Old Post: Validity check on executed waiver by: Marietta B. Saludaga

The Bureau of Internal Revenue (BIR) has recently intensified its audit activities to meet its collection targets.

With this development, taxpayers should be aware of their rights and of the remedies available to them during tax investigation. Such awareness should include the pivotal role of the waiver of defense of prescription in assessment cases.

The law mandates that tax authorities should make an assessment for deficiency taxes within three years from the last day prescribed by law to file the tax return or the actual date of filing of such return, whichever comes later.  Thus, any assessment notice issued beyond this three-year prescriptive period is not valid except those cases mentioned in Section 222 of the Tax Code, which have a longer prescriptive period of 10 years.

The regular three-year prescriptive period, however, can be extended upon a written agreement between the tax authorities and taxpayer through the execution of the waiver of defense of prescription. For this purpose, Revenue Memorandum Order No.(RMO) 20-90 dated April 4, 1990 and Revenue Delegation Authority Order No. (RDAO) 05-01 dated August 2, 2001 were issued to set the rules for the proper execution of the waiver. Among these rules are the following:

    1.  The waiver must be in proper form prescribed by RMO 20-90. The phrase “but not after_____19__” which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up;

    2. The waiver must be signed by the taxpayer himself or his duly authorized  representative;

    3. The waiver must be duly notarized;

    4. The Commissioner of Internal Revenue or the revenue official authorized by him must sign the waiver indicating the BIR’s acceptance and agreement to the waiver. The date of such acceptance  by the BIR should be indicated;

    5. Both the date of execution by the taxpayer and the date of acceptance by the BIR should be prior to the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed; and

    6.  The waiver must be in three copies: the original copy to be attached to the docket of the case, the second copy for the taxpayer, and the third copy for the Office accepting the waiver.

Failure to comply with such rules will render the waiver invalid and will not therefore extend the prescriptive period.

The importance of waiver and strict compliance with above rules laid down under RMO 02-90 were the focus of a court decision recently promulgated by the Supreme Court (SC) on May 5, 2010.  In this particular case, the SC held that due to the defects noted in the waiver, the period to assess or collect taxes was not extended and consequently, assessments issued by the BIR beyond the three-year period are void.

The court likewise addressed an important issue raised in this case and that is, whether a taxpayer is estopped from questioning the validity of the waiver and raising the prescription issue when it agreed to the audit during the period specified in the waiver.

The SC held that the doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes. This is because there is a detailed procedure for the proper execution of waiver, which the BIR must strictly follow.

The court has consistently held that the doctrine of estoppel is predicated on and has its origin in equity which is justice according to natural law and right. As such, it cannot give validity to an act that is prohibited by law or one that is against public policy.

It further clarified that the BIR cannot invoke the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO-05-01, which the BIR itself issued. It had emphasized that a waiver of the statute of limitations, being a derogation of taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.

Though this court decision tackles strict compliance with the set rules, it must also be mentioned that the execution of waiver by taxpayer should be encouraged in assessment cases. The waiver will be beneficial not only to tax authorities but also to taxpayer. It will extend the prescriptive period thereby giving taxpayer ample time to collate supporting documents and refute issued findings for tax deficiency.

In assessment cases, if a taxpayer refuses to execute a waiver, the tax authorities will have no recourse but to formalize its findings and issue a formal assessment notice before the expiration of prescriptive period. Taxpayer will therefore lose more opportunities in the administrative level to resolve its tax investigation.

So next time the tax authorities ask for a waiver, taxpayer should then make an assessment if its execution would be for its own advantage or that of tax authorities.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Marietta.Saludaga@ph.gt.com.  For other tax concerns, please check out our other tax services. 

source:  Punongbayan & Araullo

Carry-forward benefits

Republic Act No. 8424, also known as the Tax Reform Act of 1997, blessed corporate taxpayers with two new benefits: the excess minimum corporate income tax (MCIT) credits and the net operating loss carry-over (NOLCO). “Blessed” may be the appropriate term to use in this context since both benefits serve in some way to ease the tax burden on corporations. However, are these benefits actually enjoyed by the intended legislative beneficiaries or are they sometimes used against the taxpayers?

As a refresher, a corporation shall be liable to pay the 2% MCIT computed on gross income if it has zero or negative taxable income, or the MCIT is higher than the 30% normal income tax (NIT) computed on the net income (gross income less allowable deductions). The excess of the MCIT over the NIT may be carried over to the three (3) succeeding taxable years and credited against NIT due.

On the other hand, NOLCO refers to the excess of deductible expenses over gross income resulting in a loss position in a given taxable year. A corporation having operating losses may also carry forward its excess expenses to the three (3) succeeding taxable years and claim it as deduction against gross income to the extent that the excess has not been previously offset against gross income. This means that the net operating losses incurred in prior year/s may be allowed as deduction from the current year’s gross income, thus reducing or even wiping out the company’s 30% income tax liability for the current year, depending on the amount of expenses to be deducted.

SOUNDS HEAVENLY, DOESN’T IT?
However, there seems to be a disconnect between policy theory and its implementation, especially nowadays with the Bureau of Internal Revenue (BIR) aggressively disallowing credits and deductions in assessment cases. In one Court of Tax Appeals (CTA) case, the BIR disallowed the amount representing a company’s excess MCIT over NIT and excess tax credits carried over to the succeeding period without even indicating the basis for the disallowance (CTA Case No. 8521 dated 30 June 2015).

In another CTA case, not only the excess MCIT and excess tax credits were disallowed by the BIR but also the net operating loss suffered by the company during the assessed year. The NOLCO was disallowed because the BIR believes that the tax benefit had already been forwarded to the succeeding year (CTA Case No. 8323 dated 11 June 2014).

Fortunately, the CTA, in the first case, reversed the decision of the BIR because any tax benefit derived by the taxpayer from the carry-over of excess expenses and credits should redound to the succeeding year. Hence, at most, the taxpayer may only be assessed in the said succeeding year.

Citing the same underlying principle, the CTA likewise ruled against the BIR in the second case. For the denial of carry-over benefits to be warranted, there must be proof that the company used the NOLCO in the succeeding year. By disallowing the NOLCO, the losses incurred by the company for that year are deemed disregarded. Thus, to avoid the NOLCO from being rendered ineffectual, any additional taxable income found by the BIR in the course of examination of books should be offset first with such losses.

Incidentally, in both cases, it is worth mentioning that the taxpayers were denied due process of law. The BIR failed to provide a clear ground for the disallowance or a breakdown of the disallowed claims for the taxpayer to identify which transactions were allegedly unsubstantiated. Under Section 228 of the Tax Code, a taxpayer must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. While tax assessments are presumed to be correct and that the burden to prove otherwise lies with the taxpayer, the taxpayer must also bear in mind that assessments are subject to the taxpayer’s constitutional right to due process.

For unsuspecting taxpayers, it is advisable to take heed of assessments to avoid improper imposition of taxes. Tax assessments should not be cursorily read and accepted at face value. Often, close scrutiny would yield overlooked income subject to tax such as undeclared sales, disallowed expenses, unaccounted income payments and many more. More unsettling is to discover tax credits and other tax benefits having been disallowed for no apparent reason.

While we commend the BIR for being persistent and sometimes pushy beyond belief in collecting tax to meet revenue targets, collection efforts must give way to entitlements granted by law to taxpayers. After all, carry-forward benefits were intended to ease the tax burden, a noble gesture which hopefully will not be reduced into a hollow policy.

Sarah Janine P. Davalos is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

sarah.janine.p.davalos@ph.pwc.com.

source:  Businessworld

Editorial: Tax reform, NOW!

DISCONCERTING were the statements, attributed to Budget Secretary Florencio “Butch” Abad, that the tax reform package is in limbo simply because the national elections are near. He was quoted as saying that it is “difficult to talk about taxes during an election season.” More worrying was the statement made by Internal Revenue Commissioner Kim Henares that any changes in the income tax structure would not happen under President Aquino’s term.

Malacañang’s loss of interest in pushing for the tax reform package became apparent when President Aquino failed to mention it in his final State of the Nation Address last July 27. Sen. Juan Edgardo “Sonny” Angara had earlier urged the chief executive to push for the tax reform bills in Congress so that a progressive and equitable tax system could be put in place during the remaining months of the Aquino presidency.

Angara, principal backer of the tax reform bill in the Senate, has been batting for lower tax rates on both corporate and individual income taxes, pointing out that the tax rates in the Philippines are the highest in the Asean and neighboring Asian countries. The maximum individual rate in the country is 32 percent for a salary cap of P500,000 in annual earnings (or about $11,000)—a clear case of a high tax rate on a low income bracket. Compared to its neighbors, Singapore’s tax rate on its top bracket of $250,000 is 20 percent; Indonesia’s is 30 percent on $43,000, and Malaysia’s is 26 percent on $30,000. Thailand has a higher tax rate of 35 percent, but the income bracket cap is $123,000. In Hong Kong, the standard income tax rate is 15 percent of net total income.

The Aquino administration seems to fear a possible backlash from the voters if it gives the go-ahead to the proposed tax reform package, which not only aims to ease the income tax burden but also seeks to recover any foregone revenue by further raising the value-added tax.

A very important component of the tax reform package is the proposal to raise the tax-exempt cap on incomes of individuals and small businesses. At the same time, it will reduce to 25 percent the corporate income tax ceiling. The net effect, as studies have shown, is that it would address the so-called “bracket creep” phenomenon. A paper presented by Rep. Miro Quimbo, chair of the House committee on ways and means and the principal author of the bill that seeks to overhaul income taxes, noted that the tax brackets have been frozen since 1997. (They were not adjusted for inflation.) This, even as salaries were adjusted for inflation, thus eventually pushing salary workers into the higher tax brackets.

In 1997, the bulk of salary workers was found in the lowest tax brackets. By 2013, the paper noted, most of them have crept up to the higher brackets without even realizing it. Thus, salary workers pay higher tax rates today even though there has been no real increase in their income. The paper noted that this phenomenon of “bracket creep” was very apparent among selected professions, notably teachers and soldiers. In 2001, about 65 percent of teachers were classified in bracket 4. By 2013, only 21 percent remained in that bracket as most had been shifted up to brackets 5 and 6, even higher.

Early this year, tax managers submitted to Congress its comprehensive tax reform proposal. The Tax Management Association of the Philippines (TMAP) proposed an all-inclusive tax-exempt annual income threshold of P300,000. At present, a tax base of P10,000 and less is already slapped a 5-percent tax rate. TMAP is proposing a rate of 10 percent for those earning P300,000 to P500,000 a year; 20 percent for those earning more than P500,000 to P1 million; 25 percent for those earning more than P1 million to P2.5 million; and 30 percent for those earning more than P2.5 million.

By correcting the tax brackets, it is believed that a considerable number of teachers and soldiers and ordinary taxpayers would be back to brackets 3 and 4, in effect increasing their take-home pay. However, it is a pity that elections—or the political interest of those running in 2016—stand in the way of an equitable income tax structure.

Taxpayers should unite and convince their legislators to act on the tax reform program, NOW! Ordinary taxpayers deserve such fairness.

source:  Philippine Daily Inquirer

eBIRForms: Adapting to its changes

We have seen great leaps of changes from the Bureau of Internal Revenue (BIR) in improving our tax return filing system during the last several years.  This started from the change in physical layouts of the tax returns from excel to interactive bar-coded pdf tax returns, and then, from the conventional manual filing to electronic filing process.

The eBIRForms system was developed to provide taxpayers particularly non-eFPS filers with accessible and convenient service through easy preparation 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.

As the BIR went online, it earned brickbats because of the glitches and timeouts on the BIR website making it difficult for taxpayers to timely file their tax returns. In response to this, the BIR issued Revenue Memorandum Circulars (RMC) providing an alternative mode in the filing of eBIRForms as enumerated and clarified in RMC 26-2015. During the time that online eBIRForms are not accessible to taxpayers, the alternative mode is by using the offline eBIRForms and sending the .xml file to a certain email address provided in the RMC.

However, problems are still being encountered by the BIR in its alternative filing process. Due to the numerous tax returns with invalid format as well as emails with no attachment sent to the eBIRForms email accounts, the BIR issued a Memorandum on July 30, 2015 disabling the eBIRForms email accounts and rendering the alternative mode of filing obsolete.

Those who continue to submit tax returns to the email accounts will receive the following email message:

“This tax return submission channel is now unavailable and your submitted tax return will be disregarded. Please download the eBIRForms Package v.5 and follow the procedures per RMC 31-2015 to submit your tax returns.”

The electronic service of the BIR has its benefits, but it also has its limitations. Last annual tax filing season, there have been congestions in the BIR website due to the immense volume of taxpayers trying to go online. In fact, other taxpayers tried to file early in the morning or late at night when fewer taxpayers were trying to access the online facility. 

In instances of unsuccessful filing attempts, the BIR provided for alternative steps such as calling the BIR helpdesk as per Annex D of RMC 14-2015. More importantly, taxpayers must print screen the proof of unsuccessful filing, call the BIR helpdesk and obtain a Trouble Ticket Log or report to BIR Contact Center and get the Reference Number of the call.

It must be noted that corresponding penalties will be imposed for failure to file and pay the tax returns on time such as 25 percent surcharge, interest of 20 percent per annum and compromise penalties. 

The BIR has also released the newest version of the eBIRForms Package version 5.0 in RMC 31-2015. The thirty-six (36) tax returns available in the package can be filed by clicking the “Submit” button, after which the taxpayer will be directed to eBIRForms log-in portal and the taxpayer will be asked to provide a username and a password.  A Filing Reference Number (FRN) will be generated as acknowledgment of receipt and the page will display a message that “The form has been successfully filed.”.

In case of unsuccessful submission, taxpayers may use the “Final Copy” button as an alternative mode of electronic submission of returns. Upon hitting the “Final Copy” button, a message window will be displayed to confirm if the taxpayer is a registered online eBIRForms user. If yes, it will ask for the username and password. Moreover, for those who are not yet enrolled to the eBIRForms System, the user will be directed to the Terms of Service Agreement (TOSA) page in which he will be required to fully and unconditionally agree to the TOSA. Upon confirmation, the system will automatically submit the accomplished tax return to the BIR. A message will then be displayed to notify the taxpayer that the submission is successful and an email confirmation will be received by the taxpayer in the email address that was provided in the tax return.

To be able to receive the email notification, the taxpayer’s email address encoded should be valid and active. Also, the BIR email should not be in the spam folder and “bir.gov.ph” should not be blocked by the email provider. Additionally, the mailbox should have enough space to be able to receive the Tax Return Confirmation Receipt email by the BIR. Taxpayers should print the same as evidence that the BIR received the e-filed return.

For tax returns with payment, taxpayers should print the tax return together with the FRN or e-mail notification with the FRN and proceed to manually pay through the authorized agent bank or Collection Agent. Alternatively, those enrolled to e-tax and iTax payment systems of The Landbank of the Philippines (LBP) and Philippine National Bank (PNB), respectively, may process their payments online.

The BIR’s electronic filing policy shows its intention to improve its service. In line with the continuous enhancement and development of electronic services by the BIR to provide faster, more reliable and more convenient services for the taxpayers, the BIR must be prepared to accommodate the seemingly endless questions of the taxpayers when their online facility does not work. And more importantly, prepare for the system’s full implementation.

Taxpayers should file as early as possible to comply with the tax filing deadlines in case the eBIRForms system does not work.  Let us hope that the BIR’s electronic filing facilities will get even better as the BIR faces the challenge to forge the system into an accessible gem that every taxpayer could use. 

Mary Rose P. de Leon is a supervisor from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.

source:  Philippine Star

Overtaxed

It is time for a tax revolt.

The existing tax structure will annihilate the Filipino middle class. It is no wonder that our economy is characterized by a widening gap between the rich and the poor as well as a sharp polarization in incomes.

When a senior public school teacher is taxed the same rate as a business tycoon, something must be very wrong. The income level at which a wageworker is imposed the maximum tax rate is the highest in the region. The 32% tax rate itself is among the highest in the world.

This is the reason why this government thinks it can afford a P3-trillion national budget. Among the unwritten assumptions of the budget proposed for 2016 is that income tax rates will be conserved. We can only hope the Congress will interrogate that implicit assumption thoroughly.

There are bills pending in both chambers of Congress proposing adjustments to the income tax rate and the exemption levels. The exemption level has not been altered in a quarter of a century. This is the reason a junior executive gets taxed the same rate as the owner of a conglomerate.

None of the bills proposing reform of the tax rates and exemption levels are supported by the administration. None of them are categorized as urgent – even if they really are.

Relief for the struggling Filipino middle class was never a concern of this administration. Filipino wage earners have to contend with a high food price regime, among the highest power costs in the world, comparatively lower wage levels and horrible traffic just to get to work – and government takes away a third of his income.

Even when a Filipino makes his money abroad – say, a Manny Pacquiao – his earnings will be taxed the difference between the tax rates imposed here and those imposed where the money was made.

Even when a Filipino white collar worker might enjoy parity in pay with his Southeast Asian peers, the higher tax rates (plus obligatory contributions to social security, housing and medical insurance funds) ensures he has lower disposable income compared with his peers.

Considering the high transport costs imposed by an inefficient public transport system, high energy costs due to an inefficient power sector and a high food price regime, the Filipino ends up much poorer than his counterparts in the region. At the end of the day, he has less disposable income than his regional peers.

Among Southeast Asians, Filipinos spend among the largest portion of their incomes on food. This is the reason why a large majority of Filipinos might be described as food-poor.

Filipinos labor under a despotic fiscal regime.

It should not be this way, however, if the political leadership recognized its obligation to reduce income tax rates and raise exemption levels.

When government introduced value-added taxation (VAT), the presumption was that the tax burden would be shifted from income to expenditures. In modern taxation, the shift of taxation from income to expenditure is considered more reasonable. It will help raise the savings and investment rate and, in turn, drive economic growth.

As a general rule, taxes on expenditure are more easily enforced. There is little inducement to evade taxes on spending. A whole army of supermarket and restaurant cashiers collects VAT efficiently on behalf of bureaucrats.

The efficiency in collection of taxes on expenditure is the reason why modern tax systems are increasingly shifting away from income taxation. Taxes on spending discourage profligacy and encourage savings, allowing for better capital accumulation and healthier financial markets.

When the Philippine government increased VAT, the unstated social compact there was that income taxes would be proportionally reduced. If that does not happen, the entire tax system cascades on the hapless wage earner.

The Philippine government reneges on that unstated social compact by increasing the VAT rate without simultaneously decreasing the income tax rate. This ought to be a crime. The omission is an act of cruelty against the Filipino taxpayer.

How long will it take for the Philippine government to remedy the situation?

It could take very long unless the suffering mass of Filipino taxpayers rise in revolt. It could take very long because government seems happy brutally collecting taxes on both the income and expenditure side.

Filipinos are overtaxed. That fact should be recognized as an inefficiency causing our economic performance to drag.

The existing tax scheme prevents the Filipino middle class from growing. Without a robust middle class, our democracy will remain superficial and tenuous.

Without a robust middle class, our civic discourse will remain impoverished. It becomes easier for demagogues to rule. That we have seen.

Without a robust middle class, our social structure will become increasingly polarized: a callous oligarchy dominating the teeming mass of the poor. A polarized society will be vulnerable to instability.

Without a robust middle class, the traditional political clans will continue to monopolize political power. Rebellions of every sort will continue to fester. There will be no peace.

Tax reform, therefore, is much too important to leave to the architects of our fiscal order. The tax system has the power to shape our social order, improve conditions for social equality and eventually for political liberty.

We cannot expect this administration to understand the profound importance of tax reform to improving social equity. It is an administration with the mindset of the traditional landowning class, a mindset that can only understand dole outs and patronage politics.

Filipino taxpayers must put reform of the tax system on the agenda of political debate this electoral season.

source:  Philippine Star

10 conditions that make tax perks work for the country

Let us review the “necessary conditions,” which the Christian Aid paper (“Towards Measuring the Costs/Benefits of Tax Incentives,” June 2015) propounds. And let us see how relevant they are and how we can apply or enable them in the Philippine setting.

WHEN THE REVENUE LOSSES THEY CAUSE ARE NOT GREATER THAN ADDITIONAL REVENUES THEY BRING IN.
At present, we are not aware of any complete or definitive cost-benefit study on fiscal incentives, both at the aggregate level and the industry level. And the reason is simple: The necessary information is not accessible. Some studies -- for example, by Rosario Manasan (2002) and Renato Reside (2006) -- have focused on the costs or the redundancy of incentives. Such studies, likewise hampered by data collection, need to be updated.

WHEN OTHER BUSINESS CONDITIONS ARE GOOD.
In the main, present business conditions are good -- especially the political and macroeconomic stability. On the other hand, the inadequate infrastructure has been a binding constraint, which the current administration has not effectively addressed.

The argument of some lobbyists and even some government officials that the fiscal incentives are necessary to compensate for bad infrastructure is wrong. Longer-term investments will avoid a country, regardless of tax incentives, where crumbling infrastructure obstructs business. Tax incentives cannot replace good business conditions like adequate infrastructure to attract productive investments.

WHEN THEY PROMOTE SPILLOVERS -- SUCH AS THE DIFFUSION OF NEW KNOWLEDGE (TECHNOLOGY), UPGRADING OF THE SKILLS OF THE WORKFORCE AND/OR LINKAGES TO DOMESTIC FIRMS, AND/OR SUPPORTING ‘INFANT INDUSTRY.’
The criteria for granting incentives are vague, leading to arbitrary decisions. New knowledge or technology can mean anything like the change from third generation (3G) to fourth generation (4G) of mobile broadband Internet. But that kind of new technology in itself does not merit the granting of tax incentives. All industries, in order to prosper, have to diffuse new technology and upgrade the skills of workers. Going by that logic, government has to give tax incentives to all industries!

The economic criteria for granting fiscal incentives must thus be tight and well defined. Fiscal incentives must in fact be limited to the confines of the country’s industrial policy and roadmap. But that likewise means industrial policy cannot be broad and arbitrary.

WHEN THEY HAVE BEEN PUBLICLY JUSTIFIED WITH CLEAR OBJECTIVES, AS PART OF A BROADER POLICY.
The public discussion is limited. Accountability of the agencies that have the power to grant incentives suffers. This stems from the muddled criteria, the opacity of the whole regime of fiscal incentives and, concomitantly, the absence of assessments through cost-benefit studies.

WHEN THE RECIPIENTS OF TAX INCENTIVES ARE TRANSPARENT.
This kind of information remains confidential. The Bureau of Internal Revenue can only provide the information if it gets a waiver from the recipient corporations. In this light, the Department of Finance (DoF) and the Department of Trade and Industry, with the full support of the President, have endorsed a bill titled “Tax Incentives Management and Transparency Act.”

WHEN THERE IS SUFFICIENT DATA COLLECTION.
This again leads us to the lack of transparency of the regime on fiscal incentives. Further, the Philippines has many investment promotion agencies -- the Board of Investments, Philippine Economic Zone Authority, Clark Development Corporation, Bases Conversion and Development Authority, Subic Bay Metropolitan Authority, etc. And they all have their own sets of rules, making data collection difficult.

WHEN THERE ARE MONITORING AND ENFORCEMENT MECHANISMS TO ENSURE POSITIVE IMPACTS AND COMPLIANCE.
The DoF and the Bureau of Internal Revenue are the proper agencies to assess the impact of fiscal incentives and to ensure compliance with rules. But at present, the DoF is sidelined in the whole process of the decision-making on fiscal incentives. The DoF cannot even make cost-benefit studies, impeded by the refusal of, say, the Board of Investments, to provide the necessary information.

WHEN THEY ARE IN THE LAW, AVAILABLE TO ALL INVESTORS ON THE SAME TERMS AND NOT DISCRETIONARY.
Granting fiscal incentives in the Philippines is arbitrary.

To reiterate, the criteria are general and ambiguous and are not anchored on rigorous economic criteria that emphasize higher social returns or benefits than the private gains. Some degree of discretion cannot be avoided because fiscal incentives are selective. But the discretionary aspect can be disciplined by having clear and tight economic criteria, which at the very least will eliminate redundant incentives.

WHEN THEY ARE SIMPLE TO ADMINISTER AND WHEN THEY ARE ADMINISTERED BY A SINGLE GOVERNMENT AGENCY.
As previously indicated, the Philippines has too many investment promotion agencies, with different sets of rules. Worse, the DoF and the National Economic and Development Authority practically have no influence in the decision-making of these investment promotion agencies. In neighboring countries, investment promotion is vested in one agency or two agencies, at most.

WHEN THEY ARE COORDINATED AND/OR HARMONIZED (TO SOME DEGREE) WITH NEIGHBORING COUNTRIES.
It is high time that the members of the Association of Southeast Asian Nations tackled the problem of the race to the bottom arising from tax competition.

The truth is, every country in the region offers similar tax incentives, and thus no real advantage accrues to a particular country, from the perspective of tax competition. Everyone thus has to gain by cooperating towards reducing the incentives, thus being able to recover the foregone revenues from unnecessary incentives.

In sum, the Philippines has a lot to do to reform its system of fiscal incentives. The President has called Congress to pass the bills on the rationalization of fiscal incentives and the transparency of fiscal incentives.

Enactment of these bills will not be easy because of the strong resistance from vested interests, including those within government. In addition, less than a year is left to have these bills approved. The President must actively intervene to ensure the passage of the bills. The intervention needed is similar to how the President has campaigned in Congress for the controversial Basic Bangsamoro Law.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph

source:  Businessworld

DoF names bank secrecy repeal as its price for lower tax rates

PROPOSALS to lower income tax rates could be fast-tracked if Congress enacts two measures that will strengthen the Bureau of Internal Revenue’s (BIR) power to examine taxpayer accounts, senior Finance officials told lawmakers.

Internal Revenue Commissioner Kim S. Jacinto Henares said in a congressional hearing that the pace of discussions on the comprehensive tax reform package would depend on Congress’ willingness to repeal the bank secrecy law and allow BIR to scrutinize deposit accounts for tax-related audits.

Congress must likewise amend the anti-money laundering act (AMLA) and add tax evasion as a predicate crime, she added.

“If the Congress and Senate are willing to do these two things, then the discussion, I think, will be faster. But if the Senate and Congress are not willing to do these two things, then the discussion will also be more difficult,” Ms. Henares said in response to lawmakers’ queries.

Several lawmakers have introduced measures that would bring down corporate and personal income taxes to around 25% from the current 32% rate and align the country’s rates with those of its Southeast Asian peers.

However, Ms. Henares cautioned against slashing income tax rates without a measure that would offset revenue losses.

“We have to balance the revenue and if we don’t have transparency, we will not be able to collect the revenue required to replace whatever losses that will take place,” Ms. Henares said.

Department of Finance (DoF) Secretary Cesar V. Purisima, for his part, said reforming the country’s taxation system should include addressing BIR’s “handicaps” in going after tax evaders.

“I think those are things that we have to look at because if you’re able to do so, then you give space to adjust different parts of the tax structure. That’s why it has to be a holistic approach,” Mr. Purisima said.

A proposed comprehensive tax reform package has been pending with the President for approval before the measure is submitted to Congress. Broadly, the measure seeks a “holistic” approach aimed at both increasing revenue while simplifying the income tax system.

Mr. Purisima also cited the possibility of expanding the coverage of value-added taxes (VAT) to align the country’s collections to the “ideal” ratio of 12% of gross domestic product from the current 2.5%.

“Clearly there are so many ways to approach it. As we see it, it has to be a holistic process because we don’t want to create imbalances that would affect our fiscal viability,” Mr. Purisima said.

Republic Act no. 1405 and Presidential Decree no. 1792 consider bank deposits as confidential in nature unless authorized by the Monetary Board based on suspicion of fraud. No law has been passed amending the country’s bank secrecy laws despite calls from tax authorities to repeal the rule.

Senators said they support such proposals.

“I will support that move. In 2003, while amending the AMLA, I had that amendment but my colleagues removed it,” Senator Sergio R. Osmeña III, Chair of the Senate’s Committee on Banks, Financial Institutions & Currencies, said in a mobile phone message.

Senator Juan Edgardo M. Angara, chair of the Senate’s Ways and Means Committee, said for his part he is “willing” to hear DoF’s proposal.

“We must be open to new proposals and the bank secrecy law was enacted way back in the ’70s when there was capital flight from the country. We just must ensure that there are adequate safeguards that are in place to protect innocent individuals from harassment or undue security risk,” he said via text message.

Lawyer Terrence Conrad H. Bello, President of the Tax Management Association of the Philippines, said in a mobile phone message the two measures should not serve as a precondition to the reduction in income tax rates. He added an adjustment in tax rates has long been overdue.

“The repeal of the bank secrecy laws and tax evasion as a predicate crime are separate proposals that should be carefully studied and deliberated upon. The immediate passage of income tax reform should not be dependent on these two measures or proposals,” Mr. Bello said.

Business groups said they would weigh in on the issue once the executive submits its proposal to Congress, but noted the need to reform the country’s bank secrecy and tax evasion laws.

“The business community will also discuss these possible bills once they are included in the legislative mill and will ensure that we provide our inputs into the process. Business is keenly aware though that if we lessen the tax intake, we must find other sources and/or plug more leaks and/or cut costs,” Peter Angelo V. Perfecto, Executive Director of the Makati Business Club said via text.

“Lifting of bank secrecy and getting tough on tax evasion are some of these options but we must explore others and find the most effective options,” he added.

John D. Forbes, senior advisor at the American Chamber of Commerce of the Philippines, said in a text message: “If President Aquino has approved the comprehensive tax reform proposal of DoF, the business community would be very interested in knowing the details. Bank secrecy in the Philippines can protect many kinds of illegal financial actions and needs reforming.”

BIR’s collections in the first half totaled P705.87 billion, up by 10% year on year but 13% short of the target for the first six months of 2015.

source:  Businessworld

More opportunity to substantiate VAT refund claims

The Filipino taxpayer carries a heavy burden in terms of tax obligations and compliance. We are encouraged to support the tax collection efforts of the Bureau of Internal Revenue (BIR) through its Register File and Pay campaign. However, given the prevailing poverty of the vast majority of the population, inadequate access to public health care, questionable deals and disbursements within and by the government, and delays in much-needed infrastructure projects, it would appear that taxpayers -- Filipino and foreign alike -- are not too keen on supporting the BIR.

Taxes are the lifeblood of the government. It is a harsh but necessary reality that taxpayers must pay, under threat of penalty or imprisonment. However, there are instances when the law clearly allows the taxpayer relief from payment of taxes, via refund or tax credit. But while it is very easy for the BIR to exact compliance, many believe that it is very difficult to secure BIR approval for refunds or credits.

Under our tax laws, an administrative claim may be filed with the BIR for tax refund or for issuance of a tax credit certificate (TCC) within a period of two years from the close of the taxable quarter when the sales were made, in case of refund of input tax attributable to zero-rated or effectively zero-rated sales, or two years from the date of erroneous payment in the case of taxes erroneously or illegally collected. The applicant must submit the Application for Tax Credit/Refund together with all the supporting documents. After the application is filed, the BIR will conduct an examination of the applicant’s books of account and other records in the taxable year concerned to determine the validity of the claim. The taxpayer may be required to submit numerous documents.

Particularly for value-added tax (VAT) refunds, an applicant was allowed to submit all the documentary requirements before and after the filing of the administrative claim, before Revenue Memorandum Circular (RMC) No. 54-2014 (Clarifying Issues Relative to the Application of Value-Added Tax Under Section 112 of the Tax Code) became effective last year. If the taxpayer fails to submit the required documents as provided in the BIR’s checklist, the VAT claim can be denied for lack of factual basis due to failure to submit the required documents. A party aggrieved by the BIR’s denial must, within a period of thirty (30) days from lapse of one hundred twenty (120) days from the submission of the complete documents, file an appeal with the Court of Tax Appeals. In case of inaction of the BIR, the judicial claim must also elevate his claim within 30 days from the lapse of the 120-day period when all the documents were submitted.

After the effectivity of RMC 54-2014, a taxpayer applying for a VAT refund should submit the complete set of documents at the time of the filing of the administrative claim. The application should be accompanied by a sworn certification which states that the documents submitted are complete for purposes of processing the VAT claim, and that the same are the only documents that will be presented to support the same. In fact, the BIR officer and the taxpayer’s representative go through the checklist to determine the completeness of the supporting documents, before the same is accepted.

What happens if the taxpayer fails to submit all the documents that will support his claim? While this can spell a denial of the claim on the administrative level, is the taxpayer forever barred from submitting documents when he elevates his claim to the Court of Tax Appeals?

It could be argued that the answer should be “No”. The Supreme Court held in Commissioner of Internal Revenue vs. Team Sual Corp. (formerly Mirant Sual Corp. (GR No. 205055, July 18, 2014) that there is nothing the Section 112 of the Tax Code or Revenue Regulation No. 3-88 or Revenue Memorandum Order (RMO) No. 53-98 that requires the complete submission of the documents enumerated in the RMO for a grant of refund or credit of input VAT.

The above pronouncement was adopted by the Court of Tax Appeals in the very recent case of Filminera Resources Corp. vs. Commissioner of Internal Revenue (CTA Case No. 8666, Aug. 3, 2015). The Court explained that in claims for VAT refund, the non-submission of complete supporting documents at the administrative level is not fatal to a petitioner’s claim. The court is not prevented from receiving, evaluating and appreciating evidence submitted before it. The question of whether or not the evidence by a party is sufficient to warrant the granting of a refund lies in the sound discretion of the court.

Although the above decision was based on the facts before the effectivity of RMC 54-2014, the Court’s explanations in the said decision is in accord with justice and fairness, and would offer relief for the current taxpayers who, due to difficulties in retrieving documents from voluminous accounting/tax records, are unable to submit all the required documents at the time of the filing of the administrative claim, as required by RMC No. 54-2014. Hence, for as long as the taxpayer properly and timely filed an appeal with the Court of Tax Appeals, he is given an opportunity to substantiate his claim. It is also important to note that the counting of the period to file the judicial claim should be reckoned from date of the filing of the administrative claim, as also mentioned in the Filminera case.

Due to the volume of new and pending refund applications with the BIR, almost all of the cases end up being appealed before the Court of Tax Appeals. It is comforting to know, at least, that the taxpayer has a fair opportunity to pursue his VAT refund claim at the court level, as he is still given a chance to submit additional evidence to prove his claim, which would then be subjected to the Rules of the Court.

Jean Ross Abenasa-Miso is a tax manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

BIR resumes online application for TIN

THE Bureau of Internal Revenue (BIR) will resume starting Monday its online service for those who will apply for taxpayer identification number or TIN.

“Please be advised that eREG system will be accessible beginning Aug. 10, 2015 at 8 a.m.,” the BIR said in an advisory on its website.

The eREG or eREGISTRATION system is a web application for taxpayer registration services such as TIN issuance, payment of registration fee as well as issuance of certificate of registration.

In an Aug. 7 memorandum, BIR Deputy Commissioner for information systems group Lilia C. Guillermo said “the technical issues encountered in eREG system have been resolved.”

“All eREG users can resume online TIN application. RDOs [revenue district offices] will no longer manually issue TlNs,” according to Guillermo.

One module of the eREG system is the so-called eTIN, which the BIR said caters to individual taxpayers such as self-employed individuals (single proprietors and professionals), mixed income earners (for example, an employee and single proprietor and/or professional at the same time), employees, as well as prospective non-resident taxpayers under Executive Order No. 98.

Last May, BIR Commissioner Kim S. Jacinto-Henares said in an interview that the country’s largest tax-collection agency plans to do away with TIN cards made of cardboard and roll out IDs printed on smart cards by next year.

The pilot testing of TIN IDs made of smart cards would start in the second half, Henares had disclosed.

A smart card is defined by BusinessDictionary.com as a “plastic card with embedded microprocessor chip, electronic memory, and a battery,” which is being used to authenticate, manage and store information.

Some of these cards, which have the same size as a credit card, may be swiped through a magnetic reader, BusinessDictionary noted.

Initially, new taxpayers will be issued the smart cards, after which all other registered taxpayers have to switch to the new card and dispose their old IDs by January, according to Henares.

“This initiative has been planned for a long time… It will have a magnetic card and a smart chip to allow it flexibility so that we can use it for other things” in the future, the BIR chief had said, citing that the new ID may eventually also be used to track value-added tax or VAT receipts.

Henares had pointed out that some taxpayers had been complaining that the existing ID could be “easily faked,” while a smart card is deemed to be more secure.

The BIR chief had said they will roll out the new TIN card even as pending legislation for a national ID system languishes in Congress.

source:  Inquirer 

The right to recover versus the right to assess

Vigilantibus sed non dormientibus jura subveniunt. The law aids the vigilant, not those who slumber on their rights.

Last June, no less than the Court of Tax Appeals (CTA) reminded us of the truth and application of this time-honored doctrine of law in an action for recovery of erroneously paid taxes (CTA Case No. 8147 dated 22 October 2014 as amended on June 10, 2015). In this case, the taxpayer was issued a Preliminary Assessment Notice (PAN) in connection with a tax investigation covering the taxable year 2002. Due to the execution of four consecutive waivers, the PAN was issued only in 2008, or five years after the filing of the tax return.

To stop the further accrual of interest charges, the taxpayer decided to pay the assessed deficiency taxes a day after it received an advanced copy of the PAN. It then informed the Bureau of Internal Revenue (BIR) that the payment was without prejudice to its right to file a protest upon receipt of the Formal Letter of Demand (FLD)/Final Assessment Notice (FAN). The taxpayer, thereafter, filed a reply to the PAN.

Without formally ruling on the reply to the PAN, the BIR sent instead a letter informing the taxpayer that it had lost the right to submit additional documents in support of its reply. In response, the taxpayer filed an administrative claim for refund with the BIR, and thereafter, a judicial claim before the CTA.

There are a few peculiar things that set this case apart from other tax refund cases. First, the taxpayer effected a payment under protest, a scenario which is not explicitly provided for by the current tax laws and regulations. Second, such payment was made after the issuance of a PAN, but before the issuance of an FLD/FAN. Last, and probably the most curious of all, no FLD/FAN was ever issued by the CIR.

The BIR’s opposition to the claim was mainly based on the argument that the payment made by the taxpayer after the issuance of the PAN dispensed with the need for the issuance of an FLD/FAN. Hence, the assessed amount in the PAN and the settlement by the taxpayer was valid.

In granting the claim, the Court determined that since there was no issued FLD/FAN, the amount paid by the taxpayer can be considered as erroneously collected and, therefore, a proper subject of a claim for refund. Citing a Supreme Court decision, the CTA defined “tax erroneously collected” as one collected without statutory authority.

Why is there emphasis on the need for an FLD/FAN? A PAN merely serves as a notice of the BIR’s initial findings. In fact, even if the taxpayer fails to reply to such preliminary notice, Section 229 of the Tax Code does not provide for the findings to become automatically final. Only the final assessment is at risk of becoming final, executory, and legally demandable, if ignored. Hence, without an FLD/FAN, any payment made to settle purported deficiency taxes is an erroneous payment which may refunded.

The BIR also argued that the PAN was valid and enforceable because the payment was voluntary. According to the BIR, this amounted to an admission on the part of the taxpayer of the validity of the deficiency taxes set forth in the PAN, making the issuance of an FLD/FAN unnecessary.

In rejecting such a contention, the CTA ruled that payment by the taxpayer cannot be construed as an act of conceding to the alleged tax liability especially when the taxpayer reserved the right to file a protest to the FLD/FAN. The taxpayer cannot be faulted for taking the initiative of availing of the obvious remedy of immediate payment in order to stop the accrual of interest. The taxpayer did not show any intention of relinquishing any of its rights, much more admitting liability for all deficiency taxes set forth in the PAN.

Incidentally, regardless of whether the erroneous payment was made without reservation should not affect a taxpayer’s entitlement to claim for refund. Based on Section 229 of the Tax Code, a claim for refund may be given due course whether or not the tax was paid under protest or duress.

There being no final assessment issued within three years from the time that the taxpayer filed its 2002 returns, the Court ultimately ruled that the right of the BIR to assess deficiency taxes had long prescribed. The CTA did not afford weight to any of the four waivers executed by the taxpayer because they were defective in form and non-compliant with statutory requirements; thus, the waivers had no legal effect.

Finally, one might cast doubt on the good faith of the taxpayer in filing a claim for refund and question the fairness of the CTA’s decision. It is, after all, well-settled that taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, the lingering inaction of the tax authorities cannot be gainsaid. Worse, such inaction (spanning a period of one year and 10 months) on the taxpayer’s reply to the PAN was due to the wrongful application of its own rules. It is rather unfortunate that the government was deprived of additional funds only because the performance of certain public officers fell below the expected level. In this case, while the BIR is authorized to assess taxpayers with deficiency taxes, it must do so consistent with the requirements of due process. Otherwise, the tax shall be considered wrongfully assessed and collected and, therefore, invalid.

The course of action taken by the taxpayer in recovering what it had erroneously paid cannot be overly criticized as well. The taxpayer resorted to an available remedy by setting forth, one by one, the ultimate facts that make up its cause of action and by filing its claim within the time allowed by law.

Indeed, the taxpayer may have benefited from the shortcomings of the tax authorities, but we need to remember that a taxpayer has no obligation to remind them of the duties they may have overlooked.

In a case where the two parties have their respective rights on the one hand, the right to recover taxes erroneously collected and, on the other, the right to assess and collect deficiency taxes-the party who exercised his right with diligence shall prevail. Those who are remiss in the performance of their duties should suffer the consequences of their action, or in this case, inaction. In this regard, the BIR should ensure the regular performance of its duties because the consequences shall ultimately be shared not only among its ranks, but also with the public at large.

Ma. Eliza Christine C. Gomez is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

source:  Businessworld

The impact of FATCA in the Philippines

Hiding money overseas to avoid taxes has been the long-established practice of some taxpayers. Offshore tax havens (i.e., countries that have low or no taxes and lack of transparency) still exist, making it possible for individuals to evade taxes by not reporting income earned or stashed abroad.

To address such practices, the United States enacted the Foreign Account Tax Compliance Act (FATCA) in March 2010.

FATCA requires all financial institutions outside the US, designated by the law as foreign financial institutions (FFIs), to report information on financial accounts held by US persons to the US Internal Revenue Service (IRS). FATCA [MTA1] covers individual accounts with at least $50,000 and corporate accounts with at least $250,000 in US-sourced income. Non-compliance with the FATCA reportorial requirements exposes erring FFIs to a 30% withholding tax on US-sourced income including dividend, interest, fees, sales, and investments.

Consistent with the Philippines’ goal to promote fiscal transparency, the Department of Finance and the Bureau of Internal Revenue (BIR) entered into a reciprocal Intergovernmental Agreement (IGA) with the US on July 13, 2015 to implement the FATCA under Model 1. FATCA is among the priority programs of the BIR this year.

The IGA helps facilitate the compliance of local banks and financial institutions. With the IGA, all financial institutions will effectively be considered FATCA compliant and will not be subject to the 30% withholding tax on US-sourced income, provided they register with FATCA and submit to its terms.

The Philippines and the US already have an existing double taxation treaty which contains an exchange of information provision where information may be shared between the respective competent authorities to carry out the treaty provisions or for the prevention of fraud in the administration of the statutory provisions on taxes. The exchange of information may be in response to a specific request or done on a routine basis.

To enhance this treaty provision, Model 1 of the IGA requires FFIs to regularly report information of financial accounts of American citizens in their records to the BIR; the BIR, in turn, annually transmits the information to the IRS. Covered FFIs must identify, collect and report the following by Sept. 30, 2015:

(1) account holder’s name;

(2) account holder’s US tax identification number (TIN);

(3) account holder’s address;

(4) account number;

(5) account balance or value with respect to 2014 activities and/or transactions; and

(6) aggregate number and balance or values for accounts held by recalcitrant/non-cooperating holders.

Considering that FATCA compliance involves disclosure of account information, it affects the Philippines’ bank secrecy laws. However, it is still possible for FFIs to observe FATCA requirements by securing written permission from affected clients to allow banks to disclose their account information, which is an exception to the bank secrecy law.

Aside from American expatriates living in the Philippines, FATCA also significantly impacts Filipinos with dual citizenship (those whose country of citizenship is the US); Filipinos who are permanent US residents (i.e., green card holders); or Filipinos with “substantial presence” in the US (i.e., those who’ve resided in the US for more than 183 days, but not working as a diplomat, teacher, student or an athlete).

Financial institutions are advised to evaluate if they are covered by FATCA, register their FATCA status if covered, perform due diligence on their identification and collection of information about US persons in their records (on top of their know-your-customer and anti-money laundering procedure), and prepare their operating systems to capture and report the required information. Ample training of bank employees on how to handle client queries is also vital in compliance with FATCA.

As an equivalent benefit, the IRS will supply the BIR with data related to Philippine residents maintaining bank accounts in US financial institutions. Thus, the BIR can also trace Filipinos trying to evade taxes under this information exchange agreement with the US.

Charity P. Mandap-de Veyra is a tax manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld