DOF seeks Congress nod for other CTRP packages

The Department of Finance (DOF) is targeting to secure Congress’s approval for the remaining packages of its Comprehensive Tax Reform Program (CTRP) by the end of the year.

During the Philippine Economic Briefing forum in Davao City last Friday, DOF Assistant Secretary Ma. Teresa S. Habitan bared that the DOF is eyeing for “Package 2 plus” to be ratified in Congress by December along with Package 3 and Package 4 of the CTRP.

“And we count on your support on the succeeding packages to be heard by Congress this year,” Habitan told businessmen during her presentation at the forum.

Package 2 plus includes measures tackling the increase in excise taxes on sin products, namely, tobacco and alcoholic products, mining, coal and casino operations.

The proposal to increase excise tax rates on sin products like tobacco and alcoholic beverages is being targeted for Congress ratification by June 2018, while the the comprehensive mining tax and that of the removal of the value-added tax for coal and casino operations is being eyed for December.
Package 2 of the CTRP, which aims to lower corporate income-tax rates from 30 percent to 25 percent, as well as harmonizing fiscal incentives, was submitted to Congress in January. Package 1B of the first package of the CTRP, which is now the Tax Reform for Acceleration and Inclusion (TRAIN) law, is being eyed for passage by the end of this month.

“The Philippines grants the most generous tax incentives by giving them forever the GIE [gross income earned]. All other countries in the Asean impose a ceiling. This just proves that we have to revisit the way we do our incentives law,” Habitan said.

Under the TRAIN, which was signed into law by President Duterte in December 2017, the lowering of personal income-tax rates was implemented including a number of offsetting measures, such as increasing taxes on fuel, expanding the taxpayer base and limiting VAT exemptions, among others.
Under Package 1A, the increase in coal excise tax, which was originally proposed to be included in the DOF’s fifth package of the CTRP, was raised from the current P10 per metric ton to P50 per MT in the first year of implementation, P100 in the second year and P150 in the succeeding years.

And the increase in tobacco excise tax rates was also included, from the current P30 per pack, it will be raised to P32.5 in the first half of this year and to P35 starting from July 2018 to December 2019.
Finance Secretary Carlos G. Dominguez III earlier bared that Package 1B tackles tax administration measures, as well as tax amnesty provisions and lifting of the bank-secrecy law.

Package 3 of the DOF’s proposed CTRP tackles property taxation, with the goal of lowering the rate of donor’s and estate taxes, as well as the rate of transaction taxes on land. The offsetting measures include the rationalization of valuation of properties, or increasing valuation closer to market prices.
The fourth package covers capital income taxation, which aims to reduce the taxes imposed on interest income earned on peso deposit and investments from 20 percent to 10 percent. Its offsetting measures include the harmonization of capital income-tax rates for dollar deposits and investments, dividends, equity and fixed income rates to 10 percent. It also includes increasing tax on stocks traded in the stock market from 0.5 percent to 1 percent on gross selling price.

DOF Undersecretary Karl Kendrick T. Chua bared last year that the DOF wants all tax-reform packages approved before 2019, which is an election year. Packages 3 and 4 of the CTRP have yet to be submitted to Congress.

source:  Business Mirror

To new beginnings

A new year and a new tax law for Filipinos to comply with. For those of who may be planning to start a new business venture this year, here are some reminders on registering a business with the Bureau of Internal Revenue (BIR), and how the Tax Reform Act for Acceleration and Inclusion (TRAIN) law may affect it.

Registration requirements
Revenue Memorandum Circular (RMC) 70-13, as amended by RMC 93-16, provides the necessary documentary requirements for registering corporations or partnerships. The requirements listed below are to be submitted upon registration within 10 days from date of employment, on or before commencement of the business, before payment of any tax due, or upon filing of a return, statement, or declaration:

Corporations or partnerships
Application for Registration for Corporations/Partnerships (BIR Form 1903);
Photocopy of Securities and Exchange Commission (SEC) Certificate of Incorporation or Registration;

Articles of Incorporation/Articles of Partnership;
Photocopy of Mayor’s Permit/Duly received application for Mayor’s Business Permit;
New sets of permanently bound books of accounts;
Proof of payment of annual registration fee of P500;
Application for Authority to Print Receipts and Invoices (BIR Form 1906);
Final and clear sample of principal receipts/invoices; and
Other pertinent documents as may be required.

Branch and facility types – Non-individual
Application for Registration for Corporations/Partnerships (BIR Form 1903);
Photocopy of Mayor’s Permit/Duly received application for Mayor’s Business Permit;
Board Resolution/Secretary Certificate stating the branch establishment, if any;
New sets of permanently bound books of accounts;
Proof of payment of annual registration fee of P500;
Application for Authority to Print Receipts and Invoices (BIR Form 1906); and
Final and clear sample of principal receipts/invoices.

Sole proprietorship or self-employed individuals
Application for Registration for Self-Employed and Mixed Income Individuals, Estates/Trusts (BIR Form 1901)
Any identification issued by an authorized government body showing the name, address, and birthdate of the applicant;
Photocopy of Mayor’s Permit/Duly received application for Mayor’s Business Permit;
Professional Tax Receipt/Occupational Tax Receipt issued by a Local Government Unit or a Department of Trade and Industry Certificate, if any;
New sets of permanently bound books of accounts;
Proof of payment of annual registration fee of P500;
Application for Authority to Print Receipts and Invoices (BIR Form 1906);
Final and clear sample of principal receipts/invoices; and
Other pertinent documents as may be required.

Branch and facility types – Individual
Application for Registration for Self-Employed and Mixed Income Individuals, Estates/Trusts (BIR Form 1901);
Photocopy of Mayor’s Permit/Duly received application for Mayor’s Business Permit;
Professional Tax Receipt/Occupational Tax Receipt issued by an LGU or a DTI Certificate, if any;
New sets of permanently bound books of accounts;
Proof of payment of annual registration fee of P500;
Application for Authority to Print Receipts and Invoices (BIR Form 1906); and
Final and clear sample of principal receipts/invoices.

Registration for VAT
Section 236(G) of the Tax Code, as amended by TRAIN, now requires entities engaged in sale, barter, or exchange of goods, properties, or services with gross receipts exceeding P3 million – from the previous threshold of P1.9 million – to register for value-added tax (VAT). Additionally, entities not meeting the gross receipt threshold of P3 million may still opt to register for VAT. However, it should be noted that TRAIN now prohibits the optional VAT registration of entities electing the 8% tax on gross sales under income taxation.

Issuing commercial papers
Additionally, Section 73 of TRAIN amends Section 237 of the Tax Code, increasing the threshold requirement in the issuance of commercial papers. Commercial papers in this case purport to sales invoices, official receipts, and other related documents. Formerly, any entity liable to internal revenue taxes shall issue commercial papers for transactions amounting to at least P25. With the passage of TRAIN, the P25 threshold has been increased to P100 per transaction.

Electronic sales reporting
In conjunction with the above discussion on commercial papers, TRAIN raises a new system to be established in the next five years. Section 74 of the new law requires taxpayers engaged in export business, taxpayers engaged in e-commerce business and large taxpayers to issue electronic commercial papers, in lieu of manual commercial papers, originals of which are to be issued to customers. Similarly, the abovementioned taxpayers also have to electronically report to the BIR their sales data by use of electronic point of sales systems.

The TRAIN law ushers in a slew of changes that will no doubt affect Filipinos – both income-earners and entrepreneurs. At least in terms of registration, the new law exempts a greater population of taxpayers from VAT. However, with the passage of time, the provisions of TRAIN may not be so easy to comply with, especially with regard to the electronic reporting requirements. Nonetheless, as long as one remains compliant with the new requisites and processes of business registration, there should be no need to fret.

The author is a senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

source:  Manila Times

‘Papa Bear,’ ‘Mama Bear,’ ‘Ice Queen’

Get Real By: Solita Collas-Monsod

The Senate version of the much-vaunted TRAIN (Tax Reform for Acceleration and Inclusion), Senate Bill No. 1592, was passed this week. Let me tell you, Reader, and I am joined by highly respected colleagues in this view, that it leaves much to be desired.
We need this tax reform program because the administration’s platform is based on a “Build, Build, Build” program to improve the country’s infrastructure—not only physical (roads, bridges, etc.) but also human (i.e., to improve the people’s education, skills, training) and even natural. President Duterte wants to accelerate our pace of development.

The problem lies in the fact that with the current tax structure, the government cannot finance it. We have a structure that is old, creaky and full of loopholes. For example, our excise taxes on fuel haven’t been changed in 20 years. In 1998, fuel excises constituted around 50 percent of fuel prices—the same as other countries. Now they constitute maybe 10 percent.

For loopholes, how about our value-added taxes (VAT)? Sure, we have about the highest VAT rate in the region, but there are so many exemptions. Sen. Panfilo Lacson pointed this out when he said that the Philippines’ exemptions were more than those of Thailand, Malaysia, Vietnam and Indonesia put together (PH=143, T+I+M+V=111).
So, to raise the funds to finance our Philippine Development Plan and to make up for the needed reductions in personal income tax, we need to streamline and update our tax structure. That’s what the Department of Finance set out to do. Finance Secretary Sonny Dominguez was reported to have said that his proposed increase in the fuel excises would bring in P177 billion, and that removing the VAT exemptions would bring in P166 billion.

Hence the tax reform—to pay for the physical infrastructure and human capital development (P40 billion for free college tuition). And there’s universal healthcare, estimated at around P50 billion, etc. And then we have to make sure that the poor are not further marginalized.

So what happened? Well, for one, all the foregoing—the country’s needs—took a back seat to the individual needs of our senators. Someone monitoring the discussions told me that this was the first time (in three Congresses) that the senators were so open about what they wanted for themselves.

They even had pet names for themselves, like “Papa Bear” (Gordon, I am told), “Mama Bear” (Villar supposedly), and “Ice Queen” (allegedly Legarda). And if their individual needs or interests clashed with the needs of tax reform, guess who won?
Example: Sen. Sonny Angara’s interests led him to include ecozones (not just direct exporters) among those with VAT zero rating, thus adding to, rather than reducing, the exemptions. And anything that would affect real estate was given wide berth, to accommodate Mama Bear.

When the senators realized that their pet insertions had reduced the expected revenues of the tax reform, they scrambled to add more revenue-raising provisions. And so you had a doubling of the documentary stamps tax, a doubling of the minerals excise tax, a tax on coal 10 to 30 times its present rate. Is that good? No. No one bothered to check what the overall impact would be. As a colleague described it: all whimsical or arbitrary, all without the benefit of complete staff work.

The senators did arrange for the cash transfers to the poor for three years: The additional revenues from TRAIN would be divided into 60 percent for physical infrastructure, 27 percent for human infrastructure (including the cash transfers), and 13 percent for the Armed Forces. However, if the poor are to get the P50.4 billion envisaged (P3,600 a year x 14 million families—yes, the Senate considers the poor to comprise 70 percent of our families), revenues from the Senate’s TRAIN should be at least P187 billion. The latest estimated revenues are about P120 billion.

Yet, in spite of the need to raise revenues, sin taxes (with complete supporting studies) were not even considered. Senators Manny Pacquiao and JV Ejercito presumably were convinced not to pursue this, because anyway, it will be included in TRAIN II “early” next year. Anybody want to bet on that? Elections are coming, and taxes and elections do not mix well.

source:  Inquirer

Bye bye, Build Build Build?

The Tax Reform for Acceleration and Inclusion (TRAIN) has been billed as the administration’s flagship legislation for achieving sustainable seven percent growth, generating investments and jobs,and reducing poverty. If TRAIN is derailed — kiss Build, Build, Build, bye bye.

There is some concern that the Senate version of TRAIN passed two weeks ago, heavily diluted the original tax reform package proposed by the DoF. According to press reports citing the Legislative-Executive Development Advisory Council (LEDAC),the likely incremental revenue yield of the Senate bill is only around P55B, around 0.3% of GDP. Compare this to the target revenue yield of the original proposal of the DoF of P157B, (1% of GDP), or even the House version of P134B (0.8% of GDP). Or what the Philippine Development Plan aims: for infrastructure spending to ramp up to 7% of GDP by 2022 from last year’s 3.4%.

Moreover, as stressed by Foundation for Economic Freedom last Sept. 14, “Tax reform is particularly important in the face of new spending mandated by Congress — free irrigation, free tuition in SUCS (state universities and colleges), escalating pension benefits of uniformed personnel, and increases in SSS (Social Security System) pensions unmatched by increases in contribution.” The incremental yield of the Senate bill barely covers the estimated first year cost of the free tuition law. And with inordinate amount of earmarks to boot.

If government pursues its programmed five-year infrastructure spending on top of all these Congress-mandated new ones without the matching new revenues, the country courts an explosive public debt buildup.More immediately, we put at risk another “BBB” — the Philippines “investment grade” credit rating. Keeping an investment grade rating is essential. It makes the country attractive to investors and keeps borrowing cost low for both government and the private sector, including small businesses and first time homebuyers.

The major sources of dilution in the Senate version according to experts are —
1. Plugging VAT exemption loopholes. The Senate version only lifted 36 VAT exemptions from the 70 lines in the DoF bill. Moreover the Senate bill gives new exemptions to ecozones.

2. Fuel taxes, auto excise taxes were watered down and made more complicated.
3. The option to pay 8% on gross for all self-employed, in lieu of income taxes at the top marginal rate of 35%.

On the VAT exemption loopholes, the consequence of having too many holes is a VAT yield of only 4.3% of GDP, around the same as Thailand’s, even when their VAT rate is only 7%.

My favorite example of a bad tax exemption — seniors citizens’ VAT exemption on top of a legally mandated 20% discount. This is exceedingly regressive as government subsidizes in direct proportion to amount of spending, and gives minimal benefits to the needy elderly poor. Its other objectionable feature from a tax policy standpoint is the high administration cost, and its window for abuse by opportunistic taxpayers/establishments and crooked tax collectors. The DoF originally proposed to limit this exemption to medicines, and to instead provide annual cash transfers similar to the Pantawid Pamilya for the elderly poor.

There are dozens of similarly unmeritorious exemptions like this that the DoF tried to wholesale correct in their version of the bill. (At the same time, the DoF has shown flexibility in recognizing truly deserving cases. For example, with the BPO industry, one of two key drivers of the economy in terms of direct and indirect employment, foreign exchange, and economic activity. Both House and Senate versions provide for a formula that allows the industry to continue to significantly contribute to the economy in the face of anti-outsourcing rhetoric in the US, concerns of foreign clients over security concerns like Marawi/ISIS, and the accelerating negative impact of technological disruption/Artificial Intelligence.)

On the oil taxes,while the three versions converge to same rate after year 3, the Action for Economic Reforms has argued that the back loading, especially in the Senate version impacts on the ability of government to fund the compensating cash transfers needed in the early years.(Though one can also argue that timing actually dovetails with the J curve ramp up in infra spending, given government’s absorptive capacity/execution limitations.) There is also the risk to the planned revenue increase for the outer years due to the 2019 election.

Finally, on item 3 — the revenue losses from the overly generous eight percent gross option for the self-employed (initially only for smaller establishments), has been estimated by the DoF/AER to be upwards of P20 billion. While its Senate sponsors have argued that there will be more taxpayers who will pay with the much lower rate, I doubt that tax evaders now paying zero will find virtue just because the tax rate is lower. Especially since, surfacing previously hidden income stream may expose them to charges of evasion on past income.

Moreover, this measure severely fails the test of horizontal equity — as salaried people, especially at the higher tax brackets, will be subject to three to four times the burden of the self-employed.

In order to make up for the huge gap in revenue yield, the Senate version introduced new items that were originally programmed for future packages by the DoF. They have thus not been subject to full consultations. Some quick notes on these new items:

1) Increase in taxes on dividends and on FCDU dollar interest income to 20%.
Premature and piece meal in light of a comprehensive review being undertaken by a team of experts commissioned by the DoF/ADB for reform of capital income taxation (interest, dividends, capital gains) across institutions and financial instruments. The objectives of this capital income tax reform (package 4) include greater neutrality, fairness, simplicity, and efficiency — to be supportive of government’s capital market development efforts.

2) Coal tax dubbed a carbon tax.
The Senate bill proposed doubling the coal tax from the current P10 per ton. While even this higher level seems modest compared to what is being pushed by alternative fuel interests,this tax should have been left for fuller study under the DoF’s package 5, taxation of products with negative social externalities (which also includes tobacco and alcohol).

Advocates have argued for a much heavier tax on coal based on coal’s higher per unit contribution to global Co₂ vs. alternative fuels. They fail to consider that the Philippine Co₂ footprint is just 1% of world total,the lowest in ASEAN. Moreover, the renewable energy component of our power mix at 35%, is way above global average — thanks to forward looking investments done over decades in efficient hydro and geothermal plants.
The question we need to ask in levying higher taxes on coal is — given the country’s aim to promote manufacturing investments and job creation, can we afford to further add to our high electricity costs? Such have been made higher recently by compounding feed in tariffs subsidies for wind and solar.

3) Cosmetic surgery (or cosmetic products) tax. This and other similar small yielding tax measures are just administrative burdens.
One is tempted to say, purely cosmetic. But nonetheless valid considerations in Philippine politics, especially bearing in mind 2019 midterm elections. I trust that the bicam and Congress as a whole will find the right balance between short term politics and our country’s long term development imperatives.

Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during the Corazon Aquino and Fidel Ramos administrations.  

Introspective By Romeo L. Bernardo 

romeo.lopez.bernardo@gmail.com

Tax holiday for inclusive business models

Package two of the country’s tax reform initiatives will take a look at how to rationalize fiscal incentives. Certain factors that are being considered by our Finance department include the selection of industries to be promoted, the actual performance of registered entities vis-a-vis targets, and the period for availing of the incentives. It will be interesting to see how the government will continue to incentivize activities that result in positive social impact and inclusive growth. One of these activities currently qualified for fiscal incentives is the corporate Inclusive Business (IB) model.

IB is a private sector or business approach specifically directed at low-income communities or people who live at the Base of the Pyramid (BoP). A company adopting this approach customizes its business model to include low-income communities in its value chain as customers, suppliers, distributors, retailers, or employees. IBs provide more access to basic goods and services, and create opportunities for employment and livelihood to the marginalized sector in a sustainable, scalable, and commercially viable manner.

While it seems philanthropic, IBs are actually profitable investments. They also provide opportunities for large-scale businesses to realize reasonable profits from markets with significant growth potential, while making a positive social impact like reducing poverty and supporting community development. Hitting two birds with one stone as the old cliché goes.

IBs differ from Corporate Social Responsibility activities in that the latter are not conceptualized with commercial viability and profit in mind. However, both are effective ways of engaging the private sector to collaborate and partner with the low income communities, sharing in the responsibility of the government to bolster growth in all sectors, especially at the BoP.

Recognizing its potential, the Board of Investments (BoI) included IB in the 2014 Investments Priorities Plan (IPP), not as a preferred activity for investment eligible for incentives but as a key strategy for inclusive growth, and as a general policy for encouraging registered enterprises to adopt IB strategies and practices.

In the 2017 IPP, IB models finally got listed as one of the preferred activities. The IPP recognized business activities of medium and large enterprises in the agribusiness and tourism sectors which target micro and small enterprises (MSE) as part of their value chains. IB projects that are eligible for registration may qualify for BoI Pioneer status with entitlement to five years of income tax holiday.

To illustrate an IB model, let’s take an agribusiness enterprise that sources its raw materials (e.g. coffee beans, sugar, or cocoa) from low-income farmers, MSEs, or farmer’s cooperatives.

The enterprise may enter into a contract growing agreement with the farmers and may guarantee the purchase of their produce. It may provide technical assistance (e.g. trainings, seminars) or access to finance (e.g. loans, collateral) and farm inputs.

Further, the IPP enumerates the targets and the timetable for implementation of IB models.

Under the guidelines, within three years of commercial operations, at least 25% of the value of total cost of goods sold of qualified agribusiness enterprises and total cost of goods/services of qualified tourism enterprises must be sourced from registered and/or recognized MSEs (including cooperatives, or any organized entity duly recognized by a government body), as evidenced by a duly notarized contract. Moreover, there must be at least a 20% increase in the average income of individuals engaged from such MSEs from the baseline year to the third year of actual operations.

For qualified agribusiness enterprises, at least 300 farmers, fisherfolk, suppliers, and/or individual beneficiaries must be engaged, of which, at least 30% must be women. On the other hand, at least 25 direct jobs (regular employment) must be generated by qualified tourism enterprises for individuals in the identified database (e.g., DSWD Conditional Cash Transfer Graduates, DAR Agrarian Reform Beneficiaries, NCIP List, PWD, and others) of which, at least 30% must be women.

In addition, the enterprise must exhibit innovation in the business model through: (1) the provision of technical assistance/capacity building to the MSEs, farmers, fisherfolk, or employees that increases productivity and/or quality; or (2) facilitation of access to finance either directly or in partnership with a third party (i.e. provision of collateral by the company, direct lending through a subsidiary or third party-financing disbursed directly to the MSEs, farmers, fisherfolk, or employees or through the company).

Innovation in the business model may also be exhibited by agribusiness enterprises through the provision of inputs and/or technology to MSEs and/or individual farmers and fisherfolk.

Interested enterprises with agribusiness and tourism projects may opt to undertake IB models by submitting their duly notarized IB plans in the required BoI format upon application for registration.

A business strategy that incorporates the marginalized sectors of society may finally serve to break the shackles of poverty. As aptly expressed in the United Nations Report entitled, Creating Value for All: Strategies for Doing Business with the Poor (2008): “Inclusive business models build bridges between business and the poor for mutual benefit. The benefits for business go beyond immediate profits and higher income. For business, they include driving innovations, building markets, and strengthening supply chains. And for the poor, they include access to essential goods and services, higher productivity, sustainable earnings, and greater empowerment.”

With the promise that it holds, there is reason for the government to qualify IB models for fiscal incentives.

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 content is for general information purposes only, and should not be used as a substitute for specific advice.

Reynaldo E. Maniego III is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

reynaldo.e.maniego.iii@ph.pwc.com

Waves of waivers

Some of the important lessons in life we learn from unpleasant experiences. Learning from the mistakes of our past keeps us from repeating them. Wisdom comes from accepting errors and exercising better judgment in the future.


The above statements hold true even in tax collection. In the past, the Bureau of Internal Revenue (BIR) lost assessment cases due to the issue of waivers on the statute of limitations for the assessment of deficiency taxes. It may have learned its lesson the hard way, but the Bureau has implemented improved measures stemming from its experience.

In a 2004 case (G.R. 162852 dated Dec. 16, 2004), the Supreme Court ruled that a waiver must strictly conform to the requirements set forth under the rules; otherwise, the waiver is invalid. At that time, the prevailing rule on the proper execution of a waiver of the statute of limitations was Revenue Memorandum Order (RMO) No. 20-1990 and Revenue Delegation Authority Order No. 5-2001.

In a subsequent case (G.R. No. 212825 dated Dec. 7, 2015), the Supreme Court provided an exception to the general rule on validity of waivers. The crux of the issue pertained to the issuance of defective waivers, arising from the fault of both the taxpayer and the BIR. The waivers were said to be executed by the taxpayer’s accountant without a notarized board authority to sign in behalf of the company. On the other hand, the BIR was considered to be careless in performing its functions when it did not ensure that the waiver was duly accomplished and signed by an authorized representative, among others.

In that case, the Supreme Court tolerated the BIR’s slip-ups for equitable reasons. The validity of the waiver in favor of the state was then upheld on the strength of the time-honored principle that taxes are the lifeblood of the government. In its decision, the Court said the BIR’s right to collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers, especially in cases where the taxpayer was obviously in bad faith when it voluntarily executed the waivers and subsequently insisted on their invalidity by raising the very same defects it caused. Thus, the taxpayer was estopped from questioning the validity of the waivers.

As for the erring BIR officials, the Court suggested enforcing administrative liabilities for their failure to properly comply with the procedures.

In a more recent decision (G.R. No. 213943 dated March 22, 2017), the Supreme Court ruled that the three-year period to assess was not extended because all the waivers executed by the taxpayer were considered defective. What is significant to note is that the waivers were considered defective because the BIR failed to provide the third copies to the office accepting the waivers and these copies were merely attached to the docket of the case. Also, the revenue official who accepted the third waiver was not authorized to do so. In this case, the defects were solely due to the fault of the BIR.

While the BIR argued that the taxpayer was estopped from questioning the validity of the waivers, the Courts clarified that the BIR cannot shift the blame to the taxpayer for the defective waivers. The BIR cannot easily invoke the doctrine of estoppel to cover its failure to comply with the requirements for valid issuance of waivers. Having caused the defects, the BIR must bear the consequences. Considering that the waivers are defective, the assessment was considered issued beyond the three-year prescriptive period, and thus, void. Contrary to the 2015 case, the Court ruled in favor of the taxpayer here because it played no part in the waivers’ defects.

With the issuance of a new RMO last year, the question is -- Can taxpayers apply the above decisions of the Supreme Court for issues on waivers today?

On April 18, 2016, the BIR issued RMO No. 14-2016 which laid down new guidelines on the execution of waivers. According to the new RMO, compliance with the prescribed form is not mandatory. A taxpayer’s failure to follow the forms would not invalidate the executed waiver, for as long as (1) it is executed before the expiration period, and the date of execution is specifically provided in the waiver; (2) the waiver is signed by the taxpayer or duly appointed representative/responsible official; and (3) the expiry date of the period agreed upon to assess/collect the tax after the three-year period is indicated.

In addition, the new RMO provides that the taxpayer is charged with the burden of ensuring that the waivers are validly executed. The taxpayer must submit the duly executed waiver to the Commissioner of Internal Revenue or to the authorized revenue official (e.g., concerned revenue district officer or group supervisor as designated in the Letter of Authority or Memorandum of Assignment) who shall then indicate acceptance by signing the waiver. Moreover, the taxpayer must retain a copy of the accepted waivers.

Under the new RMO which seems to favor the BIR, it appears that upon execution of the waiver, taxpayers can no longer challenge its validity.

Thus, while there is a level of comfort in the decision of the Court that taxpayers should not be made to suffer for lapses of the BIR, this will only apply to waivers that have been executed prior to the effectivity of the new RMO. The BIR has learned from past mistakes. Here’s to hoping that taxpayers have learned from their own.

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 content is for general information purposes only, and should not be used as a substitute for specific advice.

Maria Jonas Yap is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

maria.jonas.s.yap@ph.pwc.com

source:  Businessworld

Another look at the tax-exempt status of charitable institutions

Tax exemptions are often met with reservations and must withstand the strict scrutiny of revenue collectors. After all, taxes are the driving fuel that propels all programs and activities of the state. Absolving persons from their tax liabilities means reducing public funds and restraining the government from actualizing its goals.

Nevertheless, the legislative groundwork covering the tax exemption of religious and charitable institutions has long been established, even as early as the Commonwealth period. The rationale for the exemption springs from the benevolent neutrality approach premised on the ground that religious and charitable institutions are not engaged in profit-seeking undertakings; whatever gains derived by the organization redounds to charity. Hence, Section 30(E) of the National Internal Revenue Code (or simply, the Tax Code) is specifically couched to incorporate the rationale in these words: a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, wherein no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person shall be exempt from income tax.

In a recent decision (CTA Case No. 8912 dated July 25, 2017), the Court of Tax Appeals (CTA) emphasized that while our Tax Code provides exemptions for certain non-stock corporations from income tax, this incentive is not absolute. It reiterated that in order to enjoy immunity from taxation, the following requirements for exemption must continually be satisfied by the taxpayer: (a) The taxpayer must be a non-stock corporation or association; (b) Organized exclusively for charitable purposes; (c) Operated exclusively for such purposes; and (d) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.

In the foregoing case, the CTA ruled in favor of the BIR, declaring that while there was no sufficient evidence to prove that any income or asset inured to the benefit of any member or officer of the institution, the 10% preferential tax rate applicable to proprietary hospitals which are nonprofit (under Section 27(B) of the Tax Code) should be imposed since the taxpayer was not operated “exclusively” in charitable purposes. Although not barred from engaging in activities conducted for profit, any income the hospital derives from profit-oriented activities should not escape the reach of taxation. Thus, an organization with both non-profit and profit-generating activities may still enjoy its tax exempt status but only on income from not-for-profit activities. Any income generated from activities conducted for profit shall strictly be subject to income tax.

As basis, the CTA also cited previous cases (G.R. Nos. 195909 and 195960 dated September 26, 2012) where the Supreme Court extensively discussed the application of Section 30(E) of the Tax Code, as amended, and upheld the same decision.

For taxpayers, an important takeaway from this case is that in order to enjoy immunity from taxation, all of the requirements for the same must continually be satisfied by the taxpayer. Thus, being a non-stock and non-profit charitable institution does not automatically exempt an institution from paying taxes.

Generally, just relying on the specific tax-exemption provision of charitable institutions from our Tax Code, a non-stock, non-profit corporation is exempt from paying income taxes at first glance. In some instances, organizations tend to overlook the succeeding provision clearly stating that the exemption only applies to income from non-profit activities. Through this case, the CTA reiterated the prevailing tax position in the Philippines that income from profit-generating activity is taxable, regardless of the disposition of the income earned from such activities. Nonetheless, while this may be the case, an organization may still, at the same time, remain tax-exempt on income from its actual charitable activities. Therefore, it may be deduced that at the end of the day, the determining factor for taxability lies in whether an activity is for profit or not.

To be exempt from tax, the challenge is for charitable and religious organizations to have a better appreciation of the rationale behind their tax-exempt status. As a rule, taxation is the overarching principle and exemption is the exception; as such, the burden of proof rests upon the party claiming exemption to prove that it is, in fact, covered by the exemption so claimed.

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 content is for general information purposes only, and should not be used as a substitute for specific advice.

Nadine E. Chan is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2) 845-2728

nadine.e.chan@ph.pwc.com

source:  Businessworld