BIR Clarification On The Effect Of The CTA Decision On Liabilities With Regard To Condominiums

It has come to the attention of the Bureau of Internal Revenue that there is ongoing misinformation as with regard to the effect of the  decision of Officemetro Philippines, Inc. with regard to condominiums.  The decision is a decision of an division of the Court of Tax Appeal and which will be appealed by the Bureau of Internal Revenue to the Court En Banc by way of a motion for reconsideration. It is not a decision of the Supreme Court as some quarters would like people to believe.

In the case of Officemetro Philippines, Inc. (formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382, June 3, 2014, the Court of Tax Appeals – Third Division (CTA) ruled that condominium dues billed to Officemetro in 2005 are not subject to expanded withholding tax (EWT). The case does not in anyway involved the issue of value added tax.

In support of the said decision, the CTA cited several BIR Rulings, issued from 2004 to 2009, wherein the BIR held that “association/condominium dues, membership fees and other assessment/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purpose(s), viz., to protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and amenities for their members, and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income. This means that the same are not subject to income tax and to withholding tax.”

The BIR rulings cited in the CTA Decision are in contrast with BIR Revenue Memorandum Circular (RMC) 065-2012 wherein the BIR pronounced that since the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants, then the gross receipts of condominium corporations including association dues, membership fees, and other assessments/charges are subject to VAT, income tax and EWT.The CTA Decision is now the subject of a pending Motion for Reconsideration filed by the BIR before the same CTA division.

However, the CTA Division did not rule on the validity of RMC 065-2012.  Therefore, RMC 065-2012 is the prevailing rule today andall concerned taxpayers are required to comply with the provisions of RMC 065-2012.

source:  Department of Finance

Accountants win court reprieve from BIR's fee disclosure rule

MANILA - Accountants on Wednesday were able to secure a temporary injunction against the Department of Finance (DOF) and the Bureau of Internal Revenue's (BIR) regulation forcing these professionals to disclose their professional rates for tax purposes.

The Supreme Court has issued a temporary restraining order against BIR's Revenue Regulation 4-2014 issued on March 20, 2014, which prescribed the policies and guidelines in the monitoring of service fees of professionals.

The restraining order is only applicableto the accounting profession, "subject to the payment by petitioners of  the appropriate and necessary docket and filing fees."

The TRO is effective immediately until further notice from the High Court.

The Association of Small Accounting Practitioners in the Philippines and the Integrated Bar of the Philippines have separately sued Finance Secretary Cesar Purisima and BIR Commissioner Kim Jacinto-Henares for issuing the contested revenue regulation.

The consolidated cases were referred to the en banc after these were raffled off to the Third Division.

According to RR 4-2014, self-employed professionals should register and pay the annual registration fee with the revenue district office or Large Taxpayers District Office that have jurisdiction over them.

Moreover, these professionals must submit an affidavit indicating the rates, manner of billings and the factors they consider in determining their service fees every year.

They also must register the books of accounts and official appointment books, containing only the names of the client the date/time of the meeting.

As part of the monitoring system, these professionals must register their sales invoices and official receipts before issuing these for any transaction.

For cases when the professional did not charge fees, a BIR-registered receipt, acknolwedged by the latter, should be issued showing a discount of 100 percent as substatiation of the "pro-bono" service.

source:  InterAksyon

Bill seeking a flat tax rate scheme filed

A BILL WAS FILED at the House of Representatives seeking to provide a flat tax scheme in order to reduce attempts to evade paying the right taxes.

House Bill (HB) 4600 filed by Quirino Rep. Dakila Carlo E. Cua, or the proposed Flat Tax for Professionals Act, seeks to amend Section 24 of the National Internal Revenue Code (NIRC) of 1997 by recommending a final flat tax of 10% to be imposed upon the taxable income of all professionals within and outside the country.

In his 2011 State of the Nation Address, President Benigno S. C. Aquino III mentioned that “according to the Bureau of Internal Revenue (BIR) we have around 1.7 million self-employed and professional taxpayers who paid a total of P9.8 billion in 2010, and must have earned only P8,600 a month (which is below the minimum wage) because of the low income taxes they paid that year.

“This representation hopes that simplifying the taxes for professionals by introducing a flat tax scheme will significantly increase their tax contribution, thereby increasing government revenue,” Mr. Cua said in the bill’s explanatory note.

“In its quest for additional tax revenues, the BIR continues to look to widen the country’s tax net, and has been targeting in particular, self-employed professionals, such as doctors, lawyers, accountants and other high-earning, self-employed individuals as it has already been pointed out that a problem with tax compliance still exists in their sector of the economy,” Mr. Cua further said on the bill.

The proposed measure also aims to amend Section 22 of the NIRC by including a definition of professionals as all individuals who require examination or license from a government agency.

The bill shall mandate the BIR to provide a unified list of professionals to be included in the flat tax scheme.

Upon enactment, the provisions of the House bill shall take effect beginning the taxable year of 2015.

For the BIR’s part, Commissioner Kim S. Jacinto-Henares said in a telephone interview that reducing tax rates would mean less funding for essential government expenditures such as infrastructure and health services, among others.

“What we’re trying to do is enforce the tax law. Where will you get money to develop the things the country needs?,” Ms. Henares said during a phone interview.

She also added that implementing a flat tax rate “is not effective [against] tax evasion.”

The BIR expects to collect P1.456 trillion this year, 16.16% or P202.651 billion higher than the P1.253-trillion goal last year.

The lion’s share of collections will still comprise of income tax, estimated at P829.759 billion, the BIR earlier said. -- Jacqueline P. Miranda

source:  Businessworld

Withholding tax on condominium dues

THE MODIFICATION of time-honored principles and interpretations of legal provisions will certainly cause issues that cannot be fully resolved in a single case alone. It will take more than one case before the ambiguities and confusions caused by these changes are fully addressed.

The real estate industry has in recent years been considered one of the bright spots of the Philippine economy. And with the alleged sustained growth indicated by different economic indicators, as well as the consequent advancements in technology that contributed to the fast-paced lifestyle of many Filipinos, there is a corresponding increase in the demand for the construction and development of additional buildings meant to be used as office spaces, commercial establishments and residential units.

Hoping to cash in on this development, the Bureau of Internal Revenue (BIR) previously issued Revenue Memorandum Circular No. (RMC) 065-12, which supposedly clarified the taxability of association dues, membership fees, and other charges collected by condominium corporations. Under RMC 065-12, the association dues, membership fees and other charges paid by unit owners and/or beneficial users have been subjected to income tax, withholding tax and 12% value-added tax (VAT).

Accordingly, the Commissioner of Internal Revenue (CIR) stressed that “[t]he amounts paid in as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter subject to income tax. This is because a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments. For tax purposes, the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants. The previous interpretation that the assessment dues are funds which are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned.”

“Moreover, since a condominium corporation is subject to income tax, income payments made to it are subject to applicable withholding taxes under existing regulations.”

Lastly, the BIR emphasized that the “[a]ssociation dues, membership fees, and other assessments/charges collected by a condominium corporation are subject to VAT since they constitute income payment or compensation for the beneficial services it provides to its members and tenants.”

The taxpayers affected raised a howl, especially that the BIR has previously been consistent in issuing rulings that affirm and confirm that the association dues and membership fees paid by unit owners and beneficial users are not subject to the aforementioned taxes.

Here now comes the case of Officemetro Philippines, Inc., (formerly Regus Centres, Inc.) vs. Commissioner of Internal Revenue, CTA Case No. 8382, June 3, 2014.

In the aforesaid case, the taxpayer was assessed for deficiency expanded withholding tax (EWT), among others for taxable year 2005. The BIR alleged in the tax assessment that Officemetro/Regus failed to pay the expanded withholding tax on certain income payments, such as rentals, professional fees, purchase of services and purchase of goods. After the reinvestigation made by the BIR, only the reduced assessments on the withholding tax on rentals and purchase of services remained.

In its petition with the Court of Tax Appeals (CTA), Officemetro alleged that a portion of the rentals that were declared in its audited financial statements were actually payments of condominium dues that do not form part of the taxable income of the condominium corporation, and is therefore not subject to withholding tax.

The Third Division of the CTA, through the Honorable Justice Esperanza R. Fabon-Victorino, agreed. According to the Court, the condominium dues billed to Officemetro are not subject to expanded withholding tax. Citing a list of BIR rulings that were issued prior to RMC 065-12, the Court held that “association/condominium dues, membership fees and other assessment/charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purpose (s), viz., to protect and safeguard the welfare of the owners, lessees and occupants; provide utilities and amenities for their members, and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income. This means that the same are not subject to income tax and withholding tax.”

For that reason, that portion of the condominium dues and membership fees that were duly substantiated by the company with invoices, official receipts, and statements of accounts were excluded by the CTA from the rental subject to EWT.

Surprisingly, RMC 065-12 was never discussed in the decision. Neither was it mentioned whether RMC 065-12 was an erroneous interpretation of the tax code by the CIR. Nor was it explained why RMC 065-12 should not be retroactively applicable to the Officemetro case, considering that RMC 065-12 provided an express proviso declaring invalid for lack of legal basis the previous interpretations declaring the assessment dues and membership fees to be merely held in trust by condominium corporations.

Incidentally, the Regional Trial Court Branch 146 in Makati City previously declared RMC 065-12 to be invalid in the special civil action case filed by First e-Bank Tower Condominium Corp. against the BIR. The RTC held in the said case that RMC 065-12 did not merely interpret or clarify but changed altogether the long-standing rule of the BIR. As a result, RMC 065-12 was issued in violation of the constitutional mandate of due process of law.

It is clearly plausible that the Officemetro case has now created a buzz and has in fact rippled through the tax community in so short a time. Nevertheless, it is emphasized that there are still issues regarding RMC 065-12 that need to be addressed, aside from, of course, whether the Supreme Court, as final arbiter, or even the CTA En Banc, once the BIR files an appeal/ reconsideration, acquiesces to the findings of the CTA Third Division.

The author is a manager 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

BIR clarifies tax refund application issues

THE BUREAU of Internal Revenue (BIR) has clarified issues on applications for tax refunds in light of rulings issued by the Supreme Court on related petitions, outlining the timetable and requirements for the filing of tax refund or credit claims.

“Clarification on the issues concerning the application for VAT (value-added) refund/tax credit has been made by the Supreme Court in Commissioner of Internal Revenue vs. San Roque Power Corp. and in Mindanao II Geothermal Partnership vs. Commissioner of Internal Revenue,” read Revenue Memorandum Circular (RMC) 54-2014, dated June 11 and published in a newspaper on Monday.

“As such, this Circular is issued to summarize the rules on filing and processing of applications for VAT refund/tax credit.”

Under the Tax Code, VAT-registered taxpayers can claim a refund of their creditable input tax due or apply for a tax credit certificate for their zero-rated sales within two years from the close of the taxable year when the sales were made.

“As such, the taxpayer can file his administrative claim for VAT refund or credit at anytime within two-year prescriptive period,” the circular read.

The BIR commissioner, under the law, has 120 days to decide on refund or credit applications, counting from the date the applicant-taxpayer submits complete documents on his claim.

The RMC, however, clarified that “if the claim for VAT refund or credit is not acted upon by the Commissioner within the 120-day period as required by law, such “inaction shall be deemed a denial” of the application for tax refund or credit.”

The issuance likewise noted that claims must be accompanied by supporting documents, with an attached affidavit attesting to these documents’ completeness.

These include the refund or credit application form, a copy of the taxpayer’s annual or quarterly income tax returns, sworn statements certifying eligibility to file for a VAT refund or tax credit, and a detailed list of zero-rated sales, among others.

“Upon submission of the administrative claim and its supporting documents, the claim shall be processed and no other documents shall be accepted/required from the taxpayer in the course of its evaluation. A decision shall be rendered by the Commissioner based only on the documents submitted by the taxpayer,” it said.

“The application for tax refund/tax credit shall be denied where the taxpayer/claimant failed to submit the complete supporting documents. For this purpose, the concerned processing/investigating office shall prepare and issue the corresponding Denial Letter to the taxpayer/claimant.”

The RMC also reiterated that the mandatory 120+30-day period under which claims may be filed and brought to the Court of Tax Appeals for review, and clarified how this will work given the automatic denial of applications that are not decided on by the BIR within the 120-day prescriptive period.

“In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day period, appeal the decision or the unacted claim with the CTA,” it said.

“Verily, a judicial claim must be filed with the CTA within 30 days from receipt of the commissioner’s decision denying the administrative claim or from the expiration of the 120-day period without any action from the Commissioner, as the case may be. In this regard, the taxpayer/claimant is required to observe the 120+30-day rule before lodging a petition for review with the CTA.”

This means a taxpayer can file an appeal on his VAT refund or tax credit application in one of two ways: file the petition with the court within 30 days after the BIR denies the claim within the 120-day prescriptive period, or file the judicial claim within 30 days from the expiration of the 120-day period if the BIR Commissioner does not act on the application in the course of those 120 days.

The BIR noted that in cases where the taxpayer has filed a “petition for review” of his claim with the CTA, the BIR Commissioner loses authority over the application.

“Indubitably, failure to file a judicial claim with the CTA within 30 days from the expiration of the 120-day period rendered the Commissioner’s decision, or inaction “deemed a denial”, final and unappealable,” the circular said.

“This applies to all currently pending administrative claims for refund/tax credit.”

While the BIR cannot decide anymore on a refund or credit claim once a CTA petition is filed, it “shall still evaluate internally the administrative claim for purposes of intelligently opposing the taxpayer’s judicial claim,” the issuance noted. -- Bettina Faye V. Roc

source: Businessworld

Condo dues not subject to tax – court

MANILA, Philippines - The Court of Tax Appeals (CTA) has ruled that condominium or association dues as well as other fees collected from unit owners are not subject to income tax and withholding tax.

The CTA issued this ruling in response to a petition lodged by Officemetro Philippines Inc. (formerly Regus Centres Inc.), appealing the deficiency income taxes imposed by the Bureau of Internal Revenue (BIR).

Officemetro leased out office spaces in the Enterprise Center in Makati City.

In its petition, Officemetro asserted that out of the reported rental of P63.11 million, the property services charges amounting to P8.85 million represent payments for condominium dues which are not taxable income of a condominium corporation and must therefore be excluded form the rental amount subject to expanded withholding tax (EWT).

“The court agrees with petitioner. Condominium dues billed to the company are not subject to EWT,” the ruling said.

“The BIR in its various rulings held that association or condominium dues, membership fees and other assessment or charges collected from the members, which are merely held in trust and which are to be used solely for administrative expenses in implementing their purposes to protect and safeguard the welfare of the owners, lessees and occupants, provide utilities and amenities for their members and from which the corporation could not realize any gain or profit as a result of their receipt thereof, must not be included in said corporation’s gross income,” the CTA said in a 21-page decision issued last June 3.

This means that the same are not subject to income tax and to withholding tax, the CTA said.
The BIR previously exempted condominium and homeowners associations from the payment of income tax and VAT.

This was premised on the theory that the money collected was merely held in trust to be used for administrative expenses incurred in servicing members and does not constitute any sale of goods or rendition of service.

However, the government’s main tax collection agency reversed its previous position and ruled that a condominium corporation or homeowners association provides services and benefits to its members and thus, payments to it shall be considered as income and consequently, must be subject to tax.
Amid the uproar by several homeowners associations and property firms, the BIR has softened its stand on the collection of income and VAT out of the association dues, membership fees and other charges paid by condominium and homeowners associations.

Under Revenue Memorandum Circular No. 9-2013, dues and membership fees will not be taxed if the local government having jurisdiction over the homeowner associations will certify that it has either no or insufficient funds to cover basic services rendered by the homeowners to their members.

Condominium or homeowners associations must present proof that the dues and fees are used for “cleanliness, safety, security and other basic services needed by members.”

The homeowners organization must also be duly constituted as “association” as defined under Republic Act 9904 which grants tax incentives to homeowners associations.  

source:  Philippine Star

Revisiting the Sin Tax Law

AFTER YEARS of debate, Congress finally ended the deal with “sin taxes” by enacting the Sin Tax Law on December 2012. The law imposes additional ad valorem taxes, among other specific taxes, on top of existing excise and value-added taxes on different kinds of tobacco products and alcoholic beverages. Naturally, the legislation drew staunch opposition from sellers and buyers of the said products.

The objectives of the Sin Tax Law are three-fold: promoting better health outcomes by discouraging consumption of alcohol and tobacco, raising much-needed revenues to fund the government’s health programs, and simplifying the tax structure for alcoholic and tobacco products.

Smoking-related diseases such as lung cancer are a burden not only on the health system, but also on overall public welfare. Heavy consumption of tobacco products is inextricably linked with the growing number of people who suffer from lung cancer, among other forms of cancer for which smoking is a risk factor. According to the Department of Health (DOH), the Philippines has an estimated 17.3 million tobacco consumers, the largest number of smokers in Southeast Asia. It comes as no surprise, therefore, that lung cancer is the leading form of cancer in the country. Furthermore, DOH data reveal that ten Filipinos die from smoking-related causes every hour. Alcoholic beverages, meanwhile, are relatively milder, health-wise, than smoking. But alcohol consumption does pose a number of social costs including vehicular accidents, violence, and crimes.

Given the above, the Sin Tax Law aims to promote a healthy lifestyle by discouraging the consumption of tobacco and alcohol. These products are known to have adverse effects on the health and welfare of its primary users and even more so for secondary users. Sin taxes, therefore, will help induce consumers of these products to reduce their consumption, if not quit altogether. More importantly, higher prices through taxation will help prevent others, especially the youth, from starting on these vices.

This leads to another objective of the Sin Tax Law, which is to increase government revenues that could then be used to augment funding for the country’s struggling universal healthcare program. The said program includes medical assistance for those in need and the enhancement of poorly-equipped government health facilities. The last objective of the law is to simplify the tax structure of the above-mentioned products and remove the price- or brand-classification freeze. This involves a shift from a multi-tiered tax structure to a single tax structure, an automatic annual adjustment of tax rates using relevant tobacco and alcohol indices established by statistical authorities, and finally, a proper tax classification of alcohol and tobacco products that will be determined every two years. The said shift, however, is to be implemented gradually and is set to be completed by 2017.

So, has the Sin Tax Law achieved its desired objectives? Bureau of Internal Revenue (BIR) Commissioner Kim Henares reported that for the first 11 months of implementation of the law, a total of PhP91.6 billion has been generated from taxes imposed on alcohol and tobacco, exceeding the full-year collection target of PhP85.86 billion. The amount is also 81.5 percent higher than the collection of PhP50.4 billion during the same period in 2012.

The bulk of total sin tax collections or 80 percent would be allocated for the universal healthcare program, specifically under the National Health Insurance Program that targets the attainment of health-related Millennium Development Goals, as well as health awareness programs. The remaining 20 percent will be used to enhance health care facilities. DOH Undersecretary Ted Herbosa noted that the government allocated PhP84 billion for the DOH in 2014, an increase of 58 percent from the 2013 budget and the highest so far in the history of the department. Of the incremental revenue collections from tobacco products, 15 percent would be used to fund programs to promote economically viable alternatives for tobacco farmers and workers.

As to whether the law has been effective in curbing smoking and alcohol usage, a consumer study conducted by AC Nielsen shows that smoking prevalence dropped from 52 percent to 46 percent for smokers aged 20 to 44 years old for the first half of 2013. BIR data also showed a reduction in the volumes withdrawn from plants for tobacco and fermented alcohol products from January to November 2013 by 16.97 percent and 12.18 percent, respectively. Withdrawn volume for distilled drinks, however, increased by 26.04 percent. Civil society groups agree that it is still too early to gauge the effectiveness of the law, but with continued annual increase in the tax rates, many are expecting that the evidence will show in the future.

In sum, the Sin Tax Law shows great promise as an effective mechanism for reducing tobacco and alcohol consumption as well as being a successful policy for generating revenues. The World Bank hailed the reform measure as a “win-win” piece of legislation for the Philippines. That being said, the government and the public should keep an eye out for developments that can affect the progression of this law. Foremost would be the issue of smuggling or the availability of illicit products in the domestic market, as well as making sure that the revenues collected would be properly spent and used towards the avowed objectives.


The Institute for Development and Econometric Analysis (IDEA), Inc. is a non-stock, non-partisan institution dedicated to high-quality economic research, instruction, and communication. The views and opinions expressed herein are those of the author and do not necessarily reflect those of the organization. For questions and inquiries, please contact Remrick Patagan via ideainc.mail[@]gmail.com or telefax no. 920-6872.

source:  Businessworld