THE BUREAU of Internal Revenue (BIR)
recently issued Revenue Regulations No. (RR) 17-2013, dated Sept. 27,
2013, to clarify the retention period and prescribe the guidelines on
the preservation of books of accounts and other accounting records of
taxpayers.
Under the said regulations, all taxpayers
are required to preserve their books of accounts, including subsidiary
books and other accounting records for a period of 10 years reckoned
from the day after the deadline for filing a return or if filed after
the deadline, from the date of filing of the return, for the taxable
year when the last entry was made in the books of accounts. It also
provides that, if the taxpayer has any pending protest or claim for tax
credit/refund of taxes, and the books and records concerned are material
to the case, the taxpayer is required to preserve his/its books of
accounts and other accounting records until the case is finally
resolved.
In addition to the responsibility of the taxpayer to retain the books
for ten years, the independent CPA who audited the records and certified
the financial statements of the taxpayer also has the responsibility to
maintain and preserve copies of the audited and certified financial
statements for a period of 10 years from the due date of filing the
annual income tax return (ITR) or the actual date of filing thereof,
whichever comes later.
All books, registers and other records, and vouchers and other
supporting papers required by the BIR shall be kept at all times at the
taxpayer’s place of business, subject to inspection by any internal
revenue officer, and upon demand, the same must be immediately produced
and submitted for inspection. They may be examined and inspected for
purposes of regular audit or extraordinary audit, requests for exchange
of information by a foreign tax authority under Sections 6 and 71 of the
National Internal Revenue Code of 1997 (NIRC), and in the exercise of
the Commissioner’s power to obtain information under Section 5 of the
NIRC, among others. Examination and inspection of books of accounts and
other accounting records shall be done in the taxpayer’s office or place
of business or in the BIR office.
More importantly, failure to observe the new retention requirements will
subject the errant taxpayer to penalties provided in Sections 266, 275,
and other pertinent provisions of the Tax Code and Section 6 of
Republic Act No. (RA) 10021, otherwise known as the “Exchange of
Information on Tax Matters Act of 2009”.
Obviously, this particular issuance creates more burden than ease for
the taxpayer. Yes, keeping accurate and orderly books of accounts and
other accounting records has its benefits, but such obligation should
not be painstakingly overstressed. From the tax audit perspective,
organized documentary system makes audit investigations more tolerable
and defensible. It seems that the BIR failed to take into consideration
the expenses that the taxpayer would have to shoulder to retain these
records for ten years, as this would entail cost for maintenance and
storage.
Section 232 of the Tax Code mandates all corporations, companies,
partnerships or persons required by law to pay internal revenue taxes to
keep a journal and a ledger or their equivalents. The reason for
requiring books of accounts, while stated in the law itself, was also
clarified by the Courts in a plethora of cases, and that is in order
that all taxes due the Government may readily and accurately be
ascertained and determined any time of the year, not only by the
taxpayer but also by the different tax collection agencies of the
government (Reyes vs. Collector, 1956).
However, by issuing RR 17-2013, the BIR has once again exercised its
sweeping authority to interpret the provisions of the Tax Code. The new
regulation is quite contrary to Section 203 of the Tax Code, which
provides that “internal revenue taxes shall be assessed within three
years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of
such taxes shall be begun after the expiration of such period.” The
above provision implies that the records of the taxpayer must be
preserved for a period of three years from the date of the last entry
made thereon.
On the other hand, the Tax Code recognizes several exceptions to this
general rule. Under Section 222 of the Tax Code, the right of the BIR to
examine and/or inspect books of accounts and other accounting records
of taxpayers may extend beyond the three-year period of limitation of
assessment, and that is in the case of a false or fraudulent return with
intent to evade tax or of failure to file a return. Under the said
provision, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time
within 10 years after the discovery of the falsity, fraud or omission.
Also, the three-year period may be waived if both the BIR Commissioner
and the taxpayer agree in writing that the period to assess be extended.
While it is in the best interest of both the government and the
taxpayers that books of accounts and accounting records are retained for
a longer period, this should not be an excuse to expand the provisions
of the Tax Code by mandating the retention of accounting records for an
unreasonable time. This is a very dangerous regulation as it no longer
distinguishes whether the taxpayer has filed a fraudulent return or not.
From its plain reading, the regulation plainly assumes that all
taxpayers are filing fraudulent returns and are thereby bound to be
assessed by the BIR for a period of 10 years. More importantly, the
10-year period in fraud cases is counted from the date of discovery.
Hence, requiring the taxpayer to retain records for 10 years from filing
of return will still not cover or address cases involving fraud.
Typically, in the absence of a BIR tax audit or findings of fraud,
taxpayers should be able to dispose of accounting records after the
three-year assessment period has passed. However, with this regulation,
all taxpayers will have to deviate from keeping their documents and
books for three years, as each and every taxpayer must now comply with
the BIR requirement under the pain of penalties, to retain records for
10 years.
Time and time again, we say that one of the characteristics of a sound
tax system is that tax laws must be capable of being effectively
enforced with the least inconvenience to the taxpayer. It assumes that
the rules and procedures for the payment of taxes, audit policies, and
availing of remedies are easily understood by the taxpayer. Clearly,
this is not the case under RR 17-2013, which fearlessly announces 10
years of solitary retention of records for all taxpayers.
The author is a tax associate with the Tax Advisory & Compliance
Division of Punongbayan & Araullo. P&A is a member firm within
Grant Thornton International Ltd.
source: Businessworld
Monday, October 21, 2013
A matter of record By Wilfredo U. Villanueva
Records management programs are generally not an organization’s priority as these usually do not generate income. Policies and practices on how records are kept and handled also vary among companies. In a large enterprise, documents are usually stored separately according to division or section, e.g., Finance, Corporate Planning, Legal, Marketing, and Sales. In some multinational companies, there is an established centralized records management group that not only oversees the indexing, storage and retrieval of files, but safeguards vital information about the organization.
A well-organized records management system contributes to a company’s overall efficiency and productivity, and supports better management decisions. With the recent issuance by the Bureau of Internal Revenue (BIR) of Revenue Regulations (RR) No. 17-2013 extending the period for preserving books of accounts and other accounting records, taxpayers now have all the more reason to come up with an effective records management system that not only enhances service and profit but also minimizes litigation and reputational risks.
RR No. 17-2013 now requires taxpayers to preserve all their books of accounts and accounting records for a period of 10 years. Previously, taxpayers were only mandated to do so until the lapse of the 3-year period within which the BIR can make an assessment; or, if there is a pending tax audit investigation, until such examination has been duly terminated; or upon expiration of the waiver of the statute of limitations that the taxpayer issued in favor of the BIR. Books of accounts include subsidiary books and other accounting records such as invoices, receipts, vouchers, and returns, and other source documents supporting the entries in the books of accounts.
According to the BIR, the longer preservation period will allow the bureau access to the taxpayer’s accounting records should it be investigated on the basis of falsity, fraud or omission in its tax returns. Under Section 222 of the Tax Code, “in case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed or proceeding in court for collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission.” This implies that there may have been instances when the BIR could not pursue a fraud investigation because supporting documents had already been disposed of.
Aside from pursuing “extraordinary audits and assessments,” the extended retention period also gives the BIR more leeway in verifying the books of accounts and other pertinent records of tax-exempt organizations and grantees of tax incentives.
Notably, the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer is equally responsible to preserve copies of the audited and certified financial statements for 10 years from the due date of filing the annual income tax return, unless a longer retention period is required under the Tax Code or other relevant laws.
While the record-keeping requirements have long existed in our tax books, this is the first time that it has extended the retention period to 10 years, perhaps consistent with its objective to strengthen its enforcement drive.
The new requirement is even more stringent compared with prevailing statutes. Section 52.1-1 of the Securities Regulations Code, for instance, requires securities brokers to maintain certain books and records of their transactions and customers for a period of not less than 6 years, the first 2 years in a place easily accessible for examination by the Securities and Exchange Commission. The Anti-Money Laundering Law requires that records of covered transactions be maintained and safely stored for 5 years from the date of the accounts or transaction.
Meanwhile, the International Organization for Standardization (ISO) does not mandate a minimum period for records retention, but allows companies to come up with their own standards or policies. They must also ensure that such standards are maintained within the organization.
As far as BIR is concerned, books of accounts are to be kept “intact, unaltered and unmutilated” to ensure that all taxes due to the government may be readily and accurately ascertained and determined any time of the year. However, what does this new requirement mean for taxpayers?
First, this will mean additional cost. While RR No. 9-09 allows taxpayers to maintain electronic records, there are strict requirements, including securing BIR approval, before e-records can be honored during a tax audit or investigation. Without the BIR approval for the conversion of hard documents to microfilm or other storage-only imaging systems, tax examiners can only rely on hard copies of original documents. With manual documents as acceptable form of evidence, it is therefore necessary for taxpayers to designate an area within its premises to store its voluminous original records. If space is an issue, then an offsite warehouse may have to be leased to store these documents. Additional measures may also need to be undertaken, such as fire-proofing, pest control and security.
Second, aside from storage, considerable manpower investment may need to be made for the upkeep of the records. Ideally, the point person must be capable not only of analyzing and putting in order the current manual recordkeeping system, but also knowledgeable in using new technology to upgrade the organization’s system.
Third, there is a need to establish an improved system of accountability. Maintaining corporate records should be seen as not just the responsibility of the records group or division, but of the whole enterprise. Records must be kept orderly despite the separation of employees who have these documents in custody. If this is fostered within the organization, then better compliance can be expected.
Indeed, keeping a company’s records for such a long time is no easy task. We have, in fact, seen companies who have started to relax or, at the very least, use technology for their record-keeping policies and practices precisely because of issues on proper storage. So one might ask whether this new requirement of the BIR is a necessary burden. The primary reason for extending the retention period to 10 years seems to be in connection with the ongoing campaign of the BIR to weed out tax cheats. This is, of course, a commendable effort, but then, as some quarters are now saying, it seems to imply that all taxpayers are suspected of unlawfully depriving the government of much-needed tax revenue. They ask: why does everyone need to be subjected to this burden?
A company’s files embody its institutional memory, an asset that, though irreplaceable, is often overlooked. Management decisions are made based on the numerous transactions a company makes daily. Thus, in any case, while the new retention rules may prove to be tedious, time-consuming, and expensive to taxpayers, this may also be seen as an opportunity for organizations to invest in a reliable records management system and professionals crucial to safeguarding this institutional memory.
Wilfredo U. Villanueva is the Deputy Head of the Tax Division of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Notably, the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer is equally responsible to preserve copies of the audited and certified financial statements for 10 years from the due date of filing the annual income tax return, unless a longer retention period is required under the Tax Code or other relevant laws.
While the record-keeping requirements have long existed in our tax books, this is the first time that it has extended the retention period to 10 years, perhaps consistent with its objective to strengthen its enforcement drive.
Wednesday, October 16, 2013
Contesting tax rulings
THE MAGNITUDE-7.2 quake that struck Visayas
the other day was shocking to say the least, as it decimated
centuries-old churches and other structures. It has been compared to the
force of 32 nuclear bombs dropped over Hiroshima, Japan during the
Second World War.
Not everyone knows what to do during an earthquake. Do you run outside? Do you stand under a doorway or crawl under a table? Knowing what to do could spell a world of difference in terms of your safety. In other words, knowing the procedures is crucial as not following them could cost you dearly.
Similarly, there are proper steps to be taken when a taxpayer wants to dispute or nullify an adverse ruling issued by the Bureau of Internal Revenue (BIR). Given that the BIR continues to issue rulings, circulars and regulations that have adverse implications, taxpayers must be aware of how to properly avail of possible remedies. One misstep can lead to your case being dismissed based on procedural grounds and not even on the merits of the ruling or regulation you are contesting.
In fact, just recently, the Court of Tax Appeals (CTA) had no choice but to dismiss a couple of petitions filed by taxpayers requesting the invalidation of unfavorable rulings issued to them by the BIR. This was because one taxpayer failed to exhaust available administrative remedies and because, in both cases, the CTA has no jurisdiction over such matters.
So, how should we go about protesting unfavorable tax rulings?
First, one must observe the requirement to exhaust all available administrative remedies (although there are exceptions to this rule). Under the Tax Code, the BIR Commissioner has the exclusive and original jurisdiction to interpret tax laws, subject to the review of the Secretary of Finance. Since all rulings are now signed by the BIR Commissioner, a taxpayer who receives an adverse ruling can seek its review by the Secretary of Finance within 30 days of receiving the ruling.
The Department of Finance prescribes strict guidelines that must be followed in appealing an adverse tax ruling. These include information that must be reflected in the request for review, and even guidance on formatting requirements. Only upon receiving the ruling of the Secretary of Finance can the taxpayer be considered as having exhausted all available administrative remedies. Generally, only then can the taxpayer raise the issue before the courts.
This doctrine of exhausting all available administrative remedies before seeking judicial intervention is based on jurisprudence and on practical grounds. It costs less, and ideally, provides for faster disposition of issues. It is based on the underlying presumption that, if given the chance, the concerned administrative agency will decide on the matter correctly and will rectify its own error, if necessary.
What about disputing regulations and circulars that are issued to the general public?
Since the Supreme Court has held that revenue regulations and revenue memorandum circulars are actually rulings or opinions of the BIR Commissioner, any attempts to challenge such issuances may also follow the same steps as when one is disputing an adverse ruling. While circulars are already issued by the Commissioner, it would appear from the arguments raised by the BIR in a recent tax court decision that in seeking to nullify a tax issuance, the BIR expects taxpayers to first file a request for reconsideration with the Commissioner, before appealing to the Secretary of Finance.
Once the case is ripe for judicial remedy, to which court should taxpayers raise their appeal?
Based on jurisprudence, the CTA’s jurisdiction to resolve tax disputes does not include cases which cover the validity or constitutionality of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi-legislative function. The determination of whether an administrative issuance has gone beyond the law falls within the jurisdiction of the regular courts. So, in challenging the validity of tax rulings, regulations or circulars issued by the BIR, taxpayers should seek judicial remedy from the regular courts, and not from the CTA.
Einstein is quoted as saying: “Imagination is more important than knowledge.” While there are areas of taxation that may benefit from innovation, imagination and creativity, remedial procedures are not one of them. Filing appeals within the deadline and at the right venue is essential to a successful dispute. After all, you don’t want to be all dressed to the nines and then realize too late that you’ve gone to the wrong party.
The author is an executive director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at roselle.k.yu@ph.pwc.com for questions or feedback.
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 the article.
source: Businessworld
Not everyone knows what to do during an earthquake. Do you run outside? Do you stand under a doorway or crawl under a table? Knowing what to do could spell a world of difference in terms of your safety. In other words, knowing the procedures is crucial as not following them could cost you dearly.
Similarly, there are proper steps to be taken when a taxpayer wants to dispute or nullify an adverse ruling issued by the Bureau of Internal Revenue (BIR). Given that the BIR continues to issue rulings, circulars and regulations that have adverse implications, taxpayers must be aware of how to properly avail of possible remedies. One misstep can lead to your case being dismissed based on procedural grounds and not even on the merits of the ruling or regulation you are contesting.
In fact, just recently, the Court of Tax Appeals (CTA) had no choice but to dismiss a couple of petitions filed by taxpayers requesting the invalidation of unfavorable rulings issued to them by the BIR. This was because one taxpayer failed to exhaust available administrative remedies and because, in both cases, the CTA has no jurisdiction over such matters.
So, how should we go about protesting unfavorable tax rulings?
First, one must observe the requirement to exhaust all available administrative remedies (although there are exceptions to this rule). Under the Tax Code, the BIR Commissioner has the exclusive and original jurisdiction to interpret tax laws, subject to the review of the Secretary of Finance. Since all rulings are now signed by the BIR Commissioner, a taxpayer who receives an adverse ruling can seek its review by the Secretary of Finance within 30 days of receiving the ruling.
The Department of Finance prescribes strict guidelines that must be followed in appealing an adverse tax ruling. These include information that must be reflected in the request for review, and even guidance on formatting requirements. Only upon receiving the ruling of the Secretary of Finance can the taxpayer be considered as having exhausted all available administrative remedies. Generally, only then can the taxpayer raise the issue before the courts.
This doctrine of exhausting all available administrative remedies before seeking judicial intervention is based on jurisprudence and on practical grounds. It costs less, and ideally, provides for faster disposition of issues. It is based on the underlying presumption that, if given the chance, the concerned administrative agency will decide on the matter correctly and will rectify its own error, if necessary.
What about disputing regulations and circulars that are issued to the general public?
Since the Supreme Court has held that revenue regulations and revenue memorandum circulars are actually rulings or opinions of the BIR Commissioner, any attempts to challenge such issuances may also follow the same steps as when one is disputing an adverse ruling. While circulars are already issued by the Commissioner, it would appear from the arguments raised by the BIR in a recent tax court decision that in seeking to nullify a tax issuance, the BIR expects taxpayers to first file a request for reconsideration with the Commissioner, before appealing to the Secretary of Finance.
Once the case is ripe for judicial remedy, to which court should taxpayers raise their appeal?
Based on jurisprudence, the CTA’s jurisdiction to resolve tax disputes does not include cases which cover the validity or constitutionality of a law, or a rule or regulation issued by an administrative agency in the performance of its quasi-legislative function. The determination of whether an administrative issuance has gone beyond the law falls within the jurisdiction of the regular courts. So, in challenging the validity of tax rulings, regulations or circulars issued by the BIR, taxpayers should seek judicial remedy from the regular courts, and not from the CTA.
Einstein is quoted as saying: “Imagination is more important than knowledge.” While there are areas of taxation that may benefit from innovation, imagination and creativity, remedial procedures are not one of them. Filing appeals within the deadline and at the right venue is essential to a successful dispute. After all, you don’t want to be all dressed to the nines and then realize too late that you’ve gone to the wrong party.
The author is an executive director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at roselle.k.yu@ph.pwc.com for questions or feedback.
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 the article.
source: Businessworld
Wednesday, October 2, 2013
A Professional’s Plea
IF YOU ASK children about their career
ambitions in life, the likely response would be the occupations of
doctor, lawyer, dentist or other professionals. Even at a young age,
cultural dictates have created an abstraction of professionals -- noble
vocations held in esteem and admired for their self-giving role to
society.
Professionals play a vital role as stewards in the preservation of society, serving public interest or the welfare of the populace. For most professional occupations, the standards and ideals of their practice are enshrined in their stringent codes of conduct, their oath of honor to abide by their ethical responsibilities, and by the rules of the Professional Regulation Commission (PRC).
Though they may aspire, not many are called to become professionals. To prepare in the discipline, additional years of formal education and training must be completed to acquire a level of competence necessary to perform the role. It requires considerable investment of time and resources, and commitment all throughout the professional’s career. For instance, physicians, accountants and engineers devote long and countless hours in hospitals, offices and in the field, in which time is effectively taken away from loved ones. Such work habit is borne of the profession’s higher duty of delivering the highest standard of professional service to clients. For some professions, as in the case of lawyers and medical practitioners, the duty extends to advocacy and aid regardless of whether the client is able to remunerate them for services rendered.
Recently, the Bureau of Internal Revenue (BIR) identified professionals as one of its priority areas for tax audit. Consistent with its continuing initiative to implement new measures for increasing tax collections across industries, the BIR issued Revenue Memorandum Order No. 4-2013, which identified business taxpayers, consisting mainly of self-employed individuals, small business owners and professionals whose annual income tax payments average below P200,000, as priority audit targets.
Barely a month ago, professional practitioners raised concerns regarding the BIR’s proposed measure of requiring professional rates to be posted at a prominent place inside their clinics and offices. The proposal is in response to observations and complaints from clients or patients about how some professionals -- for instance, doctors and lawyers -- were imposing additional charges (such as value-added tax) on top of their regular fees whenever clients asked for official receipts. Further, tax compliance in this sector is considered low, based on BIR data, since only around 400,000 of the 1.8 million individuals (22%) who are registered as self-employed, professionals or small business owners, file their income tax returns, with an average payment of just P33,441.
Apparently, the BIR takes the view that once professional rates are posted in public, tax examiners will be able to verify the amounts of fees reflected in the professional’s issued receipts. Under the proposed measure, professionals would include medical practitioners, lawyers, accountants, engineers, architects and real estate brokers. Even assuming that the BIR’s observations and data are correct, publishing or posting professional rates in public may not be a feasible solution if the BIR’s intention is to curb tax evasion. Under its legal authority, the scope of the BIR’s powers and duties extend only to the assessment and collection of national internal revenue taxes, fees and charges, and to the enforcement of all forfeitures, penalties and fines arising from them. While the BIR Commissioner has the power to secure information from taxpayers, such is limited only to ascertain the correctness of the taxes that they are liable to pay. There is no provision in our tax laws that authorize the BIR to compel taxpayers to publicly disclose confidential information, such as their professional fees. In my opinion, the transaction between a professional and his client is a private contract governed by ethical considerations of trust and confidence between them. Thus, any information in that contract should be held confidential by the parties.
Moreover, posted professional rates may not necessarily correspond to charged rates or actual fee payments. In the case of doctors and lawyers, for example, professional fees may be charged based on socialized payment schemes or on contingency basis in consideration of the patient or client’s financial capacity. As a consequence of the BIR’s proposed measure, legal and medical professionals may feel constrained to follow their published rates for fear of a tax backlash, without regard to indigent patients or pauper litigants.
Another downside to the proposed circular is that it may eventually result in the degradation of the professional practice, diminished as a price-driven commodity rather than a vocation deserving respect. This is something that the codes of conduct of most professions try to avoid by putting restrictions on how professionals present their services to the public.
For instance, in the case of lawyers, the Code of Professional Responsibility admonishes counsels from soliciting legal business. Time and time again, the Supreme Court has reminded lawyers that the practice of law is a profession and not a business. Hence, lawyers stand to be disbarred from the profession should they advertise their practice as vendors would advertise their wares in the open market. To require the posting and advertising of legal fees would commercialize and degrade the legal profession, encouraging the furtherance of business interest over social justice.
Lastly, publishing or posting rates in public does not fully guarantee effective identification by the BIR of professionals who intentionally under-declare their income to evade taxes. Professional rate/fee is but one factor, among others, that one considers in assessing taxes. Tax examiners must likewise validate the volume and nature of transactions entered into by a professional over a period of time to determine the correct amount of taxable income.
As a professional, I acknowledge the BIR’s earnest efforts to improve policies that strictly monitor tax payments and plug the loopholes in tax collections. However, I still believe that other available options should be explored to strike a balance between the BIR’s campaign against tax evaders and the need to preserve the dignity of professionals. One measure would be to provide incentives for compliant taxpayers -- applying the principle of ruling by the carrot rather than the stick. On the other hand, I also hope that, regardless of incentives, all professionals become responsible taxpayers, so the government need not impose tight measures of control.
As former US President Bill Clinton aptly said in his inaugural speech, “Let us all take more responsibility, not only for ourselves and our families but for our communities and our country.”
The author is a tax director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at joel.roy.c.navarro@ph.pwc.com for questions or feedback. 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
Professionals play a vital role as stewards in the preservation of society, serving public interest or the welfare of the populace. For most professional occupations, the standards and ideals of their practice are enshrined in their stringent codes of conduct, their oath of honor to abide by their ethical responsibilities, and by the rules of the Professional Regulation Commission (PRC).
Though they may aspire, not many are called to become professionals. To prepare in the discipline, additional years of formal education and training must be completed to acquire a level of competence necessary to perform the role. It requires considerable investment of time and resources, and commitment all throughout the professional’s career. For instance, physicians, accountants and engineers devote long and countless hours in hospitals, offices and in the field, in which time is effectively taken away from loved ones. Such work habit is borne of the profession’s higher duty of delivering the highest standard of professional service to clients. For some professions, as in the case of lawyers and medical practitioners, the duty extends to advocacy and aid regardless of whether the client is able to remunerate them for services rendered.
Recently, the Bureau of Internal Revenue (BIR) identified professionals as one of its priority areas for tax audit. Consistent with its continuing initiative to implement new measures for increasing tax collections across industries, the BIR issued Revenue Memorandum Order No. 4-2013, which identified business taxpayers, consisting mainly of self-employed individuals, small business owners and professionals whose annual income tax payments average below P200,000, as priority audit targets.
Barely a month ago, professional practitioners raised concerns regarding the BIR’s proposed measure of requiring professional rates to be posted at a prominent place inside their clinics and offices. The proposal is in response to observations and complaints from clients or patients about how some professionals -- for instance, doctors and lawyers -- were imposing additional charges (such as value-added tax) on top of their regular fees whenever clients asked for official receipts. Further, tax compliance in this sector is considered low, based on BIR data, since only around 400,000 of the 1.8 million individuals (22%) who are registered as self-employed, professionals or small business owners, file their income tax returns, with an average payment of just P33,441.
Apparently, the BIR takes the view that once professional rates are posted in public, tax examiners will be able to verify the amounts of fees reflected in the professional’s issued receipts. Under the proposed measure, professionals would include medical practitioners, lawyers, accountants, engineers, architects and real estate brokers. Even assuming that the BIR’s observations and data are correct, publishing or posting professional rates in public may not be a feasible solution if the BIR’s intention is to curb tax evasion. Under its legal authority, the scope of the BIR’s powers and duties extend only to the assessment and collection of national internal revenue taxes, fees and charges, and to the enforcement of all forfeitures, penalties and fines arising from them. While the BIR Commissioner has the power to secure information from taxpayers, such is limited only to ascertain the correctness of the taxes that they are liable to pay. There is no provision in our tax laws that authorize the BIR to compel taxpayers to publicly disclose confidential information, such as their professional fees. In my opinion, the transaction between a professional and his client is a private contract governed by ethical considerations of trust and confidence between them. Thus, any information in that contract should be held confidential by the parties.
Moreover, posted professional rates may not necessarily correspond to charged rates or actual fee payments. In the case of doctors and lawyers, for example, professional fees may be charged based on socialized payment schemes or on contingency basis in consideration of the patient or client’s financial capacity. As a consequence of the BIR’s proposed measure, legal and medical professionals may feel constrained to follow their published rates for fear of a tax backlash, without regard to indigent patients or pauper litigants.
Another downside to the proposed circular is that it may eventually result in the degradation of the professional practice, diminished as a price-driven commodity rather than a vocation deserving respect. This is something that the codes of conduct of most professions try to avoid by putting restrictions on how professionals present their services to the public.
For instance, in the case of lawyers, the Code of Professional Responsibility admonishes counsels from soliciting legal business. Time and time again, the Supreme Court has reminded lawyers that the practice of law is a profession and not a business. Hence, lawyers stand to be disbarred from the profession should they advertise their practice as vendors would advertise their wares in the open market. To require the posting and advertising of legal fees would commercialize and degrade the legal profession, encouraging the furtherance of business interest over social justice.
Lastly, publishing or posting rates in public does not fully guarantee effective identification by the BIR of professionals who intentionally under-declare their income to evade taxes. Professional rate/fee is but one factor, among others, that one considers in assessing taxes. Tax examiners must likewise validate the volume and nature of transactions entered into by a professional over a period of time to determine the correct amount of taxable income.
As a professional, I acknowledge the BIR’s earnest efforts to improve policies that strictly monitor tax payments and plug the loopholes in tax collections. However, I still believe that other available options should be explored to strike a balance between the BIR’s campaign against tax evaders and the need to preserve the dignity of professionals. One measure would be to provide incentives for compliant taxpayers -- applying the principle of ruling by the carrot rather than the stick. On the other hand, I also hope that, regardless of incentives, all professionals become responsible taxpayers, so the government need not impose tight measures of control.
As former US President Bill Clinton aptly said in his inaugural speech, “Let us all take more responsibility, not only for ourselves and our families but for our communities and our country.”
The author is a tax director at the tax services department of Isla Lipana & Co., the Philippine member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at joel.roy.c.navarro@ph.pwc.com for questions or feedback. 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
Tuesday, October 1, 2013
Preservation of books of accounts and other accounting records
The Commissioner of Internal Revenue (“CIR”) has issued Revenue
Regulations (“RR”) No. 17-2013 dated 27 September 2013 clarifying the
retention period and preservation of the books of accounts and
accounting records of a taxpayer and prescribing the guidelines
therefor.
The salient portions of the RR are as follows:
1. The taxpayers’ books of accounts and accounting records shall generally be preserved during the 3-year period within which a taxpayer can be assessed by the tax authority. The 3-year period is counted from the last day prescribed by law for the filing of the return provided that if a return is filed beyond the period prescribed by law, it shall be counted from the day the return was filed. However, the 3-year period to assess is extended to:
3. In view of the foregoing, the CIR is requiring all taxpayers to preserve their books of accounts including subsidiary books and other accounting records, for a period of 10 years. The 10-year period is reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.
4. The term “other accounting records” includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts. They should also be preserved for a period of 10 years counted from the last entry in the books to which they relate.
5. The independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return or the actual date 'of filing thereof, whichever comes later.
source: PWC - www.pwc.com/ph/en/tax-alerts/2013/tax-alert-no.-26.jhtml
Rem Notes:
The salient portions of the RR are as follows:
1. The taxpayers’ books of accounts and accounting records shall generally be preserved during the 3-year period within which a taxpayer can be assessed by the tax authority. The 3-year period is counted from the last day prescribed by law for the filing of the return provided that if a return is filed beyond the period prescribed by law, it shall be counted from the day the return was filed. However, the 3-year period to assess is extended to:
- 10 years - in the case of a false or fraudulent return with intent to evade tax OR of failure to file a return in which case the tax may be assessed or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years after the discovery of the falsity, fraud or omission.
- Agreed upon date in the Waiver of the Statute of Limitations - in case the CIR and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon.
3. In view of the foregoing, the CIR is requiring all taxpayers to preserve their books of accounts including subsidiary books and other accounting records, for a period of 10 years. The 10-year period is reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.
4. The term “other accounting records” includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts. They should also be preserved for a period of 10 years counted from the last entry in the books to which they relate.
5. The independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return or the actual date 'of filing thereof, whichever comes later.
source: PWC - www.pwc.com/ph/en/tax-alerts/2013/tax-alert-no.-26.jhtml
Rem Notes:
- Upon filing in good faith, taxpayer shall keep his records for 3 years ... But since BIR is given authority within 10-yrs after discovery of falsity or fraud to file a case. BIR is allowed only to discover such falsity or fraud within the prescribed 3-year period. In effect, the taxpayer should keep his records, for defense, within 10 years after the 3-year prescriptive period though.
- In the case of non-filing, taxpayer, ergo, has no records, BIR then is allowed file within 10years a case, even without assessment, upon discovery of omission.
- The 10yr period = starts a day after deadline of filing or on the date of filing if filing is done after deadline
Sunday, September 29, 2013
BIR tightens tax rules for tiangge operators
THE TAX bureau has scrapped the advanced
income tax and value-added tax (VAT) or percentage tax payment scheme
for "privilege store" or "tiangge" operators, instead tightening rules
on the taxation of their transactions.
The Bureau of Internal Revenue’s (BIR) Revenue Regulations (RR) 16-2013, dated Aug. 22 but published in a newspaper just last Friday, imposes new rules governing the taxation of persons who sell goods and/or services through the use of privilege stores.
The new rules take effect on Oct. 12 or 15 days after their publication.
The issuance revokes RR 16-2003 and RR 24-2003, issued on April 29, 2003 and August 29, 2003, respectively.
Both 2003 issuances imposed on tiangge operators a fixed amount of VAT or percentage tax ranging from P50-P150 per day and income tax of P50 per day.
These fixed amounts were required monthly and in advance by store operators through the BIR’s authorized agent banks during the entire duration of the stores’ business operations, and were credited against the actual business tax and income tax due from the operators for the period for which the payments were remitted to the BIR.
Under RR 16-2013, the BIR has limited the term "privilege store" to refer to just stalls or outlets engaged in business for short durations of time, for a cumulative period not exceeding 15 days.
Those operating these stalls regularly or beyond the 15-day limit will be considered as regular taxpayers and, as such, must be registered as persons engaged in trade or business with the BIR.
All persons involved in such tiangge events are required to submit to the organizers an information statement on their activities indicating the inclusive dates of business operations and their taxpayer identification numbers (TIN), among others.
Stall owners are also required to deduct, withhold, and remit to the BIR the expanded withholding tax due on rental payments they will make to the event’s organizers.
Under the new rules, privilege store operators are required only to file income tax returns covering the year the income from the event was earned.
They must also keep books of accounts and issue receipts or sales invoices as provided by the exhibitors, and submit a list of sales during their operation of their stalls within five days after the event.
Because they are not registered as business taxpayers, organizers of events are required to provide these privilege store operators with central cash register or point of sale machines, or manual official receipts or invoices for their use.
Meanwhile, for tenants in such events not qualified as privilege store operators, they are required to file income, withholding, VAT or percentage, and other tax returns as scheduled for regular business taxpayers.
They are likewise obliged to keep books of accounts and issue their own receipts or invoices at these events, and file other information returns required by law.
For their part, event organizers must report to the Revenue District Offices (RDO) having jurisdiction over their events pertinent information on the establishments involved. They are also obliged to ensure that tenants in their events are properly registered with the BIR.
If the property used to host the event is not their own, these organizers must likewise deduct, withhold, and remit to the BIR the expanded withholding tax due on rental payments they will pay to the lessor of the property concerned. -- B.F.V. Roc
source: Businessworld
The Bureau of Internal Revenue’s (BIR) Revenue Regulations (RR) 16-2013, dated Aug. 22 but published in a newspaper just last Friday, imposes new rules governing the taxation of persons who sell goods and/or services through the use of privilege stores.
The new rules take effect on Oct. 12 or 15 days after their publication.
The issuance revokes RR 16-2003 and RR 24-2003, issued on April 29, 2003 and August 29, 2003, respectively.
Both 2003 issuances imposed on tiangge operators a fixed amount of VAT or percentage tax ranging from P50-P150 per day and income tax of P50 per day.
These fixed amounts were required monthly and in advance by store operators through the BIR’s authorized agent banks during the entire duration of the stores’ business operations, and were credited against the actual business tax and income tax due from the operators for the period for which the payments were remitted to the BIR.
Under RR 16-2013, the BIR has limited the term "privilege store" to refer to just stalls or outlets engaged in business for short durations of time, for a cumulative period not exceeding 15 days.
Those operating these stalls regularly or beyond the 15-day limit will be considered as regular taxpayers and, as such, must be registered as persons engaged in trade or business with the BIR.
All persons involved in such tiangge events are required to submit to the organizers an information statement on their activities indicating the inclusive dates of business operations and their taxpayer identification numbers (TIN), among others.
Stall owners are also required to deduct, withhold, and remit to the BIR the expanded withholding tax due on rental payments they will make to the event’s organizers.
Under the new rules, privilege store operators are required only to file income tax returns covering the year the income from the event was earned.
They must also keep books of accounts and issue receipts or sales invoices as provided by the exhibitors, and submit a list of sales during their operation of their stalls within five days after the event.
Because they are not registered as business taxpayers, organizers of events are required to provide these privilege store operators with central cash register or point of sale machines, or manual official receipts or invoices for their use.
Meanwhile, for tenants in such events not qualified as privilege store operators, they are required to file income, withholding, VAT or percentage, and other tax returns as scheduled for regular business taxpayers.
They are likewise obliged to keep books of accounts and issue their own receipts or invoices at these events, and file other information returns required by law.
For their part, event organizers must report to the Revenue District Offices (RDO) having jurisdiction over their events pertinent information on the establishments involved. They are also obliged to ensure that tenants in their events are properly registered with the BIR.
If the property used to host the event is not their own, these organizers must likewise deduct, withhold, and remit to the BIR the expanded withholding tax due on rental payments they will pay to the lessor of the property concerned. -- B.F.V. Roc
source: Businessworld
Sunday, September 22, 2013
Pacta sunt servanda
THE LATIN title used for this article
translates to “agreements must be kept.” It is a phrase used in
understanding the spirit of treaties and executive agreements among
nations, including double taxation agreements (DTAs), otherwise known as
tax treaties. This is important for foreign corporations or individuals
doing business in other countries. The recent decision of the Supreme
Court in Deutsche Bank AG Manila Branch vs. CIR (G.R. No. 18850,
promulgated Aug. 19, 2013) reminds us of this time-honored Latin maxim.
In the Philippines and under our Tax Code, non-resident foreign corporations or individuals are generally subject to Philippine income tax on Philippine-sourced income. This rule, however, yields to the DTA between the Philippines and the home country of the foreign corporation or individual, particularly where the DTA provides preferential tax rates, or in some cases, tax exemption, on Philippine-sourced income.
Claiming the benefit of any DTA is, however, subject to certain procedural requirements. In Revenue Memorandum Order (RMO) No. 01-2000, dated Nov. 25, 1999, later modified by RMO No. 72-10, dated Aug. 25, 2010, the BIR declared that “it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD) [of the BIR]. In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty.” Thus, RMO 1-2000 required that such application for tax treaty relief (TTRA) “be made at least 15 days before the transaction i.e. payment of dividends, royalties, etc., with all the supporting documents justifying the relief sought.”
In October 2003, Deutsche Bank AG Manila Branch (DB Manila Branch) remitted its 2002 and prior years’ after-tax profits to its home office in Germany and withheld and remitted to the 15% Branch Profit Remittance Tax (BPRT) rate prescribed under the Tax Code. In October 2005 and in the belief that it overpaid the BPRT, DB Manila Branch filed a claim for refund or issuance of tax credit certificate (TCC) with the BIR, and at the same time filed with the ITAD a request for confirmation of its entitlement to the 10% BPRT rate prescribed under the Philippines-Germany DTA. Due to the BIR’s inaction on its claim, DB Manila Branch elevated its claim for refund to the Court of Tax Appeals (CTA).
The CTA denied DB Manila Branch’s claim for refund on the basis that DB Manila Branch’s TTRA was “not filed prior to its payment of the BPRT and actual remittance of its branch profits to DB Germany ... thereby violating the 15-day period mandated under Section III paragraph (2) of RMO 01-2000.” The CTA relied on the earlier case of Mirant (Philippines) Corporation vs. CIR (CTA En Banc Case No. 40, June 7, 2005) wherein the CTA held that a ruling from the ITAD must be secured prior to the availment of a preferential tax rate under a tax treaty. Unsatisfied with the CTA decision, DB Manila Branch filed an appeal with the Supreme Court, which upheld DB Manila Branch’s position and granted the refund. The Supreme Court determined that the “crux of the controversy lies in the implementation of RMO No. 1-2000” and, to this end, disagreed with the CTA’s decision that the prior filing of a TTRA is mandatory, and that non-compliance with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
According to the Supreme Court, “[t]he time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.” The Supreme Court pointed-out that “there is nothing in RMO No.1-2000 which would indicate deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period”, and while the Court recognizes the clear intention of the BIR in implementing RMO No. 1-2000, the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The SC regarded the obligation of the Philippines to comply with a tax treaty to be paramount over the objectives of RMO No. 1-2000. Such failure to abide with its tax treaty obligations would have “negative implications on international relations, and unduly discourage foreign investors. Non-compliance of RMO No. 1-2000 could be remedied through imposition of a fine or penalty, rather than the deprivation of a treaty benefit simply for failing to comply with an administrative issuance.
Indeed, when the Philippines became a signatory to the Vienna Convention on Jan. 27, 1980, it bound itself to honor its contracts in good faith with the international community. The principle of pacta sunt servanda stresses that these pacts and clauses are the law between the parties, and implies that the non-fulfilment of respective obligations is a breach of the pact.
Since pacta sunt servanda is based on good faith, this entitles states to require that obligations be respected and to rely upon the obligations being respected. A state that is a party to the treaty cannot invoke provisions in its Constitution or its domestic laws as an excuse or justification for failure to perform its duty. As a signatory of the Philippines-Germany DTA, the Philippines is required to honor its obligations to provide exceptions to the BPRT rate to DB Manila Branch.
Moreover, Section 2 Article III of the Constitution provides that the Philippines adopts the generally accepted principles of international law as part of the law of the land. By the doctrine of incorporation, the generally accepted principles of international law are automatically part of the laws of the Philippines. Therefore, such failure of the Philippines to uphold the provisions of the Philippines-Germany DTA may have negative economic results, in addition to being a violation of Section 3, Article II of the Constitution.
The pacta sunt servanda rule is the cornerstone of the law of treaties and the Supreme Court, in this latest decision, took the opportunity to reiterate that fulfillment of treaty obligations is essential to stable international relations and promote trust and cooperation between States. It now remains to be seen whether the BIR will review its current policy on tax treaty relief availments, considering that RMO No. 72-2010 (which amended RMO No. 1-2000) specifically provides that all TTRAs should be filed before the occurrence of the first taxable event, and “[f]ailure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA.”
Tesi Lou S. Guanzon is a tax senior director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
source: Businessworld
In the Philippines and under our Tax Code, non-resident foreign corporations or individuals are generally subject to Philippine income tax on Philippine-sourced income. This rule, however, yields to the DTA between the Philippines and the home country of the foreign corporation or individual, particularly where the DTA provides preferential tax rates, or in some cases, tax exemption, on Philippine-sourced income.
Claiming the benefit of any DTA is, however, subject to certain procedural requirements. In Revenue Memorandum Order (RMO) No. 01-2000, dated Nov. 25, 1999, later modified by RMO No. 72-10, dated Aug. 25, 2010, the BIR declared that “it is to the best interest of both the taxpayer and the Bureau of Internal Revenue that any availment of the tax treaty provisions be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD) [of the BIR]. In this way, the consequences of any erroneous interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before proceeding with the transaction and or paying the tax liability covered by the tax treaty.” Thus, RMO 1-2000 required that such application for tax treaty relief (TTRA) “be made at least 15 days before the transaction i.e. payment of dividends, royalties, etc., with all the supporting documents justifying the relief sought.”
In October 2003, Deutsche Bank AG Manila Branch (DB Manila Branch) remitted its 2002 and prior years’ after-tax profits to its home office in Germany and withheld and remitted to the 15% Branch Profit Remittance Tax (BPRT) rate prescribed under the Tax Code. In October 2005 and in the belief that it overpaid the BPRT, DB Manila Branch filed a claim for refund or issuance of tax credit certificate (TCC) with the BIR, and at the same time filed with the ITAD a request for confirmation of its entitlement to the 10% BPRT rate prescribed under the Philippines-Germany DTA. Due to the BIR’s inaction on its claim, DB Manila Branch elevated its claim for refund to the Court of Tax Appeals (CTA).
The CTA denied DB Manila Branch’s claim for refund on the basis that DB Manila Branch’s TTRA was “not filed prior to its payment of the BPRT and actual remittance of its branch profits to DB Germany ... thereby violating the 15-day period mandated under Section III paragraph (2) of RMO 01-2000.” The CTA relied on the earlier case of Mirant (Philippines) Corporation vs. CIR (CTA En Banc Case No. 40, June 7, 2005) wherein the CTA held that a ruling from the ITAD must be secured prior to the availment of a preferential tax rate under a tax treaty. Unsatisfied with the CTA decision, DB Manila Branch filed an appeal with the Supreme Court, which upheld DB Manila Branch’s position and granted the refund. The Supreme Court determined that the “crux of the controversy lies in the implementation of RMO No. 1-2000” and, to this end, disagreed with the CTA’s decision that the prior filing of a TTRA is mandatory, and that non-compliance with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate.
According to the Supreme Court, “[t]he time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement.” The Supreme Court pointed-out that “there is nothing in RMO No.1-2000 which would indicate deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period”, and while the Court recognizes the clear intention of the BIR in implementing RMO No. 1-2000, the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
The SC regarded the obligation of the Philippines to comply with a tax treaty to be paramount over the objectives of RMO No. 1-2000. Such failure to abide with its tax treaty obligations would have “negative implications on international relations, and unduly discourage foreign investors. Non-compliance of RMO No. 1-2000 could be remedied through imposition of a fine or penalty, rather than the deprivation of a treaty benefit simply for failing to comply with an administrative issuance.
Indeed, when the Philippines became a signatory to the Vienna Convention on Jan. 27, 1980, it bound itself to honor its contracts in good faith with the international community. The principle of pacta sunt servanda stresses that these pacts and clauses are the law between the parties, and implies that the non-fulfilment of respective obligations is a breach of the pact.
Since pacta sunt servanda is based on good faith, this entitles states to require that obligations be respected and to rely upon the obligations being respected. A state that is a party to the treaty cannot invoke provisions in its Constitution or its domestic laws as an excuse or justification for failure to perform its duty. As a signatory of the Philippines-Germany DTA, the Philippines is required to honor its obligations to provide exceptions to the BPRT rate to DB Manila Branch.
Moreover, Section 2 Article III of the Constitution provides that the Philippines adopts the generally accepted principles of international law as part of the law of the land. By the doctrine of incorporation, the generally accepted principles of international law are automatically part of the laws of the Philippines. Therefore, such failure of the Philippines to uphold the provisions of the Philippines-Germany DTA may have negative economic results, in addition to being a violation of Section 3, Article II of the Constitution.
The pacta sunt servanda rule is the cornerstone of the law of treaties and the Supreme Court, in this latest decision, took the opportunity to reiterate that fulfillment of treaty obligations is essential to stable international relations and promote trust and cooperation between States. It now remains to be seen whether the BIR will review its current policy on tax treaty relief availments, considering that RMO No. 72-2010 (which amended RMO No. 1-2000) specifically provides that all TTRAs should be filed before the occurrence of the first taxable event, and “[f]ailure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA.”
Tesi Lou S. Guanzon is a tax senior director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
source: Businessworld
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