#AskTheTaxWhiz: Are online freelancers required to register with BIR?

You're an online freelancer and barely making profit, should you register? Are you subject to VAT?

I am an online freelancer. Am I required to register with the Bureau of Internal Reveue (BIR) even if I am barely making profit? How do I know if I am subject to 12% value-added tax (VAT)?

Yes. Online freelancing, like any business, must be registered with the BIR.

Regardless of the financial outcome, any transaction made more than once to generate income is considered in the course of trade or business.

Except for those classified as marginal income earners, online freelancers are subject to both income and business taxes (i.e. 12% VAT or 3% percentage tax).

Marginal income earners are individuals with no compensation income but generate gross sales or receipts not exceeding P100,000 ($2,310.31*) monthly. These mainly refer to sari-sari stores, small carinderias or turo-turo, drivers/operators of a single unit tricycle. These exclude licensed professionals, consultants, artists, sales agents, and brokers.

If your gross sales or receipts for the past 12 months exceeded P1,919,500.00 ($44,348.57), you are subject to 12% VAT. Otherwise, you are liable to pay 3% percentage tax based on your monthly sales.

Got a question about taxes? #AskTheTaxWhiz! Tweet @rapplerdotcom or email us at business@rappler.com. – Rappler.com

Mon Abrea is a former BIR examiner and an advocate of genuine tax reform. He serves as chief strategy officer of the country’s first social enterprise, the Abrea Consulting Group, which offers strategic finance and tax advisory services to businesses and professionals. Mon's tax handbook, "Got a Question About Taxes? Ask the Tax Whiz!" is now available in all bookstores nationwide. Follow Mon on Twitter: @askthetaxwhiz or visit his group’s Facebook page. You may also email him at consult@acg.ph.

source:  Rappler

Buying a house, it pays to know if it is VATable or not

PEOPLE in the market for a home have a lot to consider -- from location, property type, style and size of property, to the developer. But for most people, especially those who are constrained by their budget, the clincher for big purchases such as this is the price of the property. With its considerable impact on the budget, VATability of a property -- i.e., whether the property is subject to 12% value added tax (VAT) -- should be one of the first things a prospective buyer should find out.

As provided under Revenue Regulations No. RR 16-05, as amended, the following sale of real properties shall be exempt from VAT:

(1) Low-cost housing registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) subject to a price ceiling of P750,000

(2) Socialized housing with price ceiling per unit of P450,000

(3) Residential lot with price not exceeding P1,919,500

(4) House & lot and other residential dwellings with price ceiling of P3,199,200

It may be noted that RR 16-05 provides specific price ceilings for each type of exempt sale. Given this, is a low cost housing with a price of P1,250,000 still considered exempt from VAT? Or should the buyer pay an additional P150,000 for the 12% VAT on the purchase?

Fortunately, per BIR Ruling No. 285-2014, dated July 09, 2014, the sale of low-cost housing unit with a maximum ceiling price of P1,250,000, though already exceeding the price ceiling of P750,000 may still be considered exempt from VAT. Hence, the buyer does not have to pay the additional P150,000.

Section 109 (P) of the Tax Code, as implemented by Section 4.109-1 of RR 16-05, provides that sale of real property utilized for low-cost housing wherein the unit selling price is within the selling price per unit of P750,000 is exempt from VAT. Moreover, Section 109 further provides that the sale of properties held primarily for sale to customers with a selling price not exceeding the thresholds of P1,919,500 on sale of residential lots, and P3,199,200 for sale of house and lot and other residential dwellings are exempt from VAT.

Hence, as discussed in the ruling, the sale of low-cost housing units that exceed the price ceiling of P750,000 per unit is not eligible for VAT exemption for low-cost housing under Section 109 (P) of the Tax Code. However, the sale may still be exempt from VAT if the selling price of the property held primarily for sale to customers does not exceed the thresholds of P1,919,500 on sale of residential lots, and P3,199,200 for sale of house and lot and other residential dwellings pursuant to the same provisions of Section 109 (P) of the Tax Code.

Accordingly, the BIR held that while the selling price of P1,250,000 of the low-cost housing units sold by a real estate company does not qualify under the classification of a low-cost housing, the selling price still meets the VAT-exempt threshold of P3,919,200 for sale of house and lot under Section 109 (P) of the Tax Code. Hence, the buyer of said low-cost housing units does not have to pay VAT on his purchase.

Given the rising cost of living in the Philippines, specifically the rising prices of residential properties, the ruling is a welcome respite for those who are planning to buy a house. However, to give the hardworking Filipinos more chance or opportunity to have their own homes, hopefully, the government would consider the current proposals to increase the take home pay of employees. These include, among others, the proposals to increase tax exemptions for bonuses to P70,000 annually and to effectively adjust individual income tax rate in the Philippines. With these measures, the Filipinos’ purchasing power will increase, giving them more opportunity to buy not only low cost housing, but even those residential properties subject to VAT.

Ma. Lourdes Politado-Aclan is a manager with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source:  Businessworld

CTA rules in favor of APEC Plans on VAT

THE BUREAU of Internal Revenue (BIR) lost a P155-million tax case against pre-need firm Abundance Providers and Entrepreneurs Corporation (APEC Plans) after failing to collect before the lapse of a five-year prescription period, the Court of Tax Appeals (CTA) ruled.

In a 29-page decision, the CTA en banc said that the BIR only served its warrant of distraint and levy on Feb. 11, 2010, just under 10 months after the lapse of the five-year period.

At issue was a value-added tax deficiency amounting to P155.49 million for the tax year 2001.

The BIR served its formal letter of demand and audit result on April 26, 2004.

“Petitioner (Commissioner of Internal Revenue Kim S. Henares) had a period of five years to enforce collection from such date as required by law or until April 26, 2009..... The right of the petitioner to collect is deemed to have already prescribed,” the tax court said.

The tax court upheld its resolution dated Oct. 31, 2012 granting the motion for summary judgment filed by APEC Plans seeking to declare the Feb. 11, 2010 warrant as null and void.

The alleged VAT deficiency includes penalties, based on the alleged failure to indicate the amount of trust fund contributions in its official receipts.

However, APEC argued that its omission did not prejudice the government since it paid its VAT liabilities.

The CTA then sided with APEC Plans.

“The material facts relevant to the proper disposition of the issues in this case are undisputed, thereby leaving no genuine issues of fact which would require presentation of evidence in full-blown trial,” the CTA Third Division had said.

This prompted the BIR to file a petition for review before the CTA en banc, seeking to reverse the Third Division’s ruling, and ordering the firm to pay in full the alleged tax deficiency plus the accrued 25% surcharge for late payment and 20% interest per annum from April 26, 2004.

The BIR said it has the right to collect the deficiency. It argued that the CTA has no authority to issue an order nullifying the warrant of distraint and levy.

But the CTA said otherwise.

“The appellate jurisdiction of this court is not limited only to decisions of the Commissioner of Internal Revenue involving disputed assessments or claims for refunds, but also those involving other matters which include the authority to determine the validity of a warrant of distraint and levy issued by the Commissioner of Internal Revenue,” the court said. -- Reden D. Madrid

source:  Businessworld

Nothing new with questioned alphalist requirements, BIR chief reiterates

THE COUNTRY’s tax chief on Friday stood pat on a rule imposing stricter requirements on stricter withholding tax reporting amid a move from business groups to question its constitutionality before the Supreme Court.

Bureau of Internal Revenue (BIR) Commissioner Kim S. Jacinto-Henares said the six organizations that questioned Revenue Regulation (RR) 4-2014 and its related issuances before the high court had the right to do so.

However, she reiterated there was nothing new in the questioned issuances.

“How can you question the constitutionality of something that has been there since 1998?” Ms. Henares said in a phone interview.

The Philippine Stock Exchange, Inc.; the Bankers Association of the Philippines; the Philippine Association of Securities Brokers and Dealers, Inc.; the Fund Managers Association of the Philippines; the Trust Officers Association of the Philippines; and Marmon Holdings, Inc. filed on Thursday a 58-page petition for review and prohibition questioning the validity of RR 4-2014, Revenue Memorandum Circular (RMC) 5-2014 and Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 10, series of 2014.

The petition sought to stop and eventually declare as unconstitutional the issuances which prohibit listed companies from lumping payments in stock trading through PCD Nominee Corp., the designated payee of the dividend payments made by firms trading in the bourse.

RR 1-2014 requires withholding agents to submit an alphabetical list (alphalist) of employees and list of payees baring income subject to creditable and final withholding taxes.

It likewise prohibits lumping such amounts into a single total labeled as “various” accounts.

RMC 5-2014, on the other hand, requires withholding agents to indicate taxpayers identification numbers (TINs), complete names, income amounts and tax withheld from payees.

Lastly, the SEC’s MC 10-2014 sets guidelines to help issuers of securities comply with RR 1-2014.

The petitioners said Finance Secretary Cesar V. Purisima, the BIR’s Ms. Jacinto-Henares and SEC Chairperson Teresita J. Herbosa acted with grave abuse of their discretion with their respective issuances, saying these violated their and their customers’ right to due process.

“The requirement under RR 01-14 and RMC 05-14 for listed companies to disclose the payee of dividend payments and the prohibition of the identification of the PCD Nominee as the payee is unreasonable since listed companies, by themselves, are not capable of accurately providing the required information,” the petition stated.

The questioned regulations likewise violate their right to privacy, saying it entails disclosure of “sensitive personal information” and the rules do not provide a mechanism to safeguard the identity of investors. The rules likewise violate bank secrecy law provisions, they said.

Petitioners also asked the high court to issue a temporary restraining order to protect their rights while the lawsuit is pending and to avoid liabilities that may arise from the questioned regulations.

The industry and business groups said they could face violations of the Data Privacy Act and the Bank Secrecy Law if they comply with the issuances since the orders require disclosure of confidential information.

Non-compliance, on the other hand, would mean violating provisions of the National Internal Revenue Code and the Securities Regulation Code, the petitioners said. -- Mikhail Franz E. Flores


source:  Businessworld

The privilege of taxing a privilege (franchise)

TAXATION has a very wide and long reach that can essentially cover anything under the sun. The power to tax has been described as limitless in its range such that the legislature only needs to enact a law to tax something. One wonders if there will come a time when even the privilege of dreaming big could be taxed as well. Well, that won’t hurt so long as the imposition and collection of the tax is done also in a dream.

Kidding aside, one of several privileges enjoyed by taxpayers under our tax system is the privilege of transacting business and exercising corporate franchises granted by the government. Under Section 137 of the Local Government Code (LGC), a province may impose tax on a business enjoying a franchise within its territorial jurisdiction. Corollary to this, Section 131 of the LGC defines a franchise subject to franchise tax as a right or privilege affected with public interest, which is conferred upon persons or corporations under such terms and conditions as the government and its political subdivisions may impose in the interest of public welfare, security, and safety.

Surprisingly, while the definition of franchise under the LGC appears to be clear, there have been several attempts by some local government units (LGUs) to impose franchise tax even on persons or corporations enjoying only general privileges to engage in business. These past few months, the Court of Tax Appeals has issued decisions on several assessment cases involving LGUs trying to impose franchise tax on entities engaged in power generation. This somehow shows that LGUs are taking every opportunity to create their own sources of revenue as a necessary privilege of having fiscal autonomy.

The growing interest of LGUs on franchise tax has piqued my curiosity to revisit the existing jurisprudence and rulings of the Courts on the coverage of franchise tax under Section 137 of the LGC.

The Philippine Supreme Court (SC) has already explained what types of privileges Section 137 of the LGC embraces. A 2003 SC case (G.R. No. 149110 dated 9 April 2003) is very instructive and provides an exhaustive discussion on this matter. In that case, the High Court stated that franchise tax is a tax on the privilege of transacting business in the state and exercising a corporate franchise granted by the state. It is not levied on a corporation simply for existing as a corporation, or upon its property or its income, but on its exercise of the exclusive rights or privileges granted to it by the government.

The SC went on to further distinguish a general or primary franchise from a special or secondary one, in order to emphasize that the franchise tax under Section 137 in relation to Section 131 of the LGC applies only to a special or secondary franchise. A general franchise relates to the right to exist as a corporation, by virtue of duly approved Articles of Incorporation. On the other hand, a special franchise refers to the rights or privileges conferred upon an existing corporation such as the right to use the streets of the LGU to lay pipes, erect poles or string wires. In other words, special franchises are charged with a public use. Thus, to be liable for franchise tax, one must have a franchise in the context of a secondary franchise, i.e., a special privilege conferred by the government on a person or corporation to do certain things which are not available to ordinary corporations. Further, in a 2006 case (G.R. No. 160528 dated 9 October 2006), the SC categorically stated that a franchise is a legislative grant to operate a public utility. In a long line of court cases, it has been consistently ruled that to be considered a public utility, the related activity must essentially be one of public use.

It may also be interesting to look back at what was the rule on franchise tax in the old days. In the earlier Tax Codes, one would find that franchise tax was then imposed on franchises granted by law to operate certain public utilities such as communication, power, and transportation. The term franchise has always been defined as a right or privilege acquired by special grant from the public through the legislature. Moreover, from the congressional deliberations on the LGC, it would appear that the lawmakers recognized the nature of an authority to grant franchise as essentially a legislative act. This supports a conclusion that the Congress intended to limit the collection of franchise tax only from grantees of legislative franchise and not from every franchise holder.

Even today, franchise taxes collected by the national government under Section 119 of the National Internal Revenue Code (NIRC) are imposed only on public utility companies such as those engaged in radio and/or television broadcasting, gas and water utilities, and others granted with special franchises. Significantly, Section 137 of the LGC merely replicates Section 119 of the NIRC.

All the above circumstances point to one thing -- franchise tax specifically applies to a grant of the privilege to operate a public utility.

Arguably, any action by the LGUs to expand the coverage of the franchise tax law may be considered ultra vires, i.e., an action in excess of one’s authority. While LGUs have residual taxing powers, such cannot cover franchise tax because the latter is a special-mentioned tax under the LGC with a well-defined subject matter which is a franchise in its strict and limited sense.

It is understandable that the LGUs would take every opportunity to impose taxes. History tells us that the Constitution granted LGUs fiscal autonomy so that they can create their own sources of revenue and minimize their dependency on the national government in terms of delivering basic services to their constituents. However, LGUs should keep in mind that their taxing power is a constitutional grant that is subject to limitations under the law. They should therefore exercise this authority with caution and within the confines of the law. After all, such a great privilege carries immense responsibility and accountability.

Brando C. Cabalsi is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

brando.cabalsi@ph.pwc.com

source: Businessworld

Congress moves to raise tax exemption cap for bonuses

BOTH CHAMBERS of Congress are moving to give employees some succor in time for Christmas in the face of rising prices, with one such measure hurdling the committee level in the House of Representatives yesterday.

The House committee on ways and means yesterday approved a measure seeking to more than double the income tax exemption cap for employee bonuses to P70,000 from the current P30,000 ceiling. The body is now drafting a consolidated measure from at least nine bills dealing with this proposal. The measure covers the 13th month pay “and other benefits” like Christmas bonus and productivity incentives.

“What we approved today is... we’re exempting all Christmas bonuses... 13th month pay to the extent of P70,000 that will no longer be taxed,” committee chairman Rep. Romero S. Quimbo of Marikina (2nd district) told reporters at the sidelines of a committee hearing, citing a pressing need to raise the exemption ceiling in order to provide Filipino workers some relief from continued rising prices.

He noted that the current exemption level was set in 1994, hence, the need to adjust the current value to take inflation into consideration.

The approval of such measure is a first in recent years. Two similar bills were filed in the 15th Congress, but failed to gain the nod even at the committee level.

Also yesterday, Senate President Franklin M. Drilon said his chamber has already agreed with the House to approve the measure in time for Christmas season.

“We have an agreement with the House of Representatives that we will pass this bill within the year, so that Christmas could be merrier for our workers,” a statement quoted him as saying.

“There is really a need to revisit the antiquated provisions of Republic Act No. 7833, which imposed the P30,000 cap on bonuses back in 1994.”

The Trade Union Congress of the Philippines (TUCP) lauded the committee approval of the bill. “A legislative measure such as this is very much welcome, especially at this time when workers... worked so hard to bring about improved economic growth of the country,” TUCP spokesman Alan A. Tanjusay said in a text message, referring to gross domestic product growth that slowed but still surprised at 6.4% last quarter, spurring first-half economic expansion to 6.0% against the government’s 6.5-7.5% target. “We want to see the bill become into law so that Filipino workers will feel rewarded for their hard work.”

The Employers Confederation of the Philippines (ECoP) also threw its support behind the measure, saying it could help lessen workers’ demand for an increase in wages. Besides that, ECoP President Edgardo G. Lacson added that the proposal would help stimulate the economy.“It’s very very positive,” Mr. Lacson said in a telephone interview. “What the government will lose in [income] tax, they can collect in other taxes” that will rise with increased consumption.

The House ways and means committee is also set to consolidate nine measures seeking to trim individual and corporate income tax rates, again citing the need to adjust levels to inflation.

“We are taxing individuals more now for the same value of their salaries,” Mr. Quimbo noted.

“Tax burden today is being shouldered by ordinary income earners because they have no choice.”

The Senate is in sync with the move, with Mr. Drilon yesterday saying: “Congress is aware of the necessity to revisit our existing tax structure, which has remained unchanged since 1997.”

“Congress is committed to pass legislation that will lower individual income taxes in order to help our workers deal with the effect of inflation,” Mr. Drilon said.

“If the salary hike that our workers have been asking the government to provide is not yet possible due to fiscal constraints, legislation that will increase workers’ net take-home pay is the best alternative we can work on.”

Emphasizing his department’s stand during the committee hearing yesterday, Finance Undersecretary Jeremias N. Paul, Jr. said lawmakers must take a “holistic approach” to tax reform, saying “there should be a revenue measure that will essentially plug the loophole” of about P40 billion from the raising of the bonus exemption cap alone. -- M. L. T. Lopez

source:  Businessworld

For human or not for human

PRICE hikes are always controversial. With the current situation of commodity prices, Filipinos feel every additional centavo they have to pay to meet their basic needs. This is because Filipinos belonging to the lower bracket income cannot keep up with the ballooning prices of goods, especially those which are staple in every household. In their perception, the government’s inaction is to be blamed for rising commodity prices.

A probable issue of price hike on livestock and poultry products arose just recently. The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. (RMC) 66-2014, amending RMC 55-2014. The circular provides a list of feed ingredients that may be subjected to value-added tax (VAT). Unless the taxpayer shows that the ingredients are unfit for human consumption or that the ingredient cannot be used for the production of food for human consumption, the ingredient/raw material should be subjected to VAT.

The lists of ingredients under the circular are as follows: 1. whey powder 2. skimmed milk powder 3. lactose 4. buttermilk powder 5. whole milk powder 6. palm olein. The circular also provides for a catch-all phrase, “and such other feed ingredients and additives used in the manufacture of finished feed which may hereinafter be determined by competent authority to have possible utilization for human consumption.” To avail of the VAT exemption, the circular further requires certification from the Food and Drug Administration that the ingredients are unfit for human consumption.

Under Revenue Regulations No. (RR) 16-2005, the sale or importation of fish, prawn, livestock and poultry feeds are exempt from VAT. This exemption covers ingredients, whether locally produced or imported, used in the manufacture of these animal feeds.

Republic Act No. (RA) 1556 also known as Livestock and Poultry Feeds Act, as amended by Presidential Decree No. (PD) 7, “ingredients” or “feed ingredients” is defined as any single article of feed or feeding stuff which enters into the composition of a ration, concentrate or supplement. The law does not distinguish the ingredient as to its fitness for human consumption. Previously, the VAT exemption only requires that the Bureau of Animal Industry (BAI) ascertain the classification of the importations as ingredients for animal feed. With the new rule, there is the additional requirement of a certification from the FDA for identification of whether a specific ingredient is fit for human consumption or not. In the end, we would expect that some of the ingredients will now be subject to VAT since many of these ingredients are also used in the manufacture of food for human consumption.

Tax exemptions are allowed to certain transactions by reason of public policy. The rationale for the VAT exemption of feed ingredients has been discussed in the case of Tolentino vs. Secretary of Finance and Commissioner, G.R. No. 115455. The High Court declared that in specific transactions, exemptions, such as purchase of ingredients used in the manufacture of feeds, are “granted, in some cases, to encourage agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit.” Relative to this, the Court also held that “exempt from the tax are sales of farm and marine products, so that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach of the general public.”

Additionally, under VAT Ruling No. 12-01, the bureau opined that if the law declared the end product to be exempt, it is but logical that all the inputs needed to produce the end product must necessarily be exempt. The ruling also said that the exemption accorded by law to feed and feed ingredients is closely intertwined to the public policy of exempting basic food from the coverage of VAT, related as they are to the exemption of livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption.

The Philippine populace has a higher concentration on the lower and middle income families. The impact of a little jump in the prices of basic commodities is magnified on these brackets because with very little extra funds (or none at all), there is little room for a rearrangement of their daily budget. Hence, the issue on price increase arises. The rationale for the exemption of inputs of feeds for animals, save the specialty feeds for animals considered as pets, is to prevent increase in the price of inputs to agricultural and marine food products, which are consumed more by low and middle income groups. If any of the inputs will be subjected to VAT, necessarily, it will be added to the cost of manufacturing, hence an increase in input price. There are two possible outcomes if this is to be the case: either the producer sector (meaning the livestock and poultry farmers) would squeeze their margins, or the end-consumer would carry the burden of such increase in price. As end-consumers, we just hope that the effect of the imposition of VAT on such ingredients will not greatly affect the prices of livestock and poultry products.

We could understand the reason of the BIR in passing the circular to avoid abuses of availing VAT exemptions such as diversion of ingredients for other purposes not related to the manufacture of animal feeds. We cannot argue on the good intentions of the circular. However, by imposing the circular, the BIR also sanctioned the ones diligently following the law. The BIR has other ways to meet the objectives of compliance. Say for instance, this should be included in the regular audit of the manufacturers. The BIR may also impose a threshold amount on ingredients which are susceptible from being used for purposes not in relation to the manufacture of animal feeds.

In this particular issue what we simply say is that, there is a need to revisit the practice of regulators of plugging the leakages by closing the whole pipeline. The BIR is not out of options yet and I submit that their choice in this case may not be the best one.

P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

Eliezer P. Ambatali is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld