Romance with the BIR

IT’S the month of romance! Whatever kind of relationship you may be in today, it is time to fuel up, celebrate, and maybe reflect on what makes your relationship work.

A successful relationship rests on a certain amount of give and take. The same goes with our relationship with the government -- it’s a mutually beneficial relationship. However, when the government starts to take every single penny of the taxpayer -- issuing layers and layers of regulations -- the taxpayer starts to drop the honorifics and question the morality of the government’s actions.

One big blow to the taxpayer is the Bureau of Internal Revenue’s (BIR) issuance of Revenue Memorandum Circular (RMC) 08-2014 on Feb. 7, requiring exempt individuals and entities to present tax exemption certificate or ruling before they are to be exempted from withholding tax.

Let us recall that, under the provisions of existing tax laws and administrative issuances, some individuals, entities and transactions are considered exempt from imposition of taxes on income and, consequently, from withholding taxes.

The BIR, in its creative idea, ordered the concerned withholding agents to require all individuals and entities claiming such exemptions to provide a copy of a valid, current and subsisting tax exemption certificate or ruling before payment of the related income. Failure on the part of the taxpayer to present the said tax exemption certificate or ruling shall subject the payment of appropriate withholding taxes due on the transaction. On the other hand, the withholding agent’s failure to withhold without the tax exemption certificate or ruling shall be a case for the imposition of penalties.

Let’s digest slowly what was provided in the said issuance.

COVERAGE
The said RMC covers those exempt entities, individuals and transactions. Philippine Economic Zone Authority (PEZA) and Board of Investment (BoI) enterprises that are covered by the provisions of Republic Act (RA) 7916 and the Omnibus Investments Code of 1987, respectively, are sample entities that are, by law, exempt from direct tax. Income derived by a depository bank under the expanded foreign currency deposit (EFCD) system from foreign currency transactions with non-residents, offshore banking units in the Philippines, and other depository banks under the EFCD system are exempt from all taxes under the Tax Code. Are the exemptions already provided under these laws not sufficient to exempt the said entities or transactions from withholding tax?

FAILURE ON THE PART OF THE TAXPAYER
Once the income payee fails to present the required certification or ruling, the payment is subjected to withholding tax. Accordingly, the taxes withheld are remitted to the BIR by the withholding agent.

On the part of the payee, the remitted taxes are initially recorded as an asset. However, since the income of the payee is exempt from income tax, the creditable taxes withheld remain unutilized until such time that there is income subject to regular tax rate. Until then, this is a receivable from the BIR.

It seems that a taxpayer has two options to recover the said taxes that are already in the hands of the BIR. First, check the refund option in the income tax return and apply the same from BIR within the prescriptive two years. This move should be initially evaluated by the taxpayer considering the cost and the benefit of refunding the same. Second, write it off or expense it out. However, will this be allowed as deductible expense in the income tax return? Note that there should be a due diligent effort to collect the receivable before the taxpayer is allowed to write off receivables. Should the taxpayer then send a collection letter to the BIR?

In the two options, it turns out that the taxpayer has no option but to shoulder the burden of refunding or disallowing the expense.

WITHHOLDING AGENT’S FAILURE TO WITHHOLD
Although it was provided that the withholding agent shall be penalized, there has been no penalty indicated in the said RMC.

We assume that penalties for non-withholding shall be imposed under the Tax Code. That is, expenses not subjected to proper withholding taxes at the times required by law are non-deductible for income tax purposes. For the disallowance of deduction, there shall be deficiency income tax plus 20% interest per year. Likewise, the tax not withheld shall be assessed as a deficiency tax and collected subject to interest of 20% per year. In light of this, will the penalties as mentioned in the RMC prevail in this case?

PERIOD FOR SECURING CERTIFICATE OF EXEMPTION OR RULING
An initial concern of a taxpayer-supplier is his income during the period when the ruling had not yet been issued.

Will the BIR have the capability to process the application and issue a ruling soon enough to cover these payments? Meanwhile, should the withholding agent defer the payment to the supplier pending the approval of the ruling? The supplier may need the collections for working capital purposes, especially if the amount is substantial.

There is also the question of whether a certificate or a ruling, once secured, is perpetually valid or if an annual revalidation is required. Notably, the documentary requirements for securing a ruling are not mentioned anywhere in the RMC.

Obviously, there are issues that have to be clarified even before the requirement is implemented.

Considering the seemingly never-ending regulations that taxpayers have to comply with, the BIR should humbly give taxpayers much needed leeway when abiding by the new regulation. A few months’ or a year’s grace period, taking into consideration the capability of the BIR to process the rulings, should give taxpayers assurance that they will not be disadvantaged if they are truly entitled to the exemption. After all, a successful relationship involves a certain amount of give and take.

The author is a senior with Punongbayan & Araullo’s tax advisory and compliance division. P&A is a member firm within Grant Thornton International Ltd.

source:  Businessworld