Maintaining the Float (Minimum Public Ownership)

TOP OF MIND By Genesis L. Sampaga (The Philippine Star) | Updated January 15, 2013 - 12:00am

Business entities which meet the basic guidelines, track record requirements, capital structure and operational history set by the Philippines Stock Exchange (“PSE”) shall qualify to be listed and sell their stocks to the general public to improve their financing activities.  A publicly-listed company (“public company”) is one that has held an initial public offering and whose shares are traded in the stock exchange or in the over-the-counter market.  Such companies are subject to stringent regulations, one being the rule on minimum public ownership (“MPO”).

The rule on minimum public ownership requires public companies, at all times, to maintain a percentage of its listed securities in the public float.  A float refers to the number of outstanding shares of stocks in the hands of public investors.  Public companies shall maintain a MPO of at least 10 percent of issued and outstanding shares, exclusive of any treasury shares held, or the MPO as required by the Securities and Exchange Commission (“SEC”) or PSE, whichever is higher.

Revenue Regulations (“RR”) No. 16-2012 of the Bureau of Internal Revenue (“BIR”) prescribes the tax treatment of sales, barter, exchanges or other dispositions of shares of stocks of public companies that meet or do not meet the MPO level required of listed securities.

On account of an increase in the turnover rate of stock ownership for the years 2011 and 2012, a grace period is granted to public companies to comply with the MPO.  Non-compliant public companies as of Dec. 31, 2011 and those whose public ownership levels subsequently fall below the above-mentioned MPO level at any time prior to Dec. 31, 2012, may be allowed up to Dec. 31, 2012 to meet the required float.

Non-compliant companies shall be imposed a stock transactions tax at the rate of one-half of one percent of the gross selling price or gross value of money of the shares of stock sold [Section 127 (A), Tax Code as amended] for every stock transaction up to Dec. 31, 2012.  Conversely, every stock transaction of non-compliant companies after Dec. 31, 2012 shall be imposed a final tax at either five percent  or 10 percent on the net capital gains [Sections 24(C), 25(B), 27(D)(2), 28(A)(7)(c) and 28(B)(5)(c), Tax Code as amended].

In addition to the final tax imposed on net capital gains after the lapse of the grace period, documentary stamp tax (“DST”) [Section 175, Tax Code as amended] is imposed on every transaction upon the execution of the deed transferring ownership or rights, or upon delivery, assignment or indorsement of such shares in favor of another.

In case of non-payment of the taxes prescribed, no sale, exchange, transfer or similar transactions intended to convey ownership of or title of any share of stock shall be registered in the books of the corporation unless the receipts of payment of the taxes and the Certificate Authorizing Registration (CAR) and/or Tax Clearance Certificate (TCL) under pertinent Revenue Regulations and issuances are filed with, and recorded by the stock transfer agent or secretary of the corporation.  Further, no transfer of shares of stock shall be recorded unless DST thereon has been duly paid for (Section 200, Tax Code as amended).

The taxes imposed under RR No. 16-2012 shall not apply to the following:

• a. Dealers in securities, as defined under Section 22 (U) of the Tax Code, provided that, they shall be subject to Value-Added Tax (VAT) on the basis of their gross receipts and Income Tax from their sale or exchange of securities;
• b. Investors in shares of stocks in a mutual fund company, as defined in Section 22 (B) of the Tax Code, in connection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund company pursuant to Section 32(B)(7)(h) of the Tax Code; and
• c. All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.

Any person who causes the transfer of ownership or title of any share of stock without having been furnished with the receipts of the payment of the taxes due and corresponding CAR/TCL may be subject to penalties prescribed under the Tax Code.  The same provisions shall apply to any responsible director, corporate officer, partner or employee who fails to submit the reports required under this regulation.

Genesis L. Sampaga is a supervisor from the Tax Group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email manila@kpmg.com or rgmanabat@kpmg.com.

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Addendum to 08 January 2013 Top of Mind by Jamie Andrea Mar Y. Arlos

The BIR has started the year right by releasing its recent Revenue Memorandum Circular (“RMC”) No. 2-2013 issued to clarify certain provisions of RR No. 12-2012 on the deductibility of depreciation expenses as it relates to purchase of vehicles and other expenses related thereto, and the input tax allowed therefore.

Mind-boggling question as to the effectivity of said RR No. 12-2012 has now been spelled out by the RMC.  Explicitly stated in the RMC that the RR applies prospectively, meaning is effective on the date it was published, that is last Oct. 17, 2012.  Thus, it applies to land vehicles purchased upon its effectivity.  Prior to Oct. 17, 2012, land vehicles purchased where the purchased amount exceeded the threshold of P2,400,000, the RR does not apply.  As a general rule, revenue regulations are not retroactive, except if it is curative in nature and if it expressly states its retroactive application.

In addition to the effectivity of the RR, the RMC likewise clarifies that any loss that will be incurred as a result of a sale of non-depreciable vehicles (defined as passenger vehicles of all type, whether by land, water or air) shall NOT be allowed as deduction from gross income.

Lastly and for income tax purposes, all expenses related to the non-depreciable vehicles such as but not limited to repairs and maintenance, oil and lubricants, gasoline, spare parts, tires and accessories, premium paid insurance covering said vehicles and registration fees shall NOT be allowed as deduction in its entirety. For VAT purposes, all input taxes corresponding to the disallowed expenses for income tax purposes are likewise NOT allowed. 

A continuous update on the taxpayers is the best way to avoid any disallowance by the BIR considering its zeal to collect taxes and strictly implement all tax laws.

How VAT affects real property sales

Businessworld (January 13, 2013) - THE PHILIPPINE economy continues to show many positive signs with noticeable indicators such as stable growth, increased remittances from overseas Filipino workers (OFWs), and a thriving outsourcing sector. As a result, there is also a strong parallel expectation that the country’s real estate industry will continue to flourish.

Investing in real estate, however, requires a significant amount of money, making it imperative for prospective buyers and real estate agents or sellers to be familiar with matters such as taxation of real estate transactions.

Revenue Regulations (RR) No. 16-05, as amended by RR Nos. 04-07, 3-2012 and, very recently, by 13-2012 prescribe the value-added tax (VAT) rules on real estate sales.

The sale of a residential lot with gross selling price (GSP) exceeding P1,919,500 (previously P1.5 million), and the sale of a residential house and lot or other residential dwelling with GSP exceeding P3,199,200 (previously P2.5 million), are subject to 12% VAT. These new threshold amounts apply to instruments of sale which are executed and notarized on or after Jan. 1, 2012. Here are some important definitions to know. GSP means the consideration or selling price stated in the sales document, or fair market value (FMV), whichever is higher. FMV is the FMV or zonal value as determined by the BIR, or the FMV in the real property tax (RPT) declaration, whichever is higher. If there is no zonal value, GSP refers to the FMV in the latest RPT declaration, or the consideration, whichever is higher. If the VAT is not stated separately in the document of sale, the selling price or consideration stated therein shall be deemed to be inclusive of VAT. Meanwhile, the FMV is deemed exclusive of VAT.

VAT-taxable sales of real property the consideration for which is paid by the buyer in full at the time of sale (i.e., cash sales) will be subject to VAT at the time of sale.

On the other hand, VAT-taxable sales of real property the consideration for which is paid by the buyer on installment (i.e., deferred payment) are classified for tax purposes into either (i) sales of property on the installment plan, or (ii) deferred-payment sales not on the installment plan. The determination as to whether the sale will be treated as a sale on the installment plan or a deferred payment sale not on the installment plan depends on the percentage of initial payments received in the year of sale over the GSP.

The term “initial payments” means all payments which the seller receives in the year of sale, either in cash or in property other than the evidence of indebtedness of the buyer. If the initial payments in the year of sale do not exceed 25% of the GSP, the transaction will be considered as a sale on the installment plan in which case the VAT is recognized based on collection. On the other hand, if the initial payments in the year of sale exceed 25% of the GSP, the transaction will be considered as a deferred payment sale not on the installment plan, in which case the VAT will be recognized outright in full at the time of sale as though the sale was a cash sale.

For installment sales, the seller should issue VAT official receipts (ORs) for the collections. The VAT should be declared on every installment. To illustrate, if the consideration is P5 million (excluding VAT) and the FMV is P6 million, the total VAT is P720,000 (12% of P6 million) where the VAT base is the FMV of P6 million. If the total amount collected (including interest and penalties for late payment) during the taxable year is P1 million (excluding VAT), the VAT on said collection shall be P144,000 (P720,000 multiplied by P1 million divided by P5 million). The remaining VAT of P576,000 (P720,000 less P144,000) shall be recognized upon collection of the remaining installments.

On the other hand, if the FMV is P4.5 million, the VAT base shall be the consideration of P5 million. Thus, the total VAT is P600,000 (12% of P5 million) where the VAT to be declared for the taxable year is P20,000 (P600,000 multiplied by P1 million divided by P5 million).

For deferred payment sale, the seller should issue a VAT invoice for the entire GSP. Using the illustration above, this would be the total VAT of P720,000 (12% of the FMV of P6 million). The VAT should be declared in the month of sale. Meanwhile, the seller shall issue non-VAT ORs for the subsequent collections since these are no longer subject to VAT. For both types of sales, the seller is required to separately indicate the amount of VAT on the face of the VAT invoice/OR. Moreover, these should be supported by a public instrument (e.g., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.).

RR No. 13-2012 (effective Nov. 1, 2012), the most recent amendatory regulations, explicitly provides that the sale, transfer or disposal of two or more adjacent residential lots and/or dwellings by the same seller to the same buyer “within a 12-month period” although covered by separate titles and/or tax declarations, shall be considered as one residential area for VAT purposes.

The 12-month period was not mentioned in the old RR for purposes of determining whether the sale of two or more adjacent lots to the same buyer shall be considered as a sale of one residential area. This meant, in effect, that the sale of adjacent lots should be made on the same date (even if covered by different titles) so that the sale shall be considered as one residential area for VAT purposes.

However, under the new rules the sale, for example, of two adjacent lots with a value of P1 million each within a 12-month period shall be subject to 12% VAT since the aggregate selling price of P2 million will already exceed the VAT threshold of P1,919,500 for residential lots.

Moreover, RR 13-2012 provides that the sale of parking lots in a condominium is subject to VAT, regardless of amount, since it is not considered as a residential lot, house and lot or a residential dwelling. While investing in Philippine real estate may be considered financially rewarding due to the country’s positive economic performance, it is particularly important to know the VAT rules applicable to real estate sales, including its recent amendments. The knowledge can help investors reduce their tax obligations and avoid any risk of penalties.

Maricris U. See is a Senior Tax Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Effectivity of BIR issuances

TAXPAYERS and practitioners alike were recently bombarded by numerous and controversial rules and regulations from the Bureau of Internal Revenue (BIR). These issuances cover a wide variety of subjects and affect various types of taxpayers.

Most of these issuances did not even go through public hearing. It is more often the rule, not the exception, that taxpayers are caught unaware of the new requirements imposed upon them.

Not surprisingly, most taxpayers are now confused or ambivalent about how to implement the changes brought about by the new issuances.

On top of implementation and operational issues, taxpayers are also not clear as to when the issuances take effect and the periods covered by the issuances.

For instance, Revenue Regulations No. (RR) 14-2012 provided that the regulations shall take effect 15 days following complete publication in a newspaper of general circulation in the Philippines.

The effectivity clause, however, of RR No. 12-2012, Revenue Memorandum Circular (RMC) Nos. 77-2012, 75-2012, 73-2012 and 65-2012 provided that the same shall take effect immediately.

On the other hand, RMC Nos. 76-2012, 74-2012 and 63-2012 merely enjoined all internal revenue officers and other concerned entities or individuals to give such circulars as wide a publicity as possible and did not provide for the date of effectivity.

With these various issuances, the seemingly onerous compliance effort has become even more stringent, taking also into consideration the confusion of the public with regard to the effectivity of BIR issuances.

Before we can ascertain the effectivity of such issuances, determination as to the nature of the issuance is necessary.

Discussions of collateral issues are also important, particularly on whether or not publication is mandatory for an issuance to be valid and enforceable. In addition, if and when the issuances become effective, are these applicable prospectively or retroactively?

FORCE AND EFFECT OF LAW

The so-called RR, RMC, BIR Ruling, Revenue Memorandum Order (RMO) and Revenue Audit Memorandum Order (RAMO) are the most common issuances of the BIR. These issuances, being administrative in nature, generally have the force and effect of law.

PUBLICATION

Laws shall take effect 15 days following the completion of their publication either in the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise provided, pursuant to the New Civil Code (NCC).

In a long line of decisions, the Supreme Court (SC) has enunciated in the landmark case Tanada v Tuvera that publication is necessary in those cases where the legislation itself does not provide for its effectivity date -- for then the date of publication is material for determining its date of effectivity, which is the 15th day following its publication -- but not when the law itself provides for the date when it goes into effect.

The clear object of the law is to give the general public adequate notice of the various laws which are meant to regulate their actions and conduct as citizens. It is a requirement of due process embodied in our Constitution. It is a rule of law that before a person may be bound by law, he must first be officially and specifically informed of its contents.

Without such notice and publication, there would be no basis for the application of the legal maxim ignorantia legis non excusat (ignorance of the law excuses no one from compliance therewith) laid down under Article 3 of the NCC. It would be the height of injustice to punish or otherwise burden a citizen for the transgression of a law of which he had no notice whatsoever, not even a constructive one.

It is worthy to note, however, that administrative issuances, such as those issued by the BIR, may be distinguished according to their nature and substance: legislative and interpretative. The difference is crucial in determining whether or not p ublication is mandatory prior to effectivity.

A legislative rule is in the matter of subordinate legislation, designed to implement primary legislation by providing the details thereof.

An interpretative rule, meanwhile, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing. (BPI Leasing Corp. v. CA, GR No. 127624, Nov. 18, 2003)

In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule is adopted there must be notice, hearing and publication.

"There are, however, several exceptions to the requirement of publication. First, an interpretative regulation does not require publication in order to be effective. The applicability of an interpretative regulation needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. It adds nothing to the law and does not affect the substantial rights of any person. Second, a regulation that is merely internal in nature does not require publication for its effectivity. It seeks to regulate only the personnel of the administrative agency and not the general public. Third, a letter of instruction issued by an administrative agency concerning rules or guidelines to be followed by subordinates in the performance of their duties does not require publication in order to be effective." (ASTEC v ERC, GR No. 192117, Sept. 18, 2012; CIR v Michel J. Lhuillier Pawnshop, Inc.,).

PUBLIC HEARING

In the case of Commissioner of Internal Revenue (CIR) v. Fortune Tobacco, et al., (21 SCRA 236), the SC nullified an RMC which reclassified certain cigarettes and subjected them to a higher tax rate, holding it invalid for lack of notice, publication and public hearing.

"(T)he doctrine enunciated in Fortune Tobacco, and reiterated in CIR v. Michel J. Lhuillier Pawnshop, Inc., (GR 150497) is that when an administrative rule goes beyond merely providing for the means that can facilitate or render less cumbersome the implementation of the law and substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard and, thereafter, to be duly informed, before the issuance is given the force and effect of law. In Lhuillier and Fortune Tobacco, the Court invalidated the revenue memoranda concerned because the same increased the tax liabilities of the affected taxpayers without affording them due process." (BPI Leasing v. CA)

PROSPECTIVE APPLICATION

The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively, unless the legislative intent to the contrary is manifest by express terms or by necessary implication.

They may, however, be applied retroactively in cases of procedural and interpretative laws, among others.

Any revocation, modification or reversal of any of the rules and regulations promulgated by the BIR or any of the rulings or circulars promulgated by the CIR shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith (Section 246 of the 1997 Tax Code, as amended).

Hence, in the light of the foregoing, circulars, rulings or other issuances promulgated by the CIR have no retroactive application if such would tantamount to prejudice to the taxpayers.

Conversely, if the same is beneficial to taxpayers, it must be given retroactive application to lighten the taxpayer’s burden.

The power of taxation should be exercised with caution to m inimize injury to the rights of a taxpayer. This has been reiterated and re-emphasized in our laws and vast array of Supreme Court decisions.

TAXPAYERS’ REMEDIES

To summarize: despite the harshness of implementation, BIR issuances mandating all taxpayers to strictly comply with its provisions still have the force and effect of law.

Taxpayers, however, are not deprived of remedies. The validity and enforceability of BIR issuances may be assailed if proven to be suffering from legal infirmities and are in violation of the clear and categorical provisions of the Constitution and statutes intended to protect the rights vested on the taxpayers.

Source:  Punongbayan and Araullo

CA restores trust in banks

Businessworld - ‘This is the ruling that sends a message to every one that there is hope in the justice system although there are very few Tejams in the bench.’

In the pen of Justice Noel Tejam, the Court of Appeals reversed itself in the case of Banco Filipino vs Bangko Sentral ng Pilipinas. The CA overturned  a decision penned by Associate Justice Agnes Reyes Carpio that ordered the reopening of the bank and the grant of a P25 billion advance from the Philippine Deposit Insurance Corp.

The case arose from alleged arbitrary closure of BF by the Monetary Board for documented insolvency. The late Carlota Valenzuela, then head of CB’s department of supervision, documented the allegation that the value of BF’s assets at the time of closure was way below the extent of its liabilities.

Only one word describes that situation. BF was insolvent.

However, since the bank’s main offices and branches were padlocked with the help of CB’s security force, the Supreme Court concluded that the closure was arbitrary although the obligation of BF was to disprove the CB’s findings of insolvency.

BF, at some point, claimed the bank was merely illiquid, not insolvent.

Illiquidity and insolvency are worlds apart. To us the case was that simple. But BF made the claim that the assets of the bank had grown big enough to make it sound as no longer insolvent.

I followed this case from the very beginning. I cannot understand why the lawyers of the CB failed to convince the Supreme Court  that the documented insolvency was discovered after a thorough examination and at the time of closure.

The bigger “anomaly” is why the Supreme Court chose to skip the main issue of  insolvency and instead saw,  based its ruling. the “arbitrariness” that attended the closure.

The Supreme Court ordered the reopening of Banco Filipino.

BF got the Court of Appeals to order the reopening and grant of a P25 billion loan which (if memory serves) was a claim for damages but became a loan application.

BSP Governor Armando Tetangco got the authority of the Monetary Board to hire the services of new counsel, CVC Law, headed by Pancho Villazara. Banco Filipino has been having troubles with the Monetary Board and its lawyers since then.

The savings bank was ordered closed and taken over by monetary authorities after discovering violations, not exactly related to insolvency.

CA Associate Justice Agnes Reyes Carpio ruled that the bank be reopened and that its loan application of P25 billion be granted.

This was the ruling reversed by Associate Justice Noel Tejam of the same Court of Appeals.
We do not know how much further BF is willing to fight its  case. It may have what it feels are available legal remedies to leave meaningless the ruling of Justice Tejam.

This space has maintained that in many cases, the courts are to blame in the failure of the law to punish   bankers and other people responsible for the collapse of banks that in turn meant huge losses to the PDIC which pays the insurance claims of depositors.

Up to this time, the court has not resolved the alleged liability of Jose Go in the failure and collapse of Orient Bank. The courts have neither sent an erring banker to jail nor stripped him of his assets to pay for his crime.
The Supreme Court maimed the efforts of the Anti-Money Laundering Council when it ruled illegal or unconstitutional the filing of ex parte complaint against suspected money launderers without informing the respondents.

The Supreme Court never understood the simple sense that informed ahead of a search case, the respondents would transfer their deposits or withdraw them.

The Supreme Court also ruled that the claimants of just compensation – Philippine International Air Transport Corp. (PIATCO) in this specific case - need not substantiate their claims with documentary evidence.

Tomas Aguirre , founded  Banco Filipino to make it the largest among savings and thrift banks in the Philippines in its time. It would have easily qualified for a commercial banking license.

Aguirre, apart from being a good banker, was basically a promotions man. His public relations project, “customer relations models” picked pretty women manning teller windows and campaigning for deposits.
The bank grew to new heights. What many did not know was there was a brewing trouble in the Aguirre family and with one of its big stockholders, Nancy Tee.

Pedrito Aguirre once told me that his brother Tomas had always wanted to consolidate the holdings of his family. He said he sold his holdings to Tomas.

Tomas bought out a few more stockholders until he acquired effective control.

According to Pedrito, his brother Tomas forgot to buy out their sister, Remedios Dupasquiere and Nancy Tee, probably the single biggest stockholder.

After Tomas died, the business of running the bank fell into the hands of his son, Bobby.
His other son, a Harvard graduate of a degree in history, had enough sense in banking. As fate would have it, he too died.

The rest is history. The Bangko Sentral eventually discovered violations by the new management, violations serious enough to justify a second order of closure.

CA Associate Justice Reyes Carpio agreed to a reopening.  This is the ruling that Justice Tejam reversed.
This is the ruling that sends a message to every one that there is hope in the justice system although there are very few Tejams in the bench.

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email: amadomacasaet@yahoo.com

Security deposit -- clarifying the enigma

Businessworld - FOREIGN COMPANIES desiring to engage in business in the Philippines may establish either a wholly owned subsidiary or a branch office in the Philippines. A subsidiary is a locally incorporated entity while a branch requires the issuance by the Securities and Exchange (SEC)of a license to do business in the Philippines.

The procedure for registration of a subsidiary and a branch are generally the same, although documentation is different.

Moreover, in the case of a branch, Section 126 of the Corporation Code imposes an additional requirement in the form of a security deposit, which is often treated with less importance, or even overlooked. This may partly be attributed to the ambiguous provisions of Section 126 and its implementing guidelines, i.e., SEC 1982 Security Deposit Guidelines. Under Section 126, foreign corporations who have been granted a license to do business in the Philippines are required to make an initial deposit with the SEC of acceptable securities in an amount not less than P100,000 within 60 days from the date of the issuance of their SEC license. Thereafter, additional securities shall be deposited within six months from the end of each fiscal year if the branch’s gross income exceeds PHP5 million in an amount equivalent to 2% by which said gross income exceeds P5 million.

The security deposit requirement under Section 126 is equally important as the other registration requirements mainly because this is mandatory and non-compliance therewith is a ground for cancellation of the SEC license to do business.

In addition, the amount of security deposit is an additional investment of the foreign company which may affect its operations in the country.

The security deposit requirement embodied under Section 126 of the Corporation Code is intended to protect present and future creditors of the branch with the securities constituting as a trust fund in case the foreign branches become unable to settle its debts.

Most branches normally comply with the initial P100,000 security deposit as this is straightforward and not costly. However, compliance with the additional securities in the succeeding years has posed certain problems, mainly because of ambiguity in its proper computation, which sometimes may be burdensome especially for companies with annual gross earnings already running into millions of pesos. It may be noted that such securities although earning interest, would still entail additional expenses on the part of the branch as a substantial amount will still be shelled out for its purchase.

The ambiguity lies specifically in the definition of what constitutes "gross income" as basis of the 2% additional security deposit. Gross income for purposes of the additional security deposit is not defined under the law or the implementing guidelines of the SEC. Thus, several foreign branches individually have asked SEC for clarification on the definition of gross income.

Various rulings have been issued by the SEC which defined "gross income" as synonymous to the term "gross revenue" which covers gain, income, profits and returns of a branch without any deductions made on the entire amount. Disallowance of any kind of deduction from gross income made it difficult for some foreign branches to comply with the additional security deposit since a significant portion of their earnings had to be placed in investments, which may impact their present and future business plans.

Other foreign branches have likewise asked SEC for a reduction in the 2% additional security deposit by excluding certain items of income from the definition of gross income. The SEC granted such requests on a case to case basis. Others even went as far as requesting for a waiver of the additional security deposit which were disapproved by the commission.

To address ambiguities in the implementation of Section 126 of the Corporation Code, the SEC recently issued SEC Memorandum Circular No. 2 (SEC Memo 2) which took effect on May 30, 2012, superseding the original 1982 Security Deposit Guidelines. A significant amendment introduced in SEC Memo 2 is the definition of gross income for purposes calculating the 2% additional security deposit. SEC Memo 2 adopted the same definition of gross income pronounced in the various rulings of the SEC, i.e., gross income is synonymous to gross revenue which covers gain, income, profits and returns of a branch, but allowed certain deductions consisting of: cost of sales incurred with foreign suppliers; direct costs attributable to related party transactions located outside of the Philippines; direct costs incurred which are attributable to foreign non-related suppliers; and amount of merchandise returned by a customer and/or allowances granted to a customer in the event of defective or improperly shipped merchandise.

These deductions may be deducted from gross income provided the branch submits to the SEC an audited special or annual income statement showing distinctly the amounts of direct costs and expenses actually incurred with foreign entities and foreign related parties.

It will be noted that most of the deductions exclude debts incurred from foreign sources on the premise that only local creditors are protected by the security deposit requirement.

SEC Memo 2 also includes the following features:

• Types of acceptable securities -- Some of the outdated acceptable securities enumerated in the 1982 Securities Deposit Guidelines were replaced by a wide array of choices which include government bonds or any evidence of indebtedness of the Government of the Philippines, including government-owned and -controlled corporations; shares of stock in registered enterprises defined under the Omnibus Investments Code; shares of stock in domestic corporations registered in the stock exchange; shares of stock in domestic corporations under the supervision and regulation of the Insurance Commission and shares of stock in banks licensed by the Bangko Sentral Ng Pilipinas.

• Return of securities -- The release of securities shall follow the same procedures and requirements provided under the original 1982 Securities Deposit Guidelines, i.e., securities shall be released at the time of closure of the branch upon submission of a written application supported by a Board Resolution authorizing the closure. In addition SEC Memo 2 also allows the release of securities if the branch’s gross income for a given year decreases by 10%.

• Monitoring fee -- A monitoring fee shall be paid to the SEC upon filing of the application of compliance. The fixed SEC monitoring fee of P1,000 has been increased to one-tenth of one percent of the amount of securities to be deposited, which will not be less than P5,000 but not more than P50,000 in a given year.

SEC Memo 2 is indeed welcome news to foreign branches. It aims to achieve a healthy compromise between protecting local creditors of foreign branches, at the same time making it less burdensome on the part of the foreign branches to comply with their obligation.

Nevertheless, for companies earning billions of revenue annually, the 2% additional security deposit may still be quite onerous.

I believe certain flexibility may still be applied in respect to the allowable deductions from gross income.

I hope the SEC would take a second look at direct costs attributable to locally-based affiliates which may not strictly be classified among the local creditors intended to be protected by the law, in view of their relationship with the debtor.

The author is a Senior Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send inquiries or feedback to her via e-mail at susan.m.aquino@ph.pwc.com.

Emphasis and links provided by Broker Rem Ramirez 0922.883.9308 broker.ramirez@yahoo.com.ph

For bar questions and law subjects reviewers, visit www.onlinereview.com.ph

Simplifying the VAT invoicing system

IS THERE ROOM for further simplification of the value-added tax (VAT) invoicing system?
The VAT system has been acclaimed as a superior tax because of, among others, the audit trail that it generates.

The tax credit method for computing the VAT due under the Philippine VAT system compels VAT taxpayers to demand the sellers to issue correct VAT receipts and invoices so that they can rightfully claim the corresponding input VAT from their purchases.

Under this system, VAT-registered sellers are therefore forced to correctly declare their sales, at least those made to buyers who demanded official receipts and invoices.

At the same time, the audit trail allows the Bureau of Internal Revenue (BIR) to cross-check the purchases declared by the buyers against the sales declared by the sellers. Any difference will trigger further audit or examination.

Since VAT receipts and invoices are the core documents in the audit trail, the government has exerted efforts to ensure that these documents would be most effective in supporting that trail.

The regulations require a long list of information that should be inputted in the VAT receipt and invoice, both about the seller and the buyer, as follows:

• name of the seller;

• business style of the seller;

• business address of the seller;

• statement that the seller is a VAT-registered person, followed by his tax identification number (TIN);

• name of the buyer;

• business style of the buyer;

• address of the buyer;

• TIN of the buyer, if VAT-registered and amount exceeds P1,000;

• date of transaction;

• quantity;

• unit cost;

• description of the goods or properties or nature of the service;

• purchase price plus the VAT shown as a separate item in the invoice or receipt;

• breakdown of the sale as to VAT-exempt, zero-rated sales, or subject to VAT at 12% and the calculation of the VAT on each portion of the sale;

• authority to print receipt number at the lower left corner of the invoice or receipt.

On the other hand, receipts for reimbursement of expenses advanced by the seller are not allowed to be included in VAT receipts and invoices but are instead required to be covered by non-VAT acknowledgement receipts.

There should be little problem regarding the required information about the seller because these are generally pre-printed in the case of manual invoices and receipts, or are automatically generated in the case of invoices and receipts generated from a computerized accounting system.

The buyer information is, however, inputted by the seller only when issuing the invoice or receipt and because of that, absolute compliance is not always achieved. While VAT taxpayers are always reminded to ensure that the invoices and receipts that are issued to them are correct, many factors contribute to their failure to demand for correct and complete documents. Hence, during examination, many VAT assessments arise because of alleged defects in the supporting receipts and invoices.

Common situations involve incomplete name of a company, and failure to indicate the address and the TIN. In such cases, the invoice or receipt may run the risk of being disallowed as a support for input VAT credit.

Note that these information are intended to ensure that the correct taxpayer is claiming the input VAT. Hence, only the name or the unique TIN should be critical and should be required.

Oftentimes, too, the VAT is not separately indicated in invoices and receipts. Though the seller may be penalized for failure to indicate the VAT, the buyer on the other end unfairly suffers the loss of the input VAT.

Could BIR issue a circular specifically allowing other supporting documents such as service invoice, a billing statement or a contract to isolate the VAT component?

In certain industries where the seller/service provider is obligated to make payments to third parties on behalf of their clients, such as advertising companies, travel agents, brokers and forwarders, the sellers normally commit the mistake of including such receipts for reimbursements in their VAT receipts.

Complying with the issuance of a non-VAT acknowledgement receipt involves additional processes that add up to compliance cost and time, which businesses generally want to avoid.

Unfortunately, huge assessments usually result from such mistakes, though, oftentimes, there is really no revenue loss on the part of government.

It would be simpler if inclusion of non-VAT reimbursements in the VAT official receipt would not be considered a punishable offense provided it is properly indicated as non-VAT receipts.

Or could the BIR prescribe alternative documents if the original invoices and receipts get lost or destroyed? If the alternative documents are specified in the regulations, the taxpayer need not beg while the examiner need not make hard decisions.

Could the VAT invoicing system therefore be further simplified so that technicalities leading to VAT assessments can be avoided?

Simplifications could also facilitate the audit process if the number of requirements that an examiner should audit can be reduced.

Life would be easier for both the taxpayer collecting the tax on behalf of government and overworked BIR examiners.

There are many other ways -- other taxpayers could have other ideas.

The VAT that taxpayers contribute to the tax revenues make up a major chunk. Compliance requirements instituted to ensure that transactions are captured in the VAT net and the correct taxes are paid are burdensome enough. And there are penalties for every non-compliance and erroneous compliance.

I’m sure many taxpayers would appreciate it if government can make room for further simplification of, at least, the VAT invoicing system.

The author is a tax principal with Punongbayan&Araullo’s Tax Advisory & Compliance Division. P&A is a leading audit, tax and advisory services firm and is the Philippine member of Grant Thornton International Ltd.

Readers may send comments and inquiries via e-mail to Lina.Figueroa@ph.gt.com or call 886-5511.

Emphasis and links provided by Broker Rem Ramirez 0922.883.9308 broker.ramirez@yahoo.com.ph

For bar questions and law subjects reviewers, visit www.onlinereview.com.ph

RA 9335: SC Upholds Attrition Act of 2005 Anew

sc.judiciary.gov.ph

The Supreme Court, voting unanimously, upheld the constitutionality of RA 9335, the Attrition Act of 2005, enacted to optimize the revenue-generation capability and collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC).

RA 9335 also intends to encourage BIR and BOC officials and employees to exceed their revenue targets by providing a system of rewards and sanctions through the creation of a Rewards and Incentives Fund and a Revenue Performance Evaluation Board and covers all BIR and BOC officials with at least six months of service, regardless of employment status.

In a 24-page decision penned by Justice Martin S. Villarama, Jr., the Court dismissed for lack of merit the petition for certiorari and prohibition of the Bureau of Customs Employees Association (BOCEA).

“It must be noted that this is not the first time the constitutionality of R.A. No. 9335 and its IRR are being challenged. The Court already settled the majority of the same issued raised by BOCEA in our decision in Abakada, which attained finality on September 17, 2008. As such, our ruling therein is worthy of reiteration in this case,” the Court held.

The Court ruled that RA 9335 “read and appreciated in its entirety, is complete in all its essential terms and conditions, and that it contains sufficient standards as to negate BOCEA’s supposition of undue delegation of legislative power to the Board.”

On the argument that RA 9335 violates the equal protection clause, the Court reiterated its jurisprudence in Abakada where it held: “With respect to RA 9335, its expressed public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue-generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies….Both the BIR and the BOC are bureaus under the [Department of Finance] DOF. They principally perform the special function of being the instrumentalities through which the State exercises one of its great inherent functions – taxation. Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection.”

Likewise, the Court reiterated that RA 9335 does not violate the security of tenure of officials and employees of the BIR and the BOC. The Court ruled that a BIR or BOC official or employee in this case cannot be arbitrarily removed from the service without according him his constitutional right to due process as no less than RA 9355 in accordance with the 1986 Constitution guarantees this.    
   
Furthermore, the Court ruled that RA 9335 is not a bill of attainder. A bill of attainder, the Court explained, is a legislative act which inflicts punishment on individuals or members of a particular group without a judicial trial. The Court held that RA 9335 does not possess the elements of a bill of attainder nor seek to inflict punishment without a judicial trial but merely lays down the grounds for the termination of a BIR or BOC official or employee and provides for the consequences thereof. The democratic processes are followed and the constitutional rights of the concerned employee are amply protected.

Lastly, the Court held that BOCEA’s petition was “replete with allegations of defects and anomalies in allocation, distribution and receipt of rewards. While BOCEA intimates that it intends to curb graft and corruption in the BOC in particular and in the government in general which is nothing but noble, these intentions do not actually pertain to the constitutionality of R.A. No. 9335 and its IRR, but rather in the faithful implementation thereof. R.A. No. 9335 itself does not tolerate these pernicious acts of graft and corruption.” (GR No. 181704, Bureau of Customs Employees Association v. Sec. Teves, December 6, 2011)

Emphasis and links provided by Broker Rem Ramirez 0922.883.9308 broker.ramirez@yahoo.com.ph

For bar questions and law subjects reviewers, visit www.onlinereview.com.ph