Linggo, Oktubre 19, 2014

BIR's right to collect has expired

WHEN one is facing a tax assessment case we resort to exhaust all possible and available legal remedies that the law provides for the taxpayer. One of the possible and available remedies is for the taxpayer to request for a reinvestigation of the case.

Under Revenue Regulations (RR) No. 18-2013, request for reinvestigation refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both.

This request, however, cannot be granted without a return of favor to the Bureau of Internal Revenue (BIR).As a rule, when the taxpayer requests for a reinvestigation which is granted by the Commissioner of the BIR, the running of prescriptive period of the BIR to assess and collect shall be suspended. Consequently, the five (5)-year prescriptive period for BIR to collect the tax assessment shall be suspended.


In G.R. No. 197515 (Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc.), the Supreme Court (SC) said that the request for reinvestigation should be granted or at least acted upon in due course before the suspension of the statute of limitations to collect may set in.

In the instant case, the final assessment notice (FAN) was issued by the BIR on January 9, 1996 and the taxpayer requested for a reinvestigation on March 14, 1997. However, the BIR granted such request only on January 22, 2001 or after five (5) years from the date of the issuance of the FAN. Further, the BIR issued Preliminary Collection Letter only on February 21, 2002.

The BIR argued that its right to collect the tax assessment has not yet prescribed. The five (5)-year prescriptive period to collect was interrupted when the taxpayer filed its request for reinvestigation. Thus, the period for tax collection should have begun to run from the date of the reconsidered or modified assessment.

This argument failed to persuade the SC. The Court emphasized the rule that the Commissioner of the BIR must first grant the request for reinvestigation as a requirement for the suspension of the statute of limitations. The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension.

The Court pointed out that while the request for reinvestigation was made on March 14, 1997, the same was only acted upon by the BIR on January 22, 2001 which is beyond the three (3) year statute of limitations from the issuance of the FAN on January 9, 1996. Further, the Court stressed that the Preliminary Collection Letter was only issued on February 21, 2002 which is clearly five (5) long years had already lapsed before collection was pursued by the BIR.

Moreover, the Court rejected the BIR’s argument that the taxpayer’s act of elevating its protest to the Court of Tax Appeals has fortified the continuing interruption of the BIR’s prescriptive period to collect. The Court found the argument flawed at best because the taxpayer was merely exercising its right to resort to the proper Court and does not in any way deter the BIR’s right to collect taxes from the taxpayer under existing laws.

The Court also elucidated that the statute of limitations on the collection of taxes was enacted to benefit and protect the taxpayers. Just as the government is interested in the stability of its collections, the taxpayers are also entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time.

While it is true that taxes are the lifeblood of the government, it must be exercised fairly, equally and uniformly so as not for the tax collector to kill the “hen that lays the golden egg.”

Nikkolai F. Canceran
Let’s Talk Tax
Punongbayan and Araullo

Biyernes, Oktubre 17, 2014

Fair and relaxed tax exemption rulings for NSNP entities

THE BUREAU of Internal Revenue (BIR) is in a surprisingly merry mood these days. The reason could be one of three things:

1) the nearing yuletide season;
2) the P9.45 billion increase in revenue collection as of August 2014 compared to August 2013;
3) the P62 billion worth of tax evasion cases filed in the courts as of July 2014.
Whatever the reason is, taxpayers surely felt the good vibes with the issuance of Revenue Memorandum Order No. (RMO) 34-2014 on September 18, 2014, which helpfully eased the burden of nonstock, nonprofit (NSNP) corporations and associations, falling under Section 30 of the Tax Code, namely:

a. Labor, agricultural or horticultural organizations not organized for profit
b. Mutual savings banks and cooperative banks without capital stock and organized not for profit
c. Beneficiary societies or associations operating for the exclusive benefit of the members
d. Cemetery companies owned and operated for the exclusive benefit of the members
e. NSNP corporations or associations operated exclusively for religious, charitable, scientific, athletic or cultural purposes,    no part of net income or asset inures to the benefit of any member or officer
f. Business leagues, chambers of commerce or boards of trade not organized for profit
g. Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare
h. NSNP educational institutions
i. Government educational institutions
j. Farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative    telephone companies or like organizations of a purely local character, the income of which consists solely of assessments,    dues, and fees collected from members for the sole purpose of covering expenses
k. Farmers’, fruit growers’ and like associations organized and operated as sales agents in marketing products of the members    and returning the proceeds to the members

As explained in RMO 34-2014, the tax exemption rulings granted to NSNP entities will serve as confirmation, rather than approval, on whether the conditions for tax exemption set forth by law are appropriately complied.

This means that during the preparation of income tax returns, NSNP entities are not precluded from treating income derived from registered activities as exempt from income tax in the absence of a valid, current, and subsisting BIR ruling or tax exemption certificate. Likewise, NSNP entities are still required to subject income derived from unregistered activities to 30% regular corporate income tax.

This is a welcome relief from the BIR’s previous directive in RMO 20-2013 -- as amended by RMO 28-2013 -- which strictly requires the procurement of a BIR ruling or tax exemption certificate before NSNP entities can avail of the tax exemption.

The issuance also allowed umbrella organizations duly recognized by the BIR to apply for tax exemption rulings on behalf of any of their members that are NSNP entities. This is reasonably practical and fair to NSNP entities given that most, if not all of these entities, do not have adequate budget for a relatively costly BIR ruling.

However, RMO 34-2014 does not negate the purpose of the issuance of tax exemption rulings -- i.e., to minimize tax leakages caused by inaccurate interpretation of existing tax laws and administrative issuances. Therefore, in case of a BIR tax investigation in any given period, the NSNP entities are required to present a valid, current and subsisting BIR ruling or tax exemption certificate as proof of compliance of the conditions for tax exemption. Failure to do so will expose NSNP entities to deficiency in income tax due.

NSNP entities are also required to present the same to the withholding agents in order to be exempt from applicable final and creditable withholding taxes due on their transactions. Failure to do so will likewise expose NSNP entities to deficiency in withholding taxes due. In the same manner, failure on the part of the withholding agents will lead to payment equivalent of the total amount of tax not withheld plus penalties up to P25,000.

To fully take advantage of the tax benefits given to them, qualified NSNP entities should, therefore, carefully examine the nature of their revenue-generating activities, timely check the relevance of their duly issued tax exemption rulings with the newest tax issuances and properly comply with documentary requirements.

All in all, the fair and well-thought-out interpretation of the BIR on tax exemption rulings for NSNP entities has earned the nods of the public.

RMO 34-2014 has provided an efficient way for complying with BIR requirements, which, in effect, has given NSNP entities more time, funds and energy in realizing the purposes for which the NSNP entities were established.

Could the entities under special laws be next? Will the BIR fairly see the certificates of exemption issued by the Philippine Economic Zone Authority and the Board of Investments as practical and sufficient documentation for availing tax exemption under the BIR?

We can only hope that the BIR, as one of the influential pillars of the government in running the economy, continues to set regulations and guidelines that will not only boost the revenue collections of the government, but also boost the growth and sustainability of both for profit and not-for-profit entities.

After all, it wouldn’t be “more fun in the Philippines” if there is imbalance in any of the key economic players.

Let's Talk Tax
Punongbayan and Araullo

Lunes, Oktubre 6, 2014

Not considered incidental transaction for VAT purposes

Under Section 105 of the Tax Code, VAT is imposed on the sale or transaction entered into by a person in the course of any trade or business, including transactions that are made incidental to the pursuit of a commercial activity.

Deemed by the BIR as incidental transaction subject to VAT is the loan extended by an individual taxpayer to a microfinance and lending company where the taxpayer sits as one of the board of directors.

The BIR maintained that due to the active involvement of the taxpayer in the management of the microfinance company, his act of extending the loan to the company is an incidental transaction that is subject to VAT. Likewise, since the subject individual is engaged in the business of motorcycle sales, the funds utilized to extend the loan are necessarily connected to the taxpayer’s actual trade or business, which makes the transaction incidental to his business.

The Court of Tax Appeals (CTA) held that the interest income from the loan extended to the company is not subject to VAT, since the taxpayer’s act of extending the loan cannot be considered an “incidental” transaction” under Section 105 of the Tax Code. The CTA held that based on Black’s Law Dictionary definition of the word “incidental,” for a transaction to be considered an incidental transaction in the context of Section 105 of the Tax Code, it must be “dependent upon or appertaining to” the taxpayer’s primary business transactions or activities.

The CTA noted that at the time of the extension of the loan, the taxpayer’s business was not yet in existence, and thus, it is absurd to conclude that such act of extending the said loan is incidental to the business of selling motorcycles. The CTA further held that the active involvement of the individual in the management of the microfinancing company as a member of the board of directors cannot be treated as the principal business to which the act of extending a loan can be made to depend upon or appertain to.

The CTA cited RMC 77-2008, which clarified that the performance of a director’s functions in a corporation cannot be said as being done “in the course of trade or business,” in holding that the act of the taxpayer of extending loan to the company cannot be considered the principal business to which the extension of loan may be considered incidental.

Hence, the CTA held that the member of the Board of Directors is not subject to VAT on the interest income from the loan paid by the company.

(Commissioner of Internal Revenue v. Thomas C. Ongtenco, CTA EB 995 re: CTA Case No. 8190, June 30, 2014)
Tax Brief
Punongbayan and Araullo

Miyerkules, Setyembre 10, 2014

GPPs not required to present tax exemption ruling

General professional partnerships (GPPs) are not included among the persons or entities that are required to present a tax exemption certificate or ruling pursuant to Revenue Memorandum Circular No. (RMC) 8-2014 in order to be exempt from creditable withholding tax on income payments they receive.
Under RMC 8-2014, all entities or persons claiming exemption are required to provide a copy of their valid, current and subsisting exemption certificate or ruling. Failure on the part of the taxpayer to present the tax exemption certificate or ruling shall subject him to the payment of appropriate withholding taxes due on the transaction. 
The BIR clarified that under RMC 03-2012, income payments made to GPPs in consideration of their professional services are not subject to income tax and, consequently, to withholding tax prescribed in RR 2-98, as amended. Hence, the requirement to present a tax exemption certificate or ruling does not apply to GPPs.
Revenue Memorandum Circular No. 60-2014, July 24, 2014
Tax Brief
Punongbayan and Araullo

Martes, Setyembre 9, 2014

VAT exempt sale of real property

While the sale of low-cost housing units that exceed the price ceiling of P750,000 per unit is not eligible for VAT exemption for low-cost housing under Section 109(P) of the Tax Code, the sale may still be exempt from VAT if the selling price of the property held primarily for sale to customers does not exceed the thresholds of P1,919,500 on sale of residential lots, and P3,199,200 for sale of house and lot and other residential dwellings pursuant to the same provisions of Section 109(P) of the Tax Code.

Under Section 109(P) of the Tax Code, as implemented by Section 4.109-1 of RR 16-05, sale of real property utilized for low-cost housing wherein the unit selling price is within the selling price per unit of P750,000 is exempt from VAT. Moreover, Section 109 further provides that the sale of properties held primarily for sale to customers with a selling price not exceeding the thresholds of P1,919,500 on sale of residential lots, and P3,199,200 for sale of house and lot and other residential dwellings are exempt from VAT.

The BIR held that while the selling price of P1,250,000 of the low-cost housing units sold by a real estate company does not qualify under the classification of a low-cost housing, the selling price still meets the VAT-exempt threshold of P3,190,200 for sale of house and lot and other residential dwellings under Section 109(P) of the Tax Code. 

Hence, the sale of the housing units with selling price of P1,250,000 is exempt from VAT.

BIR Ruling No. 285-2014, July 9, 2014
Tax Brief

Punongbayan and Araullo

Biyernes, Abril 4, 2014

RMC 20-2014 Guidelines for 2013 ITRs

The BIR has issued Revenue Memorandum Circular No. 20-2014 which covers the guidelines in the filing, receiving and processing of 2013 Income Tax Returns BIR Form Nos. 1700, 1701, 1702-RT, 1702-EX and 1702-MX, All June 2013 ENCS version under Revenue Regulations No. 2-2014. 

For Non-eFPS Filers
For expediency, ease and convenience in filling-up the ITRs, all Non-eFPS taxpayers are encouraged to use the offline eBIRForms package which can be accessed and downloaded from the BIR website ( through the “eBIRForms” link. Taxpayers using the said package can directly encode data, validate the entries as it can do automatic computations, edit, save, delete, view, print and  submit their tax returns. 

For eFPS Filers
Taxpayers who are mandated to use eFPS, particularly the Large Taxpayers (LTs) under the jurisdiction of the Large Taxpayers Service and other eFPS users (e.g. Top 20,000 Corporations, Top 5,000 Individuals, Government bidders, etc.) shall use the eFPS facility for the filing and payment of ITRs

Lunes, Pebrero 3, 2014

Protesting a real property tax assessment

Under Section 252 of the Local Government Code (LGC) of 1991, a taxpayer who is not satisfied with the assessment or reasonableness of a real property tax assessment may file a protest in writing within 30 days from payment of the tax to the provincial or city treasurer, or municipal treasurer in the case of a municipality within Metropolitan Manila Area. However, no protest to the real property tax assessment shall be entertained unless the taxpayer first pays the tax.
If the local treasurer denies the protest or fails to act upon it within the 60-day period, the taxpayer/real property owner may then appeal or directly file a verified petition with the Local Board of Assessment Appeal (LBAA) within 60 days from denial of the protest or receipt of the notice of assessment, as provided in Section 226 of RA 7160. If the taxpayer is not satisfied with the decision of the LBAA, he may elevate the same to the Central Board of Assessment Appeal (CBAA), which exercises exclusive jurisdiction to hear and decide all appeals from the decisions, orders and resolutions of the Local Boards involving contested assessments of real properties, claims for tax refund and/or tax credits or overpayments of taxes. An appeal may be taken to the CBAA by filing a notice of appeal within 30 days from receipt thereof.
The requirement to first pay the real property tax “under protest” also applies in cases where a taxpayer or real property owner claims an exemption from payment of real property tax. According to the SC, a claim for tax exemption, whether full or partial, does not deal with the authority of the local assessor to assess real property tax, but merely raises a question regarding the reasonableness or correctness of an assessment, which requires compliance with the payment of real property tax “under protest” under Section 252 of the LGC of 1991. 

(Camp John Hay Development Corporation v. Central Board of Assessment Appeal, GR 169234, October 2, 2013)
Tax Brief – November 2013
Punongbayan and Araullo