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