Linggo, Disyembre 6, 2015

Beware of the new BIR audit program

More than a decade ago, a taxpayer could expect only one tax investigation by the Bureau of Internal Revenue (BIR) in a given year, and seldom for two successive years.

But now, a taxpayer can be investigated up to three times in the same year: first, under a normal tax audit (i.e., covering all taxes); second, under a value-added tax (VAT) audit; and third, under a Letter Notice audit (which is based on discrepancies arising from the computerized matching of data between the taxpayer’s records and its customers and suppliers).

In the worst case, a taxpayer can be investigated every year without reprieve.

Taxpayers who are subjected to successive tax audits will finally obtain relief from the BIR’s new Audit Program under Revenue Memorandum Order (RMO) 19-2015. Under the RMO, taxpayers who were subjected to tax audit for two successive years will no longer be subject to tax audit on the third year, unless the taxpayer has under-declared sales/income or overstated expenses/deductions by at least 30% (which is considered prima facie evidence of fraud).

The RMO also provides that a full tax audit will no longer include taxes that had been previously examined (e.g., VAT audit under the VAT Audit Program or under a claim for VAT refund).

However, tax examiners are now required to investigate taxpayers who have not been audited but have been in operation for more than three years.

The foregoing new policies appear reasonable as successive tax audits will likely result in lower deficiency taxes among frequently audited taxpayers due to a progressive learning curve. Moreover, rather than concentrating on a limited few, the similarly limited manpower of the BIR would be optimized by targeting other taxpayers, achieving a more inclusive audit.

The RMO also provides that the following cases are subject to mandatory audit:

• Claims for refund (e.g., VAT, income tax, erroneous payment);

• Applications for tax clearance for dissolution or retirement of businesses with gross sales/receipts exceeding P1 million or with more than P3 million in gross assets ;

• Cases with unresolved Letter Notices;

• Request for tax clearance of taxpayers undergoing merger/consolidation and other types of corporate reorganizations;

• Estate tax returns; and

• Policy cases identified by the Commissioner of Internal Revenue.

On the other hand, the following are considered priority cases:

• Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive years;

• Taxpayers with income tax due of less than 2% of gross sales/revenues;

• Taxpayers with increase in assets of more than 50% from the previous year but with reported net loss;

• Professionals;

• Sellers of goods and services via e-commerce;

• Taxpayers with intelligence information such as specific business knowledge, third party data and publicly available information (e.g., from media press releases vs. actual revenue/tax declaration per return, etc.);

• Taxpayers who have failed to comply with the submission of information returns required under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, Summary List of Sales/Summary List of Purchases, eSales);

• Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting, industry issues, etc.);

• Taxpayers whose compliance is below the established benchmark rate;

• Taxpayers enjoying tax exemptions/incentives;

• Taxpayers with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliate in a conglomerate;

• Specific industries: Hospitals, Advertising Agencies, BPOs, Insurance, Amusement Centers, Restaurants, Telecommunication, Real Estate; and

• Other priority audits that may be identified by the BIR.

The list is so extensive in scope that it seems to include most individual and corporate taxpayers.

Finally, the RMO requires examiners to strictly comply with the prescribed periods in the completion of their audit (reinvestigation) and submission of their reports; failure to do so will result to administrative sanctions. For instance, a report on the results of a tax investigation must be submitted not later than 180 days (for non-Large Taxpayers) or 240 days (for Large Taxpayers) from the issuance of the Letter of Authority.

With these new rules and the BIR’s increasing revenue targets, one could expect a BIR audit sooner than later. Accordingly, it would be wise for businesses to improve tax compliance by being informed of the pertinent tax laws and rules affecting them, and to check accounting records vis-a-vis tax returns, as well as the adequacy and completeness thereof for submission during a tax audit.

The foregoing steps can be undertaken internally or thru the assistance of a trusted and competent tax advisor.

As we all know, taxation is the life blood of the government. Without taxes, the government cannot spend for basic social services, and infrastructure. Let’s do our share in nation-building by paying correctly our taxes so we can then have the right to demand the government to improve its services.

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.

Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
Taxwise or Otherwise : Carlos R. Mateo
Economy : Business World
December 2, 2015



Miyerkules, Disyembre 2, 2015

Are we giving up on income tax cuts?

Last week, congressmen reportedly gave up on their bid for tax cuts after repeated indications of opposition from MalacaƱang.

We can hardly accuse Congress of not trying, with not less than 10 bills filed proposing tax reform. Various versions of these bills have appeared and been discussed in due course. Not one of them has been approved by the President.

Many are asking why securing the President’s approval is difficult. Did President Benigno S. C. Aquino III not promise to listen to his “bosses,” and does Congress not represent the voice of these bosses -- the Filipino people?

The main stumbling block to the approval of the proposed tax reform appears to be the anticipated loss of government revenue without compensatory measures to replace the lost collections. According to the latest version of the proposed bill on individual income tax, the top tax bracket paying 32% will now apply to those with an annual income of more than P1 million as against the current threshold of only P500,000, dating back to 1997. The lower brackets were likewise recalibrated to reflect the impact of inflation. The Executive department believes that the updating of individual income tax brackets would slash the government’s revenue significantly, on the expectation that most Filipinos will see their income tax payments reduced.

Supporters of the reform see the alleviation of the plight of the working class by increasing take-home pay. The latest version of the proposed bill would see an employee earning P20,833 per month (or P250,000 per year), shift to a bracket charging 20%, rather than 25%. While 5 percentage points may not seem much, to the working classes this represents a significant amount.

It has also been argued that foregone government revenue will be replaced by increased individual spending, which the government will benefit from in the form of more transaction taxes like value-added tax. Any lost government revenue will flow back into the economy and eventually find its way into the treasury.

To add a further argument, higher take-home pay will make the Philippines competitive in the era of accelerating international trade and investment. More money in employees’ pockets will reduce pressure on employers to raise wages, keeping labor costs down and making the country more attractive to investors. These investors could ultimately boost our economy.

These are of course some of the more obvious points raised in what has been along drawn-out debate. Unfortunately, the Executive department seems to be viewing the proposed reform from a different perspective. Pro-tax reform economists, accountants, lawyers, data analysts, and other experts have said their piece, but it appears they cannot good news about tax reform this holiday season.

In any event, do we really need any more experts to say that the 18-year-old 1997 Tax Code income tax bracket is outdated? Is it not obvious that the value of salaries has changed significantly since 1997?

Set aside the statistics on foregone revenue... Setting aside the politics... Remove counter-arguments involving international trade... and at the end of the day the reform is about social justice, an issue that connects with many Filipinos.

The 16th Congress will recess between Dec. 19 and Jan. 18. Next year’s Congressional work will be disrupted by campaigning. Any last-ditch efforts by members of Congress will need to be done within a very limited time. Will they try to convince the Executive department once more? Will they decide to override Presidential opposition? Could they do something else? We don’t know yet.

We can take comfort in the fact that certain members of Congress have vowed to re-file the bill when the next administration comes along if nothing happens to the current legislation. Many hope that the reform will be given high priority, possibly to take effect within the 2016 tax year. After all, the voice and interest of the Filipino people, as represented by the Congress, ought to be heard in a republic like ours.

When it comes to reducing taxes, we are not giving up.

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo.

Let’s Talk Tax : Olivier D. Aznar
Economy : Business World
December 1, 2015