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Court of Appeals exempts ADB workers from income tax; nod for Uber, Grabcar not enough

Are the income and other financial emoluments received by Filipinos employed in international financial organizations like the Asian Development Bank covered by Philippine tax laws?   This question was answered in the affirmative in this column back in October 2014.

The Bureau of Internal Revenue (BIR) shared the same view and demanded that Filipinos working with the Asian Development Bank (ADB) head office in Mandaluyong City pay the corresponding taxes on their incomes. 

Two ADB employees, Erwin Salaveria and Portia Gonzales, refused to pay up and sued for relief before the Regional Trial Court in Mandaluyong City.   After the trial court ruled in their favor, the BIR appealed the case to the Court of Appeals.   Last month, the appellate court dismissed the appeal on the ground that the BIR should have gone directly to the Supreme Court for appropriate relief.

What remedial measures the BIR will pursue in the premises is not yet clear, but it is almost certain that it will not give up without a fight. 

Attention is invited to the official documentation on record.

The agreement between the Republic of the Philippines and the ADB states that ADB employees are entitled to “exemption from taxation on or in respect of the salaries and emoluments paid by the bank subject to the power of the government to tax its nationals.”   This means that while the ADB will not impose any kind of tax on the income of its employees, the Philippine government may impose taxes on the income earned by Filipinos working in the ADB.   Considering that the agreement was executed in accordance with international law, it is legally binding on the Philippines. 

Jurisprudence favors the BIR.   The Supreme Court has repeatedly recognized the obligation of the Philippine government to observe its treaty commitments (Reyes v. Bagatsing, 125 SCRA 553), and has held that tax exemptions must be strictly construed against the taxpayer (Kepco Phils. Corporation v. Commissioner of Internal Revenue, 636 SCRA 166).       

There is no need for Congress to enact specific legislation to make the ADB agreement binding on the Philippines.   Under international law, the treaty obligations of a state cannot be made to depend on the action or inaction of the legislature of that state.   In other words, obligations created under international law cannot depend on the existence of an implementing municipal law.

Exempting income and other financial emoluments received by Filipinos from the ADB, or from any similar international organization for that matter, may also give rise to a constitutional issue.   The equal protection clause of the Constitution means people similarly situated should be treated similarly.   If all Filipinos who have a sizeable income, including those working overseas, must pay income taxes, there is no reason why Filipinos employed in international organizations operating in Philippine territory who have a sizeable income should be tax exempt.   For this reason alone, the BIR must bring the ADB tax case to the Supreme Court.

By now, almost everybody knows how Internet and mobile application-based transportation companies like Uber and GrabCar operate.   A commuter who wishes to go somewhere in Metropolitan Manila without using the traditional modes of public transportation can contact these companies through on-line media.   The commuter is matched with a motorist headed in that direction.   After the parties agree on the payment scheme, the commuter is picked up by the motorist at a pre-determined location.     

Commuters tired of the old system of public transportation welcomed the new service.   Operators of existing public utility transportation services, however, complained to the LTFRB that the newcomers were providing a public service without prior government authorization.   There were also complaints of passengers waylaid by drivers of vehicles operating under the on-line system.

In the end, the LTFRB simply required the new companies to obtain accreditation, which they eventually got.   Unfortunately, there are legal consequences which the LTFRB overlooked.

The public utility transportation business is attended with a very high degree of public interest.   After all, the safety of passengers is a serious concern of the state.   The Civil Code of the Philippines refers to providers of public utility transportation services as common carriers.   Under the law, common carriers are required to observe “the extraordinary diligence of very cautious persons” whenever they carry passengers.   This level of diligence is higher than that required of ordinary businesses.   In addition, a passenger who fails to reach his destination safely can sue the common carrier for breach of the contract of carriage.

Since the safety of the passenger is very important, the law further requires that a driver of a common carrier must obtain a professional driver’s license from the Land Transportation Office (LTO).   One cannot get this type of license without going through a thorough testing procedure. Drivers who are not engaged in the business of transporting passengers need only get a non-professional driver’s license, which means less demanding requirements.

The law likewise requires common carriers to obtain a franchise to operate. This way, the state is able to strictly monitor its operations.   When the common carrier does not comply with legal requirements, the state can cancel its franchise.     

Fares charged by a common carrier are subject to prior state approval.   They are also required to observe speed limits, and they must obtain insurance.   Their units must be easy to identify for purposes of additional public safety.   Any violation of these requirements is sufficient ground for the revocation of its franchise. 

Are Uber and GrabCar common carriers? Do their drivers hold professional driver’s licenses? Do they carry insurance?   In case of an accident, what standard of diligence applies to their drivers?

The LTFRB cannot just accredit these companies.   As a line agency vested with delicate functions involving public safety, the LTFRB must comply with the law, or its officials will be vulnerable to anti-graft raps.

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