BIR to Uber, TNCs: Pay taxes, issue receipts

Transport network companies (TNCs) such as Uber and GrabTaxi must pay either common carriers or value-added tax, issue receipts and ensure that all tax returns are filed in the Bureau of Internal Revenue.Revenue Commissioner Kim S. Jacinto-Henares made this clear in Revenue Memorandum Circular No. 70-2015 issued by the country’s biggest tax-collection agency on Oct. 29, 2015 to lay down the rules on the tax treatment of TNCs.Under these rules, the BIR said TNCs holding current and valid franchise or certificates of public convenience (CPC) must have their gross receipts subjected to 3-percent common carriers tax, as mandated under Section 117 of the Tax Code or National Internal Revenue Code of 1997, as amended.

For those without CPCs, they will be classified as land transportation contractors, hence subject to 12-percent VAT, the BIR said, noting that “an accreditation [to TNCs] issued by the LTFRB (Land Transportation Franchising and Regulatory Board) is not in itself a CPC and will not make said operation that of a common carrier.”

“If the [TNC] partner is not a holder of a CPC, said partner is merely a land transportation service contractor and under the VAT system, the transportation service contractor, at its option if the gross annual sales and/or gross receipts do not exceed P1,919,500, may register either as a VAT taxpayer and be liable to the 12-percent VAT, or as non-VAT taxpayer, for it is mandated to pay the 3-percent percentage tax under Section 116 of the Tax Code. The partners of the TNC belong to this category,” the BIR pointed out.

The BIR defined “partners” as the vehicles used in transporting passengers and/or goods within the TNC, which may be owned by other people and/or other entities other than the TNC.

All TNCs and their partners must also register their businesses at their respective revenue district offices and secure a BIR Certificate of Registration, which should be displayed in the vehicles.

TNCs and their partners must also secure an authority to print (ATP) official receipts and register books of accounts for use in business, the BIR said. “The TNC shall register and obtain an ATP under the e-Invoicing System for the official receipts (ORs) issued to passengers. Its partners shall likewise follow insofar as the ORs they will issue to the TNC for the use or rental of the vehicle, if such is the case.”

The BIR reiterated that TNCs as well as partners must issue either manual or electronic ORs in at least in duplicate for every service, with the original receipt to be handed to the passenger.

source:  Philippine Daily Inquirer, Oct 31 2015

Taxing Uber: BIR mulls requiring drivers to issue receipts  

‘Uber’ rides are set to get a lot less convenient for the public as tax authorities plan to mandate the issuance of physical receipts—a rule ignored by most taxi operators.

Bureau of Internal Revenue (BIR) Deputy Commissioner Nelson Aspe said new guidelines would be issued to spell out the tax responsibilities of all parties in the Uber ecosystem.

Apart from the issuance of receipts, the BIR said it expects owners of cars used for Uber rides to file tax returns. Uber drivers who don’t own the cars they use would also be considered employees, and the appropriate taxes should be withheld from their salaries.

Uber rides would also be subjected to value-added tax (VAT), which would add an additional 12 percent to the cost to consumers.  The BIR would charge retroactively, Aspe said.

The official said it would ask credit card companies to submit data on Uber rides. This would ensure that tax liabilities of drivers, owners, and Uber itself are computed accurately. Uber passengers are charged online using their credit card information for rides.

Aspe said the same rules would apply to other ride-sharing services such as GrabTaxi, which offers a similar service called GrabCar. Unlike Uber, GrabTaxi’s business is entirely cash-based, which Aspe said is more difficult to track.

source:  Philippine Daily Inquirer, Oct 27 2015

Shell to seek legal remedies on P3.5-B tax case

MANILA, Philippines - Pilipinas Shell Petroleum Corp. will seek legal remedies following a decision by the Court of Tax Appeals to pay over P3.5 billion in excise tax for the importation of raw gasoline materials for the years 2006 to 2009.

“We will avail all legal remedies available to us,” Pilipinas Shell communications and social performance manager Cesar Abaricia said in a text message to reporters.

In a 42-page decision Thursday, the CTA altered an earlier resolution of its third division that stopped the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) from collecting billions worth of excise tax from PSPC.

This stemmed from a petition filed by the oil firm in 2009 asking for the nullification of a demand letter of then BIR commissioner Joel Tan-Torres.

In his petition, Torres ordered Pilipinas Shell to pay P7.3 billion in excise and value added tax (VAT) when it imported catalytic cracked gasoline (CCG) and light catalytic cracked gasoline (LCCG) from 2004 to 2009.

CCG and LCCG are intermediate or raw gasoline products used as blending components to produce gasoline in compliance with the Clean Air Act of 1999.

Ruling on the 2009 petition, the CTA third division sided sided with Pilipinas Shell and enjoined the BIR and the BOC from collecting the taxes.

But on Thursday, the CTA modified the initial ruling and ordered the oil firm to pay the taxes for importations made from 2006 to 2009. ‘

source:  Philippine Star

Proper timing for withholding of tax on wages and bonuses

AMONG  the income payments where the payor is required to withhold the applicable tax in full is on the payment of compensation by an employer to its officers and employees. This obligation is not difficult to comply since the withholding is done for every payroll period and remittance is made on a monthly basis. And an annualization is made at the end of the year, such that any excess withholding tax made for the previous months has to be returned to the employees and any deficiency in the taxes already withheld has to be deducted on the last payment to the employee for the year.

A related issue, however, in relation to the withholding of taxes on wages is the timing. Is the withholding and remittance of the tax required to be made upon the accrual in the books of the employer? Or is the responsibility of the employer as withholding agent timely met when the withholding tax is remitted only upon payment of the compensation to the employee?

This question was somehow settled by the Supreme Court (SC) in G.R. 167679, July 22, 2015. In said case, the taxpayer was assessed by the Bureau of Internal Revenue (BIR) for, among others, withholding tax on bonuses accruing to its officers and employees. The assessment pertains to accrued bonuses for said years where the taxpayer maintained that the liability of the employer to withhold tax does not arise until such bonus is actually distributed. As the bonuses were not paid in the year they were accrued but only in the following year when such amounts were finally determined, the employer asserted that its obligation to withhold did not arise upon accrual. The BIR, on the other hand, contended that the employer’s act of claiming the bonuses as deductible expenses although it has not yet remitted the withholding taxes contravenes Section 29(j) [now Section 349k)] of the Tax Code.

In its decision, the SC cited various provisions of the Tax Code (such as Section 79 of the Tax Code) and the implementing rules and regulation which seem to imply that withholding of tax on compensation shall be made on compensations paid to employees, either actually or constructively. However, the SC made reference also to Section 45 of the Tax Code, which provides that the deductions from gross income are taken for the taxable year in which “paid or accrued” or “paid or incurred,” dependent upon the method of accounting income and expenses adopted by the taxpayer.

Under the said rule, an expense is considered as accrued and can be deducted for tax purposes when (1) the obligation to pay is already fixed; (2) the amount can be determined with reasonable accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year. Therefore, if the taxpayer is on cash basis, the expense is deductible in the year it was paid, regardless of the year it was incurred. If the employer is on accrual method, he can deduct the expense upon accrual thereof.

In this regard, the SC also made reference to Section 34(k) of the 1997 Tax Code, which expressly requires as a condition for the deductibility of an expense, that the tax required to be withheld on the amount paid or payable is shown to have been made to the BIR by the taxpayer constituted as withholding agent of the government.

According to the Court, both the provisions of Section 79 regarding the withholding on wages must be read and construed in harmony with Section 34(k), or the Tax Code, on deductions from gross income. And reading these provisions together, the Court declared 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 expense in the payor’s/employer’s books, whichever comes first.

In conclusion, the Court held that since the employer applied the accrual method of accounting, by accruing and recording the bonuses in its books and claimed them as a deductible expense in the year of accrual, it should have withheld the compensation tax at the time of accrual and not at the time of actual payment. Further, when the employer had deducted the expense from its gross income, it already recognized the definite liability on its part to withhold since, in effect, there was already a constructive payment for income tax purposes considering that the bonuses were already allotted and made available to the officers and employees.

On final note, in this particular case, the employer was held liable for the withholding of tax on the bonuses at the time of the accrual since the accrued expenses were claimed as deductions when the accrual was made. Is the rule different if the accrued bonus was not claimed as deduction upon accrual but only in the following year when the withholding of tax was actually made. The case did not specially deal on such issue. The opening statement in the decision, however, stated that the duty to withhold tax on compensation arises upon accrual. This seems to emphasize that the withholding of tax on compensation should be made once an accrual of the expense is recorded in the books.

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The author is a junior associate of Du-Baladad and Associates Law Offices, a member-firm of World Tax Services Alliance.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice.  If you have any comments or questions concerning the article, you may e-mail the author atroselle.casiguran@bdblaw.com.ph or call 403-2001 local 370.

source:  Business Mirror Column of Atty Roselle Casiguran

Abolish the personal income tax…period

DID you ever try to have a serious conversation with someone, and they gave answers that were off topic? That is what is happening in the discussion with politicians about lowering the personal income-tax rates.

The people are trying to have a discussion about income taxes based on two ideas. Why can other regional nations have lower income-tax rates, particularly on average wage earners and the Philippines cannot? Have lower tax rates over the years created an environment for greater economic growth in those countries?

The politicians are not responding to those ideas. One presidential candidate recently said something along the lines of “Yes, we can begin lowering the income-tax rate but then, where does it end?” The implication is maybe the income-tax rate would go to zero.

Perhaps, a history lesson is in order for the person who wants to be the next Philippine president. Personal income tax rates started at zero and have been going up ever since. It is the people that are saying “Where will it end?”

Here is the “strongest” politician’s argument for keeping taxes as high as the people can bear. If income-tax rates are lowered, government spending programs are going to have to be cut. The people will “suffer.” That reminds me of the child who says “If you don’t, buy me ice cream, I will hold my breath until I die and then you will be so sorry.”

Instead of working out ways to reduce the personal income-tax burden, the government response is that this is not in the best interest of the country. And of course, the politicians are smarter than the people even if they have not tried any reasonable alternatives to the current tax system.

We are told an important reason that we have higher taxes in the Philippines is because not enough people are paying their proper taxes. Yet, which candidate has ever put forth a collection system to insure that the tens of thousands of sari-sari store owners are properly taxed? Of course, doing that might be bad at election time. Saying the government will go after erring doctors and attorneys is good for getting votes even if it is easier to evade taxes at the sari-sari store.

Not wanting to tax the brainpower of the government with this matter, here is the most reasonable solution: abolish the personal income tax completely.

Before any heads start exploding, let’s look at the facts and the reality of the situation. According to the Bureau of Internal Revenue, the government took in P294 billion from personal income taxes (PIT) in 2014. The Philippine government budget for 2015 is P2.606 trillion. Therefore, even assuming that PIT would be P350 billion in 2015, PIT would account for less than 14 percent of the national budget.

We certainly do not want the next president walking the halls of Malacañang late at night trying to figure out how to cut wasteful spending from the budget by 14 percent. Where can we get the P350 billion, or $7 billion, at a 50 (just to be conservative) to 1 US dollar exchange rate?

The total domestic and foreign debt of the Philippine government is about P5 trillion, or $100 billion. Therefore, we would need to increase the total amount of debt by 7 percent to make up the P350 billion shortfall.

The government could take advantage of its credit rating and go borrow the $7 billion in the international market now at 4 percent interest rate as it did in January 2015. At that time, foreign lenders were offering to buy $13.5 billion of Philippine government 25-year bonds at 4-percent interest.

Even with this new loan, the government would still have one of the best debt-to-GDP ratios on planet Earth.

However, the annual interest payment on that loan would be approximately P15 billion. Where would that money come from?

Assuming Filipinos would spend the extra P350 billion in tax savings and not bury it in the ground, it should generate P50 billion in corporate profits, which would be taxed at 30 percent equaling P15 billion in revenue to the government to pay the debt interest payment. Further, a portion of that P350-billion spending would also be subject to the current value-added tax, generating more revenue.

The conventional argument is that lowering taxes might cause problems with the government’s balance sheet, requiring more borrowing to cover the budget deficit, thereby, limiting economic growth. But this does not apply to the Philippines, which also has one of the lowest budget deficit to GDP ratios in the world at a negative 0.6 percent. Malaysia’s is negative 3.5 percent, with Thailand at minus 2.5 percent.

Abolish the personal income tax. Borrow the money to make up the budget shortfall. Pay the new debt from increased economic activity. Let the president get a good night’s sleep while making the people and the
country richer.

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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

source:  Business Mirror Column of John Mangun

Receipts 101

The mandate of Section 237 of the Tax Code is clear. All persons subject to internal revenue tax are required to issue duly registered receipts or commercial invoices for each sale or transfer of merchandise or services amounting to P25 or more. Note that the minimum amount of P25 still applies today which, to my mind, practically covers all kinds of sale transactions whether these be goods or services.

The basic difference between a receipt and an invoice is in the nature of the sale. Sale of goods must be covered by an invoice while sale of services must be covered by a receipt.

Non-issuance of receipts and invoices is considered a criminal offense punishable by imprisonment plus the corresponding payment of penalties.

Other related offenses that are also considered criminal in nature under Section 264 of the Tax Code are:

• Issuance of receipts or invoices which do not truly reflect and/or contain information required by law

• Using multiple or double receipts and invoices

• Printing of receipts or invoices without authority from the Bureau of Internal Revenue (BIR)

“Oplan Kandado”, a program launched by the BIR in 2009, authorizes tax agents to temporarily close down business establishments found to be selling goods or services without the corresponding receipts or invoices and/or found to be issuing improper receipts, e.g., containing information which does not truly reflect the transactions or do not contain the required information.

Despite news of store closures, it seems that the gravity of failing to issue receipts/invoices is still lost on many who continue to ignore the mandate of the law. They consider the issuance of receipts and invoices as a mere option which can be dispensed with on a whim. Because the regime is so stringent, the seriousness of this legal obligation cannot be ignored.

Even the so-called underground economy, such as tiangges or privilege stores, have been reminded by virtue of Revenue Regulations (RR) No. 16-2013 that the legal obligation to issue receipts applies to them also. And in the not so distant past, no less than the BIR Commissioner had taken issue with self-employed professionals such as lawyers and physicians for not being diligent and conscientious in issuing receipts for their professional services.

It does not take a tax expert to realize that one of the basic measures to ensure that taxes are paid correctly is ensuring that invoices and receipts are properly issued. To ensure that all profit-making businesses comply with this requirement, new tax registrants are required to apply for an Authority to Print (ATP) invoices/receipts along with their application for tax registration (BIR Form 1903). This suggests that a new business must first apply for the printing of manual receipts/invoices prior to applying for a computerized accounting system for the issuance of receipts/invoices which, incidentally, must also be approved by the BIR. The BIR Certificate of Registration (COR) will only be issued once the ATP has been duly approved by the concerned BIR office. Only printers duly accredited by the BIR are authorized to print principal and supplementary receipts and invoices for the taxpayer applicants.

The printing of receipts must of course comply with the requirements of Revenue Memorandum Order (RMO) No. 12-2013 which specifies that the receipt/invoice must contain the taxpayer’s registered name; its business address; a statement on whether the taxpayer is value-added tax (TAX) or non VAT registered followed by the Taxpayers Identification Number (TIN); VAT amount if subject to VAT, among others. The taxpayer may also provide the company’s logo or trademark in the receipt or invoice but this is merely optional.

Subsequent to the issuance of the COR and during its business operations, the business entity may opt to shift from manual receipts to a computerized accounting system for printing of receipts.

Some business establishments, specifically those engaged in the immediate and frequent sale of goods, such as supermarkets and gasoline stations, choose to issue receipts generated by cash register machines (CRM)/Point of Sale (POS)/Business Machines. Such CRM/POS/Business Machines must also be duly approved by the BIR. RR No. 11-2004 provides the process for the registration, accreditation and use of such CRM/POS/Business Machines for the issuance of receipts.

Just last month, RR No. 10-2015 was circularized mandating the use of non-thermal paper in generating receipts and invoices. The directive seeks to preserve the clarity and integrity of invoices that are often rendered undecipherable after some time.

Another recent BIR issuance is Revenue Memorandum Circular (RMC) No. 64-2015 issued on Oct. 2, 2015 which amends the provisions of RR 11-2004 as it relates to VAT receipts/invoices generated by the CRM/POS/Business Machines. In line with the VAT law and regulations, RMC specifically provides that the following information must be indicated on the VAT receipts/invoices generated by CRM/POS/Business Machines in case of sales to VAT-registered persons amounting to at least P1,000:

• Name of purchaser, customer or client

• Address

• TIN

• Business style, if any.

With the constant circulation of BIR issuances relating to receipts and invoices, business owners should continually update themselves on current tax regulations; otherwise, violators would have to face the serious consequences imposed by law. Whether the infraction arises from non-issuance of receipts or non-compliance with formal requirements, both offenses carry a criminal liability. Aside from the penal consequences of non issuance and/or improper issuance of receipts, taxpayers may even lose their right to claim tax refunds due to their failure to substantiate their claim by means of receipts and invoices.

Although the BIR’s stance appears to be rigid and overbearing, the stringent measures reflect how cleverly tax evaders over time have exploited loopholes, evaded rules and resorted to the slow grind of court processes to skirt tax liability. As the BIR pulls in the reins to discourage erring taxpayers, the state hopes to address perennial problems of tax evasion and to achieve revenue targets.

As taxpayers, we can only wish that the BIR show the same vigorous stance in processing legitimate claims for tax refunds and applications for closure/tax clearance which in this part of the world proceeds with exceeding slowness.

Susan M. Aquino is a Senior Manager at the Tax Services Department of Isla Lipana & Co.,

(02) 845-2728

susan.m.aquino@ph.pwc.com

source:  Businessworld

Court stops proceedings of Corona’s tax evasion case

THE COURT of Tax Appeals (CTA) en banc has stopped its Second Division from proceeding with the Wednesday arraignment of former Chief Justice Renato C. Corona for tax evasion.

In a 60-day temporary restraining order (TRO) dated Oct. 6, the court directed the Second Division to “refrain from taking any further action” on the six counts of violating Section 254 of the National Internal Revenue Code (NIRC).

Arraignment for Section 254, which covers attempted tax evasion, was already deferred several times, as Mr. Corona protested that he should be arraigned only for violating Section 255, which refers to the failure to pay taxes. He argued both sections of the NIRC constituted the same acts of tax evasion.

When the Second Division rejected his motion with finality, Mr. Corona was prompted to elevate the protest before the court en banc in July, finally securing a stay order this week.

In the meantime, the court en banc ordered the case set for oral arguments on Oct. 20, 1:30 p.m.

Issues to be discussed were: whether the court en banc has jurisdiction to entertain the protest and whether offenses listed under Section 254 are necessarily included in the offenses under Section 255.

The Second Division on Sept. 7 said the Oct. 7 resetting would be “the last time” Mr. Corona’s arraignment for the Section 254 cases would be deferred. This was to give way for the court en banc to resolve the pending injunction request.

In exchange, Mr. Corona’s lawyer, Reody Anthony M. Balisi, assured the court they would not ask for a deferment anymore should they fail to secure the stay order.

But with the court issuing the TRO, the arraignment for the Section 254 cases would now be deferred for the 12th time. No new date has been announced.

He was initially supposed to be arraigned on Sept. 15, 2014. This was delayed to give the prosecution time to comment on his motion to quash information, which was later denied by the court.

Arraignment later set on Dec. 8 and then Jan. 19 were postponed because of typhoon Ruby (international name: Hagupit) and the papal visit of Pope Francis.

On Feb. 2, arraignment was again postponed when Mr. Corona asked the CTA to quash the cases against him, considering the Supreme Court’s August 2014 resolution imposing a three-year limit on the Commissioner of Internal Revenue’s request for justices’ Statements of Assets, Liabilities and Net Worth (SALNs).

Mr. Corona was finally arraigned for violations of the tax code’s Section 255 on Feb. 25. The court entered a not guilty plea for him after he refused to plead. But the arraignment for violation of Section 254 was deferred anew that day, and then postponed for the sixth time on April 15.

On May 6, the defense asked for reconsideration after the tax court first junked their motion to dismiss the Section 254 cases. Arraignment was postponed for an eighth time on July 1, when Mr. Corona skipped the hearing, complaining of swollen legs.

It was reset to July 22, but this was postponed for the ninth time when the defense filed the motion to suspend proceedings pending en banc action and prosecutors were required to comment.

On July 27, the arraignment was reset for the tenth time because prosecutors have only submitted their comment on the motion to suspend proceedings that morning. The Sept. 7 arraignment came with the 11th deferment that would have been the last had the Second Division been allowed to pursue the case.

The charges Mr. Corona was arraigned for arose from his alleged failure to file income tax returns and pay taxes for the years 2003, 2004, 2005, 2007, 2008 and 2010, broken down as follows:

• 2003: P3,944,275.26

• 2004: P5,824,771.58

• 2005: P5,700,037.57

• 2007: P7,269,149.37

• 2008: P10,861,770.81

• 2010: P16,980,059.48

If convicted of the charges under Section 255, Mr. Corona may be fined a minimum of P10,000, and face imprisonment of a minimum of one year to a maximum of 10 years. The penalty for the deferred charges for violating Section 254, meanwhile, is a fine of P30,000-P100,000 and imprisonment of two to four years.

Mr. Corona was impeached by the Senate on May 29, 2012, voting 20-3 after a much-publicized trial that went on for six months. -- Vince Alvic Alexis F. Nonato

source:  Businessworld

Timing of withholding tax on compensation

The recent Supreme Court (SC) case on the timing of withholding tax on compensation income has caused quite a stir among corporate taxpayers.

While the case dealt with a deficiency withholding tax assessment on unsubstantiated business expenses (representation, travel and entertainment), the SC also ruled on the subject of withholding tax on accrued bonuses based on the taxpayer’s earlier claim that the amount in question refers to bonuses accrued during the years 1996 and 1997 but paid out in 1997 and 1998.

According to the SC, the duty to withhold the tax on compensation and bonuses arises upon their accrual. While the SC decision has some basis, there are aspects of it that may be called questionable or, at least, impractical if applied sweepingly. Thus, the statement needs to be further reconciled in light of existing withholding tax rules and regulations.

Since most companies will soon be accruing bonuses and other forms of compensation towards the end of the year for pay-out to their employees next year, they face similar issues tackled in the SC case on the timing of withholding and the related issue on the deductibility of the expense.

According to the taxpayer in the case, the duty of an employer to withhold tax on compensation only arises upon actual distribution to the employees. Since the bonuses accrued in 1996 and 1997 were finally determined and distributed only in the following year, i.e., 1997 and 1998 respectively, the taxpayer claimed that its duty to withhold tax on such bonuses should only arise in 1997 and 1998.

On the contrary, the SC held that determination is not a prerequisite for the withholding tax obligation to arise. Under the rules, employers are required to deduct and pay the tax on compensation upon payment to its employees, either actually or constructively.

Further, deductions from gross income should be claimed in the same taxable year when the compensation is “paid or accrued” or “paid or incurred” depending on the method of accounting adopted by the taxpayer.

Based on a 2007 jurisprudence outlining the rules on accrual, the SC reiterated that an expense is accrued when the obligation to pay is fixed, the amount can be determined with reasonable accuracy and is already knowable at yearend. Since the taxpayer in this case applied the accrual method of accounting, it accrued or recorded the bonuses in its books and claimed it as a deductible expense in the year of accrual.

According to the SC, the act of claiming the deduction confirms that the taxpayer recognizes a definite liability, and in that sense, the bonus has already been “allotted and made available” to the employees, giving rise to constructive receipt of the bonus by the employees. On this basis, the obligation to withhold the tax due on the accrued bonuses arose at the time of accrual and not at the time of actual payment.

It is critical to understand and interpret the rules correctly especially given these developments. To my mind, certain issues and practicalities, such as the following, should be addressed:

CONSTRUCTIVE RECEIPT OF INCOME
There were no significant changes to the principle of constructive receipt under Revenue Regulations (RR) 6-82, the applicable withholding tax regulations prior to 1998 and RR 2-98, the existing withholding tax regulations.

Under both RRs, compensation is constructively paid when it is credited to the account of or set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to possession. In order to constitute payment, the compensation must be credited or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payment brought within his control and disposition.

The RR 2-98 just expanded the definition of “constructive receipt” with the addition of the following statement:

“A book of entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but it is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with a bonus stock which is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute payment.”

With the foregoing definition(s), the question is, will the principle apply in a case where the employees do not acquire a demandable right over the income, such as when the employees’ claim over the bonuses, at the time of accrual, remains unknown and therefore, restricted? In this case, there should be no payment to speak of, whether actual or constructive. Can it then be argued that there is no obligation to withhold compensation tax at the time of accrual?

TIMING OF WITHHOLDING
Under RR 6-82, the employer is required to withhold tax from the employee’s compensation when paid, either actually or constructively.

On the other hand, RR 2-98 requires that withholding of tax on compensation payments be made upon receipt of income by the employees, which aligns with the cash basis of taxation for employees. However, while the timing of withholding may have been stated differently in RR 2-98, the term “receipt” can still be interpreted as referring to income actually or constructively received.

Thus, where constructive receipt is in question at the time of accrual, such as when the bonus amount per employee is not yet allocated, how will the taxes be computed and withheld considering that the employees fall under different income tax brackets? In relation to this, there may also be some reporting concerns on the year-end alphabetical list (as attachment to BIR Form 1604CF) and the BIR Form 2316, among others.

Assuming that a reasonable allocation of the bonus per employee is available, will such estimated amounts and the related taxes withheld, be required to be reported on the employees’ BIR Form 2316? If so, will the employees then have the right to demand from the employer that same bonus amount that has been allocated to them although still estimated and not yet definite? Will there be any legal repercussions in case the actual bonus payout is lower than what has been earlier allocated? On the other hand, if not reportable on the year of accrual, how and when will the accrued bonus amount and related taxes withheld be reported on the BIR Form 2316?

Also, how will the employees’ eligibility for substituted filing be affected in the event that the actual bonus payout is different from the amount earlier allocated? In this case, the information declared in the alphabetical list and the BIR Form 2316 will not be the same. Will the employees be penalized for not filing a return in the previous year or will the employer be penalized for not correctly withholding the tax on the employees’ total compensation at yearend?

DEDUCTIBILITY OF THE EXPENSE
The additional requirement for deductibility of expenses under the 1977 Tax Code (prior to 1998) and the 1997 Tax Code (existing Code) has not changed. Under both Codes, an expense shall only be allowed as a deduction for tax purposes if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with existing withholding tax regulations.

Interestingly, the SC held that the withholding tax obligation of the employer (even for compensation income) shall arise at the time the income was paid, became payable, or accrued or recorded as an expense in the employer’s books, whichever comes first. In RR 2-98, however, it is quite clear that this three-trigger rule applies to payments other than compensation. Specifically for compensation, the timing of withholding remains to be at the time of the employees’ receipt of the income.

Thus, if the regulations require that the taxes be withheld from the employees upon receipt of the income (whether actually or constructively), then the condition for deductibility of the expense under the Tax Code shall be satisfied so long as it can be shown and proven that the taxes have been withheld and remitted by the employer during the proper period.

For instance, if the concept of constructive receipt is challenged on the year of accrual, then the withholding tax obligation should arise only on the date of actual payout, which is still in accordance with the regulations. Thus, provided that the obligation is carried out on the payout date, the expense should still be allowed.

The above issues are also obviously intertwined and therefore, it is critical to have a clear understanding of how the rules on withholding on accrued bonuses should be applied to avert erroneous interpretation/application. Alternatively, taxpayers may resort to finding relief under the rules of accounting on accrual (e.g., if there is basis not to accrue, but to recognize a mere provision) -- but this is an issue better left in the hands of my fellow auditors.

Raymund M. Gutib is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

raymund.m.gutib@ph.pwc.com.

source:  Businessworld

Reforming the PHL tax system is a question of when, not if

The call for reforming the 19-year-old personal income and corporate income tax systems is getting noisier. Keeping the tax system in its present form might prove costly for the Philippine economy since it is out of sync with its Association of Southeast Asian Nations (ASEAN)-6 peers.

And with ASEAN integration, not only will the Philippines have the poorest public infrastructure among its ASEAN-6 peers; it, too,will have the most uninviting tax system in the ASEAN region.

Will President Benigno S. C. Aquino III use what remains of his political capital to reform the 19-year-old Philippine tax system?

Most likely not. Mr. Aquino quickly doused any hope that measures that seek to reform the personal and income tax systems would pass. He echoed the Department of Finance’s (DoF) argument that a cut in personal income tax rates and corporate tax rate without corresponding adjustment in other taxes will result in investment downgrade by international rating agencies.

DoF’s position is debatable. Here are some reasons why there is slim risk that the country would default on its foreign debt.

In the first place, foreign debt as a percent of total debt is at its rock bottom.

Second, the Philippines has been a good borrower. It continued to pay its foreign debt even during its worst times, even to the extent of sacrificing its infrastructure and social needs.

Third, the Philippines has the resources to service its foreign and domestic debt. Right now, it has a guaranteed annual inflow of some $25 billion to $26 billion overseas remittances coming from Filipino workers abroad and the promise of increasing business process outsourcing income. It has hefty gross international reserves of more than $80 billion, equivalent to close to one year’s imports requirement.

FOREIGN MASTERS VERSUS LOCAL ‘BOSSES’
Mr. Aquino scared his ‘bosses’ of the specter of rising deficit and hence a potential downgrade by international ratings agencies. Seriously? This scary scenario came from someone who’s been notorious for underspending -- delivering public goods and services much lower than what Congress authorized him to deliver.

In 2014, the Aquino administration targeted a budget deficit of P266.2 billion or 2.0% of gross domestic product (GDP). Actual deficit was only P73.1 billion or 0.6% of GDP, and this is not because of higher-than-targeted revenue intake. The lower deficit was due to simple incompetence or poor budget planning or both: planned spending of P2.284 trillion versus actual spending of P1.982 trillion, or a difference of P302 billion.

In 2015, the same sad and horrible story is unfolding. While the budget deficit target is P283.7 billion or 2.0% of GDP, actual deficit as of end July is only P32.2 billion, or only 11.4% of planned deficit. At the current rate of project implementation, the Aquino administration would be lucky to have a 1% deficit-to-GDP ratio for the entire year. Another opportunity lost.

President Aquino’s position on tax reform reveals his true color: he is more afraid of the threat of a downgrade by foreign ratings agencies than incurring the collective wrath of Filipino taxpayers, who have to contend with the increasingly burdensome 19-year-old tax system. Through inflation, all taxpayers, bar none, have been bumped up into a higher income tax bracket and therefore have to pay higher taxes than what was originally intended.

If Mr. Aquino insists that the present income tax system should remain untouched, it is yet another proof that he is truly insensitive to the welfare of his “bosses”. Questions: Is this what continuity is all about? What is the position of Interior and Local Government Secretary Manuel “Mar” A. Roxas II on this issue? Is he going to continue slavishly Mr. Aquino’s insensitivity?

The Aquino administration refuses to see the clear vote of non-confidence of international foreign investors. The Philippines has consistently lagged behind its ASEAN-6 neighbors in attracting foreign direct investment (FDIs). This year alone, during the first semester, the inflows of FDIs fell by 40.1%: to $2.019 billion from $3.373 billion logged in 2014’s comparable six months.

PHILIPPINE TAX SYSTEM OUT OF SYNC
In preparation for ASEAN integration, the Philippines refuses to respond positively unlike some of its ASEAN peers (Thailand, Vietnam, and Malaysia) by reducing the tax rates to more competitive levels.

Thailand cut its highest personal income tax rate from 37% to 35% and its corporate income tax rate from 35% in 2010 to a very attractive 20%.

Vietnam, the country which went through decades of ravaging wars but now slowly but surely overtaking the Philippines, has drastically cut its corporate income tax rates to 22%, from 35% in 2010.

Malaysia, a country that is more developed than the Philippines, will cut down its already low personal income tax rate from 26% to 25%.

Singapore, a city state that has attracted the highest FDIs among ASEAN-6 countries, has the most inviting income tax package: 20% highest marginal personal income tax rate and 17% corporate income tax rate.

Both the House and the Senate have proposed the reduction of both the personal and corporate income tax rates. But on the advice of his finance gurus, Mr. Aquino promptly rejected such proposals.

Assuming a potential revenue loss due to lower income taxation of P40 billion, that is only 1.6% of total budget. One might look at it as a tax break or a reward to those who have been religiously paying their income taxes. The beneficiaries of a tax cut will use the tax reward either for consumption or investment. In both cases, they will stimulate economic expansion. (See Table)

Part of what was lost due to the tax break might be recovered through higher consumption and greater investment.

The tax break of P40 billion pales in comparison with the planned deficit: it is only 14.1% of the planned deficit of P283.7 billion in 2015. Actual deficit might turn out to be, at best, only one% of GDP, half the original target. Hence, there is absolutely no threat of runaway deficit this year.

One other thing is lost in the debate: a tax cut is generally seen by economists as expansionary; it is seen by bean counters as taxes foregone.

A tax cut will stimulate the economy nearly as fast as higher government consumption spending, and speedier than public infrastructure spending

A tax cut, especially if it’s fair, efficient, and moderate so that it would not threaten the budget deficit to soar unsustainably, might be just what the economy needs at this time when economic growth is normalizing.

Tax reform is urgently needed in this country. The present tax system is out of date, inefficient, onerous, and out of sync with tax systems in integrating ASEAN region. Reforming it is a question of when not if. Do we do it now or do we have to wait for the next President and Congress to do it?

Benjamin E. Diokno is a former secretary of Budget and Management

bediokno@gmail.com

source:  Businessworld

Cutting income taxes is good politics and good economics

President Benigno S. C. Aquino III balked at the idea of having the 19-year-old personal income tax system reformed. I think he’s seriously ill-advised.

Both the House Ways and Means Committee Chairman Romero Federico “Miro” S. Quimbo and the Senate Ways and Means Committee Chairman Juan Edgardo “Sonny” M. Angara are spearheading the bill. Surprisingly, in a rare show of agreement, both business (the business community and the joint Foreign Chambers) and labor support the bill. The academic community endorses it too.

There is near unanimity that the personal income tax system is not only anachronistic, it is also unfair, burdensome, and out-of-sync with our Association of Southeast Asian Nations (ASEAN) neighbors. It needs to be reformed.

In face of an overwhelming support for the personal income tax cut, President Aquino, the administration’s presidential candidate Manuel “Mar” A. Roxas II, and Finance Secretary Cesar V. Purisima continue to oppose it.

The President warned of runaway deficit and possible downgrade by international ratings agencies. That’s rubbish. The administration can’t even implement programs and projects Congress has authorized it to implement. Its deficit-to-GDP (gross domestic product) ratio last year was 0.6% while the target was 2.0%. This year, the administration would be lucky to have a deficit-to-GDP ratio of 1.0%, half of its 2.0% target.

The possibility of a downgrade at this time is farfetched. Even with the looming global economic slowdown (due to weaker China, Europe and Japan), the Philippines remains one of the least vulnerable countries among developing and transition economies.

The Philippines’ foreign debt-to-GDP ratio is down to manageable level. The government can afford not to borrow from abroad. It gross international reserves are hefty and healthy. It is assured of a steady inflow of $25 billion to $26 billion overseas remittances yearly. This is on top of the growing inflows from the expanding business process outsourcing industry.

Mar Roxas asked: What government services may be sacrificed if the tax yield is cut by P30 billion as a result of lower personal income tax rates?

Well, the 2016 P3-trillion budget is oozing with “fat.” But let me identify just one item, the Miscellaneous Personnel Benefits Fund (MPBF). Embedded in the MPBF is a lump-sum item called “Lump-sum for Compensation Adjustment” with an allocation of P50,664,000,000.00 (2016 National Expenditure Program, Volume III, p. 864).

This P50.7 billion for salary increases of government workers, if implemented, will be a recurring expense of government. In the same manner, a tax cut will be a recurring loss of P30 billion.

Should policy makers favor government workers over the general taxpaying public? Is it smart to ignore the increasing clamor by all income taxpayers -- from the public sector and private businesses alike -- just to increase the salaries of public officials and employees?

Note that a personal income tax cut from 32% to 25% will favor everyone. All, including government workers (even if they do not get a salary raise), will benefit from it.

But I’m not proposing to use up the entire P50.7 billion to offset the P30-billion tax loss. Some P20.9 billion of the MPBF may still be used for the adjustment of salaries of government workers. So it will be a win-win situation.

The proposed tax cut will put more money in the pockets of individuals, which in turn will increase consumer spending, savings and investment. It will lead to lower cost of labor, which would spur more employment.

All in all, this income tax cut[ proposal is a no-brainer. It’s good economics and good politics.

AQUINO GOVERNMENT’S HISTORY OF UNDERSPENDING
Moreover, the Aquino III administration has a proven history of underspending. Its poor spending behavior might be due to poor budget planning (allocating funds for projects that are not ready for implementation), or deliberate attempt to create “fat” in the budget which could then be declared and used as “savings,” or outright incompetence, or all of the above.

From 2011 to 2014, the Aquino III administration has underspent by some P672 billion.

In 2011, the authorized expenditure program was P1.711 trillion, actual spending was P1.567 trillion, or an underspending of P154 billion.

In 2012, the authorized expenditure program was P1.854 trillion, actual spending was P1.778 trillion, or an underspending of P76 billion.

In 2013, the authorized expenditure program was P2.021 trillion, actual spending was P1.880 trillion, or an underspending of P141 billion.

In 2014, the authorized expenditure program was P2.281 trillion, actual spending was P1.982 trillion, or a staggering underspending of P299 billion.

One would think that the Aquino administration has learned from its poor spending habits and that it may now have better capacity to implement programs and projects in its penultimate year.

But no -- it continues to underspend, which is mind-boggling since the budget that Congress cranks out, year-in year-out, is almost exactly what the President submitted to Congress.

This year, the planned spending from January to July was P1.470 trillion but actual disbursements was only P1.28 trillion for a whopping underspending of P180 billion. Government incompetence has reached epic proportion.

From January to July, the planned budget deficit was P173.8 billion, but actual deficit was only P18.5 billion, or only 10.6% of planned deficit.

Last year, the planned deficit was 2.0% of GDP. Actual national government deficit was only 0.6% of GDP or P73.1 billion.

But isn’t smaller deficit better than large deficit? Under normal times, it is desirable to have smaller deficits. But for the Philippines, at this stage of its development, a large deficit may be justified. In fact, I can easily justify a deficit-to-GDP ratio of 3.0% to 5.0% for as long as public spending is focused on essential public infrastructure and investment in human capital.

The Philippines has huge requirements for public infrastructure if it wants to keep up with its ASEAN neighbors. In addition, it needs to invest heavily in human capital for its burgeoning, young people.

The young population will be a valuable resource only if its well educated, healthy and well fed.

But this requires an administration that is focused, able to prepare a responsive budget, and competent to implement well-chosen programs and projects.

QUESTIONS ON THE 2016 NATIONAL BUDGET
As the 2016 President’s budget goes through the usual congressional review and authorization phase, the following questions appear warranted.

Considering its past record of underspending, what assurances does the general public have that the Executive Department will be able to spend what Congress has authorized it in 2015?

Considering its delays in project implementation, how much of the authorized budget for 2015 will not be spent this year and therefore may spillover to 2016?

All in all, considering the authorized appropriations that the Executive Department will not be able to spend this year, and the total new appropriations that the President is seeking from Congress, how much will be the total cash budget for 2016?

Are all the programs and projects included in the 2016 annual budget ready for implementation in 2016? Or are some of these projects yet to be fleshed out in the course of the fiscal year?

The Aquino administration should justify the huge chunk of lump-sum (estimated at P424 billion) appropriations in 2016 proposed budget? This act, I think, constitutes undue delegation of congressional authority to the President, especially since department heads are likewise authorized to reprioritize their respective budgets after Congress has approved the General Appropriations Act.

Benjamin E. Diokno is a former secretary of Budget and Management

bediokno@gmail.com

source:  Businessworld

The dilemma of Philippine tax reform

The call for tax reform is ever growing in the Philippines, out of fear we are being left behind by our neighbors in Southeast Asia, coupled with concerns that our people are at the mercy of the current tax system.

Our legislators have put forward revenue bills to finally amend the almost two decade-old income tax brackets set forth in the 1997 National Internal Revenue Code of the Philippines. Unfortunately a few days ago, the House of Representatives shelved the bill proposing the reforms.

The House Committee on Ways and Means said that it was influenced by the President’s unwillingness to endorse the bill. In view of the incoming recess of Congress, the House finally decided that the remaining days of their regular session will be dedicated to finishing deliberations for the 2016 national budget. This undeniably will delay, or worse, mark the end of income tax reform under the present administration.

Under the 1987 Constitution, all revenue bills must originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. Although it seems that the Senate of the Philippines is supportive of tax reform, it cannot however make a more definitive move unless the House gets its own version of the bill approved. Having seen that the House no longer deems the time sufficient to discuss the income tax reform, the Senate and the public turned out to be waiting in vain.

What then is the role of the President in all of this? Why was his disapproval controlling in deciding the fate of the revenue bill? It must be noted that all bills passed by Congress, before they become law, need to be presented to the President. If he disapproves, he has recourse to a veto, leaving the House the option to rework the bill, taking into consideration his objections. Further deliberations ensue. You can imagine just how much time and effort is wasted if the President exercises his veto. Who knows, the bill might not even survive the reconsideration of Congress after the President vetoes.

The Administration fears that lowering income tax will negatively affect the budget. I believe that the issue lies not in the amount of tax collection. Rather, it is the efficient management of funds collected. Full realization every peso’s value is a must, and blocking tax reform must not be the government’s safety net.

In addition, the taxes foregone are estimated at P30 billion, relative to a P3-trillion budget. Such an amount will not really have a noticeable impact, should the government manage the impact of the tax reform properly.

Tax professionals are appealing to the chief executive to change his mind and support the lowering of Philippine income tax. Recently, the Tax Management Association of the Philippines launched a petition urging the president to reconsider his position on income tax reform. I certainly hope that more people come forward and support this cause. Remember, unity is strength and strength comes in numbers. Let our voices be heard and don’t let tax reform die at the hands of the present administration.

Could this be the end of tax reform under the current President or will our voices be loud enough to make him reconsider?

Lorraine G. Taguiam is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld