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

Let’s Talk Tax

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

Let’s Talk Tax

Punongbayan and Araullo

More opportunity to substantiate VAT refund claims

The Filipino taxpayer carries a heavy burden in terms of tax obligations and compliance. We are encouraged to support the tax collection efforts of the Bureau of Internal Revenue (BIR) through its Register File and Pay campaign. However, given the prevailing poverty of the vast majority of the population, inadequate access to public health care, questionable deals and disbursements within and by the government, and delays in much-needed infrastructure projects, it would appear that taxpayers -- Filipino and foreign alike -- are not too keen on supporting the BIR.

Taxes are the lifeblood of the government. It is a harsh but necessary reality that taxpayers must pay, under threat of penalty or imprisonment. However, there are instances when the law clearly allows the taxpayer relief from payment of taxes, via refund or tax credit. But while it is very easy for the BIR to exact compliance, many believe that it is very difficult to secure BIR approval for refunds or credits.

Under our tax laws, an administrative claim may be filed with the BIR for tax refund or for issuance of a tax credit certificate (TCC) within a period of two years from the close of the taxable quarter when the sales were made, in case of refund of input tax attributable to zero-rated or effectively zero-rated sales, or two years from the date of erroneous payment in the case of taxes erroneously or illegally collected. The applicant must submit the Application for Tax Credit/Refund together with all the supporting documents. After the application is filed, the BIR will conduct an examination of the applicant’s books of account and other records in the taxable year concerned to determine the validity of the claim. The taxpayer may be required to submit numerous documents.

Particularly for value-added tax (VAT) refunds, an applicant was allowed to submit all the documentary requirements before and after the filing of the administrative claim, before Revenue Memorandum Circular (RMC) No. 54-2014 (Clarifying Issues Relative to the Application of Value-Added Tax Under Section 112 of the Tax Code) became effective last year. If the taxpayer fails to submit the required documents as provided in the BIR’s checklist, the VAT claim can be denied for lack of factual basis due to failure to submit the required documents. A party aggrieved by the BIR’s denial must, within a period of thirty (30) days from lapse of one hundred twenty (120) days from the submission of the complete documents, file an appeal with the Court of Tax Appeals. In case of inaction of the BIR, the judicial claim must also elevate his claim within 30 days from the lapse of the 120-day period when all the documents were submitted.

After the effectivity of RMC 54-2014, a taxpayer applying for a VAT refund should submit the complete set of documents at the time of the filing of the administrative claim. The application should be accompanied by a sworn certification which states that the documents submitted are complete for purposes of processing the VAT claim, and that the same are the only documents that will be presented to support the same. In fact, the BIR officer and the taxpayer’s representative go through the checklist to determine the completeness of the supporting documents, before the same is accepted.

What happens if the taxpayer fails to submit all the documents that will support his claim? While this can spell a denial of the claim on the administrative level, is the taxpayer forever barred from submitting documents when he elevates his claim to the Court of Tax Appeals?

It could be argued that the answer should be “No”. The Supreme Court held in Commissioner of Internal Revenue vs. Team Sual Corp. (formerly Mirant Sual Corp. (GR No. 205055, July 18, 2014) that there is nothing the Section 112 of the Tax Code or Revenue Regulation No. 3-88 or Revenue Memorandum Order (RM O) No. 53-98 that requires the complete submission of the documents enumerated in the RMO for a grant of refund or credit of input VAT.

The above pronouncement was adopted by the Court of Tax Appeals in the very recent case of Filminera Resources Corp. vs. Commissioner of Internal Revenue (CTA Case No. 8666, Aug. 3, 2015). The Court explained that in claims for VAT refund, the non-submission of complete supporting documents at the administrative level is not fatal to a petitioner’s claim. The court is not prevented from receiving, evaluating and appreciating evidence submitted before it. The question of whether or not the evidence by a party is sufficient to warrant the granting of a refund lies in the sound discretion of the court.

Although the above decision was based on the facts before the effectivity of RMC 54-2014, the Court’s explanations in the said decision is in accord with justice and fairness, and would offer relief for the current taxpayers who, due to difficulties in retrieving documents from voluminous accounting/tax records, are unable to submit all the required documents at the time of the filing of the administrative claim, as required by RMC No. 54-2014. Hence, for as long as the taxpayer properly and timely filed an appeal with the Court of Tax Appeals, he is given an opportunity to substantiate his claim. It is also important to note that the counting of the period to file the judicial claim should be reckoned from date of the filing of the administrative claim, as also mentioned in the Filminera case.

Due to the volume of new and pending refund applications with the BIR, almost all of the cases end up being appealed before the Court of Tax Appeals. It is comforting to know, at least, that the taxpayer has a fair opportunity to pursue his VAT refund claim at the court level, as he is still given a chance to submit additional evidence to prove his claim, which would then be subjected to the Rules of the Court.

Jean Ross Abenasa-Miso

Let’s Talk Tax

Punongbayan and Araullo

Taxpayer Bill of Rights

GENERAL AUDIT PROCEDURES AND DOCUMENTATION

1. When does the audit process begin?The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.

2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.

3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.

4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated.

5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated—

Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or

Twice, in the case of LAs issued by the National Office.

Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).

6. How much time does a Revenue Officer have to conduct an audit?A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.

7. How is a particular taxpayer selected for audit?Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).

8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases:

When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;

When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;

When there is a need to verify the Taxpayer’s compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue.

When the Taxpayer’s capital gains tax liabilities must be verified; and

When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).

9. What are some of the powers of the Commissioner relative to the audit process?In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:

Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and

Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).

10. What is a Notice for Informal Conference ?A Notice for Informal Conference is a written notice informing a Taxpayer that the findings of the audit conducted on his books of accounts and accounting records indicate that additional taxes or deficiency assessments have to be paid. 
If, after the culmination of an audit, a Revenue Officer recommends the imposition of deficiency assessments, this recommendation is communicated by the Bureau to the Taxpayer concerned during an informal conference called for this purpose. The Taxpayer shall then have fifteen (15) days from the date of his receipt of the Notice for Informal Conference to explain his side.

11. Within what time period must an assessment be made?An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment. 
Any assessments issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations.

12. What is "Jeopardy Assessment"? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer’s failure to:

Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or

Substantiate all or any of the deductions, exemptions or credits claimed in his return.

13. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings.

If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment.

14. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:

When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or

When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

When the excise tax due on excisable articles has not been paid; or

When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

15. What is a Notice of Assessment/Formal Letter of Demand?

A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.

A little competition helps

With the accelerated shift of the Philippines towards a digital economy and the spread of business and investment ideas globally, the country finally took a step forward in promoting fair and free competition in trade and industry as well as an efficient shipping system through the passage of the Republic Act No. (RA) 10667 (Philippine Competition Act) and the amendment of RA 10668 (Cabotage Law).

The passage of RA 10667 paves the way for a level playing field for businesses. The law penalizes anti-competitive agreements, abuse of dominant positions and prohibited mergers. Being the first of its kind in the country and after 20 years in the making, this is the key to addressing the increasing complexities of the global economy.

The Philippine Competition Act encourages healthier competition by setting forth a national policy prohibiting acts that restrain trade and thwart competition. In addition to its business development decisions, management will now have to ensure that the company is not engaging in the prohibited acts enumerated in the law. Moreover, in cases of mergers and acquisitions when the value of the transaction exceeds P1 billion, parties to such mergers are required to inform the Philippine Competition Commission (PCC) -- an independent quasi-judicial body charged with implementing the law and reviewing such transactions. Being a lengthy process, it involves a great deal of careful consideration on the part of businesses.

On the other hand, the amendments to the Cabotage Law allow foreign vessels to load and unload their cargoes in any port in the country. Consequently this significantly reduces the cost of transporting goods into and out of the country. Take for instance the approximate shipping cost from Cagayan de Oro (CDO) to Hong Kong amounting to $1,200 -- 75% of this amount is the cost of shipment from CDO to Manila. With the amendment of the Cabotage Law, it will now cost only half of the said price to transport goods from these two points.

The Cabotage Law is expected to have a positive impact on the economy as it will boost domestic manufacturing and enhance regional dispersal of manufacturing activities. With the reduction in the cost of transport and shipping, our export products will be less costly, making them even more competitive relative to products of other countries. However, the threat of increased import consumption is also perceived along with the resulting lower cost of importation in regions that can now receive direct shipments without passing through the ports of Manila.

The above laws are a welcome change for businesses, big and small alike. Their common ground is healthy competition. Healthy competition results in fairer and healthier prices of quality goods and services, with the prospect of stimulating economic activity. However, our government is charged with the tedious task of implementing the law to its fullest extent so that businesses can benefit from it. Passing comprehensive laws is one thing, implementing them effectively is another.

Since the above laws will benefit the economic aspect of the country, the question is, how will this affect taxation? Is the system of taxation in our country compromised?

Taxation is the lifeblood of a country. Our government depends on the revenue raised through taxation. The power of taxation is inherent in a state and even without the Constitution expressly conferring it the state cannot be deprived of its right to collect taxes for its sustenance. Hence, even with the enactment of the Competition Act, the collection of taxes largely depends upon the outcome of the business activities of an enterprise.

Big business will surely pay a big portion of the taxes, while smaller businesses are not exempt from such exercise of the state’s power. This will be a game-changing era for new businesses. For those who may be hesitant to invest, this should not be a hindrance since there are avenues provided by the government wherein tax exemptions may be granted.

There are certain laws providing fiscal and non-fiscal incentives, to wit: the Omnibus Investment Code, the Bases Conversion and Development Act, the Special Economic Zone Act of 1995, among others. Generally, all investors may avail of the incentives provided the project or activity is among those registered and allowed by the agencies granting the incentives.

At some point, Philippine Economic Zone Authority (PEZA) will determine that incentives are not enough. Due to the high cost of doing business in the Philippines, the incentives provided are losing their effectiveness. According to PEZA, there was a slowdown in foreign direct investment last year due to port congestion, which is less likely to happen if international shipping lines can dock in other ports. The passage of the Anti-Competition Law will also lessen, if not eliminate, the reluctance of businesses to invest in the country.

As for the Cabotage Law, one potential negative impact is the reduced activities of local shipping lines. The sector must adjust to recover the domestic business that will be lost. Domestic shipping corporations are taxed 30% of their net income. Reduced income from domestic shipping companies would mean reduced corporate income tax. On the other hand, international shipping companies are taxed 2.5% of their Gross Philippine Billings (GPB) which now cover the domestic transport portion of their voyages.

There may be little impact on Value-Added Tax (VAT) revenue. If a domestic shipping company transports cargo from a domestic port to Manila for an international shipper, VAT is 0%. On the other hand, international shipping companies are already paying the tax on their GPB and the common carrier’s tax on the full billing including the cost of transport from the local port to Manila.

Overall, the above laws are expected to have a positive effect on the economy in terms of enhanced business activity, higher income and more tax revenues. This will most likely accelerate economic growth, thus representing a step up for the Philippines.

Flourence Kathrine Enriquez

Let’s Talk Tax

Punongbayan and Araullo

RE Developers: Protecting the Environment with Tax Issues

Sadly, it is typhoon and habagat (monsoon) season again. It is usually at this season that our country suffers the brunt of some of the strongest typhoons to make landfall. Typhoons, according to the experts, are getting stronger as a result of climate change. Thus, in an effort to reduce the effects of climate change, renewable energy (RE) sources are highly encouraged by the government. Currently, RE sources available in the Philippines include hydro power, ocean energy, geothermal, wind, solar, and biomass, such as bagasse and palay husk.

  

More than six years from the issuance of the Renewable Energy Act of 2008 and its implementing rules and regulations (IRR), the Department of Energy (DoE) has already awarded a total of 664 renewable energy contracts, as of the end of April 2015. Some 240 contracts are still pending approval by the department.

Aside from the business potential of RE sources, most companies are also entering into RE development due to the fiscal/tax incentives available under the RE Law. Under the IRR of the said law, the Bureau of Internal Revenue (BIR) shall, in coordination with DoE, Department of Finance, Bureau of Customs, BOI and other concerned government agencies, promulgate revenue regulations governing the grant of fiscal incentives. Unfortunately, several years from the issuance of the IRR, the BIR has yet to issue the guidelines for the implementation of the tax incentives under said Act. Thus, with the rising number of RE contracts being awarded, the government must look into the long overdue revenue regulations implementing the fiscal incentives.

Among other things, implementation of the following tax incentives available to RE developer must be clarified in the said revenue regulations:

Income Tax Holiday (ITH) incentive on additional investment. Under the law, new investments in RE project shall be entitled to seven years ITH from start of commercial operation. Additional investment shall be entitled to not more than three times the period of initial availment. The ITH for additional investments in an existing RE project shall be applied only to the income attributable to the additional investment, which may or may not result in increased capacity.

Thus, the revenue regulations must provide the formula to compute that income attributable to the additional investment. For increased capacity, how should the base figure be computed? Is it based on the highest sales in the last three years, or just based on the last year’s capacity? For additional investments that do not result in increased capacity, how should the income attributable to that investment be computed? Should it be based on increase in net income?

Corporate Tax Rate of 10%. After the allowed period of availment of the ITH, the registered RE developer shall pay a corporate tax of 10% on its net taxable income, as defined in the National Internal Revenue Code (Tax Code) of 1997, as amended by Republic Act No. 9337. However, the said RE developer shall pass on the savings to end users in the form of lower power rates, pursuant to a technical study by the DoE.

Yet no results of any technical study to determine the extent of savings and how the pass-on mechanism would work has been presented by the DoE. Since there may be RE developers whose ITH incentive period has or shall already expire, mechanisms or guidelines on how to implement this incentive should already be in place. Among other things, the mechanism must provide the basis for the lower power rates. Should it be determined based on the current period’s rates? Or should it be based on previous period rates charged to end users?

Tax credit on domestic capital equipment and services related to the installation of equipment and machinery. Subject to certain conditions, a tax credit equivalent to 100% of the value of the value-added tax (VAT) and customs duties that would have been paid on imported RE machinery, equipment, materials, and parts shall be given to a registered RE developer who purchases these from a domestic manufacturer, fabricator or supplier.

As provided in the IRR, the BIR shall promulgate a revenue regulation governing the granting of tax credit on domestic capital equipment. But again, no issuance has been issued yet. Thus, issues on how and where the application shall be made -- can this be utilized against any tax due? -- among other things are not clear yet.

Zero-percent VAT on sales and purchases; duty free importation. Sale of fuel from RE sources or power generated from RE, as well as local purchases needed for the development, construction, and installation of the plant facilities of RE developers, shall be subject to 0% VAT. However, for importations, the law provides that importation of machinery and equipment, and materials and parts thereof, including control and communication equipment, shall be exempt only from tariff duties within the first 10 years from the issuance of a Certificate of Registration to an RE developer. The law does not provide VAT exemption for importation.

Thus, input tax from importations of RE machinery or equipment shall be an additional cost to the RE developer. Being attributable to zero-rated sales, such shall be available as tax credit or be applied for refund. However, with the current trend now on the applications for refund, RE developers must still weigh the cost and benefit of such an application.

These are just some of the issues that the issuance of the revenue regulations can very well address. To further tap the unending potential of renewable energy sources available in our country, our government must provide clear implementing revenue regulations on the availment of tax incentives. Having this in place shall mean protecting the environment and assuring our country of additional sources of energy.

Ma. Lourdes Politado-Aclan

Let’s Talk Tax

Punongbayan and Araullo

Should we abolish the estate tax?

A few days ago, I was invited to discuss estate taxes. One of the questions proferred by viewers was whether the Philippines should repeal estate taxes. The viewer probably thought that imposing estate tax on top of the various taxes that we as taxpayers have to shoulder is a huge an imposition on our overstretched budgets.

Considering that we have already paid 32% personal income tax and most probably 12% value-added tax in purchasing the property, deducting a further 20% in estate tax would increase the government’s cut on our hard-earned money to an unconscionable level.

What is estate tax and why do some countries such as the Philippines impose estate tax? Why are we being taxed upon death as if our death is a voluntary mode of transferring property? Aren’t we supposed to conserve our property so that we can pass on our legacy and the fruits of our labor to our progeny without the government confiscating a portion thereof?

Estate tax is not a tax on property. Rather, it is a tax on the privilege of the deceased person to transmit his estate to his heirs and beneficiaries at the time of death. It is imposed on the right of transmitting property upon the death of the owner.

The Philippines is not the only country that levies estate tax. We do not even impose the highest rates on estate tax. The US, UK, Japan, South Korea and France also impose estate taxes ranging from 40% to 55%. By way of contrast, 15 of the 34 member countries of the Organization of Economic Cooperation and Development do not impose estate or inheritance tax at all.

At present, our estate tax ranges from 0% to 20%. The highest rate is imposed on the value of the net taxable estate exceeding P10 million. If we trace the history of our estate tax, the 20% rate is actually a huge improvement. From July 28, 1992 up to December 31, 1997, the top rate was at 35% on any value exceeding P10 million, while from January 1, 1973 to July 27, 1992 the top rate was a whopping 60% on any value exceeding P3 million.

Proponents of the abolition of estate tax argue that estate tax retards economic development as it depletes capital particularly those used in business. Imagine inheriting a business worth P20 million with most of the assets in real property and equipment. In order to pay for the estate tax, there might emerge a need to liquidate or sell a portion of the business. This will negatively impact on the development or growth of the business, perhaps leading to decreased production and retrenchment.

Another argument in support of repealing estate tax is that it has a narrow tax base and huge administrative cost. Simply put, the costs do not justify the expected tax revenue. For example, in 2007, there were only 29,198 estate tax returns filed, producing P649.9 million worth of estate tax collections.

The Bureau of Internal Revenue (BIR) did not provide the total number of recorded deaths for the same year but noted that the recorded deaths in the National Statistics Office are 415,271 for 2005 and 389,081 for 2006. Basing on the lower number of total deaths, less than 10% of all estates filed the corresponding tax return.

Also, total number of estate tax returns amounted to 29,863 in 2008 and 26,811 in 2009 with total estate tax collections of P854.9 million and P876.8 million, respectively.

Various other countries have acknowledged the need to remove estate taxes. From 2000 to the present, 12 countries have repealed their estate taxes. More are probably on their way to abolishing this tax.

The Philippines appears to be a long way from having an estate tax-free system. The BIR is even increasing its efforts to run after estates which did not file estate returns and pay the correct taxes.

Maybe with elections coming up in 2016, we will have a new set of leaders who will see the value of abolishing estate tax. Until then, we can only hope that our leaders become enlightened.

Atty. Eleanor L. Roque

Let’s Talk Tax

Punongbayan and Araullo