BIR Clarification On The Effect Of The CTA Decision On Liabilities With Regard To Condominiums

It has come to the attention of the Bureau of Internal Revenue that there is ongoing misinformation as with regard to the effect of the  decision of Officemetro Philippines, Inc. with regard to condominiums.  The decision is a decision of an division of the Court of Tax Appeal and which will be appealed by the Bureau of Internal Revenue to the Court En Banc by way of a motion for reconsideration. It is not a decision of the Supreme Court as some quarters would like people to believe.

In the case of Officemetro Philippines, Inc. (formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382, June 3, 2014, the Court of Tax Appeals – Third Division (CTA) ruled that condominium dues billed to Officemetro in 2005 are not subject to expanded withholding tax (EWT). The case does not in anyway involved the issue of value added tax.

In support of the said decision, the CTA cited several BIR Rulings, issued from 2004 to 2009, wherein the BIR held that “association/condominium dues, membership fees and other assessment/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purpose(s), viz., to protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and amenities for their members, and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income. This means that the same are not subject to income tax and to withholding tax.”

The BIR rulings cited in the CTA Decision are in contrast with BIR Revenue Memorandum Circular (RMC) 065-2012 wherein the BIR pronounced that since the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants, then the gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to VAT, income tax and EWT.The CTA Decision is now the subject of a pending Motion for Reconsideration filed by the BIR before the same CTA division.

However, the CTA Division did not rule on the validity of RMC 065-2012.  Therefore, RMC 065-2012 is the prevailing rule today andall concerned taxpayers are required to comply with the provisions of RMC 065-2012.

source:  Department of Finance

Accountants win court reprieve from BIR's fee disclosure rule

MANILA - Accountants on Wednesday were able to secure a temporary injunction against the Department of Finance (DOF) and the Bureau of Internal Revenue's (BIR) regulation forcing these professionals to disclose their professional rates for tax purposes.

The Supreme Court has issued a temporary restraining order against BIR's Revenue Regulation 4-2014 issued on March 20, 2014, which prescribed the policies and guidelines in the monitoring of service fees of professionals.

The restraining order is only applicableto the accounting profession, "subject to the payment by petitioners of  the appropriate and necessary docket and filing fees."

The TRO is effective immediately until further notice from the High Court.

The Association of Small Accounting Practitioners in the Philippines and the Integrated Bar of the Philippines have separately sued Finance Secretary Cesar Purisima and BIR Commissioner Kim Jacinto-Henares for issuing the contested revenue regulation.

The consolidated cases were referred to the en banc after these were raffled off to the Third Division.

According to RR 4-2014, self-employed professionals should register and pay the annual registration fee with the revenue district office or Large Taxpayers District Office that have jurisdiction over them.

Moreover, these professionals must submit an affidavit indicating the rates, manner of billings and the factors they consider in determining their service fees every year.

They also must register the books of accounts and official appointment books, containing only the names of the client the date/time of the meeting.

As part of the monitoring system, these professionals must register their sales invoices and official receipts before issuing these for any transaction.

For cases when the professional did not charge fees, a BIR-registered receipt, acknolwedged by the latter, should be issued showing a discount of 100 percent as substatiation of the "pro-bono" service.

source:  InterAksyon

Bill seeking a flat tax rate scheme filed

A BILL WAS FILED at the House of Representatives seeking to provide a flat tax scheme in order to reduce attempts to evade paying the right taxes.

House Bill (HB) 4600 filed by Quirino Rep. Dakila Carlo E. Cua, or the proposed Flat Tax for Professionals Act, seeks to amend Section 24 of the National Internal Revenue Code (NIRC) of 1997 by recommending a final flat tax of 10% to be imposed upon the taxable income of all professionals within and outside the country.

In his 2011 State of the Nation Address, President Benigno S. C. Aquino III mentioned that “according to the Bureau of Internal Revenue (BIR) we have around 1.7 million self-employed and professional taxpayers who paid a total of P9.8 billion in 2010, and must have earned only P8,600 a month (which is below the minimum wage) because of the low income taxes they paid that year.

“This representation hopes that simplifying the taxes for professionals by introducing a flat tax scheme will significantly increase their tax contribution, thereby increasing government revenue,” Mr. Cua said in the bill’s explanatory note.

“In its quest for additional tax revenues, the BIR continues to look to widen the country’s tax net, and has been targeting in particular, self-employed professionals, such as doctors, lawyers, accountants and other high-earning, self-employed individuals as it has already been pointed out that a problem with tax compliance still exists in their sector of the economy,” Mr. Cua further said on the bill.

The proposed measure also aims to amend Section 22 of the NIRC by including a definition of professionals as all individuals who require examination or license from a government agency.

The bill shall mandate the BIR to provide a unified list of professionals to be included in the flat tax scheme.

Upon enactment, the provisions of the House bill shall take effect beginning the taxable year of 2015.

For the BIR’s part, Commissioner Kim S. Jacinto-Henares said in a telephone interview that reducing tax rates would mean less funding for essential government expenditures such as infrastructure and health services, among others.

“What we’re trying to do is enforce the tax law. Where will you get money to develop the things the country needs?,” Ms. Henares said during a phone interview.

She also added that implementing a flat tax rate “is not effective [against] tax evasion.”

The BIR expects to collect P1.456 trillion this year, 16.16% or P202.651 billion higher than the P1.253-trillion goal last year.

The lion’s share of collections will still comprise of income tax, estimated at P829.759 billion, the BIR earlier said. -- Jacqueline P. Miranda

source:  Businessworld

Withholding tax on condominium dues

THE MODIFICATION of time-honored principles and interpretations of legal provisions will certainly cause issues that cannot be fully resolved in a single case alone. It will take more than one case before the ambiguities and confusions caused by these changes are fully addressed.

The real estate industry has in recent years been considered one of the bright spots of the Philippine economy. And with the alleged sustained growth indicated by different economic indicators, as well as the consequent advancements in technology that contributed to the fast-paced lifestyle of many Filipinos, there is a corresponding increase in the demand for the construction and development of additional buildings meant to be used as office spaces, commercial establishments and residential units.

Hoping to cash in on this development, the Bureau of Internal Revenue (BIR) previously issued Revenue Memorandum Circular No. (RMC) 065-12, which supposedly clarified the taxability of association dues, membership fees, and other charges collected by condominium corporations. Under RMC 065-12, the association dues, membership fees and other charges paid by unit owners and/or beneficial users have been subjected to income tax, withholding tax and 12% value-added tax (VAT).

Accordingly, the Commissioner of Internal Revenue (CIR) stressed that “[t]he amounts paid in as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter subject to income tax. This is because a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments. For tax purposes, the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants. The previous interpretation that the assessment dues are funds which are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned.”

“Moreover, since a condominium corporation is subject to income tax, income payments made to it are subject to applicable withholding taxes under existing regulations.”

Lastly, the BIR emphasized that the “[a]ssociation dues, membership fees, and other assessments/charges collected by a condominium corporation are subject to VAT since they constitute income payment or compensation for the beneficial services it provides to its members and tenants.”

The taxpayers affected raised a howl, especially that the BIR has previously been consistent in issuing rulings that affirm and confirm that the association dues and membership fees paid by unit owners and beneficial users are not subject to the aforementioned taxes.

Here now comes the case of Officemetro Philippines, Inc., (formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382, June 3, 2014.

In the aforesaid case, the taxpayer was assessed for deficiency expanded withholding tax (EWT), among others for taxable year 2005. The BIR alleged in the tax assessment that Officemetro/Regus failed to pay the expanded withholding tax on certain income payments, such as rentals, professional fees, purchase of services and purchase of goods. After the reinvestigation made by the BIR, only the reduced assessments on the withholding tax on rentals and purchase of services remained.

In its petition with the Court of Tax Appeals (CTA), Officemetro alleged that a portion of the rentals that were declared in its audited financial statements were actually payments of condominium dues that do not form part of the taxable income of the condominium corporation, and is therefore not subject to withholding tax.

The Third Division of the CTA, through the Honorable Justice Esperanza R. Fabon-Victorino, agreed. According to the Court, the condominium dues billed to Officemetro are not subject to expanded withholding tax. Citing a list of BIR rulings that were issued prior to RMC 065-12, the Court held that “association/condominium dues, membership fees and other assessment/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purpose (s), viz., to protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and amenities for their members, and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income. This means that the same are not subject to income tax and withholding tax.”

For that reason, that portion of the condominium dues and membership fees that were duly substantiated by the company with invoices, official receipts, and statements of accounts were excluded by the CTA from the rental subject to EWT.

Surprisingly, RMC 065-12 was never discussed in the decision. Neither was it mentioned whether RMC 065-12 was an erroneous interpretation of the tax code by the CIR. Nor was it explained why RMC 065-12 should not be retroactively applicable to the Officemetro case, considering that RMC 065-12 provided an express proviso declaring invalid for lack of legal basis the previous interpretations declaring the assessment dues and membership fees to be merely held in trust by condominium corporations.

Incidentally, the Regional Trial Court Branch 146 in Makati City previously declared RMC 065-12 to be invalid in the special civil action case filed by First e-Bank Tower Condominium Corp. against the BIR. The RTC held in the said case that RMC 065-12 did not merely interpret or clarify but changed altogether the long-standing rule of the BIR. As a result, RMC 065-12 was issued in violation of the constitutional mandate of due process of law.

It is clearly plausible that the Officemetro case has now created a buzz and has in fact rippled through the tax community in so short a time. Nevertheless, it is emphasized that there are still issues regarding RMC 065-12 that need to be addressed, aside from, of course, whether the Supreme Court, as final arbiter, or even the CTA En Banc, once the BIR files an appeal/ reconsideration, acquiesces to the findings of the CTA Third Division.

The author 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

BIR clarifies tax refund application issues

THE BUREAU of Internal Revenue (BIR) has clarified issues on applications for tax refunds in light of rulings issued by the Supreme Court on related petitions, outlining the timetable and requirements for the filing of tax refund or credit claims.

“Clarification on the issues concerning the application for VAT (value-added) refund/tax credit has been made by the Supreme Court in Commissioner of Internal Revenue vs. San Roque Power Corp. and in Mindanao II Geothermal Partnership vs. Commissioner of Internal Revenue,” read Revenue Memorandum Circular (RMC) 54-2014, dated June 11 and published in a newspaper on Monday.

“As such, this Circular is issued to summarize the rules on filing and processing of applications for VAT refund/tax credit.”

Under the Tax Code, VAT-registered taxpayers can claim a refund of their creditable input tax due or apply for a tax credit certificate for their zero-rated sales within two years from the close of the taxable year when the sales were made.

“As such, the taxpayer can file his administrative claim for VAT refund or credit at anytime within two-year prescriptive period,” the circular read.

The BIR commissioner, under the law, has 120 days to decide on refund or credit applications, counting from the date the applicant-taxpayer submits complete documents on his claim.

The RMC, however, clarified that “if the claim for VAT refund or credit is not acted upon by the Commissioner within the 120-day period as required by law, such “inaction shall be deemed a denial” of the application for tax refund or credit.”

The issuance likewise noted that claims must be accompanied by supporting documents, with an attached affidavit attesting to these documents’ completeness.

These include the refund or credit application form, a copy of the taxpayer’s annual or quarterly income tax returns, sworn statements certifying eligibility to file for a VAT refund or tax credit, and a detailed list of zero-rated sales, among others.

“Upon submission of the administrative claim and its supporting documents, the claim shall be processed and no other documents shall be accepted/required from the taxpayer in the course of its evaluation. A decision shall be rendered by the Commissioner based only on the documents submitted by the taxpayer,” it said.

“The application for tax refund/tax credit shall be denied where the taxpayer/claimant failed to submit the complete supporting documents. For this purpose, the concerned processing/investigating office shall prepare and issue the corresponding Denial Letter to the taxpayer/claimant.”

The RMC also reiterated that the mandatory 120+30-day period under which claims may be filed and brought to the Court of Tax Appeals for review, and clarified how this will work given the automatic denial of applications that are not decided on by the BIR within the 120-day prescriptive period.

“In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day period, appeal the decision or the unacted claim with the CTA,” it said.

“Verily, a judicial claim must be filed with the CTA within 30 days from receipt of the commissioner’s decision denying the administrative claim or from the expiration of the 120-day period without any action from the Commissioner, as the case may be. In this regard, the taxpayer/claimant is required to observe the 120+30-day rule before lodging a petition for review with the CTA.”

This means a taxpayer can file an appeal on his VAT refund or tax credit application in one of two ways: file the petition with the court within 30 days after the BIR denies the claim within the 120-day prescriptive period, or file the judicial claim within 30 days from the expiration of the 120-day period if the BIR Commissioner does not act on the application in the course of those 120 days.

The BIR noted that in cases where the taxpayer has filed a “petition for review” of his claim with the CTA, the BIR Commissioner loses authority over the application.

“Indubitably, failure to file a judicial claim with the CTA within 30 days from the expiration of the 120-day period rendered the Commissioner’s decision, or inaction “deemed a denial”, final and unappealable,” the circular said.

“This applies to all currently pending administrative claims for refund/tax credit.”

While the BIR cannot decide anymore on a refund or credit claim once a CTA petition is filed, it “shall still evaluate internally the administrative claim for purposes of intelligently opposing the taxpayer’s judicial claim,” the issuance noted. -- Bettina Faye V. Roc

source: Businessworld

Condo dues not subject to tax – court

MANILA, Philippines - The Court of Tax Appeals (CTA) has ruled that condominium or association dues as well as other fees collected from unit owners are not subject to income tax and withholding tax.

The CTA issued this ruling in response to a petition lodged by Officemetro Philippines Inc. (formerly Regus Centres Inc.), appealing the deficiency income taxes imposed by the Bureau of Internal Revenue (BIR).

Officemetro leased out office spaces in the Enterprise Center in Makati City.

In its petition, Officemetro asserted that out of the reported rental of P63.11 million, the property services charges amounting to P8.85 million represent payments for condominium dues which are not taxable income of a condominium corporation and must therefore be excluded form the rental amount subject to expanded withholding tax (EWT).

“The court agrees with petitioner. Condominium dues billed to the company are not subject to EWT,” the ruling said.

“The BIR in its various rulings held that association or condominium dues, membership fees and other assessment or charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purposes to protect and safeguard the welfare of the owners, lessees and occupants, provide utilities and amenities for their members and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income,” the CTA said in a 21-page decision issued last June 3.

This means that the same are not subject to income tax and to withholding tax, the CTA said.
The BIR previously exempted condominium and homeowners associations from the payment of income tax and VAT.

This was premised on the theory that the money collected was merely held in trust to be used for administrative expenses incurred in servicing members and does not constitute any sale of goods or rendition of service.

However, the government’s main tax collection agency reversed its previous position and ruled that a condominium corporation or homeowners association provides services and benefits to its members and thus, payments to it shall be considered as income and consequently, must be subject to tax.
Amid the uproar by several homeowners associations and property firms, the BIR has softened its stand on the collection of income and VAT out of the association dues, membership fees and other charges paid by condominium and homeowners associations.

Under Revenue Memorandum Circular No. 9-2013, dues and membership fees will not be taxed if the local government having jurisdiction over the homeowner associations will certify that it has either no or insufficient funds to cover basic services rendered by the homeowners to their members.

Condominium or homeowners associations must present proof that the dues and fees are used for “cleanliness, safety, security and other basic services needed by members.”

The homeowners organization must also be duly constituted as “association” as defined under Republic Act 9904 which grants tax incentives to homeowners associations.  

source:  Philippine Star

Revisiting the Sin Tax Law

AFTER YEARS of debate, Congress finally ended the deal with “sin taxes” by enacting the Sin Tax Law on December 2012. The law imposes additional ad valorem taxes, among other specific taxes, on top of existing excise and value-added taxes on different kinds of tobacco products and alcoholic beverages. Naturally, the legislation drew staunch opposition from sellers and buyers of the said products.

The objectives of the Sin Tax Law are three-fold: promoting better health outcomes by discouraging consumption of alcohol and tobacco, raising much-needed revenues to fund the government’s health programs, and simplifying the tax structure for alcoholic and tobacco products.

Smoking-related diseases such as lung cancer are a burden not only on the health system, but also on overall public welfare. Heavy consumption of tobacco products is inextricably linked with the growing number of people who suffer from lung cancer, among other forms of cancer for which smoking is a risk factor. According to the Department of Health (DOH), the Philippines has an estimated 17.3 million tobacco consumers, the largest number of smokers in Southeast Asia. It comes as no surprise, therefore, that lung cancer is the leading form of cancer in the country. Furthermore, DOH data reveal that ten Filipinos die from smoking-related causes every hour. Alcoholic beverages, meanwhile, are relatively milder, health-wise, than smoking. But alcohol consumption does pose a number of social costs including vehicular accidents, violence, and crimes.

Given the above, the Sin Tax Law aims to promote a healthy lifestyle by discouraging the consumption of tobacco and alcohol. These products are known to have adverse effects on the health and welfare of its primary users and even more so for secondary users. Sin taxes, therefore, will help induce consumers of these products to reduce their consumption, if not quit altogether. More importantly, higher prices through taxation will help prevent others, especially the youth, from starting on these vices.

This leads to another objective of the Sin Tax Law, which is to increase government revenues that could then be used to augment funding for the country’s struggling universal healthcare program. The said program includes medical assistance for those in need and the enhancement of poorly-equipped government health facilities. The last objective of the law is to simplify the tax structure of the above-mentioned products and remove the price- or brand-classification freeze. This involves a shift from a multi-tiered tax structure to a single tax structure, an automatic annual adjustment of tax rates using relevant tobacco and alcohol indices established by statistical authorities, and finally, a proper tax classification of alcohol and tobacco products that will be determined every two years. The said shift, however, is to be implemented gradually and is set to be completed by 2017.

So, has the Sin Tax Law achieved its desired objectives? Bureau of Internal Revenue (BIR) Commissioner Kim Henares reported that for the first 11 months of implementation of the law, a total of PhP91.6 billion has been generated from taxes imposed on alcohol and tobacco, exceeding the full-year collection target of PhP85.86 billion. The amount is also 81.5 percent higher than the collection of PhP50.4 billion during the same period in 2012.

The bulk of total sin tax collections or 80 percent would be allocated for the universal healthcare program, specifically under the National Health Insurance Program that targets the attainment of health-related Millennium Development Goals, as well as health awareness programs. The remaining 20 percent will be used to enhance health care facilities. DOH Undersecretary Ted Herbosa noted that the government allocated PhP84 billion for the DOH in 2014, an increase of 58 percent from the 2013 budget and the highest so far in the history of the department. Of the incremental revenue collections from tobacco products, 15 percent would be used to fund programs to promote economically viable alternatives for tobacco farmers and workers.

As to whether the law has been effective in curbing smoking and alcohol usage, a consumer study conducted by AC Nielsen shows that smoking prevalence dropped from 52 percent to 46 percent for smokers aged 20 to 44 years old for the first half of 2013. BIR data also showed a reduction in the volumes withdrawn from plants for tobacco and fermented alcohol products from January to November 2013 by 16.97 percent and 12.18 percent, respectively. Withdrawn volume for distilled drinks, however, increased by 26.04 percent. Civil society groups agree that it is still too early to gauge the effectiveness of the law, but with continued annual increase in the tax rates, many are expecting that the evidence will show in the future.

In sum, the Sin Tax Law shows great promise as an effective mechanism for reducing tobacco and alcohol consumption as well as being a successful policy for generating revenues. The World Bank hailed the reform measure as a “win-win” piece of legislation for the Philippines. That being said, the government and the public should keep an eye out for developments that can affect the progression of this law. Foremost would be the issue of smuggling or the availability of illicit products in the domestic market, as well as making sure that the revenues collected would be properly spent and used towards the avowed objectives.


The Institute for Development and Econometric Analysis (IDEA), Inc. is a non-stock, non-partisan institution dedicated to high-quality economic research, instruction, and communication. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the organization. For questions and inquiries, please contact Remrick Patagan via ideainc.mail[@]gmail.com or telefax no. 920-6872.

source:  Businessworld

VAT refunds: The importance of timely registration of official receipts

IN CLAIMING a refund of unutilized input value added tax (VAT) that is attributable to zero-rated sales, it is imperative to prove that the billing documents are duly registered with the Bureau of Internal Revenue (BIR) at the time of the sale transaction. In a recent case, the Court of Tax Appeals (CTA) held that the absence of such proof was fatal to the VAT refund claim.

In this case, the taxpayer purchased a parcel of land from an entity registered with the Philippine Economic Zone Authority (PEZA) in January 2008. The seller passed on 12% VAT to the taxpayer because the sale did not form part of its PEZA-registered activities. In the same month, the taxpayer entered into a lease agreement with the seller for the same property. For VAT purposes, the taxpayer treated the lease as a “zero-rated sale of services”. This sale-and-leaseback arrangement resulted in a net VAT overpayment in the 2008 and 2009 quarterly VAT returns of the taxpayer.

In 2010, the taxpayer sought to recover the accumulated input VAT it paid on the purchase of the property by filing a judicial claim before the CTA. In its second amended decision, the CTA reiterated the following requisites for refund claims of input VAT attributable to zero-rated sales:

• The taxpayer must be VAT-registered;

• The taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;

• The claim must be filed within two years after the close of the taxable quarter when such sales were made; and

• The creditable input VAT must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax.

With regard to the second requisite, the CTA declared that the taxpayer must prove its compliance with the substantiation requirements provided under the Tax Code. Of particular note in this case is the requirement under Section 238 requiring all persons engaged in business to secure authority to print (ATP) receipts or sales or commercial invoices from the BIR before a printer can print the billing documents.

The taxpayer was able to present official receipts to support its zero-rated sale transaction, i.e., the lease of the land. However, though the official receipts were dated 2009 (based on the lease transactions), the ATP as reflected in such documents was issued only in 2011.

From the taxpayer’s perspective, what is important is that the ATP was secured and that the invoices or receipts were duly registered. In a claim for input VAT refund attributable to zero-rated sales, what should be closely scrutinized is the documentary substantiation of the input VAT rather than the supporting documents for the zero-rated sales. Considering that the ATP was duly secured, the taxpayer argued that its official receipts are duly registered with the BIR.

However, the CTA ruled otherwise. Since the ATP was secured only in 2011, the taxpayer had no “duly registered official receipts at the time of the transaction” in 2009. The court said that the failure of the taxpayer to issue a duly registered official receipt warrants the denial of its claim for refund, for it failed to substantiate its zero-rated sales. The CTA explained that the foundation for requiring the presentation of official receipts in sales of services is to avoid a situation where the government could end up refunding a tax which was not even paid. According to the court, the seller will only become liable to pay output VAT upon receipt of the payment from the purchaser. If the seller is not paid on the transaction, legally, it would not have to pay output tax while the purchaser may legally claim the input tax credit thereon. In such a scenario, the government ends up refunding a tax which has not been paid at all. Hence, to avoid this, an official receipt for the sale of services is an absolute requirement.

Following this decision, in claims for VAT refund attributable to zero-rated sale of services, it is not enough that VAT zero-rated official receipts are issued; such documents must also be “duly registered at the time of the transaction” as evidenced by the timely issuance of the ATP by the BIR.

The case at hand did not shed light on the reasons for the belated issuance of the ATP and official receipts. It is possible that the delay could have been beyond the control of the taxpayer. If such were the case, it may be reasonable for the BIR to allow some flexibility in the application of this rule. If the ATP was issued late for valid reasons, perhaps the belated issuance of the official receipts which reflect the actual transaction dates should not be viewed as a violation, but simply as documentation of past transactions in the regular course of business.

As regards the rationale on the presentation of official receipts as explained by the CTA, it should be pointed out that in the case of sale of services, the recognition of output VAT by the seller and input VAT by the purchaser shall be upon payment of the latter as evidenced by the official receipt to be issued by the former. Hence, there should be no instance where the seller has not yet remitted the output VAT but the buyer may already claim the related input VAT, simply because there will be no official receipt to support the buyer’s claim.

In the sale-leaseback transaction in this case, the taxpayer entered into two transactions -- (1) purchase of land, which gave rise to the recognition of input VAT; and (2) lease of land, from which the zero-rated sale of services arose. If the court is trying to avoid the situation where the government could end up refunding a tax that was not even paid, it should have been satisfied by the presentation of the sales invoice supporting the amount of input VAT from the first transaction or when the land was purchased. It is at the issuance of such document that the seller would recognize its liability to the BIR. It would also show the amount of input VAT claimed by the taxpayer. While presentation of the zero-rated official receipts on the lease of the land may prove that there were in fact zero-rated sales of services which would qualify the taxpayer to a refund, such would not be useful in validating whether the VAT, which is what the taxpayer is seeking to recover from the first transaction, has been remitted to the BIR.

The author is a manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may send inquiries or feedback to eileen.flor.l.chavez@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 the article.

SOURCE: Businessworld  

When is selling on retail not a ‘retail sale’?

AMID THE growth of the retail industry in the Philippines, the strict legal guidelines imposed by the Retail Trade Liberalization Act of 2000 (or Retail Law) severely restrict foreign investors who have shown an interest in setting up retail businesses in the Philippines. The Retail Law defines retail trade as “any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption.”

Generally, under the Retail Law, enterprises with a paid-up capital of less than $2.5 million are exclusively reserved for Filipino citizens and corporations wholly owned by Filipino citizens. As a rule, only enterprises with a minimum paid-up capital of $2.5 million or more may be wholly owned by foreigners. With such restrictions, some foreign investors have found ways of going around the law -- aided by their Filipino wives or business partners.

To this end, the Securities and Exchange Commission (SEC) recently stated that a firm engaged in a service-related industry may, on certain occasions, supply materials to the customer without being considered as engaging in retail trade.

Yamaha Motor Philippines Inc., a subsidiary of Yamaha Motor Co. Ltd., is a domestic enterprise duly licensed in the Philippines to manufacture, assemble and distribute Yamaha motorcycles and other related products. In 2009, Yamaha Philippines opened an outlet called 3S Shop which sells, on wholesale, Yamaha motorcycles to dealers. The SEC in a previous opinion has held that a business activity like this did not constitute retail trade.

To support its business, Yamaha Philippines also intends to set up a service/repair shop for the motorcycles bought by its customers. Through the proposed service shop, Yamaha Philippines will be supplying spare parts and other products needed for the repairs.

The SEC opined that since the service shop’s main activities will merely involve routine maintenance, tune-up, repairs and other related services, the incidental sale of parts is not considered retail of goods. The SEC stated that there is no question that an entity that renders services for hire or pay, or leases services, is not engaged in the retail business because it does not sell goods to the general public.

Moreover, the SEC said that a service enterprise may supply materials to a client for the latter’s convenience or when the materials required are produced exclusively by the same firm. In this instance, the client has to separately pay the cost of these materials apart from the cost of service. Even if there may be a sale arising from the activities of the service shop, the sale is only incidental to the repair and is not an independent business.

This legal rationale was used previously by the SEC in declaring that the proposed sale and distribution by PLDT of wire-based telephone handsets, accessories and other related telecommunication equipment through its business offices nationwide cannot be considered retail trade. The SEC said such products form an integral component of providing telecommunications services in the Philippines.

Similarly, the SEC also said that the sale by Fitness First Philippines of drinks, apparel and hygiene articles cannot be considered as retail trade because the sale of these products are only incidental to the primary purpose of a gym operator and is not an independent business of Fitness First Philippines.

Although these SEC opinions only apply to Yamaha Philippines, PLDT and Fitness First, the SEC’s interpretation of retail trade would have certain implications on service enterprises and foreign investors. Certain foreign investors who previously could not engage in retail trade may opt to set up a service enterprise along with their retail enterprise so they can sell their products in the Philippines. Similarly, existing service enterprises may be invited by certain foreign investors to form a partnership with them in order for the foreign investors to distribute their products in the Philippines.

However, certain guidelines should be imposed on service enterprises that sell products to their clients as an incidental part of their business. For example, a service enterprise should only sell products that it will personally install or maintain so that the Retail Law is not circumvented. The questions now are: who will put these guidelines in place, and how long will it take to come up with these guidelines?

(The author is an Associate of the Corporate and Special Projects Department of the Angara Abello Concepcion Regala & Cruz Law Offices. She may be contacted through mcsy@accralaw.com or (632) 830-8000. The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and is not offered as and does not constitute legal advice or legal opinion.)

source:  Businessworld

A tax break for impoverished millionaires

I DON’T know Senator Sonny Angara; I never voted for him. Neither am I from Aurora. But I had met him, professionally, a couple of years back when he was still a congressman. It was a quick meeting; not the type that anybody will remember. Back then, and even after he got elected to the Senate, he never struck me as someone worth watching. Not until last week, that is.

Now I deem him somewhat deserving of our “middle class” vote, in what my friend and fellow columnist JB Baylon refers to as a doughnut society (where there is no middle). Rarely do Filipino politicians -- and Sonny Angara is a politician above all else -- court the middle class. After all, there are just too few of us; or not enough of us to actually matter in an election.

The middle class, in my opinion, has been diminishing over time, although statistics may indicate otherwise. Its ranks are being raided by the lower class, as rising prices and living costs -- along with stagnant if not declining income -- adversely affect their worth. Very few, usually entrepreneurs, survive these “raids” and successfully go up to the next rung.

And thus some kudos to Sonny Angara, for pointing out that the country’s present tax system is already outdated. He also describes it as inequitable, for making middle-income earners pay the same tax rate as billionaires.

Finally, a Filipino politician -- a wealthy and privileged man -- who seems to understand how it feels to be middle class.

“Updating our tax system is an issue of equity. It’s not an issue anymore of macroeconomics. That’s all meaningless if the average person has nothing left for his family,” Mr. Angara, who chairs the Senate ways and means committee, was quoted as saying during a Senate hearing on bills to slash individual income tax rates. “In a highly unequal system like ours, talagang kawawa yung nasa gitna (those in the middle are hit hardest).”

These comments make Mr. Angara a relatively brave soul; a politician who speaks the truth. From where I sit, I do not see a rich country pretending to be poor, like how some opt to describe us here in the Southeast. Instead, I see a poor country pretending to be rich to the outside world. I see a country of poor masses and impoverished millionaires; its people victimized by its own government through incompetence, indifference and corruption.

And the present tax system, as the government implements it, is among the culprits. It creates a situation of inequality that the government itself perpetrates. As an example, why is the system prejudiced against those who have more than four children or dependents? Why can’t taxpayers claim tax deductions beyond the fourth child? Why can’t people claim maternity benefits from the Social Security System beyond the fourth pregnancy?

For Mr. Angara, the issue is the tax rate, noting that the current top tax bracket of P500,000 and above annual income has remained unchanged since the Marcos years. “Tax brackets should be adjusted to make (these) more sensitive to current salaries of Filipinos. Because at present, a person who makes P50,000 a month -- who is considered middle class -- is already in the top tax bracket and is also paying the same tax rate as the billionaires in our country,” Mr. Angara was quoted as saying.

A person who makes P50,000 a month or P650,000 a year (including 13th month pay) currently pays an annual income tax of roughly P195,000 and nets an annual income of P455,000. And this results in a monthly household budget of about P38,000. For a family of six, that monthly budget is barely enough to keep them out of the slums.

It translates to a daily budget of about P1,200, or only P200 per day per head -- to cover house rent or amortization, utilities, food and clothing, transportation, education, health services, and, of course, mandatory deductions like social security and PhilHealth, plus other government fees and charges other than income tax.

On the other hand, a man who makes P1 million monthly or P12 million annually -- even with a 30-32% income tax rate -- still gets to take home about P700,000 a month to his family of six. There is major disparity in income and purchasing ability, yet they pay the same income tax rate?

And that is why Mr. Angara, through his Senate Bill 2149, proposes to peg at P1 million and above -- from the present P500,000 and above -- the country’s top income tax bracket, and to reduce the maximum tax rate from the current 32% to 25% by 2017.

I feel the top income tax bracket should be nearer the P3 million level (or P250,000 monthly), which is more in tune with what we can realistically define as being rich or wealthy or having more than enough. Taking the case of a family of six, an annual family income of P1 million minus P250,000 in tax (at 25%) results in a daily household budget of only P340 per head per day -- which is below the present minimum daily wage in Metro Manila.

Mr. Angara’s plan is already a major step in the right direction, particularly for middle income earners like me. But unless he raises the top income bracket to at least P3 million, cutting the tax rate to 25% appears to benefit the rich -- like himself and his family -- more rather than the middle- or low-income earners. Those who make millions and billions don’t really bother with tax brackets, as they will always be on top. But cutting their tax rate to 25% from 32% will surely save them a lot of money.

(Send comments to matort@yahoo.com.)

source:  Businessworld

A closer look at finance leases

THE KEY in determining the taxability of a transaction is to know the nature of said transaction. This is definitely important in determining the taxability of a lease.

A finance lease should be differentiated from an operating lease. Recently, the Bureau of Internal Revenue (BIR) clarified that a finance lease is subject to documentary stamp tax (DST) as a loan transaction instead of a lease transaction.

Revenue Memorandum Circular No. (RMC) 46-14 started its clarification by stating that, under Revenue Regulations No. (RR) 9-04, a finance lease was defined as a mode of extending credit through a non-cancellable lease contract, under which the lessor purchases or acquires -- at the instance of the lessee -- machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two years, during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs and maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

Moreover, it was defined as a lease that transfers substantially all the risks and rewards incident to ownership of an asset whose title may or may not eventually be transferred. This definition is similar to the accounting treatment which even requires a liability to be recognized in the books of the lessee.

With the definition provided, RMC 46-14 reiterated that a finance lease is a loan since it is in the form of extending credit to the lessee. For DST purposes, the transaction will fall under Section 179 of the Tax Code, as debt instruments, which are subject to tax of P1 on each P200 or fractional part thereof. Debt instruments were further defined to be instruments representing borrowing and lending transactions that are not limited to the transactions enumerated in Section 179.

On the other hand, RR 19-86 and BIR Ruling 009-2007 further differentiated a conditional sale from a lease. The distinction made an impact on the taxes that were not covered by RMC 46-14. The intent of the parties and the provisions of the agreement will help determine if the transaction is considered a conditional sale.

RR 19-86 listed compelling factors to determine a conditional sale: a) there is an option to purchase the asset at any time; b) the lessee acquires automatic ownership of the asset upon payment of the rentals under the contract; c) portions of the periodic rental payments are credited to the purchase price; and d) the receipts of payment indicate that the payment made were partial of full payments of the asset.

As a caution, the RR further emphasized that there is no single test or combination of tests that would absolutely determine conditional sale.

The discussion of RR 19-86 ended with a suggestion of securing an advanced tax ruling to ascertain if the lease model offered is a conditional sale.

Based on BIR Ruling 009-2007, for income tax purposes, a conditional sale is to be reported in the books of the vendor/lessor in accordance with the method of accounting it regularly employs in keeping its books of accounts or in accordance with the installment basis. For value-added tax purposes, since the transaction is, in substance, a sale of goods rather than a sale of service, the VAT amount is to be paid at the onset of the transaction, unless it qualifies under installment sale. Thus, for withholding tax purposes, since the transaction is considered a sale of goods, then the lessee is only required to withhold 1% on the transaction if it has been classified by the BIR as a large taxpayer or as one of the top 20,000 corporations in the Philippines.

On the other hand, if the transaction is simply a lease, then for income tax purposes, the lessor may depreciate the leased equipment during the lease period but such period should not be less than 60 percent of the depreciable life. For VAT purposes, the monthly payments received from the lessee are to be reported on a monthly basis since this is subject to VAT as they are actually or constructively received, and not at the inception of the lease. Thus, for withholding tax purposes, the transaction remains to be a lease/rent which, is subject to 5% withholding tax.

For purposes of clarity and to avoid confusion on the proper treatment for income tax, VAT, and withholding taxes in relation to finance leases, it would be best for the BIR to issue another clarificatory circular on this.

The author is a senior 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

It hurts when I pay my taxes

EVERY TIME I get my pay slip, I get depressed. I see the amount of what I was supposed to have earned and, right below it, the amount of tax deducted from my income that I would never see again. Of course, some would argue that I do see the tax I paid in terms of infrastructure and public services. But even if I try to console myself with such platitudes, I find myself feeling more depressed every time I ride the MRT and get squeezed by the hordes of people also trying to get in, or when I go to a government office just to be practically ignored or, on special days, even snarled at.

I am not complaining that I have to pay taxes. Paying taxes is every citizen’s responsibility. Public service will collapse without the taxes paid by the good citizenry. However, how much does the government really deserve to get from my hard earned salary? How much is fair to be considered my civic duty and how much is confiscatory on the part of the government?

I will not whine that our tax rates are higher than those of the rest of the world. There are actually countries that impose higher than 50% tax rates. Compared with such rate, our 32% may not really be something to complain about. However, in most of the countries where the taxes are high, the government provides generous benefits and adequate pension plan. Compared with those countries, our benefits and pension plan are almost non-existent.

When it comes to income taxes paid by individuals, the rates are not the critical measure. The more important consideration is the level of income subjected to a particular tax rate. Fairness dictates that after tax deduction, a person should be left with an amount still sufficient to care for his family’s needs.

Ours is supposed to be a progressive system of taxation where the poor are supposed to pay less and the rich are supposed to pay more. Based on our tax table, once an individual’s annual taxable income hits above P500,000, the highest tax rate of 32% is imposed. In fact, my niece who is a new graduate and receiving around P12,000 a month is already paying tax at the 20% level. With the prices of all commodities increasing almost every month, the 20% tax on such measly income is even more tear-jerking than the latest telenovela.

On top of the 32% income tax that gets automatically deducted from my salary, the remainder of my take home pay will still be subjected to the 12% value-added tax (VAT) for every trip I make to the grocery. No wonder I hardly see anything in my refrigerator after every payday, as almost 40% of my salary already goes directly to income tax and VAT.

Hence, when I read news reports last week that both the Senate and the Lower House are discussing reducing taxes, I could not help but smile. Truly, this was the only good news I had heard in the past week.

There are various bills seeking to reduce the tax rates that were set in 1997 and that remained unadjusted to this date. Most of the bills explained the need to adjust the tax rates considering that the Consumer Price Index from 1998 to May 2013 has almost doubled at 96%. This means that a basket of goods worth P100 in 1998 already costs P196 in 2013.

Senate Bill (SB) No. 716, filed by Senator Ralph G. Recto, proposes to double the threshold level per bracket. This means that the highest rate of 32% will only be imposed once an individual earns more than P1 million taxable income per year.

SB 1942, filed by Sen. Paolo Benigno A. Aquino IV, proposes to adjust the threshold levels and introduce additional brackets. Taxable income over P1 million will be taxed at 32%, and taxable income over P12 million, at 35%.

SB 2149, filed by Sen. Juan Edgardo M. Angara, seeks to reduce the tax rates in preparation for the Association of Southeast Asian Nations’ economic integration by 2015 and align our tax rates with those of our ASEAN neighbors. The reduction of tax rates would be implemented from 2015 to 2017. Under his proposal, the tax rate for the top level of more than P1 million shall be 32% in 2015, 28% in 2016 and 25% in 2017.

House Bill (HB) No. 4099, filed by Valenzuela Rep. Magtanggol T. Gunigundo (2nd district), proposes to lower corporate income tax to 15% and individual income tax to 30%. The bill also proposes to exempt from tax salaries of P180,000 a year.

HB 210, introduced by Cagayan Rep. Salvacion S. Ponce Enrile (1st district) proposes to reduce the tax rates by half. This means that taxable income above P500,000 will be subject to tax at 17.5%. Additional higher brackets are also introduced with the top rate of 32% imposed on taxable income above P12 Million.

Most of the proposals are not really lowering the tax rates but only adjusting the brackets to conform to the increase in consumer price index. Just the same, any reduction, no matter how small, is good news. Hopefully, the Congress will finally be able to pass a law decreasing the tax rates and adjusting the tax brackets. Perhaps, the next time I receive my salary, I can finally afford to buy that bag I have been eyeing for the last two years.

The author is a partner 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