Taxes Associated with Buying, Selling, and Inheriting Real Estate in the Philippines

Real estate-related taxes are something every property owner and seller cannot avoid; paying the correct taxes is necessary to assure the transaction is official and ownership legal. After all, tax returns are one of the requirements before a property title is transferred from the name of one person to another.

To help potential property buyers to become familiarized with the taxes associated with real estate, Lamudi Philippines has listed these common taxes and how to compute for them.

1. Capital Gains Tax

Capital gains tax or CGT is a type of tax imposed on earnings presumed that the seller has gained from the sale of capital assets. In order to determine whether a property is a capital asset, it should not fall under any of the following definitions: (a) stocks held by the taxpayer in trade or inventory; (b) properties for sale in the ordinary course of business; (c) any property used in business that the taxpayer claims for depreciation; and (d) real property used in trade or business.

Capital gains tax is equivalent to six percent of the fair market value based on Bureau of Internal Revenue(BIR) zonal value or fair market value as appraised by the provincial or city assessor, whichever is higher.

To know how CGT is computed, check out this article from Lamudi.

2. Real Property Tax

Philippine local government units (such as provinces and Metro Manila cities) are allowed to create their own revenue sources. One of these revenue sources is the Real Property Tax or RPT—the tax imposed on all forms of real property (land, building, improvements, and machinery).

The base of the tax is only a fraction of the actual market value of the property, although this is compounded by the different assessment levels depending on the property’s use (whether commercial, residential, agricultural, etc.). For example, a residential property has an assessment level of 20 percent (which means only 20 percent of the property’s value is taxable), while for a commercial property, it is 50 percent.

To know how RPT is computed, check out this article from Lamudi.

3. Documentary Stamps Tax

© Ingimage

Documentary stamps tax or DST is a tax levied on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale, or transfer of an obligation, right, or property.

When a property is transferred through sale, DST is imposed on the Deed of Absolute Sale, whose tax rate is 1.5 percent or Php15 for every Php1,000 of the property’s selling price, zonal value, or fair market value, whichever is higher. For example, if a property’s selling price is Php3 million (and if this amount is higher than the property’s zonal value or fair market value), the DST will be Php45,000.

4. Transfer Tax

The Bureau of Internal Revenue defines Transfer Tax as the tax imposed on any mode of transferring the ownership of a real property, either through sale, donation, barter, or any other mode. The rate varies from 0.5 percent to 0.75 percent of the zonal value or selling price of the property, whichever is higher, and depending on the municipality where the property is located.

5. Donor’s Tax

Donor’s Tax is a tax on a donation or gift (in this case real property) and is imposed on the free transfer of property between two or more persons (whether strangers or related) who are living at the time of the transfer.

The tax base is the total value of the net gifts during the taxable year. In case of real property, the tax base shall be the BIR zonal value or fair market value based on latest tax declaration, whichever is higher. If there is a structure (like a house or building sitting on the property), the fair market value of the structure will be the construction cost based on the building permit and/or occupancy permit plus 10 percent per year after the year of construction. Alternatively, the fair market value can also be based on the real property plus structure’s latest tax declaration.

6. Estate Tax

Most people (mistakenly) assume that Estate Tax or (or more colloquially known as Inheritance Tax) is a tax imposed on the property itself. This is not the case. Estate Tax is the tax imposed on the privilege of transferring the property upon the death of its owner to his or her lawful heirs. In addition, Estate Tax is based on the net estate, which is the difference between the gross estate and allowable deductions. A real property cannot be transferred from the decedent to his or her heirs without the filing and payment of the estate tax.

To know how to compute for Estate Tax, visit the BIR website.

source:  http://www.lamudi.com.ph/journal/taxes-associated-buying-selling-inheriting-real-estate-philippines/

Who determines sufficiency?

IT’S NO SECRET that the Bureau of Internal Revenue (BIR) was strongly opposed to our legislators’ bill to increase the tax exemption ceiling on employee bonuses to P82,000 from the previous P30,000. With the law now in place and the BIR having issued the implementing regulations just this week, most people expect the BIR to find ways to make up for the lost revenue, even as it lowered its income projection for 2015.

Aside from regular and voluntary tax payments, the BIR’s other main revenue source is collections from tax audits or investigations.

The tax findings assessed during BIR examinations normally involve both factual and legal issues. Primarily for the factual issues, but even for the legal ones, the resolution will depend largely on the availability and quality of the documents to support the transactions involved and the taxpayer’s position.

Under the Tax Code and existing regulations, once a Final or Formal Assessment Notice (FAN) is issued, the taxpayer has 30 days from receipt of the FAN to file a written protest, and 60 days thereafter to submit all necessary supporting documents. These timelines are crucial because failure to properly protest a FAN will make the assessment final and executory.

If the taxpayer determines that supporting documents are necessary (as most often is the case), these may be submitted simultaneously together with the written protest or subsequently, after the protest has been filed, but within the 60-day period. According to the Supreme Court in the case of the Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc. (G.R. Nos. 172045-46, June 16, 2009), the term “relevant supporting documents” should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents but it cannot demand what type of supporting documents should be submitted. Otherwise, the BIR may require the taxpayer to produce documents that a taxpayer cannot submit thus putting the taxpayer at the mercy of the BIR.

The Court of Tax Appeals has taken note of this guiding jurisprudence in a number of its decisions. Thus, in a couple of decisions issued late last year, the tax court ruled in favor of two taxpayers involving this same issue.

In one case, the taxpayer submitted documents together with its protest letter. It did not separately submit any other supporting documents within the 60-day period. Subsequently, upon request of the BIR, the taxpayer submitted additional documents. The BIR retained its assessment, claiming that the taxpayer failed to submit the relevant supporting documents within the 60-day period, thereby making the assessment final.

In another case, the taxpayer submitted a protest letter without any supporting documents. The BIR rendered a decision denying the protest, claiming that the assessment had already become final and executory due to the taxpayer’s failure to submit the required documents within the same 60-day period.

Citing jurisprudence, the court reiterated that it is the taxpayer’s prerogative to submit documents and it is also up to the taxpayer to determine what documents should be submitted, if at all. According to the court, the fact that the taxpayer chose to submit the protest without supporting documents does not invalidate the fact that a protest was properly filed. The non-submission of documents within the 60-day period should only matter when the BIR evaluates the merits of the said protest, but it does not result in the deficiency assessment automatically becoming final and executory. In fact, it would appear that when the taxpayer elevated the case to the tax court, it was allowed to submit additional documents to support its claims.

Given the short turnaround time that is given to taxpayers to respond to tax findings once a preliminary assessment notice and a FAN are issued, the court’s recognition that the type of supporting documents should be left at the taxpayer’s discretion seems only fair. It certainly does not prohibit BIR examiners from requesting the submission of certain specific documents which, if available, the taxpayer should willingly submit.

Even if the courts would still accept documents that the taxpayer did not previously submit to the BIR, it is not advisable to wait until then to comply. If feasible, it is always better to resolve an assessment at the administrative (BIR) level. For one thing, you avoid filing fees and other costs.

One way to help resolve the assessment at the BIR level is to communicate openly with the BIR examiners on what type of documents they would consider satisfactory, and work from there. While it is still ultimately up to the taxpayer to determine what documents to submit, it is always good to have the BIR’s input as you start to mount your protest since issues are easily resolved if both parties’ concerns are considered.

Dominique Deborah Black is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

dominique.deborah.black@ph.pwc.com

source:  Businessworld

The persistence of manual bookkeeping

Taxwise or Otherwise

By Revelino R. Rabaja, 12 March 2015

EVEN WITH the latest technology at our fingertips, many businesses, particularly small- and medium-sized enterprises (SMEs), may still maintain manual books of account.

It must be noted that in practice, actual manual recording in the books is no longer done since accounting records are usually maintained and generated in some sort of electronic format,like Excel. Printouts of the accounting records are simply pasted onto the registered manual books of account and are then used to prepare the company’s financial statements. These same books are also presented to external auditors which the latter use for their audit.

The issue is that it remains unclear whether this practice is considered substantially in compliance with the bookkeeping requirements of the Bureau of Internal Revenue (BIR) under Revenue Regulations (RR) V-I or RR V-1.

As one of the oldest known revenue regulations still generally applicable today, the “Bookkeeping Regulations” embodied in RR V-1 were issued in 1947 when the Philippines was still recovering from the devastation of World War II. They govern the keeping of books of account, records, registers, as well as, issuance of invoices, receipts, tickets and other supporting papers and documents by persons subject to internal revenue taxes.

Understandably, at that time, manual books of account were the only means available to taxpayers for recording business transactions.

To keep up with the changing times, various regulations and directives amending RR V-1 were subsequently issued, although for several decades, manual recording of entries remained an acceptable mode of maintaining accounting records.

In 1982, in response to the clamor of multinational companies doing business in the Philippines to allow them to adopt the global accounting system of their foreign parent companies, the BIR issued Revenue Memorandum Circular (RMC) No. 13-82 which authorized the use of loose leaf books of accounts, records, invoices and receipts for recording business transactions.

Soon after though, accountants and computer programmers recognized a downside to storing data: around 2000, when “millennium bug” concerns were at their peak, the need for tedious reconciliation put businesses to the test. Perhaps the challenge posed by the electronic storage of data left taxpayers thinking that manual recording remained a viable and safe option for keeping accounting records, though they kept looking for a more efficient way to do it.

Whatever the doubts, the adoption of information and communications technology (ICT) forges ahead. To promote the universal use of electronic transactions in the public sector, Republic Act (RA) 8792, otherwise known as the Electronic Commerce Act of 2000, was passed, mandating that all government offices, including the BIR, perform government functions by electronic means.

In August 2006, the Department of Finance (DoF) issued Revenue Regulations (RR) No. 16-2006, which laid down guidelines for the submission of books of account and other records in electronic format, specifying among others:

• the manner and format in which such computerized accounting books/records shall be created, retained, filed and issued;
• when and how such computerized accounting books/records have to be signed or authenticated;
• the appropriate control processes and procedures to ensure integrity, security and confidentiality of computerized accounting books/records;
• other attributes required of computerized accounting books/records; and
• the full or limited use of the documents and papers for compliance with the requirements of the BIR.

It’s worth noting that in the regular audit of taxpayers’ books, Revenue District Offices (RDOs) refuse to accept accounting records where printouts of electronically processed entries are pasted on the manual books of accounts, and still demand the presentation of accomplished manual books of account with manually written accounting entries. At times, taxpayers would prefer to pay the penalty instead of engaging a bookkeeper to update the manual books of account since this may take time and may cost them more.

SMEs keeping manual books of account may not be able to afford pricey software systems that handle accounting functions. In order to keep up with the changing times and maintain efficiency, they often use simple computer programs such as Excel spreadsheets to record and store their transactions. In managing sizable chunks of data, manual jotting down of entries no longer proves to be a practical and effective mode of bookkeeping.

Recently, the BIR ordered the mandatory implementation of the Electronic BIR Forms or eBIRForms by issuing RR No. 6-2014. The eBIRForms system was developed to provide taxpayers, particularly the Non-Electronic Filing and Payment System (Non-eFPS) filers, with accessible and convenient service through easy preparation and filing of tax returns. The use of eBIRForms improves the BIR’s tax return data capture and storage, thereby enhancing efficiency and accuracy in the filing of tax returns. The efforts of the BIR to embrace technology and continuously look into efficient measures for easy preparation and filing of tax returns have been commendable. Will freeing taxpayers from having to keep manual books of account follow?

Given the constant influx of technology in business, the BIR should be flexible and consider computer-generated spreadsheets as compliant with RMC 13-82. In essence, computer-generated printouts function in the same manner as manual or registered loose leaf records, thus conforming to the BIR’s objectives of efficiency and accuracy.

It would be timely for the BIR to issue a clarificatory circular allowing taxpayers to use computer-generated printouts as an acceptable method of recording entries in the manual books of account. Such a circular could also apply retroactively to cover Excel-formatted accounting records submitted to the BIR during tax audits of the past taxable years.

The BIR could consider imposing a one-time penalty for those years that books were not manually filled but fully supported by electronic spreadsheet printouts -- a compromise that would be less onerous for SMEs.

Revelino R. Rabaja is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

‘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

The persistence of manual bookkeeping

EVEN WITH the latest technology at our fingertips, many businesses, particularly small- and medium-sized enterprises (SMEs), may still maintain manual books of account.

It must be noted that in practice, actual manual recording in the books is no longer done since accounting records are usually maintained and generated in some sort of electronic format, like Excel. Printouts of the accounting records are simply pasted onto the registered manual books of account and are then used to prepare the company’s financial statements. These same books are also presented to external auditors which the latter use for their audit.

The issue is that it remains unclear whether this practice is considered substantially in compliance with the bookkeeping requirements of the Bureau of Internal Revenue (BIR) under Revenue Regulations (RR) V-I or RR V-1.

As one of the oldest known revenue regulations still generally applicable today, the “Bookkeeping Regulations” embodied in RR V-1 were issued in 1947 when the Philippines was still recovering from the devastation of World War II. They govern the keeping of books of account, records, registers, as well as, issuance of invoices, receipts, tickets and other supporting papers and documents by persons subject to internal revenue taxes.

Understandably, at that time, manual books of account were the only means available to taxpayers for recording business transactions.

To keep up with the changing times, various regulations and directives amending RR V-1 were subsequently issued, although for several decades, manual recording of entries remained an acceptable mode of maintaining accounting records.

In 1982, in response to the clamor of multinational companies doing business in the Philippines to allow them to adopt the global accounting system of their foreign parent companies, the BIR issued Revenue Memorandum Circular (RMC) No. 13-82 which authorized the use of loose leaf books of accounts, records, invoices and receipts for recording business transactions.

Soon after though, accountants and computer programmers recognized a downside to storing data: around 2000, when “millennium bug” concerns were at their peak, the need for tedious reconciliation put businesses to the test. Perhaps the challenge posed by the electronic storage of data left taxpayers thinking that manual recording remained a viable and safe option for keeping accounting records, though they kept looking for a more efficient way to do it.

Whatever the doubts, the adoption of information and communications technology (ICT) forges ahead. To promote the universal use of electronic transactions in the public sector, Republic Act (RA) 8792, otherwise known as the Electronic Commerce Act of 2000, was passed, mandating that all government offices, including the BIR, perform government functions by electronic means.

In August 2006, the Department of Finance (DoF) issued Revenue Regulations (RR) No. 16-2006, which laid down guidelines for the submission of books of account and other records in electronic format, specifying among others:

• the manner and format in which such computerized accounting books/records shall be created, retained, filed and issued;

• when and how such computerized accounting books/records have to be signed or authenticated;

• the appropriate control processes and procedures to ensure integrity, security and confidentiality of computerized accounting books/records;

• other attributes required of computerized accounting books/records; and

• the full or limited use of the documents and papers for compliance with the requirements of the BIR.

It’s worth noting that in the regular audit of taxpayers’ books, Revenue District Offices (RDOs) refuse to accept accounting records where printouts of electronically processed entries are pasted on the manual books of accounts, and still demand the presentation of accomplished manual books of account with manually written accounting entries. At times, taxpayers would prefer to pay the penalty instead of engaging a bookkeeper to update the manual books of account since this may take time and may cost them more.

SMEs keeping manual books of account may not be able to afford pricey software systems that handle accounting functions. In order to keep up with the changing times and maintain efficiency, they often use simple computer programs such as Excel spreadsheets to record and store their transactions. In managing sizable chunks of data, manual jotting down of entries no longer proves to be a practical and effective mode of bookkeeping.

Recently, the BIR ordered the mandatory implementation of the Electronic BIR Forms or eBIRForms by issuing RR No. 6-2014. The eBIRForms system was developed to provide taxpayers, particularly the Non-Electronic Filing and Payment System (Non-eFPS) filers, with accessible and convenient service through easy preparation and filing of tax returns. The use of eBIRForms improves the BIR’s tax return data capture and storage, thereby enhancing efficiency and accuracy in the filing of tax returns. The efforts of the BIR to embrace technology and continuously look into efficient measures for easy preparation and filing of tax returns have been commendable. Will freeing taxpayers from having to keep manual books of account follow?

Given the constant influx of technology in business, the BIR should be flexible and consider computer-generated spreadsheets as compliant with RMC 13-82. In essence, computer-generated printouts function in the same manner as manual or registered loose leaf records, thus conforming to the BIR’s objectives of efficiency and accuracy.

It would be timely for the BIR to issue a clarificatory circular allowing taxpayers to use computer-generated printouts as an acceptable method of recording entries in the manual books of account. Such a circular could also apply retroactively to cover Excel-formatted accounting records submitted to the BIR during tax audits of the past taxable years.

The BIR could consider imposing a one-time penalty for those years that books were not manually filled but fully supported by electronic spreadsheet printouts -- a compromise that would be less onerous for SMEs.

Revelino R. Rabaja is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

revelino.r.rabaja@ph.pwc.com.

source:  Businessworld

Double taxation: same but different

THE PHILIPPINES has the unfortunate reputation of imposing high tax rates, especially in comparison with our neighbors within the Association of Southeast Asian Nations. The 30% corporate income tax and 32% maximum income tax on individuals imposed under our National Internal Revenue Code (or Tax Code) are among the highest in the region.

Imagine then how it feels to bear the burden of taxation two-fold.

Our current tax system presents us with measures on how to avoid what is commonly known as double taxation. This is best demonstrated by our various tax treaties with other countries, allowing for income tax exemption or preferential tax rates on certain income payments made to residents of these treaty countries.

However, in some instances, our tax laws might appear to be less keen on avoiding double taxation.

In one case for example, after paying its local business tax liability to a certain city government, a cable television operator was billed by said city for an adjustment. Dutifully, the cable operator paid the amount. Upon inquiry as to the nature of the adjustment, the taxpayer learned that it represents local franchise tax. Perhaps baffled by the imposition of both business tax and franchise tax, the cable operator wrote a letter of protest to the office of the city treasurer and requested for cancellation of said adjustment and its corresponding refund.

Since the taxes were levied twice on the same gross receipts by the same taxing authority, the cable operator argued that the imposition of both business tax and franchise tax amounted to unjust and improper double taxation. The cable operator also contended that since it is a holder of a legislative franchise, its only obligation should be the franchise tax, instead of the business tax.

In denying the protest and claim for refund, the city treasurer justified that business tax and franchise tax are separate and distinct taxes. They are of a different nature and imposed under different provisions of the city’s local revenue code.

The cable operator brought its claim for refund before the courts. On appeal, the Court of Tax Appeals (CTA) upheld previous decisions that the imposition of business tax and franchise tax by the city government does not constitute improper double taxation (or “direct duplicate taxation”). What the law prohibits is the imposition of two taxes on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction and during the same taxing period; thus, double taxation must be of the same kind or character to be a valid issue.

In applying this definition, the CTA stated that while the business tax and the franchise tax are both based on gross receipts and sales, they are different in nature or character. The franchise tax is imposed on the exercise of enjoying a franchise, while the business tax is imposed on the privilege of engaging in one’s line of business.

Subsequently, the CTA en banc and the Supreme Court upheld the denial of the claim for refund.

Under the Local Government Code (LGC), which serves as the foundation of any local revenue code that may be enacted by a specific Local Government Unit (LGU), the local franchise tax and the local business tax are imposed under separate provisions -- Section 137 and Section 143, respectively. While the courts saw legal basis to take the view that the imposition of both taxes would not be tantamount to double taxation, this author cannot help but wonder whether duple taxes over the same transaction would be too onerous for local taxpayers and discouraging for would-be investors, who are already saddled by a crippling tax rate in this region of Asia.

As mentioned by the cable operator in the case, not all LGUs strictly impose the local franchise tax, even with the existing provisions under the LGC and an LGU’s revenue code. Considering the apparent finality of the cable operator’s case, it would not be farfetched to think that many LGUs might take advantage of this opportunity to maximize their tax collection. After all, the local franchise tax appears to span a wide coverage of franchise grantees, such as telecommunications, broadcasting, and utilities industries.

While our lawmakers are making progress on easing the burden of taxation -- particularly with the passage of Republic Act No. 10653 increasing the amount of non-taxable 13th month pay and other benefits from P30,000 to P82,000 -- one can say that there is still a long way to go towards making our current tax system more investor-friendly. Perhaps beyond rhetoric, more headway is needed to dispel the assertions often said of Philippine taxation, that of being one of the highest in the ASEAN region.

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

(02) 845-2728

marion.d.castaneda@ph.pwc.com

source:  Businessworld

A tribute to large taxpayers

THIS ARTICLE was inspired by the 2015 tax campaign launched by the Bureau of Internal Revenue (BIR) Large Taxpayers Service (LTS) on Feb. 17 at the PICC Reception Hall. Since large taxpayers are already familiar with their own situation, this is probably more for the information of us smaller taxpayers.

During the campaign kick-off, large taxpayers were called heroes. While there are only a little over 2,000 large taxpayers in the country, they contribute about 60% of the total BIR collections. For 2015, the BIR expects the large taxpayers to raise P1.05 trillion out of the P1.704 trillion target of the bureau. Quite a huge expectation!

This phenomenon, of course, is nothing new. The Pareto principle -- also known as the 80-20 rule, or the law of the vital few and trivial many -- states that for many events, roughly 80% of the results come from 20% of the causes. Many natural phenomena have exhibited this distribution. Even the distribution of income and wealth exhibits the 80-20 rule. Applied to business, 80% of sales come from 20% of the clients. Hence, businesses would normally closely monitor and take very good care of those clients belonging to the minority from whom they generate most of their sales or profit.

Following the Pareto principle, the BIR consolidated the reporting and monitoring of large taxpayers under three district offices -- the Makati Large Taxpayers District Office (LTDO) for large taxpayers in Makati, the Cebu LTDO for those in Cebu, and the LTS at the National Office for those in other revenue regions all over the country. The original target was to capture the large taxpayers contributing 85% of total collections.

To be closely monitored, large taxpayers are mandated to enrol with the electronic filing and payment system (eFPS) and, therefore, file their returns and pay their taxes through the electronic platform. This means that their filings are immediately monitored by the LTS and LTDOs and any decline can be noted right away. In fact, LTS personnel regularly conduct analyses of the performance of the large taxpayers in their account. Large taxpayers often receive love letters from their LTS officers inquiring about the declines and whether recovery is expected or not.

To ensure the accuracy of their accounting for revenues and expenses, large taxpayers are required to maintain a working and duly accredited computerized accounting system (CAS). The accreditation of the CAS for large taxpayers is much more stringent compared to the procedures in the regular district offices. The reviewers keep track of the flow of revenue and expenses in the accounting system, and ensure that the taxes payable to the BIR are properly recognized and accrued for every transaction. The reviewers see to it that the records that the CAS will produce can be relied upon during a tax audit.

To take advantage of the wide reach of large taxpayers in terms of customers and suppliers, large taxpayers are required to withhold taxes on all their expenses -- i.e., all purchases of goods and services. Hence, on top of the income payments subject to withholding as enumerated in the withholding tax regulations, they are obligated to withhold 1% on all purchases of goods and 2% on all fees paid to service providers. With this strategy, the BIR is assured that taxes have been withheld on a significant amount of taxable transactions. This always proves to be a big challenge for large taxpayers. The consequence of failure to perform the function of a BIR collection agent is heavy: the penalty is equivalent to the tax not withheld plus interest and non-deductibility of the expense.

Large taxpayers are often relied upon to lay down the audit trail for their customers and suppliers/service providers. Under the BIR matching program, reports of large taxpayers on their sales, purchases and withholding taxes are used to check the correctness of the sales and purchases reported, on the other side, by their customers and suppliers. In many cases though, the large taxpayers become victims of the audit trails they have laid down. How? In case of discrepancies from the reports of their customers and suppliers, the large taxpayers are also made to explain and account for the discrepancies, with the risk of being assessed for deficiency taxes.

Do you think large taxpayers have the privilege of being exempt or not being the top priority for tax audit? Sorry, they don’t. They are also included in the BIR audit selection criteria and their audit is, in some cases, even more thorough than the audit conducted for regular taxpayers.

For 2015, the collection goal from large taxpayers represents a 14.75% increase from last year. This is the bigger challenge! Given the single-digit economic growth forecast, the BIR should identify more large taxpayers to help out in achieving this increased target. It may not be fair to just rely on the existing large taxpayers to bring this forward.

The LTS is not even in the Pareto distribution yet. In 2013, for example, there were 179,665 annual corporate income tax returns filed. Under simplistic assumptions, the Pareto distribution suggests that 20% of that number or about 35,900 corporate taxpayers would contribute 80% of the BIR’s revenues. The 2,000+ large taxpayers currently contributing about 60% of the total revenues is a far cry from that 35,900.

The official criteria for selection as large taxpayers are not very difficult to achieve. In fact, I’ve met some corporate taxpayers asking whether they should already register as large taxpayers considering that they have met some of the financial or tax performance criteria. We would, of course, always say that they should wait for the BIR to identify and notify them, with the note that they should think twice before even dreaming of becoming a large taxpayer. It’s always great to be a big income earner, but not necessarily convenient to be classified as a large taxpayer.

To the large taxpayers, we should say “thank you.”

Lina P. Figueroa is a Principal with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld