Tax implications of donations

The human tragedy brought about by Super Typhoon Yolanda has resulted in an outpouring of sympathy from companies and individuals who have been donating to various humanitarian and government agencies. The Bureau of Internal Revenue (BIR) has commented on the taxes due on donations.  To be sure, many companies are aware of the implications of donor’s tax, the value-added tax (VAT), and the deductibility of donations. But lest the BIR be “misunderstood” for enforcing the law, some details should be provided on these laws, rules and regulations which govern donor’s tax, and other tax implications of donations. Moving from there, maybe some of these rules can be reconsidered in the light of the current state of national calamity.

The general law is that a donor’s tax of 30 percent of the net gift is imposed on donations made to a stranger.  A stranger is anyone who IS NOT a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or relative by consanguinity in the collateral line within the fourth degree of relationship). On the other hand, any donation above P100,000 made to a “non-stranger” is subject to a donor’s tax at rates provided in the Tax Code.

Now that we have cleared that hurdle, the following donations made by either residents, or non-residents who are not citizens of the Philippines, are exempt from donor’s tax:

1. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government, including government owned and/or controlled corporations.  Examples of said entities are the National Disaster Risk Reduction and Management Council under Republic Act (RA) No. 10121, and Department of Social Welfare and Development.  NOTE, however, that the BIR requires that a BIR Ruling should be issued on a per transaction and case to case basis (BIR Ruling No. 165-12, 09 March 2012).

2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization, collectively referred to as NGOs, provided that these are qualified donee institutions (i.e., they have a BIR Certificate of Registration/Ruling confirming their tax exempt status, and acknowledging their accreditation with the Philippine Council for NGO Certification, Inc.).  NOTE that the donations have to be used specifically for one or more of the purposes for which the donee entity was created or organized.  In the context of aid to victims of the super typhoon, these purposes would probably be “charitable activities” and “social welfare purposes”.  NOTE FURTHER that under Revenue Memorandum Order No. 20-2013, existing certificates of registration/rulings issued by the BIR prior to 30 June 2012 have to be “revalidated” before 31 December 2013.

Gifts to other entities when there exists a special law exempting the entity from donor’s tax.  An example would be the Philippine National Red Cross (PNRC), under RA No. 10072.

The next question would be whether the donations are deductible from the gross income of the donors.  Deductions are only allowed in full if the donations were made to the following entities:

Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA).

Foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws.

The NGOs mentioned above.

Otherwise, donations to the government for activities not covered by a National Priority Plan, or to “non-qualified” NGOs would be deductible only to the extent of 10% in the case of individuals, and 5% in the case of corporations, of the donor’s taxable income derived from trade, business or profession as computed without the benefit of the deduction stated in Section 34(H)(1) and (2) of the Tax Code.  Note that Section 5(c) of RA No. 10072 provides that donations to the PNRC to support its purposes shall be deductible from the gross income of the donor.

Note that deeds of donation are generally subject to the documentary stamp tax (DST) at the rate of PhP15.00 per deed.

Finally, donations subject to the VAT in two cases:

When the donation in kind is imported into the Philippines, and When the (local) donation consists of goods or properties originally intended for sale or for use in the course of business.

All that having been said, maybe the following rules should be reconsidered:

The need to get a BIR Ruling confirming that the donation to the government entity is exempt from donor’s tax.  This requires the submission of documents substantiating the donation to the government.  While the BIR appears to be doing its best to release rulings, the magnitude of donations currently being done will create an even larger workload for the concerned BIR divisions tasked to draft these rulings.  Can’t substantiation be done instead when, and if ever the donor is subject to an audit investigation?  Can the BIR consider drafting an issuance which would state which specific documents would be needed to substantiate the donation, for exemption from donor’s tax and for deductibility of the donation, without the need for a BIR Ruling?

All existing certificates of registration/rulings issued to accredited or qualified NGOs dated prior to 30 June 2012 will expire on 31 December 2013.  Does this mean that the allowances for deduction and exemption from donor’s tax on donations to these NGOs will no longer be allowed?  While some of us may understand the need to re-certify NGOs (based on the current political situation), can’t this deadline be extended?  There are NGOs that are in the proverbial thick of the distributing relief goods and services, and the need for their continued aid isn’t expected to lessen by the end of the year.  Will an extension of the deadline have that bad an effect on the BIR’s verification and collection efforts?

 RA No. 10121 basically provides that the VAT on importations of donations consigned to the NDRRMC shall be addressed by the prevailing General Appropriations Act.  In other words, the VAT on importations will be shouldered by the National Government.  Shouldn’t the VAT on local donations also be covered under this rule?

To be fair to the BIR, I am sure that these questions are at the top of the BIR leadership’s minds.  While some entities may be ready to shoulder all taxes in the spirit of unconditionally providing humanitarian aid, wouldn’t reconsideration of the above rules be fair to the donors and their beneficiaries?

Andrew James Gerard D. Ruiz is a Senior Manager from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please emailmanila@kpmg.com or rgmanabat@kpmg.com.

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.

source:  Philippine Star

Let’s COMPly... Withholding Tax on Compensation

IN ANCIENT Rome, soldiers received salarium, known as salary in our time, as a form of compensation for work rendered. It is believed that salarium originated from the term for "salt", sal, because the wages were either used to purchase salt or were salt itself. Hence, this gave rise to the common expression "being worth one’s own salt".

To maximize tax savings, employees and employers alike must take stock of requirements covering compensation tax.

Here are a few reminders for employees receiving purely compensation income and for employers in relation to withholding tax on compensation.

FOR EMPLOYEES
Update your tax exemption status. Employees should keep their tax exemption status updated by filing BIR Form 2305 (Certificate of Update of Exemption and of Employer’s and Employee’s Information) with the BIR within 10 days after a change in status or event (e.g., marriage, childbirth, previous qualified dependent children reaching 21 years of age), and thereafter furnishing their employers with a copy of the duly filed form.

Failure to update one’s tax exemption status could cause an employee to lose tax benefits. For instance, failing to claim an additional qualified dependent child, would mean foregone savings of P8,000 (P25,000 x 32%).

Any increase in tax exemption may be claimed in the same taxable year, while a decrease (e.g., death of a dependent) will only take effect in the next taxable year.

Submit BIR Form 2316 from previous employers. Those with previous employers during the year should submit the withholding tax certificates (BIR Form 2316) issued by their previous employers to their new employer for proper calculation of their annual taxes. This helps avoid underwithholding of tax by the current employer and the need for the employee to recalculate his income tax due when he files his annual income tax return on or before April 15 of the following year.

Note that employees with multiple employers during the year are not qualified for substituted filing and are required to file BIR Form 1700 (Annual Income Tax Return for Individuals Earning Purely Compensation). Under the substituted filing concept, an individual taxpayer is not required to file an income tax return since the employer’s annual information return and the duplicate copy of the employee’s BIR Form 2316 filed with the BIR serve as the "substitute" income tax return.

FOR EMPLOYERS
Calculate employee’s withholding taxes accurately. To ensure accurate calculation of compensation tax, a number of factors must be considered, namely:

• Tax exemption status of employees. Tax exemption status should be based on information reflected in BIR Form 1902 (Application for Registration for Individuals Earning Purely Compensation Income) or BIR Form 2305 duly filed with the BIR.

Regardless of marital status, personal tax exemption is pegged at P50,000 with additional tax exemption of P25,000 for every qualified dependent child not to exceed four children.

• Taxable income. Taxable income is equal to gross compensation income less non-taxable earnings (e.g., de minimis benefits and mandatory contributions to SSS, PHIC and HDMF), personal and additional tax exemptions. Sounds easy right? But, have you considered employee benefits not processed through the regular payroll that could be subject to withholding tax on compensation?

Take, for example, health insurance benefits given to dependents of rank-and-file employees. If these are paid for by the employer, the grossed-up monetary value (i.e. withholding tax is shouldered by the employer in the same manner as fringe benefit tax) of medical benefits, less P1,500 representing de minimis benefit, should be treated as compensation subject to withholding tax.

• Tax rates. Withholding taxes every payroll period are calculated based on the revised withholding tax tables that took effect on Jan. 1, 2009.

However, in calculating for the last withholding tax covering the month of December, the tax rates to be used should be the annual graduated tax rates of 5% to 32% while the net taxable income should be based on the annual compensation of the employees.

Determine if employees are qualified as substituted filers. Employers are required to issue BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld for Compensation) for all active employees on or before Jan. 31 of the following year (for resigned employees, when the last wage is paid).

Effective this taxable year 2013, employers are also required to submit to the BIR the duplicate hard copy of the duly accomplished BIR Form 2316 of all employees qualified as substituted filer not later than Feb. 28 of the following year. The duplicate copy must be signed by both the employer and the employee declaring the truthfulness of the information under the penalty of perjury.

It is important for employers to determine employees who are qualified as substituted filers prior to the February deadline. A good way to do this is to send a survey to all employees early on to determine whether they fully satisfy the following conditions and thus qualify as substituted filers:

• Employee should be receiving purely compensation income regardless of amount;

• Employee should be working for only one employer in the Philippines for the calendar year;

• Withholding tax has been withheld correctly by the employer (tax due equals tax withheld);

• The employee’s spouse also complies with all three conditions stated above;

• The employer files the annual information return (BIR Form 1604CF);

• The employer issues BIR Form 2316 to each employee; and

• File compensation tax returns on time.

The monthly remittance returns (BIR Form 1601C) should be filed on or before the 10th day after the end of each month, except for the month of December, which must be filed on or before Jan. 15. For e-filers, the deadline is on the 11th to 15th day after the end of each month depending on the employer’s industry classification.

Failure to file and/or remit the tax due on time will result to imposition of 25% or 50% surcharge, 20% interest per annum and compromise penalty. Further, it can result in disallowance of the related salary expense in the employer’s calculation of corporate income tax liability.

The deadline for filing the annual information return (BIR Form 1604CF), together with the required alphalist, is on or before Jan. 31 for both manual and e-filers.

Failure to file on time will result in maximum penalty of P25,000 for a taxable year.

Just as salary is the bread and butter of every employee, taxes too are the lifeblood of the government. Both are sources of income that ensure sustainable existence. Only in an enabling environment that bears compliance of tax laws and upholds equitable distribution of wages can the government and its citizens reap optimal advantage of its economic fruits.

The author is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may send feedback to floredee.t.odulio@ph.pwc.com.

The 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:  Businessoworld

SC resolves with finality rules for VAT refund claims

IN A Supreme Court (SC) resolution dated Oct. 8, the SC rejected with finality the claim of San Roque Power to recover a P400 million excess input value added tax (VAT) refund from the Bureau of Internal Revenue (BIR). The SC denied the motion for reconsideration filed by San Roque Power in a last ditch effort to save its claim for refund which was earlier denied by the SC.

In the consolidated cases of GR No. 187485, GR No. 196113 and GR No. 197156, the SC laid down the rule that a judicial claim for excess input VAT refund can be made only within 30 days after the lapse of 120 days (known as the 120-30-day rule) from the filing of the claim and complete documents with the BIR. San Roque Power failed to observe this rule.

San Roque Power, in its motion for reconsideration, appealed for a prospective application of this SC decision arguing that the administrative practice in the BIR as well as decisions of both the Court of Tax Appeals (CTA) and Court of Appeals (CA) at the time of filing its refund claim did not require strict observance of the 120-30-day rule. Applying it prospectively will have adverse effects on the national economy.

In turning down this argument, the SC emphasized that the CTA or CA decisions, unlike those of the SC, do not form part of the law of the land and are not binding precedents to persons other than parties to the case. More so, they are not binding on the SC. To hold that CTA or CA decisions, even if reversed by the SC, should still prevail is to turn upside down our legal system and hierarchy of courts with effects far worse than the doomsday scenario predicted by San Roque Power on the national economy.

In the same resolution, the separate motion for reconsideration filed by the BIR questioning the relief granted to refund claims filed from Dec. 10, 2003 to Oct. 6, 2010 has also been rejected by the SC. The BIR argues that the ruling relied upon to grant the relief is void as it was issued only by a Deputy Commissioner and not by the Commissioner himself. In striking out this argument, the SC cited the provision of the Tax Code which states that the Commissioner can validly delegate the issuance of a ruling to his Deputy Commissioner.

In its Resolution, the SC reiterated and confirmed with finality its earlier decision laying down the following rules in a judicial claim for excess input VAT refund:

1. The rule requires strict observance of the "120-30-day rule" in a judicial claim for excess input VAT refund for the court to acquire jurisdiction.

2. An exception to A (the 120-30-day rule) applies on claims for refund that were prematurely filed within the window of relief from Dec. 10, 2003 to Oct. 6, 2010. Thus, even if the taxpayer does not wait for the 120-day period for the Commissioner to decide the administrative claim before elevating it to the courts, the judicial claim is considered filed on time and not premature;

3. Judicial claims filed beyond (not within) the "120-30-day rule" after the filing of the administrative claim for refund with the BIR should be denied on the ground of late filing.

The San Roque Power case clarified the mandatory nature of the 120-30-day rule. For refund claims involving excess Input VAT, it should be filed with the BIR within two years from the end of a taxable quarter the sales were made. If not acted upon by the BIR within 120-days from submission of complete documents, the claimant can file a judicial claim with the CTA within 30 days from the expiration of the 120-day period. The observance of the 120 days is mandatory and jurisdictional, non-compliance of which will not vest the court with jurisdiction.

But other pressing issues haunting the validity of refund claims remain unresolved. Clarification of these issues is necessary, otherwise, claimants may suffer the same fate as San Roque Power. For example, the reckoning point for counting the 120 days is not yet clear. Is it from the filing of the claim? Or from submission of complete documents? What kind of documentation is considered complete? BIR issuances are lacking on this matter. The CTA has, in some cases, given its position on this issue but as ruled by the SC in its resolution, CTA decisions could not be relied upon for guidance as they are not binding precedents. So, where should taxpayers turn to?

Tax refunds are in the nature of exemptions which must be strictly contrued against the taxpayer making the claim. I agree. But on this premise, shouldn’t it also be the prime responsibility of the government -- legislative, executive and judiciary -- to provide clarity and guidance if they are to expect proper compliance?

I tend to agree with the dissenting opinion of Chief Justice Sereno in saying that in the case at hand, there was confusion in the application of the rules and the BIR as well as the Courts participated, allowed and contributed to this confusion. And for this reason alone, shouldn’t the rules, now that they are clarified, be applied prospectively? This is the rule in a game where equity and fair play matters. After all, the highest form of law is one anchored on the universal laws of fairness, equity and justice.

(The author is Chair of the Tax Committee of the Management Association of the Philippines [MAP], Governor and Secretary of MAP for 2014, and the Managing Partner and CEO of Du-Baladad and Associates [BDB Law]. Send feedback to map@globelines.com.ph and dick.du-baladad@bdblaw.com.ph. For previous articles, visit www.map.org.ph.)
 

source:  Businessworld

Doctrine of operative fact

THE ADAGE that "nothing is constant except change" holds most true for tax rules and regulations. We, as taxpayers, have to be constantly vigilant not just of changing rules and regulations but of changing interpretations of old rules and regulations. Most of us are now reeling from the realization that some practices that we hold sacrosanct are actually erroneous interpretations of the Tax Code.

One case in point is the practice relevant to the filing of the judicial claim for refund of input value-added tax (VAT). Prior to Oct. 6, 2010, taxpayers would rush to the Court of Tax Appeals (CTA) to file the judicial claim for refund prior to the lapse of the two-year period believing that the prescriptive period is mandatory and jurisdictional.

However, said practice was struck down by the Supreme Court (SC) in the Aichi case where it declared that the judicial claim for input VAT refund does not follow the two-year prescriptive period but the 120+30-days rule. In the Aichi case, the SC held that the taxpayers must file the judicial claim within 30 days from the issuance of the Bureau of Internal Revenue (BIR) decision or after the lapse of 120 days in case of inaction by the BIR. Thus, the prior practice of filing the judicial claim within the two-year period was held in most cases as either premature or delayed. As a result, a number of pending CTA cases have been denied for failure to observe the 120+30-days rule. This meant loss of millions of pesos for some taxpayers.

The Aichi case was further reiterated in the consolidated cases of San Roque, Taganito and Philex, which were decided by the SC on Feb. 12 this year. As expected, the parties filed a motion for reconsideration.

In its motion, San Roque Power Corp. prayed that the new 120+30-day rule be given only a prospective effect, arguing that the manner by which the BIR and the CTA actually treated the 120+30-days periods prior to the controversial Aichi decision constitutes an operative fact, the effects and consequences of which cannot be erased or undone.

Deciding on the case, the SC denied the motion for reconsideration on Oct. 8, 2013. It held that the doctrine of operative fact does not apply in this case.

Under the general rule, a void law or an administrative act cannot be the source of legal rights or duties. However, the doctrine of operative fact is an exception to the general rule. Under the doctrine, a judicial declaration of invalidity may not necessarily eliminate all the effects and consequences of a void act prior to such declaration.

Prior to the declaration of nullity, such challenged legislative or executive act must have been in force and had to be complied with as they were presumed to be valid. Only the courts can declare a law invalid, and without such declaration, taxpayers would have had no other choice but to follow the existing rules or in this case the practice of filing the judicial claim within the two-year period.

In rejecting the application of the doctrine of operative fact, the SC emphasized that there must be a law or executive issuance that is invalidated by the court for the doctrine to apply. In the present case, however, there is no such law or executive issuance that has been invalidated. What were held erroneous were the BIR and the CTA’s actual practice of not observing and requiring taxpayers to comply with the 120- and 30-day periods.

The SC reiterated that the 120- and 30-day rules are in accordance with Section 112(C) of the Tax Code and must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA as there will be no decision or deemed denial decision by the BIR Commissioner for the CTA to review.

The SC’s decision emphasized that tax refunds are construed strictly against the taxpayers. Therefore, taxpayers should now be able to interpret tax laws and regulations and not just rely on the existing practices upheld by the BIR and the CTA. We should now meticulously examine every law and regulation as if we are the SC and anticipate if the current practice runs counter to the strict interpretation of the law. And if we have somehow decided that the current interpretation is incorrect, we must now bravely go where others have not dared tread and pray most heartily that our interpretation will be upheld by the SC. Such daunting burden we all must face every day as we diligently pay our taxes and painstakingly seek our refunds.

The author is a head of the tax advisory & compliance division of Punongbayan & Araullo. P&A is a member firm within Grant Thornton International Ltd.

source:  Businessworld