A Letter Notice cannot substitute for a Letter of Authority

Taxation is the lifeblood of the government. Through the collected taxes, the government is able to fund the increasing need of its people for infrastructure, education, health, etc. The Bureau of Internal Revenue (BIR) is the Philippine government’s largest revenue collecting arm. For this year alone, the Bureau was assigned a P1.8 trillion tax collection target.

Throughout the years, the BIR has implemented various programs to improve its tax collection efforts. In 2003, it issued Revenue Memorandum Order (RMO) Nos. 30-2003 and 42-2003 which provided policies and guidelines to detect tax leaks by matching data from the BIR’s Integrated Tax System (ITS) and data from third party resources. Discrepancies generated through these matchings were used to unearth what could potentially be undeclared sales and/or over-claimed purchases by various taxpayers.

This “no-contact-audit approach” enables the BIR to use computerized matching to compare data from records or various returns filed by a taxpayer against those gathered from its suppliers or customers, and even those reported to other agencies, particularly the Bureau of Customs. Taxpayers with noted discrepancies are then informed of the findings through the issuance of a Letter Notice (LN) by the BIR. Consequently, such taxpayers are given 120 days to reconcile the inconsistencies; otherwise, deficiency taxes will be assessed.

In one of its recent decisions, the Supreme Court (SC) held that the absence of a Letter of Authority (LOA), makes the assessment unauthorized and thus, void. This is despite the prior issuance of an LN. According to the court, the BIR’s failure to issue an LOA constituted a violation of due process and was considered fatal to the tax audit.

The SC differentiated an LOA from an LN, noting that LNs only serve as notice of any discrepancy to the taxpayers and is not in any way a substitute for an LOA which grants authority to the revenue officers to examine the books of the taxpayers. The LN operates similarly to a Notice of Informal Conference, an erstwhile requirement which was removed from the BIR’s tax audit process when the Bureau issued its revised regulations for tax audits back in 2013.

The SC stressed that the BIR must issue an LOA prior to issuing a Preliminary Assessment Notice (PAN), a Final/Formal Assessment Notice (FAN), or a Final Decision on Disputed Assessment (FDDA) to the taxpayer; otherwise, the assessment is rendered void for lack of due process.

This decision overturns the earlier ruling of the Court of Tax Appeals (CTA) en banc which held that the LN in essence, can serve as proof of the revenue officer’s authority to examine the books of the taxpayer. The court pointed out that the taxpayer can no longer question the validity of the tax assessment on the ground of lack of an LOA since the BIR had provided the requisite legal and factual bases of the deficiency tax being assessed. In the higher interest of justice, the SC considered the absence of the LOA as fatal to the case, underscoring the importance of due process.

The SC’s decision to reverse the CTA ruling thereby effectively negates RMO No. 55-2010, which was issued by the BIR based on the earlier CTA ruling. As it is, the BIR has yet to issue guidelines on this recent decision by the SC.

Due process is a basic right guaranteed to all persons under the Philippine Constitution. It is an elementary rule that no person shall be deprived of property without due process of law. To boost taxpayers’ compliance with the tax laws and regulations, the government, through its tax authorities, must continually build trust and confidence among taxpayers and in the society in general.

The pronouncement of the SC brings to light, once again, the significance of due process in taxation. While it is imperative for the tax authorities to generate revenues through exaction of taxes, the government’s power to tax must be exercised with justice. This can only be achieved when collection of taxes exercised through programs are implemented with reasonable requirements and within the bounds of the law.

However steep the BIR’s collection target is, it must be reached only through acts that are within the bounds of the Bureau’s authority.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Kathrine Joy S. Capales is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

kathrine.joy.capales@ph.pwc.com

source:  Businessworld

The bitter side of sugary-drinks tax

WHEN schools started to ban soft drinks in their respective canteens some three years ago, the teachers themselves started to smuggle in and hoard in their respective drawers the very thing that they ask their students not to consume.

They need the sugar to teach, some of them say, not minding their school administration’s policies that also affected them, as they cannot purchase soda drinks anymore within the school premises.

 This time around, as the Duterte administration makes headway into its comprehensive tax-reform package, called Tax Reform and Acceleration and Inclusion Act (TRAIN), a House bill has been filed to slap tax on these sugary drinks as part of the revenue-generation initiatives. 

 

‘Antipoor’

A bill filed by Sultan Kudarat Rep. Horacio Suansing Jr. and Nueva Ecija Rep. Estrellita Suasing seeks to impose a P10 tax on sugar-sweetened beverages, the rate of which will be increased every year by 4 percent.

That caught the attention of many corporate chief executives, many of whom were previously silent whenever the government plans to introduce new taxes. Some of these corporate top honchos even called the move as antipoor.

“We have many concerns. First of all…it affects the masses most. The proposed tax increase here is six times what was proposed in Mexico. At the end, who are the primary consumers of ready-to-drink beverages, it’s the masses of the Filipino people. Just imagine if I drink one coffee a day and I have to pay P3 or P4 more times 365, that’s P1,500 a year. That’s the breakfast of the masses,” said Lance Gokongwei, president and CEO of food group Universal Robina Corp. (URC).

Gokongwei, also president and COO of the family’s holding firm JG Summit Holdings Inc., was referring to Mexico’s same plans on sugar tax, but at a much lower rate.

“The effective increase we’re looking at is P10 a liter in a per capita basis. The average capita per income here is $3,000. We always cite Mexico. The effective tax there was P1.45 per liter in a country where capita per income was $10,000,” Gokongwei said.

URC sells products such as C2 iced-tea beverages, which at one time outsold Coke in the Philippines, and Great Taste coffee mixes, among other sugary products. Its products are now being sold across Southeast Asia, including in Vietnam, where it has a manufacturing plant.

Sugar-sweetened beverages refer to nonalcoholic drinks that contain caloric sweeteners, added sugar, or artificial or noncaloric sweeteners. It may be in liquid form, syrup, concentrates, or solid mixture added to liquids.

Revenue figures

Estimates of the Department of Finance (DOF) foresee that a liter of Coke, now priced at P31 per bottle and rival Pepsi 1.5 liters, being sold at P46.50, will go up by an average of 36 percent.

A can of regular 330 milliliters of Coke, for instance, contains some 34.5 grams of sugar and 136 calories, which teachers say they can easily burn as they teach.

Although debatable, the amount of sugar in a single drink can lead to obesity and some of the noncommunicable diseases, such as Type-2 diabetes, blood sugar disorders and other related illnesses.

The DOF, keen on passing the new tax measure on health concerns rather than to generate additional cash, estimates a revenue of between P40 billion and P47 billion after the bill is passed into law.

The group Action for Economic Reform, a non-governmental organization that helped lobby to pass the sin-tax law, said it has not initiated a coalition yet on the sugar-tax issue like what it did with the tobacco excise tax, but its allied organization, such as the Philippine College of Physicians, has a stand on the issue.

It said, however, the bill needs more study on how the P10-per-liter tax came about, but generally the group has not yet moved significantly to push for the proposal, which is posing more questions than answers to the industry.

For one, there are some concerns if the government can really collect such amount when demand naturally drops when a new tax is passed, then recover soon after.

Feasibility question

A study of the World Health Organization (WHO) said taxing sugary drinks can lower consumption. The study said fiscal policies that lead to at least a 20-percent increase in the retail price of sugary drinks would result in proportional reductions in consumption of such products, citing its report, titled “Fiscal policies for Diet and Prevention of Noncommunicable Diseases”, published late last year.

The Beverage Industry Association of the Philippines, meanwhile, said such move can lead to a P20-billion decline in sales of sugar-sweetened beverages as demand declines.

According to the Philippine Association of Stores and Carinderia Owners, 80 percent of the consumers of these products are low-income earners and 30 percent to 40 percent of the income of sari-sari store owners comes from the sale of coffee, juice and carbonated drinks.

There are also concerns on how the government—the Bureau of Internal Revenue (BIR)—can monitor and administer such new measure.

According to the bill, the sugar-excise tax will not be levied on the raw sugar production itself, but on the products. An excise tax, which is an indirect tax charged on the sale of a particular good, is normally being collected at the source of product.

The excise tax on oil products and vehicles, for instance, is being collected at the port of entry where it will be discharged. For tobacco and alcohol products, the tax is being collected at the manufacturing plants before these are shipped out to the distributors or to the retailers.

Too high

Michael Tan, president and CEO of the LT Group Inc., said not only is the rate too high, but it will be impossible to administer such new tax measure at its current state.

“What will happen on the post mix in the restaurants or in Starbucks or in carinderia, how do you tax that? They’ll put a coffee, they’ll put a sugar and sell it over the counter. By definition, that’s excise-taxable. In microbreweries, you brew in a pub and sell it to the customer, that carries a tax. There should be a tax by their current definition and to be consistent on the existing policies on alcohol,” Tan said.

The LT Group holds most of the businesses of tycoon Lucio Tan, including PMFTC Inc., the combined company of Philip Morris Philippines and Fortune Tobacco, and Asia Brewery, which holds a stable of local and international beer brands and alcohol-laced pop drinks such as Tanduay Ice.

When the new excise tax on the so-called sin products was implemented during the Aquino administration, Tan was vocal on his smuggling allegations against one of the players, Mighty Corp., which is now being sued for smuggling and tax evasion.

“So from the manufacturing side, cigarette factories, there are six cigarette manufacturing, they cannot even manage to stop one. So this will be hundreds of beverage facilities and I don’t think the BIR has the manpower to police it,” Tan said.

“So you will end up with the bigger companies complying, and the smaller ones not complying. That’s only at the factory level. What more at the retail level, at the post mix, like the restaurants and bar,” he said.

The sugar planters, meanwhile, are backing the increase to double the excise tax to P20 per liter on the imported high fructose corn syrup (HFCS), a product also being used by beverage companies to sweeten their drinks.

WTO issue

That proposal, meanwhile, has other repercussions, especially on the possible allegations of protecting local farmers, as the county is a signatory to the World Trade Organization (WTO).

“We’re putting up an HFCS plant. It will be operational soon and the input is corn. So how can you tax it higher? There are more corn farmers in the Philippines than sugar farmers. It’s a nonlocal gain. That’s an issue [for] WTO there. You cannot discriminate, [otherwise] people will discriminate our pineapples and banana if we do that,” Tan said.

Former Ambassador Alfredo Yao, now chairman of Macay Holdings Inc., which owns the family’s carbonated business that manufactures RC Cola and Zest-O drinks, the government should instead tax the raw sugar itself and not the products.

“Then it’s a fair sharing; everybody shares. Everybody shares and it will not be as abrupt as now and only result to a peso [increase] per liter on specific industries only,” Yao said.

“We have conveyed a message to the congressmen. Now we are talking to the Senate. I hope they understand. I think the government side will understand. We know where they’re coming from. They need the taxes and all,” he said.

For now, the chief executives are still studying their next moves if indeed the Duterte administration’s TRAIN, which includes the sugar tax, can railroad their otherwise sweet business.

source:  Business Mirror

VAT on importing from within

If a buyer in the Philippines purchases goods from a Philippine Economic Zone Authority (PEZA) registered enterprise, is the purchase subject to value-added tax (VAT)?


Under Section 107 of the Tax Code in relation to Section 26 of Republic Act No. 7916 (PEZA Law), sale of goods by a PEZA-registered enterprise to a buyer in the Philippines (i.e., domestic sales) is considered a “technical importation,” i.e. the buyer is treated as the importer and the sale shall be charged the corresponding VAT. The rationale for this tax treatment is that an ecozone is considered a separate customs territory which creates a legal fiction that it is a foreign territory, even though located within the Philippines. In essence, purchases from an ecozone are likened to purchases made from abroad. Thus, the sale is treated as a technical importation.

Section 4.107-1 of Revenue Regulations (RR) No. 16-2005 (Consolidated VAT Regulations), in implementing Section 107 of the Tax Code, provides that VAT is imposed on goods brought into the Philippines, whether for use in business or not. The VAT, which is based on the total value used by the Bureau of Customs (BoC) in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges, such as postage, commission, and similar charges, should be paid prior to the release of the goods from customs custody.

In case the valuation used by the BoC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base.

The same rule applies to technical importation of goods sold by a person located in a special economic zone to a customer located in a customs territory. In this case, the VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.

From the foregoing, it is clear that all domestic sales of goods by PEZA-registered enterprises are considered technical importations where the buyer is treated as the importer liable for VAT on importation.

On the other hand, Section 2, Rule VIII of the rules and regulations implementing the PEZA Law provides that domestic merchandise sent from the restricted areas of the ecozones by PEZA-registered enterprises to the customs territory shall be subject to the internal revenue laws of the Philippines as domestic goods sold, transferred or disposed of for local consumption. Internal revenue laws, in this case, refer to the Tax Code in relation to the PEZA Law, as mentioned above.

Corollary to this, Section 105 of the Tax Code provides that any person who, in the course of his trade or business, sells, barters, exchanges or leases goods or properties shall be liable to VAT imposed in Section 106 of the Tax Code. The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental to it.

Given the foregoing, there was confusion on whether a PEZA-registered enterprise is liable to pay VAT on its domestic sales.

This matter was clarified in BIR Ruling [DA-031-07] dated Jan. 19, 2007.

In this case, a PEZA-registered enterprise imposed and collected 12% VAT on every sale of metal scrap to a buyer from the customs territory because it knows for a fact that such sale is subject to VAT. However, such VAT payment is supposed to answer for the alleged technical importation that will ultimately be remitted to the government. Thus, the BoC is no longer required to collect the VAT before the scrap metal is taken out from PEZA. In such a case, the buyer is paying a total of 24% VAT every time it hauls the same items from PEZA (12% VAT on the sale and another 12% when the goods are released from customs).

The BIR held that the payment of the VAT should be made by the buyer directly to the BoC which is the agency tasked to collect VAT on imports. Accordingly, the PEZA-registered enterprise is not required to charge VAT on every sale of goods but should be furnished a copy of the receipt of the VAT payment made by the buyer to the BoC.

This receipt will serve as authority for the buyer to request the PEZA-registered seller to refrain from imposing VAT on the sale of goods since the BoC is also collecting the same before the goods are released.

The same BIR ruling is applicable in cases of goods purchased from other ecozones (e.g. Subic, Clark) which are also considered technical importation.

Although the BIR has held in several rulings that sale of goods by a PEZA-registered enterprise to a buyer in the Philippines is considered technical importation where the latter shall be responsible for the tax imposed, the documentation needed for PEZA-registered enterprises to be absolved from imposing VAT on their domestic sale of goods was then ambiguous.

With this ruling, however, the issue of double taxation on goods purchased from PEZA-registered enterprises has finally been resolved. Conflicting views should have been put to rest.

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.

John Paul M. Vargas is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

john.paul.m.vargas@ph.pwc.com

Saving TRAIN (2)

By: Solita Collas-Monsod - @inquirerdotnet

Philippine Daily Inquirer

House Bill No. 5636, or TRAIN (Tax Reform for Acceleration and Inclusion), is essentially antipoor. Or prorich. Its net effect is to decrease the purchasing power of the bottom 60 percent of the population and increase that of the top 40 percent (especially the very rich). And the so-called “transfer” measures that are supposed to alleviate this (or compensate the poor) are only for a four-year period, plus the fact that it is not clear how those “transfers” are to be effected. That is the gist of my last column.

This column is addressed not only to the Reader but also to the Senate, which has the power to correct things. Of course, there is still the “Third Chamber” that has the ultimate power—the bicameral committee of the House and Senate.

The most obvious Senate correction needed is to ensure that transfers to the poor do not end after four years, and also to ensure that the petroleum excise taxes from which these transfers will come continue to increase in order to meet growing population needs—which means indexing them (why not make them ad valorem instead of specific?).

Second, how are these transfers to be effected? If the Department of Social Welfare and Development is put in charge, its other important activities—like the 4Ps and disaster relief—may suffer. Either that, or the transfers program, which involves 80 percent of the population, will not even get off the ground.

Third, the Senate could think of other measures, and not necessarily limit itself to the tax measures in HB 5636. For example, why not consider a negative income tax, which the Bureau of Internal Revenue could administer? A negative income tax, Reader, means that people earning less than a certain amount would receive supplemental pay from the government, instead of paying taxes (or not paying, if income is less than P250,000 a year).

Don’t laugh, Reader, or Senators. This idea is at least better than HB 5636’s current mishmash of social benefit cards, discounted fares on public utility vehicles, or discounts on medicines or subsidies on food and housing. Essentially just the negative income tax (i.e., a cash transfer) would suffice, allowing beneficiaries to choose what to spend it on. That would save on the humongous cost of administering multiple programs envisioned by HB 5636. There’s an added benefit: The BIR would see its roll of taxpayers (and negative income tax recipients) expand, so that in better times, they’d have a data base of potential income tax payers.

Fourth, economist Cielo Magno (UP School of Economics) recently pointed out in an interview that the tax reform measures for the mining industry were not included in TRAIN. She is correct. Rep. Miro Quimbo (another congressman whose salary is well deserved), with the help of the Mining Industry Consultative Council, introduced HB 5637 in the last Congress, which would precisely correct the present anomalous situation where the government’s share, as owner of the minerals, was practically zilch.

Nothing came out of that bill. It conveniently disappeared from the radar screen of both Congress and the Department of Finance. Cielo estimated that the additional revenues could safely be estimated at P20 billion. And no way could this measure be called antipoor.

Another tax measure which could have been included in TRAIN, but was not, is the reform of our sin taxes. Dr. Antonio Dans (UP College of Medicine) has been tracking the impact of the Sin Tax Reform law of 2012 , and has shown it to be eminently propoor. His data show a marked decline in smoking, and a marked increase in Filipinos who have never smoked. The decline in smoking was most marked in price-sensitive populations—the poor, rural dwellers, and the very young. An increase in sin taxes will not only result in a decrease in smokers by 1 million by 2021 but will also shift household expenditures from tobacco to more healthful products. Moreover, the reforms would bring in estimated incremental revenues of about P100 billion.

With all that, TRAIN shifts from antipoor to very propoor. Let’s see if the Senate can face down the cigarette and mining lobbies.

Regulating M&As: The intent of the law

Mergers, acquisitions, and other corporate combinations (or simply, “M&As”) are a big part of the modern-day business world. They help businesses grow quickly and, if put to good use, positively impact the economy. From a business standpoint, they provide a way for parties from both sides to obtain valuable assets, both tangible and intangible. They also provide an opportunity for companies to achieve synergy (i.e., be more profitable as a single entity as compared to the individual combining parties). M&As could even be beneficial to smaller firms by giving them a chance to adopt business practices of larger, more established firms. These benefits are acknowledged by our Tax Code which grants an incentive to firms seeking to enter such transactions. Considering the intent of the law and the economic benefits M&As could bring, this incentive should be made easily available to taxpayers.

Section 40(c)(2) of the Tax Code embodies the provisions on tax-free exchanges. It states that no gain or loss shall be recognized if, pursuant to a merger or consolidation, an exchange between the parties occurs. The exchange may consist of either: the property or securities of one entity for shares of stock of another, or a share-swap.

If qualified, these exchanges will be tax-free where no gain or loss shall be recognized. As pointed out by the Supreme Court, the purpose of the law in treating these exchanges as tax-free is to “encourage corporations in pooling, combining, or expanding their resources conducive to the economic development of our country.” The previous imposition of taxes on corporate combinations and expansions discouraged M&As to the detriment of economic progress. Thus, an incentive was provided by our legislators to encourage these transactions.

M&As, however, can also be used by firms to carry out a harmful purpose. Thus, the Philippine Competition Act (RA No. 10667) was passed. By regulating M&As, the Act intends to promote and protect competitive markets, preserve the efficiency of competition, and protect the well-being of consumers. M&As that substantially prevent, restrict, or lessen the relevant market, are prohibited. Under the Act and its implementing rules and regulations (IRR), the Philippine Competition Commission (PCC) may, on its own or upon notification, review M&As having a direct, substantial, and reasonably foreseeable effect on trade, industry, or commerce. Section 3, Rule 4 of the IRR also provides specific instances where compulsory notification becomes mandatory (i.e. upon reaching the indicated threshold).

From the laws cited above, it is clear that M&As are not mere business transactions. These are transactions imbued with public interest. They may either be helpful or ruinous to domestic markets and the local economy.

While the Tax Code and the Philippine Competition Act are different laws written for distinct purposes, both recognize the importance of M&As. One intends to provide a benefit, while the other seeks to regulate. As it stands, however, claiming the benefits of a tax-free exchange is much more tedious for taxpayers as compared to seeking the PCC approval regarding an M&A transaction.

In order to claim the benefits of a tax-free exchange, taxpayers are required to first secure a tax-free ruling from the Bureau of Internal Revenue (BIR) despite the Tax Code itself not imposing this requirement. Under BIR rules, taxpayers who do not file the required ruling application will not be able to obtain a Certificate Authorizing Registration/Tax Clearance (CAR/TCL) for shares or property transferred. This poses a problem because there are no assurances that taxpayers seeking to claim the benefits of a tax-free exchange would have their applications decided upon in a timely manner.

The BIR rules do not contain a “deemed approved” provision where a taxpayer’s ruling application would be considered approved after the lapse of a certain period. As a result, due to the long amount of time it takes for ruling requests to be processed and issued (some taking multiple years before they are concluded), taxpayers are left in limbo because they are unable to obtain a CAR/TCL.

On the other hand, under the Competition Act, if upon the expiration of 90 days, a decision has not been reached by the Commission concerning a merger or consolidation qualified for compulsory notification, it shall be deemed approved and the parties shall be allowed to consummate the transaction. This rigid deadline forces the Commission to act promptly and expeditiously. The deadline provides a safeguard for parties such that their M&A transactions would not be unduly restricted due to the government’s inaction. Moreover, big mergers that could significantly impact the economy in a positive way are given a chance to come into fruition without facing the problem of unnecessary bureaucracy.

It seems ironic that the Competition Act, the law enacted for the noble purpose of regulating M&A transactions for the protection of local consumers and market players, provides some assurance to businesses that their transactions will not be prejudiced by the government’s inaction. On the other hand, the BIR rules on tax-free exchanges do not contain any such assurance despite the purpose of the legislature in crafting Section 40(c)(2) of the Tax Code.

Notably, the Court of Tax Appeals (CTA) has recently ruled that “there is nothing explicitly requiring a party, in exchanging property for shares of stocks, to first secure a BIR confirmatory certification or tax-free ruling before it can avail itself of tax exemption” under Section 40 (c) (2). This case is somewhat parallel to the much publicized 2013 Supreme Court case of Deutsche Bank where the Supreme Court struck down the BIR’s requirement of filing a Tax Treaty Relief Application (TTRA) before a taxpayer can enjoy treaty benefits. Four years since the promulgation of the Deutsche Bank case, the BIR has begun to show signs that it recognizes this jurisprudence, albeit in a somewhat limited manner, with a new issuance which no longer requires a TTRA for certain types of income payments. It has yet to be seen, however, whether or not the BIR would adopt the CTA decision on tax-free exchange rulings.

To be clear, the Tax Code indeed does not require the filing of a tax-free ruling application in order for taxpayers to claim the benefits of Section 40(c)(2). However, in trying to make a case for the administrative requirement of obtaining a tax-free ruling, one may argue that there may be a real need to regulate these transactions in order to prevent unscrupulous parties from entering into schemes for purposes of escaping taxation. After all, the Tax Code itself provides that in order to be regarded as tax-free, the transaction must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation. As it stands, however, the current practice of obtaining a tax-free ruling pursuant to a merger or consolidation is too cumbersome for taxpayers due to the indefinite amount of time it takes to be completed, not to mention the numerous documentary submissions required.

The current practice brings about an effect opposite to what Section 40 (c) (2) originally intended, which was to create a business environment conducive to the economic development of the country. At the very least, in the interest of continuous policy improvements, the BIR could perhaps take a cue from the Competition Act and adopt a “deemed approved” period. This would at least give businesses some assurance that their commercial transactions will not be forestalled by the government’s inaction. Taxpayers would be able to claim benefits provided by the law without unnecessary restrictions. Most importantly, making the incentive readily accessible would be more consistent with the law’s intention of encouraging the pooling, combining, and expansion of resources by the different market players.

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.

Mats E. Lucero is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

mats.e.lucero@ph.pwc.com

Source:  Businessworld

Are BIR rulings confidential?

A few weeks ago, I attended a meeting where it was discussed that Bureau of Internal Revenue (BIR) rulings are no longer published.

Suddenly losing my appetite, I decided to forego dessert and coffee and instead, concentrated on listening to the discussion. The speaker said that BIR rulings must be kept private because they contain confidential information of the taxpayers which can violate the taxpayer’s right to confidentiality. In some cases, it was noted that even bank account details are included in the rulings necessitating the need to keep them private.

I was baffled by this policy of the BIR. Didn’t the Duterte administration promise full public disclosure and transparency of government records under Executive Order No. 2 dated 23 July 2016? If so, why would this administration keep BIR rulings confidential when rulings have always been published under most previous administrations?

BIR rulings are issued to taxpayers who request clarifications or confirmations on how a particular provision of the Tax Code and other tax rules apply to them and their transactions. In some cases, the rulings are required before a particular business deal can be considered tax-exempt or subject to tax relief or tax deferral. The rulings, therefore, are official interpretations of the BIR of tax laws, rules and regulations as applied to real life situations and transactions.

Publication of BIR rulings is of paramount importance because of three reasons. First, rulings guide the taxpayers on how particular tax laws apply to them. It informs the taxpayers on how the BIR will treat their transactions. The publication of rulings provides a guide to taxpayers in their tax planning exercise and in ensuring that their transactions comply with the requirements of the BIR. Equally important, rulings officially inform the taxpayers if there is a change in the interpretation of the law instead of the taxpayers just relying on hearsay or informal discussions with tax authorities.

Second, publication of the rulings ensure that tax laws are applied to taxpayers uniformly. It provides stability and predictability on how tax rules are applied by the BIR. Since the rulings are published, taxpayers will be informed if their transactions qualify for the same treatment as disclosed in a previous ruling. If the tax authorities will have a different treatment for a similar transaction, the tax authorities must clarify in the ruling why a different treatment is necessary. Thus, publication ensures that the interpretation of the tax authorities is in accordance with law and devoid of any abuse of discretion.

And third, publication of the rulings prevents graft and corruption. Multimillion peso tax exemptions are granted through the issuance of BIR rulings. Publication of such interpretation by the tax authorities ensures that any decision to tax or exempt a particular transaction has sufficient legal basis as it will be open to public scrutiny. Publication ensures that the tax authorities are made accountable for their rulings.

No less than the Supreme Court has emphasized that the right of the citizens to information is essential to hold public officials accountable to the people. Unless the citizens have the proper information, they cannot hold public officials accountable for anything. Citizens can only participate meaningfully in public discussions leading to the formulation of government policies and their effective implementation if they are armed with the right information. An informed citizenry is essential to the existence and proper functioning of any democracy. (Chavez vs. Public Estates Authority, et. al., G.R. No. 133250).

The right of the taxpayers to information is guaranteed by no less than the 1987 Constitution. Section 28 of the Declaration of Principles and State Policies state that “Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of full public disclosure of all its transactions involving public interest.”

More importantly, Section 7 of the Bill of Rights states that “The right of the people to information on matters of public concern shall be recognized. Access to official records, and to documents, and papers pertaining to official acts, transactions, or decisions, as well as to government research data used as basis for policy development, shall be afforded the citizen, subject to such limitations as may be provided by law.”

The above constitutional provisions are self-executing. They cover documents pertaining to official acts and decision which fully covers BIR rulings. The constitutional provisions supply the rules on how the right to information may be enjoyed by guaranteeing the right and mandating the duty to afford access to sources of information. The only limitations that can be set by laws are reasonable conditions and limitations upon the access such as hours and manner of inspection to prevent damage of records and avoid undue disturbance of work of the government employee having custody of the records.

It must be emphasized that government agencies are without discretion in refusing disclosure of, or access to, information of public concern. “The duty to disclose the information of public concern, and to afford access to public records cannot be discretionary on the part of said agencies. Certainly, its performance cannot be made contingent upon the discretion of such agencies. Otherwise, the enjoyment of the constitutional right may be rendered nugatory by any whimsical exercise of agency discretion.” (Legaspi vs. Civil Service Commission, G.R. No. L-72119).

BIR rulings have been published and are accessible to the public from as far back as I can remember. The oldest ruling published in the database I am using dates as far back as 1956. The issue of confidentiality has never been a deterrent in the publication of rulings in the past. While tax rulings are designated as private rulings, the word private does not mean that they cannot be published. The designation of private only means that the ruling is applicable to the specific taxpayer and the circumstances as disclosed in the ruling.

If the only reason for making them private is that they contain sensitive personal information such as bank details, then that information can be easily removed from the ruling. In the first place, I cannot think of a situation where the bank account details of the taxpayers are necessary to be put in the rulings as a particular account number should not affect the tax treatment of a transaction. Otherwise, conniving officials and taxpayers can just decide to hide behind this reason to prevent the public from inquiring into the specifics of a corrupt transaction. Hence, the better action is probably not to include unnecessary confidential information in the BIR ruling knowing that they will eventually be published.

Eleanor Lucas Roque is a head and principal 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

The real ‘why’ please stand up

CTALK By Cito Beltran (The Philippine Star)

Sometimes we want something so badly we lose sight of why.

As far as the Tax Reform Program of the Department of Finance and the congressional committee on ways and means are concerned, they have all been using such big words and ideas that I’m now lost as far as what their real “Why” was and now suspect them of having “personal” motives. As far as I can remember, the Duterte camp started with their first “Why” and that was: to lower Income Tax Rates. Obviously the reason “Why” was to get more votes and support from the middle and upper class as well as acceptance from the corporate sector.

But after the elections, Secretary Sonny Dominguez started speaking of another “Why” which was to raise the billions of pesos needed to finance infrastructure projects. To make it more attractive, they started pitching the theme: The Golden Age of Infrastructure” complete with project proposals as attractive as their political promises to fight drugs, corruption and solve traffic woes. So far they are only hitting one out of three and their drug war has come with a cost of 7,000 or 3,000 lives depending on whose talking.

Their theme was short-lived however after pundits started hammering and pummeling the DOTr in particular for many heralded plans that failed to fertilize. That’s when Congressman Joey Salceda started to appear on stage talking about the new “Why”: the need to tax the rich, about social equality, and this week’s “Why”: The 1% Rich must pay their share in Nation Building. After being pestered by reporters and Radio Anchors, one can already notice the perceptible shrill in Congressman Salceda’s voice indicating his frustration or annoyance at being hounded to explain or elaborate on the hidden cost of his tax plan.

Obviously, the public still does not get the true “Why” we need to raise taxes on just about everything. I think that the reason is because Secretary Dominguez and Congressman Salceda have failed to show and tell, prove even, “What’s in it for me.” For a bunch of numbers experts and economists, they have yet to present via a public information campaign what the detailed Tax Reform Program will be and how the lowered income tax rates and increased taxes on just about everything will come together for the actual benefit of each and every Filipino. Much like the Anti-Distracted Driving Act, the proposed Tax Reform Program is only understood by a small group of people, shared with limitations to the media and interest groups but not explained with complete transparency to the public.

Yes we all want less income tax so we can spend or save more. But what do I give up in the exchange, and what do we all gain or lose after new taxes are imposed? The only thing we keep hearing and seeing in the news are the “technocrat presentations” that are full of promises but not the cold hard facts of what personal sacrifices “nation building” will cost each of us.

The public has not bought in or taken ownership of the proposition that the government needs to raise money for their “Golden Age of Infrastructure” because we are surrounded by so many white elephants and mismanaged government projects. The MRT - LRT - PNR - Pasig Ferry - NAIA - Clark International Airport - North Rail - RFID/New Car Plates - National Broadband plan and so many other projects and plans gathering dust or costing Filipino taxpayers billions of pesos annually.  We in media are skeptical of the plan because Cabinet members and government executives have failed to deliver on the most basic of campaign promises.

Last Monday evening, the news featured voice clips of Congressman Salceda talking about how the new taxes will force the rich 1% to pay their share in nation building. Perhaps Congressman Salceda overlooked the fact that the 1% or 10% rich who own, control, or influence our economy and national wealth are also the people who have invested the most and on many occasions have bankrolled and managed many infrastructure projects that previous administrations could not do. Tsinoy, Pinoy or Tisoy, they all invested perhaps gambled on the unpredictability and corruption in doing business with government.

Nonetheless, if Congressman Salceda is earnestly convinced that the rich should give more – then tax them directly – if he can and if he dares! If those who have more should give more, then go and knock on their doors without stabbing the rest of the Filipino people in the back with a tax reform program that will make their cost of living higher and their quality of life poorer.

If Dominguez and Salceda want to wave the flag of patriotism and nation building then I suggest that they follow the principle that “charity begins at home.” Begin by increasing the taxes on mining companies to the same level that Australia has done. Double or triple the various taxes levied on mining companies and put a stop to exporting raw materials and require local processing in order to generate jobs.

The same should go for Congressman Joey Salceda and his associates in Congress and the Senate. Before imposing such heavy taxes on our gasoline, make sure all members give up their gasoline allocations or allowances. Before imposing additional taxes that will raise prices for our consumable products such as soft drinks, milk, and other food products, make sure that members of Congress are willing to give up all their dining privileges, free security protection details, paid personal staff and especially travel allowances to visit the many exotic places beyond their congressional district. 

Eleanor Roosevelt once said “ It is not fair to ask others to do what you are not willing to do yourself.” It is also important to remind yourself of “Why” you are doing something. Is it really for the benefit of everyone or all about what you think is right? Making assumptions in the comfort of your existence and lifestyle, forgetting that others have a far simpler or perhaps financially difficult life would be adding insult to injury. 

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Email: utalk2ctalk@gmail.com