The sound of silence

For people who know each other well, non-verbal communication may transcend the limits of words. One can choose to be silent, and still be understood. This, however, may not hold true for all occasions. Sometimes, we need to speak up in order to be heard and understood.

This principle resonates in a case dated Feb. 4, 2015 in which the Supreme Court (SC) favored the taxpayer who invoked the defense of prescription, notwithstanding that such defense was never raised in the protest filed before the Bureau of Internal Revenue (BIR) nor on appeal with the Court of Tax Appeals (CTA).

Under the Tax Code, after a tax return has been filed with the BIR, the Commissioner of Internal Revenue or his duly authorized representative may authorize the examination of any taxpayer’s records and issue an assessment for the correct amount of tax that must be paid. While this authority of the BIR Commissioner seems to be a powerful tool for collecting taxes, such authority can be restricted by a more compelling defense known as prescription which relates to the statute of limitations.

To revisit the concept, the statute of limitations pertains to a period set by the Tax Code within which the BIR can assess the internal revenue taxes of a taxpayer. The standard period is set at three years and is counted from the time the tax return is filed with the BIR. In cases of fraud, a ten-year period will apply counted from the discovery of the falsity, fraud or omission in the returns.

When faced with a tax investigation, taxpayers are given an opportunity to defend themselves through formal communication with the BIR, in accordance with the rules and procedures on tax assessments. Aside from disputing the assessment based on the merits of the case, taxpayers are also given the liberty to raise the defense of prescription in their protest, if applicable.

There are two stages for seeking relief from BIR assessments. First is at the administrative or BIR level, and second is at the court level. If the taxpayer is unable to resolve the assessment issues after exhausting all administrative remedies, he may seek judicial remedy by filing an appeal with the CTA within the period prescribed under the regulations.

When filing an appeal with the CTA, it is a well established rule that the pleadings should contain the complete facts and issues involved in the case, as well as the reasons or defenses relied upon in challenging the assessment. Whenever a taxpayer decides to elevate the assessment case before the CTA (in the event of denial or inaction on the part of the BIR), all arguments and defenses, both factual and legal, should be presented clearly. Defenses not raised would be deemed waived and thus, will not be considered by the court.

Based on earlier mentioned decision of the high court, however, there are exceptions to this rule. One such exception is if it appears from the pleadings or pieces of evidence on record that the assessment is barred by prescription or the statute of limitations.

In that case, the SC ruled that, notwithstanding the taxpayer’s failure to raise the defense of prescription at the administrative level and at the CTA, the BIR’s assessment was still considered as time-barred based on the evidence on record. Hence, the Court was constrained to dismiss the assessment even if the taxpayer did not raise prescription as a defense at the first instance.

The SC referred to an earlier case decided back in 2010 where it declared that it is imbued with sufficient discretion to review matters, not otherwise assigned as errors on appeal, if it finds that their consideration is necessary to arrive at a complete and just resolution of the case. This prerogative is wielded more so when the provisions on prescription were enacted to afford protection to the taxpayer against unreasonable investigation. Principles of equity dictate that the provisions relating to timeliness of assessments should be construed and applied liberally in favor of the taxpayer.

According to the SC, the BIR could have crushed the taxpayer’s belated defense of prescription by merely invoking the rule against setting up such defense only at the appeal stage. The BIR, however, failed to do so by being silent. The Court ruled that the BIR’s silence spoke loudly of its intent to waive its right to object to the argument of prescription. Thus, it would appear that had the BIR challenged the taxpayer’s belated defense of prescription on appeal, the Court may have had a different appreciation of the case.

WHAT CAN WE LEARN FROM THIS CASE?
While prescription can be considered even when taxpayers fail to raise it as a defense against BIR assessments, it is still best practice that such legal defenses be expressed whenever applicable. For taxpayers undergoing tax audits, all defenses should be properly raised and supported by pieces of evidence even during the initial stages of the assessment. After all, it is still better to speak if one really has something to say, than to be barred or risk being misinterpreted by one’s silence.

Iris Kristine D. Lacebal is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

source:  Businessworld

A little competition helps

With the accelerated shift of the Philippines towards a digital economy and the spread of business and investment ideas globally, the country finally took a step forward in promoting fair and free competition in trade and industry as well as an efficient shipping system through the passage of the Republic Act No. (RA) 10667 (Philippine Competition Act) and the amendment of RA 10668 (Cabotage Law).

The passage of RA 10667 paves the way for a level playing field for businesses. The law penalizes anti-competitive agreements, abuse of dominant positions and prohibited mergers. Being the first of its kind in the country and after 20 years in the making, this is the key to addressing the increasing complexities of the global economy.

The Philippine Competition Act encourages healthier competition by setting forth a national policy prohibiting acts that restrain trade and thwart competition. In addition to its business development decisions, management will now have to ensure that the company is not engaging in the prohibited acts enumerated in the law. Moreover, in cases of mergers and acquisitions when the value of the transaction exceeds P1 billion, parties to such mergers are required to inform the Philippine Competition Commission (PCC) -- an independent quasi-judicial body charged with implementing the law and reviewing such transactions. Being a lengthy process, it involves a great deal of careful consideration on the part of businesses.

On the other hand, the amendments to the Cabotage Law allow foreign vessels to load and unload their cargoes in any port in the country. Consequently this significantly reduces the cost of transporting goods into and out of the country. Take for instance the approximate shipping cost from Cagayan de Oro (CDO) to Hong Kong amounting to $1,200 -- 75% of this amount is the cost of shipment from CDO to Manila. With the amendment of the Cabotage Law, it will now cost only half of the said price to transport goods from these two points.

The Cabotage Law is expected to have a positive impact on the economy as it will boost domestic manufacturing and enhance regional dispersal of manufacturing activities. With the reduction in the cost of transport and shipping, our export products will be less costly, making them even more competitive relative to products of other countries. However, the threat of increased import consumption is also perceived along with the resulting lower cost of importation in regions that can now receive direct shipments without passing through the ports of Manila.

The above laws are a welcome change for businesses, big and small alike. Their common ground is healthy competition. Healthy competition results in fairer and healthier prices of quality goods and services, with the prospect of stimulating economic activity. However, our government is charged with the tedious task of implementing the law to its fullest extent so that businesses can benefit from it. Passing comprehensive laws is one thing, implementing them effectively is another.

Since the above laws will benefit the economic aspect of the country, the question is, how will this affect taxation? Is the system of taxation in our country compromised?

Taxation is the lifeblood of a country. Our government depends on the revenue raised through taxation. The power of taxation is inherent in a state and even without the Constitution expressly conferring it the state cannot be deprived of its right to collect taxes for its sustenance. Hence, even with the enactment of the Competition Act, the collection of taxes largely depends upon the outcome of the business activities of an enterprise.

Big business will surely pay a big portion of the taxes, while smaller businesses are not exempt from such exercise of the state’s power. This will be a game-changing era for new businesses. For those who may be hesitant to invest, this should not be a hindrance since there are avenues provided by the government wherein tax exemptions may be granted.

There are certain laws providing fiscal and non-fiscal incentives, to wit: the Omnibus Investment Code, the Bases Conversion and Development Act, the Special Economic Zone Act of 1995, among others. Generally, all investors may avail of the incentives provided the project or activity is among those registered and allowed by the agencies granting the incentives.

At some point, Philippine Economic Zone Authority (PEZA) will determine that incentives are not enough. Due to the high cost of doing business in the Philippines, the incentives provided are losing their effectiveness. According to PEZA, there was a slowdown in foreign direct investment last year due to port congestion, which is less likely to happen if international shipping lines can dock in other ports. The passage of the Anti-Competition Law will also lessen, if not eliminate, the reluctance of businesses to invest in the country.

As for the Cabotage Law, one potential negative impact is the reduced activities of local shipping lines. The sector must adjust to recover the domestic business that will be lost. Domestic shipping corporations are taxed 30% of their net income. Reduced income from domestic shipping companies would mean reduced corporate income tax. On the other hand, international shipping companies are taxed 2.5% of their Gross Philippine Billings (GPB) which now cover the domestic transport portion of their voyages.

There may be little impact on Value-Added Tax (VAT) revenue. If a domestic shipping company transports cargo from a domestic port to Manila for an international shipper, VAT is 0%. On the other hand, international shipping companies are already paying the tax on their GPB and the common carrier’s tax on the full billing including the cost of transport from the local port to Manila.

Overall, the above laws are expected to have a positive effect on the economy in terms of enhanced business activity, higher income and more tax revenues. This will most likely accelerate economic growth, thus representing a step up for the Philippines.

Flourence Kathrine Enriquez is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

Tax evasion and its consequences

The Bureau of Internal Revenue (BIR) appears to have stepped up its filing of tax evasion charges. Just this month, the BIR filed with the Department of Justice five tax evasion cases, an offshoot of its intensified tax assessment and collection efforts. If found guilty, tax evaders are subject to imprisonment and fine.

What is tax evasion?

Generally, the offense is criminal in nature, involving willful attempts to evade or defeat any tax imposed under the Tax Code.

The essential element in a tax evasion case is the willful act of the perpetrator.

In the Court of Tax Appeals (CTA) EB Crim. No. 031 dated May 26, 2015, the CTA has defined the term “willful” in tax crime statutes as a voluntary, intentional violation of a known legal duty. This willful act must be established beyond reasonable doubt.

In the case of Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda, Jr., et al., the Supreme Court described tax evasion as being “evil,” in “bad faith,” “willful,” or “deliberate and not accidental.” In another tax case, it was explained that the deception for purposes of evading payment of correct taxes must be intentional, “consisting of deception willfully and deliberately done.”

Who then should be prosecuted in a tax evasion case? Individual taxpayers face prosecution for their own acts, but in the case of associations, partnerships, or corporations, the following are liable: partners, presidents, general managers, branch managers, treasurers, officers-in-charge, and employees responsible for the violation.

In a 2012 CTA case, the Court convicted a sole proprietor, engaged in the salon and spa business, on two counts of violation of Section 255 of the Tax Code, as amended. The conviction was for willful, unlawful and felonious failure to file an income tax return (ITR) with the Bureau of Internal Revenue for the taxable year 2002 and for willful, unlawful and felonious failure to supply correct and accurate information in the ITR for taxable year 2003. The conviction meted penalties of one to two years’ imprisonment and fine, both for the 2002 and 2003 violations.

In another CTA case just this year, involving a corporation, the Court convicted the accused in his capacity as president of the corporation for violating Section 255, in relation to Sections 253 (d) and 256 of the 1997 (National Internal Revenue Code) NIRC, as amended. It found willful failure to pay the documentary stamp tax on pawn tickets at the time mandated by law. The CTA imposed on the president the penalty of imprisonment of one to two years plus a fine.

Also, late last year, the CTA convicted a company president and general manager on two counts of violating Section 255, in relation to Sections 253 (d) and 256 of the 1997 NIRC, as amended, by way of willfully and feloniously failing to supply correct and accurate information in the corporation’s ITRs for taxable year 2003 and 2004. In this case, there were under-declarations of gross profit/income. The penalties imposed by the CTA were also imprisonment and fine.

It should also be noted that, for corporate taxpayers, the tax evasion liability does not merely lie with employees. In a very recent case this year, the CTA also added that the Directors or Trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

What measures can a taxpayer, knowing the consequences of imprisonment and fine, take to avoid the risk of a criminal charge?

The risk cannot be taken lightly. Taxpayers should have a sufficient knowledge of the tax laws and keep up to date on the relevant rules and regulations in order to be properly guided on the tax consequences of transactions. Taxpayers may also consider seeking assistance from a tax specialist or tax consultant as there have been a number of shifts in the interpretation of tax law in certain circumstances.

Certainly, no one wants to be involved in a tax evasion case, particularly these days when the BIR has been very active in filing charges. There is no need to mention that imprisonment and fine are serious penalties. That is why we should always be prudent in our transactions.

Iderlyn P. Magsambol-Demain is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld

A plea for individual income tax rate reduction

As the 2015 State of the Nation Address (SONA) of President Benigno S. C. Aquino III draws near, a clamor for the passage of laws lowering individual income tax rates before the end of his term has started to resurface.

Although many believe that measures to bring down the tax rate or amend tax brackets are long overdue, is the last year of the presidential term the right time to tackle the issue?

In the last two years, there were three Senate bills filed seeking to amend Section 24 of the National Internal Revenue Code adjusting the individual income tax brackets and reducing income tax rates. Even the House of Representatives has its own version proposing for measures reducing income tax rates.

Among the proposed bills, Senate Bill No. 2149 authored by Senator Juan Edgardo M. Angara might get the biggest shot after the debates have begun. The said bill provides for an improved and feasible graduated scale for individual tax rates. The proposed brackets for taxable income have been expanded while lower tax rates range from 10% to 25%. At present, the highest individual income tax rate is 32%.

While the proposed bills received majority support from both Houses of Congress, there have been no substantial developments since the bills were filed.

Taxpayers have high hopes that our lawmakers and the President will address the issue of individual income tax rates before the end of the 16th Congress and the start of the campaign season for the 2016 national elections. Otherwise, this issue will once again be put on the back burner, or worse, start from scratch.

Many are optimistic that the president will bring up this issue in his SONA. Doing so may help expedite the discussion in Congress to adjust the brackets and the tax rates of the individual income earners. The passage of Republic Act No. (RA) 10653 in February of this year marked the start of reform in Philippine income taxes for the benefit of employees. RA 10653 increased the threshold of income tax exemption on the 13th month pay and other bonuses of employees.

Almost two decades have passed since the 1997 Tax Code, and many believe that it is high time for obsolete provisions to be addressed, particularly on the income tax rates of individuals.

Delays in addressing the Code’s shortcomings are believed to have created imbalances in our society. At present, those earning more than P500,000 per year (or around P41,000 per month) are generally being taxed in the same bracket as those earning millions and hundreds of millions per year. Add to this the impact of the rising cost of living in the country, and the disparity is even more noticeable.

With the possible reduction of income tax rates, the Bureau of Internal Revenue’s (BIR) tax collections will be directly hit. However, since the only concern of the BIR is the amount that it will lose upon the enactment of the proposed tax rate reduction, the agency may have a flawed appreciation of the big picture.

Allowing individual taxpayers to keep more of their income to spend has the effect of stabilizing the purchasing power of taxpayers in our economy. That purchasing power will result in transactions that will boost the value-added tax, capital gains tax, and documentary stamp tax, among others, ultimately redounding to the benefit of the government.

Further, increased purchasing power could contribute to the stimulation of the Philippine economy which could, in turn, attract more foreign investment, providing more tax revenue to the government.

Based on past trends, the last remaining year of a presidency is devoted to ensuring that pro-people bills become law. Taxpayers are still hoping that the president will highlight this long-awaited reform in individual income tax rates in his upcoming SONA. If such a law is passed, Mr. Aquino may end his term with a blast, leaving a tax legacy that Filipinos will cherish.

Mark Arthur M. Catabona is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

BIR ITAD and refunds on erroneously paid taxes

It is a well-settled principle that tax exemptions are construed strictly against taxpayers. Hence, tax refunds, which are considered as tax exemptions, are resolved strictly against the claimant.

Under Section 229 of the Tax Code of 1997, as amended, any national internal revenue tax alleged to have been erroneously or illegally assessed or collected may be refunded within two years from the date of payment of the tax or penalty by filing a claim for refund or credit with the Commissioner of Internal Revenue (CIR).

A taxpayer claiming refund based on erroneous payment of tax must comply with the substantial and procedural rules set for claiming refunds -- i.e., (1) there must be a written claim stating a categorical demand for reimbursement filed by the taxpayer with the CIR; (2) there must be proof of tax payment; and, (3) the claim for refund must be filed on time. The two-year period runs from the date the tax was paid.

Recently, in Lawl Pte. Ltd. v. CIR, CTA EB Case No. 1118 CTA Case No. 8307, May 12, 2015, the CTA had the occasion to expound on the rules regarding the proper venue of claim for refund of erroneously paid tax by a nonresident foreign corporations (NRFC).

In the instant case, the taxpayer-refund claimant is a nonresident foreign corporation duly organized and existing under the laws of Singapore, which owns shares of stock in a domestic waterworks and sewerage company. The taxpayer sold its shares of stock to another domestic company and for this purpose, filed its capital gains tax return, wherein it indicated that it is availing of the tax exemption under the Philippine-Singapore Tax Treaty. It also applied for tax treaty relief with the Bureau of Internal Revenue (BIR) International Tax Affairs Division (ITAD). LAWL paid the capital gains tax on July 6, 2009 to secure the issuance of Certificate Authorizing Registration on the sale of shares.

The BIR denied its request for tax relief under the Philippine-Singapore Tax Treaty for lack of legal basis. Consequently, the taxpayer filed a request for review of the BIR ruling with the Secretary of Finance. The taxpayer also subsequently filed its administrative claim with the BIR ITAD for the refund of the capital gains tax and interest it paid.

While its administrative claim for refund and review of its ruling were pending, the taxpayer filed a judicial claim for a refund to comply with the two-year prescriptive period within which to claim the tax refund. In its answer, the BIR contended that based on the provisions of Section 229 of the Tax Code, as amended, taxpayers claiming a refund on illegally or erroneously collected taxes must file their written claim for refund with the CIR, not with the BIR ITAD, which does not have the authority to receive or process applications and/or claims for tax refund/credit certificates. According to the BIR, the taxpayer should have filed its administrative claim for refund with the Revenue District Office (RDO) where it filed its capital gains tax return.

The Court ruled that LAWL complied with Sections 204 (C) and 229 of the National Internal Revenue Code when it filed its written claim with the BIR ITAD since under Paragraph III (E) (2.3) of Revenue Administrative Order No. 11-00, ITAD, specifically its Tax Treaty Implementation and Exchange Information Section, shall process claims for tax credit/refund of erroneously collected internal revenue taxes arising from the application of tax treaty provisions including requests for exemptions. Thus, LAWL properly filed its administrative claim before the BIR ITAD. Accordingly, the taxpayer is deemed to have sufficiently complied with the requirements as to the filing of claim for refund with the proper BIR office.

In this recent decision, the CTA en banc elaborates on the proper venue for filing of refund under Section 229 of the 1997 Tax Code, as amended. The codal provision provides the claim for refund must be filed with the CIR. However, in practice, a claimant files the claim for refund with the RDO where the taxpayer is registered. In case of NRFC they are considered registered under RDO 39 pursuant to Revenue Regulations No. (RR) 11-08, as amended by RR 07-12, which requires NRFC to register with CIR through RDO 39 for purposes of taxpayer identification number issuance. Given the foregoing, NRFC are in effect registered with RDO 39 thus, their claim for refund may also be filed with said BIR office.

The CTA decision, while ruling that filing with the BIR ITAD is proper, did not categorically state that filing with RDO 39 is incorrect. Therefore, it is safe to assume that NRFCs can choose to file refund claims with RDO 39 or with BIR ITAD, provided the claim arises from the application of tax treaty provisions including requests for exemptions. In other words, claims for refund in cases other than those arising from tax treaty provisions must still be filed with the RDO where the claimant is registered.

This decision is a welcome development for NRFCs and provides an exception to the general rule on venue for filing for refunds. NRFCs should take note of this requisite in order to make sure claims for refund sufficiently comply with existing laws and regulations and are not denied on mere technicality.

Jennylyn V. Reyes is a senior associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

CTA trashes BIR on taxability of BCDA deals

The Court of Tax Appeals (CTA) has affirmed the tax-exempt status of the Bases Conversion and Development Authority (BCDA) in the sale of properties made pursuant to its mandate under its charter to develop former military bases.

In the case of BCDA v. Commissioner of Internal Revenue, the CTA held that the BCDA’s transactions regarding the sale of parcels of land in former military bases are exempt from tax.

However, since the refund being claimed by the BCDA in the case, amounting to P23.7 million, may have already been included in the creditable taxes reported in the BCDA’s income for the year 2011, the refund prayed for was not granted.

But the CTA affirmed that the tax-exempt status of the BCDA in transactions involving the sale of real estate, citing the express provision in the BCDA’s charter, which provides for its tax exemption in transactions made pursuant to its purpose as a government-owned and -controlled corporation (GOCC).

“However, Section 8 of Republic Act [RA] 7227, as amended by RA 7917, specifically states that the proceeds from any sale of portions of Metro Manila military camps shall be exempt from all forms of taxes and fees. After all, to hold petitioner liable for payment of tax would diminish the proceeds of the sale, which shall be used for capitalization of petitioner as provided for under Section 8 of RA 7227,” the CTA decision said.

In affirming the tax-exempt status of the BCDA, the CTA overruled the argument by the Bureau of Internal Revenue that the tax exemption of the BCDA had already been revoked by the Tax Code, which enumerates the four GOCCs that are exempt from income tax.

The Tax Code, as amended, enumerates the four GOCCs as the Government Service Insurance System, Social Security System, Philippine Health Insurance Corp. and the Philippine Charity Sweepstakes Office.

The CTA said that the BCDA, which is not in the list of GOCCs that are exempt from income taxes, is, indeed, liable for income tax, but the tax exemption of the BCDA on the sale of parcels of land in former military bases subsists by virtue of its charter.

“By its very terms, proceeds of the sale of the BCDA of portions of camps located in Metro Manila are exempt from all forms of taxes. To tax the proceeds of the sale would be to tax an appropriation made by law, a power that the commissioner of Internal Revenue does not have.

The sale is in the nature of an obligation imposed by law in order to fulfill a public purpose,” the CTA decision said.

source:  Business Mirror