Workers to get additional P10,000 tax exemption

Malacañang announced on Sunday that workers will receive additional P10,000 tax exemption from their benefits beginning next month.

Presidential Communications Operations Office (PCOO) Secretary Herminio Coloma Jr. said Labor Secretary Rosalinda Baldoz and Finance Secretary Cesar Purisima announced the good news for millions of workers all over the country.

“This is the result of the approval by President Benigno Aquino III to new guidelines with regards to additional tax exemptions for the benefits to be given to the workers under the collective bargaining agreement (CBA) and productivity incentive schemes,” he said.

Coloma said the additional tax exemption was also the result of continuous dialogue by the President with the labor organizations.

“The new guidelines will be implemented in January 2015 through a revenue regulation to be issued by the Bureau of Internal Revenue (BIR),” the PCOO chief said.

Purisima described the additional tax exemption for the so-called de minimis benefits as rational because millions of workers will benefit from it.

“These workers are among those who receive lowest salaries,” Coloma said.

The total benefits which will be covered are expected to reach P104,225 from the present P94,225.

Almost P17 million will be deducted from the revenue collection of the BIR due to this additional tax exemption.

In its official gazette, the administration said the expanded list of de minimis benefits exempted from income tax on compensation  include benefits under CBAs  and productivity incentive schemes.

“This is a fitting gift to our workers in this holiday season,” Baldoz said, after the Department of Labor and Employment (DOLE) and the Department of Finance (DOF) had agreed to have the measure take effect in January 2015.

The Bureau of Internal Revenue, which is under the DOF, will issue new revenue regulations to make the measure effective.”

Baldoz recalled that expanding the list of tax-exempt de minimis benefits was one of the demands of labor at the dialogue with the President in the last Labor Day commemoration in May 2014.

At present, de minimis benefits—or benefits with relatively small values—are given by employers to their employee on top of the compensation and these benefits are not subject to withholding (tax exempt). Under RR 8-00, as amended by RR 10-00,  the following are recognized as de minimis benefits:

• 10 days monetized unused vacation leave credits;
• medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month;
• rice subsidy of P1,000  or one-sack of rice per month;
• uniforms and clothing allowance not exceeding P3,000 per year;
• medical benefits not exceeding P10,000.00;
• laundry allowance of P300 per month;
• employee achievement awards in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan;
• flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
• daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.  (With report from Philippine News Agency; information from payrollhero.ph)

source:  Manila Bulletin

PEZA-registered locators exempt from BIR clearances

LOCATORS in special economic zones need not secure the requisite Bureau of Internal Revenue (BIR) clearances for importers and customs brokers as part of a government effort to facilitate trade, according to an order by Finance Secretary Cesar V. Purisima issued last month.

“All locators of PEZA (Philippine Economic Zone Authority) special economic zones throughout the Philippines, duly registered with PEZA are exempted from the requirements of Department Order (DO) 12-2014 as amended by DO 18-2014, and shall be eligible for accreditation as importers with the Bureau of Customs Account Management Office (BoC-AMO),” according to Mr. Purisima’s DO 107-2014 signed Nov. 28.

The twin orders require importers and brokers to secure an importers clearance certificate (ICC) and a customs broker clearance certificate (BCC) as a new requisite before they can transact with the Bureau of Customs.

While PEZA locators are exempted from the requirement, the BoC may still require them to submit documents and information before accreditation is granted.

“PEZA locators that will import goods into the Philippines will have to comply with the documentary requirements provided in the relevant rules of procedure of customs,” the order stated.

“Failure to do so will subject them to the sanctions and penalties as provided by the Tariff and Customs Code of the Philippines, as amended, and by pertinent customs laws and regulations,” it added.

The Finance Department, on Feb. 6, issued Department Order (DO) 12-2014 requiring importers and brokers to secure a BIR Importer Clearance Certificate (BIR-ICC) and a BIR-brokers clearance certificate (BCC) as a requisite for accreditation with the BoC.

The new system aims to support the government’s goal of improving accountability and tax compliance.

Importers were originally given 90 days to comply with the new rule.

Of the 14,995 importers and brokers registered with the Bureau of Customs’ (BoC) client profile registration system before the July 31 deadline, 9,418 or 63% were able to comply.

However, it noted that only 11 or 0.1% of the total importers were able to beat the original May 21 deadline. A total of 3,377 applied in the first extension while an additional 6,030 sought accreditation during the second extension.

Importers and brokers who failed to beat the deadline are treated as new applicants. --Mikhail Franz E. Flores

source:  Businessworld

Paying more attention to working capital

Optimizing working capital levels

Dec 03 2014

IN THE FIRST part of our series on working capital management (published in the November 20 issue of this column), we discussed the importance of working capital management as a key driver to achieve an optimal valuation. Whether or not a company is thinking of divesting, working capital management strategies should be carefully formulated, implemented throughout the organization, and regularly reviewed.

One should adopt a rigorous approach geared towards continuous improvement to achieve results that can be sustained under different economic conditions. The key area to focus on is cash management, to minimize carrying costs and maximize yield of idle cash. Other areas to monitor include the performance of accounts receivable, accounts payable and inventory management.

In this article, we have included planning steps that may be employed by companies to proactively target working capital to the lowest sustainable levels and achieve an optimal business enterprise valuation.

For one, the firm should undertake a rigorous analysis of its current working capital requirements based on internal and external factors. These internal and external factors can include the type of industry (and existing practices), the company strategy, the business model, seasonality, how the company wishes to compete in the marketplace, and money market yields, among other factors.

The answers to certain questions may be explored. Is it an asset-light or asset-heavy industry? Are products sold or are services provided? If products are sold, does the company have a strategy of 100% product fulfillment? Is competition to boost sales primarily a discounting game, or do non-price factors such as credit terms matter? What time of the year does the working capital bulge? How competitive are the money market yields at this point in time? Other factors, such as how the collection or payments system is being managed, must be reviewed.

Along with a rigorous internal analysis, one can also benchmark against peer companies. Analyzing working capital metrics of peer companies has two main advantages. Benchmarking allows a company to understand its position relative to peers within the same industry, and compare performance.

At the same time, a firm can compare the working capital effects of its business model and strategy versus that of its competitors. Apart from having visibility on the company’s position in the country where it operates, additional insight may be taken from analyzing its peers within the same region.

Another advantage of conducting a benchmarking analysis comes from observing how the best-managed peers manage their accounts receivable, accounts payable, and inventory. Benchmarking against better working capital metrics may signal opportunities to further improve working capital management. For instance, if in the process of the benchmarking analysis, a company finds that its accounts payable turnover is considerably shorter than its peer companies, this provides an opportunity to renegotiate with its suppliers for more favorable, yet competitive, payment terms. Ultimately, good working capital management leads to a shorter time to convert working capital into cash.

The cash conversion cycle (or the sum of days inventory, days receivable, less days payable) shows the number of days needed to convert sales into cash after payment of obligations. It also shows how long working capital is financed.

By targeting a faster cash cycle, the company can improve its cash flow and use its resources more efficiently. The situation is not so easy to navigate all the time. The firm has to manage competing priorities, balancing what it values versus what is important to its customers.

For instance, a firm that decides to tighten collections may risk alienating customers who may wish more liberal payment terms. More liberal payment terms, however, result in a longer cash cycle and a higher opportunity cost of funds for the firm. Maybe the firm can also offer discounts for prompt payment. However, the discounts should not be so large as to eat into product margins.

For inventory management, keeping a higher level of inventory may minimize stock-outs and cater to happy customers, but the risk of carrying too high a level of inventory means that the firm is exposed to obsolescence or higher-than-necessary carrying costs (including storage and insurance). If the firm decides to pursue lean inventory management by adopting just-in-time methods, it then runs the risk of suppliers disrupting the supply chain if they miss a delivery of needed parts for stock.

Managing payables has its own challenges. Stretching payables for too long may alienate the firm’s suppliers and hurt its supply chain. However, paying too quickly lengthens the cash cycle and increases the opportunity cost of cash.

What certainly helps in managing working capital involves setting realistic targets that one is able to manage, and evaluating actual performance vis-a-vis targets. Setting targets involves putting down on paper what are the target days sales outstanding, days inventory outstanding, and days receivables outstanding; and managing the working capital to hit those targets. Done at a very micro level, one may even set targets per customer that build up into an overall cash cycle target for the firm.

In addition to having a target cash conversion cycle, one may adopt other targets. These may include net working capital as a percentage of sales, aging of receivables, aging of payables, and the invoice error rate. Visibility on all of these metrics gives the firm the actionable information that it can use to maximize cash flow and optimize enterprise value.

Inevitably, when it comes down to target setting, the question shifts to who should be accountable for hitting the target? The answer is, everyone in the transaction chain -- from sales, to purchasing, to order fulfillment, to collection, to finance and treasury -- has a role to play in efficient working capital management.

Firms may adopt a bottom up approach in planning working capital management policies and procedures, where each participant in the transaction chain is accountable for hitting established target metrics or service levels. These target metrics become key performance indicators for the departments and individuals involved in managing working capital.

Planning, executing, and hitting working capital targets should be adopted as a continuous improvement process. While the benefits of solid working capital management strategies can be realized in the short to medium term, a company can also benefit from this in the long run thereby achieving an optimal business enterprise valuation. For the next article in this series, we will discuss working capital strategies that can be identified and implemented to optimize firm enterprise value.


Dec 10 2014

IN OUR SECOND installment of this three-part series on the importance of working capital in valuation, we talked about effective working capital planning, benchmarking, setting target levels, and managing working capital as part of a continuous improvement process. In this last installment, we will cover the actual tactics one can implement for effective working capital management. All of these tactics, applied on an ongoing basis, can help a firm optimize its cash flow and hence, its business enterprise valuation.

First, let’s cover what to do with idle cash. The cash on a firm’s balance sheet, if idle, represents an opportunity cost. If it isn’t placed even on an overnight basis, it isn’t earning interest. The company’s treasury could set up a facility with a bank where all of the idle cash at the end of the day, after all of the transactions have occurred, gets swept into an overnight placement. It earns an overnight money market interest rate. The next day, the funds are ready to service transactions.

As a counterpart to this, companies may also have short term lines with banks to finance their receivables. This comes in handy when accounts receivable collection efforts come up short against the forecasted figures. The company uses the short term lines to plug the liquidity hole in its balance sheet. Banks especially well-versed in facilitating commercial trade transactions will usually come forward to offer an overall financing package, which incorporates both the short term line and the sweep facility.

The next layer on the balance sheet after cash concerns accounts receivable. These are generated based on credit sales to customers of course. It is often said that an ounce of prevention is worth a pound of cure. The firm’s first line of defense in managing accounts receivable is actually doing a rigorous credit analysis of each customer with which it does business.

Based on such credit analyses, customers can be grouped into several tiers. Those who are least credit-worthy become strictly “cash-on-delivery” customers. Those who meet the credit standards and have a favorable payment history, are given the best credit terms. Ideally, credit evaluations occur regularly, at least once a year, where the credit limits per customer are further refined. A customer’s recent payment history should be given more weight compared to the overall account performance.

The second thing one can do in receivables management for the best customers is to set up automatic payment arrangements through an electronic facility. The advantages of this include timely payment, lower transaction costs, and convenience for both the customer and the firm. Further, the use of automatic payment system frees up manpower time. The system also has an auditable transaction trail which allows for ease of reconciliation.

A company can also offer a prompt payment discount. The terms might be 2%/10, net 30. This means that the customer can get a 2% discount if he pays within 10 days of receiving the invoice, otherwise the entire balance is due in 30 days. The trade-off that the firm has to manage involves the effective opportunity cost of the discount, compared to the effective money market yields available for its idle cash, and the cost of any receivables financing that it uses.

On a regular basis, the firm also has to monitor the aging of its receivables and focus on those customers that are habitually late in paying. Letting accounts receivable slide for too long hurts cash flow and increases the chances that customers will default. Being too tight on payment terms and badgering customers for payment may alienate them, and they may choose to take their business elsewhere. Sometimes however, it’s perfectly fine to “fire” a customer that habitually pays late and soaks up precious time and resources in terms of collection efforts, because the effort can be used more productively elsewhere.

For businesses that really need receivables financing badly, one can discount receivables with a bank or finance company, which is otherwise known as factoring. This can get quite expensive -- the finance costs from factoring can easily eat into profit margins.

From the management of accounts receivable, we move to inventory management, which, inclusive of work in process inputs, is a challenging effort. The complexity is further magnified with a supply chain that has a multitude of warehouses, which serve as both inbound receiving centers and outbound shipping points.

The techniques of minimizing inventory and yet maximizing customer fulfillment have gotten more sophisticated, but the end goal is quite simple: reduce the amount of cash invested in inventory. From the just-in-time systems that Toyota pioneered to manage its inbound parts supply chain, inventory management has progressed to using statistical techniques like six-sigma and lean principles to reduce costs, eliminate waste, shorten turnaround times, and improve customer fulfillment.

Lean inventory management techniques focus on five principles: value, flow, pull, responsiveness, and perfection (1). When applied properly, these five principles result in a company capturing additional surplus by moving inventory only when the customer demands it, using processes that have been optimized to eliminate waste and reduce time, benchmarked against clear metrics to identify further process improvements that can be made in the future.

Firms can also use up-to-date technology to magnify the efficiency of lean inventory management. Radio frequency identification chips (RFID) attached to products that enable tracking over the internet, allow the firm to know exactly where the entire goods in transit are at any given time, and can deter the incidence of inventory shrink. As a bonus, a link to the customer’s supply chain can trigger automatic re-ordering when the customer’s stock goes below threshold levels.

Managing accounts payable brings with it a new set of challenges. To lower cost, one can take advantage of prompt payment discounts. The prospect of getting a hefty discount compared to money market rates may be enticing, but one has to weigh the early disbursement of cash versus the next best use of that cash. You have to make sure that based on projected cash cycle, your cash flow won’t suffer if you take advantage of the payment discount.

If your cash flow won’t hold up, but you’ve got financing to cover it, you have to take into account the cost of financing, which will offset the early payment discount.

Another tactic to consider involves simply delaying payment on payables. This has its own risks, because suppliers can disrupt your supply chain by refusing delivery on your future orders. Before you do this, you have to think long and hard on whether the headache of having a potentially disrupted supply chain is worth the benefits.

The other thing one can do with respect to managing working capital, with perhaps the longest lasting consequences, involves running a process improvement program (like lean six sigma) on your entire working capital management process. Every error in every activity in the cash cycle has a real cost, or an opportunity cost. Multiple errors on the same transaction pile up, especially if you multiply those errors across the multitude of transactions processed.

If you reduce error rates, the cost savings in terms of time and money flow straight to the bottom line. This is why General Electric adopted Six Sigma after Motorola pioneered it. GE knew that if it could reduce error rates, the savings from eliminating errors in the millions of transactions it does every year would result in material additional profits.

Managing working capital optimally to increase firm valuation is a commitment. The additional sustained cash flow from managing working capital well, can actually have a material impact on a firm realizing its optimal business value. This becomes significant when the working capital metrics, when compared to industry competitors, are significantly better than the industry norms. In such a situation, the firm can actually command a premium from a prospective buyer, because in valuation, cash is king.

¹ “The Scoop on Lean Inventory Management Techniques,” at www.blog.clientsfirst-ax.com

Raoul Villegas and Ma. Luisa Gonzalez, Director and Senior Associate, respectively, are from the Deals and Corporate Finance group of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

raoul.a.villegas@ph.pwc.com

maria.luisa.gonzalez@ph.pwc.com

source:  Businessworld

All about LBT

LIKE IT OR NOT, the Christmas rush is upon us. The harried nature of the season is often characterized by inexplicable traffic, overcrowded shopping centers, work deadlines before the end of the year and calendars marked by this or that party or reunion.

After the Christmas season and just when we are about to heave a sigh of collective relief -- another equally busy season comes rushing in and this is the period for the renewal of business permits.

The Local Government Code requires all business entities to renew their business permits and pay their local business taxes (LBT) on or before the 20th of January of each year. The deadline applies to all cities and municipalities in the country. The Code, however, allows local government units (LGUs) to extend the time of payment but only for a justifiable reason or cause.

Note that the extended deadline only pertains to the payment date, which means that applicants for business permit renewal should still submit and file all the necessary documents beginning the first working day of January and only until the 20th thereof.

Some LGUs usually extend the payment date until the end of January. Quarterly payments of LBT may be allowed in some cases but some LGUs give discounts to businesses that opt to pay the full amount in a single payment.

Based on experience, applications for renewal of business permits with complete supporting documents submitted a day or a few days after the 20th of January, particularly in LGUs within the Metro Manila area, are considered as late filing, and will trigger penalties and surcharges based on the amount of LBT assessed.

Businesses that are liable to pay a large amount of business tax must ensure that applications are duly filed and LBT paid within the deadline; otherwise, the penalties and surcharges will likewise be great.

Most, if not all, LGUs only start accepting applications on the first working day of January, and not a day earlier. Given the tight deadline, prudence dictates that businesses start preparing and gathering all the required documents for renewal as early as October or November. Such documents include the audited financial statements, if applicable, and statements of gross receipts and value-added tax (VAT) returns filed -in the preceding year. If not earning income, such as in the case of a representative office, an Affidavit of No Income is normally required by some LGUs aside from other documentation.

The procedures for renewal and payment may vary from one LGU to another so it pays to know the specific steps and processes early on to avoid the risk of mistakes and having to start all over again with the January 20th deadline looming near.

Another thing to consider is the Papal Visit of Pope Francis which coincides with the renewal season. The City of Manila has declared January 16 to 19, 2015 as holidays, thereby reducing the available dates for filing applications in Manila. LGUs where the Pope is scheduled to visit may likewise declare holidays in the coming days. It is hoped that deadline extensions in these areas are declared as well.

Before the renewal period starts, concerned businesses must also take heed of certain policies of some LGUs when it comes to the assessment and collection of LBT. Some impose LBT on PEZA-registered entities based on the gross receipts generated by their non-PEZA registered activities.

By law, PEZA-registered entities are exempt from paying LBT regardless of whether they are enjoying income tax holiday or are under the 5% gross income tax regime. However some LGUs insist that the tax incentives apply only to PEZA-registered activities and not to “unregistered” ones. This reasoning may perhaps be the result of a BIR ruling which imposed regular income tax on income generated by PEZA-registered enterprises from activities which are not covered by their PEZA registration.

Another issue that commonly arises in the payment of LBT is the proper situs of the tax where the business entity has branches, sales offices, project offices, and plants scattered in different cities and provinces but maintains a head or principal office in a different area.

In one fairly recent decision, the Court of Tax Appeals (CTA) ruled that the City of Makati should not be allocated any LBT by virtue of a so-called project office as declared by a taxpayer. In that case, the taxpayer treated its office in Makati City as one of three project offices and/or plants, and allocated a portion of its LBT payment thereto. The court ruled that since said office in Makati is not indispensable to the main purpose of the company, it cannot be treated as a project office, hence the allocation of LBT to that Makati office was held to be improper and without basis.

Holders of government or legislative franchises must also take note of a recent CTA decision which declared that an LGU may impose both the LBT and the local franchise tax on the gross receipts and sale of the same taxpayer in the same year. A prominent cable company called this imposition double taxation and questioned the legality of such a move. The CTA then ruled that there is no double taxation if the franchise holders pay both the LBT and franchise tax in the same year because the two taxes are different in nature -- LBT is based on the privilege of engaging in business while franchise tax is imposed on the exercise of enjoying a franchise.

In sum, I advise all applicants for business permit renewals to start and prepare early, determine the procedures and requirements adopted by your concerned LGUs before the renewal period, know your rights and remedies in case of erroneous LBT assessments and most important, have a merry renewal season. Happy Holidays!

Susan M. Aquino is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

susan.m.aquino@ph.pwc.com

source: Businessworld

Taxing tobacco: blowing away smoke from the issues

THIS WILL BE my last column for 2014, and so before anything else, please allow me to greet BusinessWorldreaders a very Merry Christmas next week and a happy and prosperous year in 2015. May I also greet the House of Representatives, from where tax laws emanates, a productive and fruitful 2015 in considering new tax policies that will truly benefit people.

Let me take off from Speaker Sonny Belmonte’s seeming concern over the implementation of the latest cigarette taxes approved by the House in 2012 and which took effect in 2013. He noted in a press forum last week the need to review the latest tax changes in light of allegedly fraudulent practices in the tobacco industry to evade taxes and duties.

There is also concern over allegedly illicit trade, or the sale of locally produced cigarettes to markets here and abroad without proper declaration of volumes to the authorities for the payment of correct taxes. News reports also note of the alleged smuggling of imported inputs to local cigarette production, through improper declaration of volumes and or import prices.

Belmonte wants the House oversight committee on cigarette taxes to review current industry practices and to determine whether or not certain cigarette manufacturers are getting away with “murder.” Pardon the play of words, but cigarette smoking, after all, has been determined to cause illnesses that can result in death.

In my opinion, anyone caught cheating on taxes particularly on a large scale should be quartered and hanged, more so companies manufacturing and selling products that are scientifically proven to be detrimental to public health. It is bad enough that they are legally allowed to sell products that are known to be harmful, and they still have the gall to cheat on their taxes?

I support the Belmonte initiative primarily to get a proper determination of the facts in this issue, considering that much information has been made public to date which may or may not be tainted or were derived from polluted sources.

There may also be an effort to misinform policy makers and perhaps the public.

Take the allegation of illicit trade, for instance. The way I understand the present situation, at least one cigarette maker has been accused of selling more than what it produces and declares to the government for tax purposes. With that, its “illicit” trade covers all products sold over and above what has been declared and thus properly taxed.

Note that cigarettes are taxed at the source. And this means that cigarette makers advance or pay ahead the excise tax and value-added tax due on their cigarettes packs as soon as they are produced and “withdrawn” from manufacturing facilities for distribution or sale. Tax collectors are already based in production plants to make the proper assessments and collection.

In this sense, illicit trade can result if there are packs made and withdrawn from plants without the payment of proper taxes, and then sold either locally or abroad as if they were “properly declared” production that are tax-paid.

We have a similar situation in mining, where data indicate metal ores are shipped out and sold abroad, unprocessed and undeclared to authorities for the proper reporting of volumes and they proper payment of taxes.

Belmonte’s concern, it would appear, is that the government is being cheated of taxes because of illicit trade. Although the country’s biggest cigarette maker is also publicly griping over its loss of market share to a smaller competitor. I just hope that the Speaker, and the House, will not lose sight of what is really important. Tax collection is the paramount concern here.

For I cannot see why and how else Belmonte and lawmakers can be too concerned with industry competition and operations since Congress’s primary duty is legislation and not necessarily implementation. It can review implementation of laws mainly to determine the need for remedial legislation.

What also appears to dispel the concern over alleged illicit trade is the fact that tax collection from cigarette makers has actually gone up -- basically, because of higher tax rates beginning 2013 -- even if production volumes and sales have gone down over the same period. As mentioned, the paramount concern here is tax collection, and not so much industry operations.

After all, the twin intent of the latest cigarette tax law is to raise tax collection and calibrate cigarette sales given that smoking is a health hazard. Simply put, higher tax values at lower sales volumes. It shouldn’t matter so much whether one company is losing market share to others, or if one company is making more money than others.

What data show us is that the Bureau of Internal Revenue (BIR) collected over P100 billion in excise taxes from sin products in 2013, with the incremental revenue under the sin tax reform amounting to more than half of that, or Php51.1 billion. The 2013 collection was also 81.2% higher than 2012’s Php55.7 billion. And for January to September this year, collection was P78.3 billion, up 27.7% year on year.

What is more telling is that one independent international study claims the possibility of illicit trade covering about 25 billion cigarette sticks in 2012 and 2013, or over 10% of an estimated total consumption of about 214 billion sticks in the two-year period. Yes, the country sells over a 100 billion cigarette sticks annually.

On the other hand, BIR data over the same period indicate a consumption volume -- and thus tax-paid, since taxes are collected even prior to withdrawal and sale -- of over 237 billion sticks already.

In this line, how can that claim of illicit trade be if total cigarettes consumption in sticks reported by this supposedly independent study both for the years 2012 and 2013 -- inclusive of allegedly illicit consumption -- is materially lower than the consumption (based on actual removals) accounted or reported by government authorities?

It is for this reason that Belmonte is on the right track. A review is still urgently necessary as illicit trade and tax evasion are still distinct possibilities, and there should be greater clarity as to which data is believable. But as mentioned, Congress should not lose sight of the latest cigarette tax law’s objectives: above all else, collect more taxes and at the same time calibrate sales to better protect and promote public health.

Marvin Tort is a former Managing Editor of BusinessWorld, and former chariman of the Philippine Press Council.

matort@yahoo.com

source:  Businessworld

The OECD action plan on Base Erosion and Profit Shifting

IN TAX, the latest global buzzword is “BEPS” or base erosion and profit shifting. BEPS refers to the practice of multinational corporations (MNCs) of shifting profits from high tax jurisdictions to low tax jurisdictions as a tax mitigation strategy.

In February 2013, the Organization for Economic Co-operation and Development (OECD) claimed that available data on the extent of BEPS is inconclusive; nevertheless, there is circumstantial evidence suggesting that BEPS practices are pervasive. In fact, studies cited in the 2013 OECD BEPS Report suggest that in certain jurisdictions, there are significant discrepancies between the physical operations of companies and the countries where they report profits for tax purposes.

Conceptually, tax planning strategies are intended to improve the overall tax efficiency of companies through the use of legitimate approaches. However, problems arise when the very laws themselves create opportunities for BEPS, such as when the application of different tax laws results in double non-taxation. This is where the issue of fairness comes in, since many MNCs have been accused of not paying their share of taxes resulting from these practices.

The OECD Action Plan explains the harmful effects of these business practices to stakeholders such as governments, individual taxpayers, and businesses.

Many governments have to cope with less revenue and higher cost to ensure compliance. In developing countries, the lack of tax revenue leads to critical under-funding of the public investments that help promote economic growth. Overall resource allocation, affected by tax-motivated behavior, is not optimal. For individual taxpayers, they bear a greater share of the burden of paying more taxes when businesses shift income to lower tax jurisdictions. For businesses that operate only in domestic markets, they will have difficulty competing with MNCs that have the ability to shift their profits across borders to avoid or reduce tax. These disadvantaged businesses include family-owned corporations and new companies.

Because of the perceived harmful effects of these BEPS practices, the BEPS issue has become not only an economic issue but a political one as well. It has caught the attention of governments and tax administrators, the OECD and the G20 Leaders and Finance Ministers. In the G20 meeting in November 2012, G20 Finance Ministers finally called on the OECD for a coordinated action to address the BEPS issues. This call jump-started the OECD BEPS Action Plan which was released in July 2013.

The BEPS Action Plan identified 15 action areas that the OECD will focus on in the next two and a half years; these are:

1. The tax challenges of the digital economy;

2. The effects of hybrid mismatch arrangements;

3. Strengthening controlled foreign corporation (CFC) rules;

4. Limiting of base erosion via interest deductions and other financial payments;

5. Countering harmful tax practices more effectively, considering account transparency and substance;

6. Prevention of treaty abuse;

7. Prevention of artificial avoidance of permanent establishment (PE) status;

8. Assurance that transfer pricing (TP) outcomes are in line with value creation of intangibles;

9. Assurance that TP outcomes are in line with risks and capital;

10. Other high-risk transactions;

11. Establishment of methodologies to collect and analyze data on BEPS, and the actions to address it;

12. Requirement on taxpayers to disclose aggressive tax planning arrangements;

13. Reexamination of TP documentation;

14. Improvement of dispute resolution mechanisms; and

15. Development of more effective multilateral instruments.

The OECD envisioned the Plan to be implemented in three phases from September 2014 through December 2015. According to the OECD, the deliverables of the BEPS Action Plan will identify best practices, model domestic legislation, changes to the OECD Model Tax Convention and other tools needed to ensure that profits and taxes are aligned with economic activities, and close the loopholes in the tax policies and domestic legislation.

In September of this year, the OECD presented its first set of deliverables to the G20 Finance Ministers, but these reports will remain in draft form until the completion of the 2015 deliverables. Until then, the OECD will continue to work on recommendations and models for the seven action areas in order to achieve reasonable and sustainable solutions to counter these BEPS practices.

This first set of deliverables consists of three reports on Digital Economy (Action 1), Harmful Tax Practices (Action 5) and Feasibility of a Multilateral Instrument (Action 15) as well as four draft rules on Hybrid mismatch arrangements (Action 2), Treaty abuse (Action 6), Transfer Pricing of intangibles (Action 8) and Transfer Pricing documentation and a country-by-country reporting template (Action 13).

Briefly, these reports are summarized as follows:

Action 1: Addressing the challenges of the digital economy

The main challenge of the digital economy is how digital players such as online sellers or retailers, internet advertisers, and app stores make their profits, how these profits are characterized for tax purposes, and where taxes on these profits should be paid. The report presented potential options to address these challenges such as modifications of the PE threshold, the concept of significant digital presence, the creation of withholding tax on some types of digital transactions, and the imposition of a bandwidth or “bit” tax and VAT or consumption tax.

Action 2: Hybrid mismatch arrangements

This report provides recommended rules and model treaty provisions intended to neutralize the effect of hybrid mismatches like the denial of dividend exemption for deductible payments, introduction of measures to prevent the use of hybrid transfers to duplicate credits for taxes withheld at source, and denial of deduction for payment that is also deductible in another jurisdiction.

Action 5: Harmful tax practices

The OECD’s efforts to counter harmful tax practices of companies are nothing new. As early as 1988, the OECD had already begun looking at these practices. Now, however, the report focuses on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime especially in the context of intangible regimes.

Action 6: Treaty abuse

The OECD identified treaty abuse as one of the major sources of BEPS and as such, has focused on specific action items to counter treaty abuse and treaty shopping.

Article 8: Transfer Pricing of intangibles

One of the biggest challenges in Transfer Pricing is how to prevent BEPS when it involves intangibles. As such, the report on TP attempts to clarify the definition of intangibles, provide guidance on identifying transactions involving intangibles, and provide supplemental guidance for determining arm’s length conditions for transactions involving intangibles.

Action 13: Transfer Pricing documentation and a country-by-country reporting template

Part of the difficulty in countering BEPS is the lack of adequate information on how they operate within businesses. Action 13 aims to increase transparency for tax administrations by providing standards for TP documentation and as well as a template for country-by-country reporting. The guidance on TP documentation requires companies to disclose high-level information regarding their global business operations which will be available to all relevant country tax administrations, and provide documentation on relevant related party transactions. The country-by-country reporting will require companies to disclose substantial information on their businesses such as where they do business, amount of revenue, profit before income tax, income tax payments, total employment, capital, retained earnings, and tangible assets in each tax jurisdiction.

Action 15: Feasibility of a Multilateral Instrument

One of the mechanisms identified by the OECD in implementing the BEPS initiative on treaty-related matters is the use of multilateral instruments, which are seen to be more effective and sustainable since they can bind all parties, thereby ensuring a consistent and coherent approach to addressing treaty-related BEPS issues.

Looking back to more than a year ago, the BEPS initiative was met with both anticipation and criticism. While the initiative to level the playing field was prompted by good intentions, companies raised legitimate concerns on how this will impact their businesses. Key concerns include the risk of improper use of the country-by-country reports, the administrative costs of increased compliance and disclosure requirements, interpretation issues on treaty benefits which could lead to double taxation, and breach of confidentiality provisions which may expose sensitive corporate information to competitors, among others. The same issues stand today even after the OECD’s release of the first set of reports. Clearly, the OECD still has a lot of ground to cover in the next year. However, given all the potential issues surrounding BEPS and the BEPS measures, it is imperative for companies to actively participate in discussions on BEPS. Not only will this allow them to understand the impact on their own businesses, it will help them come up with new tax-planning strategies and business models that are compliant with the OECD BEPS guidelines.

Fidela I. Reyes is a Partner and International Tax Services Leader and Ma. Margarita Mallari-Acaban is a Tax Senior Director of SGV & Co.

source:  Businessworld

Comprehending other comprehensive income

BEFORE January 1, 2009, a complete set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) comprised the following: a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes to the financial statements. When amendments to International Accounting Standards (IAS) 1, Presentation of Financial Statements took effect for annual reporting periods beginning 1 January 2009, the statement of comprehensive income (SCI) was introduced, and became part of an entity’s financial statements. This resulted from the International Accounting Standards Board’s (IASB) efforts to continuously improve financial reporting.

The SCI is seen as a performance statement showing all changes in net assets, except capital contributions and return of capital. Such changes are regarded by the IASB as a measure of ‘performance’ in its widest sense. The SCI does not feature the net income or loss, but instead the total comprehensive income or loss, which is defined by IAS 1 as “the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners”. Total comprehensive income includes both profit or loss and OCI. Requiring the SCI highlighted both the IASB’s and public’s increasing focus on the concept of Other Comprehensive Income (OCI).

WHAT IS OCI?
OCI contains items of income and expenses that are recognized outside of the income statement or the profit or loss. It is driven by specific IFRS provisions or requirements. Some common examples of OCI items are:

• Gains or losses on remeasuring available-for-sale (AFS) financial assets to fair value;

• Changes in revaluation surplus for items of property, plant and equipment or intangible assets that are carried using the revaluation method;

• Remeasurements of defined benefit retirement plans;

• Gains or losses arising from translating the financial statements of a foreign operation;

• The effective portion of gains or losses on hedging instruments in a cash flow hedge.

OCI is required to be presented separately in the equity section. This is done to increase the transparency of these items as users can easily distinguish them from those items presented as part of profit or loss.

IAS 1 does not define ‘income’ or ‘expenses’. The Conceptual Framework for Financial Reporting defines income and expense, but does not provide guidelines on distinguishing which should be presented as the traditional profit or loss and which should be presented as OCI. What this means is that profit and loss is the default category -- all comprehensive income is part of profit and loss unless a provision of IFRS say it is or may be OCI.

In terms of classification, there are two general types of OCI: those that can be reclassified (or ‘recycled’) to profit or loss in future periods, and those that are not allowed to be reclassified to profit or loss. Both types and their related movements must be separately shown or disclosed either in the SCI or in the notes to financial statements. Gains or losses on remeasuring AFS financial assets to fair value are OCI examples that are recycled to profit or loss when the related assets are sold or become impaired, while changes in revaluation surplus and remeasurements of defined benefit retirement plans are examples of those that are not allowed to be recycled to profit or loss.

This separate presentation enables users of the financial statement to ascertain the impact of the reclassifications on the profit or loss and the overall gain or loss from a certain transaction such as the sale of AFS financial assets.

A SINGLE STATEMENT OR TWO STATEMENTS?
Entities are given the option to present all these OCI items in a single SCI, or in two linked statements, i.e., a separate statement of income and a separate SCI. In a single-statement approach, all items of income and expenses are presented together. In a two-statement presentation, the first statement -- the income statement -- presents income and expenses recognized in profit or loss, while the second statement -- the SCI -- begins with profit or loss, adds or deducts all the items of OCI (net of the related taxes) and ends up with total comprehensive income.

There are varying opinions on the better presentation. Those who prefer the two-statement approach want to distinguish profit or loss and total comprehensive income. They point out the following rationale:

• With the two-statement approach, the income statement remains a primary financial statement.

• A single statement would undermine the importance of profit or loss by making it a subtotal.

• Presenting total comprehensive income as the last number in the statement would confuse users.

Proponents of the two-statement approach fear that requiring all items of income and expenses to be presented in a single statement would be the first step towards eliminating the notion of profit or loss. In addition, they argue that the items that are presented in OCI are different from the items presented in profit or loss.

The proponents of the single-statement approach argue that all items of non-owner changes (both P&L and OCI) in equity actually meet the definitions of income and expenses in the Conceptual Framework for Financial Reporting (the Framework). The Framework neither defines profit or loss, nor provides the criteria for distinguishing the characteristics of items that should be included in profit or loss from those items that should be excluded from profit or loss.

The IASB emphasized that both profit or loss and total OCI remain equally important and prominent in assessing an entity’s financial performance. Currently, however, the main key performance indicator of most entities remains the profit or loss before OCI. Even in the calculation of the earnings per share, profit or loss (or net income) remains the required starting point for the calculation of earnings per share.

Looking forward, the IASB is considering working on a conceptual framework for OCI to set out a conceptual basis for how an entity determines whether an item should be presented in OCI or in profit or loss, and the principles to determine which OCI items should, or should not be, reclassified to profit or loss. Given how financial reporting standards are constantly changing and evolving with the thrust moving forward to fair valuation basis of accounting, resulting to more and more income items being considered as OCI rather than the “regular” profit or loss items, total comprehensive income may someday become the key performance metric for entities.

Jennifer D. Ticlao is a Partner of SGV & Co.

source:  Businessworld

CAR for sale/transfer of real property: Revisited

With the recent congressional inquiries on transfer of lands, it makes sense to revisit the requirement to get the Certificate Authorizing Registration (CAR).

To ensure the proper reporting and monitoring of the sale, transfer and other disposition of real properties and the payment of correct taxes arising from these transactions, the Bureau of Internal Revenue (BIR) required the issuance of a CAR and prescribed the manner for its issuance.

Under existing BIR rules, a CAR is a certification issued by the Revenue District Officer (RDO) having jurisdiction over the real property transferred to ensure that the transfer and conveyance of the real property was reported and that the taxes due thereon have been fully paid and remitted to the government. The CAR is a mandatory requirement for the registration of the property with the Register of Deeds (RD) and is necessary for the issuance of a new Transfer Certificate of Title in favor of the new owner. It is in effect a tax clearance relative to the transfer of real properties.

The requirement for the issuance of CAR finds support in Section 58(E) of the National Internal Revenue Code (NIRC) of the Philippines, as amended, which provides that no registration of any document transferring real property can be effected by the RD unless the Commissioner of Internal Revenue (CIR) or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax (CWT), if any, has been paid. Likewise, with respect to the estate tax, Section 95 of the NIRC, as amended, provides that the RD can not register in the Registry of  Property any document transferring real property or real rights therein xxx unless a certification from the CIR that the tax actually due had been paid.

The requirements for securing a CAR in case of sale/transfer of real property would depend on the transaction (as this would determine the proper taxes due – e.g. donor’s tax, capital gains tax (CGT), CWT, etc.) and whether the real property to be transferred is classified as a capital asset (not used in trade or business) or an ordinary asset (used primarily or for sale in the ordinary course of trade or business). This means that the classification of the real property will determine the tax returns to be filed and the taxes to be paid. For instance, sale of real property classified as capital asset carries with it payment of capital gains tax (CGT) and the filing of the CGT return (BIR Form No. 1706). On the other hand, sale of real property classified as ordinary asset requires payment of CWT and the filing of the withholding tax remittance return (BIR Form No. 1606). Note also that a documentary stamp tax is required.

Some of the basic documentary requirements for the issuance of a CAR are the following: documents evidencing the sale or transfer of real property (e.g. deed of absolute sale, deed of donation, etc.), documents evidencing that appropriate taxes have been fully paid (CGT, CWT, documentary stamp tax, donor’s tax, estate tax, etc. and their corresponding tax returns), official receipts/deposit slips/acknowledgment receipts issued by the seller, latest tax declarations from the City Assessor’s Office, certificate of title of the property involved, tax identification numbers of the buyer/transferee and seller/transferor, etc.

The CARs issued by the RDO should have a validity of one year from the date of issue. Nonetheless, the BIR released issuances addressing issues or guidelines concerning the replacement and/or revalidation of CAR.

In line with the BIR’s continuing initiative to strengthen internal control towards integrity and to fortify the review/monitoring with respect to the sale/transfer of ownership of real properties, it recently issued Revenue Memorandum Circular No. 40-2014 which prescribes the use of Electronic CAR (eCAR) or BIR Form No. 2313-R for transaction involving transfer of real properties. The eCAR system was already primed in the RDOs under the jurisdiction of Revenue Region No. 1 – Calasiao, Pangasinan.

Further, the BIR is expected to work for the computerization of the procedure for the issuances of the CAR. This aligns with what seems to be the current thrust of the BIR to use online means for tax reporting and filing. Thus, it makes sense to revisit the requirement to get the CAR.

Lastly, for the sake of thoroughness, it is worthy to note that before the new title to the property may be actually transferred and registered in the name of the new owner, the RD necessitates submission also of a local tax clearance. This local tax clearance pertains to the real property tax and local transfer taxes.  Under Sections 135 and 151 of Republic Act No. 7160 (Local Government Code of 1991(LGC)), provinces and cities may impose a tax on the sale, donation, barter, or any other mode of transferring ownership or title of real property at the rates not exceeding the rates prescribed in the said sections. Further, before the local tax clearance is issued, local government units require that the annual real property taxes have been paid.

Chandine Kaye P. Villegas is a supervisor from the tax group of R.G. Manabat & Co. (RGM&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 RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.

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

source:  Philippine Star

Looking forward to Christmas and higher take home bonuses

IT’S 30 DAYS before Christmas and, though Christmas comes every year, most of us still get excited -- for the vacation days, the gifts, and, not least, the release of the 13^th month pay.

Excitement over 13^th-month pay was higher than usual this year because it looked like Congress might approve a higher tax exemption threshold for bonuses, raising the possibility of increased take-home pay at year’s end.

The House of Representatives is currently considering a threshold of P70,000 for tax-exempt 13^th-month pay, up from P30,000 previously. House Bill 9470 has already been approved on third reading and transmitted to the Senate.

Meanwhile the Senate has approved on second reading the corresponding Senate Bill, which seeks to exempt P82,000 worth of bonuses from tax. According to the sponsors, this is the true current value of the original P30,000 cap when this law was approved in 1994.

Apparently, the higher exemption thresholds are not happening in 2014. Any enacted law is likely be implemented next year.

Nevertheless the higher thresholds remain a significant development for every employee.

How much will an employee benefit from the higher exemption?

Assuming that the employee’s total gross income is subject to the maximum rate of 32%, the differential between the current tax treatment and the proposed regime is as follows, for an employee earning P50,000 a month:

The increase in take-home pay is P16,000 for the employee and a decline in tax collections for the Bureau of Internal Revenue by a similar amount.

One of the major objections to increasing the tax exemption is the loss of income on the part of the government.

We note though that most estimates of the revenue loss did not take into consideration the additional income of the employee, which would lead to increased spending and create income for business establishments he patronizes.

The threshold for tax exemptions on 13^th-month pay and other bonuses is an important form of tax relief given by the Government to salary earners, who are entitled to no other deduction apart from the personal exemption of P50,000 and,if applicable, additional personal exemptions of P25,000 for each qualified dependent up to a maximum of four.

Given that this privilege of P30,000 tax-exemption ceiling was crafted 20 years ago, I believe it is really time adjust the amount to a level equivalent to its 1994 value today.

While we are still at the P30,000 tax exemption, it is prudent for the companies to ensure that all the items that can be included in the ceiling of the tax exemption are properly considered so that the employee can fully enjoy the tax exemption and the net take home pay.

The least that the company can do is to ensure that the employees are not deprived of the only tax relief they can have.

Richard R. Ibarra is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld

Miles to go to make it easier for firms to pay taxes

THE PHILIPPINES ranked at the bottom third of 189 economies in an annual report that measures ease of paying corporate taxes.

Paying Taxes 2015, the 10^th such report that builds on one of 11 key indicators of the World Bank Group’s annual Doing Business report, gauges medium-sized firms’ ease of paying taxes according to:

• total tax rate, which is the total of taxes borne as a percentage of commercial profit;

• time to comply -- prepare, file and pay -- corporate income, contributions to personal income tax and other similar requirements, and consumption tax; and

• number of payments, or frequency with which a company has to file and pay taxes and contributions.

The Philippines placed 127^th in this year’s report out of 189 economies, after placing 131^st in the report last year that was based on a different methodology.

While the study did not say if rankings in this year’s and last year’s reports were directly comparable, it said the impact of methodology change on “sub-indicators is expected to be limited.”

Changes in this year’s methodology consisted of updating of gross national income per capita values to 2012 from 2005 previously; adding of a second largest city for 11 economies with population of more than 100 million people; and basing rankings this year on “distance to frontier” -- or measure of performance of each economy against the highest and lowest values of each sub-indicator -- instead of simple percentile distribution used in past reports. 

Qatar and the United Arab Emirates were tied in first place, followed by Saudi Arabia, Hong Kong, China and Singapore. On the other hand, Bolivia, Venezuela, Mauritania, Chad and the Central African Republic occupied the lowest five places.

The report -- which used data as of Dec. 31 last year -- stated that on global average, a mid-sized company takes 264 hours to comply with tax dues, makes 25.9 payments and pays 40.9% of commercial earnings for taxes and contributions (or total tax rate). Last year’s report showed it took companies 268 hours to comply with 26.7 tax payments and paid a 43.1% total tax rate.

The same report showed the Philippines faring a bit worse than global average. Specifically, it takes a medium-sized company here 193 hours to make 36 payments with 42.5% of commercial income going to taxes and contributions.

“Paying taxes has become easier over the past year for medium-sized companies around the world,” the latest report noted.

“The administrative burden of tax compliance has been steadily improving since 2004 with the growing use of electronic systems for filing and paying taxes,” it added.

“During the financial crisis there was an increase in the number of tax reforms. The pace of reform accelerated with the onset of the crisis, then slowed in subsequent periods.”

The latest results, the report said, showed several economies “are continuing to make progress in tax reform,” with measures that simplify tax systems, reduce burden on businesses and lower economic distortions. “Tax reform is therefore set to remain an important topic for governments around the world for many years to come.”

source:   Businessworld

Clarifying the tax rules on stock options

IT HAS BECOME customary for employers to grant equity-based payments -- the most common of which is the stock option -- to their employees in their desire to continuously recognize and incentivize employees as partners in the success and growth of their companies.

Generally, a stock option is defined as a privilege that gives the employee the right, but not the obligation, to buy a share of stock at a stipulated exercise price on or after a specific date.

Employees are not normally granted full ownership of the stock option on grant date. They must meet the vesting requirements prescribed by the employer before they can exercise their options. At exercise date, employees purchase the shares of stock at the exercise price.

On Oct. 31, the BIR issued Revenue Memorandum Circular (RMC) 79-2014 to clarify the tax treatment of stock option plans and other option plans.

RMC 79-2014 defines a stock option as an option granted by a person, natural or juridical, to a person or entity entitling said person or entity to purchase shares of stocks of a corporation, which may or may not be the shares of stock of the grantor itself, at a specific price to be exercised at a specific date or period (referred to as Equity-settlement Option). Even if no actual shares of stock are delivered or transferred, a stock option may also occur in a situation where a person or entity is given the right to obtain or receive, at a specific date or period, the difference between the actual fair market value (FMV) of the shares and the fixed nominal value of the shares set at grant date (referred to as the Cash-settlement Option).

In an equity-settled option, the employees not only become part-owners of the company but they also acquire the shares at discounted price. The discount (or the “spread”) that the employee enjoys is not without tax consequence. Sadly though, the Tax Code does not contain provisions specific to stock options. Prior to the issuance of RMC 79-2014, tax authorities did not have clear guidelines for determining the nature of the benefit and imposing the due tax.

Many BIR rulings used the Tax Code provisions on compensation income as basis to rule that the discount is subject to income tax and withholding tax on wages (WTW), regardless of whether the recipient employee was a rank-and-file or a supervisory or managerial employee. This was despite the introduction of the fringe benefits tax (FBT) on certain fringe benefits received by supervisory and managerial employees. In other rulings, the BIR subjected stock options to the FBT.

In a 2012 ruling, the BIR considered the compensatory nature of the plan and ruled that the stock option income received by employees, regardless of classification, is subject to WTW. Subsequently, however, the BIR said in RMC No. 88-2012 that notwithstanding this particular 2012 ruling, stock option plans granted to managerial and supervisory employees, which qualify as fringe benefits, are subject to the FBT.

The new RMC No. 79-2014 seeks to clarify, hopefully once and for all, the tax treatment of stock option plans and other option plans.

According to RMC No.79-2014, the difference between (i) the book value or FMV, whichever is higher, of the shares at the time of exercise and (ii) the price fixed on the grant date in the case of equity-settled options; or, in the case of cash-settled options, the excess of (i) the actual market value of the stock at exercise date and (ii) the fixed nominal value of the shares set at grant date, that is paid by the grantor to the holder of the option, will be considered as:

(1) Additional compensation subject to income tax and WTW if the stock option is exercised by a rank-and-file employee;

(2) Fringe benefit subject to the FBT if the employee who exercises the option occupies a supervisory or managerial position; and

(3) Additional consideration for the services rendered or goods supplied by a supplier, subject to the relevant withholding tax at source and other applicable taxes, if the option was granted to a supplier of goods or services.

RMC No. 79-2014 also distinguishes between options granted with a price and without a price. It states that in the event the option was granted due to an employee-employer relationship, and where the grantor is the employer and the grantee is the employee, and no payment was received for the grant of the said option in the year the option was granted, the grantor cannot claim deductions for the grant of the stock option. However, if the option was granted for a price, the full price of the option shall be considered capital gains, and shall be taxed as such.

The RMC also clarifies that:

• The issuance of the option is subject to documentary stamp tax (DST) at the rate of P0.75 on each P200 (or 0.375%), or fractional part thereof, of the par value of the stock subject of the option, or in the case of stocks without par value, the amount equivalent to 25% of the DST paid upon the original issue of the stock subject to the option.

• The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock not listed on the stock exchange. Thus, any grant of an option for consideration, or transfer of the option, is subject to the 5%-10% capital gains tax (CGT) rates. If the option was granted without any consideration, the cost basis of the option for purposes of computing capital gains shall be zero.

• If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the FMV of the option at the time of the donation.

Finally, RMC 79-2014 prescribes the following reportorial requirements:

Within 30 days from the grant of the option, the grantor shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:

• Terms and Conditions of the stock option;

• Names, TINs, positions of the grantees;

• Book value, FMV, par value of the shares subject of the option at the grant date;

• Exercise price, exercise date and/or period;

• Taxes paid on the grant, if any; and

• Amount paid for the grant, if any.

When the stock options are exercised, the issuing corporation is required to file a report on or before the 10th day of the month following the month of exercise stating the following:

• Exercise Date;

• Names, Tax Identification Numbers (TINs), positions of those who exercised the option;

• Book value, FMV, par value of the shares subject to the option at the exercise date/s;

• Mode of settlement (i.e. cash, equity);

• Taxes withheld on the exercise, if any; and

• Fringe benefits tax paid, if any.

While the RMC discussed stock options in particular, it also stated that the tax treatment and reportorial requirements set forth in the RMC are rules of general applicability that may also be applied to options other than stock.

Marlynda I. Masangcay-Ceralde is a Tax Senior Director of SGV & Co.

source:  Businessworld