15% tax sparing credit rate for dividends

Under Section 28(B)(5)(b) of the Tax Code, a nonresident foreign corporation may avail of the 15% preferential tax rate on dividends received by it from a domestic corporation without need for applying for a tax relief from the International Tax Affairs Division (ITAD) if it meets the tax sparing credit requirement, i.e., the country of domicile of the nonresident foreign corporation allows a credit against the tax imposable by it at an amount equivalent to 20% (now 15%) of the dividends remitted from the Philippine domestic corporation to corporations domiciled therein.

The BIR held that the exemption from taxes of the dividends received by the country of domicile of the non-resident corporate stockholder is sufficient for the applicability of the 15% tax rate under Section 25(b)(5)(B) of the Tax Code.

Hence, dividends received by a nonresident foreign corporation domiciled in a country that imposes no tax on dividends from foreign sources are subject to the 15% preferential withholding tax rate under said tax sparing credit provision of the Tax Code.

(BIR Ruling Nos. 012-2013 and 014-2013, January 3, 2013)

Tax Brief - February 2013

Punongbayan and Araullo

BIR ITR filing guidelines

The Bureau of Internal Revenue (BIR) has issued the following guidelines in the filing of income tax returns (ITR) -  BIR Forms 1702 (for corporations and partnerships), 1700 (for individuals earning purely compensation income),  and 1701 (for individuals engaged in business/practice of professions).


1. Mandatory attachment to BIR Forms 1701 and 1702The new mandatory attachment to the ITR showing the breakdown of the itemized deductions is applicable to individuals filing BIR Form 1701 and availing of itemized deductions, and non-individuals filing BIR Form 1702 (e.g., corporations),  whether availing of optional standard deduction or itemized deductions for calendar year ending December 31, 2012 onwards, including fiscal year ending January 31, 2013.   Taxpayers who have already filed their returns prior to this circular should amend the returns to include this attachment. eFPS taxpayers should follow the work-around procedures in the link below for attaching the form.   If additional rows/lines are required, additional sheets of the same format should be used.  The phrase “Additional Sheet Attached” should be indicated on the last line of the schedule on the face of the ITR.


2. Filing and payment for non-eFPS taxpayers -  The ITR should be printed in folio size bond paper (8.5” x 13”), landscape orientation, signed by the taxpayer/authorized officers/representatives.  Filing and payment shall be made with any of the Authorized Agent Bank (AAB) within the jurisdiction of the taxpayer’s Revenue District Office (RDO).  ”No payment returns” should be filed directly with the RDO.  


3.  Filing and payment for eFPS taxpayers  using BIR Forms 1700 and 1701 -  Due to unavailability of the new forms in the eFPS, the  ITR shall be filed using the work-around procedures in the link below. However, within 10 days upon announcement in the BIR website on the availability of the November 2011 ENCS version , the contents of the manually filed ITRs should be inputted into the eFPS and e-filed.  For 1701 efilers, the attachments (i.e. financial statements, schedules, etc.) may still be filed within 15 days after the manual filing of the ITR together with the hardcopy of the e-filed ITR

Revenue Memorandum Circular No. 27-2013

Income tax and VAT on membership fees of homeowners’ associations

The association dues, membership fees, and other assessments/charges collected by homeowners’ associations from its homeowner-members and other entities form part of their gross income, which is subject to income tax and Value-Added Tax (VAT). The amounts paid in dues or fees by homeowner-members constitute income payments or compensation for beneficial services homeowners’ associations provide to their members and tenants, which are subject to income tax and VAT. Moreover, since homeowners’ associations are subject to income tax, they are subject to applicable withholding taxes under existing regulations.

This notwithstanding, the association dues and income of the homeowners’ associations may be exempted from income tax, VAT and percentage tax if it satisfies the following conditions:

1. It must be a duly constituted “Association” as defined under Sec. 3(b) of Republic Act No. (RA) 9904.

2. The local government unit (LGU) must issue a certification identifying the basic community services and facilities being rendered by the homeowners’ association and therein stating its lack of resources to render such services.

3. The homeowners’ association must present proof (i.e., financial statements) that the income and dues are used for the cleanliness, safety, security and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages.

(Revenue Memorandum Circular No. 9-2013, January 30, 2013)

Tax Brief – February 2013

Punongbayan and Araullo

Application of doctrine “piercing the corporate veil”

The stockholders and/or officers of a corporation cannot be held directly liable for corporate tax liabilities, except for certain circumstances when the doctrine “piercing the corporate veil” may be applied; hence, the stockholders and/or the officers of the corporation may be directly liable for the tax liabilities of the corporation.

After having affirmed the deficiency tax assessment against the company, the CTA ordered the company’s president (who was likewise found guilty for failure to file return and supply information under Section 255 of the Tax Code) to pay for the civil liability of the company arising from its tax assessment. The company president appealed the ruling with the CTA and argued that the civil liability of the corporation should not be collected from him since he himself is not the corporation, but merely a responsible officer.

In its amended decision, the CTA held that the taxpayer is correct in pointing out that the corporation is a separate and distinct entity. Thus, while the accused is the president of the corporation, he himself is not the corporation, but merely a responsible officer. As ruled by the CTA, only in circumstances such as when the corporation was used merely as an adjunct, business conduit or alter ego of another corporation or by its officers or stockholders, or the corporation was used to perpetuate fraud in violation of the tax laws can the doctrine of “piercing the corporate veil” be applied. Considering that no allegation was made that the corporation was used by its president in the aforementioned circumstances, the fiction that the stockholders and/or officers are separate and distinct entities from the corporation cannot be disregarded. Hence, the CTA held that the company president cannot be made to pay the civil liability of the corporation arising from the deficiency assessment issued to it by the BIR.

(People of the Philippines v. Wong Yan Tak, Geralyn Bobier and Pic N’ Pac Mart, Inc., CTA Criminal Case No. 0-090, January 8, 2013)

Tax Brief – February 2013

Punongbayan and Araullo

Prepping for disaster

The year 2012 was a controversial one. Apocalyptic prophecies of how the world would end sparked a great deal of paranoia worldwide. But as New Year’s Day drew to a close with the world still intact, it became apparent that Armageddon would not be happening that year.

It remains a fact, however, that in this past year alone, our country witnessed several tragedies including typhoon Pablo (international name: Bopha). When it hit Mindanao in December 2012, it left extensive damage to properties totaling PHP36.9 billion (USD 900 million)1, making it the costliest Philippine typhoon to date. Internationally, Indonesia, Mexico, and Iran were struck by earthquakes of magnitude 6 and above; the United States was devastated by Hurricane Sandy; and several other countries experienced flash floods and landslides.

As these calamities happen more often every year, it is important that companies reexamine their Disaster Recovery (DR) systems. Since businesses rely on systems for their daily operations, business leaders should ensure that these systems are resilient and are able to withstand catastrophes so as not to hamper the company’s continued growth.

The makings of a sound DR plan

The DR plan is an essential tool in preparing for a disaster. It is a step-bystep guide on how a company can continue or recover its operations once a disruption occurs. Here are the basics of the plan:

1. Conduct a Business Impact Analysis (BIA).

This should be the first consideration in preparing the plan. The Information Systems Audit and Control Association (ISACA) defines BIA as “an exercise that determines the impact of losing the support of any resource to an organization, establishes the escalation of that loss over time, identifies the minimum resources needed to recover, and prioritizes the recovery of processes and supporting system.”

Basically, the purpose of the BIA is to identify which processes and systems are the most crucial for the survival of the company. It also shows the potential threats that might occur and its resulting effects on the company.

2. Define recovery objectives.

There are two important terms to define: (1) Recovery Time Objective (RTO) and (2) Recovery Point Objective (RPO). ISACA defines RTO as “the acceptable amount of downtime for the recovery of systems surrounding a business function or resource, after a disaster occurs;” while RPO “indicates the earliest point in time that is acceptable to recover the data.” To put it simply, the RTO should answer the question, “How long can my company survive before the process/system recovers?” RPO should answer the question, “How much data can my company tolerate to lose?”

Assigning figures to the RTO and RPO should be done realistically. BIA was conducted in the first step because it is important in identifying the most crucial processes and systems; hence, the shortest RTO and RPO should be assigned to the most crucial process and systems.

3. Establish a workforce plan.

The workforce plan should clearly define the responsibilities of each key personnel in implementing the DR plan. Backup personnel should be identified and trained for their roles in the event that the personnel with primary responsibility cannot perform the task. Regularly check the correctness of the workforce’s contact numbers to be able to communicate with them wherever they may be. If it is impossible for some personnel to report to the office for days, weeks, or longer, identify alternate locations where they can continue their work.

4. Document the plan.

When gathering information and drafting the plan, ensure that everyone is involved in order to create a sense of ownership and responsibility. Remember that documentation and dissemination of the DR plan is essential, too. Distribute hard copies of the DR plan to all the personnel involved as soon as it is finalized and make sure that the remaining copies of the plan are kept offsite.

DR templates are available in the internet. But since each company is unique, DR plans should be customized to the specific needs of the company.

5. Test and retest the plan.

Periodically test the DR plan to make sure it works as expected. The DR plan is tested in the following order:  (1) testing by mentally performing each step (paper test), (2) testing different parts of the full plan regularly (preparedness test), and (3) testing by simulating a full-blown disaster (full operational test).

Make sure to involve all employees, including executives, so they know how to respond to an emergency situation. After each test, evaluate and document the company’s performance. DR is an ongoing process. Businesses constantly change and critical processes or systems evolve. Improve the plan by testing and retesting it to find any weaknesses or changes.

Resolve to prepare

Disasters occur, but regardless of its intensity, your business should always be prepared to ride out the waves of catastrophe.

Gianina Mai R. Ortega CPA, CIA is a Lead Consultant with the Advisory Services Division of Punongbayan & Araullo

Tax Brief – February 2013

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 under BIR Forms 1700 and 1701 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