Overlapping of interest on deficiency taxes

THE imposition of interest always follows the imposition of deficiency taxes. This is based on the premise that unpaid taxes are liabilities of the taxpayer to the government, for which the former should pay interest for the use of the fund that should rightfully belong to the latter.

And as it had always been, taxpayers were required to pay only one 20-percent interest on deficiency taxes of whatever kind. Things had changed beginning in 2012, when the two types of taxes mentioned in Section 249 of the Tax Code were distinguished and imposed separately.

In CTA EB Case 821, July 18, 2012, the Court held that based on Section 249 of the Tax Code, there are two types of interests that are to be imposed—the deficiency interest and the delinquency interest, and that these are imposed at the same time. In that case, the taxpayer effectively acknowledged the imposition of these two types of interest, but argued that these cannot cover the same period or overlap each other. According to the taxpayer, the deficiency interest shall be computed from date prescribed for the payment of the tax until the last day indicated for payment in the assessment notice. Thereafter, if the deficiency tax is not yet paid, the deficiency interest shall not be imposed. But the delinquency interest shall start to run. In such case, there should be no overlapping of both types of interest. 

The Court, however, disagreed with the perspective of the taxpayer and held that the deficiency interest should be computed from the date prescribed for the payment of the deficiency tax until full payment thereof. On the other hand, delinquency interest is to be computed from the due date prescribed in the assessment notice until the full payment thereof. In other words, the deficiency interest and the delinquency interest run simultaneously from the date required for the payment of the deficiency tax in the assessment notice until the deficiency tax is paid. All in all, the imposable interests are as follows: (1) 20-percent deficiency interest computed from the date the tax should have been paid based on existing rules until the date required for payment as provided in the assessment notice, and (2) the 20-percent deficiency interest and 20-percent delinquency both computed from the date prescribed for payment in the assessment notice until the payment the deficiency tax.

It should be noted that the presiding justice at that time dissented and held that the imposition of at least a 40-percent interest per annum is grossly excessive and unjust, one that partakes the nature of an imposition that is penal, rather than compensatory. He believed that the proper computation should be that the 20-percent deficiency interest runs from the date prescribed for the payment of the unpaid deficiency tax until only the date prescribed by the assessment notice. After which, only the delinquency interest (on the deficiency tax, deficiency interest and surcharge) shall be imposed which will run until the full payment of total amount due.

From that time, the decision had been applied in a number of cases subsequently decided by the Court. Recently, however, in CTA EB Case 1117, September 21, 2015, the same Court ruled that the imposition of interest extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof, and the imposition of the delinquency interest should be computed from the time when the taxpayer failed to pay the assessed tax within the time allowed, as stated in the formal letter of demand (assessment notice) until full payment. In other words, the deficiency interest is computed only up to the date prescribed for payment in the assessment notice. If not yet paid, the delinquency interest starts to run, which shall then be imposed on the total of the basic deficiency tax,
deficiency interest and surcharge. There is no overlapping of deficiency interest and delinquency interest.

Another interesting point to note in this recent decision is that, aside from ruling on how the deficiency and delinquency interests should be computed, the Court also noted that based on the provisions of the Tax Code, there are only three instances, where the term “deficiency” had been defined, and these relate only to three types of internal revenue taxes, namely, income tax, estate tax and donor’s tax. Thus, the deficiency interest should apply only to deficiency income tax, deficiency estate tax and deficiency donor’s tax. No deficiency interest should be imposed on other deficiency taxes.

While this decision is not yet final, it is interesting to monitor how this will finally be settled. As it is, this is a welcome development. Indeed, there are enough reasons for taxpayers to celebrate during these Christmas holidays. Merry Christmas everyone.

The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services (WTS) 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 comment or question concerning the article, you may e-mail the author at ronald.cubero@bdblaw.com.ph or call 403-2001 local 350.

source:  Business Mirror

Tax credit claimants told to present better proofs of entitlement

THE DEPARTMENT of Finance (DoF) has called out textile companies that refuse to submit import documents as proof of their tax credit claims with the agency.

In its latest Tax Watch ad, the agency called on 26 firms collectively claiming P1.96 billion in tax credits from the DoF’s One Stop Shop (OSS) Center, with tax credit applications not backed by actual import papers.

“Why complain about submitting basic documents if these can prevent another Tax Credit Scam?”, the agency said.

Cited as examples are the firms Indo Phil Textile Mills, Inc., which is claiming P170.3 million but was issued P80.8 million; Indo Phil Cotton Mills, Inc. applying for P148.6 million but getting only P69 million; and Indo Phil Acrylic Manufacturing Corp., which sought P84.9 million but only secured P9.8 million from the OSS Center.

Some 23 other firms applying for a total of P1.59 billion tax credits, however, have not been issued the certifications due to their failure to submit complete documents to support their tax claims.

“A basic principle in giving tax credit or refund is this: You cannot claim a refund for something you had not paid duties and taxes on,” the DoF said. “From three companies alone from the list above, government can lose P388 million if the OSS approves refunds not supported by proper documents.”

“To prevent another Tax Credit Scam, the OSS required basic import documents to show that duties and taxes were actually paid for which tax credits are being claimed,” the agency added, referring to the 1992-1998 scheme which led to multiple firms making a moneymaking scheme out of duty claims from the DoF.

Based on records, the DoF’s OSS Center issued at least 500 tax credit certificates to a group of fake garment and textile firms amounting to P2.5 billion. The tax credits, however, were either sold or transferred to other firms, which made it a “lucrative” scheme.

Hundreds of cases have since been filed in connection with the tax credit scam and are pending before all five divisions of the Sandiganbayan, each involving hundreds of millions of pesos.

Among the documents now being required from claimants include purchase invoices, delivery receipts, official receipts of suppliers, proof of payment of import duties and taxes, proof of importation by suppliers, import entry and internal revenue declarations, commercial invoices, bills of lading, and statements of settlement of duties and taxes. -- Melissa Luz T. Lopez

source:  Businessworld

Gross income taxation to help simplify doing business in PH

Giving taxpayers the option to be taxed on their gross income in lieu of net income tax would streamline the country’s revenue collection system and would simplify doing business in the country, Gregorio Navarro, chief-executive-officer of Navarro Amper & Co. (Deloitte Philippines) told The Manila Times on Tuesday.

Navarro said that when income tax is based on gross income, it is an easy built-in business model not only for new enterprises but also even for existing ones.

“It is easier to comply with this kind of income tax [system] vis-à-vis net income tax [NIT] so long as you issue invoice with respect to goods or receipt for the sale of services,” he added.

Navarro foresees that the streamlining of the country’s taxation system would be a high priority of the next administration.

Navarro Amper & Company is the local practice of the Deloitte Touche Tohmatsu Ltd. Global Network, one of the country’s leading professional services firms providing audit, tax, risk, financial advisory and finance and accounting outsourcing services.

At present, the National Internal Revenue Code of 1997, as amended, provides that income tax in general are based on net income of taxpayers whether corporations or individuals.
NIT admits of certain deductions either itemized or optional standard deduction (OSD).

Itemized deductions, among others, allow ordinary, necessary trade, business or professional expenses as deductions, while the OSD slashes 40 percent of the gross income without any qualification to arrive at the net income tax at a rate of 30 percent.

Domestic and resident foreign corporations, however, may be compelled to pay income tax on the basis of their gross income if their NIT is lower than their gross income. In which case, a corporation is compelled to pay the “minimum corporate income tax” or 2 percent of their gross income in lieu of NIT.

“But that option lies with the tax authority, not with the taxpayers,” Navarro, a former president of the Management Association of Philippines, said.

Individual taxpayers, on the other hand, are taxed at a rate of 5 to 32 percent of their net income tax, while minimum wage earners are tax-exempt.

Further, the audit and tax firm chief explained that while under the NIT where taxpayers are entitled to claim certain deductions to arrive at their taxable income, there is always an element of uncertainty.

“Yes, there are certain deductions on the gross income to arrive at the taxable income. But these items of deductions are very erratic. It is always subject to scrutiny by the Bureau of Internal Revenue [BIR] and there is no assurance that what is deductible for this taxable year would still be deductible in the subsequent years. Businesses do not like uncertainty,” he said.

Navarro added that gross income taxation would also deter corruption on the part of tax collectors and at the same time simplify their work since there would be substantial reduction on “human interaction” between the taxpayers and the BIR examiners. Hence, it would prevent negotiations between the two parties that may lead to illegal settlement of income tax payments.

“Since the taxpayers would have an option to elect gross income as basis of their income tax, [the] BIR examiners would no longer have an opportunity to question the validity of the deductions because there would already be none. The BIR would check on gross [income], not on the deductions. Gross income being backed by receipts or invoices would [also] make the examiners’ job easier,” he said.

The option, according to Navarro, should be given to both taxpayers whether a corporation or an individual.

“When you are paying for NIT, there are many requirements that are imposed on the taxpayer by the BIR, like submitting the books and necessary documents, and thereafter keep them for the next 10 years to support the claimed deductions from tax payments.
There are many administrative works both on the part of the taxpayer and the BIR. “

“But giving the taxpayer the option to elect the tax treatment for their respective incomes would make our tax system efficient and would eradicate the bad practice of [taxpayers] hiding one’s income just to avoid these administrative works besides paying the higher taxes.”

source:  Manila Times

Tax breaks for first-time homebuyers in the works

The House Committee on Housing and Urban Development and the House Committee on Ways and Means on Tuesday has endorsed for plenary approval a measure making first-time home ownership easier and more affordable.

Rep. Alfredo Benitez of Negros Occidental, chairman of the House Committee on Housing and Urban Development, said the committee report on House Bill (HB) 414 will be submitted to the House plenary for deliberation after the measure’s approval at the House Committee on Ways and Means.

Benitez said the measure seeks to alleviate the condition and welfare of Filipino families, especially on the basic need for shelter.

HB 414 is authored by Ako Bicol Reps. Rodel Batocabe and Christopher Co.

The measure extends to first-time homebuyers exempt status from the payment of transfer tax due the purchase.

Also, any natural or juridical person registered as owner of a land subject of a subdivision or a condominium project; or who is a dealer directly engaged as a principal in the business of buying and selling real estate; or who is real-estate developer engaged in the business of developing and selling real-estate projects for his/her or its own account; and any natural or juridical person engaged as a contractor doing housing design and construction or engaged in the business of selling housing construction materials that grants a minimum discount of 5 percent to first-time homebuyers may claim the financial loss on the discount granted as a tax deduction.

Provided that the cost of the discount shall be allowed as deduction from the gross income for the same taxable year that the discount is granted, and that the total amount of the claimed tax deduction net of value added tax, if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended.

To ensure buyer awareness on the benefits of this act, any owner, dealer or real-estate developer, and any contractor doing housing and construction or anyone engaged in the business of selling housing construction materials shall provide a first-time homebuyer a disclosure statement of the discount that may be granted, as well as the transfer tax exemption and tax credit such buyer is entitled to under this act in the reservation contract, application to purchase, deed of absolute sale or contract to sell and other similar documents employed in the negotiation of the purchase or in the contract of work for the design or construction of the house or in the purchase order of the housing construction materials.

The first-time homebuyer shall also be provided the schedule of payment of installments or amortization until full payment of the purchase price.

The bill also said that the Housing and Urban Development Coordinating Council (HUDCC), with the assistance of the Land Registration Authority (LRA), Home Development Mutual Fund and the Bangko Sentral ng Pilipinas, shall establish within 90 days from the issuance of the implementing rules and regulation of this act a database of the names of all individuals who have availed of housing loan and of registered owners of residential properties.

The Bureau of Internal Revenue, in extending tax credit to a first-time homebuyer upon the effectivity of this act, shall share all relevant information and data on a periodic basis and make such data available to the HUDCC.

Any person who makes a material misdeclaration of statement, misrepresentation in any certification, or fraudulent act in connection with the claim for a tax reduction under the act or falsifies any document submitted to obtain a tax reduction shall be punished with a fine of not less P5,000 but not more than P50,000, or imprisonment of not less than six months or both, without prejudice to the prosecution of said offender under the Revised Penal Code.

source:  Business Mirror