Exempt or not exempt: this is the question

STRICTISSIMI juris. Of the strictest right or law, exemption from taxation is never favored, never presumed. Tax exemption is always construed against the taxpayer and liberally in favor of the taxing authority. It must be justified with words that are too plain to be mistaken and too conclusive to be misinterpreted.

Revenue Memorandum Circular No. (RMC) 8-2014 is an embodiment of this primordial but universal rule of tax exemption through the requirement of providing a valid, current and subsisting tax exemption certificate or ruling.

Before the issuance of RMC 8-2014, Revenue Regulations No. (RR) 2-98, as amended, of the National Internal Revenue Code (NIRC) of 1997 granted exemption from creditable withholding tax for the (1) national, provincial, city and municipal government, including its instrumentalities, and (2) persons enjoying exemption from payment of income taxes, such as entities registered with the Board of Investments (BoI), Philippine Economic Zone Authority (PEZA) and Subic Bay Metropolitan Authority (SBMA), non-stock and non-profit corporations, general professional partnerships, and joint ventures under an energy service contract with the government, without much question to the claim.

That was the case until a mandate in 2013 was promulgated, requiring non-stock and non-profit corporations to secure confirmatory rulings or certificates of tax exemption from the Bureau of Internal Revenue (BIR), highlighting the fact that tax exemptions granted under the tax code are neither automatic nor absolute.

So, what happens now? Does this mean that those entities specifically classified by the NIRC and RR 2-98 as exempt from creditable withholding tax are no longer exempt? Does this show that RMC 8-2014 inconspicuously contravenes with the long-established right of exemption for such entities? Does the BIR reify just and appropriate tax treatment in subjecting the now disputable exempt entities to creditable withholding tax?

In probing the circular, it seems as though in order to avail of the exemption from creditable withholding tax, taxpayers need to secure a certificate of exemption or a confirmatory ruling with the BIR. But, how long will it take for the application for a certification to be granted or the ruling to be released? Given that the circular mandates immediate compliance, will the entity retain its exempt status while waiting for the BIR’s approval? Will a mere application for a certification or ruling serve as sufficient and acceptable proof for the withholding tax agent to exempt the entity in question from creditable withholding tax? Will the possible tax exposure from non-withholding be treated retrospectively when after a long wait, the application for a certificate of exemption or a ruling is, for some reason, denied? Will the certificate of entitlement to incentives issued by special governing agencies like the BoI, PEZA and the SBMA have the same bearing with or be honored by the BIR as a valid, current and subsisting proof of tax exemption?

These confounding issues place the affected taxpayers in a precarious situation. With the lack of clarificatory issuances from the BIR to date, it is best to take prudent measures. How? For taxpayers claiming exemptions from creditable withholding tax, obtain a BIR-approved ruling at the earliest opportunity possible. While certificates of exemption have defined expiration dates, rulings, on the other hand, are valid and enforceable until a new law or opposing interpretation revokes the opinion of the previously issued rulings. Nevertheless, the option to secure either a certificate of exemption or a BIR ruling is up to the taxpayer.

For withholding agents, exercise proactivity in requiring every income recipient claiming exemption from creditable withholding tax to present an indispensable proof of exemption during the process of settling income payments.

Failure to present a legitimate proof will nullify the taxpayer’s assertion of exemption from creditable withholding tax; hence, subject to the applicable withholding tax rates. Likewise, failure of the withholding agents to withhold in lieu of the lack of tax exemption certificate or ruling will exact a penalty equivalent to the total amount of tax not withheld, plus compromise penalties of up to P25,000.

Questions are piling up. Interpretations are multifarious. Will the circular hold true and valid amid the controversy of its scope and intent?

One thing is clear, though: a comprehensive guideline is highly essential to explicate the letter and spirit of RMC 8-2014 with words that are too plain to be mistaken and too conclusive to be misinterpreted. Then, and only then, can the BIR effectuate the fundamental substance of the circular for compliance to the presently critical thinking public.

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

source:  Businessworld