Filipino businesses call for wider tax base

FILIPINO BUSINESSES feel the government is not taxing enough entities and are not including more people into the tax base, an international survey showed.

The Grant Thornton International Business Report, released yesterday, polled 100 Filipino executives in the first quarter, seeking their comments on the tax policies of the country.

"There are respondents who believe the current tax regime does not bring enough economic participants into the tax base: 62% of Filipinos polled [said] not enough people and entities are being taxed, compared to 49% globally," Grant Thornton, through its local partner Punongbayan & Araullo, said in a statement.

This number was also higher than the rest of the Association of Southeast Asian Nations (ASEAN) -- 45.5% of regional respondents felt governments were not expanding their tax base.

Some 58% of Filipino businesses said tax policies are heavily against the redistribution of wealth, again surpassing levels in the ASEAN and the rest of the world, at 39.4% and 41.3%, respectively.

The executives, however, are satisfied with most of the current tax regime of the Philippines, the survey showed.

Around 76% said tax laws and policies "are taxing the correct taxpayers at the correct levels, compared to just 28% globally; 68% believe these same policies are geared to stimulate economic growth, compared to just 31% globally."

Of those surveyed, 82% said current tax laws are working towards encouraging compliance.

There are an estimated 18.95 million taxpayers in the country, based on the Bureau of Internal Revenue (BIR)’s 2011 annual report, up by 9.65% from the 17.289 million taxpayers in 2010.

For its part, the BIR has been working to improve tax administration through a host of reforms.

The self-employed and professionals have been a focal point for the bureau, especially, since they declare their own income and taxes.

Simpler registration, filing and payment procedures seek to bring in more taxpayers into the fold.

Unregistered businesses have also been shuttered, while cases have been filed against tax evaders, including high-profile politicians, celebrities, lawyers and doctors.

SALES TAXES BACKED
Meanwhile, Filipino businesses were asked which type of tax should be the main source of revenue for the government.

Majority of respondents, at 28%, said sales taxes should make up bulk of government revenues, followed by the value-added tax (VAT) with 26%, and personal taxes, 20%.

Around 18% said corporate taxes must be the main source of income, while customs duties and taxes scored the least, at 8%.

Currently, income taxes -- both corporate and personal -- make up bulk of the BIR’s collections. They are expected to bring in P759.187 billion this year.

The VAT is estimated to add P268.631 billion, while excise taxes bring in P102.367 billion and percentage taxes, P60.732 billion. Other taxes top off the programmed collections this year with P62.762 billion.

TAX GUIDANCE SOUGHT
Almost all Filipino businesses, at 92%, also noted there is a need for the government to provide more guidance when filing taxes "even if this provided less opportunities to reduce tax liabilities across borders."

This went above and beyond results elsewhere, with only 86% of ASEAN businesses and 68% of global respondents saying there is a need for more tax guidance.

"The high percentage of Filipinos requesting for more tax guidance shows that taxpayers are at a loss when it comes to the various changes that are being implemented," Eleanor L. Roque, head of Punongbayan & Araullo’s tax division, said.

"Taxpayers would welcome more dialogue and consultation with the regulators. Compliance becomes difficult when there is not enough guidance available."

The government hopes to collect P1.746 trillion in revenues this year to help fund P1.98 trillion in expenditures.

The BIR accounts for about 70% of the revenue haul.

As of April, the bureau collected P393.09 billion, up 13.85% from P345.265 billion the year previous.

source:  Businessworld

VAT on isolated transactions

THE VAT TREATMENT of sale of motor vehicle by persons who are not in the regular business of selling cars has often been raised as an issue in tax examinations. The provision usually cited is Section 105 of the Tax Code which provides that VAT shall be imposed on any person who, in the course of trade or business sells, barters, exchanges, leases goods or properties, and renders services. The phase "in course of trade or business" is defined in the same section as "the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto."

The critical issue in this provision is the meaning of "incidental", i.e., when is a transaction considered incidental to the regular business of a taxpayer? The term "incidental" is defined in Black’s Law Dictionary as "depending upon or appertaining to something else as primary; something necessary, appertaining to, or depending upon another which is termed the principal; something incidental to the main purpose." This definition apparently suggests that an incidental transaction is one which is necessary or essential to the regular business, although not done on a regular basis.

In 2006, the Bureau of Internal Revenue (BIR) issued a ruling which considered the sale of motor vehicle not done in the regular business of the taxpayer as not subject to VAT (BIR Ruling DA-563-2006). This ruling clearly relates the word "incidental" to something which is regularly done and not just simply isolated. However, the Court of Tax Appeals, in a succeeding case, considered the sale of a motor vehicle by a garment manufacturing company to its general manager an incidental transaction on the grounds that the motor vehicle was purchased and used in the furtherance of the company’s business. (CTA E.B. Case No. 287) As a consequence, the BIR issued Revenue Memorandum Circular No. 015-11 in March 2011 which revoked the 2006 ruling and adopted this CTA decision. Notwithstanding these pronouncements, the basis in determining what constitutes an "incidental" vatable transaction, as applied to isolated or one-off transactions, has remained to be a contentious issue.

On March 11, 2013, the Supreme Court (SC) rendered a decision which finally settles the issue on whether an isolated transaction, such as the sale of a motor vehicle by a person not regularly engaged in this business, partakes the nature of an incidental transaction and as such, shall be subject to VAT. (G.R. Nos. 193301 and 194637)

In this particular case, the taxpayer is engaged in the business of power generation which is subject to zero-rated VAT. The taxpayer sold a fully depreciated motor vehicle used in its business and did not pay VAT on said transaction, considering it as an isolated transaction. Subsequently, the taxpayer was assessed deficiency 12% VAT. The taxpayer protested the assessment and countered that the sale is a one-time transaction and is not incidental to its operations, and therefore should not be subject to 12% VAT.

The SC ruled that the sale of the motor vehicle by the taxpayer is an incidental transaction in furtherance of the taxpayer’s business and as such, is subject to 12% VAT.

The decision of the SC in effect clarified that the word "incidental" in Section 105 of the Tax Code does not necessarily exclude isolated transactions. The fact that a transaction is "isolated" in nature, i.e., one-off or unrepeated, does not result to the conclusion that the same cannot be an incidental transaction for purposes of VAT liability.

While the taxpayer’s business of power generation does not obviously include the sale of motor vehicle, the SC nonetheless considered the latter activity as incidental to its main business activity. The decision seems to highlight the fact that taxpayer purchased the vehicle because the vehicle was necessary in the operation of its business, and was in fact actually used in said business and recorded in the books as part of the taxpayer’s property, plant, and equipment. For these reasons, although the subsequent sale of the motor vehicle after it has been fully depreciated is not a regular activity of the taxpayer, such transaction was deemed incidental to its regular activity since the acquisition and subsequent sale of the motor vehicle occurred in the regular course of the taxpayer’s business. Simply stated, if it were not for the regular conduct of the taxpayer’s business, purchase of the motor vehicle would not have been required. Clearly, it appears that the basis of the VAT on incidental transactions is not whether the transaction is isolated or one-off, but whether the transaction has some form of connection or relation to the regular activity of the taxpayer, however, minor.

Now that the issue on what constitutes "incidental" transaction that is subject to VAT has been settled by jurisprudence, it would be advisable that taxpayers take a conservative approach and seriously consider the VAT implications of the sale or disposition of assets used in their business even though isolated.


The author is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at john.edgar.maghinay@ph.pwc.com for questions or feedback.Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.

source:  Businessworld

How to avoid huge BIR tax assessments

IT HAS NEVER been a secret that aside from the taxpayers’ regular voluntary tax remittances, a sizeable chunk of the Bureau of Internal Revenue’s (BIR) revenue collections comes from tax assessments. Hence, it is not surprising that the BIR is currently bolstering its prosecution team to run after possible tax evaders -- corporations, known personalities, and businessmen, among others. Remember that for the year 2013, the BIR’s target collection is P1.25 trillion. This target is 18% higher than last year’s.

In a recent news report, the BIR collected P244.1 billion in the first quarter of 2013. Subsequently, for the month of April, the BIR collected P148.99 billion. Since we are nearing the closing of May, the BIR now has only seven more months to meet the P1.25 trillion targets.

So, the pressure is continuously on. And the taxpayers are obviously feeling it.

The taxpayers, particularly the corporate ones, are anxious on how the pressure will continue to translate to BIR’s listings of tax findings in each tax assessment case. It is not uncommon that the BIR’s initial list of assessment findings would start at P400 million, P700 million, a billion or even more. And this is only for one taxable year! That’s why, owners of businesses who see this initial list might have a silly thought of jumping out of the window from the 30th floor! And then, they may begin by saying -- what’s the sense of putting up a business if they have to pay tax deficiencies whose amount is even greater than the net worth of the business itself?

Well, to the taxpayers -- relax…

There is actually no need to worry about BIR audits, if the taxpayer is prepared for it.

How?

While it is true that it is difficult to predict the approach that the BIR examiner will use in each tax assessment case, at least there are common sources of findings which the taxpayers may consider in preparing for a BIR audit.

Here are some basic pointers:

Don’t wait for the BIR audit before starting to reconcile. Most of the BIR’s findings result from comparison of certain amounts per books as against the amounts per tax returns or per related alphalist. An example of this is the comparison of the amounts of sales and expenses per books as against those per other BIR references -- income tax returns, value-added tax (VAT) returns, withholding tax returns, and summary list/alphalist, among others.

The general practice among taxpayers is to wait for the BIR examiner to present a discrepancy before the taxpayer starts to reconcile. Most of the time, this will take a long process, particularly if the employee who is knowledgeable about the related transactions has already resigned. The reconciliation process could even take a number of years, and for all we know, after the reconciliation process is exhausted and there are still remaining unreconciled items, the amount due from these deficiency items have already doubled due to interest penalty. Note that the interest rate on tax deficiency is 20% per year.

To the taxpayers -- formulate a system of periodic reconciliation which will depend on the accounting system and pertinent record keeping procedures.

Maintain adequate documentation. One of the more common BIR findings is the alleged lack of adequate documentation supporting a transaction. This is true, particularly, when the BIR examiner is evaluating a major transaction that has a significant tax impact. In this connection, there could be questions on the nature of the transaction and the applicable withholding tax rates, or there could be a BIR challenge on the deductibility of the related expense for income tax purposes.

Hence, if the taxpayer does not have in its files the pertinent documents, then, it will be difficult to address the inquiries of the BIR examiners, and the BIR may come up with an assessment.

To the taxpayers -- be keen on maintaining adequate documentation to support transactions.

Secure withholding tax certificates from customers. Another common BIR finding is the missing withholding tax certificates. These certificates are the taxpayer’s proof of tax credits against its total income tax due for a year. Hence, if these certificates are not secured from the customers, then, the taxpayer’s claim for tax credits may fail, and the consequent assessment might be inevitable.

To the taxpayers -- ensure that all the withholding tax certificates are properly secured from its customers.

The above pointers are just basic and general ones. There are definitely numerous and more specific preventive measures that could be adopted by the taxpayers, on a case to case basis, to avoid huge tax assessments. Some can be performed by the taxpayers themselves, while others can be done with the assistance of their tax consultants.

In summary, while the BIR is pressured to intensify its assessment and collection efforts to meet its revenue target, the taxpayers, conversely, should be thoroughly prepared for any BIR examination in the future. Remember -- the BIR’s yearly target keeps on increasing.

The author is a senior manager of Tax Advisory & Compliance with Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please email Vier.Aznar@ph.gt.com or call 886-5511.

source:  Businessworld

Interim guidelines for printing receipts

IN THE RECENT Ranking of Economies (based on Ease of Doing Business) conducted by the World Bank Group, the Philippines ranked 138th out of 185 countries worldwide. The ranking is indicative of how conducive it is to start and operate a business in each country. Particularly, the same study showed that when it comes to starting a business, the Philippines ranks 161st out of 185 economies. These data would seem to indicate that investors generally find it difficult to start a business in the Philippines. This perception may be due to various reasons such as complex registration procedures and numerous regulatory and compliance requirements which must be complied with before anyone can start a business in the Philippines. One such important requirement is securing the necessary authority to print invoices and/or official receipts from the Bureau of Internal Revenue (BIR).

Section 237 of the Tax Code provides that all persons who are engaged in business in the Philippines are required to issue duly-registered invoices and/or official receipts. The printing of said invoices and receipts is not a straightforward procedure since it requires prior authorization from the BIR. Moreover, printing of these documents can only be done by printers who are duly-accredited by the BIR, in accordance with Section 238 of the Tax Code.

Further to these requirements under the Tax Code, Revenue Regulations (RR) No. 18-2012, issued by the BIR on Oct. 22, 2012, provide for the guidelines and requirements in processing of Authority to Print (ATP) Official Receipts (ORs), Sales Invoices (SIs) and other Commercial Invoices (CIs). RR No. 18-2012 provides for on-line processing of ATPs that would involve fully automated application, generation, approval and issuance of the ATP through a web-based (on-line) ATP System. As of to-date, however, the On-line ATP System is not yet fully developed.

In the meantime that the On-line ATP System is not yet available, the BIR, through Revenue Memorandum Order (RMO) No. 12-2013 dated May 2, 2013, issued additional guidelines and procedures in the processing of applications for ATP ORs, SIs and other CIs, applicable to taxpayers that still use manually-issued receipts/invoices. It is important to note that businesses issuing receipts through Cash Register Machine/ Point-Of-Sale Machines (CRM/POS) and/or Computerized Accounting System (CAS) will be covered by separate guidelines.

RMO No. 12-2013 reiterates the rule that only BIR Accredited Printers are allowed to print principal and supplementary receipts and invoices, upon issuance of the ATP by the BIR. The printed invoices/receipts must also show all the relevant information stated in the RMO, which include a breakdown of the transaction if such amounts involve a mix of transactions (i.e. VATable sales, VAT amount, Zero-rated sales, and VAT Exempt Sales). For non-VAT ORs/SIs and other CIs, the phrase "THIS DOCUMENT IS NOT VALID FOR CLAIM OF INPUT TAX" should be conspicuously printed in bold letters. Taxpayers not subject to VAT or Percentage Tax shall issue non-VAT principal receipts/invoices indicating at the face of the receipt/invoice the word "EXEMPT". Furthermore, taxpayers subject to percentage tax shall provide the breakdown of Sales Subject to Percentage Tax (SSPT) and Exempt Sales. Other information relevant to the taxpayer may be included in the invoice/receipt.

In addition, the following should be printed at the bottom portion of the OR/SI/CI:

• Name, address and TIN of the accredited printer;

• Accreditation number and date of accreditation of the accredited printer;

• ATP number, OCN, date issued (month/day/year) and valid until (month/day/year);

• BIR permit number (if loose leaf OR/SI/CI);

• Approved inclusive serial number;

• Security/special markings/features of the accredited printer; and

• The phrase "THIS INVOICE/RECEIPT SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE ATP".

In the case of taxpayers transacting business with senior citizens and persons with disabilities (PWD), the invoices and/or receipts should state the customer’s Senior Citizen tax identification number (TIN), Office of the Senior Citizens Affairs (OSCA) ID No./PWD No., Senior Citizen Discount/PWD Discount, as the case may be, and show his/her signature.

As provided under RMO No. 12-2013, in the interim, ATP applications shall be processed using the Registration System of the Integrated Tax System (ITS). The taxpayer should submit its inventory listing and surrender hard copies of unused/expired receipts/ invoices together with photocopies of the old and new ATPs and corresponding Printer’s Certificate of Delivery (PCD) to the Revenue District Office (RDO) where it is registered. The old BIR Form 1906 for ATP applications shall be used until the revised form becomes available, and the prescribed standard forms, such as the Sworn Certification of the Printer, sample format of ORs/SIs/CIs, Inventory List of Unused/Expired Principal and Supplementary Receipts and Invoices shall be used by the authorized printers and the taxpayers. The taxpayer is likewise required to choose its printer from the list of accredited printers in the BIR Web site. When the application has been approved by the RDO/LT office, the taxpayer may claim the actual ATP, which will serve as a guide/reference for accredited printers, containing the date of ATP, validity period, printer’s accreditation number, and date of accreditation.

RR No. 18-2012 also provides for an extension for expiring receipts provided that they apply for a new ATP not later than 60 days prior to the actual expiry date. Further, the transitory provisions of RMO No. 12-2013 provide that all unused or unissued receipts and invoices printed prior to the effectivity date of RR No. 18-2012 (which was on Jan. 18, 2013), shall be valid only until June 30, 2013. Taxpayers are therefore required to surrender the expired ORs, CIs, and SIs to their respective RDO on or before July 10, 2013 for destruction, together with an inventory listing of these unused/unissued receipts and invoices submitted to the BIR.

Another significant provision of the RR and RMO is that compliant receipts, or all those new sets of receipts/invoices to be printed under the requirements of the new guidelines, shall also only be valid until the full usage of the approved serial numbers or five years from its issuance, whichever comes first. After such period all unused/expired/expiring receipts/invoices shall also be surrendered to the respective RDO for destruction on or before the 10th day of the month following the validity of the expired receipts/invoices. This is a requirement not mandated previously. Although theoretically, putting strict validity requirements might curb the unscrupulous use of invoices or receipts, it would obviously entail more time and effort for taxpayers in accounting for all such invoices and receipts. This means additional costs on the part of taxpayers already over-burdened with regulatory requirements and procedures in the course of their doing business.


The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at maria.carmelita.v.torres@ph.pwc.com for questions or feedback.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.

source:  Businessworld

A manner of settling tax obligations

May 20, 2013 - Businessworld

"TAXES are what we pay for (a) civilized society, or are the lifeblood of the nation."

There is an old saying that in this life, there are only two matters that remain constant, namely: change and taxes.

This is a delusion, as there should be a third -- issuances from the Bureau of Internal Revenue (BIR).

At the advent of the current administration, the BIR has been constantly introducing new measures or re-introducing measures to improve those already in place in its attempt to improve collection.

One of the more recent measures issued to realize this objective is Revenue Regulations (RR) 9-2013, dated May 10, 2013, which sets a timeline for the payment of the compromise offer in a compromise settlement.

According to the new revenue regulations, taxpayers seeking a compromise settlement of unsettled tax obligations must now pay the compromise offer upfront before their applications are processed.

No application for compromise settlement shall be processed without the full settlement of the offered amount.

The new rules amended RR 30-2002, dated Dec. 16, 2002, which provided the implementing guidelines for Sections 7(c), 204(a) and 290 of the NIRC on the compromise settlement of tax liabilities.

Under the previous revenue regulations, the taxpayer has option to pay the compromise offer either before or upon filing the application or after the approval of the offer of compromise by the board.

In case the compromise is disapproved and the applicant had already paid his offer, the payment would be deducted from the taxpayers’ outstanding liability.

A BIR deputy commissioner already admitted in a newspaper article that this move is a collection strategy.

Indeed, this is a good collection strategy. The BIR can immediately receive the amount offered for compromise and need not wait until the compromise offer is evaluated by the boards and accepted or denied.

But is it fair to the taxpayers?

Under the rules on compromise settlement, the Commissioner of Internal Revenue is given an authority to compromise the payment of internal revenue tax liabilities of certain taxpayers with outstanding receivable accounts and disputed assessments with the BIR and the Courts.

Article 2028 of the Civil Code of the Philippines provides that a "compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced."

Compromise therefore implies a mutual agreement between the parties involved, e.g. taxpayer and BIR.

Under the present rules, the power of the commissioner to compromise any national internal revenue tax requires compliance with specific conditions, to wit: (a) there is reasonable doubt as to the validity of the claim against the taxpayer [doubtful validity of the assessment], or (b) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax [financial incapacity].

These conditions are not all-encompassing as these matters are always subject to other considerations set forth by the BIR.

You may recall that under the prevailing rules, the cases which may be compromised upon the taxpayer’s compliance with the relevant rules and regulations are limited to the following: (1) delinquent accounts; (2) cases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pending in the regional offices, revenue district offices, legal service, Large Taxpayer Service (LTS), collection service, enforcement service and other offices in the national office; (3) civil tax cases being disputed before the courts; (4) collection cases filed in courts; and (5) criminal violations, other than those already filed in court or those involving criminal tax fraud.

In case of delinquent accounts, the BIR may be justified in requiring advanced payment of the compromise offer as these are otherwise already collection cases.

However, is the new rule fair in other cases? Take for instance deficiency taxes arising from a jeopardy assessment or assessed without the benefit of complete or partial audit by the revenue officer.

This is resorted to if there is reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements set forth by law.

Consequently, the amounts assessed may be huge and without solid basis. Hence, both BIR and the taxpayer may find it mutually beneficial to agree on a compromise amount.

The taxpayer may opt to enter into a compromise settlement which the BIR has reason to accept because of the doubtful validity of the assessment.

In such cases where the settlement is mutually beneficial, is it fair for the BIR to require advance payment while it has not yet delivered its part in the settlement?

Certainly, this amendment ushers a new development that bridges the gap between compliance and collection which, in reality, is mutually beneficial to both the taxpayer and the BIR.

Nevertheless, the taxpayer must remain cautious and vigilant in entering any compromise agreement.

Once the taxpayer has showed his intention to compromise his tax violations, whether he likes it or not, he begins to feel that he will now be at the mercy of the BIR.

He begins to realize that other considerations can come into play other that the requirements and conditions in the regulations -- which should not be the case.

While compromise settlement is being offered for practical purposes, it must be emphasized that the crux of the latter is the relief extended to both the taxpayer and the BIR.

On the part of the taxpayer, said compromise aims to ease his burden in meeting his obligation to pay taxes; while on the other hand, on the part of the BIR, it serves as an avenue of additional collection or revenue.

This is a very valid program. It has been legislated based on valid reasons. Taxpayers should not be left to lose their hope that this is a remedy that they can turn to in cases of clear financial incapacity and doubtful validity of the assessment.

The BIR must be reminded of the crux of compromise settlement. Any program of the government which can provide a reasonable relief on the taxpayer’s burden should always be earnestly deliberated.


The author is a tax associate of Tax Advisory & Compliance with Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail Robert.deGuzman@ph.gt.com or call 886-5511.

Power to Issue Subpoena Duces Tecum

THE POWER and duties of the Bureau of Internal Revenue (BIR), being the prime tax collection agency of the government, comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties and fines related thereto, including the execution of judgments in all cases decided in its favor by the courts.

The supervisory and police powers conferred to the BIR are clearly spelled out in Section 2 of the 1997 Tax Code, as amended.

In the exercise of this inherent power, Section 5 of the Tax Code grants the Commissioner of Internal Revenue (CIR) investigative power which generally covers the power to examine the books and records of taxpayers or other data which may be relevant or material to such inquiry; and to obtain such materials and information not only from the taxpayer but also from other persons who may have possession of such data or information.

Obtaining relevant documentary information involves the process of issuing a subpoena duces tecum or known as the "SDT".

Under Rule 21 of the Rules of Court, an SDT is a document directing the person to whom it is issued to bring any books, documents, or other data and information under his control to the issuing authority.

It is a Latin word which means "under penalty to bring with you." As such, non-compliance with an SDT would technically result to a criminal offense.

An SDT may be issued not only to the person liable to the tax and under investigation, but also to any person who has possession, control, or custody of the relevant records, data, and information which includes any officer or officer of the national or local governments, government agencies and instrumentalities, and government-owned or controlled corporations (GOCCs).

The power to issue an SDT, however, is not a blanket authority. Essentially, this power can only be exercised within the parameters allowed by law, i.e., for the purpose of ascertaining the correctness of any tax return, or in determining the tax liability of any person, or in collecting any such liability, or in evaluating tax compliance.

In addition, restrictions imposed under special laws such as the Bank Secrecy Law, must also be generally observed in the issuance of an SDT, except in cases allowed by law, e.g., to determine the gross estate of the decedent or to evaluate the qualification of a taxpayer applying for compromise of tax liability based on financial incapacity.

To ensure that the issuance of SDTs is done properly and in accordance with law, the BIR has provided specific procedures to be followed under Revenue Memorandum Order (RMO) No. 88-2010.

STRINGENT PROCEDURES
This RMO was recently amended by RMO 10-2013, which provides for more detailed and stringent procedures, which I have summarized below:

• An SDT shall be issued to the following: a) person liable for tax or required to file a return or to any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records relating to the business of the taxpayer; or b) any office or officer of the national or local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and GOCCs.

• An SDT shall be preceded by a notice issued by authorized officers of the BIR to the above-named persons, requiring them to provide information or the pertinent books of accounts, accounting records and particular or specific documents.

• If the information or records requested are not furnished within the period stated in the notice, or when the information or records submitted are incomplete, the investigating officer shall prepare a memorandum report recommending the issuance of an SDT.

• If upon evaluation, the memorandum report is found to be meritorious, an SDT shall be prepared in three copies for signature of the Assistant Commissioner for Enforcement and Advocacy Service, Assistant Commissioner for Large Taxpayers Service, Revenue Regional Director, or any other officer duly delegated by the CIR, as the case may be. The SDT shall be in a standard form (BIR Form No. 0713) with a corresponding serial number, to be placed on the upper right portion of the SDT following a prescribed format.

• The person concerned to whom the SDT is issued shall be required to appear and submit before the signatory of the SDT the mandated information/documents at an appointed time, date, and place. The time indicated in the SDT shall be during regular business hours 8 a.m. to 5 p.m. during the work week, excluding holidays. The venue shall be in the BIR office of the signatory of the SDT.

• In case of corporations, partnerships, or associations, the SDT shall be issued to the partner, president, general manager, branch manager, treasurer, registered officer-in-charge, employee/s or other persons responsible for the custody of the books of accounts, and other accounting records mandated to be submitted or information mandated to be provided. If the concerned party is the government, the SDT shall be issued to the head of the office, agency, instrumentality, political subdivision, or GOCC.

• The compliance date for the submission of the documents and information shall be set on the 14th day from the date of issuance of SDT, i.e., the date when the SDT is officially signed.

• SDT may be delivered personally by the revenue officers assigned to investigate the case or by any authorized internal revenue officer, to the concerned party at his registered or known address or wherever he may be found. If personal service is not practicable, the SDT shall be served by substituted service or by mail. Substituted service can be done in various forms enumerated in the RMO. Service by mail, on the other hand, is done by sending a copy of the SDT by registered mail to the registered or known address of the party. Delivery may also be made through reputable professional courier service. If no registry or professional courier service is available in the locality of the addressee, service may be done by ordinary mail.

• The concerned revenue officers must be present during the appointed time, date , and place set for submission of the documents and information as stated in the SDT, and failure to comply will subject them to administrative penalties.

• The concerned revenue officer shall submit a written report to the issuing office that the documents/information stated in the SDT have been submitted or that there was either no submission or that the documents presented were incomplete. In case of failure to submit or incomplete submission, filing of the criminal case against the erring party shall be processed jointly by the concerned revenue officers and the action lawyer assigned to the case.

• Payment of the administrative penalty shall not excuse the taxpayer/person summoned from complying with the SDT.

• The filing of the criminal case will require the preparation of the letter-complaint addressed to the office of the prosecutor, recommending the criminal prosecution of the erring party for violation of Section 266 ("Failure to Obey Summons") of the 1997 Tax Code, as amended, together with the complaint-affidavit and other supporting evidentiary documents.

• The penalties for non-compliance with the SDT shall be imprisonment of not less than one year but not more than two years and a fine of not less than P5,000 but not more than P10,000. If the taxpayer is a corporation, an association or a general co-partnership, there shall be imposed an additional fine of not less than P50,000 but not more than P100,000.

STRICT RULE
A very critical feature of the process is the prohibition against withdrawal or dismissal of the criminal case by any prosecuting officer of the BIR once the complaint-affidavit has already been filed with prosecutor’s office, notwithstanding the subsequent submission by the taxpayer or concerned party of documents indicated in the SDT.

This strict rule is based on the premise that the concerned party has been accorded full notice and opportunity to comply with the SDT under the procedures set forth in the RMO.

In other words, belated submission of the requested documents/information stated in the SDT will no longer be honored since the SDT procedures set forth in the RMO are assumed to be adequate and in compliance with due process.

While I understand the rationale for this rule, I personally believe that the provision on non-withdrawal of cases in the RMO seems to be a bit harsh on the part of the parties to whom the SDT is issued.

Certain practical problems which may prevent such parties from complying with the SDT requirements were apparently not considered in the SDT procedures.

For example, service of the SDT to a barangay official in case no person can be found in the taxpayer’s registered or known address, is not equivalent to a full notice. A taxpayer cannot be fully informed in this manner.

Also, the time frame of 14 days from date of SDT issuance may not be sufficient to afford the persons concerned full opportunity to comply with the SDT, especially if the documents/information requested are voluminous and very detailed, e.g., summary list of sales and purchases, monthly working trial balance ( before and after adjustments), tax returns filed for the taxable year and corresponding attachments, invoices, official receipts, vouchers (i.e., check/cash and journal vouchers) and relevant supporting documents.

In meritorious cases, the persons concerned should be allowed to request for extension of time to comply with the SDT.

In addition, the prohibition on withdrawal of criminal case should be given a little bit of flexibility depending on the circumstances of each case.

Criminal prosecution of a person acting in good faith and with valid reasons for failure to timely comply an SDT, does not seem to be fair and equitable.

As a taxpayer and resident of our country, I do recognize the indispensability of BIR’s effort to improve tax collection. But there are certain rights that need to be respected and recognized and one such right enshrined in our Constitution is the fundamental right of every person to be accorded due process in the protection of his life, liberty and property. That is the beauty of democracy.


The author is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback at sylvia.r.salvador@ph.pwc.com.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.

source:  Businessworld

Taxation of those employed in embassies

PHILIPPINE nationals and alien individuals employed by foreign governments, embassies, diplomatic missions and international organizations based in the Philippines have this impression that the salaries they receive from their employment are exempt from income tax.

Apparently, this view is anchored on their misunderstanding of the rule that foreign governments, embassies, diplomatic missions and international organizations situated in the Philippines acting as employers enjoy immunity from collecting taxes on salaries and emoluments of their employees, whether they are foreigners or Philippine nationals.

The immunity referred to under this rule refers actually to immunity from being constituted as withholding agents of the Philippine government, which is accorded said foreign entities on the basis of international comity as embodied in several international agreements to which the Philippines is a signatory, e.g., Vienna Convention for International Relations, Convention on the Privileges and Immunities of the United Nations.

This immunity from the withholding tax obligation is further reiterated in Section 2.78.1(B)(5) of Revenue Regulations (RR) No. 2-98, otherwise known as the Withholding Tax Regulations, which exempts from the withholding tax system the remunerations paid by foreign governments and international organizations to their employees who are resident or nationals of the Philippines.

The confusion created by the above provision has prompted the Bureau of Internal Revenue (BIR) to issue Revenue Memorandum Circular (RMC) No. 31-2013 to further clarify the tax treatment of this transaction.

Under RMC No. 31-2013, it has been clarified that the exemption from withholding taxes on compensation of officials and employees applies to foreign governments, embassies, diplomatic missions, and international organizations, and that such exemption refers only to the obligation to collect tax, and therefore does not equate to the exemption from paying the income tax itself.

Section 23 of the Tax Code clearly subjects resident citizens of the Philippines on all income derived from all sources, and alien individuals, whether resident or non-resident, on income derived from Philippine sources, to Philippine income tax.

However, most international agreements which grant withholding tax immunity to foreign governments, embassies, diplomatic missions, and international organizations also grant exemption to their officials and employees who are foreign nationals and/or non-Philippine residents from paying income tax on their salaries and emoluments.

In these instances, RMC 31-2013 emphasizes that the exemption granted should apply only to those individuals who are expressly and unequivocally identified in said international agreements or laws, and shall not extend to those not specifically mentioned as tax exempt.

In other words, employees who are not specifically mentioned as tax exempt in the international agreement or law shall be subject to the general rule on taxability of Philippine nationals and alien individuals as espoused in Section 23 of the Tax Code.

Accordingly, their compensation and emoluments are subject to Philippine income tax, but exempt from withholding tax because their employer is exempt from the obligation to withhold tax.

Consequently, it shall be incumbent upon the individual employees to report their income to the BIR and pay the taxes due thereon as required under Section 24 of the Tax Code.

RMC No.31-2013 has further identified the specific individuals who are exempt from income tax as mentioned in the various international agreements, which I have enumerated briefly as follows:

1. Those employed by foreign embassies/foreign missions, who are:

• Diplomatic agents who are not nationals or permanent residents of the Philippines;

• Members of the family of the diplomatic agent forming part of his/her household who are not Philippine nationals;

• Members of the administrative and technical staff of the mission together with members of their families forming part of their respective households who are not nationals or permanent residents of the Philippines;

• Members of the service staff of the mission who are not nationals or permanent residents of the Philippines; and

• Private servants of members of the mission who are not nationals or permanent residents of the Philippines.

2. Those employed by aid agencies of foreign governments, as identified in the agreement in place;

3. Those employed by the United Nations and its specialized agencies, as identified in the agreement in place;

4. Those employed by organizations covered by separate international agreements or specific provisions of law, as identified in the agreement in place; and

5. Employees of other aid agencies or international organizations, as identified in the agreement in place;

Exemption of employees of aid agencies or international organizations who are not mentioned in RMC No. 31-2013 will be evaluated based on the terms of the applicable articles of agreement, charters or host agreements; or existing laws granting tax exemptions or privileges to said agencies or organizations.

Employees, whether Philippine nationals and non-residents, who are not specifically identified under duly recognized international agreements or local laws are required to file their annual income tax returns on or before the 15th day of April of each year using BIR Form No. 1700 or 1701, whichever is applicable, declaring their respective compensation income for the preceding taxable year for services performed for such foreign entity or international organization.

Employees who failed to file their annual tax returns for the taxable year 2012 because of the confusion on the proper tax treatment of their compensation income, are allowed up to May 15, 2013 to file their 2012 income tax returns and pay the taxes due on their compensation income without surcharge, interest, and compromise penalty for late payment, as provided under RR No. 7-2013.

Abatement of surcharge, interest, and compromise penalty shall apply provided the foreign governments, embassies, diplomatic missions and international organizations acting as employers of these individuals filed a summary list of their employees who are not tax exempt as of Dec. 31, 2012 before May 10, 2013.

Although the deadline prescribed by RR No. 7-2013 has lapsed, RMC No. 31-2013 serves as an effective guidance to individual employees of foreign governments, embassies, diplomatic missions, and international organizations on the proper tax treatment of their compensation income.

I believe that the BIR should further intensify the dissemination of RMC No. 31-2013 to ensure full compliance of these individual taxpayers with their tax obligations, moving forward.


The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send inquiries or feedback to larissa.c.dalistan@ph.pwc.com.

source:  Businessworld

BIR’s visit to the doctor

THE BUREAU of Internal Revenue’s (BIR) collection target for 2013 is approximately P1.254 trillion. To meet this target, it has identified various priority programs aimed at plugging tax loopholes and increasing its revenue collections.

One of these priority programs is the Run After Tax Evaders (RATE) Program wherein the BIR is mandated to investigate criminal violations of the National Internal Revenue Code of 1997 (NIRC), and assist in the prosecution of criminal cases that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.

The BIR has filed various cases against taxpayers under this RATE Program. Recently, a prominent doctor was charged by the BIR with tax evasion for allegedly failing to report the correct information in his tax returns from taxable years 2009 to 2011. The BIR filed a criminal complaint with the Department of Justice against the said doctor for (1) "willful attempt to evade tax;" (2) "deliberate failure to supply correct and accurate information" in his Income Tax Returns (ITR); and (3) "willful failure to file Value-Added Tax (VAT) returns for taxable years 2009, 2010 and 2011."

Based on the documents and information gathered from third-party sources, the BIR discovered that there was substantial under-declaration by the said doctor of his taxable income. Under Section 248 of the NIRC, failure to report sales, receipts or income by 30% constitutes prima facie evidence of fraud tantamount to tax evasion. In addition, the BIR noted that the doctor failed to register as a VAT taxpayer even if his income has already exceeded the VAT threshold of P1.5 million (now P1,919,500).

With this development, doctors and other professionals should be forewarned that the BIR is very serious in its campaign to go after individual taxpayers, especially the professionals such as but not limited to doctors, lawyers, accountants, engineers, architects, and real estate brokers. The BIR wants to expand its taxpayer database for this type of taxpayers because of their low tax compliance. In fact, pursuant to Revenue Memorandum Order (RMO) No. 4-2013, the audit priority targets of the BIR for 2013 include professionals and sole proprietorships whose (1) income tax due is less than P200,000 per annum; (2) gross revenue is 40% less than the previous year; (3) tax payment is 35% less than the previous year.

What then should be the lessons to the doctors and other professionals from this recent tax evasion case?

Firstly, these taxpayers should know their tax responsibilities -- the types of taxes that they need to register and pay to the BIR, the manner by which these taxes should be computed and reported, the due dates as well as the compliance requirements for filing of the applicable tax returns. In addition to the income tax, professionals in general, are subject to the business tax, either the VAT or 3% percentage tax). For doctors and medical practitioners in particular, there are procedural requirements with regard to the creditable withholding tax on professional fees (1) paid to them by hospitals and clinics, or (2) paid directly to them by patients who were "admitted and confined" to such hospitals or clinics, or (3) paid directly to them by health maintenance organizations (HMOs) or similar establishments.

Filing of the returns and payment of the taxes, however, is just the ultimate liability. Proper registration and correct documentation and recording of the revenues and expenses should be the first steps to correct compliance. In addition, there is the liability to withhold taxes on their employees as well as on certain expenses such as office rent, janitorial or security services, among others.

Tax rules and compliance requirements are very dynamic and complicated. Taxpayers may consider attending tax seminars or hiring tax consultants to orient them about their tax obligations, and also to update them on newly-issued tax rules and regulations.

An example of a recent tax update applicable to individual taxpayers is the mandatory disclosure requirement of other income in their ITR beginning taxable year 2013. Hence, individual taxpayers are advised to keep the pieces of evidence or records of their tax-exempt income and income which are subjected to final withholding tax in year 2013 to ensure compliance with the disclosure requirements.

Secondly, the professionals should also comply with the tax rules and regulations -- knowing the rules is not enough. Current tax practices should be reviewed, and if necessary, voluntarily pay any deficiency taxes. Likewise, taxpayers should be mindful that the BIR Commissioner is empowered by law to obtain information even from independent third parties to establish income made by the taxpayer during the years in question. In the case of that doctor who was charged with tax evasion, the BIR obtained information from the Philippine Health Insurance Corp. (PhilHealth), and such information was used by the BIR in computing his under-declared income.

Lastly, taxpayers should be aware that they are responsible for all information and representations contained in their ITR. Many court decisions have shown that the taxpayer cannot hide behind his accountant. They cannot blame their accountants or authorized representatives because it is presumed that the taxpayer has examined all the information in the tax returns before placing his or her signature therein.

The Supreme Court recently introduced the "Doctrine of Willful Blindness" in a landmark tax evasion case decided in year 2012. Under this doctrine, the taxpayer’s deliberate refusal or avoidance to verify the contents of his or her ITR and other documents constitutes "willful blindness" on his or her part. It is by reason of this doctrine that taxpayers cannot simply invoke reliance on mere representations of their accountants or authorized representatives in order to avoid liability for failure to pay the correct taxes.

As they say, "ignorance of the law excuses no one from compliance therewith." In order to be liable, it is enough that the taxpayer knows his or her obligation to file the required return and he has failed to comply thereto in the manner required by law.

Evidently, it is imperative for individual taxpayers like professionals to be knowledgeable with their tax obligations, to be compliant with tax rules and regulations, and to be responsible for all information reported in his or her ITR.

And as previously mentioned, the "Doctrine of Willful Blindness" is already part of our jurisprudence, and it can be used as a precedent for future tax evasion cases.

(The author is a tax manager at the Cebu and Davao Branches of Punongbayan&Araullo, the Philippine member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail Stephen.Yu@ph.gt.com or call +63 32 233-0574.)

source: Businessworld

CAR requirement on stock share transfer

IN THE course of the Corona impeachment trial in 2012, Senate President Juan Ponce Enrile and Bureau of Internal Revenue (BIR) Commissioner Kim Jacinto-Henares came to a disagreement on whether the National Internal Revenue Code, as amended (NIRC), requires that a Certificate Authorizing Registration (CAR) should be issued prior to recording any transfer by a Philippine resident of shares of stock not traded in the Stock Exchange. While Commissioner Jacinto-Henares was of the opinion that a CAR is required, the Senate President’s position was that there is no law imposing such a requirement.

Sometime in August 2012, the BIR issued Revenue Memorandum Circular No. 37-2012 (RMC 37-2012) for the purpose of clarifying Section 11 of Revenue Regulations No. 06-08 (RR No. 06-2008). In brief, Section 11 prohibits the registration of any sale, exchange, transfer or similar transaction conveying ownership or title to any share of stock unless receipts of payment of the required taxes (e.g., capital gains tax) are filed with and recorded by the stock transfer agent or corporate secretary. RMC 37-2012 clarifies this Section 11 in that, not only must receipt of payments of tax be filed with the corporate secretary, but "in order to transfer ownership of shares of stock not traded in the Stock Exchange, it is necessary to secure a CAR (Certificate Authorizing Registration)" from the BIR.

Nature of Shares of Stock. Shares of stock are personal property of the stockholder, who as owner has the inherent right to transfer them at will, without unreasonable restrictions. This principle has been upheld and recognized by the Supreme Court, which has repeatedly ruled that a reasonable restriction on the transfer of shares must have its source in legislative enactments and that the right of a transferee/assignee/buyer to have stocks transferred to his name is an inherent right flowing from ownership of the stocks. The Corporation Code makes the qualification, however, that no transfer of shares shall be valid except as between parties until the transfer has been duly recorded in the books of the corporation (i.e., stock and transfer book). Thus, until the name of the transferee is recorded, the corporation is not obliged to recognize the transferee as a stockholder and accord such transferee the rights of a stockholder, such as notice of stockholders’ meetings and voting rights.

In issuing RMC 37-2012, it appears that the BIR is effectively imposing a restraint on the free transferability of shares. This imposition restricting the transfer of shares, however, should not be countenanced as it has not been authorized by legislative enactment. While revenue regulations, as administrative regulations, have been found by the Supreme Court to have the force and effect of law for as long as they do not contravene any statute or the Constitution, a memorandum circular has been held to be merely interpretative in nature and should simply prescribe guidelines to the law which an administrative agency is tasked to enforce.

Existing Legislative Authority. Nevertheless, there are instances wherein the NIRC requires presentment of a CAR prior to the registration of a transfer of shares of stock. These include transfers of shares of stock under Title III of the NIRC (i.e., Estate and Donor’s Taxes), and Section 42(E). The latter provides that a transfer by a non-resident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in the books of the corporation unless a CAR has been secured. Note that this legislative imposition is placed on transfers by non-resident aliens or foreign corporations only while under RR No. 06-2008, for all other transfers of shares of stock, presentment of receipts of payment of the required taxes to the corporate secretary is all that is necessary to register the transfer in the books of the corporation.

Now, with RMC 37-2012, all transfers of shares of stock not traded in the Stock Exchange, regardless of the nationality of the transferor, requires presentment of a CAR before the transfer can be recorded. Arguably, RMC 37-2012 imposes an additional burden not authorized by legislative enactment and effectively contravenes the principle of free transferability of shares espoused in the Corporation Code. Until a CAR is secured, the transfer cannot be recognized by the corporate secretary even if the stockholder has already provided the receipts proving payment of the required taxes, which is all that was previously required by RR No. 06-2008.

Ultimately, it is the transferee who will be prejudiced because although the payment for shares has been made and there is proof of payment of required taxes, until the CAR can be presented to the corporate secretary, the corporation will not be bound to accord the transferee the rights of a stockholder.

Although intended to ensure the proper payment of taxes, RMC 37-2012 goes beyond legislative intent, and should therefore be re-examined.

Diana G. Dizon is an associate of Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW). She can be contacted at 830.8000 or via email at dgdizon@accralaw.com.

source:  Businessworld Column of Amicus Curiae

Fair value taxation for sale of shares by: Ed Warren L. Balauag

AS WITH most other transactions, selling or other disposition of shares is a taxable event.

A final tax or capital gains tax (CGT), depending on the amount of net gain realized during the taxable year, is imposed on the sale, barter, exchange or other disposition of shares of stock not traded through the Local Stock Exchange (LSE). If the net capital gain is not over P100,000, a rate of 5% is imposed. On the other hand, if the net capital gain exceeds P100,000, the rate on the excess is 10%.
 
Note that CGT is also applicable on shares listed in the LSE in cases where these shares are not sold through the stock exchange. The sale of a listed share is also subject to CGT if the listed company fails to comply with the minimum requirement for listing; and with the minimum amount of publicly traded shares.

The taxable gain from the sale is the excess of the amount realized therefrom over the cost of the investment in such shares. A loss arises if there is an excess of the cost of the investment over the amount realized.

On the other hand, the amount realized from the sale or other disposition of the shares is defined as the sum of money received plus the fair market value of the property (other than money) received, if any.

It appears that whatever amount agreed upon between the buyer and the seller shall be accepted as the amount realized for purposes of the determining CGT. It is, but not so.

While the agreed selling price will be the basis for determining the CGT, there is a provision under Section 100 of the Tax Code that donor’s tax shall apply if the consideration in any sale of property is less than the fair market value of the property sold, bartered, or exchanged. The buyer is deemed to have received a gift if the amount he paid is less than the fair market value of the shares.

The donor’s tax is at graduated rates of 0% to 15%. If the buyer is a stranger (not a relative of the seller), the donor’s tax is fixed at 30%. Since in most cases, the donor’s tax will be higher than the capital gains tax, the sellers would opt to sell at the fair market value and be subject to the lower capital gains tax.

So what is the fair market value of the shares?

Previously, the Bureau of Internal Revenue (BIR) issued various regulations and rulings including the comprehensive regulations on sale of shares, Revenue Regulation No. (RR) 06-2008, wherein the fair market value in the case of shares of stock not listed and traded in the local stock exchanges is the book value of the shares of stock as shown in the financial statements (FS) nearest to the date of sale duly certified by an independent certified public accountant.

Under these rules, whatever book value shown in the FS will be accepted regardless of the method of valuation adopted by the company pursuant to the accounting standards.

In the recently issued RR 06-2013, however, the BIR prescribed the use of the Adjusted Net Asset Method whereby all assets and liabilities are adjusted to fair market values. The net of adjusted assets minus the liability values is the indicated value of the equity.

In case of assets in the form of real property, the appraised value at the time of sale shall be the highest of the following: a) the fair market value as determined by the Commissioner; or b) the fair market value as shown in the schedule of valued fixed by the provincial and city assessors; or c) the fair market value as determined by the independent appraiser.

RR 06-2013 illustrates this in the case of Mr. X who sold on April 30, 2013, 5000 shares of stock of "A Corporation".

"A Corporation" has 10,000 outstanding shares. The total assets and liabilities of "A Corporation" in its latest audited financial statements (AFS) are P25 million and P5 million respectively, resulting to a net asset of P20 million.

It was assumed that the book value of all its assets and liabilities is also the market value with the exception of its real property. Supposing the market values of the real properties of "A Corporation" are as follows: (see table).

    Book Value per AFS    Monetary Value per Tax Declaration    Zonal      Valuation    Independent Appraiser    Highest of the Three    Adjustment
Land A      2,000,000     2,500,000     5,000,000    6,000,000    6,000,000    4,000,000
Land B     2,000,000      2,200,000     4,000,000    3,500,000    4,000,000     2,000,000
Building A    1,000,000    2,400,000     3,000,000    3,000,000    2,000,000
Building B    500,000      2,000,000      1,950,000    2,000,000    1,500,000
TOTAL        5,500,000     15,000,000    9,500,000


Based on the table above, the adjusted net asset is P29.5 million, computed as total assets of P25 million plus adjustment of P9.5 million less total liabilities of P5 million.

As such, with the adjusted value per share of stock at P2,950, the fair market value of the shares sold was P14.75 million, computed as 5000 shares at P2,950 per share. If there are no adjustments, the fair market value of the shares sold will only be P10 million, computed as 5000 shares at P2,000 per share.

With the new definition of fair market value, expect higher taxes will be collected on the sale, barter, exchange or other disposition of shares of stock not traded through the LSE, as is probably the objective of the BIR when it issued the new regulations.

In addition to the higher taxes that will be paid, there is the additional burden to have the assets and liabilities of the company revalued to arrive at the fair market value prescribed in this new regulations.

The process will neither be simple nor cheap. And it cannot be avoided.

The reappraisal requires the engagement of an independent appraiser. It is a good thing the new RR did not specifically mention that an FS using the Adjusted Net Asset Method is required to be certified by an independent accountant. Or is it?

And how often should there be a reappraisal? The old regulations accept an FS nearest the date of sale. Under the new regulations, would a reappraisal be required every time there is a sale of the shares?

As discussed above, the coverage of this regulation is not limited to shares not listed in the LSE. It also covers listed shares but which are not sold through the LSE. The definition of "shares of stock" actually include, in addition to shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership, joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.

Sale transactions, therefore, will not be infrequent. So, who will bear the cost of the reappraisal? Based on the rules, this cannot be done away with. The fair market value of the shares will always have to be determined every time there is a sale. Or at the very least once a year, if the BIR will subsequently clarify. Should all companies therefore have on hand every year a balance sheet at fair value?

These are just some of the issues that may need to be further clarified. But for now, individuals and corporations must note that RR 06-2013 took effect on April 24, 2013 following its publication on the same d ate in a newspaper of general circulation in the Philippines. As the effectivity is immediate, all sales of shares on April 24 and onwards would require determination of the fair market value as prescribed in the regulations.

BIR issues new tax rules

INDIVIDUALS employed by foreign governments, embassies, diplomatic missions, or international organizations in the country are not exempted from income taxes, the Bureau of Internal Revenue (BIR) said.

Revenue Regulations (RR) 7-2013, dated April 29 and published yesterday, provides guidelines for the abatement of applicable surcharges, interest, and compromise penalties for the filing of tax returns.

Earlier in April, the BIR issued Revenue Memorandum Circular (RMC) 31-2013, which clarified the liabilities of Filipino and alien employees employed by foreign governments, embassies, diplomatic missions and international organizations in the Philippines. The April 12 circular specified the types of individuals to be granted tax perks.

Those not granted such exemptions must file their income tax returns (ITRs) and pay the tax due thereon on or before the 15th day of April following the close of the taxable year.

"Upon the issuance of RMC 31-2013, the BIR has received numerous requests from embassies and international organizations for the abatement of surcharges, interests, and compromise penalties which will be imposed on the taxes due from their employees who have yet to file their 2012 tax returns and those who ought to amend their tax returns to cover tax deficiencies," RR 7-2013 notes.

"In the exercise of the power of the Commissioner of Internal Revenue to abate the payment of tax liabilities ... these regulations are being issued...," it adds.

The regulations state that the employers of the concerned individuals must submit to the BIR, before May 10, a summary list of their employees as of December 31, 2012. Only those individuals that appear in the lists may avail of the abatement of late charges.

Employees who failed to file their ITRs for the 2012 taxable year, or did not declare the correct amount of income, may file their ITRs or amend these and pay the taxes due thereon on or before May 15.

"No surcharges and interests ... shall be imposed. Further, no compromise penalty ... shall be assessed upon filing thereof," the RR states.

To qualify for the abatement, however, the individuals must be registered with the BIR, must have not been issued any tax discrepancy notices in 2012, and were not the subject of any criminal case for any offenses under the Tax Code last year.

source:  Businessworld