THE TAX bureau has scrapped the advanced
income tax and value-added tax (VAT) or percentage tax payment scheme
for "privilege store" or "tiangge" operators, instead tightening rules
on the taxation of their transactions.
The Bureau of Internal Revenue’s (BIR)
Revenue Regulations (RR) 16-2013, dated Aug. 22 but published in a
newspaper just last Friday, imposes new rules governing the taxation of
persons who sell goods and/or services through the use of privilege
stores.
The new rules take effect on Oct. 12 or 15 days after their publication.
The issuance revokes RR 16-2003 and RR 24-2003, issued on April 29, 2003 and August 29, 2003, respectively.
Both 2003 issuances imposed on tiangge operators a fixed amount of VAT
or percentage tax ranging from P50-P150 per day and income tax of P50
per day.
These fixed amounts were required monthly and in advance by store
operators through the BIR’s authorized agent banks during the entire
duration of the stores’ business operations, and were credited against
the actual business tax and income tax due from the operators for the
period for which the payments were remitted to the BIR.
Under RR 16-2013, the BIR has limited the term "privilege store" to
refer to just stalls or outlets engaged in business for short durations
of time, for a cumulative period not exceeding 15 days.
Those operating these stalls regularly or beyond the 15-day limit will
be considered as regular taxpayers and, as such, must be registered as
persons engaged in trade or business with the BIR.
All persons involved in such tiangge events are required to submit to
the organizers an information statement on their activities indicating
the inclusive dates of business operations and their taxpayer
identification numbers (TIN), among others.
Stall owners are also required to deduct, withhold, and remit to the BIR
the expanded withholding tax due on rental payments they will make to
the event’s organizers.
Under the new rules, privilege store operators are required only to file
income tax returns covering the year the income from the event was
earned.
They must also keep books of accounts and issue receipts or sales
invoices as provided by the exhibitors, and submit a list of sales
during their operation of their stalls within five days after the event.
Because they are not registered as business taxpayers, organizers of
events are required to provide these privilege store operators with
central cash register or point of sale machines, or manual official
receipts or invoices for their use.
Meanwhile, for tenants in such events not qualified as privilege store
operators, they are required to file income, withholding, VAT or
percentage, and other tax returns as scheduled for regular business
taxpayers.
They are likewise obliged to keep books of accounts and issue their own
receipts or invoices at these events, and file other information returns
required by law.
For their part, event organizers must report to the Revenue District
Offices (RDO) having jurisdiction over their events pertinent
information on the establishments involved. They are also obliged to
ensure that tenants in their events are properly registered with the
BIR.
If the property used to host the event is not their own, these
organizers must likewise deduct, withhold, and remit to the BIR the
expanded withholding tax due on rental payments they will pay to the
lessor of the property concerned. -- B.F.V. Roc
source: Businessworld
Sunday, September 29, 2013
Sunday, September 22, 2013
Pacta sunt servanda
THE LATIN title used for this article
translates to “agreements must be kept.” It is a phrase used in
understanding the spirit of treaties and executive agreements among
nations, including double taxation agreements (DTAs), otherwise known as
tax treaties. This is important for foreign corporations or individuals
doing business in other countries. The recent decision of the Supreme
Court in Deutsche Bank AG Manila Branch vs. CIR (G.R. No. 18850,
promulgated Aug. 19, 2013) reminds us of this time-honored Latin maxim.
In the Philippines and under our Tax Code, non-resident foreign corporations or individuals are generally subject to Philippine income tax on Philippine-sourced income. This rule, however, yields to the DTA between the Philippines and the home country of the foreign corporation or individual, particularly where the DTA provides preferential tax rates, or in some cases, tax exemption, on Philippine-sourced income.
Claiming the benefit of any DTA is, however, subject to certain procedural requirements. In Revenue Memorandum Order (RMO) No. 01-2000, dated Nov. 25, 1999, later modified by RMO No. 72-10, dated Aug. 25, 2010, the BIR declared that “it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD) [of the BIR]. In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty.” Thus, RMO 1-2000 required that such application for tax treaty relief (TTRA) “be made at least 15 days before the transaction i.e. payment of dividends, royalties, etc., with all the supporting documents justifying the relief sought.”
In October 2003, Deutsche Bank AG Manila Branch (DB Manila Branch) remitted its 2002 and prior years’ after-tax profits to its home office in Germany and withheld and remitted to the 15% Branch Profit Remittance Tax (BPRT) rate prescribed under the Tax Code. In October 2005 and in the belief that it overpaid the BPRT, DB Manila Branch filed a claim for refund or issuance of tax credit certificate (TCC) with the BIR, and at the same time filed with the ITAD a request for confirmation of its entitlement to the 10% BPRT rate prescribed under the Philippines-Germany DTA. Due to the BIR’s inaction on its claim, DB Manila Branch elevated its claim for refund to the Court of Tax Appeals (CTA).
The CTA denied DB Manila Branch’s claim for refund on the basis that DB Manila Branch’s TTRA was “not filed prior to its payment of the BPRT and actual remittance of its branch profits to DB Germany ... thereby violating the 15-day period mandated under Section III paragraph (2) of RMO 01-2000.” The CTA relied on the earlier case of Mirant (Philippines) Corporation vs. CIR (CTA En Banc Case No. 40, June 7, 2005) wherein the CTA held that a ruling from the ITAD must be secured prior to the availment of a preferential tax rate under a tax treaty. Unsatisfied with the CTA decision, DB Manila Branch filed an appeal with the Supreme Court, which upheld DB Manila Branch’s position and granted the refund. The Supreme Court determined that the “crux of the controversy lies in the implementation of RMO No. 1-2000” and, to this end, disagreed with the CTA’s decision that the prior filing of a TTRA is mandatory, and that non-compliance with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
According to the Supreme Court, “[t]he time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.” The Supreme Court pointed-out that “there is nothing in RMO No.1-2000 which would indicate deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period”, and while the Court recognizes the clear intention of the BIR in implementing RMO No. 1-2000, the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The SC regarded the obligation of the Philippines to comply with a tax treaty to be paramount over the objectives of RMO No. 1-2000. Such failure to abide with its tax treaty obligations would have “negative implications on international relations, and unduly discourage foreign investors. Non-compliance of RMO No. 1-2000 could be remedied through imposition of a fine or penalty, rather than the deprivation of a treaty benefit simply for failing to comply with an administrative issuance.
Indeed, when the Philippines became a signatory to the Vienna Convention on Jan. 27, 1980, it bound itself to honor its contracts in good faith with the international community. The principle of pacta sunt servanda stresses that these pacts and clauses are the law between the parties, and implies that the non-fulfilment of respective obligations is a breach of the pact.
Since pacta sunt servanda is based on good faith, this entitles states to require that obligations be respected and to rely upon the obligations being respected. A state that is a party to the treaty cannot invoke provisions in its Constitution or its domestic laws as an excuse or justification for failure to perform its duty. As a signatory of the Philippines-Germany DTA, the Philippines is required to honor its obligations to provide exceptions to the BPRT rate to DB Manila Branch.
Moreover, Section 2 Article III of the Constitution provides that the Philippines adopts the generally accepted principles of international law as part of the law of the land. By the doctrine of incorporation, the generally accepted principles of international law are automatically part of the laws of the Philippines. Therefore, such failure of the Philippines to uphold the provisions of the Philippines-Germany DTA may have negative economic results, in addition to being a violation of Section 3, Article II of the Constitution.
The pacta sunt servanda rule is the cornerstone of the law of treaties and the Supreme Court, in this latest decision, took the opportunity to reiterate that fulfillment of treaty obligations is essential to stable international relations and promote trust and cooperation between States. It now remains to be seen whether the BIR will review its current policy on tax treaty relief availments, considering that RMO No. 72-2010 (which amended RMO No. 1-2000) specifically provides that all TTRAs should be filed before the occurrence of the first taxable event, and “[f]ailure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA.”
Tesi Lou S. Guanzon is a tax senior director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
source: Businessworld
In the Philippines and under our Tax Code, non-resident foreign corporations or individuals are generally subject to Philippine income tax on Philippine-sourced income. This rule, however, yields to the DTA between the Philippines and the home country of the foreign corporation or individual, particularly where the DTA provides preferential tax rates, or in some cases, tax exemption, on Philippine-sourced income.
Claiming the benefit of any DTA is, however, subject to certain procedural requirements. In Revenue Memorandum Order (RMO) No. 01-2000, dated Nov. 25, 1999, later modified by RMO No. 72-10, dated Aug. 25, 2010, the BIR declared that “it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD) [of the BIR]. In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty.” Thus, RMO 1-2000 required that such application for tax treaty relief (TTRA) “be made at least 15 days before the transaction i.e. payment of dividends, royalties, etc., with all the supporting documents justifying the relief sought.”
In October 2003, Deutsche Bank AG Manila Branch (DB Manila Branch) remitted its 2002 and prior years’ after-tax profits to its home office in Germany and withheld and remitted to the 15% Branch Profit Remittance Tax (BPRT) rate prescribed under the Tax Code. In October 2005 and in the belief that it overpaid the BPRT, DB Manila Branch filed a claim for refund or issuance of tax credit certificate (TCC) with the BIR, and at the same time filed with the ITAD a request for confirmation of its entitlement to the 10% BPRT rate prescribed under the Philippines-Germany DTA. Due to the BIR’s inaction on its claim, DB Manila Branch elevated its claim for refund to the Court of Tax Appeals (CTA).
The CTA denied DB Manila Branch’s claim for refund on the basis that DB Manila Branch’s TTRA was “not filed prior to its payment of the BPRT and actual remittance of its branch profits to DB Germany ... thereby violating the 15-day period mandated under Section III paragraph (2) of RMO 01-2000.” The CTA relied on the earlier case of Mirant (Philippines) Corporation vs. CIR (CTA En Banc Case No. 40, June 7, 2005) wherein the CTA held that a ruling from the ITAD must be secured prior to the availment of a preferential tax rate under a tax treaty. Unsatisfied with the CTA decision, DB Manila Branch filed an appeal with the Supreme Court, which upheld DB Manila Branch’s position and granted the refund. The Supreme Court determined that the “crux of the controversy lies in the implementation of RMO No. 1-2000” and, to this end, disagreed with the CTA’s decision that the prior filing of a TTRA is mandatory, and that non-compliance with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
According to the Supreme Court, “[t]he time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.” The Supreme Court pointed-out that “there is nothing in RMO No.1-2000 which would indicate deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period”, and while the Court recognizes the clear intention of the BIR in implementing RMO No. 1-2000, the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The SC regarded the obligation of the Philippines to comply with a tax treaty to be paramount over the objectives of RMO No. 1-2000. Such failure to abide with its tax treaty obligations would have “negative implications on international relations, and unduly discourage foreign investors. Non-compliance of RMO No. 1-2000 could be remedied through imposition of a fine or penalty, rather than the deprivation of a treaty benefit simply for failing to comply with an administrative issuance.
Indeed, when the Philippines became a signatory to the Vienna Convention on Jan. 27, 1980, it bound itself to honor its contracts in good faith with the international community. The principle of pacta sunt servanda stresses that these pacts and clauses are the law between the parties, and implies that the non-fulfilment of respective obligations is a breach of the pact.
Since pacta sunt servanda is based on good faith, this entitles states to require that obligations be respected and to rely upon the obligations being respected. A state that is a party to the treaty cannot invoke provisions in its Constitution or its domestic laws as an excuse or justification for failure to perform its duty. As a signatory of the Philippines-Germany DTA, the Philippines is required to honor its obligations to provide exceptions to the BPRT rate to DB Manila Branch.
Moreover, Section 2 Article III of the Constitution provides that the Philippines adopts the generally accepted principles of international law as part of the law of the land. By the doctrine of incorporation, the generally accepted principles of international law are automatically part of the laws of the Philippines. Therefore, such failure of the Philippines to uphold the provisions of the Philippines-Germany DTA may have negative economic results, in addition to being a violation of Section 3, Article II of the Constitution.
The pacta sunt servanda rule is the cornerstone of the law of treaties and the Supreme Court, in this latest decision, took the opportunity to reiterate that fulfillment of treaty obligations is essential to stable international relations and promote trust and cooperation between States. It now remains to be seen whether the BIR will review its current policy on tax treaty relief availments, considering that RMO No. 72-2010 (which amended RMO No. 1-2000) specifically provides that all TTRAs should be filed before the occurrence of the first taxable event, and “[f]ailure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA.”
Tesi Lou S. Guanzon is a tax senior director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
source: Businessworld
Monday, September 16, 2013
Appealing a BIR ruling
ASIDE from the pork barrel scam issue, I
think that by now, many taxpayers are aware that the Bureau of Internal
Revenue (BIR) is working doubly hard to attain its collection goal. One
of its strategies to achieve its target is to strictly enforce tax laws.
This has resulted in the denial of request for rulings issued to some
taxpayers, including the rulings on upstream merger (BIR Ruling No.
508-2012, Aug. 3, 2012), deductibility of royalties (BIR Ruling No.
014-2012, Jan. 4, 2012) and NOLCO (BIR Ruling No. 214-2012, March 28,
2012), among others.
Taxpayers who received unfavorable rulings from the BIR may be wondering what their remedy could be. Can they still file a request for reconsideration of the BIR ruling issued to them? Or, can they go directly to the Court of Tax Appeals (CTA) and question the decision of the BIR?
In Department Order No. 23-01, issued by the Department of Finance, a taxpayer who receives an adverse ruling from the BIR may, within 30 days from receipt of such ruling, file a request with the Secretary of Finance to review the opinion of the BIR. The request for review must be in writing and must contain all the information required under said Order. This administrative remedy must be exhausted first before a taxpayer can go to the Court and question the unfavorable ruling issued by the BIR.
In a CTA decision (CTA EB Case No.874), the CTA En Banc ruled that the “jurisprudence have it that before a party is allowed to seek the intervention of the court, it is a pre-condition that he should first avail of all available administrative remedies under the rules. Hence, if a remedy within the administrative machinery can still be resorted to by giving the administrative officer concerned every opportunity to decide on a matter that comes within his jurisdiction, then such remedy should be exhausted first before the court’s judicial power can be sought. The premature invocation of the court’s intervention is lethal to one’s cause of action...”
Hence, a taxpayer can seek the Court’s action only after exhausting all available administrative remedies.
If after filing a request for review with the Secretary of Finance, the taxpayer still receives an unfavorable response, the question then is, where should the taxpayer file the petition for review? Does it now fall under the jurisdiction of the CTA?
Based on Section 7 of Republic Act (RA) No. 1125, as amended by RA No. 9282 (an Act expanding the jurisdiction of the CTA), one of the jurisdictions of the CTA is to review by appeal the “decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue.”
Based on this, it seems that with regard to issues with the BIR, the cases that may be brought to the CTA are not limited to decisions involving disputed assessments or refunds of internal revenue taxes. It may also involve other matters arising under the Tax Code or other laws administered by the BIR. Hence, it appears that the adverse ruling issued by the BIR to a taxpayer may also be filed for appeal with the CTA. The CTA, however, has a different view.
In the same CTA decision, the Court ruled that if the action essentially involves the validity or constitutionality of a law or administrative ruling, the CTA has no authority to rule on it. Instead, the Regional Trial Court (RTC) has jurisdiction over the said issue. Accordingly, the case was dismissed.
The same view was taken by the CTA in CTA Case No. 8360. In this particular case, the petitioner requested a ruling with the BIR to confirm the petitioner’s position that its purchases qualify for value-added tax zero rating. The BIR’s response was negative. The petitioner then filed a Request for Review of the said BIR ruling with the Secretary of Finance.
The Secretary of Finance, in its letter dated Sept. 8, 2011, addressed to the petitioner, affirmed the position of the BIR. The petitioner filed a Petition for Review with the CTA to assail the validity of the said BIR ruling and the letter issued by the Secretary of Finance. The CTA, however, ruled that its jurisdiction to resolve tax disputes, in general, does not include cases where the validity or constitutionality of a law or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function is challenged. Accordingly, the issue pertaining to the validity of the BIR ruling, among others, is beyond the jurisdiction of the CTA.
Other than exhausting all the administrative remedies, taxpayers should be aware of the legal remedies and the proper venue for filing a petition for review. A technicality may lead to the dismissal of a case, or worse, to significant amount of assessment against the taxpayer.
The author is a partner with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.
source: Businessworld
Taxpayers who received unfavorable rulings from the BIR may be wondering what their remedy could be. Can they still file a request for reconsideration of the BIR ruling issued to them? Or, can they go directly to the Court of Tax Appeals (CTA) and question the decision of the BIR?
In Department Order No. 23-01, issued by the Department of Finance, a taxpayer who receives an adverse ruling from the BIR may, within 30 days from receipt of such ruling, file a request with the Secretary of Finance to review the opinion of the BIR. The request for review must be in writing and must contain all the information required under said Order. This administrative remedy must be exhausted first before a taxpayer can go to the Court and question the unfavorable ruling issued by the BIR.
In a CTA decision (CTA EB Case No.874), the CTA En Banc ruled that the “jurisprudence have it that before a party is allowed to seek the intervention of the court, it is a pre-condition that he should first avail of all available administrative remedies under the rules. Hence, if a remedy within the administrative machinery can still be resorted to by giving the administrative officer concerned every opportunity to decide on a matter that comes within his jurisdiction, then such remedy should be exhausted first before the court’s judicial power can be sought. The premature invocation of the court’s intervention is lethal to one’s cause of action...”
Hence, a taxpayer can seek the Court’s action only after exhausting all available administrative remedies.
If after filing a request for review with the Secretary of Finance, the taxpayer still receives an unfavorable response, the question then is, where should the taxpayer file the petition for review? Does it now fall under the jurisdiction of the CTA?
Based on Section 7 of Republic Act (RA) No. 1125, as amended by RA No. 9282 (an Act expanding the jurisdiction of the CTA), one of the jurisdictions of the CTA is to review by appeal the “decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue.”
Based on this, it seems that with regard to issues with the BIR, the cases that may be brought to the CTA are not limited to decisions involving disputed assessments or refunds of internal revenue taxes. It may also involve other matters arising under the Tax Code or other laws administered by the BIR. Hence, it appears that the adverse ruling issued by the BIR to a taxpayer may also be filed for appeal with the CTA. The CTA, however, has a different view.
In the same CTA decision, the Court ruled that if the action essentially involves the validity or constitutionality of a law or administrative ruling, the CTA has no authority to rule on it. Instead, the Regional Trial Court (RTC) has jurisdiction over the said issue. Accordingly, the case was dismissed.
The same view was taken by the CTA in CTA Case No. 8360. In this particular case, the petitioner requested a ruling with the BIR to confirm the petitioner’s position that its purchases qualify for value-added tax zero rating. The BIR’s response was negative. The petitioner then filed a Request for Review of the said BIR ruling with the Secretary of Finance.
The Secretary of Finance, in its letter dated Sept. 8, 2011, addressed to the petitioner, affirmed the position of the BIR. The petitioner filed a Petition for Review with the CTA to assail the validity of the said BIR ruling and the letter issued by the Secretary of Finance. The CTA, however, ruled that its jurisdiction to resolve tax disputes, in general, does not include cases where the validity or constitutionality of a law or a rule or regulation issued by the administrative agency in the performance of its quasi-legislative function is challenged. Accordingly, the issue pertaining to the validity of the BIR ruling, among others, is beyond the jurisdiction of the CTA.
Other than exhausting all the administrative remedies, taxpayers should be aware of the legal remedies and the proper venue for filing a petition for review. A technicality may lead to the dismissal of a case, or worse, to significant amount of assessment against the taxpayer.
The author is a partner with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.
source: Businessworld
Tuesday, September 3, 2013
Are you worth it?
AL CAPONE... Renato Corona... Mikey
Arroyo... Janet Lim Napoles... What do they have in common? Among
others, they all (or in the case of Napoles, soon to) have a first-hand
experience with the Net Worth Method (NWM) of tax investigation/audit.
The NWM is one of the indirect tax audit methods utilized by tax authorities, the Bureau of Internal Revenue (BIR) included, which is generally used when a strong suspicion exists that the taxpayer “received income from undisclosed sources.” It is often employed either in: (i) the absence/unavailability/inadequacy of taxpayer’s books and records; or (ii) the refusal by the taxpayer to provide its books and records for tax audit/investigation (Revenue Memorandum Order No. 01-00, 17 March 2000). The use of the NWM is sanctioned by Section 43, and (possibly) the broad investigatory power of the Commissioner under Section 6, of the National Internal Revenue Code.
The NWM could trace its roots to the basic accounting equation, “Assets = Liabilities + Capital.” Simply put, this tells us that the assets of an entity are sourced from debt and/or contributions/earnings. Thus, if the source of the asset is not through debts and/or contributed by the businessman, then the asset must have been through the income earned by the entity. Interestingly, re-arranging the equation to “Assets -- Liabilities = Capital” reveals the “net worth” of the entity, i.e., its actual worth after all debts are paid, as of a certain date. (Myer, Understanding Financial Statements, 1964 Ed.)
As applied in taxation law, the NWM first saw the light of day in the case of Capone v. United States (51 F. 2d 609), when the US Internal Revenue Service used it to support direct proof of unreported income (Mertens Law of Federal Income Taxation, §55B.02). However, in Holland v. United States (348 US 121), the US Supreme Court cautioned that notwithstanding the usefulness of the NWM, courts “must closely scrutinize its use” as “it is so fraught with danger for the innocent.”
In the Philippines, the Tax Court in Perez v. Araneta (BTA Case No. 189, Feb. 13, 1956), and subsequently the Supreme Court in Perez v. Court of Tax Appeals (G.R. No. L-10507, May 30, 1958) had the opportunity to discuss the NWM when a deficiency income tax assessment was issued against the taxpayer. The tax court held as valid the use of NWM as sanctioned by Section 38 of the Tax Code (now Section 43) and provided the formula in determining the unreported taxable income of the taxpayer, i.e., increase in net worth (computed by subtracting the net worth at the beginning from its net worth at the end of the year) + non-deductible disbursements -- non-taxable income. On appeal, the Supreme Court upheld the decision of the tax court and laid down the requisites to properly use the NWM, which are: (i) the net worth at the beginning of the year must be established with reasonable certainty; and (ii) the increase in net worth must be attributed to a taxable income. It even went on to say that the government in tax assessment cases need not prove the specific source of income, as it is assumed that “assets are derived from a taxable source and that when this is not true the taxpayer is in a position to explain the discrepancy.”
So does this mean that when a lady acquires a Hermès Berkin, a Louis Vuitton Tribute Patchwork Bag, or a Chanel “Diamond Forever” Classic Bag, she is also shopping for herself a deficiency tax assessment? How about when a gentlemen drives a Porsche, an Audi, or a Mercedes, did he just glare his lights to the BIR for a deficiency tax assessment?
Not necessarily. Note that the NWM is employed only if the records and books of the taxpayers are inadequate to determine its correct taxable income, or that the income declared in the tax returns are doubtful and do not support the current worth (or lifestyle) of the taxpayer. Of course, it would be obvious that the BIR will resort to NWM if it can be shown that the taxpayer owns such items but the income declared, and consequently the taxes paid, in its tax returns does not justify its ownership or at least the taxpayer cannot explain its source. Absent these circumstances, NWM should not be employed.
All told, the BIR’s use of the NWM in tax audits may be justified if it can be shown that the records and books of the taxpayers are inadequate in determining its correct taxable income. If the taxpayer’s books and records clearly reflect its taxable income, and the taxpayer can explain the findings resulting from the tax audit, then resort to NWM is unwarranted. The BIR examiners should not be allowed to apply the NWM indiscriminately to protect the taxpayers that are faithful, or at least assumed, in paying the taxes due to the government.
(The author is an associate of the Angara Abello Concepcion Regala& Cruz Law Offices. She can be contacted at (632) 830.000 and <kfmatibag@accralaw.com>. The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
source: Businessworld
The NWM is one of the indirect tax audit methods utilized by tax authorities, the Bureau of Internal Revenue (BIR) included, which is generally used when a strong suspicion exists that the taxpayer “received income from undisclosed sources.” It is often employed either in: (i) the absence/unavailability/inadequacy of taxpayer’s books and records; or (ii) the refusal by the taxpayer to provide its books and records for tax audit/investigation (Revenue Memorandum Order No. 01-00, 17 March 2000). The use of the NWM is sanctioned by Section 43, and (possibly) the broad investigatory power of the Commissioner under Section 6, of the National Internal Revenue Code.
The NWM could trace its roots to the basic accounting equation, “Assets = Liabilities + Capital.” Simply put, this tells us that the assets of an entity are sourced from debt and/or contributions/earnings. Thus, if the source of the asset is not through debts and/or contributed by the businessman, then the asset must have been through the income earned by the entity. Interestingly, re-arranging the equation to “Assets -- Liabilities = Capital” reveals the “net worth” of the entity, i.e., its actual worth after all debts are paid, as of a certain date. (Myer, Understanding Financial Statements, 1964 Ed.)
As applied in taxation law, the NWM first saw the light of day in the case of Capone v. United States (51 F. 2d 609), when the US Internal Revenue Service used it to support direct proof of unreported income (Mertens Law of Federal Income Taxation, §55B.02). However, in Holland v. United States (348 US 121), the US Supreme Court cautioned that notwithstanding the usefulness of the NWM, courts “must closely scrutinize its use” as “it is so fraught with danger for the innocent.”
In the Philippines, the Tax Court in Perez v. Araneta (BTA Case No. 189, Feb. 13, 1956), and subsequently the Supreme Court in Perez v. Court of Tax Appeals (G.R. No. L-10507, May 30, 1958) had the opportunity to discuss the NWM when a deficiency income tax assessment was issued against the taxpayer. The tax court held as valid the use of NWM as sanctioned by Section 38 of the Tax Code (now Section 43) and provided the formula in determining the unreported taxable income of the taxpayer, i.e., increase in net worth (computed by subtracting the net worth at the beginning from its net worth at the end of the year) + non-deductible disbursements -- non-taxable income. On appeal, the Supreme Court upheld the decision of the tax court and laid down the requisites to properly use the NWM, which are: (i) the net worth at the beginning of the year must be established with reasonable certainty; and (ii) the increase in net worth must be attributed to a taxable income. It even went on to say that the government in tax assessment cases need not prove the specific source of income, as it is assumed that “assets are derived from a taxable source and that when this is not true the taxpayer is in a position to explain the discrepancy.”
So does this mean that when a lady acquires a Hermès Berkin, a Louis Vuitton Tribute Patchwork Bag, or a Chanel “Diamond Forever” Classic Bag, she is also shopping for herself a deficiency tax assessment? How about when a gentlemen drives a Porsche, an Audi, or a Mercedes, did he just glare his lights to the BIR for a deficiency tax assessment?
Not necessarily. Note that the NWM is employed only if the records and books of the taxpayers are inadequate to determine its correct taxable income, or that the income declared in the tax returns are doubtful and do not support the current worth (or lifestyle) of the taxpayer. Of course, it would be obvious that the BIR will resort to NWM if it can be shown that the taxpayer owns such items but the income declared, and consequently the taxes paid, in its tax returns does not justify its ownership or at least the taxpayer cannot explain its source. Absent these circumstances, NWM should not be employed.
All told, the BIR’s use of the NWM in tax audits may be justified if it can be shown that the records and books of the taxpayers are inadequate in determining its correct taxable income. If the taxpayer’s books and records clearly reflect its taxable income, and the taxpayer can explain the findings resulting from the tax audit, then resort to NWM is unwarranted. The BIR examiners should not be allowed to apply the NWM indiscriminately to protect the taxpayers that are faithful, or at least assumed, in paying the taxes due to the government.
(The author is an associate of the Angara Abello Concepcion Regala& Cruz Law Offices. She can be contacted at (632) 830.000 and <kfmatibag@accralaw.com>. The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
source: Businessworld
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