Legality of Unsolicited Proposal (SICPATRACE Proposal) Submitted by SICPA Products Security S.A. to BIR

DOJ OPINION NO. 049 , s. 2010 October 20, 2010 Commissioner Kim S. Jacinto-Henares Bureau of Internal Revenue Quezon City Dear Commissioner Henares : This pertains to your request for reconsideration of the unnumbered Opinion of this Department dated June 1, 2010 which passed upon the legality of the unsolicited proposal (SICPATRACE Proposal) submitted by the SICPA Products Security S.A. (SICPA) to the Bureau of Internal Revenue (BIR). The request, it appears, is based on the following grounds, to wit: (a) The SICPATRACE Proposal is a regulatory measure, not a revenue raising measure; (b) There is no take-or-pay provision nor a Direct Government Guarantee in the SICPATRACE Proposal; (c) Failure of the BIR to accept the SICPATRACE Proposal within thirty (30) days from its submission is not a fatal defect; (d) SICPA may show proof of compliance with the minimum equity requirement during negotiations; (e) Failure of SICPA to meet the technical and functional criteria set by the BIR is not a fatal defect. After a thorough reading and evaluation of the documents on record, which include reports from the various government agencies as well as the report of the House of Representatives Committee on Ways and Means dated January 18, 2010, we resolve the grounds/issues raised as herein below provided. First Issue The SICPATRACE Proposal is a regulatory measure, not a revenue raising measure The Opinion sought to be reconsidered emphasized that the ultimate objective of the proposed measure to attach strip stamps on cigarette packs is to generate additional revenue and not merely to improve tax administration and collection, and considering further that the cost for implementing the same is not to be borne by the government, but will be passed on to consumers, the proposed SICPA system partakes of a tax, and is, therefore, legislative in nature. Hence, the SICPA Proposal cannot be implemented by the BIR without encroaching upon the authority of Congress to enact such revenue measures. aEcSIH On the other hand, you argue that the fees to be charged for the stamps under the proposal are such that will be sufficient to cover administrative and regulatory cost. You further state that if the cost will be passed on to consumers, it is not an additional tax but a regulatory fee the imposition of which is within your authority. In support of your contention, you quote from the rulings in the cases of Philippine Airlines vs. Edu 1 and City of Iloilo vs. Remedios Sian Villanueva, et al . 2 We agree. In general, a revenue measure commonly referred to under the general terms "revenue measure" or "revenue bill", is any law which provides for the assessment and collection of a tax to defray the expenses of the government, and includes all the laws by which the government provides means for meeting its expenditures. 3 Specifically, however, a revenue measure is one which has for its purpose or object the levying of taxes in the strict sense of the word an act is not a revenue measure if such is not its principal object, though production of revenue is incidental to its enforcement. 4 Applied to the instant case, a second look at the ultimate objective of the proposed measure, i.e. , to attach strip stamps on cigarette packs primarily to improve tax administration and collection, and, secondarily, to generate additional revenue, cannot be considered a tax or a revenue measure. The production of revenue is merely incidental to the effective enforcement of the tax laws. For the same reason, there can be no doubt that the subject proposal is a regulatory not a revenue-raising measure even if, admittedly, the cost for implementing the same is not to be borne by the government, but will be passed on to consumers. The rationale is because, what determines the nature of the measure is the primary purpose not the consequential effect of its implementation. This conclusion finds support in the rulings in the cited cases of Philippine Airlines and City of Iloilo 5 wherein the Supreme Court clearly stated the factors that determine whether a measure or an act is a tax or for regulation purposes. The argument that the primary mandate of the BIR is limited to the efficient and effective assessment and collection of taxes, fees and charges and account for revenues collected, 6 thus, its "regulatory function" is merely incidental in achieving its main function, which is the raising of revenues and eventually the collection of taxes, does not hold water. The reason is because apart from said mandate, BIR is also primarily mandated to exercise duly delegated police powers to prevent and prosecute tax evasions and all other illegal economic activities. 7 The proposal is, to our mind, within the scope of said power as the "regulatory system", if implemented, would undeniably curtail tax evasion. Second Issue There is no take-or-pay provision nor a Direct Government Guarantee in the SICPATRACE Proposal You represent in your request for reconsideration that the BIR has the discretion either to reject the proposal outright or to negotiate with SICPA to do away with the take-or-pay provision, and should SICPA refuse, BIR shall reject the proposal. You also state that this provision has already been removed in the negotiations, which is acceptable to SICPA. cHCSDa Although this position has been settled in principle with SICPA (this representation was likewise given by SICPA in its letter to this Department), it has indicated that SICPA retains a caveat to the extent of "some form of protection in the event of changes in law that will threaten the Project." We reiterate our position in the Opinion that a take-or-pay scheme is violative of the prohibition against direct government guarantee as enunciated under R.A. 6957, n as amended by R.A. 7718. 8 With this in mind, BIR must ensure that any proposal to effect the protection being cited by SICPA should fall within the ambit of this prohibition. Third Issue Failure of the BIR to accept the SICPATRACE Proposal within thirty (30) days from its submission is not a fatal defect It is noteworthy to reiterate in toto the provisions of Rule 10, Section 10.7 of the Implementing Rules and Regulations (IRR) of the BOT Law, which states that: Section 10.7. Evaluation of Unsolicited Proposals. The Agency/LGU is tasked with the initial evaluation of the proposal. The Agency/LGU shall: 1) appraise the merits of the project; 2) qualify the proponent based on the provisions of Rule 5 hereof; 3) assess the appropriateness of the contractual arrangement and reasonableness of the risk allocation; and 4) inform the Approving Body of its receipt of an Unsolicited Proposal. The Agency/LGU is given thirty (30) calendar days to evaluate the proposal from the date of submission of the complete proposal. Within this thirty (30)-day period, the Agency/LGU, shall advise the proponent in writing whether it accepts or rejects the proposal. Acceptance means commitment of the Agency/LGU to pursue the project and recognition of the proponent as "original proponent" subject to Section 10.8. At this point, the Agency/LGU will no longer entertain other similar proposals unless the parties are unable to agree during the period for negotiations specified in Section 10.8 below, or the original proponent is unable to comply with the parameters set by the Approving Body, or until the solicitation of comparative proposals has been completed. The Agency/LGU shall inform the Approving Body of its decision to accept or to reject the Unsolicited Proposal. In case of acceptance, the Agency/LGU shall submit to the Approving Body all pertinent documentation. We disagree with the position that the 30-day period imposed herein is not mandatory but merely directory. The reference to "shall" connotes a word of command or of prohibition which indicates the legislative intent to make the law mandatory. 9 The intention is that the word "shall" in a statute is used in an imperative, and not in a directory sense. If a different interpretation is sought, it must rest upon something in the character of the legislation or in the context which will justify a different meaning. 10 CIHAED Besides, statutes or rules prescribing the time for the taking of certain actions are considered mandatory. They not only require strict, substantial compliance; they cannot also be waived nor can they be subject of agreements or stipulations. 11 Stated differently, where the time and manner of performing the action directed by the statute is not essential to the purpose of the statute, provisions in regard to time and method of performance are generally interpreted as directory; but not if otherwise. 12 In the instant case, acceptance means commitment of the BIR to pursue the project and recognition of the proponent as "original proponent" subject to Section 10.8 of the Rules and the BIR will no longer entertain other similar proposals unless the parties are unable to agree during the period for negotiations specified in said Section, or the original proponent is unable to comply with the parameters set by the Approving Body, or until the solicitation of comparative proposals has been completed. The importance of the mandated 30-day period for acceptance or refusal of the unsolicited proposal cannot, thus, be denied. Fourth Issue SICPA may show proof of compliance with the minimum equity requirement during negotiations We reiterate this Department's position that financial viability of a project proponent should be complied with during the pre-qualification stage. The declaration by the court in the case of Agan vs. Piatco is worthy of mentioning whereby the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may in vest in the project at the time of prequalification is vital. 13 The financial capacity of a proponent would be a substantial requirement to enable the agency concerned to determine whether a proponent is capable of pursuing a project cost, which in this case, is estimated to be at P18B. 14 Further, the BIR-BOT Pre Bids and Awards Committee (BIR-BOT-PBAC) developed a set of criteria for evaluating SICPA's eligibility, which consisted of legal requirements, experience or track record and financial capability. 15 Necessarily, subsequent negotiations as provided in Section 10.8 of the IRR, BOT Law would no longer cover financial capability but merely limited to project scope, implementation arrangements and draft provisions on the agreement. Hence, the documents of SICPA proving its financial viability should have been submitted at the pre-qualification stage. DEcITS Fifth Issue Failure of SICPA to meet the technical and functional criteria set by the BIR is not a fatal defect We reiterate that the technical and functional criteria were formulated by the PBAC and based on the latter's initial evaluation of the project, the SICPA Proposal met only 35 out of the 83 listed criteria, and only 11% on the functional/business side. 16 Thus, the recommendation of PBAC which was created primarily to determine the feasibility and viability of the SICPATRACE Proposal should be given much credence. Reports provided by such committee should be heeded. It is not sufficient, therefore, for the proponent to merely dismiss the PBAC assessment as wanting. In view of the foregoing, and save for the first issue wherein, as discussed, we affirmed your views advanced, we are inclined to sustain and, accordingly, reiterate the views contained in the Opinion sought to be reconsidered. This modifies the Opinion sought to be reconsidered. Please be guided accordingly. Very truly yours, (SGD.) LEILA M. DE LIMA Secretary Footnotes 1. 164 SCRA 320. 2. G.R. No. L-12695, March 23, 1959. 3. Western Heights Land Corp. v. City of Fort Collins , 146 Colo. 464, 362 P. 2d 155, 158, cited in Black's Law Dictionary, Centennial Ed., 1319. 4. Words and Phrases, Vol. 37 A, p. 294, citing Ard. v. People , 182 P. 892, 893, 66 Colo. 480. 5. Op cit. 6. Section 18 (1), Title II, Chapter 4, Book IV, Executive Order No. 292. 7. Ibid. , Section 18 (2) & (3). 8. Build-Operate-Transfer Law ("BOT Law"). 9. Guiao vs. Figurao , 94 Phil. 1018; Mcgee vs. Republic , 94 Phil. 820. 10. Diokno vs. Rehabilitation Finance Corporation , 91 Phil. 608; Baranda vs. Gustilo , n 165 SCRA 757. 11. See, Agpalo, Statutory Construction, 2003 ed., p. 239, citing cases. 12. Sutherland, Statutory Construction, Vol. 2, pp. 216-217. 13. G.R. No. 155001, May 5, 2003. 14. Report of House Committee on Ways and Means dated January 18, 2010. 15. PBAC's Committee Report on the Initial Evaluation of the Unsolicited Proposal of SICPA for the Enhancement Program for Excise Tax on Tobacco Products. 16. Report of House Committee on Ways and Means dated January 18, 2010. n Note from the Publisher: Written as "R.A. 6975" in the original document. n Note from the Publisher: Written as "Boranda vs. Gustilo" in the original document.