Revisiting accounting for levies

PAYING THE government certain amounts primarily due to legislation is often customary or necessary in conducting a business.

In our current business environment where compliance with legislation is paramount, businesses are compelled to pay and settle these obligations. Failure to comply with these obligations has implications ranging from imposition of penalties to revocation of licenses or business permits.

When governments or public authorities impose levies on business entities, other than impositions for income taxes and fines or other penalties, it is not always clear when the obligation to pay arises, and, consequently, when such obligation should be recognized in financial statements.

This has resulted in differences in the timing of recognition among companies. In May 2013, the IFRS Interpretations Committee issued IFRIC 21, Levies, to address this issue. The interpretation clarifies when liabilities for levies should be recognized in the financial statements.

IFRIC 21 defines a levy as “an outflow of resources (embodying economic benefits) that is imposed by governments (including government agencies and similar bodies whether local, national or international) on entities in accordance with legislation (i.e., laws and/or regulations).”

At first glance, this new definition appears broad and may cover all kinds of payments to governments by virtue of legislation. IFRIC 21, however, limits its scope and coverage to exclude payments that are within the scope of other accounting standards (such as income taxes covered by International Accounting Standards (IAS) 12, Income Taxes and service concession agreements covered by IFRIC 12, Service Concession Arrangements), fines and other penalties imposed for breaches of legislation; and contractual payments made to governments for the acquisition of an asset or rendering of a service. Moreover, application is not required for liabilities that arise from emission trading schemes.

It should also be noted that payments other than those explicitly called a “levy” may likewise be covered by IFRIC 21. The nature -- more than the designation -- of the payment is the better qualifier to determine whether the obligation is within the scope of IFRIC 21.

Businesses should consider and reassess all payments imposed by governments pursuant to legislation as many of these are not explicitly identified as levies. Legislation is not always clear on the nature of the payment and the activity that gives rise to the obligation. Sound business judgment in determining whether a payment is in the scope of IFRIC 21 must be exercised. This entails evaluation of each type of payment on its own merits and according to the legal requirements.

Some examples of payments that may be within the scope of IFRIC 21 (although specific facts and circumstances should be carefully analyzed) are real property taxes, local business taxes, and capital-based taxes. These could also include certain fees, concessions, or contributions imposed on industries which are regulated by the government such as in banking, insurance, telecommunications, power and utilities, among others. Careful assessment, however, should be made to ensure that such payments are not covered by the scope exclusions described above.

The appropriate point of recognition should then be established once a levy or payment is assessed to be covered by IFRIC 21. The obligating event, which triggers the payment or binds the business to pay the levy as required by legislation, should be identified. This is crucial as it dictates the timing and measurement of liability recognition. It determines whether to recognize the liability over a period of time or at a point in time.

For an obligating event that occurs over a period, IFRIC 21 requires that the liability to pay a levy be recognized progressively. If the generation of revenue over a period is the obligating event, for instance, the entity recognizes the corresponding liability as the said entity generates the revenue. This is because at any point in that period, the entity has the present obligation to pay a levy on revenues generated to date.

Some levies, however, need to be recognized as an obligation arising at a point in time. An example is a levy that is triggered in full as soon as the entity generates revenues in one period, based on revenues from a previous period. In this case, the liability is recognized in full as soon as the entity generates revenue in the current period. Generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

The same rule applies to an obligation to pay a levy once a minimum threshold is reached (such as minimum amount of revenue or sales generated or outputs produced). In this case, the liability is recognized only when that minimum activity threshold is reached. No obligation should be recognized prior to reaching the threshold regardless of how certain the entity is of reaching that threshold.

In sum, a liability to pay a levy to a government should be recognized only when an obligating event has occurred.

As indicated in the EY publication, titled “Accounting for Levies”: “IFRIC 21 clarifies that neither a constructive nor a present obligation arises as a result of being economically compelled to continue operating, or from any implication of an intention and ability to continue operations in the future.” The same principles must be consistently applied even for interim reporting.

IFRIC 21 is applicable for annual periods beginning on or after Jan. 1, 2014, and requires retrospective application. Hence, it is imperative that entities start assessing its impact on their financial reporting. An inventory of payments covered by the interpretation should be made, and an assessment should be done whether the new guidance on point of recognition would change current accounting practice. By taking a closer look at IFRIC 21 and scrutinizing which types of payments to government are within its scope and would be impacted by the clarified guidance, companies are better positioned to produce more accurate financial statements. Ultimately, when reporting is up to par, risks can be reduced and decisions are better informed.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Meynard A. Bonoen is a Senior Director of SGV & Co.

source:  Businessworld

Continue to site

Revisiting accounting for levies

PAYING THE government certain amounts primarily due to legislation is often customary or necessary in conducting a business.

In our current business environment where compliance with legislation is paramount, businesses are compelled to pay and settle these obligations. Failure to comply with these obligations has implications ranging from imposition of penalties to revocation of licenses or business permits.

When governments or public authorities impose levies on business entities, other than impositions for income taxes and fines or other penalties, it is not always clear when the obligation to pay arises, and, consequently, when such obligation should be recognized in financial statements.

This has resulted in differences in the timing of recognition among companies. In May 2013, the IFRS Interpretations Committee issued IFRIC 21, Levies, to address this issue. The interpretation clarifies when liabilities for levies should be recognized in the financial statements.

IFRIC 21 defines a levy as “an outflow of resources (embodying economic benefits) that is imposed by governments (including government agencies and similar bodies whether local, national or international) on entities in accordance with legislation (i.e., laws and/or regulations).”

At first glance, this new definition appears broad and may cover all kinds of payments to governments by virtue of legislation. IFRIC 21, however, limits its scope and coverage to exclude payments that are within the scope of other accounting standards (such as income taxes covered by International Accounting Standards (IAS) 12, Income Taxes and service concession agreements covered by IFRIC 12, Service Concession Arrangements), fines and other penalties imposed for breaches of legislation; and contractual payments made to governments for the acquisition of an asset or rendering of a service. Moreover, application is not required for liabilities that arise from emission trading schemes.

It should also be noted that payments other than those explicitly called a “levy” may likewise be covered by IFRIC 21. The nature -- more than the designation -- of the payment is the better qualifier to determine whether the obligation is within the scope of IFRIC 21.

Businesses should consider and reassess all payments imposed by governments pursuant to legislation as many of these are not explicitly identified as levies. Legislation is not always clear on the nature of the payment and the activity that gives rise to the obligation. Sound business judgment in determining whether a payment is in the scope of IFRIC 21 must be exercised. This entails evaluation of each type of payment on its own merits and according to the legal requirements.

Some examples of payments that may be within the scope of IFRIC 21 (although specific facts and circumstances should be carefully analyzed) are real property taxes, local business taxes, and capital-based taxes. These could also include certain fees, concessions, or contributions imposed on industries which are regulated by the government such as in banking, insurance, telecommunications, power and utilities, among others. Careful assessment, however, should be made to ensure that such payments are not covered by the scope exclusions described above.

The appropriate point of recognition should then be established once a levy or payment is assessed to be covered by IFRIC 21. The obligating event, which triggers the payment or binds the business to pay the levy as required by legislation, should be identified. This is crucial as it dictates the timing and measurement of liability recognition. It determines whether to recognize the liability over a period of time or at a point in time.

For an obligating event that occurs over a period, IFRIC 21 requires that the liability to pay a levy be recognized progressively. If the generation of revenue over a period is the obligating event, for instance, the entity recognizes the corresponding liability as the said entity generates the revenue. This is because at any point in that period, the entity has the present obligation to pay a levy on revenues generated to date.

Some levies, however, need to be recognized as an obligation arising at a point in time. An example is a levy that is triggered in full as soon as the entity generates revenues in one period, based on revenues from a previous period. In this case, the liability is recognized in full as soon as the entity generates revenue in the current period. Generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

The same rule applies to an obligation to pay a levy once a minimum threshold is reached (such as minimum amount of revenue or sales generated or outputs produced). In this case, the liability is recognized only when that minimum activity threshold is reached. No obligation should be recognized prior to reaching the threshold regardless of how certain the entity is of reaching that threshold.

In sum, a liability to pay a levy to a government should be recognized only when an obligating event has occurred.

As indicated in the EY publication, titled “Accounting for Levies”: “IFRIC 21 clarifies that neither a constructive nor a present obligation arises as a result of being economically compelled to continue operating, or from any implication of an intention and ability to continue operations in the future.” The same principles must be consistently applied even for interim reporting.

IFRIC 21 is applicable for annual periods beginning on or after Jan. 1, 2014, and requires retrospective application. Hence, it is imperative that entities start assessing its impact on their financial reporting. An inventory of payments covered by the interpretation should be made, and an assessment should be done whether the new guidance on point of recognition would change current accounting practice. By taking a closer look at IFRIC 21 and scrutinizing which types of payments to government are within its scope and would be impacted by the clarified guidance, companies are better positioned to produce more accurate financial statements. Ultimately, when reporting is up to par, risks can be reduced and decisions are better informed.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Meynard A. Bonoen is a Senior Director of SGV & Co.

source:  Businessworld

The inurement predicament

“THUS, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury (The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation by H. Hansmann, as cited by the Supreme Court in the case of the Commissioner of Internal Revenue vs. St. Luke’s Medical Center, 2012).”

A similar income tax exemption is provided under Section 30 of our Tax Code to various nonstock and/or nonprofit (“NSNP”) organizations registered in the Philippines.

Such exemption, however, is again under fire with the issuance of Revenue Memorandum Circular (“RMC”) No. 51-2014 by the Bureau of Internal Revenue (“BIR”) last 6 June 2014.

Under the RMC, for such organizations to qualify for the benefit of exemption under Section 30, no part of their net income or asset must belong to or inure to the benefit of any member, organizer, officer or any specific person. This prohibition on inurement is what the Circular seeks to clarify.

Under the Circular, the BIR enumerates six scenarios which it deems to be in violation of the prohibition on inurement.

In effect, an NSNP entity stands to lose its tax exemption when it: 1) pays unreasonable amounts of compensation to its employees; 2) pays compensation, salaries, or honorarium to its trustees; 3) extends loans and financial assistance to its members; 4) donates to any person or entity other than to other entities formed for the same purpose as its own; 5) pays for goods or services in amounts more than what they are actually worth in the market from a supplier where any one of its trustees, officers or fiduciaries has interest; or 6) upon dissolution, distributes its remaining assets to its trustees, organizers, officers or members.

Upon scrutiny, however, it seems that -- contrary to the BIR’s objective of clarifying the prohibition on inurement -- the Circular also raised more questions.

For one, are all nonstock entities enumerated under Section 30 bound to comply with the prohibition on inurement to ensure continuous relief from income tax?

A closer look at Section 30 (entitled “Exemption from Tax on Corporations”) will reveal that, while there are 11 categories of organizations listed there, only nonstock entities under Section 30 (E) and (F) contain an express qualification on the prohibition on inurement.

A basic rule in statutory construction dictates that when there is a qualification of a rule, such qualification must be understood with reference to the immediately preceding part of the provision to which it is attached and not to the law in its entirety or to the other sections thereof (Agpalo).

The current wording of the RMC, however, concludes that all entities that derive exemption under any one of the 11 subparagraphs of Section 30 -- including labor organizations, business leagues, and civic organizations -- are duty-bound to observe the prohibition.

Another question that comes to mind is whether the NSNP entity making payments or distributions classified as a prohibited inurement under the RMC will still lose its income tax exemption even if such payments or distributions are otherwise sanctioned by the law?

One prohibited inurement under the Circular is the payment of compensation, salaries, or honorarium to trustees or organizers. Indeed, for philanthropic reasons, a person agreeing to occupy a seat in the board of an NSNP organization, such as a foundation or charitable institution, generally should not expect to be compensated. Under the law, however, all private corporations including NSNP corporations are allowed to fix the compensation of its trustees in its by-laws. In fact, the Corporation Code already limits the compensation of its directors, as well as a penalty for any violation of the said limitation. Hence, if the salaries paid to the trustees are reasonable and by reason of the services these trustees render for the furtherance of the specific purpose with which their respective entities were established, such payments are permitted by the law.

Another transaction considered as a prohibited inurement is the provision of welfare aid and financial assistance to an NSNP’s members. Given this, various organizations that regularly extend non-interest bearing loans and aid to its members may lose their income tax exemption.

Labor organizations, for example, grant financial aid in favor of their union members, in case a member is either suspended or terminated from employment without reasonable cause. Veterans foundations, on the other hand, extend aid and assistance to Filipino veterans and their dependents to complement the efforts of the Government, and to promote patriotism and love of country. Various civic livelihood organizations, likewise, give similar financial assistance to its members to address the primary needs of the less fortunate and assist them in starting a business or livelihood.

All these organizations are nonstock corporations supposedly exempt from income tax under Section 30. Under the Circular, however, financial assistance extended by these entities, even if done with mainly altruistic intentions, are considered prohibited inurements, which disqualifies them from exemption.

Another prohibition worth noting would be the one on donating to any person or entity other than to other entities formed for the same purpose. This seems to effectively prohibit charitable organizations from doling out charity to the less fortunate, unless of course, they want to suffer tax from simply carrying out their purpose.

There is now doubt as to the purpose of penalizing an NSNP by denying it tax exemption even if its acts are in accordance with law and with their purpose.

It is not difficult to comprehend the objective of the BIR in applying stricter rules to NSNP organizations, especially now that our country is in the midst of a scandal due to the abuse of bogus nongovernment organizations. When tax exemptions are taken advantage of to the detriment of the Filipino people, the government should take measures to ensure that only those qualified are availing of the proper exemptions.

However, it seems that a far greater number -- legitimate entities with actual magnanimous objectives -- is being punished for the sins of a select few.

While taxes are the lifeblood of the government and tax exemptions shall be strictly construed against taxpayers, we should still be mindful that qualified NSNP organizations are exempt from income tax, because, in the main, they are providing services and resources which the government should be delivering in the first place. Tax rules must not be so stringent so as to frustrate such rationale and discourage those who want to serve others from doing so.

Ma. eliza christine c. gomez is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call (02) 845-2728 or e-mail the author for questions or feedback.

ma.eliza.christine.gomez@ph.pwc.com

source:  Businessworld

Continue to site

Tax Watch targets Makati doctors

DOCTORS IN MAKATI were the latest to be put in the spotlight as part of a government campaign against tax evasion, with compliance examined based on their income tax returns.

After six weeks of focusing on the revenue shortcomings of local governments, the Finance department turned its sights once more on the professional sector in yesterday’s Tax Watch advertisement.

Using Bureau of Internal Revenue (BIR) data, it noted that less than two-fifths of taxpayer doctors in Makati filed income tax returns in 2012 -- with some even declaring very low dues.

According to the Tax Watch ad, a total of 1,798 doctors are registered with the BIR’s Makati revenue district offices. Of this, just 647 or 36% filed their tax returns in 2012.

The ad also pointed out that 209 of the 647 taxpayer doctors even declared income tax dues less than the tax to be withheld from the gross income of a public school teacher earning P18,549 a month -- pegged at some P27,360.

For instance, a doctor who earned P3.72 million in 2012 only declared a tax due of P2,000, the ad declared.

“When you don’t pay your taxes, you’re a burden to those who do,” the Finance department declared.

Tax Watch is an ongoing campaign by the Finance department where weekly advertisements containing tax collection statistics are released, with the goal of encouraging people to comply with laws and raise government revenues.

The BIR is the government’s main revenue agency, accounting for about 70% of collections. It is tasked to collect a total of P1.456 trillion in taxes this year.

The agency has collected P549.085 billion as of May, up 8.74% from P504.95 billion recorded a year earlier but over P50 billion short of the period’s P603.871-billion target.

It shored up P1.217 trillion last year, up 15.03% from the P1.058 trillion recorded in 2012 but missing the P1.253-trillion goal. -- Bettina Faye V. Roc

source:  Businessworld

A legal confrontation on RR 1-2014 in the offing?

On December 17, the Department of Finance (DOF) and Bureau of Internal Revenue (BIR) issued Revenue Regulation No. 1-2014 which took effect last Jan. 1.

RR 1-2014  is supposed to simply amend a 15-year-old regulation (RR 2-98).

So why is there a  brouhaha over its issuance?

The regulation requires withholding agents to submit an alphabetical list (alphalist) of all employees/payees of income payments exclusively through the following means: a) as attachment in the Electronic Filing and Payment System (eFPS); b) through electronic submission using the BIR’s website (eSubmission); or c) through e-mail at dedicated BIR addresses using a prescribed CSV file format (e-mail).

More importantly, the new RR 2-98 requires withholding agents to submit the names, together with their respective tax identification number and other details, of each and every person (employee and non-employee) to whom they make payments.

By the express terms of the new regulation, the submission of alphalist where the income payments and taxes withheld are lumped into one single amount (e.g., “various employees,” “various payees,” “PCD nominees,” “others,” etc.) shall not be allowed.

The introductory paragraph of RR 1-2014 contains this phrase: “…except on cases prescribed under existing international agreements, treaties, laws and revenue regulations.”

Does this mean that RR 1-2014 will not apply to cases where the relevant law or treaty does not require the submission of the names of the income payees?

Another question is whether the new regulation applies where compliance will violate any confidentiality provision of existing laws. For instance, there is a provision in the General Banking Law penalizing a bank officer or employee for disclosing any information regarding a bank account. Does this mean that the new regulation need not be complied with in cases where the submission of the names of payees exposes the payor to criminal liability?

If the answers to the foregoing questions are that the new RR must still be complied with, is the disallowance of business deductions a valid exercise of the BIR’s rule-making powers? Some sectors posit it is not. They argue that the Tax Code only requires the taxpayer to show that the income tax required to be withheld has actually been withheld and paid to the BIR.  More telling is that the new regulation may violate substantive due process as being unduly oppressive for disallowing legitimate deductible expense merely for non-compliance with the format and mode of submission required.

For the banking industry, will the new requirement compelling banks to disclose the names and other details of their clients not violate the secrecy provisions of the General Banking Act and Secrecy of Bank Deposits?

For the stock brokerage industry, will the new requirement not violate the confidentiality provisions of their written contracts which they entered into with their clients in compliance with  the Securities Regulation Code?  Will the new rule not violate the sanctity of contracts protected by the non-impairment clause of the Constitution?

Note the new prohibition on using “PCD nominees” as payees.  This has been an internationally accepted convention in the stock market system.  Investors are paid their dividends through this nominee system  instead of the listed companies individually paying them.  It saves the parties a lot of effort, expense and time. Considering the billions—or at least millions of investors in the stock market—imagine the havoc that would result to the stock market without this system. Under this system, investors receive their dividends either from their brokers or custodian banks. As far as these investors are concerned, they are able to keep their identity and investments private and  confidential, which is so essential to maintaining stability and public confidence in our capital markets.

My friends in the PSE claim that the new requirement is wreaking havoc on the stock market. I understand that some listed companies are requiring esoteric things from their investors like consularized articles of incorporation and certificates of tax residence from their home countries to comply with the new regulation. If true, these are definitely a turn-off to these investors who are not subjected to same requirements in other countries they have investments in.

In legal parlance, this may mean that the new issuance violates the Securities Regulation Code that mandates the development of the capital markets.

The question is: will the affected industries take the DOF and BIR to court on this issue? Well, I am told that no less than a retired justice of the Supreme Court is being consulted.

My guess may still be wrong, though!

(The views of the author expressed in this column are exclusively his.  They should not be attributed in any way to the institutions with which is is currently affiliated.)

source:  Philippine Daily Inquirer by Francis Ed Lim

BIR imposes DST on finance leases

IN THE recently issued Revenue Memorandum Circular (RMC) No. 46-2014, the Bureau of Internal Revenue (BIR) clarified that a financial lease is essentially a mode of extending credit, and is therefore subject to documentary stamp tax (DST) as a loan and not as a lease.

Generally, a lease is an agreement whereby a person (lessor) binds himself to give a property to another -- (lessee) for use and enjoyment for a certain period of time in return for rental payments.

From an accounting perspective, there are two kinds of lease: operating lease and finance lease. The distinction between the two is primarily due to the application of the accounting concept of substance over form. Based on Philippine Accounting Standard (PAS) 17, which covers the accounting treatment of leases, a finance lease is a lease agreement in which substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee from the lessor. On the other hand, an operating lease is a lease other than a finance lease.

This classification has been recognized by the BIR as early as 1986 when it issued Revenue Regulations (RR) No. 19-86. Thereunder, an operating lease is a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset at the end of the primary lease period.

On the other hand, a finance lease or a full payout lease is a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor’s borrowing costs and profits. The obligatory period refers to the primary or basic non-cancellable period of the lease which in no case shall be less than 730 days. This definition of a financial lease provides no indication of a debt or credit arrangement, but focuses more on its lease classification.

However, in 2004, the BIR updated its definition by adopting the term as defined under the Financing Company Act of 1998. Therein, a finance lease was referred to as a mode of extending credit through a non-cancellable lease contract under which the lessor acquires, at the instance of the lessee, movable or immovable property in consideration of periodic payment by the lessee of a fixed amount of at least 70% of the acquisition cost. The law also defined credit to mean any loan, mortgage, finance lease, deed of trust, advance, conditional sales contract and any other contract having similar purpose or effect. This same definition was reiterated in the new RMC.

The RMC also relied on the accounting treatment of finance lease in PAS 17, where the leased asset is capitalized at the commencement of the lease in the books of accounts of the lessee, and a periodic repayment of liability is recorded rather than a periodic payment of rentals.

On the basis of these definitions and accounting treatment, the RMC clarified that a finance lease should be considered as a debt and not as a lease. As such, the BIR concluded that the appropriate DST for finance lease shall be based on Section 179 of the Tax Code, which imposes an effective DST rate of 0.5% on all debt instruments representing borrowing and lending transactions including, but not limited to, debentures, certificates of indebtedness, bonds, loan agreements and other evidences of debt having a specific maturity date.

On the other hand, under Section 194 of the Tax Code covering stamp duty lease, DST at the approximate rate of 0.1% is due on “each lease, agreement, memorandum, or contract for hire, use or rent of any lands or tenements, or portions thereof.”

Prior to the RMC, it would appear that only those lease agreements involving land and tenements were subject to DST. Under the new RMC, operating leases involving land or tenements would remain subject to 0.1% DST. However, if structured as a financial lease, the same transaction would instead be subject to the higher 0.5% DST as a debt or credit arrangement. Moreover, all financial leases, even if involving personal property, would also be subject to 0.5% DST as a debt instrument.

Taxpayers should be mindful of this clarification by the BIR and revisit their lease arrangements if they want to be compliant with the BIR’s expected tax treatment and avoid or minimize penalties in the event of an audit.

(The author is a consultant at the Tax Department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call (02) 845-2728 or e-mail the author at christian.john.rojo@ph.pwc.com for questions or feedback.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article.)



source:  Businessworld

Getting money back via input VAT refund

OVER the last few years, the process of claiming a tax refund or tax credit certificate (TCC) for unutilized input value added tax (VAT) related to VAT zero-rated sales has been the subject of many court decisions, many of the more recent of which dealt with the mandatory jurisdictional dates for filing claims for VAT refunds or TCCs with the court.

Very recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 54-2014 dated June 11, 2014, which businessmen with zero-rated sales who are planning to claim VAT refunds or TCCs must pay attention to, lest the claim fall through the cracks.

The new RMC 54-2014 clarifies that:

• The administrative claim for VAT refund or TCC must be filed within two years from the close of the taxable quarter when the zero-rated sales and/or effectively zero-rated sales were made.

• The application for VAT refund must be accompanied by complete supporting documents as specifically enumerated in Annex A of the RMC. In addition, the taxpayer should attach a sworn statement/affidavit (i) attesting to the completeness of the submitted documents; (ii) stating that the attached supporting documents are the only documents which the taxpayer will present to support the claim; and, additionally, (iii) in the case of corporations or other juridical persons, there should be a sworn statement that the officer signing the affidavit (which should at the very least be the Chief Finance Officer) has been authorized by the company’s Board of Directors.

• Upon submission of the administrative claim and its supporting documents, the BIR shall process the claim, and no other documents shall be accepted or 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. The application shall be denied if the taxpayer fails to submit the complete supporting documents.

• The Commissioner shall have 120 days from the submission of the complete supporting documents within which to decide whether or not to grant the claim. If the claim is not acted upon by the Commissioner within the 120 days, such “inaction shall be deemed a denial” of the claim.

• If the Commissioner denies the claim, whether in full or in part, or if the Commissioner does not act on the claim within the 120-day period, the taxpayer should file a judicial claim with the Court of Tax Appeals (CTA) (i) within 30 days from receipt of the Commissioner’s decision denying the claim (whether in full or in part) within the 120-day period, or (ii) from the expiration of the 120-day period if the Commissioner does not act within the 120-day period. The taxpayer is required to observe the 120+30 day rule before lodging a petition for review with the CTA.

• In cases where the taxpayer has filed for a Petition for Review with the CTA, the Commissioner loses jurisdiction over the administrative claim. However, the processing office of the administrative agency shall still evaluate internally the administrative claim for purposes of intelligently opposing the taxpayer’s judicial claim.

• Failure to file a judicial claim with the CTA within 30 days from the expiration of the 120-day period renders the Commissioner’s decision or inaction “deemed a denial,” final and unappealable. This applies to all currently pending administrative claims for refund or tax credit.

RMC 54-2014 has overreaching implications on taxpayers with unutilized input VAT related to zero-rated or effectively zero-rated sales. For example:

• Taxpayers who filed an administrative claim but did not file a judicial claim with the CTA after the lapse of the 120-day period on the basis that the BIR would continue processing and evaluating the claim, now face the spectacle of having no further recourse or remedy to pursue the claim, because RMC 54-2014 now says that these claims are deemed to have been denied by the BIR. And since RMC 54-2014 says that it applies to all pending claims, some taxpayers may be left with no remedy at all, particularly where the 30-day period for filing the judicial claim with the CTA has also lapsed.

• Prior to the “deemed denial” rule in RMC 54-2024, the BIR would at least inform the taxpayer of the reasons for the denial (e.g., improper substantiation or non-compliance with invoicing requirements). This would normally provide the taxpayer with guidance on how these unutilized input taxes should be treated in the taxpayers’ books. With the deemed denial, the taxpayer is deprived of the opportunity to learn the reasons for what would have been disallowances, and therefore also deprived of the opportunity to correct whatever mistakes they have in their practices.

• On the other hand, there are also taxpayers who file a judicial claim for refund within 30 days from the end of the 120-day period, so that they can pursue both the administrative claim as well as the judicial claim. In fact, there have been instances where the BIR granted the taxpayer’s claim for input tax refund even if a judicial claim has already been filed in court. In such cases, the BIR only requires that the judicial claim be withdrawn before awarding the refund or TCC. Under RMC 54-2014, a taxpayer cannot now cover both BIR and CTA fronts, because once a judicial claim has been filed with the CTA, the RMC says that the BIR loses jurisdiction over the administrative claim. Taxpayers can no longer expect that the BIR will grant their application for refund, but will have to rely solely on the CTA to process their judicial claims.

•Taxpayers should also note that one of the requirements under the RMC is the submission of a sworn statement or affidavit stating that the required documents are complete and that these are the only documents which the taxpayer will present to support the claim. The RMC also states that the BIR will evaluate the claim for refund based only on the documents submitted. Thus, failure on the part of the taxpayer to submit all the required documents at the time of filing the claim may prove fatal to its claim. It is crucial that taxpayers get it right the first time, since they will neither be allowed to submit additional documents to support their claim nor will the BIR accept such documents.

Given the pace at which the BIR has been processing claims for refund or TCC, it is unlikely that the BIR will be able to act on the claims within the 120-day period. Hence, taxpayers will have no choice but to file a Petition for Review with the CTA, or risk losing their right to claim the refund or TCC. This means that taxpayers will need to incur additional costs (e.g., filing fees with the CTA, professional fees of independent CPA, legal fees, among others) to keep the remedy of the refund or TCC alive.

Moreover, for financial accounting purposes, taxpayers will now have to decide whether to accrue for additional provisions for disallowance in their books if these have not been fully provided for. Considering that the provisions of the RMC are applicable to all currently pending administrative claims, claims for refund which may have been pending for several years will be affected. This may result in recognition of huge amounts of expenses/losses in the taxpayers’ books.

With the issuance of RMC 54-2014, it is essential that taxpayers who wish to get back their money (or the TCC) know these rules and requirements -- particularly the dates -- and put in place the necessary systems or mechanisms within the company for triggering action on claiming input tax refunds or TCCs, because one wrong move could lead to either a deemed denial or an automatic denial of the claim.

Josenilo G. Mendoza is a Partner of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. Views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

source:  Businessworld

Continue to site

The unintentional gift

Taxwise or Otherwise By Samantha Joy H. Oreta, 2 July 2014

GENERALLY, a gift is something that is given to another for free.

In legal parlance, it is synonymous to a donation -- a gratuitous transfer of a thing or right in favor of another who accepts it.

Under the Civil Code, one of the key elements in donation is the intention to donate.

How does the tax court and tax authorities determine that a gift/donation has been made? Does intention come into play?

In April 2008, the Bureau of Internal Revenue (“BIR”) issued Revenue Regulations (“RR”) No. 6-2008 which provides that in case the fair market value (“FMV”) of property transferred is greater than the value of the consideration received, the excess shall be deemed a gift subject to donor’s tax under Section 100 of the Tax Code. The RR then pegged the FMV of unlisted shares of stock as “the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale”.

In a recent case, the Court of Tax Appeals (“CTA”) supported the interpretation of the BIR as laid down in the above RR. In that case, a taxpayer sold shares of stock to a buyer at a price lower than their book value. To confirm that the transaction will not trigger donor’s tax, the taxpayer filed a request for ruling with the BIR in 2009 pointing out that the sale of the subject shares was an ordinary commercial transaction negotiated in good faith and motivated by legitimate business reasons. Moreover, there was no intention to donate and the pricing was not intended to avoid the payment of capital gains tax because total acquisition cost of the shares was very much higher than the book value. There was no intention to gain any tax advantage by selling at lower-than-book value because the taxpayer would still be in a loss position even if it were to dispose shares at book value/FMV.

On the basis of the representations of the taxpayer and on precedent rulings, the Assistant Commissioner for Legal Service confirmed that the subject transaction is an exception to the rule on deemed gift provisions and is not subject to donor’s tax.

However, in 2011, the BIR assessed donor’s tax on the same transaction and revoked the ruling on the ground that the claim for exemption had no legal basis.

Upon judicial appeal, the CTA upheld BIR’s position that the sale of shares is subject to donor’s tax based on the following grounds, among others:

• Section 100 of the Tax Code is clear that where the property is transferred for less than an adequate and full consideration, the excess of the FMV over the value of the consideration shall be deemed a gift. When the law is clear, it is not subject to interpretation.
• The taxpayer is estopped from questioning the propriety of using the book value as FMV. In citing the 2009 ruling in its defense, the taxpayer is deemed to have admitted the validity of the definition of FMV in the RR. Also, in the capital gains tax return covering the subject transaction, the taxpayer declared the book value of the shares as the FMV. The court considered the credibility of the return as this was filed with the BIR under the pain of perjury.
• The exemption from donor’s tax under American decisions and authorities, where Section 100 of the Tax Code was allegedly lifted from, was not adopted in our version of the provision. Exemptions are never presumed; the burden is on the claimant to clearly establish his right to exemptions.
• The non-retroactivity of the revocation of the 2009 ruling under Section 246 of the Tax Code does not apply because said ruling is considered invalid. Although the 2009 ruling cited other rulings and cases in support of the opinion, the Court held that it is one of first impression since those cited therein do not have similar factual scenarios as that of the taxpayer. Under the Tax Code, the power to issue a ruling of first impression lies only with the Commissioner of Internal Revenue. Thus, since the ruling was issued only by the Assistant Commissioner of the Legal Service, it is not valid.
 

In this court case, the taxpayer-seller became an unintentional donor where market forces dictated a price lower than the net book value. This is because Section 100 of the Tax Code was applied without regard to donative intent. The tax court’s decision, however, appears to run contrary to existing court decisions applying the same provision, where the intention to donate is a key element. Thus, we may yet see a different outcome if this case reaches the Supreme Court.

(Please note that in 2013, the BIR updated its definition of FMV in share disposals. The FMV is no longer pegged at simply the net book value, but on the adjusted net asset method whereby all assets and liabilities are adjusted to their fair market values.)

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 samantha.joy.h.oreta@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.

Dentists win court reprieve

DENTISTS YESTERDAY joined three other professions in securing a Supreme Court reprieve from a tax rule requiring self-employed professionals to disclose their rates.

The high court, which acted on a complaint-in-intervention plea filed by the Philippine Dental Association, issued a temporary restraining order (TRO) against the implementation of the tax bureau’s Revenue Regulation (RR) 4-2014.

Lawyers, doctors and accountants earlier secured similar injunctions.

“The TRO is effective immediately and until further orders from the court,” SC Spokesperson Theodore O. Te said.

Internal Revenue Commissioner Kim S. Jacinto-Henares maintained the TRO was “merely an interim order”, adding that the tax bureau would “enforce stricter monitoring” of self-employed professionals.

“We will have to conduct more tax mapping, surveillance and audit to make sure they comply with tax laws, file and pay the right taxes,” Ms. Henares said.

RR 4-2014, which took effect April 5, requires all self-employed professionals to execute an affidavit specifying the rates, manner of billings and the factors they consider in determining their service fees upon registration with the Bureau of Internal Revenue every year.

They are likewise obligated to register their books of account and official appointment books, sales invoices and official receipts.

RR 4-2014 was issued amid a government drive to increase compliance among self-employed professionals, who have been characterized as mostly not paying the right taxes.

source:  Businessworld