Establishing legal and factual bases of tax assessments

Under Section 228 of the Tax Code, a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. Otherwise, the assessment shall be considered void.

In the preliminary assessment notice (PAN) and Formal Assessment Notice (FAN) issued against the taxpayer, the BIR merely stated that per computerized matching conducted by the BIR, the taxpayer has undeclared importations as a result of comparing the Bureau of Customs (BOC) importation data and the VAT returns of the taxpayer.

The Court of Tax Appeals (CTA) held that the assessment notices issued against the taxpayer were not valid since they failed to state the legal and factual bases for the deficiency income tax and VAT arising from the alleged undeclared importation of the taxpayer. 

The CTA noted that the details in the assessment notices issued to the taxpayer are not sufficient to allow the taxpayer to intelligently answer the assessment as well as prepare the documentary evidence for its protest. Hence, it cancelled the deficiency VAT and income tax assessment arising from the alleged undeclared importation of the taxpayer.

(Commissioner of Internal Revenue v. BASF Philippines, Inc., CTA EB Case No. 872 re CTA Case No. 8128, September 12, 2013)

Tax Brief

Punongbayan and Araullo

Thinking about Christmas or taxes

WE ARE NOW in the last month of the year. At this time, companies will be closing their books, managing reconciliations of their accounting records against their tax returns, conducting year-end adjustments, preparing for the year-end withholding tax obligations, completing compliance requirements for renewal with the Bureau of Internal Revenue (BIR) and local government unit (LGU) registrations and planning for the 2014 income tax filing season.

December is also the time of the year when taxpayers evaluate certain tax positions and plan for actions that may impact not only the current taxable year but also the subsequent years.

Revisiting the significant BIR issuances and Revenue Regulations (RR) for the year is therefore a rational thing to do before we say: GOODBYE, 2013!

TRANSFER PRICING GUIDELINES (RR NO. 2-2013)

It can be recalled that, under this regulation, taxpayers are mandated to keep documentation to demonstrate that transfer prices (TP) between related parties are consistent with the arm’s length principle.

TP documentation should be an item in any taxpayer’s policy-making and tax planning assessments.

If there is still no written inter-company agreement, it is advisable to have one accomplished immediately. It is best to be prepared when the BIR requires the submission of the intercompany agreement in a transfer pricing audit.

NEW INVOICES AND ORS (RMO 12-2013)

Considering the several extensions granted by the BIR for the application of authority to print (ATP), it is a grave sin if one was unable to process one’s ATP application. Though the penalty prescribed under Sec. 264 of the Tax Code was only for a fine, which ranges from P1,000 - P50,000, the aggressiveness of the law should not be discounted: non-compliance may be considered a criminal liability for which taxpayers may suffer imprisonment of not less than two years but not more than four years.

Surely, as a supplier, you would not want to be ill-favored by your cautious customers who would likely prefer your compliant competitors.

If you have properly complied with this requirement, your next task is to ensure that you are not receiving outdated official receipts or invoices from your suppliers. This will significantly impact your claim of input taxes and deductibility of expense for income tax purposes.

WITHHOLDING REQUIREMENT FOR DEDUCTIBILITY OF EXPENSES (RR NO. 12-2013)

It can be recalled that, under the new regulations, even if the deficiency withholding tax is paid during the investigation, the expense item to which such deficiency withholding tax relates will not be allowed as a deduction against the taxable income in the year incurred.

Think of the dire consequences that taxpayers will face after the issuance of the regulation, specifically on the assessment on withholding tax and income tax.

Revisit the employee’s liquidation of cash advances and reimbursement of expenses made during the year. Aside from probing if the expenses were duly supported with official receipts under the name of the company, validate if such expenses were subjected to expanded withholding tax. 

If, currently, there are transactions that have not been subjected to withholding tax, evaluate the cost-benefit of amending the withholding tax returns and paying the withholding tax to avoid the assessment on non-withholding and further disallowance of the expense.

RECOVERY OF INPUT TAXES ATTRIBUTABLE TO VAT ZERO-RATED SALES (RMC NO. 57-2013)

By this time, taxpayers should be able to forecast if unutilized input tax attributable to value-added tax (VAT) zero-rated sales would be best reco vered through a claim for refund or tax credit certificate (TCC) or, better yet, carried over to the next taxable year.

The option was made critical because of RMC 57-2013, which prohibits expensing of unutilized input VAT attributable to VAT zero-rated sales. It was held that expensing may only be allowed if a claim for refund or tax credit has been filed and that the same was denied by the BIR for failure to comply with the invoicing requirements.

NEW DAILY MINIMUM WAGE RATES IN THE NATIONAL CAPITAL REGION (RMC NO. 71-2013)

On top of the Christmas bonus, employees have reason to cheer the new minimum wage rate in the NCR, which took effect in November.

As a consequence, employers need to revisit the compensation (basic salary plus other income including bonus) given to employees -- if these will now be within the minimum wage and considered non-taxable. 

Increasing the salary and benefits of the employees (up to the extent of the new minimum wage rate limit) without imposing additional tax is required by the issuance.

TREATMENT OF DEPOSITS AND ADVANCES (RMC NO. 16-2013)

We were surprised by the harsh treatment required on deposits or advances received by taxpayers from their clients/customers. It was mandated that any amount received as advances or deposits shall be booked as income and shall form part of the gross receipts of the taxpayer, subject to VAT or percentage tax. The advances shall, on the other hand, be considered a deductible expense by the client/customer provided that it is duly substantiated with official receipts.

Before this issuance, taxpayers first had to make a qualification if the deposit was refundable or non-refundable to be considered taxable or not. This time, the issuance says that cash deposits or advances are taxable upon receipt without qualification. 

Let’s not lose hope, though, but continue to advocate for the BIR to clarify the type of cash advances or deposits to be covered by the new requirements. This treatment has irreconcilable consequences that will place some taxpayers at a great disadvantage.

TAXABILITY OF HOMEOWNERS’ ASSOCIATIONS (RMC NO. 9-2013)

Homeowner’s associations are now subject to income tax and VAT. As a consequence, income payments to them representing membership fees and association dues are likewise subject to the applicable withholding taxes under existing regulations.

The members will feel the escalating cost of living in the city because these taxes will definitely be passed on to them.

With tax rules becoming more challenging each year and the BIR putting the pressure on taxpayers to be accountable for complete compliance, new tax issuances and regulations should be carefully revisited. 

Surely, we don’t want to be thinking about taxes during the Christmas season.

Jen R. Serrano

Let’s Talk Tax

Punongbayan and Araullo

Cutting corners in the tax assessment process

WITH Manny Pacquiao’s tax evasion case with the Bureau of Internal Revenue (BIR) still a sizzling topic, the tax office issued a new revenue regulation that is making waves among taxpayers, tax practitioners and revenue officers with regard to the due process requirements in issuing deficiency tax assessments.

The rules governing the issuance of deficiency tax assessments are long established under Section 228 of the National Internal Revenue Code of 1997 (Tax Code) and its implementing regulation, RR No. 12-99. Under the old rules, after the examination of a taxpayer’s books of accounts and other records pursuant to a Letter of Authority or a Letter Notice, the BIR officer who performed the audit shall notify the taxpayer of the discrepancy or discrepancies in the latter’s tax payments, by issuing a Notice of Informal Conference. The taxpayer is then given 15 days to present his side of the case.

In case the taxpayer fails to timely respond to the Notice of Informal Conference, the revenue officer may endorse his findings for the issuance of a Preliminary Assessment Notice (PAN) or a Formal Letter of Demand (FLD)/Final Assessment Notice (FAN), whenever the case falls under the situations enumerated in the Tax Code when a PAN is no longer required. Again, once a PAN is issued, the taxpayer has 15 days to refute the findings of the revenue officer.

If the issues are not resolved at the PAN stage, the BIR may issue the FLD/FAN calling for the payment of the deficiency taxes. The taxpayer is given 30 days from receipt of the FLD/FAN to submit a written protest against the assessments, and 60 days from the filing of the written protest to submit all relevant supporting documents. The taxpayer’s failure to protest the FLD/FAN or submit all relevant supporting documents within the prescribed period makes the tax assessments final, executory and demandable.

If the Commissioner of Internal Revenue or his duly authorized representative denies the protest, or fails to act on the protest, the taxpayer may elevate the decision of the Commissioner to the Court of Tax Appeals (CTA) within 30 days from receipt of the denial or lapse of the 180-day period for the Commissioner to decide. The taxpayer’s failure to timely appeal the adverse decision or the inaction of the Commissioner of Internal Revenue to the CTA makes the assessments final, executory and demandable.

Revenue Regulations (RR) No. 18-2013, dated Nov. 28, 2013, changed the pace of the tax assessment and collection process by introducing the following amendments:

1. Omission of the issuance of the Notice of Informal Conference;

2. Issuance of the FLD/FAN within 15 days from receipt of the PAN, in case of default by the taxpayer, or within 15 days from filing of the reply to the PAN, in case of disagreement with the tax findings in the PAN;

3. Requirement on the part of the taxpayer to state the nature of protest to the FLD/FAN, whether for request for reconsideration and request for reinvestigation, and prescribing the legal effects of each mode;

4. Institution of the administrative appeal with the Commissioner of Internal Revenue through request for reconsideration, in which the taxpayer is barred from presenting newly discovered or additional evidence to support his case;

5. Inclusion of an exclusivity rule in case of inaction of the Commissioner on the protested assessment, i.e., the remedy of filing a petition for review with the Court of Tax Appeals bars the remedy of waiting for the final decision of the Commissioner or his duly authorized representative, which decision is subject to appeal to the CTA;

6. Institution of personal service and substituted service as modes of serving the PAN/FLD/FAN and the Final Decision on Disputed Assessment (FDDA) in addition to service by registered mail.

The most notable amendment introduced by RR 18-2013 is the removal of the Notice of Informal Conference. The Notice of Informal Conference is not a requirement under the Tax Code; nevertheless, it was institutionalized under RR 12-99 as part of procedural due process. In scrapping this requirement, the BIR aims to achieve an assessment and collection process which, in numerous cases decided by the courts, is defeated by the defense of prescription under the statute of limitations of the Tax Code.

The BIR seems to be keen on formalizing the tax assessment after the investigation reaches the PAN stage. It is interesting to note that the BIR only has 15 days to resolve the issues in the PAN stage and issue the FLD/FAN. A real evaluation of the documents and arguments of the documents submitted by the taxpayer takes time and needs more than 15 days. Understanding the documents, tax reconciliations and legal defenses is impossible to do within a short period of 15 days primarily because of the huge numbers of tax investigations assigned to revenue officers. The only way to prevent the issuance of the FLD/FAN is to settle the tax assessments in the PAN, which would make one wonder why replying to the PAN is one of a taxpayer’s remedies in the first place.

The shortened period does not give the taxpayers enough time to prepare his documents and arguments. More importantly, it does not allow the BIR officers enough time to consider and study the documents and arguments presented to them.

It would seem that the shortened period, though aimed at expediting the process, however makes the PAN stage inutile.

There are other interesting provisions in RR No. 18-2013 which, in my opinion, should have been the topic of an open forum between the BIR and taxpayers, or now that it is issued, be the subject to a clarificatory issuance by the BIR. This "game changer" will take effect on Dec. 15, 2013, and given its important amendments, it pays to have a proper understanding of procedural due process as part of a taxpayer’s rights and remedies under the law.

Jean Abenasa-Miso

Let’s Talk Tax

Punongbayan and Araullo

Pacquaio's defense

WHEN an assessment has become final and executory, what can the taxpayer do?

A taxpayer is given ample time to protest the tax assessment made by the Bureau of Internal Revenue (BIR) for any taxable year. In fact, a typical assessment -- from issuance of letter of authority to the final assessment notice (FAN) -- lasts at least six months and involves several correspondences between the taxpayer and the tax examiner. However, when the assessments made by the BIR are duly received by the taxpayer, but the taxpayer fails to file its protest within the prescribed period, the said assessment will become final and executory, and will be subject to collection.

Based on news articles, this seems to be where the tax case of boxing legend Manny Pacquiao is.

When the assessment has become final and executory, any taxpayer who finds himself in the same situation as Pacquiao has the option to pay the full amount, which includes the basic tax plus increments, or apply for compromise settlement, or altogether refuse to pay the assessed tax.

The first option -- pay the final assessed tax and increments -- includes the basic tax, interest of 20%, surcharges of 25%-20% and penalties, if any. This may not be a practical option for Pacquiao since he can provide the documents required by the BIR to prove his payments made in the US through Top Rank. Further, any income made in the Philippines will still be subject to deductibles, subject to proper documentations. Therefore, the assessment made by the BIR may be minimized to a few millions, if not a few hundred thousand pesos.

As to the second option, compromise is when the taxpayer and the BIR enter into an agreement by making reciprocal concessions to avoid litigation or to put an end to one that has already commenced. One of the grounds that can be subject to a compromise, under Revenue Regulations No. (RR) 30-02, as amended by RR 08-04 and RR 09-13, is when there is failure to file a request for reinvestigation or reconsideration within 30 days from issuance of FAN, and there is reason to believe that the assessment is lacking in legal and/or factual basis. A compromise offer must be paid by the taxpayer upon filing of application for the compromise settlement.

In Pacquiao’s case, should his tax consultants find that the factual basis of the alleged deficient tax liability can be weakened by evidence showing payment of taxes, such as authenticated or original documents coming from the Internal Revenue Service (IRS), then they can opt to offer a compromise settlement with the BIR. If the BIR accepts the compromise settlement, the amount that Pacquiao is required to pay will be reduced to at least 40% of the basic tax assessed. It must be noted that the full amount can no longer be cancelled, mainly because the assessment has become final and executory without any protest filed by Pacquiao. However, a smaller amount may be allowed, subject to the approval of the National Evaluation Board, which shall be composed of the commissioner of Internal Revenue and the four deputy commissioners of the BIR.

Technical knock-out is Pacquiao’s worst enemy in this match. Prudence teaches us that a taxpayer must be diligent and responsible in his or her tax responsibilities. And any negligence is but the accountability of the taxpayer himself or herself, and not his or her accountants or lawyers -- a principle upheld in the Kintanar case (People v. Gloria Kintanar [CTA EB Crim. No. 006, Dec. 3, 2010] was sustained by the Supreme Court (SC) in 2012).

Some would ask, why put Pacquiao in the hot seat when he acquired all his income through hard work, persistence and legal means? A simple answer is this: he is not a special case. Other taxpayers who failed to file their protest within the prescribed period also earned their income in an honest and diligent manner. If Pacquiao is given special consideration, then this should likewise be extended to other taxpayers in a similar situation.

Pacquiao's tax situation has happened before and will happen again. It just so happens that the issuance of the warrant of garnishment was served after the devastation of typhoon Yolanda, when we lost several kababayans, and after the success of Pacquiao in his fight against Brandon Rios. The timing is unfortunate, but the tax consequences should be expected because the process has been in place for some time now.

Dura lex sed lex. The law may be harsh, but that is the law.

Maridelle N. Ramos

Let’s Talk Tax

Punongbayan and Araullo

Retention period of books of accounts and accounting records

The BIR has issued the following clarifications on the retention period of books of accounts and other accounting records under Section 235, in relation to Section 203 of the Tax Code.

Retention period

Pursuant to Section 235 and 203 of the Tax Code, all taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records, for a period of 10 years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.

The term “other accounting records” includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts, which should likewise be maintained for a period from the date of last entry in the books to which they relate. The term “last entry” means the particular business transaction or an item that is entered or posted last or latest in the books of accounts when the same was closed.

In case a taxpayer has a pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved.

Responsibility of independent Certified Public Accountant

Unless a longer retention period is required under the Tax Code or other relevant laws, the independent certified public accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return or the actual date of filing thereof, whichever comes later.

Examination of books of accounts

All books, registers and other records, and vouchers and other supporting papers shall be kept at all times at the place of business of the taxpayer, and must be immediately produced and submitted for inspection upon demand by any internal revenue officer. They may also be examined and inspected for purposes of regular audit or extraordinary audit, or requests for exchange of information by a foreign tax authority. The examination and inspection of books of accounts and other accounting records shall be done in the taxpayer’s office or place of business or in the office of the BIR.

(Revenue Regulations No. 17-2013, September 27, 2013)

Tax Brief – October 2013

Punongbayan and Araullo

Doctrine of operative fact

THE ADAGE that "nothing is constant except change" holds most true for tax rules and regulations. We, as taxpayers, have to be constantly vigilant not just of changing rules and regulations but of changing interpretations of old rules and regulations. Most of us are now reeling from the realization that some practices that we hold sacrosanct are actually erroneous interpretations of the Tax Code.

One case in point is the practice relevant to the filing of the judicial claim for refund of input value-added tax (VAT). Prior to Oct. 6, 2010, taxpayers would rush to the Court of Tax Appeals (CTA) to file the judicial claim for refund prior to the lapse of the two-year period believing that the prescriptive period is mandatory and jurisdictional.

However, said practice was struck down by the Supreme Court (SC) in the Aichi case where it declared that the judicial claim for input VAT refund does not follow the two-year prescriptive period but the 120+30-days rule. In the Aichi case, the SC held that the taxpayers must file the judicial claim within 30 days from the issuance of the Bureau of Internal Revenue (BIR) decision or after the lapse of 120 days in case of inaction by the BIR. Thus, the prior practice of filing the judicial claim within the two-year period was held in most cases as either premature or delayed. As a result, a number of pending CTA cases have been denied for failure to observe the 120+30-days rule. This meant loss of millions of pesos for some taxpayers.

The Aichi case was further reiterated in the consolidated cases of San Roque, Taganito and Philex, which were decided by the SC on Feb. 12 this year. As expected, the parties filed a motion for reconsideration.

In its motion, San Roque Power Corp. prayed that the new 120+30-day rule be given only a prospective effect, arguing that the manner by which the BIR and the CTA actually treated the 120+30-days periods prior to the controversial Aichi decision constitutes an operative fact, the effects and consequences of which cannot be erased or undone.

Deciding on the case, the SC denied the motion for reconsideration on Oct. 8, 2013. It held that the doctrine of operative fact does not apply in this case.

Under the general rule, a void law or an administrative act cannot be the source of legal rights or duties. However, the doctrine of operative fact is an exception to the general rule. Under the doctrine, a judicial declaration of invalidity may not necessarily eliminate all the effects and consequences of a void act prior to such declaration.

Prior to the declaration of nullity, such challenged legislative or executive act must have been in force and had to be complied with as they were presumed to be valid. Only the courts can declare a law invalid, and without such declaration, taxpayers would have had no other choice but to follow the existing rules or in this case the practice of filing the judicial claim within the two-year period.

In rejecting the application of the doctrine of operative fact, the SC emphasized that there must be a law or executive issuance that is invalidated by the court for the doctrine to apply. In the present case, however, there is no such law or executive issuance that has been invalidated. What were held erroneous were the BIR and the CTA’s actual practice of not observing and requiring taxpayers to comply with the 120- and 30-day periods.

The SC reiterated that the 120- and 30-day rules are in accordance with Section 112(C) of the Tax Code and must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA as there will be no decision or deemed denial decision by the BIR Commissioner for the CTA to review.

The SC’s decision emphasized that tax refunds are construed st rictly against the taxpayers. Therefore, taxpayers should now be able to interpret tax laws and regulations and not just rely on the existing practices upheld by the BIR and the CTA. We should now meticulously examine every law and regulation as if we are the SC and anticipate if the current practice runs counter to the strict interpretation of the law. And if we have somehow decided that the current interpretation is incorrect, we must now bravely go where others have not dared tread and pray most heartily that our interpretation will be upheld by the SC. Such daunting burden we all must face every day as we diligently pay our taxes and painstakingly seek our refunds. 

Lea L. Roque

Let’s Talk Tax

Punongbayan and Araullo

Tax consequences of donations

MORE than a week after the devastation left by super typhoon Yolanda (international name: Haiyan), the outpouring of disaster-relief donations from all over the world hasn’t shown any signs of slowing down.

Employers are providing their employees who have relatives in the affected areas with any form of assistance. Individuals and corporations both domestic and foreign are donating goods and cash, in addition to services.

So much help is being sincerely given without expecting anything in return. But, kind-hearted donors should also be mindful of the tax consequences of such donations and the penalties for failing to course the donation through authorized channels.

Many have hoped that the stringent tax rules on donations can be suspended in relation to typhoon Yolanda, but the announcements of the Bureau of Internal Revenue (BIR) have only confirmed that the existing tax rules and procedures should be followed.

ASSISTANCE PROVIDED BY AN EMPLOYER TO ITS EMPLOYEES

Any benefit received by an employee from his employer is generally considered as compensation subject to tax. Only the benefits specifically provided under the laws and regulations issued by the BIR can be exempt. Assistance provided by the employer to its employees due to calamities is not exempted from taxation because they are not included in the exemption list. The BIR has been consistent in its rulings that any kind of assistance given by the employer to its employees due to calamities is not considered as tax-exempt benefits. The employer should either withhold tax from the rank-and-file employee or shoulder the fringe benefits tax in case of managerial/supervisory employees.

DONATIONS IN KIND

Donations are generally subject to donor’s tax at the rate of 30% of the amount of cash or fair market value of the goods. If donations are made to non-strangers (i.e. those related by blood or marriage), the graduated rates from 2% to 15%, with the first Php100,000 exempted, apply.

In all cases, donations by corporations are treated as donations made to a stranger and subject to donor’s tax at the rate of 30%.

Donations, whether from local or foreign entities, or a non-resident non-citizen of the Philippines, can be exempt from donor’s tax if made to or for use of the national government, or any of its agencies which is not conducted for profit or to any political subdivision of the Government, and in favor of any educational, charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization, which must first be accredited with the Philippine Council for NGO Certification, Inc. (PCNC), and subject to the condition that not more than 30% of said donation shall be used for administration purposes.

In addition, the donor engaged in trade, business or profession is allowed to claim as full deduction the donations made within the taxable year to accredited NGOs, if all of the conditions prescribed under Revenue Regulations No. (RR) 13-98 are complied with. That is, the accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, and the level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed 30% of the total expenses for the taxable year. If the requirements are not complied with, the donation can still qualify as limited deduction in amount not in excess of 10% for an individual donor, and 5% for a corporate donor, of the donor’s income derived from trade, business or profession as computed without the benefit of this deduction. Donations made by donor not engaged in trade, business or profession is not deductible.

CLAIM OF LOSSES

T yphoon victims who are engaged in trade, profession or business may avail of tax relief by claiming, as business deductions, casualty losses incurred for properties actually used in the business enterprise that were damaged. The loss of assets not used in the course of business and/or personal in nature shall not be allowed.

To avail of the deduction, they must file their claim of casualty loss within 45 days after the typhoon Yolanda (i.e. on or before Dec. 23) through a Sworn Declaration of Loss with their respective Revenue District Office (RDO).

ADOPTING BARANGAYS AND FAMILIES

Several corporations and organizations have considered adopting specific barangays or families to provide continuous assistance until they are fully recovered and in a position to be self-sustaining. Such programs will require the sponsoring corporation to directly course the assistance to the barangay or family. In such cases, it will be best if government can provide more permanent solutions to address the tax angles. A scheme similar to the Adopt-a-school program can be legislated. In this program, private entities assist, for at least two years, a public school, whether elementary, secondary, or tertiary, but not limited, in areas such as staff and faculty development for training and further education and construction of facilities. The entities shall be entitled to tax credit, and additional deduction from the gross income equivalent to 50% of expenses incurred for such adoption.

Companies should at least devise a scheme for making donations so they can immediately take action when calamities strike without having to think too much of the tax consequences or implications. 

In these trying times, our unity is tested. There is still so much need for assistance for the victims of typhoon Yolanda as well as the earthquake victims in the Visayas. Many organizations have launched their own programs left and right, 24/7 relief operations, medical missions, fund raisings and the list goes on. Yes, there are a lot more discreet ways of giving, but what matters now is that if it is given from the heart.

Ed Warren L. Balauag

Let’s Talk Tax

Punongbayan and Araullo

A new source of tax collection for the BIR

THE BUREAU of Internal Revenue (BIR) continued to fall short of its tax collections as it missed its collection target in the first nine months of the year. However, the BIR is not taking this serious matter sitting down.

 
In the hope of improving its tax collections, the BIR has adopted several tax measures which include the following: (a) it clarified that clubs organized and operated exclusively for pleasure and recreation are not tax-exempt organizations; (b) clarified that the association dues, membership fees and other assessments/charges collected by condominium corporations are subject to income tax and value added tax (VAT); (c) clarified that the deposits/cash advances for expenses received by a taxpayer from its clients/customers are subject to income tax and to VAT or percentage tax; (d) imposed a limit on the deductibility of depreciation expense, input tax and all related expenses on purchase of motor vehicles; (e) issued the transfer pricing regulations; (f) tightened audit of industries and self-employed professionals; and (g) filed charges against suspected tax evaders.

These tax measures have contributed to the 21.11% higher tax collections in September 2013 than in the same month last year, though the bureau missed its target for the month.

Where could the BIR source its tax collection to fill-in the gap? From non-stock, non-profit corporations and associations.

It can be remembered that in July 2013, the BIR issued Revenue Memorandum Order (RMO) No. 20-2013, which prescribes the guidelines in applying for tax exemption, revalidation of tax exemption certificates and application for confirmatory BIR rulings of non-stock, non-profit organizations under Section 30 of the Tax Code. The purpose of the RMO is to ensure that only non-stock, non-profit organizations qualified for tax exemption under Section 30 of the Tax Code, as amended shall be issued the Certificate of Tax Exemption.

In the said RMO, before the issuance of the Certificate of Tax Exemption, the BIR will ascertain whether or not the non-stock, non-profit corporation or association meets the following requirements:

   i. It is a non-stock, non-profit corporation or association;

  ii. The purpose for which it was created is one of those enumerated under Section 30 of the NIRC, as amended;
 iii. No part of the corporation or association’s net income shall inure to the benefits of any private individual; and
  iv. The trustees of the non-profit corporation or association do not receive any compensation or remuneration.

Likewise, the BIR will determine whether or not the non-stock, non-profit corporation or association is operating as an organization under Section 30 of the NIRC, as amended, by examining its modus operandi, financial statements and other relevant documents. The examination must show that:

   i. Its earnings do not inure to the benefit of any private individual;
  ii. It does not operate for the benefit of private interest such as those of its founder or the founder’s family; and
 iii. It does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose.

Recently, the BIR denied the application for revalidation of the tax exemption ruling of certain non-stock, non-profit corporations on the ground that they did not qualify as a tax-exempt corporation under Section 30 of the Tax Code.

In one of the rulings denied by the BIR, the concerned non-stock, non-profit corporation has the following purposes:

   1. to promote the recognition of supply management profession as a science, and to stress its importance in commerce and  industry;
   2. to undertake the promotion of research and study or local and international market conditions;

   3. to promote the establishment of acceptable basic standards of product, and to influence manufacturers to improve the       quality of their goods;

   4. to promote local and international exchange of supply management experience and knowledge;

   5. to extend supply management technology and training of personnel of member companies;

   6. to foster closer, more mutual understanding and more friendly relations among members of the profession;

   7. to unify and bring into one compact organization the entire supply management profession in the Philippines; and

   8. to publish and circulate among members an organ for the dissemination of activities of the corporation and such other information useful to the supply management profession.

The BIR’s basis in denying its application is straight and simple -- the tax exemption of the non-stock, non-profit corporation lacks factual and legal basis. The BIR invoked the principle that tax exemptions should be construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. It should be noted that in the said ruling, the BIR did not elaborate the reason such organization did not qualify in any of the provisions under Section 30 of the Tax Code, as amended.

In RMO 20-2013, the BIR prescribed the criteria/requirements in order that a non-stock, non-profit corporation or association would qualify for tax exemption. Isn’t it reasonable enough if the BIR will identify and discuss in its ruling which of the criteria/requirements in RMO No. 20-2013 the non-stock, non-profit corporation or association fails to meet?

The consequence of the denial of tax exemption is that the net income of these non-stock, non-profit corporations will be subject to the 30% regular income tax rate while the revenue/collection of membership fees will be subject to 12% VAT, as if they are classified as corporations engaged in trade or business or practice of profession.

Imagine how many non-stock, non-profit corporations and associations similarly situated above will have their income tax exemptions denied by the BIR? How much of the net income of such non-stock, non-profit corporations and associations will be taxed at 30% regular income tax rate? How much of the revenue/collection of membership fees will be subjected to 12% VAT? Clearly, this is a new source of tax collection for the BIR. But, we are hoping that the BIR will thoroughly evaluate the operations/activities of the concerned organizations before denying their tax exemption.

Nikkolai F. Canceran

Let’s Talk Tax 

Punongbayan and Araullo

Additional disclosure requirement in ITR, further deferred to CY 2013

The Bureau of Internal Revenue has further deferred to taxable year 2013 the requirement  for individuals to disclose their other income in the enhanced BIR income tax returns  (BIR Forms 1700 and 1701).  Thus, for taxable year 2012, the disclosure of supplemental information shall be optional for individual taxpayers who are required to file their income tax returns on or before April 15, 2013.

The disclosure requirement, however, shall become mandatory for income tax filing covering and starting calendar year 2013 for which a return is required to be filed in 2014. For this purpose, individual taxpayers are advised to keep evidence or records of their tax-exempt income and income which are subjected to final withholding tax in  2013 to ensure compliance with the disclosure requirements. 

(Revenue Memorandum Circular No. 21-2013, March 5, 2013)

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Punongbayan and Araullo

Tax treatment of prizes

Under Section 32(B)(7)(c) of the Tax Code, there are two requisites that must be met for awards/prizes to qualify for exemption or exclusion from gross income: (a) the recipient was selected without any action on his part to enter the contest or proceeding; and (b) the recipient is not required to render substantial failure services as a condition to receiving the prize or award.

If the winners in a contest do not meet the requirements as laid down under Section 32(B)(7)(c) of the Tax Code, the cash awards/prizes given to individuals will be subject to tax and consequently to withholding tax. Under Section 24(B) of the Tax Code, as implemented by Section 2.57-1 of Revenue Regulations No. (RR) 2-98, a 20% final withholding tax is imposed on prizes and winnings derived by individuals from sources within the Philippines, except prizes amounting to P10,000 or less.

If the prize and/or winning is P10,000 or less, there is no requirement on the part of the payor to withhold the 20% final tax, but the income recipient (winner) is required to file an income tax return as prescribed under Sections 51 and 52 of the Tax Code and declare the amount of his prize/winning in his income tax return; the amount shall be subject to tax under Section 24(A) of the Tax Code.

(BIR Ruling No. 316-2013, August 8, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Tax treatment of donations to homeowner’s associations

The BIR has issued the following clarifications on the donations received by homeowner’s associations.

Gratuitous donations

Gratuitous gifts, donations, and other contributions received by homeowner’s associations are not qualified for exemption from donor’s tax under Section 101 (A)(3) of the Tax Code.  Hence, any person – natural or juridical, resident or non-resident – who transfers or causes to transfer property by gratuitous gift to a homeowner’s association must file BIR Form 1800 (Donor’s Tax Return) within 30 days after the date the donation was made.

Onerous donations

In case of an onerous donation or donation in exchange for goods, services or use or lease of properties, this shall not be considered a donation subject to donor’s tax since donations of this kind are not given in the nature of an endowment or donation, but in the concept of a fee or price in exchange for the performance of a service, use of properties, or delivery of an object.

However, such contributions to associations in exchange for goods, services and use of properties constitute as other assessments/ charges from activity in exchange for the performance of a service, use of properties or delivery of an object. As such, they are subject to income tax and value-added tax (or percentage tax, as the case may be), unless they satisfy the conditions for exemption under Section 18 of Republic Act No. (RA) 9904, as implemented by RMC 09-2013.

(Revenue Memorandum Circular No. 53- 2013, August 16, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Redemption period on foreclosure sales

For purposes of reckoning the one-year redemption period on the foreclosed asset of natural persons and the period within which to pay the capital gains tax or creditable withholding tax and documentary stamp tax on the foreclosure of real estate mortgage, the same shall be reckoned from the date of registration of the sale in the office of the Register of Deeds.

As regards the right of redemption of juridical persons in an extrajudicial foreclosure, the right to redeem should be made before the registration of the Certificate of Foreclosure Sale with the applicable Register of Deeds or within three months after foreclosure, whichever is earlier. The three-month period shall be reckoned from the date of the executive judge’s approval of the certificate of sale because it is only then that there is a “sale” to speak of which can be taxed.

(BIR Ruling No. 319-2013, August 16, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Invalid imposition

RECENTLY, the Bureau of Internal Revenue (BIR) came out with several controversial issuances which are a reversal of long-standing practice and rulings. One of these issuances is Revenue Memorandum Circular No. (RMC) 65-2012, which took effect on Oct. 31, 2012.
   
RMC 65-2012 clarified the taxability of association dues, membership fees and other assessments/charges collected by condominium corporations from its members and tenants. The said RMC overturned rulings exempting condominium corporations from income tax and value-added tax (VAT), stating that these rulings misinterpreted the provisions of the 1997 National Internal Revenue Code (NIRC), as amended.

Condominium corporations cried foul, and several of them referred the issue to the Law Division of the BIR for further clarification.

However, First e-Bank Tower Condominium Corp. (petitioner) brought the matter before the courts to determine their obligation under RMC 65-2012.

On Sept. 5, 2013, the Regional Trial Court (RTC) Branch 146 of Makati City issued a Resolution declaring RMC 65-2012 as invalidly issued.

The RTC declared that the disputed RMC goes beyond its objective to clarify the existing statute for it did not merely interpret or clarify the existing BIR Rulings but in fact legislated or introduced new legislation under the mantle of its quasi-legislative authority. The RTC also stated that the RMC failed to show what particular law it clarified. Instead, it merely departed from the several rulings of the BIR exempting from income tax the assessments/charges collected by condominium corporations from their members, on the ground that the collection of association dues and other assessments/charges are merely held in trust to be used solely for administrative expense in implementing their purposes.

The RTC held that the new circular made its own legislation abandoning the previous rulings of the BIR, which became the practice of the condominium corporations, including the petitioner. The RMC abruptly charged taxpayers an imposition which was then non-existent, and worse, made it immediately effective, which is prejudicial to the rights of petitioner. In short, the BIR did not merely interpret or clarify but changed altogether the long standing rule of the BIR in violation of the petitioner’s right to due process.

While the RTC decision clearly stated that First eBank Tower Condominium Corp. is not liable for income tax and VAT on association dues it received from its members, the issue now is whether it can apply to other condominium corporations.

Note that the case filed before the RTC is an action for declaratory relief which is defined as an action by any person interested in a deed, will, contract or other written instrument, executive order, or resolution, to determine any question of construction or validity arising from an instrument, executive order or regulation, or statute, and for the declaration of his rights and duties thereunder [Ferrer vs. Roco, G.R. No 174129, July 5, 2010].

It is important to emphasize that an action for declaratory relief should be filed by a person interested under a deed, will, contract or other written instrument whose rights are affected by a stature, executive order, regulation or ordinance before breach or violation thereof [Tambunting vs. Spouses Baello, G.R. No. 144101, Sept. 16, 2005].

The Rules of Court state that the filing of a pleading, i.e., complaint or petition, initiates an action or proceeding. The filing of a petition is an invocation of the powers of the court to settle a controversy. The court will not and cannot acquire jurisdiction over persons or entities who did not submit to its authority. There must be an action filed by a person in interest for the court to decide on a matter of controversy between the parties to the case.

Thus, in this case where the RTC declared that RMC 65-2012 was invalidly issued, if the decision applies only to the petitioner as the par ty in the case, what would happen to condominium corporations who are similarly situated? Can these condominium corporations use the RTC decision as basis for refusing to pay income tax and VAT on collected association dues, membership fees and other assessments/charges even if the RTC did not acquire jurisdiction over them? We note that their rights and obligations under RMC 65-2012 were not ruled upon by the courts. However, the RTC clearly stated that the RMC was invalidly issued. If the RTC decision was binding only between the BIR and First e-Bank Tower, can an invalidly issued RMC be imposed on other condominium corporations?

In another case, a petition for declaratory relief to invalidate an ordinance declaring squatters as bona fide occupants wherein the squatters were not parties to the case, the Supreme Court declared that the reason for the law requiring the joinder of all necessary parties is that the failure to do so would deprive the declaration of the final and pacifying function the action for declaratory relief is calculated to subserve, as they would not be bound by the declaration and may raise identical issue. In this case, although it is true that any declaration by the court would affect the squatters, the latter are not necessary parties because the question involved is the power of the Municipal Council to enact the ordinances in question. Whether or not they are impleaded, any determination of the controversy would be binding upon the squatters [Baguio Citizens’ Action, Inc., et al, vs. The City Council and City Mayor of the City of Baguio, G.R. No. L-27247, April 20, 1983].

Will the Supreme Court decision find application in the case of condominium corporations like First e-Bank Tower? Are all condominium corporations bound by the RTC decision despite their exclusion from the case?

To claim that the nullity of RMC 65-2012 will only benefit the petitioner in the RTC case might lead to a violation of the constitutionally guaranteed right to equal protection of the law. Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. It demands that other condominium corporations, like the petitioner, should also not be made liable for taxes imposed by the invalidly issued RMC 65-2012.

Further, should other condominium corporations be inclined to file a similar declaratory relief action before any other RTC, the decision of RTC Branch 146 of Makati City should not be used as precedent. Note that actions for declaratory relief falls within the exclusive original jurisdiction of regional trial court and, under the principle of hierarchy of courts, a court cannot pass upon the validity of a decision of another co-equal court.

Questioning the legality of RMC 65-2012 is a worthy step to assert the rights of affected condominium corporations. The issue does not end in merely declaring that it was invalidly issued. To confirm the applicability of the RMC, a higher tribunal such as the Court of Appeals or the Supreme Court must still resolve not only the validity of RMC 65-2012, but also the applicability of the RTC decision so that the matter will, finally, be laid to rest.

Shirley C. Tuazon
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Punongbayan and Araullo