Workers to get additional P10,000 tax exemption

Malacañang announced on Sunday that workers will receive additional P10,000 tax exemption from their benefits beginning next month.

Presidential Communications Operations Office (PCOO) Secretary Herminio Coloma Jr. said Labor Secretary Rosalinda Baldoz and Finance Secretary Cesar Purisima announced the good news for millions of workers all over the country.

“This is the result of the approval by President Benigno Aquino III to new guidelines with regards to additional tax exemptions for the benefits to be given to the workers under the collective bargaining agreement (CBA) and productivity incentive schemes,” he said.

Coloma said the additional tax exemption was also the result of continuous dialogue by the President with the labor organizations.

“The new guidelines will be implemented in January 2015 through a revenue regulation to be issued by the Bureau of Internal Revenue (BIR),” the PCOO chief said.

Purisima described the additional tax exemption for the so-called de minimis benefits as rational because millions of workers will benefit from it.

“These workers are among those who receive lowest salaries,” Coloma said.

The total benefits which will be covered are expected to reach P104,225 from the present P94,225.

Almost P17 million will be deducted from the revenue collection of the BIR due to this additional tax exemption.

In its official gazette, the administration said the expanded list of de minimis benefits exempted from income tax on compensation  include benefits under CBAs  and productivity incentive schemes.

“This is a fitting gift to our workers in this holiday season,” Baldoz said, after the Department of Labor and Employment (DOLE) and the Department of Finance (DOF) had agreed to have the measure take effect in January 2015.

The Bureau of Internal Revenue, which is under the DOF, will issue new revenue regulations to make the measure effective.”

Baldoz recalled that expanding the list of tax-exempt de minimis benefits was one of the demands of labor at the dialogue with the President in the last Labor Day commemoration in May 2014.

At present, de minimis benefits—or benefits with relatively small values—are given by employers to their employee on top of the compensation and these benefits are not subject to withholding (tax exempt). Under RR 8-00, as amended by RR 10-00,  the following are recognized as de minimis benefits:

• 10 days monetized unused vacation leave credits;
• medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month;
• rice subsidy of P1,000  or one-sack of rice per month;
• uniforms and clothing allowance not exceeding P3,000 per year;
• medical benefits not exceeding P10,000.00;
• laundry allowance of P300 per month;
• employee achievement awards in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan;
• flowers, fruits, books or similar items given to employees under special circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
• daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.  (With report from Philippine News Agency; information from payrollhero.ph)

source:  Manila Bulletin

PEZA-registered locators exempt from BIR clearances

LOCATORS in special economic zones need not secure the requisite Bureau of Internal Revenue (BIR) clearances for importers and customs brokers as part of a government effort to facilitate trade, according to an order by Finance Secretary Cesar V. Purisima issued last month.

“All locators of PEZA (Philippine Economic Zone Authority) special economic zones throughout the Philippines, duly registered with PEZA are exempted from the requirements of Department Order (DO) 12-2014 as amended by DO 18-2014, and shall be eligible for accreditation as importers with the Bureau of Customs Account Management Office (BoC-AMO),” according to Mr. Purisima’s DO 107-2014 signed Nov. 28.

The twin orders require importers and brokers to secure an importers clearance certificate (ICC) and a customs broker clearance certificate (BCC) as a new requisite before they can transact with the Bureau of Customs.

While PEZA locators are exempted from the requirement, the BoC may still require them to submit documents and information before accreditation is granted.

“PEZA locators that will import goods into the Philippines will have to comply with the documentary requirements provided in the relevant rules of procedure of customs,” the order stated.

“Failure to do so will subject them to the sanctions and penalties as provided by the Tariff and Customs Code of the Philippines, as amended, and by pertinent customs laws and regulations,” it added.

The Finance Department, on Feb. 6, issued Department Order (DO) 12-2014 requiring importers and brokers to secure a BIR Importer Clearance Certificate (BIR-ICC) and a BIR-brokers clearance certificate (BCC) as a requisite for accreditation with the BoC.

The new system aims to support the government’s goal of improving accountability and tax compliance.

Importers were originally given 90 days to comply with the new rule.

Of the 14,995 importers and brokers registered with the Bureau of Customs’ (BoC) client profile registration system before the July 31 deadline, 9,418 or 63% were able to comply.

However, it noted that only 11 or 0.1% of the total importers were able to beat the original May 21 deadline. A total of 3,377 applied in the first extension while an additional 6,030 sought accreditation during the second extension.

Importers and brokers who failed to beat the deadline are treated as new applicants. --Mikhail Franz E. Flores

source:  Businessworld

Paying more attention to working capital

Optimizing working capital levels

Dec 03 2014

IN THE FIRST part of our series on working capital management (published in the November 20 issue of this column), we discussed the importance of working capital management as a key driver to achieve an optimal valuation. Whether or not a company is thinking of divesting, working capital management strategies should be carefully formulated, implemented throughout the organization, and regularly reviewed.

One should adopt a rigorous approach geared towards continuous improvement to achieve results that can be sustained under different economic conditions. The key area to focus on is cash management, to minimize carrying costs and maximize yield of idle cash. Other areas to monitor include the performance of accounts receivable, accounts payable and inventory management.

In this article, we have included planning steps that may be employed by companies to proactively target working capital to the lowest sustainable levels and achieve an optimal business enterprise valuation.

For one, the firm should undertake a rigorous analysis of its current working capital requirements based on internal and external factors. These internal and external factors can include the type of industry (and existing practices), the company strategy, the business model, seasonality, how the company wishes to compete in the marketplace, and money market yields, among other factors.

The answers to certain questions may be explored. Is it an asset-light or asset-heavy industry? Are products sold or are services provided? If products are sold, does the company have a strategy of 100% product fulfillment? Is competition to boost sales primarily a discounting game, or do non-price factors such as credit terms matter? What time of the year does the working capital bulge? How competitive are the money market yields at this point in time? Other factors, such as how the collection or payments system is being managed, must be reviewed.

Along with a rigorous internal analysis, one can also benchmark against peer companies. Analyzing working capital metrics of peer companies has two main advantages. Benchmarking allows a company to understand its position relative to peers within the same industry, and compare performance.

At the same time, a firm can compare the working capital effects of its business model and strategy versus that of its competitors. Apart from having visibility on the company’s position in the country where it operates, additional insight may be taken from analyzing its peers within the same region.

Another advantage of conducting a benchmarking analysis comes from observing how the best-managed peers manage their accounts receivable, accounts payable, and inventory. Benchmarking against better working capital metrics may signal opportunities to further improve working capital management. For instance, if in the process of the benchmarking analysis, a company finds that its accounts payable turnover is considerably shorter than its peer companies, this provides an opportunity to renegotiate with its suppliers for more favorable, yet competitive, payment terms. Ultimately, good working capital management leads to a shorter time to convert working capital into cash.

The cash conversion cycle (or the sum of days inventory, days receivable, less days payable) shows the number of days needed to convert sales into cash after payment of obligations. It also shows how long working capital is financed.

By targeting a faster cash cycle, the company can improve its cash flow and use its resources more efficiently. The situation is not so easy to navigate all the time. The firm has to manage competing priorities, balancing what it values versus what is important to its customers.

For instance, a firm that decides to tighten collections may risk alienating customers who may wish more liberal payment terms. More liberal payment terms, however, result in a longer cash cycle and a higher opportunity cost of funds for the firm. Maybe the firm can also offer discounts for prompt payment. However, the discounts should not be so large as to eat into product margins.

For inventory management, keeping a higher level of inventory may minimize stock-outs and cater to happy customers, but the risk of carrying too high a level of inventory means that the firm is exposed to obsolescence or higher-than-necessary carrying costs (including storage and insurance). If the firm decides to pursue lean inventory management by adopting just-in-time methods, it then runs the risk of suppliers disrupting the supply chain if they miss a delivery of needed parts for stock.

Managing payables has its own challenges. Stretching payables for too long may alienate the firm’s suppliers and hurt its supply chain. However, paying too quickly lengthens the cash cycle and increases the opportunity cost of cash.

What certainly helps in managing working capital involves setting realistic targets that one is able to manage, and evaluating actual performance vis-a-vis targets. Setting targets involves putting down on paper what are the target days sales outstanding, days inventory outstanding, and days receivables outstanding; and managing the working capital to hit those targets. Done at a very micro level, one may even set targets per customer that build up into an overall cash cycle target for the firm.

In addition to having a target cash conversion cycle, one may adopt other targets. These may include net working capital as a percentage of sales, aging of receivables, aging of payables, and the invoice error rate. Visibility on all of these metrics gives the firm the actionable information that it can use to maximize cash flow and optimize enterprise value.

Inevitably, when it comes down to target setting, the question shifts to who should be accountable for hitting the target? The answer is, everyone in the transaction chain -- from sales, to purchasing, to order fulfillment, to collection, to finance and treasury -- has a role to play in efficient working capital management.

Firms may adopt a bottom up approach in planning working capital management policies and procedures, where each participant in the transaction chain is accountable for hitting established target metrics or service levels. These target metrics become key performance indicators for the departments and individuals involved in managing working capital.

Planning, executing, and hitting working capital targets should be adopted as a continuous improvement process. While the benefits of solid working capital management strategies can be realized in the short to medium term, a company can also benefit from this in the long run thereby achieving an optimal business enterprise valuation. For the next article in this series, we will discuss working capital strategies that can be identified and implemented to optimize firm enterprise value.


Dec 10 2014

IN OUR SECOND installment of this three-part series on the importance of working capital in valuation, we talked about effective working capital planning, benchmarking, setting target levels, and managing working capital as part of a continuous improvement process. In this last installment, we will cover the actual tactics one can implement for effective working capital management. All of these tactics, applied on an ongoing basis, can help a firm optimize its cash flow and hence, its business enterprise valuation.

First, let’s cover what to do with idle cash. The cash on a firm’s balance sheet, if idle, represents an opportunity cost. If it isn’t placed even on an overnight basis, it isn’t earning interest. The company’s treasury could set up a facility with a bank where all of the idle cash at the end of the day, after all of the transactions have occurred, gets swept into an overnight placement. It earns an overnight money market interest rate. The next day, the funds are ready to service transactions.

As a counterpart to this, companies may also have short term lines with banks to finance their receivables. This comes in handy when accounts receivable collection efforts come up short against the forecasted figures. The company uses the short term lines to plug the liquidity hole in its balance sheet. Banks especially well-versed in facilitating commercial trade transactions will usually come forward to offer an overall financing package, which incorporates both the short term line and the sweep facility.

The next layer on the balance sheet after cash concerns accounts receivable. These are generated based on credit sales to customers of course. It is often said that an ounce of prevention is worth a pound of cure. The firm’s first line of defense in managing accounts receivable is actually doing a rigorous credit analysis of each customer with which it does business.

Based on such credit analyses, customers can be grouped into several tiers. Those who are least credit-worthy become strictly “cash-on-delivery” customers. Those who meet the credit standards and have a favorable payment history, are given the best credit terms. Ideally, credit evaluations occur regularly, at least once a year, where the credit limits per customer are further refined. A customer’s recent payment history should be given more weight compared to the overall account performance.

The second thing one can do in receivables management for the best customers is to set up automatic payment arrangements through an electronic facility. The advantages of this include timely payment, lower transaction costs, and convenience for both the customer and the firm. Further, the use of automatic payment system frees up manpower time. The system also has an auditable transaction trail which allows for ease of reconciliation.

A company can also offer a prompt payment discount. The terms might be 2%/10, net 30. This means that the customer can get a 2% discount if he pays within 10 days of receiving the invoice, otherwise the entire balance is due in 30 days. The trade-off that the firm has to manage involves the effective opportunity cost of the discount, compared to the effective money market yields available for its idle cash, and the cost of any receivables financing that it uses.

On a regular basis, the firm also has to monitor the aging of its receivables and focus on those customers that are habitually late in paying. Letting accounts receivable slide for too long hurts cash flow and increases the chances that customers will default. Being too tight on payment terms and badgering customers for payment may alienate them, and they may choose to take their business elsewhere. Sometimes however, it’s perfectly fine to “fire” a customer that habitually pays late and soaks up precious time and resources in terms of collection efforts, because the effort can be used more productively elsewhere.

For businesses that really need receivables financing badly, one can discount receivables with a bank or finance company, which is otherwise known as factoring. This can get quite expensive -- the finance costs from factoring can easily eat into profit margins.

From the management of accounts receivable, we move to inventory management, which, inclusive of work in process inputs, is a challenging effort. The complexity is further magnified with a supply chain that has a multitude of warehouses, which serve as both inbound receiving centers and outbound shipping points.

The techniques of minimizing inventory and yet maximizing customer fulfillment have gotten more sophisticated, but the end goal is quite simple: reduce the amount of cash invested in inventory. From the just-in-time systems that Toyota pioneered to manage its inbound parts supply chain, inventory management has progressed to using statistical techniques like six-sigma and lean principles to reduce costs, eliminate waste, shorten turnaround times, and improve customer fulfillment.

Lean inventory management techniques focus on five principles: value, flow, pull, responsiveness, and perfection (1). When applied properly, these five principles result in a company capturing additional surplus by moving inventory only when the customer demands it, using processes that have been optimized to eliminate waste and reduce time, benchmarked against clear metrics to identify further process improvements that can be made in the future.

Firms can also use up-to-date technology to magnify the efficiency of lean inventory management. Radio frequency identification chips (RFID) attached to products that enable tracking over the internet, allow the firm to know exactly where the entire goods in transit are at any given time, and can deter the incidence of inventory shrink. As a bonus, a link to the customer’s supply chain can trigger automatic re-ordering when the customer’s stock goes below threshold levels.

Managing accounts payable brings with it a new set of challenges. To lower cost, one can take advantage of prompt payment discounts. The prospect of getting a hefty discount compared to money market rates may be enticing, but one has to weigh the early disbursement of cash versus the next best use of that cash. You have to make sure that based on projected cash cycle, your cash flow won’t suffer if you take advantage of the payment discount.

If your cash flow won’t hold up, but you’ve got financing to cover it, you have to take into account the cost of financing, which will offset the early payment discount.

Another tactic to consider involves simply delaying payment on payables. This has its own risks, because suppliers can disrupt your supply chain by refusing delivery on your future orders. Before you do this, you have to think long and hard on whether the headache of having a potentially disrupted supply chain is worth the benefits.

The other thing one can do with respect to managing working capital, with perhaps the longest lasting consequences, involves running a process improvement program (like lean six sigma) on your entire working capital management process. Every error in every activity in the cash cycle has a real cost, or an opportunity cost. Multiple errors on the same transaction pile up, especially if you multiply those errors across the multitude of transactions processed.

If you reduce error rates, the cost savings in terms of time and money flow straight to the bottom line. This is why General Electric adopted Six Sigma after Motorola pioneered it. GE knew that if it could reduce error rates, the savings from eliminating errors in the millions of transactions it does every year would result in material additional profits.

Managing working capital optimally to increase firm valuation is a commitment. The additional sustained cash flow from managing working capital well, can actually have a material impact on a firm realizing its optimal business value. This becomes significant when the working capital metrics, when compared to industry competitors, are significantly better than the industry norms. In such a situation, the firm can actually command a premium from a prospective buyer, because in valuation, cash is king.

¹ “The Scoop on Lean Inventory Management Techniques,” at www.blog.clientsfirst-ax.com

Raoul Villegas and Ma. Luisa Gonzalez, Director and Senior Associate, respectively, are from the Deals and Corporate Finance group of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

raoul.a.villegas@ph.pwc.com

maria.luisa.gonzalez@ph.pwc.com

source:  Businessworld

All about LBT

LIKE IT OR NOT, the Christmas rush is upon us. The harried nature of the season is often characterized by inexplicable traffic, overcrowded shopping centers, work deadlines before the end of the year and calendars marked by this or that party or reunion.

After the Christmas season and just when we are about to heave a sigh of collective relief -- another equally busy season comes rushing in and this is the period for the renewal of business permits.

The Local Government Code requires all business entities to renew their business permits and pay their local business taxes (LBT) on or before the 20th of January of each year. The deadline applies to all cities and municipalities in the country. The Code, however, allows local government units (LGUs) to extend the time of payment but only for a justifiable reason or cause.

Note that the extended deadline only pertains to the payment date, which means that applicants for business permit renewal should still submit and file all the necessary documents beginning the first working day of January and only until the 20th thereof.

Some LGUs usually extend the payment date until the end of January. Quarterly payments of LBT may be allowed in some cases but some LGUs give discounts to businesses that opt to pay the full amount in a single payment.

Based on experience, applications for renewal of business permits with complete supporting documents submitted a day or a few days after the 20th of January, particularly in LGUs within the Metro Manila area, are considered as late filing, and will trigger penalties and surcharges based on the amount of LBT assessed.

Businesses that are liable to pay a large amount of business tax must ensure that applications are duly filed and LBT paid within the deadline; otherwise, the penalties and surcharges will likewise be great.

Most, if not all, LGUs only start accepting applications on the first working day of January, and not a day earlier. Given the tight deadline, prudence dictates that businesses start preparing and gathering all the required documents for renewal as early as October or November. Such documents include the audited financial statements, if applicable, and statements of gross receipts and value-added tax (VAT) returns filed -in the preceding year. If not earning income, such as in the case of a representative office, an Affidavit of No Income is normally required by some LGUs aside from other documentation.

The procedures for renewal and payment may vary from one LGU to another so it pays to know the specific steps and processes early on to avoid the risk of mistakes and having to start all over again with the January 20th deadline looming near.

Another thing to consider is the Papal Visit of Pope Francis which coincides with the renewal season. The City of Manila has declared January 16 to 19, 2015 as holidays, thereby reducing the available dates for filing applications in Manila. LGUs where the Pope is scheduled to visit may likewise declare holidays in the coming days. It is hoped that deadline extensions in these areas are declared as well.

Before the renewal period starts, concerned businesses must also take heed of certain policies of some LGUs when it comes to the assessment and collection of LBT. Some impose LBT on PEZA-registered entities based on the gross receipts generated by their non-PEZA registered activities.

By law, PEZA-registered entities are exempt from paying LBT regardless of whether they are enjoying income tax holiday or are under the 5% gross income tax regime. However some LGUs insist that the tax incentives apply only to PEZA-registered activities and not to “unregistered” ones. This reasoning may perhaps be the result of a BIR ruling which imposed regular income tax on income generated by PEZA-registered enterprises from activities which are not covered by their PEZA registration.

Another issue that commonly arises in the payment of LBT is the proper situs of the tax where the business entity has branches, sales offices, project offices, and plants scattered in different cities and provinces but maintains a head or principal office in a different area.

In one fairly recent decision, the Court of Tax Appeals (CTA) ruled that the City of Makati should not be allocated any LBT by virtue of a so-called project office as declared by a taxpayer. In that case, the taxpayer treated its office in Makati City as one of three project offices and/or plants, and allocated a portion of its LBT payment thereto. The court ruled that since said office in Makati is not indispensable to the main purpose of the company, it cannot be treated as a project office, hence the allocation of LBT to that Makati office was held to be improper and without basis.

Holders of government or legislative franchises must also take note of a recent CTA decision which declared that an LGU may impose both the LBT and the local franchise tax on the gross receipts and sale of the same taxpayer in the same year. A prominent cable company called this imposition double taxation and questioned the legality of such a move. The CTA then ruled that there is no double taxation if the franchise holders pay both the LBT and franchise tax in the same year because the two taxes are different in nature -- LBT is based on the privilege of engaging in business while franchise tax is imposed on the exercise of enjoying a franchise.

In sum, I advise all applicants for business permit renewals to start and prepare early, determine the procedures and requirements adopted by your concerned LGUs before the renewal period, know your rights and remedies in case of erroneous LBT assessments and most important, have a merry renewal season. Happy Holidays!

Susan M. Aquino is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

susan.m.aquino@ph.pwc.com

source: Businessworld

Taxing tobacco: blowing away smoke from the issues

THIS WILL BE my last column for 2014, and so before anything else, please allow me to greet BusinessWorldreaders a very Merry Christmas next week and a happy and prosperous year in 2015. May I also greet the House of Representatives, from where tax laws emanates, a productive and fruitful 2015 in considering new tax policies that will truly benefit people.

Let me take off from Speaker Sonny Belmonte’s seeming concern over the implementation of the latest cigarette taxes approved by the House in 2012 and which took effect in 2013. He noted in a press forum last week the need to review the latest tax changes in light of allegedly fraudulent practices in the tobacco industry to evade taxes and duties.

There is also concern over allegedly illicit trade, or the sale of locally produced cigarettes to markets here and abroad without proper declaration of volumes to the authorities for the payment of correct taxes. News reports also note of the alleged smuggling of imported inputs to local cigarette production, through improper declaration of volumes and or import prices.

Belmonte wants the House oversight committee on cigarette taxes to review current industry practices and to determine whether or not certain cigarette manufacturers are getting away with “murder.” Pardon the play of words, but cigarette smoking, after all, has been determined to cause illnesses that can result in death.

In my opinion, anyone caught cheating on taxes particularly on a large scale should be quartered and hanged, more so companies manufacturing and selling products that are scientifically proven to be detrimental to public health. It is bad enough that they are legally allowed to sell products that are known to be harmful, and they still have the gall to cheat on their taxes?

I support the Belmonte initiative primarily to get a proper determination of the facts in this issue, considering that much information has been made public to date which may or may not be tainted or were derived from polluted sources.

There may also be an effort to misinform policy makers and perhaps the public.

Take the allegation of illicit trade, for instance. The way I understand the present situation, at least one cigarette maker has been accused of selling more than what it produces and declares to the government for tax purposes. With that, its “illicit” trade covers all products sold over and above what has been declared and thus properly taxed.

Note that cigarettes are taxed at the source. And this means that cigarette makers advance or pay ahead the excise tax and value-added tax due on their cigarettes packs as soon as they are produced and “withdrawn” from manufacturing facilities for distribution or sale. Tax collectors are already based in production plants to make the proper assessments and collection.

In this sense, illicit trade can result if there are packs made and withdrawn from plants without the payment of proper taxes, and then sold either locally or abroad as if they were “properly declared” production that are tax-paid.

We have a similar situation in mining, where data indicate metal ores are shipped out and sold abroad, unprocessed and undeclared to authorities for the proper reporting of volumes and they proper payment of taxes.

Belmonte’s concern, it would appear, is that the government is being cheated of taxes because of illicit trade. Although the country’s biggest cigarette maker is also publicly griping over its loss of market share to a smaller competitor. I just hope that the Speaker, and the House, will not lose sight of what is really important. Tax collection is the paramount concern here.

For I cannot see why and how else Belmonte and lawmakers can be too concerned with industry competition and operations since Congress’s primary duty is legislation and not necessarily implementation. It can review implementation of laws mainly to determine the need for remedial legislation.

What also appears to dispel the concern over alleged illicit trade is the fact that tax collection from cigarette makers has actually gone up -- basically, because of higher tax rates beginning 2013 -- even if production volumes and sales have gone down over the same period. As mentioned, the paramount concern here is tax collection, and not so much industry operations.

After all, the twin intent of the latest cigarette tax law is to raise tax collection and calibrate cigarette sales given that smoking is a health hazard. Simply put, higher tax values at lower sales volumes. It shouldn’t matter so much whether one company is losing market share to others, or if one company is making more money than others.

What data show us is that the Bureau of Internal Revenue (BIR) collected over P100 billion in excise taxes from sin products in 2013, with the incremental revenue under the sin tax reform amounting to more than half of that, or Php51.1 billion. The 2013 collection was also 81.2% higher than 2012’s Php55.7 billion. And for January to September this year, collection was P78.3 billion, up 27.7% year on year.

What is more telling is that one independent international study claims the possibility of illicit trade covering about 25 billion cigarette sticks in 2012 and 2013, or over 10% of an estimated total consumption of about 214 billion sticks in the two-year period. Yes, the country sells over a 100 billion cigarette sticks annually.

On the other hand, BIR data over the same period indicate a consumption volume -- and thus tax-paid, since taxes are collected even prior to withdrawal and sale -- of over 237 billion sticks already.

In this line, how can that claim of illicit trade be if total cigarettes consumption in sticks reported by this supposedly independent study both for the years 2012 and 2013 -- inclusive of allegedly illicit consumption -- is materially lower than the consumption (based on actual removals) accounted or reported by government authorities?

It is for this reason that Belmonte is on the right track. A review is still urgently necessary as illicit trade and tax evasion are still distinct possibilities, and there should be greater clarity as to which data is believable. But as mentioned, Congress should not lose sight of the latest cigarette tax law’s objectives: above all else, collect more taxes and at the same time calibrate sales to better protect and promote public health.

Marvin Tort is a former Managing Editor of BusinessWorld, and former chariman of the Philippine Press Council.

matort@yahoo.com

source:  Businessworld

The OECD action plan on Base Erosion and Profit Shifting

IN TAX, the latest global buzzword is “BEPS” or base erosion and profit shifting. BEPS refers to the practice of multinational corporations (MNCs) of shifting profits from high tax jurisdictions to low tax jurisdictions as a tax mitigation strategy.

In February 2013, the Organization for Economic Co-operation and Development (OECD) claimed that available data on the extent of BEPS is inconclusive; nevertheless, there is circumstantial evidence suggesting that BEPS practices are pervasive. In fact, studies cited in the 2013 OECD BEPS Report suggest that in certain jurisdictions, there are significant discrepancies between the physical operations of companies and the countries where they report profits for tax purposes.

Conceptually, tax planning strategies are intended to improve the overall tax efficiency of companies through the use of legitimate approaches. However, problems arise when the very laws themselves create opportunities for BEPS, such as when the application of different tax laws results in double non-taxation. This is where the issue of fairness comes in, since many MNCs have been accused of not paying their share of taxes resulting from these practices.

The OECD Action Plan explains the harmful effects of these business practices to stakeholders such as governments, individual taxpayers, and businesses.

Many governments have to cope with less revenue and higher cost to ensure compliance. In developing countries, the lack of tax revenue leads to critical under-funding of the public investments that help promote economic growth. Overall resource allocation, affected by tax-motivated behavior, is not optimal. For individual taxpayers, they bear a greater share of the burden of paying more taxes when businesses shift income to lower tax jurisdictions. For businesses that operate only in domestic markets, they will have difficulty competing with MNCs that have the ability to shift their profits across borders to avoid or reduce tax. These disadvantaged businesses include family-owned corporations and new companies.

Because of the perceived harmful effects of these BEPS practices, the BEPS issue has become not only an economic issue but a political one as well. It has caught the attention of governments and tax administrators, the OECD and the G20 Leaders and Finance Ministers. In the G20 meeting in November 2012, G20 Finance Ministers finally called on the OECD for a coordinated action to address the BEPS issues. This call jump-started the OECD BEPS Action Plan which was released in July 2013.

The BEPS Action Plan identified 15 action areas that the OECD will focus on in the next two and a half years; these are:

1. The tax challenges of the digital economy;

2. The effects of hybrid mismatch arrangements;

3. Strengthening controlled foreign corporation (CFC) rules;

4. Limiting of base erosion via interest deductions and other financial payments;

5. Countering harmful tax practices more effectively, considering account transparency and substance;

6. Prevention of treaty abuse;

7. Prevention of artificial avoidance of permanent establishment (PE) status;

8. Assurance that transfer pricing (TP) outcomes are in line with value creation of intangibles;

9. Assurance that TP outcomes are in line with risks and capital;

10. Other high-risk transactions;

11. Establishment of methodologies to collect and analyze data on BEPS, and the actions to address it;

12. Requirement on taxpayers to disclose aggressive tax planning arrangements;

13. Reexamination of TP documentation;

14. Improvement of dispute resolution mechanisms; and

15. Development of more effective multilateral instruments.

The OECD envisioned the Plan to be implemented in three phases from September 2014 through December 2015. According to the OECD, the deliverables of the BEPS Action Plan will identify best practices, model domestic legislation, changes to the OECD Model Tax Convention and other tools needed to ensure that profits and taxes are aligned with economic activities, and close the loopholes in the tax policies and domestic legislation.

In September of this year, the OECD presented its first set of deliverables to the G20 Finance Ministers, but these reports will remain in draft form until the completion of the 2015 deliverables. Until then, the OECD will continue to work on recommendations and models for the seven action areas in order to achieve reasonable and sustainable solutions to counter these BEPS practices.

This first set of deliverables consists of three reports on Digital Economy (Action 1), Harmful Tax Practices (Action 5) and Feasibility of a Multilateral Instrument (Action 15) as well as four draft rules on Hybrid mismatch arrangements (Action 2), Treaty abuse (Action 6), Transfer Pricing of intangibles (Action 8) and Transfer Pricing documentation and a country-by-country reporting template (Action 13).

Briefly, these reports are summarized as follows:

Action 1: Addressing the challenges of the digital economy

The main challenge of the digital economy is how digital players such as online sellers or retailers, internet advertisers, and app stores make their profits, how these profits are characterized for tax purposes, and where taxes on these profits should be paid. The report presented potential options to address these challenges such as modifications of the PE threshold, the concept of significant digital presence, the creation of withholding tax on some types of digital transactions, and the imposition of a bandwidth or “bit” tax and VAT or consumption tax.

Action 2: Hybrid mismatch arrangements

This report provides recommended rules and model treaty provisions intended to neutralize the effect of hybrid mismatches like the denial of dividend exemption for deductible payments, introduction of measures to prevent the use of hybrid transfers to duplicate credits for taxes withheld at source, and denial of deduction for payment that is also deductible in another jurisdiction.

Action 5: Harmful tax practices

The OECD’s efforts to counter harmful tax practices of companies are nothing new. As early as 1988, the OECD had already begun looking at these practices. Now, however, the report focuses on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime especially in the context of intangible regimes.

Action 6: Treaty abuse

The OECD identified treaty abuse as one of the major sources of BEPS and as such, has focused on specific action items to counter treaty abuse and treaty shopping.

Article 8: Transfer Pricing of intangibles

One of the biggest challenges in Transfer Pricing is how to prevent BEPS when it involves intangibles. As such, the report on TP attempts to clarify the definition of intangibles, provide guidance on identifying transactions involving intangibles, and provide supplemental guidance for determining arm’s length conditions for transactions involving intangibles.

Action 13: Transfer Pricing documentation and a country-by-country reporting template

Part of the difficulty in countering BEPS is the lack of adequate information on how they operate within businesses. Action 13 aims to increase transparency for tax administrations by providing standards for TP documentation and as well as a template for country-by-country reporting. The guidance on TP documentation requires companies to disclose high-level information regarding their global business operations which will be available to all relevant country tax administrations, and provide documentation on relevant related party transactions. The country-by-country reporting will require companies to disclose substantial information on their businesses such as where they do business, amount of revenue, profit before income tax, income tax payments, total employment, capital, retained earnings, and tangible assets in each tax jurisdiction.

Action 15: Feasibility of a Multilateral Instrument

One of the mechanisms identified by the OECD in implementing the BEPS initiative on treaty-related matters is the use of multilateral instruments, which are seen to be more effective and sustainable since they can bind all parties, thereby ensuring a consistent and coherent approach to addressing treaty-related BEPS issues.

Looking back to more than a year ago, the BEPS initiative was met with both anticipation and criticism. While the initiative to level the playing field was prompted by good intentions, companies raised legitimate concerns on how this will impact their businesses. Key concerns include the risk of improper use of the country-by-country reports, the administrative costs of increased compliance and disclosure requirements, interpretation issues on treaty benefits which could lead to double taxation, and breach of confidentiality provisions which may expose sensitive corporate information to competitors, among others. The same issues stand today even after the OECD’s release of the first set of reports. Clearly, the OECD still has a lot of ground to cover in the next year. However, given all the potential issues surrounding BEPS and the BEPS measures, it is imperative for companies to actively participate in discussions on BEPS. Not only will this allow them to understand the impact on their own businesses, it will help them come up with new tax-planning strategies and business models that are compliant with the OECD BEPS guidelines.

Fidela I. Reyes is a Partner and International Tax Services Leader and Ma. Margarita Mallari-Acaban is a Tax Senior Director of SGV & Co.

source:  Businessworld