Estate planning gets a boost from Republic Act 9243

It was not even a glint in the fathers’ eyes. And it was no more than vaguely

included in the senator’s concerns. But, thanks to the Conference Committee, it is

clearly and undeniably part of the law. Though precarious and dubious was its

conception, and its birth attended by hints of illegitimacy, Section 199(m) of the

Tax Code is undeniably a welcome boon to estate planners.

All that the House of Representatives wanted was to eliminate the documentary

stamp tax on the secondary trading of financial instruments (House Bill No. 2266)

and on the borrowing and lending of securities under the auspices of the stock

exchange as authorized by the SEC (House Bill No. 4480) and to address the pesky

problem of the Special Savings Account by expanding the meaning of “certificate of

deposit” that is subject of the tax (House Bill No. 4481).

But after a gestation period in the Senate of about a year, these modest objectives

of the Lower House were fertilized by with the more grandiose aims of the Upper

House embodied in the rather pretentious title of “An Act Rationalizing the

Provisions on the Documentary Stamp Tax of the National Internal Revenue Code,

as amended, and for other purposes” (Senate Bill No. 2518). Still, during the

measure’s gestation at the committee level, the idea of providing a tax break to

estate planners by exempting property transfers to controlled corporations was

nowhere to be found.

It was only on 28 October 2003, during the period of the amendments from the floor, that Senator Villar injected the idea, albeit, vaguely and indirectly. Senator Villar inquired whether transfers of stock or real property made by the parties to a merger or consolidation, to either the surviving corporation, or to a new entity formed to replace the parties would be benefited by the proposed measure. Senator Recto, the sponsor, in bliss responded in the affirmative. It seems, however, that Senator Villar was not too convinced that the text of the bill supported the sponsor’s optimism.

As in other instances of this kind, to save their colleagues from embarrassment, session was suspended, on motion of Senator Villar, at 4:52 in the afternoon. Thirty minutes later, after the usual whispers amongst the honorables, session was resumed; Senator Villar proposed, the sponsor accepted, and the senate approved “the insertion of a new subsection (in the enumeration of exemptions from the documentary stamp tax) to read as follows: “(m) Transfer of real property in corporate merger or consolidation.”

Thus, at the Conference Committee formed to reconcile the conflicting versions of the House and the Senate, the senators marched with a measure that granted a very limited exemption that was confined to (a) transfers of real property (b) in instances of corporate merger or consolidation”. Whether the confines of the exemption were

deliberately crafted during the thirty minute break to reflect only the narrow interests of the proponent of the particular tax benefit does not appear in the records.

But at the give-and-take atmosphere of the conference committee, the restrictive Villar amendment to Senate Bill No. 2518 metamorphosed into something beyond the expressed concern of the author. It became “(m) Transfer of property pursuant to Section 40(C)(2) of the National Internal Revenue Code of 1997, as amended.” Once again, the Conference Committee lived up to its reputation as being a Third House of our legislature, at least co-equal with the Senate and the Lower House, if not more important than the other two.

“Transfer of property pursuant to Section 40(C)(2)” is obviously not the same as “transfer of real property in corporate merger or consolidation”. By the simple expedient of making reference to Section 40(C)(2) of the Tax Code, the Conference Committee, in one stroke, expanded the Villar exemption to include (a) transfers of all kinds of property and not just real property, (b) in instances not only of mergers and consolidations, but also conveyances by one person to a corporation as a result of which transfer he, together with not more than four other persons, gains control of that corporation.

That latter expansion, relating to the kind of transfer to a controlled entity (usually a family corporation) is, as every estate planning practitioner knows, a popular tax planning technique in the country. Space limitations prevent us from examining fully the advantages and disadvantages of that technique; suffice it to say at this time, however, that that tool acquired additional attractiveness. What started as a parochial concern ended up being a benefit for everyone.

Call it sheer luck, or Adam Smith’s “unseen hand” if you will, but, from where I sit, it does occur, sometimes, that people acting in their narrow interests bring about, albeit apparently unwittingly, contributions to what the scholastics call the common good.

My researchers, who at the time they sallied forth to scan the horizon for the

legislative history of R.A. No. 2518 were still under bar, report that Senate Bill No.

2518 was the receptacle in that august body that received the imputs of the House

Representatives’ House Bill Nos. 2266, 4480 and 4481, respectively eliminating the

doc stamps on the secondary trading of financial instruments, exempting from the

doc stamps the borrowing and lending of securities, and expanding the coverage of

the term “certificate of deposit” that is subject to the doc stamps. They made

particular note, undoubtedly reflecting their high esteem of the lower house, that

the explanatory notes for each bill were adopted as the sponsorship speeches; no

interpellations were made nor amendments offered at the floor, and all three were

consequently unanimously approved on second and third readings. You really gotta

give it to Speaker Joe de V for making that transit system at the Batasan Complex

run on good time.

At the upper house, Senate Bill No. 2518 encountered some turbulence. My

researchers tell me that on 12 March 2003, it was brought up to the floor on second

reading. On that day, Senator John Osmeña, after the sponsorship speech of

Senator Recto, confessed he had not read the bill at all and thought it was “a bill to

lower the revenues of government from motor vehicles.” Consideration of the bill

was promptly suspended. Consideration was apparently resumed only on 22

October 2003 during which Senator Serge Osmeña conducted interpellation for

about thirty minutes, primarily on the revenue impact of the proposed

measure. On 28 October 2003, during the period of amendments, Senators Serge

Osmeña and Manuel Villar proposed four amendments, three from Osmeña and one

from Villar. All were accepted by the Senate Committee on Ways and Means but

none ended up in the law, despite the fact that the Senate version was the working

draft of the Conference Committee formed to reconcile the conflicting versions of

the bills approved in the Senate and in the House.

With that as its legislative genesis, the sponsorship speech of Senator Recto

constitutes the major repository of the legislative wisdom and humor behind R.A.

No. 9243.

The good senator began by apologizing for the parentage of the bill. It came, he

admitted, from that bastion of Philippine capitalism known as Ayala Avenue. But to

its credit, he hastens to add, it does not bear the mark of AGILE which would have,

according to him, raised the hackles of his colleagues. He then disclosed that the

“bill started out as a mere revenue measure but evolved into a wide-ranging piece

of legislation designed to strengthen the market infrastructure through which

savings are accumulated and channeled into productive uses.” This made a clown

of captains of Ayala Avenue who were charged to lobby for the bill. They all along

thought that they was pushing for a revenue-neutral measure primarily intended to

institute reforms and not to raise money to fund the deficit.

Then after reciting the woes of the Philippine capital market among which said was

distortions caused by the DST, he proceeded to single out the amendments that

would “level the playing field.” The first field he leveled was the area of investment

instruments. He tried to achieve this byreducing the cost of issuing original shares

of stock from P2.00 to P1.00 per P200 of par value and raising the cost of issuing

original debt instruments from P0.30 to P1.50 (mercifully lowered to P1.00) per

P200 of issue price. Thus, a businessman’s cost of increasing the money to be used

in business, whether by issuing more stocks or borrowing from the banks, will be

the same at P1.00 per P200. The good Senator forgot that stocks last for the life of

the corporation but debts are good only to maturity. Thus, the cost of the debt

instrument to the investor who lends is higher necessarily than the cost of the

certificate of stock to the investor who subscribes to stock. Some level playing

field, you’ve got there, Senator.

Perhaps to mitigate the slope of “the level playing field”, the Senator also proposed to prorate the DST on debt instruments with maturity of less than a year. This, however, militates against an avowed purpose of the bill, of developing the capital market. Instead of encouraging long term placements, this cute measure reinforces the “30-days, 30-days”

placement mentality of money market investors. It looks like the good senator has forgotten the good fight in sessions past for the Long Term Deposit or Investment Certificate.

Another field that was supposed to be leveled was the secondary trading of equity, primarily stocks, and of debt instruments. Admittedly, the former DST law was a stumbling block for secondary trading of debt since it was imposed on issuance as well as subsequent transfers of the paper. But merely removing the DST on secondary trading of debt instruments did not result in neutrality. Under the new law, non-listed stocks sold after issuance will still be subject to some DST, albeit reduced by 50% from the former rates. Listed stocks when sold in the Philippine Stock Exchange are exempt from the DST only for five years from the effectivity of R.A. No. 9243. The exemption of secondary trading on debt instruments, on the other hand, is full and forever.

But then, maybe the good Senator is right after all. The incline in favor of equity on original issues was, to an extent, cancelled out by the incline in favor of debt instruments on secondary transfers. But, then it is not “level playing field”, but “see-saw in a kiddie playground”.

After explaining other portions of the bill, the good senator confesses that, ala Joan of Arc, his bill is the because of the voices he heard, voice of the banks, of the brokers, of the Bangko Sentral (as if that office really cared whether they paid taxes or paid out dividends to the Government), of the Department of Finance, of President Gloria Macapagal-Arroyo, and of, the ever crying, Juan de la Cruz.

Now, Juan de la Cruz has a lot to cry about. Among many instances, Juan de la Cruz, according to the good senator, “breaks down in tears as fire rages all his cash, jewelry, appliances, and other belongings which he had bought from his earnings as an overseas contract worker”. The senator’s bill was meant to assuage his pain. The problem is that particular cry of Juan de la Cruz deals with property or non-life insurance the DST on which his bill did not touch. Instead, he gave concessions to the life insurance companies that do not deal with risk of fire damage to property. The good senator, capped missing the level playing field, by shooting the ball, bulls eye in fact, in the other team’s basket.

I am lucky my grandmother is no longer around to give me a good whipping. But, we

will all be luckier still, if Ate Vi runs instead when Sir Ralph’s term runs out.