BEFORE January 1, 2009, a complete set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) comprised the following: a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes to the financial statements. When amendments to International Accounting Standards (IAS) 1, Presentation of Financial Statements took effect for annual reporting periods beginning 1 January 2009, the statement of comprehensive income (SCI) was introduced, and became part of an entity’s financial statements. This resulted from the International Accounting Standards Board’s (IASB) efforts to continuously improve financial reporting.
The SCI is seen as a performance statement showing all changes in net assets, except capital contributions and return of capital. Such changes are regarded by the IASB as a measure of ‘performance’ in its widest sense. The SCI does not feature the net income or loss, but instead the total comprehensive income or loss, which is defined by IAS 1 as “the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners”. Total comprehensive income includes both profit or loss and OCI. Requiring the SCI highlighted both the IASB’s and public’s increasing focus on the concept of Other Comprehensive Income (OCI).
WHAT IS OCI?
OCI contains items of income and expenses that are recognized outside of the income statement or the profit or loss. It is driven by specific IFRS provisions or requirements. Some common examples of OCI items are:
• Gains or losses on remeasuring available-for-sale (AFS) financial assets to fair value;
• Changes in revaluation surplus for items of property, plant and equipment or intangible assets that are carried using the revaluation method;
• Remeasurements of defined benefit retirement plans;
• Gains or losses arising from translating the financial statements of a foreign operation;
• The effective portion of gains or losses on hedging instruments in a cash flow hedge.
OCI is required to be presented separately in the equity section. This is done to increase the transparency of these items as users can easily distinguish them from those items presented as part of profit or loss.
IAS 1 does not define ‘income’ or ‘expenses’. The Conceptual Framework for Financial Reporting defines income and expense, but does not provide guidelines on distinguishing which should be presented as the traditional profit or loss and which should be presented as OCI. What this means is that profit and loss is the default category -- all comprehensive income is part of profit and loss unless a provision of IFRS say it is or may be OCI.
In terms of classification, there are two general types of OCI: those that can be reclassified (or ‘recycled’) to profit or loss in future periods, and those that are not allowed to be reclassified to profit or loss. Both types and their related movements must be separately shown or disclosed either in the SCI or in the notes to financial statements. Gains or losses on remeasuring AFS financial assets to fair value are OCI examples that are recycled to profit or loss when the related assets are sold or become impaired, while changes in revaluation surplus and remeasurements of defined benefit retirement plans are examples of those that are not allowed to be recycled to profit or loss.
This separate presentation enables users of the financial statement to ascertain the impact of the reclassifications on the profit or loss and the overall gain or loss from a certain transaction such as the sale of AFS financial assets.
A SINGLE STATEMENT OR TWO STATEMENTS?
Entities are given the option to present all these OCI items in a single SCI, or in two linked statements, i.e., a separate statement of income and a separate SCI. In a single-statement approach, all items of income and expenses are presented together. In a two-statement presentation, the first statement -- the income statement -- presents income and expenses recognized in profit or loss, while the second statement -- the SCI -- begins with profit or loss, adds or deducts all the items of OCI (net of the related taxes) and ends up with total comprehensive income.
There are varying opinions on the better presentation. Those who prefer the two-statement approach want to distinguish profit or loss and total comprehensive income. They point out the following rationale:
• With the two-statement approach, the income statement remains a primary financial statement.
• A single statement would undermine the importance of profit or loss by making it a subtotal.
• Presenting total comprehensive income as the last number in the statement would confuse users.
Proponents of the two-statement approach fear that requiring all items of income and expenses to be presented in a single statement would be the first step towards eliminating the notion of profit or loss. In addition, they argue that the items that are presented in OCI are different from the items presented in profit or loss.
The proponents of the single-statement approach argue that all items of non-owner changes (both P&L and OCI) in equity actually meet the definitions of income and expenses in the Conceptual Framework for Financial Reporting (the Framework). The Framework neither defines profit or loss, nor provides the criteria for distinguishing the characteristics of items that should be included in profit or loss from those items that should be excluded from profit or loss.
The IASB emphasized that both profit or loss and total OCI remain equally important and prominent in assessing an entity’s financial performance. Currently, however, the main key performance indicator of most entities remains the profit or loss before OCI. Even in the calculation of the earnings per share, profit or loss (or net income) remains the required starting point for the calculation of earnings per share.
Looking forward, the IASB is considering working on a conceptual framework for OCI to set out a conceptual basis for how an entity determines whether an item should be presented in OCI or in profit or loss, and the principles to determine which OCI items should, or should not be, reclassified to profit or loss. Given how financial reporting standards are constantly changing and evolving with the thrust moving forward to fair valuation basis of accounting, resulting to more and more income items being considered as OCI rather than the “regular” profit or loss items, total comprehensive income may someday become the key performance metric for entities.
Jennifer D. Ticlao is a Partner of SGV & Co.
source: Businessworld
Sunday, November 30, 2014
Tuesday, November 25, 2014
CAR for sale/transfer of real property: Revisited
With the recent congressional inquiries on transfer of lands, it makes sense to revisit the requirement to get the Certificate Authorizing Registration (CAR).
To ensure the proper reporting and monitoring of the sale, transfer and other disposition of real properties and the payment of correct taxes arising from these transactions, the Bureau of Internal Revenue (BIR) required the issuance of a CAR and prescribed the manner for its issuance.
Under existing BIR rules, a CAR is a certification issued by the Revenue District Officer (RDO) having jurisdiction over the real property transferred to ensure that the transfer and conveyance of the real property was reported and that the taxes due thereon have been fully paid and remitted to the government. The CAR is a mandatory requirement for the registration of the property with the Register of Deeds (RD) and is necessary for the issuance of a new Transfer Certificate of Title in favor of the new owner. It is in effect a tax clearance relative to the transfer of real properties.
The requirement for the issuance of CAR finds support in Section 58(E) of the National Internal Revenue Code (NIRC) of the Philippines, as amended, which provides that no registration of any document transferring real property can be effected by the RD unless the Commissioner of Internal Revenue (CIR) or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax (CWT), if any, has been paid. Likewise, with respect to the estate tax, Section 95 of the NIRC, as amended, provides that the RD can not register in the Registry of Property any document transferring real property or real rights therein xxx unless a certification from the CIR that the tax actually due had been paid.
The requirements for securing a CAR in case of sale/transfer of real property would depend on the transaction (as this would determine the proper taxes due – e.g. donor’s tax, capital gains tax (CGT), CWT, etc.) and whether the real property to be transferred is classified as a capital asset (not used in trade or business) or an ordinary asset (used primarily or for sale in the ordinary course of trade or business). This means that the classification of the real property will determine the tax returns to be filed and the taxes to be paid. For instance, sale of real property classified as capital asset carries with it payment of capital gains tax (CGT) and the filing of the CGT return (BIR Form No. 1706). On the other hand, sale of real property classified as ordinary asset requires payment of CWT and the filing of the withholding tax remittance return (BIR Form No. 1606). Note also that a documentary stamp tax is required.
Some of the basic documentary requirements for the issuance of a CAR are the following: documents evidencing the sale or transfer of real property (e.g. deed of absolute sale, deed of donation, etc.), documents evidencing that appropriate taxes have been fully paid (CGT, CWT, documentary stamp tax, donor’s tax, estate tax, etc. and their corresponding tax returns), official receipts/deposit slips/acknowledgment receipts issued by the seller, latest tax declarations from the City Assessor’s Office, certificate of title of the property involved, tax identification numbers of the buyer/transferee and seller/transferor, etc.
The CARs issued by the RDO should have a validity of one year from the date of issue. Nonetheless, the BIR released issuances addressing issues or guidelines concerning the replacement and/or revalidation of CAR.
In line with the BIR’s continuing initiative to strengthen internal control towards integrity and to fortify the review/monitoring with respect to the sale/transfer of ownership of real properties, it recently issued Revenue Memorandum Circular No. 40-2014 which prescribes the use of Electronic CAR (eCAR) or BIR Form No. 2313-R for transaction involving transfer of real properties. The eCAR system was already primed in the RDOs under the jurisdiction of Revenue Region No. 1 – Calasiao, Pangasinan.
Further, the BIR is expected to work for the computerization of the procedure for the issuances of the CAR. This aligns with what seems to be the current thrust of the BIR to use online means for tax reporting and filing. Thus, it makes sense to revisit the requirement to get the CAR.
Lastly, for the sake of thoroughness, it is worthy to note that before the new title to the property may be actually transferred and registered in the name of the new owner, the RD necessitates submission also of a local tax clearance. This local tax clearance pertains to the real property tax and local transfer taxes. Under Sections 135 and 151 of Republic Act No. 7160 (Local Government Code of 1991(LGC)), provinces and cities may impose a tax on the sale, donation, barter, or any other mode of transferring ownership or title of real property at the rates not exceeding the rates prescribed in the said sections. Further, before the local tax clearance is issued, local government units require that the annual real property taxes have been paid.
Chandine Kaye P. Villegas is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-kpmgmla@kpmg.com or rgmanabat@kpmg.com.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.
source: Philippine Star
Looking forward to Christmas and higher take home bonuses
IT’S 30 DAYS before Christmas and, though Christmas comes every year, most of us still get excited -- for the vacation days, the gifts, and, not least, the release of the 13th month pay.
Excitement over 13th-month pay was higher than usual this year because it looked like Congress might approve a higher tax exemption threshold for bonuses, raising the possibility of increased take-home pay at year’s end.
The House of Representatives is currently considering a threshold of P70,000 for tax-exempt 13th-month pay, up from P30,000 previously. House Bill 9470 has already been approved on third reading and transmitted to the Senate.
Meanwhile the Senate has approved on second reading the corresponding Senate Bill, which seeks to exempt P82,000 worth of bonuses from tax. According to the sponsors, this is the true current value of the original P30,000 cap when this law was approved in 1994.
Apparently, the higher exemption thresholds are not happening in 2014. Any enacted law is likely be implemented next year.
Nevertheless the higher thresholds remain a significant development for every employee.
How much will an employee benefit from the higher exemption?
Assuming that the employee’s total gross income is subject to the maximum rate of 32%, the differential between the current tax treatment and the proposed regime is as follows, for an employee earning P50,000 a month:
The increase in take-home pay is P16,000 for the employee and a decline in tax collections for the Bureau of Internal Revenue by a similar amount.
One of the major objections to increasing the tax exemption is the loss of income on the part of the government.
We note though that most estimates of the revenue loss did not take into consideration the additional income of the employee, which would lead to increased spending and create income for business establishments he patronizes.
The threshold for tax exemptions on 13th-month pay and other bonuses is an important form of tax relief given by the Government to salary earners, who are entitled to no other deduction apart from the personal exemption of P50,000 and,if applicable, additional personal exemptions of P25,000 for each qualified dependent up to a maximum of four.
Given that this privilege of P30,000 tax-exemption ceiling was crafted 20 years ago, I believe it is really time adjust the amount to a level equivalent to its 1994 value today.
While we are still at the P30,000 tax exemption, it is prudent for the companies to ensure that all the items that can be included in the ceiling of the tax exemption are properly considered so that the employee can fully enjoy the tax exemption and the net take home pay.
The least that the company can do is to ensure that the employees are not deprived of the only tax relief they can have.
Richard R. Ibarra is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
Excitement over 13th-month pay was higher than usual this year because it looked like Congress might approve a higher tax exemption threshold for bonuses, raising the possibility of increased take-home pay at year’s end.
The House of Representatives is currently considering a threshold of P70,000 for tax-exempt 13th-month pay, up from P30,000 previously. House Bill 9470 has already been approved on third reading and transmitted to the Senate.
Meanwhile the Senate has approved on second reading the corresponding Senate Bill, which seeks to exempt P82,000 worth of bonuses from tax. According to the sponsors, this is the true current value of the original P30,000 cap when this law was approved in 1994.
Apparently, the higher exemption thresholds are not happening in 2014. Any enacted law is likely be implemented next year.
Nevertheless the higher thresholds remain a significant development for every employee.
How much will an employee benefit from the higher exemption?
Assuming that the employee’s total gross income is subject to the maximum rate of 32%, the differential between the current tax treatment and the proposed regime is as follows, for an employee earning P50,000 a month:
The increase in take-home pay is P16,000 for the employee and a decline in tax collections for the Bureau of Internal Revenue by a similar amount.
One of the major objections to increasing the tax exemption is the loss of income on the part of the government.
We note though that most estimates of the revenue loss did not take into consideration the additional income of the employee, which would lead to increased spending and create income for business establishments he patronizes.
The threshold for tax exemptions on 13th-month pay and other bonuses is an important form of tax relief given by the Government to salary earners, who are entitled to no other deduction apart from the personal exemption of P50,000 and,if applicable, additional personal exemptions of P25,000 for each qualified dependent up to a maximum of four.
Given that this privilege of P30,000 tax-exemption ceiling was crafted 20 years ago, I believe it is really time adjust the amount to a level equivalent to its 1994 value today.
While we are still at the P30,000 tax exemption, it is prudent for the companies to ensure that all the items that can be included in the ceiling of the tax exemption are properly considered so that the employee can fully enjoy the tax exemption and the net take home pay.
The least that the company can do is to ensure that the employees are not deprived of the only tax relief they can have.
Richard R. Ibarra is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
Monday, November 24, 2014
Miles to go to make it easier for firms to pay taxes
THE PHILIPPINES ranked at the bottom third of 189 economies in an annual report that measures ease of paying corporate taxes.
Paying Taxes 2015, the 10th such report that builds on one of 11 key indicators of the World Bank Group’s annual Doing Business report, gauges medium-sized firms’ ease of paying taxes according to:
• total tax rate, which is the total of taxes borne as a percentage of commercial profit;
• time to comply -- prepare, file and pay -- corporate income, contributions to personal income tax and other similar requirements, and consumption tax; and
• number of payments, or frequency with which a company has to file and pay taxes and contributions.
The Philippines placed 127th in this year’s report out of 189 economies, after placing 131st in the report last year that was based on a different methodology.
While the study did not say if rankings in this year’s and last year’s reports were directly comparable, it said the impact of methodology change on “sub-indicators is expected to be limited.”
Changes in this year’s methodology consisted of updating of gross national income per capita values to 2012 from 2005 previously; adding of a second largest city for 11 economies with population of more than 100 million people; and basing rankings this year on “distance to frontier” -- or measure of performance of each economy against the highest and lowest values of each sub-indicator -- instead of simple percentile distribution used in past reports.
Qatar and the United Arab Emirates were tied in first place, followed by Saudi Arabia, Hong Kong, China and Singapore. On the other hand, Bolivia, Venezuela, Mauritania, Chad and the Central African Republic occupied the lowest five places.
The report -- which used data as of Dec. 31 last year -- stated that on global average, a mid-sized company takes 264 hours to comply with tax dues, makes 25.9 payments and pays 40.9% of commercial earnings for taxes and contributions (or total tax rate). Last year’s report showed it took companies 268 hours to comply with 26.7 tax payments and paid a 43.1% total tax rate.
The same report showed the Philippines faring a bit worse than global average. Specifically, it takes a medium-sized company here 193 hours to make 36 payments with 42.5% of commercial income going to taxes and contributions.
“Paying taxes has become easier over the past year for medium-sized companies around the world,” the latest report noted.
“The administrative burden of tax compliance has been steadily improving since 2004 with the growing use of electronic systems for filing and paying taxes,” it added.
“During the financial crisis there was an increase in the number of tax reforms. The pace of reform accelerated with the onset of the crisis, then slowed in subsequent periods.”
The latest results, the report said, showed several economies “are continuing to make progress in tax reform,” with measures that simplify tax systems, reduce burden on businesses and lower economic distortions. “Tax reform is therefore set to remain an important topic for governments around the world for many years to come.”
Paying Taxes 2015, the 10th such report that builds on one of 11 key indicators of the World Bank Group’s annual Doing Business report, gauges medium-sized firms’ ease of paying taxes according to:
• total tax rate, which is the total of taxes borne as a percentage of commercial profit;
• time to comply -- prepare, file and pay -- corporate income, contributions to personal income tax and other similar requirements, and consumption tax; and
• number of payments, or frequency with which a company has to file and pay taxes and contributions.
The Philippines placed 127th in this year’s report out of 189 economies, after placing 131st in the report last year that was based on a different methodology.
While the study did not say if rankings in this year’s and last year’s reports were directly comparable, it said the impact of methodology change on “sub-indicators is expected to be limited.”
Changes in this year’s methodology consisted of updating of gross national income per capita values to 2012 from 2005 previously; adding of a second largest city for 11 economies with population of more than 100 million people; and basing rankings this year on “distance to frontier” -- or measure of performance of each economy against the highest and lowest values of each sub-indicator -- instead of simple percentile distribution used in past reports.
Qatar and the United Arab Emirates were tied in first place, followed by Saudi Arabia, Hong Kong, China and Singapore. On the other hand, Bolivia, Venezuela, Mauritania, Chad and the Central African Republic occupied the lowest five places.
The report -- which used data as of Dec. 31 last year -- stated that on global average, a mid-sized company takes 264 hours to comply with tax dues, makes 25.9 payments and pays 40.9% of commercial earnings for taxes and contributions (or total tax rate). Last year’s report showed it took companies 268 hours to comply with 26.7 tax payments and paid a 43.1% total tax rate.
The same report showed the Philippines faring a bit worse than global average. Specifically, it takes a medium-sized company here 193 hours to make 36 payments with 42.5% of commercial income going to taxes and contributions.
“Paying taxes has become easier over the past year for medium-sized companies around the world,” the latest report noted.
“The administrative burden of tax compliance has been steadily improving since 2004 with the growing use of electronic systems for filing and paying taxes,” it added.
“During the financial crisis there was an increase in the number of tax reforms. The pace of reform accelerated with the onset of the crisis, then slowed in subsequent periods.”
The latest results, the report said, showed several economies “are continuing to make progress in tax reform,” with measures that simplify tax systems, reduce burden on businesses and lower economic distortions. “Tax reform is therefore set to remain an important topic for governments around the world for many years to come.”
source: Businessworld
Monday, November 17, 2014
Clarifying the tax rules on stock options
IT HAS BECOME customary for employers to grant equity-based payments -- the most common of which is the stock option -- to their employees in their desire to continuously recognize and incentivize employees as partners in the success and growth of their companies.
Generally, a stock option is defined as a privilege that gives the employee the right, but not the obligation, to buy a share of stock at a stipulated exercise price on or after a specific date.
Employees are not normally granted full ownership of the stock option on grant date. They must meet the vesting requirements prescribed by the employer before they can exercise their options. At exercise date, employees purchase the shares of stock at the exercise price.
On Oct. 31, the BIR issued Revenue Memorandum Circular (RMC) 79-2014 to clarify the tax treatment of stock option plans and other option plans.
RMC 79-2014 defines a stock option as an option granted by a person, natural or juridical, to a person or entity entitling said person or entity to purchase shares of stocks of a corporation, which may or may not be the shares of stock of the grantor itself, at a specific price to be exercised at a specific date or period (referred to as Equity-settlement Option). Even if no actual shares of stock are delivered or transferred, a stock option may also occur in a situation where a person or entity is given the right to obtain or receive, at a specific date or period, the difference between the actual fair market value (FMV) of the shares and the fixed nominal value of the shares set at grant date (referred to as the Cash-settlement Option).
In an equity-settled option, the employees not only become part-owners of the company but they also acquire the shares at discounted price. The discount (or the “spread”) that the employee enjoys is not without tax consequence. Sadly though, the Tax Code does not contain provisions specific to stock options. Prior to the issuance of RMC 79-2014, tax authorities did not have clear guidelines for determining the nature of the benefit and imposing the due tax.
Many BIR rulings used the Tax Code provisions on compensation income as basis to rule that the discount is subject to income tax and withholding tax on wages (WTW), regardless of whether the recipient employee was a rank-and-file or a supervisory or managerial employee. This was despite the introduction of the fringe benefits tax (FBT) on certain fringe benefits received by supervisory and managerial employees. In other rulings, the BIR subjected stock options to the FBT.
In a 2012 ruling, the BIR considered the compensatory nature of the plan and ruled that the stock option income received by employees, regardless of classification, is subject to WTW. Subsequently, however, the BIR said in RMC No. 88-2012 that notwithstanding this particular 2012 ruling, stock option plans granted to managerial and supervisory employees, which qualify as fringe benefits, are subject to the FBT.
The new RMC No. 79-2014 seeks to clarify, hopefully once and for all, the tax treatment of stock option plans and other option plans.
According to RMC No.79-2014, the difference between (i) the book value or FMV, whichever is higher, of the shares at the time of exercise and (ii) the price fixed on the grant date in the case of equity-settled options; or, in the case of cash-settled options, the excess of (i) the actual market value of the stock at exercise date and (ii) the fixed nominal value of the shares set at grant date, that is paid by the grantor to the holder of the option, will be considered as:
(1) Additional compensation subject to income tax and WTW if the stock option is exercised by a rank-and-file employee;
(2) Fringe benefit subject to the FBT if the employee who exercises the option occupies a supervisory or managerial position; and
(3) Additional consideration for the services rendered or goods supplied by a supplier, subject to the relevant withholding tax at source and other applicable taxes, if the option was granted to a supplier of goods or services.
RMC No. 79-2014 also distinguishes between options granted with a price and without a price. It states that in the event the option was granted due to an employee-employer relationship, and where the grantor is the employer and the grantee is the employee, and no payment was received for the grant of the said option in the year the option was granted, the grantor cannot claim deductions for the grant of the stock option. However, if the option was granted for a price, the full price of the option shall be considered capital gains, and shall be taxed as such.
The RMC also clarifies that:
• The issuance of the option is subject to documentary stamp tax (DST) at the rate of P0.75 on each P200 (or 0.375%), or fractional part thereof, of the par value of the stock subject of the option, or in the case of stocks without par value, the amount equivalent to 25% of the DST paid upon the original issue of the stock subject to the option.
• The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock not listed on the stock exchange. Thus, any grant of an option for consideration, or transfer of the option, is subject to the 5%-10% capital gains tax (CGT) rates. If the option was granted without any consideration, the cost basis of the option for purposes of computing capital gains shall be zero.
• If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the FMV of the option at the time of the donation.
Finally, RMC 79-2014 prescribes the following reportorial requirements:
Within 30 days from the grant of the option, the grantor shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:
• Terms and Conditions of the stock option;
• Names, TINs, positions of the grantees;
• Book value, FMV, par value of the shares subject of the option at the grant date;
• Exercise price, exercise date and/or period;
• Taxes paid on the grant, if any; and
• Amount paid for the grant, if any.
When the stock options are exercised, the issuing corporation is required to file a report on or before the 10th day of the month following the month of exercise stating the following:
• Exercise Date;
• Names, Tax Identification Numbers (TINs), positions of those who exercised the option;
• Book value, FMV, par value of the shares subject to the option at the exercise date/s;
• Mode of settlement (i.e. cash, equity);
• Taxes withheld on the exercise, if any; and
• Fringe benefits tax paid, if any.
While the RMC discussed stock options in particular, it also stated that the tax treatment and reportorial requirements set forth in the RMC are rules of general applicability that may also be applied to options other than stock.
Marlynda I. Masangcay-Ceralde is a Tax Senior Director of SGV & Co.
source: Businessworld
Generally, a stock option is defined as a privilege that gives the employee the right, but not the obligation, to buy a share of stock at a stipulated exercise price on or after a specific date.
Employees are not normally granted full ownership of the stock option on grant date. They must meet the vesting requirements prescribed by the employer before they can exercise their options. At exercise date, employees purchase the shares of stock at the exercise price.
On Oct. 31, the BIR issued Revenue Memorandum Circular (RMC) 79-2014 to clarify the tax treatment of stock option plans and other option plans.
RMC 79-2014 defines a stock option as an option granted by a person, natural or juridical, to a person or entity entitling said person or entity to purchase shares of stocks of a corporation, which may or may not be the shares of stock of the grantor itself, at a specific price to be exercised at a specific date or period (referred to as Equity-settlement Option). Even if no actual shares of stock are delivered or transferred, a stock option may also occur in a situation where a person or entity is given the right to obtain or receive, at a specific date or period, the difference between the actual fair market value (FMV) of the shares and the fixed nominal value of the shares set at grant date (referred to as the Cash-settlement Option).
In an equity-settled option, the employees not only become part-owners of the company but they also acquire the shares at discounted price. The discount (or the “spread”) that the employee enjoys is not without tax consequence. Sadly though, the Tax Code does not contain provisions specific to stock options. Prior to the issuance of RMC 79-2014, tax authorities did not have clear guidelines for determining the nature of the benefit and imposing the due tax.
Many BIR rulings used the Tax Code provisions on compensation income as basis to rule that the discount is subject to income tax and withholding tax on wages (WTW), regardless of whether the recipient employee was a rank-and-file or a supervisory or managerial employee. This was despite the introduction of the fringe benefits tax (FBT) on certain fringe benefits received by supervisory and managerial employees. In other rulings, the BIR subjected stock options to the FBT.
In a 2012 ruling, the BIR considered the compensatory nature of the plan and ruled that the stock option income received by employees, regardless of classification, is subject to WTW. Subsequently, however, the BIR said in RMC No. 88-2012 that notwithstanding this particular 2012 ruling, stock option plans granted to managerial and supervisory employees, which qualify as fringe benefits, are subject to the FBT.
The new RMC No. 79-2014 seeks to clarify, hopefully once and for all, the tax treatment of stock option plans and other option plans.
According to RMC No.79-2014, the difference between (i) the book value or FMV, whichever is higher, of the shares at the time of exercise and (ii) the price fixed on the grant date in the case of equity-settled options; or, in the case of cash-settled options, the excess of (i) the actual market value of the stock at exercise date and (ii) the fixed nominal value of the shares set at grant date, that is paid by the grantor to the holder of the option, will be considered as:
(1) Additional compensation subject to income tax and WTW if the stock option is exercised by a rank-and-file employee;
(2) Fringe benefit subject to the FBT if the employee who exercises the option occupies a supervisory or managerial position; and
(3) Additional consideration for the services rendered or goods supplied by a supplier, subject to the relevant withholding tax at source and other applicable taxes, if the option was granted to a supplier of goods or services.
RMC No. 79-2014 also distinguishes between options granted with a price and without a price. It states that in the event the option was granted due to an employee-employer relationship, and where the grantor is the employer and the grantee is the employee, and no payment was received for the grant of the said option in the year the option was granted, the grantor cannot claim deductions for the grant of the stock option. However, if the option was granted for a price, the full price of the option shall be considered capital gains, and shall be taxed as such.
The RMC also clarifies that:
• The issuance of the option is subject to documentary stamp tax (DST) at the rate of P0.75 on each P200 (or 0.375%), or fractional part thereof, of the par value of the stock subject of the option, or in the case of stocks without par value, the amount equivalent to 25% of the DST paid upon the original issue of the stock subject to the option.
• The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock not listed on the stock exchange. Thus, any grant of an option for consideration, or transfer of the option, is subject to the 5%-10% capital gains tax (CGT) rates. If the option was granted without any consideration, the cost basis of the option for purposes of computing capital gains shall be zero.
• If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the FMV of the option at the time of the donation.
Finally, RMC 79-2014 prescribes the following reportorial requirements:
Within 30 days from the grant of the option, the grantor shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:
• Terms and Conditions of the stock option;
• Names, TINs, positions of the grantees;
• Book value, FMV, par value of the shares subject of the option at the grant date;
• Exercise price, exercise date and/or period;
• Taxes paid on the grant, if any; and
• Amount paid for the grant, if any.
When the stock options are exercised, the issuing corporation is required to file a report on or before the 10th day of the month following the month of exercise stating the following:
• Exercise Date;
• Names, Tax Identification Numbers (TINs), positions of those who exercised the option;
• Book value, FMV, par value of the shares subject to the option at the exercise date/s;
• Mode of settlement (i.e. cash, equity);
• Taxes withheld on the exercise, if any; and
• Fringe benefits tax paid, if any.
While the RMC discussed stock options in particular, it also stated that the tax treatment and reportorial requirements set forth in the RMC are rules of general applicability that may also be applied to options other than stock.
Marlynda I. Masangcay-Ceralde is a Tax Senior Director of SGV & Co.
source: Businessworld
Tuesday, November 11, 2014
Online business boom puts spotlight on tax obligations
WE LIVE IN A TIME where everything can be accessed through the World Wide Web. With the use of high-tech gadgets, phones are no longer used for mere communication, but also for different transactions such as online banking, online shopping and the like. In keeping with the advances in technology, the government has also updated its laws and regulations to govern these kinds of online transactions.
A good example is Revenue Memorandum Circular No. 55-2013 issued by the Bureau of Internal Revenue (BIR). This circular reiterates taxpayers’ obligations in relation to online business transactions. In issuing the circular, the BIR recognizes that an increasing number of consumers are visiting and buying goods and services from online stores primarily because of the high level of convenience inherent in online shopping.
The circular enumerates the most common types of business transactions in the Philippines: online shopping or online retailing, online intermediary service, online advertisement/classified ads, and online auction.
Online shopping or online retailing is defined as a form of electronic commerce where consumers directly buy goods or services from a seller over the Internet without an intermediary service.
Online intermediary service is defined as one where an intermediary acts as a conduit for goods or services offered by a supplier to a consumer, and receives a commission. The relationship between the intermediary and the merchant is that of a principal-agent.
Online advertisement/classified ads is a form of promotion that uses the Internet to deliver marketing messages to attract customers.
Online auctions are conducted through the Internet via an online service provider that specifically hosts such auctions where the seller sells the product or service to the person who bids the highest price.
The circular emphasizes that there must be a similar tax treatment on purchases (local or imported) and sale (local or international) of goods (tangible or intangible) or services, with no distinction on whether or not the marketing channel is the Internet/digital media or the typical and customary physical medium.
Like any other business establishment, persons who conduct business through online transactions have the obligations to: (1) Register the business at the Revenue District Office (RDO) that has jurisdiction over the principal place of business (or residence, in case of individuals) and pay the registration fee to any authorized agent bank located within the RDO; (2) secure the required authority to print invoices and receipts and register books of accounts for use in the business; (3) issue registered invoices or receipts, either manually or electronically; (4) withhold required creditable or expanded withholding tax, final tax, tax on compensation of employees, and other withholding taxes; (5) file applicable tax returns on or before the due dates, pay correct internal revenue taxes and submit information returns and other tax compliance reports; and (6) keep books of accounts and other business and accounting records within the time prescribed by law.
There are also different obligations involved for the online merchant or retailer in the sale of goods and services. In general, if payment is made through a credit card company, the online merchant is obliged to issue electronically the BIR-registered invoice or official receipt for the full amount of the sale to the buyer, issue an acknowledgment receipt to the credit card company for the amount received, and pay the commission of the credit card company net of 10% expanded withholding tax. If payment is made through the banks, the online merchant is obliged to issue an invoice or official receipt to the buyer for the payment of the goods and services, and issue an acknowledgment receipt to the bank for the amount received. For cash on delivery or pick-up by the customer, the online merchant is required to issue electronically or manually the BIR-registered invoice or official receipt for the full amount of the sale.
The circular likewise enumerates the different obligations and duties of the buyer or customer and payment gateways, namely credit card companies and banks.
Finally, the circular reminds taxpayers that any person engaged in Internet commerce who fails to comply with applicable tax laws, rules and regulations shall be subject to the imposition of penalties provided for under the existing laws, in addition to the imposition of penalties under the National Internal Revenue Code of 1997.
Germaine Lee Chua is an associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
glchua@accralaw.com
source: Businessworld
A good example is Revenue Memorandum Circular No. 55-2013 issued by the Bureau of Internal Revenue (BIR). This circular reiterates taxpayers’ obligations in relation to online business transactions. In issuing the circular, the BIR recognizes that an increasing number of consumers are visiting and buying goods and services from online stores primarily because of the high level of convenience inherent in online shopping.
The circular enumerates the most common types of business transactions in the Philippines: online shopping or online retailing, online intermediary service, online advertisement/classified ads, and online auction.
Online shopping or online retailing is defined as a form of electronic commerce where consumers directly buy goods or services from a seller over the Internet without an intermediary service.
Online intermediary service is defined as one where an intermediary acts as a conduit for goods or services offered by a supplier to a consumer, and receives a commission. The relationship between the intermediary and the merchant is that of a principal-agent.
Online advertisement/classified ads is a form of promotion that uses the Internet to deliver marketing messages to attract customers.
Online auctions are conducted through the Internet via an online service provider that specifically hosts such auctions where the seller sells the product or service to the person who bids the highest price.
The circular emphasizes that there must be a similar tax treatment on purchases (local or imported) and sale (local or international) of goods (tangible or intangible) or services, with no distinction on whether or not the marketing channel is the Internet/digital media or the typical and customary physical medium.
Like any other business establishment, persons who conduct business through online transactions have the obligations to: (1) Register the business at the Revenue District Office (RDO) that has jurisdiction over the principal place of business (or residence, in case of individuals) and pay the registration fee to any authorized agent bank located within the RDO; (2) secure the required authority to print invoices and receipts and register books of accounts for use in the business; (3) issue registered invoices or receipts, either manually or electronically; (4) withhold required creditable or expanded withholding tax, final tax, tax on compensation of employees, and other withholding taxes; (5) file applicable tax returns on or before the due dates, pay correct internal revenue taxes and submit information returns and other tax compliance reports; and (6) keep books of accounts and other business and accounting records within the time prescribed by law.
There are also different obligations involved for the online merchant or retailer in the sale of goods and services. In general, if payment is made through a credit card company, the online merchant is obliged to issue electronically the BIR-registered invoice or official receipt for the full amount of the sale to the buyer, issue an acknowledgment receipt to the credit card company for the amount received, and pay the commission of the credit card company net of 10% expanded withholding tax. If payment is made through the banks, the online merchant is obliged to issue an invoice or official receipt to the buyer for the payment of the goods and services, and issue an acknowledgment receipt to the bank for the amount received. For cash on delivery or pick-up by the customer, the online merchant is required to issue electronically or manually the BIR-registered invoice or official receipt for the full amount of the sale.
The circular likewise enumerates the different obligations and duties of the buyer or customer and payment gateways, namely credit card companies and banks.
Finally, the circular reminds taxpayers that any person engaged in Internet commerce who fails to comply with applicable tax laws, rules and regulations shall be subject to the imposition of penalties provided for under the existing laws, in addition to the imposition of penalties under the National Internal Revenue Code of 1997.
Germaine Lee Chua is an associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).
glchua@accralaw.com
source: Businessworld
Taxpayers, beware of the 10-year prescriptive period
BECAUSE of the latest controversial tax fraud cases, taxpayers are more aware of the power of the Bureau of Internal Revenue (BIR) to perform tax audit investigations. Tax assessments have become the norm rather than the exception. Taxpayers find themselves counting the period of limitation from their open taxable years, confident that they will no longer be assessed after three years. This is not so in tax fraud cases.
The right of the government to assess all deficiency internal revenue taxes, including value-added tax (VAT), generally prescribes after three years from the time of the filing of the return or from the last day prescribed by law for the filing of such return, whichever comes later.
This law on prescription is intended to protect law-abiding taxpayers from unreasonable investigation of government agencies. Thus, it must always be liberally construed in favor of the taxpayer and strictly construed against the government. (Bank of the Philippine Islands vs. Commission of Internal Revenue, G.R. No. 139736 dated October 17, 2005). Without such a legal defense, taxpayers would be under obligation to always maintain their books and keep them open for inspection subject to the harassment of unscrupulous tax agents. (Republic of the Philippines vs. Ablaza, 108 Phil 1105, 1108)
This period to assess, however, may be increased up to 10 years under Section 222 of the Tax Code, as amended.
When is the 10-year period to assess applicable?
The Supreme Court declared in the case of Jose B. Aznar vs. Court of Tax Appeals (CTA) and Collector of Internal Revenue that Section 222 of the Tax Code should be interpreted to mean three different situations, namely: (1) a false return; (2) a fraudulent return with intent to evade tax; or (3) failure to file a return.
In such instances, the 10-year prescriptive period begins to run only from the date of the discovery by the BIR of the falsity, fraud or omission, thus making the period to assess almost imprescriptible.
However, there is an instance where falsity or fraud may be deemed prima facie to exist when there is substantial under-declaration of taxable sales, receipts or income or substantial overstatement of deductions, in an amount exceeding 30% as provided under Section 248 (B) of the Tax Code.
In the recent case decided by the CTA, the application of the 10-year prescriptive period was further clarified. The petitioner posits that it was not guilty of falsity or fraud to warrant the application of the 10-year prescriptive period as the under-declaration in its sales was not due to intentional falsity or fraud but was merely due to the improper claim of input tax made by some of its clients.
The court ruled that although the VAT assessment was issued beyond the three-year period prescribed by law, the substantial understatement in the petitioner’s VATable sales in 2006 makes its VAT returns for the said year false. Thus, the 10-year prescriptive period under Section 222 of the Tax Code, as amended, applies.
The same case of Aznar discussed the difference between a “false return” and “fraudulent return.” The first merely implies deviation from the truth, whether intentional or not. On the other hand, the second one implies intentional or deceitful entry with intent to evade taxes due. Thus, even granting that the under-declaration of VATable sales by the petitioner was not intentional -- hence, not a case of fraudulent return -- the situation falls under a false return, which may or may not be intentional.
Noteworthy, however, is the imposition of the 50% surcharge as fraud penalty by the CTA in this case. Section 248 (B) of the Tax Code, as amended, requires that a false or fraudulent return is wilfully made to warrant the imposition of 50% fraud penalty.
In the case of Estate of Fidel F. Reyes vs. Commissioner of Internal Revenue (CTA EB No. 189 dated March 21, 2007), the CTA applied the 10-year prescriptive period based on the false returns filed by the petitioners, but disallowed the 50% surcharge fraud penalty because the falsity was not wilfully made. Thus, it is not enough that the taxpayer filed a false return to justify the imposition of the 50% penalty for fraud. The law is clear that a false or fraudulent return should be wilfully made.
The ruling in this case is contrary to the Reyes case. The CTA imposed the 50% surcharge although no evidence was presented to prove that there was an intention to wilfully file a false return on the part of the petitioner to evade the payment of taxes. Well settled is the rule that fraud is a question of fact and cannot be presumed, but must be sufficiently established. Thus, notwithstanding the applicability of the 10-year prescriptive period, the 50% surcharge should not be imposed in the absence of showing that the falsity was wilfully made.
It is crucial for taxpayers to be fully aware of the circumstances when the 10-year prescriptive period to be assessed by the BIR applies, in order to effectively contest it. The indefinite extension of the period to assess deprives taxpayers of the assurance that they will no longer be subjected to further investigation of taxes after the expiration of a reasonable period of time. Ten years is a long period to be exposed to BIR tax audit investigation.
Charity P. Mandap-de Veyra is a manager with the Tax Advisory and Compliance Division of Punongbayan & Araullo.
source: Businessworld
The right of the government to assess all deficiency internal revenue taxes, including value-added tax (VAT), generally prescribes after three years from the time of the filing of the return or from the last day prescribed by law for the filing of such return, whichever comes later.
This law on prescription is intended to protect law-abiding taxpayers from unreasonable investigation of government agencies. Thus, it must always be liberally construed in favor of the taxpayer and strictly construed against the government. (Bank of the Philippine Islands vs. Commission of Internal Revenue, G.R. No. 139736 dated October 17, 2005). Without such a legal defense, taxpayers would be under obligation to always maintain their books and keep them open for inspection subject to the harassment of unscrupulous tax agents. (Republic of the Philippines vs. Ablaza, 108 Phil 1105, 1108)
This period to assess, however, may be increased up to 10 years under Section 222 of the Tax Code, as amended.
When is the 10-year period to assess applicable?
The Supreme Court declared in the case of Jose B. Aznar vs. Court of Tax Appeals (CTA) and Collector of Internal Revenue that Section 222 of the Tax Code should be interpreted to mean three different situations, namely: (1) a false return; (2) a fraudulent return with intent to evade tax; or (3) failure to file a return.
In such instances, the 10-year prescriptive period begins to run only from the date of the discovery by the BIR of the falsity, fraud or omission, thus making the period to assess almost imprescriptible.
However, there is an instance where falsity or fraud may be deemed prima facie to exist when there is substantial under-declaration of taxable sales, receipts or income or substantial overstatement of deductions, in an amount exceeding 30% as provided under Section 248 (B) of the Tax Code.
In the recent case decided by the CTA, the application of the 10-year prescriptive period was further clarified. The petitioner posits that it was not guilty of falsity or fraud to warrant the application of the 10-year prescriptive period as the under-declaration in its sales was not due to intentional falsity or fraud but was merely due to the improper claim of input tax made by some of its clients.
The court ruled that although the VAT assessment was issued beyond the three-year period prescribed by law, the substantial understatement in the petitioner’s VATable sales in 2006 makes its VAT returns for the said year false. Thus, the 10-year prescriptive period under Section 222 of the Tax Code, as amended, applies.
The same case of Aznar discussed the difference between a “false return” and “fraudulent return.” The first merely implies deviation from the truth, whether intentional or not. On the other hand, the second one implies intentional or deceitful entry with intent to evade taxes due. Thus, even granting that the under-declaration of VATable sales by the petitioner was not intentional -- hence, not a case of fraudulent return -- the situation falls under a false return, which may or may not be intentional.
Noteworthy, however, is the imposition of the 50% surcharge as fraud penalty by the CTA in this case. Section 248 (B) of the Tax Code, as amended, requires that a false or fraudulent return is wilfully made to warrant the imposition of 50% fraud penalty.
In the case of Estate of Fidel F. Reyes vs. Commissioner of Internal Revenue (CTA EB No. 189 dated March 21, 2007), the CTA applied the 10-year prescriptive period based on the false returns filed by the petitioners, but disallowed the 50% surcharge fraud penalty because the falsity was not wilfully made. Thus, it is not enough that the taxpayer filed a false return to justify the imposition of the 50% penalty for fraud. The law is clear that a false or fraudulent return should be wilfully made.
The ruling in this case is contrary to the Reyes case. The CTA imposed the 50% surcharge although no evidence was presented to prove that there was an intention to wilfully file a false return on the part of the petitioner to evade the payment of taxes. Well settled is the rule that fraud is a question of fact and cannot be presumed, but must be sufficiently established. Thus, notwithstanding the applicability of the 10-year prescriptive period, the 50% surcharge should not be imposed in the absence of showing that the falsity was wilfully made.
It is crucial for taxpayers to be fully aware of the circumstances when the 10-year prescriptive period to be assessed by the BIR applies, in order to effectively contest it. The indefinite extension of the period to assess deprives taxpayers of the assurance that they will no longer be subjected to further investigation of taxes after the expiration of a reasonable period of time. Ten years is a long period to be exposed to BIR tax audit investigation.
Charity P. Mandap-de Veyra is a manager with the Tax Advisory and Compliance Division of Punongbayan & Araullo.
source: Businessworld
Tax on stock options -- clarified?
SHARE-BASED payments have become prevalent in the corporate world, especially for publicly listed companies. One of the most common share-based payments is the stock option plan (SOP) or stock-based compensation for employees. Just recently, the Securities and Exchange Commission (SEC) allowed a publicly listed company to exercise its employees’ SOP amounting to as much as P7 billion.
Stock-based compensation has been acknowledged as an effective means of rewarding and motivating employees, attracting and retaining the best talent, and enhancing employee commitment and performance.
Stock plans could take various forms. In an SOP, the employee is given the option to purchase a specific number of shares on specified dates at a specified price which is lower than the market value of the stocks.
There are three important events in SOP -- the grant date, the vesting period and the exercise date
The grant date is the date on which the employee is given a stock option by the employer. The vesting period is the time that an employee must wait in order to be able to exercise employee stock options. The exercise date is when the employee/option holder notifies the company that he or she would like to buy the stock at the strike price/option price indicated in the SOP.
In 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. (RMC) 88-12, which provides clarifications on the tax treatment of SOPs. Recently, RMC 79-14 was issued to further clarify the taxability of SOPs and other option plans.
RMC 79-14 is more detailed than RMC 88-12. The former contains the tax treatment from the grant to the exercise of a stock option. It even discusses the tax implications of the sale or transfer of options and the reportorial requirements. The tax implications on the subsequent sale of the shares of stock obtained from the exercise of the option were not discussed in RMC 79-14 but these were covered in RMC 88-12.
While RMC 79-14 contains more discussions on the tax treatment of stock options, there are still some issues that must be clarified.
Based on the new RMC, if the option was granted by the employer to its employees and no payment was received for the grant of the said option, the grantor/employer cannot claim a deduction on grant date. This is consistent with the provisions of the Tax Code since at the time of grant, the actual benefit of the employees cannot be determined yet until the employee exercises the option. Therefore, no actual expense is incurred yet by the employer upon grant of the option.
However, it is also provided under the said RMC that if the option is granted for a price, the full price of the option shall be considered capital gains and shall be taxed at such. The new RMC does not provide exceptions on this. Hence, it seems that the price received for the option shall be taxable to the grantor, regardless of the conditions or circumstances. There are various instances, however, where the shares of stock to be issued will come from the unissued shares of the grantor. Would it be proper to treat the price received as taxable income or part of the capital of the grantor? If the price received is refundable upon fulfillment of the conditions, when will you consider the taxable event -- upon receipt or upon the occurrence of the condition? These are some of the issues that I believe should be further clarified.
Moreover, based on the new RMC, upon issuance of the option, the same is subject to documentary stamp tax (DST) provided under Section 175 of the 1997 Tax Code, as amended. It is not clear, however, if the imposition of DST refers only to the option granted for a price. Please note that the grant date is normally different from the exercise date and the grantee may or may not exercise the option. Hence, the sale/transfer or subscription (in case of original issuance) of shares of stock will occur only upon exercise and not upon issuance of the option. Accordingly, DST on shares of stocks subject of the option should be imposed upon the exercise. Again, this is one of the areas that needs further clarification.
On the other hand, in the event that the option is transferable (although in most cases, options are non-transferable especially in the case of employee stock option plan), the RMC 79-14 clarified that the sale, barter or exchange of the stock option is subject to capital gains tax. If the option was granted without any consideration, the cost base of the option for purposes of computing the capital gains shall be zero. Moreover, if the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation subject to 30% donor’s tax. The basis shall be the fair value of the option at the time of the donation.
Upon exercise of the option, the benefits (i.e., the difference between the book value or fair market value, whichever is higher, at the time of the exercise of the option and the option price) shall be subject to withholding tax on compensation if provided to rank-and-file employees. If such benefit is granted to supervisory and managerial employees, it will be subject to FBT. The same rules apply in case of Cash-settlement Option. In a cash-settlement option, the actual delivery of the stock is not required. Rather, the difference between the market value of the stocks at the exercise date and the option price is paid by the grantor to the holder of the option.
RMC 79-14, however, does not provide for the timing of the deductibility of the benefits given to employees. But in BIR Ruling 119-12, it was found that the expenses incurred by the employer pertaining to the difference between the exercise price (i.e., price fixed on the grant date) and the market value of the shares when its employees exercised their rights on stock options, are considered ordinary and necessary business expenses deductible for purposes of computing the employer’s taxable income.
On the other hand, the RMC also provides that in the event that the option was granted to a supplier of goods or services, the difference between the book value and fair market value -- whichever is higher at the time of the exercise and the price fixed on grant date -- shall be recognized as additional consideration for the purchases. Hence, the same is subject to the relevant withholding tax at source and other taxes applicable.
The issues cited in are just some of the concerns on the taxation of option. There are still various issues that must be clarified, and in some cases, the BIR’s positions must be re-evaluated. A clear position and simple guidelines in implementing to tax laws will help in ensuring compliance and administering tax collections. As former US Senator Max Baucus pointed out, “tax complexity itself is a kind of tax.”
Edward L. Roguel 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
Stock-based compensation has been acknowledged as an effective means of rewarding and motivating employees, attracting and retaining the best talent, and enhancing employee commitment and performance.
Stock plans could take various forms. In an SOP, the employee is given the option to purchase a specific number of shares on specified dates at a specified price which is lower than the market value of the stocks.
There are three important events in SOP -- the grant date, the vesting period and the exercise date
The grant date is the date on which the employee is given a stock option by the employer. The vesting period is the time that an employee must wait in order to be able to exercise employee stock options. The exercise date is when the employee/option holder notifies the company that he or she would like to buy the stock at the strike price/option price indicated in the SOP.
In 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. (RMC) 88-12, which provides clarifications on the tax treatment of SOPs. Recently, RMC 79-14 was issued to further clarify the taxability of SOPs and other option plans.
RMC 79-14 is more detailed than RMC 88-12. The former contains the tax treatment from the grant to the exercise of a stock option. It even discusses the tax implications of the sale or transfer of options and the reportorial requirements. The tax implications on the subsequent sale of the shares of stock obtained from the exercise of the option were not discussed in RMC 79-14 but these were covered in RMC 88-12.
While RMC 79-14 contains more discussions on the tax treatment of stock options, there are still some issues that must be clarified.
Based on the new RMC, if the option was granted by the employer to its employees and no payment was received for the grant of the said option, the grantor/employer cannot claim a deduction on grant date. This is consistent with the provisions of the Tax Code since at the time of grant, the actual benefit of the employees cannot be determined yet until the employee exercises the option. Therefore, no actual expense is incurred yet by the employer upon grant of the option.
However, it is also provided under the said RMC that if the option is granted for a price, the full price of the option shall be considered capital gains and shall be taxed at such. The new RMC does not provide exceptions on this. Hence, it seems that the price received for the option shall be taxable to the grantor, regardless of the conditions or circumstances. There are various instances, however, where the shares of stock to be issued will come from the unissued shares of the grantor. Would it be proper to treat the price received as taxable income or part of the capital of the grantor? If the price received is refundable upon fulfillment of the conditions, when will you consider the taxable event -- upon receipt or upon the occurrence of the condition? These are some of the issues that I believe should be further clarified.
Moreover, based on the new RMC, upon issuance of the option, the same is subject to documentary stamp tax (DST) provided under Section 175 of the 1997 Tax Code, as amended. It is not clear, however, if the imposition of DST refers only to the option granted for a price. Please note that the grant date is normally different from the exercise date and the grantee may or may not exercise the option. Hence, the sale/transfer or subscription (in case of original issuance) of shares of stock will occur only upon exercise and not upon issuance of the option. Accordingly, DST on shares of stocks subject of the option should be imposed upon the exercise. Again, this is one of the areas that needs further clarification.
On the other hand, in the event that the option is transferable (although in most cases, options are non-transferable especially in the case of employee stock option plan), the RMC 79-14 clarified that the sale, barter or exchange of the stock option is subject to capital gains tax. If the option was granted without any consideration, the cost base of the option for purposes of computing the capital gains shall be zero. Moreover, if the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation subject to 30% donor’s tax. The basis shall be the fair value of the option at the time of the donation.
Upon exercise of the option, the benefits (i.e., the difference between the book value or fair market value, whichever is higher, at the time of the exercise of the option and the option price) shall be subject to withholding tax on compensation if provided to rank-and-file employees. If such benefit is granted to supervisory and managerial employees, it will be subject to FBT. The same rules apply in case of Cash-settlement Option. In a cash-settlement option, the actual delivery of the stock is not required. Rather, the difference between the market value of the stocks at the exercise date and the option price is paid by the grantor to the holder of the option.
RMC 79-14, however, does not provide for the timing of the deductibility of the benefits given to employees. But in BIR Ruling 119-12, it was found that the expenses incurred by the employer pertaining to the difference between the exercise price (i.e., price fixed on the grant date) and the market value of the shares when its employees exercised their rights on stock options, are considered ordinary and necessary business expenses deductible for purposes of computing the employer’s taxable income.
On the other hand, the RMC also provides that in the event that the option was granted to a supplier of goods or services, the difference between the book value and fair market value -- whichever is higher at the time of the exercise and the price fixed on grant date -- shall be recognized as additional consideration for the purchases. Hence, the same is subject to the relevant withholding tax at source and other taxes applicable.
The issues cited in are just some of the concerns on the taxation of option. There are still various issues that must be clarified, and in some cases, the BIR’s positions must be re-evaluated. A clear position and simple guidelines in implementing to tax laws will help in ensuring compliance and administering tax collections. As former US Senator Max Baucus pointed out, “tax complexity itself is a kind of tax.”
Edward L. Roguel 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
Thursday, November 6, 2014
A tax on spending rather than on earnings
THE Philippines is reputed to have the longest Christmas season in the world, an observation borne out by the onset of gift shopping as of this writing, just under 50 days from the actual holiday itself.
This is also around the time workers start thinking about what to do with their 13th month pay and other bonuses -- thoughts which become more elaborate if the bonuses come free of tax.
On Sept. 26, House Bill No. 4970 -- “An Act Increasing the Ceiling for the Total Exclusion from Gross Income of 13th Month Pay and Other Benefits to Seventy Thousand Pesos (P70,000), Amending for the Purpose Section (32)(7)(E) of the National Internal Revenue Code of 1997, as Amended” -- was unanimously approved by all 250 lawmakers present on third and final reading. This is a consolidation of twelve bills filed by various authors at the Congress.
If passed into law, all private and public employees will be receiving the full amount of their bonuses, if these total less than P70,000.
Section (32)(7)(E) of the National Internal Revenue Code of 1997, if amended, will then read as follows:
“(e) 13th Month Pay and Other Benefits-Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Seventy thousand pesos (P70,000) which shall cover:
• Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
• Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Seventy thousand pesos (P70,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.”
While the proposed bill is intended to bridge the gap between the cost of living and the current salary of employees in the public and private sectors, especially those whose salary is classified as grade 18, as well as to update the Tax Code which was passed 17 years ago, the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) have weighed in against the measure, claiming the potential loss of billions of pesos in foregone tax collections.
It is noteworthy that the increase in the tax exemption ceiling on bonuses like performance incentives, 13th month pay, Christmas bonuses and other benefits as stated in the Tax Code, will effectively increase the take-home pay of employees (both public and private) receiving such by P40,000 at the most which is the difference between P70,000 proposed ceiling compared to P30,000 current threshold for exemption on bonuses. Needless to say, the increase in the take-home pay of employees will effectively decrease the annual income tax due of an employee by P12,800 maximum (32% of P40,000). The tax savings of an employee will vary depending on which tax bracket he or she falls into. The income tax rate applicable to individual tax payers using the present graduated income tax table ranges from 5% to 32% annually.
The BIR argument of lost tax failed to convince the House of Representatives as it remained firm on its position that the increase in the take-home pay of employees will ultimately increase their purchasing power, pointing to the possibility that the lost taxes on income will be offset by taxes on spending.
This theory hinges on people being encouraged to spend more, thereby encountering the 12% Value-Added Tax on their purchases.
The move to initiate relevant and beneficial laws supporting the morale of employees is encouraging. After all, the inherent powers of the state do not only include taxation and eminent domain but also the power to protect its citizens and promote the welfare of the broader society. While the bill will have to wait final approval from the President after the Senate passes a similar bill, for now we can say, “Merry Christmas!” somehow.
Marvin L. Madrigalejo is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
marvin.l.madrigalejo@ph.pwc.com
source: Businessworld
This is also around the time workers start thinking about what to do with their 13th month pay and other bonuses -- thoughts which become more elaborate if the bonuses come free of tax.
On Sept. 26, House Bill No. 4970 -- “An Act Increasing the Ceiling for the Total Exclusion from Gross Income of 13th Month Pay and Other Benefits to Seventy Thousand Pesos (P70,000), Amending for the Purpose Section (32)(7)(E) of the National Internal Revenue Code of 1997, as Amended” -- was unanimously approved by all 250 lawmakers present on third and final reading. This is a consolidation of twelve bills filed by various authors at the Congress.
If passed into law, all private and public employees will be receiving the full amount of their bonuses, if these total less than P70,000.
Section (32)(7)(E) of the National Internal Revenue Code of 1997, if amended, will then read as follows:
“(e) 13th Month Pay and Other Benefits-Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Seventy thousand pesos (P70,000) which shall cover:
• Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
• Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
• Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Seventy thousand pesos (P70,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year.”
While the proposed bill is intended to bridge the gap between the cost of living and the current salary of employees in the public and private sectors, especially those whose salary is classified as grade 18, as well as to update the Tax Code which was passed 17 years ago, the Bureau of Internal Revenue (BIR) and the Department of Finance (DOF) have weighed in against the measure, claiming the potential loss of billions of pesos in foregone tax collections.
It is noteworthy that the increase in the tax exemption ceiling on bonuses like performance incentives, 13th month pay, Christmas bonuses and other benefits as stated in the Tax Code, will effectively increase the take-home pay of employees (both public and private) receiving such by P40,000 at the most which is the difference between P70,000 proposed ceiling compared to P30,000 current threshold for exemption on bonuses. Needless to say, the increase in the take-home pay of employees will effectively decrease the annual income tax due of an employee by P12,800 maximum (32% of P40,000). The tax savings of an employee will vary depending on which tax bracket he or she falls into. The income tax rate applicable to individual tax payers using the present graduated income tax table ranges from 5% to 32% annually.
The BIR argument of lost tax failed to convince the House of Representatives as it remained firm on its position that the increase in the take-home pay of employees will ultimately increase their purchasing power, pointing to the possibility that the lost taxes on income will be offset by taxes on spending.
This theory hinges on people being encouraged to spend more, thereby encountering the 12% Value-Added Tax on their purchases.
The move to initiate relevant and beneficial laws supporting the morale of employees is encouraging. After all, the inherent powers of the state do not only include taxation and eminent domain but also the power to protect its citizens and promote the welfare of the broader society. While the bill will have to wait final approval from the President after the Senate passes a similar bill, for now we can say, “Merry Christmas!” somehow.
Marvin L. Madrigalejo is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
marvin.l.madrigalejo@ph.pwc.com
source: Businessworld
Catholic school wins versus BIR's Henares
A Makati court declares 'unconstitutional' a BIR memorandum that requires schools to justify their tax-exempt status
The joint resolution was prompted by a clarification sought by St Paul College-Makati and a motion for reconsideration filed by the BIR assailing the ruling of the court last July that found RMO 20-2013 as violative of the Constitution.
Last year, the BIR issued RMO 20-2013 requiring non-stock, non-profit corporations and associations to secure tax exemption certifications from the BIR regional district offices where these are registered. The RMO covered educational institutions. (READ: Why the BIR is running after schools)
The memorandum was meant to enhance monitoring and plug loopholes in the tax system. Institutions that failed to apply and secure the tax exemption certificate would be stripped of their tax immunity.
While other schools decided to comply with the BIR order, St. Paul College-Makati refused to take it sitting down.
Challenging the BIR memorandum, the school argued the order was abusive and automatically strips other institutions of their tax-exempt status. De Leon initially issued a temporary restraining order and later a preliminary injunction on the challenged BIR memorandum. (READ: Catholic school wins Round 1 vs BIR’s Henares
Two days after the TRO was issued, the BIR issued Revenue Memorandum Circular 8-2014 which mandated banks to require corporations and institutions to present “valid, current and subsisting tax exemption certificate or ruling.” Failure on the part of these institutions to submit the tax exemption certificate would mean they are to be subjected to withholding taxes from interest in their deposits.
In July 2014, the court injunction became permanent after De Leon ruled that the BIR memorandum is contrary to Article XIV Section 4 of the Constitution. Article 14, Sec. 4(3) says, “all revenues, assets on non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.” The exemption is in recognition of the “complementary roles of public and private institutions in the educational system.”
Diminution of privilege
De Leon agreed with St Paul College-Makati that RMO 20-2013 is “unconstitutional as it imposes a prerequisite to the enjoyment by non-stock, non-profit educational institutions of the privilege of tax exemption…”
By imposing the prerequisites, and if not complied with by non-stock, non profit educational institutions, it will serve as a diminution of the constitutional privilege, which even the Congress cannot diminish by legislation, and thus more so by the Commissioner of the Internal Revenue who merely exercises quasi-legislative functions,” De Leon said.
Even as it won the case, St Paul College-Makati sought a clarification whether the ruling applies to other issuances by the BIR that appeared to implement the contested memorandum, particularly Revenue Memorandum Circular 8-2014.
This was opposed by the BIR, arguing that the school is, in effect, seeking an amendment of its petition. The BIR also filed a motion for reconsideration on the court’s adverse ruling.
But the judge could not be swayed.
In his joint resolution, De Leon clarified that the court order refers to other issuances by the BIR “which tend to implement RMO-20-2103..for otherwise said decision would be useless and would be rendered nugatory.”
He also junked the BIR’s motion for reconsideration for lack of merit.
Sabino Padilla III, lawyer for St Paul College-Makati, said the court’s ruling applies to all non-stock, non profit educational institutions, contrary to the position being held by the BIR that it is only applicable to the territorial juridisction of the Makati RTC.
“The Supreme Court however has long declared and settled that following Section 5, Article VIII of the 1987 Constitution, a regional trial court has jurisdiction to resolve the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. Accordingly, there is no doubt that the decisions in Civil Case No. 13-1405 apply to the four corners of the country,“ Padilla said. – Rappler.com
Monday, November 3, 2014
Tax relief after a loss
BUSINESSMEN expect to earn a profit, but that is not always the case. Losses are always possible, especially for start-ups, or if economic conditions are unfavorable. A loss, while not ideal, is not exactly the end of the world.
One of the ways losses are compensated, like life insurance for loved ones who pass away, is tax relief. Those who register a net operating loss are entitled to offset one year’s losses against the succeeding year’s income, subject to certain conditions. The so-called “net operating loss carry-over” (NOLCO) provides tax relief by reducing the tax liability for future years.
The big issue with NOLCO is how the Bureau of Internal Revenue (BIR) interprets the rules. Lately, the bureau has been very aggressive in tax assessments when it comes to NOLCO treatment, adopting the position that even taxpayers reporting losses are to be assessed zero taxable income per return. This effectively prevents the use of losses to reduce taxable income. Accordingly, the BIR disregards losses incurred for the taxable year under audit regardless of whether the same was utilized in the succeeding years or not.
Under Philippine tax rules, the net operating loss of a business for any taxable year immediately preceding the current year, which has not been previously offset as deduction from gross income, shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss.
However, in some cases, the BIR is taking the position that the taxpayer is no longer entitled to claim unutilized NOLCO as deduction for any deficiency tax assessment for the year under audit. The BIR theory is that the taxpayer waives the right to claim losses for the taxable period in question when it signified its intention to make these deductions available to the subsequent years through filed income tax returns (ITR). Since the losses became part of the available NOLCO, the taxpayer is barred from claiming these losses in the year they emanated.
While it is true that the regulation does not specify that NOLCO cannot be used to offset any deficiency tax assessment, it must also be noted that nothing in the Tax Code states that a taxpayer who has failed to utilize the accumulated NOLCO shall be deemed to have waived its right to utilize the same as deduction from any tax assessment by signifying in the ITR its intention to carry over the same as tax deduction in the succeeding year.
The law would have expressly provided this if it were the intention of the lawmakers to constitute such failure as a waiver of its right to utilize the available and unexpired NOLCO in the current year. A waiver, being a relinquishment of a legal right, cannot be presumed.
In fact, various recent Court of Tax Appeal (CTA) cases (Oakwood Overseas Limited vs. CIR, CTA Case No. 8196, April 29, 2014, AR Realty Holdings Co., Inc., vs. CIR, CTA Case No. 8239, April 1, 2014, among others) resulted in findings of erroneous computation of the deficiency income tax, because although the BIR started with the taxable loss per return, it added back the taxable loss.
According to the CTA, unless the BIR can present evidence to prove that petitioner used its net loss as NOLCO in the succeeding year, the tax benefit purportedly realized by the taxpayer in the succeeding year cannot be assumed.
Consequently, the taxpayer must be allowed to deduct net operating loss incurred from the taxable income during the year.
Notwithstanding the Court decisions, some BIR examiners are still disregarding the losses incurred by the taxpayers in determining the amount of deficiency tax liabilities. That is why some taxpayers are questioning whether there really is a tax relief for losses.
In certain countries, lawmakers have been providing actual relief to taxpayers in case of losses, including the carrying back of NOLCO to the preceding years, using the current year’s deficit to earn a refund for the taxes paid in the previous years. NOLCO can also be carried forward over the next 20 years to reduce future tax liability.
In the Philippines, instead of tax relief, we are seeing businessmen who have incurred losses also have to settle huge tax deficiencies.
Businesses are important economic engines, and it is important for the BIR to look at all the circumstances before disallowing losses, and not just assume that the same will benefit the taxpayer in the future. Instead of being strict on the treatment of NOLCO, the BIR should be providing relief to taxpayers in times of economic distress. The payoff comes later, when taxpayers turn profitable, translating to large tax payments down the line.
Jen R. Serrano is a senior member of 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
One of the ways losses are compensated, like life insurance for loved ones who pass away, is tax relief. Those who register a net operating loss are entitled to offset one year’s losses against the succeeding year’s income, subject to certain conditions. The so-called “net operating loss carry-over” (NOLCO) provides tax relief by reducing the tax liability for future years.
The big issue with NOLCO is how the Bureau of Internal Revenue (BIR) interprets the rules. Lately, the bureau has been very aggressive in tax assessments when it comes to NOLCO treatment, adopting the position that even taxpayers reporting losses are to be assessed zero taxable income per return. This effectively prevents the use of losses to reduce taxable income. Accordingly, the BIR disregards losses incurred for the taxable year under audit regardless of whether the same was utilized in the succeeding years or not.
Under Philippine tax rules, the net operating loss of a business for any taxable year immediately preceding the current year, which has not been previously offset as deduction from gross income, shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss.
However, in some cases, the BIR is taking the position that the taxpayer is no longer entitled to claim unutilized NOLCO as deduction for any deficiency tax assessment for the year under audit. The BIR theory is that the taxpayer waives the right to claim losses for the taxable period in question when it signified its intention to make these deductions available to the subsequent years through filed income tax returns (ITR). Since the losses became part of the available NOLCO, the taxpayer is barred from claiming these losses in the year they emanated.
While it is true that the regulation does not specify that NOLCO cannot be used to offset any deficiency tax assessment, it must also be noted that nothing in the Tax Code states that a taxpayer who has failed to utilize the accumulated NOLCO shall be deemed to have waived its right to utilize the same as deduction from any tax assessment by signifying in the ITR its intention to carry over the same as tax deduction in the succeeding year.
The law would have expressly provided this if it were the intention of the lawmakers to constitute such failure as a waiver of its right to utilize the available and unexpired NOLCO in the current year. A waiver, being a relinquishment of a legal right, cannot be presumed.
In fact, various recent Court of Tax Appeal (CTA) cases (Oakwood Overseas Limited vs. CIR, CTA Case No. 8196, April 29, 2014, AR Realty Holdings Co., Inc., vs. CIR, CTA Case No. 8239, April 1, 2014, among others) resulted in findings of erroneous computation of the deficiency income tax, because although the BIR started with the taxable loss per return, it added back the taxable loss.
According to the CTA, unless the BIR can present evidence to prove that petitioner used its net loss as NOLCO in the succeeding year, the tax benefit purportedly realized by the taxpayer in the succeeding year cannot be assumed.
Consequently, the taxpayer must be allowed to deduct net operating loss incurred from the taxable income during the year.
Notwithstanding the Court decisions, some BIR examiners are still disregarding the losses incurred by the taxpayers in determining the amount of deficiency tax liabilities. That is why some taxpayers are questioning whether there really is a tax relief for losses.
In certain countries, lawmakers have been providing actual relief to taxpayers in case of losses, including the carrying back of NOLCO to the preceding years, using the current year’s deficit to earn a refund for the taxes paid in the previous years. NOLCO can also be carried forward over the next 20 years to reduce future tax liability.
In the Philippines, instead of tax relief, we are seeing businessmen who have incurred losses also have to settle huge tax deficiencies.
Businesses are important economic engines, and it is important for the BIR to look at all the circumstances before disallowing losses, and not just assume that the same will benefit the taxpayer in the future. Instead of being strict on the treatment of NOLCO, the BIR should be providing relief to taxpayers in times of economic distress. The payoff comes later, when taxpayers turn profitable, translating to large tax payments down the line.
Jen R. Serrano is a senior member of 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
Supreme Court upholds CBK Power’s tax refund claim
THE SUPREME COURT has ruled in favor of hydroelectric producer CBK Power Co. Ltd. over a consolidated tax refund case amounting P 100 million.
In a 13-page decision, the high court sitting en banc reversed an earlier decision made by the Court of Tax Appeals (CTA), which rejected the company’s petition for a tax refund.
CBK Power filed its first petition on March 26, 2009 involving a claim of P58.8 million covering tax year 2007. It filed a claim with the CTA on March 27, 2009 after the Bureau of Internal Revenue (BIR) failed to rule on its administrative claim.
The company lodged another tax refund claim with the BIR on two separate dates on March 31, 2008, and July 23, 2008 covering a claim from the tax year 2006 in the amount of P43.81 million. It filed a judicial claim with the CTA on July 24 of the same year.
The BIR ruled that the petitions were prematurely filed, a finding that was upheld by the CTA’s Third Division.
In appealing before the high tribunal, the company argued that under the National Internal Revenue Code, the period for refund or tax credit of input taxes is “directory and permissive, as long as it is made within the two-year prescriptive period prescribed under Section 229 (Recovery of Tax Erroneously or Illegally Collected) of the same code.
It also argued that the CTA did not consider the “huge financial impact” for the denial of refund or issuance of tax credit certificates.
But the BIR said that the two-year period pertains to administrative claims with the BIR, while judicial claims with the CTA must be made within 30 days upon receipt of the BIR’s decision or after the lapse of the 120-period given to the BIR to act on the claim.
It argued that the observance of the 120-day period is mandatory and jurisdictional, and non-compliance results in the denial of the claim.
In deciding in the case, the high court cited the case of Commissioner of Internal Revenue vs. San Roque Power Corporation.
“This court held that compliance with the 120-day and the 30-day periods under Section 112 of the Tax Code, save for those Value-Added Tax refund cases that were prematurely (i.e., before the lapse of the 120-day period) filed with the Court of Tax Appeals between Dec. 10, 2003 and Oct. 6, 2010, is mandatory and jurisdictional,” the court said.
While the court said that the company failed to comply with the 120-day period, it filed the judicial claims within the CTA in a timely manner.
“Nevertheless, since the judicial claims were filed within the window created in San Roque, the petitions are exempted from the strict application of the 120-day mandatory period,” the court ruled.
The high court then ordered that the cases be remanded to the CTA for the determination and computation of amounts valid for refund.
CBK Power operates the Caliraya, Botocan, and Kalayaan hydroelectric power plants and related facilities in Laguna. -- Reden D. Madrid
source: Businessworld
In a 13-page decision, the high court sitting en banc reversed an earlier decision made by the Court of Tax Appeals (CTA), which rejected the company’s petition for a tax refund.
CBK Power filed its first petition on March 26, 2009 involving a claim of P58.8 million covering tax year 2007. It filed a claim with the CTA on March 27, 2009 after the Bureau of Internal Revenue (BIR) failed to rule on its administrative claim.
The company lodged another tax refund claim with the BIR on two separate dates on March 31, 2008, and July 23, 2008 covering a claim from the tax year 2006 in the amount of P43.81 million. It filed a judicial claim with the CTA on July 24 of the same year.
The BIR ruled that the petitions were prematurely filed, a finding that was upheld by the CTA’s Third Division.
In appealing before the high tribunal, the company argued that under the National Internal Revenue Code, the period for refund or tax credit of input taxes is “directory and permissive, as long as it is made within the two-year prescriptive period prescribed under Section 229 (Recovery of Tax Erroneously or Illegally Collected) of the same code.
It also argued that the CTA did not consider the “huge financial impact” for the denial of refund or issuance of tax credit certificates.
But the BIR said that the two-year period pertains to administrative claims with the BIR, while judicial claims with the CTA must be made within 30 days upon receipt of the BIR’s decision or after the lapse of the 120-period given to the BIR to act on the claim.
It argued that the observance of the 120-day period is mandatory and jurisdictional, and non-compliance results in the denial of the claim.
In deciding in the case, the high court cited the case of Commissioner of Internal Revenue vs. San Roque Power Corporation.
“This court held that compliance with the 120-day and the 30-day periods under Section 112 of the Tax Code, save for those Value-Added Tax refund cases that were prematurely (i.e., before the lapse of the 120-day period) filed with the Court of Tax Appeals between Dec. 10, 2003 and Oct. 6, 2010, is mandatory and jurisdictional,” the court said.
While the court said that the company failed to comply with the 120-day period, it filed the judicial claims within the CTA in a timely manner.
“Nevertheless, since the judicial claims were filed within the window created in San Roque, the petitions are exempted from the strict application of the 120-day mandatory period,” the court ruled.
The high court then ordered that the cases be remanded to the CTA for the determination and computation of amounts valid for refund.
CBK Power operates the Caliraya, Botocan, and Kalayaan hydroelectric power plants and related facilities in Laguna. -- Reden D. Madrid
source: Businessworld
Sunday, November 2, 2014
Business groups ready legal action vs BIR
Some business groups are now working on a legal action against Bureau of Internal Revenue (BIR) for refusing to withdraw Revenue Memorandum Circular (RMC) 54-2014.
Tax Management Association of the Philippines, Inc. president Rina Lorena Manuel said in an interview with reporters that the business groups are now exploring legal options against Henares’ decision and the RMC itself.
“There’s a team studying it right now [about the legal options we can pursue against RMC]. The group would still have to meet to explore that. [This week], we will make an announcement,” Manuel said.
Manuel explained that the existence of RMC 54-2014 could involve billions worth of money that businessmen from different sectors have long been waiting but might not be able to receive anymore.
“The difficult part for the business group is that it is an end-must denial of all the pending claims. They have long been waiting for it. They have long been processing it. They didn’t sleep [in getting these refunds]. It’s just that it’s taking the BIR a lot of time to process it and now with the RMC, it would all be automatically deemed denied,” she added.
Now, TMAP together with business groups such as chambers of commerce in the Philippines, Philippine Exporters Confederation, Philippine Chamber of Commerce and Industry and United Coconut Associations of the Philippines Chairman, is planning to pursue legal action against BIR’s decision to keep RMC.
The cluster is joined by other business groups such as the Association of Certified Public Accountants in Public Practice, Employers’ Confederation of the Philippines, IT and Business Process Association of the Philippines, and the Management Association of the Philippines, among others.
The groups have been requesting the BIR to ease the RMC.
Under RMC, BIR has 120 days from the date of submission whether to grant or deny a company’s refund claim on its value-added taxes (VAT), which is a tax on the consumption charged on the sale, barter, exchange or lease of goods, properties, and services in the Philippines, as well as on the importation of goods.
If the BIR chief, for instance, failed to make a decision within the given period, the claim of the taxpayer will be “deemed denied” and the latter would only have 30 days to bring its refund request before the Court of Tax Appeals (CTA).
source: Manila Bulletin
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