On Sept. 24, the Bureau of Internal Revenue (BIR) organized a tax forum at the National Training Center in the National Office where the officials of the Large Taxpayer Service (LTS) discussed recent BIR issuances. It seems that the most controversial issuance is the submission of enhanced inventory lists, the target of the most number of questions and clarifications from the taxpayers in the jam-packed auditorium.
It may be recalled that the BIR issued on Sept. 16 Revenue Memorandum Circular (RMC) No. 57-2015 requiring all taxpayers with tangible asset-rich balance sheets maintaining inventory of stock-in-trade, raw materials, goods in process, supplies and other goods (herein referred by the BIR officials as “saleable inventories or inventories intended for sale”) to submit hard and soft copies of the enhanced format of inventory list on or before Sept. 30. The RMC specified the manufacturing, wholesaling, distributing/retailing sectors including real estate dealers and developers, service companies, construction companies, and building contractors, among others. The copies of the enhanced formats of inventory lists are shown in the annexes of the said RMC.
The enhanced inventory lists as well as other applicable schedules are to be submitted with the concerned Revenue District Office (RDO) where the non-large taxpayers are registered and with the Large Taxpayers Assistance Division (LTAD), Excise Large Taxpayers Regulatory Division (ELTRD), Large Taxpayers Division (LTD) Makati and Cebu, for taxpayers classified as large under the LTS.
The Bureau’s objective, as discussed in the forum, is to expand and improve the landscape of accounting information reporting that seeks to provide reliable data and to maximize the quality and adequacy of such data for better monitoring and analysis. Simply put, the Bureau will use this information as a tool in conducting their tax investigations. Taxpayers submitting the inventory lists are therefore well-advised to be diligent in ensuring the correctness and consistency of the information with other reports and returns maintained or submitted by the company.
Below are some of the clarifications made by the BIR in response to the taxpayers’ questions.
WHO SHOULD SUBMIT, DETAILS OF SUBMISSION?
• For as long as the taxpayer maintains saleable inventories/inventories intended for sale, submission of inventory list is required.
• The term “often with at least half of their total assets in working capital assets” is not a condition precedent to submission of the inventory list. Only saleable inventories or inventories intended for sale need to be included in the inventory list. Office supplies, manufacturing supplies, parts and materials not forming part of the saleable inventories or inventories intended for sale shall not be included.
• Saleable inventories or inventories intended for sale shall include all goods, whether taxpayer has title thereto or not, provided these goods are actually situated in the head office or branch or facilities of the taxpayer under the following circumstances for retail/manufacturing industry: (a) code CH -- goods on consignment held by the taxpayer; (b) code P -- parked goods or goods owned by related parties; (c) code O -- goods owned by the taxpayer; and (d) code CO -- goods out on consignment in the hands of an entity other than the taxpayer.
According to the BIR, in their past conduct of inventory stock taking, some of the inventories located in the taxpayer’s offices are not their own inventories. By using the codes, the Bureau can easily determine those inventories owned and not owned by the taxpayer.
• Inventories owned by others but located in the taxpayer’s head office, branch and/or office are not included in enhanced inventory list of the taxpayer if the said goods are not on consignment to the taxpayer or owned by related parties.
• For retail and manufacturing industry, the amount to be reported under “unit price” shall be the cost of the saleable inventories, not the selling price.
• For the construction industry, the amount to be reported under “contract price” is inclusive of VAT.
• If at the end of the fiscal year or calendar year the taxpayer has zero balance of saleable inventories or inventories intended for sale, the taxpayer is still required to submit the enhanced inventory list with no details.
Given these requirements, there will be instances when at least two parties will be reporting the same details of inventory. For example: (1) goods consigned by the taxpayer to another will be reported in the enhanced inventory list of both the taxpayer and the consignor; and (2) goods located in the taxpayer’s head office/branch/facility but owned by a related party will be reported in the enhanced inventory list of both the taxpayer and the related party.
As such, the details (cost, unit price, description, etc.) of inventory to be reported by these two parties should be the same. Any discrepancy may invite further investigation. Hence, it is advisable to compare and reconcile with the other reporting entity the details of inventory before submitting to BIR.
Will banks and pawnshops be required to submit the enhanced inventory list for their real and other properties acquired (ROPA) e.g., foreclosed cars, house and lot, jewelry considering that these ROPAs are also made available for sale by the banks and pawnshops?
DEADLINE FOR TAXPAYERS ON FISCAL YEAR BASIS
• The Sept. 30, 2015 deadline for the initial submission of the enhanced inventory list shall also cover inventory list for fiscal years (FY) ended July 31, 2014, Aug. 31, 2014, Sept. 30, 2014, Oct. 31, 2014, Nov. 30, 2014, Jan. 31, 2015, Feb. 28, 2015, March 31, 2015, April 30, 2015, May 31, 2015 and June 30, 2015.
You will note that the RMC expressly mentioned that, for the initial filing using the enhanced format, the inventory to be submitted covers only ending inventory as of Dec. 31, 2014. The RMC did not mention any other taxable periods. But, during the forum, the LTS officials clarified that the initial filing shall cover also the taxable periods mentioned above.
• Taxpayers on fiscal year reporting with taxable period ending July 31, Aug. 31, Sept. 30 and so on should submit their initial enhanced inventory list on or before the 30th day following the close of the taxable year.
MODE OF SUBMISSION
• The soft copies of the enhanced inventory list shall be stored in Digital Versatile Disk-Recordable (DVD-R) properly labeled (name, address and TIN of the taxpayer, period covered and the statement “Pursuant to RMC No. 57-2015”) should be submitted together with the hard copy of the enhanced inventory list and notarized certification, as shown in Annex “D” of the RMC, duly signed by the authorized representative of the taxpayer.
• Previously filed original inventory lists (submitted on or before the 30th day following the close of the taxable year) is not required to be re-submitted on or before Sept. 30.
EXTENSIONS AND AMENDMENTS
• Taxpayers can amend the enhanced inventory list and re-submit as long as no Letter of Authority/assessment notice is received.
• Taxpayers can file a written request for extension to submit the initial enhanced inventory list with the BIR offices mentioned earlier indicating the reasons why the taxpayer cannot meet the Sept. 30 deadline. This request for extension is subject to evaluation and approval of the concerned BIR offices.
Since there is no guarantee that a request for extension shall be approved, it is best for the qualified taxpayers to submit the enhanced inventory list on or before Sept. 30 to avoid the risk of penalties. Thereafter which, the submission can be amended should there be incorrect/incomplete information.
PENALTIES
According to the RMC, any violation shall be subject to two types of penalties: (1) P1,000 for each information return, schedule, report, sworn statement, certification and other document not made, filed or submitted or for each record not maintained, but not more than a total of P25,000 during a calendar year; and (2) graduated penalties ranging from P1,000 to P25,000 depending on the amount of gross sales or receipts for failure to make/file/submit any return or supply correct information at the time or times required by law or regulation.
Since the enhanced inventory list is just a report or schedule and not a return, I’mhoping the BIR will clarify that the graduated rates shall not apply.
For those who have further clarifications and want to catch up with recent issuances, the BIR will conduct a re-run of the tax forum on Sept. 29 (today) at the National Training Center in the BIR National Office. There will be one session each in the morning and afternoon. You may contact the LTS office for more details.
As a precaution, certain RDOs may not be aware of these clarifications because these were announced only during the said forum and may not have been properly communicated to all BIR offices. Hence, you should be prepared to explain your source of the clarifications. Besides, no formal issuance will be released before the Sept. 30 deadline regarding these clarifications, according to LTS officials.
With only two days remaining before the Sept. 30] deadline, I’m sure most of us are hoping that the Bureau will be grant an extension and will be more considerate, especially in the imposition of penalties.
Nikkolai F. Canceran is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
Monday, September 28, 2015
Sunday, September 27, 2015
Claiming accrued bonuses as deductions
The withholding tax on, and deductibility of, year-end bonuses to employees are issues that are frequently raised during tax examinations of a company’s books of accounts. Usually, these bonuses are accrued at yearend and deducted for income tax purposes in the year accrued, although the bonus is paid to the individual employee, and the withholding tax deducted and remitted to the Bureau of Internal Revenue (BIR), in the succeeding year. In these situations, the BIR usually questions and disallows the tax deduction claimed by the employer on the ground of non-withholding.
In a decision promulgated recently by the Supreme Court, the Court confirmed that the obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor’s/employer’s books, whichever comes first. The Court said that since the employer accrued or recorded the bonuses as deductible expense in its books, therefore, its obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the time of accrual and not at the time of actual payment.
At issue in this case was the withholding tax on bonuses accrued and recorded by the employer as a deductible expense in its books in 1996 and 1997, but which the employer paid to the employees in the succeeding year. The employer argued that the liability of the employer to withhold the tax does not arise until such bonus is actually distributed, citing Section 72 [now 79 (A)] of the Tax Code, which states that “[e]very employer making payment of wages shall deduct and withhold upon such wages a tax.”
However, the Court applied Section 34 (K) of the Tax Code which provides that any amount paid or payable -- which is otherwise deductible from or taken into account in computing gross income -- may be deducted only if it is shown that the appropriate tax has been paid to the BIR.
Section 2.57.4 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 12-01, also provides that the obligation of the payor to deduct and withhold the tax arises at the time income is paid or payable, or accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable, or legally enforceable. However, where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
The Court said that the provision of Section 72 [now 79 (A)] of the Tax Code regarding withholding on wages must be read and construed in harmony with Section 29 (j) [now 34 (K)] of the Tax Code on deductions from gross income. “This is in accordance with the rule on statutory construction that an interpretation is to be sought which gives effect to the whole of the statute such that every part is made effective, harmonious, and sensible, if possible, and not defeated nor rendered insignificant, meaningless, and nugatory. If the theory of the employer is adopted, then the condition imposed by Section 29 (j) [now 34 (K)] would have been rendered nugatory, or we would in effect have created an exception to this mandatory requirement when there was none in the law.”
The Court also reiterated the doctrine that “The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.” If the taxpayer is on the accrual method, he can deduct the expense upon accrual thereof. An item that is reasonably ascertained as to amount and acknowledged to be due has “accrued;” actual payment is not essential to constitute “expense.”
More interestingly in this case, the Court said that employer already recognized a definite liability on its part considering that it had deducted as business expense from its gross income the accrued bonuses due to its employees. Underlying its accrual of the bonus expense was a reasonable expectation or probability that the bonus would be achieved. Applying the then prevailing Revenue Regulations No. 6-82, as amended, the Court said that, in this sense, there was already a constructive payment for income tax purposes as these accrued bonuses were already allotted or made available to its officers and employees.
Joanne Marie D. Macainag-Cobacha is a Tax Senior Director of SGV & Co.
source: Businessworld
In a decision promulgated recently by the Supreme Court, the Court confirmed that the obligation of the payor/employer to deduct and withhold the related withholding tax arises at the time the income was paid or accrued or recorded as an expense in the payor’s/employer’s books, whichever comes first. The Court said that since the employer accrued or recorded the bonuses as deductible expense in its books, therefore, its obligation to withhold the related withholding tax due from the deductions for accrued bonuses arose at the time of accrual and not at the time of actual payment.
At issue in this case was the withholding tax on bonuses accrued and recorded by the employer as a deductible expense in its books in 1996 and 1997, but which the employer paid to the employees in the succeeding year. The employer argued that the liability of the employer to withhold the tax does not arise until such bonus is actually distributed, citing Section 72 [now 79 (A)] of the Tax Code, which states that “[e]very employer making payment of wages shall deduct and withhold upon such wages a tax.”
However, the Court applied Section 34 (K) of the Tax Code which provides that any amount paid or payable -- which is otherwise deductible from or taken into account in computing gross income -- may be deducted only if it is shown that the appropriate tax has been paid to the BIR.
Section 2.57.4 of Revenue Regulations (RR) No. 2-98, as amended by RR No. 12-01, also provides that the obligation of the payor to deduct and withhold the tax arises at the time income is paid or payable, or accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books, whichever comes first. The term “payable” refers to the date the obligation becomes due, demandable, or legally enforceable. However, where income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in which the same is claimed as an expense or amortized for tax purposes.
The Court said that the provision of Section 72 [now 79 (A)] of the Tax Code regarding withholding on wages must be read and construed in harmony with Section 29 (j) [now 34 (K)] of the Tax Code on deductions from gross income. “This is in accordance with the rule on statutory construction that an interpretation is to be sought which gives effect to the whole of the statute such that every part is made effective, harmonious, and sensible, if possible, and not defeated nor rendered insignificant, meaningless, and nugatory. If the theory of the employer is adopted, then the condition imposed by Section 29 (j) [now 34 (K)] would have been rendered nugatory, or we would in effect have created an exception to this mandatory requirement when there was none in the law.”
The Court also reiterated the doctrine that “The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.” If the taxpayer is on the accrual method, he can deduct the expense upon accrual thereof. An item that is reasonably ascertained as to amount and acknowledged to be due has “accrued;” actual payment is not essential to constitute “expense.”
More interestingly in this case, the Court said that employer already recognized a definite liability on its part considering that it had deducted as business expense from its gross income the accrued bonuses due to its employees. Underlying its accrual of the bonus expense was a reasonable expectation or probability that the bonus would be achieved. Applying the then prevailing Revenue Regulations No. 6-82, as amended, the Court said that, in this sense, there was already a constructive payment for income tax purposes as these accrued bonuses were already allotted or made available to its officers and employees.
Joanne Marie D. Macainag-Cobacha is a Tax Senior Director of SGV & Co.
source: Businessworld
New BIR requirements for firms with inventories
INTERNAL Revenue Commissioner Kim Jacinto-Henares has issued Revenue Memorandum Circular 57-2015 prescribing new reporting requirements of companies maintaining inventories of stock-in-trade, raw materials, goods and other supplies to track these inventories which are used in computing a company’s net income
“This is in line with the bureau’s objective of implementing an expanded and improved landscape of accounting information reporting that seeks to provide reliable data and to maximize the quality and adequacy of such data for better monitoring and analysis,” the new circular said.
The new reporting requirements shall be in addition to the annual inventory list required to be reported to the Bureau of Internal Revenue (BIR) and should be submitted by September 30, 2015, and thereafter on every 30th day following the close of the taxable year.
“This circular aims to consistently apply the data requirements across different sectors with the peculiarity of the industry, where the taxpayers belong directing the volume of reporting. Hence, the additional reports or schedules to be submitted and filed with the annual inventory list shall cover companies maintaining inventory of stock-in-trade, raw materials, goods in process, supplies and other goods, such as manufacturing, wholesaling, distributing/retailing sectors, including real-estate dealers/developers, service companies, construction companies, building contractors, etc.,” the circular said.
“It bears stressing that the data/information contained in the said schedules/lists should be reconciled with the amount declared in the financial statements and annual income-tax returns,” it added.
The new requirements provide for a format specifically for companies in the industries of retail, manufacturing, real estate and construction, but shall also be applicable to other companies not in these industries but are also maintaining inventories in their businesses.
“The submission of the schedules and inventory list that does not conform with the herein prescribed format shall be deemed not received by the concerned office of the BIR and shall be considered as grounds for the imposition of penalties under the Tax Code, as amended,” the circular said.
The failure to submit the new reporting requirements will subject the taxpayers to penalties provided under Section 250 and 255 of the Tax Code.
Such penalties include a fine of not less than P10,000 and imprisonment of not less than one year but not
more than 10 years.
more than 10 years.
source: Business Mirror
Tuesday, September 22, 2015
Elusive proof for ‘doing business outside the Philippines’
The Philippines is becoming a center for outsourced services. Many companies in the Philippines, even those which are not registered with Philippine Economic Zone Authority, are able to offer their services to non-resident foreign corporations.
The supply of services to such non-resident foreign corporations is subject to zero rate of value-added tax (VAT). In zero rating, the sale is a taxable transaction but the sale does not result in an output tax. In addition, the input tax on the purchases of a VAT-registered person with a zero-rated sale may be allowed as a tax credit or refund. Hence, in the export of services, the input VAT paid by such service exporters can be applied for credit or refund if these are unutilized.
Section 108 (B)(2) of the National Internal Revenue Code prescribes the following conditions for some exports of services to be VAT zero rated:
1. The services by a VAT-registered person must be other than processing, manufacturing or repacking of goods;
2. The payment for such services must be in acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas rules and regulations; and
3. The recipient of such services is doing business outside the Philippines
Of the three requisites, in many cases, the service exporter claiming a refund failed to prove the third requisite.
Certainly, crucial now is the taxpayer’s burden of proof to establish that it provided services to clients “doing business outside the Philippines” in order to substantiate its claim for VAT input refund or credit on zero rated supply of services. For then, as in the cases below, the said service provider may be denied its claim no matter how many documents, devoid of any evidence that the clients were doing business outside of the Philippines, have been attached and presented in court.
In some of the cases decided in 2015, the Court of Tax Appeals (CTA) made a specific pronouncement as to the documentary requirements that should be presented to prove that the recipient of the service is doing business outside the Philippines.
These 2015 decisions were based on a 2014 case which is now a pending petition for review before the CTA En Banc. In the said cases, the CTA ruled that to be considered as a non-resident foreign corporation doing business outside the Philippines, each entity must be supported by both Securities and Exchange Commission (SEC) Certificate of Non Registration of corporation/partnership and the certificate/articles of foreign incorporation/association/registration.
The CTA, in the said cases, held that SEC Certificates of Non Registration indicate that the named entities are not registered corporations/partnerships in the Philippines but they do not prove that such entities are non-resident foreign corporations doing business outside the Philippines. On the other hand, the Certificate of Association and Certificates of Registration/ Incorporation of Foreign Company only establish that the named entities were incorporated/organized abroad but do not indicate that such entities are not doing business in the Philippines.
Hence, neither of these documents alone is sufficient proof.
Instead, both these documents should be presented to prove that the client is doing business outside the Philippines.
In a 2012 case, the Supreme Court (SC) had the opportunity to rule on this issue. However, the SC only concluded that service exporter claiming a refund failed to discharge its burden. The SC made no specific mention as to what documentary requirements should have been submitted by the petitioner. Instead, the Court went on to say that the evidence presented by petitioner may have established that its clients are foreign but that fact does not automatically mean that its clients were doing business outside the Philippines.
The Court instead emphasized, as in another case it cited, that there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines and that each case must be judged in the light of its peculiar environmental circumstances.
It’s indeed exciting to see what the decision of the SC will be if the CTA cases are elevated to it ultimately.
But with these decisions, the Courts are reminding us once again that tax refunds, like tax exemptions, are construed strictly against the taxpayer. Consequently, a taxpayer claiming a tax credit or refund has always the burden of proof to establish the factual basis of that claim.
Jennifer M. Rosete is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.
The supply of services to such non-resident foreign corporations is subject to zero rate of value-added tax (VAT). In zero rating, the sale is a taxable transaction but the sale does not result in an output tax. In addition, the input tax on the purchases of a VAT-registered person with a zero-rated sale may be allowed as a tax credit or refund. Hence, in the export of services, the input VAT paid by such service exporters can be applied for credit or refund if these are unutilized.
Section 108 (B)(2) of the National Internal Revenue Code prescribes the following conditions for some exports of services to be VAT zero rated:
1. The services by a VAT-registered person must be other than processing, manufacturing or repacking of goods;
2. The payment for such services must be in acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas rules and regulations; and
3. The recipient of such services is doing business outside the Philippines
Of the three requisites, in many cases, the service exporter claiming a refund failed to prove the third requisite.
Certainly, crucial now is the taxpayer’s burden of proof to establish that it provided services to clients “doing business outside the Philippines” in order to substantiate its claim for VAT input refund or credit on zero rated supply of services. For then, as in the cases below, the said service provider may be denied its claim no matter how many documents, devoid of any evidence that the clients were doing business outside of the Philippines, have been attached and presented in court.
In some of the cases decided in 2015, the Court of Tax Appeals (CTA) made a specific pronouncement as to the documentary requirements that should be presented to prove that the recipient of the service is doing business outside the Philippines.
These 2015 decisions were based on a 2014 case which is now a pending petition for review before the CTA En Banc. In the said cases, the CTA ruled that to be considered as a non-resident foreign corporation doing business outside the Philippines, each entity must be supported by both Securities and Exchange Commission (SEC) Certificate of Non Registration of corporation/partnership and the certificate/articles of foreign incorporation/association/registration.
The CTA, in the said cases, held that SEC Certificates of Non Registration indicate that the named entities are not registered corporations/partnerships in the Philippines but they do not prove that such entities are non-resident foreign corporations doing business outside the Philippines. On the other hand, the Certificate of Association and Certificates of Registration/ Incorporation of Foreign Company only establish that the named entities were incorporated/organized abroad but do not indicate that such entities are not doing business in the Philippines.
Hence, neither of these documents alone is sufficient proof.
Instead, both these documents should be presented to prove that the client is doing business outside the Philippines.
In a 2012 case, the Supreme Court (SC) had the opportunity to rule on this issue. However, the SC only concluded that service exporter claiming a refund failed to discharge its burden. The SC made no specific mention as to what documentary requirements should have been submitted by the petitioner. Instead, the Court went on to say that the evidence presented by petitioner may have established that its clients are foreign but that fact does not automatically mean that its clients were doing business outside the Philippines.
The Court instead emphasized, as in another case it cited, that there is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines and that each case must be judged in the light of its peculiar environmental circumstances.
It’s indeed exciting to see what the decision of the SC will be if the CTA cases are elevated to it ultimately.
But with these decisions, the Courts are reminding us once again that tax refunds, like tax exemptions, are construed strictly against the taxpayer. Consequently, a taxpayer claiming a tax credit or refund has always the burden of proof to establish the factual basis of that claim.
Jennifer M. Rosete is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
Monday, September 21, 2015
Philippine Tax Academy: The envisioned center of learning for government tax collectors and CPAs
Part One
Today we launch aBusinessMirror column that will be hosted by the members of the accountancy profession. This column is aptly called “Debit Credit,” which is the basic language or principle of all accountants. True to the character of accountants, the articles for this Debit Credit column would present all sides of an issue for a fair assessment. The “debits” and “credits” of a subject would be threshed out.
‘Debit Credit” articles will be of interest to the accountancy profession, in particular, and to the business community, in general. The writers can be any of the more than 160,000 Certified Public Accountants (CPAs) registered with the Board of Accountancy. The CPAs in the various sectors of commerce and industry, public practice, academe and government will contribute articles of interest in their particular fields. Even junior accountants studying in the various accounting schools can also share their thoughts on relevant matters of interest.
So, readers of this column, expect a varied and interesting “Debit Credit” discussion every week.
For our maiden column, I will discuss the Philippine Tax Academy (PTA) which is a creation of law, but has yet to exist at this time. This Academy should be of interest to us because, once this training center for our tax collectors is organized, we can expect a more professional and capable corps of tax collectors from the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), and our local governments.
Better tax administration
Just imagine these scenarios. Tax officers of the BIR discussing the emerging tax-administration governance issues as part of the curriculum of their two-year advance taxation course. BOC officials gathered together in a table to prepare for their midterm examinations on tariff comparative practices in the Asean region. Treasurers of local government units (LGUs) of Metro Manila researching on the topic “Applying Information Technology to Expedite the Tax Payments of Local Business Taxes” using the electronic-library facilities. A corps of professional instructors who are experts in the field of taxation, public finance, revenue administration preparing their lesson plans. A batch of government tax-collecting CPAs receiving their certificates of completion after a year of extensive training. Hundreds of applicants for the vacancies in the BIR, the BOC and the LGUs taking the admission examinations as a requirement for processing of their applications for employment. A group of BIR CPA supervisors checking in the Training Hostel preparatory to the start of their three-month tax-update seminar. The Board of Trustees of the PTA discussing the budget for the coming year.
Are these just figments of our imagination? Dreams that will dissipate when we wake up? These responses are partly correct and partly incorrect.
Correct, in the sense that these are aspirations of the taxpaying public of what the tax-collecting agencies and personnel should be doing in order to have a more effective and enlightened tax collectors. We all can see the benefits of providing organized learning and training to the tax collectors of the BIR, the BOC and the LGUs. These can produce “graduates” who will have a well-rounded and updated knowledge of the tax system and new ways in dealing with the public that they serve. However, most think that these are still far from reality.
The good news is that the perceptions that these are far from reality are incorrect, and that it can be a matter of time when a Philippine Training Academy may be established.
There is now a law that mandates the establishment of the PTA. Republic Act (RA) 10143, or the Philippine Tax Academy Act, became law on July 31, 2010. In fact, this may have been the very first piece of legislation passed under the administration of President Aquino.
I was personally involved in the drafting of the bill for this law and in the swift approval of this bill in both the Senate and the House of Representatives of the Fourteenth Congress sometime early 2010. Rep. Exequiel Javier sponsored the bill in the lower house, while Sen. Panfilo Lacson sponsored the Senate bill.
Beginning with my appointment as Senior Deputy Commissioner of the BIR in August 2009, I advocated for the creation of the Tax Academy. During the latter part of 2009, I worked with a group of BIR officials to conceptualize the Tax Academy structure. I was able to visit the National Tax College of the National Tax Administration of Japan, observe the operations of such an institution and gain valuable insights.
When I was appointed commissioner of internal revenue in November 2010, I moved for the passage of a law that will create a learning center for the tax collectors of the land, including, of course, the BIR. In early 2010 I constituted a group of young CPAs and lawyers coming from the Junior Executive Development Program (JEDP) of the BIR to help draft a bill that will establish a Tax Training Academy. The idea then is to form a training organization that is separate from the tax-collecting agencies, and that will be focused on providing training and learning to all tax-collecting officers. My JEDP group was able to draft a bill that became the basis for the passage of the Philippine Tax Academy Act. I was able to have this certified as urgent by Malacañang and the approval of the bill in the two chambers of Congress was expedited and fast-tracked. RA 10143 was transmitted to Malacañang on July 1, 2010, and 30 days after, on July 31, 2010, this lapsed into law without the signature of the President, in accordance with Article VI, Section 27(1) of the Constitution. Yes, this is probably the first law passed during the term of President Aquino. And this definitely is one piece of legislation that is much needed for the tax-collecting agencies and officers, as well as the tax-paying public.
Features of the Philippine Tax Academy Act
AS provided for in RA 10143, the mandate of the Philippine Tax Academy (“Academy”) is to train, mold, enhance and develop capabilities of tax collectors and administrators to help improve their tax-collection efficiency, and to become competent and effective public servants for the national interest. Through this specialized institution, it will provide the appropriate education, training skills and values to tax collectors and administrators, and will disseminate tax laws, regulation, guidelines and relevant information to the public.
The Philippine Tax Academy shall serve as a learning institution for tax collectors and administrators of the government and selected applicants from the private sector. It shall handle all the trainings, continuing-education programs and other courses for all the officials and personnel of the BIR, the BOC and the Bureau of Local Government Finance (BLGF). It shall develop and implement a curriculum, which includes those pertaining to: (a) the technical aspects of tax collection, administration and compliance; and (b) the career orientation and development for civil servants. It shall conduct lectures, seminars, workshops and other training programs designed to mold, develop and enhance the skills and knowledge, moral fitness, efficiency and capability of tax collectors and administrators. It shall also perform such other function and duties as may be necessary in carrying out its mandate. The law provided that all existing officials and personnel of the BIR, the BOC and the BLGF shall be required to undergo the re-tooling and enhancement seminars and training programs to be conducted by the PTA. In fact, even applicants to the said bureaus shall also be required to pass the basic courses before they can be hired, whether on contractual or permanent status. Clearly, these provisions of law will ultimately result in a highly trained and competent tax collectors.
Broad powers were given to the PTA. Among others the Academy shall have the following powers:
(a) To adopt, alter and use a corporate seal;
(b) To take and hold by bequest, devise, gift, purchase or lease, either absolutely or in trust for any of its purposes, any property, real or personal, without limitation as to amount or value; to convey such property and to invest and reinvest any principal, and deal with and expend the income and principal of the PTA in such manner as will best promote its objectives;
(c) To collect, receive and maintain a fund or funds, by subscription or otherwise, and to apply the income and principal thereof to the promotion of its aims and purposes herein before set out;
(d) To contract any obligation, or enter into any agreement necessary or incidental to the proper management of its corporate powers; and
(e) To carry on any activity and to have and exercise all of the powers conferred by the laws upon private or government-owned or -controlled corporation; and to do any and all of the acts and things herein set forth to the same extent as juridical persons could do, and in any part of the world, as principal, factor, agent or otherwise, alone or in syndicate or otherwise in conjunction with any person, entity, partnership, association or corporation, domestic or foreign.
The law provides that the PTA shall be located in such place or places as the Department of Finance (DOF) may determine. It shall have facilities for instructive learning and workshops; housing/lodging and other facilities to accommodate faculty, staff, personnel and trainees. With all of these facilities, the Academy will be in a position to provide high-quality training to a large number of government tax collectors. In fact, it is provided in the law that the PTA shall have separate learning institutes each for the BIR, the BOC and the BLGF.
For governance and administration, the PTA shall have a governing board to be known as the Board of Trustees, composed of the following:
(1) Representative from the DOF—ex officio chairperson;
(2 ) Representative from the BIR—ex officio vice chairperson;
(3) Representative from the BOC—ex officio Vice Chairperson;
(4) Executive director of the BLGF—member; and
(5) Three representatives from academe with at least five years of teaching experience from a reputable school.
The representatives from the DOF, the BIR and the BOC shall be appointed by the President of the Philippines from the nominees of the secretary of finance.
The representatives coming from academe shall be appointed from the nominees of the state universities and/or accredited private educational institutions; chosen on the basis of years of experience, integrity, probity; and proven expertise in the field of taxation, public finance, public administration and have taught in a reputable school for the same number of years.
The members of the Board of Trustees shall serve for a term of three (3) years. In case of vacancy in the Board, the person so appointed or designated shall serve only for the unexpired term.
The members of the Board of Trustees shall serve without compensation for the performance of their functions, but they shall be entitled to reasonable honoraria, allowance or per diem pursuant to existing laws and regulations.
The law provides that the executive officials of the Academy shall be composed of a president and three chancellors and vice chancellors to administer the institutes for the BIR, the BOC and the BLGF, respectively, all to be appointed by the Secretary of finance for a term of three (3) years without prejudice to subsequent reappointment.
In term of of the teaching faculty, the PTA shall be staffed by a corps of professional instructors with sufficient knowledge, education, training and actual experience in taxation, public finance and revenue administration, among others. An instructor shall be appointed by the Board of Trustees, upon nomination of any member. The requirements and restrictions of the Civil Service Law, laws, rules and regulations on position classification and salary standardization shall be observed in the appointment of the instructors of the Academy. For the purpose of filling up the staffing requirements for the corps of professional instructors, officers, employees or personnel of the BIR, the BOC and the BLGF may be transferred to and from the Academy and their respective institutions.
Appointments to the administrative or research staff of the PTA may be on a full-time or part-time basis, and shall be covered by the requirements and restrictions of the Civil Service Law, laws, rules and regulations on position classification and salary standardization. For the purpose of filling up the staffing requirements, officers, employees or personnel of the BIR, the BOC and the BLGF may be transferred to and from the Academy and their respective institutions.
The PTA may enter into consortium agreements and joint-venture agreements with the University of the Philippines, public and private universities and training institutions for the development and implementation of the curriculum, programs for orientation, career development and continuing education in tax collection, auditing, administration and compliance.
The Academy has full autonomy in the funding for its operations. As a government institution, the Academy will be allotted a budget during the annual appropriation process. Furthermore, the Academy can solicit gifts and donations, which will be deposited in a special fund to be known as the Tax Academy Fund. This fund shall be administered, appropriated and disbursed by the Board of Trustees of the PTA exclusively for the purposes of this Academy. The Academy can also implement revenue-generating activities, such as organizing seminars, publishing books, doing consulting work and others. Finally, it is provided for in the law that all income, gifts, donations, foreign aids and grants for the benefit of the PTA or for its operation, administration, support or maintenance shall be exempt from all forms of taxes, fees, assessments and other charges of the government, its agencies, instrumentalities branches and subdivisions.
So, with all these provisions provided in the law creating the PTA, there is no reason why the Academy will not be able to meet the expectation of all its stakeholders and the corresponding benefits achieved.
Clearly, with a Tax Academy in place, the benefits for the tax-collecting agencies and the tax-paying public will be attained.
For the tax-collecting agencies, the following are the benefits:
1) A dedicated learning institution will be established that will have the authority and powers to ensure that an organized and long-term training and learning program will be implemented for the BIR, the BOC and the LGUs.
2) The tax-collecting officers and staff of the BIR, the BOC and the LGUs will be imbued with the learning that will help them in their work, as well as instill in them the relevant knowledge and practices for their work.
3) The career advancement and promotion of the officers and staff of the BIR, the BOC and the LGUs can be governed by a system of meritocracy based on their successful completion of the learning requirements of the Tax Academy.
4) The hiring of new staff will also be governed by a similar system of meritocracy resulting in good quality of recruits.
On the part of the-tax paying public, they will greatly benefit with a corps of tax collecting officers who are well-trained and imbued with governance practices.
To be continued
source: Business Mirror
FATCA: Where are we now?
On July 13, 2015, the Philippines signed a reciprocal Intergovernmental Agreement (IGA) with the United States to implement the provisions of the Foreign Account Tax Compliance Act (FATCA).
Signed into law in 2010 by US President Barack Obama as part of the US Hiring Incentives to Restore Employment (HIRE) Act, the FATCA aims to obtain information on US persons with offshore income and/or assets to increase compliance with US tax laws.
For this purpose, financial institutions outside the US -- i.e., foreign financial institutions (FFIs) were made responsible for periodically reporting to the US Internal Revenue Service (IRS) information on financial accounts held by US persons. Non-participating FFIs and non-compliant account holders (known as recalcitrant account holders) will have to face a 30% withholding tax, not only on their US revenues (e.g., interest or dividends received) but also on all sales proceeds from instruments which yield revenues from US sources.
There are more than 230 Philippine FIs that have registered and have been assigned Global Intermediary Identification Numbers (GIINs) by the IRS. These include banks, insurance companies, investment houses, stock brokers, mutual funds entities, asset management and leasing companies, and even holding companies. This number is still expected to grow.
The reporting regime adopted in 2013 by the FATCA regulations consisted of the FFIs signing individual agreements to disclose information about their US clients to the IRS. This regime was subsequently modified by introducing inter-governmental agreements (IGAs) to increase compliance by removing legal impediments that could prevent disclosure of US accounts and reducing implementation burdens for FFIs.
Two model IGAs were implemented, namely:
• Model 1 IGA, which involves the reporting of information to the FATCA Partner Government followed by a government-to-government exchange of information; and,
• Model 2 IGA, which involves the direct reporting of information by the FFI to the IRS.
To date, the FATCA information-sharing regime has grown to include at least 73 countries that have formally signed an IGA with the US, 39 countries that have reached agreements in substance to sign the IGAs, and several others are still under discussion.
The Philippines and the US also have an existing double taxation treaty which outlines the basis for the exchange of financial information between the IRS and the Bureau of Internal Revenue (BIR). The new IGA, therefore, enhances the effectiveness of this framework.
The Philippines has negotiated a Model 1 IGA, under which Philippine FIs will report information on US accounts to the BIR. As a matter of fact, the BIR included FATCA as a priority program under Revenue Memorandum Circular No. 3-2015 last Jan. 13.
The Philippines’ Model 1 IGA consists of three parts: the main agreement and supporting annexes. The main agreement deals with the information exchange process between the IRS and the BIR, and details the specific information on US persons, including controlling persons of passive non-financial foreign entities, and/or recalcitrant account holders, to be obtained and exchanged by Philippine FIs on an annual basis (starting with 2014):
• Account holder’s name, address, and US TIN;
• Account number;
• Account balance or value; and
• Number of accounts and aggregate account balance of recalcitrant account holders.
In Annex I of the IGA, Philippine FIs need to perform due diligence procedures for new and pre-existing individual and entity account holders with balances exceeding $50,000 and $250,000, respectively, as of Nov. 30, 2014 (determination date). These procedures include the electronic searching of US indicia, obtaining self-certifications and other documentary evidence and performing enhanced review procedures (i.e., paper search and inquiry with the relationship manager) in the case of accounts with balances that exceed $1,000,000 as of the determination date.
In Annex II, certain Philippine FIs can be treated as deemed-compliant FFIs and are exempt from reporting. These include FIs that have a local base with 98% of their accounts held by Philippine individuals and/or entities. Likewise, certain local banks and FIs with only low-value accounts are exempted.
With respect to 2015 information and onwards, Philippine FIs also need to report the US persons’ and recalcitrant account holders’ total amount of gross income paid or credited to their accounts (including aggregate amount of gross proceeds from the sale or redemption of property). They also need to report the name of each Non-Participating FFI to which they have made payments and the aggregate amount of such payments.
Just recently, the BIR issued an advisory postponing the first reporting period by Philippine FIs to the second quarter of 2016, months after the initial target date of Sept. 30, 2015. The BIR also mentioned that the first batch of reports to be submitted will include information relating to 2014 and 2015 US reportable accounts.
The main agreement also makes it clear that although the IGA has been signed, it is a part of a longer negotiation process. The IGA shall enter into force on the date of the Philippines’ written notification to the US that the country has completed its necessary internal procedures for implementation. This includes being satisfied that the US has established safeguards and infrastructure on information that will be exchanged. The agreement can also be amended any time before Dec. 31, 2016.
Indeed, the signing of the Model 1 IGA provides welcome clarity on a number of issues. Philippine FIs can now further improve their plans for the FATCA implementation, resolve apparent conflicts on certain domestic data privacy laws, and reduce the scope of the reporting requirements by excluding certain categories of accounts. With the reciprocity clause in the Model 1 IGA, the IRS will disclose information relating to Philippine residents in the US to the BIR, to help validate whether correct Philippine income taxes have been settled, thereby increasing tax collections in the long run.
Had the Philippines not concluded an IGA, Philippine FIs would have incurred costs, including the massive 30% withholding tax penalty. There would also have been reputational or other practical limitations in dealing with FFIs abroad due to the withholding obligations under FATCA.
Since the FATCA negotiations between the Philippines and the US remain an ongoing process, Philippine FIs should remain persistent, flexible, and watchful of developments. The Philippine government is still expected to ratify the Model 1 IGA into law in the coming months. Only then can the BIR issue the implementing rules and regulations which should provide more guidance on some practical implications, such as: issues on products and counterparties scoping; validation of reportable accounts and documents provided by account holders; reporting and withholding responsibilities; reporting formats and submission mechanisms to use; monitoring of FIs’ compliance; and imposition of penalties, among others.
The BIR should also continue conducting public consultation, including coordination with the Association of Bank Compliance Officers, Inc. (ABCOMP), which has been tasked by the Bangko Sentral ng Pilipinas to review and address FATCA-related questions or concerns of Philippine banks and other nonbank FIs performing quasi-banking functions. Collaboration with these institutions and other regulatory bodies directly affected by FATCA can provide the BIR with relevant inputs to help with drafting its implementing guidance.
At the same time, Philippine FIs should keep up to date and actively participate in these developments so that their FATCA compliance programs remain robust.
Jay A. Ballesteros is a Tax Senior Director at SGV & Co.
For this purpose, financial institutions outside the US -- i.e., foreign financial institutions (FFIs) were made responsible for periodically reporting to the US Internal Revenue Service (IRS) information on financial accounts held by US persons. Non-participating FFIs and non-compliant account holders (known as recalcitrant account holders) will have to face a 30% withholding tax, not only on their US revenues (e.g., interest or dividends received) but also on all sales proceeds from instruments which yield revenues from US sources.
There are more than 230 Philippine FIs that have registered and have been assigned Global Intermediary Identification Numbers (GIINs) by the IRS. These include banks, insurance companies, investment houses, stock brokers, mutual funds entities, asset management and leasing companies, and even holding companies. This number is still expected to grow.
The reporting regime adopted in 2013 by the FATCA regulations consisted of the FFIs signing individual agreements to disclose information about their US clients to the IRS. This regime was subsequently modified by introducing inter-governmental agreements (IGAs) to increase compliance by removing legal impediments that could prevent disclosure of US accounts and reducing implementation burdens for FFIs.
Two model IGAs were implemented, namely:
• Model 1 IGA, which involves the reporting of information to the FATCA Partner Government followed by a government-to-government exchange of information; and,
• Model 2 IGA, which involves the direct reporting of information by the FFI to the IRS.
To date, the FATCA information-sharing regime has grown to include at least 73 countries that have formally signed an IGA with the US, 39 countries that have reached agreements in substance to sign the IGAs, and several others are still under discussion.
The Philippines and the US also have an existing double taxation treaty which outlines the basis for the exchange of financial information between the IRS and the Bureau of Internal Revenue (BIR). The new IGA, therefore, enhances the effectiveness of this framework.
The Philippines has negotiated a Model 1 IGA, under which Philippine FIs will report information on US accounts to the BIR. As a matter of fact, the BIR included FATCA as a priority program under Revenue Memorandum Circular No. 3-2015 last Jan. 13.
The Philippines’ Model 1 IGA consists of three parts: the main agreement and supporting annexes. The main agreement deals with the information exchange process between the IRS and the BIR, and details the specific information on US persons, including controlling persons of passive non-financial foreign entities, and/or recalcitrant account holders, to be obtained and exchanged by Philippine FIs on an annual basis (starting with 2014):
• Account holder’s name, address, and US TIN;
• Account number;
• Account balance or value; and
• Number of accounts and aggregate account balance of recalcitrant account holders.
In Annex I of the IGA, Philippine FIs need to perform due diligence procedures for new and pre-existing individual and entity account holders with balances exceeding $50,000 and $250,000, respectively, as of Nov. 30, 2014 (determination date). These procedures include the electronic searching of US indicia, obtaining self-certifications and other documentary evidence and performing enhanced review procedures (i.e., paper search and inquiry with the relationship manager) in the case of accounts with balances that exceed $1,000,000 as of the determination date.
In Annex II, certain Philippine FIs can be treated as deemed-compliant FFIs and are exempt from reporting. These include FIs that have a local base with 98% of their accounts held by Philippine individuals and/or entities. Likewise, certain local banks and FIs with only low-value accounts are exempted.
With respect to 2015 information and onwards, Philippine FIs also need to report the US persons’ and recalcitrant account holders’ total amount of gross income paid or credited to their accounts (including aggregate amount of gross proceeds from the sale or redemption of property). They also need to report the name of each Non-Participating FFI to which they have made payments and the aggregate amount of such payments.
Just recently, the BIR issued an advisory postponing the first reporting period by Philippine FIs to the second quarter of 2016, months after the initial target date of Sept. 30, 2015. The BIR also mentioned that the first batch of reports to be submitted will include information relating to 2014 and 2015 US reportable accounts.
The main agreement also makes it clear that although the IGA has been signed, it is a part of a longer negotiation process. The IGA shall enter into force on the date of the Philippines’ written notification to the US that the country has completed its necessary internal procedures for implementation. This includes being satisfied that the US has established safeguards and infrastructure on information that will be exchanged. The agreement can also be amended any time before Dec. 31, 2016.
Indeed, the signing of the Model 1 IGA provides welcome clarity on a number of issues. Philippine FIs can now further improve their plans for the FATCA implementation, resolve apparent conflicts on certain domestic data privacy laws, and reduce the scope of the reporting requirements by excluding certain categories of accounts. With the reciprocity clause in the Model 1 IGA, the IRS will disclose information relating to Philippine residents in the US to the BIR, to help validate whether correct Philippine income taxes have been settled, thereby increasing tax collections in the long run.
Had the Philippines not concluded an IGA, Philippine FIs would have incurred costs, including the massive 30% withholding tax penalty. There would also have been reputational or other practical limitations in dealing with FFIs abroad due to the withholding obligations under FATCA.
Since the FATCA negotiations between the Philippines and the US remain an ongoing process, Philippine FIs should remain persistent, flexible, and watchful of developments. The Philippine government is still expected to ratify the Model 1 IGA into law in the coming months. Only then can the BIR issue the implementing rules and regulations which should provide more guidance on some practical implications, such as: issues on products and counterparties scoping; validation of reportable accounts and documents provided by account holders; reporting and withholding responsibilities; reporting formats and submission mechanisms to use; monitoring of FIs’ compliance; and imposition of penalties, among others.
The BIR should also continue conducting public consultation, including coordination with the Association of Bank Compliance Officers, Inc. (ABCOMP), which has been tasked by the Bangko Sentral ng Pilipinas to review and address FATCA-related questions or concerns of Philippine banks and other nonbank FIs performing quasi-banking functions. Collaboration with these institutions and other regulatory bodies directly affected by FATCA can provide the BIR with relevant inputs to help with drafting its implementing guidance.
At the same time, Philippine FIs should keep up to date and actively participate in these developments so that their FATCA compliance programs remain robust.
Jay A. Ballesteros is a Tax Senior Director at SGV & Co.
source: Businessworld
Wednesday, September 16, 2015
A broad-based, comprehensive tax reform is the only way forward
The core elements of a broad-based, comprehensive tax reform program are lower income and corporate income tax rates, broader corporate tax base by rationalizing fiscal incentives, higher value-added tax rates, and higher real property tax.
Both the chairmen of the Senate and the House of Representatives Ways and Means Committee, Senator Juan Edgardo M. Angara and Congressman Romero Federico S. Quimbo, respectively, are right: the Philippine personal income tax system is archaic and needs to be reformed.
The present personal and corporate income tax systems have not been adjusted since almost two decades ago. With inflation-creep, the personal income tax system has collected from workers more taxes than what was originally planned.
Compared to its Association of Southeast Asian Nations neighbors, the Philippines’ personal income and corporate tax system continue to be the highest (see Tables 1 and 2).
For the personal income system, the Philippines highest marginal tax rate of 35% applies to top tax base of P500,000. Malaysia’s top tax rate of 26% applies to top tax base of P1.38-million equivalent; Indonesia’s top tax rate of 30% applies to top tax base of P1.87-million equivalent; Thailand’s top tax rate of 35% applies to top tax base of P5.5-million equivalent; and Singapore’s top rate of 20% applies to top tax base of P11.2-million equivalent.
In sum, I see no strong arguments why both systems should not be reformed now. But reducing the corporate and income tax rates should not be stand-alone measures. They should be done within a comprehensive framework for tax reform.
Because the Philippine tax effort, defined as taxes as percent of gross domestic product (GDP), is very low by international standards, a reasonable condition for the design of a comprehensive tax reform program is that the final outcome of the reform will be that it is at least revenue-neutral. Total taxes before the reform should be equal to or higher than total taxes after the reform.
Revenue losses from reducing personal income tax rates should be offset by higher value-added tax (VAT). It is not true that our VAT system imposes a heavy burden on the poor. In fact, a study by the International Monetary Fund finds that our VAT system is slightly progressive because food, in its original state, is VAT-exempt.
The poor can avoid paying VAT by cooking their own food, which accounts for about half of their budget, rather than buying them from fast-food outlets.
President Benigno S. C. Aquino III talked about the impact of higher commodity prices as a result higher VAT on petroleum products. But isn’t he aware that the price of petroleum products went down from $103 per barrel last year to less than $50 today, by more than half? The three-percentage point increase in the VAT rate would hardly make a dent in a typical consumer’s budget.
In fact a higher VAT on petroleum product is good for the government. It could make up for at least a big part of the revenue loss due to lower oil prices. It might even help ease traffic congestion in Metropolitan Manila and most urban cities.
The reduction in corporate income tax should be accompanied by rationalizing fiscal incentives. Tax perks should be rationalized, they should be fewer, focused, and performance-based. For too long, fiscal incentives have been a drain on the national treasury because of too many redundant tax sweeteners.
By limiting fiscal incentives, the corporate tax base is broadened.
The comprehensive tax reform program should include a nationwide real property tax (RPT) piggy-backed on the locally imposed RPT. The proceeds from it may be used to supplement the deficiencies in funding of the K-12 basic education system.
President Aquino should be less wary of a downgrade by rating agencies. The rating agencies are usually concerned with the risk of default. But the Philippines ability to service its debt is beyond question. Its gross international reserves total more than $80 billion, close to year’s imports requirement. Thanks to the annual inflow of some $25-billion to $26-billion remittances from Filipinos overseas.
The inflation rate is low and might even end up a tad lower than the 2% floor of the official inflation target. The 2016 deficit-to-GDP ratio of 2% is low by developing country standards, and it might even end up at less than 1%.
For a developing economy with massive infrastructure deficiency, having a budget deficit of as low as 2% is totally mind-boggling.
As President, Mr. Aquino should be more genuinely concerned with the sentiments of his “bosses”, the Filipino people, who feel that they have been overtaxed, yet get very little in terms of efficient and predictable public services.
No economist worth his soul would argue against the need for a comprehensive tax reform program (CTRP) for the Philippines. The new tax system should be broad-based, fair, efficient, high yielding, and competitive with its neighboring countries.
In terms of managing the reform, the CTRP is best left to the next administration.
With eight months before the next presidential and local elections, this might not be a good time to push for such meaningful change. A watered-down version, where tax-reducing parts would be enacted while tax raising parts would be neglected or deferred, would be counterproductive. It will only weaken the already flawed tax system.
Benjamin E. Diokno is a former secretary of Budget and Management.
bediokno@gmail.com
Both the chairmen of the Senate and the House of Representatives Ways and Means Committee, Senator Juan Edgardo M. Angara and Congressman Romero Federico S. Quimbo, respectively, are right: the Philippine personal income tax system is archaic and needs to be reformed.
The present personal and corporate income tax systems have not been adjusted since almost two decades ago. With inflation-creep, the personal income tax system has collected from workers more taxes than what was originally planned.
Compared to its Association of Southeast Asian Nations neighbors, the Philippines’ personal income and corporate tax system continue to be the highest (see Tables 1 and 2).
For the personal income system, the Philippines highest marginal tax rate of 35% applies to top tax base of P500,000. Malaysia’s top tax rate of 26% applies to top tax base of P1.38-million equivalent; Indonesia’s top tax rate of 30% applies to top tax base of P1.87-million equivalent; Thailand’s top tax rate of 35% applies to top tax base of P5.5-million equivalent; and Singapore’s top rate of 20% applies to top tax base of P11.2-million equivalent.
In sum, I see no strong arguments why both systems should not be reformed now. But reducing the corporate and income tax rates should not be stand-alone measures. They should be done within a comprehensive framework for tax reform.
Because the Philippine tax effort, defined as taxes as percent of gross domestic product (GDP), is very low by international standards, a reasonable condition for the design of a comprehensive tax reform program is that the final outcome of the reform will be that it is at least revenue-neutral. Total taxes before the reform should be equal to or higher than total taxes after the reform.
Revenue losses from reducing personal income tax rates should be offset by higher value-added tax (VAT). It is not true that our VAT system imposes a heavy burden on the poor. In fact, a study by the International Monetary Fund finds that our VAT system is slightly progressive because food, in its original state, is VAT-exempt.
The poor can avoid paying VAT by cooking their own food, which accounts for about half of their budget, rather than buying them from fast-food outlets.
President Benigno S. C. Aquino III talked about the impact of higher commodity prices as a result higher VAT on petroleum products. But isn’t he aware that the price of petroleum products went down from $103 per barrel last year to less than $50 today, by more than half? The three-percentage point increase in the VAT rate would hardly make a dent in a typical consumer’s budget.
In fact a higher VAT on petroleum product is good for the government. It could make up for at least a big part of the revenue loss due to lower oil prices. It might even help ease traffic congestion in Metropolitan Manila and most urban cities.
The reduction in corporate income tax should be accompanied by rationalizing fiscal incentives. Tax perks should be rationalized, they should be fewer, focused, and performance-based. For too long, fiscal incentives have been a drain on the national treasury because of too many redundant tax sweeteners.
By limiting fiscal incentives, the corporate tax base is broadened.
The comprehensive tax reform program should include a nationwide real property tax (RPT) piggy-backed on the locally imposed RPT. The proceeds from it may be used to supplement the deficiencies in funding of the K-12 basic education system.
President Aquino should be less wary of a downgrade by rating agencies. The rating agencies are usually concerned with the risk of default. But the Philippines ability to service its debt is beyond question. Its gross international reserves total more than $80 billion, close to year’s imports requirement. Thanks to the annual inflow of some $25-billion to $26-billion remittances from Filipinos overseas.
The inflation rate is low and might even end up a tad lower than the 2% floor of the official inflation target. The 2016 deficit-to-GDP ratio of 2% is low by developing country standards, and it might even end up at less than 1%.
For a developing economy with massive infrastructure deficiency, having a budget deficit of as low as 2% is totally mind-boggling.
As President, Mr. Aquino should be more genuinely concerned with the sentiments of his “bosses”, the Filipino people, who feel that they have been overtaxed, yet get very little in terms of efficient and predictable public services.
No economist worth his soul would argue against the need for a comprehensive tax reform program (CTRP) for the Philippines. The new tax system should be broad-based, fair, efficient, high yielding, and competitive with its neighboring countries.
In terms of managing the reform, the CTRP is best left to the next administration.
With eight months before the next presidential and local elections, this might not be a good time to push for such meaningful change. A watered-down version, where tax-reducing parts would be enacted while tax raising parts would be neglected or deferred, would be counterproductive. It will only weaken the already flawed tax system.
Benjamin E. Diokno is a former secretary of Budget and Management.
bediokno@gmail.com
source: Businessworld
Monday, September 7, 2015
It pays to know the technicalities
Emotions can get the best of us at times, and “thinking before acting” often saves us from many wild ideas brought about by intense emotion. Tax regulations often inspire such intense emotions, as manifested in comments on social media regarding new tax issuances. Of course such issues are not resolved via social media. Regulations that a taxpayer wishes to question will require the filing of a formal plea before a court. Which brings about the key question: which court should you file a complaint with?
In a recent case, Clark Investors and Locators Association, Inc. (CILA) vs. Secretary of Finance and Commissioner of Internal Revenue (GR No. 200670), the court reminded the public that in filing a case the appropriate court must be determined. The issues to be raised in the complaint must be in line with those issues that a particular court has jurisdiction over. Otherwise, the case will be dismissed on the grounds of improper venue.
In the case at hand, CILA filed a petition for certiorari with a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction to annul and set aside Revenue Regulation (RR) No. 2-2012. The regulation imposed value-added tax (VAT) and excise tax on importation of petroleum and petroleum products from overseas into the Freeport or Economic Zones, which is said to be contrary to Republic Act (RA) No. 7227 Bases Conversion and Development Act of 1992, as amended.
RA No. 7227 was enacted to convert the Subic military reservation into the Subic Special Economic Zone. This was further extended to include Clark Freeport Zone via the issuance of RA No. 9400. Under these laws, the special economic zone and the Freeport zone can hand out tax incentives such as a preferential gross income tax rate of 5% in lieu of all national and local taxes and exemption from the payment of all taxes and duties on the importation of raw materials, capital, and equipment into the zone.
In 2012, the Department of Finance, (DoF) upon the recommendation of the Bureau of Internal Revenue (BIR), issued RR No. 2-2012 which imposed VAT and excise tax on petroleum products from overseas into the Freeport or Economic Zone. The regulation further stated that the importer may claim a tax credit or refund with the Bureau of Customs subject to favorable endorsement of the BIR after presentation of proof that these are properly classified as 0% VAT.
With this issuance, CILA felt that the exemption from duties and taxes was ignored and in turn it filed a petition for certiorari under Rule 65 of the 1997 Rules of Civil Procedure as amended, alleging that the respondents acted with grave abuse of discretion in issuing RR 2-2012 since in effect it revoked the tax exemption granted by RA 7227 and RA 9400. In response to such petition, the Office of the Solicitor General (OSG) denied outright the special civil action for certiorari since the respondent was exercising its quasi-legislative (i.e., rule making) powers and not exercising judicial or quasi-judicial powers. This was differentiated by the OSG since a certiorari can only be filed against a public officer exercising judicial or quasi-judicial powers. The case further defined the terms judicial function as the power to determine what the law is and what the legal rights of the parties are and then undertakes to determine these questions and adjudicate upon the rights of the parties while quasi-judicial function is a term which applies to the action, discretion, etc of public administrative officers or bodies required to investigate facts, or ascertain the existence of facts, hold hearings, and draw conclusions from them as basis for their official action and to exercise discretion of a judicial nature.
With these definitions, the case was confirmed to be a quasi-legislative function exercised by the DoF and not judicial or quasi-judicial. This was further backed by Section 244 of the Tax Code which provides that the Secretary of Finance upon recommendation of the Commissioner shall promulgate all the necessary rules and regulations for the effective enforcement of the provisions of this code.
The Court ruled that the case filed should have been a petition for declaratory relief (i.e., a declaration by court of the unconstitutionality and illegality of the questioned rule). It is the Regional Trial Court (RTC) that has jurisdiction over this. It also further emphasized that the Supreme Court, Court of Appeals and the RTC have concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunctions, such concurrence does not give the petitioner unrestricted freedom of choice of court of forum. It further explained that the Court has numerous cases to decide and that if all cases were to be entertained including those that are out of jurisdiction, this would cause inevitable delay in the adjudication of cases.
This reminded me of a case in which the banks brought legal action concerning the implementation of RR 4-2011, bringing their filing to the RTC. When I heard of this case, I wondered why it was filed with the RTC and not the SC; now I realize that they have filed their complaint in the proper court.
This case emphasized the jurisdiction of each court and that it pays to know the technicalities. Otherwise, the taxpayer is at risk that his petition will be dismissed for lack of jurisdiction.
Joanna Grace P. Manuel-Bonghanoy is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
In a recent case, Clark Investors and Locators Association, Inc. (CILA) vs. Secretary of Finance and Commissioner of Internal Revenue (GR No. 200670), the court reminded the public that in filing a case the appropriate court must be determined. The issues to be raised in the complaint must be in line with those issues that a particular court has jurisdiction over. Otherwise, the case will be dismissed on the grounds of improper venue.
In the case at hand, CILA filed a petition for certiorari with a prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction to annul and set aside Revenue Regulation (RR) No. 2-2012. The regulation imposed value-added tax (VAT) and excise tax on importation of petroleum and petroleum products from overseas into the Freeport or Economic Zones, which is said to be contrary to Republic Act (RA) No. 7227 Bases Conversion and Development Act of 1992, as amended.
RA No. 7227 was enacted to convert the Subic military reservation into the Subic Special Economic Zone. This was further extended to include Clark Freeport Zone via the issuance of RA No. 9400. Under these laws, the special economic zone and the Freeport zone can hand out tax incentives such as a preferential gross income tax rate of 5% in lieu of all national and local taxes and exemption from the payment of all taxes and duties on the importation of raw materials, capital, and equipment into the zone.
In 2012, the Department of Finance, (DoF) upon the recommendation of the Bureau of Internal Revenue (BIR), issued RR No. 2-2012 which imposed VAT and excise tax on petroleum products from overseas into the Freeport or Economic Zone. The regulation further stated that the importer may claim a tax credit or refund with the Bureau of Customs subject to favorable endorsement of the BIR after presentation of proof that these are properly classified as 0% VAT.
With this issuance, CILA felt that the exemption from duties and taxes was ignored and in turn it filed a petition for certiorari under Rule 65 of the 1997 Rules of Civil Procedure as amended, alleging that the respondents acted with grave abuse of discretion in issuing RR 2-2012 since in effect it revoked the tax exemption granted by RA 7227 and RA 9400. In response to such petition, the Office of the Solicitor General (OSG) denied outright the special civil action for certiorari since the respondent was exercising its quasi-legislative (i.e., rule making) powers and not exercising judicial or quasi-judicial powers. This was differentiated by the OSG since a certiorari can only be filed against a public officer exercising judicial or quasi-judicial powers. The case further defined the terms judicial function as the power to determine what the law is and what the legal rights of the parties are and then undertakes to determine these questions and adjudicate upon the rights of the parties while quasi-judicial function is a term which applies to the action, discretion, etc of public administrative officers or bodies required to investigate facts, or ascertain the existence of facts, hold hearings, and draw conclusions from them as basis for their official action and to exercise discretion of a judicial nature.
With these definitions, the case was confirmed to be a quasi-legislative function exercised by the DoF and not judicial or quasi-judicial. This was further backed by Section 244 of the Tax Code which provides that the Secretary of Finance upon recommendation of the Commissioner shall promulgate all the necessary rules and regulations for the effective enforcement of the provisions of this code.
The Court ruled that the case filed should have been a petition for declaratory relief (i.e., a declaration by court of the unconstitutionality and illegality of the questioned rule). It is the Regional Trial Court (RTC) that has jurisdiction over this. It also further emphasized that the Supreme Court, Court of Appeals and the RTC have concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunctions, such concurrence does not give the petitioner unrestricted freedom of choice of court of forum. It further explained that the Court has numerous cases to decide and that if all cases were to be entertained including those that are out of jurisdiction, this would cause inevitable delay in the adjudication of cases.
This reminded me of a case in which the banks brought legal action concerning the implementation of RR 4-2011, bringing their filing to the RTC. When I heard of this case, I wondered why it was filed with the RTC and not the SC; now I realize that they have filed their complaint in the proper court.
This case emphasized the jurisdiction of each court and that it pays to know the technicalities. Otherwise, the taxpayer is at risk that his petition will be dismissed for lack of jurisdiction.
Joanna Grace P. Manuel-Bonghanoy is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
Thursday, September 3, 2015
A tax break for whom?
For most taxpayers, I believe lower income tax is still very much preferred to lower value-added tax. And it is in this line that popular support may be expected for House and Senate initiatives to lower income tax rates and adjust existing tax brackets to account for inflation. And it is unsurprising that tax breaks are offered just before an election year. Taxes are always political.
The present House ways and means chairman promises that the bill on cutting income taxes, with expanded exemptions for more workers and a lowering of the top tax bracket to 30%, will move by next week. “We will finalize and report out (the bill to the plenary) next week a two-step process for the overhaul of income taxes,” says Marikina Rep. Romero Federico S. Quimbo.
Income tax brackets were last adjusted in 1997, or almost 20 years ago.
At present, persons and businesses earning more than P500,000 pay an income tax of 32%. This will be changed under the proposed law, but with tax deductions for breadwinners or those with dependents also to be removed. Then another adjustment will be made three years after to limit the tax brackets to only four:
• the tax-exempt threshold, for workers earning less than P180,000 per annum;
• 9% for those earning P180,000 to P500,000;
• 17% those earning between P500,001 and P10 million;
• 30% for those earning beyond P10 million.
At the Senate, Senator Juan Edgardo “Sonny” M. Angara is also pushing for changes, saying that “tax brackets should be adjusted to make (these) more sensitive to current salaries of Filipinos. Because at present, a person who makes P50,000 a month -- who is considered middle class -- is already in the top tax bracket and is also paying the same tax rate as the billionaires in our country.”
I support these changes, but with caution. Offhand, there is a need to address a situation of inequality that the government itself perpetrates.
As an example, why is the tax system prejudiced against those who have more than four children or dependents? Why can’t taxpayers claim tax deductions beyond the fourth child? And why can’t people claim maternity benefits from the Social Security System beyond the fourth pregnancy?
Quimbo’s solution to this inequality is to remove the exemptions altogether, also to make the tax system simpler.
Instead, based on income, tax rates will be adjusted to allow those who have less in life to pay lower taxes. His plan might just work, and jibe with his logic that “the simpler the bracket, the simpler the computation, the easier for compliance.” Thus, more people and companies will be inclined to pay the correct taxes.
However, I have some misgivings as to how his proposed four-tier tax bracket is structured, which tend to leave one with the impression that the tax breaks appear to favor the rich more than the poor. I get the same impression from the Angara proposal at the Senate, which aims to peg at P1 million and above -- from the present P500,000 and above -- the country’s top income tax bracket, and to reduce the maximum tax rate from the current 32% to 25%.
As I had commented previously on the Angara proposal, the top income tax bracket should be nearer the P3-million level, which is more in tune with what we can realistically define as being rich or wealthy or having more than enough in this country. On the other hand, the Quimbo proposed cap of P10 million is just too high, in my opinion.
Taking the case of a family of six, an annual family net taxable income of P1 million minus P250,000 in tax (at 25%) results in a daily household budget of only P347 per head -- which is below the present minimum daily wage in Metro Manila. Taking the same family and Quimbo’s P30 million at 30%, that leaves the family a daily household budget of P9,722 per head. Notice the disparity? The proposed tax brackets will redefine the meaning of wealthy in this country.
An income of P1 million a year makes one a millionaire, but not necessarily wealthy.
On the other hand, triple that income to P3 million and your daily budget goes up to P1,000 per head per day. Even a tax rate of 25% will still allow you to become a millionaire, spend enough on your family, and maintain a bank account. But to multiply that income by 10, as Quimbo proposes, even at a higher tax rate of 30%, still leaves one with plenty of money.
The Quimbo and Angara proposals are major steps in the right direction. But they need to be reviewed thoroughly to benefit more the poor and middle income earners, rather than the rich. A top bracket of P1 million, with tax at 25%, saves the poor but penalizes middle-income earners. In this line, Angara should propose a higher top bracket.
As for the Quimbo’s top bracket of P30 million, that’s too much leeway for the rich. Also, one who earns P500,000 pays 9% tax but one who makes P505,000 pays 17%? Just because of a P5,000 increase? And those earning more than P500,000 pay at the same rate as those earning P10 million? That doesn’t seem right, does it?
At present, those who earn P500,000 already pay 10%. Quimbo wants this cut to 9%. Those who earn more than P500,000 pay 32%. Quimbo wants this cut to 30% for those making more than P10 million, but to 17% for those with more than P500,000 but less than P10 million. I believe these are minimal cuts with little benefit to the poor and middle income.
Perhaps those who make more than P500,000 but less than P3 million should pay 17%, and those who make more than P3 million should pay 25%, as Angara suggested. Anyway, those who make tens of millions or even billions don’t really bother with tax brackets, as they will always have more than enough money to pay for taxes. But one who now earns P10 million currently pays 32% tax. Does he really need Quimbo to cut his income tax to 17%?
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council
matort@yahoo.com
The present House ways and means chairman promises that the bill on cutting income taxes, with expanded exemptions for more workers and a lowering of the top tax bracket to 30%, will move by next week. “We will finalize and report out (the bill to the plenary) next week a two-step process for the overhaul of income taxes,” says Marikina Rep. Romero Federico S. Quimbo.
Income tax brackets were last adjusted in 1997, or almost 20 years ago.
At present, persons and businesses earning more than P500,000 pay an income tax of 32%. This will be changed under the proposed law, but with tax deductions for breadwinners or those with dependents also to be removed. Then another adjustment will be made three years after to limit the tax brackets to only four:
• the tax-exempt threshold, for workers earning less than P180,000 per annum;
• 9% for those earning P180,000 to P500,000;
• 17% those earning between P500,001 and P10 million;
• 30% for those earning beyond P10 million.
At the Senate, Senator Juan Edgardo “Sonny” M. Angara is also pushing for changes, saying that “tax brackets should be adjusted to make (these) more sensitive to current salaries of Filipinos. Because at present, a person who makes P50,000 a month -- who is considered middle class -- is already in the top tax bracket and is also paying the same tax rate as the billionaires in our country.”
I support these changes, but with caution. Offhand, there is a need to address a situation of inequality that the government itself perpetrates.
As an example, why is the tax system prejudiced against those who have more than four children or dependents? Why can’t taxpayers claim tax deductions beyond the fourth child? And why can’t people claim maternity benefits from the Social Security System beyond the fourth pregnancy?
Quimbo’s solution to this inequality is to remove the exemptions altogether, also to make the tax system simpler.
Instead, based on income, tax rates will be adjusted to allow those who have less in life to pay lower taxes. His plan might just work, and jibe with his logic that “the simpler the bracket, the simpler the computation, the easier for compliance.” Thus, more people and companies will be inclined to pay the correct taxes.
However, I have some misgivings as to how his proposed four-tier tax bracket is structured, which tend to leave one with the impression that the tax breaks appear to favor the rich more than the poor. I get the same impression from the Angara proposal at the Senate, which aims to peg at P1 million and above -- from the present P500,000 and above -- the country’s top income tax bracket, and to reduce the maximum tax rate from the current 32% to 25%.
As I had commented previously on the Angara proposal, the top income tax bracket should be nearer the P3-million level, which is more in tune with what we can realistically define as being rich or wealthy or having more than enough in this country. On the other hand, the Quimbo proposed cap of P10 million is just too high, in my opinion.
Taking the case of a family of six, an annual family net taxable income of P1 million minus P250,000 in tax (at 25%) results in a daily household budget of only P347 per head -- which is below the present minimum daily wage in Metro Manila. Taking the same family and Quimbo’s P30 million at 30%, that leaves the family a daily household budget of P9,722 per head. Notice the disparity? The proposed tax brackets will redefine the meaning of wealthy in this country.
An income of P1 million a year makes one a millionaire, but not necessarily wealthy.
On the other hand, triple that income to P3 million and your daily budget goes up to P1,000 per head per day. Even a tax rate of 25% will still allow you to become a millionaire, spend enough on your family, and maintain a bank account. But to multiply that income by 10, as Quimbo proposes, even at a higher tax rate of 30%, still leaves one with plenty of money.
The Quimbo and Angara proposals are major steps in the right direction. But they need to be reviewed thoroughly to benefit more the poor and middle income earners, rather than the rich. A top bracket of P1 million, with tax at 25%, saves the poor but penalizes middle-income earners. In this line, Angara should propose a higher top bracket.
As for the Quimbo’s top bracket of P30 million, that’s too much leeway for the rich. Also, one who earns P500,000 pays 9% tax but one who makes P505,000 pays 17%? Just because of a P5,000 increase? And those earning more than P500,000 pay at the same rate as those earning P10 million? That doesn’t seem right, does it?
At present, those who earn P500,000 already pay 10%. Quimbo wants this cut to 9%. Those who earn more than P500,000 pay 32%. Quimbo wants this cut to 30% for those making more than P10 million, but to 17% for those with more than P500,000 but less than P10 million. I believe these are minimal cuts with little benefit to the poor and middle income.
Perhaps those who make more than P500,000 but less than P3 million should pay 17%, and those who make more than P3 million should pay 25%, as Angara suggested. Anyway, those who make tens of millions or even billions don’t really bother with tax brackets, as they will always have more than enough money to pay for taxes. But one who now earns P10 million currently pays 32% tax. Does he really need Quimbo to cut his income tax to 17%?
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council
matort@yahoo.com
Strict requirements for allegations of falsity or fraud
In an en banc decision on July 30 (CTA En Banc Case No. 1191), the Court of Tax Appeals (CTA) reiterated the legal principle that allegations of falsity or fraud in the filing of tax returns must be proven to exist by clear and convincing evidence and cannot be justified by mere speculation. The fraud or falsity contemplated by law is actual and not constructive in nature. Therefore, it must be intentional i.e. a willful and deliberate act of deception with the sole objective of avoiding tax.
The burden of proof in establishing whether the taxpayer is guilty of filing false or fraudulent returns with intent to evade tax is with the Commissioner of Internal Revenue or its duly authorized representative. Negligence per se on the part of the taxpayer, whether slight or gross, is not equivalent to filing of false or fraudulent returns under the law.
A quick look at the period of limitation for assessment under the Tax Code shows that the Bureau of Internal Revenue (BIR) has three years from the last day prescribed by law for the filing of the return to assess internal revenue taxes. However, the three-year period shall be extended in cases where taxpayers are found to have filed false or fraudulent returns with intent to evade tax or in case of failure to file a return. In cases like these, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be filed without assessment at any time within 10 years after the discovery of the falsity, fraud or omission.
In the foregoing en banc case, the BIR sought to collect deficiency internal revenue taxes from the taxpayer, claiming that even if the three-year period had already lapsed, the assessment was still valid since the applicable period of limitation for assessment of false returns is 10 years. The BIR further argued that falsity arises as long as there is some deviation from the truth, whether it is due to mistake, ignorance, or carelessness.
In this case, the CTA ruled against the BIR. It held that falsity, like fraud, is also a question of fact, and thus, should never be lightly presumed. It was pointed out that the allegation that the taxpayer filed false returns was mere speculation because the BIR did not present any witnesses or evidence to support such falsity. Further, the Final Assessment Notice (FAN) and subsequently, the Final Decision on Disputed Assessments (FDDA) failed to indicate that the taxpayer filed false tax returns. Thus, even if it was shown that the Preliminary Assessment Notice (PAN) of the BIR alleged the filing of false returns, the allegation cannot be considered since a PAN is a notice preparatory to the issuance of the FAN and therefore is not, legally speaking, an assessment.
For taxpayers, it is important to note it is the FAN or the Formal Letter of Demand (FLD) that constitutes a legal assessment subject to formal protest; otherwise, it becomes final and executory. Thus, any allegation of falsity or fraud should be indicated in the FAN and FDDA.
The Supreme Court, in earlier rulings, had strictly held that fraud or falsity must be alleged and proven, at least satisfactorily, if not conclusively by the one who alleges its existence. (48 Phil. 58; 18 Phil. 484)
The Courts also noted that the rule was founded on public policy which guards against the speculative tendencies of the human mind and its readiness to accept as facts theories that appeal to the imagination. (G.R. No. L-6397 dated 31 August 1955; CTA Case No. 84 dated 8 July 1958).
Applying this principle, in the absence of concrete proof of falsity or fraud, penalties cannot be imposed and the period of limitations for assessment cannot be extended.
In another earlier case (CTA Case No. 7123 dated 18 July 2007), the CTA stated that in order to render a return filed by a taxpayer a “false return,” there must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake that is not culpable in respect of its value would not constitute a false return.
Relative to the recent case, the BIR’s failure to submit clear and convincing evidence proved fatal to their claim to collect deficiency taxes. Its allegation of falsity which was indicated only in the PAN, but was not later on discussed or mentioned in the FAN and FDDA, would not warrant the application of the 10-year assessment period. There was no basis to extend the three-year prescriptive period. Considering that the FAN was issued beyond the three-year period, the BIR’s right to assess deficiency taxes had prescribed. The assessment was considered void.
An important note to take from this case is that despite the BIR’s very high revenue goal, tax investigations and procedures for the assessment of deficiency taxes should still strictly adhere to the basic rules set by law. This is especially applicable for such serious charges as fraud or falsity. Taxpayers should find comfort that Philippine courts do not tolerate mere speculation on the part of the BIR and in fact, firmly require conclusive supporting documents before finding culpability for fraud or falsity of returns.
Maria Jonas S. Yap is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
maria.jonas.s.yap@ph.pwc.com
source: Businessworld
The burden of proof in establishing whether the taxpayer is guilty of filing false or fraudulent returns with intent to evade tax is with the Commissioner of Internal Revenue or its duly authorized representative. Negligence per se on the part of the taxpayer, whether slight or gross, is not equivalent to filing of false or fraudulent returns under the law.
A quick look at the period of limitation for assessment under the Tax Code shows that the Bureau of Internal Revenue (BIR) has three years from the last day prescribed by law for the filing of the return to assess internal revenue taxes. However, the three-year period shall be extended in cases where taxpayers are found to have filed false or fraudulent returns with intent to evade tax or in case of failure to file a return. In cases like these, the taxes may be assessed, or a proceeding in court for the collection of such taxes may be filed without assessment at any time within 10 years after the discovery of the falsity, fraud or omission.
In the foregoing en banc case, the BIR sought to collect deficiency internal revenue taxes from the taxpayer, claiming that even if the three-year period had already lapsed, the assessment was still valid since the applicable period of limitation for assessment of false returns is 10 years. The BIR further argued that falsity arises as long as there is some deviation from the truth, whether it is due to mistake, ignorance, or carelessness.
In this case, the CTA ruled against the BIR. It held that falsity, like fraud, is also a question of fact, and thus, should never be lightly presumed. It was pointed out that the allegation that the taxpayer filed false returns was mere speculation because the BIR did not present any witnesses or evidence to support such falsity. Further, the Final Assessment Notice (FAN) and subsequently, the Final Decision on Disputed Assessments (FDDA) failed to indicate that the taxpayer filed false tax returns. Thus, even if it was shown that the Preliminary Assessment Notice (PAN) of the BIR alleged the filing of false returns, the allegation cannot be considered since a PAN is a notice preparatory to the issuance of the FAN and therefore is not, legally speaking, an assessment.
For taxpayers, it is important to note it is the FAN or the Formal Letter of Demand (FLD) that constitutes a legal assessment subject to formal protest; otherwise, it becomes final and executory. Thus, any allegation of falsity or fraud should be indicated in the FAN and FDDA.
The Supreme Court, in earlier rulings, had strictly held that fraud or falsity must be alleged and proven, at least satisfactorily, if not conclusively by the one who alleges its existence. (48 Phil. 58; 18 Phil. 484)
The Courts also noted that the rule was founded on public policy which guards against the speculative tendencies of the human mind and its readiness to accept as facts theories that appeal to the imagination. (G.R. No. L-6397 dated 31 August 1955; CTA Case No. 84 dated 8 July 1958).
Applying this principle, in the absence of concrete proof of falsity or fraud, penalties cannot be imposed and the period of limitations for assessment cannot be extended.
In another earlier case (CTA Case No. 7123 dated 18 July 2007), the CTA stated that in order to render a return filed by a taxpayer a “false return,” there must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake that is not culpable in respect of its value would not constitute a false return.
Relative to the recent case, the BIR’s failure to submit clear and convincing evidence proved fatal to their claim to collect deficiency taxes. Its allegation of falsity which was indicated only in the PAN, but was not later on discussed or mentioned in the FAN and FDDA, would not warrant the application of the 10-year assessment period. There was no basis to extend the three-year prescriptive period. Considering that the FAN was issued beyond the three-year period, the BIR’s right to assess deficiency taxes had prescribed. The assessment was considered void.
An important note to take from this case is that despite the BIR’s very high revenue goal, tax investigations and procedures for the assessment of deficiency taxes should still strictly adhere to the basic rules set by law. This is especially applicable for such serious charges as fraud or falsity. Taxpayers should find comfort that Philippine courts do not tolerate mere speculation on the part of the BIR and in fact, firmly require conclusive supporting documents before finding culpability for fraud or falsity of returns.
Maria Jonas S. Yap is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
maria.jonas.s.yap@ph.pwc.com
source: Businessworld
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