Updates on employee taxes

December is just around the corner, the month of giving and spending extravagantly. Employees like me are very much eager to get hold of their 13th month pay, Christmas bonuses and final pay checks for the year. By this time, employers should already be preparing for the annualization of their employees’ compensation, which will determine the adjusted withholding tax due on compensation, and the employees’ net final pay for the year.

On the annualization of compensation, it is important to take note of the several tax regulations issued this year which affect the taxability of employees’ compensation income.

The most significant among these is the passage of Republic Act (RA) 10653 on Feb. 12, 2015, increasing the tax exemption threshold from P30,000 to P82,000 for 13th month pay and other benefits. This will be enjoyed by compensation income earners starting this year.

Employers should be wary, however, about which benefits the increased threshold is applied to. Among the other benefits covered by the new tax exemption threshold include productivity incentives, Christmas bonus, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private entities. This also covers the excess amount of the de minimis benefits. Revenue Regulation (RR) No. 3-2015, which implements RA 10653, also clarified that the P82,000 exemption shall neither apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances, nor to self-employed individuals and income generated from business.

Also at the beginning of this year, the Bureau of Internal Revenue (BIR) issued RR No. 1-2015, which added to the list of non-taxable de minimis benefits those benefits provided under a collective bargaining agreement (CBA) and productivity incentive schemes amounting to P10,000 per employee per annum. This issuance has raised some concerns of the taxpayer-employers on how certain benefits or incentives shall be classified. One of the concerns is the award given to a sales employee who was able to meet or exceed his sales quota. Will such sales award be classified under the other benefits subject to the P82,000 exemption threshold; the employee achievement awards subject to P10,000 de minimis threshold; or the productivity incentive scheme amounting to P10,000 provided under RR 1-2015? Considering that the three classifications vary in the ceilings involved as well as the required form of the benefit to be provided (whether in cash or in kind, or strictly in the form of a tangible property only), it is important that the BIR issue a clarification to avoid any dispute on interpretation and implementation.

Other than the increases in tax-exempt thresholds for certain employee benefits, the BIR also released several issuances during the year which provide for certain changes in the submission of documents in relation to employees’ compensation and registration information.

On March 2015, the BIR issued RR No. 2-2015 which sets forth the mandatory submission of employee’s certificate of compensation payment/taxes withheld or BIR Form 2316 in soft copies or “PDF” file format to be stored in a Digital Versatile Disk-Recordable (DVD-R). The duly accomplished DVD-R shall be submitted to the BIR Office where the taxpayer-employer is registered not later than Feb. 28 following the close of the calendar year, together with a notarized certification stating that the DVD-R is submitted in compliance with RR No. 2-2015; that the contents of the DVD-R being submitted conforms to the conditions/specifications requirements set by the BIR; and, that the soft copies contained therein are complete and exact copies of the original document. The mandatory submission of BIR Form 2316 in soft copy is required for all taxpayers registered with the large taxpayers service (LTS). However, should any non-LTS taxpayer opt to adopt the requirements prescribed by this regulation, he may freely do so but such option may no longer be revoked.

Another recent change initiated by the BIR is the electronic updating of employee’s exemption registration. Under Revenue Memorandum Circular (RMC) No. 59-2015, employees shall no longer file their certificate of update of exemption. Instead, the filing of BIR Form 2305 shall now be coursed through the employer. Using the Update of Exemption of Employees Data Entry Module, which can be downloaded from the BIR Web site, or the Microsoft Excel program, the employer inputs all registration updates of its employees one by one.

Updates in the employees registration covered by this electronic submission are limited only to additional exemption for qualified dependents, change of marital status, and execution of the “waiver to claim the additional exemption” by the husband or revocation of the previously executed “waiver to claim the additional exemption by the husband”.

After validating the CSV file using the 2305 Batch File Validation Module, the CSV file shall then be transmitted to the BIR via e-mail to BIRFORM_2305@bir.gov.ph. In addition to the electronic submission of updates in employees’ registration, employers are required to submit with the RDO/LTD having jurisdiction over the place of its office the following documents on or before the 10th day of the following month:

(i) accomplished BIR Form 2305 signed by both the employee and employer together with the required documentary requirements (e.g. NSO certified birth certificate/marriage contract);

(ii) systems-generated e-mail notification of electronically filed BIR Form No. 2305; and

(iii) printed alphalist of employees and information update report listing the names of those with changes for the month only which can be generated from the data entry module or printed excel file following the lay-out prescribed under Annex F of the circular.

Although no specific penalties in case of failure to comply with the electronic submission of the BIR Form 2305 was mentioned in the RMC, taxpayer-employers shall take into consideration the consequence of failure to update the employee’s registration, more particularly with regard to claiming of additional exemption. Section 2.79.2 of RR No. 2-1998, as amended, provides that in case of failure to file BIR Form No. 2305, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the appropriate penalties under the pertinent provisions of the Tax Code, as amended, and the applicable regulations issued by the BIR.

The above-mentioned are only updates on employee taxes which took effect this year. Considering the many tax rules on compensation income, a taxpayer-employer must ensure, among others, that it observes the proper tax treatment on various benefits provided to employees to avoid possible assessment for deficiency withholding tax and disallowance of expense in case of failure to subject any taxable compensation income to withholding tax.

One way to avoid reporting the incorrect amount of taxable compensation, non-taxable compensation or withholding tax due, is to prepare the annualization of employees’ compensation on or before the end of the calendar year to avoid cramming, especially in the case of taxpayers with a significant number of employees. In any case, the employer shall ensure that the payment of compensation for the last payroll period is considered in the annualization. Ideally, the correct amount of compensation and withholding tax due, as adjusted for the year, shall be reflected in the December BIR Form 1601C, as it is the last tax remittance return for withholding tax on compensation that will be filed for the year.

Lastly, the employer shall also see to it that all administrative requirements in relation to employees’ compensation and registration information are strictly complied with to avoid any penalties.

Keeping abreast of all the latest tax issuances should always be a top priority for all taxpayers.

With all these new developments concerning employee taxes, employers shall take full responsibility for determining the correct amount of taxes to be withheld from their employees’ compensation income. Not only are we, the employees, concerned with simply receiving our net pay checks, but also with that significant portion of our hard-earned income that is remitted to the government.

Arianne Cyril L. Mandac is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

Let’s Talk Tax : Arianne Cyril L. Mandac

Economy : Business World 

November 23, 2015

Defenses for common tax audit issues

While it is indisputable that taxes are vital to the country’s growth, one of the most unpleasant experiences for a taxpayer is to receive a large and baseless assessment which requires a defense. Those experiencing it for the first time may be filled with fear and panic. Further aggravating a taxpayer’s situation is the fact that during discussions, the tax examiners may continue to insist on their position despite clear and factual evidence to the contrary.

Indeed, a tax assessment issued by the Bureau of Internal Revenue (BIR) is an unavoidable and serious matter that one cannot ignore. As such, the key to effectively handling tax assessments is to know the process and the various legal remedies available to a taxpayer. Although it is recommended that one obtain the services of a tax professional, it would be prudent for a taxpayer to have a basic idea, not only of the BIR’s procedures, but more importantly of the defenses which it may raise to protest an assessment.

Below are examples of possible defenses which a taxpayer may raise against a couple of common issues raised by a tax examiner during a tax investigation.

Readers may be aware that the BIR conducts computerized consolidation and matching of data contained in a taxpayer’s tax returns and reports against those submitted by its customers and suppliers (i.e., the BIR’s Reconciliation of Listing for Enforcement (RELIEF) System). Any discrepancies are then considered grounds for deficiency tax assessment. In such cases, the concerned taxpayer may raise the defense that the assessment is based on mere presumption. The use of such ‘presumption’ as the sole basis for assessing deficiency taxes does not satisfy the due process requirement under the Tax Code. An assessment, to be valid, must have legal and factual bases. It cannot be based on mere conjecture no matter how reasonable or logical the rationale may be behind the said presumptions.

In fact, in one recent case, our Court of Tax Appeals (CTA) held that this type of assessment lacks basis, especially if a taxpayer was not provided with the corresponding information reported in the tax returns and reports filed by its customers or suppliers. As explained in that decision, such computerized data matching program of the BIR does not include the checking of the substance or contents in the returns or reports generated from the BIR’s system against other source documents. Accordingly, these data are considered to be doubtful, inconclusive and unreliable since the tax examiners do not, in anyway, validate the information fed into the system.

Another common issue raised by tax examiners against taxpayers relates to net operating loss carryover (NOLCO) that under the law, may be carried over and claimed as a deduction by taxpayers in the next three succeeding years. During tax audits, examiners disallow taxpayers from utilizing these available NOLCO on the presumption that these have been utilized in the succeeding period. In a 2013 tax assessment case, the CTA ruled that such disallowance is improper. Taxpayers should be allowed to claim the losses/credit in the current year under audit and, at most, be assessed only in the succeeding year. While it was not mentioned in the said case, it can also be inferred that the court considered the assessment to be based mainly on the presumption that the taxpayer already benefitted from the “disallowed” credit.

As mentioned earlier, assessments cannot be based on mere presumption. In a 2015 tax assessment case, the CTA maintained its position regarding the improper disallowance of NOLCO. In addition, the court ruled similarly on the proposed disallowance of the excess Minimum Corporate Income Tax or MCIT carried over to the succeeding period.

Any of the above defenses notwithstanding, a taxpayer under audit must invariably know whether the BIR complied with the proper procedures for tax assessments as laid down by our tax laws and regulations. Failure of the tax authorities to comply with their own rules and regulations is a violation of a taxpayer’s constitutionally protected right to due process, which a taxpayer may use as a ground to invalidate an assessment.

Although deficiency tax assessments are presumed correct and made in good faith, it should not be forgotten that an assessment must be conducted in accordance with our tax laws and regulations. Otherwise, such presumption of correctness can be overturned. This is where taxpayers may find some comfort -- in the knowledge that only valid assessments that are issued according to the law are a matter of real concern.

The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Jocelyn T. Tsang is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. jocelyn.t.tsang@ph.pwc.com

Taxwise or Otherwise : Jocelyn T. Tsang

Economy : Business World

November 25, 2015

APEC and Philippine taxes for investors

We have been expecting for a couple of months now the Asia-Pacific Economic Cooperation (APEC) meeting which shall be held tomorrow. The government has been prepping more than ever. It is all over the news how the authorities plan the use of the streets to pave the way for the arrival of guests. New bollards have been installed in our main thoroughfares, not to mention the closure of some roads and re-routing. And of course there is the creation of Mabuhay Lane and APEC lane. Passing through EDSA every day and being caught up in the various dry runs, I can make out this event to be a really big deal.

During one of the dry runs, I was caught in terrible traffic and almost missed one of my important appointments. Of course, I blamed it on the summit. What’s behind this event? Well, as the name suggests, it is a meeting of heads of economies within the Asia-Pacific Region for the purpose of uplifting the economic welfare among members. This also means that APEC leaders will help determine policies and agreements that will promote progression of free trade and cross border investments among the members. Every economy is interconnected and there are no more hermits.

A couple of ads on a global news channel promote more investment in the Philippines. The tagline of the ad is “Your investment, our people”. Truly, the Philippine’s most promising asset is its people. Our country boasts a wide range of skilled and professional workers with high levels of technical knowledge and English proficiency.

For more than two decades, our government has constantly improved the investment environment to entice both foreign and local investors. Among the more prominent measures are the creation of economic zones and the liberalization of trade. We know that more investment will bring more jobs. More job means more taxes, which in the end will make it truly more fun in the Philippines.

WHAT CAN AN INVESTOR EXPECT WHEN PUTTING MONEY INTO THE PHILIPPINES?

Foreign Investors. On the tax side, when a foreign investor sets up a corporation, it is by default exposed to the regular corporate tax rate of 30%. Aside from which, a corporation is also required to withhold taxes for certain income payments. It can also be required to remit 12% value-added tax (VAT) on its sale of goods and services in the Philippines.

Depending on the type of activity, foreign-owned enterprises may register with the Philippine Economic Zone Authority (PEZA) or Board of Investments (BoI). The government awards both fiscal and non-fiscal incentives to these entities.

Among the fiscal incentives that can be granted to a PEZA- or BoI-registered enterprise is the income tax holiday (ITH) for the first four years of operation. This means that the entity is exempt from paying income tax on its registered activities. For a PEZA-registered enterprise, after operating for four years under the ITH regime, the registered entity may transition to a special tax incentive of 5% gross income tax (GIT) in lieu of national and local taxes.

In general, PEZA entities are subjected to 0% VAT on its sales and purchases. BoI enterprises which are engaged primarily in export are likewise entitled to 0% VAT on the sale of exported goods or services. However, for purchases of local goods or services of BoI entities, the rate is 12% VAT. Input VAT attributable to VAT zero-rated sales may be refunded or claimed as a tax credit certificate (TCC), but the claimant must be warned that the refund or credit process involves significant documentary and technical hurdles.

Other fiscal incentives for both PEZA and BoI enterprises may include, subject to certain conditions, exemption from taxes and duties on importation of raw materials, capital equipment, machinery and spare parts; and exemption from wharfage dues and export tax, duty, impost and fees.

The above discussion merely provides a glimpse of what a foreign investor can expect when doing business in the Philippines. It would be best to ask experts or consultants for a more detailed discussion on the prospective investment.

Local Investors. Local investors benefit as well from liberalized trade between APEC nations. From the tax perspective, local investors engaging in the export of goods or services may also opt to become a PEZA- or BoI-registered entity, and be entitled also to tax incentives granted by those agencies.

Nonetheless, even if an enterprise is not registered with the incentive-granting agencies, export sales may still be subject to 0% VAT. Note again that the excess or unutilized input VAT attributable to VAT zero-rated sales can be refunded or claimed as a tax credit, subject to documentary and technical requirements, as previously mentioned.

With the upcoming APEC event, we expect our President to lay on the table the many advantages of investing in the Philippines. We are expecting as well that by enticing investors to fund enterprises, our State, through our regulators, will consistently abide to its promises by making regulatory processes less complicated and more efficient.

The Philippines has posted rapid economic growth in recent years and it is not going to slow anytime soon. It is true that the Philippines has a lot to improve in terms of economic policy, infrastructure and processes to facilitate seamless trade. We struggle every day to do so, even in terms of traffic flow in the streets. Nevertheless, with conviction, I strongly believe that the Philippines is investment worthy, as we have excellent individuals working hard to get things done. And that’s one sure thing an investor can count on.

Eliezer P. Ambatali is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

Let’s Talk Tax : Economy

Business World : November 17, 2015

The road to financial transparency: Are we ready to share?

“Building Inclusive Economies, Building a Better World” is the theme of the 2015 Asia-Pacific Economic Conference (APEC) which the Philippines is hosting. In line with this, the member countries have acknowledged the importance of transparency and the need to work together to avert cross-border tax evasion.

Recently, the Philippines took part in the global initiative allowing automatic intergovernment exchange of taxpayers’ detailed financial information.

Commissioner Kim S. Jacinto-Henares of the Bureau of Internal Revenue (BIR) confirmed that the Philippines is one of the 90 countries that would implement the Standard for Automatic Exchange of Financial Account Information in Tax Matters (“Standard”) spearheaded by the Organization for Economic Cooperation and Development (OECD).

The OECD said more than 50 countries “have committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017.” The Philippines is projected to follow suit some time in 2018.

In August 2015, the OECD released the handbook for the Standard, providing the much needed guidelines for its implementation.

According to the OECD in its background information brief prior to the release of the handbook, under the single global standard, jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. The handbook sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. It consists of two components: a) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and b) the Model Competent Authority Agreement, which contains the detailed rules on the exchange of information.

What needs to be done by the Philippine authorities?

According to the handbook, the participating country needs to comply with the four (4) core requirements to implement the Standard:

• First is translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation.

• Second is selecting a legal basis for the automatic exchange of information.

• Third is putting in place information technology (IT) and administrative infrastructure and resources.

• Last is protecting confidentiality and safeguarding data.

HURDLES IN IMPLEMENTING THE STANDARD IN THE PHILIPPINES
Needless to say, there’s more to laying the groundwork for the CRS. At the periphery are statutory hurdles that put to the test a state’s capabilities and readiness for compliance. For instance, the automatic exchange of information under the Standard runs contrary to the Philippine bank secrecy laws. Under Republic Act Nos. 1405 and 6426, deposits in the Philippines are considered confidential in nature except with written consent of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

The challenge is recognized by both Finance Secretary Cesar V. Purisima and BIR Commissioner Henares who share the position that the country needs to amend its regulations if it seeks to align with the Standard. Such calls were reiterated during the presentation of the Philippine delegates in the APEC 2015 Special Senior Finance Officials’ Meeting held in Clark last 21-22 January 2015. During the event, the government affirmed the need to expand the coverage of Section 6 (F) of the National Internal Revenue Code (Tax Code) authorizing the Commissioner to access bank information for prosecution of tax evasion cases to also enable the Philippines to comply with the automatic exchange of information obligation.

The reason for the proposed expansion in coverage springs from the restricted power of the BIR Commissioner to inquire into certain bank deposits even after recent amendments. Instances where such inquiries are authorized include cases involving (1) a decedent to determine his gross estate; (2) a taxpayer who has filed an application for compromise under Sec 204 (A)(2) of the Tax Code due to financial incapacity to pay his tax liability; and (3) exchange of information by request under Republic Act 10021. Hence, the automatic exchange of information set forth by the Standard cannot happen unless the bank secrecy laws are amended and/or the Tax Code expands the power of the BIR Commissioner to inquire into certain bank deposits.

Furthermore, even though the Anti-Money Laundering Act (AMLA) allows inquiry or examination of bank deposits or investments when probable cause of money laundering has been established in court, such information cannot be used by the taxing authority under the CRS since tax evasion is not a predicate crime for money laundering. Hence, the AMLA should be amended to include tax evasion as a crime subject of any of the money-laundering offenses. Finance Secretary Purisima deems the revisions as necessary to ensure continued compliance with Foreign Account Tax Compliance Act (“FATCA”), the Standard and to improve tax collection. Currently, the Philippines is one out of only two countries which does not treat tax evasion as a predicate crime, the other being Lebanon.

Though the Standard appears promising in establishing transparency in cross border transactions and in minimizing tax evasion, the problem lies in setting up the necessary laws and infrastructures for implementation in the Philippines. With barely two years left before its implementation, our readiness to comply with the Standard still rests on shaky ground. Apparently the automatic sharing of information will not be that automatic.

(The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.)

Glacy S. Tabirara is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

Timing of withholding tax on compensation

The recent Supreme Court (SC) case on the timing of withholding tax on compensation income has caused quite a stir among corporate taxpayers.

While the case dealt with a deficiency withholding tax assessment on unsubstantiated business expenses (representation, travel and entertainment), the SC also ruled on the subject of withholding tax on accrued bonuses based on the taxpayer’s earlier claim that the amount in question refers to bonuses accrued during the years 1996 and 1997 but paid out in 1997 and 1998.

According to the SC, the duty to withhold the tax on compensation and bonuses arises upon their accrual. While the SC decision has some basis, there are aspects of it that may be called questionable or, at least, impractical if applied sweepingly. Thus, the statement needs to be further reconciled in light of existing withholding tax rules and regulations.

Since most companies will soon be accruing bonuses and other forms of compensation towards the end of the year for pay-out to their employees next year, they face similar issues tackled in the SC case on the timing of withholding and the related issue on the deductibility of the expense.

According to the taxpayer in the case, the duty of an employer to withhold tax on compensation only arises upon actual distribution to the employees. Since the bonuses accrued in 1996 and 1997 were finally determined and distributed only in the following year, i.e., 1997 and 1998 respectively, the taxpayer claimed that its duty to withhold tax on such bonuses should only arise in 1997 and 1998.

On the contrary, the SC held that determination is not a prerequisite for the withholding tax obligation to arise. Under the rules, employers are required to deduct and pay the tax on compensation upon payment to its employees, either actually or constructively.

Further, deductions from gross income should be claimed in the same taxable year when the compensation is “paid or accrued” or “paid or incurred” depending on the method of accounting adopted by the taxpayer.

Based on a 2007 jurisprudence outlining the rules on accrual, the SC reiterated that an expense is accrued when the obligation to pay is fixed, the amount can be determined with reasonable accuracy and is already knowable at yearend. Since the taxpayer in this case applied the accrual method of accounting, it accrued or recorded the bonuses in its books and claimed it as a deductible expense in the year of accrual.

According to the SC, the act of claiming the deduction confirms that the taxpayer recognizes a definite liability, and in that sense, the bonus has already been “allotted and made available” to the employees, giving rise to constructive receipt of the bonus by the employees. On this basis, the obligation to withhold the tax due on the accrued bonuses arose at the time of accrual and not at the time of actual payment.

It is critical to understand and interpret the rules correctly especially given these developments. To my mind, certain issues and practicalities, such as the following, should be addressed:

CONSTRUCTIVE RECEIPT OF INCOME
There were no significant changes to the principle of constructive receipt under Revenue Regulations (RR) 6-82, the applicable withholding tax regulations prior to 1998 and RR 2-98, the existing withholding tax regulations.

Under both RRs, 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 by him at any time although not then actually reduced to possession. In order to constitute payment, the compensation must be credited or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payment brought within his control and disposition.

The RR 2-98 just expanded the definition of “constructive receipt” with the addition of the following statement:

“A book of entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but it is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with a bonus stock which is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute payment.”

With the foregoing definition(s), the question is, will the principle apply in a case where the employees do not acquire a demandable right over the income, such as when the employees’ claim over the bonuses, at the time of accrual, remains unknown and therefore, restricted? In this case, there should be no payment to speak of, whether actual or constructive. Can it then be argued that there is no obligation to withhold compensation tax at the time of accrual?

TIMING OF WITHHOLDING
Under RR 6-82, the employer is required to withhold tax from the employee’s compensation when paid, either actually or constructively.

On the other hand, RR 2-98 requires that withholding of tax on compensation payments be made upon receipt of income by the employees, which aligns with the cash basis of taxation for employees. However, while the timing of withholding may have been stated differently in RR 2-98, the term “receipt” can still be interpreted as referring to income actually or constructively received.

Thus, where constructive receipt is in question at the time of accrual, such as when the bonus amount per employee is not yet allocated, how will the taxes be computed and withheld considering that the employees fall under different income tax brackets? In relation to this, there may also be some reporting concerns on the year-end alphabetical list (as attachment to BIR Form 1604CF) and the BIR Form 2316, among others.

Assuming that a reasonable allocation of the bonus per employee is available, will such estimated amounts and the related taxes withheld, be required to be reported on the employees’ BIR Form 2316? If so, will the employees then have the right to demand from the employer that same bonus amount that has been allocated to them although still estimated and not yet definite? Will there be any legal repercussions in case the actual bonus payout is lower than what has been earlier allocated? On the other hand, if not reportable on the year of accrual, how and when will the accrued bonus amount and related taxes withheld be reported on the BIR Form 2316?

Also, how will the employees’ eligibility for substituted filing be affected in the event that the actual bonus payout is different from the amount earlier allocated? In this case, the information declared in the alphabetical list and the BIR Form 2316 will not be the same. Will the employees be penalized for not filing a return in the previous year or will the employer be penalized for not correctly withholding the tax on the employees’ total compensation at yearend?

DEDUCTIBILITY OF THE EXPENSE
The additional requirement for deductibility of expenses under the 1977 Tax Code (prior to 1998) and the 1997 Tax Code (existing Code) has not changed. Under both Codes, an expense shall only be allowed as a deduction for tax purposes if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with existing withholding tax regulations.

Interestingly, the SC held that the withholding tax obligation of the employer (even for compensation income) shall arise at the time the income was paid, became payable, or accrued or recorded as an expense in the employer’s books, whichever comes first. In RR 2-98, however, it is quite clear that this three-trigger rule applies to payments other than compensation. Specifically for compensation, the timing of withholding remains to be at the time of the employees’ receipt of the income.

Thus, if the regulations require that the taxes be withheld from the employees upon receipt of the income (whether actually or constructively), then the condition for deductibility of the expense under the Tax Code shall be satisfied so long as it can be shown and proven that the taxes have been withheld and remitted by the employer during the proper period.

For instance, if the concept of constructive receipt is challenged on the year of accrual, then the withholding tax obligation should arise only on the date of actual payout, which is still in accordance with the regulations. Thus, provided that the obligation is carried out on the payout date, the expense should still be allowed.

The above issues are also obviously intertwined and therefore, it is critical to have a clear understanding of how the rules on withholding on accrued bonuses should be applied to avert erroneous interpretation/application. Alternatively, taxpayers may resort to finding relief under the rules of accounting on accrual (e.g., if there is basis not to accrue, but to recognize a mere provision) -- but this is an issue better left in the hands of my fellow auditors.

Raymund M. Gutib is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

Economy : Business World : October 7, 2015

Senior citizen’s ID: one less thing to remember

Setting aside my personal opinion on issues of public governance, I somehow feel grateful whenever our government exerts effort to show concern and filial care for our senior citizens. One concrete example is the enactment of Republic Act No. 9994, otherwise known as the “Expanded Senior Citizens Act of 2010.”

Unfortunately, while the intention of the law is to promote social justice, there are times when its implementation is afflicted by legal ambiguities. As shared by my mom, there were instances when she was denied the senior citizen’s discount (one of the benefits under the Expanded Senior Citizens Act) just because she had a “senior moment” and forgot to bring her Senior Citizen’s Identification Card (“ID”) issued by the municipality where she resides.

This practice seems to be based on Article 6 of the Implementing Rules and Regulations (“IRR”) of the Expanded Senior Citizens Act which requires senior citizens or their duly authorized representatives to present the Senior Citizens’ Identification Card issued by the Office of Senior Citizens Affairs (“OSCA”). On the basis of this provision alone, the denial of senior citizens’ discounts by some suppliers, due to the failure to present a Senior Citizen’s ID, would seem to be justified.

However, this should not be the case. Article 6 of the IRR should be interpreted in harmony with Article 5.5 of the same implementing rules. Article 5.5 enumerates the identification documents that a senior citizen may use to avail of the benefits and privileges granted under the law. In fact, these documents are reiterated in Revenue Regulations (“RR”) No. 11-2015 recently issued by the Bureau of Internal Revenue (“BIR”).

The said regulations clarified that, in implementing the tax privileges under the Expanded Senior Citizens Act, the senior citizen may use or present any of the following documents:

• Senior Citizens’ ID issued by the OSCA in the city or municipality where the senior citizen resides;

• Philippine passport; or

• Government-issued ID which reflects the name, picture, date of birth and nationality of the senior citizen. This includes Digitized Social Security ID, Government Service Insurance System ID, Professional Regulation Commission ID, Integrated Bar of the Philippines ID, Unified Multi-Purpose ID, and Driver’s License.

Thus, based on the IRR and as clarified by the BIR, the Senior Citizens’ ID should only be one among many other documents that may be used by senior citizens in availing of the benefits and privileges granted by the law, particularly the 20% senior citizens’ discount and exemption from value-added tax (“VAT”).

To limit the entitlement of our senior citizens to the benefits granted to them, just because they failed to present the Senior Citizens’ Identification Card issued by OSCA, would be in clear contravention of the objectives and purpose of the Expanded Senior Citizens Act. Among its policy intents are to establish mechanisms whereby the contributions of the senior citizens are maximized, and to adopt measures whereby our senior citizens are assisted and appreciated by the community as a whole.

Thus, suppliers of goods and services (e.g., drug stores, hospital pharmacies, etc.) should interpret the law consistent with the legislative spirit of extending the privilege to its targeted beneficiary -- the senior citizens. After all, they can always claim the discount and the input VAT as additional items of deduction from their gross income provided they comply with the conditions set forth under the rules. This includes keeping a separate record of the sales which contains the information of the senior’s citizen’s identification document as provided by RR 11-2015.

I have read on the Internet that “To care for those who once cared for us is one of the highest honors.” (Tia Walker, The Inspired Caregiver). Hopefully, the issuance of RR No. 11-2015 (effective 15 Oct. 2015) will help clear up any confusion and give additional assurance to our senior citizens that they will be able to enjoy their benefits and privileges as accorded by law.

Maria Ysidra May Y. Kintanar-Lopez is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PwC network.

Economy : Business World : October 21, 2015