Income tax exemptions in water contracts

“MWSS apologists said the concessionaires will not pass on their corporate income tax liabilities to customers.”

The supply of potable water in Metropolitan Manila is managed by two concessionaires — Maynilad and the Manila Water Company. Both concessionaires are big corporate enterprises. Both water concessionaires are classified by Philippine law as public utilities because they provide a basic public need.

Under the law, a public utility is entitled to State protection against cut-throat competitors.

In exchange for that special protection, the public utility concessionaire is required to keep its rates affordable. Likewise, its profits must be reasonable.

The news media reported that several consumer advocacy groups are protesting the concession contracts which the government separately executed with the two public utility concessionaires. According to the reports, both concessionaires are allowed by their contracts to pass on their corporate income tax liabilities as overhead expenses to be paid by their customers.

Because the protests have been prominently covered in the news media, apologists of the Metropolitan Waterworks and Sewerage System (MWSS), the state agency which regulates the rates charged by the two concessionaires, announced that the concessionaires will not pass on their corporate income tax liabilities to their customers for the meantime.

That supposed assurance notwithstanding, the MWSS apologists said the concessionaires will not pass on their corporate income tax liabilities to customers unless the courts, where there are pending cases questioning the income tax pass-on stipulation in the concessionaires’ contracts, say otherwise.

Meanwhile, the consumer groups are demanding copies of the business plans of the two concessionaires for consumer groups to ascertain if their scheme regarding corporate income tax liability will, indeed, push through. News reports revealed that the MWSS and the concessionaires refuse to provide the needed documents to the consumer groups.

Fortunately, there is a legal remedy available. Since the government is a party to those concession contracts, those contracts are public documents which are, pursuant to the Constitution and applicable laws, accessible by the general public and demandable through the courts of law. In addition, those corporate business plans are necessarily adjunct to the concession contracts and are, therefore, imbued with public interest which means they are accessible by the public.

Therefore, if it is true that the concession contracts actually allow the concessionaires to pass on their corporate income tax liabilities to their customers, then those contracts violate both the law and public policy.

Taxes are the lifeblood of the State. Without taxes, there will be no money to finance the operations of the government. As the saying goes, there are only two sure things in life — death and taxes. That is why everyone in the country, big corporations included, but with the exception of organized religion, must pay taxes — income tax in particular.

The Constitution mandates a taxation system that is uniform, equitable, and progressive, which means those who earn more money should pay more in income tax. Likewise, Philippine tax laws frown against tax exemptions, and all doubts are resolved by the courts in favor of the obligation to pay taxes to the State.

There is no valid reason why the two water concessionaires should be permitted by their contracts to pass on corporate income tax liabilities to customers. Since their corporate income tax liabilities arise from, and are based on, their corporate income earned after operations, there is no way that their tax liability can be legally considered as an overhead expense which arose in the course of its operations. Any accountant of good repute knows that.

Being so, it logically follows that a contract which allows a public utility concessionaire to pass on its corporate income tax liabilities to its customers violates both law and public policy. Under the Civil Code, any contractual stipulation that violates the law or public policy is void.

“A contract which allows a public utility concessionaire to pass on its corporate income tax liabilities to its customers violates the law.”

By passing off their corporate income tax liabilities to their customers, the two water concessionaires are indirectly exempting themselves from paying corporate income tax. That scheme is illegal because according to jurisprudence, an act which may not be done directly, may not be done indirectly.

A news report revealed that one concessionaire resorted to international dispute arbitration and got the arbitration tribunal to rule that the water concessionaire is not a public utility. Good grief! That ruling should be reversed by the Supreme Court!

To repeat, the Constitution mandates a taxation system that is, among others, equitable. Where is the equity in allowing a big corporate enterprise, a public utility at that, to pass on its corporate income tax liabilities to helpless consumers?

About a decade ago, the Manila Electric Company (Meralco) attempted to pass on its income tax liabilities to its customers. Angry customers brought the issue to the Supreme Court, which eventually ruled against Meralco. That judicial precedent supports the current public opposition to the plan of the two water concessionaires to indirectly exempt themselves from their legal, moral and social obligation to pay corporate income tax.

It’s about time consumers take legal action against any blatant attempt to circumvent tax laws and against corporate schemes designed to take advantage of the unsuspecting public. Anti-graft cases must be filed against the MWSS officers and other government officials who signed those illegal contracts, as well as against the corporate officers of the concessionaires who also had a hand in those contractual violations of the law and public policy.