Rising fortunes, falling taxes

THEY ARE EQUATIONS that are simple enough for anyone to follow: Anyone who acquires more properties and assets – net of liabilities – should have earned much more to be able to cover these investments.

Anyone who incurs huge loans should have been creditworthy to be trusted as capable of paying up.

Anyone who sells any properties should have earned from the deal, and paid the taxes due on such sale.

Anyone who receives a donation or inheritance has grown more in wealth, and both donor and donee, as well as the source of bequest, should have paid donor’s or estate taxes.

In brief, anyone who has earned more, acquired more, sold more, and inherited more should have paid the lawful and correct amounts of taxes that the government, by its sovereign right and duty, levies on any number of so-called “tax incidents” or taxable transactions on all citizens.

And anyone – not least of them lawmakers who had sworn to uphold and enforce the laws – who fails to file tax returns, with the correct amounts and within deadline, is certain to send the Bureau of Internal Revenue (BIR) on an investigation into exactly what that individual has reported, or not reported.

The taxman cometh with a frown for Ang Galing Pinoy Rep. Juan Miguel ‘Mikey’ Macapagal Arroyo and wife Ma. Angela Montenegro Arroyo on account of the yawning gap between their constantly growing estate and their constantly falling tax payments, as well as their alleged failure to file income tax returns for several years.

A la Capone

Using the net-worth method first employed by the United States Internal Revenue Service to nail mobster Alfonse ‘Scarface’ Capone in 1931, the BIR last week filed a P73.85-million tax evasion complaint against the young Arroyo couple.

The case stemmed from tax deficiencies that BIR discerned after a review of the Statement of Assets, Liabilities, and Net Worth (SALN) from 2004 to 2009 of Rep. Arroyo, as well as the income tax returns that he had filed for certain years during the same period. The SALN is a document that a public official is required to file, notarize, and certify to be the true and correct picture of his wealth.

The tragedy of Mikey Arroyo, eldest son of former President Gloria Macapagal Arroyo, is he has himself confused the nation, and apparently the BIR, about the true state of his wealth.

With advice from tax lawyers and certified public accountants, PCIJ reviewed the couple’s SALNs and corporate records and found that Mikey and his wife Angela have a lot of explaining to do regarding the increase in their wealth, especially if they insist that Mikey has only his salary as congressman to rely on to sustain his wife and two young daughters.

As well, analysts observe certain red-flag items in Mikey Arroyo’s SALNs similar to other statements that attempt to hide the true extent of one’s wealth.

Over a year ago, pressed to explain the sharp growth in his net worth from just P5 million in 2002 to P76.53 million in 2004, and how he managed to buy a house in the United States, he had initially said that the funds came from excess donations raised from supporters in his campaign for Congress in the 2004 elections.

Weeks later, Arroyo recast his explanation thus: the rise in his net worth was because of his marriage in 2002 to Angela Montenegro, his second cousin and an heiress belonging to an old-rich family. Arroyo was quick to add that he did not marry for money because “I am not a gold digger.”

Now that the BIR has focused on his tax payments and other incomes that he might have earned in recent years, Arroyo last week seemed to have dug his own grave just a bit deeper. He told reporters that Angela is an income-less plain housewife who does not receive even a single centavo from him for her maternal labors.

Married rich

At the very least, Mikey Arroyo’s own contradictory statements have called attention to his behavior as a taxpayer.

A year ago, he had no qualms admitting that it was his wife who made him a wealthier man. But with the BIR starting to look into his wealth, he is claiming the opposite, saying Angela brings no income at all to their household.

According to Mikey Arroyo and his lawyer, Ruy Rondain, the couple has no other source of income other than the salary that Mikey gets as a congressman.

In truth, by his own statements, Arroyo had limited his lawful income to be just the P35,000 a month – or, multiplied by 13 months, just P455,000 a year – that he received as his lawful salary for being a member of the House of Representatives (representing Pampanga from 2004 to 2010, and from 2010 until 2013, as representative of the Ang Galing Pinoy party-list group).

All government officials and personnel are duty-bound in law to file their SALN by April 30 every year.

All citizens are duty-bound in law to file their income tax return (ITR) – personally or through substituted filing by their employers for their compensation income – by April 15 every year.

In theory, for public officials, the SALN and the ITR should be a complementary pair. The SALN should account fully for an official’s true net worth (income and assets minus liabilities), while his ITR, if he paid correctly and promptly, all the taxes due on all that he had earned, purchased, or received as donations or bequest, in the same year.

Using the net-worth method, the BIR compared the increase in the Arroyos’ net worth, according to the SALNs that Mikey and Angela Arroyo have been signing together since they became husband and wife, and the reported taxable income, according to income tax returns they filed over the years.

Underdeclared

The BIR says that the Arroyos have at least P73.85 million worth of tax liability, including surcharges and interest. The agency found that the couple either underdeclared their income or failed to file their income tax returns from 2004 to 2009.

Arroyo lawyer Rondain, however, says that comparing the SALN and ITR is “too simplistic.” He argues that an increase in net worth, he says, does not necessarily correspond to an increase in income. A substantial gift, a killing from the stock market, inheritance, may cause the net worth to grow, he says, but these are not compensation income.

According to the Internal Revenue Code of the Philippines, though, these same transactions that Rondain enumerated are precisely levied with the appropriate taxes.

Additionally, Republic Act No. 6713, or the Code of Conduct and Ethical Standards for Public Officials and Employees, and Republic Act. No. 3019 or the Anti-Graft and Corrupt Practices Act, prohibit public officials from requesting or receiving “any gifts, present, share, percentage, or benefit, for himself, for his relatives or for any other person, in connection with any contract or transaction between the Government and any other part, wherein the public officer in his official capacity has to intervene under the law.”

The same laws also state that public officials may not “own, control, manage or accept employment as officer, employee, consultant, counsel, broker, agent, trustee or nominee in any private enterprise regulated, supervised or licensed by their office unless expressly allowed by law.”

The ITR covers tax payments for compensation income from employee-employer relationship, business or profession income, and other taxable income. What it doesn’t cover are other possible sources of funds such as those that are subject to final withholding tax like bank deposit interest, royalties, and dividends from domestic corporations.

The BIR complaint that covers taxable years 2004 to 2009 brings to light two charges against the couple: failure to file income tax returns for certain years, and failure to pay the right taxes and attempting to evade or defeat tax.

Resident citizens like the Arroyos are required to file income tax returns if they are receiving yearly profits arising from property, profession, trades or offices, or as a tax on a person’s income, emoluments, profits and the like. The ITR due every Apr. 15 of each year should cover the taxable income for the preceding taxable year.

Verifications made by the BIR with its Revenue District Office No. 39, South Quezon City and Revenue District Office No. 21, Pampanga reveal that Mikey Arroyo did not file any ITR in 2005, 2008, and 2009 and Angela, in years 2003 to 2009.

The BIR also discovered that Mikey and Angela only registered for a Tax Identification Number (TIN) – a basic requirement for taxpayers – in Apr. 2001 and Sept. 2002, respectively. Mikey actually registered for another TIN in June 2002. His first TIN was later cancelled in July 2009.

Meanwhile, for the years 2004, 2006, and 2007, the BIR discovered that the young Arroyo couple reported in their ITRs the taxable income of only P2.49 million, P1.74 million, and P376,500, respectively.

Unreported millions

Using the net-worth method, the BIR was able to establish the unreported income of Rep. and Mrs. Juan Miguel Arroyo by comparing the increase in their net worth and the reported taxable income over the years.

By subtracting the net worth of the prior year, the BIR arrived at the couple’s net worth growth at P70.47 million, P420,000, P12.65 million, P7.14, P2.5 million and P2.09 million from 2004 to 2009, respectively. (See BIR’s computation)

The couple’s reported taxable incomes were then subtracted from these amounts. The result is the unreported taxable income that the BIR computed thus: P67.98 million, P420,000, P10.92 million, P6.77 million, P2.50 million, and P2.09 million from 2004 to 2009, respectively. (See BIR’s computation)

Rondain, however, says that he recalls the Arroyos filing ITRs every year.  He says that the House of Representatives withholds taxes on Mikey’s salary and remits these payments to the BIR. As well, the House files for his certificate of withholding tax before the agency and this document, he says, is the equivalent of an ITR.

Indeed, tax is withheld from individuals who receive purely compensation income. If he or she has no other sources of income, ‘substituted filing’ may take place such that the employer submits the certificate of withholding tax to the revenue agency.

But the issue raised by the BIR is not whether Mikey paid tax on his income as lawmaker. It is its finding that the congressman and his wife accumulated income that is not reported in their ITR and that they therefore did not pay the appropriate taxes for.

No other income sources?

Rondain says the problem lies is the difference in assumptions. “As far as I understand the BIR regulations,” he says, “there is no requirement that a separate ITR be filed if there is no other income because the certificate of withholding from one singular employer is sufficient. The BIR is assuming that there are other incomes. Kung wala, sufficient na (If there is none, it [certificate] should already be sufficient.)”

But tax lawyers point out that almost all income is taxable and these must be declared. BIR Commissioner Kim Jacinto-Henares herself says that that if a government official reports that he has an asset, then he should be able to say where the money that was used to buy it came from. Normally, she says, there is almost always a tax incident in relation to where the money came from.

“They claim they have all these assets but no income tax return has ever been reported by Angela Montenegro Arroyo,” says Henares, noting that the lawmaker’s wife has failed to file any ITR since she enrolled for a TIN. “So that is a basis for the tax evasion.”

In fact, a tax lawyer says there are at least seven possible types of taxes that the Arroyo couple should have paid in the application of their funds, i.e., buying and selling a house, making home improvements, or acquiring loans, deemed from their SALNs.

So how did the personal fortune of the congressional representative of security guards flourish from the P5.72 million he had declared as his net worth in 2001 to P101.35 million in 2009?

In part, and just for the two years after, the Montenegro-Arroyo marriage on Jun. 24, 2002 may account for the growth in Mikey’s wealth. After all, the SALN form requires the declaration of conjugal properties for married declarants such as Mikey and Angela.

From his P5-million net worth in Dec. 2002, Mikey reported P69.43 million worth of additional assets in his 2004 SALN.

By 2004, the Arroyo couple had bought a P4-million house and lot in Lubao, Mikey’s hometown in Pampanga. Except for the P17.54 million that was added to Mikey’s cash on hand and in bank, the rest of the new assets Mikey reported were non-liquid assets or non-ready cash: “Jewelry, watches, clothes, other personal effects” that amounted to P18 million (from only P250,000 in his 2002 SALN), motor vehicles worth P5.9 million, “Furniture, appliances & other fixtures” that cost P1 million and “Shares of Stock/Club Shares” amounting to a total of P25.39 million (from P2.14 million in his 2002 SALN).

More questions

How the income-less Angela managed to accumulate this much wealth is a question that lingers even as Mikey became richer a year after their wedding is a facile proposition. But it’s the steady growth in the couple’s wealth in the succeeding years after 2003 that invites a lot more questions.

From P76.53 million in Dec. 2004, the Arroyos’ fortune grew to P101.35 million in 2009. Yet the only source of income that Mikey mentions is his salary as congressman at P35,000 a month. This is while the SALN also lists companies under his name and Angela’s.

Rondain suggests that one has to sit down and analyze each SALN because there might be just a simple exchange in values in the properties.

For instance, he explains entries in the 2006 SALN by saying the couple was able to buy a P63.7-million house in the United States in 2005 because they made a profit selling the first house that was worth P49.5-million (and which they also bought on installment in the same year). “(They) sold one and bought another one, a bigger one,” he says. “(They) sold one at a profit.”

For sure, the entries in Arroyo SALNs don’t make that clear. Data for this house in the 2005 and 2006 SALNs are the same and generic except for the acquisition cost, which increased by P14.22 million in the latter year. One may easily assume that it is the same house but that it just increased in value.

When asked to clarify if Mikey and Angela had earned from the sale, Rondain says it is simply an “increase in value, which was re-invested.” He adds, “You’re assuming it’s the same house. You see it’s not income and yet it’s an increase in your net worth. And in the mind of the BIR, I suspect, ‘Aha, may P12-million na hidden wealth.’”

Yet if Mikey and Angela had sold their first house at a profit, then they should have reported this and paid taxes on what they earned from the sale.

Tax lawyers say that resident citizens like the Arroyos are taxed on income derived within and outside the Philippines. The income from the sale of the U.S. property should have been filed in the couple’s ITR for 2005 where the five- to 32-percent graduated tax shall apply. The BIR found no tax return filed by the couple this year.

The U.S. house is not the only sale the Arroyos made in 2005. According to Rondain, Mikey and Angela also sold jewelry because they were improving a house. In the same year, the couple enrolled in their SALN P15-million worth of improvements on their P8-million house in the uppity La Vista Subdivision in Diliman, Quezon City.

Yet again, if Mikey and Angela earned a profit from selling their jewelry, then they should declared this in their ITR and pay income tax on what they earned from the sale that year.

More assets & loans

A close look at the couple’s SALN in 2005 would lead one to expect that they should have built up more cash holdings than they reported.

That year, they incurred a personal loan from unidentified relatives worth P27.15 million and sold jewelry previously booked as worth P8.5 million for an unknown price. Assuming they did not sell their valued ornaments at a loss, this means they generated gross additional cash of P35.65 million.

However, the young couple also used P14.85 million as downpayment for a P49.5 million house in the U.S. and another P15 million to improve their P8-million home in La Vista in Quezon City. Deducting the cost of these two items from their additional cash should yield a net cash increase of P5.8 million.

This is almost 14 times the actual additional cash of only P420,000 that the spouses reported in their SALN. It is also more than a dozen times Mikey’s annual salary as a congressman, which amounts to only P455,000, suggesting that the lawmaker’s salary contributes just a tiny part of his family’s annual income and expenses.

In truth, there could have been other possible sources of funds as can be gleaned from the 2005 SALN, such as Angela’s dividends from her shareholdings and any fee she received as director in her family’s companies.

Old company shares

Angela acquired shares in Pacific Activated Carbon Co., Inc., (PACCO) H.M. Montenegro Co., Inc., and Titan Megabags Industrial Corp. on Sept. 5, 1991, her 18^th birthday. Her shares in PACCO International and Titan Megatiles, meanwhile, were acquired in 1999 and 1992, respectively. All the companies except Pennsylvania-based PACCO International are registered in the Securities and Exchange Commission (SEC).

Records show that Angela managed to have shares under her name in the four domestic companies when she was still in her teens. It cannot be ascertained though if Angela has ever received dividends from the companies in which she has shares because the latest financial statements of business entities were filed at least three years before. In fact, in August 2005, H.M. Montenegro paid a fine of P80,000 for failing to submit the general information sheet (GIS) from 1997 to 2004 and the financial statement (FS) from 2001 to 2004.

The latest financial statements of PACCO and H.M. Montenegro say their retained earnings are not available for dividend declaration. The statements of Titan Megabags and Titan Megatiles, meanwhile, bear the note “for the purposes of dividend declaration, the retained of the Company shall be restricted to the extent of deficit wiped out by the appraisal increment.”

If Angela did earn dividends from these firms, a 10-percent final withholding tax would have been paid.  This tax, though, would appear in the company’s business return and audited financial statement, and not in the stockholder’s ITR. The exception would be dividends from PACCO International, which should be declared as income in her ITR. PACCO International, a foreign company, is not subject to final withholding tax in the country.

As for any fee Angela may have received as director, all four domestic companies left blank the GIS item that should have indicated the directors’ total annual compensation.

Rondain meantime says that being a director is not a job; he also doesn’t think Angela gets any compensation for being one.

Indeed, directors may receive only reasonable per diems, according to the Corporation Code of the Philippines. The total annual compensation should not exceed 10 percent of the corporation’s net income before income tax during the preceding year. Any fee received by a director is also subject to tax and should be declared in the ITR.

BIR’s Henares says the tax agency has actually looked into the “passive income” that Mikey and Angela might have earned but did not report in their tax returns. There is a way to determine this, Henares says, adding, “I won’t say how. It’s for them to defend themselves. I’m sure they will hire big lawyers and accounting firms but all of that has been taken into consideration. And no matter how we look at their SALN, it does not justify it.”

‘Easy to bloat’ items

Some lawyers and accountants also comment that some officials tend to “overstate” amounts declared in the first SALN filed to accommodate whatever “extra” income he or she may later on incur in public office. Usually, amounts are overstated for items that “easy to bloat” such as cash, jewelry, and shares of stocks.

In their first joint SALN on file with the Office of the Ombudsman’s Office, the Arroyos declared real property worth P4-million (a house and lot in Lubao) and P5.9-million worth of motor vehicles. This was as of July 2004. Interestingly, the same SALN recorded higher amounts for other items such as “CIB/COH” worth P20.14 million, “Jewelry, watches, clothes, other personal effects” that amounted to P18 million, “Shares of Stock/Club Shares” worth a total of P25.39 million.

Experts note that unlike real properties that have records at the Registry of Deeds and Assessor’s Office, or motor vehicles that are registered with the Land Transportation Office, the BIR or the Ombudsman would have a hard time inspecting cash, jewelry, and shares of stocks. For example, while corporate files such as GIS and FS are available at the SEC, the entirety of an individual’s shares of stocks may hard to identify because the availability of information is subject to documents filed by the corporation before the SEC.

In the case of cash in bank, the Bank Secrecy Law prohibits disclosure of or inquiry into deposits with any banking institution. Access to bank documents may only be allowed in certain cases such as upon the issuance of a court order or if there is a settlement of estate.

Personal items such as cash on hand and jewelry, meanwhile, would be difficult to inspect unless the owner allows a check of these items along with supporting documentation.

But Rondain sees “overstating” particular items as illogical. “That doesn’t make sense to me,” he says. “You’re bloating your cash so you can hide something else. You’re still attracting attention to the P20-million (pesos) cash and P18-million (pesos worth of) jewelry.”

But when asked how the SALNs of Mikey and Angela had enrolled a steady surge in both their “easy to bloat” assets as well as their liabilities from unnamed creditors, even Rondain begins to show some confusion.

He says, “Remember a SALN will tell you a person’s net worth. ‘Di ba nadoon ang inheritance niya. Nandoon ‘yung gambling … and I’m not referring to Mikey Arroyo. I’m saying in general. If you win in the lotto, if you win in the casino, if you make a killing in the stock market, ‘di ba i-increase ang net worth mo, but that’s not income.”

In all the SALNs they filed as a couple from 2004 to 2009, not even once did Mikey and Angela report any amounts or assets that they inherited, or any winnings or earnings they made from lotto or the casinos, or from gambling.

Among the liabilities that they listed from 2005 to 2009, however, were loans and advances from unidentified relatives. Rondain says he knows one or two of these relatives, but that he cannot name them out of respect for their privacy. To be sure, he adds, it is not illegal to borrow or incur loans.

But a tax lawyer suggests that one should check if the loans stated in the Arroyos’ SALNs are bona fide loans. Such an inquiry should start, he says, with the creditor to find out if he or she has the capacity to lend a particular amount. Usually, there is an affidavit or promissory note that is subject to a documentary stamp tax of P1 for every P200 of the total amount borrowed.

One can also check the creditors’ tax returns if they paid taxes off the interest income they earned from the loans. Big loans are suspect, the lawyer says, because the creditors may be questioned as to why he or she is lending money to a person, instead of investing the amount in a bank that offers security and assured interest income.

Another suspicious practice is the acquisition loans. Assets may increase, but the loans or liabilities will be subtracted from these assets. The result: a smaller total net worth for the public official or taxpayer. – PCIJ, April 2011