Tax on Text

Smart Communications, Inc., the mobile phone unit of PLDT, and Globe Telecom have warned that the consolidated bill approved by the House of Representatives on September 3, 2009 imposing a 5 centavo tax on text and other services will hurt consumers, particularly low-income earners, who are heavy users of these services.  Senate President Juan Ponce Enrile, himself, said he opposes the proposal by the House, because this would be passed on to consumers.

The House version contains: Section 4, which seeks to impose a P0.05 tax per SMS (short messaging service), MS (messaging service) and multi-media service (MMS); Section 5, which will imposed P0.05 tax per overseas dispatch, message or conversation transmitted from the Philippines; and Section 6, which orders the National Telecommunication Commission or NTC to acquire a metering device or portal which will interconnect the NTC, BIR and other concerned agencies with mobile phone service providers.

Ray Espinosa, head of Regulatory Affairs and Policy Office of PLDT, said the proposed tax on SMS (or text) is objectionable because it will constitute a big burden on consumers and it comes at a time when the effective price of a text message has already significantly come down with the proliferation of bucket pricing which includes unlimited plans. 

In his argument, Espinosa said:

"In the case of the SMART Group, 92{ae5572ab744dd06b98b2bb6060e9049de6b6b37dc400402c07faaa4c4c3000de} of its SMS traffic is generated out of bucket-priced plans. Bucket-priced SMS plans, which include the very popular unlimited SMS plans, are the “pang-masa” SMS offerings of the SMART Group.  The average price of these bucket-priced SMS traffic is effectively 11 centavos per SMS. The 5 centavo tax translates, therefore, into a whopping 45.5{ae5572ab744dd06b98b2bb6060e9049de6b6b37dc400402c07faaa4c4c3000de} tax per SMS."

"Bucket-priced SMS plans, which benefit most low-income earners, operate on the basis of either unlimited SMS or a pre-defined number of SMS traffic over a defined time period. These bucket-priced SMS plans now serve the basic communication needs of the country’s lowest income earners. SMS in this country, more than anywhere else in the world, has evolved into a basic and very affordable communication tool."

"However, the imposition of the tax on SMS will destroy and obliterate the bucket-priced SMS plans since the tax is imposed on each SMS. Consumers, therefore, can no longer expect to see bucket-priced plans including the very popular unlimited text plans if and when the SMS tax is imposed. SMS will revert to standard pricing which will not serve the needs of low income earners."

"On this basis, the proposed tax on SMS is clearly anti-poor and anti-consumer."

On the tax on overseas call, Smart said the consolidated House Bill (as officially transmitted to SMART by the House Committee on Ways and Means) also imposes a 5 centavo tax on each overseas call made from the Philippines. Again, this is uncalled for and imposes a big burden on consumers, particularly the family and loved ones of our OFWs who need to stay in touch them. Sadly, this proposed tax comes in the aftermath of efforts of telephone companies to lower the price of overseas calls originating from the Philippines.

"On this basis, the proposed tax on overseas calls is again clearly anti-poor and anti-consumer, and in particular, anti-OFW."

On the metering device or portal, Smart said "the installation of a metering device or portal which will interconnect the NTC, BIR and other concerned agencies with mobile phone service providers should be viewed with serious concern by all those in the private and public sectors."

"While the device or portal is being pushed ostensibly to keep mobile phone service providers honest tax-wise, this “device” or “portal” is actually in the nature of a “probe” which, given recent technology advancements, is powerful enough to retrieve and store messages and allow these messages to be viewed and read. All messages, therefore, can be read by “concerned agencies.”

The capability of this “metering device” or “portal” to allow messages to be stored, retrieved, viewed, and read sends a serious chilling effect on the constitutional right to privacy of every individual. The technological capability of these “probes” should be extensively examined and scrutinized since this capability can be abused.

If the concern is to make sure that mobile phone service providers declare and pay correct taxes, there is already abundant monitoring being done today by the Bureau of Internal Revenue to ensure that taxes are properly declared and paid.

Based on Smart Press Release

For its part, Globe Telecom denounced the proposed 5-centavo excise tax on SMS, MMS and overseas dispatch as one of the worst anti-consumer legislation ever made.  The proposed taxes will surely trigger an increase in the prices of these services, especially text messaging, it said.

The proposed measure, a consolidation of house bills proposed by Congressman Danilo Suarez and Eric Singson, will impose a Php 0.05 tax on every text message, MMS, ringtone, icon and image. The proposed measure also imposes a Php 0.05 tax on every outgoing overseas dispatch, message, or conversation. The consolidated version of the bills proposing these taxes was approved by the House Committee on Ways and Means and is expected to be presented to the plenary for deliberation.

This will be the first time a service will be made subject to an excise tax. Excise taxes, by definition, are indirect taxes imposed on the consumption of a specified list of goods or products. Although levied on the producer or manufacturer, the tax is passed on to the end consumer as part of the selling price. The excise tax also forms part of the tax base for purposes of calculating the Value-Added Tax, and so the new tax will also raise the amount of VAT payable by the consumer. 

Globe also explained that because the Php 0.05 tax is imposed on each and every message regardless of the price of the message, this new tax will herald the death of free messages and unlimited and bucket pricing offers.  Effectively 25{ae5572ab744dd06b98b2bb6060e9049de6b6b37dc400402c07faaa4c4c3000de} of all SMS handled by Globe are either free or effectively zero-rated under unlimited or other offers; and only 9{ae5572ab744dd06b98b2bb6060e9049de6b6b37dc400402c07faaa4c4c3000de} are rated at Php 1.00 per text. The balance are priced on average at about only Php 0.23 per text. A new tax will make these low prices unsustainable. Under some Globe promos a text may cost only 10-centavos or even less. Imposing a 5-centavo tax on a 10-centavo text is certainly oppressive and confiscatory thus unconstitutional.

“What we have at hand is one of the worst anti-consumer legislation that, once implemented, will destroy the viability of these aggressive promos that the public today benefits from, like free and unlimited SMS. The days of  unlimited and free SMS will be numbered. Consumers can bid farewell to today’s highly affordable and widely available mobile telephony that we have come to embrace.” said Globe Chief Legal Counsel and Senior Advisor Atty. Rodolfo A. Salalima. 

The proposed measure is being heavily criticized even within Congress for being anti-consumer. Proposals to include a no-pass-on provision to prevent the telcos from passing the tax to consumers, however, also face a legal hurdle according to Salalima.  “Every producer or manufacturer who is subject to excise tax passes the tax on to the end-consumer as part of the selling price of goods sold. That is the nature of an excise tax. To prevent the telcos from also passing it on to consumers would be unconstitutional; it would violate the equal protection clause in our Constitution. In fact, in many decisions of the Supreme Court, the Court has upheld that all taxes are passable to the consumers except the income tax. So why single out the telcos from doing the same? There is no legal basis for making such a distinction in the case of the telecommunications industry.” He also added that “As it is, the industry is already heavily taxed as it is subject to the EVAT on both its services and importations, on the cororate income tax, local taxes and the Overseas Communications Tax. We also pay Annual Supervision Fees and the Spectrum User Fees to the NTC, and as an industry we already deliver billions to the government in various forms of taxes every year.” 

Salalima also added that this will retard investment into the telecommunications industry. “Globe makes reasonable profit on services rendered, enough to maintain the satisfaction and support of its shareholders. If government continues to pull down margins because of excessive taxation and regulation, this will dampen the enthusiasm of investors in the industry.”

Funds to be raised from the new tax will be used to procure metering devices that will supposedly allow the government to better measure telco revenues for purposes of assessing taxes on them. Globe points out, however, that such devices will not give the government better visibility into telco revenues. According to Salalima, “The proposed metering device as we understand it can only record the absolute number of telecommunications transactions passing through a network, but will not tell you how much each message is priced for purposes of calculating revenues. The metering device cannot determine and discriminate which SMS have prices versus the free and unlimited SMS. So it does not provide any revenue data at all for purposes of assessing the tax. “

Globe also criticized the procurement of the metering device, which can be procured directly by the NTC under the proposed bill, as being redundant and unnecessary government expenditure. “Globe already has systems that measure traffic and revenue that the BIR has access to every time it wants to do an audit. A metering device such as that proposed in this draft bill serves no purpose. The BIR is already authorized under existing laws to examine the books and records of telco operators. Just like other taxpayers’ the telcos’s books and records are open for audit and verification,” according to Salalima.

Globe also pointed out that such metering devices pose a danger to subscribers’ privacy. With the metering device being maintained by third parties, there is every possibility that privileged and sensitive information that can be extracted using probes on which these metering devices operate can be made available to third parties, which unduly risks invasions of the consumers’ inherent and constitutional right to privacy.

“Certainly there will be components to the envisaged metering system that will be physically situated outside the control of telcos, exacerbating the danger that private data on a consumer’s life and lifestyle can be captured and housed where they may fall prey to public intrusion. Where would one’s Constitutional and basic human right to privacy be then,” Atty. Salalima said.

From Press Release of Globe Telecom

At the Senate, Senate President Juan Ponce Enrile said he would only agree to the proposal to impose a five-centavo excise tax on text messages only if the telecommunication companies (telcos) would reduce their current rates as a way to ensure that the additional burden will not be shouldered by consumers.

Enrile said there was no way the proposed House measure could guarantee that the tax burden will not be passed on to consumers, despite the so-called “no pass-on” provision allegedly contained in the House bill.

“My proposal, which I broached during the last Legislative-Executive Development Advisory Council (LEDAC) in Malacañang, was for the telcos to first reduce their current rates before any text tax can be imposed so that we guarantee that the tax burden will not fall on the shoulders of consumers,” Enrile said.

“For example, the current P1 per text rate can be reduced to 80 centavos and government can get a 10 percent tax on that rate. That way, after the tax, telcos still collect 72 centavos per text message. It will be fair because it ensures that the tax burden will not be passed on to the consumers,” Enrile added.

He said imposing an additional five-centavo tax on top of the present rate of P1 per text message was “not warranted,” noting that the measure approved by the House Ways and Means Committee last Tuesday would result in an “indirect tax on consumers.”

Enrile said he doubted if the House measure as it is would be passed in the Senate. “I myself will vote against it if the interest of the texting public will be prejudiced,” he said.

Enrile explained that his proposal would not result in huge profit losses to telcos since the reduction of the rates would definitely mean a substantial increase in the volume of text messaging. “Their volume of sales will definitely increase once they reduce their rates because people will be sending more text messages,” Enrile said.

Enrile said he agreed with the proposition that an excise text tax will help increase government revenues to finance a comprehensive computer literacy program in public schools. 

However, Enrile said he would oppose any new taxes without giving commensurate relief to the public since the people were already having a hard time coping with the current economic difficulties.

“Government must find creative ways to spur the economy apart from burdening the public with additional impositions. Allowing the people to keep their savings and spending them would definitely prompt more economic activities,” he explained.

The Senate President also expressed concern over the cost to be incurred by the government in a metering system to monitor the text messaging sales of telcos. 

“The metering system may be good in principle but will it be financially feasible considering the high costs of the metering machines?” Enrile asked.

At the same time, Enrile echoed the concern raised by Cagayan de Oro Rep. Rufus Rodriguez that metering system could violate the Filipino’s right to privacy.

Enrile noted that House Bill 262 seeks to install a “metering device to directly link the Bureau of Internal Revenue (BIR), National Telecommunications Commission (NTC), and telecommunications companies to be able to capture all the revenues by mobile telecommunications companies in their database…”

Enrile said this provision could pave the way for government agencies to pry on text messages transmitted by cell phone users. “I share the concern that this metering system could clash with the people’s right to privacy of communication as it could be open to abuse,” Enrile said.

The Senate President said his objection against text tax was consistent with his advocacy against the burdensome royalty on indigenous sources of energy such as natural gas which translates to very high generation costs as essentially borne by the consumers.

He said reducing the royalty taxes would allow Filipino households enjoy lower electricity rates and after all, natural gas is a natural resource owned by the people and should therefore benefit the public at the least cost to them.

From Press Release of Senate President Juan Ponce Enrile