SEC on technology corporations

Our era is characterized by ever-changing technological advancement. Technology has touched our human existence including the way we educate ourselves, the way we deal and communicate, and the way we travel from one place to another. It has affected our interactions with one another such as shopping and socializing. From a business perspective, technology continues to play a vital role on how entities conduct their operation and maintain their competitive advantage.

The advent of technology, however, has given birth to some issues confronting our government regulators. Such advancement includes the use of Internet to disseminate information on certain products and the sale of products online. These issues may not have been expected a few decades ago, but should be clarified and expounded in order to meet the demands of our fast changing world.

The Securities and Exchange Commission (SEC) is no exception from this challenge. Recently, it faced the task of making a determination as to whether a certain business using technology to bolster its operation would be subject to the foreign equity limitation in accordance with existing rules. Under the Constitution, mass media must be fully owned and controlled by Filipino citizens. On the other hand, foreign equity is allowed for advertising business but must not exceed 30% of the total shareholdings.

The issue on foreign equity becomes relevant when, for instance, a foreign investor which may be more technologically wise and advanced would like to engage in business in the Philippines. As we know, our Constitution was last revised in 1987 -- an era when technological development may not have been as extremely fast as today. Thus, it is timely to look back at how the SEC has classified certain business activities to determine whether there is need to comply with the requirements on foreign equity.

In making the characterization of a business activity, the SEC, citing a Department of Justice opinion, held that the function of advertising agencies is to serve as agents or counselors of advertisers by writing, preparing or producing the commercial messages or materials used by advertisers in selling their goods and services and by selecting and recommending the medium or media to be used as the vehicle for disseminating such messages to the public. Advertising agencies do not actually disseminate the materials they prepare as they have to utilize or avail of the facilities of mass media such as newspapers, radio, and television.

Relevantly, the Consumer Act of the Philippines states that advertising agency or agent is a service organization or enterprise creating, conducting, producing, implementing or giving counsel on promotional campaigns or program through any medium for and in behalf of any advertiser. Advertising is defined as the business of conceptualizing, presenting or making available to the public, through any form of mass media, fact, data or information about the attributes, features, quality or availability of consumer products, services or credit.

On the other hand, mass media under the Constitution refers to any medium of communication designed to reach the masses and that tends to set the standards, ideals and aims of the masses, the distinctive feature of which is the dissemination of information and ideas to the public, or a portion thereof. It refers to any means or methods used to convey advertising messages to the public such as television, radio, magazine, cinema, billboards, posters, streamers, hand bills, leaflets, mails and the like.

Considering the forgoing, the SEC has made the following determination:

1. The leasing out or subleasing of advertising spaces, such as waiting sheds, billboard structures, electronic LED displays, and other fixed or movable structures where advertisements can be displayed, actually provides a medium to disseminate or convey advertising messages to the public is considered as mass media activity (SEC-OGC Opinion No. 16-17).

2. The operation of a voucher platform on the Internet with the purpose of increasing the sales of particular product or service is, in effect, a dissemination of information to the general public through the Internet and, thus, considered as mass media activity. However, the mere design of the voucher placement such as writing, preparing or producing the commercial messages or materials and selecting and recommending the medium or media to be used as the vehicle for disseminating such messages to the public is treated as advertising business (SEC-OGC No. 16-12).

3. The wholesale marketing and sale of digital publications through the Internet and mobile technology which necessarily includes the conceptualization, creation, preparation and production of the commercial Web layout and communication messages intended by the digital publications’ creators to attract and lure their target consumers to purchase said digital publications is considered as advertising activity (SEC-OGC Opinion No. 06-14).

Undoubtedly, the shift of business models from the traditional brick and mortar to virtual may cause some issues as to their proper classifications. Businesses and regulators must continuously coordinate to address any difficulty and find solutions that preserve the rule of law and promote business at the same time.

Renato R. Balisacan, Jr. is a manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.

Lower income tax rate seen passed by January 2017

The implementation of the proposed tax policy reform program to be pitched by the Duterte administration to Congress next month is targeted to generate P600 billion in additional revenues by 2019 while also fostering a simpler, fairer and more efficient system for taxpayers, documents obtained by the Inquirer showed.

The program, aimed at augmenting the P1 trillion in priority investments needed by the administration over the next six years to sustain at least 7-percent economic growth until 2040 as well as slash the poverty rate to 17 percent by 2022 from 26 percent at present, will come in four main packages, the first of which will reduce personal income tax while raising consumption taxes by next year.

The proposed policy packages, all constituting a bill that balances trade-offs, will allow the government to raise P600 billion or 3 percent of gross domestic product (GDP) in 2019 prices, of which P400 billion or 2 percent of GDP will come from tax policy reform measures.

The remaining P200 billion will be generated through tax administration reforms to be implemented at the bureaus of Customs and of Internal Revenue, including com  batting smuggling and reducing compliance costs to increase taxpayer satisfaction, respectively.

The first tax policy package, aimed for passage in January next year, will adjust personal income tax brackets to correct so-called income creeping; reduce the personal income tax maximum rate to 25 percent (from 32 percent at present) over time, except for the highest income earners, and shift to a simpler, modified gross system.

This will entail six income brackets:

• those earning zero to P250,000 a year will be slapped P2,500 in income tax in the first year;
• more than P250,000 to P400,000 will be charged P2,500 plus 20 percent of the excess over P250,000;
• more than P400,000 to P800,000 will pay P32,500 plus 25 percent of the excess over P400,000;
• more than P800,000 to P2 million will be taxed P132,500 plus 30 percent of the excess over P800,000;
• more than P2 million to P5 million will pay P492,500 plus 32 percent of the excess over P2 million, and
• more than P5 million will be taxed P1.45 million plus 35 percent of the excess over P5 million.

The tax rate for those earning P250,000 and below annually, which account for 83 percent of taxpayers in 2013, will be kept in the second year onwards, while the tax rates for the five other income brackets will have downward adjustments.

To compensate for the foregone revenues from lower personal income tax take, earlier pegged by the Department of Finance at P139 billion, the Duterte administration proposes the following compensating measures:

• expand the value-added tax (VAT) base by limiting exemptions to raw food as well as other necessities such as education and health;
• increase the excise tax on petroleum products and index it to inflation;
• levy a tax on sugary products;
• relax bank secrecy for fraud cases, and
• include tax evasion as a predicate crime to money laundering.

The proposed excise tax on sugary products—domestic raw sugar, refined sugar as well as imported sugar and sugar substitutes—at P5 a kilo will generate P18.1 billion.

According to the documents, the government will “use targeted programs to protect the poor and vulnerable” to be affected by higher consumption taxes, while noting that “low income consumers and businesses are already protected by the marginal threshold, which can be adjusted if needed.”

“The bottom 50 percent of households will be fully protected through social protection schemes,” the documents said, including higher pension or conditional cash transfer amounts with rice subsidies for senior citizens; higher PhilHealth coverage and benefits for persons with disabilities; more lifeline subsidy for low-income electricity consumers, and discount on public utility vehicles for commuters.

In terms of revenue impact, the first package will bring about a net gain of P220.7 billion.

The second  package planned for passage in June next year will reduce the corporate income tax rate to 25 percent from 30 percent  over time and simplify provisions to improve compliance.

source:  Philippine Daily Inquirer

Dominguez bares P173B revenue loss due to lower income tax

Finance Secretary Carlos Dominguez on Monday said the move to lower income tax rates for personal and corporate income could cost government some P173.8 billion annually in revenue losses.

During the Development Budget Coordinating Committee meeting at the House of Representatives on Monday, Dominguez was asked by Albay Rep. Edcel Lagman if the move to lower income taxes could result in government revenue loss.

Dominguez earlier bared his proposal to gradually lower personal income tax from 32 percent to 25 percent and to lower corporate income tax from 30 percent to 25 percent.

Dominguez had said the finance department planned to do this in a period of two to three years.

During the hearing, Dominguez admitted that lowering income tax rate could result in a P139 billion revenue loss, and lowering corporate income tax rate could result in P34.8 billion revenue loss.

“Lowering income tax rates would bring down revenues by approximately P139 billion, and the lowering of the corporate income tax rates will bring down revenues by approximately P34.8 billion,” Dominguez said.

source:  Inquirer

VAT tweaks to help offset income tax cut

THE FINANCE DEPARTMENT will keep value-added tax (VAT) exemptions for three key sectors, but may opt to remove this benefit from senior citizens and others to arrive at a “fair” tax regime.

Finance Secretary Carlos G. Dominguez III told reporters late last week that the government is looking to trim the list of exemptions from the 12% VAT in order to raise more revenues that will fund state projects, a tweak that will come alongside lower personal and corporate income taxes.

While refusing to go into details as the department finalizes the proposal, Mr. Dominguez said three sectors particularly important to the poor will continue to enjoy VAT-free transactions: “We will not remove the VAT exemptions on food, medicine and education. Those are very necessary.”

The VAT rate went up to 12% from 10% in February 2006 under former president Gloria Macapagal-Arroyo and is imposed on the sale of goods and services. VAT-exempt items include farm produce in its original state such as rice, fruits and vegetables.

VAT payments are equivalent to 4.2% of gross domestic product (GDP), Mr. Dominguez said, adding that, in 2015, tax effort stood at 13.7% of GDP.

“[I]t will be very irresponsible to only do the reduction (of income taxes), so we will rationalize now what we are exempting... We have a lot of exemptions and we have lots of zero-rated transactions, so we have to collect on that side,” Mr. Dominguez said.

Tax cuts form part of the 10-point socioeconomic agenda President Rodrigo R. Duterte outlined in his first State of the Nation Address on July 25.

Mr. Dominguez said he is looking at a three-year window to bring down income taxes by adjusting existing brackets, which were last set in 1997, and reducing the rates to a maximum of 25% from the current 32% ceiling.

Budget Secretary Benjamin E. Diokno had earlier said that the Cabinet is looking at raising the excise tax on fuel products by P4-6 per liter, along with additional taxes on soft drinks to offset revenue losses from the planned income tax reduction.

Mr. Dominguez hinted of revoking the VAT exemption of senior citizens -- provided under Republic Act No. 9994, or the Expanded Senior Citizens Act of 2010 -- saying this perk is used more often by those well-off to get discounts.

“I go buy a meal that is P1,000, and I get a subsidy of P120 because I don’t pay the VAT. But the guy who needs the P120 (discount) cannot get it because he doesn’t have the money to pay for an expensive meal. Now is that fair?” the Finance chief said.

“If you put it in that way, we want it to be fair. Why should I or she be subsidized when that guy cannot get it?”

Apart from VAT exemption, a 20% discount is also accorded to Filipinos aged at least 60 for medical-related purchases or payments; local transport fares; in hotels, restaurants, leisure places and for funeral and burial services.

“Tax reform has two purposes: one is fairness and the second is to allow the country to make the necessary investments precisely to reduce poverty,” Mr. Dominguez added.

The Duterte government plans to ramp up public spending for the next six years, particularly by increasing investments in infrastructure and social services. Mr. Diokno said infrastructure spending is expected to reach P7 trillion from 2017 to 2022, starting with an P860.7-billion allocation next year.

Mr. Dominguez has thumbed down suggestions to hike the VAT rate to 14%, saying instead that the department will work to broaden the VAT base, rationalize fiscal incentives granted to firms and boost collection efficiency.

Improved tax administration by the Bureau of Internal Revenue and Bureau of Customs are seen to contribute a third of additional collections, he added.

In a conference call with clients of Zurich-based investment bank Credit Suisse last week, Mr. Dominguez said economic managers will maintain “fiscal discipline” by capping the budget shortfall at 3% of GDP yearly, as well as fortify anti-tax evasion efforts and further reduce red tape in their bid to raise more revenues.

The Finance department plans to submit a comprehensive tax reform package proposal to Congress by September, to be legislated and then signed into law by Malacañang.

source:  Businessworld

Flat tax rate eyed: Proposal aimed at raising collection from professionals, self-employed

THE GOVERNMENT’S tax research arm is pushing for the imposition of a flat rate on self-employed individuals and professionals to increase collections, a proposal that the Bureau of Internal Revenue (BIR) is looking into.

In a report titled “Income Tax Profile of Self-Employed Individuals and Professionals,” the National Tax Research Center (NTRC) noted that despite placing self-employed individuals and professionals under “stricter scrutiny” by the BIR—mainly through a name-and-shame campaign targeted at professions with low tax compliance, this group of taxpayers continued to account for a small share in the total individual income tax collection.

In the last decade, self-employed individuals and professionals accounted for just 14 percent, including withholding tax at source, of total collection, whereas the bigger share of 86 percent came from compensation income earners.

“NTRC’s tax gap estimates in 2010-2014 showed that there was, on the average, a 55-percent tax leakage among this so-called ‘hard-to-tax’ group of taxpayers,” it added.

Based on 2013 data reviewed by the NTRC, one of every three self-employed individuals and professionals who filed income tax returns that year incurred net loss or had zero net taxable income due to “excessive” claims of deductions as well as under declaration of incomes.

The remaining two-thirds of self-employed individuals and professionals who reported net taxable income, meanwhile, “did not sufficiently contribute to tax collection as indicated by their low effective tax rates … also due to overstated deductions or understated income,” the NTRC said.

In 2013, the effective tax rates, or the ratio of tax due to sales and receipts, stood at only 1.55 percent for single proprietors and 10.46 percent in the case of professionals.

In this regard, the NTRC pitched the following reforms in the taxation of self-employed individuals and professionals, which had been filed in Congress: Imposition of a flat rate on small self-employed individuals and professionals, similar to those of corporations; or provision for an optional standard deduction that would no longer require such taxpayers to keep books of accounts.

“Also, attention should be focused on high profile self-employed individuals and professionals,” the NTRC added.

Sought for comment, Internal Revenue Commissioner Caesar R. Dulay told the Inquirer that the NTRC’s proposals “will be studied” by the BIR, in coordination with the Department of Finance.

source :  Philippine Daily Inquirer

Tax amnesty: forgive and forget… but fulfill by Wilfredo U. Villanueva (September 21, 2009)

The merits of a tax amnesty deserve a second look by both tax authorities and taxpayers.
The famous quote – In this world nothing can be said to be certain, except death and taxes – is attributed to American Statesman Benjamin Franklin.

If he were alive today, Mr. Franklin will most likely be a member of, or adviser to, the C-Suite for he clearly understood the dynamics and necessity of fiscal policy, particularly taxation.

Taxes affect almost all entities and individuals. It is a reality that some people tend to eschew but must inevitably confront.

Serious repercussions await delinquent taxpayers and that is why tax amnesties provide relief and opportunity for them to mend their ways. The essence of tax amnesty is that the government pardons, under certain conditions, the tax violations of erring taxpayers. This is a way to promote and enhance revenue administration and collection.

The last tax amnesty in the Philippines was offered through Republic Act (RA) No. 9480, which lapsed into law on May 24, 2007. This law authorized a tax amnesty covering all national internal revenue taxes for taxable year 2005 and prior years.

However, RA 9480 excluded from its coverage (1) withholding agents with respect to their withholding tax liabilities and (2) tax cases subject to final and executory judgment by the courts, among others.

Taxpayers who availed of the amnesty under RA 9480 and fully complied with all its conditions are entitled to certain immunities and privileges. These include immunity from the payment of taxes and statutory increments, and the related civil, criminal or administrative penalties under the Tax Code for the covered years.

However, it was not smooth sailing for some taxpayers who availed themselves of the amnesty, hoping to enjoy its associated legal benefits. This is especially true for those who were affected, and perhaps, even discouraged to apply when the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 19-2008 which excluded the following from the scope of the amnesty:

• issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to the amnesty availment of the taxpayer;
• cases involving issues ruled with finality by the Supreme Court (SC) prior to the effectivity of RA 9480;
• taxes passed on and collected from customers for remittance to the BIR; and
• delinquent accounts/accounts receivable considered as assets of the BIR/Government, including self-assessed taxes.

These exclusions were not specifically mentioned in RA 9480’s list of disqualified cases.

As expected, the propriety of the BIR’s issuance was challenged. The premise is that administrative rules and regulations must not override, and must remain consistent and in harmony with, the law they seek to implement.

By and large, the Supreme Court (SC) and the Court of Tax Appeals (CTA) have already spoken about the invalidity of some of these exclusions.

In Philippine Banking Corporation vs Commissioner of Internal Revenue, Jan. 30, the SC ruled that excluding issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer from the amnesty was misplaced.

The High Court held that the concerned taxpayer is qualified for tax amnesty because its case was not yet final and executory when it availed of the tax amnesty.

Although still subject to the SC’s review on appeal, the CTA also decided in Commissioner of Internal Revenue vs Pilmico Foods Corporation, March 31, that the exclusion of delinquent accounts/accounts receivable considered as assets of the BIR/Government, including self-assessed tax from the coverage of RA 9480 does not have the force and effect of law. The Tax Court anchored its conclusion on the fact that RA 9480 does not include such instance as one of the exceptions.

Moreover, even the exclusion of cases involving issues ruled with finality by the SC prior to the effectivity of RA 9480 is questionable, as implied in Metropolitan Bank and Trust Co. vs Commissioner of Internal Revenue, Aug. 4.

In the Metrobank case, the SC upheld the liability for documentary stamp tax (DST) of Metrobank’s special savings account since it is in the nature of a certificate of deposit drawing interest, which conforms to the SC’s decisions in previous similar cases.

Despite the BIR’s objections, the SC still canceled Metrobank’s deficiency DST assessment solely because of its tax amnesty availment.

The ruling of the SC in the Metrobank case cogently affirms what the CTA has been doing in recent months. Although the CTA appeared to have hesitated in earlier cases, it eventually canceled the tax assessments because of the taxpayers’ valid tax amnesty availment.

The BIR can take its cue from this and consider it as a mandate to formally cancel the deficiency tax assessments of concerned taxpayers who have complied with the tax amnesty’s requirements.
More than a year has passed since the tax amnesty program under RA 9480 officially ended. However, stakeholders – Congress, tax authorities, and taxpayers – should take a second look at the results of the program.

The information gathered from a post-implementation analysis of the program will help stakeholders measure its success. The results can also suggest whether it will be wise to continue with RA 9480’s declaration of a moratorium on any further grant of tax amnesty, or if there is substantial merit in offering it again, perhaps not soon, but at an appropriate time in the foreseeable future.

If tax amnesty actually fosters the desired improvement in revenue administration and collection, then making it available can be considered sound policy.

However, an amnesty should be what it is supposed to be: it forgives, forgets, and consequently fulfills its desired end of strengthening tax enforcement, as well as giving erring entities another chance to reform and become more responsible taxpayers.

To be truly effective, the program should really encourage transparency, be very clear on its terms so as not to be susceptible to various interpretations, and implemented in a manner that will avoid unnecessary litigation between the taxpayer and the government.
Wilfredo U. Villanueva is a Tax Principal of SGV & Co.

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

Implementing TIMTA

Finally, after much debate and months of delay, the Implementing Rules and Regulations (IRR) of Republic Act (RA) No. 10708, otherwise known as the Tax Incentives Management and Transparency Act (TIMTA), have been finalized and jointly issued by the Department of Finance (DoF) and Department of Trade and Industry (DTI) through Joint Administrative Order No. 1-2016. TIMTA aims to monitor and evaluate the fiscal incentives granted by investment promotion agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI) and others.

In accordance with the IRR, all registered business entities (RBEs) as registered with IPAs are mandated to file the first annual tax incentives report (ATIR) on or before Sept. 15, 2016 for all taxable years ended in 2015. The ATIR shall contain the complete information on income-based tax incentives, value-added tax (VAT) incentives, duty exemptions, deductions, credits, exclusions from the tax base and other required information. Thereafter, the ATIR will be submitted by RBEs to the respective IPAs within 30 days from the statutory deadline of filing the annual income tax return.

Various government agencies will be involved in the implementation of TIMTA and will perform their respective roles. After receiving the ATIR from RBEs, the IPAs will make a consolidated ATIR and submit this to the Bureau of Internal Revenue (BIR). The DoF will utilize the information submitted by BIR and Bureau of Customs (BoC) in creating and maintaining a single database for monitoring and analysis of tax incentives granted.

Likewise, the National Economic and Development Authority (NEDA) will basically conduct a cost-benefit analysis of the investment incentives to determine the impact of tax incentives on the Philippine economy based on the information provided by the IPAs. To this effect, the government can make an intelligent and strategic decision as regards to revisions of our economic and investment policies in the future based on the information gathered through TIMTA.

On the other hand, non-compliance of this law is very costly. Penalties imposed include P100,000 for the first violation, P500,000 for the second violation and revocation of registration for the third violation.

PEZA has taken the initiative to e-mail PEZA entities a copy of the regulations and soft copy of the worksheets for preparation and submission of the reports. We note that the information being required in the reports are not really new to the RBEs. Such information are generally reported in the Annual Report on Actual Operations submitted to PEZA and the annual income tax return (BIR Form No. 1702-MX). The TIMTA report only entails additional details/specifications of the incentives availed, particularly on the purchases.

TIMTA is definitely favorable to the government in making strategic decisions but, still, an added burden to the RBEs and an added risk for penalties in case of non-compliance. As of the moment, RBEs have no choice but to comply to avoid the costly penalties and to continue to enjoy the tax incentives currently availed.

Sheena Marie D. Daño is a manager at the Cebu branch of Punongbayan & Araullo’s Tax & Outsourcing Division.

source: Businessworld

Tax reform could lower income, estate taxes

THE government will soon send a proposal to Congress to lower estate duty to 6 percent as part of a tax reform plan, along with other measures such as the reduction of individual and corporate income tax.

The Department of Finance is expected to meet with the Ways and Means Committee of the House of Representative this week to discuss these proposals.

The estate duty currently ranges from 5 percent to 20 percent of the net asset a person leaves behind upon death, which the heirs of the deceased or chosen beneficiaries will inherit. Thus, the highest amount of estate tax that shall be paid is P1.215 million, plus 20 percent if the net estate is over P10 million.

The idea behind lowering the estate duty to 6 percent across the board is to encourage land development in the country, said Finance Secretary Carlos Dominguez 3rd.

Because of the high estate duty most of the inherited land remain in the name of the deceased, as the inheritors do not want to pay 20 per cent tax and transfer the land to their name. Thus when people go around buying or leasing lands they find a lot of properties remain locked up in the name of the deceased, Dominguez pointed out during a chance interview.

“Most likely the outcome we want is to reduce the tax rates to something to be like the same as capital gain tax,” he said.

Under the prevailing policy, the estate tax return must be filed within six months of the death of a person leaving behind an inheritance. There could be surcharges and interests if the estate taxes are left unsettled six months after the decedent’s death, but the BIR Commissioner may grant an extension not exceeding 30 days and in special circumstances up to five years.

However, the Finance Secretary said: “If you are encouraging them to just pay lower tax, let us say 6 percent, then there’s a potential for them to be develop quickly,” he added.

With this measure, he pointed out that the government is encouraging the economy to move ahead toward development.

Also in the tax reform plan are measures to offset revenue loss that lower income tax may cause. Additional revenues will be sourced from the increase in excise tax on fuel and sweetened beverages.

The government earlier rejected plans for higher value-added tax (VAT) but stressed that it may reduce exemptions. However, it aims to keep the 20 percent and 12 percent VAT exemptions for senior citizens and persons with disabilities, respectively.

source:  Manila Times

Upholding the Constitutional exemptions of non-stock, non-profit schools

We have come to a time when we are no longer afraid of change. We welcome change, believing that such will be a catalyst for improvement. We are all very excited by blow-by-blow developments. We have seen it slowly happening within the ranks of the Bureau of Internal Revenue (BIR) vis-à-vis the proposed amendments of the Tax Code.

With the vision to make government processes more efficient, there are numerous issuances at the administrative level which aim to promote efficiency across all levels.

Recently, the Commissioner of Internal Revenue issued Revenue Memorandum Order No. 44-2016. The issuance excluded educational institutions from the coverage of RMO 20-2013, which prescribed the Policies and Guidelines in the issuance of Tax Exemption Rulings to Qualified Non-Stock, Non-Profit Corporations and Associations.

The objective is to put in proper context the nature and tax status of non-stock non-profit educational institutions. The RMO recognizes that non-stock non-profit educational institutions are distinct because their exemption arises from the Constitution itself. As such only two requisites are required to avail the exemption, 1) the school must be non-stock and non-profit and 2) the income is actually, directly and exclusively used for educational purposes.

Stakeholders have another reason to rejoice as tax exemption rulings are already made perpetual. The rulings shall remain valid and effective unless recalled for valid grounds. Non-stock non-profit educational institutions are not required to renew or revalidate the tax exemption rulings previously issued to them.

Meanwhile, the list of requirements in applying for tax exemption ruling / certificate was cut from eleven to only six documents, as follows:

(a) Application letter for issuance of Tax Exemption Ruling;

(b) Certificate of Good Standing issued by the Securities and Exchange Commission;

(c) Certification under Oath of the Treasurer as to the amount of the income, compensation, salaries or any emoluments paid to its trustees, officers and other executive officers;

(d) Copy of the Financial Statements of the corporation for the last three (3) years;

(e) Copy of government recognition/permit/accreditation to operate as an educational institution issued by the Commission on Higher Education, Department of Education, or Technical Education and Skills Development Authority; and

(f) Certificate of utilization of annual revenues and assets by the Treasurer of the non-stock and non-profit educational institution.

The reduced list excluded, among others, the Articles of Incorporation, certificate of BIR registration, income tax return and BIR clearance.

However, newly established schools may have a problem with the requirement of submitting last three annual Financial Statements of the applicant corporation. This implies that a non-stock non-profit education institution may only avail of all the tax exemptions granted under the law on its fourth year of operation. In lieu of the requirement, the BIR may consider allowing newly established educational institutions to enjoy the exemption with the condition that the taxes that have been waived will be paid if the school cannot comply with the requirement.

Section 4 of the issuance provides that the BIR may require additional documents as may be warranted by the circumstances. Though it is not also clear who are authorized, in practice, it is the evaluating officers who determine whether additional documents are necessary. We still hope that this will not give rise to confusion and conflicting interpretations. 

A bigger source of confusion which could be addressed in succeeding issuances is the coverage of activities that may be deemed aligned with the educational purpose and are, therefore covered by the exemption and which activities would clearly be taxable. At the moment, guidance is scattered in various BIR rulings and court decisions which make compliance difficult.

To ensure that the government’s fiscal condition is not in peril, it is very important to balance the government’s interest and the taxpayers. Principles in law say that tax exemptions should be strictly interpreted against the one claiming it. On the other hand, in certain circumstances when there is a clear grant in the law of such exemption, what regulators need only to do is to ensure that conditions imposed under the law are met. Ancillary requirements, which are not directly relevant to the conditions required by law, should not cause denial of the application of exemption.

We must all understand that the State considers education as a primary factor in nation-building. Anent this, the Constitution provides that education should be accessible to all. With our current rate of population and economic growth, the government will surely have difficulty catching up. The role and contribution of non-stock non-profit educational institutions should be recognized and supported. 

As previously stated, we welcome change. In line with President Rodrigo R. Duterte’s directive to all government agencies to provide fast and hassle free service to the public. RMO 44-2016 is proof of the new BIR Commissioner’s adherence to the advocacy of the President for efficiency. We have high hopes that the bureau’s new strategies will uphold that the laws should not be interpreted and implemented in such a manner that will defeat or diminish the intent and language of the Constitution and the laws.

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

New bank secrecy law will hit only tax dodgers

THE government’s plan to lift the bank secrecy law will affect only those who are under investigation for tax evasion or fraud.

Paola Alvarez, the spokesperson of the Department of Finance (DOF), made this clear on Wednesday.

“What we are trying to get at is that if you honestly declare your taxes then you should not have any fear that the bank secrecy law will be lifted against you,” she said.

So the law, she explained will be lifted, only against those beings investigated for tax evasion or tax fraud.

Earlier, addressing the Financial Times-First Metro Philippines Investment Summit on Tuesday, Finance Secretary Carlos Dominguez 3rd had indicated that the government is going to put “more effort” in tax collection. He also called for the Large Taxpayers Service (LTS) Unit of the Bureau of Inland Revenue (BIR) to increase its tax collection efficiency.

What the government now wants, Alvarez said, is to enable BIR to access bank records without going to court for permission. That means, it is made a policy that will be in the implementing rules of the BIR.

The proposal for granting BIR the power to lift the bank secrecy law, when a situation warrants it, is set to go to Congress before the end of next month (September) for legislation.

President Rodrigo Duterte had included bank secrecy law reform in his first State of the Nation Address last month.

The existing law, the Republic Act 1405, declares bank deposits confidential including investments in bonds issued by the government, its political subdivisions and its instrumentalities. It has been pointed out, in a recent report by a World Bank Group, as one of the strictest in the world that hampers the execution of the Anti-Money Laundering Act (AMLA) compliance review programs.

The proposal to the Congress for revising the law runs along the recommendations made by the Bangko Sentral ng Pilipinas, the Department of Finance and multilateral organizations in order for strengthening the AMLA.

source:  Manila Times

Tax treaty relief application: What to do now?

With the appointment of Caesar Dulay as the new BIR commissioner comes Revenue Memorandum Circular (RMC) No. 69-2016 which suspends the effectivity of all issuances promulgated and issued during the period of June 1-30. Among the list of suspended issuances is Revenue Memorandum Order (RMO) No. 27-2016, issued on June 23, which detailed the (supposedly) new procedures on claiming reduced tax treaty rates.

The Philippines is a signatory to over 40 tax treaties. These tax treaties lay down conditions for nonresident income recipients to qualify for a tax relief on various types of income. Relief may either be in the form of a tax exemption or a lower preferential tax rate. As mechanisms to confirm entitlement of tax reliefs, the BIR issued several Revenue Memorandum Orders (RMOs), RMO No. 27-2016 being the latest. All with the end goal of improving efficiency and service to taxpayers.

Briefly stated, RMO No. 27-2016 provides that the applicable preferential treaty rates for dividends, interest and royalty are granted outright by withholding final taxes at the proper tax treaty rates subject to regular audit in lieu of the mandatory filing of tax treaty relief application (TTRA), thereby amending RMO No. 72-2010. This means that unlike the requirement of filing for tax treaty relief in RMO No. 72-2010, RMO No. 27- 2016 recognized the immediate or instant application of the treaty rates for these income types. A compliance check on withholding tax obligation and confirmation of the appropriateness of claiming treaty benefits shall be part of BIR’s regular audit investigation conducted by the Revenue District Office (RDO) where the domestic withholding agent is registered. For income such as business profits, profits from shipping and air transport, capital gains, income from services and other income earnings, the provisions contained in and the procedures required in RMO No. 72-2010 shall continue to apply.

Just as non-resident foreign income earners and their agents are still studying the implications of this new RMO, commissioner Dulay, on his first day, starts his term with the suspension thereof. The suspension shall last until commissioner Dulay provides an issuance to the contrary. With its suspension, all concerned parties shall observe status quo.

Given the circumstances and until proper authorities decide the fate of RMO No. 27- 2016, for those planning to claim tax benefits and to the curious minds alike, it appears the provisions of RMO No. 72-2010 remain to be the rule on TTRA filing. A discussion of which will follow. 

The RMO prescribed the documentary requirements for the applications for relief from double taxation pursuant to existing Philippine tax treaties. For specific type of income such as business profits, profits from shipping and air transport, dividend, interest, royalty, capital gains, income from services and other income earnings, a specific TTRA form is assigned.

Documentary requirements must accompany all duly accomplished TTRAs. The filer may either be the income earner or the duly authorized representative of the income earner. The BIR also reserves the right to request additional documents/revise or update documentary requirements to properly process TTRA filed with it.

Now, where to file the TTRA with the BIR? The International Tax Affairs Division (ITAD) receives all submitted TTRAs. Those submitted to any other BIR Office shall be considered as improperly filed.

Now that we know what and where to file, the next question is: When do we file it? Ideally, a TTRA is filed prior to the first taxable event. The taxable event shall mean the first or the only time when the income payor is required to withhold the income tax thereon or should have withheld taxes thereon had the transaction been subjected to tax. However, as articulated by the Supreme Court in Deutsche Bank AG Manila Branch vs. commissioner of Internal Revenue (G.R. No. 188550 dated Aug. 19, 2013), a TTRA may be filed anytime and the rule on prior filing is not an indispensable requirement anymore.

With the receipt of the ITAD of the application and documentary requirements, the filer shall be notified if there are lacking requirements.  Upon receipt of the ITAD of the completed documents, the docket will be assigned to a reviewing officer who will evaluate the TTRA. It will be processed and evaluated by the ITAD, the Legal Service/Legal and Inspection Group, and the deputy commissioner for Legal and Inspection Group. Lastly the commissioner of Internal Revenue will review the TTRA and sign the ruling with an approval or denial.

A request for ruling which is based on hypothetical transactions or future transactions shall not be accepted and ruled upon by the ITAD.

The grant of tax treaty relief application may seem tedious for the taxpayer who is entitled to the benefits of the tax treaty. As emphasized over and again, the filing of the TTRA is not an additional requirement imposed by the BIR to qualify for the tax benefits, but is a confirmation that the applicant is indeed entitled to the reliefs/benefits granted by the tax treaties.

Angelie B. Santamina is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email  HYPERLINK “mailto:ph-inquiry@kpmg.com” ph-inquiry@kpmg.com or  HYPERLINK “mailto:rgmanabat@kpmg.com” rgmanabat@kpmg.com.

source:  TOP OF MIND By Angelie B. Santamina (The Philippine Star) 

Dominguez rejects VAT hike

Department of Finance (DOF) has rejected anew the proposal to increase value-added tax (VAT) from 12 percent to 14 percent to offset losses from the government’s proposed cut in income and corporate taxes.

“There has been a proposal to increase the VAT rate to 14 percent to offset the income and corporate rate cut. I am inclined against that proposal,” Finance Secretary Carlos
Dominguez 3rd said in a speech during the 112th anniversary of the Bureau of Internal Revenue (BIR).

The VAT hike was one of the proposals under the Comprehensive Tax Reform Program (CTRP) of the previous Aquino administration. The CTRP calls for lower income tax rates but offsets the reduction by increasing the VAT rate to 14 percent.

“We could double VAT collections simply by being more efficient in collecting it,” Dominguez said.

He added that the Durerte government’s decision to cut to propose legislation cutting tax rates for individual and corporate taxpayers should serve as a challenge to revenue collecting agencies.

“We should be able to compensate for this rate reductions by rapidly broadening the tax base and improving VAT collection efficiency,” the DOF chief said. “There are some things we could do short of raising new taxes,” he added.

For instance, he said the BIR can reorganize the Large Taxpayers Unit responsible for the bulk of collections.

“I cannot imagine that we only have 2,800 so-called ‘large taxpayers.’ The numbers should at least be double that,” Dominguez said.

“We have to grow our revenues faster. The current tax efforts among our neighbors run as high as 17 percent,” he added, referring to the tax collection as a percentage of gross domestic product, which as of the first quarter of 2016 stood at 13 percent.

Dominguez also called on the BIR to simplify forms and the process of tax payment so that queues will be avoided.

“There must be a way to eliminate long lines at the BIR offices. Why punish them when they have come to pay?” he said.

“[I] hope that simplified forms for smaller companies or individuals can be made. There is really no need to make our clients feel exasperated trying to fill up the forms,” Dominguez added.

source:  Manila Times

IFRS 15: More than an accounting change

Management, analysts and other users of financial statements almost always consider a company’s revenue as its key performance indicator. To stay competitive and increase revenue, companies may add flexibility and value to their products and service offerings -- be it an enhancement in the price, additional services or guarantees or other add-ons in the contract terms. However, these diverse marketing strategies give rise to complexity in revenue recognition.

One criticism of the current revenue standards is the limited guidance for certain transactions. For instance, there is no detailed guidance under International Financial Reporting Standards (IFRS) for multiple deliverable arrangements. To address this limited guidance and the differing guidance under IFRS and US Generally Accepted Accounting Principles (US GAAP), the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) jointly developed a common revenue standard that aims to: (1) remove inconsistencies and weaknesses in previous revenue requirements; (2) provide detailed guidance for addressing revenue issues; (3) improve comparability across entities and industries; (4) improve disclosure requirements; and (5) reduce the number of reference standards for revenue recognition. The new revenue recognition standard is known as IFRS 15, Revenue from Contracts Customers (ASU 2014-09 Topic 606 under US GAAP). It was released in May 2014 and will replace virtually all the current revenue standards under IFRS.

THE NEW REVENUE RECOGNITION MODEL
IFRS 15 is based on the core principle that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to.” To apply this principle, entities must go through the following five-step model in recognizing revenue:

• Step 1: Identify the contract with a customer. A contract (whether written, oral or implied by customary business practices) is an agreement between two or more parties that creates enforceable rights and obligations. In some cases, IFRS 15 requires an entity to combine contracts and account for them as one. IFRS 15 also provides guidance on accounting for contract modifications.

• Step 2: Identify the performance obligations in the contract. Performance obligations involve the transfer of goods or services to a customer. If there are multiple deliverables under a contract, IFRS 15 provides guidance on determining whether the goods or services are distinct and should, therefore, be accounted for separately.

• Step 3: Determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services. The transaction price can be a fixed amount, but may sometimes include variable or non-cash considerations. The transaction price also considers the time value of money.

• Step 4: Allocate the transaction price to the performance obligations in the contract. The transaction price is allocated to each distinct performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service. Under certain criteria, the residual allocation method can be used.

• Step 5: Recognize revenue when or as the entity satisfies a performance obligation. A performance obligation may be satisfied at a point in time or over time.

MORE THAN AN ACCOUNTING CHANGE
Adoption of this new standard will result in major changes in the current way of accounting for revenue transactions. The following is an overview of some of these major changes:

• Oral and implied contracts, in addition to written contracts, are scoped in by IFRS 15. This would result in earlier recognition of revenue for some entities whose customary business practice is to start providing the goods or services even before a written contract has been signed.

• Unlike current revenue recognition standards, IFRS 15 provides more explicit requirements on how to account for contract modifications and when to combine contracts.

• For a single contract with multiple deliverables, applying the new standard may result in the identification of new or different performance obligations or deliverables compared to the deliverables identified under the current standards. IFRS 15 also has detailed guidance in assessing whether these deliverables are distinct from each other and, therefore, to be accounted for separately.

• Revenue is now measured based on the consideration that the entity expects to be entitled to. This is a significant change from the current measurement basis of fair value of the consideration received or receivable.

The new standard requires entities to consider in their transaction price elements other than the fixed contract price, such as variable considerations. Some examples of variable considerations are rebates, discounts, refunds and bonuses. Currently, entities may defer measurement of these variable considerations until the uncertainty is removed, which is usually when the final payment is received or these are granted. However, under IFRS 15, these variable considerations should be identified, estimated and constrained at contract inception date and reassessed moving forward. Thus, the transaction price or amount by which the revenue will be recorded may differ from the fixed contract price.

• The current standards provide limited requirements on multiple-element arrangements, particularly on the allocation of the contract price to these arrangements. IFRS 15 now prescribes the allocation methods and introduces the new concept of “relative stand-alone selling prices” in allocating transaction price. Thus, the amounts that will be allocated under the new standard may differ from the amounts allocated under the current standards.

• From the current revenue recognition trigger of transfer of risks and rewards, revenue is now recognized when control is transferred. Revenue can only be recognized over time when certain criteria are met. Otherwise, it is recognized at a specific point in time.

• IFRS 15 also provides explicit guidance on certain topics such as costs to obtain and fulfill a contract, warranties, right of return, breakage, and customer options for additional goods or services. One significant change is that costs to obtain a contract (e.g., commissions), if they are expected to be recovered in the future, will be capitalized under the new standard.

• Lastly, IFRS 15 requires expanded disclosures on contracts with customers.

With these new requirements, the impact of IFRS 15 may vary among industries and entities depending on how entities structure their revenue arrangements. Some entities may see significant changes on how and when they recognize revenue while others may not be impacted significantly. For those entities that fall in the second category, this does not mean that they are spared. They still need to validate this expectation by evaluating their existing revenue contracts vis-à-vis the requirements of IFRS 15. They also need to plan and take the needed steps to capture and to comply with the expanded disclosure requirements of the new standard.

TRANSITION
Once adopted by the Philippine Financial Reporting Standards Council (FRSC) and approved by the Board of Accountancy, the new standard is effective for calendar year 2018. Companies have the option to transition using the full retrospective or modified retrospective approach. Under the full retrospective approach, contracts outstanding as of the beginning of the earliest period presented (Jan. 1, 2016 for publicly listed companies) have to be assessed under IFRS 15 and any restatement should be recognized on the same date. In the modified retrospective approach, only contracts existing as of Jan. 1, 2018 are revisited, with any restatement reflected in the opening balance of retained earnings on the same date. Additional disclosures are required to compensate for non-comparative revenue figures. 

The standard was originally intended to be effective in 2017 but the IASB eventually approved a one-year deferral. This deferral acknowledges the fact that applying IFRS 15 will not be an easy task and that companies need more time to implement this standard. The impact of IFRS 15 is not constrained to the financials; it has a wider business impact, affecting multiple business functions. The implementation effort should not only involve the finance or accounting departments, but should also involve other functions such as (among others) tax, legal, sales, human resources, marketing, investor relations, and Information Technology.

Even prior to the effectivity of the new standard, entities should already study the provisions and implications of IFRS 15 and make an early assessment of the standard’s impact on their revenue streams and systems and processes. With the magnitude of anticipated impact, education and early preparation are the keys to ensure a smooth transition to the new standard. 

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

Erwin A. Paigma is a Senior Director of SGV & Co.

source:  Businessworld