2012: The new rule on taxation of nonresident citizens

SUITS THE C-SUITE By Iryn S. Yap-Balmores
Business World (06/11/2012)

Companies in today’s business environment compete on a global level, making it more commonplace for employees to work across borders.

Businesses are looking increasingly at work arrangements such as seconding employees which allows them opportunities for training, specialization, and exposure to other countries and cultures. Being seconded overseas can further develop an individual’s career and also acts an incentive to help companies retain their good people. It also allows an entity within a global organization to share resources and emphasize to their employees its worldwide reach.

Secondment is not a new phenomenon. Filipinos working in multinational or global companies stand a chance of being sent to foreign offices. These arrangements usually last from a few months to a couple of years. Given this, how then do Filipinos account for their taxes when they are assigned abroad?
Prior to the passage of Republic Act (RA) 8424 or the Tax Reform Act of 1998, income tax was imposed on foreign-sourced income of nonresident Filipino citizens. The top marginal rate was 3% for foreign-sourced income over US$20,000.

With the passage of RA 8424, however, nonresident citizens became subject to tax only on their income from Philippine sources. Only resident citizens are taxed on their worldwide income. Clearly, for Philippine income tax purposes, it is vital to determine whether a Filipino is a resident or a nonresident citizen.

Taxation of Nonresident Citizens under the Tax Code and Previous Tax Rulings

Section 22 of the Tax Code defines a nonresident citizen as “a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.” In Section 2 of Revenue Regulations (RR) No. 1-79, the term “most of the time” means presence outside the Philippines for not less than 183 days during the taxable year.

The provisions above have been the bases for BIR rulings which held that income of employees who were assigned overseas is not taxable in the Philippines under either of the following premises:

• Employees who are registered with the Philippine Overseas Employment Administration (POEA) are considered as overseas contract workers (OCWs), regardless of the number of days spent outside the Philippines during the taxable year; or

• Employees who may not be registered with the POEA, but who are physically present abroad for at least 183 days during the taxable year, are considered as nonresident citizens.

In these rulings, nonresidency of a Filipino and eligibility to qualify for tax exemption were determined on the basis of physical presence. The place where the salary was paid was deemed immaterial in determining residency – perhaps based on the underlying principle that the situs of taxation in the case of personal services is determined by the place where the services are rendered.

Thus, based on the Tax Code provision as interpreted in past BIR rulings, companies and employees often remember and use the 183-day threshold.

However, based on a recent BIR ruling, it appears that looking only at the 183-day rule is not enough.

BIR Ruling No. 517-2011

In this ruling dated December 22, 2011, the Bureau of Internal Revenue (BIR) held that a local company’s employees (they are engineers) assigned to render services abroad do not qualify as “nonresident citizens” and will thus be treated as resident citizens. Accordingly, compensation income from their assignment abroad, where such engineers are present in the foreign country most of the time during the taxable year (more than 183 days), are subject to Philippine income tax and consequently to creditable withholding tax on wages.

The local employer is a domestic corporation that sends its engineers to various countries for a maximum period of 214 days per calendar year. While working overseas, these engineers remain on the Philippine payroll. The BIR held that the engineers cannot qualify because the phrase “employment thereat” [as used in paragraph (3) of Section 22(E)] means that the individual must be employed in such country. For this purpose, it cited the definition of an “employee” under Section 2.78.3 of RR 2-98, that is, an individual performing services under an employer-employee relationship.

The BIR noted that the personnel are employed as full-time staff in the local company and the foreign assignment is considered part of their duties. As their salaries were paid by the local company whether they were in the Philippines or on foreign assignment, their temporary assignment does not make them employees of the foreign companies for which they rendered that service. The BIR further explained that as the employees of the local company, though working abroad, they are still under an employer-employee relationship with the Philippine entity and not with the foreign entity, and so they do not qualify them as non-residents under paragraph (3).

The basic principle in BIR Ruling No. 517-2011 – that an employer who claims compensation paid to an employee as an expense should withhold the requisite withholding tax on compensation – is sound. Some companies may argue that perhaps the BIR should also consider diverse arrangements between companies in the host and home countries, and the assignees. In construing who is the employer in these secondment arrangements, perhaps the BIR may clarify situations where the home country entity remains the legal employer in form, but the substance of the transaction is that the host country entity is the real employer of the individual, as it has the right to control and direct the individual on the means by which the services will be performed, the results to be accomplished, and ultimately, is the entity that receives the benefit of the services.

BIR Ruling No. 517-2011 abandons previous BIR pronouncements on the same issue. Previously, emphasis was given on the number of days an individual spends within or without the Philippines and the location where the services are rendered in order to determine the situs of taxation. This time, it is the entity who holds the employment contract and pays the payroll costs that were considered material.
This is, of course, something that taxpayers with mobile employees should consider, particularly if the company had previously been issued a ruling on secondment arrangements upon which they have adopted tax practices and policies. While secondment is a welcome career opportunity for most, an employee must also be responsible for remitting the appropriate tax on his or her income earned from work performed overseas.

Iryn S. Yap-Balmores is Senior Tax Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Absent but present

With a month to go before 2016 ends, companies are now processing their payroll annualization, estimating the final amount of tax for individual employees. For a citizen working abroad during the taxable year, one very important matter to consider is his residential status, because it will determine how much of his income, if any, is taxable.

As provided in the Philippine Tax Code, a resident citizen is taxable on all income derived from sources within and without the Philippines, while a non-resident citizen is taxable only on income derived from sources within the Philippines.

Section 22 (E) of the Tax Code defines a non-resident citizen as any of the following:

(1) A Philippine citizen who establishes to the satisfaction of the Bureau of Internal Revenue (BIR) Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

(2) A Philippine citizen who leaves the country during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 

(3) A Philippine citizen who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 

A person previously considered a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the country shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 

The forgoing Tax Code provision mirrors the definitions under Section 2 of Revenue Regulations (RR) No. 1-79 dated Jan. 8, 1979. Under the RR, a non-resident citizen is one who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with the definite intention to reside therein, and shall include any Filipino who leaves the country during the taxable year as an immigrant, a permanent employee abroad, or a contract worker. 

The same RR also defined the term “most of the time” under Section 22(E)(3) above by establishing the 183-day physical presence rule that continues to be applied today.

However, the application of this rule is not as simple as it appears as exemplified in BIR Ruling No. 305-2016 where a government employee who was on assignment abroad for three years was held to be a resident citizen for tax purposes and as such, subject to tax on her worldwide income.

In the ruling, the critical points raised by the BIR are the temporary nature of the transfer (secondment) and the continuing employee-employer relationship with the Philippine employer.

Based on the Memorandum of Agreement between the government agency and the international organization, the individual remained an employee of the government agency during the period of secondment but was considered on leave without pay. The government agency continued to pay for the mandatory government contributions during the duration of her secondment. As such, the employee does not qualify as a non-resident citizen under Section 22(E)(3).

Further, the individual did not have any intention to reside in the foreign country either as an immigrant or on a permanent basis to make her a non-resident citizen under Section 22(E).

In 2011, the BIR issued BIR Ruling No. 517-2011 stating that employees who rendered services for more than 183 days in foreign countries were not considered non-residents on the basis that: (1) the employee-employer relationship continued to exist between the local company and employees; and (2) the salaries of the employees were paid by the local company. Section 2.78.3 of RR 2-98 states that an employee-employer relationship exists when the person for whom the services were performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished, but also as to the manner and means by which such results are accomplished. 

It can be inferred from both rulings that whichever party shoulders the compensation payment and whichever party has the right to control and direct the individual do not matter. The substance of the employee arrangements with foreign companies appears inconsequential to the issue. What seems to be the determining factor is whether the individual remains employed by the local employer, regardless of where the employee gets directions or compensation.

As the year is about to end, entities that second or transfer employees abroad for more than 183 days during the taxable year may need to revisit the provisions of their employees’ contracts of employment and arrangements with foreign companies to properly assess the residency status of their employees. 

Most taxpayers want to comply with tax rules and regulations. However, some of our existing ones are vague and can be interpreted differently. Hence, as part of the government tax reform plan to restructure individual tax rates, the BIR may need to revisit Section 22(E)(3), issue implementing guidelines, and provide clear-cut illustrations on when an individual qualifies as a non-resident. 

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Jane R. Alcause-Fabro is a Director at the Client Accounting Services group of Isla Lipana & Co.,

(02) 845-27 28

jane.r.alcause@ph.pwc.com

An ‘out with the old’ VAT exemption

In September, the Department of Finance (DoF) submitted the first of six tax reform packages to Congress. The first package proposes to adjust the income tax brackets and to lower individual income tax rates, except for high earners who will be taxed at 35%. But while this proposal will generally result in less income tax paid by individuals, it will also mean reduced revenue collection for the government.

To mitigate this anticipated effect, the DoF also proposes certain offsetting measures. These include adjustments in the excise tax rates for petroleum products and automobiles, and the expansion of the value-added tax (VAT) base by removing current exemptions under existing tax laws.

Last month, the Senate Committee on Ways and Means held its first public hearing on the DoF-sponsored bill covering the first tax reform package. Various government agencies and affected sectors and organizations, including the Tax Management Association of the Philippines and our firm, were invited to express their sentiments and comments.

As may be expected, most representatives opposed the proposed increase in excise taxes, the 35% personal income tax rate, and the removal of the VAT exemptions if such measures would affect their particular sector, organization, or special group of people. But one particular organization -- the Coalition of Services of the Elderly (COSE) -- surprised me in its support of the DoF proposal to remove the VAT exemption of senior citizens. 

Although their statement was qualified as not being the official and collective position of the entire group, the COSE representative mentioned that they are amenable to the removal of the VAT exemption of senior citizens provided that pensions and other direct incentives and subsidies are given and/or increased, and made available to replace the lost exemption. 

Other senior citizen groups may have other sentiments on the matter. As the removal of this VAT exemption is a sensitive issue, perhaps these other elderly groups can also voice out their concerns. As one senator put it during the hearing, this matter is an emotionally charged issue since the elderly believe that the exemption currently granted is something they have earned having paid their dues for so long.

While I understand that the objective of the proposed tax reform is to adhere to the principle of equity and simplification, there is also the principle of compassion (which was also mentioned by one senator) that needs to be considered. 

Compared to other member countries of the Association of Southeast Asian Nations (ASEAN), we are the only country that gives VAT exemptions to senior citizens. While others may consider conforming to the other ASEAN countries on this matter (and remove the VAT exemption enjoyed by senior citizens), I am proud that the Philippines is unique enough to give this privilege as a sign of our respect to the elderly.

The VAT exemption is granted by Republic Act No. 9994, otherwise known as the “Expanded Senior Citizens Act,” with the following declared policies and objectives:

• To recognize the rights of senior citizens to take their proper place in society and make it a concern of the family, community, and government;

• To give full support to the improvement of the total well-being of the elderly and their full participation in society, considering that senior citizens are an integral part of Philippine society;

• To motivate and encourage senior citizens to contribute to nation building;

• To encourage their families and the communities they live with to reaffirm the valued Filipino tradition of caring for senior citizens;

• To provide a comprehensive health care and rehabilitation system for disabled senior citizens to foster their capacity to attain a more meaningful and productive ageing; and

• To recognize the important role of the private sector in the improvement of the welfare of senior citizens and to actively seek their partnership.

No less than the Constitution requires the State to prioritize the needs of the elderly, particularly in terms of health development, as well as social justice in all phases of national development. The State likewise values the dignity of every human person and guarantees full respect for human rights.

If we would take a look at the intention of the Expanded Senior Citizens Act, Congress gave the VAT privilege as a sign of our Filipino value of caring for senior citizens, regardless of social status. 

While I understand that COSE might have as its primary objective the creation of, if not better, pensions and subsidies, why can’t we just provide these pensions and subsidies without sacrificing the VAT exemption of senior citizens? In fact, there are other alternatives where the government can get its revenue collections. 

One of the things that I admire in the new administration is how it aims to address the long overdue reform of the tax laws. I can see why the people elected President Rodrigo R. Duterte. A lot of Filipinos feel his sincerity in bringing change to the Philippines by eradicating crime, primarily those relating to illegal drugs, fighting corruption in the government, strengthening foreign relations particularly with China and Japan, and protecting the underprivileged. Filipinos generally see President Duterte for his heart. 

I genuinely support the tax reform initiatives of the government. I believe that the DoF listens to each stakeholder that will be affected by the proposed tax reforms. But more than just listening, I do hope that it will also have the heart to reconsider repealing the VAT exemption given to the elderly. 

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Benedict C. Villalon is an assistant manager belonging to the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

(02) 845-2728 

benedict.villalon@ph.pwc.com

Don’t die rich or you’ll get taxed!

One week from now, we commemorate All Souls Day. Many of us will visit the cemetery to remember departed loved ones. For some, this occasion is a reminder that, after all the toils and struggles in life, our physical bodies will be laid to rest in the same place. Then, what happens?

Aside from the spiritual and religious aspects of death, there is another aspect which we might not be able to avoid -- tax. In particular, upon death, our estate could be subject to estate tax. Others call it the death tax. Is this applicable only to rich people?

Actually, the estate tax is imposable on the right to transfer the estate of the deceased person to his heirs or beneficiaries. There is estate tax if the net estate at the time of death (after deducting the allowable deductions, including the standard deduction at P1 million and the family home also at P1 million) is valued at more than P200,000. The excess of P200,000 net estate is subject to estate tax. In computing the estate tax due, there is a tabular estate tax rate which ranges from 5% to 20%. These are based on the basic tax rules that we currently have, while we are still waiting for the outcome of the on-going proposals to amend our estate tax laws. 

To give an example, if someone dies with a “net” estate of P7 million, the amount of estate tax due, based on the tax table, would be P765,000. The remittance of the P765,000 estate tax will be attended to by the heirs (if there is no executor/administrator). This tax remittance should be made within six months of the decedent’s death, unless extended by the Commissioner of the Bureau of Internal Revenue (BIR) in meritorious cases, which extension does not exceed 30 more days.

So, when we die, we will leave to our heirs/loved ones -- (1) our net properties, (2) the obligation to remit estate tax, and (3) the obligation to beat the deadline within six months from the time of death. The last two items are, undeniably, the other gloomy consequences of death. But can we somehow lessen the impact of future estate tax when we intend to transfer our properties to our loved ones?

You might consider the following modes:

1. Donate while alive;

2. Sell the asset; or

3. Create a trust fund or obtain life insurance coverage.

The ensuing discussions will give a glimpse of the above.

DONATING WHILE ALIVE
When you donate your properties to your intended loved ones while you’re alive, your future estate that could be subjected to estate tax will be reduced. Here, the donor’s tax applicable ranges from the tax rate of 2% to 15%. This range is relatively lower than the 5% to 20% of the estate tax. However, note that the 2% to 15% rate applies only if the donee is classifiable as your brother, sister, spouse, ancestor, lineal descendant, or relative by consanguinity in the collateral line within the fourth degree of relationship. Otherwise, if the donation is made to a stranger, the donor’s tax rate applicable is even higher at 30%.

In addition, the donation should also qualify as a valid donation, and not just a mere transfer of properties but still in contemplation of death.

SELLING THE ASSET
Selling the asset to the intended heirs/beneficiaries will also reduce your future estate that could be subjected to estate tax. This can also be considered if you have the objective of transferring an identified property to a particular heir. 

From your perspective as the seller, the resultant tax consequence in a sale would be lower, particularly when what is being sold is a real property that is considered a capital asset. Here, the applicable taxes on the value of the asset are capital gains tax at 6%, documentary stamp tax at 1.5%, and less than 1% of local transfer tax. The total of these taxes, even when combined, could still be lower than the amount of estate tax which has a maximum rate of 20%.

As a reminder, the sale should be a valid sale.

CREATING A TRUST FUND OR OBTAINING LIFE INSURANCE COVERAGE
In this option, although you will not be reducing your future estate, you will, instead create a fund to cover the future estate tax. While alive, you may want to invest in trust funds or you may want to get life insurance coverage, with the objective of raising the amount that would approximate the amount of possible estate tax in the future. You may approach several financial institutions or insurance companies that can give you the package that would suit your interest.

Here, you will be able to ease the burden of your heirs/beneficiaries to raise the money for estate tax remittance to the BIR within a period of 6 months.

The above discussions are but previews only, and there are a lot more details to consider in an estate planning. There are also other modes or combinations thereof which could be applicable depending on the objectives of the taxpayer.

Certainly, you would want your loved ones to succeed to the fruits of your hard work when you pass away. But how about reducing your net estate by giving some to charity? You can do this while alive or you may set aside a portion of your future net estate for this; especially so, when you have already reserved enough for your family and loved ones. You may want to know that there are donations to accredited institutions/organizations that are exempt from tax under the rules. After all, giving to charity -- a more valuable investment in life -- is not a bad idea. 

Next week, we will visit our departed loved ones. While doing so, we might remember that we cannot bring our properties with us after we die, and for the properties that we will leave behind -- these can be taxed!

Olivier D. Aznar is a partner of the Tax Advisory and Compliance Division of Punongbayan & Araullo.

Excise tax on sweetened drinks may create more harm than good–BIAP

AS the House Committee on Ways and Means started its hearing on a measure imposing excise tax on sugar sweetened beverages (SSBs), the Beverage Industry Association of the Philippines (BIAP) on Wednesday called for “nondiscriminatory” tax proposals on its beverage products.

This, after the Department of Finance (DOF) and government health agencies backed the proposal to impose tax on sweetened beverages.

During the lower chamber’s hearing, Joan Sumpio of the BIAP urged lawmakers to further study the impact of the proposal to the Filipino people.

“The BIAP supports the Duterte administration’s tax-reform efforts through fair and nondiscriminatory tax measures that would have broad-based positive impact for the country. However, some tax proposals have to be studied further to ensure that these would create more good than harm, particularly the current plans to levy a tax on sugar-sweetened beverages, such as House Bills 292, 3720 and 4005, all filed [in] the 17th Congress,” Sumpio told lawmakers.

Casualties

While the bills on taxing sweetened beverages purportedly seek to curb the risk of developing obesity and other health-related problems, Sumpio, however, said the proposed taxes would only serve to unduly burden “those who can least afford such an increase, while achieving nothing of real significance to address the health angle it purports to target.”

“It is important to note that the beverages that will be affected by the proposed tax are those consumed by the majority of Filipinos, particularly those in the lower socioeconomic classes,” she said.

Sumpio, citing the latest Family Income and Expenditure Survey of the Philippine Statistics Authority, said close to 40 percent of the income of an average family is spent on food and nonalcoholic beverages.

“Items like coffee, juice and soft drinks will become more expensive for ordinary Filipino consumers, and any upward adjustment in prices of these beverages would impact their purchasing power,” Sumpio added.

Any tax proposals on sweetened beverages, he said, will not generate the additional revenue promised.

“BIAP member-firms employ over 30,000 workers, and for each direct job in a BIAP member-firm, an additional six to 10 other people are employed in secondary, support or allied services. It would lead to job losses within the beverage industry and, in turn, among small- and medium-sized retailers who sell sweetened beverages,” she said.

“Worse, it would likely fall short in terms of revenues raised due to industry job losses and foregone retail sales. Most important, these house bills would not solve the Philippine obesity and diabetes challenge,” Sumpio added.

Culprit

Also, the BIAP official said obesity and diabetes are multifactorial, as these are triggered by personal choices and is, therefore, not directly caused by a single factor, much less a single type of food or drink.

“A typical Filipino meal, based on the 2013 National Nutrition Survey of the Food and Nutrition Research Institute, consists mainly of the staple rice and food that are high in fat. This constitutes the lion’s share of calorie intake,” Sumpio said.

“Sweetened beverages are not a regular fixture in many Filipinos’ daily meals. In fact, sugar and syrup represent less than 2 percent of the daily caloric intake in a typical Filipino diet. Singling out sweetened beverages as the sole cause, and taxing these beverages then will not be an effective deterrent to fight the obesity and diabetes challenge in the country,” she added.

Moreover, the BIAP official said discrimination against sweetened beverages without regard to the other food and beverage components of a people’s diet will negatively affect the future of the beverage industry and allied industries, such as sugar, packaging, marketing and advertising sectors.

“Consequently, a stagnant growth in any of these industries would lead to economic slowdown and imperil the jobs and livelihoods of millions of stakeholders,” she said.

The players

The Beverage Industry Association of the Philippines is the umbrella organization of firms engaged in the manufacture, distribution, marketing and selling of beverages in the country. BIAP counts as members some of the country’s top corporations, such as Pepsi Cola Products Philippines Inc., Coca-Coca Philippines, Coca-Cola Femsa Philippines, San Miguel Corp., Mondelez Philippines, Universal Robina Corp., Asia Brewery, Nestlé Philippines, Liwayway Corp., Kopiko, Del Monte Philippines, Asiawide Refreshment Corp. and Zest-O Corp.

For his part, Finance Undersecretary Karl Kendrick Chua said the finance department is fully supporting the proposal, as it is eyeing the bill as one of the offsetting measures to make up the foregone revenues from the comprehensive tax-reform package. “We fully support the bill to increase excise tax on sugar-sweetened beverages,” Chua said.

In House Bill (HB) 292, Partido Demokratiko Pilipino-Laban Reps. Horacio Suansing Jr. of Sultan Kudarat and Estrellita Suansing of Nueva Ecija said their bills seeks to impose an excise tax of P10 on sugar-sweetened beverage per liter of volume capacity to generate additional revenues for the government and promote public health and wellness.

HB 292 seeks to impose an excise tax on sugar-sweetened beverages by inserting a new Section 150-A in the National Internal Revenue Code of 1997, as amended. The new Section 150-A, titled Sugar Sweetened Beverages, provides, “There shall be levied, assessed and collected on sugar-sweetened beverages per liter of volume capacity an excise tax of P10. The rate of tax imposed under this section shall be increased by 4 percent every year thereafter effective on January 1, 2017, through Revenue Regulations issued by the secretary of finance.”

Categories

The bill defines sugar-sweetened beverage as “a nonalcoholic beverage that contains caloric sweeteners/added sugar or artificial/noncaloric sweetener. It may be in liquid or solid mixture, syrup or concentrates that are added to water or other liquids to make a drink.”

Sugar-sweetened beverages include a) soft drinks, soda, pop and soda pop, which are nonalcoholic, flavored, carbonated or noncarbonated beverages; b) fruit drinks, punches or ades, which are sweetened beverages consisting of diluted fruit juice; c) sports drinks, which are beverages designed to help athletes rehydrate, as well as replenish electrolytes, sugar and other nutrients; d) sweetened tea and coffee drinks, which are teas and coffees to which caloric and noncaloric sweeteners have been added; e) energy drinks, which are carbonated drinks that contain  large amounts of caffeine, sugar and other ingredients, such as vitamins, amino acids and herbal stimulants; and f) all nonalcoholic beverages that are ready-to-drink and in powder form with added natural or artificial sugar. The bill excludes the following from the scope of the Act: 100-percent natural-fruit juices; 100-percent natural-vegetable juices; yogurt and fruit-flavored yogurt beverages with pure fruit and vegetable juice or concentrate; meal-replacement beverages (medical food), as well as weight-loss product; and all milk products, infant formula and milk alternatives, such as soy milk or almond milk, including flavored milk, such as chocolate milk.

source:  Business Mirror

DTI, BIR sign agreement on e-registration

The Bureau of Internal Revenue (BIR) and the Department of Trade and Industry (DTI) signed on Monday a memorandum of agreement requiring mandatory registration for a taxpayer identification number (TIN) from sole proprietorships and partnerships seeking to register under the Philippine Business Registry (PBR).

The agreement mandates the BIR to facilitate the issuance of a TIN for all sole proprietorships and partnerships applying to be registered under the PBR of the DTI.

Under the agreement, the BIR agreed to issue a TIN through the e-registration, or eReg, System linked to the PBR.

The BIR will process the registration of the new business and issue the corresponding Certificate of Registration and other permits relative to the secondary registration after the businesses shall have completed the documentary requirements.

The BIR will also provide the DTI with material information regarding the applicant for registration.

The DTI, on the other hand, will generate and provide the BIR with a monthly list of DTI-registered businesses with newly issued TINs.

The DTI will also inform the applicants to proceed to the BIR to complete their registration requirements before the issuance of the Certificate of Registration.

The two agencies also agreed to coordinate their policies and procedures in registering new businesses to broaden the tax base, which is one of the solutions which the Department of Finance is looking into to generate more revenues amidst the measures aimed at lowering the tax rates.

The agreement was signed at the BIR’s main office in Quezon City by Internal Revenue Commissioner Caesar R. Dulay and Trade and Industry Secretary Ramon M. Lopez.

source:  Business Mirror

Managing tax planning and minimizing tax risks: How CFOs must square the circle

“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.”—John  F. Kennedy

‘Tis the season for change.

The Department of Finance submitted to Congress the tax-reform package. As it is a priority bill and one of the election promises of the President, it is expected that it will be given due consideration by the country’s legislators.

There is also the likely call for tax amnesty that will provide a clean slate for taxpayers moving forward, provided certain conditions are met. In the past, tax amnesties were granted if tax payers would present the appropriate balance sheet and declare likely gaps in past tax declarations on which a corresponding amount will be voluntarily tendered, subject to certain minimum amount to be settled including terms and conditions. Thereafter, the taxpayer is deemed to be tax compliant as far as the years covered by voluntary declaration of gaps and tax settled. It would be timely to have the tax-amnesty program before the effectivity of the new tax laws.

Most chief finance officers (CFOs) are trying to understand the proposed package and likely tax amnesty, and are studying how they will impact on their respective company’s business and personal circumstances. Postenactment of the law that will put aside the 1997 Tax Code, CFOs will be busy doing tax planning.

Tax planning is an art. Creativity is a major factor in arranging the corporate affairs in such a manner that will save the company from paying excess corporate taxes without violating any law or regulation. Business processes, and even location of  business, are looked into with the aim of structuring things to achieve a tax-efficient setup and ways of doing business. Optimization of tax benefits and/or savings over the long term is a usual goal in tax planning.

CFOs are expected to be “tax literate” and they should be major participants, if not the leaders, in crafting an appropriate tax plan aligned with their business plan. A tax plan is an important tool in enhancing the bottom line that translates to increasing the wealth of equity holders. Thus, tax and financial planning are intertwined.

As things seem to move fast, one can only hope that those tasked to legislate and those in authority to implement laws would have foremost in their minds and hearts what is good for our country and people now and in the future.  May I quote Lao Tzu —“The people are hungry: It is because those in authority eat up too much in taxes.”

Note:

The importance of tax planning is well recognized by the International Association of Finance Executives Institutes (IAFEI), where the Financial Executives Institute of the Philippines (Finex) is a founding member. In the 46th IAFEI World Congress from November 8 to 10 at the Cape Town International Convention Center in South Africa, the topic on managing tax planning will be taken up by the international tax committee of the premier global society of finance executives in one technical session. Delegates from various countries all over the world will participate in the discussions of burning issues that concern finance executives.

Dr. Conchita L. Manabat is the president of the Development Center for Finance, a joint undertaking of the Finex Research & Development Foundation Inc. and the Virata School of Business at the University of the Philippines. She is a trustee of the Finex Development & Research Foundation. A past chairman of the International Association of Financial Executives Institutes (IAFEI), she now serves as the chairman of the Advisory Council of the said organization. She can be reached atclm@clmanabat.com.

source:  Business Mirror

Gaming industry wins tax bet

“More than the clarity we need to have about what MUST change, we need to have even more clarity about what MUST NOT change...”

-- Assegid Habtewold, The 9 Cardinal Building Blocks: For Continued Success in Leadership

Ambiguity in our laws almost always leads to controversy requiring court intervention. If by plain reading, the intent of the law is not apparent, the court will dutifully exercise its power to interpret, and apply relevant statutory construction rules to clarify the vagueness in the law.

In August, in a very instructive fashion, the Supreme Court exercised its power to interpret in a case involving one of the licensees of the Philippine Amusement and Gaming Corporation (PAGCOR), a government-owned and controlled corporation (GOCC). With that decision (G.R. No.212530 dated Aug. 10, 2016), the SC has put an end to the confusion about the tax obligation of PAGCOR and its licensees.

According to the SC, since it has already been clarified back in 2014 that PAGCOR’s tax exemption is undisturbed with respect to its income from gaming operations, the latter’s licensees would still enjoy their tax exemption granted under the PAGCOR Charter or Presidential Decree (PD) No. 1869, as amended by Republic Act (RA) No. 9487. The licensees only need to pay 5% franchise tax, in lieu of all taxes.

As a backdrop, the tax-exemptions of PAGCOR and its licensees were shaken when RA 9337 amended the 1997 Tax Code in 2005, removing PAGCOR from the list of tax-exempt GOCCs previously provided under the old Tax Code. By virtue of such removal, some concluded that PAGCOR became subject to income tax as a regular corporation. As expected, PAGCOR questioned the constitutionality of RA 9337, but in March 2011, the SC upheld the legality of amendatory law (G.R. No. 172087 dated March 15, 2011). 

Of course, nobody was surprised when the Bureau of Internal Revenue (BIR) immediately assessed PAGCOR for back taxes. Based on newspaper accounts, PAGCOR paid close to a billion pesos in deficiency income taxes in 2011. The BIR wanted more revenue; hence, PAGCOR’s licensees were also targeted. Thus, the BIR issued Revenue Memorandum Circular (RMC) No. 33-2013 dated April 17, 2013 declaring that PAGCOR, in addition to the 5% franchise tax on its gross revenue under Section 13(2)(a) of its charter, was now subject to regular 30% corporate income tax under the Tax Code. The RMC further states that PAGCOR’s licensees, being entities duly authorized and licensed by it to perform gambling casinos, gaming clubs and other similar recreation or amusement places, and gaming pools, are now likewise subject to income tax.

A licensee of PAGCOR challenged RMC 33-2013 reasoning that it violates PAGCOR’s charter (PD 1869, as amended by RA 9487), an existing and valid law. The licensee argued that the deletion of PAGCOR from the list of tax-exempt entities under the Tax Code did not repeal the clear tax exemption of PAGCOR’s contracting parties under Section 13(2)(b) of the charter.

Separately, PAGCOR likewise questioned the RMC claiming that it is erroneously implementing the March 2011 ruling of the SC. Thus, PAGCOR sought the SC’s clarification on the matter.

In the clarificatory ruling (G.R. No. 215427 dated Dec. 10, 2014), the SC confirmed that its March 2011 ruling upheld only the constitutionality of RA 9337 removing PAGCOR from the list of tax-exempt entities; it made no distinction as to which income of PAGCOR is subject to corporate income tax. The SC therefore recognized that PAGCOR earns two types of income: (1) those from gaming operations which are within its franchise; and (2) those income from other related services. The High court conducted a side-by-side study and interpretation of the relevant provisions of PAGCOR’s charter as against RA 9337 and came up with a clear and very instructive conclusion. 

The SC declared that, as a result of the removal of PAGCOR from the list of tax-exempt entities, it became subject to regular income tax but only with respect to its income from related services. PAGCOR’s income and revenue from gaming operations conducted under its franchise remain subject to 5% franchise tax, in lieu of all taxes, as provided under Section 13 of its charter. PAGCOR’s tax exemption or preferential taxation under PD 1869 exists independently from the Tax Code and was not repealed by RA 9337. It is a canon of statutory construction that a special law prevails over a general law -- regardless of their dates of passage -- and the special law is to be considered as remaining an exception to the general law. RA 9337 did not make any clear declaration to change the taxation of PAGCOR under its charter. The SC said that if the lawmakers had intended to withdraw PAGCOR’s tax exemption on its gaming income, then Section 13(2)(a) of PD 1869 should have been amended expressly in RA 9487, or at the very least, such withdrawal should have been mentioned in the repealing clause of RA 9337. The SC emphasized that repeal of law by implication is not favored. 

In a nutshell, the SC declared that PAGCOR had always been exempt from income tax on its revenue from gaming operations whether or not it was treated as a tax-exempt entity under the Tax Code. However, PAGCOR is now subject to income tax on its income from other related services because of its removal from the list of tax-exempt entities.

Consistent with this pronouncement, the SC ruled that the tax exemption of PAGCOR’s licensees on their income from gaming operations is likewise undisturbed.

It can be said then that PAGCOR, together with its licensees, had won its bet.

While the SC’s eagle eye in interpreting the perceived inconsistency between PD 1869 and RA 9337 is commendable, such painstaking effort could have been avoided had the lawmakers’ intention regarding PAGCOR’s tax status was made very clear.

In view of the government’s initiatives for comprehensive tax reform, we are currently on the cusp of what could be major changes in tax legislation, those that will affect not just a particularly industry but all taxpayers in general. I hope the lawmakers keep the PAGCOR decision in mind when reforming our tax laws yet again so that any change (or no change) is very clear, leaving no room for interpretation or ambiguity. 

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Brando C. Cabalsi is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

(02) 845-2728 

brando.cabalsi@ph.pwc.com

Taxability of service fees received by non-resident foreign companies from online advertising in the Philippines

The use of the internet for the promotion of goods and services, particularly social media (Facebook, Twitter and Instagram to name a few), has grown in the recent years. Internet or online advertising has helped increase the revenues of local companies and of media and advertising companies. This trend, of course, has caught the attention of the Bureau of Internal Revenue (BIR) for potential sources of government revenue.

While local revenue issuances provide for fairly detailed rules on the tax obligations of online media companies and of advertisers, it failed to consider that most online media companies are foreign corporations located abroad.

Generally, whenever a transaction involves foreign corporations, the situs of taxation of the income or transaction becomes an issue. For online advertising, the usual questions are: if all the services are performed, and all the facilities used for such services (ie, computers, servers, among others) are located outside the Philippines, are the service fees still taxable in the Philippines? Is it enough that online advertisements are viewable and accessible in the Philippines by the intended market/customer to make the service fees taxable here?

At present, no Philippine law categorically imposes tax on online media/advertising services rendered by non-resident foreign corporations. Admittedly, however, the provisions of the National Internal Revenue Code (Tax Code), a number of BIR rulings and the existing jurisprudence may provide for bases to treat such transactions as either exempt from or subject to Philippine taxes.

Possible bases to exempt from Philippine taxes — Under Section 42(C)(3) of the Tax Code, payments for services performed outside the country are considered income from sources outside the Philippines. In ITAD Ruling No. 014-01 (February 16, 2001), the BIR ruled that if the editing, programming, designing and dissemination of advertisements are done using the facilities located abroad, the situs of the income is abroad.

It may be argued that views or access within the Philippines do not make advertising service taxable in the country. In BIR Ruling No. 009-05 (August 2, 2005), services rendered abroad through the internet (ie, registration and maintenance of domain names), even if the same are for clients located in the Philippines (ie, domain name holders in the Philippines), are considered rendered outside the country. Further, in CIR v. American Express International, Inc. (G.R. No. 152609, June 29, 2005), the Supreme Court held that, for value-added tax (VAT) purposes, the service is distinct from the product/output that arises from the performance of the service. What determines jurisdiction is the place where the service is rendered, not the place where the output of the service is ultimately used.

Possible bases to subject to Philippine taxes — The Supreme Court’s decision in CIR v. British Overseas Airways Corporation (G.R. No. 65773-74, April 30, 1987) may be used to argue that views/access in the Philippines may be considered as the activity that produces the income. Considering that media companies are paid for the promotion of products in the Philippine market, it is the visibility of the advertisement in the country that makes the transaction taxable here. Moreover, consumption, in the context of a service, means the performance or completion of a contractual duty, releasing the performer from future liability. If the company will not be paid unless advertisements are viewable or accessible in the Philippines, then consumption, arguably, happens in the Philippines.

Unless a new law is passed or a Supreme Court decision covering the above issues is promulgated, the taxability of the service fees received by non-resident foreign companies from online advertising in the Philippines will remain unsettled. As such, local companies availing of these services are constantly exposed to the risk of being pursued by the BIR. In case the BIR will take the strict position, the exposure may include the assessment of: a) deficiency 30 percent final withholding income tax; b) 12 percent final withholding VAT; c) 30 percent income tax on the disallowed advertising expenses due to failure to withhold taxes; d) 20 percent annual interest for late payment; and e) 25 percent surcharge for non-filing of return and non-payment of taxes.
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The congestion charge and tax on a second vehicle

First of three parts - Oct 11, 2016

Despite all the ongoing programs to alleviate traffic, decongestion is still a pipe dream. By now, the measures being considered are getting more drastic as the weeks pile on. You can infer the desperation of our authorities when you realize the extent the government is ready to curtail our motoring freedom of circulation. Besides the time torture and vehicle density, private motorists face more woes like lane restrictions, turn restrictions, wholesale access restrictions (like the EDSA bollard blockade that prevents motorists coming from Ortigas Avenue to access the Ortigas Center via EDSA Annapolis and Connecticut), plate number restrictions (UVRRP, or the Unified Vehicle Volume Reduction Program, aka coding), and so on.

Some ideas, tired and old, have met an icy reception from the public and resulted in doubtful success. The mandatory opening of private roads of gated communities to public access is again being mulled, notwithstanding that the road layout of most, if not all well-planned communities, are limited access and built to service only the self-contained communities exclusively, hence through or pass-through traffic is usually impractical.

Looking for inspiration from various countries and cities, our authorities would be remiss if they didn’t even study other vehicle reduction schemes. As always, the benchmark happens to be the most successful -- Singapore. There, licenses to purchase motor vehicles are by quota and the price depends on competitive auction. Parking spaces are also limited and auctioned. Then there are the controlled access to the road itself; the ubiquitous Electronic Road Pricing (ERP) gantries. Mounted fore and aft of an over-the-road gantry, ERP vehicle ID readers record the front and rear license plate of a car driving into the ERP zone. Then the reader sends the plate number to headquarters, which then determines how much congestion charge to deduct from the particular passing vehicle’s pre-paid in-car electronic tag, depending on the time of the day.

It’s one of the most sophisticated in the world as pricing is based on real-time supply and demand of road use. If point-to-point speeds fall below a certain benchmarked distance, like during peak hour, the ERP charge goes up. It’s a theoretical economist’s wet dream come true as the user is charged by his/her marginal utility; i.e. as per the current cost of using road space. Not content with this, Singapore is pushing the envelope and is already designing GPS-monitored tags that can operate with other electronic road monitors and toll collections, doing away with the need for those giant gantries. But ERP is only one branch of a whole integrated transport network where the alternative to private motoring is one of the world’s safest, most comfortable and extensive mass transit networks.

Another recent practitioner of pseudo-ERP is a newcomer to the game -- London. Begun in 2003, it looks quaintly Edwardian, or even Victorian, compared to Singapore’s homegrown, high-tech solution, which began in the mid-1990s. London currently charges a flat rate congestion charge of GBP11.50 per entry into the 7.5-square-kilometer restricted zone of the city. Residents are given a discount, which nets the charge to GBP1.50. Monitoring is by police CCTV cameras. Upon entering the “charge zone,” marked on the tarmac by a giant red circle with a white “C” in the middle, license plates are recorded, and if the day’s congestion charge has not been paid by midnight, a penalty charge will be mailed to the vehicle owner.

Though already proposed during the Marcos years, vehicle-reduction programs, like odd-even, were always successfully opposed by the Philippine Motor Association, today’s Automobile Association Philippines, on the grounds of unreasonable restrictions on the right to drive. But the construction of the MRT-3 in the mid-1990s made the odd-even ban a necessity. Instead of the European practice where odd-number plate numbers are banned on odd-number calendar days and even-numbered plate numbers are banned on even-numbered days, the MMDA chose regular days of the week; Monday, Wednesday, Friday for odd-numbered plates, Tuesday, Thursday, Saturday for even-numbered plates. High-occupancy vehicles, distinguished by having two or more passengers, excluding driver, were exempted from the ban. Faster travel times were indeed recorded during rush hour when this was in place 20 years ago. At that time, the motoring public believed the government promise that once the MRT-3 was finished, regular travel on EDSA will be restored and buses will be banned because the MRT-3 was supposed to supplant them. But this turned out to be a politico’s empty promise.

Still, the odd-even ban made life difficult for single-vehicle families and so the variant called UVRRP was instituted. Instead of a theoretical 50% ban, it was modified to a 20% ban, essentially prohibiting plate numbers that end with 1 and 2 on Mondays, 3 and 4 on Tuesdays, and so on. The motoring public reacted by buying more cars and specifying plate numbers on new-car purchases so that they don’t lose mobility for the whole week. A rather expensive solution, but it did create an unrelenting sales boom for car dealers because the discordant mass transit system left the motoring public with no choice.

Second of three parts - Oct 18, 2016

At present, legislators and technocrats are studying further options which are generally derivatives of the two-pronged approach of Singapore; (1.) Limiting vehicle ownership by quotas for purchases and parking space, and (2.) Congestion or CBD access charge, where prices depend on the flow of traffic.

In the meantime, there are pending bills in Congress that are proposing a “no-garage, no-car-purchase” law, or even a “no-income tax return, no-car purchase” law. But these harebrained measures damage the economy by restricting trade of the automotive industry, a pillar of the economy, a huge taxpayer, a giant employer and an industry that the government wants to promote and grow. A variant of these laws is the proposal to tax the second or third vehicle that a family buys. The problem lies in that these proposed laws assume that the rest of the country is as congested as Metro Manila, or that income earners like pensioners, contractors and professionals (other than those regularly employed) do not have a right to purchase a car. This is downright discriminatory and ridiculous.

Let us tackle the second-vehicle tax first. The proposal assumes that by taxing the extra vehicles bought to get around the coding or odd-even schemes will reduce congestion. We believe that while vehicle reduction by this tax will not be significant, the law will be prone to discretion and loopholes. This will then need extra effort to police which, in turn, goes against efficient tax administration. Moreover, as a one-size-fits-all, broad-brush solution, it will do more harm than good; i.e. hurt the auto industry by punishing vehicle purchases in other cities where congestion is not as severe as Metro Manila’s.

On the other hand, we are aware that the DoF needs compensatory revenue after it reduces income taxes. BIR is looking at taxing luxury cars ad valorem (i.e. a tax as percentage of sale price). We think taxing cars and congestion reduction are not a correlated relationship particularly for countries as area-large as ours.

Proof of this is another economy that has the same size and population as Singapore, the same excellent mass transit system, the same predictable traffic flow, but without Singapore’s interventionist restrictions on car ownership, taxes and congestion discrimination -- Hong Kong. There, auto taxes are high for fiscal and environmental reasons and not for congestion reduction purposes. So assuming that increasing revenue is the purpose of the second-vehicle tax, we propose a flat tax per category per price segment.

For example, cars selling for P1.0 million should be exempt from the tax because this is the price point of multi-passenger transport for the regular Filipino starter family. The next price segment, P2.0-3.0 million will now be charged a flat tax of P50,000 as this is the price range of fancier SUVs and D-segment cars. The next price segment, P3.0-4.0 million will entail a flat tax of another P50,000. Hence, a P22.0-million Aston Martin Rapide will be taxed at P1.0 million and a P35.0-million Rolls-Royce Phantom will carry a P1.65-million tax. This is on top of all the regular taxes imported cars pay. Not a bad deal for the tycoons, right? To promote alternative energy, hybrids like the Toyota Prius and some Porsche and Lexus models, can be exempt.

This P50,000 tax should be suspended once the exchange rate shoots up beyond P50 to $1. Imagine if a Mitsubishi Mirage that today costs P600,000 suddenly costs P4.0 million because of an exchange rate depreciation, the P100,000 tax in this case would kill auto industry sales. Of course, the auto industry and other affected stakeholders should join in with their reservations or support, since our auto industry already pays a lot of taxes, making our car pricing the most uncompetitive among the car-exporting countries in ASEAN.

As for congestion charging, forgive us if we have lost faith in the odd-even, coding, no-garage, no-purchase and quota to purchase combined schemes as Hong Kong, with its mass transit facilities, proves that it can do without it. Congestion reduction/discrimination was tried at one of the many cross-harbor tunnels some time ago but it met with widespread public opprobrium. In our case, the restraint on personal freedoms is too much for us, Asia’s oldest democratic car culture.

We have proposed this before and it won’t need expensive technology like Singapore’s. We can keep it simple and attractive. We can have as many bids, or BOT-PPPs, or unsolicited proposals for as long as congestion charging for Metro Manila prioritizes ease of application/enforcement, speed of construction, minimal traffic inconvenience, simple maintenance and income for the government. The participants can fulfill President Duterte’s wish that we get the best and not the lowest bidder.

We propose a one-time passage fee of P100 per day, valid from 8 a.m to 10 p.m., while passage outside those hours is free of charge. We can combine it with an odd-even twist; P100 for even-numbered plate numbers on even-numbered calendar days, while the even-numbered plate number can travel on odd-number calendar days but must pay P200. If one wants to stick to coding, then cars, jeeps, taxis, buses, etc. pay P50 a day four days of the week, but P200 on the coding day if they need to travel.

But with this, vehicle reduction would hardly change from today’s pattern.

tfhermoso@gmail.com

source:  Businessworld

Tax sparing spared

If a taxpayer was given two benefits which cannot be simultaneously availed, who should choose which benefit to avail -- the government or the taxpayer?

If we apply Revenue Memorandum Order (RMO) No. 27-2016 dated June 23, 2016 with regard to the final withholding tax (FWT) on dividends paid to foreign corporate shareholders, it appears that it is the government who can choose. However, the effectivity of this RMO was suspended by the BIR under Revenue Memorandum Circular No. 69-2016 dated July 1, 2016. Is the suspension good news?

Under this suspended RMO, the Bureau of Internal Revenue (BIR) issued procedures for claiming tax treaty benefits for dividend, interest and royalty income of nonresident income earners. 

Interestingly, the RMO also covers the application of the 15% preferential tax rate on intercorporate dividends paid to non-resident foreign corporations (NRFC) under Section 28(B)(5)(b) of the Tax Code, or the “tax sparing rule.” Pursuant to this provision, a lower 15% FWT rate will be imposed on dividends received by an NRFC if the country in which the NRFC is domiciled allows a tax credit against the tax due from the NRFC representing taxes deemed to have been paid in the Philippines equivalent to 15%.

Under the suspended RMO, the tax sparing rule shall apply to an NRFC which is a resident or is domiciled in a country which: (1) has no effective tax treaty with the Philippines; (2) has a worldwide system of taxation; and (3) allows a tax credit against the tax due from the NRFC dividend taxes deemed to have been paid in the Philippines equivalent to 15%.

In its previous rulings, the BIR ruled that “the only condition for the application of the tax sparing credit is that the country-domicile of the recipient corporation allows a credit against the tax due from non-resident foreign corporations.” It appears, however, that these new requirements are more rigid which may result in the denial of the taxpayer’s benefits. 

First, based on the same RMO, in order for the tax sparing rule to apply, the Philippines must not have a tax treaty with the country of residence of the NRFC. It is worthy to note in some tax treaties, an NRFC must hold a minimum percentage in a domestic corporation before a preferential tax rate would apply (e.g., NRFC from Singapore must hold at least 15% minimum stockholdings in a Philippine company in order to apply the 15% preferential tax rate. Otherwise, 25% FWT will apply). In other treaties, the preferential tax rate is higher than the 15% rate under the tax sparing rule (e.g., the Philippines-US tax treaty provides for 20% and 25% FWT on dividends). Thus, there are instances where the preferential tax rate under the tax sparing rule is more beneficial to the NRFC than those provided under the treaty. This does not actually result in a conflict since the tax treaties provide for the maximum rate that a treaty country can impose. It does not provide a definite rate. 

Applying the RMO, the presence of a tax treaty removes the NRFC’s benefit under the tax sparing rule, even if the latter is more beneficial than the maximum FWT rate under the treaty? Does the BIR have the authority to remove that benefit from a taxpayer even if it is clearly provided under the Tax Code? Understandably, a taxpayer cannot enjoy both benefits simultaneously, but can our tax authorities choose which benefit is applicable to a taxpayer, especially if it is detrimental to the taxpayer?

Secondly, the RMO requires that the country of residence/domicile of the NRFC must have a “worldwide system of taxation.” It does not provide specific guidance on what this means. 

Thirdly, the RMO retained the deemed tax paid credit under the Tax Code. In this regard, the RMO requires the submission of a consularized copy of the law of the country of the NRFC which expressly allows the said credit is required to be submitted in the application for tax sparing rule. If the country does not subject the dividends to tax, does this mean that the dividends will then be subject to 30% FWT? If so, this would be contrary to the Supreme Court case which confirmed the 15% FWT rate on dividends also applies to an NRFC where the country of residence does not impose any tax on the dividends. 

Finally, pursuant to the suspended RMO, it seems that the filing of an application for a tax sparing ruling is required to avail of the benefits. The RMO is, however, silent if whether the application should be made before the availment of the benefits (as a pre-requisite) or after the availment (merely serving as a confirmation). This begs another question, would a ruling be required (whether confirmatory or not) to avail of the preferential tax rate even if there’s no such requirement under the Tax Code? Would it not be a void requirement as beyond the authority of the BIR?

It is good thing that the said RMO was suspended by the new BIR commissioner. Maybe the foregoing issues were also considered by the BIR in suspending the effectivity of the RMO and retaining the suspension to date. Our country needs foreign investments. In order to entice foreign investors, our taxes should be competitive with those of other countries. One of the means provided to encourage foreign investments is the tax sparing rule. 

It is worthy to note that the BIR has a draft RMO on the new procedures for the availment of tax treaty relief on dividends, royalties and interest. However, this does not cover the tax sparing rule. Currently (and with the suspension of this particular RMO), there is no BIR issuance that tackles the tax sparing rule. It may help if the BIR would issue a regulation specifically setting guidelines to remove any uncertainties. However, in doing so, the BIR should also consider that one of the purposes of this provision is to attract foreign investors to the Philippines, and not to discourage them with unnecessary and complicated requirements.

So, is the suspension good news? 

The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Realyn M. Postrado-dela Cruz is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

realyn.m.postrado@ph.pwc.com

Bloomberry wins SC tax case vs BIR

The Supreme Court (SC) has granted the certiorari petition of Bloomberry Resorts & Hotels, Inc. (BRHI) against the imposition of corporate income tax by the Bureau of Internal Revenue (BIR) on BRHI as a licensed casino operator of the Philippine Amusement and Gaming Corporation (PAGCOR).

In a disclosure to the Philippine Stock Exchange, parent company Bloomberry Resorts Corporation, the Supreme Court ordered the BIR to cease and desist from imposing corporate income tax on income from gaming operations of casinos duly licensed by the PAGCOR.

Bloomberry, the casino operator in Solaire Resort & Casino filed the petition in 2014 to nullify the provision of Revenue Memorandum Circular (RMC) No. 33-1013 issued by then BIR Commissioner Kim Henares in 2013 which imposed corporate income tax on casinos.

“This Supreme Court decision will allow PAGCOR and BRHI as an integrated casino resort to revert to the original license fee structure of 15 percent and 25 percent license fee (inclusive of the 5 percent franchise tax) for high rollers/junket and mass gaming respectively,” said Bloomberry.

The Supreme Court affirmed Bloomberry’s argument that as contracting party of PAGCOR, it was subject only to the 5 percent franchise tax on its gross gaming revenue, in lieu of all taxes, as provided under Section 13(2) of Presidential Decree No. 1869 (the PAGCOR Charter).

The Court cited its en banc decision in PAGCOR v. The Bureau of Internal Revenue, GR No. 215427, dated December 10, 2014.

source:  Manila Bulletin

Tax hikes to stoke inflation -- ING

PROPOSED INCREASES in levies on fuel and other basic goods under the Finance department’s tax reform plan could drive up commodity prices by as much as a percentage point, an economist of ING Bank N.V. Manila said yesterday.

Basing his estimates on the first package of proposed tax reforms laid out by the Department of Finance (DoF) last week, ING Bank senior economist Jose Mario I. Cuyegkeng said plans to remove several exemptions from the 12% value-added tax (VAT) and raise the excise tax imposed on fuel products may lead to a faster inflation rate by 2017.

“We estimate that the full impact of the fiscally induced price pressures from higher oil product excise taxes, expansion of VAT’s scope and other taxes would be 0.8 to 1 percentage point increase in inflation rate,” Mr. Cuyegkeng said in a market commentary e-mailed to reporters yesterday.

The package consists of restructuring the personal income tax system, expanding the VAT base by reducing exemptions, increasing excise taxes on petroleum products, and streamlining the excise tax on cars except for buses, trucks, cargo vans, jeeps, jeepney substitutes and special purpose vehicles. Initial DoF estimates peg revenue to be foregone from lower personal income taxes at P180 billion, to be offset by increased collections from the bill’s three other components.

Under a six-bracket tax schedule for 2018, as proposed by the DoF, workers earning up to P250,000 yearly will be exempt from paying taxes. Those earning more than P250,000 but not over P400,000 will be taxed 20% of the excess over P250,000; those earning more than P400,000 but not over P800,000 will pay P30,000 tax plus 25% of the excess over P400,000. Those earning more than P800,000 but not over P2 million will be taxed P130,000 plus 30% of the excess over P800,000; those earning more than P2 million but not over P5 million will pay P490,000 plus 32% of the excess over P2 million. Those earning more than P5 million -- the highest bracket -- will be taxed P1.45 million plus 35% of the excess over P5 million.

The levels were calibrated to make the system more “progressive” and “fair,” Finance Secretary Carlos G. Dominguez III had said earlier.

“We may see the inflation impact by the second or third quarter of next year if both houses of Congress approve the tax reform package in the first quarter or early second quarter,” ING’s Mr. Cuyegkeng added.

The Bangko Sentral ng Pilipinas (BSP) said it also expects higher oil levies to prod inflation, flagging it as an upside risk during its Sept. 22 policy meeting. At the same time, the BSP said it is unlikely that the resulting annual average would top the central bank’s 2-4% target band despite reform’s potential impact on pump prices and transport fares.

BSP Deputy Governor Diwa C. Guinigundo said the BSP expects inflation to average 1.7% this year before moving within target to 2.9% by 2017, which assumes that higher oil taxes will be in place.

Tax cuts for personal income earners and companies were promised by President Rodrigo R. Duterte during his first State of the Nation Address last July 25.

The House of Representatives received the DoF’s first set of tax reform proposals on Sept. 27, but has yet to start committee discussions on the bill as the chamber is currently focused on approving the P3.35-trillion national budget proposed for 2017.

Quirino Rep. Dakila Carlo E. Cua, chairman of the House Committee on Ways and Means, had said that the planned tax system overhaul may be passed as early as yearend.

However, House Speaker Pantaleon D. Alvarez said he has ordered the Ways and Means committee to prepare a “counterproposal” to the Executive proposal, as he is not keen on introducing new duties.

The first batch of reforms is expected to be followed by at least three other packages that similarly seek to reduce some taxes and cover revenues to be foregone by other revenue-generating measures.

The plan to trim corporate income taxes to 25% from 30% will be offset by streamlining tax incentives granted to companies. Lower estate and donor’s taxes will be compensated by increased property valuation rates to raise more funds for local governments.

Taxes on capital income will also be “harmonized” at 10%, which will cover interest earning on deposits, dividends, equity, and fixed income regardless of currency, maturity, and type of investment.

A set of additional luxury taxes -- entailing higher levies on fancy cars, jewelry, fatty food, and income from lotto and casino winnings -- may also be considered should there be a need to “augment” tax collections, Mr. Dominguez told lawmakers.

If passed, the reforms are estimated to result in a cumulative net revenue gain of P368.1 billion by 2019, with P566.4 billion in additional collections making up for P198.3-billion foregone revenues.