M. Anden of the Department of Health manifested her submission
of the position paper signed by Secretary Enrique Ona. She was also requested by the
Chairman to submit a study on the effect of distilled spirits consumption,

On the query of Rep. Fernando V. Gonzales, Chairman Mandanas said that

raising revenue for the government is the primordial concer of the Committee on
Ways and Means.


Dr. Limpin of the Philippine College of Physicians shared information on some
of the queries, like the multi-tiered system. She stated that the multi-tiered system does
not help the tobacco farmers becavse tobacco produce will stil! be bought from them by
the manufacturers even with a unitary tax rate. The multi-tiered system supports the
tobacco companies and not the tobacco farmers. As far as revenue is concerned, the
low-tiered tax rate encourages people to shift from a high-priced tobacco to a low-
priced tobacco. The consumer will still continue to smoke by shifting to low-priced
tobacco. On the health aspect, the multi-tiered system does not help the most vulnerable
sector of the society. She recomunended that the revenues that.can be generated from
these products be used in Phi/Health and on programs that prevent tobacco related
diseases. .

Ms. Carmen Herce of PMFTC, Inc, the new company that was created when
Fortune Tobacco Corporation and Philip Morris combined its assets and liabilities,
manifested that based on the PMI 2010 Report they have 93% share of the market. She
said that on the objective of raising revenue and discouraging consumption of
cigarettes, PMFTC does not support any proposal that will introduce drastic change in
the tax system or provide an unreasonably high tax rate. She explained that based on ,
experience in other countries drastic change in the tax system as well as the shifting to a
unitary rate will consequently have a tremendous increase in the prices of the product.
There will be unintended consequences, like the increase in smuggling and counterfeit
cigarettes. Using the compounded annual growth rate (CAGR), from 1997 to 2004, the
increase in withdrawals is 5.4% and in collection, also 5.4%. It appears that there is
parallel growth both in withdrawals and collection. Looking at the 2004 - 2010 period,
the CAGR for withdrawal is 1.3% VS 5.4% which appears that it addressed the issues
raised by the health advocates that there might be reduction in consumption.

On the issue of frontloading, Ms, Herce assured the body that the frontioaded
quantity of PMFTC amounts to only two months withdrawals which is around P2
billion. She also assured the BIR representatives that they will not have a tremendous
drop in collection for 2011.

Mr. Nestor Mendones of ‘Tanduay reiterated their request to refrain as much as
possible from commenting that will in anyway affect the WTO case that is now due for
second hearing and decision by middle of this year. His assessment so far is that they
presented a very good case, He added that so much focus is given on the taxation of
distilled spirits as a revenue generation measure when the distilled spirits industry
contributed only 4% in the total excise tax collection. He then recognized the fact that
the rates must be adjusted in accordance with the movement of prices of the products
but changing the tax structure at present will be very disadvantageous to the industry.
In addition, he requested that manufacturer's wholesale price as registered in the BIR be
used as the basis of tax classification. .


Mr, Bim Gaticia of Diageo opined that they are aware of the pending WTO case,
the non-discriminalory tax between local and imported, the right of government to raise
revenues to defray the cost of running the government and the responsible drinking.
He shared that in the instances of alcohol abuse, their company has rolled-out
programs, and that they strictly abide in the marketing code where they do not sell their
products to minors. He further stressed that the present system is complex that even
the process of determining the net retail price is cumbersome. He suggested that the
Committee recommends a system that is simple, gives the industry a clear direction,
and addresses the issue of smuggling.

Mr. Roberto Eugenio of British American Tobacco manifested that the
unintended consequence in alcohol consumption was a sort of discrimination between
the local and imported products. He mentioned that in the case of imported tobacco the
unintended consequence is the price classification freeze accorded to old brands
serves as a barrier in the entry of new players because as new player, no brand is listed
in the Annexes of the law which effectively the excise tax rafe will be based on the
current net retail-price as against the 1996 price of the old brands. He concluded that
the present tax system is a barrier to entry of new players.

Chairman Mandanas, however, assured Mr. Eugenio that the price classification
will surely change and that all the House Bills are pegged on current retail prices and
not on the 1996 price.

Atty. Raul Academia of PMFFC, Inc. stated that the issues raised by the BAT
were fully resolved in a Supreme Court decision that upheld the current tax system and
said that the same was not discriminatory, Betwcen the existing and old brands, the SC
ruled that when the survey was done in 1996 there were no new brands to speak of at
that time and that there was valid distinction between new and old brands.

Atty. Academia added that there is a provision under Revenue Regulation 3-2006
that basically allows new brands to be classified. All they have to do is maintain a
specific price up to a certain period of time in the initial tax classification that was
provided by the BIR until it becomes the final tax classification. He said, it is not as if
there is no level playing field. On the point of having a single tax rate, he requested that
the Committee should also evaluate whether or not the parties who will be most
benefited by such a system are the imported products. He echoed the argument of
former Rep. Exequiel Javier who is a renowned tax expert that under the Philippine
Constitution what it advocates is a progressive system of taxation and a single tax rate
goes against this principle.

Mr. Eugenio interjected that it is true that the SC ruled on the constitutionality of
the price classification on the basis that Congress as policy maker has the power and
authority to make that determination of policy. And if this policy needs to be rectified,
the parties have to go back to Congress, This is precisely the reason why they are

u

hich


bringing the issue to Congress to revisit the policy and address the issue of level
playing field. :

Atty. Vicente Lasam of the National Tobacco Administration commented that
drastic change in the tax structure is not called for. He proposed that the bill authored
by Rep. Singson be adopted. He added that a unitary tax rate will put tobacco farmers
producing low grade tobacco which is mostly used in the medium and low-priced
cigarettes to a grave disadvantage. Adopting a uniform percentage increase per
category will be fair and equitable to alt,

Due to time constraint, Chairman Mandanas referred back all the House Bills to
the Subcommittee on National Internal Revenue to deliberate and finish before
adjournment on March 25, 2011. The Mother Committee, he said, is scheduled to finish
and submit the report within the first year of Congress.

The Chair then requested BIK to provide the Committee a soft copy of the net
retail price of all the alcohol and tobacco products for posting in the website.

Vv. ADJOURNMENT

The Chairman, upon motion of Rep. Apacible, adjourned the meeting at 1:15pm...

Lhereby certify to the correctness and accugacy epi
PD ee .

f
MAURICIO R, PULHIN
Legislative Conumittee Secretary

/itl

Approved by:

REP. HERMILANDO I MANDANAS

Chairman
Committee on Ways and Means