A reminder to head the call by: Joanna Grace Manuel

APRIL 15 marks the end of another taxable year for many companies. This is the time when annual income tax returns are filed to report the company’s performance during the year. For the tax authority, however, this marks the beginning of another audit quest.

A taxpayer will know if it is under audit when it receives an electronic letter of authority (eLA). This is a written notice that signals the start of the tax authority’s audit process. Attached to the eLA is a request for submission, within a specific time frame, of documents like books of accounts, tax returns, and alphalists.
 
Taxpayers should always keep in mind that immediate attention must be given to these requirements. Non-compliance with this simple request can lead to various undesirable consequences. Taxpayers may clamor that this “simple request” is not really simple as it involves collation of voluminous documents that is time consuming.

In case where the information or records requested are not provided within the prescribed period, the assigned tax examiner will cause the issuance of a subpoena duces tecum (SDT) directed to the taxpayer. SDT is the document that orders the taxpayer to appear before a court and produce the requested documents during the hearing or trial. Evidently, a request from tax authorities must be taken seriously and must be acted upon promptly.

SDTs are issued to the president, partner, general manager, branch manager, treasurer, registered officer-in-charge, employee/s or other persons responsible for the custody of the books of accounts and other accounting records that are required to be submitted. In determining to whom the SDT will be issued, the examiner checks the General Information Sheet (GIS) submitted to the Securities and Exchange Commission (SEC) on a yearly basis.

The SDT will also contain the specific time, date, and place wherein the requested documents should be submitted to the examiner at the BIR office. The time indicated is between 8 a.m. and 5 p.m., which is the regular business hours. The date of compliance is set on the 14th day from the date imprinted on the SDT.

The issuance date on the SDT may not always be the same as the date the taxpayer actually receives it as the examiner has three days from the date of signing to serve the SDT to the taxpayer. This shall be served by the examiner personally at the taxpayer’s registered or known address or wherever he may be found. However, there may be cases wherein personal delivery may not be practicable, then it can be served through substituted service or mail at his registered or known address.

Substituted service may be resorted to when the party is not present at the registered or known address. Substituted service means: a) the SDT will be left with his clerk or with a person having charge at the registered address; b) the SDT may be left with his clerk or with a person having charge at the known address (business activities of the party are conducted); c) the SDT may be left with a person of legal age residing therein; d) the SDT may also be served to a barangay official and two disinterested witnesses to the address to attest that no person has been found at the party’s registered or known address; e) the SDT may also be served to a barangay official and two disinterested witnesses to the registered or known address in the presence of the party to observe the party’s refusal to receive the SDT. The names, official position, and signatures of witnesses will be contained in the bottom portion of the SDT.

On the date reflected on the SDT, the required documents submitted to the concerned BIR examiner must be substantially complete. In case the taxpayer does not submit the documents or submitted incomplete documents, the action lawyer that has been assigned will call a conference on the fifth working day after that was set in the SDT. Within seven days after the conference, the action lawyer will prepare a letter-compl aint together with the complaint-affidavit, recommending the criminal prosecution of the individual taxpayer or the responsible officer of the corporation or partnership who disobeyed the SDT.

It is important to note that Revenue Memorandum Order 10-2013 has explicitly provided that once the complaint-affidavit against the taxpayer is filed, this cannot be withdrawn even if the taxpayer submits the documents after the date that was set in the SDT.

The withdrawal of the complaint was previously allowed upon compliance with the submission of documents and payment of the P10,000 administrative fee. However, the tax authorities are implementing stricter rules to enforce their authority. Compliance is a must. Let us always be reminded to heed the tax authority’s call.

RMC No. 16-2013: Tax implication and recording of deposits/advances for expenses received by taxpayers other than GPPs

Philippine Star - A notable businessman once said that in the business world everyone is paid in two coins:  cash and experience. Take the experience first; the cash will come later.  Idealistic it truly is, but oftentimes reality sets one on a different path. Requiring clients to give a deposit to cover necessary expenses for a service or engagement is common practice nowadays.

The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 16-2013 to clarify the tax implication and recording of deposits/advances for expenses received by taxpayers other than General Professional Partnerships (GPPs).

RMC No. 89-2012 prescribes the accounting and recording of cash deposit/advances received by GPPs.  The tax authorities felt the need to issue the subject RMC because of reports that the expenses are being claimed twice as a deduction for income tax purposes, both by the GPP and its client.

Just like GPPs, there are some companies that require clients to make a cash advance/deposit to answer for certain expenses that will be incurred in the course of rendering the service. Thus, RMC No. 16-2013 was issued last February 8, 2013 targeting companies other than GPP that recognize cash deposits/advances from its customers/clients.

Similar to RMC 89-2012, the new RMC No. 16-2013 highlights the proper treatment of cash advances/deposits.  It likewise stresses the importance of issuing official receipts to document the said advances/deposits.

Under RMC No. 16-2013, the Company shall recognize the cash deposits/advances received as income in its financial books and issue the corresponding official receipt to the client/customer. As income, the cash deposits/advances are thus subject to value added tax (VAT) or percentage tax (PT), whichever is applicable. The official receipt issued shall cover the whole amount which the client/customer advanced and it should conform to the proper invoicing requirement for VAT registered person under Section 113 of the National Internal Revenue Code of the Philippines, as amended (NIRC).

When expenses are incurred or paid in behalf of the client/customer and the expenses are properly substantiated by receipts issued by the third party establishments in the name of the company, the latter shall record the expenses as its own for income tax purposes. The necessary withholding tax from the income payment should also be paid and remitted to the BIR in order for it to be considered as legitimate expense for deduction against gross income. We are reminded by the BIR that expenses are deductible only to the party in whose name the official receipt is issued and other parties are excluded in claiming the same expense.

The client/customer making the cash advance/deposit for the necessary expenses shall treat the same as an outright expense in their books of account. It may claim such cash advance/deposit paid to the company as a deductible expense provided that the withholding tax due thereon has been withheld and remitted to the BIR.
Companies that are able to utilize their tax credits need not worry. The income from the receipt of cash advance/deposit will be offset by the expenses incurred; hence, no additional income tax will be due to the company. The clients/customers should neither worry for the advances are deductible in full to them, and they can also claim as VAT credit, the VAT that will be levied on the cash advance/deposit.

RMC No. 16-2013 is effective immediately and parties affected (i.e. the company and the customer/client) should conform to it to minimize risk of assessment of tax or penalties.

Jose Bernard V. Basallaje is an associate 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 view 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.

Income tax return primers released

Businessworld - LENT is a time when many Christians fast as a way to focus on God. The Lenten season ended on Holy Saturday.

For taxpayers, however, the end of Lent marks the start of the preparation -- and later, the submission -- of income tax returns.

We recall that in November 2011 the Bureau of Internal Revenue (BIR) mandated taxpayers to use the enhanced annual income tax returns (ITR) for individuals and estates and trusts (BIR Form 1701), and non-individual tax payers (BIR Form 1702). Many taxpayers complained of difficulty in filling out the forms.

After more than a year, the BIR issued a primer to serve as guide on how to properly accomplish BIR Forms 1701 and 1702.

The following are the general instructions:

1. All applicable spaces must be filled in.

2. All information required must be written in capitals.

3. Mark with “X” all applicable circles.

It is worth noting that the taxpayer may be held liable for erroneous or incorrect information and will be penalized with tax deficiency payment or penalty on future assessments or even denial of tax claims. Hence, it is also a good point the BIR did not only list the procedures in filling the forms, but also provided a line-by-line explanation of each item, supporting details and certain rules. Taxpayers should be mindful of certain relevant items as follows:

METHOD OF DEDUCTION
The BIR has reiterated that the taxpayer choose one of two methods of deduction in the first quarter of the year and shall consistently use this method throughout the year:

1. itemized deduction

2. optional standard deduction (OSD) or the standard deduction of an amount not exceeding 40% of gross income for corporations and 40% of gross sales/receipts/revenues/fees for individuals.

In the event a taxpayer fails to avail of one of the two methods of deduction in their first quarter ITR or file the quarterly ITR for the first quarter, he or she shall be assigned with the itemized deduction method.

Moreover, the choice between OSD or itemized deduction is irrevocable for the taxable year and such irrevocability is not affected by any amendment by the taxpayer of his first quarter ITR.

Hence, for the filing to be made on or before April 15, the taxpayer shall have no choice but to consistently apply the choice made in the first quarter ITR. Thus, for final income tax return for 2013 that will be filed on 2014, it is important that at this early stage, one shall have decided between itemized deductions and OSD through careful analysis of forecasted cost and revenues and overall review of one’s projected business operations for 2013.

OVERPAYMENT
Generally, taxpayers opt to carry over the excess tax credits/payments in the quarters of the succeeding taxable years. Alternatively, the taxpayer may also opt for the excess be refunded or issued with the tax credit certificate (TCC).

Once the taxpayer signifies his intention to carry over and apply the excess income tax against income tax due for the succeeding taxable year, no application for cash refund or issuance of a TCC shall be allowed. In case the taxpayer fails to signify his/her choice, the excess payment shall be automatically carried over to the next taxable period.

In Court of Tax Appeals (CTA) Case No. 8083, the Court had the opportunity again to discuss the application of the irrevocability rule on the disposition of excess income taxes as cited in the ITR primer.

In the said case, petitioner ticked the box “to be issued a tax credit certificate” in its 2004 income tax return, which was filed on April 15, 2005. Subsequently, in 2007 it filed with the BIR a claim for issuance of TCC of excess creditable withholding tax for the year 2004. The Court, however, noted that the company carried over its excess credits in 2004 to the three quarters of 2005 as well as in the annual income tax return for the year, hence, the denial of the claim.

It is important that taxpayers decide on what to do with their excess income tax. In case he or she opts to be refunded or issued a tax credit certificate, he or she should also weigh the cost and benefit of applying the tax refund/credit certificate.

With the BIR further deferring to taxable year 2013 the requirement for individuals to disclose their other income in the enhanced BIR ITR (BIR Forms 1700 and 1701), individual taxpayers are advised to keep evidence or records of their tax-exempt income and income subject to final withholding tax such as interest income, fringe benefits, property acquired by gift or bequest, etc. in 2013 to ensure compliance with the disclosure requirements.

In addition to the guidelines in accomplishing the forms, the BIR has listed the necessary attachments:

1. statement of management’s responsibility (SMR) for annual income tax return;

2. regular allowable itemized deductions as mandatory attachment to BIR Form 1701/1702 (this may not be submitted if the taxpayer opted for OSD);

3. certificate of independent CPA and financial statements (FS)

4. schedules that must be part of the notes to the audited FS such as sales/receipts/fees, cost of sales/services, non-operating and other taxable income, etc.; and

5. proof of taxes withheld or tax credits such as Certificate of Income Tax Withheld on Compensation (BIR Form 2316) and Certificate of Creditable Tax Withheld at Source (BIR Form 2307).

Lastly, to encourage taxpayers to submit the required attachments, the BIR reiterated it will slap a fine of not more than P25,000 in a calendar year for non-submission or incomplete submission of the attachments.

Such meager fine must not be taken by taxpayers as reason to neglect the submission of required attachments because the information in attachments not submitted may be critical during BIR assessments.

With the issuance of the primer, the BIR has emphasized the importance of the information in the ITRs. Accordingly, taxpayers are expected to be proficient in the preparation of ITRs to minimize, if not avoid, tax penalties and future BIR assessments.

Ms. Fawagan is a tax senior with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is a leading audit, tax and an advisory service firm and is the Philippine member of Grant Thornton International Ltd. For comments and inquiries please e-mail MarieFe.Fawagan@ph.gt.com or call 886-5511.

We recall that in November 2011 the Bureau of Internal Revenue (BIR) mandated taxpayers to use the enhanced annual income tax returns (ITR) for individuals and estates and trusts (BIR Form 1701), and non-individual tax payers (BIR Form 1702). Many taxpayers complained of difficulty in filling out the forms.

After more than a year, the BIR issued a primer to serve as guide on how to properly accomplish BIR Forms 1701 and 1702.

The following are the general instructions:

1. All applicable spaces must be filled in.

2. All information required must be written in capitals.

3. Mark with “X” all applicable circles.

It is worth noting that the taxpayer may be held liable for erroneous or incorrect information and will be penalized with tax deficiency payment or penalty on future assessments or even denial of tax claims. Hence, it is also a good point the BIR did not only list the procedures in filling the forms, but also provided a line-by-line explanation of each item, supporting details and certain rules. Taxpayers should be mindful of certain relevant items as follows:

METHOD OF DEDUCTION
The BIR has reiterated that the taxpayer choose one of two methods of deduction in the first quarter of the year and shall consistently use this method throughout the year:

1. itemized deduction

2. optional standard deduction (OSD) or the standard deduction of an amount not exceeding 40% of gross income for corporations and 40% of gross sales/receipts/revenues/fees for individuals.

In the event a taxpayer fails to avail of one of the two methods of deduction in their first quarter ITR or file the quarterly ITR for the first quarter, he or she shall be assigned with the itemized deduction method.

Moreover, the choice between OSD or itemized deduction is irrevocable for the taxable year and such irrevocability is not affected by any amendment by the taxpayer of his first quarter ITR.

Hence, for the filing to be made on or before April 15, the taxpayer shall have no choice but to consistently apply the choice made in the first quarter ITR. Thus, for final income tax return for 2013 that will be filed on 2014, it is important that at this early stage, one shall have decided between itemized deductions and OSD through careful analysis of forecasted cost and revenues and overall review of one’s projected business operations for 2013.

OVERPAYMENT
Generally, taxpayers opt to carry over the excess tax credits/payments in the quarters of the succeeding taxable years. Alternatively, the taxpayer may also opt for the excess be refunded or issued with the tax credit certificate (TCC).

Once the taxpayer signifies his intention to carry over and apply the excess income tax against income tax due for the succeeding taxable year, no application for cash refund or issuance of a TCC shall be allowed. In case the taxpayer fails to signify his/her choice, the excess payment shall be automatically carried over to the next taxable period.

In Court of Tax Appeals (CTA) Case No. 8083, the Court had the opportunity again to discuss the application of the irrevocability rule on the disposition of excess income taxes as cited in the ITR primer.

In the said case, petitioner ticked the box “to be issued a tax credit certificate” in its 2004 income tax return, which was filed on April 15, 2005. Subsequently, in 2007 it filed with the BIR a claim for issuance of TCC of excess creditable withholding tax for the year 2004. The Court, however, noted that the company carried over its excess credits in 2004 to the three quarters of 2005 as well as in the annual income tax return for the year, hence, the denial of the claim.

It is important that taxpayers decide on what to do with their excess income tax. In case he or she opts to be refunded or issued a tax credit certificate, he or she should also weigh the cost and benefit of applying the tax refund/credit certificate.

With the BIR further deferring to taxable year 2013 the requirement for individuals to disclose their other income in the enhanced BIR ITR (BIR Forms 1700 and 1701), individual taxpayers are advised to keep evidence or records of their tax-exempt income and income subject to final withholding tax such as interest income, fringe benefits, property acquired by gift or bequest, etc. in 2013 to ensure compliance with the disclosure requirements.

In addition to the guidelines in accomplishing the forms, the BIR has listed the necessary attachments:

1. statement of management’s responsibility (SMR) for annual income tax return;

2. regular allowable itemized deductions as mandatory attachment to BIR Form 1701/1702 (this may not be submitted if the taxpayer opted for OSD);

3. certificate of independent CPA and financial statements (FS)

4. schedules that must be part of the notes to the audited FS such as sales/receipts/fees, cost of sales/services, non-operating and other taxable income, etc.; and

5. proof of taxes withheld or tax credits such as Certificate of Income Tax Withheld on Compensation (BIR Form 2316) and Certificate of Creditable Tax Withheld at Source (BIR Form 2307).

Lastly, to encourage taxpayers to submit the required attachments, the BIR reiterated it will slap a fine of not more than P25,000 in a calendar year for non-submission or incomplete submission of the attachments.

Such meager fine must not be taken by taxpayers as reason to neglect the submission of required attachments because the information in attachments not submitted may be critical during BIR assessments.

With the issuance of the primer, the BIR has emphasized the importance of the information in the ITRs. Accordingly, taxpayers are expected to be proficient in the preparation of ITRs to minimize, if not avoid, tax penalties and future BIR assessments.

Ms. Fawagan is a tax senior with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is a leading audit, tax and an advisory service firm and is the Philippine member of Grant Thornton International Ltd. For comments and inquiries please e-mail MarieFe.Fawagan@ph.gt.com or call 886-5511. - See more at: http://www.bworldonline.com/content.php?section=Economy&title=Income-tax-return-primers-released&id=67994#sthash.c6FY4KCp.dpuf

We recall that in November 2011 the Bureau of Internal Revenue (BIR) mandated taxpayers to use the enhanced annual income tax returns (ITR) for individuals and estates and trusts (BIR Form 1701), and non-individual tax payers (BIR Form 1702). Many taxpayers complained of difficulty in filling out the forms.

After more than a year, the BIR issued a primer to serve as guide on how to properly accomplish BIR Forms 1701 and 1702.

The following are the general instructions:

1. All applicable spaces must be filled in.

2. All information required must be written in capitals.

3. Mark with “X” all applicable circles.

It is worth noting that the taxpayer may be held liable for erroneous or incorrect information and will be penalized with tax deficiency payment or penalty on future assessments or even denial of tax claims. Hence, it is also a good point the BIR did not only list the procedures in filling the forms, but also provided a line-by-line explanation of each item, supporting details and certain rules. Taxpayers should be mindful of certain relevant items as follows:

METHOD OF DEDUCTION
The BIR has reiterated that the taxpayer choose one of two methods of deduction in the first quarter of the year and shall consistently use this method throughout the year:

1. itemized deduction

2. optional standard deduction (OSD) or the standard deduction of an amount not exceeding 40% of gross income for corporations and 40% of gross sales/receipts/revenues/fees for individuals.

In the event a taxpayer fails to avail of one of the two methods of deduction in their first quarter ITR or file the quarterly ITR for the first quarter, he or she shall be assigned with the itemized deduction method.

Moreover, the choice between OSD or itemized deduction is irrevocable for the taxable year and such irrevocability is not affected by any amendment by the taxpayer of his first quarter ITR.

Hence, for the filing to be made on or before April 15, the taxpayer shall have no choice but to consistently apply the choice made in the first quarter ITR. Thus, for final income tax return for 2013 that will be filed on 2014, it is important that at this early stage, one shall have decided between itemized deductions and OSD through careful analysis of forecasted cost and revenues and overall review of one’s projected business operations for 2013.

OVERPAYMENT
Generally, taxpayers opt to carry over the excess tax credits/payments in the quarters of the succeeding taxable years. Alternatively, the taxpayer may also opt for the excess be refunded or issued with the tax credit certificate (TCC).

Once the taxpayer signifies his intention to carry over and apply the excess income tax against income tax due for the succeeding taxable year, no application for cash refund or issuance of a TCC shall be allowed. In case the taxpayer fails to signify his/her choice, the excess payment shall be automatically carried over to the next taxable period.

In Court of Tax Appeals (CTA) Case No. 8083, the Court had the opportunity again to discuss the application of the irrevocability rule on the disposition of excess income taxes as cited in the ITR primer.

In the said case, petitioner ticked the box “to be issued a tax credit certificate” in its 2004 income tax return, which was filed on April 15, 2005. Subsequently, in 2007 it filed with the BIR a claim for issuance of TCC of excess creditable withholding tax for the year 2004. The Court, however, noted that the company carried over its excess credits in 2004 to the three quarters of 2005 as well as in the annual income tax return for the year, hence, the denial of the claim.

It is important that taxpayers decide on what to do with their excess income tax. In case he or she opts to be refunded or issued a tax credit certificate, he or she should also weigh the cost and benefit of applying the tax refund/credit certificate.

With the BIR further deferring to taxable year 2013 the requirement for individuals to disclose their other income in the enhanced BIR ITR (BIR Forms 1700 and 1701), individual taxpayers are advised to keep evidence or records of their tax-exempt income and income subject to final withholding tax such as interest income, fringe benefits, property acquired by gift or bequest, etc. in 2013 to ensure compliance with the disclosure requirements.

In addition to the guidelines in accomplishing the forms, the BIR has listed the necessary attachments:

1. statement of management’s responsibility (SMR) for annual income tax return;

2. regular allowable itemized deductions as mandatory attachment to BIR Form 1701/1702 (this may not be submitted if the taxpayer opted for OSD);

3. certificate of independent CPA and financial statements (FS)

4. schedules that must be part of the notes to the audited FS such as sales/receipts/fees, cost of sales/services, non-operating and other taxable income, etc.; and

5. proof of taxes withheld or tax credits such as Certificate of Income Tax Withheld on Compensation (BIR Form 2316) and Certificate of Creditable Tax Withheld at Source (BIR Form 2307).

Lastly, to encourage taxpayers to submit the required attachments, the BIR reiterated it will slap a fine of not more than P25,000 in a calendar year for non-submission or incomplete submission of the attachments.

Such meager fine must not be taken by taxpayers as reason to neglect the submission of required attachments because the information in attachments not submitted may be critical during BIR assessments.

With the issuance of the primer, the BIR has emphasized the importance of the information in the ITRs. Accordingly, taxpayers are expected to be proficient in the preparation of ITRs to minimize, if not avoid, tax penalties and future BIR assessments.

Ms. Fawagan is a tax senior with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is a leading audit, tax and an advisory service firm and is the Philippine member of Grant Thornton International Ltd. For comments and inquiries please e-mail MarieFe.Fawagan@ph.gt.com or call 886-5511. - See more at: http://www.bworldonline.com/content.php?section=Economy&title=Income-tax-return-primers-released&id=67994#sthash.c6FY4KCp.dpuf

We recall that in November 2011 the Bureau of Internal Revenue (BIR) mandated taxpayers to use the enhanced annual income tax returns (ITR) for individuals and estates and trusts (BIR Form 1701), and non-individual tax payers (BIR Form 1702). Many taxpayers complained of difficulty in filling out the forms.

After more than a year, the BIR issued a primer to serve as guide on how to properly accomplish BIR Forms 1701 and 1702.

The following are the general instructions:

1. All applicable spaces must be filled in.

2. All information required must be written in capitals.

3. Mark with “X” all applicable circles.

It is worth noting that the taxpayer may be held liable for erroneous or incorrect information and will be penalized with tax deficiency payment or penalty on future assessments or even denial of tax claims. Hence, it is also a good point the BIR did not only list the procedures in filling the forms, but also provided a line-by-line explanation of each item, supporting details and certain rules. Taxpayers should be mindful of certain relevant items as follows:

METHOD OF DEDUCTION
The BIR has reiterated that the taxpayer choose one of two methods of deduction in the first quarter of the year and shall consistently use this method throughout the year:

1. itemized deduction

2. optional standard deduction (OSD) or the standard deduction of an amount not exceeding 40% of gross income for corporations and 40% of gross sales/receipts/revenues/fees for individuals.

In the event a taxpayer fails to avail of one of the two methods of deduction in their first quarter ITR or file the quarterly ITR for the first quarter, he or she shall be assigned with the itemized deduction method.

Moreover, the choice between OSD or itemized deduction is irrevocable for the taxable year and such irrevocability is not affected by any amendment by the taxpayer of his first quarter ITR.

Hence, for the filing to be made on or before April 15, the taxpayer shall have no choice but to consistently apply the choice made in the first quarter ITR. Thus, for final income tax return for 2013 that will be filed on 2014, it is important that at this early stage, one shall have decided between itemized deductions and OSD through careful analysis of forecasted cost and revenues and overall review of one’s projected business operations for 2013.

OVERPAYMENT
Generally, taxpayers opt to carry over the excess tax credits/payments in the quarters of the succeeding taxable years. Alternatively, the taxpayer may also opt for the excess be refunded or issued with the tax credit certificate (TCC).

Once the taxpayer signifies his intention to carry over and apply the excess income tax against income tax due for the succeeding taxable year, no application for cash refund or issuance of a TCC shall be allowed. In case the taxpayer fails to signify his/her choice, the excess payment shall be automatically carried over to the next taxable period.

In Court of Tax Appeals (CTA) Case No. 8083, the Court had the opportunity again to discuss the application of the irrevocability rule on the disposition of excess income taxes as cited in the ITR primer.

In the said case, petitioner ticked the box “to be issued a tax credit certificate” in its 2004 income tax return, which was filed on April 15, 2005. Subsequently, in 2007 it filed with the BIR a claim for issuance of TCC of excess creditable withholding tax for the year 2004. The Court, however, noted that the company carried over its excess credits in 2004 to the three quarters of 2005 as well as in the annual income tax return for the year, hence, the denial of the claim.

It is important that taxpayers decide on what to do with their excess income tax. In case he or she opts to be refunded or issued a tax credit certificate, he or she should also weigh the cost and benefit of applying the tax refund/credit certificate.

With the BIR further deferring to taxable year 2013 the requirement for individuals to disclose their other income in the enhanced BIR ITR (BIR Forms 1700 and 1701), individual taxpayers are advised to keep evidence or records of their tax-exempt income and income subject to final withholding tax such as interest income, fringe benefits, property acquired by gift or bequest, etc. in 2013 to ensure compliance with the disclosure requirements.

In addition to the guidelines in accomplishing the forms, the BIR has listed the necessary attachments:

1. statement of management’s responsibility (SMR) for annual income tax return;

2. regular allowable itemized deductions as mandatory attachment to BIR Form 1701/1702 (this may not be submitted if the taxpayer opted for OSD);

3. certificate of independent CPA and financial statements (FS)

4. schedules that must be part of the notes to the audited FS such as sales/receipts/fees, cost of sales/services, non-operating and other taxable income, etc.; and

5. proof of taxes withheld or tax credits such as Certificate of Income Tax Withheld on Compensation (BIR Form 2316) and Certificate of Creditable Tax Withheld at Source (BIR Form 2307).

Lastly, to encourage taxpayers to submit the required attachments, the BIR reiterated it will slap a fine of not more than P25,000 in a calendar year for non-submission or incomplete submission of the attachments.

Such meager fine must not be taken by taxpayers as reason to neglect the submission of required attachments because the information in attachments not submitted may be critical during BIR assessments.

With the issuance of the primer, the BIR has emphasized the importance of the information in the ITRs. Accordingly, taxpayers are expected to be proficient in the preparation of ITRs to minimize, if not avoid, tax penalties and future BIR assessments.

Ms. Fawagan is a tax senior with Punongbayan & Araullo’s (P&A) Tax Advisory and Compliance Division. P&A is a leading audit, tax and an advisory service firm and is the Philippine member of Grant Thornton International Ltd. For comments and inquiries please e-mail MarieFe.Fawagan@ph.gt.com or call 886-5511. - See more at: http://www.bworldonline.com/content.php?section=Economy&title=Income-tax-return-primers-released&id=67994#sthash.c6FY4KCp.dpuf

LIST: Where to donate to get tax deductions for 2013

There are 14 government projects and programs included in the National Priority Plan of 2013

MANILA, Philippines - Donating to good causes has its bonuses: it also carries tax breaks. The key is knowing which ones do.

For instance, there are 14 government projects and programs that are part of the 2013 National Priority Plan (NPP) list of the National Economic and Development Authority (Neda).

The NPP includes projects, programs, and activities (PPPAs) in education, health, youth and sports development, human settlements, science and culture, and economic development. Donating to these projects, says the Bureau of Internal Revenue, carries "full tax deductibility."

In a circular, the Neda said, "(The NPP) shall specify the activities as appropriate for each project to guide both the donee and the donor in making donations. It shall also specify the authorized donee institutions for each project. The authorized donee institution is a department, bureau, commission, agency, office, or instrumentality of the national government authorized by law or its charter to accept donations for a local government unit, which proposes the infusion of PPAs in the NPP," Neda said in a circular.

In the 2013 NPP, the Neda said the following PPAs are included:

Program/Project/Activity	Implementing Agency	Year of inclusion
Milk Feeding Program	National Dairy Authority	Aug 26, 2002 (Renewed annually from 2003 until 2013)
Sponsorship Program (formerly Medicare Para sa Masa)	PhilHealth	Aug 9, 2001 (Renewed annually from 2003 until 2013)
Adopt-A-School Program	Department of Education	Jan 31, 2012 (Renewed in January 28, 2013)
Camp Manuel Yan Eco-Military Park and Tribal Village	Department of Tourism/Compostela Valley Provincial Government	Jan 28, 2013
Lake Leonard Eco-Tourism Park Site Development	Department of Tourism/Compostela Valley Provincial Government	Jan 28, 2013
Tagbibinta Falls Site Developments	Department of Tourism/Compostela Valley Provincial Government	Jan 28, 2013
Mainit Waterfalls Hot Spring and Spa	Department of Tourism/Compostela Valley Provincial Government	Jan 28, 2013
Nabunturan Children's Eco Park	Department of Tourism/Compostela Valley Provincial Government	Jan 28, 2013
Passig Islet Aqua-Eco Park	Department of Tourism/Davao Del Sur Provincial Government	Jan 28, 2013
Punta Piape Mt Crocodile Park	Department of Tourism/Davao Del Sur Provincial Government	Jan 28, 2013
Kinuskusan Eco Park	Department of Tourism/Davao Del Sur Provincial Government	Jan 28, 2013
Health Facilities Program and its component program/activities (HFP)	Department of Health	Jan 28, 2013
Responsible Parenthood and Family Planning Program (RP-FP)	Department of Health	Jan 28, 2013
Expanded Program on Immunization for Infants in NHTS-PR Families (EPI)	Department of Health	Jan 28, 2013

Based on the Neda circular, apart from making donors and donations to the PPPAs eligible for full tax deduction, the following are also considerations in the National Priority Plan:

• The receipt of donations by the government from the private sector is one mode of mobilizing private sector participation in national development, and the financing of government expenditures. It increases the government's resources to the extent that donations received are used according to the government's expenditure thrusts, thereby freeing public resources for other developmental activities.
• The receipt of donations is not without cost to the government since donors are allowed to claim tax deductions on such donations. The nature and form of the donation could also delimit the government's use of the donated resources.

source:  Rappler

Tax treatment of deposits, cash advances

by: Jen Reyes

THE BUREAU of Internal Revenue’s (BIR) new issuance, Revenue Memorandum Circular No. 16-2013 (RMC 16-2013) clarified the tax treatment of deposits/advances given by clients/customers to their suppliers/providers. This new issuance is an offshoot of RMC 89-2012, which involves cash advances given to General Professional Partnerships (GPPs). Unlike RMC 89-2012, RMC 16-2013 covers all taxpayers, other than GPPs, doing business in the Philippines. The latter details all the tax implications to and obligations of the taxpayer and the client for purposes of recording and documentation of the deposits/cash advance made.
 
Under RMC 16-2013, all deposits/cash advance received by a taxpayer shall be considered and recorded as income in his books of account and it shall form part of the taxpayer’s gross income for the taxable year. Similarly, Value-Added Tax (VAT) will be imposed on the deposits/cash advances received by each taxpayer. Moreover, the RMC makes it the obligation of the taxpayer to issue official receipts for the cash advances received from its clients. The RMC, in turn, directs the taxpayer to claim the expenses incurred for its client as deductions from its gross income provided there are official receipts in the name of the taxpayer claiming for deductions. On the part of the clients or customers, the deposits/advances given to suppliers/providers should be treated as expense which is deductible from their gross income provided official receipts support such expense. Furthermore, clients/customers are required to withhold the appropriate withholding tax on income on the deposits/cash advance made to their suppliers/providers at the applicable rate pursuant to the provisions of Revenue Regulation No. 02-98 (RR 2-98). Consequently, the client has the obligation to report and remit the tax withheld to the BIR. Rules on reporting and remittance of withholding tax for filers using electronic filing and payment system (eFPS) shall apply to their transaction.

Since the deposits/cash advance is subject to VAT, the client may claim it as input VAT while the recipient taxpayer must pay output VAT.

After a careful perusal of RMC 16-2013, it is not clear what type of cash advance or deposits will be covered by the new requirements. Depending on the nature of the business and the business arrangements agreed upon with the customers, advances or deposits may take several forms. A deposit may be required to commence performance of a contract which is therefore considered as advance payment for the services or goods. This forms part of the fee paid by the client for the services rendered. In certain industries, this is called acceptance fee. In the case of leasing arrangements, a deposit may be required to cover the cost of any damages that the lessee may cause on the property or equipment in the duration of the lease. Hence, this is usually refunded at the end of the lease term if no damages need to be settled.

Under certain arrangements, the service provider requires cash advances to pay on behalf of client, certain fee or charges which are receipted in the name of the client, such as notarial fees, government filing fees and other regulatory fees. Such funds are generally held in trust for the client utilized to defray client expenses and subject to liquidation. If the issuance covers these types of advances, there may be unforeseen repercussion on the part of the taxpayer which may expose it to possible higher tax payment.

The BIR issuance allows the service provider to claim deduction for the expense incurred using the cash advance. However, this is possible only if the supporting official receipts are in the name of the service provider claiming the expense. Otherwise, the supplier/service provider cannot claim for deductions for business expense. This situation exposes the taxpayer to the risk of having a higher taxable income resulting to higher tax due because of the recorded income sans any deduction of expense to offset. Besides, while the ai m of the issuance is to prevent double claim of deduction, the same may still happen when the client claims for deductions with receipts in its name to substantiate the claim for deductible business expense.

You will also note that the provisions of RMC 16-2013 seems inconsistent with the existing rules and regulations on what forms part of income to be subject to Creditable Withholding Tax (CWT) and VAT.

In Commissioner of Internal Revenue vs. Tours Specialists, Inc. (G.R. No. L-66416 March 21, 1990) the Supreme Court (SC) has the occasion to pronounce that gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit. This being so, said money received should not be treated as income.

In requiring the withholding of CWT, the RMC presupposes that there is income redounding to the benefit of the payee. As provided under RR 02-98, CWT is imposed on payment for services rendered by or goods bought from the payee. In this case, there is no sale of goods or services by the payee.

Similarly, under Section 105 of the National Internal Revenue Code (NIRC), VAT is imposed on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. Thus, the imposition of VAT presupposes an exchange between the payee and payor, i.e. goods or services in exchange for the payment. This element is clearly not present for the payment of cash advance especially if the cash advance is used to pay to third party establishment since the money is utilized for client expenses and is separate and distinct from the fee paid for the services of the recipient taxpayer. Thus, relating to the above-mentioned SC decision that monies held in trust should not be treated as income, the cash advance received by taxpayer from client should not be subject to CWT and VAT as it is inconsistent with the purpose for which the two taxes are imposed because the cash advance are paid not for the services or goods received from the taxpayer.

In sum, while the intention of the new BIR issuance to prevent double claiming for deduction of certain expense is reasonable, it will be accomplished at the expense of other taxpayers. Hence, it may be prudent to reconsider the requirement of RMC 16-2013 or provide clarifications on the types of advances that will be covered.

Nonetheless, taxpayers must be ready to comply and be prepared for the possible consequences of the new BIR issuance.

Prescriptive period for tax refunds

by: Jean Ross Abenasa-Miso

LAST MONTH, the Supreme Court (SC) en banc promulgated a consolidated decision (G.R. Nos. 187485, 196113 and 197156) that disposed of the appeals on the cases filed separately with the Court of Tax Appeals (CTA) by three taxpayers for the refund or credit of unutilized input value-added tax (VAT) incurred by them. In plain and unambiguous terms, the SC decision clarifies the existing rules on the proper period for the filing of a judicial claim for refund or credit of taxes.
 
The basic rules on the prescriptive period for the refund or credit of taxes are found in the provisions of Sections 112 and 229 of the 1997 National Internal Revenue Code (NIRC), as amended.

Section 112 prescribes that a VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. The Commissioner of Internal Revenue (CIR) shall grant a refund or issue the tax credit certificate for creditable input taxes within 120 days from the date of submission of complete documents in support of the tax refund/credit application. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the CIR to act on the application within 120 days, the taxpayer affected may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120 day-period, appeal with the CTA the decision or the unacted claim.

On the other hand, Section 229 bars the filing of a suit or proceeding for the recovery of any national internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the CIR. In any case, no suit of proceeding shall be allowed after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.

What happens if the taxpayer, without waiting for the 120-day period in his previously filed administrative claim, files a petition for review with the CTA for tax refund or credit?

In the aforementioned recent decision, the SC dismissed the first taxpayer’s judicial claim, holding that the filing of the CTA case 13 days after it filed its administrative claim for refund violated the doctrine of exhaustion of administrative remedies, and renders the petition premature. According to the SC, the 120-day waiting period given by law to the CIR to decide whether to grant or deny the refund or credit is mandatory and jurisdictional.

The SC rejected the taxpayer’s reliance on Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue (G.R. Nos. 141104 and 148763) which held that if the two-year prescriptive period for filing a claim for tax refund is about to expire without the BIR acting on the application, the taxpayer can file a petition for review with the CTA within the two-year period. Since the taxpayer filed its judicial claim on April 10, 2003 or more than four years before the promulgation of the Atlas case on June 8, 2007, the SC held that the Atlas doctrine was inapplicable. Moreover, the doctrine merely stated that the two-year prescriptive period should be counted from the date of payment of the output VAT, not from the close of the taxable quarter when the sales involving the input VAT were made. It does not interpret, expressly or impliedly, the 120+30 day periods under Section 112 of the 1997 NIRC.

[Note: The SC abandoned the Atlas doctrine with the promulgation of its decision in Commissioner of Internal Revenue vs. Mirant Pagbilao Corporation (G.R. No. 172129) on September 12, 2008. The Mirant doctrine counts the two-year prescriptive period from the close of the taxable quarter when the sales were made, following the rule that law should be applied exactly as worded since it is clear, plain and unequivocal.]

The SC allowed the CTA case filed by the second taxpayer for tax refund or credit. Interestingly, the second taxpayer filed the CTA case without waiting for the 120-day period to lapse and four months before the SC promulgated the Atlas doctrine. The SC granted the tax refund or credit because, unlike the first taxpayer, the CTA claim failed by the second taxpayer was filed after the issuance of BIR Ruling No. DA-489-03 on December 10, 2003, which allowed the taxpayer to seek judicial relief with the CTA on its claim for refund or credit, without waiting for the lapse of the 120-day period. The SC considered BIR Ruling No. DA-489-03 as a general interpretative rule which can be relied upon by all taxpayers. Boy, the second taxpayer got lucky!

[Note: The rule in BIR Ruling No. DA-489-03 was abandoned when the SC promulgated its decision in Commissioner of Internal Revenue vs. Aichi Forging Company of Asia, Inc. (G.R. No. 184823) on October 6, 2010. In the Aichi case, the SC held that the 2-year prescriptive period to file a refund for input VAT arising from zero-rated sales should be reckoned from the close of the taxable quarter when the sales were made. Moreover, the failure to wait the decision of the CIR or the lapse of the 120-day period prescribed in Section 112(D) of the 1997 NIRC amounts to premature filing.]

Finally, the SC denied the judicial claim filed by the third taxpayer, for being filed out of time. The third taxpayer filed its claim with the BIR within the two-year prescriptive period. The CIR failed to act on the taxpayer’s administrative claim within the 120-day period. Unfortunately, the taxpayer failed to elevate the inaction of the CIR before the CTA within the 30-day period prescribed by law. Unlike the claims filed by the first two taxpayers, the third case involves late filing, and had to be dismissed.

The lengthy discussion on the applicable laws and doctrines notwithstanding, the rules for filing a claim for tax refund or credit are simple:

1. The 30-day period to file the judicial claim need not fall within the two-year prescriptive period-as long as the administrative claim is filed within the two-year prescriptive period. The two-year period under Section 112 of the 1997 NIRC, as amended, does not refer to the filing of the judicial claim with the CTA but to the filing of the administrative claim with the CIR. The taxpayer can file his administrative claim for refund or credit anytime within the two-year prescriptive period. If he files his claim on the last day of the two-year prescriptive period, his claim is still filed on time.

2. Whether or not the CIR acts on the administrative claim, the taxpayer is required to observe the 120+30 day waiting period before lodging a petition for review with the CTA, otherwise, his claim can be dismissed due to premature filing.

3. A judicial claim for tax refund or credit filed beyond 30 days after the lapse of the 120-day waiting period will not be allowed, as this amounts to late filing.

Stock transaction tax or capital gains tax?

STOCK trading in the local stock exchange has been one of the most popular and busiest ventures in the Philippines since way back 1920’s.

Analysts say that venturing into stock trading would yield a reasonable return on an idle fund. As popular as stock trading is, it cannot go away with the coverage of the tax rules in the Philippines.

Under the present National Internal Revenue Code of the Philippines, as amended, if there is a sale (other than by a dealer in securities) of shares of stock which is both listed and traded through the local stock exchange, such sale is subject to stock transaction tax. Stock transaction tax is imposed at the rate of one half 1% of the gross selling price or gross value in money of the shares of stocks.

However, in a recent revenue regulation (RR No. 16-2012) issued by the Department of Finance (DoF), it seems that the above tax rate could not be readily applied. Under the new regulation, beginning Jan. 1, 2013, it is necessary to determine whether a publicly-listed company that issued the shares is meeting the minimum percentage of public float (minimum public ownership of shares or MPO).

The MPO is set to be whichever the higher is between: (a) 10% of issued and outstanding shares exclusive of any treasury shares; or (b) the minimum public ownership required by the Securities and Exchange Commission or Philippine Stock Exchange (PSE).

Further, under the above regulation, publicly-listed companies which are non-compliant with the MPO as of Dec. 31, 2011 and those whose public ownership levels subsequently fall below the MPO level at any time prior to Dec. 31, 2012 may be allowed to comply with the MPO up to Dec. 31, 2012.

Hence, beginning Jan. 1, 2013, following RR No. 16-2012, if there is a sale of listed shares through the stock exchange and if the listed company meets the MPO, then the applicable tax on such sale is the stock transaction tax of one half of 1%. On the other hand, if in the said sale, the listed company does not meet the MPO, then the applicable tax on sale is the final tax at the rate of 5% and 10% on the net capital gains (capital gains tax). The rate of 5% applies to the first P100,000 net capital gain, while the 10% applies to the amount in excess of P100,000 net capital gain.

Thus, it will be either stock transaction tax or capital gains tax on sale of listed shares, other than the sale by a dealer in securities, depending on whether the listed company meets the MPO.

Note that in the two tax treatments above, there is a difference on the tax base. For stock transaction tax, the tax base is the gross selling price or gross value in money of the shares of stocks; while for capital gains tax, the tax base is the gain on sale (selling price minus cost).

So, for capital gains tax, if there is a loss on sale of shares of stocks, then there is no tax, but if there is a huge gain, the investor-seller will be hit at a rate of 5%/10% on the gain. Meanwhile, for stock transaction tax, regardless of how much the gain is or regardless of whether there is a gain or loss, the tax still applies, as the applicable tax base is the gross selling price or gross value in money of the shares of stocks.

As an additional note, under RR 16-2012, if the MPO requirement is not met, the sale will no longer be exempt from documentary stamp tax (DST). Instead, a DST at the rate of P0.75 on each P200, or fractional part thereof, of the par value of the stock sold, will be imposed.

Interestingly, the above MPO requirement for taxation purposes is not cited in the NIRC. Thus, on whether RR No. 16-2012, by prescribing an MPO requirement, goes beyond the interpretation of the provisions of the NIRC, it remains to be seen if a challenge will be posed in the future. At any rate, RR No. 16-2012 was already issued, and its effect will be felt more beginning 2013.

Another interesting development is that, subsequent to the above revenue regulation issued by the DoF, the board of the Philippine Stock Exchange (PSE), this time, approved a resolution to suspend listed companies with insufficient public ownership on the first trading day of 2013. Thus, it could happen that, although the shares are listed, it cannot be traded through the local stock exchange. Consequently, the sale of listed shares outside the PSE trading system will be subject to capital gains tax and documentary stamp tax.

It is unfortunate that there were recent reports that more than 20 listed firms are still below the minimum public float prescribed by the PSE.

Hence, from the perspective of an investor or prospective investor who is planning to trade listed shares, it will be a prudent course of action to factor in the impact of the above MPO requirement on tax consequences, in evaluating the amount of actual yield on stock trading ventures.


Punongbayan & Araullo