Overlapping of interest on deficiency taxes

THE imposition of interest always follows the imposition of deficiency taxes. This is based on the premise that unpaid taxes are liabilities of the taxpayer to the government, for which the former should pay interest for the use of the fund that should rightfully belong to the latter.

And as it had always been, taxpayers were required to pay only one 20-percent interest on deficiency taxes of whatever kind. Things had changed beginning in 2012, when the two types of taxes mentioned in Section 249 of the Tax Code were distinguished and imposed separately.

In CTA EB Case 821, July 18, 2012, the Court held that based on Section 249 of the Tax Code, there are two types of interests that are to be imposed—the deficiency interest and the delinquency interest, and that these are imposed at the same time. In that case, the taxpayer effectively acknowledged the imposition of these two types of interest, but argued that these cannot cover the same period or overlap each other. According to the taxpayer, the deficiency interest shall be computed from date prescribed for the payment of the tax until the last day indicated for payment in the assessment notice. Thereafter, if the deficiency tax is not yet paid, the deficiency interest shall not be imposed. But the delinquency interest shall start to run. In such case, there should be no overlapping of both types of interest. 

The Court, however, disagreed with the perspective of the taxpayer and held that the deficiency interest should be computed from the date prescribed for the payment of the deficiency tax until full payment thereof. On the other hand, delinquency interest is to be computed from the due date prescribed in the assessment notice until the full payment thereof. In other words, the deficiency interest and the delinquency interest run simultaneously from the date required for the payment of the deficiency tax in the assessment notice until the deficiency tax is paid. All in all, the imposable interests are as follows: (1) 20-percent deficiency interest computed from the date the tax should have been paid based on existing rules until the date required for payment as provided in the assessment notice, and (2) the 20-percent deficiency interest and 20-percent delinquency both computed from the date prescribed for payment in the assessment notice until the payment the deficiency tax.

It should be noted that the presiding justice at that time dissented and held that the imposition of at least a 40-percent interest per annum is grossly excessive and unjust, one that partakes the nature of an imposition that is penal, rather than compensatory. He believed that the proper computation should be that the 20-percent deficiency interest runs from the date prescribed for the payment of the unpaid deficiency tax until only the date prescribed by the assessment notice. After which, only the delinquency interest (on the deficiency tax, deficiency interest and surcharge) shall be imposed which will run until the full payment of total amount due.

From that time, the decision had been applied in a number of cases subsequently decided by the Court. Recently, however, in CTA EB Case 1117, September 21, 2015, the same Court ruled that the imposition of interest extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof, and the imposition of the delinquency interest should be computed from the time when the taxpayer failed to pay the assessed tax within the time allowed, as stated in the formal letter of demand (assessment notice) until full payment. In other words, the deficiency interest is computed only up to the date prescribed for payment in the assessment notice. If not yet paid, the delinquency interest starts to run, which shall then be imposed on the total of the basic deficiency tax,
deficiency interest and surcharge. There is no overlapping of deficiency interest and delinquency interest.

Another interesting point to note in this recent decision is that, aside from ruling on how the deficiency and delinquency interests should be computed, the Court also noted that based on the provisions of the Tax Code, there are only three instances, where the term “deficiency” had been defined, and these relate only to three types of internal revenue taxes, namely, income tax, estate tax and donor’s tax. Thus, the deficiency interest should apply only to deficiency income tax, deficiency estate tax and deficiency donor’s tax. No deficiency interest should be imposed on other deficiency taxes.

While this decision is not yet final, it is interesting to monitor how this will finally be settled. As it is, this is a welcome development. Indeed, there are enough reasons for taxpayers to celebrate during these Christmas holidays. Merry Christmas everyone.

The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) Alliance.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported, therefore, by a professional study or advice.  If you have any comment or question concerning the article, you may e-mail the author at ronald.cubero@bdblaw.com.ph or call 403-2001 local 350.

source:  Business Mirror

Tax credit claimants told to present better proofs of entitlement

THE DEPARTMENT of Finance (DoF) has called out textile companies that refuse to submit import documents as proof of their tax credit claims with the agency.

In its latest Tax Watch ad, the agency called on 26 firms collectively claiming P1.96 billion in tax credits from the DoF’s One Stop Shop (OSS) Center, with tax credit applications not backed by actual import papers.

“Why complain about submitting basic documents if these can prevent another Tax Credit Scam?”, the agency said.

Cited as examples are the firms Indo Phil Textile Mills, Inc., which is claiming P170.3 million but was issued P80.8 million; Indo Phil Cotton Mills, Inc. applying for P148.6 million but getting only P69 million; and Indo Phil Acrylic Manufacturing Corp., which sought P84.9 million but only secured P9.8 million from the OSS Center.

Some 23 other firms applying for a total of P1.59 billion tax credits, however, have not been issued the certifications due to their failure to submit complete documents to support their tax claims.

“A basic principle in giving tax credit or refund is this: You cannot claim a refund for something you had not paid duties and taxes on,” the DoF said. “From three companies alone from the list above, government can lose P388 million if the OSS approves refunds not supported by proper documents.”

“To prevent another Tax Credit Scam, the OSS required basic import documents to show that duties and taxes were actually paid for which tax credits are being claimed,” the agency added, referring to the 1992-1998 scheme which led to multiple firms making a moneymaking scheme out of duty claims from the DoF.

Based on records, the DoF’s OSS Center issued at least 500 tax credit certificates to a group of fake garment and textile firms amounting to P2.5 billion. The tax credits, however, were either sold or transferred to other firms, which made it a “lucrative” scheme.

Hundreds of cases have since been filed in connection with the tax credit scam and are pending before all five divisions of the Sandiganbayan, each involving hundreds of millions of pesos.

Among the documents now being required from claimants include purchase invoices, delivery receipts, official receipts of suppliers, proof of payment of import duties and taxes, proof of importation by suppliers, import entry and internal revenue declarations, commercial invoices, bills of lading, and statements of settlement of duties and taxes. -- Melissa Luz T. Lopez

source:  Businessworld

Gross income taxation to help simplify doing business in PH

Giving taxpayers the option to be taxed on their gross income in lieu of net income tax would streamline the country’s revenue collection system and would simplify doing business in the country, Gregorio Navarro, chief-executive-officer of Navarro Amper & Co. (Deloitte Philippines) told The Manila Times on Tuesday.

Navarro said that when income tax is based on gross income, it is an easy built-in business model not only for new enterprises but also even for existing ones.

“It is easier to comply with this kind of income tax [system] vis-à-vis net income tax [NIT] so long as you issue invoice with respect to goods or receipt for the sale of services,” he added.

Navarro foresees that the streamlining of the country’s taxation system would be a high priority of the next administration.

Navarro Amper & Company is the local practice of the Deloitte Touche Tohmatsu Ltd. Global Network, one of the country’s leading professional services firms providing audit, tax, risk, financial advisory and finance and accounting outsourcing services.

At present, the National Internal Revenue Code of 1997, as amended, provides that income tax in general are based on net income of taxpayers whether corporations or individuals.
NIT admits of certain deductions either itemized or optional standard deduction (OSD).

Itemized deductions, among others, allow ordinary, necessary trade, business or professional expenses as deductions, while the OSD slashes 40 percent of the gross income without any qualification to arrive at the net income tax at a rate of 30 percent.

Domestic and resident foreign corporations, however, may be compelled to pay income tax on the basis of their gross income if their NIT is lower than their gross income. In which case, a corporation is compelled to pay the “minimum corporate income tax” or 2 percent of their gross income in lieu of NIT.

“But that option lies with the tax authority, not with the taxpayers,” Navarro, a former president of the Management Association of Philippines, said.

Individual taxpayers, on the other hand, are taxed at a rate of 5 to 32 percent of their net income tax, while minimum wage earners are tax-exempt.

Further, the audit and tax firm chief explained that while under the NIT where taxpayers are entitled to claim certain deductions to arrive at their taxable income, there is always an element of uncertainty.

“Yes, there are certain deductions on the gross income to arrive at the taxable income. But these items of deductions are very erratic. It is always subject to scrutiny by the Bureau of Internal Revenue [BIR] and there is no assurance that what is deductible for this taxable year would still be deductible in the subsequent years. Businesses do not like uncertainty,” he said.

Navarro added that gross income taxation would also deter corruption on the part of tax collectors and at the same time simplify their work since there would be substantial reduction on “human interaction” between the taxpayers and the BIR examiners. Hence, it would prevent negotiations between the two parties that may lead to illegal settlement of income tax payments.

“Since the taxpayers would have an option to elect gross income as basis of their income tax, [the] BIR examiners would no longer have an opportunity to question the validity of the deductions because there would already be none. The BIR would check on gross [income], not on the deductions. Gross income being backed by receipts or invoices would [also] make the examiners’ job easier,” he said.

The option, according to Navarro, should be given to both taxpayers whether a corporation or an individual.

“When you are paying for NIT, there are many requirements that are imposed on the taxpayer by the BIR, like submitting the books and necessary documents, and thereafter keep them for the next 10 years to support the claimed deductions from tax payments.
There are many administrative works both on the part of the taxpayer and the BIR. “

“But giving the taxpayer the option to elect the tax treatment for their respective incomes would make our tax system efficient and would eradicate the bad practice of [taxpayers] hiding one’s income just to avoid these administrative works besides paying the higher taxes.”

source:  Manila Times

Tax breaks for first-time homebuyers in the works

The House Committee on Housing and Urban Development and the House Committee on Ways and Means on Tuesday has endorsed for plenary approval a measure making first-time home ownership easier and more affordable.

Rep. Alfredo Benitez of Negros Occidental, chairman of the House Committee on Housing and Urban Development, said the committee report on House Bill (HB) 414 will be submitted to the House plenary for deliberation after the measure’s approval at the House Committee on Ways and Means.

Benitez said the measure seeks to alleviate the condition and welfare of Filipino families, especially on the basic need for shelter.

HB 414 is authored by Ako Bicol Reps. Rodel Batocabe and Christopher Co.

The measure extends to first-time homebuyers exempt status from the payment of transfer tax due the purchase.

Also, any natural or juridical person registered as owner of a land subject of a subdivision or a condominium project; or who is a dealer directly engaged as a principal in the business of buying and selling real estate; or who is real-estate developer engaged in the business of developing and selling real-estate projects for his/her or its own account; and any natural or juridical person engaged as a contractor doing housing design and construction or engaged in the business of selling housing construction materials that grants a minimum discount of 5 percent to first-time homebuyers may claim the financial loss on the discount granted as a tax deduction.

Provided that the cost of the discount shall be allowed as deduction from the gross income for the same taxable year that the discount is granted, and that the total amount of the claimed tax deduction net of value added tax, if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended.

To ensure buyer awareness on the benefits of this act, any owner, dealer or real-estate developer, and any contractor doing housing and construction or anyone engaged in the business of selling housing construction materials shall provide a first-time homebuyer a disclosure statement of the discount that may be granted, as well as the transfer tax exemption and tax credit such buyer is entitled to under this act in the reservation contract, application to purchase, deed of absolute sale or contract to sell and other similar documents employed in the negotiation of the purchase or in the contract of work for the design or construction of the house or in the purchase order of the housing construction materials.

The first-time homebuyer shall also be provided the schedule of payment of installments or amortization until full payment of the purchase price.

The bill also said that the Housing and Urban Development Coordinating Council (HUDCC), with the assistance of the Land Registration Authority (LRA), Home Development Mutual Fund and the Bangko Sentral ng Pilipinas, shall establish within 90 days from the issuance of the implementing rules and regulation of this act a database of the names of all individuals who have availed of housing loan and of registered owners of residential properties.

The Bureau of Internal Revenue, in extending tax credit to a first-time homebuyer upon the effectivity of this act, shall share all relevant information and data on a periodic basis and make such data available to the HUDCC.

Any person who makes a material misdeclaration of statement, misrepresentation in any certification, or fraudulent act in connection with the claim for a tax reduction under the act or falsifies any document submitted to obtain a tax reduction shall be punished with a fine of not less P5,000 but not more than P50,000, or imprisonment of not less than six months or both, without prejudice to the prosecution of said offender under the Revised Penal Code.

source:  Business Mirror

Jilted businessmen seek VAT refund via legislation

With judicial remedies clearly unavailable for businesses seeking refunds on their input value-added tax (VAT) payments, corporate taxpayers propose new legislation in Congress to get back what the government has denied them.

PricewaterhouseCoopers Chairman and Senior Partner Alexander Cabrera, who conducted this year’s Asia-Pacific Economic Cooperation (Apec) CEO survey, said the lack of judicial remedy to enforce a VAT refund from the government has prompted corporations to lobby for a covering legislation in Congress.

Earlier, the Department of Trade and Industry (DTI) issued a statement alluding to a “VAT refund facilitation bill” now pending in Congress, apparently in response to a reported discussion between Japanese Prime Minister Shinzo Abe, who visited the country this week at the Apec Leaders’ Meeting, and President Aquino.

Japanese firms were hit hard by Internal Revenue Commissioner Kim Jacinto-Henares’s Revenue Memorandum Circular 54-2014, which “deemed denied” all applications for VAT refund as of June 11, 2014.

The denial of the applications for VAT refund meant that taxpayers seeking them within 30 days from the date of the effectivity of the circular.

Henares issued the circular because she was particularly sore at taxpayers fraudulently seeking VAT refunds on their input VAT payments made in the conduct of their businesses.

Cabrera said the proposed legislation imposing the VAT refund seemed the only way for taxpayers whose applications have been denied, because even the Court of Tax Appeals (CTA) had denied them the judicial relief on the ground of lack of jurisdiction.

It used to be that taxpayers seeking VAT refund wait for actual denial of their petition, 30 days from which they file a petition before the court to get them. But with the denial of all pending applications at the administrative level, the taxpayers are now forced to go to the CTA because it takes forever for the Bureau of Internal Revenue to actually deny their applications for VAT refund.

Cabrera said the business entities have noted the CTA has, likewise, dismissed their petitions for a refund on the ground of lack of jurisdiction mainly because those were filed beyond the period that the taxpayer should have filed for judicial relief.

source:  Business Mirror

Should our sources of income and assets be disclosed?

In this digital age where disclosure has taken over discretion, and collection and sharing of data is so much more convenient, should we contemporaneously limit the definition of privacy? Should an individual’s right to privacy be overridden by the state’s interest in collecting taxes? Should our assets and income no longer remain secret from our taxing authorities?

The certainty of taxes is too daunting. Almost every inflow of asset, whether as hard-earned income or gratuitously received, is subject to at least one type of tax. Hence, it has been the interest of all governments to compel taxpayers to disclose their sources of assets. And it has been the interest of taxpayers to keep secret their assets. Between two interests, the Philippines has favored secrecy over tax collection.

In the deliberations of Bank Secrecy Law, enacted in 1955, the Congress recognized that “[m]any people do not deposit their money in banks or invest in bonds for fear that the tax collection agencies of our Government might make inquiries or investigations about their bonds and deposits for purposes of taxation... While it is true that many tax evaders will evade liability for tax evasion if this bill is approved, it is believed that the benefits that will accrue to our economy in enacting this bill to law will counter-balance immeasurable the losses of the Government from such tax evasion.”

The Bank Secrecy Law prohibits involuntary disclosure of bank deposits, i.e., these deposits “may not be examined, inquired or looked into” by the government. Hence, disclosure made by the depositor, of course, is not prohibited. Can the taxpayers, nonetheless, becompelled to make disclosures?

The Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) seem to be uncertain. The BIR has suspended, on a yearly basis, the implementation of the compulsory disclosure of certain income and asset information.

In 2011, the DoF, upon recommendation of the BIR, promulgated Revenue Regulations (RR) No. 2-2011, which required, for the first time, the disclosure of (a) income already subject to final withholding tax (FWT), and (b) those excluded from gross income, referred to as “Supplemental Information.”

Interest from bank deposits is income subject to FWT. Such FWT is reported and paid by the payor-banks. Assets received gratuitously,via donation or succession, are excluded from gross income. The donor’s or estate tax on these gratuitous transfers is reported and paid by the grantor. Hence, these inflows of assets are supposed to have been previously reported. Nonetheless, under RR 2-2014, these items have to be disclosed by the recipient in his own income tax return, under the pain of perjury. Further, income exempt under a tax treaty, even if excluded from gross income, is likewise a required disclosure under RR 2-2014.

The required disclosures under RR 2-2014 seem to be in line with the Republic of the Philippines-United States Tax Treaty (RP-US Tax Treaty), and the Agreement between the Government of the United States of America and the Government of the Republic of the Philippines to Improve International Tax Compliance and to Implement Foreign Account Tax Compliance Act.

Under the RP-US Tax Treaty, the Philippines and the US shall exchange information as is necessary, provided that the information is of a class that can be obtained under the laws and administrative practices of each government with respect to its own taxes. With the requirement of disclosing all sources of assets under RR2-2014, the US government will have access to information on US taxable events.

Under the RP-US Tax Treaty, as well, information on bank accounts may be exchanged, on a per request basis, with reference to particular tax cases. This type of exchange of information is implemented via Republic Act No. 10021. Under said law, the BIR may inquire into bank deposit accounts, notwithstanding the Bank Secrecy and other related laws, if the information is required by the US government pursuant to a specific tax case.

The Agreement (which was signed in 2015 by the Secretary of Finance, on behalf of the Philippines), on the other hand, compels qualified Philippine financial institutions to disclose information to the Philippine government on financial accounts maintained by US residents in the Philippines. Qualified US financial institutions are likewise required to report financial accounts maintained by Philippine residents to the US government. The Philippine and US governments are then required to exchange information.

The Agreement cites as basis Article 26 of the RP-US Tax Treaty on Exchange of Information, and yet it goes above and beyond what are provided therein. As discussed, the information for disclosure under the RP-US Tax Treaty are limited to (a) those that are collected as a matter of routine, and (b) those that are collected by specific request. The RP-US Tax Treaty does not require blanket compulsion to financial institutions to make disclosures on accounts maintained with them by covered individuals.

It seems then that the legal status of the Agreement is doubtful. It is not a mere executive agreement because it does not merely carry-out the RP-US Tax Treaty. Moreover, it is an indirect derogation of the Philippines’ policy on bank secrecy.

As such, it is, in substance, a treaty and should comply with the applicable formal requirements, i.e., concurrence by the Senate. The Agreement, then, cannot be considered as valid and binding by mere expediency of a signature by the Secretary of Finance.

What then now?

The definition of privacy, the state’s interest in collection of taxes, and the secrecy of financial accounts are political questions to be answered by the legislative department, either through domestic laws or by concurrence in treaties. These matters cannot be decided by the executive branch, through administrative issuances and/or executive agreements.

Should we comply with the disclosure requirements under RR 2-2014 and the Agreement? There are good legal reasons not to.

This requirement of additional disclosure in RR 2-2011, and its successor RR 2-2014, however, has been suspended every year by the BIR. For the income tax filing for taxable year 2014, the implementation of the required disclosure has also been deferred.

(The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).

Karen Andrea D. Torres is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

830-8000

kdtorres@accralaw.com.

source:  Businessworld

Countdown to a PE

Before entering Philippine borders, foreign companies always evaluate the complexities of doing business here. Foreign companies send hundreds of their employees each year to the Philippines due to the country’s fast growing economy.  Over the years, we have witnessed the Bureau of Internal Revenue (BIR) become more and more aggressive when it comes to collecting taxes through stricter interpretations of the law. This should be a clear warning for taxpayers including nonresident foreign corporations, to carefully study the tax implications of their investment plans in the Philippines.

A recent ruling issued by the BIR held that a foreign corporation has a permanent establishment (PE) in the Philippines for rendering services through employees which is more than an aggregate of six months within any 12 month period. The BIR ruled the said foreign corporation should be treated as a resident and their service fees are subject to Philippine income tax.

When is a foreign company deemed to have a PE in the Philippines?

A PE is a bilateral tax treaty concept. The existence of a PE is a basic precondition before any taxation on business profits may occur under a tax treaty. Between two countries with a tax treaty in force, a PE essentially determines the right of one country to tax the profits of an enterprise of the other country. The PE framework of the Organization of Economic Cooperation and Development Model Tax Convention (OECD Model) is used by the Philippines when negotiating tax treaties. Article 7 of the OECD Model says a country may not tax business profits of an enterprise unless that enterprise has a PE in that country. Article 5, on the other hand, lists the several types of PE to include: a place of management; a branch; an office; a factory; a workshop; a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; a building site or construction, or installation project constitutes a permanent establishment only if it lasts more than 12 months and an agent habitually exercising the authority to conclude contracts.

In a number of treaties entered into by the Philippines, a PE could also include the furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other contracting state for a period or periods aggregating more than 183 days or six months within any 12 month period in some tax treaties.

Based on this definition, a PE can be broadly classified into two: (1) PE through a fixed place of business, either through management of assets of the non-resident entity located in a one country and (2) PE by agency, through the acts in one country of individual employees or agents of the non-resident entity of the other country.  The latter, which is commonly in the form of employee presence, can be more complex for tax authorities to track and determine.   

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How does the BIR count the days in determining PE?

Recently, the BIR harmonized the counting of days for establishing PE with the OECD Model’s method of counting the minimum days stay in a country to tax-exempt income from independent and dependent personal services.

 According to the commentaries of the OECD Model, the “days of physical presence” method is used to determine if the individual’s physical presence in the Philippines has exceeded the threshold provided in the tax treaty and conclude whether his employment income can be exempt from tax. Further, it states that under this method, the counting of days is straightforward as the individual is either present in a country or he is not. 

Physical presence includes day of arrival, day of departure, and all other days spent inside the state of activity such as saturday and sundays, national holidays before, during and after the activity, short breaks (training, strikes, lock-out, delay in supplies), days of sickness, and death or sickness in the family.  A day during any part of which, however brief, the taxpayer is present in a country counts as a day of presence in that country. 

However, days spent in the country of activity in transit in the course of a trip between two points outside the country of activity should be excluded from the computation. It follows from these principles that any entire day spent outside the country of activity, whether for holidays, business trips, or any other reasons, should not be taken into account.

The BIR applied the days of physical presence method in counting the aggregate number of days stay of the Japanese corporation’s employees in concluding the corporation has a deemed PE. Also, the BIR only made one count for the days when there are two or more personnel present in the country.

Will the same approach be used to count days in determining individual residency status?

Under the tax code, a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year (i.e. he stays there for at least 183 days) is considered a non-resident citizen. On the other hand, a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed as a non-resident alien doing business in the Philippines.

The BIR currently has no clear guidance on how to count the physical presence of an individual in determining residency status based on the above rules. However, since the BIR adopted the method provided in the OECD Model to determine PE, it is plausible they will also make use of the same method in counting days for determining residency status.  This is particularly important for individuals as we are taxed depending on residency status. Residency determines what income will be subject to tax and what tax rates will be used.  In general, a resident citizen is taxable on worldwide-sourced income at the graduated rates of 5-32 percent, while a non-resident citizen is taxable only on income within the Philippines at the same tax rates applied to a resident citizen. On the other hand, resident aliens and non-resident aliens engaged in trade or business are generally taxed in the same manner as a nonresident citizen. A non-resident alien not engaged in trade or business is taxable on income within the Philippines at a flat rate of 25% based on gross income.  Considering these different tax treatments, a difference of one day in physical presence can affect how an individual gets taxed.

The BIR’s continuous efforts to provide clear guidance on tax law application will make it easier for companies to assess their would-be tax circumstances in doing business in the Philippines and develop informed business decisions. 

Jan Kent Q. Viray is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.

KPMG R.G. Manabat & Co. will host a one-day seminar on Jan. 28, 2016 in Makati City. Be updated with the most recent tax and corporate laws, cases, regulations and issuances of various government agencies. Details and invites will be sent subsequently. The seminar will include CPE credits.

Interested parties can call (02) 885-7000 local 768 or 429.

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.

TOP OF MIND By Jan Kent Q. Viray (The Philippine Star)

Tax reform in the CPA board exam syllabus

The big news in tax circles these days is an initiative by various groups seeking the immediate adjustment of the 19-year-old set of tax brackets and the reduction of income tax rates for individuals and businesses.

But another reform has taken place without much fanfare: the change in syllabus for the Certified Public Accountant (CPA) board examination.

Under the old syllabus, Business Law and Taxation (BLT) were taken as one subject of the seven areas covered by the exams. But starting next year BLT will be split into two independent subjects: Taxation, and Regulatory Framework for Business Transactions, each with a weight equal to the six other subjects. The revised syllabus will be implemented in the May 2016 CPA board examination.

What makes the reform compelling is the inclusion of additional topics, namely: Taxation in the Local Government Code, Fiscal incentives vested the Philippine Economic Zone Authority and Board of Investment enterprises, availment of Tax Treaty Relief, the Senior Citizen Law, and the Magna Carta for Disabled Persons. These changes will make future accountants more conversant and knowledgeable about the tax rules.

I have been in tax practice for almost a decade and with the academe handling taxation subjects for six years. I would say that there is a huge gap between subjects taught in school and actual work in tax practice. The inclusions of new topics could offer an opportunity to expose aspiring CPAs to issues relevant to actual practice.

Taxation is a very dynamic discipline, because of constant changes to the rules and regulations. Each year, the Bureau of Internal Revenue (BIR) averages about 130 revenue issuances. The table below provides a summary for the last five years:

Click to enlarge

While the reforms are welcome, it is also important that the review of the syllabus be done at regular intervals to adapt to the changes in the business world.

The challenge that comes with the reform in the tax syllabus to be implemented by the Board of Accountancy is how the Academe (which should include the review schools) will adapt to the significant developments and still continue to provide quality instruction material in less than two years.

Furthermore, I noted that Taxation is one of the least favored subjects among the accounting students. For this reason, the instructional design must also help increase the interest of these students in the subject matter.

Since taxation is a combination of the legal and accounting disciplines, the subject is considered tough. Thus, the materials to be developed must remain authoritative while innovating to make learning easy.

So what will constitute good material for academic purposes?

First, all the related provisions of the Tax Code must be covered. These must be explained from a business perspective. The rationale of the related provisions must be covered in the discussion. The potential grey areas must be raised and put in their proper context to minimize erroneous interpretation.

Second, discussions should be illustrated with the most recent court decisions, Bureau of Local Government Finance rulings and BIR rulings. This way the discussions would be more practical and provide better insight into the tax process.

Last, discussions should examine not only the tax implications, but also the impact on the accounting side. It must show how to reconcile the differences both in the tax and accounting treatment of a particular transaction.

I look forward to the tax materials being developed for academic purposes. They must be practical and easily understandable. It is also my hope that the changes in the CPA course syllabus in Taxation will continue to strengthen the analytical skills of our future professionals. The reforms should also prepare them to face challenges in the actual practice of taxation.

Finally, I see reforms to the tax syllabus making young accountants more inclined to join the tax practice. The new breed of tax professionals should not only be able to provide potential tax-saving advice to the company, but also ensure that the company or taxpayer-client is compliant with the rules.

Richard R. Ibarra is a tax 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

Clear and concise laws

It was in February 2009 that shipments of gasoline products were held by the Bureau of Customs in Batangas. And their owner, Pilipinas Shell, was told to pay a whopping P21 billion in duties, taxes, and penalties. This amount was supposedly to cover unpaid taxes and duties on Shell’s importations of such products from 2006 to until that time in 2009.

Back then, global business Shell found itself accused locally of violating tax laws.

Customs and tax agencies, meantime, were hard pressed to prove their case, as well as to defeat insinuations of a “shakedown.” But they stuck to their guns, even getting a boost from the defunct Office of the Presidential Adviser on Revenue

Enhancement.

Six years have since passed and the case remains unresolved.

Most of the personalities involved in that case, including Batangas Customs Collector Juan Tan and Presidential Adviser on Revenue Enhancement Narciso “Jun” Santiago have all moved on. Customs Commissioner Napoleon “Boy” Morales has retired, as well as other tax and Finance officials of that administration.

About a month ago, the Court of Tax Appeals, voting 8-1, came out with its latest ruling on the case.

In that decision, it ruled that “Pilipinas Shell Petroleum Corporation is liable for the unpaid excise taxes and VAT (value-added tax) for its subject Catalytic Cracked Gasoline (CCG) and Light Catalytic Cracked Gasoline (LCCG) importations for the relevant periods in 2006 to 2009.”

Despite this, however, the case is far from over. Appeals and new motions or petitions are expected, and it will probably take another five or six years -- and a new administration -- before this issue is finally resolved. And this brings one to this point: what is keeping the country from drafting and strictly enforcing clear and consistent policies in relation to taxes?

In my opinion, Shell, in importing CCG and LCCG into the country whether as a finished component or a blending component, made a business decision relying significantly on the opinion of tax administrators. Of course, with that decision came the risk of being overturned in court, as in this case.

Shell had argued that CCG and LCCG imported into the country as blending component for unleaded gasoline should not be subject to excise tax. And in this line, it had managed to secure at different times separate opinions from three Bureau of Internal Revenue (BIR) deputy commissioners and an Energy undersecretary to back up its claim for exemption.

On the other hand, Customs officials had insisted that under the law, CCG and LCGG, whether imported as blending component for unleaded gasoline or as finished products, were subject to excise tax.

No ifs, no buts.

In short, the exemption “opinions” from BIR were erroneous interpretations of applicable laws.

In resolving the matter, in its latest ruling, the Court of Tax Appeals backed the Customs bureau’s assertion. The court noted that the tax code was clearly worded with respect to importations subject to excise tax.

“Since the phrase ‘things imported’ was worded without any qualification, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction.”

The Court had also ruled that if it had been truly the intent of Congress, through its tax laws, to exempt from excise tax fuel products such as CCG and LCCG for being mere raw materials for unleaded gasoline, then “it would have done so by expressing it using clear, concise, and appropriate language.”

On the matter of being taxed twice, on the raw materials and again on the finished product, the court also ruled that “unfortunately for [Shell, the law] neither provides a specific rule nor an exempting proviso on imported CCG and LCCG when used or consumed as raw materials. If at all, imported CCG and LCCG once reprocessed, re-refined, or recycled are subject again to excise tax.”

“Tax exemptions must be clear unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer,” the court added.

As to the memoranda issued by three BIR deputy commissioners supposedly exempting Pilipinas Shell from paying taxes on its imported CCG and LCCG, the court said these could not be considered “BIR rulings” but merely “internal communications” or “office memoranda or communications stating the respective position and opinion of the concerned BIR officials...on the tax treatment of [Shell’s] CCG and LCCG importations.”

Despite the latest Court of Tax Appeals decision, one cannot consider this case resolved.

For sure, considering the amounts and issues involved, an aggrieved party like Pilipinas Shell is most likely to exhaust all judicial remedies available to it. The thing is, the Shell case is not the first -- nor will it be the last -- controversial issue involving big business and tax interpretations.

Perhaps the challenge to the incoming administration in 2016, and to the new Congress that will open, is to strike for more consistency in law and policy. Consistency in policies, coupled with strict application in laws, can go a long way in promoting greater business confidence. And it can help companies like Pilipinas Shell operate in a more transparent and accountable business environment.

Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council

matort@yahoo.com

source:  Businessworld

Taxing taxis in the Internet age

The effects of the unfortunate traffic situation on the lives of Filipinos, particularly those living in Metro Manila, is undeniable. Day in and day out, we suffer through what is known as “rush hour” (which now lasts for hours) on our way to work and on our way back home. With the holiday season looming, the traffic jams will inevitably extend even beyond the “normal” rush hours. To this end, many of us turn to modern Internet-based transportation solutions using mobile apps, including Uber and GrabTaxi, both of which allow their users to easily find a ride amidst the chaotic traffic that has become the norm nowadays.

Cognizant of the popularity of these online transportation apps, the Bureau of Internal Revenue (BIR) released Revenue Memorandum Circular No. (RMC) 70-2015 dated Oct. 29, 2015 to deal with the “tax incidence of the business of land transportation, particularly transport network companies (TNCs), such as but not limited to the likes of Uber, GrabTaxi, their Partners/suppliers and similar arrangements”.

The RMC characterizes the persons involved in these transportation arrangements as follows:

• TNCs, who facilitate accessibility of land transportation vehicles to the riding public (e.g., Uber, GrabTaxi);

• Partners, who operate the vehicles used in transporting passengers; and

• passengers or customers.

For tax purposes, the RMC differentiates TNCs and/or Partners who are holders of Certificates of Public Convenience (CPC) from those who are not. If a TNC or Partner holds a CPC, they shall be classified as a “common carrier” and therefore subject to the 3% common carriers tax (CCT) under Section 117 of the Tax Code. Otherwise, they shall be classified as “land transportation service contractors” and therefore subject to the 12% value-added tax (VAT) or to the 3% percentage tax (the latter applies to Partners with gross receipts not exceeding P1,919,500 who opt not to be VAT-registered).

Like any other business, TNCs and Partners are mandated to register with the Revenue District Office having jurisdiction over their principal place of business, pay the corresponding registration fee, secure the required Authority to Print (ATP) official receipts, and register and maintain books of account.

The BIR also emphasized the TNC’s/Partner’s responsibility to issue registered official receipts (ORs) to the passenger, either manually or electronically. The type of OR to be issued depends on the recipient. A VAT OR must be issued if the payment is received by a VAT-registered TNC/Partner. On the other hand, a non-VAT OR must be issued by a TNC/Partner classified as a common carrier or by a Partner that does not opt to be VAT-registered.

In addition to the transaction of the TNC/Partner with the passenger, the RMC also covers the transaction between the TNC and the Partner. The same rules on issuing ORs as discussed above will apply.

Lastly, the BIR reminds TNCs and Partners to properly withhold taxes as required under existing tax regulations and to file the appropriate tax returns and required attachments (e.g., Summary List of Sales/Purchases for VAT-registered taxpayers; Alpha List of Payees for withholding taxes).

With the surge in use of transportation apps, the issuance of this RMC was a matter of when, not if. While the RMC aims to clarify the taxation of land transportation arrangements, it also raises some concerns that may call for a deeper examination of such arrangements. For instance, the RMC recognizes situations wherein a TNC may be a holder of a CPC. Normally, per Memorandum Circulars issued by the LTFRB earlier this year, TNCs are granted Certificates of TNC Accreditation, not CPCs (a separate LTFRB circular imposes the CPC requirement on the drivers/operators accredited by TNCs). On this note, the RMC explicitly states that an Accreditation issued by the LTFRB is not equivalent to a CPC. Harmonizing these circulars, perhaps the BIR is contemplating instances wherein TNCs are not acting as mere conduits between passengers and drivers/operators, but where they also own and operate vehicles that provide transportation services to passengers.

Another interesting point to note is that in one BIR ruling issued in 2004, the tax authority appears to have had a different view when it held that a taxpayer in the hotel industry can be considered a common carrier subject to the 3% tax with respect to one of its lines of businesses: renting out its vehicles to the public (not only to hotel guests). Although merely incidental to the hotel’s business, the ruling states that the 3% CCT still applies to this particular line of business of the hotel, even if it had not been issued a CPC.

Understandably, Internet-based land transportation services -- arguably the taxis in the Internet age -- are a novel concept. In fact, the LTFRB only came up with the regulations and guidelines covering this new type of service less than six months ago. The BIR’s effort to clarify the taxation of parties under this new business model is noteworthy, but there is an apparent need to gain a better and more thorough understanding of these services. More evident than ever, the drive to provide taxpayers with guidance should be a bigger objective than the goal of merely collecting additional revenues, lest the tax authority discourage an industry positively contributing to transportation, a sector where our government has long been quite lacking.

Marion D. Castañeda is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

marion.d.castaneda@ph.pwc.com

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

source:  Businessworld

RDC supports tax free bill for start-up business

TUGUEGARAO CITY, Cagayan, November 2 (PIA) - - Regional Development Council (RDC) region 2 has recently approved a resolution supporting Senate Bill no. 2217, exempting start-up enterprises from taxes arising from the first two years of operation.

NEDA regional director and council acting chair MaryAnn Darauay said development and growth of enterprises are constrained by high cost of doing business and the inadequate support for start-up enterprises especially in establishing their start-up funds and sustaining their current operations.

“Start-up enterprises need adequate time to prepare and establish their business operations and market base to be able to compete in the local and foreign markets so we have to give time for them to establish well their businesses,” Darauay said.

The bill proposes for exemption of start-up business from all local and national taxes for the first two years of its operation, provided  they are duly registered business and do not have any previous or other exiting registered businesses.

Darauay said the proposed exemption is expected to foster inclusive growth by encouraging the creation of more enterprises in the country that would facilitate job creation, innovation, production and trade.

“This recognizes the role of enterprises development in accelerating economic growth and pursue endeavor bringing competitive industry sectors in the ASEAN integration,” Darauay added.

The council members are hopeful the bill will be favored by the majority of the law makers and to take effect immediately. (ALM/OTB/PIA-Cagayan)

- See more at: http://news.pia.gov.ph/article/view/461446100885/rdc-supports-tax-free-bill-for-start-up-business#sthash.rU3hElbi.dpuf

source:  PIA

TMAP, 21 groups back proposal adjusting income tax to inflation

The Tax Management Association of the Philippines (TMAP) and 21 foreign business groups, professional organizations, and trade and labor groups on Wednesday asked the leadership of the House of Representatives to pass the measure adjusting the levels of taxable income to inflation as compromise to the proposal lowering income- and corporate-tax rates strongly opposed by the Palace.

In a news conference at the House of Representatives, TMAP President Terence Conrad Bello said the proposal should be passed to increase the take-home pay of Filipino workers.

“While compromise proposal involving only the updating of the tax brackets is not what TMAP and its coalition partners had in mind, TMAP believes that the compromise proposal will immediately alleviate somehow the plight of salaried individuals who are ‘overtaxed’ under the current system,” Bello said.

He added that the TMAP and the 21 foreign business groups, professional organizations, and trade and labor groups have submitted a proposal adjusting the levels of taxable income to inflation to Speaker Feliciano Belmonte Jr.

Under their proposal, which is similar to the proposal raised by House Committee on Ways and Means Chairman and Liberal Party Rep. Romero Quimbo of Marikina City, the seven new tax brackets are:

Those earning not over P22,000 will pay a fixed tax rate of 5 percent;

Those earning over P22,000 but not over P66,000 would pay a fixed tax of P1,100 with an additional 10 percent of the excess over P22,000;

Those earning over P66,000 but not over P153,000 would pay a fixed tax of P5,500 with an additional 15 percent of the excess over P66,000;

Those earning over P153,000 but not over P307,000 would pay an excess tax of P18,550 with an additional 20 percent of the excess over P153,000;

Those earning over P307,000 but not over P547,000 would pay a fixed tax of P49,350 with an additional 25 percent of the excess over P307,000;

Those earning over P547,000 but not over P1.095 million would pay a fixed tax of P109,350 with an additional 30 percent of the excess over P547,000; and

Those earning over P1.095 million would pay a fixed tax of P273,750 with an additional 32 percent of the excess over that amount.

“We voiced our support for various income-tax reform measures then pending in Congress to restore fairness in the Philippine tax system and make our country competitive with our Asean neighbors,” Bello said.

Included to the foreign chambers who have expressed support to the proposal are the European Chamber of Commerce of the Philippines, Japanese Chamber of Commerce and Industry, Canadian Chamber of Commerce of the Philippines, Korean Chamber of Commerce of the Philippines and the Australia-New Zealand Chamber of Commerce of the Philippines.

Moreover, Bello also expressed hope that this proposal will be passed before the 16th Congress ends next year.

“Despite popular support from taxpayers and from the Senate and the House of Representatives Ways and Means Committee leadership, it seemed that the chances of passing the income-tax reform measure then pending were slim to none, without the support from the President,” he said.

In September Malacañang, taking the cue from the Department of Finance, already rejected the passage in Congress of a long-pending bill lowering individual and corporate income-tax rates, saying the government “cannot put our fiscal sustainability and credit rating at risk by doing piecemeal revenue-reducing legislation.”

Belmonte has said that he and Senate President Franklin Drilon are set to meet soon with President Aquino to convince him at least on the proposal adjusting the levels of taxable income to inflation.

Quimbo, for his part, admitted that only the proposal adjusting the levels of taxable income to inflation is viable considering the remaining session days of Congress and the position of the Palace against lowering income-tax rates.

The finance department, meanwhile, said adjusting the levels of taxable income to inflation may cause the government to lose revenues totaling as much as 1.5 percent of the country’s GDP, or P30 billion.

source:  Business Mirror

BIR to Uber, TNCs: Pay taxes, issue receipts

Transport network companies (TNCs) such as Uber and GrabTaxi must pay either common carriers or value-added tax, issue receipts and ensure that all tax returns are filed in the Bureau of Internal Revenue.Revenue Commissioner Kim S. Jacinto-Henares made this clear in Revenue Memorandum Circular No. 70-2015 issued by the country’s biggest tax-collection agency on Oct. 29, 2015 to lay down the rules on the tax treatment of TNCs.Under these rules, the BIR said TNCs holding current and valid franchise or certificates of public convenience (CPC) must have their gross receipts subjected to 3-percent common carriers tax, as mandated under Section 117 of the Tax Code or National Internal Revenue Code of 1997, as amended.

For those without CPCs, they will be classified as land transportation contractors, hence subject to 12-percent VAT, the BIR said, noting that “an accreditation [to TNCs] issued by the LTFRB (Land Transportation Franchising and Regulatory Board) is not in itself a CPC and will not make said operation that of a common carrier.”

“If the [TNC] partner is not a holder of a CPC, said partner is merely a land transportation service contractor and under the VAT system, the transportation service contractor, at its option if the gross annual sales and/or gross receipts do not exceed P1,919,500, may register either as a VAT taxpayer and be liable to the 12-percent VAT, or as non-VAT taxpayer, for it is mandated to pay the 3-percent percentage tax under Section 116 of the Tax Code. The partners of the TNC belong to this category,” the BIR pointed out.

The BIR defined “partners” as the vehicles used in transporting passengers and/or goods within the TNC, which may be owned by other people and/or other entities other than the TNC.

All TNCs and their partners must also register their businesses at their respective revenue district offices and secure a BIR Certificate of Registration, which should be displayed in the vehicles.

TNCs and their partners must also secure an authority to print (ATP) official receipts and register books of accounts for use in business, the BIR said. “The TNC shall register and obtain an ATP under the e-Invoicing System for the official receipts (ORs) issued to passengers. Its partners shall likewise follow insofar as the ORs they will issue to the TNC for the use or rental of the vehicle, if such is the case.”

The BIR reiterated that TNCs as well as partners must issue either manual or electronic ORs in at least in duplicate for every service, with the original receipt to be handed to the passenger.

source:  Philippine Daily Inquirer, Oct 31 2015

Taxing Uber: BIR mulls requiring drivers to issue receipts  

‘Uber’ rides are set to get a lot less convenient for the public as tax authorities plan to mandate the issuance of physical receipts—a rule ignored by most taxi operators.

Bureau of Internal Revenue (BIR) Deputy Commissioner Nelson Aspe said new guidelines would be issued to spell out the tax responsibilities of all parties in the Uber ecosystem.

Apart from the issuance of receipts, the BIR said it expects owners of cars used for Uber rides to file tax returns. Uber drivers who don’t own the cars they use would also be considered employees, and the appropriate taxes should be withheld from their salaries.

Uber rides would also be subjected to value-added tax (VAT), which would add an additional 12 percent to the cost to consumers.  The BIR would charge retroactively, Aspe said.

The official said it would ask credit card companies to submit data on Uber rides. This would ensure that tax liabilities of drivers, owners, and Uber itself are computed accurately. Uber passengers are charged online using their credit card information for rides.

Aspe said the same rules would apply to other ride-sharing services such as GrabTaxi, which offers a similar service called GrabCar. Unlike Uber, GrabTaxi’s business is entirely cash-based, which Aspe said is more difficult to track.

source:  Philippine Daily Inquirer, Oct 27 2015