Miyerkules, Mayo 29, 2013

How to avoid huge BIR tax assessments

It has never been a secret that aside from the taxpayers’ regular voluntary tax remittances, a sizeable chunk of the Bureau of Internal Revenue’s (BIR) revenue collections comes from tax assessments. Hence, it is not surprising that the BIR is currently bolstering its prosecution team to run after possible tax evaders -- corporations, known personalities, and businessmen, among others. Remember that for the year 2013, the BIR’s target collection is P1.25 trillion. This target is 18% higher than last year’s.
  
In a recent news report, the BIR collected P244.1 billion in the first quarter of 2013. Subsequently, for the month of April, the BIR collected P148.99 billion. Since we are nearing the closing of May, the BIR now has only seven more months to meet the P1.25 trillion targets.

So, the pressure is continuously on. And the taxpayers are obviously feeling it.

The taxpayers, particularly the corporate ones, are anxious on how the pressure will continue to translate to BIR’s listings of tax findings in each tax assessment case. It is not uncommon that the BIR’s initial list of assessment findings would start at P400 million, P700 million, a billion or even more. And this is only for one taxable year! That’s why, owners of businesses who see this initial list might have a silly thought of jumping out of the window from the 30th floor! And then, they may begin by saying -- what’s the sense of putting up a business if they have to pay tax deficiencies whose amount is even greater than the net worth of the business itself?

Well, to the taxpayers -- relax…

There is actually no need to worry about BIR audits, if the taxpayer is prepared for it.

How?

While it is true that it is difficult to predict the approach that the BIR examiner will use in each tax assessment case, at least there are common sources of findings which the taxpayers may consider in preparing for a BIR audit.

Here are some basic pointers:

Don’t wait for the BIR audit before starting to reconcile. Most of the BIR’s findings result from comparison of certain amounts per books as against the amounts per tax returns or per related alphalist. An example of this is the comparison of the amounts of sales and expenses per books as against those per other BIR references -- income tax returns, value-added tax (VAT) returns, withholding tax returns, and summary list/alphalist, among others.

The general practice among taxpayers is to wait for the BIR examiner to present a discrepancy before the taxpayer starts to reconcile. Most of the time, this will take a long process, particularly if the employee who is knowledgeable about the related transactions has already resigned. The reconciliation process could even take a number of years, and for all we know, after the reconciliation process is exhausted and there are still remaining unreconciled items, the amount due from these deficiency items have already doubled due to interest penalty. Note that the interest rate on tax deficiency is 20% per year.

To the taxpayers -- formulate a system of periodic reconciliation which will depend on the accounting system and pertinent record keeping procedures.

Maintain adequate documentation. One of the more common BIR findings is the alleged lack of adequate documentation supporting a transaction. This is true, particularly, when the BIR examiner is evaluating a major transaction that has a significant tax impact. In this connection, there could be questions on the nature of the transaction and the applicable withholding tax rates, or there could be a BIR challenge on the deductibility of the related expense for income tax purposes.

Hence, if the taxpayer does not have in its files the pertinent documents, then, it will be difficult to address the inquiries of the BIR examiners, and the BIR may come up with an assessment.

To the taxpayers -- be keen on maintaining a dequate documentation to support transactions.

Secure withholding tax certificates from customers. Another common BIR finding is the missing withholding tax certificates. These certificates are the taxpayer’s proof of tax credits against its total income tax due for a year. Hence, if these certificates are not secured from the customers, then, the taxpayer’s claim for tax credits may fail, and the consequent assessment might be inevitable.

To the taxpayers -- ensure that all the withholding tax certificates are properly secured from its customers.

The above pointers are just basic and general ones. There are definitely numerous and more specific preventive measures that could be adopted by the taxpayers, on a case to case basis, to avoid huge tax assessments. Some can be performed by the taxpayers themselves, while others can be done with the assistance of their tax consultants.

In summary, while the BIR is pressured to intensify its assessment and collection efforts to meet its revenue target, the taxpayers, conversely, should be thoroughly prepared for any BIR examination in the future. Remember -- the BIR’s yearly target keeps on increasing. 


Olivier D. Aznar
Let's Talk Tax
Punongbayan and Araullo

Miyerkules, Mayo 22, 2013

A matter of settling tax obligations

"TAXES are what we pay for (a) civilized society, or are the lifeblood of the nation."

There is an old saying that in this life, there are only two matters that remain constant, namely: change and taxes.

This is a delusion, as there should be a third -- issuances from the Bureau of Internal Revenue (BIR).

At the advent of the current administration, the BIR has been constantly introducing new measures or re-introducing measures to improve those already in place in its attempt to improve collection.

One of the more recent measures issued to realize this objective is Revenue Regulations (RR) 9-2013, dated May 10, 2013, which sets a timeline for the payment of the compromise offer in a compromise settlement.

According to the new revenue regulations, taxpayers seeking a compromise settlement of unsettled tax obligations must now pay the compromise offer upfront before their applications are processed.

No application for compromise settlement shall be processed without the full settlement of the offered amount.

The new rules amended RR 30-2002, dated Dec. 16, 2002, which provided the implementing guidelines for Sections 7(c), 204(a) and 290 of the NIRC on the compromise settlement of tax liabilities.

Under the previous revenue regulations, the taxpayer has option to pay the compromise offer either before or upon filing the application or after the approval of the offer of compromise by the board.

In case the compromise is disapproved and the applicant had already paid his offer, the payment would be deducted from the taxpayers’ outstanding liability.

A BIR deputy commissioner already admitted in a newspaper article that this move is a collection strategy.

Indeed, this is a good collection strategy. The BIR can immediately receive the amount offered for compromise and need not wait until the compromise offer is evaluated by the boards and accepted or denied.

But is it fair to the taxpayers?

Under the rules on compromise settlement, the Commissioner of Internal Revenue is given an authority to compromise the payment of internal revenue tax liabilities of certain taxpayers with outstanding receivable accounts and disputed assessments with the BIR and the Courts.

Article 2028 of the Civil Code of the Philippines provides that a "compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced."

Compromise therefore implies a mutual agreement between the parties involved, e.g. taxpayer and BIR.

Under the present rules, the power of the commissioner to compromise any national internal revenue tax requires compliance with specific conditions, to wit: (a) there is reasonable doubt as to the validity of the claim against the taxpayer [doubtful validity of the assessment], or (b) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax [financial incapacity].

These conditions are not all-encompassing as these matters are always subject to other considerations set forth by the BIR.

You may recall that under the prevailing rules, the cases which may be compromised upon the taxpayer’s compliance with the relevant rules and regulations are limited to the following: (1) delinquent accounts; (2) cases under administrative protest after issuance of the final assessment notice to the taxpayer which are still pending in the regional offices, revenue district offices, legal service, Large Taxpayer Service (LTS), collection service, enforcement service and other offices in the national office; (3) civil tax cases being disputed before the courts; (4) collection cases filed in courts; and (5) criminal violations, other than those already filed in court or those involving criminal tax fraud.

In case of delinquent accounts, the BIR may be justified in requiring advanced payment of the compromise offer as th ese are otherwise already collection cases.

However, is the new rule fair in other cases? Take for instance deficiency taxes arising from a jeopardy assessment or assessed without the benefit of complete or partial audit by the revenue officer.

This is resorted to if there is reason to believe that the assessment and collection of a deficiency tax will be jeopardized by delay because of the taxpayer’s failure to comply with the audit and investigation requirements set forth by law.

Consequently, the amounts assessed may be huge and without solid basis. Hence, both BIR and the taxpayer may find it mutually beneficial to agree on a compromise amount.

The taxpayer may opt to enter into a compromise settlement which the BIR has reason to accept because of the doubtful validity of the assessment.

In such cases where the settlement is mutually beneficial, is it fair for the BIR to require advance payment while it has not yet delivered its part in the settlement?

Certainly, this amendment ushers a new development that bridges the gap between compliance and collection which, in reality, is mutually beneficial to both the taxpayer and the BIR.

Nevertheless, the taxpayer must remain cautious and vigilant in entering any compromise agreement.

Once the taxpayer has showed his intention to compromise his tax violations, whether he likes it or not, he begins to feel that he will now be at the mercy of the BIR.

He begins to realize that other considerations can come into play other that the requirements and conditions in the regulations -- which should not be the case.

While compromise settlement is being offered for practical purposes, it must be emphasized that the crux of the latter is the relief extended to both the taxpayer and the BIR.

On the part of the taxpayer, said compromise aims to ease his burden in meeting his obligation to pay taxes; while on the other hand, on the part of the BIR, it serves as an avenue of additional collection or revenue.

This is a very valid program. It has been legislated based on valid reasons. Taxpayers should not be left to lose their hope that this is a remedy that they can turn to in cases of clear financial incapacity and doubtful validity of the assessment.

The BIR must be reminded of the crux of compromise settlement. Any program of the government which can provide a reasonable relief on the taxpayer’s burden should always be earnestly deliberated.

Robert Josef A. de Guzman
Let's Talk Tax
Punongbayan and Araullo

Linggo, Mayo 19, 2013

BIR's visit to the doctor

THE BUREAU of Internal Revenue’s (BIR) collection target for 2013 is approximately P1.254 trillion. To meet this target, it has identified various priority programs aimed at plugging tax loopholes and increasing its revenue collections.

One of these priority programs is the Run After Tax Evaders (RATE) Program wherein the BIR is mandated to investigate criminal violations of the National Internal Revenue Code of 1997 (NIRC), and assist in the prosecution of criminal cases that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.

The BIR has filed various cases against taxpayers under this RATE Program. Recently, a prominent doctor was charged by the BIR with tax evasion for allegedly failing to report the correct information in his tax returns from taxable years 2009 to 2011. The BIR filed a criminal complaint with the Department of Justice against the said doctor for (1) "willful attempt to evade tax;" (2) "deliberate failure to supply correct and accurate information" in his Income Tax Returns (ITR); and (3) "willful failure to file Value-Added Tax (VAT) returns for taxable years 2009, 2010 and 2011."

Based on the documents and information gathered from third-party sources, the BIR discovered that there was substantial under-declaration by the said doctor of his taxable income. Under Section 248 of the NIRC, failure to report sales, receipts or income by 30% constitutes prima facie evidence of fraud tantamount to tax evasion. In addition, the BIR noted that the doctor failed to register as a VAT taxpayer even if his income has already exceeded the VAT threshold of P1.5 million (now P1,919,500).

With this development, doctors and other professionals should be forewarned that the BIR is very serious in its campaign to go after individual taxpayers, especially the professionals such as but not limited to doctors, lawyers, accountants, engineers, architects, and real estate brokers. The BIR wants to expand its taxpayer database for this type of taxpayers because of their low tax compliance. In fact, pursuant to Revenue Memorandum Order (RMO) No. 4-2013, the audit priority targets of the BIR for 2013 include professionals and sole proprietorships whose (1) income tax due is less than P200,000 per annum; (2) gross revenue is 40% less than the previous year; (3) tax payment is 35% less than the previous year.

What then should be the lessons to the doctors and other professionals from this recent tax evasion case?

Firstly, these taxpayers should know their tax responsibilities -- the types of taxes that they need to register and pay to the BIR, the manner by which these taxes should be computed and reported, the due dates as well as the compliance requirements for filing of the applicable tax returns. In addition to the income tax, professionals in general, are subject to the business tax, either the VAT or 3% percentage tax). For doctors and medical practitioners in particular, there are procedural requirements with regard to the creditable withholding tax on professional fees (1) paid to them by hospitals and clinics, or (2) paid directly to them by patients who were "admitted and confined" to such hospitals or clinics, or (3) paid directly to them by health maintenance organizations (HMOs) or similar establishments.

Filing of the returns and payment of the taxes, however, is just the ultimate liability. Proper registration and correct documentation and recording of the revenues and expenses should be the first steps to correct compliance. In addition, there is the liability to withhold taxes on their employees as well as on certain expenses such as office rent, janitorial or security services, among others.

Tax rules and compliance requirements are very dynamic and complicated. Taxpayers may consider attending tax seminars or hiring tax consultants to orient them about their tax obligations, and also to update them on newly -issued tax rules and regulations.

An example of a recent tax update applicable to individual taxpayers is the mandatory disclosure requirement of other income in their ITR beginning taxable year 2013. Hence, individual taxpayers are advised to keep the pieces of evidence or records of their tax-exempt income and income which are subjected to final withholding tax in year 2013 to ensure compliance with the disclosure requirements.

Secondly, the professionals should also comply with the tax rules and regulations -- knowing the rules is not enough. Current tax practices should be reviewed, and if necessary, voluntarily pay any deficiency taxes. Likewise, taxpayers should be mindful that the BIR Commissioner is empowered by law to obtain information even from independent third parties to establish income made by the taxpayer during the years in question. In the case of that doctor who was charged with tax evasion, the BIR obtained information from the Philippine Health Insurance Corp. (PhilHealth), and such information was used by the BIR in computing his under-declared income.

Lastly, taxpayers should be aware that they are responsible for all information and representations contained in their ITR. Many court decisions have shown that the taxpayer cannot hide behind his accountant. They cannot blame their accountants or authorized representatives because it is presumed that the taxpayer has examined all the information in the tax returns before placing his or her signature therein.

The Supreme Court recently introduced the "Doctrine of Willful Blindness" in a landmark tax evasion case decided in year 2012. Under this doctrine, the taxpayer’s deliberate refusal or avoidance to verify the contents of his or her ITR and other documents constitutes "willful blindness" on his or her part. It is by reason of this doctrine that taxpayers cannot simply invoke reliance on mere representations of their accountants or authorized representatives in order to avoid liability for failure to pay the correct taxes.

As they say, "ignorance of the law excuses no one from compliance therewith." In order to be liable, it is enough that the taxpayer knows his or her obligation to file the required return and he has failed to comply thereto in the manner required by law.

Evidently, it is imperative for individual taxpayers like professionals to be knowledgeable with their tax obligations, to be compliant with tax rules and regulations, and to be responsible for all information reported in his or her ITR.

And as previously mentioned, the "Doctrine of Willful Blindness" is already part of our jurisprudence, and it can be used as a precedent for future tax evasion cases.

Stephen L. Yu
Let's Talk Tax
Punongbayan and Araullo

Miyerkules, Mayo 15, 2013

3-MONTH "REPRIEVE" ON CO-OP AUDIT REPORTS RAISES MORE QUESTIONS


3-MONTH "REPRIEVE" ON CO-OP AUDIT REPORTS RAISES MORE QUESTIONS





Those cooperatives who failed to submit theirPerformance, and Social Audit Reports, along with the CAPR, etc. last April 30, 2013 may have reason to rejoice and be thankful for the 3-month reprieve they apparently got from the Cooperative Development Authority (CDA).

On their May 14, 2013 Facebook posts, "Cda Bicol" followed/supported by "Philippine Cooperators' Page", virtually granted a 3- month reprieve to such cooperatives.  In effect, these two Facebook pages announcedthat submissions of the above-mentioned reports from May 1, 2013 to July 31, 2013 will not be considered late nor will they be subjected to the monetary penalties imposed for late filing.

We maintain that such reprieve and penalty condonation should be issued by way of an official CDA Memorandun Circular.  In the absence (as of yet) of the same, we grant,(without admitting) that these Facebook posts have official effect.

But along with the 3-month relief, some questions beg to be answered.  

For example, does this  CDA action also exempt, in the meantime, cooperatives from submitting their Performance, and Social Audit reportswhen they file for the renewal of their Certificate of Good Standing (CGS)? The deadline for this also expired last April 30, 2013.

If this were the case, CDA must likewise say so.  If this were not the case, does this mean that the deadline for the filing for the renewal of the cooperative's CGS was likewise moved up to July 31, 2013?

On the other hand, does the Bureau of Internal Revenue (BIR) has a deadline for cooperatives to submit their CGS, in compliance with the conditions of theirCertificate of Tax Exemption (CTE), where the CGS is required to be submitted to BIR every year, during the 5-year effectivity of the coopetives' CTEs?

Questions, questions.  The cooperatives need some answers/clarifications from CDA.  So, there. 

Business / Tax News


BUSINESS/TAX NEWS
Dear Valued Clients
     We are pleased to furnish you the following for your perusal and future value.
REVENUE REGULATIONS
RR No. 18-2012
Prescribes the policies and guidelines in the processing of Authority to Print (ATP) Official Receipts, Sales Invoices and other Commercial Invoices using the online ATP System and provides for the additional requirements in the printing thereof.
October 22, 2012
REVENUE MEMORANDUM ORDERS
BIR RMO NO. 12-2013
Prescribes the work-around guidelines and procedures in the processing of Authority to Print (ATP) Official Receipts, Sales Invoices and other Commercial Invoices in the interim period until the online ATP System is fully developed
May 2, 2013
BIR RMO NO. 13-2013
Prescribes the work-around procedures in the accreditation of printers as a prerequisite to the printing of Official Receipts, Sales Invoices and other Commercial Receipts and/or invoices
May 2, 2013
            Should you need further clarification, please let us know immediately.
            My best personal regards.
          
Very truly yours,
ATTY. HENRY R. ONIA, CPA, REB

Biyernes, Mayo 10, 2013

Clarification on taxes due from FTAA contractors during recovery periods


Under Section 81 of RA 7942 (otherwise known as the Philippine Mining Act of 1995), the collection of government share in financial or technical assistance agreement (FTAA) shall commence after the FTAA contractor has fully recovered its pre-operating expenses, exploration, and development expenditures.

The non-collection of the government share during the recovery period of the FTAA contractors referred to in Section 81 of RA 7942 is not tantamount to an express grant of tax exemption.

According to the BIR, even the pertinent provisions (Sections 83 and 24 on the liability of FTAA contractors to income tax and excise tax) of RA 7942 do not provide or mention any tax exemption to FTAA contractors.

Hence, FTAA contractors are liable to pay taxes due under the Tax Code and existing rules and regulations during and after their “recovery period”. This payment is in the nature of compliance with tax obligations and not in the nature of settling the “government share” under the FTAA.

(Revenue Memorandum Circular No. 17-2013, February 15, 2013)
Tax Brief – March 2013
Punongbayan and Araullo

Huwebes, Mayo 2, 2013

IAET for listed companies?

EVER since the introduction of the 1997 Tax Code, domestic corporations classified as closely-held corporations have been exposed to the 10% improperly accumulated earnings tax (IAET) for failure to declare dividends, which are beyond the reasonable needs of the corporation.
 
Closely-held corporations are those corporations, of which at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations, not falling under such definition, are considered publicly held corporation and therefore, exempt from IAET.

In previous Bureau of Internal Revenue (BIR) rulings, Philippine corporations that are owned by corporations listed on stock exchanges locally or abroad were exempted from the IAET provided they complied with the ownership requirements for publicly held corporations.

In a recent BIR ruling, the BIR scrutinized the ultimate individual stock-ownership of a Philippine corporation owned by a listed corporation. Examining the ownership structure of the listed corporation, the BIR held that although the majority owner was listed on the stock exchange, the Philippine corporation was not publicly held and therefore, subject to the IAET.

In this ruling, more than 50% of the Philippine corporation was owned by an intermediate holding company which, in turn, was wholly owned by a listed corporation.

In analyzing the facts of the case, the BIR emphasized that for purposes of determining whether a corporation is a closely-held corporation, stocks owned by a corporation shall be considered as being owned proportionately by its individual shareholders.

Thus, the ownership of a domestic corporation for purposes of IAET is ultimately traced to the individual shareholders of the parent company. Accordingly, where at least 50% of the outstanding capital or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered a publicly held corporation as the term is defined in Revenue Regulations No. (RR) 2-2001, which implements the IAET.

Examining the stockholders of the publicly listed corporation, the BIR noted that there were only about five to six persons who controlled the listed corporation. As a result, the Philippine corporation was found to be closely-held and therefore subject to the 10% IAET under Section 29 of the Tax Code.

The IAET is imposed to discourage tax avoidance through corporate surplus accumulation. When corporations do not declare dividends, income taxes are not paid on the undeclared dividends. The Supreme Court in the case of Cyanamid Philippines, Inc. vs. the Court of Appeals explained that the tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so the said earnings by shareholders could, in turn, be taxed.

Aside from publicly held corporations, the following corporations are also exempt from the IAET: (a) banks and other non-bank financial intermediaries; (b) insurance companies; (c) taxable partnerships; (d) general professional partnerships; (e) non-taxable joint ventures; and (f) enterprises duly registered with the PEZA and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 as well as other enterprises duly registered under special economic zones declared by law, which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.

The new ruling seem to signal a tightening by the tax authorities in determining what corporations may be considered as publicly held corporations and therefore, exempt from IAET. Hence, it will not be surprising if tax audit examiners will now require proof that the publicly listed stockholde r or parent company is in fact, publicly held.

The 50%-21 stockholder rule may be particularly important for taxpayers whose parent companies are listed on the Philippine Stock Exchange (PSE). Under the minimum public ownership rule adopted by the PSE, the minimum public float is only 10% of the issued and outstanding shares. Thus, even if a Philippine corporation is listed on the PSE, there is a possibility that as little as 10% is owned by the public. Taxpayers, who invoke they are exempt from the IAET by being listed on the PSE or by having a controlling stockholder that is publicly listed, must evaluate the amount of ultimate individual stockholdings. They should be able to present proof that at least 50% of the value of the stocks or voting shares of the publicly listed company is owned directly or indirectly by not less than 21 individuals.

We know for a fact that tax authorities are hard pressed to increase their collections from the taxpayers. Consequently, it is expected that more rules will be issued that strictly interpret the laws in favor of tax collections. Taxpayers are advised to reevaluate their tax positions on the basis of whether they have tax exposures due to unclear rules in the past or liberal interpretations of the law.





Let's Talk Tax
Punongbayan and Araullo