‘Papa Bear,’ ‘Mama Bear,’ ‘Ice Queen’

Get Real By: Solita Collas-Monsod

The Senate version of the much-vaunted TRAIN (Tax Reform for Acceleration and Inclusion), Senate Bill No. 1592, was passed this week. Let me tell you, Reader, and I am joined by highly respected colleagues in this view, that it leaves much to be desired.
We need this tax reform program because the administration’s platform is based on a “Build, Build, Build” program to improve the country’s infrastructure—not only physical (roads, bridges, etc.) but also human (i.e., to improve the people’s education, skills, training) and even natural. President Duterte wants to accelerate our pace of development.

The problem lies in the fact that with the current tax structure, the government cannot finance it. We have a structure that is old, creaky and full of loopholes. For example, our excise taxes on fuel haven’t been changed in 20 years. In 1998, fuel excises constituted around 50 percent of fuel prices—the same as other countries. Now they constitute maybe 10 percent.

For loopholes, how about our value-added taxes (VAT)? Sure, we have about the highest VAT rate in the region, but there are so many exemptions. Sen. Panfilo Lacson pointed this out when he said that the Philippines’ exemptions were more than those of Thailand, Malaysia, Vietnam and Indonesia put together (PH=143, T+I+M+V=111).
So, to raise the funds to finance our Philippine Development Plan and to make up for the needed reductions in personal income tax, we need to streamline and update our tax structure. That’s what the Department of Finance set out to do. Finance Secretary Sonny Dominguez was reported to have said that his proposed increase in the fuel excises would bring in P177 billion, and that removing the VAT exemptions would bring in P166 billion.

Hence the tax reform—to pay for the physical infrastructure and human capital development (P40 billion for free college tuition). And there’s universal healthcare, estimated at around P50 billion, etc. And then we have to make sure that the poor are not further marginalized.

So what happened? Well, for one, all the foregoing—the country’s needs—took a back seat to the individual needs of our senators. Someone monitoring the discussions told me that this was the first time (in three Congresses) that the senators were so open about what they wanted for themselves.

They even had pet names for themselves, like “Papa Bear” (Gordon, I am told), “Mama Bear” (Villar supposedly), and “Ice Queen” (allegedly Legarda). And if their individual needs or interests clashed with the needs of tax reform, guess who won?
Example: Sen. Sonny Angara’s interests led him to include ecozones (not just direct exporters) among those with VAT zero rating, thus adding to, rather than reducing, the exemptions. And anything that would affect real estate was given wide berth, to accommodate Mama Bear.

When the senators realized that their pet insertions had reduced the expected revenues of the tax reform, they scrambled to add more revenue-raising provisions. And so you had a doubling of the documentary stamps tax, a doubling of the minerals excise tax, a tax on coal 10 to 30 times its present rate. Is that good? No. No one bothered to check what the overall impact would be. As a colleague described it: all whimsical or arbitrary, all without the benefit of complete staff work.

The senators did arrange for the cash transfers to the poor for three years: The additional revenues from TRAIN would be divided into 60 percent for physical infrastructure, 27 percent for human infrastructure (including the cash transfers), and 13 percent for the Armed Forces. However, if the poor are to get the P50.4 billion envisaged (P3,600 a year x 14 million families—yes, the Senate considers the poor to comprise 70 percent of our families), revenues from the Senate’s TRAIN should be at least P187 billion. The latest estimated revenues are about P120 billion.

Yet, in spite of the need to raise revenues, sin taxes (with complete supporting studies) were not even considered. Senators Manny Pacquiao and JV Ejercito presumably were convinced not to pursue this, because anyway, it will be included in TRAIN II “early” next year. Anybody want to bet on that? Elections are coming, and taxes and elections do not mix well.

source:  Inquirer

Bye bye, Build Build Build?

The Tax Reform for Acceleration and Inclusion (TRAIN) has been billed as the administration’s flagship legislation for achieving sustainable seven percent growth, generating investments and jobs,and reducing poverty. If TRAIN is derailed — kiss Build, Build, Build, bye bye.

There is some concern that the Senate version of TRAIN passed two weeks ago, heavily diluted the original tax reform package proposed by the DoF. According to press reports citing the Legislative-Executive Development Advisory Council (LEDAC),the likely incremental revenue yield of the Senate bill is only around P55B, around 0.3% of GDP. Compare this to the target revenue yield of the original proposal of the DoF of P157B, (1% of GDP), or even the House version of P134B (0.8% of GDP). Or what the Philippine Development Plan aims: for infrastructure spending to ramp up to 7% of GDP by 2022 from last year’s 3.4%.

Moreover, as stressed by Foundation for Economic Freedom last Sept. 14, “Tax reform is particularly important in the face of new spending mandated by Congress — free irrigation, free tuition in SUCS (state universities and colleges), escalating pension benefits of uniformed personnel, and increases in SSS (Social Security System) pensions unmatched by increases in contribution.” The incremental yield of the Senate bill barely covers the estimated first year cost of the free tuition law. And with inordinate amount of earmarks to boot.

If government pursues its programmed five-year infrastructure spending on top of all these Congress-mandated new ones without the matching new revenues, the country courts an explosive public debt buildup.More immediately, we put at risk another “BBB” — the Philippines “investment grade” credit rating. Keeping an investment grade rating is essential. It makes the country attractive to investors and keeps borrowing cost low for both government and the private sector, including small businesses and first time homebuyers.

The major sources of dilution in the Senate version according to experts are —
1. Plugging VAT exemption loopholes. The Senate version only lifted 36 VAT exemptions from the 70 lines in the DoF bill. Moreover the Senate bill gives new exemptions to ecozones.

2. Fuel taxes, auto excise taxes were watered down and made more complicated.
3. The option to pay 8% on gross for all self-employed, in lieu of income taxes at the top marginal rate of 35%.

On the VAT exemption loopholes, the consequence of having too many holes is a VAT yield of only 4.3% of GDP, around the same as Thailand’s, even when their VAT rate is only 7%.

My favorite example of a bad tax exemption — seniors citizens’ VAT exemption on top of a legally mandated 20% discount. This is exceedingly regressive as government subsidizes in direct proportion to amount of spending, and gives minimal benefits to the needy elderly poor. Its other objectionable feature from a tax policy standpoint is the high administration cost, and its window for abuse by opportunistic taxpayers/establishments and crooked tax collectors. The DoF originally proposed to limit this exemption to medicines, and to instead provide annual cash transfers similar to the Pantawid Pamilya for the elderly poor.

There are dozens of similarly unmeritorious exemptions like this that the DoF tried to wholesale correct in their version of the bill. (At the same time, the DoF has shown flexibility in recognizing truly deserving cases. For example, with the BPO industry, one of two key drivers of the economy in terms of direct and indirect employment, foreign exchange, and economic activity. Both House and Senate versions provide for a formula that allows the industry to continue to significantly contribute to the economy in the face of anti-outsourcing rhetoric in the US, concerns of foreign clients over security concerns like Marawi/ISIS, and the accelerating negative impact of technological disruption/Artificial Intelligence.)

On the oil taxes,while the three versions converge to same rate after year 3, the Action for Economic Reforms has argued that the back loading, especially in the Senate version impacts on the ability of government to fund the compensating cash transfers needed in the early years.(Though one can also argue that timing actually dovetails with the J curve ramp up in infra spending, given government’s absorptive capacity/execution limitations.) There is also the risk to the planned revenue increase for the outer years due to the 2019 election.

Finally, on item 3 — the revenue losses from the overly generous eight percent gross option for the self-employed (initially only for smaller establishments), has been estimated by the DoF/AER to be upwards of P20 billion. While its Senate sponsors have argued that there will be more taxpayers who will pay with the much lower rate, I doubt that tax evaders now paying zero will find virtue just because the tax rate is lower. Especially since, surfacing previously hidden income stream may expose them to charges of evasion on past income.

Moreover, this measure severely fails the test of horizontal equity — as salaried people, especially at the higher tax brackets, will be subject to three to four times the burden of the self-employed.

In order to make up for the huge gap in revenue yield, the Senate version introduced new items that were originally programmed for future packages by the DoF. They have thus not been subject to full consultations. Some quick notes on these new items:

1) Increase in taxes on dividends and on FCDU dollar interest income to 20%.
Premature and piece meal in light of a comprehensive review being undertaken by a team of experts commissioned by the DoF/ADB for reform of capital income taxation (interest, dividends, capital gains) across institutions and financial instruments. The objectives of this capital income tax reform (package 4) include greater neutrality, fairness, simplicity, and efficiency — to be supportive of government’s capital market development efforts.

2) Coal tax dubbed a carbon tax.
The Senate bill proposed doubling the coal tax from the current P10 per ton. While even this higher level seems modest compared to what is being pushed by alternative fuel interests,this tax should have been left for fuller study under the DoF’s package 5, taxation of products with negative social externalities (which also includes tobacco and alcohol).

Advocates have argued for a much heavier tax on coal based on coal’s higher per unit contribution to global Co₂ vs. alternative fuels. They fail to consider that the Philippine Co₂ footprint is just 1% of world total,the lowest in ASEAN. Moreover, the renewable energy component of our power mix at 35%, is way above global average — thanks to forward looking investments done over decades in efficient hydro and geothermal plants.
The question we need to ask in levying higher taxes on coal is — given the country’s aim to promote manufacturing investments and job creation, can we afford to further add to our high electricity costs? Such have been made higher recently by compounding feed in tariffs subsidies for wind and solar.

3) Cosmetic surgery (or cosmetic products) tax. This and other similar small yielding tax measures are just administrative burdens.
One is tempted to say, purely cosmetic. But nonetheless valid considerations in Philippine politics, especially bearing in mind 2019 midterm elections. I trust that the bicam and Congress as a whole will find the right balance between short term politics and our country’s long term development imperatives.

Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during the Corazon Aquino and Fidel Ramos administrations.  

Introspective By Romeo L. Bernardo 

romeo.lopez.bernardo@gmail.com

Tax holiday for inclusive business models

Package two of the country’s tax reform initiatives will take a look at how to rationalize fiscal incentives. Certain factors that are being considered by our Finance department include the selection of industries to be promoted, the actual performance of registered entities vis-a-vis targets, and the period for availing of the incentives. It will be interesting to see how the government will continue to incentivize activities that result in positive social impact and inclusive growth. One of these activities currently qualified for fiscal incentives is the corporate Inclusive Business (IB) model.

IB is a private sector or business approach specifically directed at low-income communities or people who live at the Base of the Pyramid (BoP). A company adopting this approach customizes its business model to include low-income communities in its value chain as customers, suppliers, distributors, retailers, or employees. IBs provide more access to basic goods and services, and create opportunities for employment and livelihood to the marginalized sector in a sustainable, scalable, and commercially viable manner.

While it seems philanthropic, IBs are actually profitable investments. They also provide opportunities for large-scale businesses to realize reasonable profits from markets with significant growth potential, while making a positive social impact like reducing poverty and supporting community development. Hitting two birds with one stone as the old cliché goes.

IBs differ from Corporate Social Responsibility activities in that the latter are not conceptualized with commercial viability and profit in mind. However, both are effective ways of engaging the private sector to collaborate and partner with the low income communities, sharing in the responsibility of the government to bolster growth in all sectors, especially at the BoP.

Recognizing its potential, the Board of Investments (BoI) included IB in the 2014 Investments Priorities Plan (IPP), not as a preferred activity for investment eligible for incentives but as a key strategy for inclusive growth, and as a general policy for encouraging registered enterprises to adopt IB strategies and practices.

In the 2017 IPP, IB models finally got listed as one of the preferred activities. The IPP recognized business activities of medium and large enterprises in the agribusiness and tourism sectors which target micro and small enterprises (MSE) as part of their value chains. IB projects that are eligible for registration may qualify for BoI Pioneer status with entitlement to five years of income tax holiday.

To illustrate an IB model, let’s take an agribusiness enterprise that sources its raw materials (e.g. coffee beans, sugar, or cocoa) from low-income farmers, MSEs, or farmer’s cooperatives.

The enterprise may enter into a contract growing agreement with the farmers and may guarantee the purchase of their produce. It may provide technical assistance (e.g. trainings, seminars) or access to finance (e.g. loans, collateral) and farm inputs.

Further, the IPP enumerates the targets and the timetable for implementation of IB models.

Under the guidelines, within three years of commercial operations, at least 25% of the value of total cost of goods sold of qualified agribusiness enterprises and total cost of goods/services of qualified tourism enterprises must be sourced from registered and/or recognized MSEs (including cooperatives, or any organized entity duly recognized by a government body), as evidenced by a duly notarized contract. Moreover, there must be at least a 20% increase in the average income of individuals engaged from such MSEs from the baseline year to the third year of actual operations.

For qualified agribusiness enterprises, at least 300 farmers, fisherfolk, suppliers, and/or individual beneficiaries must be engaged, of which, at least 30% must be women. On the other hand, at least 25 direct jobs (regular employment) must be generated by qualified tourism enterprises for individuals in the identified database (e.g., DSWD Conditional Cash Transfer Graduates, DAR Agrarian Reform Beneficiaries, NCIP List, PWD, and others) of which, at least 30% must be women.

In addition, the enterprise must exhibit innovation in the business model through: (1) the provision of technical assistance/capacity building to the MSEs, farmers, fisherfolk, or employees that increases productivity and/or quality; or (2) facilitation of access to finance either directly or in partnership with a third party (i.e. provision of collateral by the company, direct lending through a subsidiary or third party-financing disbursed directly to the MSEs, farmers, fisherfolk, or employees or through the company).

Innovation in the business model may also be exhibited by agribusiness enterprises through the provision of inputs and/or technology to MSEs and/or individual farmers and fisherfolk.

Interested enterprises with agribusiness and tourism projects may opt to undertake IB models by submitting their duly notarized IB plans in the required BoI format upon application for registration.

A business strategy that incorporates the marginalized sectors of society may finally serve to break the shackles of poverty. As aptly expressed in the United Nations Report entitled, Creating Value for All: Strategies for Doing Business with the Poor (2008): “Inclusive business models build bridges between business and the poor for mutual benefit. The benefits for business go beyond immediate profits and higher income. For business, they include driving innovations, building markets, and strengthening supply chains. And for the poor, they include access to essential goods and services, higher productivity, sustainable earnings, and greater empowerment.”

With the promise that it holds, there is reason for the government to qualify IB models for fiscal incentives.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Reynaldo E. Maniego III is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

reynaldo.e.maniego.iii@ph.pwc.com

Waves of waivers

Some of the important lessons in life we learn from unpleasant experiences. Learning from the mistakes of our past keeps us from repeating them. Wisdom comes from accepting errors and exercising better judgment in the future.


The above statements hold true even in tax collection. In the past, the Bureau of Internal Revenue (BIR) lost assessment cases due to the issue of waivers on the statute of limitations for the assessment of deficiency taxes. It may have learned its lesson the hard way, but the Bureau has implemented improved measures stemming from its experience.

In a 2004 case (G.R. 162852 dated Dec. 16, 2004), the Supreme Court ruled that a waiver must strictly conform to the requirements set forth under the rules; otherwise, the waiver is invalid. At that time, the prevailing rule on the proper execution of a waiver of the statute of limitations was Revenue Memorandum Order (RMO) No. 20-1990 and Revenue Delegation Authority Order No. 5-2001.

In a subsequent case (G.R. No. 212825 dated Dec. 7, 2015), the Supreme Court provided an exception to the general rule on validity of waivers. The crux of the issue pertained to the issuance of defective waivers, arising from the fault of both the taxpayer and the BIR. The waivers were said to be executed by the taxpayer’s accountant without a notarized board authority to sign in behalf of the company. On the other hand, the BIR was considered to be careless in performing its functions when it did not ensure that the waiver was duly accomplished and signed by an authorized representative, among others.

In that case, the Supreme Court tolerated the BIR’s slip-ups for equitable reasons. The validity of the waiver in favor of the state was then upheld on the strength of the time-honored principle that taxes are the lifeblood of the government. In its decision, the Court said the BIR’s right to collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases where the taxpayer was obviously in bad faith when it voluntarily executed the waivers and subsequently insisted on their invalidity by raising the very same defects it caused. Thus, the taxpayer was estopped from questioning the validity of the waivers.

As for the erring BIR officials, the Court suggested enforcing administrative liabilities for their failure to properly comply with the procedures.

In a more recent decision (G.R. No. 213943 dated March 22, 2017), the Supreme Court ruled that the three-year period to assess was not extended because all the waivers executed by the taxpayer were considered defective. What is significant to note is that the waivers were considered defective because the BIR failed to provide the third copies to the office accepting the waivers and these copies were merely attached to the docket of the case. Also, the revenue official who accepted the third waiver was not authorized to do so. In this case, the defects were solely due to the fault of the BIR.

While the BIR argued that the taxpayer was estopped from questioning the validity of the waivers, the Courts clarified that the BIR cannot shift the blame to the taxpayer for the defective waivers. The BIR cannot easily invoke the doctrine of estoppel to cover its failure to comply with the requirements for valid issuance of waivers. Having caused the defects, the BIR must bear the consequences. Considering that the waivers are defective, the assessment was considered issued beyond the three-year prescriptive period, and thus, void. Contrary to the 2015 case, the Court ruled in favor of the taxpayer here because it played no part in the waivers’ defects.

With the issuance of a new RMO last year, the question is -- Can taxpayers apply the above decisions of the Supreme Court for issues on waivers today?

On April 18, 2016, the BIR issued RMO No. 14-2016 which laid down new guidelines on the execution of waivers. According to the new RMO, compliance with the prescribed form is not mandatory. A taxpayer’s failure to follow the forms would not invalidate the executed waiver, for as long as (1) it is executed before the expiration period, and the date of execution is specifically provided in the waiver; (2) the waiver is signed by the taxpayer or duly appointed representative/responsible official; and (3) the expiry date of the period agreed upon to assess/collect the tax after the three-year period is indicated.

In addition, the new RMO provides that the taxpayer is charged with the burden of ensuring that the waivers are validly executed. The taxpayer must submit the duly executed waiver to the Commissioner of Internal Revenue or to the authorized revenue official (e.g., concerned revenue district officer or group supervisor as designated in the Letter of Authority or Memorandum of Assignment) who shall then indicate acceptance by signing the waiver. Moreover, the taxpayer must retain a copy of the accepted waivers.

Under the new RMO which seems to favor the BIR, it appears that upon execution of the waiver, taxpayers can no longer challenge its validity.

Thus, while there is a level of comfort in the decision of the Court that taxpayers should not be made to suffer for lapses of the BIR, this will only apply to waivers that have been executed prior to the effectivity of the new RMO. The BIR has learned from past mistakes. Here’s to hoping that taxpayers have learned from their own.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Maria Jonas Yap is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

maria.jonas.s.yap@ph.pwc.com

source:  Businessworld

Another look at the tax-exempt status of charitable institutions

Tax exemptions are often met with reservations and must withstand the strict scrutiny of revenue collectors. After all, taxes are the driving fuel that propels all programs and activities of the state. Absolving persons from their tax liabilities means reducing public funds and restraining the government from actualizing its goals.

Nevertheless, the legislative groundwork covering the tax exemption of religious and charitable institutions has long been established, even as early as the Commonwealth period. The rationale for the exemption springs from the benevolent neutrality approach premised on the ground that religious and charitable institutions are not engaged in profit-seeking undertakings; whatever gains derived by the organization redounds to charity. Hence, Section 30(E) of the National Internal Revenue Code (or simply, the Tax Code) is specifically couched to incorporate the rationale in these words: a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, wherein no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person shall be exempt from income tax.

In a recent decision (CTA Case No. 8912 dated July 25, 2017), the Court of Tax Appeals (CTA) emphasized that while our Tax Code provides exemptions for certain non-stock corporations from income tax, this incentive is not absolute. It reiterated that in order to enjoy immunity from taxation, the following requirements for exemption must continually be satisfied by the taxpayer: (a) The taxpayer must be a non-stock corporation or association; (b) Organized exclusively for charitable purposes; (c) Operated exclusively for such purposes; and (d) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

In the foregoing case, the CTA ruled in favor of the BIR, declaring that while there was no sufficient evidence to prove that any income or asset inured to the benefit of any member or officer of the institution, the 10% preferential tax rate applicable to proprietary hospitals which are nonprofit (under Section 27(B) of the Tax Code) should be imposed since the taxpayer was not operated “exclusively” in charitable purposes. Although not barred from engaging in activities conducted for profit, any income the hospital derives from profit-oriented activities should not escape the reach of taxation. Thus, an organization with both non-profit and profit-generating activities may still enjoy its tax exempt status but only on income from not-for-profit activities. Any income generated from activities conducted for profit shall strictly be subject to income tax.

As basis, the CTA also cited previous cases (G.R. Nos. 195909 and 195960 dated September 26, 2012) where the Supreme Court extensively discussed the application of Section 30(E) of the Tax Code, as amended, and upheld the same decision.

For taxpayers, an important takeaway from this case is that in order to enjoy immunity from taxation, all of the requirements for the same must continually be satisfied by the taxpayer. Thus, being a non-stock and non-profit charitable institution does not automatically exempt an institution from paying taxes.

Generally, just relying on the specific tax-exemption provision of charitable institutions from our Tax Code, a non-stock, non-profit corporation is exempt from paying income taxes at first glance. In some instances, organizations tend to overlook the succeeding provision clearly stating that the exemption only applies to income from non-profit activities. Through this case, the CTA reiterated the prevailing tax position in the Philippines that income from profit-generating activity is taxable, regardless of the disposition of the income earned from such activities. Nonetheless, while this may be the case, an organization may still, at the same time, remain tax-exempt on income from its actual charitable activities. Therefore, it may be deduced that at the end of the day, the determining factor for taxability lies in whether an activity is for profit or not.

To be exempt from tax, the challenge is for charitable and religious organizations to have a better appreciation of the rationale behind their tax-exempt status. As a rule, taxation is the overarching principle and exemption is the exception; as such, the burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Nadine E. Chan is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

nadine.e.chan@ph.pwc.com

source:  Businessworld

Get Real: Breaking down the tax reform package

This table, from the Department of Finance, shows its estimates of the combined impact of the “TARA sa TRAIN” (Tax Administration Reform Act, Tax Reform for Acceleration and Inclusion) on Filipino households (hh).

The first column breaks down the households by decile (definition: each of 10 equal groups into which a population can be divided according to the distribution of values of a particular variable, which in this case is household income). Thus, you have the column listing from D1 to D10. The highest income decile (D10) is further broken down into the top 1 percent (P100), and even further into the top 0.1 percent (P1,000).  This further subdivision is done so we can see what the tax reform does to this elite class.

The second column describes the characteristics of each of the deciles. Note that the bottom 50 percent of income earners are either “Subsistence Poor,” “Poor” or “Near Poor.” Note that the  “Minimum Wage Worker” comes in the seventh decile, and  the highest (tenth) income decile is only where the “Middle Class” begins.

That decile is further broken down into “Executive,” those who belong to the top 1 percent, and still further into the top one-tenth of one percent are labeled “CEO.”
Now we come to the third column, which shows the 2018 monthly hh total income by decile. The DOF assumes that each hh has two income earners. The next seven columns give the impact of each of the tax measures in the tax reform package plus the effect of inflation.

The last column summarizes the final impact: the resulting change in take-home pay. Visually, without even looking at the details, the reader can see that the bottom 60 percent of income earners are negatively impacted by the package (the figures are in italics, and are parenthesized) as well as the top 0.1 percent. Those are the DOF estimates.

To make up for the minuses, there is a complicated and not yet worked out system of transfers that add up to P3,000 a year for the first five deciles and P1,500 for the next two (up to the seventh decile). BUT: This is relief that lasts only four years. WHY ONLY FOUR YEARS? No one who has critiqued my stand has answered.



Source: DOF staff estimates using the preliminary Family Income and Expenditure Survey- Labor Force Survey 2015
Notes: Each household has about two income earners

*Total household income includes compensation income, income from entrepreneurial activities (i.e. businesses) and other sources of income (i.e. cash transfers)

**Automobile excise tax impact was computed using 2016 prices, assuming 5 years of amortization

***The inflationary effect was computed as a function of income, marginal propensity to consume (MPC), and estimates on the price effect of the increased oil excise on the price of food

source:  Philippine Daily Inquirer By: Solita Collas-Monsod

What the legislature grants, it can take away

While queuing for more than an hour just to catch a ride home, I noticed commuters in front of me giggling while staring at their smartphones with earphones on. I subtly leaned in to find out what was stirring their interest. On the screen, I saw the familiar faces of Korean actors of a prime time soap opera. I realized that the benefit of foreign telenovelas among Filipinos is that it helps to keep them calm and entertained, especially city commuters who endure hours of standing in line.

With the robust expansion of foreign influences into mainstream media as seen in drama series, K-pop songs and matinee idols (i.e., boy bands), we also see the enhancement of foreign relations between the Philippines, South Korea and the global community at large.

On the economic side, the Philippine government has incessantly endeavored to introduce measures that will increase foreign investment such as providing various fiscal and non-fiscal incentives to foreign investors. One example of these incentives is that specifically provided to regional operating headquarters (ROHQs).

As defined, an ROHQ is a resident foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific region and in other foreign markets. Its operations are limited in the sense that it is merely allowed to perform the qualifying services enumerated in the Omnibus Investments Code of 1987, and only for its affiliates. Violation of these rules may result in the revocation of the ROHQ’s license or registration, and effectively, its tax exemptions and incentives.

WHAT EXACTLY ARE THE INCENTIVES PROVIDED BY OUR GOVERNMENT TO THESE ROHQS?
Generally, resident foreign corporations are subject to the 30% corporate income tax. However, as provided in the Tax Code, an ROHQ is liable to income tax at the special rate of 10% based on its taxable income. In addition, an ROHQ is also exempted from the payment of all kinds of local taxes, fees, or charges imposed by the local government, except real property tax on land improvements and equipment. Likewise, it is entitled to a tax and duty-free importation of equipment and materials used for training and conferences.

Moreover, several incentives are also given to expatriate employees of an ROHQ. These include the grant of a multiple entry visa for the expatriate employee including his spouse and unmarried children below the age of 21, tax and duty-free importation of personal and household effects, and travel tax exemption. Most importantly, a preferential tax rate of 15% applies on the salaries, annuities, and all other compensation of expatriates occupying managerial and technical positions exclusively working for the ROHQ and earning a gross annual taxable compensation of at least P975,000. The same treatment applies to Filipinos employed and occupying the same position as those aliens employed by the ROHQ.

Given the huge tax savings and various non-pecuniary benefits profusely provided by the Philippine government, many foreign corporations opted to establish their ROHQs in the Philippines resulting in a boost to foreign investment. This further translated to a rise in job opportunities for highly skilled workers, enticement for highly desirable employees, and a reduction in the risk of brain drain, among others.

A significant change in the incentives provided to ROHQs is being proposed in the Tax Reform for Acceleration and Inclusion (TRAIN) Bill passed by the House on May 31. Section 7 of the TRAIN Bill amends Section 25 of the National Internal Revenue Code of 1997. Specifically, the Bill deletes the 15% preferential tax rate provided to ROHQ employees occupying managerial and technical positions.

WHAT DOES THE REMOVAL OF THIS PREFERENTIAL TAX RATE MEAN FOR ROHQ EMPLOYEES?
Evidently, the ROHQ employees’ taxable income will then be subject to the normal graduated income tax rates of 0% to 35% applicable to all employees, as proposed by the TRAIN Bill. Those previously enjoying the preferential income tax rate of 15%, given the gross annual income of at least P975,000, will most likely qualify for the 30% to 35% income tax rates. The effective tax rate would, of course, be lower than 30% to 35%, but it would definitely be more than the current 15% rate. Consequently, this would result in reduced take-home pay for such employees if there is no augmentation in their gross compensation.

It is also worth noting that the TRAIN Bill is just the first part of the Tax Reform Program of the Philippine government. The second package intends to review and amend the income taxes on corporations, among others. Thus, it is possible that the 10% special income tax rate provided to ROHQs may also be amended or totally removed.

Some may argue that these reforms will produce unfavorable outcomes for the Philippine economy. Nonetheless, we must always bear in mind that the power of taxation is solely vested in the legislature. It is only Congress, as delegates of the people, which has the inherent power not only to select the subjects of taxation but to grant incentives and exemptions. Given the power to grant, it also has the inherent power to take away. We just have to trust that this move is consistent with the goal of the Tax Reform Program of achieving “efficiency, equity and simplicity” in our tax system and eventually benefit the entire population in the near future.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Abigael Demdam is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may call +63 (2) 845-2728 or e-mail the author at abigael.demdam@ph.pwc.com for questions or feedback.

source:  Businessworld

No deal

The tax evasion proceedings against homegrown cigarette manufacturer Mighty Corp. is proving to be a test case in the Duterte administration’s campaign to punish corporate offenders.

It has, we heard, already caused a rift between lawmakers and President Duterte’s officials.

Mighty’s offer to settle was finally made public last week by the Department of Finance, which is reviewing the proposal sent to its attached unit, the Bureau of Internal Revenue, which is the lead agency in the cigarette firm’s case.

In a July 10 letter to Internal Revenue Commissioner Caesar R. Dulay, Mighty president Oscar Barrientos indicated that the firm was willing to “settle all such excise and tax issues and respectfully offer as settlement of the company’s shareholders’ and its officers’ liability … the total sum of P25 billion.”

The BIR has filed three tax-evasion cases against Mighty at the Department of Justice for its alleged use of fake tax stamps in order to dodge payment of excise taxes. It estimated the unpaid taxes at P37.88 billion.

Barrientos said the settlement sum would be funded by an interim loan from the unit of Japan Tobacco Inc. (JTI) in the Philippines and the sale by Mighty and its affiliates of its manufacturing and distribution business and assets, along with the associated intellectual property rights, including those owned by the company Wong Chu King Holdings Inc., and other affiliates to JTI “for a total purchase price of P45 billion, exclusive of VAT.” In effect, Mighty will cease operations after concluding its deal with JTI.

Barrientos indicated that Mighty would pay P3.5 billion in deficiency excise taxes on its cigarette products that are now the subject of the three tax cases pending at the DOJ. Mighty would also remit P21.5 billion “representing the liabilities of the company and its shareholders, as well as the company officers for all internal revenue taxes, including income tax from 2010 to 2016 and the tax period up to the closing of the proposed transaction with JTI, and all transaction taxes related to the agreement with JTI.”

He said that the initial payment of P3.5 billion would be paid by Mighty on or before July 20, and that a binding memorandum of agreement in relation to the proposed transaction with JTI would be concluded before that date. The balance is to be paid upon or after the sale of Mighty to JTI.

After all these, Mighty wants the BIR to issue to the company and its shareholders and officers “the relevant certificate of availment of compromise, a final tax assessment for all the company’s excise and other tax issues described above, and relevant tax clearances to the company, its shareholders and officers,” Barrientos said.

Finance Secretary Carlos Dominguez III is correct to make it clear that any settlement offer by Mighty for its tax deficiencies should be separate from the criminal charges that might be filed in court by the BIR against it. Dominguez’s position that criminal liability should be left out of any settlement with Mighty is the alleged cause of disagreement between the cigarette firm and its backers in Congress on one hand, and the President’s economic team on the other.

Clearing Mighty of criminal liability under the proposed settlement will certainly weaken the government’s resolve to weed out unscrupulous businessmen who have been depriving the people of vital public services through nonpayment of taxes. Settlement with a company that underpaid its taxes without intending to—for example, due to a disparity in valuations—should be agreeable. But this should not be so for a company that deliberately evaded the payment of taxes by resorting to criminal acts like the use of fake tax stamps.

And just as a reminder, Section 263 of the Tax Code states that any person found in possession of locally manufactured articles subject to excise tax, the tax on which has not been paid in accordance with the law, shall be punished with a fine of not less than 10 times the amount of excise tax due, as well as imprisonment.

source:  Philippine Daily Inquirer

A Letter Notice cannot substitute for a Letter of Authority

Taxation is the lifeblood of the government. Through the collected taxes, the government is able to fund the increasing need of its people for infrastructure, education, health, etc. The Bureau of Internal Revenue (BIR) is the Philippine government’s largest revenue collecting arm. For this year alone, the Bureau was assigned a P1.8 trillion tax collection target.

Throughout the years, the BIR has implemented various programs to improve its tax collection efforts. In 2003, it issued Revenue Memorandum Order (RMO) Nos. 30-2003 and 42-2003 which provided policies and guidelines to detect tax leaks by matching data from the BIR’s Integrated Tax System (ITS) and data from third party resources. Discrepancies generated through these matchings were used to unearth what could potentially be undeclared sales and/or over-claimed purchases by various taxpayers.

This “no-contact-audit approach” enables the BIR to use computerized matching to compare data from records or various returns filed by a taxpayer against those gathered from its suppliers or customers, and even those reported to other agencies, particularly the Bureau of Customs. Taxpayers with noted discrepancies are then informed of the findings through the issuance of a Letter Notice (LN) by the BIR. Consequently, such taxpayers are given 120 days to reconcile the inconsistencies; otherwise, deficiency taxes will be assessed.

In one of its recent decisions, the Supreme Court (SC) held that the absence of a Letter of Authority (LOA), makes the assessment unauthorized and thus, void. This is despite the prior issuance of an LN. According to the court, the BIR’s failure to issue an LOA constituted a violation of due process and was considered fatal to the tax audit.

The SC differentiated an LOA from an LN, noting that LNs only serve as notice of any discrepancy to the taxpayers and is not in any way a substitute for an LOA which grants authority to the revenue officers to examine the books of the taxpayers. The LN operates similarly to a Notice of Informal Conference, an erstwhile requirement which was removed from the BIR’s tax audit process when the Bureau issued its revised regulations for tax audits back in 2013.

The SC stressed that the BIR must issue an LOA prior to issuing a Preliminary Assessment Notice (PAN), a Final/Formal Assessment Notice (FAN), or a Final Decision on Disputed Assessment (FDDA) to the taxpayer; otherwise, the assessment is rendered void for lack of due process.

This decision overturns the earlier ruling of the Court of Tax Appeals (CTA) en banc which held that the LN in essence, can serve as proof of the revenue officer’s authority to examine the books of the taxpayer. The court pointed out that the taxpayer can no longer question the validity of the tax assessment on the ground of lack of an LOA since the BIR had provided the requisite legal and factual bases of the deficiency tax being assessed. In the higher interest of justice, the SC considered the absence of the LOA as fatal to the case, underscoring the importance of due process.

The SC’s decision to reverse the CTA ruling thereby effectively negates RMO No. 55-2010, which was issued by the BIR based on the earlier CTA ruling. As it is, the BIR has yet to issue guidelines on this recent decision by the SC.

Due process is a basic right guaranteed to all persons under the Philippine Constitution. It is an elementary rule that no person shall be deprived of property without due process of law. To boost taxpayers’ compliance with the tax laws and regulations, the government, through its tax authorities, must continually build trust and confidence among taxpayers and in the society in general.

The pronouncement of the SC brings to light, once again, the significance of due process in taxation. While it is imperative for the tax authorities to generate revenues through exaction of taxes, the government’s power to tax must be exercised with justice. This can only be achieved when collection of taxes exercised through programs are implemented with reasonable requirements and within the bounds of the law.

However steep the BIR’s collection target is, it must be reached only through acts that are within the bounds of the Bureau’s authority.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Kathrine Joy S. Capales is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

kathrine.joy.capales@ph.pwc.com

source:  Businessworld

The bitter side of sugary-drinks tax

WHEN schools started to ban soft drinks in their respective canteens some three years ago, the teachers themselves started to smuggle in and hoard in their respective drawers the very thing that they ask their students not to consume.

They need the sugar to teach, some of them say, not minding their school administration’s policies that also affected them, as they cannot purchase soda drinks anymore within the school premises.

 This time around, as the Duterte administration makes headway into its comprehensive tax-reform package, called Tax Reform and Acceleration and Inclusion Act (TRAIN), a House bill has been filed to slap tax on these sugary drinks as part of the revenue-generation initiatives. 

 

‘Antipoor’

A bill filed by Sultan Kudarat Rep. Horacio Suansing Jr. and Nueva Ecija Rep. Estrellita Suasing seeks to impose a P10 tax on sugar-sweetened beverages, the rate of which will be increased every year by 4 percent.

That caught the attention of many corporate chief executives, many of whom were previously silent whenever the government plans to introduce new taxes. Some of these corporate top honchos even called the move as antipoor.

“We have many concerns. First of all…it affects the masses most. The proposed tax increase here is six times what was proposed in Mexico. At the end, who are the primary consumers of ready-to-drink beverages, it’s the masses of the Filipino people. Just imagine if I drink one coffee a day and I have to pay P3 or P4 more times 365, that’s P1,500 a year. That’s the breakfast of the masses,” said Lance Gokongwei, president and CEO of food group Universal Robina Corp. (URC).

Gokongwei, also president and COO of the family’s holding firm JG Summit Holdings Inc., was referring to Mexico’s same plans on sugar tax, but at a much lower rate.

“The effective increase we’re looking at is P10 a liter in a per capita basis. The average capita per income here is $3,000. We always cite Mexico. The effective tax there was P1.45 per liter in a country where capita per income was $10,000,” Gokongwei said.

URC sells products such as C2 iced-tea beverages, which at one time outsold Coke in the Philippines, and Great Taste coffee mixes, among other sugary products. Its products are now being sold across Southeast Asia, including in Vietnam, where it has a manufacturing plant.

Sugar-sweetened beverages refer to nonalcoholic drinks that contain caloric sweeteners, added sugar, or artificial or noncaloric sweeteners. It may be in liquid form, syrup, concentrates, or solid mixture added to liquids.

Revenue figures

Estimates of the Department of Finance (DOF) foresee that a liter of Coke, now priced at P31 per bottle and rival Pepsi 1.5 liters, being sold at P46.50, will go up by an average of 36 percent.

A can of regular 330 milliliters of Coke, for instance, contains some 34.5 grams of sugar and 136 calories, which teachers say they can easily burn as they teach.

Although debatable, the amount of sugar in a single drink can lead to obesity and some of the noncommunicable diseases, such as Type-2 diabetes, blood sugar disorders and other related illnesses.

The DOF, keen on passing the new tax measure on health concerns rather than to generate additional cash, estimates a revenue of between P40 billion and P47 billion after the bill is passed into law.

The group Action for Economic Reform, a non-governmental organization that helped lobby to pass the sin-tax law, said it has not initiated a coalition yet on the sugar-tax issue like what it did with the tobacco excise tax, but its allied organization, such as the Philippine College of Physicians, has a stand on the issue.

It said, however, the bill needs more study on how the P10-per-liter tax came about, but generally the group has not yet moved significantly to push for the proposal, which is posing more questions than answers to the industry.

For one, there are some concerns if the government can really collect such amount when demand naturally drops when a new tax is passed, then recover soon after.

Feasibility question

A study of the World Health Organization (WHO) said taxing sugary drinks can lower consumption. The study said fiscal policies that lead to at least a 20-percent increase in the retail price of sugary drinks would result in proportional reductions in consumption of such products, citing its report, titled “Fiscal policies for Diet and Prevention of Noncommunicable Diseases”, published late last year.

The Beverage Industry Association of the Philippines, meanwhile, said such move can lead to a P20-billion decline in sales of sugar-sweetened beverages as demand declines.

According to the Philippine Association of Stores and Carinderia Owners, 80 percent of the consumers of these products are low-income earners and 30 percent to 40 percent of the income of sari-sari store owners comes from the sale of coffee, juice and carbonated drinks.

There are also concerns on how the government—the Bureau of Internal Revenue (BIR)—can monitor and administer such new measure.

According to the bill, the sugar-excise tax will not be levied on the raw sugar production itself, but on the products. An excise tax, which is an indirect tax charged on the sale of a particular good, is normally being collected at the source of product.

The excise tax on oil products and vehicles, for instance, is being collected at the port of entry where it will be discharged. For tobacco and alcohol products, the tax is being collected at the manufacturing plants before these are shipped out to the distributors or to the retailers.

Too high

Michael Tan, president and CEO of the LT Group Inc., said not only is the rate too high, but it will be impossible to administer such new tax measure at its current state.

“What will happen on the post mix in the restaurants or in Starbucks or in carinderia, how do you tax that? They’ll put a coffee, they’ll put a sugar and sell it over the counter. By definition, that’s excise-taxable. In microbreweries, you brew in a pub and sell it to the customer, that carries a tax. There should be a tax by their current definition and to be consistent on the existing policies on alcohol,” Tan said.

The LT Group holds most of the businesses of tycoon Lucio Tan, including PMFTC Inc., the combined company of Philip Morris Philippines and Fortune Tobacco, and Asia Brewery, which holds a stable of local and international beer brands and alcohol-laced pop drinks such as Tanduay Ice.

When the new excise tax on the so-called sin products was implemented during the Aquino administration, Tan was vocal on his smuggling allegations against one of the players, Mighty Corp., which is now being sued for smuggling and tax evasion.

“So from the manufacturing side, cigarette factories, there are six cigarette manufacturing, they cannot even manage to stop one. So this will be hundreds of beverage facilities and I don’t think the BIR has the manpower to police it,” Tan said.

“So you will end up with the bigger companies complying, and the smaller ones not complying. That’s only at the factory level. What more at the retail level, at the post mix, like the restaurants and bar,” he said.

The sugar planters, meanwhile, are backing the increase to double the excise tax to P20 per liter on the imported high fructose corn syrup (HFCS), a product also being used by beverage companies to sweeten their drinks.

WTO issue

That proposal, meanwhile, has other repercussions, especially on the possible allegations of protecting local farmers, as the county is a signatory to the World Trade Organization (WTO).

“We’re putting up an HFCS plant. It will be operational soon and the input is corn. So how can you tax it higher? There are more corn farmers in the Philippines than sugar farmers. It’s a nonlocal gain. That’s an issue [for] WTO there. You cannot discriminate, [otherwise] people will discriminate our pineapples and banana if we do that,” Tan said.

Former Ambassador Alfredo Yao, now chairman of Macay Holdings Inc., which owns the family’s carbonated business that manufactures RC Cola and Zest-O drinks, the government should instead tax the raw sugar itself and not the products.

“Then it’s a fair sharing; everybody shares. Everybody shares and it will not be as abrupt as now and only result to a peso [increase] per liter on specific industries only,” Yao said.

“We have conveyed a message to the congressmen. Now we are talking to the Senate. I hope they understand. I think the government side will understand. We know where they’re coming from. They need the taxes and all,” he said.

For now, the chief executives are still studying their next moves if indeed the Duterte administration’s TRAIN, which includes the sugar tax, can railroad their otherwise sweet business.

source:  Business Mirror

VAT on importing from within

If a buyer in the Philippines purchases goods from a Philippine Economic Zone Authority (PEZA) registered enterprise, is the purchase subject to value-added tax (VAT)?


Under Section 107 of the Tax Code in relation to Section 26 of Republic Act No. 7916 (PEZA Law), sale of goods by a PEZA-registered enterprise to a buyer in the Philippines (i.e., domestic sales) is considered a “technical importation,” i.e. the buyer is treated as the importer and the sale shall be charged the corresponding VAT. The rationale for this tax treatment is that an ecozone is considered a separate customs territory which creates a legal fiction that it is a foreign territory, even though located within the Philippines. In essence, purchases from an ecozone are likened to purchases made from abroad. Thus, the sale is treated as a technical importation.

Section 4.107-1 of Revenue Regulations (RR) No. 16-2005 (Consolidated VAT Regulations), in implementing Section 107 of the Tax Code, provides that VAT is imposed on goods brought into the Philippines, whether for use in business or not. The VAT, which is based on the total value used by the Bureau of Customs (BoC) in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges, such as postage, commission, and similar charges, should be paid prior to the release of the goods from customs custody.

In case the valuation used by the BoC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base.

The same rule applies to technical importation of goods sold by a person located in a special economic zone to a customer located in a customs territory. In this case, the VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.

From the foregoing, it is clear that all domestic sales of goods by PEZA-registered enterprises are considered technical importations where the buyer is treated as the importer liable for VAT on importation.

On the other hand, Section 2, Rule VIII of the rules and regulations implementing the PEZA Law provides that domestic merchandise sent from the restricted areas of the ecozones by PEZA-registered enterprises to the customs territory shall be subject to the internal revenue laws of the Philippines as domestic goods sold, transferred or disposed of for local consumption. Internal revenue laws, in this case, refer to the Tax Code in relation to the PEZA Law, as mentioned above.

Corollary to this, Section 105 of the Tax Code provides that any person who, in the course of his trade or business, sells, barters, exchanges or leases goods or properties shall be liable to VAT imposed in Section 106 of the Tax Code. The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental to it.

Given the foregoing, there was confusion on whether a PEZA-registered enterprise is liable to pay VAT on its domestic sales.

This matter was clarified in BIR Ruling [DA-031-07] dated Jan. 19, 2007.

In this case, a PEZA-registered enterprise imposed and collected 12% VAT on every sale of metal scrap to a buyer from the customs territory because it knows for a fact that such sale is subject to VAT. However, such VAT payment is supposed to answer for the alleged technical importation that will ultimately be remitted to the government. Thus, the BoC is no longer required to collect the VAT before the scrap metal is taken out from PEZA. In such a case, the buyer is paying a total of 24% VAT every time it hauls the same items from PEZA (12% VAT on the sale and another 12% when the goods are released from customs).

The BIR held that the payment of the VAT should be made by the buyer directly to the BoC which is the agency tasked to collect VAT on imports. Accordingly, the PEZA-registered enterprise is not required to charge VAT on every sale of goods but should be furnished a copy of the receipt of the VAT payment made by the buyer to the BoC.

This receipt will serve as authority for the buyer to request the PEZA-registered seller to refrain from imposing VAT on the sale of goods since the BoC is also collecting the same before the goods are released.

The same BIR ruling is applicable in cases of goods purchased from other ecozones (e.g. Subic, Clark) which are also considered technical importation.

Although the BIR has held in several rulings that sale of goods by a PEZA-registered enterprise to a buyer in the Philippines is considered technical importation where the latter shall be responsible for the tax imposed, the documentation needed for PEZA-registered enterprises to be absolved from imposing VAT on their domestic sale of goods was then ambiguous.

With this ruling, however, the issue of double taxation on goods purchased from PEZA-registered enterprises has finally been resolved. Conflicting views should have been put to rest.

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

John Paul M. Vargas is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

john.paul.m.vargas@ph.pwc.com

Saving TRAIN (2)

By: Solita Collas-Monsod - @inquirerdotnet

Philippine Daily Inquirer

House Bill No. 5636, or TRAIN (Tax Reform for Acceleration and Inclusion), is essentially antipoor. Or prorich. Its net effect is to decrease the purchasing power of the bottom 60 percent of the population and increase that of the top 40 percent (especially the very rich). And the so-called “transfer” measures that are supposed to alleviate this (or compensate the poor) are only for a four-year period, plus the fact that it is not clear how those “transfers” are to be effected. That is the gist of my last column.

This column is addressed not only to the Reader but also to the Senate, which has the power to correct things. Of course, there is still the “Third Chamber” that has the ultimate power—the bicameral committee of the House and Senate.

The most obvious Senate correction needed is to ensure that transfers to the poor do not end after four years, and also to ensure that the petroleum excise taxes from which these transfers will come continue to increase in order to meet growing population needs—which means indexing them (why not make them ad valorem instead of specific?).

Second, how are these transfers to be effected? If the Department of Social Welfare and Development is put in charge, its other important activities—like the 4Ps and disaster relief—may suffer. Either that, or the transfers program, which involves 80 percent of the population, will not even get off the ground.

Third, the Senate could think of other measures, and not necessarily limit itself to the tax measures in HB 5636. For example, why not consider a negative income tax, which the Bureau of Internal Revenue could administer? A negative income tax, Reader, means that people earning less than a certain amount would receive supplemental pay from the government, instead of paying taxes (or not paying, if income is less than P250,000 a year).

Don’t laugh, Reader, or Senators. This idea is at least better than HB 5636’s current mishmash of social benefit cards, discounted fares on public utility vehicles, or discounts on medicines or subsidies on food and housing. Essentially just the negative income tax (i.e., a cash transfer) would suffice, allowing beneficiaries to choose what to spend it on. That would save on the humongous cost of administering multiple programs envisioned by HB 5636. There’s an added benefit: The BIR would see its roll of taxpayers (and negative income tax recipients) expand, so that in better times, they’d have a data base of potential income tax payers.

Fourth, economist Cielo Magno (UP School of Economics) recently pointed out in an interview that the tax reform measures for the mining industry were not included in TRAIN. She is correct. Rep. Miro Quimbo (another congressman whose salary is well deserved), with the help of the Mining Industry Consultative Council, introduced HB 5637 in the last Congress, which would precisely correct the present anomalous situation where the government’s share, as owner of the minerals, was practically zilch.

Nothing came out of that bill. It conveniently disappeared from the radar screen of both Congress and the Department of Finance. Cielo estimated that the additional revenues could safely be estimated at P20 billion. And no way could this measure be called antipoor.

Another tax measure which could have been included in TRAIN, but was not, is the reform of our sin taxes. Dr. Antonio Dans (UP College of Medicine) has been tracking the impact of the Sin Tax Reform law of 2012 , and has shown it to be eminently propoor. His data show a marked decline in smoking, and a marked increase in Filipinos who have never smoked. The decline in smoking was most marked in price-sensitive populations—the poor, rural dwellers, and the very young. An increase in sin taxes will not only result in a decrease in smokers by 1 million by 2021 but will also shift household expenditures from tobacco to more healthful products. Moreover, the reforms would bring in estimated incremental revenues of about P100 billion.

With all that, TRAIN shifts from antipoor to very propoor. Let’s see if the Senate can face down the cigarette and mining lobbies.

Regulating M&As: The intent of the law

Mergers, acquisitions, and other corporate combinations (or simply, “M&As”) are a big part of the modern-day business world. They help businesses grow quickly and, if put to good use, positively impact the economy. From a business standpoint, they provide a way for parties from both sides to obtain valuable assets, both tangible and intangible. They also provide an opportunity for companies to achieve synergy (i.e., be more profitable as a single entity as compared to the individual combining parties). M&As could even be beneficial to smaller firms by giving them a chance to adopt business practices of larger, more established firms. These benefits are acknowledged by our Tax Code which grants an incentive to firms seeking to enter such transactions. Considering the intent of the law and the economic benefits M&As could bring, this incentive should be made easily available to taxpayers.

Section 40(c)(2) of the Tax Code embodies the provisions on tax-free exchanges. It states that no gain or loss shall be recognized if, pursuant to a merger or consolidation, an exchange between the parties occurs. The exchange may consist of either: the property or securities of one entity for shares of stock of another, or a share-swap.

If qualified, these exchanges will be tax-free where no gain or loss shall be recognized. As pointed out by the Supreme Court, the purpose of the law in treating these exchanges as tax-free is to “encourage corporations in pooling, combining, or expanding their resources conducive to the economic development of our country.” The previous imposition of taxes on corporate combinations and expansions discouraged M&As to the detriment of economic progress. Thus, an incentive was provided by our legislators to encourage these transactions.

M&As, however, can also be used by firms to carry out a harmful purpose. Thus, the Philippine Competition Act (RA No. 10667) was passed. By regulating M&As, the Act intends to promote and protect competitive markets, preserve the efficiency of competition, and protect the well-being of consumers. M&As that substantially prevent, restrict, or lessen the relevant market, are prohibited. Under the Act and its implementing rules and regulations (IRR), the Philippine Competition Commission (PCC) may, on its own or upon notification, review M&As having a direct, substantial, and reasonably foreseeable effect on trade, industry, or commerce. Section 3, Rule 4 of the IRR also provides specific instances where compulsory notification becomes mandatory (i.e. upon reaching the indicated threshold).

From the laws cited above, it is clear that M&As are not mere business transactions. These are transactions imbued with public interest. They may either be helpful or ruinous to domestic markets and the local economy.

While the Tax Code and the Philippine Competition Act are different laws written for distinct purposes, both recognize the importance of M&As. One intends to provide a benefit, while the other seeks to regulate. As it stands, however, claiming the benefits of a tax-free exchange is much more tedious for taxpayers as compared to seeking the PCC approval regarding an M&A transaction.

In order to claim the benefits of a tax-free exchange, taxpayers are required to first secure a tax-free ruling from the Bureau of Internal Revenue (BIR) despite the Tax Code itself not imposing this requirement. Under BIR rules, taxpayers who do not file the required ruling application will not be able to obtain a Certificate Authorizing Registration/Tax Clearance (CAR/TCL) for shares or property transferred. This poses a problem because there are no assurances that taxpayers seeking to claim the benefits of a tax-free exchange would have their applications decided upon in a timely manner.

The BIR rules do not contain a “deemed approved” provision where a taxpayer’s ruling application would be considered approved after the lapse of a certain period. As a result, due to the long amount of time it takes for ruling requests to be processed and issued (some taking multiple years before they are concluded), taxpayers are left in limbo because they are unable to obtain a CAR/TCL.

On the other hand, under the Competition Act, if upon the expiration of 90 days, a decision has not been reached by the Commission concerning a merger or consolidation qualified for compulsory notification, it shall be deemed approved and the parties shall be allowed to consummate the transaction. This rigid deadline forces the Commission to act promptly and expeditiously. The deadline provides a safeguard for parties such that their M&A transactions would not be unduly restricted due to the government’s inaction. Moreover, big mergers that could significantly impact the economy in a positive way are given a chance to come into fruition without facing the problem of unnecessary bureaucracy.

It seems ironic that the Competition Act, the law enacted for the noble purpose of regulating M&A transactions for the protection of local consumers and market players, provides some assurance to businesses that their transactions will not be prejudiced by the government’s inaction. On the other hand, the BIR rules on tax-free exchanges do not contain any such assurance despite the purpose of the legislature in crafting Section 40(c)(2) of the Tax Code.

Notably, the Court of Tax Appeals (CTA) has recently ruled that “there is nothing explicitly requiring a party, in exchanging property for shares of stocks, to first secure a BIR confirmatory certification or tax-free ruling before it can avail itself of tax exemption” under Section 40 (c) (2). This case is somewhat parallel to the much publicized 2013 Supreme Court case of Deutsche Bank where the Supreme Court struck down the BIR’s requirement of filing a Tax Treaty Relief Application (TTRA) before a taxpayer can enjoy treaty benefits. Four years since the promulgation of the Deutsche Bank case, the BIR has begun to show signs that it recognizes this jurisprudence, albeit in a somewhat limited manner, with a new issuance which no longer requires a TTRA for certain types of income payments. It has yet to be seen, however, whether or not the BIR would adopt the CTA decision on tax-free exchange rulings.

To be clear, the Tax Code indeed does not require the filing of a tax-free ruling application in order for taxpayers to claim the benefits of Section 40(c)(2). However, in trying to make a case for the administrative requirement of obtaining a tax-free ruling, one may argue that there may be a real need to regulate these transactions in order to prevent unscrupulous parties from entering into schemes for purposes of escaping taxation. After all, the Tax Code itself provides that in order to be regarded as tax-free, the transaction must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. As it stands, however, the current practice of obtaining a tax-free ruling pursuant to a merger or consolidation is too cumbersome for taxpayers due to the indefinite amount of time it takes to be completed, not to mention the numerous documentary submissions required.

The current practice brings about an effect opposite to what Section 40 (c) (2) originally intended, which was to create a business environment conducive to the economic development of the country. At the very least, in the interest of continuous policy improvements, the BIR could perhaps take a cue from the Competition Act and adopt a “deemed approved” period. This would at least give businesses some assurance that their commercial transactions will not be forestalled by the government’s inaction. Taxpayers would be able to claim benefits provided by the law without unnecessary restrictions. Most importantly, making the incentive readily accessible would be more consistent with the law’s intention of encouraging the pooling, combining, and expansion of resources by the different market players.

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

Mats E. Lucero is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

mats.e.lucero@ph.pwc.com

Source:  Businessworld

Are BIR rulings confidential?

A few weeks ago, I attended a meeting where it was discussed that Bureau of Internal Revenue (BIR) rulings are no longer published.

Suddenly losing my appetite, I decided to forego dessert and coffee and instead, concentrated on listening to the discussion. The speaker said that BIR rulings must be kept private because they contain confidential information of the taxpayers which can violate the taxpayer’s right to confidentiality. In some cases, it was noted that even bank account details are included in the rulings necessitating the need to keep them private.

I was baffled by this policy of the BIR. Didn’t the Duterte administration promise full public disclosure and transparency of government records under Executive Order No. 2 dated 23 July 2016? If so, why would this administration keep BIR rulings confidential when rulings have always been published under most previous administrations?

BIR rulings are issued to taxpayers who request clarifications or confirmations on how a particular provision of the Tax Code and other tax rules apply to them and their transactions. In some cases, the rulings are required before a particular business deal can be considered tax-exempt or subject to tax relief or tax deferral. The rulings, therefore, are official interpretations of the BIR of tax laws, rules and regulations as applied to real life situations and transactions.

Publication of BIR rulings is of paramount importance because of three reasons. First, rulings guide the taxpayers on how particular tax laws apply to them. It informs the taxpayers on how the BIR will treat their transactions. The publication of rulings provides a guide to taxpayers in their tax planning exercise and in ensuring that their transactions comply with the requirements of the BIR. Equally important, rulings officially inform the taxpayers if there is a change in the interpretation of the law instead of the taxpayers just relying on hearsay or informal discussions with tax authorities.

Second, publication of the rulings ensure that tax laws are applied to taxpayers uniformly. It provides stability and predictability on how tax rules are applied by the BIR. Since the rulings are published, taxpayers will be informed if their transactions qualify for the same treatment as disclosed in a previous ruling. If the tax authorities will have a different treatment for a similar transaction, the tax authorities must clarify in the ruling why a different treatment is necessary. Thus, publication ensures that the interpretation of the tax authorities is in accordance with law and devoid of any abuse of discretion.

And third, publication of the rulings prevents graft and corruption. Multimillion peso tax exemptions are granted through the issuance of BIR rulings. Publication of such interpretation by the tax authorities ensures that any decision to tax or exempt a particular transaction has sufficient legal basis as it will be open to public scrutiny. Publication ensures that the tax authorities are made accountable for their rulings.

No less than the Supreme Court has emphasized that the right of the citizens to information is essential to hold public officials accountable to the people. Unless the citizens have the proper information, they cannot hold public officials accountable for anything. Citizens can only participate meaningfully in public discussions leading to the formulation of government policies and their effective implementation if they are armed with the right information. An informed citizenry is essential to the existence and proper functioning of any democracy. (Chavez vs. Public Estates Authority, et. al., G.R. No. 133250).

The right of the taxpayers to information is guaranteed by no less than the 1987 Constitution. Section 28 of the Declaration of Principles and State Policies state that “Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full public disclosure of all its transactions involving public interest.”

More importantly, Section 7 of the Bill of Rights states that “The right of the people to information on matters of public concern shall be recognized. Access to official records, and to documents, and papers pertaining to official acts, transactions, or decisions, as well as to government research data used as basis for policy development, shall be afforded the citizen, subject to such limitations as may be provided by law.”

The above constitutional provisions are self-executing. They cover documents pertaining to official acts and decision which fully covers BIR rulings. The constitutional provisions supply the rules on how the right to information may be enjoyed by guaranteeing the right and mandating the duty to afford access to sources of information. The only limitations that can be set by laws are reasonable conditions and limitations upon the access such as hours and manner of inspection to prevent damage of records and avoid undue disturbance of work of the government employee having custody of the records.

It must be emphasized that government agencies are without discretion in refusing disclosure of, or access to, information of public concern. “The duty to disclose the information of public concern, and to afford access to public records cannot be discretionary on the part of said agencies. Certainly, its performance cannot be made contingent upon the discretion of such agencies. Otherwise, the enjoyment of the constitutional right may be rendered nugatory by any whimsical exercise of agency discretion.” (Legaspi vs. Civil Service Commission, G.R. No. L-72119).

BIR rulings have been published and are accessible to the public from as far back as I can remember. The oldest ruling published in the database I am using dates as far back as 1956. The issue of confidentiality has never been a deterrent in the publication of rulings in the past. While tax rulings are designated as private rulings, the word private does not mean that they cannot be published. The designation of private only means that the ruling is applicable to the specific taxpayer and the circumstances as disclosed in the ruling.

If the only reason for making them private is that they contain sensitive personal information such as bank details, then that information can be easily removed from the ruling. In the first place, I cannot think of a situation where the bank account details of the taxpayers are necessary to be put in the rulings as a particular account number should not affect the tax treatment of a transaction. Otherwise, conniving officials and taxpayers can just decide to hide behind this reason to prevent the public from inquiring into the specifics of a corrupt transaction. Hence, the better action is probably not to include unnecessary confidential information in the BIR ruling knowing that they will eventually be published.

Eleanor Lucas Roque is a head and principal with 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