Due process in the constructive service of BIR notices

In an En Banc decision last March 2015, the Court of Tax Appeals (CTA) ruled that even if a taxpayer or his duly authorized representative refuses to acknowledge receipt of assessment notices for deficiency taxes issued by the Bureau of Internal Revenue (BIR), personal delivery shall be considered “constructive service” provided that such notices are left at the premises of the taxpayer and such fact is attested to by at least two revenue officers other than the revenue officer who constructively served them.

To contextualize, the parties to the case were a domestic corporation along with its president and treasurer. In both criminal and civil cases, they were charged with failure to file tax returns and pay deficiency income tax and value-added taxes for the taxable years 2003 to 2005 despite the issuance of Final Assessment Notices (FAN).

With respect to the criminal case, warrants of arrest were issued against the president and treasurer but were not actually served as the company was no longer operating in its business premises. Nonetheless, the treasurer later on submitted himself to the jurisdiction of the CTA in Division; however, he was subsequently acquitted due to gross insufficiency of evidence to sustain his indictment or to support a verdict of guilt beyond reasonable doubt. According to the CTA in Division, the testimony of the prosecution’s witnesses show that the treasurer is actually a different person and not the treasurer involved in this case. Further, the prosecution was unable to establish the role of the person who came forward in the management of the affairs of the company.

In its Motion for Partial Reconsideration of the civil aspect of the CTA en banc case, the BIR requested that the company be found civilly liable for the deficiency taxes despite the dismissal of the criminal case against the treasurer. The Bureau argued that the Preliminary Assessment Notice (PAN) and Final Letter of Demand (FLD) were validly served through constructive service based on the following reasons:

• The constructive service was witnessed by two barangay officials with jurisdiction over the company’s place of business. Such fact was established through the handwritten notes in the PAN and FLD stating that such documents were constructively served in September 2008 and December 2008, respectively, as witnessed by the barangay officials; and

• The employee of the company who affixed her signature in the PAN and FLD but refused to receive the PAN and FLD was the same employee who received the Letter of Authority, requests for presentation of records, and Subpoena Duces Tecum issued by the BIR in 2006.

According to the BIR, despite the receipt of the PAN and FLD, the company failed to file a protest; hence, the assessments became final, demandable and executory. The BIR argued that upholding the ruling of the CTA in Division would set a dangerous precedent where taxable entities could escape tax liability by simply having unauthorized persons receive assessment notices against them; this restricted view would put a premium on dishonesty and lack of accountability and is anathema to the concept of fair play, equity and justice.

Despite the BIR’s arguments, the CTA en band ruled in favor of the company due to the improper service of the PAN and FLD which violated the taxpayer’s right to due process of law. In its ruling, the CTA emphasized the mandatory nature of the due process requirement in the issuance of an assessment, particularly in informing the taxpayer of the assessment based on Section 228 of the Tax Code as implemented by Revenue Regulations (RR) No. 12-99. Under this RR, “if the notice is personally served to the taxpayer or his duly authorized representative who refused to acknowledge receipt thereof, the same shall be constructively served on the taxpayer. Constructive service thereof shall be considered effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two (2) revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of the case.”

According to the Court, while the refusal of the company’s employee to receive the PAN and FLD should constitute constructive service, the BIR failed to comply with the requirement that such must be attested to by at least two other revenue officers. As such, the alleged constructive service of the assessment notices were rendered invalid and the assessment considered void.

It is worthwhile to note that the above rules on constructive receipt were amended in 2013 through the issuance of RR 18-2013. The new rules provide that “should the party be found at his registered or known address or any other place but refuse to receive the notice, the revenue officers concerned shall bring a barangay official and two (2) disinterested witnesses in the presence of the party so that they may personally observe and attest to such act of refusal. The notice shall then be given to said barangay official. Such facts shall be contained in the bottom portion of the notice, as well as the names, official position and signatures of the witnesses. ‘Disinterested witnesses’ refer to persons of legal age other than employees of the Bureau of Internal Revenue.”

The requirement to have a barangay official and two disinterested witnesses in lieu of revenue officers shall only apply upon the effectivity of RR 18-2013. The CTA, in this case, correctly applied the policy amendment prospectively. Although the RR was issued on 28 November 2013 while the case was still being decided by the CTA, it could not apply retroactively to cover the alleged constructive service of the PAN and FLD that took place in 2008 even if the revenue officer satisfied the requirements of such RR.

Proper delivery of legal documents to parties required to respond or take action is critical for courts to acquire jurisdiction over them. Under our legal system, legal proceedings and imposition of liabilities cannot take effect without according the person an opportunity to be heard. In procedural due process, there are no shortcuts to take, but only the main road.

Eileen Flor C. Abalos is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

source:  Businessworld

Land I can call my own: Tax procedures for real property acquisition

One of the ultimate goals of Filipinos is to acquire real property. Whether it’s residential property, agricultural land, or commercial space, such acquisitions are treated as part of one’s legacy, which can be passed on to descendants.

One of the advantages of real property is that it generally appreciates over time. Accordingly, land has been the source of many of the country’s biggest fortunes. The first acquisition of real property is a momentous event for almost everyone, a marker of having attained a comfortable station in life.

There are various ways that will ripen to transferring real properties which include but not limted to sale, donation, inheritance, property swap or payment of debt. Whatever the mode it is, ownership is only secure when the transferee’s name is annotated in the Transfer Certificate of Title (TCT), Condominium Certificate of Title (CCT) or Original Certificate of Title (OCT).

With the real estate boom of recent years, many have jumped on the bandwagon and purchasing property of their own. It therefore comes as no surprise that many have fallen into the trap of purchasing real properties which they cannot register in their names, either because they have not secured a Certificate Authorizing Registration (CAR) or the title to the property is bogus.

In other words many still fail to observe the processes prescribed by law. Others exercise due diligence too late, when penalties have already piled up.

On April 17, 2015, the Bureau of Internal Revenue (BIR) circularized the Memorandum of Agreement (MoA) between the Department of Finance, the Department of Justice, the BIR and the Land Registration Authority (LRA) dated Sept. 25, 2013. The MoA aims to plug all loopholes to prevent tax leakage and to properly ensure that all taxes due to the government are collected before registration or transfer of real property is effected by the Register of Deeds (RD). With the MoA, the concerned agencies undertake to expedite the delivery of services to the public and simultaneously, promptly collect the tax due.

The MoA focuses on inter-agency linkages to achieve better monitoring and control over real property transactions. The BIR’s role in achieving the MoA’s goal is to issue CAR, furnish reports on CAR issued and generated online to the RDs for online automated verification as to authenticity by LRA, and receiving and matching electronic reports from LRA on the New Number generated for the newly issued TCT/CCT/OCT.

On the other hand LRA and the RDs are to provide linkage, comparing information relating to all Real Property Transfers against the CARs issued by the BIR. The LRA shall also ensure the development, implementation, and operation of the online automated verification of the CARs presented to the RD through its Land Titling Computerization Project (LTCP). LRA shall also ensure, through the LTCP, the development, implementation, and operation of an automated system that shall provide BIR with monthly electronic reports on new TCT/CCT/OCT, immediately upon their issuance and inclusion.

It is fairly well known that the transfer of a real property requires the issuance of a CAR to the transferor. However, with enhanced communications among agencies, a finding of tax deficiency remains possible even after the real property is registered with the RD under the name of the transferee. To avoid this problem, the transferor must comply with the CAR requirement of the BIR. The parties must know what taxes they will have to pay for.

For instance, in a sale transaction, the owner will be required to pay capital gains tax (CGT) pursuant to Section 24 (D) in the case of an individual seller or Section 27 (D)(5) in the case of a corporate seller. It must be noted that the BIR shall compute the CGT liability of the seller based on the selling price, the fair market value based on the BIR’s zonal valuation, or the assessed value based on the tax declaration of the Local Government Unit which has jurisdiction of the real property, whichever is highest. Moreover, the documentary stamp tax (DST) pursuant to Section 196 of the Tax Code must be paid by any of the parties that have agreed to bear the tax liability.

It is also important to note the deadline within which the CGT returns or DST returns should be filed to avoid the running of the interest of the tax due. The DST should be paid on or before the 5th day of the next succeeding month when the deed of sale is executed. On the other hand, the CGT on sale, exchange or disposition of real properties treated as capital assets (those that are not actually used in the business) shall be filed within 30 days following each sale, exchange or disposition. It shall be filed and the taxes due thereon be made to an authorized agent bank in the appropriate revenue district.

In addition, sellers who convey their real properties which are considered ordinary assets shall report the sale as part of their income and subject the same to value-added tax. The buyer on the other hand, is required to subject the payment to expanded withholding tax which shall be filed on or before the 10th day of the next succeeding month when the deed is executed, subject, however, to the specific rules prescribed by Revenue Regulations No. 2-98, as amended, and the rules prescribed in the eFPS regulations, in case the taxpayer is duly registered with the same. The returns shall also be filed in the appropriate revenue district.

In 2003, the BIR issued Revenue Memorandum Order No. 15-2003 (RMC 15-2003) prescribing policies, guidelines and procedures in the processing of One-Time Transactions and the issuance of CAR on various transactions which include transfer of real properties. Taxpayers must be aware of the checklist of documentary requirements on sale of real property subject to CGT, foreclosure sale of real property, sale of real property classified as real assets, sale of real property under the Community Mortgage Program, tax-exempt sale of principal residence, transfer subject to donor’s tax, transfer subject to estate tax, and sale of real property under Socialized Housing Program as Certified by the HLURB. The BIR is strictly implementing RMC 15-2003 and non-compliance entails non-issuance of the CAR.

After the issuance of the CAR, the buyer must use it within one (1) year, otherwise it is considered revoked and the buyer must apply for CAR again.

The MoA opens a lot of doors towards responsible transfer of properties. The rules and regulations have been there for a long time, but many choose to ignore it. By ignoring these requirements, transferees cannot be wholly secure in their ownership and penalties keep piling up over time. Transferees of real property must be vigilant that the transferor has done everything to comply with his tax and other obligations with the BIR.

While investing in real property promises a brighter future for the investor, doing it the right way should be a primordial consideration to avoid future complications, the resolution of which consume a lot of time, money and peace of mind. After all, buying a little piece of that earth requires that we expend some of the fruits of our labor earned over many years.

source:  Punongbayan & Araullo

Capital asset but not subject to 6-percent capital gains tax

THE type of imposable transaction taxes largely depends on the nature of the asset involved. For instance, for income-tax purposes, sale of capital asset is subject to capital-gains tax, while sale of ordinary asset is subject to the ordinary income tax. That is not, however, always the case. It may also depend on who the seller is.

Sale of real properties classified as real properties is subject to the 6-percent capital-gains tax, regardless of whether the seller is an individual or a juridical entity. However, sale by a corporation of machineries and equipment, though forming part of capital assets, is not subject to this tax. Instead, it is subject to the normal corporate-income tax. This was the pronouncement of the Supreme Court (SC) in G.R. 175410 promulgated in November of 2014.

Sometime in 1998, a Philippine Economic Zone Authority (Peza)- registered entity constructed buildings and purchased machineries and equipment. However, the entity failed to commence operations and its factory was thereafter closed. Hence, it sold its buildings and some of the machineries and equipment installed in the building. On account of the sale, the taxpayer paid the 5-percent final tax applicable to Peza-registered corporations on the entire gross sales.

Realizing that the tax was erroneously paid, the taxpayer applied for refund. The tax court confirmed that the payment of the 5-percent tax was erroneous. However, the claim was not granted, since the properties sold, consisting of buildings and machineries and equipment, were capital assets subject to a 6-percent capital-gains tax. The taxpayer appealed the decision, contending, among others, that the machineries and equipment sold were not subject to the 6-percent capital-gains tax. The SC agreed and made a distinction between individuals and corporate taxpayers insofar as the imposition of capital-gains tax on real properties is concerned.

Before a taxpayer’s property can be subjected to capital-gains tax, the same must form part of the taxpayer’s capital assets. “Capital assets,” as defined under the Tax Code, refers to taxpayer’s property that is not any of the following:

1. Stock in trade;

2. Property that should be included in the taxpayer’s inventory at the close of the taxable year;

3. Property held for sale in the ordinary course of the tax-payer’s business;

4. Depreciable property used in the trade or business; and

5. Real property used in the trade or business.

The properties involved in this case include taxpayer’s buildings, equipment and machineries. They are not among the exclusions enumerated in Section 39(A)(1) of the National Internal Revenue Code (NIRC) of 1997. None of the properties were used in taxpayer’s trade or ordinary course of business because taxpayer never commenced operations. They were not part of the inventory. None of them were stocks in trade. Thus, based on the definition of capital assets under Section 39 of the NIRC of 1997, they are capital assets.

However, corporations and individuals are taxed differently. For individuals, they are liable to capital-gains tax on sale of all real properties in the Philippines classified as capital assets. For corporations, the Tax Code treats the sale of land and buildings, and the sale of machineries and equipment differently. Corporations are subject to the 6-percent capital-gains tax only on the presumed gain realized from the sale of lands and/or buildings only. The tax code does not impose the 6-percent capital-gains tax on the gains realized from the sale of machineries and equipment. Therefore, only the presumed gain from the sale of taxpayer’s land and/or building may be subjected to the 6-percent capital-gains tax. The income from the sale of machineries and equipment is subject to the provisions on normal corporate income tax.

Finally, the Court reiterated its pronouncements in a plethora of cases that the rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly and unambiguously. A tax cannot be imposed without clear and express words for that purpose.

Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.

Reynaldo M. Prudenciado Jr. is a senior tax specialist of Du-Baladad and Associates Law Offices, a member firm of World Tax Services Alliance. The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at reynaldo. prudenciado@bdblaw.com.ph or call 403-2001 local 380.

source:  Business Mirror

BIR’s power to interpret tax laws is not absolute

Inherent in the three branches of our government are three core powers granted by the 1987 Philippine Constitution. The authority to make laws and to alter or repeal them is conferred on the Legislative Department. The implementation of laws is charged to the Executive Department. The power to interpret laws, to hear and decide cases when disputes arise, lies with the Judiciary. The existence of these independent co-equal bodies is a fundamental characteristic of a democratic government.

As part of the Executive Department, the Bureau of Internal Revenue (BIR) is vested with powers to assess and collect taxes. To some extent, it also exercises quasi-judicial and subordinate legislative functions. The Tax Code authorizes the Commissioner of Internal Revenue (“Commissioner”) to interpret tax laws, subject to review by the Secretary of Finance. Government agencies like the BIR also have the power of subordinate legislation to aid in the implementation of tax laws. In exercising these functions, the Commissioner recommends the promulgation of Revenue Regulations (RRs) and issues tax rulings and other revenue issuances such as Revenue Memorandum Circulars (RMCs), Revenue Memorandum Orders (RMOs), Revenue Audit Memorandum Orders (RAMOs) and Revenue Memorandum Rulings (RMRs), among others.

These issuances have different purposes and functions according to the BIR. RRs are issued by the Secretary of Finance, upon the recommendation of the Commissioner. They prescribe or define rules and regulations for the effective enforcement of the provisions of the Tax Code and related statutes. Tax rulings on the other hand, are official positions of the BIR on inquiries of taxpayers who request clarification on certain provisions of the Tax Code, other tax laws, or their implementing regulations, usually to seek tax exemptions. RMCs contain pertinent and applicable portions, as well as amplification of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. RMOs provide directives or instructions, prescribe guidelines and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, objectives, plans and programs of the BIR in all areas of operations, except audit. Lastly, RMRs are rulings, opinions and interpretations of the Commissioner with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time to inform taxpayers of the tax consequences on specific situations.

On the BIR’s power of subordinate legislation, the Supreme Court (SC) has explained that although the power to legislate is non-delegable and belongs exclusively to Congress, such authority may be delegated to implement laws and effectuate policies whenever Congress finds it impracticable, if not impossible, to anticipate situations that may be met in carrying the law into effect. It is required, however, that the regulations be germane to the objects and purposes of the law, and conform to the prescribed standards of the law. Although courts usually accord these regulations with great respect, such interpretation is not conclusive and will be ignored if judicially found to be erroneous.

Applying this well-settled principle, over the past few years, the SC had overruled the Commissioner’s issuances and interpretations of the law because such were found to be erroneous.

In a 2013 case on availment of tax treaty benefits, the SC highlighted the time-honored international law principle of pacta sunt servanda which requires both parties to comply with their treaty obligations in good faith, since treaties have the force and effect of law in our jurisdiction. (G.R. 188550, 19 August 2013.) In that case, the taxpayer filed a claim for refund on its overpayment of branch profit remittance tax (BPRT) on the basis of a preferential tax treaty rate of 10% (instead of the 15% rate that the taxpayer used). However, it failed to timely file a tax treaty relief application (TTRA) as required by RMO No. 1-2000.

The SC disagreed with the BIR that the timely filing of a TTRA is necessary for availing of tax treaty benefits. Further, it held that failure to strictly follow the requirement for a TTRA should not operate to divest entitlement to the relief in violation of the pacta sunt servanda doctrine. Therefore, the BIR must not impose this additional requirement when the tax treaty does not provide for said prerequisite.

With this development, subsequent decisions of the Court of Tax Appeals (CTA) have been in favor of the taxpayer notwithstanding the non-filing or belated filing of the TTRA. Notwithstanding, the BIR still requires the filing of TTRA although they are no longer strict as to the period of filing (i.e., before the first taxable event as required under RMO No. 72-2010, which subsequently amended RMO No. 1-2000).

Another instance of overturned administrative issuances would be BIR Ruling Nos. 370-2011 and 378-2011. In January 2015, the SC invalidated these tax rulings which covered the imposition of a 20% final withholding tax (FWT) on the interest income from the issuance of Poverty Eradication and Alleviation Certificates (PEACe) Bonds by the Bureau of Treasury for being deposit substitutes (G.R. No. 198756, 13 January 2015). The Tax Code defines deposit substitutes as “an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from twenty [20] or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account.”

In striking down these issuances, the SC applied the 20-lender rule (i.e., 20 or more lenders at any one time) to determine whether a debt instrument is considered a deposit substitute, subject to 20% FWT. The SC found that these rulings disregarded the 20-lender rule by considering all treasury bonds, regardless of the number of purchasers/lenders at the time of origination/issuances, to be deposit substitutes. As a result, the SC ruled that the BIR’s interpretation created a distinction between government debt instruments and private bonds where there was none in the tax law.

The SC further explained that the phrase ‘at any one time’, for purposes of determining the 20-lender rule, would refer to every transaction executed in the primary or secondary market relative to the purchase or sale of the securities. The SC also ruled that there is a deemed public borrowing and the bonds are considered deposit substitutes when funds are simultaneously obtained from 20 or more lenders through any of the transactions connected in the issuance/trading of the government bonds (e.g., issuance by the Bureau of Treasury; sale/distribution of government dealers; and trading in the secondary market).

As a result, there is currently a temporary restraining order on implementing RR No. 1-2014 and RMC No. 5-2014. These issuances required disclosure of recipients of income, including investors who receive income payments and dividends, and disallowed listed companies to name a Philippine Central Depositary nominee as payee of the income.

Likewise, taxpayers are now questioning the implementation of RR No. 4-2011. This RR provides that a bank may deduct only those costs and expenses attributable to the operation of its Regular Banking Unit (RBU) to arrive at its taxable income. Any cost or expense related to or incurred in the operation of its foreign currency deposit unit (FCDU)/expanded FCDU (EFCDU) or offshore banking unit (OBU) is not allowed as deduction from the RBU’s taxable income.

To safeguard taxpayers from the implications of erroneous administrative rulings, the non-retroactivity rule under Section 246 of the Tax Code provides that modifications or reversals of any BIR rules, regulations and rulings shall not be given retroactive application if it will be prejudicial to the taxpayers, subject to certain exceptions (e.g., deliberate omission of certain facts, taxpayers acted in bad faith, and material facts subsequently gathered by the BIR are different from the facts presented in its ruling). It is derived from a statutory presumption that all laws should be interpreted to have only future effects unless expressly stated otherwise.

The collective efforts of the BIR to source needed funds for public welfare are commendable, but its powers should be exercised judiciously and consistently with its legislative purpose and within the procedural standards of the law. As an administrative agency, the BIR must act within the limits of its delegated power of subordinate legislation and its limited adjudication power with deference to the courts. Such fundamental principles cannot be ignored. Without restraint of their powers, taxing authorities would be left unchallenged. And more regrettably, taxpayers may find themselves having to pay more than their fair share.

Sylvia B. Salvador is a director at the tax services department of Isla Lipana & Co., the Philippine member firm of PwC network.

sylvia.r.salvador@ph.pwc.com.

source:  Businessworld

Pacquiao and the tax on Filipino incomes earned abroad by Ed Warren L. Balauag

Filipinos worldwide were dismayed by the outcome of the match between Manny Pacquiao and Floyd Mayweather, Jr.  But the Filipino ring icon earned the respect of fans for his valiant stand despite suffering a shoulder injury in training. Pacquiao will of course still take home unimaginable riches from what was touted as the highest-grossing bout in boxing history.  Unfortunately, from the tax point of view, such earnings mean he has an appointment with the BIR.

Like Pacquiao, many other Filipinos earn income from overseas -- e.g., athletic prize money; artists’ performance fees; consultancy fees for professionals; dividend income from a foreign investment; the sale of property abroad; and compensation income for overseas Filipino workers (OFW).

Filipinos earning income abroad can be classified into two types as defined by the Tax Code: (a) resident citizens and (b) non-resident citizens. It is important to know whether the citizen is a resident or non-resident of the Philippines.  A resident citizen will be taxable on his worldwide income; while a non-resident shall be exempt on his income from sources abroad.

A resident citizen refers to a person who has the Philippines as his habitual place of abode to which, whenever away, he has the intention of returning.  Belonging to this type are Filipinos who have investments abroad, artists (theater, film and arts) performing on short-term projects in foreign countries, athletes competing in foreign events, and professionals (consultants) rendering consulting services to foreign clients. They are required to pay the corresponding taxes on their income whether generated within the Philippines or from outside the Philippines.

On the other hand, non-resident means: (a) a citizen who establishes his physical presence overseas with the definite intention to reside therein; (b) who leaves the country to reside abroad either as an immigrant or for employment on a permanent basis; (c) who works and derives income overseas and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

Belonging in this group are the OFWs and overseas contract workers (OCWs).  They are taxed only on income earned within the Philippines.

The rule on income taxation for resident and non-resident citizens is embodied under the general principles of income taxation in the Philippine Tax Code.  On the other hand, the rules on determining whether income is from within the Philippines or from outside the Philippines are embodied in the basic concept of situs of taxation.  The related issue that a Filipino citizen should be cautious of is the possibility of double taxation, which happens when a Filipino citizen is taxed by a foreign jurisdiction on the same income that is also being taxed by the Philippine government.

HOW CAN A FILIPINO TAXED IN THE PHILIPPINES ON WORLDWIDE INCOME AVOID DOUBLE TAXATION?

Tax treaties between the Philippines and the country where the income was earned generally provide conditions for the exemption of income of Filipinos who still qualify as Philippine residents.

For example, the Philippines-Australia Tax Treaty provides that income generated in Australia by a Philippine national in the nature of independent personal services shall only be taxable in the Philippines, except if a) the Filipino citizen has a fixed base regularly available to him in Australia for the purpose of performing his activities; b) the Filipino citizen stays in Australia for a period aggregating 183 days for the purpose of performing his activities; and c) the Filipino citizen derives a gross income exceeding 10,000 Australian dollars in a year of income or taxable year.

Likewise, the Philippines-US Tax Treaty provides that income generated from United States by a Filipino citizen in the nature of independent personal services shall be taxable only in the Philippines except if (a) the Filipino citizen has fixed base regularly available to him in the US for the purpose of performing his activities, (b) he is present in the US for a period or periods aggregating 90 days or more in the taxable year, and (c) gross income derived in the taxable year for the performance of such services in the US exceeds $10,000.

The Filipino earning income from overseas will generally be required to apply or register with the foreign tax office to avail of the tax treaty relief provisions.

There are also tax treaties addressing the double taxation issue through the concept of tax crediting. Crediting of taxes paid in other countries is also allowed under Philippine tax laws. This means that, a Filipino who generated income in another country during a temporary visit and remitted the corresponding income tax to that country’s government would be able to use the amount paid in the foreign country as a deduction against his income tax due to the Philippine government.

In this case, it is critical to secure the original documentary evidence that the corresponding taxes have been paid to the foreign government. This will be a prerequisite of the Bureau of Internal Revenue (BIR) for allowing the tax credit.

HOW ABOUT THE NON-RESIDENT FILIPINO?

Non-resident citizens working and deriving overseas income as OCWs are taxable only on income from sources within the Philippines.  Thus, if a non-resident Filipino is not earning income in the Philippines, then he is supposed to have no income tax due to the Philippine BIR.

Under Revenue Regulation No. 01-2011, OFWs and OCWs refer to Filipino citizens employed overseas, who are physically present there as a consequence of their employment.  To be considered as an OFW or OCW, they must be registered with the Philippine Overseas Employment Administration (POEA) and must have a valid Overseas Employment Certificate (OEC).

For Filipino seafarers or seamen who receive compensation for services as members of the complement of a vessel engaged exclusively in international trade, they must also have a valid Seafarers Identification Record Book or Seaman’s Book issued by the Maritime Industry Authority, in addition to the POEA registration.

Regardless of whether Filipinos are resident or non-resident citizens for tax purposes, they must always bear in mind the basic requirements and documents that need to be secured and maintained to avoid double taxation, whether through tax exemption or tax crediting. After all, Manny Pacquiao and all Filipinos earning income abroad should be fully entitled to the fruits of their labor and sacrifices, net of the correct taxes.

source:  Punongbayan & Araullo

Tuwid na daan or arbitrary assessment? by Madel M. Ramos

The government has embraced the slogan “Tuwid na Daan” to manifest its core program of transparency and its fight against corruption in government. Various government agencies have done their part through programs intended to reflect a “Tuwid na Daan” approach to governance.

The Bureau of Internal Revenue (BIR), for its part, has been taking an aggressive approach to achieve its target collection of at least P1 trillion, focusing more on large taxpayers, which represent 60% of the BIR’s total revenue. In pursuit thereof, the BIR embarked on several programs to accelerate collection of taxes and discourage tax evasion through its controversial “shame campaign.”

One way to accelerate collection is to fast-track tax assessments and audits as provided under Revenue Regulations No. (RR) 18-2013, which effectively removed the informal conference between the BIR and the taxpayer. RR 18-2013 also requires the taxpayer to file a reply to the preliminary assessment notice (PAN) within 15 days from receipt thereof to avoid being in default or considered to have failed to reply within the prescribed period. Likewise, the BIR case officer must issue the final assessment notice (FAN) within 15 days from filing of the reply to the PAN.

In the real world, settling tax assessments requires reconciling, reviewing and exhausting all pertinent documents subject of the tax assessment as well as several meetings between the BIR and the taxpayer to explain and discuss the details of each assessed amount. This process generally takes months and even years before it is administratively settled and sometimes, the three-year prescriptive period to assess kicks in to the detriment of the BIR.

At the start of a tax assessment, the taxpayer will receive a BIR letter of authority (LOA) with an attached request letter to submit required documents, stating the names of the BIR case officers who will directly evaluate the taxpayer’s documents.

In the context of RR 18-2013, let us suppose the taxpayer has already complied with the documentary requirements set forth by the LOA on or before the deadline set by the BIR. Under such a scenario, no further correspondence between the BIR and the taxpayer will ensue, until the issuance of the PAN.

Several taxpayers get the shock of their lives when they receive the PAN/FAN assessing them millions or billions of pesos in alleged tax deficiencies. What is excruciating is the fact that it is incumbent upon the taxpayer to prove otherwise the allegations of the BIR within a limited period of time.

Further, there are instances where assessments are merely based on alleged discrepancies in numbers from one report to another -- i.e., third party information against taxpayer’s income tax return -- without considering the nature of the transactions and the nature of the business of the taxpayer or the industry practice.

The requirement on the part of the BIR to state the “factual and legal basis” of the assessment is easily complied with by simply stating the applicable provision in the Tax Code. On the part of the taxpayer, mere statement of the applicable provision of the Tax Code is insufficient. One must explain the nature of the transaction with supporting documents.

Most of the time, the documents to be submitted in reply to the PAN or protesting the FAN are also the documents that are supposedly already in possession of the BIR since the BIR has the power “to obtain on a regular basis from any person or government agency any information” in relation to the assessment under Section 5 of the Tax Code.

Furthermore, in several instances, the FAN is a mere restatement of the PAN. This, in effect, defeats the purpose of the PAN. The taxpayer will only know t he response of the BIR in its reply to the PAN and protest to the FAN upon the issuance of the final decision on disputed assessment (FDDA) months later.

However, it must be emphasized that the FDDA is the final denial of the administrative protest. No further discussion to cancel certain amounts in the assessment will be allowed thereafter. The taxpayer’s next available remedy is to file an appeal before the Court of Tax Appeals (CTA). Should the taxpayer fail to appeal before the CTA, the FDDA will become final and executory, and will now be subject for collection.

Pending the settlement of the assessment administratively or before the CTA, the interest, surcharges and penalties of the alleged deficiencies are running against the taxpayer, which, after four years, may be equal to the amount of the alleged deficiency tax. On the other hand, the BIR has more time to evaluate tax assessments and can even delay the running of prescription to assess through a valid waiver, without any interest, surcharges and penalties running against the BIR. To be fair to the taxpayer, who in good faith, complied with all the requirements of the BIR, perhaps it is time that interests, surcharges and penalties should also run against the BIR for any delays, which include periods when cases are pending before the Courts.

From a business perspective, tax assessments are akin to additional expenses that may result in actual losses and sometimes, closure of business. Expenses may include costs of tax professional services, legal fees, compensation of employees and other related expenses. In fact, some taxpayers have had to hire additional employees just to focus on tax assessments.

Even if the taxpayer wins the case against the BIR before the Courts, or even if its application for compromise or abatement have been granted by the BIR, the expenses for these procedures have already accrued.

In a news article, the Commissioner of the BIR was quoted as saying that the agency’s program for 2015 is to instill patriotism among Filipinos, and that paying the correct taxes is part of nation-building and uplifting the lives of our countrymen.

What is missing from such a statement is the importance of investment in the Philippines, which I believe, works hand in hand with paying the correct taxes in pursuit of nation-building and uplifting the lives of the Filipinos.

Not only do businesses and foreign investors contribute to the stability of our economy, they also provide job opportunities for our countrymen. It is through these businesses that the workers they employ obtain the means to provide for their families and send their children to schools.

So why kill (or unduly burden) the goose that lays the golden egg while walking the tuwid na daan?

In this regard, an efficient and effective procedure for assessments should be implemented, including opening the door again for discussions between case officers and taxpayers but should also be given a specific period, say six months, to reach FDDA. With the new database system that the BIR is implementing focusing on the progress of all assessments nationwide, internal review can be easily performed by the Commissioner.

On the other hand, taxpayers should keep appropriate accounts and tax records for at least 10 years, as required by BIR regulations. Further, effective tax planning with review of tax compliance is always a good idea.

source:  Punongbayan & Araullo