Tax planning strategies

Now that the annual tax filing season is over, it is about time to revisit your tax planning strategy for the next year. This becomes more relevant since the deadline for the first quarter income tax return is fast approaching. Tax planning involves weighing various tax options to determine the most beneficial way to conduct a business. One should bear in mind that tax planning aims not only to save on taxes but also to reduce or eliminate tax exposures during tax examinations. These days, the Bureau of Internal Revenue (BIR) is very aggressive in its campaign to increase collections, and it is crucial to employ the right tax planning strategies.

Below are some strategies you may consider:

• Maximize allowable deductions. Deductible expenses must be supported with documents such as official receipts and sales invoices. For example, some deductible expenses require specific documentation like a board resolution for bad debts and a BIR notification for casualty losses. In addition, the correct tax must be withheld if an expense is subject to withholding tax, otherwise such expense may be disallowed as a tax deduction. 

For taxpayers claiming itemized deductions, avail of the net operating loss carry-over (NOLCO) if there is any. This must be properly stated on prior year financial statements and income tax returns. NOLCO can be claimed within 3 taxable years from the year of loss on a first-in, first-out basis.

• Take advantage of available tax credits. Creditable withholding tax certificates are proof of advance income tax payments deductible from annual income taxes. Claims for withholding tax credits should be supported by creditable withholding tax certificates (BIR Form No. 2307) issued by clients or customers. Thus, ensure that these certificates have been secured from clients or customers.

Consider minimum corporate income tax from prior years which may be credited against the normal income tax due. Similar to NOLCO, this can be claimed within 3 taxable years immediately succeeding the year in which the same is paid. 

• Know your donees. Charitable contributions made to accredited donee institutions may be fully deductible subject to certain conditions. Donors claiming charitable contributions as deductions must submit a Certificate of Donation (BIR Form 2322) which contains a donee certification and a donor’s statement of values. Such contributions may also be exempt from donor’s tax subject also to certain conditions.

• Decide which method of deduction is more advantageous, Optional Standard deduction (OSD) or Itemized Deduction. OSD pertains to an amount of deduction not exceeding 40% of the gross income of corporate taxpayers during the taxable year. OSD would be better when there is less cost of sales/service because it uses a higher tax base for OSD computation which would result to lower income tax due. If your proof of allowable deductions is not sufficient or you have no documents at all, OSD is the prudent choice. Note, however, that your choice of method of deduction to adopt in the first-quarter return shall be irrevocable for the same taxable year.

• Decide which option to take with regard to excess income tax payments. Taxpayers who have incurred excess income tax payments may opt to: (1) carry-over the excess credit to the next taxable year/quarter; (2) refund the excess amount of taxes paid or apply for the issuance of tax credit certificate (TCC). Once you choose the option to carry-over it becomes irrevocable. In making the decision to refund, consider the cost of the refund vis-à-vis the amount to be refunded as well as the time it will take to claim the refund. Be aware that any application for refund will expose the taxpayer to an audit investigation.

• Avoid taxing the non-taxable income. Check the proper treatment of the items of income in your gross sales or gross receipts to avoid paying taxes on non-taxable items like unrealized foreign exchange gains and others.

• Monitor unappropriated retained earnings in relation to your paid-up capitalization to avoid penalties. Unappropriated retained earnings are not allowed to exceed paid-up capital. The Tax Code imposes a 10% penalty tax on improper accumulations.

• Avail of Tax Treaty relief for transactions involving residents of tax treaty countries. Transactions covered by a tax treaty may avail of tax exemption or preferential tax rates as the case may be. This however, is subject to the requirement of the tax treaty relief application (TTRA) to confirm the entitlement of the taxpayer to the relief. In exception to this, a recent Supreme Court decision states that the failure to strictly comply with filing a TTRA before the taxable event would not deprive a taxpayer of the benefits of a tax treaty. Despite this, the better practice is still to file a TTRA even after availing of the tax treaty benefit to avoid issues with the BIR.

Despite the importance of tax planning, it has taken a backseat to the costly and burdensome requirements of tax regulations which in reality pass the burden of tax administration. Taxpayers have been busying themselves trying to comply with the countless BIR reportorial requirements and have minimal to nil time to do tax planning. But advance tax planning is vital and may save a taxpayer a lot of needless worry and risk in the long run.

Charity P. Mandap-de Veyra is a tax manager at the Cebu and Davao Branches of Punongbayan & Araullo.

source:  Businessworld

BIR Form No. 1606: Establishing the fact of withholding in CWT refund

The countdown has started and taxpayers have barely 4 days before the last day for filing the final adjustment return otherwise known as the Annual Income Tax Return for the taxable year ended December 31, 2015. Specifically, corporate taxpayers are required to file a final adjustment return covering the taxable income for the preceding calendar year on or before the 15th day of April and, likewise, to pay the income tax due thereon at the time the declaration or return is filed in accordance with the provisions of Section 76 and 77 of the National Internal Revenue Code of 1997 (Tax Code), as amended.

RELATED STORIES Let’s Talk Tax -- Eleanor Lucas Roque: "Determining market value in tax free exchanges" Let’s Talk Tax -- Charity P. Mandap-de Veyra: "Tax planning strategies" Let’s Talk Tax -- Henesty Z. Salvador: "Will the 2016 election be a crossroads for tax reform?" Let’s Talk Tax -- Oliver D. Aznar: "Some things for taxpayers to consider before the elections" Let’s Talk Tax -- Jantzen Joe C. Chua: "Favorable developments in deficiency and delinquency interest"

Save for the mandatory requirement for all taxpayers to file on time, the burden of paying the correct taxes is not the only thing corporate taxpayers must mind -- they are faced with managing excess/unutilized creditable withholding taxes (CWTs) arising from income earned or received that has been subjected to withholding tax. For them, the tedious process of a claim for refund or credit awaits at the end of the tunnel.

Accordingly, Section 76 of the Tax Code lays down the options available to a corporate taxpayer with excess/unutilized CWT credits, to wit:

1. Carry over the excess credit; or,

2. Be credited or refunded with the excess amount paid, as the case may be.

It should be noted that said options are alternative and not cumulative in nature, and the choice of one precludes the other.

In the event the taxpayer opts to claim a refund, the taxpayer-claimant has the burden to establish proof of entitlement. In accordance with the prevailing jurisprudence and implementing regulations of the Bureau of Internal Revenue, a taxpayer who seeks a refund of excess and unutilized CWT must:

1. File the claim with the CIR within the two-year period from the date of payment of the tax;

2. Show in the return that the income received was declared as part of the gross income; and,

3. Establish the fact of withholding by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld.

Revenue Regulations (RR) No. 2-98, as amended, further requires a taxpayer opting for a refund of excess/unutilized CWT credits to indicate in its income tax return such option. The option is considered irrevocable for that taxable year.

However, compliance with the third condition of establishing the fact of withholding through a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld encountered conflicting interpretations in case of withholding taxes on sale of real property classified as ordinary assets.

The Court of Tax Appeals (CTA) ruling in the case of Mermac, Inc. (CTA Case No. 7758, June 28, 2010) relied heavily on the ruling of the Supreme Court in Banco Filipino (BF) Savings and Mortgage Bank (G.R. No. 155682, March 27, 2007). In the said CTA case, the taxpayer-claimant submitted BIR Form No. 1606 (Withholding Tax Remittance Return) instead of the BIR Form No. 2307. Form 1606 is the return used, many times by the seller itself, to remit to the BIR the withholding tax on the purchase of real property. Accordingly, the CTA denied the claim for refund based on the ground that the BIR Form No. 1606 does not suffice because it was not filed by the withholding agent itself and is contrary to the requirement under RR No. 2-98, as amended, that a copy of withholding tax statement should be issued by the payor to the payee. As such, it was emphasized that the submission of BIR Form No. 1606 cannot substitute for the requirement of presenting the BIR Form No. 2307 in a claim for refund of CWTs.

Despite this, taxpayers should not fret. A recent en banc decision of the CTA dated March 21, 2016 affirmed the findings of its Second Division that taxpayer-claimant has sufficiently complied with the requirements for refund of unutilized CWT in the amount of P14.39 million and granted an additional amount of P20.40 million for a total of P34.78 million with respect to the latter’s sale of its Real and Other Properties Owned and Acquired.

In the said case, the tax court consistently applied the ruling of the Supreme Court in the recent case of PNB (G.R. No. 206019, March 18, 2015). The Supreme Court held that BIR Form No. 1606 contains the very same key information that would be obtained from BIR Form No. 2307 which suffices to prove the fact of withholding. Relative thereto, citing the clear intention of the pertinent provisions of Revenue Regulations No. 2-98, as amended, that the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee showing the amount paid and the amount of tax withheld therefrom does not preclude a taxpayer-claimant to adduce alternative pieces of evidence to prove that it did not use the claimed CWT to pay its tax liabilities.

It is noteworthy to mention that while it is true that tax refunds partake the nature of tax exemptions and are thus strictly construed “strictissimi juris” against the person or entity claiming the exemption. The burden in claiming tax refund rests upon the taxpayer. However, in the event that the taxpayer-claimant has satisfied the conditions to be entitled for the claim of refund, release should be made from such unnecessary burdensome obligation of proving entitlement to the claim for refund.

It is in this light that all taxpayers, especially for those that are accumulating millions of unutilized CWTs in their books, fervently hope that a more consistent and liberal application of tax rules should be followed in so far as tax exemptions and refunds are concerned as long as the import of law has been complied with meritoriously.

As a reminder, taxpayer-claimant should comply with the statutory requirements provided for under the Tax Code in order to successfully pursue one’s claim and avoid disallowances due to procedural technicalities.

Daryl Matthew A. Sales is a tax manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.

Determining market value in tax free exchanges

When I started practicing in tax law, the rules in determining fair market value of shares of stocks were quite simple. We were instructed to rely on the book value of the shares of stock based on the latest audited financial statement of the company which issued the shares. There were certain adjustments, of course, but generally, the book value is quite reliable.

But in taxation, as in life, nothing remains simple. We have been so used to quoting “it’s complicated” in our Facebook status that the complications leak into our tax rules. Recently, the BIR issued Revenue Memorandum Order (RMO) No. 17-2016 dated May 5, 2016. The RMO was issued to supplement the existing guidelines for securing tax free exchange rulings. The RMO now requires that the number of shares to be issued by the transferee corporation in exchange for the property must be equal to the market value of the property transferred, requiring that the transaction must be a value for value exchange.

Back in the old days, taxpayers were to use tax free exchange rules if they want to transfer property to their controlled corporations. In a tax free exchange transaction, the transfer of the property to the controlled corporation will not be subject to income tax subject to certain conditions. The income tax, if any, shall be due only upon the subsequent transfer of the same property. Hence, the misnomer that it is tax-free when in fact, the transaction is only tax-deferred.

Generally, the property would be transferred in exchange for shares of the controlled corporation. Since this is a tax free exchange, the taxpayers were free to receive such number of shares as they have agreed provided that the issuance of shares will not result to watered stocks. Watered stocks happen when shares are issued for a consideration which is below their total par values.

Under the new RMO, the BIR reiterated the rules in determining the market value of the property to be transferred under a tax free exchange. If the properties to be transferred are listed shares of stocks, the rules are quite easy as they are based on the closing price on the day when the shares are transferred or exchanged. When no sale is made on the stock exchange, then the market value shall be the closing price on the day nearest to the date of the transfer.

For shares not listed and traded in the stock exchange, the rules get to be more complicated. The market value shall be the book value of the shares of stock based on the audited financial statements, with the assets therein adjusted to its fair market value as of a date not earlier than 90 days from the date of the transaction. Generally, this would mean that the company will have to hire an accredited property appraiser to issue an appraisal report on the underlying assets.

The further complication arises if the company whose shares are being transferred have underlying assets which include shares in other corporations. The BIR requires that in such case, the underlying assets which are also shares shall be adjusted to their fair market value as of a date not earlier than 90 days from the date of the transaction. The adjustment shall be made pursuant to Revenue Regulation No. 6-2013 which introduced to taxpayers the concept of Adjusted Net Asset Value. In this scenario, how far down the line must the net asset value be adjusted? What if the second underlying company has assets which again include shares in another company? What happens if the shares issued are less than the fair market value of the properties exchange? Will this result in the outright denial of the request for ruling? Will the transaction be subject to income tax or to donor’s tax?

In following the BIR rules on determining fair market value, taxpayers have already been burdened with the need for an appraisal report every time shares of stocks are being sold or exchanged. When Revenue Regulations No 6-2013 was issued, there was already a clamor to reverse it as it unduly burdened the seller in shouldering additional costs of hiring property appraisers. It became prohibitive for minority shareholders to transfer their shares of stocks in property-rich companies.

However, in this case, the transfer is being done under a tax-free exchange scenario. In principle, the transaction is tax-free because there really is no transfer at this stage. It is the subsequent transfer which will become subject to tax as the RMO clearly illustrated. In such subsequent transfer, the fair market value of the shares at the time of the transfer will have to be determined necessitating the need for an appraisal report again. Hence, one wonders why the market value of the property being transferred in a tax free exchange is even crucial at this stage. Is it only to capture the documentary stamp tax on the original issuance of shares of the transferee corporation?

Tax free exchanges are not means employed by conscientious taxpayers to evade taxes. They are transactions allowed by law as they serve legitimate business purposes. We should all be reminded that the power to tax is the power to destroy. When requirements to legitimate transactions become so odious that they prohibit law-abiding taxpayers in availing what the law allows, the country is not served at all. While it is true that taxes are the lifeblood of a nation, we should also remember that it is taxpayers who are required to slice their veins open and shed that blood.

Eleanor Lucas Roque is the head and principal of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

Yes, New Taxes 3: A reform program for the new administration

In two earlier columns (“Yes, New Taxes”, 1 February 2016, and “Low Hanging Fruit”, 29 February 2016), I pushed for comprehensive tax reform to make the system fairer, yield more for infrastructure financing, and, at the same time, simplify for ease in compliance and administration, thereby making it less prone to corruption.

We offered some ideas for this both 1) administrative -- like use of technology for security marking, including on oil products, and 2) tax policy, such as a variable excise on oil products, tariffying quantitative restrictions (QRs) on rice with a 30% excise, and a rationalization of redundant incentives and unjustified exemptions.

Earlier this month, the Department of Finance unveiled a work in progress Comprehensive Tax Reform Package. Its elements (and the revenue impact for the first year) are as follows:

1) Lower income tax rate to 25% for individuals and corporations (minus P158 billion to P222 billion);

2) P1 million all-in income tax exemption for wage earners;

3) Fiscal incentives rationalization (P5 billion);

4) Excise tax increase on gas, diesel, and other oil (P132 bilion);

5) Expand VAT base (P80 billion);

6) Increase VAT rate from 12% to 14% (P82 billion); and

7) Tax administration reforms

-Make tax evasion a predicate crime to money laundering

-Repeal Bank Secrecy for BIR

-Remove BIR and BoC from salary standardization and civil service protection

-Allow BIR and BoC to retain 1% of their revenues as their budget for modernization and to fund personnel enhancement measures.

Some quick comments on the tax reform package.

First, it seems aligned with earlier reform proposals from within the DoF and by outside experts. My only regret is that this is being proposed at the tail end of this administration. Tax reform is best pursued early while an administration has abundant political capital, and so that it reaps fiscal dividends early. Nonetheless, it is commendable that Sec. Purisima and his team of mostly career professionals have taken the initiative to help the new administration get off on the right foot.

The personal income tax gives in the plan look fairly aggressive, though almost fully offset by the higher rate and expanded VAT. What will likely be said by critics is that VAT is not a progressive tax; and that we already have the highest VAT rate in the ASEAN region.

Reductions in the corporate income tax side are called for. It makes us more aligned with the corporate income tax rates in the region. 

On the other hand, it is disappointing to see the estimated gains from rationalizing tax incentives at only P5 billion. I was hoping for more bite from this reform measure, not only for revenue grounds, but also because it would suggest needed guillotine of incentives and exemptions, and a more level playing field.

The proposed additional tax on oil and diesel was computed at P10 for gasoline and P6 for diesel, and of the rates to be indexed to inflation at 4% per year. I think more can be squeezed from this tax source. Not just via higher rates, but as observed in my second column (“Low Hanging Fruits”) by adoption of technology to flush out smuggling, now estimated at minimum of 20% of imports. President Duterte is well placed to demonstrate the people’s wrath versus smugglers, who have vexed us for decades.

Nothing was said in the DoF package about tariffication of rice QRs. 

As observed in my earlier column, this will not only halve the price of rice and help address poverty and malnutrition, but can raise revenue amounting to P30 billion annually. Just as important, it will release wasted subsidies to NFA in the billions of pesos annually. This has accumulated to around P150 billion in unpayable national government guaranteed debt.

The World Bank estimates that for every P5 of spending for NFA, P4 are wasted leakages that provide no public benefit. (Please see recent statement of the Foundation for Economic Freedom on this “Let change come to the present rice policy: Liberalize ride importation” infef.org.ph )

The tax administration elements in the program pose high risks. Both in getting these highly sensitive legislation passed, and in actual implementation.

It will take very skillful navigation by new administration to get support by legislators on a law that will repeal the bank secrecy for BIR. Same with a bill to make tax evasion a predicate crime to money laundering. The argument that the Philippines is only one of two countries (the other being Lebanon) in the world where tax evasion is not a predicate crime and only one of three (Lebanon plus Switzerland) that do not allow tax administrations access to bank deposits has not swayed Congress so far. I think we can all guess why.

Exemptions of BIR and BoC from salary standardization and civil service protection will also not be easy -- this is a reform that earlier administrations have tried to push without success. Often it is the employees of the bureaus who lobbied Congress against the lifting of civil service protection.

Choosing the right people to head these two agencies is critical -- with the requisite technical background and experience, but perhaps even more important, the temper and skills to introduce and manage radical reform. They should be fully trusted by, and accountable to the Finance Secretary. The President needs to give him the say on these appointments. 

As I said earlier, these reform proposals are not new, but failed to pass or be implemented. We can only hope that under a President who is known for resolute action, we shall see greater demonstration of skill in pushing through the mill and of political will to summarily execute (wink!).

Romeo L. Bernardo is vice-chairman of the Foundation of Economic Freedom and a GlobalSource Partners advisor. He was formerly undersecretary of Finance during the Aquino1 and Ramos administrations.

romeo.lopez.bernardo@gmail.com

source:  Businessworld

A peek at the next five years for Philippine transfer pricing

With the determination to fulfill its mandate even in the midst of challenges, the Bureau of Internal Revenue (BIR) has come up with a strategic plan that is designed to help the organization achieve its vision to be an institution of service excellence and integrity. This strategic plan will serve as the BIR’s roadmap for the next five years (i.e., 2016-2020) and aims to achieve seven high-level strategic objectives, namely: attain collection targets and sustain collection growth; improve taxpayer satisfaction and compliance; strengthen good governance; improve assistance and enforcement; build and deploy information technology systems, processes and tools; improve integrity, competence, professionalism and satisfaction of human resources; and optimize management resources. These seven overarching objectives shall support the BIR’s goal of improving services to taxpayers to increase voluntary compliance and of enforcing the laws for those who do not comply.

One of the focus points of the BIR Strategic Plan is transfer pricing. Under Revenue Regulations No. 2-2013 (The Philippine Transfer Pricing Guidelines), the term “transfer pricing” is generally defined “as the pricing of cross-border, intra-firm transactions between related parties or associated enterprises.” In the height of ongoing developments in international taxation following the initiative of the Organisation for Economic Co-operation and Development (OECD) in addressing Base Erosion and Profit Shifting (BEPS) within multinational companies, the BIR has been continuously determined to strictly implement transfer pricing rules in the Philippines. Thus, to carry out its 2016-2020 strategic plan, the BIR has laid down its programs on how to establish its approach to transfer pricing so that the Bureau will be able to address BEPS as well as the challenges of the digital economy and global business structures.

These programs include the identification of the required skills and expertise in transfer pricing, reporting requirements, organizational arrangements, Advance Pricing Arrangements (APA), Mutual Agreement Procedure and documentation processes. They also target to strengthen the focus on international tax risks and to develop a methodology to identify and audit high risk companies that shift profits offshore or avoid tax obligations.

In view of these strategically planned objectives, more proactive measures from the BIR could be expected moving forward. In fact, one of the BIR’s priority programs this year is to subscribe to a commercial database for transfer pricing and develop test cases for its Large Taxpayer Services division. It is not clear though how this transfer pricing database will work, its purpose and functions, and whether or not it is the same or usual database independent service providers use for benchmarking purposes. It is also unclear how the BIR will conduct the said test cases; but leveraging on previous experience, the BIR may once again do its own benchmarking based on specific industry classification and send notices to taxpayers who are found to fall outside the computed benchmarked range. 

The BIR is also pushing for the crafting and finalization of various transfer pricing related issuances that would supplement the formal transfer pricing regulations issued last 2013. These include the APA regulations, and revenue memorandum orders on transfer pricing documentation and transfer pricing risk assessment, among others.

As regards the OECD’s BEPS initiative, while the BIR has not yet issued an official position on whether the 15 Action Points that provide measures to eradicate transfer pricing flaws will be adopted in local tax and transfer pricing rules, it has done various internal evaluations and consultative talks regarding this matter. Despite the Philippines not being a member of the OECD, the BIR adheres to the rules set by the said organization and thus it is reasonable to anticipate that the BIR would also observe the suggested practices provided in the BEPS action plan.

In addressing the increasing challenges of globalization, the BIR seeks to have a well-established and operational transfer pricing rules in the country. The agency is also looking forward to have international risk and mitigation strategies in place and to undertake compliance activities. Overall, the main result that the BIR wants to see in the area of transfer pricing within the next five years, as discussed in its Strategic Plan, is for multinational enterprises to increasingly comply with the globally-accepted arm’s length principle.

Notwithstanding worldwide advancements in transfer pricing, its legal groundwork still needs to be galvanized domestically. Hence, taxpayers should still begin with the basics. At present, where more comprehensive and sophisticated local transfer pricing rules are not yet formalized and issued, taxpayers are advised to simply follow what is provided in existing tax and transfer pricing regulations. More so now that the BIR has been persistent in looking into transfer pricing issues more extensively since the formal transfer pricing rules were issued.

Thus, for taxpayers engaged in related party transactions, maintaining contemporaneous documentation of their intercompany dealings could be considered as the first step in demonstrating their adherence to the principle of arm’s length transfer pricing.

As the country turns a new leaf in its history with the transition of government leadership, the success of the BIR’s strategic plan including its programs on transfer pricing will depend on the new administration’s willingness to implement and continue spelled-out reforms and priority programs. Having laid down its strategic goals and objectives, the next five years for the BIR calls for more decisive steps to concretize efficient service, plug tax leakages and achieve tax collection targets.

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.

Iris Kristine D. Lacebal is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

iris.kristine.d.lacebal@ph.pwc.com

source:  Businessworld

How to avoid unnecessary tax expenses

It is a common practice among Filipinos to consult a doctor or go to the hospital only when the disease has reached a serious stage. This sometimes puts the patient at risk of being diagnosed only when the illness already requires intensive care, or worse, when it is too late to save the patient’s life.

This same human behavior, unfortunately, is mirrored in the corporate behavior of most small and medium companies, and even among some large corporations in the Philippines, in dealing with their tax problems. Many companies approach tax consultants, like our firm, only when the tax problem has already been diagnosed by the Bureau of Internal Revenue (BIR) and is already in the intensive care stage. Under this dire situation, the company usually ends up paying more because, aside from the deficiency basic tax, there is also a 25 percent or 50 percent surcharge, 20 percent interest and compromise penalties, all charged to the taxpayer. These items come unnecessarily as unbudgeted expenses for the company. If not properly handled, this tax issue will certainly affect the financial condition, and even the operation and reputation of the company.

So, how do you avoid these unnecessary tax expenses? Are there ways to prevent huge amounts of tax assessments?

Avoidance of unnecessary tax expenses requires drilling down to the causes of the tax problem. We diagnosed three common causes and, the good news is, there are curative measures.

Accounting records not in order. The condition of the accounting records (i.e. not updated, not in order, etc.) is the usual culprit in many tax problems. A classic example is a company that has been assessed by the BIR because the purchases declared in the tax returns did not match the purchases journal and supporting documents. We all know these items should tie up if done by a good bookkeeper.

One of the advocacies of our firm is to educate companies about the importance of keeping updated and accurate financial records. The importance of proper bookkeeping has been discussed thoroughly in previous editions of this column. Among others, the company’s books become the basis of BIR examinations.

Lack of tax knowledge. Some simple mistakes can be very costly. Most of these mistakes could have been avoided by training the accountant about the basic tax compliance rules. This is more easily achieved by sending him regularly to attend tax seminars for continuing education. For example, withholding on certain income payments such as rental and interest on foreign loans is basic tax compliance, but could be missed if the accountant lacked basic tax knowledge. This failure to withhold will expose the company to two types of tax assessments immediately: deficiency withholding tax and income tax for non-deductibility of the expense.

Companies, especially with voluminous and/or complex transactions, should continuously and consciously send their accountants or accounting personnel to tax seminars. Another way is to hire an internal tax accountant. In the absence of a tax accountant, the company may outsource its tax functions, including the preparation and filing of tax returns. For new contracts and business arrangements, or even significant non-recurring transactions, the company may consult a tax expert to determine the tax implications, preferably prior to securing the contract or commencing the arrangement. In this way, the management will be guided on the tax-efficient structure of the said transaction. Knowing the tax obligations ahead will also avoid nonpayment or late payment of the tax.

Lack of appropriate business processes. Sometimes the accounting system is not properly designed to capture transactions promptly. A good example is when the board of directors declares a cash dividend but the corporate secretary fails to communicate that to the accounting department. Thus, even if the accountant knows that cash dividends to resident citizen stockholders are subject to 10 percent final withholding tax on the date it is payable, the tax may not be remitted on time because the accountant only learns of the dividends when he receives the payment instructions, which in this case are likely to come late. Consequently, the company incurs the 25 percent penalty for late filing and payment, 20 percent annual interest and compromise penalties.

Many unnecessary penalties incurred by companies could have been avoided if the transactions with accounting and tax implications were provided immediately to the accounting department. Such simple business processes could have saved millions from unnecessary tax expenses.

Going back to my analogy about human health, in as much as people need to undergo regular diagnostic tests for early detection of any sickness and to prevent it from worsening, companies also have to undergo regular tax compliance reviews to correct any wrong tax practices, avoid huge amounts of tax assessments, and implement more tax-efficient arrangements. As the saying goes, “prevention is better than cure.”

Wendell D. Gahinhin is a Partner, Tax & Outsourcing, Cebu and Davao Branches of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.

source:  Manila Times

Tax planning strategies

Now that the annual tax filing season is over, it is about time to revisit your tax planning strategy for the next year. This becomes more relevant since the deadline for the first quarter income tax return is fast approaching. Tax planning involves weighing various tax options to determine the most beneficial way to conduct a business. One should bear in mind that tax planning aims not only to save on taxes but also to reduce or eliminate tax exposures during tax examinations. These days, the Bureau of Internal Revenue (BIR) is very aggressive in its campaign to increase collections, and it is crucial to employ the right tax planning strategies.

Below are some strategies you may consider:

• Maximize allowable deductions. Deductible expenses must be supported with documents such as official receipts and sales invoices. For example, some deductible expenses require specific documentation like a board resolution for bad debts and a BIR notification for casualty losses. In addition, the correct tax must be withheld if an expense is subject to withholding tax, otherwise such expense may be disallowed as a tax deduction. 

For taxpayers claiming itemized deductions, avail of the net operating loss carry-over (NOLCO) if there is any. This must be properly stated on prior year financial statements and income tax returns. NOLCO can be claimed within 3 taxable years from the year of loss on a first-in, first-out basis.

• Take advantage of available tax credits. Creditable withholding tax certificates are proof of advance income tax payments deductible from annual income taxes. Claims for withholding tax credits should be supported by creditable withholding tax certificates (BIR Form No. 2307) issued by clients or customers. Thus, ensure that these certificates have been secured from clients or customers.

Consider minimum corporate income tax from prior years which may be credited against the normal income tax due. Similar to NOLCO, this can be claimed within 3 taxable years immediately succeeding the year in which the same is paid. 

• Know your donees. Charitable contributions made to accredited donee institutions may be fully deductible subject to certain conditions. Donors claiming charitable contributions as deductions must submit a Certificate of Donation (BIR Form 2322) which contains a donee certification and a donor’s statement of values. Such contributions may also be exempt from donor’s tax subject also to certain conditions.

• Decide which method of deduction is more advantageous, Optional Standard deduction (OSD) or Itemized Deduction. OSD pertains to an amount of deduction not exceeding 40% of the gross income of corporate taxpayers during the taxable year. OSD would be better when there is less cost of sales/service because it uses a higher tax base for OSD computation which would result to lower income tax due. If your proof of allowable deductions is not sufficient or you have no documents at all, OSD is the prudent choice. Note, however, that your choice of method of deduction to adopt in the first-quarter return shall be irrevocable for the same taxable year.

• Decide which option to take with regard to excess income tax payments. Taxpayers who have incurred excess income tax payments may opt to: (1) carry-over the excess credit to the next taxable year/quarter; (2) refund the excess amount of taxes paid or apply for the issuance of tax credit certificate (TCC). Once you choose the option to carry-over it becomes irrevocable. In making the decision to refund, consider the cost of the refund vis-à-vis the amount to be refunded as well as the time it will take to claim the refund. Be aware that any application for refund will expose the taxpayer to an audit investigation.

• Avoid taxing the non-taxable income. Check the proper treatment of the items of income in your gross sales or gross receipts to avoid paying taxes on non-taxable items like unrealized foreign exchange gains and others.

• Monitor unappropriated retained earnings in relation to your paid-up capitalization to avoid penalties. Unappropriated retained earnings are not allowed to exceed paid-up capital. The Tax Code imposes a 10% penalty tax on improper accumulations.

• Avail of Tax Treaty relief for transactions involving residents of tax treaty countries. Transactions covered by a tax treaty may avail of tax exemption or preferential tax rates as the case may be. This however, is subject to the requirement of the tax treaty relief application (TTRA) to confirm the entitlement of the taxpayer to the relief. In exception to this, a recent Supreme Court decision states that the failure to strictly comply with filing a TTRA before the taxable event would not deprive a taxpayer of the benefits of a tax treaty. Despite this, the better practice is still to file a TTRA even after availing of the tax treaty benefit to avoid issues with the BIR.

Despite the importance of tax planning, it has taken a backseat to the costly and burdensome requirements of tax regulations which in reality pass the burden of tax administration. Taxpayers have been busying themselves trying to comply with the countless BIR reportorial requirements and have minimal to nil time to do tax planning. But advance tax planning is vital and may save a taxpayer a lot of needless worry and risk in the long run.

Charity P. Mandap-de Veyra is a tax manager at the Cebu and Davao Branches of Punongbayan & Araullo.

source:  Businessworld

The new rule on waivers: a taxpayer’s gamble

Casino Rule: The house always wins. Something to keep in mind for who study the tax system, particularly in light of the recent policy turnaround in regard to the waiver of the Statute of Limitations.

Until just recently, the prevailing rules on the proper execution of the waiver of the Statute of Limitations under the National Internal Revenue Code of the Philippines (Tax Code) can be found in Revenue Memorandum Order (RMO) 20-90 of the Bureau of Internal Revenue (BIR). In the landmark case of Philippine Journalists, Inc. v. Commissioner of Internal Revenue (G.R. No. 162852, 16 December 2004), the Supreme Court (SC) gave a stringent interpretation of RMO 20-90, requiring faithful compliance with its requirements for a waiver to be valid. The court ruled that since a waiver to extend the period for the BIR to issue an assessment and collect taxes “is a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, waivers of this kind must be carefully and strictly construed.”

Recently however, the Supreme Court adjusted its stance. In G.R. No. 212825 dated Dec. 29, 2015, the high court laid down exceptions to the rule. In this case, the BIR and the corporate taxpayer were considered in pari delicto or in equal fault, and the Court deemed it more equitable to allow BIR’s lapses to pass (mentioning that proper administrative sanctions could be imposed on the negligent BIR officials). Consequently, the validity of the waivers were upheld in support of the principle that tax collection is the lifeblood of the state. Since the taxpayer was also at fault, it was not allowed to benefit from its own wrongdoing by invalidating the signed waivers. For failure to raise any objections, the taxpayer was estopped from questioning the validity of the waivers. 

In parallel with this SC decision, the BIR found it high time to repeal RMO 20-90. Thus, on April 4, the BIR issued RMO 14-2016, providing a new set of rules on executing waivers. Under the new relaxed rules, the waiver may be, but not necessarily in the form prescribed by RMO 20-90 or the related Revenue Delegation Authority Order No. 05-01. The taxpayer’s failure to follow the prescribed forms will not invalidate the executed waiver, as long as the following minimum conditions are complied with:

• The waiver of the Statute of Limitations shall be executed before the expiration of the period to assess or to collect taxes. The date of execution shall specifically be indicated in the waiver.

• The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials.

• The expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription should be indicated. 

In addition, the taxpayer is now charged with the burden of ensuring that the waivers are validly executed by its authorized representatives. The BIR no longer requires that the delegation of authority to a representative be in writing and notarized. This means that it is presumed that the person signing has the authority to do so. Thus, the taxpayer is now estopped from questioning the authority of its representative who signed the waiver. Also, the waiver itself need not be notarized. It is sufficient that they be in writing to produce legal effect and to bind the taxpayer upon its execution. 

The apparent departure from RMO 20-90 is the previous requirement that only the authorized revenue officials are allowed to accept the waiver. With the new relaxed rules, the group supervisor as designated in the Letter of Authority or Memorandum of Assignment can accept the waiver. Further, the date of acceptance of the signed waiver by the BIR is no longer required to be indicated. RMO 14-2016 only considers two material dates: 1) the date of the execution of the waiver by the taxpayer or its authorized representative; and 2) the expiry date of the period the taxpayer waives the statute of limitations. 

Even under the old rules, taxpayers must consider carefully whether or not they should execute waivers to extend the prescriptive period. Now, with these new relaxed rules that lean in favor of the BIR, the decision should be weighed more carefully because once signed, waivers can no longer be challenged.

While it would seem unfair for the BIR to change a long-standing rule to its advantage, it is but proper since the Commissioner, under the Tax Code, is vested with powers, not only to assess and collect taxes, but also to prescribe additional requirements for tax administration and enforcement. This means that the Commissioner has the power to make, amend or repeal rulings he may deem necessary for the proper implementation and interpretation of the tax laws.

With the enactment of RMO 14-2016, the BIR would seem to always win. As for the taxpayers, however, the law may be harsh, but like players in a game of poker, they will have to play by the rules.

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


Caryl H. Granada-Bacay is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

caryl.h.granada@ph.pwc.com

source:  Businessworld

Are waivers sole responsibility of taxpayers?

In every relationship, the parties involved need to agree to achieve a harmonious relationship. The Bureau of Internal Revenue (BIR) and the taxpayer are no exception.

An assessment has to be formally issued within three years from the due date or date filing of the tax return, whichever is later. In case the three-year period is not sufficient, the taxpayer and the BIR may agree in writing to extend the three-year period for assessment pursuant to Section 222 of the Tax Code. The taxpayer executes a Waiver of the Statute of Limitation which is accepted by the BIR.

Can a waive make or break a tax audit?

Under the rules, the Waiver has to be executed in strict compliance with the provisions of Revenue Memorandum Order (RMO) No. 20-90, as amended. In many cases where the BIR failed to comply with the formalities of a valid waiver, the Supreme Court and Court of Tax Appeals, instead of deciding on the arguments in the appeal, have declared the waiver, and consequently the assessment as invalid which cause the BIR to lose multimillion-peso tax-deficiency assessment cases. 

The BIR observed that the issue on defective waiver is initiated by the taxpayer as a means to cancel his alleged tax liabilities. In many cases, the Court nullifies the waiver because the same was not accepted by the BIR within the prescribed period or the taxpayer was not furnished a copy of the waiver signed by BIR. Thus, there was no binding of the parties. 

To address this trend in court decisions, the BIR issued RMO No. 14-2016 to provide guidelines and relax the rules on the execution of the waiver. 

The new rule still requires that the waiver is accepted by the designated officer. However, the responsibility to have the waiver signed and accepted is shifted to the taxpayer. Thus, the taxpayer, if it would like to extend the period of collection, should ensure that the waiver is accepted before the expiration of the prescription period. 

The new rules also ensured that the taxpayer can no longer scrutinize the technicalities of his own waiver to challenge the assessment. The BIR, perhaps mindful of these technicalities which are normally disputed by the taxpayer in his appeal, prescribed new rules as follows:

1. The waiver may be, but not necessarily, in the form prescribed by RMO No. 20-90 or Revenue Delegation Authority Order No. 05-01 as long as (a) the date of execution is indicated (b) signed by the taxpayer or his authorized representative and (c) expiry date of the period agreed upon to assess/collect the tax is indicated.

2. The waiver is no longer required to be notarized to be deemed valid and binding on the taxpayer.

3. The waiver need not specify the particular taxes to be assessed nor the amount thereof. It may simply state “all internal revenue taxes” considering the BIR is still in the process of examining and determining the tax liability of the taxpayer.

4. The taxpayer is charged with the burden of ensuring that the waiver of the statute of limitations is validly executed by its authorized representative. The authorized representative can no longer be contested to invalidate the waiver.

5. Considering that the waiver is a voluntary act of the taxpayer, the waiver shall take legal effect and be binding on the taxpayer upon its execution.

In sum, the said RMO posits that the waiver is the sole responsibility of the taxpayer. We are reminded by the BIR that the taxpayer executes the waiver for him to have ample time to submit the required documents. However, in actual cases, the waiver is initiated not just for the taxpayer’s cause. There are cases where the waiver is requested by the BIR examiner to give him the time to evaluate the documents and information, discuss the findings to his superiors, and prepare his reports in support of the assessment. 

In some cases, the BIR serves the Letter of Authority to the taxpayer at the time where the 3-year prescriptive period is about to end. As such, the Waiver is executed for the examiner to come up with an assessment based on an examination of the taxpayer’s records. A waiver, therefore, is not really a unilateral act by the taxpayer but a bilateral agreement between two parties to extend the period to a date certain. 

While acknowledging that the waiver is necessary to extend the time for each party to evaluate the findings and justifications, it shall not only be the taxpayer’s responsibility to execute a valid waiver. A waiver of the statute of limitations, being a derogation of the taxpayer’s right to security against prolonged and unscrupulous investigations, must be carefully and strictly construed.

Regardless of the reasons behind the RMO, the takeaway is quite clear. Taxpayers should take priority over the tax audit and coordinate closely with the BIR officer to complete the tax audit. This way, there is a lower cost to the taxpayer and possibility that the BIR asks for the waiver. Moreover, taxpayers should bank on documents and factual defenses against tax audit since the new rules leave no elbow room to challenge the waiver in the court.

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


Marie Fe F. Dangiwan is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld