Documentation for deductibility of donations

Pursuant to Section 8 of Revenue Regulations 13-98, taxpayers claiming donations as deduction from gross income in computing the income tax, must present to the BIR the Certificate of Donation indicating the actual receipt and date of donation and the amount of cash, or acquisition cost if in property

These information shall be provided in the Certificate of Donation (BIR Form 2322).  The Form consists of two parts:

1.  the donee certification on the receipt of the donation and indicating the date and amount of cash or description of the property donated, signed by an authorized representative.

2. the donor statement on the description, acquisition cost and net book value of the property donated as reflected in its financial statements, signed by an authorized representative.  Copy of the sales document will also be required to support the acquisition cost.

Revenue Memorandum Circular No. 86-2014, December 5, 2014

Tax Alerts

Punongbayan and Araullo

Emotional Pain Can Make You Change

 One day, I wanted to impress my girlfriend.

            Thankfully, I felt rich that day because I had P500 in my wallet.

So I invited her to eat in a nice restaurant.

            But a part of me still wondered if I really had enough money for the meal.

            I knew the restaurant's specialty was Crispy Pata or deep-fried pig's knuckles (Yep, I was still eating meat at that time). Quickly, I read the menu. It cost P150 only. Yes! I could afford it.

            I called the waiter and ordered Crispy Pata. With two cups of rice.

            To save money, I didn't order drinks. Thankfully, my girlfriend didn't order too. I smiled.  Things were going my way.

            At the end of our meal, the waiter brought in two little green bowls of Macapuno (sweetened coconut). So this was how it was in more expensive restaurants: They give free desserts!

            The waiter then gave me the bill.

            And that was when I felt like my soul jumped out my body for 10 seconds.

Because my bill was P561!

            With my heart racing, I called the waiter. I asked how my bill could be more than five hundred if I ordered only Crispy Pata worth P150?

            He showed me the menu again. He pointed out that it was P150 per 100 grams. With a smile on his face, he informed me that he served us 300 grams. Like he did me a favor!

So we ate a whopping P450 of Crispy Pata.

            And that wasn't the end of my trials. 

The waiter also pointed out that the Macapuno was P20 each. It wasn't free at all. So with the rice and the tax, the entire bill reached more than what I had in my wallet.

            So I did one of the most embarrassing things I ever did in my entire life—right up there with preaching with my zipper open. Sheepishly, I asked my girlfriend, "Uh, do you have money? I'm a little short…”

            Thankfully, she had a few pesos in her wallet.

            But both of us had nothing left for the waiter's tip.

            With my head bowed down, I walked out of the restaurant as fast as I could.

            Friends, this happened a long time ago. 

But I can never forget how this embarrassing experience gave me a wild fantasy. It may not be wild for you, but it was absolutely wild for me: I fantasized of a time when I had so much money, I could enter into any restaurant I wanted to, and order anything I wanted to—without even looking at the prices on the menu!

Call me silly. Call me juvenile. Call me crazy. But experiences like these were painful enough, they fueled my desire to become wealthy.

           

Write Down Your Emotional Why

            Think deeply.

            Why do you want to become a happy millionaire?

            Write down the reasons below.

"I will earn ­                   by                              .”

                       (Amount)                  (Date)

Here are my Emotional Whys for wanting to be a happy millionaire:

---

---

---

            Next, we work on your beliefs…

            May your dreams come true,

            Bo Sanchez

Recourse against invalid subpoena

TO AID in the speedy conduct of tax investigations, the Commissioner of Internal Revenue and its duly authorized officers are empowered to issue a Subpoena Duces Tecum (SDT) to taxpayers who deliberately refuse or ignore the request of the Bureau of Internal Revenue (BIR) to submit books of accounts and/or other documents and records. In case of non-compliance, the BIR may also invoke the authority of the courts by filing a criminal case against a taxpayer. However, is there any available recourse to the taxpayer, in case the issued SDT does not comply with the prescribed guidelines and procedures?

In Revenue Memorandum Order (RMO) 010-2013, submission of the taxpayer’s books of accounts must be done within fourteen days from the issuance of the SDT. The SDT must also be served on the taxpayer within three working days from the receipt of the revenue officers. Since the date of the issuance of the SDT is the date when it was officially signed by an authorized BIR official, it is very possible that the 14-day period given to the taxpayer to comply with, will be shortened. This is because the 14-day period does not commence from the receipt of the SDT but upon the date of its issuance. What will happen if the taxpayer received the SDT one day before the lapse of the 14-day period? Obviously, he may not be able to comply with it especially if the books of accounts or documents are voluminous. In a situation like this, what are the available remedies? Would the non-submission or incomplete submission of books of accounts and documents be tantamount to failure to obey the SDT, and therefore, subjects the taxpayer to administrative penalties?

Another thing to ponder: what if the revenue officer failed to comply with the three-day period to serve the SDT? Would such an infirmity invalidate it? The existing regulations are not clear on this. The rules only provide administrative liability to revenue officials and employees who failed to follow the guidelines and procedures on the issuance of the SDT.

Administrative rules and regulations are created to enforce the law and to implement its intent. Thus, like all laws, it must always withstand the test of reasonableness and must always be in harmony with the law. The 14-day period to comply with the SDT was put in place to afford the taxpayer a reasonable time to prepare and collate documents and accounting records. While the purpose of the SDT is to compel the taxpayer to submit such documents, the law did not envision impossibility of compliance. Therefore, the BIR must revisit the existing regulations so as to address circumstances like these.

Also, under the RMO, the revenue officer handling the particular case must be present during the designated time, date and place set for the presentation of books of accounts and other accounting records. This is to allow the officer to verify if the documents presented are substantially complete. Failure on the part of the revenue officer to do any of the aforementioned shall subject him to administrative liability. What will happen if the revenue officer does not appear on the date of compliance of SDT? Will this invalidate the SDT? Are there any remedies for the taxpayer who brings all the voluminous records and documents during the date of compliance set in the SDT?

The rules and regulations do not provide an answer. However, in most cases, the taxpayer is required to coordinate with the revenue officer for the submission of documents as the assigned action lawyer will not receive it. Now, this begs the question of whether the taxpayer is non-compliant with the SDT since no documents were received by the action lawyer due to the absence of the revenue officer.

It is worthy to note that in case of non-submission or incomplete submission of the books of accounts and other accounting records, the action lawyer assigned to the case shall request the concerned revenue officer to set a conference within five working days from the date set for compliance with SDT, to determine if there is sufficient evidence for the criminal prosecution of the taxpayer. While the regulations provide for a conference, in practice, even if the taxpayer subsequently submits all the documents to the action lawyer in the presence of the revenue officer, the BIR usually fails, probably due to lack of coordination, monitoring and heavy workload, to note the subsequent compliance of the taxpayer with the SDT. This results in the filing of a complaint with the Office of the Prosecutor.

As the filing of a complaint may result in criminal prosecution of the taxpayer, the BIR is duty-bound to strictly comply with the prescribed guidelines and procedures in the issuance and enforcement of SDT. Like any legal process, SDT must observe not only the substantive due process but also the procedural due process to protect the rights of the taxpayer.

Also, it is interesting to note that in RMO 010-13, the BIR deleted the provision found in RMO 88-2010 which allows the dismissal of the case before the Office of the Prosecutor or the Court upon payment of the penalty of P10,000 and upon presentation of joint certification of the revenue officer and authorized BIR officer on the compliance of SDT. In fact, in the said RMO, the BIR mandated that no prosecuting officer of the BIR shall cause the withdrawal or the dismissal of the case notwithstanding the subsequent submission of the document indicated in the SDT.

With the deletion of the aforementioned provision, will there be any recourse available to the taxpayer in cases of defective or invalid subpoena? Considering that the aforementioned circumstances are very prevalent today, it is highly suggested that the BIR revisit the existing rules and regulation on subpoena to guard not only the right of the government agency but also of the taxpayer. 

Farrah Andres-Neagoe

Let’s Talk Tax

Punongbayan and Araullo

Looking forward to Christmas and higher take home bonuses

IT’S 30 DAYS before Christmas and, though Christmas comes every year, most of us still get excited -- for the vacation days, the gifts, and, not least, the release of the 13th month pay.

Excitement over 13th-month pay was higher than usual this year because it looked like Congress might approve a higher tax exemption threshold for bonuses, raising the possibility of increased take-home pay at year’s end.

The House of Representatives is currently considering a threshold of P70,000 for tax-exempt 13th-month pay, up from P30,000 previously. House Bill 9470 has already been approved on third reading and transmitted to the Senate.

Meanwhile the Senate has approved on second reading the corresponding Senate Bill, which seeks to exempt P82,000 worth of bonuses from tax. According to the sponsors, this is the true current value of the original P30,000 cap when this law was approved in 1994.

Apparently, the higher exemption thresholds are not happening in 2014. Any enacted law is likely be implemented next year.

Nevertheless the higher thresholds remain a significant development for every employee.

How much will an employee benefit from the higher exemption?

Assuming that the employee’s total gross income is subject to the maximum rate of 32%, the differential between the current tax treatment and the proposed regime is as follows, for an employee earning P50,000 a month:

The increase in take-home pay is P16,000 for the employee and a decline in tax collections for the Bureau of Internal Revenue by a similar amount.

One of the major objections to increasing the tax exemption is the loss of income on the part of the government.

We note though that most estimates of the revenue loss did not take into consideration the additional income of the employee, which would lead to increased spending and create income for business establishments he patronizes.

The threshold for tax exemptions on 13th-month pay and other bonuses is an important form of tax relief given by the Government to salary earners, who are entitled to no other deduction apart from the personal exemption of P50,000 and,if applicable, additional personal exemptions of P25,000 for each qualified dependent up to a maximum of four.

Given that this privilege of P30,000 tax-exemption ceiling was crafted 20 years ago, I believe it is really time adjust the amount to a level equivalent to its 1994 value today.

While we are still at the P30,000 tax exemption, it is prudent for the companies to ensure that all the items that can be included in the ceiling of the tax exemption are properly considered so that the employee can fully enjoy the tax exemption and the net take home pay.

The least that the company can do is to ensure that the employees are not deprived of the only tax relief they can have.

 Richard R. Ibarra

Let’s Talk Tax

Punongbayan and Araullo

Tax relief after a loss

BUSINESSMEN expect to earn a profit, but that is not always the case. Losses are always possible, especially for start-ups, or if economic conditions are unfavorable. A loss, while not ideal, is not exactly the end of the world.

One of the ways losses are compensated, like life insurance for loved ones who pass away, is tax relief. Those who register a net operating loss are entitled to offset one year’s losses against the succeeding year’s income, subject to certain conditions. The so-called “net operating loss carry-over” (NOLCO) provides tax relief by reducing the tax liability for future years.

The big issue with NOLCO is how the Bureau of Internal Revenue (BIR) interprets the rules. Lately, the bureau has been very aggressive in tax assessments when it comes to NOLCO treatment, adopting the position that even taxpayers reporting losses are to be assessed zero taxable income per return. This effectively prevents the use of losses to reduce taxable income. Accordingly, the BIR disregards losses incurred for the taxable year under audit regardless of whether the same was utilized in the succeeding years or not.

Under Philippine tax rules, the net operating loss of a business for any taxable year immediately preceding the current year, which has not been previously offset as deduction from gross income, shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss.

However, in some cases, the BIR is taking the position that the taxpayer is no longer entitled to claim unutilized NOLCO as deduction for any deficiency tax assessment for the year under audit. The BIR theory is that the taxpayer waives the right to claim losses for the taxable period in question when it signified its intention to make these deductions available to the subsequent years through filed income tax returns (ITR). Since the losses became part of the available NOLCO, the taxpayer is barred from claiming these losses in the year they emanated.

While it is true that the regulation does not specify that NOLCO cannot be used to offset any deficiency tax assessment, it must also be noted that nothing in the Tax Code states that a taxpayer who has failed to utilize the accumulated NOLCO shall be deemed to have waived its right to utilize the same as deduction from any tax assessment by signifying in the ITR its intention to carry over the same as tax deduction in the succeeding year.

The law would have expressly provided this if it were the intention of the lawmakers to constitute such failure as a waiver of its right to utilize the available and unexpired NOLCO in the current year. A waiver, being a relinquishment of a legal right, cannot be presumed.

In fact, various recent Court of Tax Appeal (CTA) cases (Oakwood Overseas Limited vs. CIR, CTA Case No. 8196, April 29, 2014, AR Realty Holdings Co., Inc., vs. CIR, CTA Case No. 8239, April 1, 2014, among others) resulted in findings of erroneous computation of the deficiency income tax, because although the BIR started with the taxable loss per return, it added back the taxable loss.

According to the CTA, unless the BIR can present evidence to prove that petitioner used its net loss as NOLCO in the succeeding year, the tax benefit purportedly realized by the taxpayer in the succeeding year cannot be assumed.

Consequently, the taxpayer must be allowed to deduct net operating loss incurred from the taxable income during the year.

Notwithstanding the Court decisions, some BIR examiners are still disregarding the losses incurred by the taxpayers in determining the amount of deficiency tax liabilities. That is why some taxpayers are questioning whether there really is a tax relief for losses.

In certain countries, lawmakers have been providing actual relief to taxpayers in case of losses, including the carrying back of NOLCO to the preceding years, using the current year’s deficit to earn a refund for the taxes paid in the previous years. NOLCO can also be carried forward over the next 20 years to reduce future tax liability.

In the Philippines, instead of tax relief, we are seeing businessmen who have incurred losses also have to settle huge tax deficiencies.

Businesses are important economic engines, and it is important for the BIR to look at all the circumstances before disallowing losses, and not just assume that the same will benefit the taxpayer in the future. Instead of being strict on the treatment of NOLCO, the BIR should be providing relief to taxpayers in times of economic distress. The payoff comes later, when taxpayers turn profitable, translating to large tax payments down the line.

Jen R. Serrano

Let’s Talk Tax

Punongbayan and Araullo

Taxpayer Beware of the 10- year prescriptive period

BECAUSE of the latest controversial tax fraud cases, taxpayers are more aware of the power of the Bureau of Internal Revenue (BIR) to perform tax audit investigations. Tax assessments have become the norm rather than the exception. Taxpayers find themselves counting the period of limitation from their open taxable years, confident that they will no longer be assessed after three years. This is not so in tax fraud cases.

The right of the government to assess all deficiency internal revenue taxes, including value-added tax (VAT), generally prescribes after three years from the time of the filing of the return or from the last day prescribed by law for the filing of such return, whichever comes later.

This law on prescription is intended to protect law-abiding taxpayers from unreasonable investigation of government agencies. Thus, it must always be liberally construed in favor of the taxpayer and strictly construed against the government. (Bank of the Philippine Islands vs. Commission of Internal Revenue, G.R. No. 139736 dated October 17, 2005). Without such a legal defense, taxpayers would be under obligation to always maintain their books and keep them open for inspection subject to the harassment of unscrupulous tax agents. (Republic of the Philippines vs. Ablaza, 108 Phil 1105, 1108)This period to assess, however, may be increased up to 10 years under Section 222 of the Tax Code, as amended.

When is the 10-year period to assess applicable?

The Supreme Court declared in the case of Jose B. Aznar vs. Court of Tax Appeals (CTA) and Collector of Internal Revenue that Section 222 of the Tax Code should be interpreted to mean three different situations, namely: (1) a false return; (2) a fraudulent return with intent to evade tax; or (3) failure to file a return.

In such instances, the 10-year prescriptive period begins to run only from the date of the discovery by the BIR of the falsity, fraud or omission, thus making the period to assess almost imprescriptible.

However, there is an instance where falsity or fraud may be deemed prima facie to exist when there is substantial under-declaration of taxable sales, receipts or income or substantial overstatement of deductions, in an amount exceeding 30% as provided under Section 248 (B) of the Tax Code.

In the recent case decided by the CTA, the application of the 10-year prescriptive period was further clarified. The petitioner posits that it was not guilty of falsity or fraud to warrant the application of the 10-year prescriptive period as the under-declaration in its sales was not due to intentional falsity or fraud but was merely due to the improper claim of input tax made by some of its clients.

The court ruled that although the VAT assessment was issued beyond the three-year period prescribed by law, the substantial understatement in the petitioner’s VATable sales in 2006 makes its VAT returns for the said year false. Thus, the 10-year prescriptive period under Section 222 of the Tax Code, as amended, applies.

The same case of Aznar discussed the difference between a “false return” and “fraudulent return.” The first merely implies deviation from the truth, whether intentional or not. On the other hand, the second one implies intentional or deceitful entry with intent to evade taxes due. Thus, even granting that the under-declaration of VATable sales by the petitioner was not intentional -- hence, not a case of fraudulent return -- the situation falls under a false return, which may or may not be intentional.

Noteworthy, however, is the imposition of the 50% surcharge as fraud penalty by the CTA in this case. Section 248 (B) of the Tax Code, as amended, requires that a false or fraudulent return is wilfully made to warrant the imposition of 50% fraud penalty.

In the case of Estate of Fidel F. Reyes vs. Commissioner of Internal Revenue (CTA EB No. 189 dated March 21, 2007), the CTA applied the 10-year prescriptive period based on the false returns filed by the petitioners, but disallowed the 50% surcharge fraud penalty because the falsity was not wilfully made. Thus, it is not enough that the taxpayer filed a false return to justify the imposition of the 50% penalty for fraud. The law is clear that a false or fraudulent return should be wilfully made.

The ruling in this case is contrary to the Reyes case. The CTA imposed the 50% surcharge although no evidence was presented to prove that there was an intention to wilfully file a false return on the part of the petitioner to evade the payment of taxes.

Well settled is the rule that fraud is a question of fact and cannot be presumed, but must be sufficiently established. Thus, notwithstanding the applicability of the 10-year prescriptive period, the 50% surcharge should not be imposed in the absence of showing that the falsity was wilfully made.

It is crucial for taxpayers to be fully aware of the circumstances when the 10-year prescriptive period to be assessed by the BIR applies, in order to effectively contest it. The indefinite extension of the period to assess deprives taxpayers of the assurance that they will no longer be subjected to further investigation of taxes after the expiration of a reasonable period of time. Ten years is a long period to be exposed to BIR tax audit investigation.

Charity P. Mandap-de Veyra

Let’s Talk Tax

Punongbayan and Araullo

Clarification on the mode of submission of alphalist

The BIR has issued the following clarifications on the submission of the alphabetical list of employees and list of payees on income payments subject to creditable and final withholding tax (alphalist) in accordance with Revenue Regulations No. 1-2014.

a. Mode of submission of alphalists

All withholding agents, regardless of the number of employees/payees, are now required to submit electronically their alphabetical list of employees and list of payees using either of the following modes:       

 1) Attachment in the electronic filing and payment system (eFPS)

 2) Electronic submission using the BIR’s website (esubmission@bir.gov.ph)

 3) Electronic mail (email) at dedicated BIR address using the prescribed      CSV data file format.

The proper mode of submission shall depend on the type of registration/enrolment of the taxpayer, as follows:

Taxpayer registration	Mode of Submission of alphalist
	e-Submission	e-mail Submission	Attachment in the eFPS
eFPS	Yes	No	Yes, when attachment facility becomes available
BIR Inter-Active Form system (IAFS)	Yes	No	No
Non-eFPS/Non-IAFS	Yes (BIR-preferred mode)	Yes	No

Taxpayers submitting their alphalist through eSubmission or email shall receive an email message on the status of their submission.  The required courses of action for the taxpayer are outlined below:

Submission status	Course of action of taxpayer
Alphalist successfully uploaded	Print the e-mail message or the computer screen displaying the confirmation which shall serve as proof of filings/submission. The printed copy of the computer screen display shall be attached to the hard or physical copy of the monthly remittance returns, annual information returns, etc. required to be filed by non-eFPS taxpayers
Alphalist failed the prescribed validation process	Address the issues and re-submit the corrected and completely filled-up alphalist within 5 days from receipt of email-message
No e-mail message	Coordinate with the RDO to confirm the status.  If submission did not reach BIR, re-check correctness of email address and re-send.

b. Coverage of the  modes of submission of alphalist  

The prescribed modes of submission under RR 01-2014 covers the Monthly Alphalist of Payees (MAP) and the Summary Alphalist of Withholding Taxes (SAWT).  It does not cover the monthly remittance return for compensation (BIR Form 1601C) where the monthly list of recipients of compensation is not required to be attached to the return. 

c. Penalty on failure to successfully upload the alphalist 

In case a taxpayer unsuccessfully uploaded its alphalist and was considered not received by the BIR, he/it shall be liable to pay P10,000  plus imprisonment of not less than one year but not more than 10 years, or in lieu of imprisonment, pay the compromise penalty based on gross annual sales under RMO 19-2007.

In case the BIR, after conducting the validation process, duly informed the taxpayer for non-compliance of requirements in the submission of alphalist (Q12 of the Circular) and required the re-submission of a correct alphalist, a separate penalty shall be imposed against the taxpayer for each incorrectly accomplished and submitted alphalist.  

On the other hand,  if the taxpayer failed to file the alphalist, or failed to address the issues and re-submit its complete and corrected alphalists after the validation process, the taxpayer cannot claim the expenses arising from the alphalist for income tax purposes.  

Where the taxpayer is able to successfully upload its alphalist in the BIR’s data warehouse but fails to enter some transactions that should have been entered in its previously submitted alphalist, the taxpayer is required not only to re-file/re-submit the missing information but also to re-file/re-submit the complete and corrected alphalist to the BIR. 

The specific procedures/steps in the submission of alphalists are explained in RMC 5-2014  Likewise, the e-mail addresses of the different BIR offices where the taxpayer may submit their alphalist through email is contained in the Annex “A” of RMC 5-2014.  

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Punongbayan and Araullo