Incentives are more than just hospitable gestures

“IT IS UNSOUND practice and uncouth behaviour to invite over guests to dinner at home, then charge them for use of the silverware before allowing them to dine.”

This statement in the penultimate paragraph of retired Justice Dante Tinga in a 2004 case hits home, especially when viewed in relation to the globally-renowned hospitality of Filipinos towards guests.

Even in business, we remain true to our hospitable traits by giving “special” treatment to investors, particularly in preferred areas of investment that have been identified in the government’s Investment Priorities Plan (IPP). One such preferential treatment is the exemption from national and local taxes and duties granted to qualified investors.

This commitment we have as hosts to investors is what the Court of Tax Appeals (CTA) enunciated in a recent decision (CTA EB Case No. 1142, 05 January 2015). The case involved a refund claim by a taxpayer registered with the Philippine Economic Zone Authority (PEZA) of the customs duties it paid on local purchases of petroleum products. The claim was initially denied by the District Collector at the Port of Manila for failure of the taxpayer to establish entitlement to the refund. On appeal, it was also denied by the Commissioner of Customs due to procedural infirmities in perfecting an appeal under the Tariff and Customs Code of the Philippines (TCCP).

Fortunately for the taxpayer, the CTA disagreed with the Commissioner of Customs. Citing the same 2004 Supreme Court (SC) decision (GR No. 144440, 1 September 2004) mentioned earlier, the CTA reiterated that the procedural requirements provided under the TCCP are not applicable to refund claims of entities registered with PEZA under Section 17 of Presidential Decree No. 66. This is because under the said provision, all supplies brought into the economic zone to be used directly or indirectly in the PEZA-registered activity shall neither be subjected to customs and internal revenue laws and regulations nor to local tax ordinances.

More than tax exemption, PD 66 placed the said supplies beyond the reach of customs laws and regulations. In other words, the said supplies are not only exempted from tax but are also exempted from other rules and regulations which are normally followed in the discharge of importation. As a result, neither the prescriptive periods nor the procedural requirements provided under the TCCP should govern the claim for refund of a PEZA-registered entity.

The Court went on to state that the provisions of the Civil Code on solutio indebiti (a principle which applies when taxes or other amounts are paid by mistake) will govern such claims. Therefore, the proper prescriptive period for refunding taxes and duties erroneously paid by PEZA-registered entities on supplies brought into the zone is six years from the date of payment.

It appears that the usual conflict or difficulty that comes with the principle that tax exemptions are to be strictly construed against the taxpayer finds no place here. The exemption is clear and it is consistent with the main pitch of the PEZA law to attract investors. If the courts had ruled otherwise, we may be seen as using the incentives as bait to hook investors.

Cursorily, the grant of incentives would appear to be a mere welcome gesture with revenue concessions the state is willing to absorb. However, there is more to it than meets the eye. From a performance standpoint, foreign investments bring the needed capital seed and revenue to jump-start a struggling economy that is ailing from debt payments, inflation, unemployment and a weak industry sector. Its impact is pervasive and inclusive, reaching even ancillary and peripheral sectors that benefit from its ripple effects.

The nature of the businesses under the IPP would show that the government’s intention is for the investment to trickle to the diverse and manifold sectors of the economy. We take for instance the preferred investment in tourism that creates work opportunities for our kababayans who are in the souvenir cottage industry, travel tours, inter-island transport, taxi services and even street hawkers, to name a few. Consequently, these investments bring to shore multiplier benefits that contribute to overall economic growth -- job generation, skills development, and optimization of local resources.

The decisions of the CTA and SC strike a proper balance between the country’s need to provide a conducive investment climate and the need to enhance revenue collections. The grant of incentives is more than an act of hospitality; it is, in fact, justified in view of the substantial economic benefits brought to the country by such investments.

In fact, pursuant to our investment laws, various campaigns were created to encourage foreigners to invest and do business in the Philippines. The tourism slogan “It’s more fun in the Philippines” is true even from a business perspective, particularly when one looks at the investment laws which grant various fiscal and non-fiscal incentives. But in making such promises, it is a must that we, as host, deliver and follow through on them. Otherwise, the effect will not just be a mere discourtesy to invited guests, but rather a painful slap on the very hand that helped us.

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

(02) 845-2728

marie.kristel.virtudez@ph.pwc.com

source:  Businessworld

A regressive tax system

POPE Francis, during his trip to the Philippines, called attention to “scandalous social inequalities” plaguing the country. Indeed, a 2011 World Bank report cited the Philippines as having the highest level of income inequality in East Asia.

Our outdated tax scheme exacerbates this dismal situation. For instance, the prevailing personal income tax rates and brackets remain unadjusted, nearly 18 years since they were adopted. And with the consumer price index doubling in the intervening years, tens of thousands of young professionals and junior executives find themselves catapulted to the top tax brackets.

An entry-level call center agent would already be paying at the third-highest rate of 25 percent while a mid-level professional with gross monthly income of P60,000 would be taxed at the same rate charged the owner of the company he works for.

Such tax scheme pushes our people to jobs overseas. A person earning around $5,700 (roughly P250,000) will be taxed at 2 percent in Malaysia, 10 percent in Thailand, 15 percent in Indonesia and exempt from income tax in Singapore. That same person will be taxed at 25 percent, here at home. This explains why in a 2014 Pew Research Center survey, 31 Filipino respondents said they would recommend “moving abroad” to a young person who wants a good life.

With the current scheme, a significant portion of the government’s tax revenues come from middle-class wage and salary earners, mostly as taxes withheld. A 2014 UP School of Economics study revealed that up to P240 billion in government revenues–representing up to 20 percent of total tax collection in 2013–came from the incomes of only 4.66 million Filipino families, comprising an overworked and increasingly thinned-out middle class.

What we have is in fact a regressive taxation system, contrary to constitutional provisions mandating a progressive one. With much of the population unable to pay taxes and well-to-do families able to avoid tax obligations, the burden falls mainly on the shoulders of the salaried and fixed income earners.

President Aquino recently signed into law a measure that raises the tax exemption ceiling on salary benefits such as 13th month pay and Christmas bonus, from P30,000 to P82,000. The measure will benefit an estimated 22 million Filipino wage and salary earners– putting back much needed purchasing power into the hands of middle class families. It should also mark the first of many needed reforms in our unjust taxation system.

E-mail: angara.ed@gmail.com.

source:  Business Mirror

Complying with PEZA validation requirements

IF THE “busy season” for an accounting firm’s audit and accounting departments is from December to April, January and February are among the busiest months for the Enterprise Services Division (ESD) and Incentives Management Division (IMD) of the Philippine Economic Zone Authority (PEZA). During this time, PEZA-registered enterprises renew their certificate of incentives and value-added tax (VAT) zero-rating certificate.

The primary tax incentives enjoyed by a PEZA-registered enterprise are:

• Four- or six-year income tax holiday (ITH) for pioneer or non-pioneer registered activities, respectively

• 5 percent gross income tax (GIT) incentive, which can be availed any time after the ITH has lapsed, and is in lieu of all national and local taxes

• VAT zero-rating on local purchases of goods and services

• VAT-free and duty free importations of capital equipment and machineries, among others

The grant of these incentives is subject to the following special conditions provided under the PEZA Registration Agreement (and/or Supplemental Agreement, as the case may be):

• Validation of actual date of SCO

When a company registers with PEZA, it is required to submit a project brief indicating the estimated date of the start of commercial operations (SCO). Since the reckoning of the ITH period is based on the date of the SCO, PEZA needs to validate the actual SCO date (as opposed to the estimated date). For PEZA’s purposes, the actual SCO date is when the registered enterprise issues its first billing or commercial invoice to its customer.

Within seven days from said SCO date, the registered enterprise is required to submit to the PEZA Zone Manager a notarized certification on the date of actual SCO, which will be validated and attested by the latter. The attested certification will then be submitted to PEZA-IMD. A copy of the attested actual SCO date will also be submitted to PEZA Enterprise Registration Division (ERD).

The important supporting documents that must be submitted along with the certification on the date of actual SCO are:

• copy of the first commercial invoice

• copy of the occupancy permit (OP), or at least proof of submission of the application for the OP

While the copy of the first commercial invoice is readily available, securing the OP from PEZA Head Office Building Official (PEZA-HOBO) can easily be overlooked. When a PEZA-registered enterprise constructs its facility or fits out its office premises, the function of ensuring compliance with the requirements of the National Building Code are transferred from the Local Government Unit (LGU) to the PEZA-HOBO. Prior to construction or fit-out, the PEZA-registered enterprise should apply for a construction permit with the PEZA HOBO. Upon completion of construction or fit-out, PEZA-HOBO will conduct an inspection and thereafter, issue the OP. Even if a facility is site-hosted, the registered enterprise is still required to secure an OP.

In addition to being a requirement to secure SCO validation, a registered enterprise that subsequently transfers to a new office space will not be allowed by PEZA-HOBO to construct or fit-out the new premises unless it has already secured an OP for the old site.

• Validation of ITH entitlement

The grant of ITH is premised on investment by the registered enterprise of brand new equipment and machineries that are included as part of the information indicated in the project brief. Within 45 days after the first year of its commercial operations reckoned from the attested actual SCO date, the registered enterprise is required to file an application for validation of its investment in new equipment.

The most important supporting document that must be submitted together with the application for validation of investment is a certified list of the machines and equipment acquired for the project within the first year along with the corresponding invoices and/or PEZA import permits. PEZA-EOD will first conduct an inspection of the equipment and thereafter attest the certified listing. The attested list will then be submitted to PEZA-IMD which will process the application for validation. The report on validation will then be reviewed by PEZA-ERD before the final review by the Deputy Director General (Deputy DG) and signature by the PEZA DG.

In the case of call center activity, in addition to the validation of investment in IT equipment, the registered enterprise is also required to file for validation of the required investment cost per seat as stated in its PEZA Registration Agreement. Investment cost includes cost of equipment (hardware and software), office furniture and fixture, building improvements and renovations, and fixed assets, excluding cost of land, building and working capital.

As with validation of investment in equipment, the most crucial supporting document to validate investment cost per seat is the listing of equipment, furniture, improvements and other fixed assets. The same time period and process is applicable to validation of investment cost per seat.

• Validation of base figure in case of expansion projects

PEZA may grant a separate three-year expansion ITH on incremental revenues for an expansion project (subsequent to the original registered project) that involves investment in new equipment and improvements. The expansion ITH is subject to a base figure equivalent to the highest sales value for the past three years of the PEZA enterprise’s existing registered activity. This base figure shall be subject to validation by PEZA-ERD and must be filed not later than the last day of filing with the Bureau of Internal Revenue (BIR) of the final ITR for the first taxable year of the expansion project.

The application for validation of base figure shall be submitted to PEZA-IMD together with the sales summary for the last three years prior to the registration of the expansion project, and audited financial statements for the said last three years. PEZA-IMD will prepare the report on validation which shall be reviewed by PEZA-ERD before final review by the Deputy DG and signature by the DG.

In recent years, in order to enhance their compliance monitoring, PEZA has required the submission of applications for validation of the above-mentioned special conditions prior to renewing the certificate of incentives and VAT zero-rating certificate. Other than validation of actual date of SCO (which must be accomplished within seven days), most of the special conditions have to be complied with after the first year from actual SCO date. As such, a PEZA-registered enterprise renewing its certificate of incentives and VAT zero-rating certificate after the first year of operations will encounter challenges in the renewal process if, at that time, it has not yet complied with the special conditions. In addition, all PEZA quarterly and annual reports must be submitted to PEZA-ESD before PEZA-IMD can process the renewal of said certificates.

Delay in securing the certificates can have significant consequences on the part of a PEZA-registered enterprise. Under the new BIR ITR forms, particularly, the ITR form for mixed income taxpayers, the certificate of entitlement to incentives should be attached to the ITR. Also, some LGUs require the submission of the certificate of incentives prior to issuing the assessment or billing for the annual mayor’s permit. More importantly, most suppliers of goods and services will require presentation of the latest VAT zero-rating certificate before they issue their billing at 0 percent VAT to the PEZA-registered enterprise.

To ensure that their certificates are renewed promptly, PEZA-registered enterprises would do well to enhance their understanding of the special conditions and thereby improve their compliance with the same. These validations need to be complied with not only for purposes of renewing the certificates, but more importantly, for establishing condition precedents in the event that the registered enterprise will apply for extension of its ITH under applicable provisions of the PEZA law.

As can be seen from the foregoing, the most important document that will facilitate compliance by a registered enterprise with the required validations is the fixed asset register and supporting invoices and PEZA import permits. If a registered enterprise has multiple projects across several sites, each of which are entitled to their respective new or expansion ITH, keeping a well-maintained fixed asset register and separate tagging of assets for each project becomes even more crucial to its ability to comply with the validations required by PEZA for its entitlement to incentives.

Tata Panlilio-Ong is a Director 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

Higher tax break cap for bonuses now a law

PRESIDENT BENIGNO S.C. Aquino III has signed into law the measure that would raise the income tax exemption ceiling for the 13th month pay “and other benefits” like Christmas bonus and productivity incentives.

“According to the Office of the Executive Secretary, the President has signed into law the bill raising the ceiling on tax exemptions on bonuses to P82,000,” Communications Secretary Herminio B. Coloma Jr., said in a telephone interview Thursday.

The bill seeking to more than double the income tax exemption cap for employee bonuses to P82,000 from the current P30,000 was transmitted by Congress to Malacañang last Jan. 14.

The Senate on Nov. 26 last year approved on third and final reading its version of the bill -- under Senate Bill 2437 -- which seeks to make workers’ bonuses of as much as P82,000 tax-free.

The figure is higher than the P70,000 limit approved by the House of Representatives in September. The House of Representatives then adopted the Senate’s version.

House Committee on Ways and Means Chairman Rep. Romero S. Quimbo of Marikina (2nd district) in a statement yesterday said the measure will be effective “as early as June 2015, when half of the 13th month pay is released...”

Both chambers of Congress previously agreed to treat the measure as a priority, citing the need to adjust the rates due to inflation. The passage of the proposal will amend Republic Act No. 7833 which set the tax exemption ceiling at P30,000 in 1994.

Senator Juan Edgardo “Sonny” M. Angara, chairman of the Senate’s ways and means committee, said in a separate statement that the newly enacted law “has provided for automatic adjustment of the ceiling every three years, taking into account inflation, to ensure that the tax ceiling won’t be left unchanged again for more than two decades.”

Congress originally hoped the measure would take effect in time for last Christmas. Sen. Ralph G. Recto, one of the proponents of the measure, said Finance officials had requested that approval of the bill be delayed so it would take effect this year instead of end-2014.

The Department of Finance (DoF) and the Bureau of Internal Revenue (BIR) had earlier opposed the measure, saying it would create a huge revenue loophole of at least P26 billion for the original proposal of raising tax exemption to P70,000, adding that “should Congress ratify the bill which is currently pegged at P82,000,” the DoF would come up with a computation way higher than the P26.8 billion.

The Senate and House ways and means committees however, used as basis the P2-billion estimate by University of the Philippines economist Stella Luz A. Quimbo, who is also Mr. Quimbo’s wife.

Sought for comment yesterday, Internal Revenue Commissioner Kim S. Jacinto-Henares said: “With the passage of the bill into law, it will just mean the revenue goal of the BIR will go down by between P26-30 billion.”

“This is on top of the P16.9 billion of forgone revenue resulting from the additional de minimis granted,” she added, referring to an Executive measure that counts employee perks granted under collective bargaining agreements and productivity incentive schemes as tax-free.

“The revenue goal of the BIR will go down from P1.720 trillion to P1.674 trillion.”

source:  Businessworld

‘No Contact Audit’ revisited

THE BUREAU of Internal Revenue (BIR) has a gargantuan task of achieving its collection target for this year of P1.72 trillion (a significant increase from last year’s target of P1.456 trillion, which was not met). To achieve this goal, the BIR has identified 27 priority programs as explained in a recent circular (RMC 3-2015).

Against this backdrop, taxpayers should expect more frequent and aggressive tax audits.

In addition to the regular tax audit involving an investigation of the taxpayer’s records, the BIR will likely continue its so called “no-contact audit approach”, which involves the computerized matching of sales and purchases as reported by sellers and buyers in their tax and information returns, and importations per taxpayers’ returns and per records of the Bureau of Customs.

Discrepancies arising from the computerized matching are communicated to the taxpayer through the issuance of a letter notice (LN). If the taxpayer is not able to reconcile the alleged discrepancies, such may be used as a basis for deficiency tax assessments.

However way the mismatch goes, the BIR may attempt to go after either one of the parties.

For instance, if one taxpayer’s reported sales are matched with a second taxpayer’s reported purchases and the latter amount is found to be higher, the corresponding discrepancy may be considered as undeclared sales on the part of the first taxpayer. In case the results were reversed and the first taxpayer’s reported sales are found to be higher than the reported purchases by the other taxpayer, the latter is not off the hook as the BIR may then treat the discrepancy as undeclared purchases on the part of the second taxpayer. In either case, the BIR may treat the resulting discrepancy as subject to deficiency income and VAT assessments.

Particularly for the second scenario, is such an approach valid?

Under Section 229 of the Tax Code and its implementing regulations, an assessment must have legal and factual bases which must be communicated to the taxpayer in writing in order to be valid. In other words, it cannot be based on a presumption. As held by the Supreme Court in one case (G.R. No. L-46644 dated 11 September 1987), an “assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. The assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption.”

In one case (CTA Case No. 7540 dated 20 May 2010), the Court of Tax Appeals (CTA) held that no taxable income results from undeclared expenses because it rests on mere presumption. According to the court, even if the alleged undeclared expenses were to be considered as income, the same would be offset by recording the equivalent expenses. Hence, such alleged undeclared expenses will not result in taxable income.

Recently, the CTA En Banc sustained an earlier CTA decision canceling the deficiency income tax and VAT assessment, which were based on BIR findings that the taxpayer had under-declared purchases or unaccounted expenses (CTA EB No. 1054 dated 13 January 2015). However, since the alleged discrepancy arose from an LN, no evidence was submitted by the BIR showing that income resulted from the alleged unaccounted purchases/expenses and that said income was actually received by the corporation.

The CTA considered the assessment as lacking in legal and factual basis. According to the tax court, mere presumption of income based on under-declared purchases/unaccounted expenses which supposedly translate into income is not sufficient to sustain the validity of an assessment. Citing jurisprudence (G.R. 108576 dated 20 January 1999), the CTA reiterated that in order for a taxpayer to be validly assessed for deficiency income tax, the following elements should be present: a) clear proof of gain or profit, b) the gain or profit was received by the taxpayer, actually or constructively, and c) the income is not exempted by law or treaty from income tax.

In the same token, the CTA held that no deficiency VAT assessment should arise from the under-declared purchases. Under Section 105 of the Tax Code, VAT is imposed on the seller of goods and assessed on the “gross selling price or gross value in money of the goods or properties sold”. When assessing deficiency VAT, the CTA ruled that the BIR must prove that the taxpayer was or ought to be paid in consideration for a sale, and not when said taxpayer purchases or disburses cash to purchase goods or properties. Thus, there is no basis to impose deficiency VAT merely on the basis of alleged under-declared purchases.

Notwithstanding the CTA decision, I sincerely believe that the BIR should still pursue its no-contact audit approach as it helps in identifying taxpayers who may be amiss in paying correct taxes. However, such approach should only be used as a tool in determining which taxpayers should be subjected to examination, instead of as an outright basis for deficiency taxes. Deficiency tax assessments should be based on an actual audit of the taxpayer’s records and not on mere matching between taxpayer’s records with third party information.

Individually (and collectively), we can assist the BIR (and our beloved country) to meet its collection target by paying our taxes correctly. With proper record-keeping and faithful compliance with the tax rules (of course, having a reliable tax adviser may prove invaluable in understanding and keeping updated on the rules), a BIR examination need not be stressful nor complicated.

Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

carlos.mateo@ph.pwc.com

source:  Businessworld

More hopes pinned on large taxpayers

THE BUREAU of Internal Revenue (BIR) has adjusted the allocations of its collecting units to meet this year’s P1.704-trillion target as more companies and individuals were included under the agency’s Large Taxpayers Service (LTS).

“In view of the enlisting of additional taxpayers in the Large Taxpayers Service for CY 2015 (Calendar Year), this Order is being issued to amend... the Allocation of CY 2015 BIR Collection Goal, by Implementing Office,” Revenue Memorandum Order 4-2015 stated.

The LTS, which accounts for almost two-thirds of BIR’s total collections, added P195.92 million to its original allocation to bring its target to P1.07 trillion.

Revenue regions now have a P606.02-billion target, down from the previous P606.21 billion under RMO 2-2015.

BIR’s implementing offices now have a P1.676-trillion target for 2015.

Under Revenue Regulation 17-2010, a taxpayer becomes a candidate to become a “large taxpayer” if it satisfies at least one criteria based on tax payments, financial condition and results of operation.

For tax payments, the taxpayer should have satisfied any of the following conditions in the preceding year: P200,000 quarterly VAT returns for one quarter, P1 million in excise taxes, P1 million in annual income taxes, P1 million withholding taxes, P200,000 in quarterly documentary stamp taxes.

By financial condition and results of operation, a taxpayer becomes a candidate for LTS coverage when it reaches gross sales of at least P1 billion, net worth of at least P300 million, gross purchases of at least P800 million and is included in the Securities and Exchange Commission’s list of top corporate taxpayers.

BIR also updated its targets for each tax type, taking into account the expected P19.5-billion revenue loss from a new rule exempting employee perks under collective bargaining agreements and productivity schemes from tax.

Under the revised targets, taxes on net income and profits have been set at P1.024 trillion, down from the original P1.04-trillion target.

Targets for other tax types have been kept intact: P140.44 billion for excise taxes, P373.83 billion for value-added taxes, P79.14 billion for percentage taxes and P86.96 billion for other taxes.

BIR has issued Revenue Regulations No. 1-2015, formalizing the expansion of de minimisbenefits that are exempt from withholding and fringe benefit taxes.

“For as long as the benefit given under CBA and/or performance incentives combined does not exceed P10,000 per year, it will be considered a de minimis benefit and not included as part of the person’s taxable compensation and, therefore, not subject to tax,” BIR Commissioner Kim Jacinto-Henares had said in December.

BIR collections reached P1.098 trillion at end-October, P93 billion or 7.81% short of a P1.19-trillion target for that period but still up 10.54% from P993.54 billion in 2013’s comparable 10 months.

source:  Businessworld

What makes or breaks a tax case

ANYONE who likes mainstream pop music knows that the chorus often makes the song. The chorus is the high point, with the most unforgettable lines and the catchiest beat. A song may or may not have a third or a fourth verse or even a coda. But a chorus is a must.

Having been in the tax practice for several years, I have come to observe that tax cases with the Bureau of Internal Revenue (BIR) often follow the pattern of songs. Like songs with lines and verses, each relating to its message, a tax investigation has several parts, and when taken as a whole, the exercise is aimed at determining whether the taxpayer has unpaid taxes and whether the government has the right to assess and collect the same.

First, an investigation takes place where tax issues are identified and addressed. The taxpayer and the BIR examiners go through the process of discussing the tax treatment of income and expenses, discussing laws and jurisprudence, reconciling tax discrepancies and submitting supporting documents. In every stage of the tax investigation, the substantive and procedural due process rules must come into play: the BIR is required to send a Preliminary Notice Assessment, to which a taxpayer is given 15 days to reply and submit documents; in case of a disagreement as to the taxes assessed, the BIR shall send a Final Letter of Demand (FLD) or a Final Assessment Notice (FAN) within the three (3) -year period prescribed for the assessment of taxes. The taxpayer must contest the FLD or FAN in a timely manner by filing a request for reconsideration or a request for reinvestigation; otherwise, tax assessments become final and executory. The BIR may or may not act on the protest by issuing a Final Decision on Disputed Assessment (FDDA), and the taxpayer may or may elevate the case to the Court of Tax Appeals (CTA).

Where it is established that the BIR duly served a FLD or FAN, what makes or breaks the tax case is the filing or non-filing of the protest letter. The filing of the protest to the FLD or FAN is the most crucial remedy in the pursuit of a taxpayer’s defense. In countless cases decided by the courts, the validity of the tax assessments were upheld not because the government had a basis to assess and collect the taxes, but because the taxpayer failed to dispute the assessment and collection of the taxes within the period and by the manner prescribed by law.

Section 228 of the National Internal Revenue Code (NIRC) of 1997 provides that the tax assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and within 60 days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. In a recent decision, the CTA held that the tax assessment does not become final and executory although the taxpayer chose to submit the protest without supporting documents, since the lack of documentation will only matter when the BIR evaluates the merits of the said protest (CTA Case No. 8185, Third Division, December 3, 2014).

The filing of the protest letter should not only be made; it must also be clearly established. Last week, the CTA dismissed an appeal filed by a taxpayer on the final decision of the BIR, citing lack of jurisdiction. In this case, the facts show that the BIR issued a FAN against the taxpayer, and later, a FDDA. The petitioner filed an appeal on the FDDA with the Commissioner of Internal Revenue. The CTA held that although the petitioner made allegations that it filed a protest letter, no proof was presented. For having failed to file a protest to the FAN within the given period, the FAN attained finality (CTA Case No. 8891, Third Division, February 2, 2015).

Under Revenue Regulation (RR) No. 18-2013, which implements Section 228 of the NIRC, the protest letter should now indicate the nature of the protest, i.e., request for reconsideration or request for reinvestigation, specifying the newly discovered evidence to be presented in case of reinvestigation, the date of the assessment notice, the applicable laws, rules and regulations, and jurisprudence on which the protest is based; otherwise, the protest shall be considered void and without force and effect. The additional requirements laid down in RR No. 18-2013 only highlight how important the exercise of this remedy is.

The two cases and the new regulation cited above illustrate how the filing (and non-filing) of the protest letter can make or break the tax case.

To relate all of these to our song analogy, I would say the protest letter is definitely the chorus. A bad chorus can still make for an enjoyable song, although its ultimate meaning may be difficult to understand. On the other hand, a song without a chorus may have no point at all.

Jean Ross Abenasa-Miso is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld

BIR’s P1.72-T 2015 target

THE 2015 collection target of the Bureau of Internal Revenue (BIR) is P1.72085 trillion. As part of its effort to achieve the goal, earlier this year the BIR issued Revenue Memorandum Circular No. 3-2015 (RMC No. 3-2015) outlining 27 Priority Programs for 2015.

RMC No. 3-2015 cites the importance of BIR revenue performance in the context of the Philippines emerging as one of the fastest-growing economies in Southeast Asia. Among the more noteworthy of the programs are.

• Run against Tax Evaders (RATE) program -- This program has been expanded to Revenue Regions and aims to identify and prosecute high-profile tax evaders.

• Oplan Kandado program -- This pertains to strengthening the BIR’s array of administrative sanctions, including suspending businesses and closing their premises for non-compliance with the requirements of value-added tax (VAT) rules.

• Compliance Improvement Strategy -- This refers to a system that will develop a comprehensive end-to-end compliance improvement strategy for taxpayers for the effective management of risks and to improve overall levels of compliance in areas of registration, filing and payment, under-reporting and arrears management.

• Exchange of Information (EOI) Program and the Implementation of the Foreign Account Tax Compliance Act Intergovernmental Agreement Model 1 (FATCA-IGA 1) -- This program seeks to make the BIR more aware of the benefits of EOI in collecting taxes, particularly in cross-border transactions, wherein the BIR can obtain information from another tax authority regarding the foreign-sourced incomes of taxable residents.

• Transfer Pricing program This program seeks to complement the transfer pricing guidelines of the BIR issued in 2013, which prescribed how to determine the appropriate revenue and taxable income of the parties in controlled transactions. The proposed program will include a commercial database subscription for transfer pricing studies and the crafting/finalization of related issuances on transfer pricing.

The programs indicate that the BIR is gearing up to upgrade to a more automated or computer-based system. Examples of these automated programs are the Online System for Transfer Tax Transactions, Online System for Accreditation of Importers and Customs Brokers, and Online Application and Processing of Tax Clearance for Bidding Purposes.

With such an aggressive collection target, many taxpayers are skeptical whether the BIR can pull off its 27-point strategy without imposing measures that will disadvantage taxpayers. Taxpayers are anxious about more stringent regulation by the BIR and the potential for the issue of confusing tax directives.

On the automation processes, the BIR intends to revolutionize the mechanism of implementing its power of taxation. If implemented well, the automation of the processes could be a win-win situation both for the government and the taxpayer. This is because of potential efficiencies and reduced human intervention, thus resulting in fewer errors.

With a view towards avoiding any detrimental effects from the 27-point program, it is the desire of taxpayers that regulations be tangible and the requirements definitive to avoid conflicting interpretations by different BIR offices. In addition, the BIR’s public information campaign should be strengthened to keep the taxpayers abreast of developments in tax rules.

Moreover, in regard to automation, taxpayers hope that the intent of such initiatives, which is the speedy disposition of tax-related cases, not be foiled by delays in the review stages.

To reduce worry, taxpayers must be well-informed about how to comply with the tax rules. Procedural requirements set by the BIR should be taken seriously to avoid disputes with the BIR case officers. Past tax returns must periodically be reviewed to check for any need for amendments, in order to prevent being charged interest on possible deficiency taxes. Transactions must be studied for tax implications prior to the preparation of returns. Controls must be strengthened on maintaining of books of accounts and on observing documentary procedures, such as VAT invoicing requirements. Policies and strategies which expose the company to potential violations must be evaluated and corrected to align with the prevailing rules and issuances of the BIR.

As the game plan of the BIR keeps evolving, taxpayers must be sufficiently equipped to remain well within the bounds of law to curb any pain that new reforms might inflict. P1.72085 trillion is a huge target. Taxpayers should always aim to be faithful subjects of the State. On the other hand the BIR should also take care to ensure that taxation does not end up killing the hen that lays the golden eggs.

Eliezer P. Ambatali is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

BEPS Action Plan 5: Countering harmful tax practices

IN LAST WEEK’S column we talked about the OECD’s BEPS Action Plan on Hybrid Mismatch Arrangements. This week’s column focuses on the OECD’s Action Plan on Harmful Tax Practices (HTP).

As the world economy continues the process of globalization and technological advances, tax authorities from various jurisdictions are inevitably faced with the issue of companies taking advantage of enhanced mobility to distort the location of capital and services. The distortion may occur where companies, particularly multinationals, move taxable profits created in one country to another country which offers a preferential tax regime at no or low tax rates. Using the OECD 1998 Report “Harmful Tax Competition: An Emerging Global Issue” as framework, the OECD Forum on HTP outlined three elements in determining whether a regime is a harmful preferential regime; these are:

• Whether a regime is within the scope of work of the Forum on HTP or if it is preferential;

• Whether a preferential regime is potentially harmful; and

• The economic effects of a regime.

Based on these, a preferential regime is considered harmful if it:

(a) Applies to geographically mobile activities, such as financial and other service activities, including the provision of intangibles;

(b) Taxes at a preferential rate compared with the general principles of taxation in the relevant country and the regime imposes no or low tax rates on the income;

(c) Is ring-fenced from the domestic economy;

(d) Lacks transparency; and

(e) Does not provide for an effective exchange of information.

The OECD’s BEPS Action Plan 5 emphasizes two important measures to counter harmful preferential regimes:

• The need for the substantial activity requirement; and

• The need to improve transparency through compulsory spontaneous exchange of rulings related to preferential regime between tax authorities.

SUBSTANTIAL ACTIVITY REQUIREMENT
Currently, OECD’s work on the substantial activity requirement is focused on intangible property (IP). According to the Report, the Forum on HTP considers three approaches to requiring substantial activities in an IP regime:

• The value creation approach, which requires the taxpayer to undertake a set number of significant development activities;

• The transfer pricing approach, which allows a regime to provide benefits to all the income generated by the IP if the taxpayer had located a set level of important functions in the jurisdiction providing the regime; and

• The nexus approach, which looks at whether an IP regime makes its benefits conditional on the extent of research and development activities of taxpayers receiving benefits.

The third approach is said to permit jurisdictions to provide benefits to the income arising out of the IP so long as there is a direct nexus between the income receiving the benefits and the expenditures contributing to that income. The Report further states that it is not the amount of expenditures that acts as a direct proxy for the amount of activities. Instead, it is the proportion of expenditures directly related to development activities that demonstrate real value-added by the taxpayer, and acts as a proxy for how much substantial activity the taxpayer undertook.

TRANSPARENCY AND EXCHANGE OF RULINGS
The second important measure discussed in the Report is the need to improve transparency through the compulsory spontaneous exchange, between tax authorities, of rulings related to preferential regime. The lack of transparency is seen as a cause that makes it harder for an affected country to take defensive measures against harmful tax practices. As such, the OECD has put together a framework that details the situations in which rulings/information should be exchanged between two tax authorities.

The Report recognizes that the information exchange between tax authorities requires a framework that legally enables the sending country to exchange the information and the recipient country to receive it. The Report mentions several international legal instruments on the basis of which information exchange for tax purposes may take place, such as bilateral information exchange instruments. It further advises that countries which currently do not have the necessary legal framework in place for information exchange will need to consider institutionalizing such a framework.

In the Philippines, we have formalized our commitment to comply with internationally agreed-upon standards on transparency and effective exchange of tax information when we passed Republic Act (RA) No. 10021 otherwise known as the “Exchange of Information of Tax Matters Act of 2009.”

In addition, the Philippines signed in September 2014 the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an international instrument developed jointly by the OECD and the Council of Europe, to fight international tax avoidance and evasion, and also participated in the first BEPS Technical Meeting for Partner Countries in Paris, France.

Ma. Theresa M. Abarientos is an Associate Director of SGV & Co. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

source:  Businessworld