Here’s to healthier tax disputes

Let’s Talk Tax

By Diana Elaine B. Bataller-Simbulan

The COVID-19 vaccine is just around the corner but the challenges of the first quarter must still hold our attention. The news is full of headlines on the Philippines’ budget deficit growing to a record P1.37 trillion and the debt-to-GDP ratio rising to 54.5% at the end of 2020. The increased need to address the burgeoning deficit and debt leaves the government scrambling to raise revenue.

When tax people hear the phrase “raise revenue,” they think of increased Bureau of Internal Revenue (BIR) audits and tax disputes to make up for shortfalls. Several scenarios that can pose challenges and burdens to taxpayers come to mind. Two recent challenges relate to denial of Voluntary Assessment and Payment Program (VAPP) availment and issuance of subpoena duces tecum (SDT).

In September, the BIR issued Revenue Regulation (RR) No. 21-2020 for the implementation of VAPP for Taxable Year 2018 under certain conditions. One of the objectives of the RR is to reduce the number of audit investigations by encouraging voluntary payment of additional taxes.

However, there have been situations when the BIR denied VAPP availment. One of the denials was due to non-withholding of taxes. On another occasion, the BIR attempted to deny availment on the basis of an assessment finding for disallowed expenses which translated to overstatement of expenses by more than 30%.

In the case involving alleged non-withholding of taxes, it is important to note the difference between non-withholding of taxes and non-remittance of withholding taxes. What invalidates the VAPP availment is non-remittance of taxes that had in fact been withheld by a designated withholding agent — which is akin to theft of government tax revenue. It should be noted that mere non-withholding is not grounds for invalidation.

As for the overstatement of expenses case, the regulations provide that for VAPP availment to be invalidated, there must be “strong” evidence or findings of overstatement of deductions by more than 30%. This seems to be rooted in the Tax Code provisions on fraud, i.e., that under-declaring income or overstating deductions by more than 30% constitutes prima facie evidence of fraud. However, it must be emphasized that there must be strong evidence based on facts. The burden of establishing such strong evidence falls upon the BIR.

Many taxpayers avail of the VAPP in the hope of avoiding or putting an end to tax disputes. We can only imagine them clinging on in the hope of surviving yet another audit. Invalidating availments based on questionable application of the rules undermines confidence in VAPP.

Another challenge in tax assessment cases is the issuance of SDT. To many, the mere mention of the word “subpoena” is threatening. SDT is a process directed to a person requiring him to bring any books, documents, or other paraphernalia under his control. Basically, this type of subpoena is issued for presentation of documents that are necessary for the BIR to conduct an audit.

The problem, however, is that there are instances when subpoenas are issued even when there was prior submission of documents. The usual list attached to the Letter of Authority (LoA) issued to taxpayers is a long one. At times, taxpayers can submit majority of the documents, but not all due to the sheer volume of requirements. The problem is confounded today by the fact that retrieving documents in our COVID-stricken world can be a nightmare. When would such a subpoena be deemed absolutely necessary?

Under BIR regulations, a subpoena can be issued if the information or records requested are not furnished within the period prescribed or when the information or records submitted are incomplete. The word “incomplete” may be overly broad. Some taxpayers ask whether the examiner, during the examination stage, really needs 100% of such records. Even the BIR’s Handbook on Audit Procedures and Techniques allows for sampling, which is defined as the application of examination procedures to less than 100% of the items in an account to verify accuracy.

The concern is that the subpoena needs to be used fairly. At a time when everyone’s stress levels are at an all-time high, the issuance of SDTs for questionable “incomplete” submissions may be uncalled for.

With the array of concerns about erroneous denial of VAPP and unreasonable issuance of SDTs, it is no surprise that taxpayers are wishing for an improved BIR approach and for a healthier dispute resolution process in these difficult times.

An apt reminder in raising revenues in this time of crisis is the Supreme Court pronouncement in the case of Roxas vs. Court of Tax Appeals: “The power of taxation is sometimes called also the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally, and uniformly, lest the tax collector kill the ‘hen that lays the golden egg.’ And in order to maintain the general public’s trust and confidence in the Government, this power must be used justly and not treacherously.”

Yes, taxes are the lifeblood of the nation, but the most sustainable source of increased government revenue should come from growth spurred by increased business activity, profits, and increased employment. This will not happen if we kill today the “hen that lays the golden egg.”

Diana Elaine B. Bataller-Simbulan is a manager of the Tax Advisory and Compliance Division of P&A Grant Thornton.

The Danger of Unilateral Digital Services Tax (DST)

 

Taxwise Or Otherwise

By Mac Kerwin P. Visda

While our physical movement has been limited by the pandemic, technology enables us to reach even the farthest corners of the digital world. Nearly a year under community quarantine, virtual meetings and gatherings have remained part of our everyday life. At the end of a workday, most people’s routines consist of turning to online video and audio streaming services, or clicking the add-to-cart button to shop online. Even though these online transactions were present before the pandemic, they have continued to flourish given our current circumstances. This has also heightened the intention of governments worldwide to throw the net of taxation to capture a fair share of the income earned by these online businesses.

Long before COVID-19, the Organisation for Economic Co-operation and Development (OECD) acknowledged the challenges brought about by digitalization. The OECD/Group of Twenty (G20) Inclusive Framework intends to address these challenges with consensus-based and long-term solutions. According to the OECD, without this kind of solution, the world can expect the passing of domestic and unilateral digital services taxes (DSTs). Consequently, it may produce damaging tax and trade disputes, which would undermine tax certainty and investment. And if left uncontrolled, these unilateral DSTs worldwide may start a global trade war. The OECD estimated that the failure to reach a consensus to handle the challenges brought about by digitalization could reduce global gross domestic product (GDP) by more than 1% annually. For instance, in response to France’s DST that it found to be discriminatory against US companies, the US announced that it would be levying import duties on products from France beginning January of this year. However, this duty imposition was deferred since France delayed its DST implementation. The US is currently reviewing if it can also apply the same import duties against nine other countries which have adopted or drafted DST legislation.

To work on this consensus-based solution, the G20 Finance Ministers and Leaders endorsed in June 2019 the Programme of Work that laid down a two-pillar approach in an attempt to solve this challenge. Pillar One aims to create a new nexus and profit allocation rules, while Pillar Two will provide the formation of a global base erosion mechanism. In October of the same year, the OECD Secretariat developed and published the “Unified Approach” under Pillar One.

Unhampered by the pandemic and even by their political differences, last year, the Inclusive Framework members released for public comment the Reports on the Blueprints of Pillar One and Pillar Two. These blueprints reflect their perspectives on various key policy features, principles, and parameters on both Pillars, and identify remaining political and technical issues where differences of views remain to be bridged, including the next steps to be taken to reach an agreement by mid-2021.

From only having a Unified Approach in 2019, which I considered a game-changer in the digital taxation landscape as mentioned in a 2019 article, Pillar One has now become clearer under this blueprint. In line with the Unified Approach, the Blueprint still classified Pillar One’s 11 key elements into three groups: (1) Amount A, which is the new taxing right for market jurisdictions over a share of residual profit calculated at a Multinational Enterprise (MNE) group (or segment) level; (2) Amount B, which is the fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction, in line with the arm’s length principle; and (3) the processes to improve tax certainty through effective dispute prevention and resolution mechanisms.

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While the Blueprint for Pillar One still has some open issues on key features of the solution, like the scope of application, amount of profit to be allocated, and extent of tax certainty, it already provides for a process map to apply the various elements in possibly computing for Amount A. In determining whether an MNE will be covered by this Amount A, global revenue and foreign-source income in-scope revenue threshold shall be used. Afterward, the consolidated financial accounts of the MNE groups will be used to compute for the profit before tax where tax adjustments, segmentations, and carry-forward losses can be applied. Upon arriving at the proper tax base, a three-step formulaic calculation (i.e., profitability threshold, reallocation percentage, and allocation key) will be applied to determine the share of an eligible market jurisdiction.

In case the MNE has a taxable presence in a certain country, the MNE can eliminate duplicative allocation of residual profit from its share in Amount A. Lastly, MNE groups should identify the jurisdiction(s) where they are required to relieve double taxation and determine the entities that have to pay Amount A tax liability through a simplified administrative procedure.

On the other hand, Pillar Two Blueprint provides a solid basis for a systemic solution that is designed to unravel the remaining issues about base erosion and profit shifting. It also laid down the rules enabling countries to have the right to “tax back” transactions where other jurisdictions have not exercised their primary taxing rights or where these transactions were subjected only to low levels of effective taxation. Despite not reaching an agreement yet, this Blueprint is a giant leap for the future agreement that would ensure that all large internationally operating businesses pay at least a minimum level of tax.

Although the Philippines is not yet a member of this Inclusive Framework, our government may consider these as positive developments since our country can be considered a large market jurisdiction for these digital products. Though there is a pending bill in Congress that seeks to impose a value-added tax on digitally supplied services including those rendered by non-resident foreign corporations, it would be good if our legislators consider the above changes in the international tax architecture in balancing our fiscal needs with the additional administrative burden it may impose on MNEs. With this in mind, we can help prevent the danger of having a unilateral DST.

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.

 

Mac Kerwin P. Visda  is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

mac.kerwin.visda@pwc.com