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