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
Thursday, June 22, 2017
Friday, June 16, 2017
Saving TRAIN (2)
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.
Thursday, June 15, 2017
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
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
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