Tax obligations after death

IN THE CHRISTIAN tradition, we Filipinos will again observe All Soul’s Day (Nov. 2) to pay respect to loved ones who have passed away. For those who hold deeply personal relationships, death, which signifies the end of a person’s earthly life, brings pain and sorrow for the eternal parting of a beloved.

Just as death is an ubiquitous certainty, tax is an inevitable reality. Upon death, succession takes place, and the State is instantly vested with the right to tax the decedent’s privilege of passing on property to the heirs. Accordingly, estate tax accrues upon death, and certain tax requirements have to be met.

Under the Consolidated Revenue Regulations on Estate Tax and Donor’s Tax (Revenue Regulations No. 2-03), following are the guidelines and requirements for estate tax purposes:

SECURING OF TAXPAYER IDENTIFICATION NUMBER (TIN) FOR THE ESTATE
The estate, which refers to the mass of properties left by a deceased person, is within the operative definition of the term “person” for tax purposes. As such, it is necessary to register and secure a separate TIN for the estate (apart from the decedent’s TIN).

For resident decedents, the TIN of the estate should be secured from the Revenue District Office (RDO) where the decedent was domiciled at the time of death. In case of a non-resident decedent, the TIN must be obtained from the RDO where the executor or administrator is registered (or from the RDO having jurisdiction over the executor’s or administrator’s legal residence in case such executor/administrator is not registered). If the non-resident decedent does not have an executor or administrator in the country, the TIN shall be secured from the Office of the Commissioner of Internal Revenue (CIR) through RDO 39-South Quezon City.

FILING OF NOTICE OF DEATH
Within two (2) months after the decedent’s death, a written notice of the death must be filed with the CIR, in all cases of transfers subject to tax, or where the gross value of the estate exceeds P20,000.

FILING OF ESTATE TAX RETURN AND PAYMENT OF ESTATE TAX
The estate tax return should be filed within six (6) months from the decedent’s death in the following instances:

1. transfers subject to estate tax;

2. gross value of the estate exceeds P200,000; or

3. estate consists of registered or registrable property (i.e., real property, motor vehicle, share of stock or other similar property) for which a clearance from the BIR is required before transfer of ownership in the name of the heirs or transferees.

In meritorious cases, the six-month period for filing the estate tax return may be extended for a maximum period of thirty (30) days. An application for extension should be filed with the RDO where the estate is registered.

The estate tax return shall be filed under oath in duplicate and should set forth the following:

1. gross value of the estate of the decedent at the time of death or the part of the gross estate situated in the Philippines in case of non-resident foreign nationals;

2. deductions allowed from the gross estate; and

3. such other information as may be necessary to establish the correct tax.

In case the gross value of the estate exceeds P2 million, the estate tax return should be supported by a statement from a certified public accountant containing the itemized assets of the decedent, itemized deductions from gross estate and the amount of estate tax due.

The estate tax is usually paid upon filing the estate tax return. However, subject to the BIR’s approval, payment may be extended for a period not to exceed two years (if the estate is settled extrajudicially) or five years (in case of judicial settlement). No extension shall be granted if the delay is due to negligence, intentional disregard, or fraud.

A bond may be required in such amount not exceeding double the amount of the tax and with such sureties as the CIR deems necessary, conditioned upon the payment of the estate tax. Further, during the period of extension, the running of the three-year statute of limitations for deficiency assessment is suspended.

In case the available cash of the estate is insufficient to pay the total estate tax liability, the estate may be allowed to pay by installment. In this case, a Certificate Authorizing Registration (clearance) shall be released only with respect to the property corresponding to the tax which has already been paid. As such, there can be issued as many clearances as there are properties released by installment payments of the estate tax.

Whether paid through a BIR approved extension or installment, any payment after the statutory due date of the estate tax (i.e., six months from death) but within the extension/installment period granted, shall be subject to interest at the rate of 20% per annum. Conversely, failure to pay within six months from decedent’s death, without securing BIR approval, will trigger interest, surcharge and compromise penalty.

SECURING OF TAX CLEARANCE
An estate tax clearance must be secured from the RDO having jurisdiction over the estate. Such clearance will serve as the authority to transfer the remaining distributable properties/shares of the estate to the heirs or beneficiaries.

Under the Tax Code, the Register of Deeds and Corporate Secretary shall not recognize any transfer of real property or shares of stock in the concerned registries unless a tax clearance is issued by the BIR certifying that the estate tax has been paid. The same certification is required where the decedent has maintained a bank account, singly or jointly with others, before any withdrawal from the said bank account by the heirs can be allowed.

While death and taxes are certain, so are the penalties that come with failure to comply with the above tax obligations. Tax compliance facilitates the smooth transfer of properties in favor of the heirs, beneficiaries or transferees. More importantly, it minimizes the agonizing burden of struggling with tax issues for heirs who are still coping with a loss.

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 rachel.i.diciano@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

Putting BIR rulings in a business context

IN THE PAST few years, the Bureau of Internal Revenue (BIR) has issued rulings which effectively revoked long-standing precedent rulings which have laid down consistent interpretations, principles and applications of tax rules and tax treaties to specific transactions. Needless to say, this has caused a great degree of uncertainty among taxpayers -- both Filipino corporations as well as multinational companies -- leading them to re-examine the tax impact on their business models, corporate structure and long-term business plans.

One such ruling, which has caused quite a stir in not a few boardrooms, was the one issued by the International Tax Affairs Division (ITAD) of the BIR in January 2013 but published only last month. This ITAD ruling involved a multinational company (MNC) that is a leading manufacturer and seller of fast-moving consumer goods (FMCG).

This MNC is a non-resident foreign corporation which, in line with its global operating model, set up a branch in Singapore that serves as its Asia Pacific regional operating entity responsible for developing, executing and managing strategic functions across various markets in the region. More importantly, said regional operating entity is the licensee of various intellectual properties and enters into manufacturing and distribution contracts in many Asian countries to ensure that its products are available for sale to the customers in each of the markets it serves.

Consistent with its global model, the Singapore branch entered into a five-year contract with a related Philippine entity (Manufacturing Co.) to perform raw materials sourcing, manufacturing, packaging and other related services for the manufacture of the products. From time to time, the MNC would deliver product orders and specifications to the Manufacturing Co., which, after production, would store the finished products until delivery to such parties as may be instructed by the MNC. The purchase price of the products would be determined according to the transfer pricing laws and be based on cost plus a certain mark-up.

The MNC also entered into a five-year distribution agreement with another related Philippine entity (Distributor), appointing the latter exclusive distributor of the products in the Philippines. The Distributor would place product orders to the MNC at a distributor’s price, which would be set such that it would allow the Distributor to earn a certain operating margin based on net sales. The Distributor would then be responsible for entering into contracts (not binding on the MNC) with wholesalers, retailers, government offices, self-services or any trade channels (the “Customers”), whether wholly by itself or partially through other entities engaged by it. The Distributor would then invoice the Customers to which it would sell direct from its stocks and extending acceptable credit and trade terms. It would also make the necessary arrangements for the warehousing, transportation and delivery of the products to the Customers. The Distributor would be allowed to contract with third parties for distribution of items that do not compete with the products of the MNC.

In essence, BIR-ITAD ruled that, since the Manufacturing Co. and the Distributor habitually maintain the products in their premises for the MNC, and regularly deliver these products to third parties on behalf of the MNC, both the Manufacturing Co. and the Distributor are deemed permanent establishment (PE) of the MNC. Accordingly, income derived by the MNC from the sale of the products in the Philippines attributable to said PE shall be subject to Philippine income tax. In effect, the MNC, as a foreign corporation, shall be taxed as a resident foreign corporation subject to income tax based on its taxable income (i.e., gross income less allowable deductions).

The above ruling runs contrary to a line of precedent rulings -- involving substantially the same business model and transactions -- issued by BIR-ITAD in 2000, 2002, 2004 and 2005.

In issuing the contrary ruling, BIR-ITAD concluded that in the case of the Manufacturing Co., even though it has no authority to conclude sales contracts on behalf of the MNC, it habitually maintains in the Philippines a stock of goods from which it regularly delivers goods on behalf of the MNC. BIR-ITAD reached this conclusion after noting that the contract with the Manufacturing Co. is for five (5) years, thus satisfying the condition of habitualness and regularity. BIR-ITAD also noted that, since the MNC provided the Manufacturing Co. with monthly forecasts for the products to be manufactured in accordance with its purchase order specifying the quantities to be produced, this showed that the products belong or will belong at all times to the MNC. In addition, since the Manufacturing Co. stored the finished products and delivered the same based on instructions by the MNC, the Manufacturing Co. is deemed to be a PE of the MNC as it habitually maintains and regularly delivers products on behalf of the MNC.

In the case of the Distributor, BIR-ITAD also concluded that because of the term of the distribution agreement as well as by reason of the fact that the Distributor warehouses the products, the Distributor performs business activities and maintains products for the MNC with habitualness and regularity.

More importantly, BIR-ITAD did not consider the Manufacturing Co. and the Distributor as brokers, commission agents or other agents of independent status doing business for their own account so as not to consider them as PE of the MNC.

In the case of the Manufacturing Co., BIR-ITAD explained that since the manufacturing contract merely allows it manufacture products for the MNC but does not authorize it to negotiate or conclude sales contracts with third parties on behalf of the MNC, it cannot be deemed a broker or a commission agent to the general public.

With respect to the Distributor Co, BIR-ITAD conceded that it is acting as commission agent, but its independent status is overridden by the fact that its business activities as exclusive distributor are and will be devoted wholly or almost wholly on behalf of the MNC.

BIR-ITAD went through great pains to lengthily lay down the basis for arriving at its conclusions, but we believe that it adopted a limited view in understanding the MNC’s business model and transaction flow with the Manufacturing Co. and the Distributor. The business and transaction structures utilized by the MNC are based on bona fide corporate structures in pursuance of legitimate business objectives and practices, which, in turn, are anchored on prevailing consumer patterns, market conditions, manufacturing and supply chain models.

In addition, the pricing structures adopted by the MNC vis-à-vis its Manufacturing Co. and Distributor are based on concrete transfer pricing studies used across various markets. We believe that rather than immediately putting into question legitimate business and transaction models, tax authorities can adopt a wholistic approach by understanding the business context in which taxpayers operate. In the above ruling, looking at the transfer pricing angle, i.e., evaluating whether the transfer price or mark-up on services is indeed arm’s-length based on certain factors, might have been a more comprehensive view.

That certain arrangements are exclusive are and often times based on the confidential and proprietary nature of the products or services involved rather than an indication that the parties are inclined to manipulate the price. The proprietary nature of the products or services indicates the use of intellectual properties for which royalties may be paid, and thus, corresponding taxes would also be due.

A distribution arrangement can also be exclusive because the distribution facility was built by the Distributor based on the specifications of the principal, and thus, no other principal would be inclined to use the same or pay the higher distribution fee.

In other words, tax authorities would be in a better position to evaluate taxpayer’s transactions and determine areas in which to improve collection if they also took time to understand the business context in which the taxpayers operate and conduct their activities.

The author is a director with the tax advisory and compliance Division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.

source:  Businessworld

A matter of record

LAST week, we wrote about the new Bureau of Internal Revenue (BIR) rule — Revenue Regulations (RR) No. 17-2013 — which extended the period for the preservation of a taxpayer’s books of accounts and other accounting records to 10 years (from the original three years, subject to certain exceptions). We said that while the new retention rules may prove to be tedious, time-consuming, and expensive to taxpayers, this may also be seen as an opportunity for organizations to invest in a reliable records management system and professionals crucial to safeguarding its institutional memory.

This week, we continue with our analysis of RR 17-2013 and look at the records preservation options that taxpayers may wish to consider.

By extending the records retention period to 10 years without any exceptions, it appears that the main consideration for the extended period is to complement the BIR’s 10-year prescriptive period within which to institute collection proceedings in the case of fraud, falsity or omission in the tax returns. This, notwithstanding the well-established doctrine that fraud is never presumed but must be proven, not to mention the fact that the 10-year prescriptive period under Section 222 of Tax Code legally starts to run only after the BIR’s discovery of the fraud, falsity or omission.

It is important for the taxpayers to be knowledgeable about and always comply with existing tax rules and regulations and pay the correct amount of taxes in order to avoid being subjected to a fraud investigation.

Being subjected to a regular BIR audit or examination is already a tedious process, more so in the case of a fraud audit or investigation. A fraud examination likewise triggers reputational risks to an enterprise. Hence, effective and efficient records management, personnel who are competent in tax matters, and records that are evidently compliant with existing tax rules and regulations, will significantly ease and expedite the process.

Arguably, the biggest issue that taxpayers will have to contend with in light of RR 17-2013 is storage and the huge cost that it could entail. Taxpayers may have to tweak their records management systems to better manage the cost while conforming to the BIR rule.

Keeping books of accounts and records in manual or hard copy formats spanning 10 years will require a relatively large physical space for storage. It may be high time for taxpayers to evaluate the costs and benefits of keeping books of accounts and records entirely in electronic format.

Large taxpayers are now required to use and register a computerized accounting system, but there are still many who keep manual or hard copies of other accounting records. In a regular BIR audit, examiners require the submission of printed originals of documents for review. While electronic copies of books of accounts may be inspected during a field audit, proof of transactions such as voucher registers and supporting invoices and receipts, contracts, and the like have to be turned over for BIR perusal.

Under Republic Act No. 8792 or the E-Commerce Act of 2000, an electronic document shall be the functional equivalent of a written document under existing laws for evidentiary purposes. The law specifically provides that electronic documents shall have the “legal effect, validity or enforceability as any other document or legal writing.” However, full faith in electronic documents has yet to be adopted by the BIR, although there have been some strides towards the use and recognition of e-documents.

For example, RR No. 16-2006 dated Aug. 15, 2006, allows the submission of electronic format of books of accounts and records for purposes of a tax audit or investigation that will have the legal effect, validity or enforceability as any other document or legal writing subject, consistent with RA No. 8792. Taxpayers must be able to maintain the integrity and reliability of these documents through time and these can be authenticated for subsequent reference. However, the rules require that these same documents must be retained in original form.

RR No. 9-2009, dated Dec. 23, 2009, also allows the use of alternative storage media. It provides that, for purposes of storage and retention, taxpayers may convert hard copy documents received or produced in the normal course of business to microfilm, microfiche or other storage-only imaging systems and may discard the original hard copy documents, subject to certain conditions and requirements. RR No. 9-2001 also enumerates the documents which may be stored in these media to include, but are not limited to general books of accounts, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda. Prior permit from the BIR is, however, required before a taxpayer can use these alternative media storage.

Since specific conditions and requirements have been provided, taxpayers should now evaluate the practicability of these requirements in light of any cost and efficiency advantages to keeping and preserving books of accounts and records in electronic format and other alternative forms of media storage.

More than just storage, organizations must also be able to impose a stronger sense of accountability on its members and stakeholders, insofar as records management is concerned. It must be able to address concerns on continuity, particularly the seamless turnover of documents when responsible officers or employees leave the enterprise.

Ultimately, it boils down to compliance. Whether taxpayers decide to preserve records manually or electronically, improvement of its tax compliance culture must always be the primary concern. At the end of the day, once this culture is ingrained in the organization, operational issues may be resolved with greater ease.

Saha P. Adlawan-Bulagsak is a senior tax 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 author and do not necessarily represent the views of SGV & Co.

source:  Businessworld

A new source of tax collection for the BIR

THE BUREAU of Internal Revenue (BIR) continued to fall short of its tax collections as it missed its collection target in the first nine months of the year. However, the BIR is not taking this serious matter sitting down.

In the hope of improving its tax collections, the BIR has adopted several tax measures which include the following: (a) it clarified that clubs organized and operated exclusively for pleasure and recreation are not tax-exempt organizations; (b) clarified that the association dues, membership fees and other assessments/charges collected by condominium corporations are subject to income tax and value added tax (VAT); (c) clarified that the deposits/cash advances for expenses received by a taxpayer from its clients/customers are subject to income tax and to VAT or percentage tax; (d) imposed a limit on the deductibility of depreciation expense, input tax and all related expenses on purchase of motor vehicles; (e) issued the transfer pricing regulations; (f) tightened audit of industries and self-employed professionals; and (g) filed charges against suspected tax evaders.

These tax measures have contributed to the 21.11% higher tax collections in September 2013 than in the same month last year, though the bureau missed its target for the month.

Where could the BIR source its tax collection to fill-in the gap? From non-stock, non-profit corporations and associations.

It can be remembered that in July 2013, the BIR issued Revenue Memorandum Order (RMO) No. 20-2013, which prescribes the guidelines in applying for tax exemption, revalidation of tax exemption certificates and application for confirmatory BIR rulings of non-stock, non-profit organizations under Section 30 of the Tax Code. The purpose of the RMO is to ensure that only non-stock, non-profit organizations qualified for tax exemption under Section 30 of the Tax Code, as amended shall be issued the Certificate of Tax Exemption.

In the said RMO, before the issuance of the Certificate of Tax Exemption, the BIR will ascertain whether or not the non-stock, non-profit corporation or association meets the following requirements:

i. It is a non-stock, non-profit corporation or association;

ii. The purpose for which it was created is one of those enumerated under Section 30 of the NIRC, as amended;

iii. No part of the corporation or association’s net income shall inure to the benefits of any private individual; and

iv. The trustees of the non-profit corporation or association do not receive any compensation or remuneration.

Likewise, the BIR will determine whether or not the non-stock, non-profit corporation or association is operating as an organization under Section 30 of the NIRC, as amended, by examining its modus operandi, financial statements and other relevant documents. The examination must show that:

i. Its earnings do not inure to the benefit of any private individual;

ii. It does not operate for the benefit of private interest such as those of its founder or the founder’s family; and

iii. It does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose.

Recently, the BIR denied the application for revalidation of the tax exemption ruling of certain non-stock, non-profit corporations on the ground that they did not qualify as a tax-exempt corporation under Section 30 of the Tax Code.

In one of the rulings denied by the BIR, the concerned non-stock, non-profit corporation has the following purposes:

1. to promote the recognition of supply management profession as a science, and to stress its importance in commerce and industry;

2. to undertake the promotion of research and study or local and international market conditions;

3. to promote the establishment of acceptable basic standards of product, and to influence manufacturers to improve the quality of their goods;

4. to promote local and international exchange of supply management experience and knowledge;

5. to extend supply management technology and training of personnel of member companies;

6. to foster closer, more mutual understanding and more friendly relations among members of the profession;

7. to unify and bring into one compact organization the entire supply management profession in the Philippines; and

8. to publish and circulate among members an organ for the dissemination of activities of the corporation and such other information useful to the supply management profession.

The BIR’s basis in denying its application is straight and simple -- the tax exemption of the non-stock, non-profit corporation lacks factual and legal basis. The BIR invoked the principle that tax exemptions should be construed strictissimi juris against the taxpayer and liberally in favour of the taxing authority. It should be noted that in the said ruling, the BIR did not elaborate the reason such organization did not qualify in any of the provisions under Section 30 of the Tax Code, as amended.

In RMO 20-2013, the BIR prescribed the criteria/requirements in order that a non-stock, non-profit corporation or association would qualify for tax exemption. Isn’t it reasonable enough if the BIR will identify and discuss in its ruling which of the criteria/requirements in RMO No. 20-2013 the non-stock, non-profit corporation or association fails to meet?

The consequence of the denial of tax exemption is that the net income of these non-stock, non-profit corporations will be subject to the 30% regular income tax rate while the revenue/collection of membership fees will be subject to 12% VAT, as if they are classified as corporations engaged in trade or business or practice of profession.

Imagine how many non-stock, non-profit corporations and associations similarly situated above will have their income tax exemptions denied by the BIR? How much of the net income of such non-stock, non-profit corporations and associations will be taxed at 30% regular income tax rate? How much of the revenue/collection of membership fees will be subjected to 12% VAT? Clearly, this is a new source of tax collection for the BIR. But, we are hoping that the BIR will thoroughly evaluate the operations/activities of the concerned organizations before denying their tax exemption.

The author is a tax manager with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.
  
source:  Businessworld

Ten years of solitary retention (of Books)

THE BUREAU of Internal Revenue (BIR) recently issued Revenue Regulations No. (RR) 17-2013, dated Sept. 27, 2013, to clarify the retention period and prescribe the guidelines on the preservation of books of accounts and other accounting records of taxpayers.

Under the said regulations, all taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records for a period of 10 years reckoned from the day after the deadline for filing a return or if filed after the deadline, from the date of filing of the return, for the taxable year when the last entry was made in the books of accounts. It also provides that, if the taxpayer has any pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved.

In addition to the responsibility of the taxpayer to retain the books for ten years, the independent CPA who audited the records and certified the financial statements of the taxpayer also has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return (ITR) or the actual date of filing thereof, whichever comes later.

All books, registers and other records, and vouchers and other supporting papers required by the BIR shall be kept at all times at the taxpayer’s place of business, subject to inspection by any internal revenue officer, and upon demand, the same must be immediately produced and submitted for inspection. They may be examined and inspected for purposes of regular audit or extraordinary audit, requests for exchange of information by a foreign tax authority under Sections 6 and 71 of the National Internal Revenue Code of 1997 (NIRC), and in the exercise of the Commissioner’s power to obtain information under Section 5 of the NIRC, among others. Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer’s office or place of business or in the BIR office.

More importantly, failure to observe the new retention requirements will subject the errant taxpayer to penalties provided in Sections 266, 275, and other pertinent provisions of the Tax Code and Section 6 of Republic Act No. (RA) 10021, otherwise known as the “Exchange of Information on Tax Matters Act of 2009”.

Obviously, this particular issuance creates more burden than ease for the taxpayer. Yes, keeping accurate and orderly books of accounts and other accounting records has its benefits, but such obligation should not be painstakingly overstressed. From the tax audit perspective, organized documentary system makes audit investigations more tolerable and defensible. It seems that the BIR failed to take into consideration the expenses that the taxpayer would have to shoulder to retain these records for ten years, as this would entail cost for maintenance and storage.

Section 232 of the Tax Code mandates all corporations, companies, partnerships or persons required by law to pay internal revenue taxes to keep a journal and a ledger or their equivalents. The reason for requiring books of accounts, while stated in the law itself, was also clarified by the Courts in a plethora of cases, and that is in order that all taxes due the Government may readily and accurately be ascertained and determined any time of the year, not only by the taxpayer but also by the different tax collection agencies of the government (Reyes vs. Collector, 1956).

However, by issuing RR 17-2013, the BIR has once again exercised its sweeping authority to interpret the provisions of the Tax Code. The new regulation is quite contrary to Section 203 of the Tax Code, which provides that “internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.” The above provision implies that the records of the taxpayer must be preserved for a period of three years from the date of the last entry made thereon.

On the other hand, the Tax Code recognizes several exceptions to this general rule. Under Section 222 of the Tax Code, the right of the BIR to examine and/or inspect books of accounts and other accounting records of taxpayers may extend beyond the three-year period of limitation of assessment, and that is in the case of a false or fraudulent return with intent to evade tax or of failure to file a return. Under the said provision, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission. Also, the three-year period may be waived if both the BIR Commissioner and the taxpayer agree in writing that the period to assess be extended.

While it is in the best interest of both the government and the taxpayers that books of accounts and accounting records are retained for a longer period, this should not be an excuse to expand the provisions of the Tax Code by mandating the retention of accounting records for an unreasonable time. This is a very dangerous regulation as it no longer distinguishes whether the taxpayer has filed a fraudulent return or not. From its plain reading, the regulation plainly assumes that all taxpayers are filing fraudulent returns and are thereby bound to be assessed by the BIR for a period of 10 years. More importantly, the 10-year period in fraud cases is counted from the date of discovery. Hence, requiring the taxpayer to retain records for 10 years from filing of return will still not cover or address cases involving fraud.

Typically, in the absence of a BIR tax audit or findings of fraud, taxpayers should be able to dispose of accounting records after the three-year assessment period has passed. However, with this regulation, all taxpayers will have to deviate from keeping their documents and books for three years, as each and every taxpayer must now comply with the BIR requirement under the pain of penalties, to retain records for 10 years.

Time and time again, we say that one of the characteristics of a sound tax system is that tax laws must be capable of being effectively enforced with the least inconvenience to the taxpayer. It assumes that the rules and procedures for the payment of taxes, audit policies, and availing of remedies are easily understood by the taxpayer. Clearly, this is not the case under RR 17-2013, which fearlessly announces 10 years of solitary retention of records for all taxpayers.

The author is a tax associate with the Tax Advisory & Compliance Division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.

source:  Businessworld

A matter of record By Wilfredo U. Villanueva

Records management programs are generally not an organization’s priority as these usually do not generate income. Policies and practices on how records are kept and handled also vary among companies. In a large enterprise, documents are usually stored separately according to division or section, e.g., Finance, Corporate Planning, Legal, Marketing, and Sales. In some multinational companies, there is an established centralized records management group that not only oversees the indexing, storage and retrieval of files, but safeguards vital information about the organization.

A well-organized records management system contributes to a company’s overall efficiency and productivity, and supports better management decisions. With the recent issuance by the Bureau of Internal Revenue (BIR) of Revenue Regulations (RR) No. 17-2013 extending the period for preserving books of accounts and other accounting records, taxpayers now have all the more reason to come up with an effective records management system that not only enhances service and profit but also minimizes litigation and reputational risks.

RR No. 17-2013 now requires taxpayers to preserve all their books of accounts and accounting records for a period of 10 years. Previously, taxpayers were only mandated to do so until the lapse of the 3-year period within which the BIR can make an assessment; or, if there is a pending tax audit investigation, until such examination has been duly terminated; or upon expiration of the waiver of the statute of limitations that the taxpayer issued in favor of the BIR. Books of accounts include subsidiary books and other accounting records such as invoices, receipts, vouchers, and returns, and other source documents supporting the entries in the books of accounts.

According to the BIR, the longer preservation period will allow the bureau access to the taxpayer’s accounting records should it be investigated on the basis of falsity, fraud or omission in its tax returns. Under Section 222 of the Tax Code, “in case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed or proceeding in court for collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission.” This implies that there may have been instances when the BIR could not pursue a fraud investigation because supporting documents had already been disposed of.

Aside from pursuing “extraordinary audits and assessments,” the extended retention period also gives the BIR more leeway in verifying the books of accounts and other pertinent records of tax-exempt organizations and grantees of tax incentives.
Notably, the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer is equally responsible to preserve copies of the audited and certified financial statements for 10 years from the due date of filing the annual income tax return, unless a longer retention period is required under the Tax Code or other relevant laws.
While the record-keeping requirements have long existed in our tax books, this is the first time that it has extended the retention period to 10 years, perhaps consistent with its objective to strengthen its enforcement drive.

The new requirement is even more stringent compared with prevailing statutes. Section 52.1-1 of the Securities Regulations Code, for instance, requires securities brokers to maintain certain books and records of their transactions and customers for a period of not less than 6 years, the first 2 years in a place easily accessible for examination by the Securities and Exchange Commission. The Anti-Money Laundering Law requires that records of covered transactions be maintained and safely stored for 5 years from the date of the accounts or transaction.

Meanwhile, the International Organization for Standardization (ISO) does not mandate a minimum period for records retention, but allows companies to come up with their own standards or policies. They must also ensure that such standards are maintained within the organization.

As far as BIR is concerned, books of accounts are to be kept “intact, unaltered and unmutilated” to ensure that all taxes due to the government may be readily and accurately ascertained and determined any time of the year. However, what does this new requirement mean for taxpayers?

First, this will mean additional cost. While RR No. 9-09 allows taxpayers to maintain electronic records, there are strict requirements, including securing BIR approval, before e-records can be honored during a tax audit or investigation. Without the BIR approval for the conversion of hard documents to microfilm or other storage-only imaging systems, tax examiners can only rely on hard copies of original documents. With manual documents as acceptable form of evidence, it is therefore necessary for taxpayers to designate an area within its premises to store its voluminous original records. If space is an issue, then an offsite warehouse may have to be leased to store these documents. Additional measures may also need to be undertaken, such as fire-proofing, pest control and security.

Second, aside from storage, considerable manpower investment may need to be made for the upkeep of the records. Ideally, the point person must be capable not only of analyzing and putting in order the current manual recordkeeping system, but also knowledgeable in using new technology to upgrade the organization’s system.

Third, there is a need to establish an improved system of accountability. Maintaining corporate records should be seen as not just the responsibility of the records group or division, but of the whole enterprise. Records must be kept orderly despite the separation of employees who have these documents in custody. If this is fostered within the organization, then better compliance can be expected.

Indeed, keeping a company’s records for such a long time is no easy task. We have, in fact, seen companies who have started to relax or, at the very least, use technology for their record-keeping policies and practices precisely because of issues on proper storage. So one might ask whether this new requirement of the BIR is a necessary burden. The primary reason for extending the retention period to 10 years seems to be in connection with the ongoing campaign of the BIR to weed out tax cheats. This is, of course, a commendable effort, but then, as some quarters are now saying, it seems to imply that all taxpayers are suspected of unlawfully depriving the government of much-needed tax revenue. They ask: why does everyone need to be subjected to this burden?

A company’s files embody its institutional memory, an asset that, though irreplaceable, is often overlooked. Management decisions are made based on the numerous transactions a company makes daily. Thus, in any case, while the new retention rules may prove to be tedious, time-consuming, and expensive to taxpayers, this may also be seen as an opportunity for organizations to invest in a reliable records management system and professionals crucial to safeguarding this institutional memory.

Wilfredo U. Villanueva is the Deputy Head of the Tax Division 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 author and do not necessarily represent the views of SGV & Co.

Contesting tax rulings

THE MAGNITUDE-7.2 quake that struck Visayas the other day was shocking to say the least, as it decimated centuries-old churches and other structures. It has been compared to the force of 32 nuclear bombs dropped over Hiroshima, Japan during the Second World War.

Not everyone knows what to do during an earthquake. Do you run outside? Do you stand under a doorway or crawl under a table? Knowing what to do could spell a world of difference in terms of your safety. In other words, knowing the procedures is crucial as not following them could cost you dearly.

Similarly, there are proper steps to be taken when a taxpayer wants to dispute or nullify an adverse ruling issued by the Bureau of Internal Revenue (BIR). Given that the BIR continues to issue rulings, circulars and regulations that have adverse implications, taxpayers must be aware of how to properly avail of possible remedies. One misstep can lead to your case being dismissed based on procedural grounds and not even on the merits of the ruling or regulation you are contesting.

In fact, just recently, the Court of Tax Appeals (CTA) had no choice but to dismiss a couple of petitions filed by taxpayers requesting the invalidation of unfavorable rulings issued to them by the BIR. This was because one taxpayer failed to exhaust available administrative remedies and because, in both cases, the CTA has no jurisdiction over such matters.

So, how should we go about protesting unfavorable tax rulings?

First, one must observe the requirement to exhaust all available administrative remedies (although there are exceptions to this rule). Under the Tax Code, the BIR Commissioner has the exclusive and original jurisdiction to interpret tax laws, subject to the review of the Secretary of Finance. Since all rulings are now signed by the BIR Commissioner, a taxpayer who receives an adverse ruling can seek its review by the Secretary of Finance within 30 days of receiving the ruling.

The Department of Finance prescribes strict guidelines that must be followed in appealing an adverse tax ruling. These include information that must be reflected in the request for review, and even guidance on formatting requirements. Only upon receiving the ruling of the Secretary of Finance can the taxpayer be considered as having exhausted all available administrative remedies. Generally, only then can the taxpayer raise the issue before the courts.

This doctrine of exhausting all available administrative remedies before seeking judicial intervention is based on jurisprudence and on practical grounds. It costs less, and ideally, provides for faster disposition of issues. It is based on the underlying presumption that, if given the chance, the concerned administrative agency will decide on the matter correctly and will rectify its own error, if necessary.

What about disputing regulations and circulars that are issued to the general public?

Since the Supreme Court has held that revenue regulations and revenue memorandum circulars are actually rulings or opinions of the BIR Commissioner, any attempts to challenge such issuances may also follow the same steps as when one is disputing an adverse ruling. While circulars are already issued by the Commissioner, it would appear from the arguments raised by the BIR in a recent tax court decision that in seeking to nullify a tax issuance, the BIR expects taxpayers to first file a request for reconsideration with the Commissioner, before appealing to the Secretary of Finance.

Once the case is ripe for judicial remedy, to which court should taxpayers raise their appeal?

Based on jurisprudence, the CTA’s jurisdiction to resolve tax disputes does not include cases which cover the validity or constitutionality of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi-legislative function. The determination of whether an administrative issuance has gone beyond the law falls within the jurisdiction of the regular courts. So, in challenging the validity of tax rulings, regulations or circulars issued by the BIR, taxpayers should seek judicial remedy from the regular courts, and not from the CTA.

Einstein is quoted as saying: “Imagination is more important than knowledge.” While there are areas of taxation that may benefit from innovation, imagination and creativity, remedial procedures are not one of them. Filing appeals within the deadline and at the right venue is essential to a successful dispute. After all, you don’t want to be all dressed to the nines and then realize too late that you’ve gone to the wrong party.

The author is an executive 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 roselle.k.yu@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 the article.

source:  Businessworld

A Professional’s Plea

IF YOU ASK children about their career ambitions in life, the likely response would be the occupations of doctor, lawyer, dentist or other professionals. Even at a young age, cultural dictates have created an abstraction of professionals -- noble vocations held in esteem and admired for their self-giving role to society.

Professionals play a vital role as stewards in the preservation of society, serving public interest or the welfare of the populace. For most professional occupations, the standards and ideals of their practice are enshrined in their stringent codes of conduct, their oath of honor to abide by their ethical responsibilities, and by the rules of the Professional Regulation Commission (PRC).

Though they may aspire, not many are called to become professionals. To prepare in the discipline, additional years of formal education and training must be completed to acquire a level of competence necessary to perform the role. It requires considerable investment of time and resources, and commitment all throughout the professional’s career. For instance, physicians, accountants and engineers devote long and countless hours in hospitals, offices and in the field, in which time is effectively taken away from loved ones. Such work habit is borne of the profession’s higher duty of delivering the highest standard of professional service to clients. For some professions, as in the case of lawyers and medical practitioners, the duty extends to advocacy and aid regardless of whether the client is able to remunerate them for services rendered.

Recently, the Bureau of Internal Revenue (BIR) identified professionals as one of its priority areas for tax audit. Consistent with its continuing initiative to implement new measures for increasing tax collections across industries, the BIR issued Revenue Memorandum Order No. 4-2013, which identified business taxpayers, consisting mainly of self-employed individuals, small business owners and professionals whose annual income tax payments average below P200,000, as priority audit targets.

Barely a month ago, professional practitioners raised concerns regarding the BIR’s proposed measure of requiring professional rates to be posted at a prominent place inside their clinics and offices. The proposal is in response to observations and complaints from clients or patients about how some professionals -- for instance, doctors and lawyers -- were imposing additional charges (such as value-added tax) on top of their regular fees whenever clients asked for official receipts. Further, tax compliance in this sector is considered low, based on BIR data, since only around 400,000 of the 1.8 million individuals (22%) who are registered as self-employed, professionals or small business owners, file their income tax returns, with an average payment of just P33,441.

Apparently, the BIR takes the view that once professional rates are posted in public, tax examiners will be able to verify the amounts of fees reflected in the professional’s issued receipts. Under the proposed measure, professionals would include medical practitioners, lawyers, accountants, engineers, architects and real estate brokers. Even assuming that the BIR’s observations and data are correct, publishing or posting professional rates in public may not be a feasible solution if the BIR’s intention is to curb tax evasion. Under its legal authority, the scope of the BIR’s powers and duties extend only to the assessment and collection of national internal revenue taxes, fees and charges, and to the enforcement of all forfeitures, penalties and fines arising from them. While the BIR Commissioner has the power to secure information from taxpayers, such is limited only to ascertain the correctness of the taxes that they are liable to pay. There is no provision in our tax laws that authorize the BIR to compel taxpayers to publicly disclose confidential information, such as their professional fees. In my opinion, the transaction between a professional and his client is a private contract governed by ethical considerations of trust and confidence between them. Thus, any information in that contract should be held confidential by the parties.

Moreover, posted professional rates may not necessarily correspond to charged rates or actual fee payments. In the case of doctors and lawyers, for example, professional fees may be charged based on socialized payment schemes or on contingency basis in consideration of the patient or client’s financial capacity. As a consequence of the BIR’s proposed measure, legal and medical professionals may feel constrained to follow their published rates for fear of a tax backlash, without regard to indigent patients or pauper litigants.

Another downside to the proposed circular is that it may eventually result in the degradation of the professional practice, diminished as a price-driven commodity rather than a vocation deserving respect. This is something that the codes of conduct of most professions try to avoid by putting restrictions on how professionals present their services to the public.

For instance, in the case of lawyers, the Code of Professional Responsibility admonishes counsels from soliciting legal business. Time and time again, the Supreme Court has reminded lawyers that the practice of law is a profession and not a business. Hence, lawyers stand to be disbarred from the profession should they advertise their practice as vendors would advertise their wares in the open market. To require the posting and advertising of legal fees would commercialize and degrade the legal profession, encouraging the furtherance of business interest over social justice.

Lastly, publishing or posting rates in public does not fully guarantee effective identification by the BIR of professionals who intentionally under-declare their income to evade taxes. Professional rate/fee is but one factor, among others, that one considers in assessing taxes. Tax examiners must likewise validate the volume and nature of transactions entered into by a professional over a period of time to determine the correct amount of taxable income.

As a professional, I acknowledge the BIR’s earnest efforts to improve policies that strictly monitor tax payments and plug the loopholes in tax collections. However, I still believe that other available options should be explored to strike a balance between the BIR’s campaign against tax evaders and the need to preserve the dignity of professionals. One measure would be to provide incentives for compliant taxpayers -- applying the principle of ruling by the carrot rather than the stick. On the other hand, I also hope that, regardless of incentives, all professionals become responsible taxpayers, so the government need not impose tight measures of control.

As former US President Bill Clinton aptly said in his inaugural speech, “Let us all take more responsibility, not only for ourselves and our families but for our communities and our country.”

The author is a tax 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 joel.roy.c.navarro@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

Preservation of books of accounts and other accounting records

The Commissioner of Internal Revenue (“CIR”) has issued Revenue Regulations (“RR”) No. 17-2013 dated 27 September 2013 clarifying the retention period and preservation of the books of accounts and accounting records of a taxpayer and prescribing the guidelines therefor.
The salient portions of the RR are as follows:

1. The taxpayers’ books of accounts and accounting records shall generally be preserved during the 3-year period within which a taxpayer can be assessed by the tax authority. The 3-year period is counted from the last day prescribed by law for the filing of the return provided that if a return is filed beyond the period prescribed by law, it shall be counted from the day the return was filed. However, the 3-year period to assess is extended to:

• 10 years - in the case of a false or fraudulent return with intent to evade tax OR of failure to file a return in which case the tax may be assessed or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission.
• Agreed upon date in the Waiver of the Statute of Limitations - in case the CIR and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon.

2. In relation to Item 1 above, the books of accounts and accounting records of the taxpayer need to be preserved until the resolution of the case if there is a pending tax case, protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case.

3. In view of the foregoing, the CIR is requiring all taxpayers to preserve their books of accounts including subsidiary books and other accounting records, for a period of 10 years. The 10-year period is reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.

4. The term “other accounting records” includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts. They should also be preserved for a period of 10 years counted from the last entry in the books to which they relate.

5. The independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return or the actual date 'of filing thereof, whichever comes later.

source:  PWC - www.pwc.com/ph/en/tax-alerts/2013/tax-alert-no.-26.jhtml

Rem Notes:  

• Upon filing in good faith, taxpayer shall keep his records for 3 years ... But since BIR is given authority within 10-yrs after discovery of falsity or fraud to file a case. BIR is allowed only to discover such falsity or fraud within the prescribed 3-year period. In effect, the taxpayer should keep his records, for defense, within 10 years after the 3-year prescriptive period though.
• In the case of non-filing, taxpayer, ergo, has no records, BIR then is allowed file within 10years a case, even without assessment, upon discovery of omission.
• The 10yr period = starts a day after deadline of filing or on the date of filing if filing is done after deadline