ASIDE from the pork barrel scam issue, I
think that by now, many taxpayers are aware that the Bureau of Internal
Revenue (BIR) is working doubly hard to attain its collection goal. One
of its strategies to achieve its target is to strictly enforce tax laws.
This has resulted in the denial of request for rulings issued to some
taxpayers, including the rulings on upstream merger (BIR Ruling No.
508-2012, Aug. 3, 2012), deductibility of royalties (BIR Ruling No.
014-2012, Jan. 4, 2012) and NOLCO (BIR Ruling No. 214-2012, March 28,
2012), among others.
Taxpayers who received unfavorable rulings
from the BIR may be wondering what their remedy could be. Can they still
file a request for reconsideration of the BIR ruling issued to them?
Or, can they go directly to the Court of Tax Appeals (CTA) and question
the decision of the BIR?
In Department Order No. 23-01, issued by the Department of Finance, a
taxpayer who receives an adverse ruling from the BIR may, within 30 days
from receipt of such ruling, file a request with the Secretary of
Finance to review the opinion of the BIR. The request for review must be
in writing and must contain all the information required under said
Order. This administrative remedy must be exhausted first before a
taxpayer can go to the Court and question the unfavorable ruling issued
by the BIR.
In a CTA decision (CTA EB Case No.874), the CTA En Banc ruled that the
“jurisprudence have it that before a party is allowed to seek the
intervention of the court, it is a pre-condition that he should first
avail of all available administrative remedies under the rules. Hence,
if a remedy within the administrative machinery can still be resorted to
by giving the administrative officer concerned every opportunity to
decide on a matter that comes within his jurisdiction, then such remedy
should be exhausted first before the court’s judicial power can be
sought. The premature invocation of the court’s intervention is lethal
to one’s cause of action...”
Hence, a taxpayer can seek the Court’s action only after exhausting all available administrative remedies.
If after filing a request for review with the Secretary of Finance, the
taxpayer still receives an unfavorable response, the question then is,
where should the taxpayer file the petition for review? Does it now fall
under the jurisdiction of the CTA?
Based on Section 7 of Republic Act (RA) No. 1125, as amended by RA No.
9282 (an Act expanding the jurisdiction of the CTA), one of the
jurisdictions of the CTA is to review by appeal the “decisions of the
Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue.”
Based on this, it seems that with regard to issues with the BIR, the
cases that may be brought to the CTA are not limited to decisions
involving disputed assessments or refunds of internal revenue taxes. It
may also involve other matters arising under the Tax Code or other laws
administered by the BIR. Hence, it appears that the adverse ruling
issued by the BIR to a taxpayer may also be filed for appeal with the
CTA. The CTA, however, has a different view.
In the same CTA decision, the Court ruled that if the action essentially
involves the validity or constitutionality of a law or administrative
ruling, the CTA has no authority to rule on it. Instead, the Regional
Trial Court (RTC) has jurisdiction over the said issue. Accordingly, the
case was dismissed.
The same view was taken by the CTA in CTA Case No. 8360. In this
particular case, the petitioner requested a ruling with the BIR to
confirm the petitioner’s position that its purchases qualify for
value-added tax zero rating. The BIR’s response was negative. The
petitioner then filed a Request for Review of the said BIR ruling with
the Secretary of Finance.
The Secretary of Finance, in its letter dated Sept. 8, 2011, addressed
to the petitioner, affirmed the position of the BIR. The petitioner
filed a Petition for Review with the CTA to assail the validity of the
said BIR ruling and the letter issued by the Secretary of Finance. The
CTA, however, ruled that its jurisdiction to resolve tax disputes, in
general, does not include cases where the validity or constitutionality
of a law or a rule or regulation issued by the administrative agency in
the performance of its quasi-legislative function is challenged.
Accordingly, the issue pertaining to the validity of the BIR ruling,
among others, is beyond the jurisdiction of the CTA.
Other than exhausting all the administrative remedies, taxpayers should
be aware of the legal remedies and the proper venue for filing a
petition for review. A technicality may lead to the dismissal of a case,
or worse, to significant amount of assessment against the taxpayer.
The author is a partner with the tax advisory and compliance division
of Punongbayan & Araullo. P&A is a member firm within Grant
Thornton International Ltd.
source: Businessworld
Monday, September 16, 2013
Tuesday, September 3, 2013
Are you worth it?
AL CAPONE... Renato Corona... Mikey
Arroyo... Janet Lim Napoles... What do they have in common? Among
others, they all (or in the case of Napoles, soon to) have a first-hand
experience with the Net Worth Method (NWM) of tax investigation/audit.
The NWM is one of the indirect tax audit methods utilized by tax authorities, the Bureau of Internal Revenue (BIR) included, which is generally used when a strong suspicion exists that the taxpayer “received income from undisclosed sources.” It is often employed either in: (i) the absence/unavailability/inadequacy of taxpayer’s books and records; or (ii) the refusal by the taxpayer to provide its books and records for tax audit/investigation (Revenue Memorandum Order No. 01-00, 17 March 2000). The use of the NWM is sanctioned by Section 43, and (possibly) the broad investigatory power of the Commissioner under Section 6, of the National Internal Revenue Code.
The NWM could trace its roots to the basic accounting equation, “Assets = Liabilities + Capital.” Simply put, this tells us that the assets of an entity are sourced from debt and/or contributions/earnings. Thus, if the source of the asset is not through debts and/or contributed by the businessman, then the asset must have been through the income earned by the entity. Interestingly, re-arranging the equation to “Assets -- Liabilities = Capital” reveals the “net worth” of the entity, i.e., its actual worth after all debts are paid, as of a certain date. (Myer, Understanding Financial Statements, 1964 Ed.)
As applied in taxation law, the NWM first saw the light of day in the case of Capone v. United States (51 F. 2d 609), when the US Internal Revenue Service used it to support direct proof of unreported income (Mertens Law of Federal Income Taxation, §55B.02). However, in Holland v. United States (348 US 121), the US Supreme Court cautioned that notwithstanding the usefulness of the NWM, courts “must closely scrutinize its use” as “it is so fraught with danger for the innocent.”
In the Philippines, the Tax Court in Perez v. Araneta (BTA Case No. 189, Feb. 13, 1956), and subsequently the Supreme Court in Perez v. Court of Tax Appeals (G.R. No. L-10507, May 30, 1958) had the opportunity to discuss the NWM when a deficiency income tax assessment was issued against the taxpayer. The tax court held as valid the use of NWM as sanctioned by Section 38 of the Tax Code (now Section 43) and provided the formula in determining the unreported taxable income of the taxpayer, i.e., increase in net worth (computed by subtracting the net worth at the beginning from its net worth at the end of the year) + non-deductible disbursements -- non-taxable income. On appeal, the Supreme Court upheld the decision of the tax court and laid down the requisites to properly use the NWM, which are: (i) the net worth at the beginning of the year must be established with reasonable certainty; and (ii) the increase in net worth must be attributed to a taxable income. It even went on to say that the government in tax assessment cases need not prove the specific source of income, as it is assumed that “assets are derived from a taxable source and that when this is not true the taxpayer is in a position to explain the discrepancy.”
So does this mean that when a lady acquires a Hermès Berkin, a Louis Vuitton Tribute Patchwork Bag, or a Chanel “Diamond Forever” Classic Bag, she is also shopping for herself a deficiency tax assessment? How about when a gentlemen drives a Porsche, an Audi, or a Mercedes, did he just glare his lights to the BIR for a deficiency tax assessment?
Not necessarily. Note that the NWM is employed only if the records and books of the taxpayers are inadequate to determine its correct taxable income, or that the income declared in the tax returns are doubtful and do not support the current worth (or lifestyle) of the taxpayer. Of course, it would be obvious that the BIR will resort to NWM if it can be shown that the taxpayer owns such items but the income declared, and consequently the taxes paid, in its tax returns does not justify its ownership or at least the taxpayer cannot explain its source. Absent these circumstances, NWM should not be employed.
All told, the BIR’s use of the NWM in tax audits may be justified if it can be shown that the records and books of the taxpayers are inadequate in determining its correct taxable income. If the taxpayer’s books and records clearly reflect its taxable income, and the taxpayer can explain the findings resulting from the tax audit, then resort to NWM is unwarranted. The BIR examiners should not be allowed to apply the NWM indiscriminately to protect the taxpayers that are faithful, or at least assumed, in paying the taxes due to the government.
(The author is an associate of the Angara Abello Concepcion Regala& Cruz Law Offices. She can be contacted at (632) 830.000 and <kfmatibag@accralaw.com>. The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
source: Businessworld
The NWM is one of the indirect tax audit methods utilized by tax authorities, the Bureau of Internal Revenue (BIR) included, which is generally used when a strong suspicion exists that the taxpayer “received income from undisclosed sources.” It is often employed either in: (i) the absence/unavailability/inadequacy of taxpayer’s books and records; or (ii) the refusal by the taxpayer to provide its books and records for tax audit/investigation (Revenue Memorandum Order No. 01-00, 17 March 2000). The use of the NWM is sanctioned by Section 43, and (possibly) the broad investigatory power of the Commissioner under Section 6, of the National Internal Revenue Code.
The NWM could trace its roots to the basic accounting equation, “Assets = Liabilities + Capital.” Simply put, this tells us that the assets of an entity are sourced from debt and/or contributions/earnings. Thus, if the source of the asset is not through debts and/or contributed by the businessman, then the asset must have been through the income earned by the entity. Interestingly, re-arranging the equation to “Assets -- Liabilities = Capital” reveals the “net worth” of the entity, i.e., its actual worth after all debts are paid, as of a certain date. (Myer, Understanding Financial Statements, 1964 Ed.)
As applied in taxation law, the NWM first saw the light of day in the case of Capone v. United States (51 F. 2d 609), when the US Internal Revenue Service used it to support direct proof of unreported income (Mertens Law of Federal Income Taxation, §55B.02). However, in Holland v. United States (348 US 121), the US Supreme Court cautioned that notwithstanding the usefulness of the NWM, courts “must closely scrutinize its use” as “it is so fraught with danger for the innocent.”
In the Philippines, the Tax Court in Perez v. Araneta (BTA Case No. 189, Feb. 13, 1956), and subsequently the Supreme Court in Perez v. Court of Tax Appeals (G.R. No. L-10507, May 30, 1958) had the opportunity to discuss the NWM when a deficiency income tax assessment was issued against the taxpayer. The tax court held as valid the use of NWM as sanctioned by Section 38 of the Tax Code (now Section 43) and provided the formula in determining the unreported taxable income of the taxpayer, i.e., increase in net worth (computed by subtracting the net worth at the beginning from its net worth at the end of the year) + non-deductible disbursements -- non-taxable income. On appeal, the Supreme Court upheld the decision of the tax court and laid down the requisites to properly use the NWM, which are: (i) the net worth at the beginning of the year must be established with reasonable certainty; and (ii) the increase in net worth must be attributed to a taxable income. It even went on to say that the government in tax assessment cases need not prove the specific source of income, as it is assumed that “assets are derived from a taxable source and that when this is not true the taxpayer is in a position to explain the discrepancy.”
So does this mean that when a lady acquires a Hermès Berkin, a Louis Vuitton Tribute Patchwork Bag, or a Chanel “Diamond Forever” Classic Bag, she is also shopping for herself a deficiency tax assessment? How about when a gentlemen drives a Porsche, an Audi, or a Mercedes, did he just glare his lights to the BIR for a deficiency tax assessment?
Not necessarily. Note that the NWM is employed only if the records and books of the taxpayers are inadequate to determine its correct taxable income, or that the income declared in the tax returns are doubtful and do not support the current worth (or lifestyle) of the taxpayer. Of course, it would be obvious that the BIR will resort to NWM if it can be shown that the taxpayer owns such items but the income declared, and consequently the taxes paid, in its tax returns does not justify its ownership or at least the taxpayer cannot explain its source. Absent these circumstances, NWM should not be employed.
All told, the BIR’s use of the NWM in tax audits may be justified if it can be shown that the records and books of the taxpayers are inadequate in determining its correct taxable income. If the taxpayer’s books and records clearly reflect its taxable income, and the taxpayer can explain the findings resulting from the tax audit, then resort to NWM is unwarranted. The BIR examiners should not be allowed to apply the NWM indiscriminately to protect the taxpayers that are faithful, or at least assumed, in paying the taxes due to the government.
(The author is an associate of the Angara Abello Concepcion Regala& Cruz Law Offices. She can be contacted at (632) 830.000 and <kfmatibag@accralaw.com>. The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion).
source: Businessworld
Monday, August 26, 2013
Severe consequences of failure to withhold
REVENUE Regulations No. (RR) 12-2013, which
were issued more than a month ago, made a drastic impact on some
taxpayers. Many got panicked and were upset by the sudden change while
others remained skeptical on the seriousness of the intent of the
regulation and immediately took precautionary measures to mitigate the
impact of the issuance on their businesses.
The regulation was issued to amend the old rule relative to the requirements for deductibility of expenses. Under the old rule, if a deficiency withholding tax is discovered by the Bureau of Internal Revenue (BIR) examiner during an investigation, the expense item to which such deficiency withholding tax relates will still be allowed as deduction against the taxable income in the year incurred, provided that the deficiency withholding tax plus interest or penalties are paid by the taxpayer during the investigation. Under the new rule (RR 12-2013), however, even if the deficiency withholding tax is paid during the investigation, the expense item to which such deficiency withholding tax relates will not be allowed as a deduction against the taxable income in the year incurred.
The taxpayers, as withholding tax agents, will have to face dire consequences -- i.e., assessment on withholding tax and income tax -- once found noncompliant. Among the income payments that will be greatly affected by the regulation are the petty cash expenses and reimbursable business expenses. Note that corporations designated by the BIR as one of the Top 20,000 Corporations (TTC) are required to withhold a tax of 1% or 2% on purchases of goods and services, respectively. Time and again, withholding on reimbursements has been an issue for businesses.
For instance, as for petty cash expenses, withholding on every expense incurred by officers and employees for meals, representation and entertainment, gasoline, administrative expenses, out-of town-expenses and supplies are found by the taxpayers to be impractical to do. It has been a concern that officers and employees (including company drivers and utility men) are not likely to withhold on small expenses. They are not expected to bring with them withholding tax certificates (BIR Form 2307) whenever they incur such expenses.
To address these complexities, what should the taxpayers do?
It is imperative among taxpayers to be more prudent and vigilant of their withholding tax obligations. It is not unusual to find taxpayers facing BIR assessments for violation of withholding rules and regulations. Accordingly, taxpayers must familiarize themselves with the basic principles relative to withholding taxes.
For petty cash expenses, employees in the business sector may consider using company credit cards -- strictly, “cashless spending”. Under this scheme, the burden to withhold is shifted to the credit card companies.
Moreover, there are a lot of precautionary actions that could be specifically implemented to prevent non-withholding of income payments and, subsequently, disallowance of expense. One of these is by regularly attending tax seminars to keep abreast of changes in the tax rules. Taxpayers should also evaluate compliance of their internal tax practices. This may be done through in-house trainings or by engaging a qualified personnel or tax practitioner to conduct tax compliance review. Outsourcing the preparation of the company’s tax returns may also be an option.
Another measure which the taxpayers could adopt is the formation of a method of periodic reconciliation of the accounting records as against the tax returns. With this, in case of discrepancies noted and there are discovered mistakes of under-withholding or non-withholding of expenses, an amendment to the tax returns can immediately be done.
These preventive measures may perhaps incur too much of the taxpayer’s time and resources. Conversely, the burden is nothing compared to the risk of huge amount of possible withholding tax and income tax assessments in the future.
Currently, there are taxpayers who still hope that the BIR will have a change of heart and revoke this regulation. The sentiment of the taxpayers is that they merely partake in the collection effort of the government to ensure that the tax is collected in advance even before it reaches the hands of the income recipients. Unfortunately, while they are just being tasked to perform the duty of a tax collector on behalf of the government, they are the ones exposed to harsh tax penalties. Nevertheless, the best recourse for taxpayers is to be meticulous in fulfilling their withholding tax obligations to avoid the severe consequences.
The author is a senior with Punongbayan & Araullo’s (P&A) tax advisory and compliance division. P&A is the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please e-mail Jen.Serrano@ph.gt.com or call 886-5511.
source: Businessworld
The regulation was issued to amend the old rule relative to the requirements for deductibility of expenses. Under the old rule, if a deficiency withholding tax is discovered by the Bureau of Internal Revenue (BIR) examiner during an investigation, the expense item to which such deficiency withholding tax relates will still be allowed as deduction against the taxable income in the year incurred, provided that the deficiency withholding tax plus interest or penalties are paid by the taxpayer during the investigation. Under the new rule (RR 12-2013), however, even if the deficiency withholding tax is paid during the investigation, the expense item to which such deficiency withholding tax relates will not be allowed as a deduction against the taxable income in the year incurred.
The taxpayers, as withholding tax agents, will have to face dire consequences -- i.e., assessment on withholding tax and income tax -- once found noncompliant. Among the income payments that will be greatly affected by the regulation are the petty cash expenses and reimbursable business expenses. Note that corporations designated by the BIR as one of the Top 20,000 Corporations (TTC) are required to withhold a tax of 1% or 2% on purchases of goods and services, respectively. Time and again, withholding on reimbursements has been an issue for businesses.
For instance, as for petty cash expenses, withholding on every expense incurred by officers and employees for meals, representation and entertainment, gasoline, administrative expenses, out-of town-expenses and supplies are found by the taxpayers to be impractical to do. It has been a concern that officers and employees (including company drivers and utility men) are not likely to withhold on small expenses. They are not expected to bring with them withholding tax certificates (BIR Form 2307) whenever they incur such expenses.
To address these complexities, what should the taxpayers do?
It is imperative among taxpayers to be more prudent and vigilant of their withholding tax obligations. It is not unusual to find taxpayers facing BIR assessments for violation of withholding rules and regulations. Accordingly, taxpayers must familiarize themselves with the basic principles relative to withholding taxes.
For petty cash expenses, employees in the business sector may consider using company credit cards -- strictly, “cashless spending”. Under this scheme, the burden to withhold is shifted to the credit card companies.
Moreover, there are a lot of precautionary actions that could be specifically implemented to prevent non-withholding of income payments and, subsequently, disallowance of expense. One of these is by regularly attending tax seminars to keep abreast of changes in the tax rules. Taxpayers should also evaluate compliance of their internal tax practices. This may be done through in-house trainings or by engaging a qualified personnel or tax practitioner to conduct tax compliance review. Outsourcing the preparation of the company’s tax returns may also be an option.
Another measure which the taxpayers could adopt is the formation of a method of periodic reconciliation of the accounting records as against the tax returns. With this, in case of discrepancies noted and there are discovered mistakes of under-withholding or non-withholding of expenses, an amendment to the tax returns can immediately be done.
These preventive measures may perhaps incur too much of the taxpayer’s time and resources. Conversely, the burden is nothing compared to the risk of huge amount of possible withholding tax and income tax assessments in the future.
Currently, there are taxpayers who still hope that the BIR will have a change of heart and revoke this regulation. The sentiment of the taxpayers is that they merely partake in the collection effort of the government to ensure that the tax is collected in advance even before it reaches the hands of the income recipients. Unfortunately, while they are just being tasked to perform the duty of a tax collector on behalf of the government, they are the ones exposed to harsh tax penalties. Nevertheless, the best recourse for taxpayers is to be meticulous in fulfilling their withholding tax obligations to avoid the severe consequences.
The author is a senior with Punongbayan & Araullo’s (P&A) tax advisory and compliance division. P&A is the Philippine member firm of Grant Thornton International Ltd. For comments and inquiries, please e-mail Jen.Serrano@ph.gt.com or call 886-5511.
source: Businessworld
Wednesday, August 21, 2013
Equity and consistency in granting tax refunds
THE DYNAMIC character of tax laws is due in
large part to the wealth of jurisprudence that through the years have
helped interpret, clarify and elaborate Tax Code provisions and their
implementing rules and regulations. On some occasions, court rulings
have even upheld the constitutionality of tax issuances and looked
favorably on decisions and policies made by tax officials. Judicial
interpretations both from the Court of Tax Appeals (CTA) and the Supreme
Court (SC) breathe new life to tax laws, introducing insightful
perspectives. Nowhere is this more evident than in the refunds of excess
creditable withholding tax (CWT).
CWT pertains to taxes withheld on certain income payments. Under Revenue Regulations No. 2-98, CWT is intended to equal, or at least approximate, the corresponding tax due of the payee on said income. The income recipient is still required to file an income tax return (ITR), to report the income and to pay the difference between the tax withheld and the tax due on the income, if any. This basically describes the way the creditable withholding system works.
However, there are instances when the CWT withheld for a given taxable year results in excessive tax payments as compared with the total amount of tax actually due from the taxpayer. In such a situation, Section 76 of the Tax Code grants the taxpayer the option to ask for a refund of the excess payments made or to simply carry them over as credit against the quarterly income tax liabilities of the succeeding taxable years. In case the refund option is taken by the taxpayer, the CTA has, in a number of cases, spelled out the three (3) essential conditions for entitlement:
1. That the claim for refund was filed within the two-year prescriptive period;
2. That the CWT is established by a copy of a statement issued by the withholding agent to the taxpayer, showing the amount paid and the amount of tax withheld; and
3. That it is shown on the ITR of the taxpayer-claimant that the income received was declared as part of gross income.
As early as 1997, the foregoing requirements were affirmed by the SC in the case of Citibank, N.A. vs. Court of Appeals, G.R. No. 107434. Much later SC decisions reiterated these guidelines that continue to hold true even today, save for interpretative innovations or twists that further shaped the CWT refund landscape. One such tweak in the conditions is on the required documentary submissions to prove one’s entitlement to the excess CWT.
In two recent decisions promulgated sometime in June and July this year, the CTA rendered two opposing views on the need to submit quarterly ITRs of the succeeding year in order to prove one’s claim for excess CWT.
In the first case, the CTA En Banc denied the refund claim on the ground that the taxpayer failed to submit its quarterly ITRs for the succeeding year. The court ruled that such failure to submit made it difficult for the BIR to determine with reasonable certainty whether the claimant carried over and utilized the excess taxes of the previous year to the succeeding taxable quarters. Logically, if the taxpayer carried forward and utilized said excess CWT, the claim to a cash refund or tax credit certificate should rightfully be denied.
In a subsequent decision issued a month after, the CTA departed from its previous stance, stating that presentation of the taxpayer’s quarterly ITRs for the succeeding year is not an essential requirement for a CWT refund. Instead, citing the case of Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004 dated Dec. 14, 2005, only the following documents are required: 1) withholding tax statements; 2) ITR of the present quarter to which the excess withholding tax credits are being applied; and 3) the ITR of the quarter for the previous taxable year in which the excess credits arose.
HOW CAN WE MAKE SENSE OUT OF TWO DIVERGENT PRONOUNCEMENTS?
This writer believes that the two vacillating views must be read in the light of the decision of the SC in the Philam Asset case. A vital issue raised in that case was whether or not the non-submission of the annual ITR of the succeeding calendar year is fatal to the claim for refund of excess CWT. Resolutely, the SC struck down the requirement of submitting the ITR of the succeeding year to prove excess CWT. The court declared that such requirement “has no basis in law and jurisprudence” since Section 76 of the Tax Code merely requires the filing of the ITR for the preceding, not the succeeding, taxable year. It was on the strength of this decision that subsequent cases of similar nature were penned on parallel interpretation of the law.
While it is an established principle that tax refunds are strictly construed against the taxpayer, taxpayers should at least have the benefit of consistency in treatment.
The author is a Senior Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback to susan.m.aquino@ph.pwc.com
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 such article.
source: Businessworld
CWT pertains to taxes withheld on certain income payments. Under Revenue Regulations No. 2-98, CWT is intended to equal, or at least approximate, the corresponding tax due of the payee on said income. The income recipient is still required to file an income tax return (ITR), to report the income and to pay the difference between the tax withheld and the tax due on the income, if any. This basically describes the way the creditable withholding system works.
However, there are instances when the CWT withheld for a given taxable year results in excessive tax payments as compared with the total amount of tax actually due from the taxpayer. In such a situation, Section 76 of the Tax Code grants the taxpayer the option to ask for a refund of the excess payments made or to simply carry them over as credit against the quarterly income tax liabilities of the succeeding taxable years. In case the refund option is taken by the taxpayer, the CTA has, in a number of cases, spelled out the three (3) essential conditions for entitlement:
1. That the claim for refund was filed within the two-year prescriptive period;
2. That the CWT is established by a copy of a statement issued by the withholding agent to the taxpayer, showing the amount paid and the amount of tax withheld; and
3. That it is shown on the ITR of the taxpayer-claimant that the income received was declared as part of gross income.
As early as 1997, the foregoing requirements were affirmed by the SC in the case of Citibank, N.A. vs. Court of Appeals, G.R. No. 107434. Much later SC decisions reiterated these guidelines that continue to hold true even today, save for interpretative innovations or twists that further shaped the CWT refund landscape. One such tweak in the conditions is on the required documentary submissions to prove one’s entitlement to the excess CWT.
In two recent decisions promulgated sometime in June and July this year, the CTA rendered two opposing views on the need to submit quarterly ITRs of the succeeding year in order to prove one’s claim for excess CWT.
In the first case, the CTA En Banc denied the refund claim on the ground that the taxpayer failed to submit its quarterly ITRs for the succeeding year. The court ruled that such failure to submit made it difficult for the BIR to determine with reasonable certainty whether the claimant carried over and utilized the excess taxes of the previous year to the succeeding taxable quarters. Logically, if the taxpayer carried forward and utilized said excess CWT, the claim to a cash refund or tax credit certificate should rightfully be denied.
In a subsequent decision issued a month after, the CTA departed from its previous stance, stating that presentation of the taxpayer’s quarterly ITRs for the succeeding year is not an essential requirement for a CWT refund. Instead, citing the case of Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 156637/162004 dated Dec. 14, 2005, only the following documents are required: 1) withholding tax statements; 2) ITR of the present quarter to which the excess withholding tax credits are being applied; and 3) the ITR of the quarter for the previous taxable year in which the excess credits arose.
HOW CAN WE MAKE SENSE OUT OF TWO DIVERGENT PRONOUNCEMENTS?
This writer believes that the two vacillating views must be read in the light of the decision of the SC in the Philam Asset case. A vital issue raised in that case was whether or not the non-submission of the annual ITR of the succeeding calendar year is fatal to the claim for refund of excess CWT. Resolutely, the SC struck down the requirement of submitting the ITR of the succeeding year to prove excess CWT. The court declared that such requirement “has no basis in law and jurisprudence” since Section 76 of the Tax Code merely requires the filing of the ITR for the preceding, not the succeeding, taxable year. It was on the strength of this decision that subsequent cases of similar nature were penned on parallel interpretation of the law.
While it is an established principle that tax refunds are strictly construed against the taxpayer, taxpayers should at least have the benefit of consistency in treatment.
The author is a Senior Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback to susan.m.aquino@ph.pwc.com
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 such article.
source: Businessworld
Everything You Need to Know About the New BIR Ruling on Official Receipts and Invoices
The Bureau of Internal Revenue (BIR) has issued a new revenue regulation dated last year (Revenue Regulations No. 18-2012,
October 22, 2012) but was only cascaded to businesses early this year
that says you need to have new receipts (official receipts, invoices,
delivery receipts, etc.) printed out on or before June 30 August 30 and surrender all unused receipts by September 10, 2013 10 days after the printing of the receipts. You can find more information by looking at the RMC No 44-2013.
However, a new update sent out last August 13, 2013 (Revenue Memorandum Circular 52-2013) clarified the usage of all unused receipts (principal and supplementary). Businesses can still use their old receipts until October 31, 2013, provided that they meet these two (2) criteria:
- Old / Current ATP was released after January 1, 2011. This can be seen in the receipts themselves and the ATP form; and,
- A new ATP was already issued to you on or before August 30, 2013.
Reminder for Business Owners:
- You will still incur penalties for late filing of ATP (1,000) regardless of when you accomplish this.
- Remember to put a stamp “valid until October 31, 2013 only” on copies (original, duplicate, triplicate) of your receipts.
Since this is a government ruling, the only thing we law-abiding citizens can do is obey and comply with it. So “what do I now?” you may ask. Here are the requirements and procedures.
Requirements
-
Certificate of Registration, copy
-
This is the BIR 2303. Photocopy it, then you are good to go.
-
-
0605 Payment Form for BIR Annual Registration (2013), copy
-
Every year, you have to renew your permits. This is the proof of payment and proof that you have renewed your permits for the year.
-
-
Authority to Print (ATP) Official Receipts, Invoices, and other Commercial Invoices
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All receipts have to be printed by an accredited supplier of the BIR. One of the steps in registering your business is to secure an ATP so that you can have receipts printed out. This is needed. Otherwise, you have to pay a penalty of one thousand pesos (PhP 1,000).
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Application for Authority to Print (BIR Form 1906). You can download this directly form the BIR website.
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Last Booklet of Official Receipts, Invoices, and other Commercial Invoices.
Procedure
Part 1 – With the BIR
- Go to Regional District Office (RDO) having jurisdiction over business address.
- Get a queue number and wait for your turn.
- Submit accomplished Bureau of Internal Revenue (BIR) form 1906, Authority to Print (ATP) together with the other requirements.
- Releasing of ATP. Usually it take 3 to 5 working days before it will release.
Part 2 – With the Accredited Printer
- Submit the new ATP to the accredited printer.
- Processing of new Official Receipt and Invoices with accredited BIR Printer.
- Releasing of new Official Receipt and Invoices.
- Usually it will take 10 to 15 working days before it will release.
- They will forward it to the BIR to have it stamped. If you do not get this done by June 30, a penalty will be imposed.
Part 3 – After the Release of the Receipts
- Surrender all the old, unused receipts to the BIR. Do this within 10 days after your new receipts have been printed.
source: FullSuite
source:
Wednesday, August 7, 2013
Naked Assessments
Naked Assessments
WHEN asked what the Bureau of Internal Revenue (BIR) would do in the face of an alleged billion-peso pork barrel scam involving several prominent politicians and ranking officials, the BIR forthrightly replied that it will conduct investigations and file tax evasion charges, if warranted. This laudable initiative of prosecuting tax evaders not only seeks to alleviate the nation’s burden of paying the P1.25-trillion tax collection target set this year by Congress, but also sends a strong and clear message against corruption.
Such bold pronouncements, however, must come with untiring efforts to review evidence with a keen eye and to skillfully use tax laws with mastery. The BIR is well reminded that mistakes or errors, no matter how trifling, can translate to critical loss of opportunities in revenue collection. As in one recent case decided by the Court of Tax Appeals (CTA) in CTA Case No. 8345, dated May 29, 2013, the legal gaffe came in the form of a speculative assessment on under-declared income.
In that case, a domestic corporation was assessed for deficiency income tax and VAT on assumed income based on the BIR’s findings that it had underdeclared purchases or unaccounted expenses. The sole basis for the BIR’s tax assessments is the finding of underdeclaration of purchases based on Third Party Information (TPI) matching programs. The TPI program involves correlation of information provided by the taxpayer with those gathered from third parties, i.e., Reconciliation of Listing for Enforcement System (RELIEF), Tax Reconciliation System (TRS) and Third Party Matching-Bureau of Customs (TPM-BOC) Data Program. Of particular interest in this case is that no evidence was submitted showing that income resulted from the unaccounted purchases/expenses and that income was actually received by the corporation.
The CTA considered the BIR assessment wanting in legal and factual basis. The court explained that the tax finding was presumptive in nature, the BIR having assumed that the alleged undeclared purchases are unaccounted expenses which would translate into income. Here lies the misplaced notion that hidden or undeclared purchases are analogous to hidden income.
A taxpayer is free to claim or not to claim deductions from gross income. That is a taxpayer’s prerogative. Instead, what is prohibited by the law is to claim a deduction beyond the authorized amount. Accordingly, an underdeclaration of purchases or unaccounted expenses is not prohibited by law.
For a tax assessment to be valid and binding, there must be clear proof of realized income, and such income was received by the taxpayer. An assessment based on mere presumption of income from underdeclared purchases/unaccounted expenses is flawed and ineffective. Such speculation runs afoul of the well-established elements for the imposition of income tax, namely (a) that there must clear proof of gain or profit, (b) that such gain or profit was received by the taxpayer, actually or constructively, and (c) that it is not exempted by law or treaty from income tax. In the same vein, VAT can be imposed only if the taxpayer received an amount of money from the sale or exchange of services -- not when there are under-declared purchases.
It may be further noted that, generally, under Section 6 (B) of the Tax Code, the Commissioner is empowered to assess proper tax on the best evidence obtainable and thus make estimations. In the words of the Supreme Court in Commission of Internal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, dated March 31, 2005:
“The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.”
However, in the same case, the Supreme Court decisively struck down the assessment for not being based on actual facts, but on mere presumptions. Thus, “Where the BIR has come out with a ‘naked assessment,’ i.e., without any foundation character, the determination of the tax due is without rational basis.”
Verily, a “naked assessment,” or one lacking factual basis, is a clear contravention of the law, more specifically Republic Act (RA) 8424 (otherwise known as the Tax Reform Act of 1997), which amended provisions of the Tax Code on protesting assessments. Prior to the amendment, the Commissioner was only obliged to notify the taxpayer of its findings. Now, under RA 8424, the BIR is required not only to state the applicable law, but also the facts upon which the assessment is based; otherwise, such assessment is void.
Here is a case where the law tilts the balance in favor of the taxpayers, offering protection and consolation to taxpayers who may otherwise be at the mercy of tax revenue officers under pressure to meet their target revenue collection. Left unbridled, the authority to assess and impose taxes may result in abuse or error.
It may be noted that in commonplace practice, more often than not, the BIR merely informs the taxpayer of the details of discrepancies, demands payment of tax deficiencies, and then waits for the taxpayer to prove that the assessment is incorrect. In short, during assessments, the revenue officers normally rely on preset presumptions that must be disputed by the taxpayer. The burden lies with the taxpayer to prove otherwise.
It would seem that this practice may be partly explained, if not exacerbated, by the ever-increasing burden on the part of the BIR to speed up the tax assessment process in order to meet ever-growing collection targets. As a result, the BIR places increasing reliance on its TPI matching program to facilitate tax administration and collection. Under this program, the BIR collates the information from taxpayers’ submissions and matches the same to third party information. Should there be any discrepancies, the BIR would then assess the tax due.
While the TPI matching program, in an ideal scenario, may promise an efficient tax system, its downside impact cannot be discounted. As seen in this tax court case, improper reliance and application of the program could spur the cycle of abuse and inefficiencies in tax administration, such as in the case of issuances of naked or unfounded assessments. Apart from the TPI, the BIR would do well to institute more thorough validating measures that would provide an inclusive substantiation of assessments based on evidentiary factual findings. In this way, both the BIR and the taxpayers would be spared from the distress and time wasted in pursuing and defending against unfounded or naked assessments.
However, Congress’ role cannot be downplayed. In the light of the recent pork barrel scam, the House must auspiciously appropriate taxpayers’ money for good use, keeping in mind the way by which hard-earned contributions to state funds come to be. As the budget and goal-setting body, Congress must step up to identify other revenue-generating undertakings, such as state-run businesses, that would unburden taxpayers from a lifetime obligation of tax payments and afford the BIR some breathing space in the relentless pursuit of tax collections. Simply, the challenge is for Congress to realize and put to heart that its mandate emanates from the taxpayers -- the same constituents to whom they are ultimately held accountable.
The author is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Send inquiries or feedback to jaffy.y.azarraga@ph.pwc.com.
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 such article.
source: Businessworld
WHEN asked what the Bureau of Internal Revenue (BIR) would do in the face of an alleged billion-peso pork barrel scam involving several prominent politicians and ranking officials, the BIR forthrightly replied that it will conduct investigations and file tax evasion charges, if warranted. This laudable initiative of prosecuting tax evaders not only seeks to alleviate the nation’s burden of paying the P1.25-trillion tax collection target set this year by Congress, but also sends a strong and clear message against corruption.
Such bold pronouncements, however, must come with untiring efforts to review evidence with a keen eye and to skillfully use tax laws with mastery. The BIR is well reminded that mistakes or errors, no matter how trifling, can translate to critical loss of opportunities in revenue collection. As in one recent case decided by the Court of Tax Appeals (CTA) in CTA Case No. 8345, dated May 29, 2013, the legal gaffe came in the form of a speculative assessment on under-declared income.
In that case, a domestic corporation was assessed for deficiency income tax and VAT on assumed income based on the BIR’s findings that it had underdeclared purchases or unaccounted expenses. The sole basis for the BIR’s tax assessments is the finding of underdeclaration of purchases based on Third Party Information (TPI) matching programs. The TPI program involves correlation of information provided by the taxpayer with those gathered from third parties, i.e., Reconciliation of Listing for Enforcement System (RELIEF), Tax Reconciliation System (TRS) and Third Party Matching-Bureau of Customs (TPM-BOC) Data Program. Of particular interest in this case is that no evidence was submitted showing that income resulted from the unaccounted purchases/expenses and that income was actually received by the corporation.
The CTA considered the BIR assessment wanting in legal and factual basis. The court explained that the tax finding was presumptive in nature, the BIR having assumed that the alleged undeclared purchases are unaccounted expenses which would translate into income. Here lies the misplaced notion that hidden or undeclared purchases are analogous to hidden income.
A taxpayer is free to claim or not to claim deductions from gross income. That is a taxpayer’s prerogative. Instead, what is prohibited by the law is to claim a deduction beyond the authorized amount. Accordingly, an underdeclaration of purchases or unaccounted expenses is not prohibited by law.
For a tax assessment to be valid and binding, there must be clear proof of realized income, and such income was received by the taxpayer. An assessment based on mere presumption of income from underdeclared purchases/unaccounted expenses is flawed and ineffective. Such speculation runs afoul of the well-established elements for the imposition of income tax, namely (a) that there must clear proof of gain or profit, (b) that such gain or profit was received by the taxpayer, actually or constructively, and (c) that it is not exempted by law or treaty from income tax. In the same vein, VAT can be imposed only if the taxpayer received an amount of money from the sale or exchange of services -- not when there are under-declared purchases.
It may be further noted that, generally, under Section 6 (B) of the Tax Code, the Commissioner is empowered to assess proper tax on the best evidence obtainable and thus make estimations. In the words of the Supreme Court in Commission of Internal Revenue vs. Hantex Trading Co., Inc., G.R. No. 136975, dated March 31, 2005:
“The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.”
However, in the same case, the Supreme Court decisively struck down the assessment for not being based on actual facts, but on mere presumptions. Thus, “Where the BIR has come out with a ‘naked assessment,’ i.e., without any foundation character, the determination of the tax due is without rational basis.”
Verily, a “naked assessment,” or one lacking factual basis, is a clear contravention of the law, more specifically Republic Act (RA) 8424 (otherwise known as the Tax Reform Act of 1997), which amended provisions of the Tax Code on protesting assessments. Prior to the amendment, the Commissioner was only obliged to notify the taxpayer of its findings. Now, under RA 8424, the BIR is required not only to state the applicable law, but also the facts upon which the assessment is based; otherwise, such assessment is void.
Here is a case where the law tilts the balance in favor of the taxpayers, offering protection and consolation to taxpayers who may otherwise be at the mercy of tax revenue officers under pressure to meet their target revenue collection. Left unbridled, the authority to assess and impose taxes may result in abuse or error.
It may be noted that in commonplace practice, more often than not, the BIR merely informs the taxpayer of the details of discrepancies, demands payment of tax deficiencies, and then waits for the taxpayer to prove that the assessment is incorrect. In short, during assessments, the revenue officers normally rely on preset presumptions that must be disputed by the taxpayer. The burden lies with the taxpayer to prove otherwise.
It would seem that this practice may be partly explained, if not exacerbated, by the ever-increasing burden on the part of the BIR to speed up the tax assessment process in order to meet ever-growing collection targets. As a result, the BIR places increasing reliance on its TPI matching program to facilitate tax administration and collection. Under this program, the BIR collates the information from taxpayers’ submissions and matches the same to third party information. Should there be any discrepancies, the BIR would then assess the tax due.
While the TPI matching program, in an ideal scenario, may promise an efficient tax system, its downside impact cannot be discounted. As seen in this tax court case, improper reliance and application of the program could spur the cycle of abuse and inefficiencies in tax administration, such as in the case of issuances of naked or unfounded assessments. Apart from the TPI, the BIR would do well to institute more thorough validating measures that would provide an inclusive substantiation of assessments based on evidentiary factual findings. In this way, both the BIR and the taxpayers would be spared from the distress and time wasted in pursuing and defending against unfounded or naked assessments.
However, Congress’ role cannot be downplayed. In the light of the recent pork barrel scam, the House must auspiciously appropriate taxpayers’ money for good use, keeping in mind the way by which hard-earned contributions to state funds come to be. As the budget and goal-setting body, Congress must step up to identify other revenue-generating undertakings, such as state-run businesses, that would unburden taxpayers from a lifetime obligation of tax payments and afford the BIR some breathing space in the relentless pursuit of tax collections. Simply, the challenge is for Congress to realize and put to heart that its mandate emanates from the taxpayers -- the same constituents to whom they are ultimately held accountable.
The author is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Send inquiries or feedback to jaffy.y.azarraga@ph.pwc.com.
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 such article.
source: Businessworld
Monday, August 5, 2013
Mandatory and jurisdictional period exceptions
Mandatory and jurisdictional period exceptions by: Oliver Gil M. Beltran
ONE of the basic principles of law that is well-established in prevailing jurisprudence is that a claimant has the burden of proof to establish the factual basis of his or her claim for tax refund. This is because tax refunds are in the nature of tax exemptions that are to be construed strictissimi juris against the taxpayer.Taxpayer-claimants are admonished that although they may have the right to file a claim for tax refund, such right becomes worthless unless they are able to sufficiently prove their claim to the amount in question. Likewise, compliance with the fundamental procedural requirements is mandatory.
Moreover, one of the more controversial procedural issues involving tax refund cases pertain to the periods given the taxpayer to file his administrative and judicial claims with the Bureau of Internal Revenue (BIR) and the Court of Tax Appeals (CTA), respectively.
Earlier this year, the Supreme Court (SC) En Banc promulgated a consolidated decision involving separate claims for tax refund of unutilized input value-added tax (VAT) by San Roque Power Corp., Taganito Mining Corp., and Philex Mining Corp. In the aforementioned decision, the SC clarified the correct interpretation of the two-year prescriptive period provided under Section 229 of the Tax Code.
In the case of San Roque, the Court denied its Petition for Refund since it was filed with the CTA without exhausting the 120-day period for the Commissioner of Internal Revenue (CIR) to issue a decision on the administrative claim for refund. According to the Court, Section 112 (C) of the Tax Code grants a taxpayer a 30-day period to appeal to the CTA the decision or inaction of the Commissioner. In other words, the mandatory 30-day period starts to run 120 days from the submission by the taxpayer-claimant of complete documents in support of its administrative claim for refund.
On the other hand, in the case of Taganito, the Court held that while similar to the case of San Roque, Taganito also filed its Petition for Refund with the CTA without waiting for the lapse of the 120-day period, the latter can nonetheless invoke BIR Ruling DA-489-03, dated Dec. 10, 2003, since Taganito filed its petition before the promulgation of the Aichi Doctrine on Oct. 6, 2010. The SC emphasized that BIR Ruling DA-489-03 expressly provided the “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review.”
The Supreme Court ruled that BIR Ruling No. DA-489-03 is a general interpretative rule, the benefits of which may be invoked by all taxpayers, and though considered as a misleading and erroneous interpretation by the Commissioner on a difficult question of law, it nevertheless provides a valid claim for equitable estoppel under Section 246 of the Tax Code. Hence, the Court said, “taxpayers acting in good faith should not be made to suffer for adhering to general interpretative rules of the Commissioner interpreting tax laws, should such interpretation later turn out to be erroneous and reversed by the Commissioner or the Court.”
This effect of BIR Ruling No. DA-489-03 was further explained by the Court in the consolidated cases of Mindanao II Geothermal Partnership vs. CIR, and Mindanao I Geothermal Partnership vs. CIR, G.R. Nos. 193301 and 194637, March 11, 2013.
As per the SC, “(a)ll taxpayers, however, can rely on BIR Ruling DA-489-03 from the time of its issuance on Dec. 10, 2003 up to its reversal by this Court in Aichi on Oct. 6, 2010, as an exception to the mandatory and jurisdictional 120+30 day periods.”
From the foregoing pronouncements of the SC, a considerable number of taxpayer-claimants whose claims for refund were previously denied either by the CTA Division or En Banc pursuant to the Aichi Doctrine, were given a new lease on life.
Nonetheless, emphasis must be made on the fact that only those taxpayer-claimants whose claims were re spectively filed during the effectivity of BIR Ruling DA-489-03 (before promulgation of the Aichi case), and which claims are still pending before the Courts may benefit from this exemption to the general rule. Taxpayer-claimants who failed to file their respective timely appeals on the previous denials made by the CTA before the promulgation of the San Roque and Mindanao Geothermal decisions are barred from relying on the benefits extended by BIR Ruling DA-489-03, as their failure to file an appeal resulted to res judicata in their own case.
Truly, while it is essential for a taxpayer-claimant to prove not only his entitlement to a refund but also his compliance with the procedural due process as non-observance of the prescriptive periods within which to file the administrative and the judicial claims would result in the denial of his claim, valid exceptions such as those offered under BIR Ruling DA-489-03 should also be recognized.
As decided by the SC in one case, “technicalities and legalisms, however exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens.”
source: Punongbayan and Araullo
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