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.

source:  Businessworld

Close encounters with gov’t crooks

An accountant of 30 years unburdens herself through this column. Requesting anonymity, she recounts her run-ins with government crooks. She hopes her story can help reform the Bureaus of Internal Revenue and of Customs, and other public agencies:

“(1) One of my first jobs was to audit a new import company of a Frenchman married to a Filipina. Operating leanly, it was manned only by the officers and an accountant-secretary. The financial worksheet listed importations, labor, and other actual costs. A column was titled simply as ‘30 percent.’ From the accountant I learned that they allotted 30 percent of total costs to Customs. It was for fast, hassle-free release of the goods. Being young then, I was bothered by that first encounter. I recalled what a college prof had told the class – that 99 percent of Customs personnel share their take from ‘deals’ with importer-exporters. That’s why they can afford to live in mansions. I was so scared I dropped the client. Years later I heard he was elected as officer of the European Chamber of Commerce in the Philippines.

“(2) The Frenchman’s brother, also married to a Filipina, owned a separate import firm. The BIR-Makati was watching him, and had called about a ‘tax deficiency.’ They haggled for a lower assessment, and I was at the office when the BIR team arrived to collect. I witnessed their ‘tax collection.’ We happened to leave the office at the same time, and they probably thought I expected a share, because one of them handed me a wad of peso bills. I was so shocked that I dropped it on the floor and ran away. I’m sure they thought I was dumb.

“(3) Another client, a constructor, was a ‘favorite’ of the BIR-Novaliches, Quezon City. Years ago it wrongly was assessed a P3-million VAT deficiency. I was asked to contest it at the BIR office. The supervisor angrily waved the worksheet at my face. Having computed it myself, I insisted that tax fully was paid. I spotted her mistake in tacking on huge VAT on on-the-spot local hires to clean up some construction site debris. That shut her up, but it was not the end of the story. The BIR kept assessing them for tax deficiencies, so they thought to just give under the table to avoid any more trouble. I advised against it, arguing that the BIR would keep returning for more. I was right; the demanded amount grew every year, starting with P600,000 to about P34 million. With that last assessment, the BIR team arrived ready to padlock the office. I learned later that the finance manager was able to haggle down the price to P11 million. Half went to the ‘dealers’; the other half was receipted to the government’s account.

“(4) The same constructor no longer takes on government contracts because of a sad experience. It was for a provincial bus terminal with travelers’ inns. On audit, I saw the item ‘legal fees,’ although there were no legal cases. They said it was actually ‘tong-pats’ (kickback) for the approving local official. I was told that the official’s rep would call often to collect, and complain if the bribe installment was low. Informed that it was a percentage based on actual collection from the local government unit, the rep worked for bigger releases from their cashier. The client made no profit from the project.

“(5) Still that same client had to increase capitalization. It had to pay the Securities and Exchange Commission P30,000 under the table to speed up release of documents.

“I narrate all this to confirm that there’s corruption at every level led by Customs, BIR, local governments, SEC, even in publishing of public school textbooks, another client’s business. If only we can stop paying out billions of pesos in bribes to crooked officials, there would be no need to increase taxes.

“One last gripe: why do City Halls charge employment fee before employees can start working there. My niece was charged such fee when she began to work as an auditor at our City Hall. Then she asked for transfer to another department. She was again charged employment fee before she could draw her first salary at the new post. Employment is not a business that they can tax!”

source:  Philippine Star Column 

GOTCHA By Jarius Bondoc 

Make discounts count

It may surprise you to know tax assessments worth millions have been issued by the BIR simply because taxpayers failed to properly invoice discounts. Even now, many big companies underestimate and neglect the importance of good invoicing. Businessmen and accounting officers still tend to overlook the value of properly filling out such a small piece of paper, which could later on make or break their case.

Universally, discounts are given as a marketing strategy to promote sales or to encourage prompt payments. Discounts may be cash/purchase discounts, quantity/volume discounts, or trade discounts. Cash discounts are granted for early payment, volume discounts are reductions in price for purchases made in large quantities, while trade discounts pertain to percentage reductions from the list price. Since these discounts reduce the selling price, corporations treat them as deductions from gross sales in computing income tax and VAT. However, the proper treatment of discounts is not as straightforward as that.

Section 27 (A) of the Tax Code defines “gross income” as “gross sales less sales returns, discounts and allowances and cost of goods sold.” Discounts are treated as reductions from gross receipts or gross sales to arrive at gross income, which in turn is reduced by operating expenses to compute taxable income. For income tax purposes, it appears there is no invoicing requirement. As long as a discount is given, it is treated as a deduction.

However, the same does not apply for VAT purposes. The Tax Code and BIR issuances provide more specific and rigid invoicing requirements. Expressly, the Tax Code states that, to be deductible, sales discounts: (a) must be granted and indicated in the invoice at the time of sale; and (b) should not depend upon the happening of a future event (Section 106 [D]). Also, sales discounts should be excluded from gross sales within the same quarter it was given. 

In various rulings, the BIR has strictly implemented these invoicing requirements.

If the discount is not granted and indicated in the invoice at the time of sale, the sales discount is automatically disallowed. When the discount is indicated in the invoice, but depends on a contingency (e.g., a cash discount which depends on early payment by the customer), the sales discount is also disallowed. The BIR has a stringent unwavering position on nothing less than religious compliance with the requirements of the Tax Code. 

The law requires deductible discounts must be granted and indicated in the invoice only (and not in both invoice and official receipt). Invoice, as provided in law, is given a technical meaning in the law on VAT, and is issued for sale of goods or properties. While an official receipt is issued for sale of service or lease. Sales discounts must be unconditional. It should be indicated from the issuance of the invoice. At this time, the taxpayer’s VAT liability is already fixed, and the customer may already claim the input VAT. This avoids situations where a discount is subsequently withdrawn without payment of the corresponding output VAT, or where input VAT on the undiscounted price is claimed but a discount is subsequently granted. This ensures the VATable amount upon issuance of the invoice will be the same amount upon payment. The rules on the issuance of an official receipt are different since it is issued upon payment, and the VATable amount will already reflect the actual discount granted. 

Interestingly, the CTA, in one case, allowed sales discounts given to senior citizens even if supported merely by cash slips. Although this may be used as an argument against failing to issue VAT invoice, it still does not dispense with the requirement that the discount is separately indicated, and the same is not conditional on a future event.

It pays for taxpayer to be well-versed with the invoicing requirements for discounts provided by the Tax Code and BIR issuances to prevent future tax assessments. Taxpayers should never discount the value of proper invoicing.

The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.

Mhealler T. Ycong is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

830-8000

mtycong@accralaw.com

Real estate brokerage: Of licensure exams and withholding taxes

This column was originally published on July 21 and is being reprinted in this issue because of a computer error that garbled parts of the originally published piece. We apologize to Mr. Villalon for the error. -- Ed.

Change has come even in the field of real estate broker licensure examinations.

Last May 22, a real estate broker licensure examination was held in Manila, Cagayan de Oro and Cebu. What set this exam apart from all previous ones was that for the first time, only degree holders in Bachelor of Science in Real Estate Management (BS REM) were qualified to take it. Unfortunately, non-BS REM graduates, even though holders of a relevant bachelor’s degree, were ineligible to take the licensure exam.

Section 14 of Republic Act 9646, otherwise known as the Real Estate Service Act of the Philippines or the RESA Law, provides the qualifications of applicants for the real estate broker licensure examination. The requirements include that the applicant be a holder of a relevant bachelor’s degree from a state university or college, or other educational institution duly recognized by the Commission on Higher Education (CHED). The law further provides that should a course leading to a bachelor’s degree in real estate service (i.e., BS REM) be implemented by the CHED, such course shall be a requirement for taking the licensure examination. 

Considering that the CHED has already issued Memorandum Order No. 28 on Oct. 25, 2011, providing guidelines for the implementation of the 4-year BS REM course, a degree from the said course is now a requirement to apply for the exam. The guidelines aim to develop real estate practitioners that are globally competitive in pace with the business environment.

In recent years, for so long as the applicant has completed at least 120 credit units of real estate subjects and has undergone training with an accredited service provider, he or she may apply for the licensure exam. But since the initial offering of the BS REM course in 2012, producing the first batch of graduates this year, only degree holders of the course were allowed to take the exam on May 22, 2016.

Incidentally, out of the 39 BS REM graduates who applied for the exam, 21 passed. This volume pales in comparison to the 5,499 passers out of the 9,749 applicants during the February 2016 exams. 

Some non-majors in BS REM are still hoping that they will be allowed to take the examination in the future; but to date, no resolution from the Professional Regulatory Commission (PRC) has been issued granting them eligibility.

With the disallowance of non-BS REM degree holders, a potential growth in the number of unlicensed brokers can be expected. As this course requires time and investment, non-holders of a BS REM degree may not want to undergo 4 years of education just to earn such degree. 

Having said this, it is not surprising that the Bureau of Internal Revenue (BIR) issued an amendment to the withholding tax regulations after the CHED Memorandum Order was issued, which took into consideration both licensed and unlicensed real estate brokers.

Revenue Regulations No. 10-2013 provides for the following withholding taxes on fees/income received by real estate service practitioners (i.e., real estate consultants, real estate appraisers and real estate brokers): 

• 15% on professional fees of licensed real estate service practitioners if their gross income for the current year exceeds P720,000; otherwise, 10%;

• 10% on gross commissions or fees paid to unlicensed real estate service practitioners, i.e., those who failed or did not take the licensure examination and are not registered with the real estate service under the PRC.

Comparatively, unlicensed real estate brokers enjoy a lower withholding tax rate than their licensed counterparts. A tax rate as high as 15% may be withheld from licensed brokers should their gross income exceed P720,000. This disparity would seem to discourage professional regulation by imposing a higher tax burden on licensed practitioners. Perhaps the BIR should have made the tax rates for both practitioners at par with each other. After all, licensed brokers underwent compliance with the regulatory requirements of the government; hence, disparities in treatment, if any, should be to their advantage. 

Another option would be to impose higher withholding tax rates on unlicensed brokers to help curb the unauthorized practice of real estate services. 

Section 29 of the RESA Law prohibits the unauthorized practice of real estate service unless a broker has satisfactorily passed the required licensure examination, holds a valid certificate of registration and professional identification card, and has paid the required amount of bond. Under the RESA Law, unlicensed real estate service practitioners shall be subject to a penalty of P200,000 or imprisonment of not less than four (4) years, or both.

On a positive note, I appreciate the BIR’s recognition that there are unlicensed persons who are engaged in the practice of real estate service and has done its part to at least make sure that they are subjected to withholding taxes on their income. 

Also, come to think of it, the distinction of the withholding tax rates between licensed and unlicensed real estate service practitioners may be beneficial to some extent. This is especially true for withholding tax on individuals whose annual gross income exceeds P720,000. Perhaps, the PRC as well as other responsible officers of the law can coordinate with the BIR to identify unlicensed practitioners through the 10% withholding tax rate applied, so they may be brought before the law. 

The challenges right now include how the PRC can increase the number of people who can take the real estate broker examination, and how we can mitigate, if not eliminate, the unauthorized practice of real estate service. There are other ways and legal means by which people in general can still practice real estate service without violating the RESA Law (e.g., being accredited real estate salespersons of licensed real estate brokers). 

If the government is serious in uplifting the standards of the real estate profession, then change must be instituted on a broader spectrum -- one which may require collaboration by and among the PRC, BIR as well as other relevant government agencies, and real estate practitioners. Together, the Philippines can achieve a globally competitive realty industry. But change must foremost be welcomed. It’s the first step in moving forward.

Benedict C. Villalon is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

(02) 845-2728 local 2035

benedict.villalon@ph.pwc.com

source:  Businessworld

Has change started at the Bureau of Internal Revenue?

With appointment of the new Bureau of Internal Revenue (BIR) Commissioner, Atty. Cesar R. Dulay, everyone is expecting significant changes to happen in the BIR. Atty. Dulay is joining an organization cited by President Duterte as one of the most corrupt government agencies. Certainly, changing such an organization will be one gargantuan task.

Stakeholders like the local and foreign business organizations, tax practitioners, individual taxpayers, and foreign investors are eagerly observing the changes that are being introduced. It is worthwhile to examine the BIR issuances released by the new Commissioner for the first two weeks after he assumed his post last July 1. These issuances give the stakeholders and observers a clear insight of the changes what we will expect and the priorities of this new administration.

On his first day of office, the new BIR Commissioner immediately issued two revenue memoranda which were applauded by the public.

First, RMC 70-2016 suspending the conduct of BIR audit effective on July 1, 2016 and requiring the submission of inventory of pending Letters of Authority/Letter Notices as of June 30, 2016. This provided a great relief for all taxpayers by suspending all field audits and other operations of the BIR on the examination and verification of taxpayer’s books accounts and other records. The suspension provided a much need respite for taxpayers who feel harassed and stressed with all the documentary requirements imposed by the BIR during the examination process. Taxpayers have to dig through their voluminous records looking for specific invoice or contract being required by the BIR examiner. 

However, the suspension does not cover: (a) investigation of cases prescribing on or before Oct. 31, 2016; (b) taxpayer retiring from business; and (c) processing and verification of estate tax returns, donor’s tax returns, capital gains tax returns and withholding tax returns on the sale of real properties or shares of stocks together with the documentary stamp tax returns related thereto. 

We have seen some confusions as to this suspension order. Some taxpayers believed that all phases of the audit investigation were suspended. Hence, they were surprised that some examiners and BIR officials continued with the audit process and the subsequent issuance of preliminary assessment notices, final assessment notices, and final decision disputed assessment. To avoid further confusion, it is probably prudent for the BIR to make a clarificatory issuance explaining why some audits, which are not covered by the exclusions, are still continuing. 

The suspension of the examinations of taxpayers is expected to deter the unscrupulous acts of the BIR case officers. Some are hopeful that the suspension is an indication that a tax amnesty program is looming in the near future. The amnesty program will encourage taxpayers to start with a clean slate. It will also further improve the government’s tax collection by means of voluntary payment of taxes to the government.

Second, RMC 69-2016 suspending the effectivity of all revenue issuances within June 1 to 30, 2016 until further notice. Covered by this suspension are 16 Revenue Memorandum Orders (RMO), 10 Revenue Memorandum Circulars (RMC) and one Revenue Regulation (RR). There is a need to review these “midnight” issuances to streamline the processes within the BIR and avoid rules that may be used for graft and corruption. 

In addition, some rules were revoked such as the controversial RMO 24-2016 and 25-2016. These prescribe the investigation of parties in transaction involving the transfer/assignment/ sale of properties. 

With due credit to the former BIR Commissioner Henares, there were suspended issuances that are helpful and should be implemented. However, it is also within the discretion of the new administration to assess and evaluate the midnight issuances to see if they are aligned with the new thrust and policy of the new administration. 

RMC 71-2016 (issued last July 5) suspended the transfer and appointment of various BIR personnel. It recalled and revoked all Revenue Travel Assignment Orders (RTAO) issued within the period June 1 to 30, 2016. The revocation was issued to give the new administration an opportunity to make its own selection of qualified personnel that will operate the BIR offices. However, such revocation of the RTAO does not include the presidential appointees as laid down by RMC 72-16 (issued last July 8). 

The new BIR Commissioner also reminds us of the “No Gift Policy” through the RMO 40-2016 (issued last July 5). It emphasized that BIR officials and employees are public servants. As such, they must adhere to the principle that public office is a public trust and they must always aim to promote a high standard of ethics in public service. They are expected to perform their duties and responsibilities without expectation of any favor or material rewards. 

It is noticeable that some of the BIR examiners are now strictly observing the no contact policy with the taxpayers. Also, a marked number of meetings and discussions in relation to the ongoing tax investigations are now being conducted inside the premises of the Revenue District Offices and no longer in restaurants or similar establishments. 

Last week, BIR issued another remarkable issuance, RMC 74-2016, geared to promote efficiency on its service to the public. The RMC streamlined the requirements in issuing Tax Clearances required for government bidding and projects. Under the memorandum, the tax clearance shall be processed within two (2) working days from the date submission of complete documents. Further, the documentary requirements were trimmed down from nine to three, namely: (1) Duly accomplished and notarized application form with two (2) loose Documentary Stamp Tax; (2) Print-out Certification fee paid thru the BIR eFPS; and, (3) Delinquency Verification issued by the concerned Large Taxpayer Service or National/Regional Offices with a one month validity upon issuance.

This is a very welcome development as taxpayers were burdened with too many documentary requirements and uncertainty as to when to expect their tax clearance. Naturally, if the BIR processing will be more efficient, taxpayers will be able to transact their business with the BIR faster and they will be able to concentrate more on performing their core business activities. This will reduce the number of hours or days that taxpayers have to waste just following up on their applications with the BIR. 

In less than a month after assuming his post, we already witnessed the new BIR commissioner eagerly starting his mission of improving the BIR. We can see his earnest desire to remove corruption at the BIR, streamline processes and bring back taxpayer services as an important responsibility of the BIR. Taxpayers are hopeful that this new administration will finally and truly adhere to the BIR’s Vision Statement: “The Bureau of Internal Revenue is an institution of service excellence and integrity.” 

Richard R. Ibarra is a tax manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

Letting go of too much discretion

Discretion is a power which makes someone powerful even more powerful.

Administrative bodies like the Bureau of Internal Revenue (BIR) and the Bureau of Customs, were given discretionary powers in order to carry out their tasks to implement laws. The grant of discretion recognizes that the agency has the knowledge, experience and specialization on a particular field to make judgments. Discretionary powers facilitate efficient implementation, upholds the law, curbs the evils the laws seek to avoid and achieves the higher interest of the State, its citizens and those who sojourn its territory, equity. However, discretion is double-edged in that it impacts negatively when it is abused, performed in manifest partiality and favored one’s own interest.

Pursuant to the 1997 Tax Code, the BIR is given executive functions in the collection of taxes and granting of clearance, quasi-judicial functions on interpretation of laws and issuance of rulings, and quasi-legislative functions on formulation of rules and regulation. In all these functions, the BIR enjoys a lot of freedom in exercising discretion.

It is not very novel that we face problems where discretion is misapplied by the BIR. In the case of tax investigations, taxpayers can be confronted with issues which result to absurd interpretation of laws for the sake of collecting taxes. When the BIR and taxpayers agree on the amount of tax deficiency to be paid, the tax payable is sometimes driven by the need to collect taxes rather the dutiful obligation of the taxpayer to pay what it legally owes to the government. 

Refund applications can be denied at the BIR level based on unfounded reasons. Or BIR can choose not to act on a claim of refund. Sad it is to say that the BIR turns a blind eye in these cases. In many situations, the taxpayer has no other choice but to seek remedy to the Courts.

In dealing with gray areas of taxation, the BIR tends to veer towards what is only beneficial to their aim. This is totally understandable because the BIR and the taxpayers’ interests are situated on different sides. Interests which will never go together because if one gains, the other loses.

We are seeing that taxpayers are caught in a situation where taxpayers ask relief from the authorities whose interest is contrary to his own. It is clear that the primary interest of the BIR is to raise revenues. Each officer is given collection goals. These officers are also the ones who investigate and issue assessment. In case the taxpayer protests, they are also the very same officers who decides whether or not the assessment they themselves issued are valid based on the taxpayer’s arguments. 

It is true that discretion in the administrative level is not left unchecked. As BIR always advises in case of disagreement, “you can always go to Court.” However, we know that filing a case in Court is a very tedious and costly process. After all, not all cases of abuse of discretion is worthy of the Court’s attention. 

As our country’s leadership has changed, we are promised of reforms. In the first week of the new Presidents rule, we are slowly realizing these changes. 

The new Commissioner immediately rallied this campaign. As he reviews the issuances under the former administration, we hope that future changes in the system will take into consideration the balancing of the interest of stakeholders.

As the President advocates efficiency, checking on the unbounded freedom of the bureau to exercise discretion in many cases can eliminate delays in processes because of the insufficiency of clear standards which taxpayers ought to follow. The President is also taking serious measures to eradicate corruption across all ranks in government agencies. Reducing discretionary powers can curb unlawful dealings within the bureau’s ranks. 

Our legislators are also part of the game changers in this league. We need tax laws which delimit the exercise of discretion by government agencies. I believe that when the mandate calls for a ministerial act, it must be always be performed as purely ministerial.

It is also important the tax rules are clearly understood by the taxpayers. Tax rules must be crafted in the simplest language an ordinary man of ordinary intelligence understands.

Future legislations or rules must provide clearer standards at the administrative level so that officers will just be left in the implementation of rules. These standards must be formulated to avoid multiple interpretations of the said regulations. 

To avoid the conflict of interest, discretionary powers may be devolved to another agency at the administrative level who has also expertise and skills in the field of taxation and whose interest is impartial on the tax collection. 

We, taxpayers claim for tax reforms. Who does not? But tax reforms should go beyond tax rate cuts. Issues such as complexity of compliance, standard interpretation of tax laws and faster processing of tax cases are equally important also. 

I know that there is no silver bullet to address all tax issues. But, we can start in letting go of too much discretion. If change is really coming, let this be one of them. 

Eliezer P. Ambatali is a senior associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

New BIR guidelines on tax-free exchanges

As part of its efforts to streamline the Philippine tax system, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order (RMO) No. 17-2016 (RMO 17-16) dated May 5, 2016 to supplement the guidelines in recording the tax-free exchange of properties for issuance of shares under Section 40(C)(2), in relation to Section 40 (C)(6)(c) of the 1997 Tax Code.

Section 40(C)(2) includes transactions involving a corporation which exchanges property for stock, a shareholder who exchanges stock for stock of another corporation, or a security holder who exchanges his securities for stock of another corporation, that is also a party to a merger/consolidation. It also includes transfer to a controlled corporation where not more than five persons transfer property in exchange for at least 51% of the voting shares of the transferee corporation. In these instances, no gain or loss will be recognized.

Revenue Regulations (RR) No. 18-2001 (RR 18-01), as amended by RMO No. 32-2001, contain the existing guidelines in monitoring the basis (amount to be used as cost) of the property transferred and shares issued under Section 40(C)(2). These guidelines require a certification or ruling signed by the Commissioner of Internal Revenue on the tax-free exchange and also provide for penalties for non-compliance.

There are two valuation bases in a tax-free exchange under Section 40(C)(2): the basis of the transferee (issuer of shares) in recording the property; and, the substituted basis of the transferor (of the property) in recording the shares received. The substituted basis is also relevant in computing gain or loss in subsequent transfers of the property and the shares.

Under RMO 17-16, the basis for the transferee in recording the property is the asset’s fair market value (FMV). The value of the shares issued should be equal to the FMV of the property transferred (value for value exchange). Additional paid-in capital is not allowed.

The FMV depends on the kind of property transferred. When the property consists of shares, RMO 17-16 cites the rules under RR 06-2013, that is, the FMV of listed shares is the closing price on the day of the transfer, or the day nearest if no sale is made on that date. The FMV of shares not listed and not traded is the book value in the annual financial statements duly certified by an independent CPA nearest to the date of sale. The assets in the financial statements should be adjusted to its FMV as of a date not earlier than 90 days from the date of transaction.

On the other hand, for the transferor, the substituted basis is used in recording the shares received in consideration for the property exchanged. We must stress that Section 40(C)(2) merely defers recognition of the gain or loss from the transaction. Accordingly, gain or loss may eventually be recognized in a subsequent transfer of the property or shares.

What then is the substituted basis? Under Section 40(C)(5), the substituted basis of stocks or securities received by the transferor is the original basis of the property, stock or securities transferred minus the money received, and the FMV of other property received, plus the amount treated as dividend and any gain recognized on the exchange. If the transferee assumes a liability, or acquires from the transferor property that is subject to a liability, it shall be treated as money received. As to the transferee, the basis of the property should be the same as it was in the hands of the transferor, plus any gain recognized to the transferor.

RMO 17-16 provides pro-forma entries in recording the property and shares in a tax-free exchange, which both the transferor and the transferee can refer to. It additionally states that failure to annotate the tax-free exchange in the certificate of title of ownership of properties would render the ruling null and void. However, it is interesting to note that the Court of Tax Appeals (CTA) En Banc, in Commissioner of Internal Revenue v. Dakudao & Sons, Incorporated promulgated on May 15, 2015, and more recently, in the CTA Division ruling in Lucio L. Co, Susan P. Co, Ferdinand Vincent P. Co and Pamela Justice P. Co vs. CIR promulgated on June 2, 2016, held that securing a BIR ruling under RR 18-01 is not a condition precedent for the availment of tax exemption under Section 40(C)(2) of the Tax Code.

Interestingly, RMO 17-16 would be a basis for taxpayers in explaining the treatment of the tax-free exchange transactions and the differences, if any, with Philippine Financial Reporting Standards. While other directives issued by former Commissioner Kim Jacinto-Henares in her last month in office were either revoked or suspended, RMO 17-16, having been issued in May, continues to be in effect. As such, taxpayers who plan to enter into tax-free exchanges must still comply with the guidelines provided in the issuance.

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

Margaux A. Advincula is a Tax Senior Director of SGV & Co.

Study: Mexico’s junk-food tax cuts purchases by 5.1 percent

MEXICO CITY—Mexico’s 8-percent tax on high-calorie snacks has been successful in reducing junk-food purchases, but only by a small amount and only among poor and middle-class households, a study said on Tuesday.

The report, published in the online journal PLOS-Medicine, showed an average reduction of 5.1 percent in purchases of items subject to the tax, which was implemented in 2014. The reduction equaled only about 25 grams (0.88 ounces) per month per person.

Poorer households bought 10.2-percent less junk food, while medium-income households bought 5.8 percent less, according to bar-code analyses based of consumer-tracking data. Higher-income shoppers showed no impact at all from the new taxes. The tax applies to processed foods having more than 275 calories per 100 grams of product.

The study did not indicate whether families reduced calorie intake, bought healthier foods or simply switched to cheaper street food—important factors for Mexico, which is plagued with high obesity rates.

Beans

THE study was conducted by researchers from Mexico’s National Institute of Public Health and the University of North Carolina, Chapel Hill, who said future studies “should explore how these shifts are linked to changes in the nutritional quality of the overall diet.”

Nutritionist Julieta Ponce of the Center for Dietary Orientation said the study’s finding only open the debate on how to substitute empty calories in Mexicans’ diet for better-quality food. For example, the junk-food reductions noted in the study could be replaced by eating a single tortilla or a third of a cup of beans.

Ponce said the question is how to return such foods as fresh fruits and vegetables to the average Mexican’s diet on a larger scale.

“Obesity and adverse metabolic effects are also the result of the loss of the traditional diet, not just the consumption of junk food,” Ponce said. “At the moment, Mexico lacks a broader policy on eating well. For the moment, there are just emergency measures to limit the damage.”

Critics

THE study is in line with a paper released late last year suggesting another Mexican tax on sugary soft-drinks had achieved an average 6-percent reduction in some purchases. That tax is 1-peso per liter. Critics of the fast-food tax have suggested that poorer Mexicans, faced with higher pass-along prices on processed snacks sold by major companies, may simply switch to nontaxed similar foods sold by unlicensed street vendors. The country’s streets, especially outside schools, parks, bus stops and subway stations, are crowded with vendors selling no-brand or home-made snacks that often have salt, sugar or fat counts as high as name brands.

Even name-brand chips are sometimes made worse at street stands, where vendors will open a bag of chips and douse them in an infinite variety of salty, sugary or spicy sauces.

‘Substitution’

SUPPORTERS of the tax agree that those practices, known as junk-food “substitution,” could blunt the gains of tax-induced reductions, but insist they won’t erase the improvements.

“There will be a discussion about ‘substitution,’ but I don’t think any [street] product has the distribution network that these [name-brand] products have,” said Alejandro Calivillo, director of the advocacy group The Power of the Consumer. “There could be substitution in some cases, but I don’t think it would be anything significant.”

Mexico is among the fattest countries in the world. Just under one-third of adults are obese, according to the UN Food and Agriculture Organization.

source:  Business Mirror

Tax amnesty today, tax reform tomorrow

INTERNAL Revenue Commissioner Caesar Dulay was warmly welcomed by various tax reform groups including the Center of Strategic Reforms of the Philippines (CSR Philippines) after issuing two circulars to suspend audit and recall revenue issuances issued by his predecessor from June 1 to 30, 2016.

It is good to know that after almost a decade of advocating genuine tax reform, finally, we are seeing some light and hope.

Finance Secretary Sonny Dominguez repeatedly mentioned that tax reform was among the top priorities of the Duterte administration.

In fact, first among the top 10 recommendations of the business leaders was the adoption of a comprehensive tax reform package, which includes lowering both individual and corporate income tax to 25 percent, which is the average income tax rate among member-countries of the Association of Southeast Asian Nations.

But what’s the guarantee that our revenue collections will not be compromised? More importantly, will this stop corruption in BIR?

As a step in the right direction, I propose tax amnesty as prerequisite for genuine tax reform.

Let’s have a fresh start and stop running after the “tax evaders” when the big time tax evaders and smugglers are doing business as usual.

First, we need to broaden our taxpayer base.

How come less than 15 percent of the population is registered with BIR? How come more than 50 percent of the 13 million registered employees are minimum wage earners and only 20 percent are earning an annual gross compensation income of over P500,000?

Unfortunately, even our professionals are not being professional with less than 300,000 of them registered, contributing roughly P14 billion (or 1 percent of total collections) compared with P232 billion (or 20 percent of the total collections) in withholding taxes from employees.

Also, of the more than two million Overseas Filipino Workers, how come only 55,000 are on the BIR database?

Narrow base

With the very narrow taxpayer base, and practically unreliable and outdated numbers, BIR will never be efficient and fair in collecting taxes.

We don’t need an audit (or assessment), we need assistance and tax information to increase the taxpayer base nationwide. We also need to increase voluntary compliance by assisting taxpayers.

Stop imposing penalties and harassing the micro and small businesses.

Second, we need to engage multi-sectoral groups to reform our tax administration and adopt a risk-based automated audit for large taxpayers.

Revenue District Offices (RDO) must not be collection-driven offices but rather taxpayer assistance offices. And revenue officers must visit all micro and small businesses in their respective areas to register them, assist them to comply or remind them of the BIR deadlines.

Some 98 percent of total collections are still based on voluntary payments. It is a no-brainer to focus more on increasing voluntary compliance than filing tax evasion cases that end up in the warehouse of courts.

Less than 2 percent of collections come from audit/assessment. We can improve this if BIR could really prosecute or collect from big time tax evaders and smugglers. And we need a citizen watch to encourage taxpayers to complain or provide information about anybody they know who are not registered but doing business or doing illegal business, especially the smugglers in our neighborhood.

With almost 500 tax evasion cases filed by the BIR, how much in taxes were actually collected?

In 2014, we invited BIR to a tax forum at the Ateneo Graduate School of Business to discuss the impact of our tax system on doing business in the country. With our aim to promote honesty in paying taxes, we proposed a private-led certification program to award a “Seal of Honesty” after a three-year Citizen Tax Planning.

We thought of this to institutionalize honest tax payment without the threat of penalties, compromises, or worse, tax evasion cases. Ultimately, the objective of the certification program is to gather and incentivize honest taxpayers.

Unfortunately, the partnership with BIR didn’t materialize.

Voluntary compliance

Third, why tax amnesty?

We need to offset any possible revenue losses from lowering income taxes, suspension of audit, among others.

Since we all know what happens during an BIR audit and how much money goes under the table, we can conclude that the BIR audit is definitely not a reliable source of tax collections. It discourages voluntary compliance.

If the Duterte administration wants to stop corruption in BIR, it needs to trust the taxpayers to pay their taxes correctly and the BIR examiners to do their job honestly.

Under the proposed tax amnesty program, violations of tax laws and regulations from a specific period up to the present will be pardoned, allowing taxpayers to just make the amendments and declarations.

Through this, the government will be able to collect more taxes from previous taxable years without using the threat of penalty or filing tax evasion cases against the taxpayer.

Assuming the 99 percent of the taxpayers who didn’t pay their correct taxes will pay an additional 20 percent a year, we could double our total revenue collections without audit or assessment and filing of any tax evasion cases which, anyway, didn’t contribute at all.

This will definitely offset any revenue loss from lowering income taxes or suspension of BIR audits.

More importantly, the BIR can focus on data collection and industry profiling to implement a risk-based automated audit among large taxpayers.

BIR examiners assigned to handle the large taxpayers must be trained abroad on forensic and fraud audit with the use of advanced technology to prosecute big time tax evaders including smugglers.

We need to stop illegal businesses and put all smugglers in jail.

As I have promised BIR Commissioner Dulay, I will help him in every way possible to improve our tax administration, simplify compliance for SMEs, and collect more taxes for the government.

In view of this, we launched the Pledge of Support—A Commitment in Promoting A Culture of Honesty and Integrity to ask the business community to show their trust and support to the BIR and help collect more taxes by paying right.

Pledge

We ask all business chambers and professional associations to sign the pledge and help the government collect the taxes it needs to fund the “change” that we want to see.

(The author is a former BIR examiner and recipient of the 2015 Asia CEO Young Leader Award, The Outstanding Young Men (TOYM) and Distinguished Bedan Award in the field of Accounting and Taxation. He is also President of the Abrea Consulting Group. For more information, please contact Marion at 0977-856-0202 or e-mail consult@acg.ph)

source:  Philippine Daily Inquirer

BIR Chief’s first order of business: Review previous tax issuances

When the new Bureau of Internal Revenue (BIR) Commissioner, lawyer Cesar Dulay, formally assumed office on July 1, it appeared to many that he intended to make an impression. Wasting no time, the Commissioner took many by surprise with three new issuances.

The three, released on Friday, consisted of two revenue memorandum circulars (RMC) -- RMC Nos. 69-2016 and 70-2016, and one revenue memorandum order (RMO) -- RMO No. 38-2016.

RMC No. 69-2016 suspends until further notice the issuances of his predecessor in the period covering June 1 to 30, 2016. The new Commissioner being true to his promise that he will review all tax issuances that dismayed many taxpayers.

Among those suspended are RMO No. 26-2016. This RMO provides: “Formal Letter of Demand and Final Assessment Notice (FLD)/(FAN) shall be issued fifteen (15) days from date of receipt by the taxpayer of the PAN (preliminary assessment notice), whether the same was protested or not.”

This controversial RMO was interpreted by taxpayers as rendering their reply to the PAN as meaningless. The suspension of this RMO gives taxpayers hope that a more reasonable assessment procedure will be followed under the current BIR administration.

Also suspended was RMO 27-2016. This issuance recognizes the outright grant by the BIR of preferential tax treaty rates on dividends (except for dividend tax sparing provision), interest, and royalties, subject to the keeping of documents for later BIR audit. However, the BIR still appears to have retained its requirement for application of tax treaty relief rulings for other types of income paid to non-residents.

Further, the BIR required a separate application for a BIR ruling on the taxpayer’s availment of the reduced 15% tax rate on intercorporate dividends under the tax sparing provision of the 1997 Tax Code, as amended [Section 28(B)(5) of the Tax Code]. 

Hence, the suspension of RMO 27-2016 likewise gives hope to taxpayers that the procedures in availing of preferential tax treaty rates and the dividend tax sparing rates will become more expedient on the part of the taxpayers.

The BIR Web site contains the full list of suspended BIR issuances as of June 2016.

On the other hand, Mr. Dulay also issued RMC No. 70-2016 suspending all tax audits and other field operations of the BIR related to the examinations of taxpayer’s books of accounts, records and other transactions. Although the suspension does not cover those taxpayers retiring from business, national government agencies, local government units and government owned and controlled corporations including subsidiaries and affiliates, and those with cases prescribing on or before Oct. 31, 2016, many taxpayers certainly welcomed this suspension. It is a common sentiment that the previous BIR administration appeared to force collections from taxpayers during BIR audits.

Many are hopeful that with the new BIR administration, a fair examination of procedures will take place. In addition, the bureau should also look into emphasizing accountability on the part of examiners who resort to harassing taxpayers to agree to settlements.

Finally, the new BIR Chief also issued RMO No. 38-2016, which revoked RMO Nos. 24-2016 and 25-2016. It can be recalled that these RMCs prescribed the guidelines and procedures in the conduct of investigation on the capacity of parties to acquire properties. These issuances have resulted in many questions about the fairness of the judgments on the financial incapacity of parties to acquire property.

Certain comments on these suspended RMOs include observations that they promote corruption and give the BIR examiners wide latitude or discretion in determining what would constitute necessary documents to be submitted, and determine capacity to acquire. These RMOs also appear to presume that the taxpayers have committed fraud. Thus, many taxpayers are counting on these issuances to be revoked. 

Change has finally arrived. Let’s hope that, moving forward, the BIR will continue look into calls by taxpayers for more fairness.

Should we prepare for more issuances? After only three days into his six-year term, the new Commissioner may have more up his sleeve.

Arianne Cyril L. Mandac is a senior of the Tax Advisory and Compliance division of Punongbayan & Araullo.

BIR suspends most tax audits

BUREAU of Internal Revenue Commissioner Caesar R. Dulay’s first order of businesson Friday was to immediately suspend most tax audits on private taxpayers, indefinitely.

Revenue Memorandum Circular No. 70 states that “all field audit and other field operations... relative to examinations of taxpayers’ books of accounts, records and other transactions are hereby ordered suspended until further notice.”

This means no field audit, field operation, or any form of business visitation to execute Letters of Authority/Audit Notices (LAs/ANs), Letter Notices (LNs) or Mission Orders will be conducted for the meantime.

Exceptions include: cases where the investigation period will prescribe on or before Oct. 31, those involving processing and verification of tax returns submitted on the sale of real properties or shares of stock, and the audit of taxpayers retiring from business.

National government agencies, local government units, and state corporations will also continue to be subject to tax audit.

Audits will also proceed on matters subject to deadlines imposed by the Commissioner of Internal Revenue.

At the same time, Mr. Dulay sought the submission of an inventory of outstanding LAs/ANs and LNs by July 16.

Mr. Dulay made his first-day plans known to businessmen at the Sulong Pilipinas workshop in Davao City on June 20.

He claimed to have received information that letters of authority have been abused and tax investigations prolonged to allow “negotiations” with taxpayers.

TMAP President Benedict R. Tugonon said in a Twitter post that the issuance shows that “the new BIR Commissioner indeed listens to the grievances of taxpayers oppressed by a very centralized six-year rule.”

source:  Businessworld