A new source of tax collection for the BIR

THE BUREAU of Internal Revenue (BIR) continued to fall short of its tax collections as it missed its collection target in the first nine months of the year. However, the BIR is not taking this serious matter sitting down.

 
In the hope of improving its tax collections, the BIR has adopted several tax measures which include the following: (a) it clarified that clubs organized and operated exclusively for pleasure and recreation are not tax-exempt organizations; (b) clarified that the association dues, membership fees and other assessments/charges collected by condominium corporations are subject to income tax and value added tax (VAT); (c) clarified that the deposits/cash advances for expenses received by a taxpayer from its clients/customers are subject to income tax and to VAT or percentage tax; (d) imposed a limit on the deductibility of depreciation expense, input tax and all related expenses on purchase of motor vehicles; (e) issued the transfer pricing regulations; (f) tightened audit of industries and self-employed professionals; and (g) filed charges against suspected tax evaders.

These tax measures have contributed to the 21.11% higher tax collections in September 2013 than in the same month last year, though the bureau missed its target for the month.

Where could the BIR source its tax collection to fill-in the gap? From non-stock, non-profit corporations and associations.

It can be remembered that in July 2013, the BIR issued Revenue Memorandum Order (RMO) No. 20-2013, which prescribes the guidelines in applying for tax exemption, revalidation of tax exemption certificates and application for confirmatory BIR rulings of non-stock, non-profit organizations under Section 30 of the Tax Code. The purpose of the RMO is to ensure that only non-stock, non-profit organizations qualified for tax exemption under Section 30 of the Tax Code, as amended shall be issued the Certificate of Tax Exemption.

In the said RMO, before the issuance of the Certificate of Tax Exemption, the BIR will ascertain whether or not the non-stock, non-profit corporation or association meets the following requirements:

   i. It is a non-stock, non-profit corporation or association;

  ii. The purpose for which it was created is one of those enumerated under Section 30 of the NIRC, as amended;
 iii. No part of the corporation or association’s net income shall inure to the benefits of any private individual; and
  iv. The trustees of the non-profit corporation or association do not receive any compensation or remuneration.

Likewise, the BIR will determine whether or not the non-stock, non-profit corporation or association is operating as an organization under Section 30 of the NIRC, as amended, by examining its modus operandi, financial statements and other relevant documents. The examination must show that:

   i. Its earnings do not inure to the benefit of any private individual;
  ii. It does not operate for the benefit of private interest such as those of its founder or the founder’s family; and
 iii. It does not operate for the purpose of conducting a trade or business that is not related to its tax-exempt purpose.

Recently, the BIR denied the application for revalidation of the tax exemption ruling of certain non-stock, non-profit corporations on the ground that they did not qualify as a tax-exempt corporation under Section 30 of the Tax Code.

In one of the rulings denied by the BIR, the concerned non-stock, non-profit corporation has the following purposes:

   1. to promote the recognition of supply management profession as a science, and to stress its importance in commerce and  industry;
   2. to undertake the promotion of research and study or local and international market conditions;

   3. to promote the establishment of acceptable basic standards of product, and to influence manufacturers to improve the       quality of their goods;

   4. to promote local and international exchange of supply management experience and knowledge;

   5. to extend supply management technology and training of personnel of member companies;

   6. to foster closer, more mutual understanding and more friendly relations among members of the profession;

   7. to unify and bring into one compact organization the entire supply management profession in the Philippines; and

   8. to publish and circulate among members an organ for the dissemination of activities of the corporation and such other information useful to the supply management profession.

The BIR’s basis in denying its application is straight and simple -- the tax exemption of the non-stock, non-profit corporation lacks factual and legal basis. The BIR invoked the principle that tax exemptions should be construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. It should be noted that in the said ruling, the BIR did not elaborate the reason such organization did not qualify in any of the provisions under Section 30 of the Tax Code, as amended.

In RMO 20-2013, the BIR prescribed the criteria/requirements in order that a non-stock, non-profit corporation or association would qualify for tax exemption. Isn’t it reasonable enough if the BIR will identify and discuss in its ruling which of the criteria/requirements in RMO No. 20-2013 the non-stock, non-profit corporation or association fails to meet?

The consequence of the denial of tax exemption is that the net income of these non-stock, non-profit corporations will be subject to the 30% regular income tax rate while the revenue/collection of membership fees will be subject to 12% VAT, as if they are classified as corporations engaged in trade or business or practice of profession.

Imagine how many non-stock, non-profit corporations and associations similarly situated above will have their income tax exemptions denied by the BIR? How much of the net income of such non-stock, non-profit corporations and associations will be taxed at 30% regular income tax rate? How much of the revenue/collection of membership fees will be subjected to 12% VAT? Clearly, this is a new source of tax collection for the BIR. But, we are hoping that the BIR will thoroughly evaluate the operations/activities of the concerned organizations before denying their tax exemption.

Nikkolai F. Canceran

Let’s Talk Tax 

Punongbayan and Araullo

Additional disclosure requirement in ITR, further deferred to CY 2013

The Bureau of Internal Revenue has further deferred to taxable year 2013 the requirement  for individuals to disclose their other income in the enhanced BIR income tax returns  (BIR Forms 1700 and 1701).  Thus, for taxable year 2012, the disclosure of supplemental information shall be optional for individual taxpayers who are required to file their income tax returns on or before April 15, 2013.

The disclosure requirement, however, shall become mandatory for income tax filing covering and starting calendar year 2013 for which a return is required to be filed in 2014. For this purpose, individual taxpayers are advised to keep evidence or records of their tax-exempt income and income which are subjected to final withholding tax in  2013 to ensure compliance with the disclosure requirements. 

(Revenue Memorandum Circular No. 21-2013, March 5, 2013)

Let’s Talk Tax 

Punongbayan and Araullo

Tax treatment of prizes

Under Section 32(B)(7)(c) of the Tax Code, there are two requisites that must be met for awards/prizes to qualify for exemption or exclusion from gross income: (a) the recipient was selected without any action on his part to enter the contest or proceeding; and (b) the recipient is not required to render substantial failure services as a condition to receiving the prize or award.

If the winners in a contest do not meet the requirements as laid down under Section 32(B)(7)(c) of the Tax Code, the cash awards/prizes given to individuals will be subject to tax and consequently to withholding tax. Under Section 24(B) of the Tax Code, as implemented by Section 2.57-1 of Revenue Regulations No. (RR) 2-98, a 20% final withholding tax is imposed on prizes and winnings derived by individuals from sources within the Philippines, except prizes amounting to P10,000 or less.

If the prize and/or winning is P10,000 or less, there is no requirement on the part of the payor to withhold the 20% final tax, but the income recipient (winner) is required to file an income tax return as prescribed under Sections 51 and 52 of the Tax Code and declare the amount of his prize/winning in his income tax return; the amount shall be subject to tax under Section 24(A) of the Tax Code.

(BIR Ruling No. 316-2013, August 8, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Tax treatment of donations to homeowner’s associations

The BIR has issued the following clarifications on the donations received by homeowner’s associations.

Gratuitous donations

Gratuitous gifts, donations, and other contributions received by homeowner’s associations are not qualified for exemption from donor’s tax under Section 101 (A)(3) of the Tax Code.  Hence, any person – natural or juridical, resident or non-resident – who transfers or causes to transfer property by gratuitous gift to a homeowner’s association must file BIR Form 1800 (Donor’s Tax Return) within 30 days after the date the donation was made.

Onerous donations

In case of an onerous donation or donation in exchange for goods, services or use or lease of properties, this shall not be considered a donation subject to donor’s tax since donations of this kind are not given in the nature of an endowment or donation, but in the concept of a fee or price in exchange for the performance of a service, use of properties, or delivery of an object.

However, such contributions to associations in exchange for goods, services and use of properties constitute as other assessments/ charges from activity in exchange for the performance of a service, use of properties or delivery of an object. As such, they are subject to income tax and value-added tax (or percentage tax, as the case may be), unless they satisfy the conditions for exemption under Section 18 of Republic Act No. (RA) 9904, as implemented by RMC 09-2013.

(Revenue Memorandum Circular No. 53- 2013, August 16, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Redemption period on foreclosure sales

For purposes of reckoning the one-year redemption period on the foreclosed asset of natural persons and the period within which to pay the capital gains tax or creditable withholding tax and documentary stamp tax on the foreclosure of real estate mortgage, the same shall be reckoned from the date of registration of the sale in the office of the Register of Deeds.

As regards the right of redemption of juridical persons in an extrajudicial foreclosure, the right to redeem should be made before the registration of the Certificate of Foreclosure Sale with the applicable Register of Deeds or within three months after foreclosure, whichever is earlier. The three-month period shall be reckoned from the date of the executive judge’s approval of the certificate of sale because it is only then that there is a “sale” to speak of which can be taxed.

(BIR Ruling No. 319-2013, August 16, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Invalid imposition

RECENTLY, the Bureau of Internal Revenue (BIR) came out with several controversial issuances which are a reversal of long-standing practice and rulings. One of these issuances is Revenue Memorandum Circular No. (RMC) 65-2012, which took effect on Oct. 31, 2012.
   
RMC 65-2012 clarified the taxability of association dues, membership fees and other assessments/charges collected by condominium corporations from its members and tenants. The said RMC overturned rulings exempting condominium corporations from income tax and value-added tax (VAT), stating that these rulings misinterpreted the provisions of the 1997 National Internal Revenue Code (NIRC), as amended.

Condominium corporations cried foul, and several of them referred the issue to the Law Division of the BIR for further clarification.

However, First e-Bank Tower Condominium Corp. (petitioner) brought the matter before the courts to determine their obligation under RMC 65-2012.

On Sept. 5, 2013, the Regional Trial Court (RTC) Branch 146 of Makati City issued a Resolution declaring RMC 65-2012 as invalidly issued.

The RTC declared that the disputed RMC goes beyond its objective to clarify the existing statute for it did not merely interpret or clarify the existing BIR Rulings but in fact legislated or introduced new legislation under the mantle of its quasi-legislative authority. The RTC also stated that the RMC failed to show what particular law it clarified. Instead, it merely departed from the several rulings of the BIR exempting from income tax the assessments/charges collected by condominium corporations from their members, on the ground that the collection of association dues and other assessments/charges are merely held in trust to be used solely for administrative expense in implementing their purposes.

The RTC held that the new circular made its own legislation abandoning the previous rulings of the BIR, which became the practice of the condominium corporations, including the petitioner. The RMC abruptly charged taxpayers an imposition which was then non-existent, and worse, made it immediately effective, which is prejudicial to the rights of petitioner. In short, the BIR did not merely interpret or clarify but changed altogether the long standing rule of the BIR in violation of the petitioner’s right to due process.

While the RTC decision clearly stated that First eBank Tower Condominium Corp. is not liable for income tax and VAT on association dues it received from its members, the issue now is whether it can apply to other condominium corporations.

Note that the case filed before the RTC is an action for declaratory relief which is defined as an action by any person interested in a deed, will, contract or other written instrument, executive order, or resolution, to determine any question of construction or validity arising from an instrument, executive order or regulation, or statute, and for the declaration of his rights and duties thereunder [Ferrer vs. Roco, G.R. No 174129, July 5, 2010].

It is important to emphasize that an action for declaratory relief should be filed by a person interested under a deed, will, contract or other written instrument whose rights are affected by a stature, executive order, regulation or ordinance before breach or violation thereof [Tambunting vs. Spouses Baello, G.R. No. 144101, Sept. 16, 2005].

The Rules of Court state that the filing of a pleading, i.e., complaint or petition, initiates an action or proceeding. The filing of a petition is an invocation of the powers of the court to settle a controversy. The court will not and cannot acquire jurisdiction over persons or entities who did not submit to its authority. There must be an action filed by a person in interest for the court to decide on a matter of controversy between the parties to the case.

Thus, in this case where the RTC declared that RMC 65-2012 was invalidly issued, if the decision applies only to the petitioner as the par ty in the case, what would happen to condominium corporations who are similarly situated? Can these condominium corporations use the RTC decision as basis for refusing to pay income tax and VAT on collected association dues, membership fees and other assessments/charges even if the RTC did not acquire jurisdiction over them? We note that their rights and obligations under RMC 65-2012 were not ruled upon by the courts. However, the RTC clearly stated that the RMC was invalidly issued. If the RTC decision was binding only between the BIR and First e-Bank Tower, can an invalidly issued RMC be imposed on other condominium corporations?

In another case, a petition for declaratory relief to invalidate an ordinance declaring squatters as bona fide occupants wherein the squatters were not parties to the case, the Supreme Court declared that the reason for the law requiring the joinder of all necessary parties is that the failure to do so would deprive the declaration of the final and pacifying function the action for declaratory relief is calculated to subserve, as they would not be bound by the declaration and may raise identical issue. In this case, although it is true that any declaration by the court would affect the squatters, the latter are not necessary parties because the question involved is the power of the Municipal Council to enact the ordinances in question. Whether or not they are impleaded, any determination of the controversy would be binding upon the squatters [Baguio Citizens’ Action, Inc., et al, vs. The City Council and City Mayor of the City of Baguio, G.R. No. L-27247, April 20, 1983].

Will the Supreme Court decision find application in the case of condominium corporations like First e-Bank Tower? Are all condominium corporations bound by the RTC decision despite their exclusion from the case?

To claim that the nullity of RMC 65-2012 will only benefit the petitioner in the RTC case might lead to a violation of the constitutionally guaranteed right to equal protection of the law. Equal protection requires that all persons or things similarly situated should be treated alike, both as to rights conferred and responsibilities imposed. It demands that other condominium corporations, like the petitioner, should also not be made liable for taxes imposed by the invalidly issued RMC 65-2012.

Further, should other condominium corporations be inclined to file a similar declaratory relief action before any other RTC, the decision of RTC Branch 146 of Makati City should not be used as precedent. Note that actions for declaratory relief falls within the exclusive original jurisdiction of regional trial court and, under the principle of hierarchy of courts, a court cannot pass upon the validity of a decision of another co-equal court.

Questioning the legality of RMC 65-2012 is a worthy step to assert the rights of affected condominium corporations. The issue does not end in merely declaring that it was invalidly issued. To confirm the applicability of the RMC, a higher tribunal such as the Court of Appeals or the Supreme Court must still resolve not only the validity of RMC 65-2012, but also the applicability of the RTC decision so that the matter will, finally, be laid to rest.

Shirley C. Tuazon
Let's talk tax
Punongbayan and Araullo

Tax treatment of online transactions

The Bureau of Internal Revenue (BIR) has issued the following reminders on the tax obligations of different parties engaged in online business transactions, which cover online shopping or online retailing, online intermediary service, online advertisement/classified ads, and online auction.

Registration requirements

Persons who conduct business through online transactions must undergo the following stages in the registration process:

1. Register the business at the Revenue District Office (RDO) having jurisdiction over the principal place of business/head office (or residence in case of individuals) by accomplishing BIR Form 1901 (for individuals) or 1903 (for corporations or partnerships), and pay theregistration fee to any Authorized Agent Bank (AAB) located within the RDO

2. Secure the required Authority to Print (ATP) invoices/receipts and register books of accounts for use in business (manual or computerized)

3. Issue registered invoice or receipt, either manually or electronically, for every sale, barter, exchange, or lease of goods and properties, as well as for every sale, barter, or exchange of service

4. Withhold and remit creditable/ expanded withholding tax, final tax, tax on compensation of employees, and other withholding taxes, and issue the corresponding withholding tax certificates

5. File applicable tax returns on or before the due dates, pay correct internal revenue taxes, and submit information returns and other tax compliance reports, such as the Summary List of Sales/Purchases (SLS/P), Annual Alpha List of Payees, etc., at the time or times required by existing rules and regulations

6. Keep books of accounts and other business/accounting records within the time prescribed by law, and make them available anytime for inspection and verification by duly authorized Revenue Officer/s for the purpose of ascertaining compliance with tax rules and regulations

Tax compliance obligations of parties to different types of online transactions

The BIR outlined the duties and obligations of parties in different types of online transactions. Depending on the type of online transaction, the parties may include buyer/customer, freight forwarders, online website administrators, and payment gateways (credit card companies and banks).

The obligations and duties of parties to the online transactions cover the issuance of BIR-registered manual or electronic invoices and receipts, acknowledgment receipts, and imposition of creditable withholding tax, as well as remittance and issuance of certificates of withholding tax.

For a detailed discussion on the obligations and duties of parties in online transactions, see Revenue Memorandum Circular No. (RMC) 55-2013.

Penalty provisions

Any person engaged in internet commerce who fails to comply with applicable tax laws, rules and regulations shall be subject to imposition of penalties under existing laws, rules and regulations, in addition to the imposition of penalties pursuant to applicable provisions of the Tax Code.

(Revenue Memorandum Circular No. 55- 2013, August 22, 2013)

Tax Brief – September 2013

Punongbayan and Araullo

Is RR No. 17-2013 illegal?

The Bureau of Internal Revenue, thru Revenue Regulation No. 17-2013, requires all taxpayers and their external auditors (CPAs) to keep/preserve their books of accounts, including accounting records and working papers of auditors, for a PERIOD OF TEN YEARS.

Until a court decision is out invalidating this Revenue Regulation, it will be with full force and effect.

Reason: a Revenue Regulation cannot enlarge the specific provision of a law. The NIRC says that books and supporting documents be kept for three (3) years. It is only when there is an allegation of fraud that the BIR can audit the books up to ten (10) years.