Linggo, Pebrero 15, 2015

What makes or breaks a tax case

ANYONE who likes mainstream pop music knows that the chorus often makes the song. The chorus is the high point, with the most unforgettable lines and the catchiest beat. A song may or may not have a third or a fourth verse or even a coda. But a chorus is a must.
Having been in the tax practice for several years, I have come to observe that tax cases with the Bureau of Internal Revenue (BIR) often follow the pattern of songs. Like songs with lines and verses, each relating to its message, a tax investigation has several parts, and when taken as a whole, the exercise is aimed at determining whether the taxpayer has unpaid taxes and whether the government has the right to assess and collect the same.
First, an investigation takes place where tax issues are identified and addressed. The taxpayer and the BIR examiners go through the process of discussing the tax treatment of income and expenses, discussing laws and jurisprudence, reconciling tax discrepancies and submitting supporting documents. In every stage of the tax investigation, the substantive and procedural due process rules must come into play: the BIR is required to send a Preliminary Notice Assessment, to which a taxpayer is given 15 days to reply and submit documents; in case of a disagreement as to the taxes assessed, the BIR shall send a Final Letter of Demand (FLD) or a Final Assessment Notice (FAN) within the three (3) -year period prescribed for the assessment of taxes. 
The taxpayer must contest the FLD or FAN in a timely manner by filing a request for reconsideration or a request for reinvestigation; otherwise, tax assessments become final and executory. The BIR may or may not act on the protest by issuing a Final Decision on Disputed Assessment (FDDA), and the taxpayer may or may elevate the case to the Court of Tax Appeals (CTA).
Where it is established that the BIR duly served a FLD or FAN, what makes or breaks the tax case is the filing or non-filing of the protest letter. The filing of the protest to the FLD or FAN is the most crucial remedy in the pursuit of a taxpayer’s defense. In countless cases decided by the courts, the validity of the tax assessments were upheld not because the government had a basis to assess and collect the taxes, but because the taxpayer failed to dispute the assessment and collection of the taxes within the period and by the manner prescribed by law.
Section 228 of the National Internal Revenue Code (NIRC) of 1997 provides that the tax assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment, and within 60 days from the filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. In a recent decision, the CTA held that the tax assessment does not become final and executory although the taxpayer chose to submit the protest without supporting documents, since the lack of documentation will only matter when the BIR evaluates the merits of the said protest (CTA Case No. 8185, Third Division, December 3, 2014).
The filing of the protest letter should not only be made; it must also be clearly established. Last week, the CTA dismissed an appeal filed by a taxpayer on the final decision of the BIR, citing lack of jurisdiction. In this case, the facts show that the BIR issued a FAN against the taxpayer, and later, a FDDA. The petitioner filed an appeal on the FDDA with the Commissioner of Internal Revenue. The CTA held that although the petitioner made allegations that it filed a protest letter, no proof was presented. For having failed to file a protest to the FAN within the given period, the FAN attained finality (CTA Case No. 8891, Third Division, February 2, 2015).
Under Revenue Regulation (RR) No. 18-2013, which implements Section 228 of the NIRC, the protest letter should now indicate the nature of the protest, i.e., request for reconsideration or request for reinvestigation, specifying the newly discovered evidence to be presented in case of reinvestigation, the date of the assessment notice, the applicable laws, rules and regulations, and jurisprudence on which the protest is based; otherwise, the protest shall be considered void and without force and effect. The additional requirements laid down in RR No. 18-2013 only highlight how important the exercise of this remedy is.
The two cases and the new regulation cited above illustrate how the filing (and non-filing) of the protest letter can make or break the tax case.
To relate all of these to our song analogy, I would say the protest letter is definitely the chorus. A bad chorus can still make for an enjoyable song, although its ultimate meaning may be difficult to understand. On the other hand, a song without a chorus may have no point at all.
Jean Ross Abenasa-Miso
Let’s Talk Tax
Punongbayan and Araullo

Lunes, Pebrero 9, 2015

Due process in change of address

TAXES are the “lifeblood” that give real meaning to the existence of the government. Without them, the government would be unable to perform its functions and duties. Taxes are the cost of a functioning government and by extension a civilized society.

Since taxes are critical to its existence, the government is continuously improving its tax collection processes. The Bureau of Internal Revenue (BIR) has been very focused on strengthening its tax collection effort. Under pressure from ambitious revenue targets, the bureau has passed a series of regulations to ensure prompt collection of taxes. The 
motivational  nature of the targets is felt by the public in the form of the BIR’s aggressive approach. It should come as no surprise that the BIR be highly focused on the assessment process. Collections from assessments have traditionally constituted a major share of tax revenue.

To check any tendency towards harsh taxation, the Supreme Court (SC) has been consistent in blocking practices deemed as arbitrary. Justice Isagani Cruz has written: “Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with the law as any arbitrariness will negate the very reason for the government itself.” (CIR v. Algue, Inc.) In other words, taxes should be collected expeditiously, though not to the point where collection methods become preposterous.

In the recent case of Commissioner of Internal Revenue v. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the assessment process once again was the subject of dispute. It involved an invalid assessment preceded by invalid assessment notices, a clear case of denial of due process of law.

Due process is both substantive and procedural in nature. It is substantive in the sense that it acts as a safeguard from arbitrary denial of life, liberty, or property by the government outside the sanction of law. It is also procedural in nature, aiming to protect individuals from the coercive power of government, by ensuring that adjudication processes under valid laws are fair and impartial.

The denial of due process that resulted in the deprivation of property was the core issue underlying the SC decision.

In the BASF case, the BIR was overruled when the SC affirmed a decision by the Court of Tax Appeals, and found no valid assessment due to invalid notices of assessment. Being an invalid assessment, the notice never attained finality and the period for assessment and collection was therefore deemed to have lapsed.

The respondent company, BASF, transferred to a new office without informing the BIR of the move. In 2003, the BIR issued a Final Assessment Notice (FAN) for the taxable year of 1999. However, it was sent to BASF via registered mail to its old address. The company duly protested citing violation of due process and prescription.

Due to inaction on the part of the BIR, the case was elevated to the Court of Tax Appeals (CTA) and then subsequently to the SC. The SC backed the CTA in denying the Petition for Review filed by the BIR, ruling that no valid notices that were sent. Hence, the assessments were also declared void. In effect, the right of the BIR to assess and collect was found to have prescribed.

It is noteworthy that the SC upheld once again the significance of notice as part of due process. What is peculiar about the case is that the BIR was not also properly informed of the change of address of BASF. The BIR cited this circumstance in its Petition before the SC. The BIR also contended that such change of address without prior notice means the prescription clock continues to run, as provided by Sections 203 and 222 of the Tax Code of 1997.

Section 11 of BIR Revenue Regulation No. 12-85 requires the taxpayer to give written notice of any change of address to the Revenue District Officer (RDO) or the district having jurisdiction over his former legal residence and/or place of business. In the event of failure to give notice, any communications sent to the former address are still be considered valid.

The case hinged on the SC’s finding that BIR officers, at various times prior to the issuance of the FAN, had conducted examinations and investigations of BASF’s tax liabilities for 1999 at the latter’s new address. Several communications were also sent to the new address of the respondent prior to the issuance of the FAN including letters and reports of the BIR signed by the revenue officer.

It must not be overlooked that the BIR sent the Preliminary Assessment Notice (PAN) via registered mail to the old address of the respondent but was “returned to sender” as attested by the revenue officer. Despite the return, the BIR still mailed the FAN to the old address. The SC has construed this to mean that the BIR should have been alerted of such change of address. As a result, the Statute of Limitations was not suspended, resulting in the lapsing of the assessment and collection deadline.

A closer look at the decision makes it apparent that both parties failed to give proper notice to each other. The taxpayer was not able to formally notify the BIR of its change of address. On the other hand, the BIR continued to transmit its assessment notices to the “wrong address,” a practice which, combined with the other circumstances, rendered its notices invalid.

This means both parties were “in pari delicto” or “equally at fault,” giving rise to a situation where a court may refuse to intervene. Nevertheless, the weight of justice tilted in favor of the taxpayer.

Let this jurisprudence be our guide in dealing with BIR assessments in the future. It provides an indication that the Supreme Court recognizes the principle laid down in a longstanding ruling from CIR v. Algue, which states: “It is necessary to reconcile the apparent conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.”

Mark Arthur M. Catabona
Let’s Talk Tax
Punongbayan and Araullo

Linggo, Enero 25, 2015

Wrapping it up on employee taxes

AT THE turn of each year, many employees are eager to find out whether they will receive a tax refund, or whether additional taxes will be withheld from their December paychecks. This concern arises from the annualization of compensation that every employer does at year’s end. Thus, it is important that employee taxes are properly computed to ensure that employees pay only what is due from them for the entire year and that no issues emerge during a Bureau if Internal Revenue (BIR) audit of employers.

Ideally, annualization should be done on or before the end of the calendar year, but prior to the payment of compensation for the last payroll period. Nonetheless, should this not be done yet, the employer still has the time to do the annualization prior to the January 25 deadline of refunding any over-withheld tax from the employee.

Here are some common issues on annualization of withholding taxes of employees and reminders on filing:

Basic personal and additional exemptions -- Every individual, regardless of tax status, is entitled to a P50,000 basic personal exemption. In addition, for every qualified dependent child, an additional exemption of P25,000 shall be available to the husband, unless a waiver in favor of the wife is executed. In case the husband is unemployed or working abroad, the wife automatically claims the additional exemption, provided required documents have been duly submitted.

In case a child was born or adopted within the year, such child can already be claimed as qualified dependent for the year, so long as necessary documents have been updated and properly filed with the BIR. If the employee fails to update his information, the excess tax withheld will not be refunded and will be forfeited in favor of the government. Employees should, therefore, properly submit certificates of update of exemption to be entitled to the additional exemption of P25,000.

On the other hand, in case a qualified dependent changes status during the year, such that his status shall no longer qualify him for exemption, an additional exemption of P25,000 can still be claimed during the year. It is only on the following year when the employee can no longer claim the exemption.

Considering the above rules on additional exemption, employers are then reminded to properly check the tax status of the employee prior to computing the tax due for the year. Any additional exemption not considered will definitely impact the employee’s net take home pay. Of course, employees can opt to file an annual income tax return and apply for refund. However, considering the cost and hassle of doing so, this recourse may no longer be an option for some employees.

Employees with previous employers -- Employers are required to annualize the employee’s compensation including that from previous employer (if employed within the same year). Thus, it is necessary that BIR Form 2316 issued by previous employer be provided by the employees to their current employer. Note that tax due of employees who failed to submit the same shall be computed only based on the compensation paid by the current employer. Hence, failure to provide the same may significantly result to higher tax payable upon filing of their individual annual income tax return. Employees with previous employers cannot qualify for substituted filing and are required to file their annual income tax return on or before April 15.

Taxable vs. non-taxable income -- Under existing revenue regulations, certain types of compensation income can be considered non-taxable and exempt from withholding. However, recent issuances/rulings by the BIR provide that those benefits considered non-taxable should be limited only to those specifically provided in the law as non-taxable (e.g. P30,000 tax exempt bonus, statutory contributions, de minimis benefits). In recent years, the BIR issued clarifications on the taxability of stock option plans, de minimis benefits, among others.

Hence, it is recommended that employers revisit their classification of employee benefits.

Tax returns and certificates -- Currently, employers who are considered withholding agents are required to submit monthly remittance return of income taxes withheld on compensation (BIR Form 1601-C), annual information return of income taxes withheld on compensation (BIR Form 1601-CF), together with the alphabetical lists (alphalists) of employees, and employee’s certificate of compensation payment/taxes withheld (BIR Form 2316). A copy of the latter is also required to be submitted to the BIR RDO where the company is registered on or before Feb. 28.

As of calendar year 2013, alphalists of employees are to be submitted either as attachments to the electronic Filing and Payment System (eFPS) or through e-submission/e-mail. Manual submission of diskettes, CDs or hard copies shall no longer be allowed.

Prior to filing, among other things, it must be ensured that the amount of compensation income and taxes withheld per monthly returns, annual returns, alphalist of employees, and employees’ BIR Form 2316 tie up. Also, such compensation income as reported in the returns must also tie up, or at least be reconcilable with the totals in the company’s books.

The above list includes only some of the reminders on employee withholding taxes. Other issues may arise considering the many rules on employee taxes.

At the end of the day, it is the employers who shall be subjected to audit by the BIR. Any taxable compensation income payment not subjected to withholding tax shall result in deficiency withholding tax and disallowance of expense. Thus, following the old adage “prevention is better than the cure”, a thorough review is highly recommended prior to filing.

Ma. Lourdes A. Politado-Aclan
Let’s Talk Tax
Punongbayan and Araullo


Martes, Enero 20, 2015

New Year’s list: Tax reminders at the start of the year

1. BIR Annual registration fee -- As a basic compliance requirement with the BIR, the annual registration fee should be paid on or before Jan. 31, 2015.

2. Renewal of LGU registration -- The annual renewal of business registration with the LGU consists of, but is not limited to, payment of local business tax (LBT), mayor’s permit fee, sanitary inspection fee, garbage fee, building inspection fee, electrical inspection fee, mechanical inspection fee, plumbing inspection fee, fire inspection fee, personnel fee, business plate registration fee, and other charges imposed by the different LGUs.

While LBT is due on or before Jan. 20, 2015, taxpayers may opt to pay this on installment basis within the first 20 days of each quarter. Establishments that fail to renew their business permit or license will not be allowed to operate within the territory of the LGU concerned. In Metro Manila, where LGUs strictly monitor establishments, businesses could be closed down for failure to secure new business permits.

3. Annual information return of income taxes withheld on compensation (BIR Form 1604-CF) -- The Annual information return and alphabetical list (alphalist) must be submitted on or before Jan. 31 of the year following the calendar year in which the compensation payment and other income payments subject to final withholding taxes were paid or accrued. The alphalist is required to be attached as an integral part of BIR Form 1604-CF under certain prescribed modes. The failure to submit the alphalist in the prescribed mode may be a reason for the disallowance of the related claimed expense.

4. Employees’ withholding statements (BIR Form 2316) -- Employees must be provided a copy of the corresponding BIR Form 2316 on or before Jan. 31 of the succeeding calendar year.

Additionally, the BIR now requires all employers to submit the duplicate copy of BIR Form 2316 to the BIR not later than Feb. 28 following the close of the calendar year. Please note that this is the second year that the said new requirement is in effect, and if an employer fails to comply with the submission of BIR Form 2316 for two consecutive years, there is a stiffer penalty as prescribed by the related BIR issuance.

5. Periodic filing of monthly and quarterly tax returns -- Monthly filing pertains to the regular filings of withholding taxes (on income payments subject to final tax, expanded withholding tax, and compensation tax) for the month of December. On the other hand, the quarterly filings refer to quarterly value-added tax (VAT) return and fringe benefits tax (FBT) return. The deadline for monthly submission is Jan. 15, 2015; however for EFPS-filers, dates for filing is based on your groupings. As for the quarterly VAT and FBT returns, the deadline for submission shall be Jan. 25 and Jan. 10 respectively. For EFPS-filers deadline for submission of FBT returns is on Jan. 15, 2015.

6. Submission of books of accounts -- This includes submission of computerized books of accounts and permanently bound computer-generated/loose-leaf books of accounts.

A. Loose-leaf books of accounts -- The deadline for submission of loose-leaf bound books of accounts for taxable year ending Dec. 31, 2014 is on Jan. 15, 2015.

B. Computerized books of accounts -- The deadline for submission of computerized books of accounts and other accounting records in CD-R, DVD-R, or other optical media for the year ending Dec. 31, 2014 is on Jan. 30, 2015.

7. Submission of inventory list -- Under existing tax regulations, taxpayers are required to file an inventory list of stock-in-trade, raw materials, goods in process, supplies, and other goods not later than 30 days after the close of the taxable year. Hence, taxpayers whose accounting period ends on Dec. 31, 2014 should file their annual inventory list on or before Jan. 30, 2015. It is important to ensure that the amount of ending inventory declared in the list can be reconciled with the amount reported in the annual income tax return.

The above list pertains to some of the more common requirements that a corporate taxpayer has to be aware of to avoid penalties, and in view of these numerous requirements, it is a prudent course of action to always check on a tax calendar for reminders. Taxpayers must also take note of holidays in January as this may affect compliance with set deadlines.


Jennylyn V. Reyes
Let’s Talk Tax
Punongbayan and Araullo

Miyerkules, Disyembre 17, 2014

Generosity, gift-giving and the 30% donor tax

IT’S THE most wonderful time of the year, with people worldwide gearing up for Christmas by dispensing gifts. The spirit of the season truly crosses all boundaries of culture, economic background or social status, and business people are definitely not immune to the wave of giving as they sign hefty checks to the objects of their generosity.

Before sending out those gifts, however, it is important to consider the tax implications. Almost everything is taxable, so it should not come as a surprise that the tax authorities also have their eye even on holiday acts of kindness.

Strictly speaking, gifts to strangers -- i.e., anybody who is not a sibling, spouse, ancestor, or lineal descendant; or a relative by consanguinity in the collateral line within the fourth degree of relationship -- are subject to 30% donor’s tax. However, gifts to qualified donee institutions duly accredited by the Philippine Council for Non-Government Organizations (NGO) Certification, Inc. (PCNC), are exempt from donor’s tax provided that the donor complies with certain conditions prescribed by law and other relevant issuances.

The Tax Code provides exemptions from donor’s tax on donations to qualified institutions. In addition, donors to these institutions may enjoy full deductibility of their gift from taxable income. However, to be entitled to the tax exemption, the donor engaged in business is required by Revenue Regulation (RR) No. 02-03 to submit a notice of donation on every gift worth at least P50,000 to the Revenue District Office (RDO) with jurisdiction over the donor’s place of business, within 30 days after receipt of the qualified donee institution’s duly issued certificate of donation.

The certificate of donation shall be attached to the notice of donation, stating that not more than 30% of the said donation/gifts for the taxable year shall be used by such accredited nonstock, nonprofit corporation/NGO institution (qualified-donee institution) for administration purposes pursuant to the provisions of Section 101 (A)(3) and (B)(2) of the Tax Code.

In addition to the requirements stated above, the Bureau of Internal Revenue (BIR) also recently issued Revenue Memorandum Circular No. (RMC) 86-2014 dated 5 December 2014, clarifying the valuation of contributions or gifts actually paid or made in computing taxable income, as part of the substantiation requirement under Section 8 of RR 13-98. Under the said 1998 revenue regulations, taxpayers claiming donations as deductions from gross income must present to the BIR the Certificate of Donation indicating the actual receipt and date of donation, and the amount of cash, or acquisition cost if in property.

The mandatory information under Section 8 of RR 13-98 is now required to be provided in the Certificate of Donation (BIR Form 2322) as prescribed by the new RMC 86-2014. BIR Form 2322 consists of two parts -- a donee certification and a donor’s statement of values. The donee certification indicates the donee’s confirmation of receipt of donation, the date it was received, and the amount of cash or the description of the property donated; and is signed by an authorized representative of the donee organization.

On the other hand, the donor statement provides the description, acquisition cost and net book value of the property donated as reflected in the financial statements of the donor, signed by an authorized representative. A copy of the sales document will also be required to support the acquisition cost claimed by the donor.

The numerous requirements unfortunately discourage the business sector in availing of the grant. It suppresses the spirit of giving by mandating requirements that negate the purpose of the incentive if not fully complied with and followed to the letter.

The Congress must evaluate the taxation of donations. Stringent requirements for the availment of tax incentives on donations discourage donors from continuing their generous contributions. There seems to be no logical reason for a donation to be taxed when the income from which such donation came from has already been taxed. If anything, generosity should be applauded and encouraged by the government.

The context of much giving is the calamities that plague our country. In most cases, victims of such calamities cannot depend on the government to provide for their needs. During such times, we can only turn to the private sector to augment the assistance to the victims by donating whatever resources they can spare. However, after donating whatever cash or property is available, the donor is then slapped with an astounding 30% donor’s tax. Why do we punish donors for their acts of kindness?

Yet, despite the difficulties imposed by the donor’s tax, we should always remember the true meaning of Christmas and celebrate this season with generosity and love. It is good to give generously and wholeheartedly. By all means let us be merry, but let us also be wise: before handing out precious gifts, remember to comply with the new requirements under RMC 86-2014 to avail of the exemptions.

On behalf of the Punongbayan & Araullo family, we wish you a Merry Christmas and a Prosperous New Year!

Iderlyn P. Magsambol-Demain
Let’s Talk Tax
Punongbayan and Araullo


Martes, Disyembre 16, 2014

Documentation for deductibility of donations

Pursuant to Section 8 of Revenue Regulations 13-98, taxpayers claiming donations as deduction from gross income in computing the income tax, must present to the BIR the Certificate of Donation indicating the actual receipt and date of donation and the amount of cash, or acquisition cost if in property

These information shall be provided in the Certificate of Donation (BIR Form 2322).  The Form consists of two parts:

1.  the donee certification on the receipt of the donation and indicating the date and amount of cash or description of the property donated, signed by an authorized representative.

2. the donor statement on the description, acquisition cost and net book value of the property donated as reflected in its financial statements, signed by an authorized representative.  Copy of the sales document will also be required to support the acquisition cost.

Revenue Memorandum Circular No. 86-2014, December 5, 2014
Tax Alerts
Punongbayan and Araullo

Martes, Disyembre 9, 2014

Emotional Pain Can Make You Change

 One day, I wanted to impress my girlfriend.
            Thankfully, I felt rich that day because I had P500 in my wallet.
So I invited her to eat in a nice restaurant.
            But a part of me still wondered if I really had enough money for the meal.
            I knew the restaurant's specialty was Crispy Pata or deep-fried pig's knuckles (Yep, I was still eating meat at that time). Quickly, I read the menu. It cost P150 only. Yes! I could afford it.
            I called the waiter and ordered Crispy Pata. With two cups of rice.
            To save money, I didn't order drinks. Thankfully, my girlfriend didn't order too. I smiled.  Things were going my way.
            At the end of our meal, the waiter brought in two little green bowls of Macapuno (sweetened coconut). So this was how it was in more expensive restaurants: They give free desserts!
            The waiter then gave me the bill.
            And that was when I felt like my soul jumped out my body for 10 seconds.
Because my bill was P561!
            With my heart racing, I called the waiter. I asked how my bill could be more than five hundred if I ordered only Crispy Pata worth P150?
            He showed me the menu again. He pointed out that it was P150 per 100 grams. With a smile on his face, he informed me that he served us 300 grams. Like he did me a favor!
So we ate a whopping P450 of Crispy Pata.
            And that wasn't the end of my trials. 
The waiter also pointed out that the Macapuno was P20 each. It wasn't free at all. So with the rice and the tax, the entire bill reached more than what I had in my wallet.
            So I did one of the most embarrassing things I ever did in my entire life—right up there with preaching with my zipper open. Sheepishly, I asked my girlfriend, "Uh, do you have money? I'm a little short…”
            Thankfully, she had a few pesos in her wallet.
            But both of us had nothing left for the waiter's tip.
            With my head bowed down, I walked out of the restaurant as fast as I could.
            Friends, this happened a long time ago. 
But I can never forget how this embarrassing experience gave me a wild fantasy. It may not be wild for you, but it was absolutely wild for me: I fantasized of a time when I had so much money, I could enter into any restaurant I wanted to, and order anything I wanted to—without even looking at the prices on the menu!
Call me silly. Call me juvenile. Call me crazy. But experiences like these were painful enough, they fueled my desire to become wealthy.
           
Write Down Your Emotional Why

            Think deeply.
            Why do you want to become a happy millionaire?
            Write down the reasons below.

"I will earn ­                   by                              .”
                       (Amount)                  (Date)

Here are my Emotional Whys for wanting to be a happy millionaire:






            Next, we work on your beliefs…


            May your dreams come true,

            Bo Sanchez