Reckoning of the 120-day rule

A tax refund is one of the most tedious processes in our tax system, if not the most. Refunds are in the nature of tax exemptions construed strictly against the taxpayer. However, this doesn’t necessarily mean that the taxpayer is at the mercy of government power. In our system of taxation, statutory procedures protect the rights of the taxpayer.

For value-added tax (VAT) refunds, Section 112 of the Tax Code provides that the taxpayer, whose sales are zero-rated or effectively zero-rated, has two years after the close of the taxable quarter when the sales were made, to apply for an administrative claim for refund. Thereafter, the Commissioner of Internal Revenue (CIR) has 120 days from the submission of complete supporting documents to act upon the claim for refund. In case of full or partial denial of the claim or failure of the CIR to act on the application within 120 days, the taxpayer may appeal with the Court of Tax Appeals (CTA) within 30 days from receipt of the decision or upon expiration of the 120-day period.

In the landmark case of CIR vs. Aichi (GR No. 184823 dated October 6, 2010), the Supreme Court (SC) held that the observance of the 120-day period is a mandatory and jurisdictional requisite to the filing of a judicial claim for refund before the CTA. As such, its non-observance would warrant the dismissal of the judicial claim for lack of jurisdiction.

Thus, the proper question now would be, how should we reckon the 120-day period in order to properly observe its mandatory and jurisdictional nature? When should the submission of documents be deemed “completed” for purposes of determining the running of the 120-day period?

In a recent decision of the SC sitting En Banc (GR No. 207112 dated December 29, 2015), the Court clarified that, starting June 11,2014 when Revenue Memorandum Circular (RMC) No. 54-2014 took effect, the 120-day period should be counted from the date that the administrative claim was filed.

Under RMC No. 54-2014, prescribing the current rules on VAT refunds, the taxpayer is required to present complete supporting documents at the time of filing the claim. The application must be accompanied by supporting documents as enumerated in the Circular and a statement under oath attesting to its completeness. The affidavit shall further state that the said documents are the only documents which the taxpayer will present to support the claim. Thus, the taxpayer is barred from submitting additional documents after filing the administrative claim. Thus, the 120-day period would start upon the filing of the administrative claim for refund.

What about claims filed before June 11, 2014, or prior to the effectivity of RMC No. 54-2014?

The SC clarified that the 120-day period granted to the CIR to decide on the administrative claim is primarily intended for the benefit of the taxpayer, to ensure that his claim is decided judiciously and expeditiously. Ideally, upon filing his administrative claim, a taxpayer should complete the necessary documents to support his claim for tax credit or refund for excess unutilized VAT. After all, should the taxpayer decide to submit additional documents and effectively extend the 120-period, it grants the CIR more time to decide the claim. Moreover, it would be prejudicial to the interest of a taxpayer to prolong the period of processing of his application before he may reap the benefits of his claim.

The SC emphasized, however, that the benefit given to the taxpayer to extend the deadline is not unbridled. Prior to RMC No. 54-2014, RMC No. 49-2003 provides that if in the course of the investigation and processing of the claim, additional documents are required for the proper determination of the legitimacy of the claim, the taxpayer-claimants shall submit such documents within 30 days from the request of the investigating/processing office. Notice, by way of a request from the tax collection authority to produce the complete documents in these cases, is essential. It is only upon the submission of these documents that the 120-day period would begin to run.

In addition, under RMC No. 29-2009, the CIR is tasked with the duty to notify the taxpayer of the incompleteness of its supporting documents and, if the taxpayer fails to complete the supporting documents despite such notice, the administrative claim shall be denied. Under this RMC, the 120-day period stops running when the taxpayer is notified.

Moreover, whatever documents a taxpayer intends to file to support his claim must be completed within the two-year period under Section 112 (A) of the Tax Code.

As to the proper supporting documents, the SC pointed out that a taxpayer’s failure to adequately submit the requirements listed under Revenue Memorandum Order No. 53-98 is not fatal to its claim for tax credit or refund of excess unutilized VAT. The SC explained that RMO No. 53-98 is addressed to internal revenue officers and employees, for purposes of equity and uniformity, to guide them as to what documents they may require taxpayers to present upon audit of their tax liabilities. Nothing stated in the issuance would show that it was intended to be a benchmark in determining whether the documents submitted by a taxpayer are actually complete to support a claim for tax credit or refund of excess unutilized VAT. The SC recognizes that it is the taxpayer who ultimately determines when complete documents have been submitted for the purpose reckoning the 120-day period.

While the Court held that the non-compliance with the requirements under RMO No. 53-98 is not fatal to the claim of the taxpayer, it did not rule upon the nature of the checklist enumerated under RMC No. 54-2014. Taking caution by the hand, it may be prudent for taxpayers to consider the checklist under the RMC as mandatory for administrative claims to be valid.

Nonetheless, as an end note, the SC emphasized the difference between the administrative cases appealed due to inaction and those dismissed at the administrative level due to the failure of the taxpayer to submit supporting documents. When a judicial claim for refund or tax credit in the CTA is an appeal of an unsuccessful administrative claim, the taxpayer has to convince the CTA that the CIR had no reason to deny its claim. However, a taxpayer cannot cure its failure to submit a document requested by the BIR at the administrative level by filing the said document before the CTA. While, in case the judicial claim is due to inaction, the CTA may give credence to all evidence presented by the taxpayer, including those that may not have been submitted to the CIR as the case is being essentially decided in the first instance.

The views or opinions expressed 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.

Archie D. Guevarra is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

Makati can’t tax Aboitiz unit, CTA affirms

THE COURT of Tax Appeals (CTA) has affirmed that Makati City cannot impose taxes on Luzon Hydro Corp. (LHC), a unit of Aboitiz Power Corp., because its administrative office there does not perform sales.

In a 16-page decision dated Jan. 14, the court en banc voted 9-0 to affirm the Special First Division’s November 2013 decision, which reversed the Makati Regional Trial Court’s April 2012 order entitling the city to business tax from LHC.

The CTA en banc said its division was correct to rule that LHC’s office in Makati City did not perform sales, going by the statement of the company’s finance and accounting manager.

The decision stated that it is not enough for an office to conduct operations to be considered a branch or sales office for the purpose of tax collection under the Local Government Code.

Such an office would need to have recorded sales and transactions made within Makati City’s jurisdiction, something the city government was not able to prove in the case of LHC.

“Considering that the [LHC] Makati City office is not a branch or sales office, it is not entitled to share in the 70% sales allocation,” the decision read.

Because of this, the CTA affirmed that only the towns of Bakun, Benguet, and Alilem, Ilocos Sur, can tax the company’s sales proceeds. LHC’s 70-megawatt hydroelectric plant along Bakun River straddles the two towns.

Previously, the Aboitiz unit had allocated an equal 23.33% portion of its gross sales each to Bakun, Alilem, and Makati City (or a total of 70%). Questioning this setup, Bakun in 2006 obtained from the Bureau of Local Government Finance (BLGF) an opinion declaring that Makati City is not entitled to local business tax. Alilem adopted the BLGF opinion a year later.

This prompted LHC to ask the Makati RTC to determine how it should distribute the 70% sales allocation. In April 2012, the court ruled that the Makati office was a project office, saying the city can impose tax on LHC at a reduced 20% rate. This, in turn, led Bakun to successfully appeal before the CTA.

The en banc decision was penned by Associate Justice Cielito N. Mindaro-Grulla.

Corporate News

By Vince Alvic A.F. Nonato, Reporter

IFRS 16, Leases: Increasing transparency on lease assets and liabilities

After more than five years, the International Accounting Standards Board (IASB) has finally issued International Financial Reporting Standards (IFRS) 16, Leases, which is the new standard that will replace International Accounting Standards (IAS) 17, Leases.

IFRS 16 was issued to address the criticisms surrounding IAS 17, primarily around the fact that many leases are off balance sheet, thereby making it difficult for users to get an accurate picture of an entity’s lease assets and liabilities; to compare companies that lease assets with those that buy assets; and to estimate the amount of off balance sheet obligations.

The changes that will be brought about by IFRS 16 are expected to address many of these criticisms and will better facilitate capital allocation by enabling better credit and investment decision-making by both investors and companies.

IFRS 16 was issued as part of the IASB’s joint project with the Financial Accounting Standards Board (FASB). Although FASB has yet to issue its revised leases standard, it is expected that like IASB, FASB will require lessees to recognize most leases on the balance sheet. However, since both standard-setting bodies made different decisions during the deliberations, differences are expected to arise between the two new standards.

Among the key changes to the current lease accounting that will be brought about by IFRS 16 are the definition of a lease, the lease accounting models, and the separation of the lease and non-lease components of lease contracts.

DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE
IFRS 16 defines a lease as a contract (or part of a contract) that conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. This retains the requirements of IAS 17 but emphasizes the concept of “right to control the use of an identified asset.”

Determining when a customer has the right to direct the use of an identified asset may require significant judgment, particularly for arrangements that include significant services. Most contracts that qualify as leases under the current IAS 17 are generally expected to be considered as leases under the new standard; however, it is expected that IFRS 16 will exclude from its scope some service contracts that may have been considered leases under IAS 17 (e.g., supply contracts).

LESSEE ACCOUNTING
Perhaps the most significant change that will be brought about by IFRS 16 is lessee accounting. IFRS 16 prescribes a single lessee model that will be applied to generally all leases. IFRS 16 requires all leases to be put on the lessee’s balance sheet, resulting in the recognition of a right-of-use asset and a corresponding lease liability.

The lease liability is measured at the present value of the lease payments to be made over the lease term. The right-of-use asset, on the other hand, is measured at the amount of the lease liability, adjusted for lease payments, lease incentives received, lessee’s initial direct costs and any estimate of restoration and dismantling costs.

The amounts that will be capitalized are generally based on the fixed lease payments, including inflation-linked payments. This means that variable lease payments linked to sales, or use of the underlying asset, or optional payments where extension of lease term is not reasonably certain, will be excluded from the capitalized right-of-use asset.

Subsequent to initial recognition, the right-of-use asset will generally be depreciated over the lease term, applying the depreciation requirements in IAS 16, Property, Plant and Equipment. Meanwhile, the lease liability will be increased to reflect interest accretion and decreased to reflect lease payments over the lease term.

The right-of-use asset is subject to impairment testing in accordance with IAS 36, Impairment of Assets.

EXEMPTIONS
Relief is provided under IFRS 16 in that lessees have the option not to recognize on their balance sheets short-term leases (i.e., a lease that, at the commencement date, has a lease term of 12 months or less and that has no purchase option) or those leases for which the underlying asset is of low value (e.g., a lease of a personal computer). A lessee that opts to invoke the exemption shall recognize lease payments associated with those leases similar to the accounting for operating leases under IAS 17 (i.e., as expense on a straight-line basis or another systematic method that is representative of the pattern of benefit derived by the lessee).

As the relief is optional as far as short-term leases are concerned, this can be an area where judgment may be involved and can pose structuring opportunities. Another area of judgment is determining whether a lease is “low value.” IFRS 16 does not specify what “low value” means, although the Application Guidance to IFRS 16 gives direction on how to determine if an underlying asset is of low value to the entity.

LESSOR ACCOUNTING
The IASB decided not to change the lessor accounting as it has gathered that the cost of currently changing lessor accounting would outweigh the related benefits. Instead, the principles for lessor accounting under IAS 17 are carried forward under IFRS 16. This means that for lessors, there will still be a dual model approach applying either operating lease accounting or finance lease accounting. The IASB, however, decided to enhance the disclosure requirements for lessors, particularly disclosures on the exposure to residual value risk, in response to concerns regarding the lessor’s risk exposure and the lack of information of such exposure.

While it is perceived that lessors will not be as affected by the new standard as the lessees will be, the IASB acknowledges that the change in lessee accounting might have an impact on the leasing market if companies decide to buy more assets and as a consequence, lease fewer assets. However, it is expected that the reasons why companies lease their assets will continue to exist even after the effectivity of IFRS 16.

SEPARATING THE COMPONENTS OF A LEASE CONTRACT
IFRS 16 also provides for the separation of lease from non-lease components based on the relative stand-alone prices of those components. This is highly relevant to contracts that contain a lease coupled with an agreement to purchase or sell other goods or services (i.e., non-lease components such as maintenance).

As a practical expedient, however, a lessee may elect (by class of underlying asset) not to separate the non-lease components, and instead account for each lease component and any associated non-lease component as a single lease component. This practical expedient may result in differences considering that treating a non-lease component as a lease may put it on the balance sheet which could be avoided had it been treated otherwise. The practical expedient is not available for lessors who are required to allocate the consideration among the various components in accordance with IFRS 15, Revenue form Contracts with Customers.

KEY EFFECTS OF IFRS 16
From a lessor standpoint, because IFRS 16 carries the key features of IAS 17 (aside from the additional disclosure requirements), no significant effect is anticipated.

On the other hand, from a lessee standpoint, since current operating leases will be capitalized and accounted for similar to finance leases under IAS 17, the financial statements are expected to significantly change. On the balance sheet, right-of-use assets will increase, financial liabilities will increase, while equity is likely to go down. On the income statement, the general effect on net income before tax is not expected to be significant because while operating expenses are expected to go down (i.e., no operating lease expense but depreciation of leased assets), finance costs will go up because of the accretion of lease liability.

EBITDA (earnings before interest, tax, depreciation and amortization) and operating profit are expected to increase for companies with material off balance sheet leases. Finally on the cash flow statement, operating cash outflows will go down and financing cash outflows will go up.

On the lessee’s performance metrics, debt-to-equity ratio is expected to increase. On the other hand, asset-based ratios like asset turnover are expected to decrease because of the bulking up of the assets. EBITDAR (EBITDA and rent), on the other hand, is not expected to change.

The use of off balance sheet leases is highly concentrated within some industry sectors and within some companies. Among the industries identified by the IASB that have significant operating leases are airlines, retailers, travel and leisure, transport, telecommunications, energy, media, distributors, information technology, and health care. It is expected that IFRS 16 will significantly affect these industries.

EFFECTIVE DATE
IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early application is permitted but only if IFRS 15 is applied at or before the date of initial application of IFRS 16.

A lessee can apply IFRS 16 either:

a) Retrospectively to each prior reporting period presented, following IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors; or

b) Retrospectively with the cumulative effect of initial application recognized at the date of initial application.

In case Option b) is applied, a lessee shall not restate comparative information.

On the other hand, a lessor is not required to make any adjustments on transition for leases in which it is a lessor, and shall account for those leases applying IFRS 16 from the date of initial application.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.
John T. Villa is a partner of SGV & Co.

Can a defective waiver be valid?

Does your company have an on-going tax assessment covering tax year 2012? If yes, then it is likely that you have already been asked to execute a waiver on the statute of limitations.

Following the general three-year period to assess, Final Assessment Notice for taxable year 2012 must be made not later than April 15, 2016. Thus, since this is merely three months away, the Bureau of Internal Revenue (BIR) will normally ask the taxpayer to execute a waiver.

Under the Tax Code, after the lapse of the applicable period, the BIR’s right to assess the taxpayer is deemed to have prescribed, unless the taxpayer executes a waiver of the statute of limitations prior to the prescriptive period.

By executing the waiver, the taxpayer is, in effect, allowing the BIR to continue with its investigation and to issue an assessment even after the original three-year period. The taxpayer thereby waives his right to invoke the defense of prescription for the assessments issued after the prescribed period to assess.

In several cases, the Court has consistently ruled that for a waiver to be valid and binding, the same must faithfully comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90 and Revenue Delegation Authority Order (RDAO) No. 05-01.

Thus, in several cases, waivers which failed to comply with the requirements listed below of RMO No. 20-90 and RDAO No. 05-01 were considered defective and extension of the period to assess invalid.

• The waiver must be in the form as provided under RDAO No. 05-01.

• The phrase “but not after ________ 20__” should be filled up.

• The waiver shall be signed by the taxpayer himself or his duly authorized representative.

In the case of a corporation, the waiver must be signed by any of its responsible officials.

• The same must be accepted by the Revenue District Office (RDO) or the Regional Director, as applicable.

* The date of acceptance by the Bureau, which must be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed, should be clearly indicated.

However, on Dec. 7, 2015, the Third Division of the Supreme Court promulgated a decision on the case of Next Mobile, Inc. (formerly Nextel Communications Phils., Inc.) vs. CIR, which departed from the general rule on the compliance with the above requirements for a waiver to be valid and effective.

Under the general rule, a defective waiver cannot extend the prescriptive period. However, due to the peculiar circumstances of the case, the Court held that though the waivers have some defects, they shall still be considered valid.

So what would make a defective waiver valid?

In its decision, the Court agreed with the flaws in the waiver found by Court of Tax Appeals, i.e. (1) they were executed without a notarized board authority; (2) the dates of acceptance by the BIR were not indicated therein; and (3) the fact of receipt by the Company of its second of the five waivers was not indicated on the face of the original Second Waiver.

With the flaws stated above, the Court found both parties to be at fault.

On the first defect, the party questioning the authority of the signatory is the same party which caused the unauthorized person to sign the five waivers. Thus, the Company failed to comply with the requirement that it must be signed by the responsible official of the Company duly authorized to sign. Likewise, the BIR failed for five times to ensure through a written delegation that the signatory to the waiver was duly authorized by the company.

The Court also pointed out that both parties, despite the defects in the waiver, continued with the assessment relying on the waiver. The company did not even question the validity of the waiver in its protest letter. Yet, after being able to submit additional documents due to its execution of the waiver, the company questioned in court the validity of the same waiver. On the other hand, the BIR should have been prudent enough to ensure compliance on the waiver requirements.

Thus, both parties have been pointed out to be in pari delicto or “in equal fault”. They should have no action against each other. However, relying on the basic principle of taxation that taxes are the lifeblood of the government, the Court ruled that it would be more equitable to consider the waiver valid in order to support said basic principle. Also, following this principle, the company is estopped from questioning validity of its own waivers.

In addition, the company should have come to court with clean hands. Thus, it cannot benefit from successfully insisting on the invalidity of the waiver to evade paying deficiency taxes. By not raising any objection against the validity of the five waivers executed until the BIR assessed them deficiency taxes, the company is estopped from questioning the same. Again, the court ruled that application of the doctrine of estoppel in this case would cause undue harm to the government.

Finally, the court ruled that this highly suspicious situation cannot be tolerated. Taxpayers who intend to escape the responsibility of paying taxes may do so by merely hiding behind technicalities. On other hand, BIR’s failure to exercise diligence, as provided in RMO No. 20-90, must be addressed by imposing administrative penalties upon the responsible officers.

With this new development, the general rule that the waiver of the statute of limitations is a derogation of the taxpayer’s rights to security against prolonged and unscrupulous investigations, and therefore must be carefully and strictly construed, may no longer suffice. Taxpayers questioning the validity of the same must also be prudent enough to ensure compliance on their part.

Ma. Lourdes Politado-Aclan is a senior manager of 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.

Renewing business registration

It is day 12 of 2016. Corporations, partnerships, professionals and sole proprietorships should already be working on the renewal of their respective business registration/permits with the local government units (LGUs). I’m sharing in this article some issues that business establishments may encounter in the renewal of their business registration.

Under the Local Government Code (LGC), all establishments are required to annually renew their registration with the LGUs. The annual renewal of business registration consists of, but is not limited to, payment of local business tax (LBT), mayor’s permit fee, sanitary inspection fee, garbage fee, building inspection fee, electrical inspection fee, mechanical inspection fee, plumbing inspection fee, fire inspection fee, personnel fee, business plate registration fee and other charges imposed by the various LGUs.

The LBT is based on gross sales/receipts while the applicable LBT rate varies by the establishment’s activities. Situs rules apply if a specific company maintains a branch, factory, warehouse, or plantation in various localities. Mayor’s permit and other fees and charges, are usually charged as a fixed amount by LGUs.

Businesses should be aware that the basis of the LBT is gross sales/receipts of the preceding year. Some LGUs refuse to consider a lower LBT than that paid in the previous year, even if gross sales/receipts register a decline. In such cases, businesses must also be keen in protecting their rights to ensure that LBT is correctly computed.

Renewal and payment of LBT must be made on or before the 20th of January of each year. Payment of LBT may be done annually, semi-annually (July 20) or quarterly (April 20, July 20 and October 20) depending on the schedule of payment chosen by the business.

The deadline applies to all cities and municipalities. The LGC, however, allows LGUs to extend the time of payment but only for a justifiable cause. In the last two years, Makati City and Quezon City extended the payment date until the end of January. It best to confirm with your particular LGU. Remember, too, that the extension is only on the time of payment and not on the submission of documents necessary for the renewal of the business permits.

Late payment of LBT will attract a 25% surcharge on the unpaid taxes, fees or charges, plus an additional 2% interest per month which is computed not only the unpaid amount but also on the surcharge.

On the other hand, businesses that fail to renew their business permit are, technically, not allowed to operate within the territory of the LGU.

Every separate or distinct establishment or place of business, including facilities where sales transactions occur, is also required to be registered with the BIR and pay the annual Registration Fee of P500 on or before Jan. 31 with an authorized agent bank of the Revenue District Office that has jurisdiction over the business establishment. Many companies have been penalized for failure to register an additional floor that has been leased to house additional staff, or a warehouse or depot because of absence of business or sales activities therein. Under Section 258 of the Tax Code, failure to register shall be punished by a fine of not less than P5,000 but not more than P20,000. There is also a provision for imprisonment of not less than six months but not more than two years.

Philippine Economic Zone Authority (PEZA)-registered entities should be forewarned on certain policies of some LGUs when it comes to the assessment and collection of LBT.

According to PEZA law, PEZA-registered entities are exempt from paying LBT regardless of whether they are enjoying income tax holidays or are under the 5% gross income tax regime. Thus, if the Company is a PEZA-registered entity, it is exempt from payment of LBT on its registered activities. However, some LGUs have a memorandum of agreement with PEZA allowing them to impose mayor’s permit fees and other regulatory fees.

In case the company generates income from activities deemed outside of the registered activity or has local sales exceeding the 30% threshold, both of which will be subject to the regular corporate income tax, the LGUs may assess the and collect LBT on such revenues of the company.

No matter how diverse procedures are for LGUs in terms of business registration and LBT payment, the key is to be organized and pro-active. Avoid mistakes and late payment penalties by filing on time. Know the rules and ensure that you will be paying only the taxes and fees that are due.

Let’s start 2016 on a high note.

Ed Warren L. Balauag is a senior associate of 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.

Transparency through TIMTA

The Asia-Pacific Economic Cooperation promotes free and open trade and investment thereby increasing competition throughout the Asia-Pacific region. This makes it an opportune time to offer an attractive business environment to foreign investors.

One of the tools for attracting foreign investment is fiscal incentives. Currently, several investment promotion agencies (IPAs) such as the Board of Investments, Philippine Economic Zone Authority (PEZA), and others grant tax holidays, investment allowances, accelerated depreciation, reduced corporate income tax rates, and exemptions from indirect taxes, to eligible investors.

Recently, the Philippine government established a way to monitor and evaluate these incentives through Republic Act No. 10708 otherwise known as the Tax Incentives Management and Transparency Act (TIMTA). TIMTA was passed over the objection of local and foreign business groups who fear the apparent burden the law will cause investors that would weaken the country’s competitiveness. Its critics also opposed the resulting constraint on the IPA’s administration of incentives, the limiting budget created in the General Appropriations Act (GAA) for these incentives, and the authority that may be given to the Bureau of Internal Revenue (BIR) to impose requirements before the award of incentives.

The proponents of the law justify TIMTA as a tool to measure and account for the aggregate amount of tax incentives granted by the government without interfering with the fiscal incentives currently enjoyed. The Department of Finance (DoF) argues that the law will develop our fiscal policy by bolstering transparency and accountability in forgoing resources of the government in favor of the private sector in the interest of economic development.

A study by the Philippine Institute for Development Studies reveals that fiscal incentives have only a minimal effect on investment. The grant of substantial fiscal incentives will not necessarily boost the competitiveness of a country. It is argued that the effectiveness of fiscal incentives in increasing investment will only take place if projects that are sensitive to taxes are given more favorable tax treatment. Some incentives are even granted to investors who would have invested without the incentive. Time-bound incentives usually attract short-lived enterprises which leave after the incentive expires.

Taking into consideration these pros and cons, let us see what the approved TIMTA actually provides. Its salient features are as follows:

1. Registered business entities enjoying fiscal incentives are required to electronically file and pay their annual tax returns with the BIR each year;

2. Registered business entities availing of incentives shall file with their respective IPAs a complete annual tax incentives report of income-based tax incentives, value-added tax and duty exemptions, deductions, credits, or exclusions from the tax base, within thirty (30) days from the statutory deadline for filing of tax returns and payment of taxes;

3. The IPAs shall, within sixty (60) days from the deadline for filing tax returns, submit to the BIR their respective annual tax incentives report based on the list of registered business entities who have filed said report;

4. The BIR and the Bureau of Customs (BoC) shall have the right to conduct assessment within the prescribed period provided in the National Internal Revenue Code, as amended, and the Tariff and Customs Code of the Philippines, as amended, respectively;

5. The BIR and BoC shall submit to the DoF the: (a) tax and duty incentives of registered business entities as reflected in their filed tax returns and import entries; and (b) actual tax and duty incentives as evaluated by the BIR and BoC;

6. The DoF shall maintain a single database for monitoring and analysis of tax incentives granted;

7. The DoF shall submit to the Department of Budget and Management (DBM) the aggregate data of the incentives availed of by the registered business entities on a sectoral and per industry basis, which shall be reflected in the annual Budget of Expenditures and Sources of Financing which shall be known as the Tax Incentives Information section;

8. TIMTA would not diminish or limit the amount of incentives that IPAs may grant pursuant to their charters or prevent or delay the promotion and regulation of investments, processing of applications for registrations, and evaluation of entitlement of incentives by IPAs;

9. The National Economic and Development Authority (NEDA) is mandated to conduct a cost-benefit analysis on the investment incentives to determine the impact of tax incentives on the Philippine economy;

10. Any registered business entity which fails to comply with filing and reportorial requirements will be penalized with a fine amounting to P100,000 for its first violation; P500,000 for the second violation; and, cancellation of the registration of the business entity for the third violation. In addition, any government official or employee who fails without justifiable reason to provide or furnish data or information as required under this act, shall be punished by a fine equivalent to that official’s or employee’s basic salary for a period of one month to six months, or by suspension from government service for not more than one year, or both, in addition to any criminal and administrative penalties imposable under existing laws; and

11. The implementation of this law is to be funded from the current GAA.

It is worth noting that the passed law deleted the proposed provisions on the suspension of incentives for failure to file reportorial requirements and the extension of the BIR’s assessment period from three years to four and a half years.

The non-diminution of the amount of incentives that IPAs may grant and the non-interference on the application process for registrations and entitlements were also provided for. However, would this be enough to preserve the incentives granted to investors, as well as, the authority of IPAs to determine eligibility to incentives? The process under TIMTA involves several stages from the filing with BIR/BoC to the monitoring database of the DoF, submission to DBM and Oversight Committee, until the cost-benefit analysis to be conducted by NEDA. This will definitely cause some delay in approval or confirmation when applicants actually avail of incentives.

Although TIMTA seems to strengthen transparency and accountability, the government should consider simplifying its implementation and countering the negative effects this reporting can have on the attractiveness of our business environment. Since TIMTA is already in place, the government may offer other economic benefits that would appeal to investors, such as efficient public infrastructure, consistent and efficient regulatory environment, and overall improvement in the ease of doing business in the Philippines, so as not to sacrifice business viability for the sake of transparency.

Charity Mandap-de Veyra is a tax manager at the Cebu and Davao Branches of Punongbayan & Araullo.

Transparency through TIMTA

Let’s Talk Tax : Charity Mandap – de Veyra

Business World : December 21, 2015

Limited imposition of deficiency interest

As the New Year sets in, tax investigations which were suspended by virtue of RMC 75-2015 will also resume. Fortunately before 2015 ended, the Court of Tax Appeals (CTA) promulgated a decision which may give hope to taxpayers under investigation.

On Dec. 9, 2015, the First Division of the CTA promulgated its amended decision in CTA Case No. 8439 entitled “Ace/Saatchi & Saatchi Advertising, Inc. vs. CIR,” which deviates from the established practice on the imposition of deficiency interest on all taxes found deficient by the BIR or the Court.

In a long line of decisions, the CTA has always sustained BIR’s assessment of deficiency interest on all types of taxes. In the aforementioned amended decision, however, the CTA canceled the taxpayer’s assessment for deficiency interest on deficiency final withholding tax (FWT), withholding tax on compensation (WTC), expanded withholding tax and value-added tax (VAT).

WHAT WAS THE LEGAL BASIS CITED BY THE CTA?
The Court interpreted Sec. 249 B to mean that deficiency interest of 20% should only be imposed on deficiency taxes as defined under the Tax Code. Interestingly, as found by the CTA, deficiency tax was defined only in three tax types, i.e. income tax (Section 56), estate tax (Section 93), and donors tax (Section 104). In conclusion, the CTA categorically stated that deficiency interest under Section 249 B of the National Internal Revenue Code (NIRC) as amended, applies only to income tax, estate tax and donors tax.

Consequently, according to the CTA, creditable withholding taxes, final withholding tax, VAT, DST, Excise Tax and Percentage Tax, provided under the Tax Code should not be subject to deficiency interest.

Aren’t the FWT and CWT also considered income taxes? It must be noted that the Sections imposing the FWT and CWT are also under the Tax Code title on income tax and, thus, may also be included in the income taxes which must be subject to deficiency interest. However, it has also been explained many times that the withholding tax is not really tax on the withholding agent but is just a manner of advanced collection of the tax from the income earner. Note that FWT and CWT are tax due on the part of the income earner and not the taxpayer remitter. Hence, the CTA’s interpretation of Section 249 B may also mean that it should apply only to taxes which are due from the taxpayers themselves.

On the other hand, I believe that this interpretation of Section 249 B of the Tax Code is in a way more equitable for the taxpayer. In many cases, the taxes on the income payments subject to the deficiency tax assessments have already been paid by the income earner upon payment of their quarterly or annual income tax despite failure of the withholding agent to withhold the tax. Hence, it is but proper that interest should not anymore be imposed on the withholding agent. The collection of deficiency withholding tax, in such cases, allows the BIR to collect the tax twice, from the income earner and from the withholding agent.

The interpretation is also fair if we relate it to RR 12-2013, which disallows claims for deductions of expenses which are not subject to withholding tax even if the withholding tax due was already paid. Applying the foregoing interpretation of the Court, the taxpayer will no longer be required to pay interest on the withholding tax due, but the taxpayer will still be subject to deficiency interest on income tax when the disallowed expense is added back to its gross income for the year.

It must also be mentioned that the issue on scope of the imposition of deficiency interest is not new as the CTA en banc has already passed upon this issue in CTA EB Case No. 745, dated Sept. 4, 2012, “Takenaka Corporation Philippine Branch vs. CIR” which provides that deficiency interest under Section 249 B of the Tax Code applies to all internal revenue taxes imposed by the NIRC as amended. The CTA en banc decision was based on the Supreme Court (SC) decision in Paper Industries Corporation of the Philippines vs. Court of Appeals (GR No. 106949-50 dated Dec. 1, 1995), where it was ruled that deficiency interest may only be imposed on tax specifically covered by the NIRC. However please note that the SC Decision involves provisions of the 1977 Tax Code and any mention of the 1997 Tax Code was just made in passing.

WHAT CAN TAXPAYERS EXPECT FROM THIS DECISION?
While the CTA decision is a welcome development, we expect that the BIR will not adopt this case doctrine immediately as this is an unfavorable decision on the part of the BIR and it is not yet considered jurisprudence. But since the decision was issued by the CTA division, the legal battle will still take a long way to the CTA en banc and eventually to the SC before we will have settled jurisprudence on what taxes are subject to deficiency interest.

That this will ultimately be settled jurisprudence depends on whether the decision is appealed by the BIR. In the past, where there is a risk that the SC will rule in favor of the taxpayer, the BIR has opted not to contest the case, thereby preventing the CTA interpretation from becoming jurisprudence. That way, the CTA decision remains binding only between the BIR and the taxpayer.

There are many other provisions in the Tax Code that we would probably want challenged. I personally hope that more taxpayers are willing to bring them up before the courts.

Jennylyn V. Reyes is a senior associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.

Jennylyn V. Reyes

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