THE HUGE amount of P1.2 trillion for the
national budget set by Congress for this year has placed a heavy burden
on the Bureau of Internal Revenue (BIR) to further intensify its revenue
collection efforts. In view of the present administration’s policy of
not imposing new taxes, the BIR has to resort to other courses of
actions to help meet this revenue target. One of the recent measures
undertaken by the BIR is strengthening its regulatory and monitoring
powers over tax-exempt entities, ensuring that the conditions for their
tax-exempt status are properly complied with and that they are not
simply used as instruments for tax avoidance. Specifically, these are
the entities enumerated under Section 30 of the Tax Code, consisting of
nonstock, nonprofit corporations and associations organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes or for rehabilitation of veterans; and nonstock and
nonprofit educational institutions, among others, which are generally
exempt from income tax.
The exemption granted under Section 30 is
not automatic since it is still incumbent upon the concerned nonprofit,
nonstock entity to prove that it is qualified for such exemption. Thus,
entities falling under this section are still required to secure a
ruling from the BIR confirming their tax-exempt status. In a sense, such
ruling offers them a certain level of protection in the event of a
regular audit of their books by the BIR.
Generally, the tax exemption ruling, once issued, is considered valid
and subsisting for the life of the nonstock, nonprofit entity covered by
it. It becomes invalid only if the facts on which the tax exemption
ruling was based are found to be inaccurate or no longer subsist. Thus,
revalidation of the tax exemption ruling was not necessary as a matter
of practice.
However, the continuing validity of tax exempt rulings was somehow
changed in the case of proprietary nonprofit, nonstock hospitals, which
are subject to a preferential income tax rate of 10% under Section 27
(B) of the Tax Code. These entities were able to secure tax exemption
rulings under Section 30 of the Tax Code because they are also operated
for charitable purposes or for promotion of social welfare and thus,
exempt from corporate income tax under Section 30.
In the case of Commissioner of Internal Revenue vs. St. Luke’s Medical
Center, G.R. No. 195909, Sept. 26, 2012, the Supreme Court held that a
proprietary nonprofit hospital shall be exempt under Section 30 provided
it is a nonstock corporation or association, it is organized and
operated exclusively for charitable purposes, and no part of its net
income or assets shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Organizational test requires that the constitutive documents of the
corporation exclusively limit its purposes to activities exempted by
law, while operational test mandates that the regular activities shall
be exclusively devoted to the accomplishment of its purposes. The
corporation is considered noncompliant with the operational test if a
substantial part of its operations are considered “activities conducted
for profit.”
As a consequence of this decision, the BIR issued Revenue Memorandum
Circular (RMC) No. 4-2013 dated Jan. 11, 2013, which essentially revoked
all tax exempt rulings issued to proprietary nonprofit hospitals prior
to Nov. 1, 2012, and required them to secure a revalidated tax exemption
ruling/certificate. Under this RMC, applications for tax exempt ruling
or revalidation shall be filed with the Revenue District Office (RDO)
where the entity is registered, supported by copies of their latest
articles of incorporation and by-laws duly certified by the Securities
and Exchange Commission, BIR Certificate of Registration, Tax Clearance
issued by the RDO, Income Tax Return or Annual Information Return,
financial statements for the last three years, and statement of modus
operandi and sources of revenues.
Taking off from RMC 4-2013, the BIR recently released Revenue Memorandum
Order (RMO) No. 20-2013 dated July 22, 2013, which effectively extends
the application of RMC No. 4-2013 to all other nonprofit, nonstock
corporations covered under Section 30. Under RMO 20-2013, nonprofit,
nonstock corporations and associations are required to secure a tax
exemption ruling before they can avail of the exemption benefit under
Section 30. In the case of corporations and associations which were
already issued a tax exemption ruling prior to June 30, 2013, they are
required to secure a revalidation of their existing ruling which are
given a validity period of only up to Dec. 31, 2013. The processing of
the applications for new ruling or revalidation shall follow the same
procedures and requirements prescribed under RMC 4-2013 as discussed
above. In addition, any changes in the articles of incorporation and
by-laws of the entity must be certified by an executive officer, while
salaries and compensation of the board of trustees should be certified
by the Treasurer.
For nonstock, nonprofit educational institutions, they must have the
necessary permit/accreditation to operate as an educational institution
issued by CHEd, DepEd or TESDA, which shall be accompanied by a
certificate of operation/good standing issued by the appropriate
government agency if the permit/accreditation was issued more than five
years prior to the application. A certificate of utilization of annual
revenues and assets issued by the Treasurer or his equivalent indicating
the breakdown provided under Section 1.3 of Department of Finance Order
No. 137-87 is also necessary.
To qualify for exemption under the RMO, the applicant should also meet
the organizational and operational tests as clarified in the St. Luke’s
decision as discussed above, i.e, the purposes of the corporation as
stated in its constitutive documents are exclusively limited to
activities exempted by law, and that a substantial part of its regular
activities are exclusively devoted to the accomplishment of its
nonprofit purposes.
Application for tax exempt ruling or revalidation will undergo a
pre-evaluation process to be conducted by the RDO. If the corporation or
association is found to be disqualified to avail of the exemption, it
shall be properly notified by the RDO. The final decision of the RDO may
be appealed to the Regional Director within 30 days from receipt of the
notice. If denied at the regional level, the corporation or association
shall be assessed accordingly for deficiency income tax, inclusive of
penalties and interest.
Another important feature of RMC 20-2013 is the provision which fixes
the period of validity of tax exempt rulings to only three years from
the date of their issuance, unless sooner revoked or cancelled. The
ruling may be renewed for another three years upon filing of a
subsequent application for tax exemption/ revalidation.
The RMC further imposes as a mandatory condition for exemption the
filing by the corporation of its annual information return, such that
non-filing of said document will result in the automatic forfeiture of
the tax exemption benefit, reckoned from the start of the year of
noncompliance.
It is worthy to note that the tax ruling is a critical document that
serves as basis by counterparties (e.g., banks, suppliers, etc.) to
verify tax exemption.
So while the concerned entities may find these requirements cumbersome,
they are left with no choice but to comply in order to continue enjoying
tax exemption.
For so long, nonprofit, nonstock corporations and associations have
generally enjoyed a period of blissful and peaceful existence, not
having been strictly under the watchful eyes of the BIR. However, with
the recent changes in the BIR’s regulatory policies, they would have to
face the reality that this would soon come to an end. Because tax-exempt
corporations and associations will now be actively regulated and
monitored similar to regular corporations, it would be necessary for
them to review their operations to verify that the conditions for their
exemption are not violated, and that they are fully compliant with their
other tax and statutory reporting obligations.
The author is a director 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 genevieve.m.limbo@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.
source: Businessworld
Wednesday, July 31, 2013
Tuesday, July 30, 2013
In pursuit of taxes: BIR sights real estate practitioners
The real estate industry is one of the fastest growing businesses in
the country today. One only needs to take a quick stroll around the city
to see the new buildings sprouting aplenty amidst several other
commercial and residential developments. As a consequence of this
growth, agricultural lands are converted into commercial and industrial
lots. Indeed, the Philippines appears to be in the midst of a real
estate boom. Thus, it is no wonder that the Bureau of Internal Revenue
would like to have a slice of the pie, so to speak and collect the
proper taxes that may result in the additional income which is a logical
consequence of this boom. This is certainly underscored by issuance of
the BIR of Revenue Regulations No. 10-2013 (RR 10-13).
Under the BIR regulation, starting June 1, 2013, real estate practitioners are now included as among those professionals falling under Section 2.57.2(A)(1) of RR 2-98, as amended by RR 30-2003. This means that Real Estate Service Practitioners (RESPs), consisting of consultants, appraisers, assessors, brokers and salespersons which are duly-registered and licensed pursuant to Republic Act No. 9646 or known as the “Real Estate Service Act of the Philippines” shall be subject to a creditable withholding tax of 15 percent, if the gross income for the current year exceeds P720,000; and 10 percent, if otherwise. In order to determine the applicable tax rate, the real estate practitioner shall periodically disclose his gross income for the current year to the BIR by submitting a sworn declaration.
The issuance of the regulation does not mean that real estate practitioners were not subject to withholding tax on income payments before. Prior to RR 10-13, Section 2.57.2 (A) (1) of Revenue Regulation No. 2-98 already has a catch-all phrase – that “…and all professions requiring government licensure examinations and/or regulated by the Professional Regulations Commission (PRC), Supreme Court, etc.”. Thus, when Republic Act No. 9646 took effect, all licensed real estate practitioners fell squarely on the mentioned provision.
An interesting point, however, lies in Section 3 of RR 10-2013. The said provision states that “Section 2.57.2(G) of RR 2-98, as last amended by RR 14-02, is hereby further amended to read as follows:
Section 2.57.2. – Income payments subject to creditable withholding tax and rates prescribed thereon. – xxx
(G) Income payments to certain brokers and agents. – On gross commissions or service fees of customs, insurance, stock, immigration and commercial brokers, fess of professional entertainers and Real Estate Service Practitioners (RESPS) (i.e. real estate consultants, real estate appraisers and real estate brokers) who failed or did not take up the licensure examination given by and not registered with the Real Estate Service under the Professional Regulations Commission. – 10 percent.”
It appears that the BIR may have sought to clarify what may appear to
be an ambiguous provision of Section 2.57.2 (G) where the term “real
estate” brokers and agents were not qualified, because Section 2.57.2
(A) (1) covers only real estate practitioners that have been
duly-licensed.
Based on the above, even if the real estate practitioner is not licensed or may have failed the licensure examination, the transaction would still be subject to withholding tax. This is consistent with the principle that all income is taxable, unless subject to exemption under the law; even income derived from illegal means.
However, one can see what may appear to be an unintentional consequence of the regulations. Note that under these regulations an unlicensed real estate practitioner who earns gross income of more than seven hundred twenty thousand (P720,000) pesos for the current year shall be taxed at only 10 percent as compared to a licensed real estate practitioner who shall be subject to a higher rate of fifteen percent. In effect, if this ambiguity is left unaddressed, it may discourage real estate practitioners from aspiring to be licensed real estate practitioners in a growing industry that calls for regulation. The Declaration of Policy of RA 9646 (RESA Law) affirmed the State’s commitment “to develop and nurture through proper and effective regulation and supervision a corps of technically competent, responsible and respected professional real estate practitioners whose standards of practice and service shall be globally competitive…xxx.” Real estate practitioners play an essential role in nation building. Their part in the social, political, and economic development of our country is significant because of their sizeable contribution in government income resulting from their real estate transactions.
Nevertheless, the prime consideration of these regulations is essentially the proper collection of taxes. The Bureau of Internal Revenue is aware of the common practice that any person, even if not duly-licensed under the law could still engage in real estate service. Thus, to avoid any traces of doubt or uncertainty, the Bureau of Internal Revenue issued these regulations.
Carissa Ann M. Eñano is a supervisor from the tax group of Manabat Sanagutin & Co. (MS&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com
source: Inquirer
Under the BIR regulation, starting June 1, 2013, real estate practitioners are now included as among those professionals falling under Section 2.57.2(A)(1) of RR 2-98, as amended by RR 30-2003. This means that Real Estate Service Practitioners (RESPs), consisting of consultants, appraisers, assessors, brokers and salespersons which are duly-registered and licensed pursuant to Republic Act No. 9646 or known as the “Real Estate Service Act of the Philippines” shall be subject to a creditable withholding tax of 15 percent, if the gross income for the current year exceeds P720,000; and 10 percent, if otherwise. In order to determine the applicable tax rate, the real estate practitioner shall periodically disclose his gross income for the current year to the BIR by submitting a sworn declaration.
The issuance of the regulation does not mean that real estate practitioners were not subject to withholding tax on income payments before. Prior to RR 10-13, Section 2.57.2 (A) (1) of Revenue Regulation No. 2-98 already has a catch-all phrase – that “…and all professions requiring government licensure examinations and/or regulated by the Professional Regulations Commission (PRC), Supreme Court, etc.”. Thus, when Republic Act No. 9646 took effect, all licensed real estate practitioners fell squarely on the mentioned provision.
An interesting point, however, lies in Section 3 of RR 10-2013. The said provision states that “Section 2.57.2(G) of RR 2-98, as last amended by RR 14-02, is hereby further amended to read as follows:
Section 2.57.2. – Income payments subject to creditable withholding tax and rates prescribed thereon. – xxx
(G) Income payments to certain brokers and agents. – On gross commissions or service fees of customs, insurance, stock, immigration and commercial brokers, fess of professional entertainers and Real Estate Service Practitioners (RESPS) (i.e. real estate consultants, real estate appraisers and real estate brokers) who failed or did not take up the licensure examination given by and not registered with the Real Estate Service under the Professional Regulations Commission. – 10 percent.”
Based on the above, even if the real estate practitioner is not licensed or may have failed the licensure examination, the transaction would still be subject to withholding tax. This is consistent with the principle that all income is taxable, unless subject to exemption under the law; even income derived from illegal means.
However, one can see what may appear to be an unintentional consequence of the regulations. Note that under these regulations an unlicensed real estate practitioner who earns gross income of more than seven hundred twenty thousand (P720,000) pesos for the current year shall be taxed at only 10 percent as compared to a licensed real estate practitioner who shall be subject to a higher rate of fifteen percent. In effect, if this ambiguity is left unaddressed, it may discourage real estate practitioners from aspiring to be licensed real estate practitioners in a growing industry that calls for regulation. The Declaration of Policy of RA 9646 (RESA Law) affirmed the State’s commitment “to develop and nurture through proper and effective regulation and supervision a corps of technically competent, responsible and respected professional real estate practitioners whose standards of practice and service shall be globally competitive…xxx.” Real estate practitioners play an essential role in nation building. Their part in the social, political, and economic development of our country is significant because of their sizeable contribution in government income resulting from their real estate transactions.
Nevertheless, the prime consideration of these regulations is essentially the proper collection of taxes. The Bureau of Internal Revenue is aware of the common practice that any person, even if not duly-licensed under the law could still engage in real estate service. Thus, to avoid any traces of doubt or uncertainty, the Bureau of Internal Revenue issued these regulations.
Carissa Ann M. Eñano is a supervisor from the tax group of Manabat Sanagutin & Co. (MS&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com
source: Inquirer
Wednesday, July 24, 2013
Withholding Tax: Interpretations
UNDER the recently issued Revenue
Regulations (RR) No. 12-2013, an income payment is allowed as a
deduction from the taxpayer’s gross income only if it is shown that the
income tax required to be withheld has been remitted and paid to the
Bureau of Internal Revenue (BIR) in accordance with the withholding tax
regulations. While previously, deductions were allowed even when tax was
not withheld on time but rather paid (together with penalties) during a
tax audit or investigation, the new RR obliterates such exception.
In the aftermath of this recent BIR directive, withholding agents are now expected to be more mindful and hyper-vigilant of their obligation to withhold tax on income payments; otherwise, they face the dire consequence of an expense disallowance. Time and again, the BIR has consistently emphasized that the duty to pay taxes is different and separate from the duty to withhold. Consequently, non-compliance with the directive to withhold taxes gives rise to the imposition of penalties, regardless of the income recipient’s eventual settlement of the correct taxes.
However, how should the regulation be interpreted in light of the specific requirements for deductibility for wages under Section 2.79 (F) of RR 2-98?
Take, for instance, the case of employers with seconded or assigned expatriates, a once minority sector of the labor market that has continued to increase due to international mobility. As with most cross-border transactions, employers have to deal with territorial policies, including all their nuances in a multidimensional context. Confronted by economic and/or legal restrictions, most global conglomerates are often times compelled to keep their expatriates on the foreign head office payroll, as opposed to including them on the local payroll where they have been physically and functionally assigned. Generally, under this arrangement, salaries of expatriates are paid by the foreign entity and credited directly to their individual foreign bank accounts, subject to recharging to or reimbursement by the domestic payroll of assignment costs incurred by the foreign head office.
In the absence of information and control over the compensation paid to expatriates, it would be difficult for the Philippine employer to carry out its withholding tax obligation. Having no reference for calculating the tax due for remittance, the domestic employer needs to wait for the recharge advice from the foreign head office before it can withhold the appropriate taxes.
Strictly speaking, the Philippine employer’s obligation to withhold shall be deemed to arise on the date that it receives the recharge advice from the foreign head office. However, if at year-end, the foreign head office has not recharged the cost to the Philippine employer, the expatriates themselves are expected to report their income and pay the taxes due directly to the BIR by filing their annual income tax return (BIR Form 1700) by April 15 of the following year.
Matters, though, can get complicated if the recharge advice is received only after the taxes have already been settled by the expatriates. In this case, the timing of the cost charging by the foreign head office to the Philippine employer may impact the withholding tax obligation of the employer and its expense deduction for corporate tax purposes.
Thus, oftentimes, the BIR would assess Philippine employers for non-withholding if salary expenses in its books were not subjected to withholding tax. In a worst-case scenario, the employer would face (1) penalties for non-withholding and (2) disallowance of the corporate expense.
These sanctions seem too onerous. The employer is penalized for its inability to comply with the withholding tax requirement resulting from limitations/complications brought about by international mobility, such as the scenario described above. Personally, the BIR should allow for exceptional cases such as this.
Perhaps the expense disallowance and the penalties for non-withholding should not be imposed provided that the employer is able to establish that (a) prior to the recharge, it did not have information or control over the compensation paid to the expatriates, and that (b) the required taxes on compensation have been properly paid by the expatriates.
However, until the BIR categorically excludes compensation income from the coverage of RR 12-2013, it would be most prudent for affected employers to review their current recharging policies against the operational dictates of the law.
With the Philippines geared towards attracting more foreign investments to boost its domestic economy, the bid to formulate sound tax regulations is imperative. Fiscal policies must strategically align with cross-border transactions of multinational companies and the presence of their growing human capital in the Philippines. These policy transformations may not necessarily be in the form of tax incentives or exemptions. Providing clear guidelines may be enough. Perhaps, advocating flexibility and recognizing exceptions to the rules on withholding tax on wages can serve as a good starting point.
The author is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call (02) 845-2728 or e-mail the author at kent.lileo.c.tong@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.
source: Businessworld
In the aftermath of this recent BIR directive, withholding agents are now expected to be more mindful and hyper-vigilant of their obligation to withhold tax on income payments; otherwise, they face the dire consequence of an expense disallowance. Time and again, the BIR has consistently emphasized that the duty to pay taxes is different and separate from the duty to withhold. Consequently, non-compliance with the directive to withhold taxes gives rise to the imposition of penalties, regardless of the income recipient’s eventual settlement of the correct taxes.
However, how should the regulation be interpreted in light of the specific requirements for deductibility for wages under Section 2.79 (F) of RR 2-98?
Take, for instance, the case of employers with seconded or assigned expatriates, a once minority sector of the labor market that has continued to increase due to international mobility. As with most cross-border transactions, employers have to deal with territorial policies, including all their nuances in a multidimensional context. Confronted by economic and/or legal restrictions, most global conglomerates are often times compelled to keep their expatriates on the foreign head office payroll, as opposed to including them on the local payroll where they have been physically and functionally assigned. Generally, under this arrangement, salaries of expatriates are paid by the foreign entity and credited directly to their individual foreign bank accounts, subject to recharging to or reimbursement by the domestic payroll of assignment costs incurred by the foreign head office.
In the absence of information and control over the compensation paid to expatriates, it would be difficult for the Philippine employer to carry out its withholding tax obligation. Having no reference for calculating the tax due for remittance, the domestic employer needs to wait for the recharge advice from the foreign head office before it can withhold the appropriate taxes.
Strictly speaking, the Philippine employer’s obligation to withhold shall be deemed to arise on the date that it receives the recharge advice from the foreign head office. However, if at year-end, the foreign head office has not recharged the cost to the Philippine employer, the expatriates themselves are expected to report their income and pay the taxes due directly to the BIR by filing their annual income tax return (BIR Form 1700) by April 15 of the following year.
Matters, though, can get complicated if the recharge advice is received only after the taxes have already been settled by the expatriates. In this case, the timing of the cost charging by the foreign head office to the Philippine employer may impact the withholding tax obligation of the employer and its expense deduction for corporate tax purposes.
Thus, oftentimes, the BIR would assess Philippine employers for non-withholding if salary expenses in its books were not subjected to withholding tax. In a worst-case scenario, the employer would face (1) penalties for non-withholding and (2) disallowance of the corporate expense.
These sanctions seem too onerous. The employer is penalized for its inability to comply with the withholding tax requirement resulting from limitations/complications brought about by international mobility, such as the scenario described above. Personally, the BIR should allow for exceptional cases such as this.
Perhaps the expense disallowance and the penalties for non-withholding should not be imposed provided that the employer is able to establish that (a) prior to the recharge, it did not have information or control over the compensation paid to the expatriates, and that (b) the required taxes on compensation have been properly paid by the expatriates.
However, until the BIR categorically excludes compensation income from the coverage of RR 12-2013, it would be most prudent for affected employers to review their current recharging policies against the operational dictates of the law.
With the Philippines geared towards attracting more foreign investments to boost its domestic economy, the bid to formulate sound tax regulations is imperative. Fiscal policies must strategically align with cross-border transactions of multinational companies and the presence of their growing human capital in the Philippines. These policy transformations may not necessarily be in the form of tax incentives or exemptions. Providing clear guidelines may be enough. Perhaps, advocating flexibility and recognizing exceptions to the rules on withholding tax on wages can serve as a good starting point.
The author is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call (02) 845-2728 or e-mail the author at kent.lileo.c.tong@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.
source: Businessworld
Thursday, July 11, 2013
BIR sues estate administrator and lawyer for estate tax evasion
From the Bureau of Internal Revenue
The Bureau of Internal Revenue (BIR)
today filed a criminal complaint with the Department of Justice against
Mary Anne A. Abad for one count of willful attempt to evade or defeat
the payment of Estate Tax and for one count of deliberate
failure to file the Estate Tax Return of the Estate of Martiniano G.
Abad, in violation of Sections 254 and 255 of the
National Internal Revenue Code of 1997, as amended (Tax Code).
.
Likewise charged was Atty. Antolin V.
Oliva (ATTY. OLIVA) for for one count of willful attempt to evade or
defeat the payment of Estate Tax of the Estate of Martiniano G. Abad, in
violation of Section254 in relation to Section 253 (b) of the Tax Code.
The investigation of the Estate of
Martiniano G. Abad was prompted by a denunciation letter received by the
Office of the Regional Director on February 10, 2010, with the
information that a certain Martiniano G. Abad died on December 21, 2008,
without a will and left several residential and commercial real
properties with improvements.
Investigation showed that Remedios, wife
of Martiniano, died in 1986 without any estate tax return being filed
by the legal heirs Martiniano and Myrna Abad. Nevertheless, Martiniano
settled the Estate of Remedios in 1997 under the Voluntary Assessment
Program (VAP) of the BIR.
Despite the death of Remedios in 1986,
five Special Powers of Attorney (SPAs) were executed on June 2006
appointing Abad as Attorney-in-Fact of Spouses Martiniano and Remedios
to exercise control and supervision over all the spouses’ properties
located in Manila, Quezon City, Makati, Nueva Ecija, and Laguna valued
at P382.67 million. Oliva notarized the said SPAs wherein he
acknowledged the execution of the documents by, among others, Remedios
who was already dead at that time. Oliva was not a commissioned Notary
Public in 2006.
Martiniano died in December 2008 without
any estate tax return being filed by Myrna, the sole legal heir of both
spouses. On October 2009, notwithstanding the death of Spouses
Martiniano and Remedios, Abad executed five Deeds of Assignment
conveying their properties in favor of Abad Royale Estate, Inc. (AREI)
as payment for the subscription of stocks of the latter. The said
conveyance was exempted from the payment of the corresponding taxes by
BIR Certification Ruling SN No. 391-2009 dated December 29, 2009. AREI
was incorporated in 2010 with the properties so conveyed forming part of
the total assets of the corporation.
With both majority shareholders
Martiniano and Remedios dead, Abad had the controlling shares and
exercised effective “owner-like” rights over the real properties of
AREI. On June 2011, Myrna Abad died intestate. On July 10, 2013, the
BIR revoked the Certification Ruling issued to AREI in view of factual
misrepresentation made in the application for exemption, in particular,
at the time of the execution of the Deeds of Assignment, Spouse
Martiniano and Remedios were already dead making the transfers invalid.
Since no estate tax returns were filed
by Abad for Martiniano and Myrna and with her collective series of acts
of executing the SPAs when one of the principal, Remedios, was already
dead, the transfer of the properties of Martiniano and Remedios Abad to
AREI by virtue of the Deeds of Assignment, and the subsequent
incorporation of AREI, Abad is liable for the payment of estate tax
since she is the person in actual and constructive possession of the
properties of the decedent.
Abad was sued for the payment of the estate tax on the Estate of Martiniano G. Abad amounting to P129.70
million, inclusive of surcharges and interests, and OLIVA for willfully
aiding or abetting in the commission of the crime of attempting to
evade or defeat payment of estate tax.
The case against Abad and Oliva is the 175th filed
under the Run After Tax Evaders (RATE) program of the BIR under the
leadership of Commissioner Kim S. Jacinto-Henares. It is likewise a RATE
case of Revenue Region No. 7, Quezon City.
Friday, July 5, 2013
Local banks told to comply with US tax law
BANKS in the country that transact with US
nationals have been advised under a central bank memorandum to comply
with a United States tax law and be ready to cut ties with uncooperative
American clients in order to avoid hefty penalties.
This, as local bankers are pushing for an easier way to comply with the US’ Foreign Account Tax Compliance Act (FATCA).
Bangko Sentral ng Pilipinas (BSP) Memorandum No. M-2013-030, dated July 1 but posted on the central bank’s Web site only yesterday, reminded all “BSP-supervised institutions” to evaluate if they are covered by FATCA, “study the potential effets of FATCA to their businesses and determine the necessary steps to take to avoid the unfavorable consequences of non-compliance...”
“BSP-supervised institutions, which have determined the applicability of FATCA to them, are also enjoined to establish a policy and prepare their operating systems which would enable them to capture and perform tagging of their account holders subject of the FATCA requirement,” the memoradum read.
Enacted in 2010 as part of the US Hiring Incentives to Restore Employment Act, FATCA is designed to ensure that American citizens and permanent residents pay taxes on their foreign accounts and assets.
Under FATCA, banks outside the US with accounts of American nationals should register with the Internal Revenue Service (IRS) as foreign financial institutions (FFIs). As FFIs, such banks are required to audit their accounts and report those that hold US income.
While the IRS is yet to issue FATCA implementing rules and regulations, banks have until next year to register as FFIs.
Penalties will kick in after that deadline expires. Financial institutions that fail to sign up with the IRS will be slapped with a 30% withholding tax on all their US-sourced income.
“[Complying with FATCA] is ultimately a business decision of banks. FATCA imposes reporting responsibilities upon all banks dealing with customers who are US nationals,” Bangko Sentral ng Pilipinas Deputy Governor Nestor A. Espenilla, Jr., said in a text message yesterday. “Such customers will be expected by banks to give written consent so banks can report to US tax authority; otherwise, banks may be constrained to terminate the relationship.”
Philippine banks, however, find it difficult to comply with FATCA under the country’s strict confidentiality laws. Among other relevant Philippine laws, Republic Act 1405 or the Law on Secrecy of Bank Deposits provides that “all deposits of whatever nature with banks or banking institutions in the Philippines...are hereby considered as of an absolutely confidential nature,” except in a few circumstances.
Hence, Mr. Espenilla said, “The BAP (Bankers’ Association of the Philippines) is requesting an alternative reporting mechanism through an intergovernmental agreement.” The banks’ proposal, he said, should make it somewhat “easier” for them to comply with the US law’s reporting requirements. “The BSP has endorsed the matter to the BIR (Bureau of Internal Revenue) for consideration...” he said. -- Ann Rozainne R. Gregorio
source: Businessworld
This, as local bankers are pushing for an easier way to comply with the US’ Foreign Account Tax Compliance Act (FATCA).
Bangko Sentral ng Pilipinas (BSP) Memorandum No. M-2013-030, dated July 1 but posted on the central bank’s Web site only yesterday, reminded all “BSP-supervised institutions” to evaluate if they are covered by FATCA, “study the potential effets of FATCA to their businesses and determine the necessary steps to take to avoid the unfavorable consequences of non-compliance...”
“BSP-supervised institutions, which have determined the applicability of FATCA to them, are also enjoined to establish a policy and prepare their operating systems which would enable them to capture and perform tagging of their account holders subject of the FATCA requirement,” the memoradum read.
Enacted in 2010 as part of the US Hiring Incentives to Restore Employment Act, FATCA is designed to ensure that American citizens and permanent residents pay taxes on their foreign accounts and assets.
Under FATCA, banks outside the US with accounts of American nationals should register with the Internal Revenue Service (IRS) as foreign financial institutions (FFIs). As FFIs, such banks are required to audit their accounts and report those that hold US income.
While the IRS is yet to issue FATCA implementing rules and regulations, banks have until next year to register as FFIs.
Penalties will kick in after that deadline expires. Financial institutions that fail to sign up with the IRS will be slapped with a 30% withholding tax on all their US-sourced income.
“[Complying with FATCA] is ultimately a business decision of banks. FATCA imposes reporting responsibilities upon all banks dealing with customers who are US nationals,” Bangko Sentral ng Pilipinas Deputy Governor Nestor A. Espenilla, Jr., said in a text message yesterday. “Such customers will be expected by banks to give written consent so banks can report to US tax authority; otherwise, banks may be constrained to terminate the relationship.”
Philippine banks, however, find it difficult to comply with FATCA under the country’s strict confidentiality laws. Among other relevant Philippine laws, Republic Act 1405 or the Law on Secrecy of Bank Deposits provides that “all deposits of whatever nature with banks or banking institutions in the Philippines...are hereby considered as of an absolutely confidential nature,” except in a few circumstances.
Hence, Mr. Espenilla said, “The BAP (Bankers’ Association of the Philippines) is requesting an alternative reporting mechanism through an intergovernmental agreement.” The banks’ proposal, he said, should make it somewhat “easier” for them to comply with the US law’s reporting requirements. “The BSP has endorsed the matter to the BIR (Bureau of Internal Revenue) for consideration...” he said. -- Ann Rozainne R. Gregorio
source: Businessworld
Banks required to submit tax returns
BANKS and non-banks performing
quasi-banking functions must submit proof of their remittance of taxes
paid on the interest income derived from their deposits with the Bangko
Sentral ng Pilipinas (BSP).
Memorandum No. M-2013, issued by the BSP’s supervision and examination sector last July 1, said these entities must submit to the central bank documents on their remittance to the Bureau of Internal Revenue (BIR) of gross receipts taxes paid on interest income received from the central bank.
The issuance said these documents may be in the form of “tax returns and breakdown/schedules,” among others, providing proof that the institutions concerned have settled the tax liabilities due on income derived from interest payments by the central bank on their respective placements.
The BSP required the entities to submit proofs of remittance of taxes due from interest income received during the calendar or fiscal years 2009 to 2013.
Documents covering interest income gained in year 2009 must be submitted to the central bank on or before July 22, the issuance said. The schedules for income received during the other covered years are as follows: by October 31 for 2010; by Dec. 31 for 2011; by March 31, 2014 for 2012; and by June 30, 2014 for 2013. -- Bettina Faye V. Roc
source: Businessworld
Memorandum No. M-2013, issued by the BSP’s supervision and examination sector last July 1, said these entities must submit to the central bank documents on their remittance to the Bureau of Internal Revenue (BIR) of gross receipts taxes paid on interest income received from the central bank.
The issuance said these documents may be in the form of “tax returns and breakdown/schedules,” among others, providing proof that the institutions concerned have settled the tax liabilities due on income derived from interest payments by the central bank on their respective placements.
The BSP required the entities to submit proofs of remittance of taxes due from interest income received during the calendar or fiscal years 2009 to 2013.
Documents covering interest income gained in year 2009 must be submitted to the central bank on or before July 22, the issuance said. The schedules for income received during the other covered years are as follows: by October 31 for 2010; by Dec. 31 for 2011; by March 31, 2014 for 2012; and by June 30, 2014 for 2013. -- Bettina Faye V. Roc
source: Businessworld
Tax returns required for interest income earned from BSP
BANKS AND non-banks performing
quasi-banking functions must submit proof of their remittance of taxes
paid on the interest income derived from their deposits with the Bangko
Sentral ng Pilipinas (BSP).
Memorandum No. 031-2013, issued by the BSP's supervision and examination sector last July 1, said these entities must submit to the central bank documents proving their remittance to the Bureau of Internal Revenue (BIR) of gross receipts taxes (GRT) paid on interest income received from the BSP.
The central bank pays interest on banks' and non-banks' placements in its facilities. These, among others, include its repurchase and reverse repurchase facilities, which are currently paid 5.5% and 3.5% in interest, respectively.
Placements in the special deposit account (SDA) facility, meanwhile, are paid 2% in interest.
According to the Tax Code, banks and non-banks conducting quasi-banking functions, such as the issuance of financial instruments to borrow funds, are subject to the GRT.
GRT is a form of percentage tax, which is defined as a business tax imposed on persons or entities who sell or lease goods or services in the course of trade or business in the Philippines.
Banks lend funds out of clients' deposits while non-bank financial intermediaries lend funds or purchase receivables.
The Tax Code states that banks must pay the GRT on their income resulting from interest, commissions and discounts from their lending activities as well as income from financial leasing.
The rate of the tax due is computed on the basis of remaining maturities of instruments from which such receipts are derived: 5% for income derived from instruments with a maturity period of five years or less, and 1% from those that mature in more than five years.
The issuance said the documents to be submitted to the BSP may be in the form of "tax returns and breakdown/schedules," among others, providing proof that the institutions concerned have settled the tax liabilities due on the interest income.
The BSP required entities to submit proof of remittance of taxes received during the calendar or fiscal year 2009 by July 22.
The deadlines for income earned in other years are: Oct. 31, 2013 for 2010; Dec. 31, 2013 for 2011; March 31, 2014 for 2012; and June 30, 2014 for 2013. -- Bettina Faye V. Roc
source: Businessworld
Memorandum No. 031-2013, issued by the BSP's supervision and examination sector last July 1, said these entities must submit to the central bank documents proving their remittance to the Bureau of Internal Revenue (BIR) of gross receipts taxes (GRT) paid on interest income received from the BSP.
The central bank pays interest on banks' and non-banks' placements in its facilities. These, among others, include its repurchase and reverse repurchase facilities, which are currently paid 5.5% and 3.5% in interest, respectively.
Placements in the special deposit account (SDA) facility, meanwhile, are paid 2% in interest.
According to the Tax Code, banks and non-banks conducting quasi-banking functions, such as the issuance of financial instruments to borrow funds, are subject to the GRT.
GRT is a form of percentage tax, which is defined as a business tax imposed on persons or entities who sell or lease goods or services in the course of trade or business in the Philippines.
Banks lend funds out of clients' deposits while non-bank financial intermediaries lend funds or purchase receivables.
The Tax Code states that banks must pay the GRT on their income resulting from interest, commissions and discounts from their lending activities as well as income from financial leasing.
The rate of the tax due is computed on the basis of remaining maturities of instruments from which such receipts are derived: 5% for income derived from instruments with a maturity period of five years or less, and 1% from those that mature in more than five years.
The issuance said the documents to be submitted to the BSP may be in the form of "tax returns and breakdown/schedules," among others, providing proof that the institutions concerned have settled the tax liabilities due on the interest income.
The BSP required entities to submit proof of remittance of taxes received during the calendar or fiscal year 2009 by July 22.
The deadlines for income earned in other years are: Oct. 31, 2013 for 2010; Dec. 31, 2013 for 2011; March 31, 2014 for 2012; and June 30, 2014 for 2013. -- Bettina Faye V. Roc
source: Businessworld
Thursday, July 4, 2013
Rescission of a contract to buy and sell: Uncovering tax implications
RELATIONSHIPS and agreements may at times
end on a sour note. And more often, when nothing more can be done,
parties have no better option but to release each other from their
obligations, pick up the pieces, and look forward to move on with
anticipation at restoring the status quo.
Legally, the right to rescind or to nullify the agreement is an available remedy to the injured party. The wronged party is entitled to apply with the court for a decree of rescission. However, the right proceeds from a judicial pronouncement, and not from the parties’ prerogative to walk-away from the obligation. To enforce the rescission against the whole world, a binding court decision must be secured.
Such is the case of two corporations that entered into a contract to buy and sell real properties. For failure of one of the parties to comply with its undertakings, a judicial decree to declare the contract void (or rescission of contract) was secured by the wronged party. Both parties were directed by the court to return whatever they had received from each other, with one party returning the purchase price, and the other party reconveying the titles over the real properties.
Ordinarily, restoration would have meant a mere handing over of wares. In a twist, title and ownership over the disputed lands had already been transferred to the buyer. And consequently, to return the disputed lands to the seller, a Certificate Authorizing Registration (CAR) must be obtained from the Bureau of Internal Revenue for the cancellation of titles over the lands and retransfer of the registration to the seller. For the CAR to be issued, the corresponding taxes, i.e. capital gains tax and documentary stamp tax, must be paid or a tax exemption ruling must be obtained.
The gnawing question is whether the reconveyance of the parcels of land should be exempt from the payment of capital gains tax (CGT) and documentary stamp tax (DST).
In the affirmative, the BIR favorably granted exemption from payment of CGT and DST over the reconveyance of the real properties in favor of the seller. The BIR’s position is underpinned by the principle that rescission of a contract is tantamount to declaring a contract void from its inception, as if no contract existed between the parties. In effect, rescission of a contract would not give rise to a taxable event. This principle is supported by the argument that first, no income is realized from a sale or exchange that has been declared void, and second, the return of the property is not for monetary consideration, but merely an acknowledgment of the title or ownership of the original owner of the property.
However, the BIR went a step further to clarify the issue on payment of DST, and this is where the fine line of distinction is drawn. DST is levied on the exercise of certain privileges, regardless of the legal status of the transactions that gave rise to it -- that is, irrespective of whether the contract was declared void or unenforceable. The operative impact of the DST is that it is levied upon the issuance of the specific instrument or document, and not on the legal transaction or agreement evidenced by the document. Thus, DST previously paid on the initial transfer of title is no longer refundable by the BIR, a judicial rescission of the Contract to Buy and Sell notwithstanding.
Perhaps a good lesson that can be culled from this common tale of relations gone wrong would be for the aggrieved party not to forget to seek the recovery of whatever taxes and costs that it had to pay to the BIR in carrying out the original transfer of the property to the defaulting buyer. This way the aggrieved party is fully restored to its former status.
After all, life is full of uncertainties. The least that we can do is to plan ahead, strategize our backup plans, and identify our exit mechanisms to avoid falling into economic traps and to cushion potential detrimental effects.
The author is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to ma.teresa.t.ledesma@ph.pwc.com.
Legally, the right to rescind or to nullify the agreement is an available remedy to the injured party. The wronged party is entitled to apply with the court for a decree of rescission. However, the right proceeds from a judicial pronouncement, and not from the parties’ prerogative to walk-away from the obligation. To enforce the rescission against the whole world, a binding court decision must be secured.
Such is the case of two corporations that entered into a contract to buy and sell real properties. For failure of one of the parties to comply with its undertakings, a judicial decree to declare the contract void (or rescission of contract) was secured by the wronged party. Both parties were directed by the court to return whatever they had received from each other, with one party returning the purchase price, and the other party reconveying the titles over the real properties.
Ordinarily, restoration would have meant a mere handing over of wares. In a twist, title and ownership over the disputed lands had already been transferred to the buyer. And consequently, to return the disputed lands to the seller, a Certificate Authorizing Registration (CAR) must be obtained from the Bureau of Internal Revenue for the cancellation of titles over the lands and retransfer of the registration to the seller. For the CAR to be issued, the corresponding taxes, i.e. capital gains tax and documentary stamp tax, must be paid or a tax exemption ruling must be obtained.
The gnawing question is whether the reconveyance of the parcels of land should be exempt from the payment of capital gains tax (CGT) and documentary stamp tax (DST).
In the affirmative, the BIR favorably granted exemption from payment of CGT and DST over the reconveyance of the real properties in favor of the seller. The BIR’s position is underpinned by the principle that rescission of a contract is tantamount to declaring a contract void from its inception, as if no contract existed between the parties. In effect, rescission of a contract would not give rise to a taxable event. This principle is supported by the argument that first, no income is realized from a sale or exchange that has been declared void, and second, the return of the property is not for monetary consideration, but merely an acknowledgment of the title or ownership of the original owner of the property.
However, the BIR went a step further to clarify the issue on payment of DST, and this is where the fine line of distinction is drawn. DST is levied on the exercise of certain privileges, regardless of the legal status of the transactions that gave rise to it -- that is, irrespective of whether the contract was declared void or unenforceable. The operative impact of the DST is that it is levied upon the issuance of the specific instrument or document, and not on the legal transaction or agreement evidenced by the document. Thus, DST previously paid on the initial transfer of title is no longer refundable by the BIR, a judicial rescission of the Contract to Buy and Sell notwithstanding.
Perhaps a good lesson that can be culled from this common tale of relations gone wrong would be for the aggrieved party not to forget to seek the recovery of whatever taxes and costs that it had to pay to the BIR in carrying out the original transfer of the property to the defaulting buyer. This way the aggrieved party is fully restored to its former status.
After all, life is full of uncertainties. The least that we can do is to plan ahead, strategize our backup plans, and identify our exit mechanisms to avoid falling into economic traps and to cushion potential detrimental effects.
The author is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to ma.teresa.t.ledesma@ph.pwc.com.
Rescission of a contract to buy and sell: Uncovering tax implications
RELATIONSHIPS and agreements may at times
end on a sour note. And more often, when nothing more can be done,
parties have no better option but to release each other from their
obligations, pick up the pieces, and look forward to move on with
anticipation at restoring the status quo.
Legally, the right to rescind or to nullify the agreement is an available remedy to the injured party. The wronged party is entitled to apply with the court for a decree of rescission. However, the right proceeds from a judicial pronouncement, and not from the parties’ prerogative to walk-away from the obligation. To enforce the rescission against the whole world, a binding court decision must be secured.
Such is the case of two corporations that entered into a contract to buy and sell real properties. For failure of one of the parties to comply with its undertakings, a judicial decree to declare the contract void (or rescission of contract) was secured by the wronged party. Both parties were directed by the court to return whatever they had received from each other, with one party returning the purchase price, and the other party reconveying the titles over the real properties.
Ordinarily, restoration would have meant a mere handing over of wares. In a twist, title and ownership over the disputed lands had already been transferred to the buyer. And consequently, to return the disputed lands to the seller, a Certificate Authorizing Registration (CAR) must be obtained from the Bureau of Internal Revenue for the cancellation of titles over the lands and retransfer of the registration to the seller. For the CAR to be issued, the corresponding taxes, i.e. capital gains tax and documentary stamp tax, must be paid or a tax exemption ruling must be obtained.
The gnawing question is whether the reconveyance of the parcels of land should be exempt from the payment of capital gains tax (CGT) and documentary stamp tax (DST).
In the affirmative, the BIR favorably granted exemption from payment of CGT and DST over the reconveyance of the real properties in favor of the seller. The BIR’s position is underpinned by the principle that rescission of a contract is tantamount to declaring a contract void from its inception, as if no contract existed between the parties. In effect, rescission of a contract would not give rise to a taxable event. This principle is supported by the argument that first, no income is realized from a sale or exchange that has been declared void, and second, the return of the property is not for monetary consideration, but merely an acknowledgment of the title or ownership of the original owner of the property.
However, the BIR went a step further to clarify the issue on payment of DST, and this is where the fine line of distinction is drawn. DST is levied on the exercise of certain privileges, regardless of the legal status of the transactions that gave rise to it -- that is, irrespective of whether the contract was declared void or unenforceable. The operative impact of the DST is that it is levied upon the issuance of the specific instrument or document, and not on the legal transaction or agreement evidenced by the document. Thus, DST previously paid on the initial transfer of title is no longer refundable by the BIR, a judicial rescission of the Contract to Buy and Sell notwithstanding.
Perhaps a good lesson that can be culled from this common tale of relations gone wrong would be for the aggrieved party not to forget to seek the recovery of whatever taxes and costs that it had to pay to the BIR in carrying out the original transfer of the property to the defaulting buyer. This way the aggrieved party is fully restored to its former status.
After all, life is full of uncertainties. The least that we can do is to plan ahead, strategize our backup plans, and identify our exit mechanisms to avoid falling into economic traps and to cushion potential detrimental effects.
The author is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to ma.teresa.t.ledesma@ph.pwc.com.
Legally, the right to rescind or to nullify the agreement is an available remedy to the injured party. The wronged party is entitled to apply with the court for a decree of rescission. However, the right proceeds from a judicial pronouncement, and not from the parties’ prerogative to walk-away from the obligation. To enforce the rescission against the whole world, a binding court decision must be secured.
Such is the case of two corporations that entered into a contract to buy and sell real properties. For failure of one of the parties to comply with its undertakings, a judicial decree to declare the contract void (or rescission of contract) was secured by the wronged party. Both parties were directed by the court to return whatever they had received from each other, with one party returning the purchase price, and the other party reconveying the titles over the real properties.
Ordinarily, restoration would have meant a mere handing over of wares. In a twist, title and ownership over the disputed lands had already been transferred to the buyer. And consequently, to return the disputed lands to the seller, a Certificate Authorizing Registration (CAR) must be obtained from the Bureau of Internal Revenue for the cancellation of titles over the lands and retransfer of the registration to the seller. For the CAR to be issued, the corresponding taxes, i.e. capital gains tax and documentary stamp tax, must be paid or a tax exemption ruling must be obtained.
The gnawing question is whether the reconveyance of the parcels of land should be exempt from the payment of capital gains tax (CGT) and documentary stamp tax (DST).
In the affirmative, the BIR favorably granted exemption from payment of CGT and DST over the reconveyance of the real properties in favor of the seller. The BIR’s position is underpinned by the principle that rescission of a contract is tantamount to declaring a contract void from its inception, as if no contract existed between the parties. In effect, rescission of a contract would not give rise to a taxable event. This principle is supported by the argument that first, no income is realized from a sale or exchange that has been declared void, and second, the return of the property is not for monetary consideration, but merely an acknowledgment of the title or ownership of the original owner of the property.
However, the BIR went a step further to clarify the issue on payment of DST, and this is where the fine line of distinction is drawn. DST is levied on the exercise of certain privileges, regardless of the legal status of the transactions that gave rise to it -- that is, irrespective of whether the contract was declared void or unenforceable. The operative impact of the DST is that it is levied upon the issuance of the specific instrument or document, and not on the legal transaction or agreement evidenced by the document. Thus, DST previously paid on the initial transfer of title is no longer refundable by the BIR, a judicial rescission of the Contract to Buy and Sell notwithstanding.
Perhaps a good lesson that can be culled from this common tale of relations gone wrong would be for the aggrieved party not to forget to seek the recovery of whatever taxes and costs that it had to pay to the BIR in carrying out the original transfer of the property to the defaulting buyer. This way the aggrieved party is fully restored to its former status.
After all, life is full of uncertainties. The least that we can do is to plan ahead, strategize our backup plans, and identify our exit mechanisms to avoid falling into economic traps and to cushion potential detrimental effects.
The author is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to ma.teresa.t.ledesma@ph.pwc.com.
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