FROM THE MARGINS
Last week, House Speaker Martin Romuldez vowed to pass by December the administration’s priority bills, including the Passive Income and Financial Intermediary Taxation Act (PIFITA), the last tranche of the government’s Comprehensive Tax Reform Program.
The PIFITA is laudable because it simplifies a complicated tax structure that imposes numerous tax base and tax rate combinations on financial income, financial intermediation services and financial transactions. These disparities in tax treatment open the windows for arbitrage and leveraging, which distort investment decisions. It also inequitably distributes the tax burden, favoring the rich who could afford to invest in equity and long-term instruments with lesser taxes, while the working class could only place their funds in short-term investments with higher taxes.
I leave to economists and tax experts the discussion on PIFITA’s technical aspects, but let me highlight its potential benefits and pitfalls for the microfinance and microinsurance sector.
Protecting the poor
In a recent article published in the Business Mirror, former Insurance Commissioner Manny Dooc called for the removal of taxes on microinsurance. I join his appeal. Microinsurance is crucial in the battle against poverty because it protects poor people and microenterpreneurs against losses from unforeseen events which could trap them into a downward spiral of debt and worsening poverty. The PIFITA could promote disaster risk resilience among the poor by reiterating the tax exemption of microinsurance Mutual Benefit Associations (Mi-MBAs), which are registered non-stock, non-profit associations that provide life, health, disability benefits and even relief services to their members.
Mi-MBAs are managed and operated by members solely for their protection and not for profit, filling in the gaps of still-inadequate social protection mechanisms and the market failure to provide insurance to poor and low-income households. The Insurance Code and the National Internal Revenue Code exempt Mi-MBAs from paying the tax on corporations, tax on life insurance premiums and documentary stamp tax. Unfortunately, the Bureau of Internal Revenue (BIR) has not been consistent in its interpretation of the law.
According to the Microinsurance MBA Association of the Philippines (MIMAP), some of its members are still waiting for BIR to approve their applications for exemption, while others have been erroneously issued notices of tax deficiencies. This is unfortunate, since MI-MBAs already operate on very thin margins because of their restricted capacity to spend a maximum of 20 percent of contributions for administrative and operating expenses. The PIFITA should reiterate the tax-exempt status of Mi-MBAs and help MiMAP, which has a combined outreach of 7.86 million members, insuring 29.38 million lives nationwide as of June 2022.
The PIFITA could also expand risk protection for the poor by reducing the taxes imposed on non-life insurance. Unlike life insurance that is levied only two percent premium tax, non-life insurance is imposed 12 percent value-added tax, 12.5 percent documentary stamp tax, two percent fire service tax, and 0.15-0.75 percent local government tax. These total more than 25 percent of premium, making our non-life insurance tax among the highest in Southeast Asia. The PIFITA could remove the inequity to encourage more providers to offer pro-poor non-life insurance products like disaster insurance, business interruption insurance, hospitalization insurance, education insurance, agriculture insurance, property insurance, among others.
Adverse impact on financial inclusion
The PIFITA could negatively impact poverty alleviation and financial inclusion. This is well-explained in the position paper submitted to Congress as early as 2019 by several non-government organizations (NGOs), the Alliance of Philippine Partners in Enterprise Development (APPEND) and the Microfinance Council of the Philippines, Inc. (MCPI).
It is right for the microfinance industry to raise the alarm. The seemingly innocuous Repealing Clause of PIFITA removes the two percent preferential tax granted to microfinance NGOs under RA 10693 (Act Strengthening NGOs Engaged in Microfinance Operations for the Poor). It is tantamount to depriving the poor and our MSMEs of much-needed financial support, a backward step that will negate the gains that several government administrations and social development practitioners have made after decades of advocacy.
As Congress deliberates on the PIFITA, legislators should keep in mind that microfinance institutions – with nearly eight million poor clients as of June 2022 per MCPI — are the last-mile conduit of financial inclusion. They provide much-needed capital to microenterpreneurs, even during the height of the pandemic. They give financial services, training microinsurance, health, and other services to the marginalized sectors, operating in hard-to-reach areas not served by formal financial institutions.
Microfinance NGOs, Mi-MBAs, and other community-based organizations that serve the financially excluded are in the business of poverty eradication. They are not primarily profit-making enterprises like commercial establishments, banks or insurance companies. They are helping the government do its most important job: fighting poverty and making life better for the ordinary Filipino. Given the government’s limited resources, this private sector and people-led initiative is important.
I earnestly appeal to Congress to pass a version of the PIFITA that will retain the preferential treatment granted to microfinance NGOs, exempt microinsurance MBAs from taxation, and reduce the taxes levied on non-life insurance. To borrow the words of Justice Isagani Cruz: “The power of taxation, while indispensable, is not absolute and may be subordinated to the demands of social justice.”
(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate. He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)