VISITORS to the Philippines come for the beautiful islands, tropical weather, and exotic cuisine. It therefore comes as no surprise to find foreigners all over the Philippines. But they’re not all lounging by hotel pools -- many of them are prowling the central business districts wearing suits, supervising projects in the red-hot business process outsourcing sector, among other industries currently attracting investment. Only a few startling statistics are necessary to demonstrate that quite a number of them are here for business. One is the fact that the tiny British Virgin Islands -- a favored address for registering investment vehicles -- topped all sources of foreign investment in the 2013-2014 fiscal year. Another is that only 528, or 20%, of all companies registered with the Philippine Economic Zone Authority (PEZA) are wholly Filipino-owned, indicating that the remainder have at least some foreign ownership.
Foreign investors seeking direct participation in the management of their projects in the Philippines usually send a representative or live here themselves. For such investors, here is a useful checklist of responsibilities of expatriates working in the Philippines:
PRE-WORKING REQUIREMENTS
To be legally employed in the Philippines, expatriates are required to obtain a work visa. An employment contract and benefits package are some of the key requirements before a visa is approved. The latter should be structured efficiently for tax purposes before it is submitted to the Philippines’ immigration department.
TAX FILING OBLIGATION
Aliens residing in the Philippines or deriving income in the Philippines are generally required to file an income tax return in the Philippines except expatriates covered by substituted filing.
Under substituted filing, a resident expatriate earning purely compensation income from a single employer on which withholding tax on compensation had been properly withheld shall no longer be required to file an income tax return. The Certificate of Withholding Taxes on Compensation (BIR Form 2316), issued by the local employer would suffice for the purpose. If expatriates plan to claim tax credits in their home country, they may use the BIR Form 2316 or alternatively, they may file income tax returns at their option or as required by their home country.
Applying the above, resident expatriates and non-resident expatriates engaged in trade or business in the Philippines are required to file an income tax return.
CHARGE TO TAX
In general, aliens are taxable in the Philippines only on Philippine-sourced income. The income from employment, such as salaries, allowances, benefits and other forms of compensation for labor or personal services performed in the Philippines are treated as Philippine-sourced income, regardless of where the payment is made. The salaries and benefits must be subjected to withholding tax by the employer.
In certain cases, however, an expatriate receives compensation from a foreign affiliate of the local employer, in addition to the salaries received from the local employer. This set-up, where two companies are paying the expatriate, is referred to as a split-pay arrangement. If the foreign-paid salary is given in account for the assignment or work in the Philippines, such income paid by the foreign company is also taxable in the Philippines.
In most cases, the foreign-paid salary above is not subject to withholding tax since the salaries are not shouldered by the local employer and not paid through them. This is because the salaries are directly deposited to the account of the expatriate without the details being known to the local employer. If this is not subject to withholding tax, the expatriate employee loses his qualification for substituted filing.
In addition to salaries, these are some of the benefits and allowances granted by employers and some income earned by the employee from other sources:
• Fringe benefits
The employer may grant or pay the employee housing, car, or personal household expenses. The expatriate need not worry since these benefits are subject to fringe benefit tax which is borne by the employer.
• De minimis benefits
These are small benefits, such as laundry allowance and clothing allowance. Although these are non-taxable, they must be reported as part of the non-taxable amount in the income tax return.
• Passive income
This includes income exempt from tax and income subject to final tax, such as interest, royalties, dividends, and winnings, sale or exchange of stock, etc. For 2014, unless it is further deferred in the succeeding year, these must be disclosed in the individual income tax return. It is therefore imperative that the expatriate all his income earned in the Philippines that is subject to final tax or exempted from income tax.
Speaking of stocks, it is very common for multinational companies to grant stock options to its employees for services rendered in the Philippines. Under Revenue Memorandum Circular No. 79-2014 issued by the Bureau of Internal Revenue, it seems the stock option is taxed upon grant and exercise. Expatriates are advised to seek special advice on the taxation of stock options.
Other taxes that expatriates are responsible to pay include: (1) annual community tax, (2) real property tax if owning a condominium, and (3) social security. Social security is compulsory for all individuals working in the Philippines. However, for citizens of countries with which the Philippines has existing social security agreements -- such as Austria, Belgium, Canada, France, Korea, Netherlands, Quebec, Spain, Switzerland and the United Kingdom -- a request for exemption may be filed with the Philippine social security authorities.
POSSIBLE TAX SAVINGS
Lastly, expatriates may be entitled to income tax relief in accordance with the international tax treaties entered into by the Philippine government. Under most tax treaties, an expatriate who is a resident of a treaty country shall not be liable to pay income tax on employment exercised in the Philippines if the employee is present in the Philippines for an aggregate period of less than 180 or 90 days for the taxable year, depending on the alien’s country of origin. However, to avail of the exemption under the tax treaties, a tax treaty relief application must be filed with the tax bureau before the first taxable transaction/payment is made.
An expatriate earning income in the Philippines should know his tax responsibilities. Whether the income is exempt or not from tax, there is always the responsibility of filing a return or securing an exemption.
Marie Fe L. Fawagan is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
Monday, January 26, 2015
Thursday, January 22, 2015
The dreaded financial closing
AFTER the long holiday break, ‘tis the season that many finance managers and staff dread the most -- the yearend financial closing, especially for a large number of companies that follow the calendar year as their fiscal year, wherein they toil long hours to close the books for the preceding year requiring volumes of information from line-of-business.
The reason this activity is so horrendous is because of the time-consuming convoluted close-to-disclose process that is likewise headache-inducing. Finance department staff in the frontline work through weekends to get the job done, which is not easy or always perfect. Many laggards in a global study of financial consultants Hackett Group take 30 days to close the books, costing these companies 13% of the total company revenue. These costs come from using too many resources to accomplish what should be nothing more than a mechanical task, which should have been allocated for solving other more important issues in the finance department.
Apart from the intense manual labor and long working hours, these companies face greater risks due to human error in using multiple spreadsheets and manipulating complex business data. In fact, the potential for spreadsheet errors was cited by banking giant JPMorgan in its reported investigation of $7 billion in losses due to massive spreadsheet errors in 2012. Many spreadsheet error examples abound that resulted in financial and reputational losses. What’s even more glaring is that 70% of companies globally use spreadsheets to manage financial reporting, based on a 2012 study conducted by Oracle and Accenture.
But what’s more interesting now is that many companies are starting to streamline processes, working on the human element and investing in automation technologies. Much of the drive is coming from regulatory pressures from the Sarbanes-Oxley Law and the Securities and Exchange Commission of many countries to have a more transparent financial reporting system, as well from the desire of business executives to gain operational efficiencies. In fact, in a 2012 survey of the American Productivity & Quality Center (APQC), a business benchmarking and research organization, 75% of organizations reported that close-to-disclose process is one of the top two targets for financial improvement over the next 18 months.
Improving the financial close is proving to be incredibly challenging as averred by many CEOs. Business executives should look at three critical areas to improve on -- processes, technology, and people -- with the objective of shortening the closing cycle to the global average of nine days, and even reach the best practice of 7.6 days, according to the Hackett Group.
To streamline the process in properly closing the books and preparing financial statements, it is important to start with a checklist that includes all the necessary journal entries and procedures The CFO’s role is critical in re-evaluating the process by understanding how many people are involved in the process, who does what in the cycle, what can be moved to the pre-close cycle, and what and where the bottlenecks are. Key is standardizing tasks and timelines to ensure the closing of the books on time.
Apart from hastening the process, what’s also important is to understand the complexity of the closing process. As more and more corporations become increasingly complicated through acquisitions and complex subsidiary structures, business executives need to be cognizant of the local reporting requirements and differing accounting rules for each corporate structure. This is where technology can help by automating the close-to-disclose process by assisting in reconciling financial accounts, processing inter-company activities, and so on. This also removes the risk of errors from the use of spreadsheets.
But process improvements and technology are not silver bullets. They are nothing if not for people who will execute the new process and adopt and implement the new technology. Training, reward and motivation programs for finance department staff are all important to ensure the success of any improvement initiative and preclude burnout among employees.
All financial closing improvement initiatives require a balanced focus on process, technology and people, coupled with proper governance in order to truly realize its full value.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.
REYNALDO C. LUGTU, JR. is a senior executive in an information and communications technology firm. He also teaches strategy, management and marketing courses in the MBA Program of the Ramon V. del Rosario College of Business, De La Salle University.
reylugtu@gmail.com
source: Businessworld
The reason this activity is so horrendous is because of the time-consuming convoluted close-to-disclose process that is likewise headache-inducing. Finance department staff in the frontline work through weekends to get the job done, which is not easy or always perfect. Many laggards in a global study of financial consultants Hackett Group take 30 days to close the books, costing these companies 13% of the total company revenue. These costs come from using too many resources to accomplish what should be nothing more than a mechanical task, which should have been allocated for solving other more important issues in the finance department.
Apart from the intense manual labor and long working hours, these companies face greater risks due to human error in using multiple spreadsheets and manipulating complex business data. In fact, the potential for spreadsheet errors was cited by banking giant JPMorgan in its reported investigation of $7 billion in losses due to massive spreadsheet errors in 2012. Many spreadsheet error examples abound that resulted in financial and reputational losses. What’s even more glaring is that 70% of companies globally use spreadsheets to manage financial reporting, based on a 2012 study conducted by Oracle and Accenture.
But what’s more interesting now is that many companies are starting to streamline processes, working on the human element and investing in automation technologies. Much of the drive is coming from regulatory pressures from the Sarbanes-Oxley Law and the Securities and Exchange Commission of many countries to have a more transparent financial reporting system, as well from the desire of business executives to gain operational efficiencies. In fact, in a 2012 survey of the American Productivity & Quality Center (APQC), a business benchmarking and research organization, 75% of organizations reported that close-to-disclose process is one of the top two targets for financial improvement over the next 18 months.
Improving the financial close is proving to be incredibly challenging as averred by many CEOs. Business executives should look at three critical areas to improve on -- processes, technology, and people -- with the objective of shortening the closing cycle to the global average of nine days, and even reach the best practice of 7.6 days, according to the Hackett Group.
To streamline the process in properly closing the books and preparing financial statements, it is important to start with a checklist that includes all the necessary journal entries and procedures The CFO’s role is critical in re-evaluating the process by understanding how many people are involved in the process, who does what in the cycle, what can be moved to the pre-close cycle, and what and where the bottlenecks are. Key is standardizing tasks and timelines to ensure the closing of the books on time.
Apart from hastening the process, what’s also important is to understand the complexity of the closing process. As more and more corporations become increasingly complicated through acquisitions and complex subsidiary structures, business executives need to be cognizant of the local reporting requirements and differing accounting rules for each corporate structure. This is where technology can help by automating the close-to-disclose process by assisting in reconciling financial accounts, processing inter-company activities, and so on. This also removes the risk of errors from the use of spreadsheets.
But process improvements and technology are not silver bullets. They are nothing if not for people who will execute the new process and adopt and implement the new technology. Training, reward and motivation programs for finance department staff are all important to ensure the success of any improvement initiative and preclude burnout among employees.
All financial closing improvement initiatives require a balanced focus on process, technology and people, coupled with proper governance in order to truly realize its full value.
The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.
REYNALDO C. LUGTU, JR. is a senior executive in an information and communications technology firm. He also teaches strategy, management and marketing courses in the MBA Program of the Ramon V. del Rosario College of Business, De La Salle University.
reylugtu@gmail.com
source: Businessworld
A new form for giving
“YOU CAN GIVE without loving, but you can’t love without giving.”
Gift giving has always been a part of the Filipino culture -- one that is innate and manifests our generosity towards others. It is our way of expressing gratitude, love, affection, friendship, or simply showing that we care. In a country where relationships (with family, friends, co-workers, etc.) are highly valued, giving gifts is seen as a way of strengthening these relationships. Most especially for Filipinos who have an extensive support network of family and friends, we tend to spend significant time, effort and money searching for the right gifts for special occasions and ceremonies.
Donor’s tax is a tax on any donation or gift. It is imposed on the gratuitous transfer of property between two or more persons (resident or not) during their lifetime. This applies regardless of whether or not the transfer is in trust, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.
Generally, donations made to strangers are subject to 30% donor’s tax based on the net gift. For this purpose, the Tax Code defines a “stranger” as a person who is not a brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral line within the fourth degree of relationship. On the other hand, donations to relatives exceeding P100,000 are subject to graduated tax rates ranging from 2% to 15%, while those below P100,000 are exempt.
Imposing taxes on gifts might seem unreasonable as it puts a burden on a person who gives away property, without expecting anything in return. To be fair, the Tax Code also provides exemptions to certain donations such as those made on account of marriage up to P10,000 (in case of a resident donor); gifts made to or for the use of the national government or any entity created by any of its agencies; and gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization (NGO), trust or philanthropic organization or research institution or organization, provided not more than 30% of said gifts will be used by such donee for administration purposes.
In addition, donations to accredited NGOs or those accredited by the Philippine Council for NGO Certification, Inc. shall also be deductible for purposes of computing the net taxable income of the donor. However, in order to claim the deduction, the Bureau of Internal Revenue (BIR) provides certain conditions which should be followed. Under Section 8 of Revenue Regulations No. 13-98, the claimant-donor should secure a Certificate of Donation from the donee for every donation within 30 days from making the donation. The Certificate should indicate the date the NGO received the donation and the value of the donation, if in cash, or the acquisition cost, if in the form of property. Further, the donor is required to notify the Revenue District Office having jurisdiction over his place of business by filing a Notice of Donation for every donation worth at least P50,000 within 30 days upon receipt of the certification.
The substantiation requirement mentioned above was again reiterated by the BIR in a fairly recent issuance, Revenue Memorandum Circular (RMC) No. 86-2014. The RMC prescribes a revised Certificate of Donation (BIR Form 2322) which shall now consist of two parts -- a donee certification, and a donor statement of values.
The donee certification indicates the donee’s acknowledgement of the receipt of the donation, the date of receipt as well as the value of the donated cash or property. Compared to the old form, the first page of the revised version already provides a schedule showing the description of the properties (personal or real property) received by the donee. This must be signed by an authorized representative of the donee organization.
The second page of the new form is the donor statement showing the descriptions, acquisition costs, and net book value of the property donated as reflected in the financial statements of the donor.
Similar to the previous form, the new format also requires the donor to attach a certified true copy of the deed of sale/bill of sale, or a sworn certification by the donor of the net book value and acquisition cost as proof of valuation. The new form now requires the donor or authorized representative to sign the statement. The values indicated by the donor in the form shall still be subject to further confirmation by the BIR.
Oddly, given the minimal incentives and the steep tax on donations, the law appears to be discouraging gift-giving. In addition to this, the BIR continues to come up with new rules, placing more requirements in order for taxpayers to avail of deductions or exemptions.
While some would say that giving is its own reward, taxpayer-donors should make sure they satisfy the deductibility requirements of the BIR in order to make the act of giving, however full of liberality, even more rewarding.
Florida K. Fomaneg is a consultant at the Tax Services Department of Isla Lipana & Co., the Philippine memberfirm of the PwC network.
+63 (2) 845-2728
florida.k.fomaneg@ph.pwc.com
Gift giving has always been a part of the Filipino culture -- one that is innate and manifests our generosity towards others. It is our way of expressing gratitude, love, affection, friendship, or simply showing that we care. In a country where relationships (with family, friends, co-workers, etc.) are highly valued, giving gifts is seen as a way of strengthening these relationships. Most especially for Filipinos who have an extensive support network of family and friends, we tend to spend significant time, effort and money searching for the right gifts for special occasions and ceremonies.
Donor’s tax is a tax on any donation or gift. It is imposed on the gratuitous transfer of property between two or more persons (resident or not) during their lifetime. This applies regardless of whether or not the transfer is in trust, whether the gift is direct or indirect and whether the property is real or personal, tangible or intangible.
Generally, donations made to strangers are subject to 30% donor’s tax based on the net gift. For this purpose, the Tax Code defines a “stranger” as a person who is not a brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendant, or a relative by consanguinity in the collateral line within the fourth degree of relationship. On the other hand, donations to relatives exceeding P100,000 are subject to graduated tax rates ranging from 2% to 15%, while those below P100,000 are exempt.
Imposing taxes on gifts might seem unreasonable as it puts a burden on a person who gives away property, without expecting anything in return. To be fair, the Tax Code also provides exemptions to certain donations such as those made on account of marriage up to P10,000 (in case of a resident donor); gifts made to or for the use of the national government or any entity created by any of its agencies; and gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization (NGO), trust or philanthropic organization or research institution or organization, provided not more than 30% of said gifts will be used by such donee for administration purposes.
In addition, donations to accredited NGOs or those accredited by the Philippine Council for NGO Certification, Inc. shall also be deductible for purposes of computing the net taxable income of the donor. However, in order to claim the deduction, the Bureau of Internal Revenue (BIR) provides certain conditions which should be followed. Under Section 8 of Revenue Regulations No. 13-98, the claimant-donor should secure a Certificate of Donation from the donee for every donation within 30 days from making the donation. The Certificate should indicate the date the NGO received the donation and the value of the donation, if in cash, or the acquisition cost, if in the form of property. Further, the donor is required to notify the Revenue District Office having jurisdiction over his place of business by filing a Notice of Donation for every donation worth at least P50,000 within 30 days upon receipt of the certification.
The substantiation requirement mentioned above was again reiterated by the BIR in a fairly recent issuance, Revenue Memorandum Circular (RMC) No. 86-2014. The RMC prescribes a revised Certificate of Donation (BIR Form 2322) which shall now consist of two parts -- a donee certification, and a donor statement of values.
The donee certification indicates the donee’s acknowledgement of the receipt of the donation, the date of receipt as well as the value of the donated cash or property. Compared to the old form, the first page of the revised version already provides a schedule showing the description of the properties (personal or real property) received by the donee. This must be signed by an authorized representative of the donee organization.
The second page of the new form is the donor statement showing the descriptions, acquisition costs, and net book value of the property donated as reflected in the financial statements of the donor.
Similar to the previous form, the new format also requires the donor to attach a certified true copy of the deed of sale/bill of sale, or a sworn certification by the donor of the net book value and acquisition cost as proof of valuation. The new form now requires the donor or authorized representative to sign the statement. The values indicated by the donor in the form shall still be subject to further confirmation by the BIR.
Oddly, given the minimal incentives and the steep tax on donations, the law appears to be discouraging gift-giving. In addition to this, the BIR continues to come up with new rules, placing more requirements in order for taxpayers to avail of deductions or exemptions.
While some would say that giving is its own reward, taxpayer-donors should make sure they satisfy the deductibility requirements of the BIR in order to make the act of giving, however full of liberality, even more rewarding.
Florida K. Fomaneg is a consultant at the Tax Services Department of Isla Lipana & Co., the Philippine memberfirm of the PwC network.
+63 (2) 845-2728
florida.k.fomaneg@ph.pwc.com
source: Businessworld
Monday, January 19, 2015
Due process in change of address
TAXES are the “lifeblood” that give real meaning to the existence of the government. Without them, the government would be unable to perform its functions and duties. Taxes are the cost of a functioning government and by extension a civilized society.
Since taxes are critical to its existence, the government is continuously improving its tax collection processes. The Bureau of Internal Revenue (BIR) has been very focused on strengthening its tax collection effort. Under pressure from ambitious revenue targets, the bureau has passed a series of regulations to ensure prompt collection of taxes. The motivational nature of the targets is felt by the public in the form of the BIR’s aggressive approach. It should come as no surprise that the BIR be highly focused on the assessment process. Collections from assessments have traditionally constituted a major share of tax revenue.
To check any tendency towards harsh taxation, the Supreme Court (SC) has been consistent in blocking practices deemed as arbitrary. Justice Isagani Cruz has written: “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with the law as any arbitrariness will negate the very reason for the government itself.” (CIR v. Algue, Inc.) In other words, taxes should be collected expeditiously, though not to the point where collection methods become preposterous.
In the recent case of Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the assessment process once again was the subject of dispute. It involved an invalid assessment preceded by invalid assessment notices, a clear case of denial of due process of law.
Due process is both substantive and procedural in nature. It is substantive in the sense that it acts as a safeguard from arbitrary denial of life, liberty, or property by the government outside the sanction of law. It is also procedural in nature, aiming to protect individuals from the coercive power of government, by ensuring that adjudication processes under valid laws are fair and impartial.
The denial of due process that resulted in the deprivation of property was the core issue underlying the SC decision.
In the BASF case, the BIR was overruled when the SC affirmed a decision by the Court of Tax Appeals, and found no valid assessment due to invalid notices of assessment. Being an invalid assessment, the notice never attained finality and the period for assessment and collection was therefore deemed to have lapsed.
The respondent company, BASF, transferred to a new office without informing the BIR of the move. In 2003, the BIR issued a Final Assessment Notice (FAN) for the taxable year of 1999. However, it was sent to BASF via registered mail to its old address. The company duly protested citing violation of due process and prescription.
Due to inaction on the part of the BIR, the case was elevated to the Court of Tax Appeals (CTA) and then subsequently to the SC. The SC backed the CTA in denying the Petition for Review filed by the BIR, ruling that no valid notices that were sent. Hence, the assessments were also declared void. In effect, the right of the BIR to assess and collect was found to have prescribed.
It is noteworthy that the SC upheld once again the significance of notice as part of due process. What is peculiar about the case is that the BIR was not also properly informed of the change of address of BASF. The BIR cited this circumstance in its Petition before the SC. The BIR also contended that such change of address without prior notice means the prescription clock continues to run, as provided by Sections 203 and 222 of the Tax Code of 1997.
Section 11 of BIR Revenue Regulation No. 12-85 requires the taxpayer to give written notice of any change of address to the Revenue District Officer (RDO) or the district having jurisdiction over his former legal residence and/or place of business. In the event of failure to give notice, any communications sent to the former address are still be considered valid.
The case hinged on the SC’s finding that BIR officers, at various times prior to the issuance of the FAN, had conducted examinations and investigations of BASF’s tax liabilities for 1999 at the latter’s new address. Several communications were also sent to the new address of the respondent prior to the issuance of the FAN including letters and reports of the BIR signed by the revenue officer.
It must not be overlooked that the BIR sent the Preliminary Assessment Notice (PAN) via registered mail to the old address of the respondent but was “returned to sender” as attested by the revenue officer. Despite the return, the BIR still mailed the FAN to the old address. The SC has construed this to mean that the BIR should have been alerted of such change of address. As a result, the Statute of Limitations was not suspended, resulting in the lapsing of the assessment and collection deadline.
A closer look at the decision makes it apparent that both parties failed to give proper notice to each other. The taxpayer was not able to formally notify the BIR of its change of address. On the other hand, the BIR continued to transmit its assessment notices to the “wrong address,” a practice which, combined with the other circumstances, rendered its notices invalid.
This means both parties were “in pari delicto” or “equally at fault,” giving rise to a situation where a court may refuse to intervene. Nevertheless, the weight of justice tilted in favor of the taxpayer.
Let this jurisprudence be our guide in dealing with BIR assessments in the future. It provides an indication that the Supreme Court recognizes the principle laid down in a longstanding ruling from CIR v. Algue, which states: “It is necessary to reconcile the apparent conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.”
Mark Arthur M. Catabona is an associate 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
Since taxes are critical to its existence, the government is continuously improving its tax collection processes. The Bureau of Internal Revenue (BIR) has been very focused on strengthening its tax collection effort. Under pressure from ambitious revenue targets, the bureau has passed a series of regulations to ensure prompt collection of taxes. The motivational nature of the targets is felt by the public in the form of the BIR’s aggressive approach. It should come as no surprise that the BIR be highly focused on the assessment process. Collections from assessments have traditionally constituted a major share of tax revenue.
To check any tendency towards harsh taxation, the Supreme Court (SC) has been consistent in blocking practices deemed as arbitrary. Justice Isagani Cruz has written: “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with the law as any arbitrariness will negate the very reason for the government itself.” (CIR v. Algue, Inc.) In other words, taxes should be collected expeditiously, though not to the point where collection methods become preposterous.
In the recent case of Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the assessment process once again was the subject of dispute. It involved an invalid assessment preceded by invalid assessment notices, a clear case of denial of due process of law.
Due process is both substantive and procedural in nature. It is substantive in the sense that it acts as a safeguard from arbitrary denial of life, liberty, or property by the government outside the sanction of law. It is also procedural in nature, aiming to protect individuals from the coercive power of government, by ensuring that adjudication processes under valid laws are fair and impartial.
The denial of due process that resulted in the deprivation of property was the core issue underlying the SC decision.
In the BASF case, the BIR was overruled when the SC affirmed a decision by the Court of Tax Appeals, and found no valid assessment due to invalid notices of assessment. Being an invalid assessment, the notice never attained finality and the period for assessment and collection was therefore deemed to have lapsed.
The respondent company, BASF, transferred to a new office without informing the BIR of the move. In 2003, the BIR issued a Final Assessment Notice (FAN) for the taxable year of 1999. However, it was sent to BASF via registered mail to its old address. The company duly protested citing violation of due process and prescription.
Due to inaction on the part of the BIR, the case was elevated to the Court of Tax Appeals (CTA) and then subsequently to the SC. The SC backed the CTA in denying the Petition for Review filed by the BIR, ruling that no valid notices that were sent. Hence, the assessments were also declared void. In effect, the right of the BIR to assess and collect was found to have prescribed.
It is noteworthy that the SC upheld once again the significance of notice as part of due process. What is peculiar about the case is that the BIR was not also properly informed of the change of address of BASF. The BIR cited this circumstance in its Petition before the SC. The BIR also contended that such change of address without prior notice means the prescription clock continues to run, as provided by Sections 203 and 222 of the Tax Code of 1997.
Section 11 of BIR Revenue Regulation No. 12-85 requires the taxpayer to give written notice of any change of address to the Revenue District Officer (RDO) or the district having jurisdiction over his former legal residence and/or place of business. In the event of failure to give notice, any communications sent to the former address are still be considered valid.
The case hinged on the SC’s finding that BIR officers, at various times prior to the issuance of the FAN, had conducted examinations and investigations of BASF’s tax liabilities for 1999 at the latter’s new address. Several communications were also sent to the new address of the respondent prior to the issuance of the FAN including letters and reports of the BIR signed by the revenue officer.
It must not be overlooked that the BIR sent the Preliminary Assessment Notice (PAN) via registered mail to the old address of the respondent but was “returned to sender” as attested by the revenue officer. Despite the return, the BIR still mailed the FAN to the old address. The SC has construed this to mean that the BIR should have been alerted of such change of address. As a result, the Statute of Limitations was not suspended, resulting in the lapsing of the assessment and collection deadline.
A closer look at the decision makes it apparent that both parties failed to give proper notice to each other. The taxpayer was not able to formally notify the BIR of its change of address. On the other hand, the BIR continued to transmit its assessment notices to the “wrong address,” a practice which, combined with the other circumstances, rendered its notices invalid.
This means both parties were “in pari delicto” or “equally at fault,” giving rise to a situation where a court may refuse to intervene. Nevertheless, the weight of justice tilted in favor of the taxpayer.
Let this jurisprudence be our guide in dealing with BIR assessments in the future. It provides an indication that the Supreme Court recognizes the principle laid down in a longstanding ruling from CIR v. Algue, which states: “It is necessary to reconcile the apparent conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.”
Mark Arthur M. Catabona is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
Thursday, January 15, 2015
Tax court sides with San Miguel beer unit in P740-M tax refund case
A TAX COURT has ordered the government to refund San Miguel Brewery, Inc. over P740 million in taxes it paid in 2011, affirming that San Mig Light is a separate brand that should be taxed lower than variants of existing products.
In a 29-page decision dated Dec. 23, the second division of the Court of Tax Appeals (CTA) told the Bureau of Internal Revenue “to refund or to issue a tax credit certificate in favor of petitioner in the reduced amount of P740,294,926.62 representing overpayment of its excise taxes for the period covering Jan. 1, 2011 to Dec. 31, 2011.”
The decision, penned by Associate Justice Juanito C. Castañeda, Jr., cited the tax court’s previous rulings that classify San Mig Light -- a low-calorie beer sold in bottle and in can with 5% alcohol content -- as a “new brand.”
This had the effect of taxing San Mig Light “according to its current net retail price,” reducing the imposed excise tax to P15.49 per liter, from the previous P20.57 per liter.
The nearly P1-billion refund sought covered 145.7 million liters of the product removed from its five plants in 2011. The brewery paid close to P3 billion in excise taxes, but this would now be reduced to P2.26 billion because of the product’s classification as a “new brand.”
In partially granting the refund, the court reduced the claim by P5,791.20 because 1,140 liters of San Mig Light were either misclassified, or declared in August 2011 excise tax returns and not removed.
The Bureau of Internal Revenue classified San Mig Light as a “variant” of an existing San Miguel Brewery product in 2002, which led to it being “taxed under the highest classification of any variant of that brand” under Republic Act (RA) No. 8424, a 1997 law that amended the Tax Code’s provisions on excise taxes.
Under RA 9334 enacted in 2004 and which amended the Tax Code’s classification of fermented liquors, a “new brand” is one registered after an older law -- RA 8240 took effect on Jan. 1, 1997. That 1997 law amended sections of the National Internal Revenue Code governing taxes on distilled spirits, wines, liquor and cigar.
“Variants,” on the other hand, “refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand.”
However, the decision said that San Mig Light was introduced in 1999 as a “new brand” of the brewery’s fermented liquor, because the existing Pale Pilsen brand -- a beer with more calories but the same 5% alcoholic content -- did not have the root name of “San Miguel” or “San Mig” in its names.
The decision also cited a 2012 ruling noting that Pale Pilsen and San Mig Light had “marked differences” in their label designs.
Associate Justice Amelia R. Cotangco-Manalastas dissented.
The case was docketed as CTA Case No. 8591, San Miguel Brewery, Inc., a subsidiary of San Miguel Corporation versus the Commissioner of Internal Revenue. -- V. A. A. F. Nonato
source: Businessworld
In a 29-page decision dated Dec. 23, the second division of the Court of Tax Appeals (CTA) told the Bureau of Internal Revenue “to refund or to issue a tax credit certificate in favor of petitioner in the reduced amount of P740,294,926.62 representing overpayment of its excise taxes for the period covering Jan. 1, 2011 to Dec. 31, 2011.”
The decision, penned by Associate Justice Juanito C. Castañeda, Jr., cited the tax court’s previous rulings that classify San Mig Light -- a low-calorie beer sold in bottle and in can with 5% alcohol content -- as a “new brand.”
This had the effect of taxing San Mig Light “according to its current net retail price,” reducing the imposed excise tax to P15.49 per liter, from the previous P20.57 per liter.
The nearly P1-billion refund sought covered 145.7 million liters of the product removed from its five plants in 2011. The brewery paid close to P3 billion in excise taxes, but this would now be reduced to P2.26 billion because of the product’s classification as a “new brand.”
In partially granting the refund, the court reduced the claim by P5,791.20 because 1,140 liters of San Mig Light were either misclassified, or declared in August 2011 excise tax returns and not removed.
The Bureau of Internal Revenue classified San Mig Light as a “variant” of an existing San Miguel Brewery product in 2002, which led to it being “taxed under the highest classification of any variant of that brand” under Republic Act (RA) No. 8424, a 1997 law that amended the Tax Code’s provisions on excise taxes.
Under RA 9334 enacted in 2004 and which amended the Tax Code’s classification of fermented liquors, a “new brand” is one registered after an older law -- RA 8240 took effect on Jan. 1, 1997. That 1997 law amended sections of the National Internal Revenue Code governing taxes on distilled spirits, wines, liquor and cigar.
“Variants,” on the other hand, “refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand.”
However, the decision said that San Mig Light was introduced in 1999 as a “new brand” of the brewery’s fermented liquor, because the existing Pale Pilsen brand -- a beer with more calories but the same 5% alcoholic content -- did not have the root name of “San Miguel” or “San Mig” in its names.
The decision also cited a 2012 ruling noting that Pale Pilsen and San Mig Light had “marked differences” in their label designs.
Associate Justice Amelia R. Cotangco-Manalastas dissented.
The case was docketed as CTA Case No. 8591, San Miguel Brewery, Inc., a subsidiary of San Miguel Corporation versus the Commissioner of Internal Revenue. -- V. A. A. F. Nonato
source: Businessworld
Wednesday, January 14, 2015
New update form for foreign corporations
FOREIGN CORPORATIONS operating through a license to do business in the Philippines are covered by the provisions of the Corporation Code. In this respect, similar to domestic corporations, they are regulated by the Securities and Exchange Commission (SEC). Among the obligations of a foreign corporation is the duty to notify the SEC of relevant changes on a timely basis, such as changes in principal office address, accounting period, current set of officers, among others.
Data such as these are required to be reflected in the General Information Sheet (GIS). In case changes occur after the filing of the annual GIS, the current practice is for the foreign corporations to either submit a letter notice to the SEC or file an amended GIS to formally notify the SEC.
Last December, the SEC issued Memorandum Circular No. 22 prescribing the use of a “notification update form” when notifying the SEC of the changes mentioned above. The adoption of this uniform requirement starting this year is specifically intended to dispense with the various notices submitted from time to time by foreign corporations to the SEC.
Under the guidelines, the notification update form must be accomplished and signed under oath by the president or resident agent of the concerned foreign corporation. Being mere extensions of their head offices in the Philippines, foreign corporations have the same set of officers as that of their head office. In case the signatory will be signing this form outside the Philippines, in addition to notarization, the form should likewise be authenticated or consularized at the Philippine Embassy or Consular office in the place where the form is signed.
What changes should be reported to the SEC using the new form? Under the guidelines, the new form should be used for updates in the foreign corporation’s principal office address, fiscal year, composition of officers in the Philippines and additional subsidiaries/affiliates.
Since the form does not distinguish whether the principal office address refers only to the Philippine office, one could take the view that any change in principal office address of the foreign corporation, whether in the Philippines or in its home country, should be covered.
As mere extensions of their head offices, Philippine branches, representative offices, and regional headquarters of foreign corporations follow the accounting period observed by their head offices. Thus, in case the head office changes its accounting period, necessarily, its licensed Philippine office should observe the new accounting period as well. In such cases, the SEC must be properly notified. The timely notice of the change of accounting period is crucial considering that the last date of filing reports, such as the Audited Financial Statements, and the additional security deposit for branch offices, are reckoned from the fiscal year end.
Updates on subsidiaries and affiliates are specifically crucial for Regional Headquarters (RHQ) and Regional Operating Headquarters (ROHQ), which are only allowed to transact business with affiliates, subsidiaries, and branches. Upon applying for registration with the SEC, RHQs and ROHQs submit a list of the affiliates, subsidiaries, and branches with which they will be transacting. Previously, any addition to the list is submitted to the SEC in the form of a letter notice. Now, the updated list should instead be reflected through the use of the new form.
The notification update form must be submitted by the foreign corporation within thirty (30) days from the occurrence of any of the changes mentioned above. Once submitted, the updates shall form part of the records of the foreign corporation with the SEC and shall be made available to the public.
The notification form does not, by any means, replace the obligation of foreign corporations to submit the annual GIS thirty (30) days from the anniversary of the issuance of the foreign corporations’ SEC license. Moreover, all updates contained in the notification update form which remain effective at the time of submission of the GIS should also be reflected in the GIS; the mere filing of the notification update form will not be sufficient.
With respect to other information not covered under the notification update form, there is nothing in the memorandum circular that precludes foreign corporations from filing a traditional letter notice or an amended GIS, whichever option the company decides to take.
While the memorandum circular does not provide for sanctions in case of failure to file the notification information update within the time prescribed, this new requirement should not be taken lightly. After all, these data form part of the foreign corporations’ records with the SEC and failure to reflect changes may have adverse consequences.
For instance, the foreign corporation may not receive official letters or notices from the SEC if the latter was not properly notified of the change in address. Moreover, as discussed above, information such as fiscal year end have an impact in determining a foreign corporation’s compliance with the SEC’s reportorial requirements. The foreign corporation may be penalized for late filing of reports if the SEC is not properly notified of the change in accounting period. More importantly, the foreign corporation has the obligation to keep its records with the SEC updated as the parties with whom it transacts may depend on such information. As such, it is only proper that its records are maintained as accurately and updated as possible.
Clearly, the notification update form is intended to make notification requirements more convenient to comply with on the part of foreign corporations. Moreover, it is advisable to use the prescribed form to avoid issues with the SEC.
Aimee Rose DG. dela Cruz is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 845-2728
aimee.rose.d.dela.cruz@ph.pwc.com
source: Businessworld
Data such as these are required to be reflected in the General Information Sheet (GIS). In case changes occur after the filing of the annual GIS, the current practice is for the foreign corporations to either submit a letter notice to the SEC or file an amended GIS to formally notify the SEC.
Last December, the SEC issued Memorandum Circular No. 22 prescribing the use of a “notification update form” when notifying the SEC of the changes mentioned above. The adoption of this uniform requirement starting this year is specifically intended to dispense with the various notices submitted from time to time by foreign corporations to the SEC.
Under the guidelines, the notification update form must be accomplished and signed under oath by the president or resident agent of the concerned foreign corporation. Being mere extensions of their head offices in the Philippines, foreign corporations have the same set of officers as that of their head office. In case the signatory will be signing this form outside the Philippines, in addition to notarization, the form should likewise be authenticated or consularized at the Philippine Embassy or Consular office in the place where the form is signed.
What changes should be reported to the SEC using the new form? Under the guidelines, the new form should be used for updates in the foreign corporation’s principal office address, fiscal year, composition of officers in the Philippines and additional subsidiaries/affiliates.
Since the form does not distinguish whether the principal office address refers only to the Philippine office, one could take the view that any change in principal office address of the foreign corporation, whether in the Philippines or in its home country, should be covered.
As mere extensions of their head offices, Philippine branches, representative offices, and regional headquarters of foreign corporations follow the accounting period observed by their head offices. Thus, in case the head office changes its accounting period, necessarily, its licensed Philippine office should observe the new accounting period as well. In such cases, the SEC must be properly notified. The timely notice of the change of accounting period is crucial considering that the last date of filing reports, such as the Audited Financial Statements, and the additional security deposit for branch offices, are reckoned from the fiscal year end.
Updates on subsidiaries and affiliates are specifically crucial for Regional Headquarters (RHQ) and Regional Operating Headquarters (ROHQ), which are only allowed to transact business with affiliates, subsidiaries, and branches. Upon applying for registration with the SEC, RHQs and ROHQs submit a list of the affiliates, subsidiaries, and branches with which they will be transacting. Previously, any addition to the list is submitted to the SEC in the form of a letter notice. Now, the updated list should instead be reflected through the use of the new form.
The notification update form must be submitted by the foreign corporation within thirty (30) days from the occurrence of any of the changes mentioned above. Once submitted, the updates shall form part of the records of the foreign corporation with the SEC and shall be made available to the public.
The notification form does not, by any means, replace the obligation of foreign corporations to submit the annual GIS thirty (30) days from the anniversary of the issuance of the foreign corporations’ SEC license. Moreover, all updates contained in the notification update form which remain effective at the time of submission of the GIS should also be reflected in the GIS; the mere filing of the notification update form will not be sufficient.
With respect to other information not covered under the notification update form, there is nothing in the memorandum circular that precludes foreign corporations from filing a traditional letter notice or an amended GIS, whichever option the company decides to take.
While the memorandum circular does not provide for sanctions in case of failure to file the notification information update within the time prescribed, this new requirement should not be taken lightly. After all, these data form part of the foreign corporations’ records with the SEC and failure to reflect changes may have adverse consequences.
For instance, the foreign corporation may not receive official letters or notices from the SEC if the latter was not properly notified of the change in address. Moreover, as discussed above, information such as fiscal year end have an impact in determining a foreign corporation’s compliance with the SEC’s reportorial requirements. The foreign corporation may be penalized for late filing of reports if the SEC is not properly notified of the change in accounting period. More importantly, the foreign corporation has the obligation to keep its records with the SEC updated as the parties with whom it transacts may depend on such information. As such, it is only proper that its records are maintained as accurately and updated as possible.
Clearly, the notification update form is intended to make notification requirements more convenient to comply with on the part of foreign corporations. Moreover, it is advisable to use the prescribed form to avoid issues with the SEC.
Aimee Rose DG. dela Cruz is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 845-2728
aimee.rose.d.dela.cruz@ph.pwc.com
source: Businessworld
Monday, January 12, 2015
Wrapping it up on employee taxes
AT THE turn of each year, many employees are eager to find out whether they will receive a tax refund, or whether additional taxes will be withheld from their December paychecks. This concern arises from the annualization of compensation that every employer does at year’s end. Thus, it is important that employee taxes are properly computed to ensure that employees pay only what is due from them for the entire year and that no issues emerge during a Bureau if Internal Revenue (BIR) audit of employers.
Ideally, annualization should be done on or before the end of the calendar year, but prior to the payment of compensation for the last payroll period. Nonetheless, should this not be done yet, the employer still has the time to do the annualization prior to the January 25 deadline of refunding any over-withheld tax from the employee.
Here are some common issues on annualization of withholding taxes of employees and reminders on filing:
• Basic personal and additional exemptions -- Every individual, regardless of tax status, is entitled to a P50,000 basic personal exemption. In addition, for every qualified dependent child, an additional exemption of P25,000 shall be available to the husband, unless a waiver in favor of the wife is executed. In case the husband is unemployed or working abroad, the wife automatically claims the additional exemption, provided required documents have been duly submitted.
In case a child was born or adopted within the year, such child can already be claimed as qualified dependent for the year, so long as necessary documents have been updated and properly filed with the BIR. If the employee fails to update his information, the excess tax withheld will not be refunded and will be forfeited in favor of the government. Employees should, therefore, properly submit certificates of update of exemption to be entitled to the additional exemption of P25,000.
On the other hand, in case a qualified dependent changes status during the year, such that his status shall no longer qualify him for exemption, an additional exemption of P25,000 can still be claimed during the year. It is only on the following year when the employee can no longer claim the exemption.
Considering the above rules on additional exemption, employers are then reminded to properly check the tax status of the employee prior to computing the tax due for the year. Any additional exemption not considered will definitely impact the employee’s net take home pay. Of course, employees can opt to file an annual income tax return and apply for refund. However, considering the cost and hassle of doing so, this recourse may no longer be an option for some employees.
• Employees with previous employers -- Employers are required to annualize the employee’s compensation including that from previous employer (if employed within the same year). Thus, it is necessary that BIR Form 2316 issued by previous employer be provided by the employees to their current employer. Note that tax due of employees who failed to submit the same shall be computed only based on the compensation paid by the current employer. Hence, failure to provide the same may significantly result to higher tax payable upon filing of their individual annual income tax return. Employees with previous employers cannot qualify for substituted filing and are required to file their annual income tax return on or before April 15.
• Taxable vs. non-taxable income -- Under existing revenue regulations, certain types of compensation income can be considered non-taxable and exempt from withholding. However, recent issuances/rulings by the BIR provide that those benefits considered non-taxable should be limited only to those specifically provided in the law as non-taxable (e.g. P30,000 tax exempt bonus, statutory contributions, de minimis benefits). In recent years, the BIR issued clarifications on the taxability of stock option plans, de minimis benefits, among others.
Hence, it is recommended that employers revisit their classification of employee benefits.
• Tax returns and certificates -- Currently, employers who are considered withholding agents are required to submit monthly remittance return of income taxes withheld on compensation (BIR Form 1601-C), annual information return of income taxes withheld on compensation (BIR Form 1601-CF), together with the alphabetical lists (alphalists) of employees, and employee’s certificate of compensation payment/taxes withheld (BIR Form 2316). A copy of the latter is also required to be submitted to the BIR RDO where the company is registered on or before Feb. 28.
As of calendar year 2013, alphalists of employees are to be submitted either as attachments to the electronic Filing and Payment System (eFPS) or through e-submission/e-mail. Manual submission of diskettes, CDs or hard copies shall no longer be allowed.
Prior to filing, among other things, it must be ensured that the amount of compensation income and taxes withheld per monthly returns, annual returns, alphalist of employees, and employees’ BIR Form 2316 tie up. Also, such compensation income as reported in the returns must also tie up, or at least be reconcilable with the totals in the company’s books.
The above list includes only some of the reminders on employee withholding taxes. Other issues may arise considering the many rules on employee taxes.
At the end of the day, it is the employers who shall be subjected to audit by the BIR. Any taxable compensation income payment not subjected to withholding tax shall result in deficiency withholding tax and disallowance of expense. Thus, following the old adage “prevention is better than the cure”, a thorough review is highly recommended prior to filing.
Ma. Lourdes A. Politado-Aclan 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
Ideally, annualization should be done on or before the end of the calendar year, but prior to the payment of compensation for the last payroll period. Nonetheless, should this not be done yet, the employer still has the time to do the annualization prior to the January 25 deadline of refunding any over-withheld tax from the employee.
Here are some common issues on annualization of withholding taxes of employees and reminders on filing:
• Basic personal and additional exemptions -- Every individual, regardless of tax status, is entitled to a P50,000 basic personal exemption. In addition, for every qualified dependent child, an additional exemption of P25,000 shall be available to the husband, unless a waiver in favor of the wife is executed. In case the husband is unemployed or working abroad, the wife automatically claims the additional exemption, provided required documents have been duly submitted.
In case a child was born or adopted within the year, such child can already be claimed as qualified dependent for the year, so long as necessary documents have been updated and properly filed with the BIR. If the employee fails to update his information, the excess tax withheld will not be refunded and will be forfeited in favor of the government. Employees should, therefore, properly submit certificates of update of exemption to be entitled to the additional exemption of P25,000.
On the other hand, in case a qualified dependent changes status during the year, such that his status shall no longer qualify him for exemption, an additional exemption of P25,000 can still be claimed during the year. It is only on the following year when the employee can no longer claim the exemption.
Considering the above rules on additional exemption, employers are then reminded to properly check the tax status of the employee prior to computing the tax due for the year. Any additional exemption not considered will definitely impact the employee’s net take home pay. Of course, employees can opt to file an annual income tax return and apply for refund. However, considering the cost and hassle of doing so, this recourse may no longer be an option for some employees.
• Employees with previous employers -- Employers are required to annualize the employee’s compensation including that from previous employer (if employed within the same year). Thus, it is necessary that BIR Form 2316 issued by previous employer be provided by the employees to their current employer. Note that tax due of employees who failed to submit the same shall be computed only based on the compensation paid by the current employer. Hence, failure to provide the same may significantly result to higher tax payable upon filing of their individual annual income tax return. Employees with previous employers cannot qualify for substituted filing and are required to file their annual income tax return on or before April 15.
• Taxable vs. non-taxable income -- Under existing revenue regulations, certain types of compensation income can be considered non-taxable and exempt from withholding. However, recent issuances/rulings by the BIR provide that those benefits considered non-taxable should be limited only to those specifically provided in the law as non-taxable (e.g. P30,000 tax exempt bonus, statutory contributions, de minimis benefits). In recent years, the BIR issued clarifications on the taxability of stock option plans, de minimis benefits, among others.
Hence, it is recommended that employers revisit their classification of employee benefits.
• Tax returns and certificates -- Currently, employers who are considered withholding agents are required to submit monthly remittance return of income taxes withheld on compensation (BIR Form 1601-C), annual information return of income taxes withheld on compensation (BIR Form 1601-CF), together with the alphabetical lists (alphalists) of employees, and employee’s certificate of compensation payment/taxes withheld (BIR Form 2316). A copy of the latter is also required to be submitted to the BIR RDO where the company is registered on or before Feb. 28.
As of calendar year 2013, alphalists of employees are to be submitted either as attachments to the electronic Filing and Payment System (eFPS) or through e-submission/e-mail. Manual submission of diskettes, CDs or hard copies shall no longer be allowed.
Prior to filing, among other things, it must be ensured that the amount of compensation income and taxes withheld per monthly returns, annual returns, alphalist of employees, and employees’ BIR Form 2316 tie up. Also, such compensation income as reported in the returns must also tie up, or at least be reconcilable with the totals in the company’s books.
The above list includes only some of the reminders on employee withholding taxes. Other issues may arise considering the many rules on employee taxes.
At the end of the day, it is the employers who shall be subjected to audit by the BIR. Any taxable compensation income payment not subjected to withholding tax shall result in deficiency withholding tax and disallowance of expense. Thus, following the old adage “prevention is better than the cure”, a thorough review is highly recommended prior to filing.
Ma. Lourdes A. Politado-Aclan 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
Monday, January 5, 2015
New Year’s list: Tax reminders at the start of the year
THE NEW YEAR promises an opportunity to start afresh. As we usher in 2015, let us also be mindful of our yearly tasks -- annual registration/compliance requirements of the Bureau of Internal Revenue (BIR) and the Local Government Units (LGU). Some of the important requirements that have to be met by a corporate taxpayer within the first month of the year are listed below.
1. BIR Annual registration fee -- As a basic compliance requirement with the BIR, the annual registration fee should be paid on or before Jan. 31, 2015.
2. Renewal of LGU registration -- The annual renewal of business registration with the LGU consists of, but is not limited to, payment of local business tax (LBT), mayor’s permit fee, sanitary inspection fee, garbage fee, building inspection fee, electrical inspection fee, mechanical inspection fee, plumbing inspection fee, fire inspection fee, personnel fee, business plate registration fee, and other charges imposed by the different LGUs.
While LBT is due on or before Jan. 20, 2015, taxpayers may opt to pay this on installment basis within the first 20 days of each quarter. Establishments that fail to renew their business permit or license will not be allowed to operate within the territory of the LGU concerned. In Metro Manila, where LGUs strictly monitor establishments, businesses could be closed down for failure to secure new business permits.
3. Annual information return of income taxes withheld on compensation (BIR Form 1604-CF) -- The Annual information return and alphabetical list (alphalist) must be submitted on or before Jan. 31 of the year following the calendar year in which the compensation payment and other income payments subject to final withholding taxes were paid or accrued. The alphalist is required to be attached as an integral part of BIR Form 1604-CF under certain prescribed modes. The failure to submit the alphalist in the prescribed mode may be a reason for the disallowance of the related claimed expense.
4. Employees’ withholding statements (BIR Form 2316) -- Employees must be provided a copy of the corresponding BIR Form 2316 on or before Jan. 31 of the succeeding calendar year.
Additionally, the BIR now requires all employers to submit the duplicate copy of BIR Form 2316 to the BIR not later than Feb. 28 following the close of the calendar year. Please note that this is the second year that the said new requirement is in effect, and if an employer fails to comply with the submission of BIR Form 2316 for two consecutive years, there is a stiffer penalty as prescribed by the related BIR issuance.
5. Periodic filing of monthly and quarterly tax returns -- Monthly filing pertains to the regular filings of withholding taxes (on income payments subject to final tax, expanded withholding tax, and compensation tax) for the month of December. On the other hand, the quarterly filings refer to quarterly value-added tax (VAT) return and fringe benefits tax (FBT) return. The deadline for monthly submission is Jan. 15, 2015; however for EFPS-filers, dates for filing is based on your groupings. As for the quarterly VAT and FBT returns, the deadline for submission shall be Jan. 25 and Jan. 10 respectively. For EFPS-filers deadline for submission of FBT returns is on Jan. 15, 2015.
6. Submission of books of accounts -- This includes submission of computerized books of accounts and permanently bound computer-generated/loose-leaf books of accounts.
A. Loose-leaf books of accounts -- The deadline for submission of loose-leaf bound books of accounts for taxable year ending Dec. 31, 2014 is on Jan. 15, 2015.
B. Computerized books of accounts -- The deadline for submission of computerized books of accounts and other accounting records in CD-R, DVD-R, or other optical media for the year ending Dec. 31, 2014 is on Jan. 30, 2015.
7. Submission of inventory list -- Under existing tax regulations, taxpayers are required to file an inventory list of stock-in-trade, raw materials, goods in process, supplies, and other goods not later than 30 days after the close of the taxable year. Hence, taxpayers whose accounting period ends on Dec. 31, 2014 should file their annual inventory list on or before Jan. 30, 2015. It is important to ensure that the amount of ending inventory declared in the list can be reconciled with the amount reported in the annual income tax return.
The above list pertains to some of the more common requirements that a corporate taxpayer has to be aware of to avoid penalties, and in view of these numerous requirements, it is a prudent course of action to always check on a tax calendar for reminders. Taxpayers must also take note of holidays in January as this may affect compliance with set deadlines.
Jennylyn V. Reyes is a senior associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.
2. Renewal of LGU registration -- The annual renewal of business registration with the LGU consists of, but is not limited to, payment of local business tax (LBT), mayor’s permit fee, sanitary inspection fee, garbage fee, building inspection fee, electrical inspection fee, mechanical inspection fee, plumbing inspection fee, fire inspection fee, personnel fee, business plate registration fee, and other charges imposed by the different LGUs.
While LBT is due on or before Jan. 20, 2015, taxpayers may opt to pay this on installment basis within the first 20 days of each quarter. Establishments that fail to renew their business permit or license will not be allowed to operate within the territory of the LGU concerned. In Metro Manila, where LGUs strictly monitor establishments, businesses could be closed down for failure to secure new business permits.
3. Annual information return of income taxes withheld on compensation (BIR Form 1604-CF) -- The Annual information return and alphabetical list (alphalist) must be submitted on or before Jan. 31 of the year following the calendar year in which the compensation payment and other income payments subject to final withholding taxes were paid or accrued. The alphalist is required to be attached as an integral part of BIR Form 1604-CF under certain prescribed modes. The failure to submit the alphalist in the prescribed mode may be a reason for the disallowance of the related claimed expense.
4. Employees’ withholding statements (BIR Form 2316) -- Employees must be provided a copy of the corresponding BIR Form 2316 on or before Jan. 31 of the succeeding calendar year.
Additionally, the BIR now requires all employers to submit the duplicate copy of BIR Form 2316 to the BIR not later than Feb. 28 following the close of the calendar year. Please note that this is the second year that the said new requirement is in effect, and if an employer fails to comply with the submission of BIR Form 2316 for two consecutive years, there is a stiffer penalty as prescribed by the related BIR issuance.
5. Periodic filing of monthly and quarterly tax returns -- Monthly filing pertains to the regular filings of withholding taxes (on income payments subject to final tax, expanded withholding tax, and compensation tax) for the month of December. On the other hand, the quarterly filings refer to quarterly value-added tax (VAT) return and fringe benefits tax (FBT) return. The deadline for monthly submission is Jan. 15, 2015; however for EFPS-filers, dates for filing is based on your groupings. As for the quarterly VAT and FBT returns, the deadline for submission shall be Jan. 25 and Jan. 10 respectively. For EFPS-filers deadline for submission of FBT returns is on Jan. 15, 2015.
6. Submission of books of accounts -- This includes submission of computerized books of accounts and permanently bound computer-generated/loose-leaf books of accounts.
A. Loose-leaf books of accounts -- The deadline for submission of loose-leaf bound books of accounts for taxable year ending Dec. 31, 2014 is on Jan. 15, 2015.
B. Computerized books of accounts -- The deadline for submission of computerized books of accounts and other accounting records in CD-R, DVD-R, or other optical media for the year ending Dec. 31, 2014 is on Jan. 30, 2015.
7. Submission of inventory list -- Under existing tax regulations, taxpayers are required to file an inventory list of stock-in-trade, raw materials, goods in process, supplies, and other goods not later than 30 days after the close of the taxable year. Hence, taxpayers whose accounting period ends on Dec. 31, 2014 should file their annual inventory list on or before Jan. 30, 2015. It is important to ensure that the amount of ending inventory declared in the list can be reconciled with the amount reported in the annual income tax return.
The above list pertains to some of the more common requirements that a corporate taxpayer has to be aware of to avoid penalties, and in view of these numerous requirements, it is a prudent course of action to always check on a tax calendar for reminders. Taxpayers must also take note of holidays in January as this may affect compliance with set deadlines.
Jennylyn V. Reyes is a senior associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
The OECD action plan on Base Erosion and Profit Shifting
December 14, 2014
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.
January 04, 2015
BEPS action plan 1: The digital economy
IN A PREVIOUS column (http://www.bworldonline.com/content.php?section=Economy&title=the-oecd-action-plan-on-base-erosion-and-profit-shifting&id=99561), we wrote about the general framework of the Base Erosion and Profit Shifting (BEPS) initiative, why addressing BEPS is a key priority for many governments across the globe, and the 15-point BEPS Action Plan drafted by the Organization for Economic Co-operation and Development (OECD). The Action Plan aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. In this column, we tackle the OECD Report on Action 1, which addresses the tax challenges of the digital economy.
Over the years, many stakeholders have raised concerns on how businesses operating in the digital economy have made use of their mobility as well as the gaps in the different tax systems to create “stateless income.” Questions have likewise been raised on how to attribute value from the generation of data through digital products and services, or how to characterize payments for digital goods or services. More significantly, the question is whether current tax residence or Permanent Establishment (PE) rules are still applicable considering the rise of “digital presence.”
THE DIGITAL ECONOMY: KEY FEATURES, NEW BUSINESS MODELS AND BEPS OPPORTUNITIES
Some key features of the digital economy identified by the OECD include mobility with respect to intangibles, users/consumers and business functions; reliance on data and use of multi-sided business models where two sides of the market are located in separate jurisdictions. These features have allowed enterprises to conduct substantial business in different market jurisdictions from a remote location, or transfer intangible assets to associated enterprises with relative ease and, often, to those which do not have any economic activity, in order to reduce or avoid taxes in countries in the entire supply chain. To date, digital enterprises have been successful in doing so due to gaps in the countries’ tax systems and tax treaties. If not addressed soon, more and more digital enterprises will have “stateless” income which will remain untaxed to the detriment of governments and smaller businesses.
WHAT NEEDS TO BE DONE
To address these challenges in the digital economy, the approach should be comprehensive and coordinated. The OECD proposes to do this by combining the BEPS measures under Action 1 with the other Action Areas such as Action 2 (Neutralizing the effects of hybrid mismatch arrangements), Action 5 (Counter harmful tax practices), Action 6 (Prevent Treaty Abuse) and Action 7 (Prevent the artificial avoidance of PE status) in order to align taxation with economic activities and value creation.
In Action 1, the OECD proposes several corporate income tax and VAT options to address the digital issues, such as:
CHANGES IN PERMANENT ESTABLISHMENT (PE) RULES.
The OECD notes that some activities which have been previously defined as merely preparatory or auxiliary under the treaty have now become the main business activity of some enterprises. To the extent, therefore, that these exceptions do not or cannot apply to digital activities, it is proposed that they be removed from the treaty, or at least limit the PE exemption to those activities which are actually preparatory or auxiliary in nature.
Action 1 introduces the concept of “significant digital presence” whereby an enterprise engaged in “fully dematerialized digital activities” will be deemed to have a PE in a certain jurisdiction if it maintains “significant digital presence” therein.
According to the report, “significant digital presence” can be deemed to exist if a significant number of contracts for the provision of fully dematerialized digital goods or services are remotely signed between the enterprise and a customer who is a tax resident in the country, or if digital goods or services of the enterprise are widely used or consumed in said country. Meanwhile, an activity will qualify as a “fully dematerialized digital activity” if: (1) The core business of the enterprise relies completely or in a considerable part on digital goods or services; (2) No physical elements or activities are involved in the actual creation of the goods or services and their delivery other than the existence, use, or maintenance of servers, Web sites or other IT tools and the collection, processing, and commercialization of location-relevant data; (3) Contracts are generally concluded remotely either through Internet or telephone; (4) Payments are made solely through credit cards or other means of electronic payments; (5) Web sites are the only means used to enter into a relationship with the enterprise; no physical stores or agencies exist for the performance of the core activities other than offices located in the parent company or operating company countries; (6) All or a majority of profits are attributable to the provision of digital goods or services; (7) Legal or tax residence and the physical location of the vendor are disregarded by the customer and do not influence its choices; and (8) Actual use of the digital goods or the performance of the digital service do not require physical presence or the involvement of a physical product other than the use of a computer, mobile devices or other IT tools.
The proposal to replace the PE concept with “significant presence” is meant to account for the contribution of closer and interactive customer relationships in digital transactions. The criteria include (1) long-term [i.e., more than six months] relationships with customers combined with some physical presence in the country; (2) sale of goods or services through a Web site in the local language, offering delivery from suppliers in the jurisdiction, using banking and other facilities from suppliers in the country, or offering goods or services sourced from suppliers in the country; and (3) supplying goods or services to customers in the country resulting from or involving systematic data-gathering from persons in the country.
WITHHOLDING TAX ON DIGITAL TRANSACTIONS
Considering that digital enterprises have been able to conduct business activity in different jurisdictions without creating a PE therein, the OECD proposes to impose a final withholding tax on payments made by residents of a country for digital goods or services supplied by said enterprises. To operationalize this proposal, the OECD suggests that the withholding be done by the financial institutions involved with the payments, instead of requiring the customers themselves to do the actual withholding of the tax.
BANDWIDTH OR “BIT” TAX
A bandwidth tax refers to a tax paid based on a Web site’s bandwidth use. Said tax assumes that a larger bandwidth equates to more data flow and economic activity. It is envisioned that this tax would only apply once a certain threshold annual bandwidth is reached.
VAT
A digital enterprise’s ability to sell its goods without paying VAT on its supplies due to certain import exemptions has created undue advantage over domestic suppliers. To address this issue, the OECD suggests a review of the thresholds for exemptions on imports of low-valued goods. It likewise calls for the VAT registration of non-resident suppliers of digital business-to-consumer (B2C) supplies in the jurisdiction of their consumers, as this will ensure that the VAT is properly collected on said B2C transactions.
The OECD Report on Action 1 acknowledges that there is still work to be done to fully understand the tax challenges of the digital economy and, consequently, develop a comprehensive solution to counter these challenges. As such, the Task Force on Digital Economy has expressed its commitment to ensure that work will be carried out in the remaining action areas affecting the digital economy. While there is still much debate on these areas, it is clear that the initial report offered good starting points in addressing the BEPS issues affecting the digital economy. Businesses are well advised to follow these developments.
Ma. Margarita Mallari-Acaban is a Tax Senior Director of SGV & Co.
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.
January 04, 2015
BEPS action plan 1: The digital economy
IN A PREVIOUS column (http://www.bworldonline.com/content.php?section=Economy&title=the-oecd-action-plan-on-base-erosion-and-profit-shifting&id=99561), we wrote about the general framework of the Base Erosion and Profit Shifting (BEPS) initiative, why addressing BEPS is a key priority for many governments across the globe, and the 15-point BEPS Action Plan drafted by the Organization for Economic Co-operation and Development (OECD). The Action Plan aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. In this column, we tackle the OECD Report on Action 1, which addresses the tax challenges of the digital economy.
Over the years, many stakeholders have raised concerns on how businesses operating in the digital economy have made use of their mobility as well as the gaps in the different tax systems to create “stateless income.” Questions have likewise been raised on how to attribute value from the generation of data through digital products and services, or how to characterize payments for digital goods or services. More significantly, the question is whether current tax residence or Permanent Establishment (PE) rules are still applicable considering the rise of “digital presence.”
THE DIGITAL ECONOMY: KEY FEATURES, NEW BUSINESS MODELS AND BEPS OPPORTUNITIES
Some key features of the digital economy identified by the OECD include mobility with respect to intangibles, users/consumers and business functions; reliance on data and use of multi-sided business models where two sides of the market are located in separate jurisdictions. These features have allowed enterprises to conduct substantial business in different market jurisdictions from a remote location, or transfer intangible assets to associated enterprises with relative ease and, often, to those which do not have any economic activity, in order to reduce or avoid taxes in countries in the entire supply chain. To date, digital enterprises have been successful in doing so due to gaps in the countries’ tax systems and tax treaties. If not addressed soon, more and more digital enterprises will have “stateless” income which will remain untaxed to the detriment of governments and smaller businesses.
WHAT NEEDS TO BE DONE
To address these challenges in the digital economy, the approach should be comprehensive and coordinated. The OECD proposes to do this by combining the BEPS measures under Action 1 with the other Action Areas such as Action 2 (Neutralizing the effects of hybrid mismatch arrangements), Action 5 (Counter harmful tax practices), Action 6 (Prevent Treaty Abuse) and Action 7 (Prevent the artificial avoidance of PE status) in order to align taxation with economic activities and value creation.
In Action 1, the OECD proposes several corporate income tax and VAT options to address the digital issues, such as:
CHANGES IN PERMANENT ESTABLISHMENT (PE) RULES.
The OECD notes that some activities which have been previously defined as merely preparatory or auxiliary under the treaty have now become the main business activity of some enterprises. To the extent, therefore, that these exceptions do not or cannot apply to digital activities, it is proposed that they be removed from the treaty, or at least limit the PE exemption to those activities which are actually preparatory or auxiliary in nature.
Action 1 introduces the concept of “significant digital presence” whereby an enterprise engaged in “fully dematerialized digital activities” will be deemed to have a PE in a certain jurisdiction if it maintains “significant digital presence” therein.
According to the report, “significant digital presence” can be deemed to exist if a significant number of contracts for the provision of fully dematerialized digital goods or services are remotely signed between the enterprise and a customer who is a tax resident in the country, or if digital goods or services of the enterprise are widely used or consumed in said country. Meanwhile, an activity will qualify as a “fully dematerialized digital activity” if: (1) The core business of the enterprise relies completely or in a considerable part on digital goods or services; (2) No physical elements or activities are involved in the actual creation of the goods or services and their delivery other than the existence, use, or maintenance of servers, Web sites or other IT tools and the collection, processing, and commercialization of location-relevant data; (3) Contracts are generally concluded remotely either through Internet or telephone; (4) Payments are made solely through credit cards or other means of electronic payments; (5) Web sites are the only means used to enter into a relationship with the enterprise; no physical stores or agencies exist for the performance of the core activities other than offices located in the parent company or operating company countries; (6) All or a majority of profits are attributable to the provision of digital goods or services; (7) Legal or tax residence and the physical location of the vendor are disregarded by the customer and do not influence its choices; and (8) Actual use of the digital goods or the performance of the digital service do not require physical presence or the involvement of a physical product other than the use of a computer, mobile devices or other IT tools.
The proposal to replace the PE concept with “significant presence” is meant to account for the contribution of closer and interactive customer relationships in digital transactions. The criteria include (1) long-term [i.e., more than six months] relationships with customers combined with some physical presence in the country; (2) sale of goods or services through a Web site in the local language, offering delivery from suppliers in the jurisdiction, using banking and other facilities from suppliers in the country, or offering goods or services sourced from suppliers in the country; and (3) supplying goods or services to customers in the country resulting from or involving systematic data-gathering from persons in the country.
WITHHOLDING TAX ON DIGITAL TRANSACTIONS
Considering that digital enterprises have been able to conduct business activity in different jurisdictions without creating a PE therein, the OECD proposes to impose a final withholding tax on payments made by residents of a country for digital goods or services supplied by said enterprises. To operationalize this proposal, the OECD suggests that the withholding be done by the financial institutions involved with the payments, instead of requiring the customers themselves to do the actual withholding of the tax.
BANDWIDTH OR “BIT” TAX
A bandwidth tax refers to a tax paid based on a Web site’s bandwidth use. Said tax assumes that a larger bandwidth equates to more data flow and economic activity. It is envisioned that this tax would only apply once a certain threshold annual bandwidth is reached.
VAT
A digital enterprise’s ability to sell its goods without paying VAT on its supplies due to certain import exemptions has created undue advantage over domestic suppliers. To address this issue, the OECD suggests a review of the thresholds for exemptions on imports of low-valued goods. It likewise calls for the VAT registration of non-resident suppliers of digital business-to-consumer (B2C) supplies in the jurisdiction of their consumers, as this will ensure that the VAT is properly collected on said B2C transactions.
The OECD Report on Action 1 acknowledges that there is still work to be done to fully understand the tax challenges of the digital economy and, consequently, develop a comprehensive solution to counter these challenges. As such, the Task Force on Digital Economy has expressed its commitment to ensure that work will be carried out in the remaining action areas affecting the digital economy. While there is still much debate on these areas, it is clear that the initial report offered good starting points in addressing the BEPS issues affecting the digital economy. Businesses are well advised to follow these developments.
Ma. Margarita Mallari-Acaban is a Tax Senior Director of SGV & Co.
source: Businessworld
Sunday, January 4, 2015
BIR loses appeal in P100-M BCDA refund case
AFFIRMING that sales of military property are not taxable, the Court of Tax Appeals (CTA) has dismissed the appeal of the Bureau of Internal Revenue (BIR) against a previous decision to refund the Bases Conversion and Development Authority (BCDA) P101.6 million in withholding taxes after a land sale in 2008.
In a 31-page decision dated Dec. 16, 2014, the CTA en banc affirmed the decision issued by the court’s first division on Dec. 13, 2013, which said that “while [the BCDA] is not entitled to exemption from income tax, the proceeds from the sale of portions of Metro Manila military camps are tax exempt.”
The en banc decision penned by Associate Justice Juanito C. Castañeda, Jr. agreed with the BIR’s argument that the BCDA was not among the government corporations exempted by the National Internal Revenue Code (NIRC, or the Tax Code) from paying taxes.
However, it noted that the Bases Conversion and Development Act of 1992 “clearly provides that the proceeds from [the BCDA’s] sale of government lands and other properties [under the law] are government funds and shall be remitted to the National Treasury… and automatically appropriated for the budget requirement of the several beneficiary-agencies.”
“To tax the proceeds of the sale would be to tax an appropriation made by law, a power that the Commissioner of Internal Revenue does not have,” the decision read.
“Such payment would in effect have resulted in diminishing the proceeds of the sale that the Republic received and turned over to the respondent to capitalize it,” it added.
The petition for review filed by the Commissioner on Internal Revenue (CIR) stated that the 1997 Tax Code could not be overridden by the Bases Conversion and Development Act (implemented in 1995) because it was “the later legislative will,” an argument the CTA disagreed with because the latter was not repealed.
The decision also dismissed the CIR’s argument that BCDA was barred from claiming the refund because it already opted to carry over its 2008 excess credit to its 2009 income tax return, an option that is irrevocable according to the Tax Code.
The court said that the income from which the taxes were withheld in 2008 did not include the 2008 land sale because it was exempted from the creditable withholding tax system, which meant that the irrevocability clause did not apply to the transaction.
It added that the Tax Code excluded sales of government property from declarations of gross income.
The decision recalled that the BCDA entered into four separate contracts on May 23, 2008, selling a total of 12,036 square meters of land -- collectively known as the Expanded Big Delta Lots -- to an unincorporated joint venture called the Net Group for P2.03 billion.
The BCDA then wrote BIR in a letter received on May 28, requesting a confirmation that it is exempted from all taxes and fees, including the creditable withholding tax (CWT) and value-added tax on the land sale, which the commissioner’s office did not reply to.
On July 2008, the BCDA and the buyer-companies remitted P101.6 million, equivalent to the 5% CWT on the land sale. BCDA later filed on March 2009 a request for the amount to be refunded, which was not acted on.
The BCDA then brought the matter to the CTA on July 2010.
The BIR responded in October, arguing that BCDA was not among the government corporations exempted by the Tax Code from paying taxes and that it failed to substantiate the refund claim.
The BIR’s appeal was docketed as CTA EB No. 1123, Commissioner of Internal Revenue versus Bases Conversion and Development Authority.
It sought to reverse the decision made on CTA Case No. 8140, Bases Conversion and Development Authority versus Commissioner of Internal Revenue.
source: Businessworld
In a 31-page decision dated Dec. 16, 2014, the CTA en banc affirmed the decision issued by the court’s first division on Dec. 13, 2013, which said that “while [the BCDA] is not entitled to exemption from income tax, the proceeds from the sale of portions of Metro Manila military camps are tax exempt.”
The en banc decision penned by Associate Justice Juanito C. Castañeda, Jr. agreed with the BIR’s argument that the BCDA was not among the government corporations exempted by the National Internal Revenue Code (NIRC, or the Tax Code) from paying taxes.
However, it noted that the Bases Conversion and Development Act of 1992 “clearly provides that the proceeds from [the BCDA’s] sale of government lands and other properties [under the law] are government funds and shall be remitted to the National Treasury… and automatically appropriated for the budget requirement of the several beneficiary-agencies.”
“To tax the proceeds of the sale would be to tax an appropriation made by law, a power that the Commissioner of Internal Revenue does not have,” the decision read.
“Such payment would in effect have resulted in diminishing the proceeds of the sale that the Republic received and turned over to the respondent to capitalize it,” it added.
The petition for review filed by the Commissioner on Internal Revenue (CIR) stated that the 1997 Tax Code could not be overridden by the Bases Conversion and Development Act (implemented in 1995) because it was “the later legislative will,” an argument the CTA disagreed with because the latter was not repealed.
The decision also dismissed the CIR’s argument that BCDA was barred from claiming the refund because it already opted to carry over its 2008 excess credit to its 2009 income tax return, an option that is irrevocable according to the Tax Code.
The court said that the income from which the taxes were withheld in 2008 did not include the 2008 land sale because it was exempted from the creditable withholding tax system, which meant that the irrevocability clause did not apply to the transaction.
It added that the Tax Code excluded sales of government property from declarations of gross income.
The decision recalled that the BCDA entered into four separate contracts on May 23, 2008, selling a total of 12,036 square meters of land -- collectively known as the Expanded Big Delta Lots -- to an unincorporated joint venture called the Net Group for P2.03 billion.
The BCDA then wrote BIR in a letter received on May 28, requesting a confirmation that it is exempted from all taxes and fees, including the creditable withholding tax (CWT) and value-added tax on the land sale, which the commissioner’s office did not reply to.
On July 2008, the BCDA and the buyer-companies remitted P101.6 million, equivalent to the 5% CWT on the land sale. BCDA later filed on March 2009 a request for the amount to be refunded, which was not acted on.
The BCDA then brought the matter to the CTA on July 2010.
The BIR responded in October, arguing that BCDA was not among the government corporations exempted by the Tax Code from paying taxes and that it failed to substantiate the refund claim.
The BIR’s appeal was docketed as CTA EB No. 1123, Commissioner of Internal Revenue versus Bases Conversion and Development Authority.
It sought to reverse the decision made on CTA Case No. 8140, Bases Conversion and Development Authority versus Commissioner of Internal Revenue.
source: Businessworld
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