Favorable developments in deficiency and delinquency interest

Taxpayers may have finally been given two rays of hope by the Court of Tax Appeals when it comes to the applicability of deficiency and delinquency interest in tax assessments.

Taxpayers under assessment are often faced with two types of interest under the Tax Code. The first, deficiency interest, is imposed on any deficiency tax due from the date prescribed for its payment until the full payment thereof. The second, delinquency interest, is imposed on the deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the BIR. Interest rates for both are at 20%.

A cursory reading would give the impression that both forms of interest may simultaneously run. In fact, the simultaneous applicability of both types was affirmed by the Supreme Court as early as the year 2000. The latest decision affirming the interpretation was promulgated in 2013 where the Supreme Court ruled that tax laws must be strictly interpreted, hence, the only interpretation is that both types of interest may concurrently run.

Notably in the 2015 case of Liquigaz Philippines, Inc. v. CIR, Court of Tax Appeals En Banc introduced a novel ruling that may change the course of an otherwise steady flight.

In that case, the Court En Banc ruled that the imposition of deficiency interest under the Tax Code extends only up to the time when the taxpayer is required to pay the assessed tax after being informed thereof; and that the imposition of the delinquency interest shall commence from the time when the concerned taxpayer failed to pay the assessed tax within the time allowed as stated in the formal letter of demand.

In essence, the decision converted what was once a duet into a relay race. As the Court of Tax Appeals interpreted the provisions, deficiency interest stops when delinquency interest begins. It might be an innocuous change at first but a shift in interpretation can potentially save taxpayers hundreds of millions of pesos given the amount involved in tax assessments.

Another novel ruling introduced by the same decision is the limited applicability of deficiency interest on deficiency income tax, deficiency estate tax, and deficiency donor’s tax. The Court noted that an examination of the Tax Code shows that there are only three instances where it defines the term “deficiency”, and this relates only and respectively to three types of internal revenue taxes, namely, income tax, estate tax, and donor’s tax, pursuant to Sections 56 (8), 93 and 104. For this reason, no deficiency interest can be imposed on deficiency Expanded Withholding Tax, Value Added Tax and Withholding Tax on Compensation.

While there is still a pending Motion for Reconsideration on the decision of the Court of Tax Appeals En Banc, taxpayers can hope that the case reaches the Supreme Court and a ruling affirming the decision be promulgated. It is about time our Courts revisit an age-old doctrine that has been imposing an unnecessary burden on taxpayers

Jantzen Joe C. Chua is a tax associate with the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

The non-transferability of donor’s tax

Taxwise or Otherwise By Roselee B. Santos

Taxation law is composed of myriads of laws, regulations, rulings and other issuances -- it’s overwhelming even to professional practitioners. From time to time, however, the courts are able to cut through extraneous matters and deliver clear guidance not only for taxpayers but also for tax authorities.

One such instance is the recent case decided by the Court of Tax Appeals (CTA) on Jan. 27, 2016. The issue facing the court was whether a domestic corporation that received additional capital by way of contribution from its non-resident shareholder is liable as a donee to pay the alleged donor’s tax on the contribution.

In context, the issue arose when a non-resident foreign company shareholder contributed P30 million to the investee-taxpayer under a Capital Infusion Agreement to sustain the viability of the taxpayer’s business operations. The taxpayer’s Audited Financial Statements disclosed the amount as proceeds from donation. On that basis, the Bureau of Internal Revenue (BIR) assessed and demanded payment of deficiency donor’s tax from the taxpayer.

Considering that the taxpayer recorded the amount as a donation, the Court saw no need to settle the question of whether there was actually a donation since the taxpayer had already admitted such fact. Although it would be interesting, to say the least, to know whether capital contribution in the form of additional paid-in capital should be considered a donation, the Court considered it moot and academic.

Instead, the Court focused on resolving these questions: is donor’s tax a direct or indirect tax? Consequently, who is liable to pay for it?

Of course, it is a safe assumption that the BIR is well aware that donor’s tax is a direct tax that should be paid by the giver or contributor. In fact, the term “donor’s tax” already implies that it is a tax on the donor, and not on the recipient.

Further, all the relevant requirements to pay the tax point toward the donor as the party that must report, file, and pay the tax. Nowhere is there a requirement that the donee must pay for the tax, whether directly or in behalf of the donor.

However, in trying to justify the filing of the case against the donee, it is evident that the BIR was mindful of the fact that the donor was a foreign entity beyond its tax jurisdiction. Unable to enforce its authority on the donor, the BIR instead went after the taxpayer-donee, a domestic corporation subject to the laws of the Philippines.

The CTA disagreed with the BIR. As the tax sought to be imposed is a donor’s tax, the Court ruled that a donee may not be made liable for its payment. Section 13 of Revenue Regulation No. 2-2003 explicitly provides that the person making a donation shall be the one required to accomplish and file a donor’s tax return. This is in line with Section 98 of the Tax Code, which provides that the donor’s tax shall be levied on the transfer by any person, resident or nonresident, of a property by gift.

Thus, it is clear under the law, as well as the BIR’s regulations, that the donor’s tax is a direct tax that can only be imposed on, and paid by, the donor. Consequently, the CTA ruled that the liability for donor’s tax falls on the donor’s shoulders and is, therefore, not transferable.

This case is novel in the sense that the principle of “non-transferability of the burden of direct tax” had not been previously applied to donor’s tax. Although the Supreme Court (SC) already had occasion to explain the nature of direct and indirect taxes, jurisprudence only goes so far as to state that transfer taxes, specifically donor’s tax, are classified as direct taxes. The recent CTA case, therefore, is the first court decision to directly apply the said principle to donor’s taxes.

There were other issues left undecided by the CTA because answering the question on who should bear the tax seemed the end of it. However, it would have been equally important, if not more so, to discuss whether additional capital contribution should be considered a donation in the first place.

For now, we may have to wait for the resolution of the BIRs’ appeal to see if this other equally important issue will be tackled more directly -- pardon the pun.

Unfortunately, until the BIR reconsiders this position, other taxpayers may find it necessary to contest similar assessments or impositions.

The views or opinions expressed 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.

BIR updates Quezon City zonal values

THE BUREAU of Internal Revenue (BIR) has updated the zonal values of real properties in Quezon City, which had remained unchanged for more than 14 years.

Finance Secretary Cesar V. Purisima, through Department Order (DO) 004-2016 published on a newspaper on Wednesday, approved the implementation of the revised zonal values.

The order dated Jan. 12 covers real properties located within the jurisdiction of BIR Revenue District Office No. 39 -- South Quezon City. This implements the fifth revision of the zonal values in the area last revisited in 2003.

“This order is issued to implement the revised zonal values of real properties for the purposes of computing any internal revenue tax due on sale/transfer or any other disposition of real properties,” DO 004-2016 read.

The new zonal values shall apply provided they exceed the fair market value shown in the schedule of values of the provincial or city assessors as well as the gross selling price or consideration shown in the duly notarized document of sale or transfer of real properties.

The adjustment of the zonal values should not increase taxes paid for the disposition of real properties, BIR Commissioner Kim S. Jacinto-Henares said in a text message.

“[T]he zonal value is determined by the amount properties are being sold there. It only means taxpayer should not cheat at an amount lower than the zonal value,” Ms. Jacinto-Henares noted.

The BIR commissioner possesses the authority fix the zonal value schedule under Section 6 (E) of Republic Act No. 8424 or the Tax Reform Act of 1997.

The law authorizes the BIR commissioner to divide the Philippines into different zones or areas and determine the fair market value of real properties there for internal revenue tax purposes.

“An adjustment is good provided it can reasonably approximate the correct values of the property,” P&A Grant Thornton Tax Advisory and Compliance Division Head Eleanor L. Roque said in a text message.

Ms. Roque added that, on the government’s part: “an upward adjustment in the zonal values will increase the tax base for transactions, which are based on fair market values such as capital gains tax.” -- Keith Richard D. Mariano

source:  Businessworld

PIDS expert says income tax cuts justified; warns government of revenue loss

Proposals to amend the personal income-tax schedule appear to be well-justified. However, these proposals should include measures that will allow government to recover the revenue loss from lower income taxes.

Dr. Rosario Manasan, senior research fellow of state think-tank Philippine Institute for Development Studies (PIDS), said at a Senate-sponsored seminar, the government should look for new revenue measures to compensate for the projected revenue loss that will arise as a result of the implementation of any of the various proposals to restructure the personal income tax.

Currently, there are several income-tax reform proposals pending in both houses of Congress. All of them, according to Manasan, have the same objective of addressing the phenomenon of bracket creep, which results from “non-indexation to inflation of personal income-tax brackets.” Simply put, bracket creep occurs when employees’ income increases over time as a result of inflation. This pushes them to pay higher taxes, but their purchasing power
remains the same. The Philippines has not adjusted its personal income-tax system since 1998.

Manasan also noted the proposals all attempt to reduce the country’s high personal income-tax rate relative to its neighbors in the Association of South East Asian Nations (Asean). In particular, the Philippines’s top marginal personal income-tax rate of 32 percent is higher than the Asean member-states save for Thailand and Vietnam.

The proposals to amend the personal income-tax law assessed in the PIDS study were Sen. Ralph G. Recto’s Senate Bill (SB) 716, Sen. Bam Aquino’s SB 1942, Sen. Sonny Angara’s SB 2149, Rep. Miro Quimbo’s of the Second District of Marikina Cityn House Bill (HB) 4829, and Party-list Reps. Neri Colmenares’s and Carlos Zarate’s of Bayan Muna HB 5401. Similar proposals have been raised by the private sector, most notably the Tax Management Association of the Philippines (TMAP).

According to Manasan, Recto’s SB 716 and Quimbo’s HB 4829 will reform the personal income-tax system by adjusting the tax brackets, according to changes in consumer-price index between 1998 and 2015. Meanwhile, Aquino’s SB 1942 will exempt incomes below P60,000 and raise the top-bracket income threshold to P12 million. Angara’s SB 2149 will affect changes in tax rates in phases over a span of three years, reducing the bottom marginal tax rate from 15 percent to 10 percent and the top marginal tax rate from 32 percent to 25 percent. Under this proposal, all incomes below P20,000 will also be exempted from taxation.

Colmenares and Zarate’s HB 5401 exempts income below P396,000 and raises the top threshold to P2 million.

source:  Business Mirror

Can the BIR’s 5-year plan make an impact?

Taxation will always be contentious. Many Filipino taxpayers still struggle to understand taxation and tax compliance; among them there has emerged the view that the Bureau of Internal Revenue’s (BIR) regulations and processes are far from ideal.

So let’s examine the bold statement in the Bureau’s vision and mission -- “The Bureau of Internal Revenue is an institution of service excellence and integrity. We collect taxes through just enforcement of tax laws for nation building and the upliftment of the lives of Filipinos.” That guiding principle informs Revenue Memorandum Order (RMO) No. 6-2016, which was issued prescribing the strategic plan of the BIR for 2016 to 2020.

The BIR’s plan has as its focus to improve services to taxpayers, to increase voluntary compliance, and to enforce laws against those who do not comply. To achieve this, RMO 6-2016 outlines seven high-level strategic objectives:

First, attain collection targets and sustain collection growth. Being mandated by law to collect taxes, BIR’s collection target for taxable year 2016 is set at P2.025 trillion. The BIR continues to improve its ability to achieve the targets set by the government.

Second, improve taxpayer satisfaction and compliance. The BIR aims to gather information through consultation, meetings and dialogue with the community to identify improvements and recommendations for amendments to the law.

Third, strengthen good governance. BIR aims to enhance its performance through monitoring and evaluating of processes.

Fourth, improve assistance and enforcement processes. The BIR will make use of services that will ease the process for taxpayers to comply with their obligations. On the other hand, the BIR will also employ enforcement activities to identify and pursue those who deliberately evade or avoid paying tax.

Fifth, build and deploy contemporary information technology systems, processes, and tools. Because change is inevitable especially in the digital world, the BIR aims to maintain and enhance its online services to replace manual and paper-based services and processes.

Sixth, improve integrity, competence, professionalism, and satisfaction of human resources. The BIR strives to develop an organization with high levels of integrity that fosters the observance of high professional standards and demonstrates the values of the organization.

Last, optimize management of resources. The BIR ensures the highest standard of financial integrity, focusing on budget, asset and records management capabilities to ensure that BIR resources deliver their results.

The 7 high-level strategic objectives above appear to be very promising. Let’s just hope that with the experience gained from the past few years it can rectify some issues that hound the Bureau.

An example of the issue that should be addressed is the online filing of tax returns. There were glitches in the system which were discovered as a result of the sheer volume of taxpayers scrambling to fulfil their obligations.

Another concern of taxpayers is the BIR’s implementation of its tax assessment process. Taxpayers have hoped that part of the BIR’s Fourth Objective on improvement of enforcement processes would include revisiting tax findings by certain BIR examiners. These findings normally start at a huge amount, leaving questions about the BIR’s audit procedures and doubt over whether proper analysis was actually done.

On the other hand, with respect to the BIR’s Sixth Objective on improving integrity, many believe that this objective should be cascaded down to all levels of the Bureau. It would be a very disappointing on the part of the taxpayers if they encounter a BIR officer who asks for something in exchange for his speedy assistance.

Time will tell if the BIR’s initiatives are a match for its intended outcomes, and whether it achieves a balance between the mandate to collect tax and the objective of easing the tax process for the burdened taxpayer.

The BIR 5-year plan is supposed to run until 2020, while the term of the BIR Commissioner ends in June 2016 assuming she is not re-appointed. Whether the next administration retains the 5-year plan or makes improvements on it will be something to look out for.

Gretchel N. Lim is a tax associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld

BIR tightening tax exemption rules for schools

MANILA, Philippines - The Bureau of Internal Revenue (BIR) has tightened the rules on tax exemptions for  non-profit schools.

Under Revenue Memorandum Circular (RMC) 24-2016, non-stock, non-profit educational institutions are reminded to prove their income tax-exempt status every time they file their information returns or risk being subjected to audit.

The Constitution exempts all assets and revenues of non-earning schools from final income taxes of 7.5 percent and 20 percent, depending on the type of income.

But the Department of Finance, the BIR’s mother agency, issued Department Order 149-1995 instructing schools to provide BIR documents proving these exemptions during tax filing season.

“It has been observed that there are educational institutions organized and operated as non-stock, non-profit educational institutions that no longer comply with the DOF DO 149-95...,” the BIR circular dated Feb. 24 said.

“Thus, this circular is being issued to reiterate the requirements,” it added.

Under DO 149-95, certifications showing the school’s passive investment income, projects funded by the income and board resolution of future projects must be submitted.

Revenue district offices (RDOs) must ensure all documents are present every tax-filing season.

“The RDOs shall conduct an audit of the annual information return filed to determine compliance with the conditions set forth in the certificate of exemption and the tax liabilities,” the BIR said.

Sought for comment, Anthony Coloma, advocacy officer at the Catholic Educational Association of the Philippines (CEAP), said the group would review the new order.

He recalled CEAP won a court case against BIR over another order in 2013 that required schools to submit additional documents in applying for tax exemptions.

While the Constitution and certain laws provide for tax exemptions, the BIR wants concerned parties to apply for these rights for monitoring purposes.

“We actually won a case against them in the Makati RTC (Regional Trial Court) that said they should respect our exemptions even without these documents,” Coloma said in a phone interview.

“They (BIR) cannot deny us our right,” he added.

The BIR, which accounts for 80 percent of tax revenues, has been issuing a number of clarifications regarding some tax procedures.

For instance, it issued RMC 9-2016 last month to clarify income tax exemptions granted to non-stock savings and loan associations.

Even the Catholic Church was not spared. Lingayen-Dagupan Archbishop Socrates Villegas earlier said the BIR has been sending “feelers” it would soon look into taxing religious stores operations.

BIR Commissioner Kim Henares, however, clarified that under the law, religious entities in profit businesses are already being taxed.

source:  Philippine Star

Kicking off 2016, the BIR Way

Taxation is the lifeblood of the government. For the government to function, it needs its citizens to contribute to this lifeblood. With the mandate to assess and collect national taxes, the BIR is starting off 2016 with two things: a collection goal through Revenue Memorandum Order No. 2-2016 and a number of programs to attain that as summarized in Revenue Memorandum Circular No. 14-2016.

The 2015 collection goal of P1.676 trillion was raised 21% to P2.025 trillion. With this increase in target collections, the BIR came up with programs which will focus on wider tax implementation, information centralization, process automation, and enhancement of tax rules in relation to industries and international tax policies.

First, the BIR arranged for a more extensive application of tax rules and an efficient system for collection. As such, the BIR will strengthen its drive against non-compliant taxpayers by strengthening its Run After Tax Evaders (RATE), Oplan Kandado, and VAT Audit programs.

Moreover, the BIR’s Taxpayer Registration Information Update program is designed to give taxpayers real-time access to their registration records, issue TIN cards and Certificates of Registration that are made of more durable materials. Through this program, the BIR also plans to issue Near Field Communication TIN cards for senior citizens which they will present for VAT exemption.

The BIR is also working to use credit cards, debit cards, and prepaid cards as alternative modes of payment. Currently, tax payments are done electronically through the eFPS and manually through Authorized Agent Banks. In making payment easier, the BIR hopes to increase its collections.

Second, the BIR is working on improving its internal systems by collecting and centralizing taxpayers’ information to make them accessible to all relevant parties, particularly other government agencies.

Some of these programs are a continuation of those launched in previous years such as the Electronic Tax Information System, Geographical Information System, Workflow Management System, Collection Reconciliation System, Asset Information Management Program, Automated Internal Revenue Allotment Computation, and expansion of satellite offices, among others.

Since these are being rolled out nationwide this year, taxpayers can expect that the BIR may ask for additional documents which will be used by the agency in completing the collection of data in its system.

Third, the BIR is also gearing up to automate several processes. These include the enhancement of the Electronic Certificate Authorizing Registration system, the Online Application and Processing of Tax Clearance for Bidding Purposes, the Online System Accreditation of Importers and Custom Brokers, and the Electronic Official Registry Book, among others.

With these programs, the BIR intends to reduce manual processes, with an eye towards higher levels of compliance with the tax rules.

Finally, on the BIR’s drawing board are programs that seek to settle issues within several industries in the Philippines and formulate implementing guidelines on cross-border transactions. These are the Industry Issues Resolution, Exchange of Information, and Transfer Pricing Program.

As part of its continuing Industry Issues Resolution program, the BIR’s LTS Core Group will tackle matters peculiar to several industries, especially on “No Ruling Areas” and resolution on issues from audit investigations.

The Exchange of Information Program aims to automate the exchange of cross-border related information and is done in compliance with the Intergovernmental Agreement in implementing the Foreign Account Tax Compliance Act.

As for the Transfer Pricing Program, which commenced in 2013, developments include new issuances to rationalize the Transfer Pricing Guidelines such as Revenue Regulations on Advance Pricing Arrangement and Revenue Memorandum Orders on Transfer Pricing Documentations and Transfer Pricing Risk Assessment, among others. The regulations are meant to aid the BIR in determining the appropriate revenue and income of parties in controlled transactions, as well as to address gray areas in the Transfer Pricing Guidelines. Hence, taxpayers will be guided by clearer regulations that will help them to fully comply with the BIR’s requirements.

Given all these programs on the BIR’s plate, the year is going to be busy for the BIR and taxpayers alike. Temporary inconveniences are in store in exchange for what could be a long-term easing in the workload involved in fulfilling a taxpayer’s duties. If tax collection becomes more efficient and the economy improves, it will be a worthwhile trade-off, like getting pricked for a blood extraction in order to diagnose a disease.

Cheryl R. Gatdula is a senior of the Tax Advisory and Compliance division of Punongbayan & Araullo.

source:  Businessworld