A MEASURE seeking to adjust the individual income tax brackets to inflation was filed yesterday at the House of Representatives, as part of legislation to be decided by the 17th Congress.
Marikina City Rep. Romero S. Quimbo (2nd district) filed House Bill 20, which proposes the indexation of tax brackets to inflation, as determined by the Consumer Price Index.
“While my initial proposal was to overhaul the entire income tax system, the adjustment of brackets to inflation is the most urgent step in our quest for genuine reform,” said Mr. Quimbo in a statement.
Under the proposed Taxable Income Brackets, those earning below P21,613 will have a 5% tax rate; those earning more than P21,613 but not over P64,839 will be taxed at P1,080 plus 10% on the amount in excess of P21,613; those earning more than P64,839 but not over P151,290 will be taxed P5,402 plus 15% of the amount in excess of P64,839.
Those in the more than P302,581 but not over P540,323 bracket will be taxed P48,628 plus 25% on the amount in excess of P302,581; those falling between P540,323 and P1,080,645 will be taxed P108,063 plus 30% of of the amount in excess of P540,323; and those in the P1,080,645 and over bracket will be taxed P270,160 plus 32% of the amount in excess of P1,080,645.
The proposed measure also provides for an automatic adjustment of the tax brackets to inflation every three years.
Mr. Quimbo noted that 6.6 million Filipino workers “bear the brunt of paying individual income tax” according to Bureau of Internal Revenue (BIR) records.
“This means only 16% of our 22.2 million wage and salary workers serve as the milking cows of BIR. We cannot allow the suffering of our workers to perpetuate under our archaic and unfair tax system. We must ensure that they are able to live comfortably to provide for their families,” Mr. Quimbo was quoted as saying in a statement.
Mr. Quimbo’s bill is consistent with his previous approach of reforming the tax system in phases -- first brackets, then tax rates -- to minimize risks to the country’s fiscal health.
“The other phases would include a fixed but lowered tax scheme for the self-employed and professionals as well as a reduction of corporate income tax rate to 25% to make the country competitive,” he added.
Mr. Quimbo pushed an income tax reform in the 16th but “failed due to the opposition of the Department of Finance.” -- Raynan F. Javil
source: Businessworld
Thursday, June 30, 2016
Zero tax convictions during Henares BIR term
THE Bureau of Internal Revenue (BIR) may have been active in running after tax evaders, but it failed to secure a single conviction within the six-year term of Commissioner Kim S. Jacinto-Henares.
Some 492 tax-evasion complaints were filed under its Run After Tax Evaders (RATE) program, but the number of cases that reached the courts did not hit triple digits.
All five cases that were actually completed by the Court of Tax Appeals (CTA) and one by the Supreme Court ended in defeat for the BIR.
According to a summary prepared by the BIR, four out of five criminal complaints filed under the leadership of Commissioner Henares remained at the prosecutorial level with the Department of Justice (DoJ).
Some 97 cases were either filed only recently or have yet to be assigned to a prosecutor. Meanwhile, preliminary investigation is ongoing for 56 cases, including the P36.14-million one against social commerce company Ensogo, Inc., filed in February 2015.
Preliminary investigation has been terminated for 219 cases submitted for resolution by the prosecutors. But with the prosecutors yet to issue their findings, the issue of sufficient probable case to bring them to court remains hanging.
Among the cases to be resolved is the P73.34-million tax evasion complaint filed in January 2015 against Antonio L. Tiu, the chief executive officer of publicly-listed Greenergy Holdings, Inc., who was accused by the Senate blue ribbon subcommittee of acting as a front for outgoing Vice-President Jejomar C. Binay’s allegedly ill-gotten property acquisition in Batangas.
Another pending case is the P101.7-million complaint filed in September 2015 against JCLN Global Properties Development Corp., the realty firm run by James Christopher L. Napoles and Jo Christine L. Napoles, children of pork barrel scam defendant Janet Lim-Napoles.
Others up for resolution are: the P88.54-million case of Camp John Hay Leisure, Inc., filed in February 2015, the P118.32-million complaint against Warner Music Philippines in January 2014, the P4.45-million case against actor Zoren G. Legaspi in May 2014, and the cases filed against 12 employees of the Asian Development Bank in September 2014.
State prosecutors have issued resolutions on four dozen cases, but they have not been elevated to the courts as they are either being appealed at prosecutor level or questioned in petitions for review filed with the Secretary of Justice.
Fourteen of the pending cases were resolved in the BIR’s favor, including the P14.96-million and P39.03-million cases against Mr. Tiu’s brother James L. Tiu and sister-in-law Ann Lorraine B. Tan, both leading contributors to Mr. Binay’s vice-presidential campaign.
On the other hand, 38 of the BIR’s complaints were dismissed by the DoJ for lack of probable cause or insuffiency of evidence.
Among these were the cases filed against former Philcomsat Holdings Corp. Chairman Benito Ramon V. Araneta (P87.7 million), and former officials Philip G. Brodett (P526.61 million) and Luis K. Lokin, Jr. (12.4 million). Also dismissed were the P1.82-million case against Korean television host Ryan Bang, and a P983,658.07 case against Brazilian model Daiana Menezes.
Only 81 of the tax evasion cases under RATE actually left the DoJ and made it to the courts.
Proceedings for 54, or more than half, of these cases are ongoing with the CTA, which has the jurisdiction over criminal cases of tax evasion.
Among these pending CTA cases are, listed in order of filing, those of: former military comptroller Jacinto C. Ligot and wife Erlinda (P290.2 million and P137.8 million); former Pampanga 2nd District Rep. Juan Miguel M. Arroyo (P73.85 million); former Social Security System President Romulo L. Neri (P13.6 million); Izumo Contractors, Inc., owned by Cedric Lee (P76.22 million); comic book writer and movie producer Carlo J. Caparas (P540.2 million); and Janet Lim-Napoles, her husband Jaime L. Napoles, and daughter Jeane Christine L. Napoles (P44.71 million, P16.47 million, and P17.89 million, respectively).
The P120.5-million tax evasion case of impeached Chief Justice Renato C. Corona was included in the count, even after the dismissal of the case in May following his death in late April.
Twenty criminal cases are also ongoing at various Regional Trial Courts, while none is pending with the Supreme Court.
One case is pending with the Court of Appeals (CA), concerning former Justice Secretary Leila M. de Lima’s dismissal of the BIR’s complaint against an heir of Oscar Ongsiako’s estate. The CA in August 2015 denied the petition as the BIR was found to have sought the wrong remedy.
Finally, all five cases completed by the CTA were dismissed.
The one case that was elevated to the Supreme Court ended in an acquittal for businessman Macario Lim Gaw, whose P6.52-billion tax evasion case was considered by the DoJ as among its top 20 major cases.
The 492 tax evasion complaints involved a total of P84.457 billion in alleged tax liabilities.
source: Businessworld
Some 492 tax-evasion complaints were filed under its Run After Tax Evaders (RATE) program, but the number of cases that reached the courts did not hit triple digits.
All five cases that were actually completed by the Court of Tax Appeals (CTA) and one by the Supreme Court ended in defeat for the BIR.
According to a summary prepared by the BIR, four out of five criminal complaints filed under the leadership of Commissioner Henares remained at the prosecutorial level with the Department of Justice (DoJ).
Some 97 cases were either filed only recently or have yet to be assigned to a prosecutor. Meanwhile, preliminary investigation is ongoing for 56 cases, including the P36.14-million one against social commerce company Ensogo, Inc., filed in February 2015.
Preliminary investigation has been terminated for 219 cases submitted for resolution by the prosecutors. But with the prosecutors yet to issue their findings, the issue of sufficient probable case to bring them to court remains hanging.
Among the cases to be resolved is the P73.34-million tax evasion complaint filed in January 2015 against Antonio L. Tiu, the chief executive officer of publicly-listed Greenergy Holdings, Inc., who was accused by the Senate blue ribbon subcommittee of acting as a front for outgoing Vice-President Jejomar C. Binay’s allegedly ill-gotten property acquisition in Batangas.
Another pending case is the P101.7-million complaint filed in September 2015 against JCLN Global Properties Development Corp., the realty firm run by James Christopher L. Napoles and Jo Christine L. Napoles, children of pork barrel scam defendant Janet Lim-Napoles.
Others up for resolution are: the P88.54-million case of Camp John Hay Leisure, Inc., filed in February 2015, the P118.32-million complaint against Warner Music Philippines in January 2014, the P4.45-million case against actor Zoren G. Legaspi in May 2014, and the cases filed against 12 employees of the Asian Development Bank in September 2014.
State prosecutors have issued resolutions on four dozen cases, but they have not been elevated to the courts as they are either being appealed at prosecutor level or questioned in petitions for review filed with the Secretary of Justice.
Fourteen of the pending cases were resolved in the BIR’s favor, including the P14.96-million and P39.03-million cases against Mr. Tiu’s brother James L. Tiu and sister-in-law Ann Lorraine B. Tan, both leading contributors to Mr. Binay’s vice-presidential campaign.
On the other hand, 38 of the BIR’s complaints were dismissed by the DoJ for lack of probable cause or insuffiency of evidence.
Among these were the cases filed against former Philcomsat Holdings Corp. Chairman Benito Ramon V. Araneta (P87.7 million), and former officials Philip G. Brodett (P526.61 million) and Luis K. Lokin, Jr. (12.4 million). Also dismissed were the P1.82-million case against Korean television host Ryan Bang, and a P983,658.07 case against Brazilian model Daiana Menezes.
Only 81 of the tax evasion cases under RATE actually left the DoJ and made it to the courts.
Proceedings for 54, or more than half, of these cases are ongoing with the CTA, which has the jurisdiction over criminal cases of tax evasion.
Among these pending CTA cases are, listed in order of filing, those of: former military comptroller Jacinto C. Ligot and wife Erlinda (P290.2 million and P137.8 million); former Pampanga 2nd District Rep. Juan Miguel M. Arroyo (P73.85 million); former Social Security System President Romulo L. Neri (P13.6 million); Izumo Contractors, Inc., owned by Cedric Lee (P76.22 million); comic book writer and movie producer Carlo J. Caparas (P540.2 million); and Janet Lim-Napoles, her husband Jaime L. Napoles, and daughter Jeane Christine L. Napoles (P44.71 million, P16.47 million, and P17.89 million, respectively).
The P120.5-million tax evasion case of impeached Chief Justice Renato C. Corona was included in the count, even after the dismissal of the case in May following his death in late April.
Twenty criminal cases are also ongoing at various Regional Trial Courts, while none is pending with the Supreme Court.
One case is pending with the Court of Appeals (CA), concerning former Justice Secretary Leila M. de Lima’s dismissal of the BIR’s complaint against an heir of Oscar Ongsiako’s estate. The CA in August 2015 denied the petition as the BIR was found to have sought the wrong remedy.
Finally, all five cases completed by the CTA were dismissed.
The one case that was elevated to the Supreme Court ended in an acquittal for businessman Macario Lim Gaw, whose P6.52-billion tax evasion case was considered by the DoJ as among its top 20 major cases.
The 492 tax evasion complaints involved a total of P84.457 billion in alleged tax liabilities.
source: Businessworld
Wednesday, June 29, 2016
Henares files tax raps vs former LTO chief
On her last day in office, Bureau of Internal Revenue (BIR) Commissioner Kim Jacinto-Henares filed her 492nd tax evasion complaint before the Department of Justice (DOJ).
The respondent was former Land Transportation Office (LTO) chief Alberto Suansing, who was appointed by then-President Gloria Macapagal- Arroyo.
Suansing, president of North Star Port Development Corp., a cargo-handling company, was charged by Henares along with his treasurer Rosauro Aguinaldo.
The bureau alleged that North Star violated Section 255 in relation to Sections 253 and 256 of the National Internal Revenue Code of 1997.
It said it has repeatedly sent notices to the company for its failure to pay P29.83 million in taxes.
The notices were unanswered, according to the BIR.
The bureau said the Justice department, after conducting preliminary investigation and finding probable cause, should indict Suansing and Aguinaldo before the tax courts and prosecute them for tax evasion.
source: Manila Times
Tax evasion filed vs bank official, client
The Bureau of Internal Revenue (BIR) filed a complaint against Planters Development Bank (PDB), its Senior Vice President Jose Acetre and its client for alleged tax evasion in violation of the Tax Code. Likewise named in the charge sheet was Willingthon Lim, the buyer in the subject transfer of land. Investigation showed that Lim obtained a loan from PDB in the amount of P5.2 million, which he fully paid on Nov. 16, 2009, for which PDB issued an Official Receipt. However, supporting documents showed that PDB and Lim colluded in executing the deed of absolute sale with a later date, Nov. 16, 2015, when in fact and in law, there was already a cash sale on Nov. 16, 2009 to evade the payment of applicable penalties in the amount of P959,581.35.
source: Manila Times
source: Manila Times
Tuesday, June 28, 2016
Corporation under Sec. 30 of the NIRC: Nature, Tax Treatment and Administrative Compliance
With few days before BIR Commissioner Kim Henares steps down, one can expect the surge of last-minute revenue circulars, orders and issuances from the Bureau of Internal Revenue (BIR). Just recently, two revenue orders were issued laying down the guidelines and procedures in the conduct of investigation on the financial capacity of parties to acquire properties.
Last week, Revenue Memorandum Circular (RMC) 64-2016 was circularized which provides clarification on the nature, tax treatment, registration and compliance requirement of corporations and associations under Section 30 of the National Internal Revenue Code (NIRC) of 1997, as amended (1997 Tax Code). This did not come as a surprise as tax-exempt entities are under the close radar of the BIR when it comes to tax compliance and collection goal. As substantial revenue losses are incurred relating to non-implementation of taxes to non-stock non-profit organization whose organization and operation is not within the ambit of Sec. 30 of the 1997 Tax Code, RMC 64-2016 was issued to consolidate all the rules affecting the tax-exempt corporations and associations.
The RMC provides for the detailed description, characteristics, purpose and respective operations of corporations and association that fall within the contemplation of the eleven (11) categories under Sec. 30 of the 1997 Tax Code. The RMC also highlights the significance of the last paragraph of Section 30 which expressly states that, “notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.” In other words, the RMC was issued to take out the perception that all corporations registered as non-stock, non-profit with the Securities and Exchange Commission (SEC) automatically fall under Section 30 of the 1997 Tax Code and that all income derived by them are totally exempt from income tax or all taxes for that matter.
In determining entitlement to tax exemption, the RMC reiterates the use of two tests: organization test and operational test. Organizational test requires that the corporation or association constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code. On the other hand, operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. A corporation or association fails to meet this test if substantial part of its operation are considered “activities conducted for profit.” Does this provision mean that the corporation or association loses its tax-exempt status if substantial part of its operations are activities conducted for profit? Or would only the income derived from activities conducted for profit be subject to income tax? What if the income derived from activities conducted for profit is used in furtherance of the purpose of the corporation, will it make the income, tax-exempt? While the RMC did not provide a straight answer on this, it is clear from the last paragraph of Sec. 30 and from decided cases of the Supreme Court (SC) that income from activities conducted for profit, regardless of the “disposition made of such income” shall be subject to tax.
The RMC also restates several instances where “inurements” are present which disqualifies corporations/association from tax exemption. Since corporations in Sec. 30 are organized not for profit, no net income or assets must accrue to or benefits any members or specific person. Tax-exempt entities under Sec. 30 must not be organized or operated for the benefit of private interest such as specific individuals, incorporators or his family, shareholders of the organization or person controlled directly or indirectly by such private interest. The organization must serve a public rather than a private purpose. In other words, to qualify as non-stock and/or non-profit corporation/association/organization exempt from income tax under Sec. 30 of the 1997 Tax Code, it must demonstrate that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.
Donation to any person or entity by the non-stock non-profit organizations (except donation to other entities formed for the purpose/s similar to its own) is considered inurement. This means, only donation to entities formed for the purpose/purposes similar to its own are allowed. If this is the case, does this mean if charitable institution and other foundation donates goods and services to qualified individual beneficiaries, the charitable institution loses is exemption from tax? The RMC, however, has no clear answer to this issue.
The RMC also emphasizes that income tax exemption is not absolute. Tax exemption only covers income received as such by corporations organized and operated in accordance with Sec. 30 provision. Sec. 30 corporations are still subject to the corresponding internal revenue taxes under the NIRC on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income, rental income from real or personal properties) which income should be reported for taxation purposes. Further purchase of goods or properties or services and importation of goods by corporation organized and operated as Sec. 30 corporations shall be subject to the 12% VAT since shifting of the VAT does not make these corporation directly liable and therefore, it cannot invoke its tax exemption privilege under Sec. 30 of the 1997 Tax Code to avoid the passing on or shifting of the VAT.
Further, the RMC clearly sets the rules on tax exemption of non-stock, non-profit educational institution. Revenues derived from assets used in the operation of cafeterias, canteen, and bookstores are exempt from taxation provided they are owned and operated by the education institution as ancillary activities and the same are located within the school premises. This is therefore, in accordance with the constitutional mandates that revenue and assets of nonstock, nonprofit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.
Moreover, the RMC provides guidelines and procedures for registration of Sec. 30 corporations/organization and sets out the rules on administrative compliance. Corporations or association organized as a Sec. 30 corporation shall for the first three years of operations, accomplish and file an account information form (BIR Form 1702- AIF) on or before the 15th day of fourth month following the end of the taxable year. The AIF shall be filed together with the annual income tax return. The RMC also distinguishes the compliance requirements of corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation as such and those corporations with mixed income having other activities involving sale of goods and/or services not in connection with its primary purpose.
For those corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation it must file annual income tax return (BIR Form No. 1702- EX) and attach a copy of the confirmatory ruling or certificate of tax exemption, if any. They are no longer required to file the monthly and quarterly VAT/Percentage tax returns and quarterly income tax returns unlike those corporations with mixed income or having other profit-oriented activities.
It was noted, however, that the RMC fails to provide the timeline in the processing of the certificate of tax exemption. It cannot be discounted that securing a tax rulings poses a major hurdle to corporations. Thus, fixing the number of days in processing the certificate of tax exemption will not only provide comfort and relief to corporations of Sec. 30 but also encourages efficiency and transparency in the BIR.
While there are still some issues not addressed by the RMC, BIR should be still be lauded on its effort for issuing said RMC. With the enumeration of the characteristics, corporate purposes and defining the actual operations of entities per each category under Sec. 30, tax leakages arising from inaccurate interpretation of Sec. 30 are minimized. Corporations and associations are well-guided on whether or not they are organized and operated for the purpose described in Sec. 30 and thus, entitled to tax exemption. The clear set of rules provided in the RMC will help corporations organized under Sec. 30 to ascertain existence of income derived from non-exempt activities and its proper tax treatment. In the long run, it will promote strict compliance as doubts and ambiguities are reduced.
Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
The RMC provides for the detailed description, characteristics, purpose and respective operations of corporations and association that fall within the contemplation of the eleven (11) categories under Sec. 30 of the 1997 Tax Code. The RMC also highlights the significance of the last paragraph of Section 30 which expressly states that, “notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.” In other words, the RMC was issued to take out the perception that all corporations registered as non-stock, non-profit with the Securities and Exchange Commission (SEC) automatically fall under Section 30 of the 1997 Tax Code and that all income derived by them are totally exempt from income tax or all taxes for that matter.
In determining entitlement to tax exemption, the RMC reiterates the use of two tests: organization test and operational test. Organizational test requires that the corporation or association constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code. On the other hand, operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. A corporation or association fails to meet this test if substantial part of its operation are considered “activities conducted for profit.” Does this provision mean that the corporation or association loses its tax-exempt status if substantial part of its operations are activities conducted for profit? Or would only the income derived from activities conducted for profit be subject to income tax? What if the income derived from activities conducted for profit is used in furtherance of the purpose of the corporation, will it make the income, tax-exempt? While the RMC did not provide a straight answer on this, it is clear from the last paragraph of Sec. 30 and from decided cases of the Supreme Court (SC) that income from activities conducted for profit, regardless of the “disposition made of such income” shall be subject to tax.
The RMC also restates several instances where “inurements” are present which disqualifies corporations/association from tax exemption. Since corporations in Sec. 30 are organized not for profit, no net income or assets must accrue to or benefits any members or specific person. Tax-exempt entities under Sec. 30 must not be organized or operated for the benefit of private interest such as specific individuals, incorporators or his family, shareholders of the organization or person controlled directly or indirectly by such private interest. The organization must serve a public rather than a private purpose. In other words, to qualify as non-stock and/or non-profit corporation/association/organization exempt from income tax under Sec. 30 of the 1997 Tax Code, it must demonstrate that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.
Donation to any person or entity by the non-stock non-profit organizations (except donation to other entities formed for the purpose/s similar to its own) is considered inurement. This means, only donation to entities formed for the purpose/purposes similar to its own are allowed. If this is the case, does this mean if charitable institution and other foundation donates goods and services to qualified individual beneficiaries, the charitable institution loses is exemption from tax? The RMC, however, has no clear answer to this issue.
The RMC also emphasizes that income tax exemption is not absolute. Tax exemption only covers income received as such by corporations organized and operated in accordance with Sec. 30 provision. Sec. 30 corporations are still subject to the corresponding internal revenue taxes under the NIRC on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income, rental income from real or personal properties) which income should be reported for taxation purposes. Further purchase of goods or properties or services and importation of goods by corporation organized and operated as Sec. 30 corporations shall be subject to the 12% VAT since shifting of the VAT does not make these corporation directly liable and therefore, it cannot invoke its tax exemption privilege under Sec. 30 of the 1997 Tax Code to avoid the passing on or shifting of the VAT.
Further, the RMC clearly sets the rules on tax exemption of non-stock, non-profit educational institution. Revenues derived from assets used in the operation of cafeterias, canteen, and bookstores are exempt from taxation provided they are owned and operated by the education institution as ancillary activities and the same are located within the school premises. This is therefore, in accordance with the constitutional mandates that revenue and assets of nonstock, nonprofit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.
Moreover, the RMC provides guidelines and procedures for registration of Sec. 30 corporations/organization and sets out the rules on administrative compliance. Corporations or association organized as a Sec. 30 corporation shall for the first three years of operations, accomplish and file an account information form (BIR Form 1702- AIF) on or before the 15th day of fourth month following the end of the taxable year. The AIF shall be filed together with the annual income tax return. The RMC also distinguishes the compliance requirements of corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation as such and those corporations with mixed income having other activities involving sale of goods and/or services not in connection with its primary purpose.
For those corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation it must file annual income tax return (BIR Form No. 1702- EX) and attach a copy of the confirmatory ruling or certificate of tax exemption, if any. They are no longer required to file the monthly and quarterly VAT/Percentage tax returns and quarterly income tax returns unlike those corporations with mixed income or having other profit-oriented activities.
It was noted, however, that the RMC fails to provide the timeline in the processing of the certificate of tax exemption. It cannot be discounted that securing a tax rulings poses a major hurdle to corporations. Thus, fixing the number of days in processing the certificate of tax exemption will not only provide comfort and relief to corporations of Sec. 30 but also encourages efficiency and transparency in the BIR.
While there are still some issues not addressed by the RMC, BIR should be still be lauded on its effort for issuing said RMC. With the enumeration of the characteristics, corporate purposes and defining the actual operations of entities per each category under Sec. 30, tax leakages arising from inaccurate interpretation of Sec. 30 are minimized. Corporations and associations are well-guided on whether or not they are organized and operated for the purpose described in Sec. 30 and thus, entitled to tax exemption. The clear set of rules provided in the RMC will help corporations organized under Sec. 30 to ascertain existence of income derived from non-exempt activities and its proper tax treatment. In the long run, it will promote strict compliance as doubts and ambiguities are reduced.
Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
Corporation under Sec. 30 of the NIRC: Nature, Tax Treatment and Administrative Compliance
With few days before BIR Commissioner Kim Henares steps down, one can expect the surge of last-minute revenue circulars, orders and issuances from the Bureau of Internal Revenue (BIR). Just recently, two revenue orders were issued laying down the guidelines and procedures in the conduct of investigation on the financial capacity of parties to acquire properties.
Last week, Revenue Memorandum Circular (RMC) 64-2016 was circularized which provides clarification on the nature, tax treatment, registration and compliance requirement of corporations and associations under Section 30 of the National Internal Revenue Code (NIRC) of 1997, as amended (1997 Tax Code). This did not come as a surprise as tax-exempt entities are under the close radar of the BIR when it comes to tax compliance and collection goal. As substantial revenue losses are incurred relating to non-implementation of taxes to non-stock non-profit organization whose organization and operation is not within the ambit of Sec. 30 of the 1997 Tax Code, RMC 64-2016 was issued to consolidate all the rules affecting the tax-exempt corporations and associations.
The RMC provides for the detailed description, characteristics, purpose and respective operations of corporations and association that fall within the contemplation of the eleven (11) categories under Sec. 30 of the 1997 Tax Code. The RMC also highlights the significance of the last paragraph of Section 30 which expressly states that, “notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.” In other words, the RMC was issued to take out the perception that all corporations registered as non-stock, non-profit with the Securities and Exchange Commission (SEC) automatically fall under Section 30 of the 1997 Tax Code and that all income derived by them are totally exempt from income tax or all taxes for that matter.
In determining entitlement to tax exemption, the RMC reiterates the use of two tests: organization test and operational test. Organizational test requires that the corporation or association constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code. On the other hand, operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. A corporation or association fails to meet this test if substantial part of its operation are considered “activities conducted for profit.” Does this provision mean that the corporation or association loses its tax-exempt status if substantial part of its operations are activities conducted for profit? Or would only the income derived from activities conducted for profit be subject to income tax? What if the income derived from activities conducted for profit is used in furtherance of the purpose of the corporation, will it make the income, tax-exempt? While the RMC did not provide a straight answer on this, it is clear from the last paragraph of Sec. 30 and from decided cases of the Supreme Court (SC) that income from activities conducted for profit, regardless of the “disposition made of such income” shall be subject to tax.
The RMC also restates several instances where “inurements” are present which disqualifies corporations/association from tax exemption. Since corporations in Sec. 30 are organized not for profit, no net income or assets must accrue to or benefits any members or specific person. Tax-exempt entities under Sec. 30 must not be organized or operated for the benefit of private interest such as specific individuals, incorporators or his family, shareholders of the organization or person controlled directly or indirectly by such private interest. The organization must serve a public rather than a private purpose. In other words, to qualify as non-stock and/or non-profit corporation/association/organization exempt from income tax under Sec. 30 of the 1997 Tax Code, it must demonstrate that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.
Donation to any person or entity by the non-stock non-profit organizations (except donation to other entities formed for the purpose/s similar to its own) is considered inurement. This means, only donation to entities formed for the purpose/purposes similar to its own are allowed. If this is the case, does this mean if charitable institution and other foundation donates goods and services to qualified individual beneficiaries, the charitable institution loses is exemption from tax? The RMC, however, has no clear answer to this issue.
The RMC also emphasizes that income tax exemption is not absolute. Tax exemption only covers income received as such by corporations organized and operated in accordance with Sec. 30 provision. Sec. 30 corporations are still subject to the corresponding internal revenue taxes under the NIRC on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income, rental income from real or personal properties) which income should be reported for taxation purposes. Further purchase of goods or properties or services and importation of goods by corporation organized and operated as Sec. 30 corporations shall be subject to the 12% VAT since shifting of the VAT does not make these corporation directly liable and therefore, it cannot invoke its tax exemption privilege under Sec. 30 of the 1997 Tax Code to avoid the passing on or shifting of the VAT.
Further, the RMC clearly sets the rules on tax exemption of non-stock, non-profit educational institution. Revenues derived from assets used in the operation of cafeterias, canteen, and bookstores are exempt from taxation provided they are owned and operated by the education institution as ancillary activities and the same are located within the school premises. This is therefore, in accordance with the constitutional mandates that revenue and assets of nonstock, nonprofit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.
Moreover, the RMC provides guidelines and procedures for registration of Sec. 30 corporations/organization and sets out the rules on administrative compliance. Corporations or association organized as a Sec. 30 corporation shall for the first three years of operations, accomplish and file an account information form (BIR Form 1702- AIF) on or before the 15th day of fourth month following the end of the taxable year. The AIF shall be filed together with the annual income tax return. The RMC also distinguishes the compliance requirements of corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation as such and those corporations with mixed income having other activities involving sale of goods and/or services not in connection with its primary purpose.
For those corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation it must file annual income tax return (BIR Form No. 1702- EX) and attach a copy of the confirmatory ruling or certificate of tax exemption, if any. They are no longer required to file the monthly and quarterly VAT/Percentage tax returns and quarterly income tax returns unlike those corporations with mixed income or having other profit-oriented activities.
It was noted, however, that the RMC fails to provide the timeline in the processing of the certificate of tax exemption. It cannot be discounted that securing a tax rulings poses a major hurdle to corporations. Thus, fixing the number of days in processing the certificate of tax exemption will not only provide comfort and relief to corporations of Sec. 30 but also encourages efficiency and transparency in the BIR.
While there are still some issues not addressed by the RMC, BIR should be still be lauded on its effort for issuing said RMC. With the enumeration of the characteristics, corporate purposes and defining the actual operations of entities per each category under Sec. 30, tax leakages arising from inaccurate interpretation of Sec. 30 are minimized. Corporations and associations are well-guided on whether or not they are organized and operated for the purpose described in Sec. 30 and thus, entitled to tax exemption. The clear set of rules provided in the RMC will help corporations organized under Sec. 30 to ascertain existence of income derived from non-exempt activities and its proper tax treatment. In the long run, it will promote strict compliance as doubts and ambiguities are reduced.
Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
The RMC provides for the detailed description, characteristics, purpose and respective operations of corporations and association that fall within the contemplation of the eleven (11) categories under Sec. 30 of the 1997 Tax Code. The RMC also highlights the significance of the last paragraph of Section 30 which expressly states that, “notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.” In other words, the RMC was issued to take out the perception that all corporations registered as non-stock, non-profit with the Securities and Exchange Commission (SEC) automatically fall under Section 30 of the 1997 Tax Code and that all income derived by them are totally exempt from income tax or all taxes for that matter.
In determining entitlement to tax exemption, the RMC reiterates the use of two tests: organization test and operational test. Organizational test requires that the corporation or association constitutive documents exclusively limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code. On the other hand, operational test requires that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. A corporation or association fails to meet this test if substantial part of its operation are considered “activities conducted for profit.” Does this provision mean that the corporation or association loses its tax-exempt status if substantial part of its operations are activities conducted for profit? Or would only the income derived from activities conducted for profit be subject to income tax? What if the income derived from activities conducted for profit is used in furtherance of the purpose of the corporation, will it make the income, tax-exempt? While the RMC did not provide a straight answer on this, it is clear from the last paragraph of Sec. 30 and from decided cases of the Supreme Court (SC) that income from activities conducted for profit, regardless of the “disposition made of such income” shall be subject to tax.
The RMC also restates several instances where “inurements” are present which disqualifies corporations/association from tax exemption. Since corporations in Sec. 30 are organized not for profit, no net income or assets must accrue to or benefits any members or specific person. Tax-exempt entities under Sec. 30 must not be organized or operated for the benefit of private interest such as specific individuals, incorporators or his family, shareholders of the organization or person controlled directly or indirectly by such private interest. The organization must serve a public rather than a private purpose. In other words, to qualify as non-stock and/or non-profit corporation/association/organization exempt from income tax under Sec. 30 of the 1997 Tax Code, it must demonstrate that its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person.
Donation to any person or entity by the non-stock non-profit organizations (except donation to other entities formed for the purpose/s similar to its own) is considered inurement. This means, only donation to entities formed for the purpose/purposes similar to its own are allowed. If this is the case, does this mean if charitable institution and other foundation donates goods and services to qualified individual beneficiaries, the charitable institution loses is exemption from tax? The RMC, however, has no clear answer to this issue.
The RMC also emphasizes that income tax exemption is not absolute. Tax exemption only covers income received as such by corporations organized and operated in accordance with Sec. 30 provision. Sec. 30 corporations are still subject to the corresponding internal revenue taxes under the NIRC on income derived from any of their properties, real or personal, or any activity conducted for profit regardless of the disposition thereof (i.e. interest income, rental income from real or personal properties) which income should be reported for taxation purposes. Further purchase of goods or properties or services and importation of goods by corporation organized and operated as Sec. 30 corporations shall be subject to the 12% VAT since shifting of the VAT does not make these corporation directly liable and therefore, it cannot invoke its tax exemption privilege under Sec. 30 of the 1997 Tax Code to avoid the passing on or shifting of the VAT.
Further, the RMC clearly sets the rules on tax exemption of non-stock, non-profit educational institution. Revenues derived from assets used in the operation of cafeterias, canteen, and bookstores are exempt from taxation provided they are owned and operated by the education institution as ancillary activities and the same are located within the school premises. This is therefore, in accordance with the constitutional mandates that revenue and assets of nonstock, nonprofit educational institution used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.
Moreover, the RMC provides guidelines and procedures for registration of Sec. 30 corporations/organization and sets out the rules on administrative compliance. Corporations or association organized as a Sec. 30 corporation shall for the first three years of operations, accomplish and file an account information form (BIR Form 1702- AIF) on or before the 15th day of fourth month following the end of the taxable year. The AIF shall be filed together with the annual income tax return. The RMC also distinguishes the compliance requirements of corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation as such and those corporations with mixed income having other activities involving sale of goods and/or services not in connection with its primary purpose.
For those corporations organized and operated under Sec. 30 of the 1997 Tax Code whose source of income is solely derived from its operation it must file annual income tax return (BIR Form No. 1702- EX) and attach a copy of the confirmatory ruling or certificate of tax exemption, if any. They are no longer required to file the monthly and quarterly VAT/Percentage tax returns and quarterly income tax returns unlike those corporations with mixed income or having other profit-oriented activities.
It was noted, however, that the RMC fails to provide the timeline in the processing of the certificate of tax exemption. It cannot be discounted that securing a tax rulings poses a major hurdle to corporations. Thus, fixing the number of days in processing the certificate of tax exemption will not only provide comfort and relief to corporations of Sec. 30 but also encourages efficiency and transparency in the BIR.
While there are still some issues not addressed by the RMC, BIR should be still be lauded on its effort for issuing said RMC. With the enumeration of the characteristics, corporate purposes and defining the actual operations of entities per each category under Sec. 30, tax leakages arising from inaccurate interpretation of Sec. 30 are minimized. Corporations and associations are well-guided on whether or not they are organized and operated for the purpose described in Sec. 30 and thus, entitled to tax exemption. The clear set of rules provided in the RMC will help corporations organized under Sec. 30 to ascertain existence of income derived from non-exempt activities and its proper tax treatment. In the long run, it will promote strict compliance as doubts and ambiguities are reduced.
Farrah Andres-Neagoe is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
Sunday, June 26, 2016
Revisiting withholding tax rules on professional fees
Two trillion pesos. This is the revenue collection target of the Bureau of Internal Revenue (BIR) for 2016 and much of this represents income tax collected via withholding tax. In 2014 alone, withholding taxes accounted for more or less 40% of total income tax collected by the government.
Considering the significance of withholding tax to the government, each and every taxpayer engaged in trade or business in the Philippines is required to withhold on their income payments, unless specifically exempted.
Failure to withhold or under-withholding of the required taxes gives rise to various penalties. This includes not only payment of the amount that the taxpayer failed to withhold and corresponding penalties. More significantly, this includes disallowance of corresponding expense as deduction, despite payment of the deficiency withholding at the time of tax audit. Thus, for failure to withhold, a taxpayer shall be required to pay not only the deficiency withholding tax and corresponding penalties, but shall also be required to pay deficiency income tax of 30%, together with the corresponding penalties.
Considering these penalties, every taxpayer must learn the basic rules and comply with the withholding tax requirements. Every income payment must be assessed if such must be subject to withholding tax and what rate must be applied. For income payments of professional/talent/consultancy fees, this could be 10% or 15% withholding tax rate.
So when must the lower rate of 10% or higher rate of 15% be applied?
This knowledge is important because during a tax audit, the BIR will normally immediately apply the 15% rate on professional fees, management/consultancy fees, and talent fees. It is now up to the taxpayer to prove that the applicable rate is 10% only or that the tax has been correctly withheld.
Basically, the applicable withholding tax rates depends on the amount of the gross income of the payee, and the timing of payment of the fees. A professional whose gross income during the year exceeds P720,000 should be subject to 15% withholding tax. Otherwise, if he did not meet the threshold, the lower rate of 10% must be applied.
So how would the withholding tax agent know if the payee’s gross income exceeds or shall exceed the P720,000 threshold?
Note that this threshold takes into consideration the total gross income of the professional not only from the withholding agent but also from his other clients.
To determine the applicable withholding tax rate, the professional must periodically submit an Affidavit Declaration of Current Year’s Gross Income to the BIR (“sworn declaration”). The sworn declaration must be filed by the professional on or before June 30 of each year or 15 days after the end of the month the income reaches P720,000, whichever comes earlier, during the year. A copy of the BIR duly received sworn declaration shall then be furnished to all the payors 5 days from date of receipt by the BIR.
Based on the foregoing, five days after June 30 of each year, every withholding agent must require its professionals/talents/consultants to submit a copy of their BIR-stamped received sworn declaration. Should such sworn declaration indicate that the professional’s gross income does not exceed P720,000 during the year, then 10% withholding tax rate must be applied by the withholding agent. Otherwise, if the same indicates that the professional’s gross income exceeds P720,000 during the year or the professional failed to submit the sworn declaration, the higher rate of 15% withholding tax must be applied effective July income payment.
The higher rate of 15% also applies in case the income payment of the withholding agent alone to the professional based on the contract is expected to exceed P720,000. Thus, regardless of the submission of the sworn declaration, the withholding agent must already subject to 15% withholding tax rate its income payment to the professional even prior to June 30.
To summarize, the 10% withholding tax rate applies only to income payments for the months of January to June, unless the withholding agent’s total income payment to the professional based on actual payments or the contract already exceeds or is expected to exceed the P720,000 threshold.
On the other hand, the 15% withholding tax rate must be applied effective July income payment, unless the professional submits a sworn declaration stating that his income shall not exceed P720,000 during the year.
Given that the requirement to withhold not only requires withholding but withholding using the correct tax rate, every withholding agent must apply the above rules on professional fees.
With the complicated and constantly changing rules on withholding taxes not only on professional fees but also on other types of income payments, all taxpayers agree that withholding tax requirements pose a significant burden to the taxpayers. Aside from the requirement to withhold and remit the same to the BIR, there are also various administrative reportorial requirements for withholding taxes.
Thus, the current practice by the BIR during tax audits and corresponding penalties imposed for failure to withhold must be re-assessed by the BIR.
On the part of the BIR during tax audits, deficiency withholding tax on professional fees must also be computed in accordance with the regulations. Instead of computing the same using the higher rate of 15% only, the BIR must also comply with the regulations that it expects the taxpayers to comply with.
On penalties imposed for failure to withhold or erroneous withholding, taxpayers must not be burdened if they failed to withhold. Note that under the withholding tax system, taxpayers are merely helping the government in collecting taxes.
Thus, any income payment which the withholding agent fails to withhold will be declared taxable income by the payee and corresponding full income tax due thereon will also be paid by the income payee. Thus, assessing deficiency withholding tax and income tax on the withholding agent will only unjustly enrich the government. In fact, it must be the BIR who should run after the payee to ensure that income is reported and corresponding income taxes due thereon is paid based on the information from the taxpayer/withholding tax agent.
With the incoming new administration’s pronouncements that change is coming, we hope that the new BIR administration will look at these issues. Otherwise, in case of taxpayer’s failure to withhold, taxpayers will continue to be burdened while unjustly enriching the government.
Ma. Lourdes Politado-Aclan is a senior manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.
Considering the significance of withholding tax to the government, each and every taxpayer engaged in trade or business in the Philippines is required to withhold on their income payments, unless specifically exempted.
Failure to withhold or under-withholding of the required taxes gives rise to various penalties. This includes not only payment of the amount that the taxpayer failed to withhold and corresponding penalties. More significantly, this includes disallowance of corresponding expense as deduction, despite payment of the deficiency withholding at the time of tax audit. Thus, for failure to withhold, a taxpayer shall be required to pay not only the deficiency withholding tax and corresponding penalties, but shall also be required to pay deficiency income tax of 30%, together with the corresponding penalties.
Considering these penalties, every taxpayer must learn the basic rules and comply with the withholding tax requirements. Every income payment must be assessed if such must be subject to withholding tax and what rate must be applied. For income payments of professional/talent/consultancy fees, this could be 10% or 15% withholding tax rate.
So when must the lower rate of 10% or higher rate of 15% be applied?
This knowledge is important because during a tax audit, the BIR will normally immediately apply the 15% rate on professional fees, management/consultancy fees, and talent fees. It is now up to the taxpayer to prove that the applicable rate is 10% only or that the tax has been correctly withheld.
Basically, the applicable withholding tax rates depends on the amount of the gross income of the payee, and the timing of payment of the fees. A professional whose gross income during the year exceeds P720,000 should be subject to 15% withholding tax. Otherwise, if he did not meet the threshold, the lower rate of 10% must be applied.
So how would the withholding tax agent know if the payee’s gross income exceeds or shall exceed the P720,000 threshold?
Note that this threshold takes into consideration the total gross income of the professional not only from the withholding agent but also from his other clients.
To determine the applicable withholding tax rate, the professional must periodically submit an Affidavit Declaration of Current Year’s Gross Income to the BIR (“sworn declaration”). The sworn declaration must be filed by the professional on or before June 30 of each year or 15 days after the end of the month the income reaches P720,000, whichever comes earlier, during the year. A copy of the BIR duly received sworn declaration shall then be furnished to all the payors 5 days from date of receipt by the BIR.
Based on the foregoing, five days after June 30 of each year, every withholding agent must require its professionals/talents/consultants to submit a copy of their BIR-stamped received sworn declaration. Should such sworn declaration indicate that the professional’s gross income does not exceed P720,000 during the year, then 10% withholding tax rate must be applied by the withholding agent. Otherwise, if the same indicates that the professional’s gross income exceeds P720,000 during the year or the professional failed to submit the sworn declaration, the higher rate of 15% withholding tax must be applied effective July income payment.
The higher rate of 15% also applies in case the income payment of the withholding agent alone to the professional based on the contract is expected to exceed P720,000. Thus, regardless of the submission of the sworn declaration, the withholding agent must already subject to 15% withholding tax rate its income payment to the professional even prior to June 30.
To summarize, the 10% withholding tax rate applies only to income payments for the months of January to June, unless the withholding agent’s total income payment to the professional based on actual payments or the contract already exceeds or is expected to exceed the P720,000 threshold.
On the other hand, the 15% withholding tax rate must be applied effective July income payment, unless the professional submits a sworn declaration stating that his income shall not exceed P720,000 during the year.
Given that the requirement to withhold not only requires withholding but withholding using the correct tax rate, every withholding agent must apply the above rules on professional fees.
With the complicated and constantly changing rules on withholding taxes not only on professional fees but also on other types of income payments, all taxpayers agree that withholding tax requirements pose a significant burden to the taxpayers. Aside from the requirement to withhold and remit the same to the BIR, there are also various administrative reportorial requirements for withholding taxes.
Thus, the current practice by the BIR during tax audits and corresponding penalties imposed for failure to withhold must be re-assessed by the BIR.
On the part of the BIR during tax audits, deficiency withholding tax on professional fees must also be computed in accordance with the regulations. Instead of computing the same using the higher rate of 15% only, the BIR must also comply with the regulations that it expects the taxpayers to comply with.
On penalties imposed for failure to withhold or erroneous withholding, taxpayers must not be burdened if they failed to withhold. Note that under the withholding tax system, taxpayers are merely helping the government in collecting taxes.
Thus, any income payment which the withholding agent fails to withhold will be declared taxable income by the payee and corresponding full income tax due thereon will also be paid by the income payee. Thus, assessing deficiency withholding tax and income tax on the withholding agent will only unjustly enrich the government. In fact, it must be the BIR who should run after the payee to ensure that income is reported and corresponding income taxes due thereon is paid based on the information from the taxpayer/withholding tax agent.
With the incoming new administration’s pronouncements that change is coming, we hope that the new BIR administration will look at these issues. Otherwise, in case of taxpayer’s failure to withhold, taxpayers will continue to be burdened while unjustly enriching the government.
Ma. Lourdes Politado-Aclan is a senior manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
Tax court denies PLDT appeal on jurisdiction grounds
THE COURT of Tax Appeals (CTA) has rejected a petition by Philippine Long Distance Telephone Co., Inc. (PLDT), ruling that a Makati court has no jurisdiction over the company’s dispute with Tuguegarao City over P2.455 million in unpaid franchise taxes.
In a 15-page decision promulgated June 17, the CTA, sitting en banc, voted 5-3 to deny PLDT’s petition against the CTA Second Division, which originally declared improper jurisdiction on the part of Makati Regional Trial Court Branch 132.
The CTA cited a similar case in Bataan which declared the proper venue to hear a dispute within the province to be the Balanga City RTC.
It added that though PLDT headquarters is in Makati, the Makati RTC cannot “order respondents to cease and desist from assessing and collecting... business tax in addition to the franchise tax based on the same gross receipts.”
The CTA cited Section 21 of Batasang Pambansa (BP) 129 which states that “injunctive writs issued by an RTC are enforceable only within the judicial region where such court belongs,” emphasizing that the correct lower court to handle the case is the RTC of Tuguegarao.
The ruling was written by Associate Justice Esperanza R. Fabon-Victorino and concurred in by Associate Justices Juanito C. Castañeda, Jr., Erlinda P. Uy, Cielito N. Mindaro-Grulla and Caesar A. Casanova.
Dissenting were Associate Justices Lovell R. Bautista, Ma. Belen M. Ringpis-Liban and Presiding Justice Roman G. del Rosario.
In 2006, the company was compelled to pay franchise tax in Cebu City as ordered by the Supreme Court amounting to P432,468.75 after it failed to make payments from 1999-2003.
PLDT challenged Cebu City in 2004 on the imposition of franchise tax, claiming it is exempt.
Hastings Holdings, Inc. -- a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc. -- has a stake in BusinessWorld through the Philippine Star Group, which it controls.
source: Businessworld
In a 15-page decision promulgated June 17, the CTA, sitting en banc, voted 5-3 to deny PLDT’s petition against the CTA Second Division, which originally declared improper jurisdiction on the part of Makati Regional Trial Court Branch 132.
The CTA cited a similar case in Bataan which declared the proper venue to hear a dispute within the province to be the Balanga City RTC.
It added that though PLDT headquarters is in Makati, the Makati RTC cannot “order respondents to cease and desist from assessing and collecting... business tax in addition to the franchise tax based on the same gross receipts.”
The CTA cited Section 21 of Batasang Pambansa (BP) 129 which states that “injunctive writs issued by an RTC are enforceable only within the judicial region where such court belongs,” emphasizing that the correct lower court to handle the case is the RTC of Tuguegarao.
The ruling was written by Associate Justice Esperanza R. Fabon-Victorino and concurred in by Associate Justices Juanito C. Castañeda, Jr., Erlinda P. Uy, Cielito N. Mindaro-Grulla and Caesar A. Casanova.
Dissenting were Associate Justices Lovell R. Bautista, Ma. Belen M. Ringpis-Liban and Presiding Justice Roman G. del Rosario.
In 2006, the company was compelled to pay franchise tax in Cebu City as ordered by the Supreme Court amounting to P432,468.75 after it failed to make payments from 1999-2003.
PLDT challenged Cebu City in 2004 on the imposition of franchise tax, claiming it is exempt.
Hastings Holdings, Inc. -- a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc. -- has a stake in BusinessWorld through the Philippine Star Group, which it controls.
source: Businessworld
Thursday, June 23, 2016
Offsetting arrangements: A disallowed tax practice
Even with the upcoming change in leadership, the Bureau of Internal Revenue (BIR) has not scaled back on efforts to meet its steep collection target of more than two trillion pesos. To this end, it is no coincidence that the BIR has come up with more detailed guidelines and strict control measures to plug possible loopholes in our tax system. In recent issuances, the BIR has provided guidelines covering the conduct of investigation on the capacity of parties to acquire properties and clarifying the tax treatment of gross receipts tax passed on to borrowers.
Meanwhile, in Revenue Memorandum Circular No. (RMC) 61-2016 dated 13 June 2016, the BIR focuses on “offsetting” or “netting” arrangements and practices. Under the RMC, the practice of offsetting the amounts recognized as accrued/trade receivables against amounts recognized as accrued/trade payables is strictly prohibited for taxation purposes. As a consequence, accrued receivables or payables arising from the sale or lease of goods or properties or the performance of services shall be recognized at gross amounts for income and value-added tax (VAT) or percentage tax purposes.
To appreciate the concept of “offsetting arrangements”, the RMC provides three illustrations of these transactions and the prescribed entries in the accounting books, detailed as follows:
THE SUPERMARKET AND THE MANUFACTURER
Illustration No. 1 is a typical commercial arrangement between a VAT-registered manufacturer selling food products to a VAT-registered supermarket. For displaying the food products in the store, the supermarket charges a service fee on the manufacturer. While the manufacturer issues a sales invoice for the sale of the food products reflecting the total value of the goods, the supermarket would be paying for the amount of its purchases, net of the service fee. In this example, both manufacturer and supermarket are assumed to be top 20,000 private corporations for withholding tax purposes.
To ensure that taxes are properly imposed, the receivable and the payable transactions, together with the corresponding sale and service fee expenses respectively, shall be recorded in the books of the manufacturer separately at gross amounts, subject to the applicable taxes (in this case, the creditable income tax and the output VAT on the sale, and the withholding tax and the input VAT on the expense). Likewise, the supermarket shall record separately the receivable and the payable at gross amounts, which correspond to its service fee revenue and purchases respectively, plus applicable taxes. The amount payable to the manufacturer for the purchase of food products cannot be recorded in the books of the supermarket as net of service fee since the transaction may appear in form to be a discount, but in substance is a sale of service. This misclassification must be avoided since the tax consequences of a discount and a service are different. To avoid simulated transactions, the principle of “substance over form” will apply to reflect the true intentions of the parties and ensure that they are taxed accordingly.
THE INTERCONNECTED TELECOMMUNICATION NETWORKS
Illustration No. 2 is an industry-specific transaction between two local telecommunications companies that are both top 20,000 private corporations for withholding tax purposes. A subscriber of the originating telecoms company calls a user from the receiving telecoms network. The caller’s network earns revenue from its subscriber who made the call but concurrently incurs an access charge expense payable to the network of the user who received the call.
The RMC provides that the telecoms company of the subscriber who made the call shall record separately at gross amounts the receivable and the payable relative to the revenue earned from the subscriber and the expense incurred from the interconnection access fee charged by the other telecoms network respectively. The applicable taxes -- creditable income tax and output VAT on the subscriber’s revenue/receipt as well as withholding tax and input VAT on the access charge expense -- shall likewise be separately recorded.
On the other hand, the telecoms network of the user who received the call shall record revenue from the interconnection fee charged to the caller’s network at gross amount, subject to the applicable taxes (creditable income tax on the amount withheld and VAT, if the telecoms network is VAT-registered).
THE LENDER AND THE DEPOSITOR
Illustration No. 3 covers interest income earned by a bank on a loan extended to a company. Since the company is likewise a depositor, the bank also incurs interest expense on the deposit. In this case, the bank must separately record at gross amounts the interest income from the loan and the interest expense from the deposit. The applicable taxes (e.g., gross receipts tax, final withholding tax on deposits and deposit substitutes) must likewise be separately computed and recorded accordingly.
The implications of the RMC are pervasive enough to affect taxpayers engaged in any kind of business activity or industry. Essentially, the RMC requires taxpayers to look into the substance of their commercial arrangements and treat each identifiable transaction separately for both recording (accounting) and tax purposes, regardless if the eventual settlement between the parties will be at a “net” amount. On this note, it may concern taxpayers whether the authority of the BIR under the Tax Code even includes prescribing journal entries to be recorded for accounting purposes.
Consequently, taxpayers will need to properly determine whether a reduction in the settlement amount qualifies as a discount or as a separate expense since in the case of the latter, taxpayers must ensure that such expense is properly supported by documents (e.g., invoice, official receipt) and subjected to the appropriate withholding tax to comply with the requisites for deductibility of costs and expenses for income tax purposes and the invoicing requirements under VAT rules.
To conclude, the prohibition on the practice of offsetting effectively requires: (1) recognition of revenues at gross, resulting in the correct taxable base; and (2) sufficient and appropriate documentation of purchases that are sought to be claimed as taxable base reductions, whether as cost/expense deductions for income tax purposes or as input tax credits from purchases for VAT purposes. The latter point is particularly crucial since the impact of disallowed costs/expenses and input VAT credits could be significant. Furthermore, the requirement to withhold on certain income payments should also be emphasized, as failure to appropriately withhold taxes would open the door to the possibility of significant tax consequences in the form income tax (at 30%) and withholding tax (at the appropriate rate, ranging from 1% to 30%), not to mention the considerable impact of interests and penalties on the deficiency taxes assessed.
Since the RMC touches upon both accounting and tax treatment of transactions, taxpayers and auditors alike should read the guidelines under critical lenses in light of the substantial tax impact that can be anticipated from its strict implementation.
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.
Marion D. Castañeda is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
marion.d.castaneda@ph.pwc.com
Meanwhile, in Revenue Memorandum Circular No. (RMC) 61-2016 dated 13 June 2016, the BIR focuses on “offsetting” or “netting” arrangements and practices. Under the RMC, the practice of offsetting the amounts recognized as accrued/trade receivables against amounts recognized as accrued/trade payables is strictly prohibited for taxation purposes. As a consequence, accrued receivables or payables arising from the sale or lease of goods or properties or the performance of services shall be recognized at gross amounts for income and value-added tax (VAT) or percentage tax purposes.
To appreciate the concept of “offsetting arrangements”, the RMC provides three illustrations of these transactions and the prescribed entries in the accounting books, detailed as follows:
THE SUPERMARKET AND THE MANUFACTURER
Illustration No. 1 is a typical commercial arrangement between a VAT-registered manufacturer selling food products to a VAT-registered supermarket. For displaying the food products in the store, the supermarket charges a service fee on the manufacturer. While the manufacturer issues a sales invoice for the sale of the food products reflecting the total value of the goods, the supermarket would be paying for the amount of its purchases, net of the service fee. In this example, both manufacturer and supermarket are assumed to be top 20,000 private corporations for withholding tax purposes.
To ensure that taxes are properly imposed, the receivable and the payable transactions, together with the corresponding sale and service fee expenses respectively, shall be recorded in the books of the manufacturer separately at gross amounts, subject to the applicable taxes (in this case, the creditable income tax and the output VAT on the sale, and the withholding tax and the input VAT on the expense). Likewise, the supermarket shall record separately the receivable and the payable at gross amounts, which correspond to its service fee revenue and purchases respectively, plus applicable taxes. The amount payable to the manufacturer for the purchase of food products cannot be recorded in the books of the supermarket as net of service fee since the transaction may appear in form to be a discount, but in substance is a sale of service. This misclassification must be avoided since the tax consequences of a discount and a service are different. To avoid simulated transactions, the principle of “substance over form” will apply to reflect the true intentions of the parties and ensure that they are taxed accordingly.
THE INTERCONNECTED TELECOMMUNICATION NETWORKS
Illustration No. 2 is an industry-specific transaction between two local telecommunications companies that are both top 20,000 private corporations for withholding tax purposes. A subscriber of the originating telecoms company calls a user from the receiving telecoms network. The caller’s network earns revenue from its subscriber who made the call but concurrently incurs an access charge expense payable to the network of the user who received the call.
The RMC provides that the telecoms company of the subscriber who made the call shall record separately at gross amounts the receivable and the payable relative to the revenue earned from the subscriber and the expense incurred from the interconnection access fee charged by the other telecoms network respectively. The applicable taxes -- creditable income tax and output VAT on the subscriber’s revenue/receipt as well as withholding tax and input VAT on the access charge expense -- shall likewise be separately recorded.
On the other hand, the telecoms network of the user who received the call shall record revenue from the interconnection fee charged to the caller’s network at gross amount, subject to the applicable taxes (creditable income tax on the amount withheld and VAT, if the telecoms network is VAT-registered).
THE LENDER AND THE DEPOSITOR
Illustration No. 3 covers interest income earned by a bank on a loan extended to a company. Since the company is likewise a depositor, the bank also incurs interest expense on the deposit. In this case, the bank must separately record at gross amounts the interest income from the loan and the interest expense from the deposit. The applicable taxes (e.g., gross receipts tax, final withholding tax on deposits and deposit substitutes) must likewise be separately computed and recorded accordingly.
The implications of the RMC are pervasive enough to affect taxpayers engaged in any kind of business activity or industry. Essentially, the RMC requires taxpayers to look into the substance of their commercial arrangements and treat each identifiable transaction separately for both recording (accounting) and tax purposes, regardless if the eventual settlement between the parties will be at a “net” amount. On this note, it may concern taxpayers whether the authority of the BIR under the Tax Code even includes prescribing journal entries to be recorded for accounting purposes.
Consequently, taxpayers will need to properly determine whether a reduction in the settlement amount qualifies as a discount or as a separate expense since in the case of the latter, taxpayers must ensure that such expense is properly supported by documents (e.g., invoice, official receipt) and subjected to the appropriate withholding tax to comply with the requisites for deductibility of costs and expenses for income tax purposes and the invoicing requirements under VAT rules.
To conclude, the prohibition on the practice of offsetting effectively requires: (1) recognition of revenues at gross, resulting in the correct taxable base; and (2) sufficient and appropriate documentation of purchases that are sought to be claimed as taxable base reductions, whether as cost/expense deductions for income tax purposes or as input tax credits from purchases for VAT purposes. The latter point is particularly crucial since the impact of disallowed costs/expenses and input VAT credits could be significant. Furthermore, the requirement to withhold on certain income payments should also be emphasized, as failure to appropriately withhold taxes would open the door to the possibility of significant tax consequences in the form income tax (at 30%) and withholding tax (at the appropriate rate, ranging from 1% to 30%), not to mention the considerable impact of interests and penalties on the deficiency taxes assessed.
Since the RMC touches upon both accounting and tax treatment of transactions, taxpayers and auditors alike should read the guidelines under critical lenses in light of the substantial tax impact that can be anticipated from its strict implementation.
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.
Marion D. Castañeda is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
marion.d.castaneda@ph.pwc.com
Tuesday, June 21, 2016
Next BIR chief nixes lifestyle check on property buyers
DAVAO CITY, Philippines – In what could be his first act as incoming Internal Revenue commissioner, Cesar Dulay will reverse one of the much criticized recent orders by his predecessor, Kim Henares.
“There was this latest issuance only three weeks ago on lifestyle check on the buyer whether the buyer is qualified or has the money to buy the property,” Dulay told reporters on the sidelines of the second day of Sulong Pilipinas business workshop.
“We just want to recall and take a look at that in particular,” he added.
The two-day event sought to garner recommendations from the business community on action plans for the incoming Duterte administration’s 10-point economic agenda.
Dulay was pertaining to Revenue Memorandum Order (RMO) 24-2016, issued last June 7, which laid out guidelines on tax probes for property buyers and sellers who fail to show proof of financial capacity.
Henares and tax industry group Tax Management Association of the Philippines (TMAP) had traded barbs over what the latter called were “last-minute” orders two weeks before she steps down.
In particular, TMAP blasted RMO 24-2016 for being “unjust and unfair” for presuming fraud on taxpayers who cannot show proof of financial capacity.
Dulay and TMAP officials were seen conversing on the sidelines of yesterday’s forum.
“These lifestyle checks are prone to harassment,” Dulay said.
Earlier, Henares said Dulay has every power “to do what he wants” once he takes over by noon of June 30.
Dulay also clarified yesterday that he would only “review” letters of authority (LOA) which he said have taken “so much time that they have become prone to corruption.”
“But for those which are valid (LOAs), we will let them continue,” Dulay said, adding he would still need to study how BIR operates.
BIR, which traditionally accounts for 80 percent of state revenues, is the government’s main revenue agency.
Under Henares, BIR collections grew an average of 11.7 percent from 2011 to 2015, faster than 10.01 percent in the previous five years, Department of Finance data showed.
source: Philippine Star
BIR plugs loophole in tax-appeal cases
Internal Revenue Commissioner Kim S. Jacinto-Henares has closed yet another loop-hole taxpayers use to invalidate tax-deficiency assessments against them that should have already become final and executory.
In issuing Revenue Memorandum Order (RMO) 26-2016, Henares outlined the new process to be followed in handling disputed assessments. The new process hardly changed the former process, but now has a measure against taxpayers invoking the defense that they did not receive any assessment notice from the Bureau of Internal Revenue (BIR), which is a requirement of due process.
Under the new RMO 26-2016, the lapse of the period to appeal an assessment that was mailed to the address on record of the taxpayer would be enough for such assessment to become final and executory.
This closes a loophole used by taxpayers in trying to appeal tax-deficiency assessments that have already become final, executory and demandable because of the lapse of the period to appeal.
Pacquiao case
In the P2-billion tax case against boxing icon and Senator-elect Emmanuel D. Pacquiao, one of the issues resolved by the Court of Tax Appeals (CTA) was whether the appeal filed by Pacquiao was filed on time.
The BIR had earlier moved to dismiss Pacquiao’s petition on the ground of prescription, arguing that the Final Decision on Disputed Assessment (FDDA) served by BIR agents to Pacquiao’s office at the House of Representatives was “constructive service” of such FDDA to Pacquiao himself, although he did not personally receive such notice but only through his staff.
Pacquiao’s defense in the BIR’s motion to dismiss his appeal before the CTA was that the 30-day period to appeal the FDDA to the CTA begun only after he had personally received the FDDA, and not when his staff at the House of Representatives received it from the BIR agents. The BIR served the FDDA at Pacquiao’s office in May 2013, while Pacquiao filed his appeal before the CTA only in August 2013, or more than two months after the FDDA’s “constructive service” through Pacquiao’s staff at the House of Representatives.
The CTA eventually denied the BIR’s motion to dismiss Pacquiao’s appeal, brushing aside the BIR’s argument that the FDDA had already attained the status of being final, executory and demandable after the lapse of the 30-day period to appeal.
Usual defense
The BIR’s lawyer in Pacquiao’s case said it was a usual defense for a taxpayer to say that he did not personally receive the FDDA so that he would still be able to appeal the assessment before the CTA even after the lapse of the 30-day period to appeal.
“When a taxpayer fails to appeal on time, yes, it’s common for them to give the excuse that they did not receive these documents,” lawyer Felix Velasco said in a text message to the BusinessMirror.
Velasco used to head the litigation department of the BIR, and is now connected with the BIR’s Enforcement and Advocacy Service.
And once this issue of whether the appeal was filed on time be resolved in favor of the taxpayer, it prevents the government from collecting on the tax deficiency assessment until the case is finally resolved by the courts.
Evidentiary rules
There is a presumption under the law that a letter duly directed and mailed was received in the regular course of the mail.
But under current jurisprudence, this presumption can easily be disproved by the mere denial by the taxpayer that he did actually receive such mail. Thus, the burden of proving the receipt of the mail shall fall upon the party asserting such fact.
However, under Henares’s new RMO 26-2016, she created another presumption that assessment notices sent to the address on record of the taxpayer is deemed received and shall ripen into a final, executory and demandable tax-deficiency assessment after the lapse of the period to appeal.
Under Section II, Paragraph 15 of RMO 26-2016, even the failure of the taxpayer to receive the assessment notices can be a ground for the assessment to become final and unappealable if the notices were sent to the taxpayer’s address on record.
The provision said that “failure of the taxpayer to receive any assessment notices because it was served in the address indicated in the BIR’s registration database and the taxpayer transferred to a new address or closed/ceased operations without updating and transferring its BIR registration or canceling its BIR registration as the case may be” is a ground for the assessment to become final, executory and demandable.
source: Business Mirror
BIR clarifies treatment of bank gross receipts tax
THE BUREAU of Internal Revenue has issued a circular clarifying the proper tax treatment of gross receipts taxes (GRT) “passed on” by banks to their clients.
Revenue Memorandum Circular No. 62-2016, dated June 13, states the shifting of the 5% GRT to the client would still incur tax on the bank’s part, as it is considered a form of “other fees and charges.”
The circular noted that “the ‘passed-on’ GRT shall be considered as receipt of income as specified under Section 32 of the Tax Code.”
It also clarified that the “passed-on” GRT still forms part of the tax base for the purpose of computing a bank or financial institution’s gross receipts.
The circular noted that under Section 121 and 122 of the Tax Code, all banks, non-bank financial intermediaries and financing companies doing business in the Philippines are “directly liable” for GRT.
The circular presented an example in which a bank passes on the 5% GRT worth P500 to a client who is due to pay P10,000 interest.
In this case, the bank is still liable for a 5% GRT on the P10,000 interest (or P500), plus a 7% GRT on the P500 it “passed on” to the borrower (or P35).
The circular said that considering the “passed-on” tax as a bank fee is consistent with Section 2 of the Bangko Sentral ng Pilipinas Circular No. 370 (Updated Rules Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency).
At the same time, the circular also stated the borrower can claim the “passed-on” GRT as a deductible expense under Section 34 of the Tax Code, subject to requirements set by Section 2.58.5 of Revenue Regulation No. 2-98.
The lender, should it pay the GRT itself, can claim it as a deductible expense under Section 34 (c) of the Tax Code. -- Vince Alvic Alexis F. Nonato
SOURCE: Businessworld
Revenue Memorandum Circular No. 62-2016, dated June 13, states the shifting of the 5% GRT to the client would still incur tax on the bank’s part, as it is considered a form of “other fees and charges.”
The circular noted that “the ‘passed-on’ GRT shall be considered as receipt of income as specified under Section 32 of the Tax Code.”
It also clarified that the “passed-on” GRT still forms part of the tax base for the purpose of computing a bank or financial institution’s gross receipts.
The circular noted that under Section 121 and 122 of the Tax Code, all banks, non-bank financial intermediaries and financing companies doing business in the Philippines are “directly liable” for GRT.
The circular presented an example in which a bank passes on the 5% GRT worth P500 to a client who is due to pay P10,000 interest.
In this case, the bank is still liable for a 5% GRT on the P10,000 interest (or P500), plus a 7% GRT on the P500 it “passed on” to the borrower (or P35).
The circular said that considering the “passed-on” tax as a bank fee is consistent with Section 2 of the Bangko Sentral ng Pilipinas Circular No. 370 (Updated Rules Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency).
At the same time, the circular also stated the borrower can claim the “passed-on” GRT as a deductible expense under Section 34 of the Tax Code, subject to requirements set by Section 2.58.5 of Revenue Regulation No. 2-98.
The lender, should it pay the GRT itself, can claim it as a deductible expense under Section 34 (c) of the Tax Code. -- Vince Alvic Alexis F. Nonato
SOURCE: Businessworld
Checking financial capacity in transfers of properties
Most, if not all, individuals and corporate entities alike, have had some experience buying, selling, exchanging, transferring, inheriting or donating real and/or personal property/ies. We are well aware that such transfers of properties are subject to applicable income/capital gains taxes (based either on the selling price or fair market value of the properties transferred or gain realized on the transfer) as well as documentary stamp tax (DST) in the case of transfers of real properties and shares of stock not traded in the stock exchange. In the case of transfers of real or personal properties that are held for sale or lease or are used in the business, the same are also subject to value-added tax (VAT). In addition to these national taxes, the sale or exchange of real properties is subject to applicable transfer taxes payable to the concerned local government unit.
Once the taxes have been paid, there is a need to secure from the relevant Bureau of Internal Revenue (BIR) -- Revenue District Office (RDO) the required Certificates Authorizing Registration (CAR) and/or Tax Clearance (TCL). In the case of transfers of real properties, the CAR and/or TCL must be presented to the concerned Register of Deeds in order for the latter to issue a new transfer certificate of title in the name of the buyer/transferee. Similarly, with respect to transfers of shares of stock (not traded in the stock exchange), the CAR must be presented to the corporate secretary of the investee corporation so that the latter can record the transfer in the stock and transfer book of the corporation as well as issue the stock certificate in the name of the buyer/transferee.
The CAR and/or TCL is processed by the One Time Transaction (ONETT) unit of the concerned BIR-RDO and their primary objective is to ensure that the correct taxes have been paid on the transaction. In the course of processing the CAR and/or TCL, the main documents required by the ONETT (as per BIR Revenue Memorandum Order 15-2003) include the contract or deed evidencing the transfer and consideration therefor; documents to support the acquisition cost as well as the fair market value (FMV) of the properties transferred; proof of payment of applicable taxes; and the authority of the respective parties to effect the transfer.
Recently, the BIR issued Revenue Memorandum Order (RMO) Nos. 24-2016 and 25- 2016 dated June 7 and 12, 2016, respectively, prescribing guidelines to investigate the financial capacity of the parties to acquire the properties subject of certain transfers.
The transactions covered by the above RMOs are, but not limited to, those subject to: (1) final capital gains Tax (CGT) on sale of real properties considered as capital assets; (2) CGT on sale, transfer or assignment of stocks not traded in the stock exchange; (3) expanded withholding tax (EWT) on the sale of real properties considered as ordinary assets; (4) donor’s tax; (5) estate tax; (6) other taxes including documentary stamp tax related to the sale/transfer of properties, and (7) those covered by tax-free exchange/transfer under Section 40 of the Tax Code (i.e., where a transferor exchanges property for shares or shares for shares of a transferee corporation wherein the transferor gains control or further control of the transferee corporation), involving taxes in excess of Php 1 Million and transactions exempt from CGT/EWT.
In addition to the supporting documents required when applying for CARs and/or TCLs under RMO 15- 2003, the parties (buyer/transferor and seller/transferee) may be subjected to an audit/investigation to determine their capacity to hold and/or acquire properties.
In all cases, the ONETT team shall verify in the BIR Integrated Tax System (ITS) that the parties regularly file tax returns and report income sufficient to establish financial capacity.
For individuals not required to file an income tax return to establish his financial capacity, he shall submit an affidavit stating why he is not required to file an income tax return, total annual income and sources of income. In addition, presentation of documents, such as, but not limited to Income Tax Return, Certificate of Creditable Tax Withheld at Source, Certificate of Final Tax Withheld at Source, or loan documents as the source of the consideration for the acquisition of the subject property may be used to establish financial capacity.
If the buyer/transferee is proven to have no financial capacity to acquire the subject property, the transaction shall be deemed a donation, not a sale. Donor’s tax shall be imposed instead of CGT, and a duly executed deed of donation shall be required.
RMO 25-2016 amended the above provision of RMO 24-2016 and added the following:
“If the seller/transferor/assignor is a corporation or is a stranger to the buyer/transferee/assignee, and it is proven that the said buyer/transferee/assignor does not have any financial capacity to purchase the subject property, it shall be presumed that the buyer/transferee/assignee has earned income that he did not declare and taxes due thereon where not paid. In addition to the tax due on the sale/transfer/assignment, deficiency income tax shall be assessed on the buyer/transferee/assignee on the amount of consideration for the transfer which cannot be supported by his financial capacity, on the taxable year when the sale/transfer/assignment of the subject property occurred.”
The original wording of RMO 24-2016 refers to the financial capacity of the buyer/transferee. If it is proven that the buyer/transferee has no financial capacity to acquire the property, the transaction is taxed as a donation and not a sale. But, the amendment introduced by RMO 25-2016 specifically refers to a situation where the seller/transferor/assignor is a corporation or a stranger and the financial capacity of the buyer/transferee/assignor is similarly not proven. Some questions arise. If the seller is a corporation or a stranger but the buyer has no financial capacity, will the transaction be considered a donation (and taxed accordingly) or will it be taxed as a sale? Does the provision on treating the transfer as a donation due to inability to prove buyer’s financial capacity apply to transactions between individuals and related parties but not to corporate entities and unrelated parties?
The amendment mentions that in addition to the tax due on transaction, the buyer may be liable for deficiency income tax on the portion of the consideration that was not supported by his financial capacity. But, if the transaction will already be taxed as a donation due to the inability to prove the buyer’s financial capacity, should the buyer still be exposed to deficiency income tax? Is it reasonable that the same transaction will give rise to two types of tax, one that is in the nature of a penalty and the other in the form of a deficiency tax?
The RMO 24-2016 expressly provides that the lack of financial capacity of the seller/transferor/assignor shall not stop the processing and issuance of the CAR/TCL for the subject property. However, the RDO may recommend the issuance of a Letter of Authority to conduct an audit or investigation.
In case of applications for ruling/certification on the consequences of tax-free exchanges under Section 40 of the Tax Code, the documents required under existing rules shall be submitted to the Law Division of the BIR National office. If it is determined that the transferor/assignor does not have the financial capacity to acquire the properties subject of the tax-free exchange, the case shall be forward to the National Investigation Division (NID) for initiation of an audit/investigation. The processing of the BIR certification/ruling and issuance of CARs and TCLs on the transfer of property in exchange for shares of stock shall likewise proceed notwithstanding the audit or investigation.
A perusal of the above RMOs seems to indicate that ostensibly, the purpose is not only to ensure that correct taxes are paid but more importantly, that these transfers of properties, particularly those between related parties, involve actual exchange of consideration and are not simulated. Requiring proof of financial capacity of the seller/transferor/ assignor (to acquire the property) as well as the buyer/transferee/assignee (to purchase the property) will also have a deterrent effect on money-laundering activities and hiding ill-gotten wealth. The BIR can be lauded for its efforts in this regard but it is hoped that these RMOs will not unduly delay the processing and issuance of CARs/TCLs for bona fide transactions which are done in the ordinary course of business and for legitimate purposes such as corporate restructuring.
The RMOs grant a great degree of discretion on the part of the ONETT examiners with respect to acceptable proof of financial capacity. It is hoped that the BIR examiners will be reasonable in evaluating the financial capacity of the parties, particularly with respect to corporate entities, domestic or foreign because in their case, alternative sources of information (such as published news/articles on significant corporate deals; annual report; disclosures of publicly listed entities, etc.) that will demonstrate their financial capacity are readily available.
Tata Panlilio-Ong is a director of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
Once the taxes have been paid, there is a need to secure from the relevant Bureau of Internal Revenue (BIR) -- Revenue District Office (RDO) the required Certificates Authorizing Registration (CAR) and/or Tax Clearance (TCL). In the case of transfers of real properties, the CAR and/or TCL must be presented to the concerned Register of Deeds in order for the latter to issue a new transfer certificate of title in the name of the buyer/transferee. Similarly, with respect to transfers of shares of stock (not traded in the stock exchange), the CAR must be presented to the corporate secretary of the investee corporation so that the latter can record the transfer in the stock and transfer book of the corporation as well as issue the stock certificate in the name of the buyer/transferee.
The CAR and/or TCL is processed by the One Time Transaction (ONETT) unit of the concerned BIR-RDO and their primary objective is to ensure that the correct taxes have been paid on the transaction. In the course of processing the CAR and/or TCL, the main documents required by the ONETT (as per BIR Revenue Memorandum Order 15-2003) include the contract or deed evidencing the transfer and consideration therefor; documents to support the acquisition cost as well as the fair market value (FMV) of the properties transferred; proof of payment of applicable taxes; and the authority of the respective parties to effect the transfer.
Recently, the BIR issued Revenue Memorandum Order (RMO) Nos. 24-2016 and 25- 2016 dated June 7 and 12, 2016, respectively, prescribing guidelines to investigate the financial capacity of the parties to acquire the properties subject of certain transfers.
The transactions covered by the above RMOs are, but not limited to, those subject to: (1) final capital gains Tax (CGT) on sale of real properties considered as capital assets; (2) CGT on sale, transfer or assignment of stocks not traded in the stock exchange; (3) expanded withholding tax (EWT) on the sale of real properties considered as ordinary assets; (4) donor’s tax; (5) estate tax; (6) other taxes including documentary stamp tax related to the sale/transfer of properties, and (7) those covered by tax-free exchange/transfer under Section 40 of the Tax Code (i.e., where a transferor exchanges property for shares or shares for shares of a transferee corporation wherein the transferor gains control or further control of the transferee corporation), involving taxes in excess of Php 1 Million and transactions exempt from CGT/EWT.
In addition to the supporting documents required when applying for CARs and/or TCLs under RMO 15- 2003, the parties (buyer/transferor and seller/transferee) may be subjected to an audit/investigation to determine their capacity to hold and/or acquire properties.
In all cases, the ONETT team shall verify in the BIR Integrated Tax System (ITS) that the parties regularly file tax returns and report income sufficient to establish financial capacity.
For individuals not required to file an income tax return to establish his financial capacity, he shall submit an affidavit stating why he is not required to file an income tax return, total annual income and sources of income. In addition, presentation of documents, such as, but not limited to Income Tax Return, Certificate of Creditable Tax Withheld at Source, Certificate of Final Tax Withheld at Source, or loan documents as the source of the consideration for the acquisition of the subject property may be used to establish financial capacity.
If the buyer/transferee is proven to have no financial capacity to acquire the subject property, the transaction shall be deemed a donation, not a sale. Donor’s tax shall be imposed instead of CGT, and a duly executed deed of donation shall be required.
RMO 25-2016 amended the above provision of RMO 24-2016 and added the following:
“If the seller/transferor/assignor is a corporation or is a stranger to the buyer/transferee/assignee, and it is proven that the said buyer/transferee/assignor does not have any financial capacity to purchase the subject property, it shall be presumed that the buyer/transferee/assignee has earned income that he did not declare and taxes due thereon where not paid. In addition to the tax due on the sale/transfer/assignment, deficiency income tax shall be assessed on the buyer/transferee/assignee on the amount of consideration for the transfer which cannot be supported by his financial capacity, on the taxable year when the sale/transfer/assignment of the subject property occurred.”
The original wording of RMO 24-2016 refers to the financial capacity of the buyer/transferee. If it is proven that the buyer/transferee has no financial capacity to acquire the property, the transaction is taxed as a donation and not a sale. But, the amendment introduced by RMO 25-2016 specifically refers to a situation where the seller/transferor/assignor is a corporation or a stranger and the financial capacity of the buyer/transferee/assignor is similarly not proven. Some questions arise. If the seller is a corporation or a stranger but the buyer has no financial capacity, will the transaction be considered a donation (and taxed accordingly) or will it be taxed as a sale? Does the provision on treating the transfer as a donation due to inability to prove buyer’s financial capacity apply to transactions between individuals and related parties but not to corporate entities and unrelated parties?
The amendment mentions that in addition to the tax due on transaction, the buyer may be liable for deficiency income tax on the portion of the consideration that was not supported by his financial capacity. But, if the transaction will already be taxed as a donation due to the inability to prove the buyer’s financial capacity, should the buyer still be exposed to deficiency income tax? Is it reasonable that the same transaction will give rise to two types of tax, one that is in the nature of a penalty and the other in the form of a deficiency tax?
The RMO 24-2016 expressly provides that the lack of financial capacity of the seller/transferor/assignor shall not stop the processing and issuance of the CAR/TCL for the subject property. However, the RDO may recommend the issuance of a Letter of Authority to conduct an audit or investigation.
In case of applications for ruling/certification on the consequences of tax-free exchanges under Section 40 of the Tax Code, the documents required under existing rules shall be submitted to the Law Division of the BIR National office. If it is determined that the transferor/assignor does not have the financial capacity to acquire the properties subject of the tax-free exchange, the case shall be forward to the National Investigation Division (NID) for initiation of an audit/investigation. The processing of the BIR certification/ruling and issuance of CARs and TCLs on the transfer of property in exchange for shares of stock shall likewise proceed notwithstanding the audit or investigation.
A perusal of the above RMOs seems to indicate that ostensibly, the purpose is not only to ensure that correct taxes are paid but more importantly, that these transfers of properties, particularly those between related parties, involve actual exchange of consideration and are not simulated. Requiring proof of financial capacity of the seller/transferor/ assignor (to acquire the property) as well as the buyer/transferee/assignee (to purchase the property) will also have a deterrent effect on money-laundering activities and hiding ill-gotten wealth. The BIR can be lauded for its efforts in this regard but it is hoped that these RMOs will not unduly delay the processing and issuance of CARs/TCLs for bona fide transactions which are done in the ordinary course of business and for legitimate purposes such as corporate restructuring.
The RMOs grant a great degree of discretion on the part of the ONETT examiners with respect to acceptable proof of financial capacity. It is hoped that the BIR examiners will be reasonable in evaluating the financial capacity of the parties, particularly with respect to corporate entities, domestic or foreign because in their case, alternative sources of information (such as published news/articles on significant corporate deals; annual report; disclosures of publicly listed entities, etc.) that will demonstrate their financial capacity are readily available.
Tata Panlilio-Ong is a director of the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
Monday, June 20, 2016
Taxes: Jail the pusher or the user?
In the law-enforcement battle against illegal drugs, there has always been a debate about whether the emphasis should be on stopping the pusher of the drugs or the user. The drug dealer is supposedly the “big fish” and is often protected by the powerful and wealthy. But if you take out the pusher, there are no drugs for the user.
The user is sometimes characterized as a victim of illegal drugs. Law enforcement can more easily catch the user, but there are many more of them, which is both an advantage and a disadvantage. Yet, without buyers and users, the illegal-drug business goes away.
But this is not a discussion of illegal drugs. This is about taxes.
A “tax” is a forced contribution to state revenue and there are two kinds of taxes. Income tax is money taken from you when you earn. A consumption (or sales) tax is money taken from you when you spend. In the battle of government to take your money, there has always been a debate about whether the emphasis should be on taking your money first or later.
Going after the drug pusher could be dangerous, as high-ranking government officials might be involved, and hundreds if not thousands are being paid off to look the other way. The Mexican drug cartels and American organized crime are good examples. It is safer to go after the little guy—the users.
If the government relies on consumption taxes, it is like concentrating on arresting the pushers. The government has to wait to get its revenue and has no certain idea of how much it is going to collect. Big business and others that depend on government contracts are going to be very unhappy and complain.
If the government relies on income taxes, it is like concentrating on arresting the users. It gets immediate results and revenue, and the little fish are probably not going to rise up in revolt. The feeding trough of government-generated business is guaranteed.
Now we can release the ugly demons that are the “experts” as they decide the economic truth of which tax—income or consumption—is better for the economy and the people. “Government experts” favor income tax; consumption taxes are favored by most “economic experts.” But like a discussion on the death penalty, it depends on who is doing the talking. Singapore has the lowest percentage of illegal-drug use in the world, according to the United Nations. But the question is, does capital punishment account for that?
Income tax has the most positive results in the short term, providing immediate funding for government- provided infrastructure and the like. Consumption tax has the most beneficial long-term benefits, encouraging people to save money and for businesses to spend more for capital expenditures.
If crazed druggies are running wild in the streets, you jail the users. If drug abuse is a growing problem for the future, jail the pusher. If the government is desperate for money just to keep its doors open, more income tax. If the government has a sound financial position and is looking for long-term economic investment, more consumption tax. The Philippines is the latter.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
source: Business Mirror
Kim and income taxes: not Duterte’s type
President-elect Rodrigo Duterte was reported to have said he would abolish the Bureau of Internal Revenue (BIR), Bureau of Customs, and the Land Transportation Office once he steps in as President, due to rampant corruption in these agencies (GMA News 05.16.16). Kim Henares was deeply hurt (Pinoy News 05.24.2016). Why, she has been incumbent President Benigno S. C. Aquino III’s top performer for revenue generation in his now-ending six-year term.
“I know BIR Commissioner Kim Henares already has a reputation for being fiercely dedicated to her duties, but those involved can attest that all our work paid off. Tax collections have never been more efficient,” said Aquino.
“For example, in 2012, we breached the P1-trillion mark for the first time. Collections from the arrears management program have also drastically increased: from P2.3 billion in 2013 to P8.4 billion in 2015. All this has led to increased fiscal space for our administration and even our successors,” he added (Philippine News 05.26.2016).
BIR Collections were P1.335 billion in CY 2014, 91.65% of goal, and an increase of 9.71% over 2013. About 58.79% of grand total was contributed by company and corporate enterprise, and 18.52% was from individual income taxes and withholding taxes on wages. Combined, income taxes paid by companies and individuals (except capital gains taxes and other taxes withheld at source like bank deposits and government securities) were 77.81% of total collections (computed from Table 4 “Comparative Internal Revenue Collections and Goals by Type” on BIR Web site).
Taxes on net income and profit have been paid by 753,000+ corporate taxpayers and 15.345+ million individual taxpayers as of December 2014. (BIR tables for 2015 are only for the first semester, but interpolation shows that 2013-2014 and 2014-2015 keep the same growth in collection at 9.71%+ increase per year. Growth in number of registered taxpayers is steady at 8.2% from CY 2013 to CY2014 and 8.21% 1st Sem. CY 2015 from 1st Sem. 2014 (Ibid.).
Looking good, Kim, but you are just not his type. One consolation is that perhaps it’s not you, but you know, tax cuts are a very popular issue, and very effective for campaigns and popularity surveys. Candidates in the immediate past election have all somehow baited votes with promised income tax cuts. In fact before that, many politicians have proposed these, even during the term of President Aquino.
Dr. Rosario Manasan of the Philippine Institute for Development Studies (PIDS) assessed the various bills filed in Congress to reduce income tax rates relative to neighbors in the Association of South East Asian Nations (ASEAN). She said that the Philippines’s top marginal personal income-tax rate of 32% is higher than the Asean member-states except for the 35% in Thailand and Vietnam (Business Mirror 03.16.2016). In Vietnam, Malaysia, and Thailand, workers earning the same annual income only pay 20%, 11% and 10% respectively (Tax News, 08.19.2014).
Last year, the Aquino government rejected a bill filed in the House of Representatives to reduce the taxes paid by fixed-income earners, saying “the administration could not risk losing the gains of the robust economy.” Kim Henares estimated that the government would suffer at least P29 billion in lost revenues (Philippine Star, 09.04.2015). In an earlier reaction to then proposed tax cuts, the Department of Finance estimated that the government would stand to lose at least P43 billion in revenue for the three years to 2017 (Tax News, Ibid.)
In exchange for the lawmakers’ plan to reduce income taxes, Finance Secretary Cesar Purisima proposed to increase the value-added tax (VAT) from the current 12% to 14% and reduce exemptions (The Philippine Star, Ibid.). BIR Commissioner Henares agreed that income tax rates can be lowered if the Bank Secrecy Law will be lifted, perchance to find other sources of revenue for the BIR (The Philippine Star 09.15.2015). Always a quid pro quo.
But that’s the way it is, Dr. Manasan said in the PIDs study.
“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” (Business Mirror, Ibid.).
Yet she stressed that the Philippines has not adjusted its personal income-tax system since 1998, and there is that “phenomenon of ‘bracket creep’, defined as the non-indexation to inflation of personal income-tax brackets. This bracket creep occurs when employees’ income increases over time as a result of inflation, pushing them to pay higher taxes, (while) their purchasing power remains the same” (Ibid.).
Incoming Finance Minister Carlos Dominguez has looked at the proposed reform package too-late submitted by outgoing Finance Minister Cesar Purisima last month which recommended a decrease of the income tax rate to 25% and the tandem recovery scheme of expanding levy coverage plus raising the Value Added Tax rate (VAT) from 12% to 14% (BusinessWorld06.06.2016).
Dominguez agrees with the reduction of income taxes to the “mid-20% level” to “provide taxpayers with more money to spend and encourage business activity in the Philippines” (Ibid.). He calls this a “long-term investment” to prod consumption, not a revenue-erosion sacrifice. Despite an expected budget deficit from decreased tax revenues and increased government spending for stepped-up infrastructure projects, increased borrowing (estimated up to 3% of GDP target) will sustain expected GDP growth to the targeted 8% in the Duterte term.
Dominguez says no to an increase in VAT because this punishes all and is anti-poor, though incoming Budget Chief Benjamin Diokno said “lower income tax rates may have to come with a corresponding increase in VAT to as much as 15% from the 12% currently, in order to offset revenues to be foregone” (BusinessWorld 06.14.2016).
Tax cuts always come with passionate pros and cons, and a lot of bargained-for quid pro quos. Yet supply-side economists of the 1980s espoused and proposed this to governments, with the best success stories of tax cuts in the terms of US President Ronald Reagan and his “Reaganomics” and George W. Bush who hotly pursued tax cuts alongside deficit spending to spur growth.
But “in January 2012, the US economy plunged into an unprecedented $15-trillion deficit” (The Economics Book, London, 2012).
Economists William G. Gale and Andrew A. Samwick of the US Ivy-league Dartmouth College and the National Economic Research warn: “Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time they also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth” (Effects of Income Tax Changes on Economic Growth, September 2014).
Don’t take it personally, Kim Henares, that you did not elicit that wolf-whistle to appreciate your charming personality as tax-vixen for the past six years of torrid tax collection.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com
source: Businessworld
“I know BIR Commissioner Kim Henares already has a reputation for being fiercely dedicated to her duties, but those involved can attest that all our work paid off. Tax collections have never been more efficient,” said Aquino.
“For example, in 2012, we breached the P1-trillion mark for the first time. Collections from the arrears management program have also drastically increased: from P2.3 billion in 2013 to P8.4 billion in 2015. All this has led to increased fiscal space for our administration and even our successors,” he added (Philippine News 05.26.2016).
BIR Collections were P1.335 billion in CY 2014, 91.65% of goal, and an increase of 9.71% over 2013. About 58.79% of grand total was contributed by company and corporate enterprise, and 18.52% was from individual income taxes and withholding taxes on wages. Combined, income taxes paid by companies and individuals (except capital gains taxes and other taxes withheld at source like bank deposits and government securities) were 77.81% of total collections (computed from Table 4 “Comparative Internal Revenue Collections and Goals by Type” on BIR Web site).
Taxes on net income and profit have been paid by 753,000+ corporate taxpayers and 15.345+ million individual taxpayers as of December 2014. (BIR tables for 2015 are only for the first semester, but interpolation shows that 2013-2014 and 2014-2015 keep the same growth in collection at 9.71%+ increase per year. Growth in number of registered taxpayers is steady at 8.2% from CY 2013 to CY2014 and 8.21% 1st Sem. CY 2015 from 1st Sem. 2014 (Ibid.).
Looking good, Kim, but you are just not his type. One consolation is that perhaps it’s not you, but you know, tax cuts are a very popular issue, and very effective for campaigns and popularity surveys. Candidates in the immediate past election have all somehow baited votes with promised income tax cuts. In fact before that, many politicians have proposed these, even during the term of President Aquino.
Dr. Rosario Manasan of the Philippine Institute for Development Studies (PIDS) assessed the various bills filed in Congress to reduce income tax rates relative to neighbors in the Association of South East Asian Nations (ASEAN). She said that the Philippines’s top marginal personal income-tax rate of 32% is higher than the Asean member-states except for the 35% in Thailand and Vietnam (Business Mirror 03.16.2016). In Vietnam, Malaysia, and Thailand, workers earning the same annual income only pay 20%, 11% and 10% respectively (Tax News, 08.19.2014).
Last year, the Aquino government rejected a bill filed in the House of Representatives to reduce the taxes paid by fixed-income earners, saying “the administration could not risk losing the gains of the robust economy.” Kim Henares estimated that the government would suffer at least P29 billion in lost revenues (Philippine Star, 09.04.2015). In an earlier reaction to then proposed tax cuts, the Department of Finance estimated that the government would stand to lose at least P43 billion in revenue for the three years to 2017 (Tax News, Ibid.)
In exchange for the lawmakers’ plan to reduce income taxes, Finance Secretary Cesar Purisima proposed to increase the value-added tax (VAT) from the current 12% to 14% and reduce exemptions (The Philippine Star, Ibid.). BIR Commissioner Henares agreed that income tax rates can be lowered if the Bank Secrecy Law will be lifted, perchance to find other sources of revenue for the BIR (The Philippine Star 09.15.2015). Always a quid pro quo.
But that’s the way it is, Dr. Manasan said in the PIDs study.
“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” (Business Mirror, Ibid.).
Yet she stressed that the Philippines has not adjusted its personal income-tax system since 1998, and there is that “phenomenon of ‘bracket creep’, defined as the non-indexation to inflation of personal income-tax brackets. This bracket creep occurs when employees’ income increases over time as a result of inflation, pushing them to pay higher taxes, (while) their purchasing power remains the same” (Ibid.).
Incoming Finance Minister Carlos Dominguez has looked at the proposed reform package too-late submitted by outgoing Finance Minister Cesar Purisima last month which recommended a decrease of the income tax rate to 25% and the tandem recovery scheme of expanding levy coverage plus raising the Value Added Tax rate (VAT) from 12% to 14% (BusinessWorld06.06.2016).
Dominguez agrees with the reduction of income taxes to the “mid-20% level” to “provide taxpayers with more money to spend and encourage business activity in the Philippines” (Ibid.). He calls this a “long-term investment” to prod consumption, not a revenue-erosion sacrifice. Despite an expected budget deficit from decreased tax revenues and increased government spending for stepped-up infrastructure projects, increased borrowing (estimated up to 3% of GDP target) will sustain expected GDP growth to the targeted 8% in the Duterte term.
Dominguez says no to an increase in VAT because this punishes all and is anti-poor, though incoming Budget Chief Benjamin Diokno said “lower income tax rates may have to come with a corresponding increase in VAT to as much as 15% from the 12% currently, in order to offset revenues to be foregone” (BusinessWorld 06.14.2016).
Tax cuts always come with passionate pros and cons, and a lot of bargained-for quid pro quos. Yet supply-side economists of the 1980s espoused and proposed this to governments, with the best success stories of tax cuts in the terms of US President Ronald Reagan and his “Reaganomics” and George W. Bush who hotly pursued tax cuts alongside deficit spending to spur growth.
But “in January 2012, the US economy plunged into an unprecedented $15-trillion deficit” (The Economics Book, London, 2012).
Economists William G. Gale and Andrew A. Samwick of the US Ivy-league Dartmouth College and the National Economic Research warn: “Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and raise interest rates. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time they also reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth” (Effects of Income Tax Changes on Economic Growth, September 2014).
Don’t take it personally, Kim Henares, that you did not elicit that wolf-whistle to appreciate your charming personality as tax-vixen for the past six years of torrid tax collection.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com
source: Businessworld
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