Mandatory use of non-thermal paper for tape receipts (Revenue Regulations 10- 2015)

Use of non-thermal paper for all CRM/POS and other invoice/receipt-generating machine/software shall be mandatory effective on October 7, 2015 (15th day after its publication) for new business registrants.

Considering the costs of transitioning to non-thermal paper, for existing registered taxpayers, staggered implementation shall be in effect over three years as follows:

Machines Registration date:                Implementations dates:

July 1, 2014 onwards                           On or before July 1, 2018

July 1, 2013 – June 30, 2014               On or before July 1, 2017

Prior July 1, 2012 – June 30, 2013       On or before September 1, 2016

Existing taxpayers, though, may opt to transition to non-thermal paper earlier. The use of non-thermal paper is necessary to ensure the preservation of documents over the required 10-year period.

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Punongbayan and Araullo

Required format for CRM/POS issued receipts (Revenue Regulations 10- 2015)

Official Receipts and Sales or Commercial Invoice generated from CRM/POS/other similar machines/software shall be printed showing among others, the information listed below:  This also covers electronic receipts generated/issued from a network or linked to CAS or components thereof.

1.   Taxpayer’s (TP) Registered Name; 

2.   TP’s Business Name/style (if any); 

3.   A statement that the taxpayer is VAT or Non VAT registered followed by the Taxpayers Identification Number (TIN) and 4-digit Branch Code.(Example: VAT Registered TIN 123-456-789-0000); 

4.   Machine Identification Number (MIN); 

5.   Detailed Business address where such ORs/SIs/CIs shall be used/located; 

6.   Date of transaction; 

7.   Serial Number of the OR/SI/CI printed prominently; 

8.   A space provided for the Name, Address and TIN of the buyer; 

9.   Description of the items/goods or nature of service; 

10.  Quantity; 

11.  Unit cost; 

12.  Total cost; 

13.  VAT amount (if subject to 12% VAT); 

14.  Break down of VATable, VAT Amount, Zero Rated, and VAT Exempt Sales, if mixed transactions;

15.  For Non-VAT ORs/SIs and other CIs (VAT or Non-VAT) and secondary receipts, the phrase “THIS DOCUMENT IS NOT VALID FOR CLAIM OF INPUT TAX” in bold letters at the bottom receipt; 

16.  Taxpayers with transactions that are VAT exempt or subject to Percentage Tax, receipt shall prominently indicate the word “EXEMPT”. 

17.  Breakdown of Sales Subject to Percentage Tax (SSPT) and Exempt Sales, if falling under (16);

The following information shall be printed at the bottom portion of the OR/SI/CI:

1.  Name, Address and TIN of the accredited supplier of CRM/POS/other similar machines/software;

2.  Accreditation no, date of accreditation until its validity with the format “mm/dd/yyy”

3.  BIR Final Permit to Use (PTU) Number;

4.  The phrase “THIS INVOICE/RECEIPT SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE”

For taxpayers required to provide discounts to Senior Citizens and PWDs, a space shall be required for:

1.  Senior Citizen/PWD TIN

2.  OSCA ID No./PWD ID No.;

3.  Senior Citizen Discount/PWD Discount

4.  Signature of the Senior Citizen/PWD

In order to provide ample time in procuring, reconfiguring machines and systems, adjustments shall be undertaken on or before October 1, 2015. Any extension due to enhancements of systems required to be undertaken abroad shall seek the approval from the taxpayer’s RDO which shall not be longer than six months from the effectivity of these Regulations.  RR 10-2015 takes effect on October 7 (15th day after publication).

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Punongbayan and Araullo

Accrued bonuses: When to withhold?

September just kicked in reminding everyone that we are just a few months away from the season of giving.  It is also by this time when individuals from the working sector, whether from private or public, expect to receive one’s hard-earned additional income in the form of bonuses. However, such grant of incentive does not come without a price – taxes as enforced contributions are levied to apportion the costs of the government to support public needs, including every form of compensation for personal services.

Settled is the rule in so far as the income tax collected at source on compensation income is concerned, the requirement is that every employer must withhold from compensation paid in accordance with Revenue Regulations (RR) No. 2-98, as amended.   

However, this may be the clamour of taxpayers, whether on a corporate or individual standpoint, with regard the recent interpretation made by the Supreme Court (SC) in what has been perceived as a controversial and recurring issue notwithstanding the clear provisions of law and implementing regulations that are clearly established. 

In the case of Ing Bank N.V., one of the main issues submitted for resolution is whether the petitioner-taxpayer is liable for deficiency withholding tax on accrued bonuses for the taxable years ended 1996 and 1997. Petitioner-taxpayer maintains its position that the liability of employer to withhold the tax does not arise in the respective year of accrual, 1996 and 1997, until such bonus is actually distributed in the succeeding year. 

The SC in resolving the main issue anchored its position on Section 34 of the National Internal Revenue Code of 1997 (Tax Code), as amended, which provides the additional requirements for the deductibility of certain payments which refers to any amount paid or payable which is deductible from, or taken into account in computing gross income shall be allowed as a deduction from gross income only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue (BIR).  

To supplement the above provision of the Tax Code, the SC highlighted existing withholding tax regulations reiterating the same deductibility requirement wherein any income payment which is otherwise deductible shall be allowed as deduction from the payor’s gross income only if it is shown that the income tax required to be withheld and has been paid to the BIR.

Grounded from the above stated provisions of law and regulations, the SC held that petitioner-taxpayer is liable for the withholding tax on the bonus at the time of accrual and not at the time of actual payment. Also, it was held that the absolute or exact accuracy in the determination of the amount of the compensation income is not a prerequisite for the employer’s withholding obligation to arise.

Accordingly, in the same case, the application of the “withholding tax on accrual” concept was clarified by SC in one of its landmark case, Commissioner of Internal Revenue vs Isabela Cultural Corporation, where the court explained the difference between the accrual method of accounting as against the cash method for tax purposes. On the one hand, accrual method relies upon the taxpayer’s right to perceive amounts or obligation to pay the same. On the other hand, cash method of accounting characterizes actual receipt of payment. An all-events test was also put in place which requires the (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. Hence, if the taxpayer used the accrual method, the actual deduction of the expense is proper upon accrual.  Stated differently, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is already fixed; (2) the amount ca n be determined with reasonable accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year.  Furthermore, it is submitted that the fourth requisite pertains to the additional condition for the deductibility of an expense requiring the tax to be withheld and remitted to the Bureau of Internal Revenue in accordance with Section 34(K) of the Tax Code.

The SC reiterated that the existing withholding tax regulations supports the rules requiring every employer to deduct and pay the income tax on compensation paid to its employees, either actually or constructively.  Accordingly, compensation is constructively paid when it is credited to the account of or set apart for an employee so that it may be drawn upon him at any time although not then actually reduced to possession. 

However, in this particular case, the application of the “withholding tax on accrual” concept may run counter with one of the basic and underlying assumptions in accounting providing the fundamental premise in the preparation of the financial statements – the accrual basis of accounting. One may recall that accrual accounting means that an expense is recognized when incurred regardless whether paid or not in accordance with the generally accepted accounting principles. This may not present any issue with regard the accrual of expenses if such amount is already fixed or the amount can be determined with reasonable accuracy and it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year. But what if an accrued expense, in the form of bonuses, is recognized only for the purpose of financial reporting as a mere estimate or with a set of conditions that must be complied with by the employee before entitlement, such as tenure or continuity of service until the actual pay-out the following year, which immediately negates the requisite of fixing a right to receive the income. Obviously, such is not the case contemplated by the SC when it rendered this decision simply because the tax required to be withheld by the employer does not yet arise as of that moment – upon accrual of expense as a mere estimate or with a specified condition. 

After all, settled is the rule that the interpretation of a provision of law should be read and construed in harmony with another which gives the effect to the statute as a whole. It is the elementary rule in statutory construction that when the law speaks in clear and categorical language, there is no room for interpretation or construction. A plain and unambiguous statute speaks for itself, and any attempt to make it clearer is vain labor and tends only to obscurity.   

This notwithstanding, it should also be stressed that there are technicalities left unresolved by the issuance of this decision. Will the BIR automatically subject to withholding tax the accrued bonus at the time of accrual? It should not be because the issue would be the proper computation of withholding tax on each employee. However, taxpayers and the tax authorities may have different interpretation and analysis of this SC decision.  Hence, it is really important that this issue should be addressed timely by the BIR to avoid any confusion. The proper implementing rules that will plug a loophole are called upon to support the overall tax compliance drive. 

Altogether, employers constituted as withholding agents are all but willing to comply with the rules and regulations promulgated by the BIR. It is with this fervent prayer that taxpayers be guided accordingly through relevant and timely issuances.  

Daryl Sales

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Punongbayan and Araullo

Lingering thoughts on the sale of scrap material by PEZA entities

The Court of Tax Appeals (CTA) has decided and Philippine Economic Zone Authority (PEZA) companies have accepted that they will be paying regular corporate income tax on the sale of scrap material.

This change in interpretation came about after the CTA in division issued its decision in the case of Nidec Copal Philippines Corp. (Nidec), a PEZA-registered enterprise, and which was affirmed by the CTA en banc in 2008. Prior to this case, the BIR has been ruling that income from sale of scrap arising from the registered activity is subject to the same tax regime as the registered activity.  

Why can’t I put this issue to rest?

I have three lingering thoughts, simple thoughts, actually:

First, I’ve been thinking that the PEZA rule used as basis for the decision applies only on the taxation of movement of goods in and out of the zone, hence should involve only VAT and excise tax and may not be used as basis for determining the income tax treatment of sale of scrap.

Second, I was hoping that the sale of scrap can be viewed as just a recovery of an amount previously expensed and hence, shouldn’t the company pay tax based only on the tax benefit previously enjoyed (5% tax or zero tax if under income tax holiday).

Third, the simple layman question of why a generally unavoidable consequence of the registered activity cannot be considered part of the registered activity?

Let me share my simple thoughts.

Nidec argued that, pursuant to PEZA Memorandum Circular No. 2005-32 dated Sept. 15, 2005, its sale of scrap materials, which arose from the manufacture of its registered products, is subject to the 5% preferential tax rate and not to the normal corporate income tax.

The Commissioner of Internal Revenue, on the other hand, took the position that since Nidec’s sale of scrap materials is not one of its registered activities, the same is subject to the regular corporate income tax rate, then 34%, pursuant to Section 8, Rule VIII of the Implementing Rules and Regulations (IRR) of Republic Act No. 7916.

The CTA en banc ruled that, between the PEZA IRR and the PEZA Circular issued by the director-general, the IRR should prevail.

The CTA en banc quoted and affirmed the decision of the Court in Division as follows:

“‘Scrap’ is a term used to describe manufactured articles or parts rejected or discarded and useful only as material for reprocessing: especially waste and discarded metal (Webster’s New Collegiate Dictionary, 1977 edition). In other words, these scrap materials are recoverable wastes, where the proceeds derived from the sale thereof shall be taxed in accordance with the applicable provisions of the NIRC of 1997 referred to under Section 8, Rule VIII, Part V of the PEZA Rules.

But what is Section 8, Rule VIII, Part V of the PEZA Rules all about?

Section 8 reads as follows:

SEC. 8. Rejects, Seconds and Recoverable Wastes. -- Subject to the provisions of Section 3 of this Rule, rejects, seconds and recoverable wastes shall, when taken from the restricted areas of the ECOZONES to the customs territory, or to the non-restricted areas of the ECOZONE, be taxed in accordance with the applicable provisions of the customs and internal revenue laws and regulations of the Philippines.

The Section should be read in the whole context of Rule VIII.

Rule VIII is entitled “Tax Treatment of Merchandise in the Restricted Areas of the Ecozones”. Section 1 rules that merchandise brought to the restricted areas shall not be subject to all customs and internal revenue laws and regulations of the Philippines nor to local tax ordinance s. Section 2 mentions that domestic merchandise sent from the restricted areas to the custom territory shall be subject to the internal revenue laws of the Philippines as domestic goods sold, transferred or disposed of for local consumption. Section 3 provides that domestic merchandise on which all internal revenue taxes have been paid if subject thereto, and foreign merchandise on which duty or tax has been paid, may be taken into restricted areas from the customs territory and brought back thereto free of quota, duty or tax.

Clearly, Rule VIII governs only the movement of goods in and out of the restricted areas of the ecozones. And when one talks about taxes on movement of goods across customs territories, the taxes that are involved should only be value-added tax, excise tax and customs duties. Hence, when the Section 8 mentions “applicable provisions of the customs and internal revenue laws and regulations of the Philippines,” this should only refer to provisions on VAT, excise taxes and customs duties.

Not income taxes.

It is understandable that the rules would be particularly concerned about movement of goods, especially from within the zone to the customs territory because of the incentives.

We should note that there are separate rules in the IRR that govern the taxation of income of PEZA enterprises and these are the rules that should be applied on whether or not income from sale of scrap should be under incentives or the regular rates.

The income from the sale of scrap may, on the other hand, be considered as just a recovery of an amount previously expensed and subsequently recovered. Note that the cost of the original materials which are the sources of the scraps were expensed as part of the registered activity and therefore gave the company a tax benefit based only the 5% gross income tax, or no benefit at all if the company is under income tax holiday. Hence, if company was able to sell the scrap and recover part of the amount that has been previously expensed, the tax on the income should not exceed the benefit earlier enjoyed from the expense. This principle was applied when, some years ago, the Bureau of Internal Revenue allowed that Meralco refunds received by PEZA companies be taxed, not at the regular income tax, but at the rate applicable when the cost of the electricity which was refunded was claimed as expense.

Lingering thoughts.

I’m sure you have lots of these.

I thought by writing this and sharing with you, I can temporarily put these lingering thoughts to rest. This, of course doesn’t stop me hoping that the issues will later be finally put to rest. Happily, forever.

Lina P. Figueroa

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Punongbayan and Araullo

The ban on political contributions from corporations

The Philippine national election to elect the president, vice-president and senators is barely a year away. Very soon, we will be bombarded with television commercials, radio jingles and print advertisements extolling the achievements and virtues of candidates in the hopes of securing our coveted votes. The streets and billboards in the metropolis will soon be plastered with campaign posters and tarpaulins. Once campaign season officially begins, an avalanche of T-shirts, bumper stickers, caps, pins and other campaign giveaways will be handed out. During political rallies, food and drink will flow, resembling distribution of relief goods during natural disasters.

Amidst all these is the curious phrase “Paid for by Friends of” this or that politician, which follows every campaign commercial, poster and paraphernalia. One then wonders: Who are these so-called “friends” of said politician? Are these individuals? Or perhaps big corporations which certainly can afford to sponsor the election campaign of a politician (or two)? All the big spending involved certainly gives the impression that making political contributions on the part of corporations is allowed and that there must be some tax benefit to doing so.

On the contrary, under Section 36, paragraph 9 of the Philippine Corporation Code, there is an absolute prohibition on corporations, both foreign and domestic, donating to any political party or candidate, or for the purpose of any partisan political activity. Said provision enumerates the powers and capacities of a corporation registered under the Corporation Code. These corporate powers include “[T]o make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes, provided, that no corporation, domestic or foreign, shall give donations in aid or any political party or candidate or for purposes of partisan political activity.”

The above prohibition is absolute and total. In terms of the corporate entities covered, it includes domestic corporations as well as foreign corporations licensed to do business in the Philippines as a representative office, branch, regional operating headquarters or any other entity. The nationality of a corporation is of no moment as all corporations, regardless of percentage of foreign ownership, are forbidden to make any kind of donation for partisan political activity. In terms of prohibited activities, the wording is broad and general enough to include any form of donation or contribution to any political party or candidate in relation to an election campaign or any other partisan political activity.

In a July 2015 opinion, the Securities and Exchange Commission (SEC) emphatically pronounced that there is an absolute prohibition for corporations, both foreign and domestic, from giving donations to any political party, candidate or for the purpose of partisan political activity. In said opinion, the SEC was asked to clarify whether Section 95 of B.P. Blg. 881 or “The Omnibus Election Code of the Philippines”, which enumerates certain juridical entities that are prohibited from making political contributions, amends or repeals the more general prohibition provided in Section 36, paragraph 9 of the Philippine Corporation Code.

Section 95 of the Omnibus Election Code provides an enumeration of natural and juridical persons, including corporations, who, because of benefits, privileges, license or franchise received from government are prohibited from making contributions, directly or indirectly, for purposes of partisan political activity. Apparently, the enumeration gives the impression that the prohibition applies only to the entities listed therein, and, conversely, all other entities not specifically included are permitted to give contributions for the purpose of partisan political activities.

The SEC categorically stated that Section 95 of the Omnibus Election Code did not amend or repeal, whether expressly or impliedly, Section 36, paragraph 9 of the Corporation Code. The SEC explained that since the repealing clause of the Omnibus Election Code does not include the Corporation Code or any part thereof, the former did not expressly repeal the latter.

Neither was there an implied amendment or repeal because the two provisions are not inconsistent or repugnant to each other as to render either one ineffective. The SEC held that there is no conflict between the two provisions and both can be harmonized and given effect insofar as “the Corporation Code provides a prohibition specifically applicable to corporations making political contributions while the Omnibus Election Code imposes the same prohibition on all natural and juridical persons falling under the specific categories enumerated”.

Section 95 of the Omnibus Election Code can be considered an amplification of the absolute prohibition contained in the Corporation Code and illustrates some specific circumstances of the evil sough to be avoided in both provisions of law. The SEC opinion even added that if anything, the presence of these two laws, especially as they affect corporations, serve as a more effective deterrent for corporations planning to make contributions for partisan political activities.

Thus the prohibition on corporate political donations cannot be any clearer. To complement this ban, political donations or contributions cannot be claimed as tax deductions as these are not ordinary business expenses. Under Section 34 (H) of the Tax Code, donations for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for rehabilitation of veterans or social welfare or donations to non-government organizations are allowed as deductible expenses. Donations to a political party or candidate or any contribution for partisan political activities are not included as part of the allowable deductible expenses. In effect, there is no tax benefit in the form of a deductible expense against income, for corporations making political contributions.

While a corporation is expressly prohibited from making political donations, there is no similar ban on individuals contributing to a political party or candidate. However, such donations likewise cannot be claimed by said individual as a deductible expense as the same cannot be considered ordinary and necessary business expenses. Similarly, under the above-mentioned provision of the Tax Code, political donations by individuals are not among the allowable deductible expenses.

When the Philippine national elections take place in May, it is individuals who will make the contributions. Their motivation to allocate personal resources to support the campaigns of their chosen political party and candidates will be anchored on their strong belief in the capabilities, achievements and platform of government of these politicians regardless of any tax benefit that may be realized therefrom.

Tata Panlilio-Ong

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Punongbayan and Araullo