The non-transferability of donor’s tax

Taxwise or Otherwise By Roselee B. Santos

Taxation law is composed of myriads of laws, regulations, rulings and other issuances -- it’s overwhelming even to professional practitioners. From time to time, however, the courts are able to cut through extraneous matters and deliver clear guidance not only for taxpayers but also for tax authorities.

One such instance is the recent case decided by the Court of Tax Appeals (CTA) on Jan. 27, 2016. The issue facing the court was whether a domestic corporation that received additional capital by way of contribution from its non-resident shareholder is liable as a donee to pay the alleged donor’s tax on the contribution.

In context, the issue arose when a non-resident foreign company shareholder contributed P30 million to the investee-taxpayer under a Capital Infusion Agreement to sustain the viability of the taxpayer’s business operations. The taxpayer’s Audited Financial Statements disclosed the amount as proceeds from donation. On that basis, the Bureau of Internal Revenue (BIR) assessed and demanded payment of deficiency donor’s tax from the taxpayer.

Considering that the taxpayer recorded the amount as a donation, the Court saw no need to settle the question of whether there was actually a donation since the taxpayer had already admitted such fact. Although it would be interesting, to say the least, to know whether capital contribution in the form of additional paid-in capital should be considered a donation, the Court considered it moot and academic.

Instead, the Court focused on resolving these questions: is donor’s tax a direct or indirect tax? Consequently, who is liable to pay for it?

Of course, it is a safe assumption that the BIR is well aware that donor’s tax is a direct tax that should be paid by the giver or contributor. In fact, the term “donor’s tax” already implies that it is a tax on the donor, and not on the recipient.

Further, all the relevant requirements to pay the tax point toward the donor as the party that must report, file, and pay the tax. Nowhere is there a requirement that the donee must pay for the tax, whether directly or in behalf of the donor.

However, in trying to justify the filing of the case against the donee, it is evident that the BIR was mindful of the fact that the donor was a foreign entity beyond its tax jurisdiction. Unable to enforce its authority on the donor, the BIR instead went after the taxpayer-donee, a domestic corporation subject to the laws of the Philippines.

The CTA disagreed with the BIR. As the tax sought to be imposed is a donor’s tax, the Court ruled that a donee may not be made liable for its payment. Section 13 of Revenue Regulation No. 2-2003 explicitly provides that the person making a donation shall be the one required to accomplish and file a donor’s tax return. This is in line with Section 98 of the Tax Code, which provides that the donor’s tax shall be levied on the transfer by any person, resident or nonresident, of a property by gift.

Thus, it is clear under the law, as well as the BIR’s regulations, that the donor’s tax is a direct tax that can only be imposed on, and paid by, the donor. Consequently, the CTA ruled that the liability for donor’s tax falls on the donor’s shoulders and is, therefore, not transferable.

This case is novel in the sense that the principle of “non-transferability of the burden of direct tax” had not been previously applied to donor’s tax. Although the Supreme Court (SC) already had occasion to explain the nature of direct and indirect taxes, jurisprudence only goes so far as to state that transfer taxes, specifically donor’s tax, are classified as direct taxes. The recent CTA case, therefore, is the first court decision to directly apply the said principle to donor’s taxes.

There were other issues left undecided by the CTA because answering the question on who should bear the tax seemed the end of it. However, it would have been equally important, if not more so, to discuss whether additional capital contribution should be considered a donation in the first place.

For now, we may have to wait for the resolution of the BIRs’ appeal to see if this other equally important issue will be tackled more directly -- pardon the pun.

Unfortunately, until the BIR reconsiders this position, other taxpayers may find it necessary to contest similar assessments or impositions.

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.

BIR updates Quezon City zonal values

THE BUREAU of Internal Revenue (BIR) has updated the zonal values of real properties in Quezon City, which had remained unchanged for more than 14 years.

Finance Secretary Cesar V. Purisima, through Department Order (DO) 004-2016 published on a newspaper on Wednesday, approved the implementation of the revised zonal values.

The order dated Jan. 12 covers real properties located within the jurisdiction of BIR Revenue District Office No. 39 -- South Quezon City. This implements the fifth revision of the zonal values in the area last revisited in 2003.

“This order is issued to implement the revised zonal values of real properties for the purposes of computing any internal revenue tax due on sale/transfer or any other disposition of real properties,” DO 004-2016 read.

The new zonal values shall apply provided they exceed the fair market value shown in the schedule of values of the provincial or city assessors as well as the gross selling price or consideration shown in the duly notarized document of sale or transfer of real properties.

The adjustment of the zonal values should not increase taxes paid for the disposition of real properties, BIR Commissioner Kim S. Jacinto-Henares said in a text message.

“[T]he zonal value is determined by the amount properties are being sold there. It only means taxpayer should not cheat at an amount lower than the zonal value,” Ms. Jacinto-Henares noted.

The BIR commissioner possesses the authority fix the zonal value schedule under Section 6 (E) of Republic Act No. 8424 or the Tax Reform Act of 1997.

The law authorizes the BIR commissioner to divide the Philippines into different zones or areas and determine the fair market value of real properties there for internal revenue tax purposes.

“An adjustment is good provided it can reasonably approximate the correct values of the property,” P&A Grant Thornton Tax Advisory and Compliance Division Head Eleanor L. Roque said in a text message.

Ms. Roque added that, on the government’s part: “an upward adjustment in the zonal values will increase the tax base for transactions, which are based on fair market values such as capital gains tax.” -- Keith Richard D. Mariano

source:  Businessworld

PIDS expert says income tax cuts justified; warns government of revenue loss

Proposals to amend the personal income-tax schedule appear to be well-justified. However, these proposals should include measures that will allow government to recover the revenue loss from lower income taxes.

Dr. Rosario Manasan, senior research fellow of state think-tank Philippine Institute for Development Studies (PIDS), said at a Senate-sponsored seminar, the government should look for new revenue measures to compensate for the projected revenue loss that will arise as a result of the implementation of any of the various proposals to restructure the personal income tax.

Currently, there are several income-tax reform proposals pending in both houses of Congress. All of them, according to Manasan, have the same objective of addressing the phenomenon of bracket creep, which results from “non-indexation to inflation of personal income-tax brackets.” Simply put, bracket creep occurs when employees’ income increases over time as a result of inflation. This pushes them to pay higher taxes, but their purchasing power
remains the same. The Philippines has not adjusted its personal income-tax system since 1998.

Manasan also noted the proposals all attempt to reduce the country’s high personal income-tax rate relative to its neighbors in the Association of South East Asian Nations (Asean). In particular, the Philippines’s top marginal personal income-tax rate of 32 percent is higher than the Asean member-states save for Thailand and Vietnam.

The proposals to amend the personal income-tax law assessed in the PIDS study were Sen. Ralph G. Recto’s Senate Bill (SB) 716, Sen. Bam Aquino’s SB 1942, Sen. Sonny Angara’s SB 2149, Rep. Miro Quimbo’s of the Second District of Marikina Cityn House Bill (HB) 4829, and Party-list Reps. Neri Colmenares’s and Carlos Zarate’s of Bayan Muna HB 5401. Similar proposals have been raised by the private sector, most notably the Tax Management Association of the Philippines (TMAP).

According to Manasan, Recto’s SB 716 and Quimbo’s HB 4829 will reform the personal income-tax system by adjusting the tax brackets, according to changes in consumer-price index between 1998 and 2015. Meanwhile, Aquino’s SB 1942 will exempt incomes below P60,000 and raise the top-bracket income threshold to P12 million. Angara’s SB 2149 will affect changes in tax rates in phases over a span of three years, reducing the bottom marginal tax rate from 15 percent to 10 percent and the top marginal tax rate from 32 percent to 25 percent. Under this proposal, all incomes below P20,000 will also be exempted from taxation.

Colmenares and Zarate’s HB 5401 exempts income below P396,000 and raises the top threshold to P2 million.

source:  Business Mirror

Can the BIR’s 5-year plan make an impact?

Taxation will always be contentious. Many Filipino taxpayers still struggle to understand taxation and tax compliance; among them there has emerged the view that the Bureau of Internal Revenue’s (BIR) regulations and processes are far from ideal.

So let’s examine the bold statement in the Bureau’s vision and mission -- “The Bureau of Internal Revenue is an institution of service excellence and integrity. We collect taxes through just enforcement of tax laws for nation building and the upliftment of the lives of Filipinos.” That guiding principle informs Revenue Memorandum Order (RMO) No. 6-2016, which was issued prescribing the strategic plan of the BIR for 2016 to 2020.

The BIR’s plan has as its focus to improve services to taxpayers, to increase voluntary compliance, and to enforce laws against those who do not comply. To achieve this, RMO 6-2016 outlines seven high-level strategic objectives:

First, attain collection targets and sustain collection growth. Being mandated by law to collect taxes, BIR’s collection target for taxable year 2016 is set at P2.025 trillion. The BIR continues to improve its ability to achieve the targets set by the government.

Second, improve taxpayer satisfaction and compliance. The BIR aims to gather information through consultation, meetings and dialogue with the community to identify improvements and recommendations for amendments to the law.

Third, strengthen good governance. BIR aims to enhance its performance through monitoring and evaluating of processes.

Fourth, improve assistance and enforcement processes. The BIR will make use of services that will ease the process for taxpayers to comply with their obligations. On the other hand, the BIR will also employ enforcement activities to identify and pursue those who deliberately evade or avoid paying tax.

Fifth, build and deploy contemporary information technology systems, processes, and tools. Because change is inevitable especially in the digital world, the BIR aims to maintain and enhance its online services to replace manual and paper-based services and processes.

Sixth, improve integrity, competence, professionalism, and satisfaction of human resources. The BIR strives to develop an organization with high levels of integrity that fosters the observance of high professional standards and demonstrates the values of the organization.

Last, optimize management of resources. The BIR ensures the highest standard of financial integrity, focusing on budget, asset and records management capabilities to ensure that BIR resources deliver their results.

The 7 high-level strategic objectives above appear to be very promising. Let’s just hope that with the experience gained from the past few years it can rectify some issues that hound the Bureau.

An example of the issue that should be addressed is the online filing of tax returns. There were glitches in the system which were discovered as a result of the sheer volume of taxpayers scrambling to fulfil their obligations.

Another concern of taxpayers is the BIR’s implementation of its tax assessment process. Taxpayers have hoped that part of the BIR’s Fourth Objective on improvement of enforcement processes would include revisiting tax findings by certain BIR examiners. These findings normally start at a huge amount, leaving questions about the BIR’s audit procedures and doubt over whether proper analysis was actually done.

On the other hand, with respect to the BIR’s Sixth Objective on improving integrity, many believe that this objective should be cascaded down to all levels of the Bureau. It would be a very disappointing on the part of the taxpayers if they encounter a BIR officer who asks for something in exchange for his speedy assistance.

Time will tell if the BIR’s initiatives are a match for its intended outcomes, and whether it achieves a balance between the mandate to collect tax and the objective of easing the tax process for the burdened taxpayer.

The BIR 5-year plan is supposed to run until 2020, while the term of the BIR Commissioner ends in June 2016 assuming she is not re-appointed. Whether the next administration retains the 5-year plan or makes improvements on it will be something to look out for.

Gretchel N. Lim is a tax associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld