BIR rejects calls to junk new VAT refund rules

THE BUREAU of Internal Revenue (BIR) has rejected anew a request from business groups to relax its tax rules, this time sticking to its issuance involving a mandatory period to file a refund claim on value-added taxes (VAT).

Commissioner of Internal Revenue Kim S. Jacinto-Henares, in a phone interview, said “no” when asked if she would withdraw Revenue Memorandum Circular (RMC) 54-2014 based on an appeal to reconsider such issuance contained in a seven-page letter from 16 business groups.

Under RMC 54-2014 issued last June 17 the BIR chief has 120 days from the date of submission whether to grant or deny a refund claim. If the tax chief fails to act within the given period, the claim is “deemed denied” and the taxpayer has 30 days to elevate its refund request before the Court of Tax Appeals (CTA).

“That’s the law. It’s a Supreme Court decision,” Ms. Henares said.

Ms. Henares and Finance Secretary Cesar V. Purisima had met business groups last Oct. 14 to tackle the latter’s position on the VAT refund claim.

Rina-Lorena R. Manuel, President of the Tax Management Association of the Philippines (TMAP), said in a telephone interview the discussion had mixed results.

“In terms of the technical issues, we were not able to resolve that,” Ms. Manuel said, referring to the period in filing tax claims.

“But at least on the administrative side, they committed to involve the group in reviewing the documents for the processing of VAT refund claims,” Ms. Manuel said.

In a draft letter dated Sept. 12, the business groups pointed out that RMC 54-2014 “effectively created new rules and interpretation” which gave taxpayers a hard time to recover VAT refunds owed by the government.

“With its interpretation that BIR inaction on VAT refund applications is ‘deemed denial’, said RMC effectively encourages the BIR to abdicate its administrative duty to process refund claims by compelling taxpayers to pursue judicial claims with the CTA,” the letter read.

Taxpayers, they said, would lose the right to await the BIR’s final ruling on the tax claims, bear additional costs in litigation fees and clog CTA’s dockets.

Further, the business groups claimed the BIR issuance was against the Supreme Court decision which allowed BIR to rule over the administrative claim even as the refund request already reached the tax appellate court.

“Instead of streamlining the VAT refund application process, RMC 54-2014 makes compliance more burdensome to taxpayers by imposing impractical and unrealistic requirements that are very difficult to comply with, or by prescribing additional requirements not found under the law,” the business groups said.

Thus, the business groups asked the BIR to “withdraw RMC 54-2014 and uphold the taxpayer’s right to an administrative appeals process.”

The groups likewise urged BIR to “define service standards for the processing of VAT refund applications to enable the BIR to adhere to the 120-day period.”

“This should be done upon prior consultation with affected zero-rated taxpayers and investors,” the letter stated.

Signatories include five leaders of chambers of commerce in the Philippines: Ebb Hinchliffe, Executive Director (American), Julian Payne, President (Canadian), Michael Raeuber, President (European), Tetsuo Tomino, President (Japanese) and Edward Eun-Gap Chang, President (Korean).

The letter was likewise signed by Sergio R. Ortiz-Luis (Philippine Exporters Confederation President and Philippine Chamber of Commerce and Industry Honorary Chair) and Dean A. Lao, Jr. (United Coconut Associations of the Philippines Chairman), among others.

Other signatories to the business groups’ letter were Donnies T. Alas, President of the Association of Certified Public Accountants in Public Practice; Edgardo G. Lacson, President of the Employers’ Confederation of the Philippines; Jose Mari Mercado, President of the IT and Business Process Association of the Philippines; Gregorio S. Navarro, President of the Management Association of the Philippines; and Ms. Manuel, TMAP President.

As a general rule, the Supreme Court said, Section 112 (C) of the Tax Code gives the BIR chief 120 days to act on a refund request. If the tax chief fails to act within the given period, a taxpayer is given 30 days to raise its tax claim before the CTA.

However, claims filed from Dec. 10, 2003 to Oct. 6, 2010 can be exempted from this general rule since BIR issued a ruling which states that a “taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of petition for review.”

In 2010, the high court also ruled that the 30-day period to raise the tax refund claim is mandatory. It reiterated its ruling in a decision dated Feb. 12, 2013. -- Mikhail Franz E. Flores

source:  Businessworld

Tax bureau tops goal in September

THE BUREAU of Internal Revenue (BIR) breached its target for a second month for 2014 in September, but the year-to-date tally still fell short of the goal for those nine months, according to data the Finance department released through a statement yesterday.

BIR collections last month totaled P105.71 billion, up 22.87% from last year’s P86.034-billion take and 2.6% above September’s P102.987-billion target for the month.

September’s tally brought the year-to-date tally to P996.426 billion, up 10.97% from the P897.951 billion collected in 2013’s first nine months.

STILL SHORT
The end-September, haul, however, was still P79.639 billion or 7.4% short of the bureau’s P1.076 trillion target for those nine months.

This year, BIR -- which accounts for about three-fourths of the state’s total tax collections in a year -- first exceeded its monthly target in July -- by 0.05% or P58.52 million.

Collections reached P119.94 billion that month, up 19.82% from the P100.098 billion collected in July last year and above the bureau’s P119.883-billion target for the month.

“The good collection performance for September 2014 was largely due to the increase in collection by the Large Taxpayer Service,” the Finance department said in its statement.

Sought for comment, Internal Revenue Kim S. Jacinto-Henares said in a telephone interview “hard work” drove the agency’s above-target collections.

“We’re still working, trying very hard to reach it or lower the shortfall,” Ms. Henares added, referring to the full-year target.

The BIR’s Large Taxpayers Service -- which accounts for 65% of BIR’s total haul -- exceeded its monthly target by P5.64 billion or 9.33% above the goal. It collected P66.17 billion last month, up 33.69% from the past year’s take.

Collections from BIR operations totaled P101.63 billion, up 24.3% from September 2013 and exceeding its target by 3.1%.

Non-BIR operations -- involving taxes on government securities -- contributed P4.08 billion, 4.62% less than September 2013 collections and P338.83 million or 7.68% short of the goal set for last month.

Regional offices raked in P35.47 billion, up 9.9% from collections in July 2013 but P3.79 billion or 9.66% short of their target for last month.

BIR is mandated to collect P1.456 trillion this year. With the latest tally of 996.426 trillion, it still needs to collect P459.904 billion from this month until December to meet its 2014 target. -- Mikhail Franz E. Flores

source:  Businessworld

Businessmen want new VAT refund rule junked

Sixteen local and foreign business and industry groups have asked the government to withdraw a new tax rule which, they claimed, would make it more difficult for investors to get their value-added tax (VAT) refund.

In a Sept. 12 letter to Finance Secretary Cesar V. Purisima, six foreign chambers as well as 10 Filipino industry associations called on the government to void Revenue Memorandum Circular (RMC) No. 54-2014 issued by the Bureau of Internal Revenue (BIR) last June and “uphold the taxpayer’s right to an administrative appeals process.”

“While an RMC is supposed to only publish and amplify pertinent and applicable portions of tax laws and regulations, RMC 54-2014 effectively created new rules and interpretations, which made it even more difficult for zero-rated taxpayers and investors to recover the VAT refunds owed by government,” according to the joint letter signed by officials of the American, Canadian, European, Japanese and South Korean chambers of commerce as well as the Philippine Association of Multinational Companies Regional Headquarters.

Also signatories to the letter were executives belonging to the Association of Certified Public Accountants in Public Practice, Employers’ Confederation of the Philippines, Information Technology and Business Process Association of the Philippines, Management Association of the Philippines, Philippine Banana Growers and Exporters Association, Philippine Chamber of Commerce and Industry, Philippine Coconut Oil Producers Association, Philippine Exporters Confederation, Tax Management Association of the Philippines, and United Coconut Associations of the Philippines.

According to these groups, RMC 54-2014 “removes the fundamental right of a taxpayer to an administrative appeals process.”

The rules state that the BIR said “if the claim for VAT refund or credit is not acted upon by the Commissioner within 120-days as required by law, such inaction shall be deemed a denial of the claim.”

“This effectively encourages the BIR to abdicate its administrative duty to process refund claims by compelling taxpayers to pursue judicial claims with the CTA [Court of Tax Appeals],” they said.

Such an interpretation is “prejudicial to the taxpayer who has the option to appeal immediately the inaction to the courts after the lapse of the 120-day period.” The groups said that, adding such “will be very costly to the taxpayer who has to incur needless expenses in the form of docket fees—which is about 1 percent of the amount of the claim—and legal costs.”

The business groups also claimed that the circular “runs contrary to the Supreme Court’s ruling in San Roque Power Corp. v. Commissioner of Internal Revenue, 690 SCRA 336 (2013), which it purports to circularize.”

The ruling said that, “the BIR does not lose jurisdiction to process the administrative claim for refund simply because the taxpayer elected to appeal the inaction to the CTA. In fact, the Supreme Court said ‘the Commissioner should still evaluate internally the administrative claim for purposes of opposing the taxpayer’s judicial claim, or even for purposes of determining if the BIR should actually concede to the taxpayer’s judicial claim,’” they noted.

Also, “the retroactive application of the strict ‘120+30’ rule to all pending VAT refund applications is confiscatory since it will result in a large scale automatic denial of all pending applications. This is in violation of the non-retroactivity rule, which undermines the fairness of the tax system,” according to the groups.

The business groups noted that investors were allowed to appeal with the Court of Tax Appeals denials of their tax refund or tax credit claims within 30 days upon receipt of the BIR decision.

However, the groups also pointed out that “the BIR usually takes an average of four to six years to process and approve valid input VAT refund claims, much to the frustration of zero-rated sellers and investors.”

“A far greater number of input VAT refund claims, which already run into billions of pesos, remain unacted upon by the BIR or are pending with the Court of Tax Appeals with no definite timeframe on when these claims will be resolved,” they added.

“Instead of streamlining the VAT refund application process, RMC 54-2014 makes compliance more burdensome to taxpayers by imposing impractical and unrealistic requirements that are very difficult to comply with, or by prescribing additional requirements not found under the law,” they said.

According to the 16 business groups, they deem that “RMC 54-2014, coupled with the questionable stand of the BIR that input VAT claims could not be claimed as cost or expense for income tax purposes, effectively nullifies the incentives granted by law to zero-rated taxpayers and/or transactions.”

“The sudden change in the VAT refund process rules under the said RMC shows the lack of transparency, predictability and consistency on the part of government, which greatly affects investor trust and confidence,” they said, adding that “any unrefunded VAT arising from these very restrictive rules, on top of the existing bureaucratic inefficiencies, will result in higher costs of doing business in the Philippines.”

source:  Inquirer

Authority to print and the value-added tax refund

FAILURE to secure an Authority to Print (ATP) prior to the zero-rated transaction is fatal to the taxpayer’s claim for tax refund of input tax attributable to such zero-rated sales.

In the recent case of Emerson Electric (Asia) Limited-ROHQ vs. Commissioner of Internal Revenue (CIR), the Court of Tax Appeals (CTA) ruled that to prove that a taxpayer is engaged in zero-rated sales, the duly registered invoices or receipts must be presented. This assumes that the proper ATP was secured prior to the transaction. If the ATP is not indicated in the invoices or receipts, the only way to verify whether the said invoices or receipts are duly registered is for the taxpayer to present its ATP issued by the Bureau of Internal Revenue (BIR). Without this proof, the invoices or receipts would have no probative value for the purpose of refund.

The CTA emphasized that invoices or receipts must be duly registered. Absence of an ATP is fatal to the taxpayer’s claim for refund/tax credit of input tax attributable to zero-rated sales. Also, securing the required ATP after the subject transactions have taken place is fatal to the taxpayer’s refund claim.

Zero-rated sales of goods and services by a value-added tax (VAT)-registered taxpayer are taxable transactions for VAT purposes. However, they do not result in any output VAT. Thus, the taxpayer is in a situation where there is accumulated input VAT on purchases of goods, properties or services related to such zero-rated sale but there is no output VAT to credit against. Consequently, the law allows the taxpayer to file a claim for refund to enable it to recover the accumulated unutilized input VAT.

According to Section 112 (A) of the Tax Code, a taxpayer is entitled to the tax refund provided that the following requirements are present:

1. There must be zero-rated or effectively zero-rated sales;

2. Input taxes were incurred or paid;

3. Such input taxes are attributable to zero-rated or effectively zero-rated sales;

4. The input taxes were not applied against any output VAT liability; and

5. The claim for refund was filed within the two-year prescriptive period.

In this case, the taxpayer was held to be compliant with all the requirements under the Tax Code -- except that it failed to substantiate its alleged zero-rated sales. The taxpayer claimed that the services it rendered to its non-resident affiliates qualify for VAT-zero rating. To support its claim, the taxpayer presented its schedule of zero-rated sales and related sales invoices, various service agreements with the non-resident clients, incorporation documents in their respective foreign countries, Certifications of Non-registration, Certificate of inward remittances, and credit advices.

In the case of CIR vs. Burmeister (GR No. 153205), the Supreme Court held that for the supply of services to be zero-rated under Section 108 (B)(2) of the Tax Code, the following requisites must be satisfied:

1. The services must be other than processing, manufacturing or repacking of goods;

2. The payment for such services must be in acceptable foreign currency accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations; and

3. The recipient of such services is doing business outside the Philippines.

In determining whether the transaction qualifies as zero-rated sales, the CTA did not confine itself to the requirements stated in the Tax Code. The CTA, in this case, explained that corollary to the requirement that the payments be in acceptable foreign currency, the taxpayer must also comply with the invoicing requirements under Section 113 (A)(2) of the Tax Code. The Court said that said Section states in no uncertain terms that the foreign currency remittances must likewise be supported by a VAT zero-rated official receipt.

While the taxpayer presented the related sales invoices, the Court stressed that the taxpayer failed to prove that it issued an official receipt. More glaringly, the CTA noted that the taxpayer was only able to secure its ATP in July 22, 2008. However, the transactions covered by the refund were for the fourth quarter of 2007 and the first quarter of 2008. Thus, the Court held that securing the required ATP after the transaction took place is fatal to the petitioner’s claim for refund.

For the claim of VAT refund to be successful, the taxpayer should comply with every requisite. In this case, the Court held that all requirements of the Tax Code, no matter how seemingly inconsequential can be fatal to the request for refund. More importantly, the Court did not limit itself to the requirements under Section 112 (A) of the Tax Code on VAT refund but widened the requirements to include Section 113 of the Tax Code.

Taxpayers with foreign clients must be mindful of the invoicing regulations even if their clients do not require them to issue VAT official receipts or invoices. They should remember that failure to comply with the requirements of the law can have fatal effects on their claims for input VAT refund, as evidenced by this case.

It bears stressing that a claim for tax refund is in the nature of a tax exemption. Laws granting tax exemptions are construed against the taxpayer and are liberally in favor of the taxing authority. As mentioned by the law authorities, taxation is the rule and exemption is the exception.

As such, the taxpayer should comply with every requisite required by law for it to be entitled to the claim for tax refund.

Ed Warren L. Balauag is an associate with the Tax Advisory and Compliance Division of Punongbayan & Araullo.

source:  Businessworld

Making filing and paying easier for taxpayers

“IT IS very strange that the years teach us patience -- that the shorter our time, the greater our capacity for waiting.”

-- Elizabeth Taylor, A Wreath of Roses

The efforts of the Bureau of Internal Revenue (BIR) to embrace technology and continuously look into efficient measures for easy preparation and filing of tax returns have been noticeable and commendable. Just recently, the BIR ordered the mandatory implementation of the Electronic Bureau of Internal Revenue Forms or eBIRForms. The eBIRForms system was developed to provide taxpayers particularly the Non-Electronic Filing and Payment System (Non-eFPS) filers with accessible and convenient service through easy preparation and filing of tax returns. The use of eBIRForms shall improve the BIR’s tax return data capture and storage thereby enhancing efficiency and accuracy in the filing of tax returns.

Revenue Regulations (RR) No. 6-2014, which became effective last Sept. 24, prescribes the mandatory use of eBIRForms in the filing of all tax returns by Non-eFPS filers particularly Accredited Tax Agents/Practitioners, Accredited Printers of Principal and Supplementary Receipts/Invoices, and One-time Transaction (ONETT) Taxpayers.

It makes it mandatory for non-eFPS filers or taxpayers to use eBIRForms covering 36 BIR Forms in the preparation and filing of their tax returns relative to the existing revenue issuances under Revenue Memorandum Circular (RMC) No. 61-2012, “Authorizing the Use of eBIRForms Package in Preparation and Filing of Tax Returns” and Revenue Memorandum Order (RMO) No. 24-2013, “Prescribing the Guidelines, Policies and Procedures on the Use of eBIRForms in Relation to RMC No. 61-2012”.

eBIRForms refer to the two types of electronic services (e-Services) provided by the BIR relative to the preparation, generation and submission of tax returns, which are the following:

a. Offline eBIRForms Package is a tax preparation software that allows taxpayers and Authorized Tax Agents/Practitioners (ATAs) to accomplish or fill-up tax forms offline. Instead of the conventional manual process of completing tax returns on pre-printed forms that is highly susceptible to human error, taxpayers or ATAs can directly encode data, validate, edit, save, delete, view, print and submit their tax returns. The package can also do automatic computations and has the capability to validate information encoded by taxpayers/ATAs.

Taxpayers/ATAs can submit the returns to the Online eBIRForms System after filling out the forms. This, however, is allowed in case the Taxpayer/ATA has successfully been registered with Online eBIRForms.

In the meantime, those Taxpayers/ATAs who have yet to comply with the Online eBIRForms registration must initially resort to manual filing and payment since there are no registration requirements using the Offline eBIRForms. “No Payment” or “NIL” returns need to be manually filed with the BIR. While for those with tax payment, the taxpayers/ATAs can pay them directly with the Authorized Agent Bank (AAB) without the need to have the tax return stamped by the BIR.

The submission of the CD-RW or USB flash drive with the eBIRForms soft copy to the RDO is no longer required.

To download the Offline eBIRForms Package v2.0, you can go to https://ebirforms.bir.gov.ph.

b. Online eBIRForms System is a filing infrastructure that accepts tax returns submitted online and automatically computes penalties for tax returns submitted beyond the due date. The system creates secured user accounts for taxpayers, ATAs, and Tax Software Providers (TSPs) for use of the online system and allows ATAs to file in behalf of their clients. The system also has the capability for TSPs to test and certify the data generated by their tax preparation software (certification is by form). It is capable of accepting returns data filed using system-certified TSP tax preparation software.

Taxpayers/ATAs need to comply with the registration requirements as set forth in Annex C of RMO No. 24-2013 before the BIR can provide access to the Online eBIRForms System. Same with eFPS, filing has to be done online after successful registration with the BIR. In addition, payment of taxes can be processed online through accredited banks such as Landbank and Philippine National Bank for now.

RR No. 6-2014 mandates compliance with the following non-eFPS filers:

1. Accredited Tax Agents/Practitioners and all client-taxpayers;

2. Accredited Printers of Principal and Supplementary Receipts/Invoices;

3. ONETT taxpayers;

4. Those who shall file a “No Payment” return;

5. Government-Owned or -Controlled Corporations (GOCCs);

6. Local Government Units (LGUs), except barangays; and

7. Cooperatives registered with National Electrification Administration (NEA) and Local Water Utilities Administration (LWUA).

Growth in electronic technology has unquestionably been achieved and continues to modernize the world. As taxpayers, we have openly adopted the enhancement of technology through the BIR’s drive to constantly revolutionize the tax filing and payment process. This is a welcome development for us. With the wide range of taxpayers, it would be practical for the BIR to also review the current capacity of its system and determine how this could be further improved to take full advantage of its benefits.

I will not be surprised if, in the near future, an app will be created allowing the filing and paying of taxes via our mobile phone.

Eric M. Rañeses is an assistant manager at the Client Accounting Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

eric.m.raneses@ph.pwc.com

source:  Businessworld

BIR’s right to collect has expired

WHEN one is facing a tax assessment case we resort to exhaust all possible and available legal remedies that the law provides for the taxpayer. One of the possible and available remedies is for the taxpayer to request for a reinvestigation of the case.

Under Revenue Regulations (RR) No. 18-2013, request for reinvestigation refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both.

This request, however, cannot be granted without a return of favor to the Bureau of Internal Revenue (BIR).As a rule, when the taxpayer requests for a reinvestigation which is granted by the Commissioner of the BIR, the running of prescriptive period of the BIR to assess and collect shall be suspended. Consequently, the five (5)-year prescriptive period for BIR to collect the tax assessment shall be suspended.

WHEN DOES THE SUSPENSION OF THE FIVE (5)-YEAR PRESCRIPTION PERIOD TO COLLECT COMMENCE?
In G.R. No. 197515 (Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc.), the Supreme Court (SC) said that the request for reinvestigation should be granted or at least acted upon in due course before the suspension of the statute of limitations to collect may set in.

In the instant case, the final assessment notice (FAN) was issued by the BIR on January 9, 1996 and the taxpayer requested for a reinvestigation on March 14, 1997. However, the BIR granted such request only on January 22, 2001 or after five (5) years from the date of the issuance of the FAN. Further, the BIR issued Preliminary Collection Letter only on February 21, 2002.

The BIR argued that its right to collect the tax assessment has not yet prescribed. The five (5)-year prescriptive period to collect was interrupted when the taxpayer filed its request for reinvestigation. Thus, the period for tax collection should have begun to run from the date of the reconsidered or modified assessment.

This argument failed to persuade the SC. The Court emphasized the rule that the Commissioner of the BIR must first grant the request for reinvestigation as a requirement for the suspension of the statute of limitations. The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension.

The Court pointed out that while the request for reinvestigation was made on March 14, 1997, the same was only acted upon by the BIR on January 22, 2001 which is beyond the three (3) year statute of limitations from the issuance of the FAN on January 9, 1996. Further, the Court stressed that the Preliminary Collection Letter was only issued on February 21, 2002 which is clearly five (5) long years had already lapsed before collection was pursued by the BIR.

Moreover, the Court rejected the BIR’s argument that the taxpayer’s act of elevating its protest to the Court of Tax Appeals has fortified the continuing interruption of the BIR’s prescriptive period to collect. The Court found the argument flawed at best because the taxpayer was merely exercising its right to resort to the proper Court and does not in any way deter the BIR’s right to collect taxes from the taxpayer under existing laws.

The Court also elucidated that the statute of limitations on the collection of taxes was enacted to benefit and protect the taxpayers. Just as the government is interested in the stability of its collections, the taxpayers are also entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time.

While it is true that taxes are the lifeblood of the government, it must be exercised fairly, equally and uniformly so as not for the tax collector to kill the “hen that lays the golden egg.”

Nikkolai F. Canceran 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

Premium on redemption of shares: capital gains or dividends?

SHARES of a company may be redeemed for a number of reasons. Redemption of shares can be an obligation under a buy-sell agreement to purchase stock. Companies also buy back shares in order to increase price or to retire preferred stock so as to dispense with the payment of dividends. Generally, stock redemption may also be viewed as a means of returning capital to investors or as an alternative to dividends.

Because of its close resemblance to the nature of dividends, some countries have taken the position of taxing any redemption premium (i.e., the difference between the redemption price and the cost of the shares redeemed) as dividends and not as capital gains, if certain criteria are met.

In the Philippines, the rules on the tax treatment of such premium may not be as definite and straightforward, which may be the reason why such has been the subject of a recent Court of Tax Appeals (CTA) En Banc decision. In the CTA case entitled Commissioner of Internal Revenue (CIR) vs. Goodyear Philippines, Inc. (“Goodyear”) dated Aug. 14, the BIR argued that the amount in excess of the original subscription price paid by Goodyear should not be treated as mere premium, but as accumulated dividends in arrears of the redeemed preferred shares, hence, subject to 15% final withholding tax on dividends. The CTA ruled that the premium shall be treated as capital gain or loss and shall not be considered dividends subject to dividend tax.

The capital gain or loss treatment applied to the redemption of shares was principally anchored on Revenue Regulations (RR) No. 6-2008, where the BIR consolidated the rules on the taxation of shares sold, bartered, exchanged, or otherwise disposed of. Under the RR, the tax consequences of the redemption will depend on the intention of the issuing company to either retire the shares or to hold it in treasury, as summarized below:

a) Redemption of shares for cancellation or retirement -- The difference between the redemption price and the original cost of the preferred shares shall be treated as capital gain or capital loss, and shall be subject to the regular income tax rates imposed under the Tax Code.

b) Redemption of shares held in treasury -- If the shares are listed and transferred through the trading system and/or facilities of the Local Stock Exchange, the stock transaction tax shall; Otherwise, the transaction shall be subject to the 5% and 10% net capital gains tax.

(If the shareholder is a resident of a country with which the Philippines has an existing tax treaty, subject to certain qualifications, exemption from income tax may be available.)

Although the RR seems to be clear on the capital gains or loss treatment, in this case, the CIR was keen to treat the inclusion of the accrued dividends in the redemption price as payment of dividends, and impose the dividends tax.

However, the court ruled that the net capital gain does not meet the definition of dividends under the Tax Code thus should not be taxed as such. Per definition, dividends should be paid out of earnings and profits but the court noted that Goodyear did not declare and pay dividends as the company did not have unrestricted retained earnings to cover any dividend declaration. Dividends should also be a recurring return on the shares.

The court went further in saying that there is only one provision in the Tax Code which treats as dividends the gain derived from redemption or buy back of shares. It is only in cases of redemption of shares previously issued as stock dividends that the difference between the par value and the redemption price may be treated as dividends.

The transaction in the above case took place in 2008 and was still appealed by the BIR to the CTA En Banc in 2013. The appeal seems contrary to a 2012 ruling issued where the BIR held that the net capital gain realized by a nonresident foreign corporation (domiciled in the Netherlands) from the redemption of preferred shares is exempt from income tax under the capital gains provision of the Philippines-Netherlands tax treaty. The BIR, in this case, did not consider the premium as taxable dividends.

One can surmise that the tax treaty exemption was properly applied in the 2012 ruling but the BIR did not appear to find the circumstances in the 2008 transaction to be the same as in the 2012 ruling. Thus, while the CTA has already confirmed that treaty exemption should apply on share redemptions regardless of whether it is pegged to include unpaid and accrued dividends, taxpayers may find it prudent to consider the potential risk when redeeming their shares.

Reynaldo E. Maniego III is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network. You may send inquiries or feedback to reynaldo.e.maniego.iii@ph.pwc.com

source:  Businessworld