Indication of complete principal office address of corporations and partnerships

Under Securities and Exchange Commission (SEC) Memorandum Circular (MC) No. 6, series of 2014, all existing corporations and partnerships whose articles of incorporation or articles of partnership indicate a general address as their principal office address must amend their articles of incorporation/partnership to specify their complete address.

To ease the burden of affected corporations and partnerships in amending their articles of incorporation when they transfer or move to a new location, the SEC issued the following guidelines:

1. In the event that a corporation whose principal office address as indicated in its articles of incorporation is already specific and complete or fully compliant with SEC MC No. 6, series of 2014, has moved or moves to another location within the same city or municipality, the corporation is not required to file an amended articles of incorporation. However, it must declare its new or current specific address in its General Information Sheet (GIS) within 15 days from transfer to its new location.

2. Failure on the part of the corporation to file the GIS within the prescribed period shall constitute a violation of Section 16 of the Corporation Code and shall subject the corporation to the imposition of penalty in accordance with the existing scale of fines.

3. In the case of a partnership, considering that it has no obligation to file a GIS, it is required to file amended articles of partnership every time it transfers to a new location within the same or another city or municipality.

4. Both corporations and partnerships shall be deemed to have been duly notified or validly served where the Commission has sent its subpoena, summons, notice, show cause letter, and other communications to the address indicated in the articles of incorporation or partnership, and/or GIS, as the case may be.

(SEC Memorandum Circular No. 16, series of 2014, August 13, 2014)

Tax Brief 

Punongbayan and Araullo

The trouble with tax clearance

WITH the current tax season underway, going-concern companies are preoccupied with the preparation and filing of tax returns as well as the corresponding payment of taxes. For corporations planning to dissolve or those that have already ceased operations, the filing of nil tax returns is still required until the official closure is effected.
  
In the Philippine setting, the dissolution of business does not preclude the effects of taxation. Section 235 of the Tax Code provides that corporations and partnerships shall not be dissolved until cleared of any tax liability. Similarly, Section 52 (c) of the Tax Code and Section 120 of the Corporation Code requires a dissolving corporation to secure a certificate of tax clearance from the Bureau of Internal Revenue (BIR) and to submit said certificate to the Securities and Exchange Commission (SEC) upon filing of the application for dissolution.

The taxpayer, therefore, needs the approval of both the SEC and the BIR before the dissolution becomes effective. Note that even if the date of dissolution is immediate, the same will not be effective until the SEC issues the approval of the dissolution, which requires the submission of the duly issued BIR tax clearance. The certificate of tax clearance is a written confirmation from the BIR that a taxpayer has no pending tax liabilities as of the date of issue of the certificate.

For foreign corporations licensed to do business in the Philippines as a branch, regional operating headquarters, or representative office, a Certificate of Withdrawal of License must be secured by filing a petition with the SEC which likewise requires a BIR tax clearance.

A tax clearance is also a requirement for refund of excess taxes of a dissolving entity. It serves as a substantive proof that the taxpayer is cleared of all its tax liabilities, and is therefore entitled to a refund of any taxes paid.

Under Revenue Regulations No. (RR) 11-2008, cancellation of registration with the BIR requires the filing of the Notice of Closure or Cessation of Business to the Revenue District Office (RDO) where the taxpayer is registered by accomplishing the prescribed registration updates form (BIR Form 1905). The supporting documents required are:

• a board resolution authorizing a shortened corporate term in the case of a domestic corporation, or the dissolution of the Philippine entity in the case of branches or representative offices of foreign firms;
• an inventory of goods, supplies, and capital goods;
• a list of unused sales invoices (SI) or official receipts (OR) and all other accounting forms, such as vouchers, debit/credit memos, delivery receipts and purchase orders;
• the surrender of original copies of unused sales invoices or official receipts and all other unused accounting forms; and
• short period return for income tax purposes and the surrender of original copies of all business notices and permits.

The RDO, upon receipt of the above-mentioned requirements shall:

1. “End date” the tax types of the taxpayer;
2. Destruct, in the presence of the taxpayer or his authorized representative, the unutilized SI/ORs and other accounting forms by cutting them crosswise and lengthwise at the middle thereof so that the same shall be divided into four, ensuring that the same will no longer be used as originally intended; and
3. Return to taxpayer the destructed SI/ORs and other accounting forms for burning and/or proper disposition.

To be able to issue a tax clearance, the BIR has to perform a tax audit. Hence, all taxpayers that filed for cancellation of registration due to closure/cessation or termination of business shall be subjected to immediate investigation by the BIR office concerned. This is also to prevent the situation where companies with existing tax liabilities close down their business to avoid or evade the payment of taxes.

Generally, the processing of the tax clearance can take one to three years and can naturally delay the filing of the SEC application. For dormant companies or those with no operations, the period should be shorter as there are few or no transactions to examine. For companies that are operational in the years under investigation (prior to closure), the process for securing a tax clearance may take longer since this will go through the same process as a regular audit and there will be more transactions and taxes to examine.

There is a possibility that deficiency tax assessments may be issued in the course of the examination, which will require more time to resolve and which will further prolong the process of securing a tax clearance. Where the issues are complex and the liabilities are substantial, the taxpayer may decide to challenge the assessments before the Courts and the resolution of the issues by the Court can take four to 10 years.

Should the BIR be satisfied that there are no more open cases or tax liabilities, it will cancel the dissolving taxpayer’s Certificate of Registration and TIN and issue the tax clearance or Certificate of No Outstanding Tax Liability.

It must be emphasized that securing the BIR tax clearance is the most cumbersome process in the dissolution procedure. In order to avoid further delay, taxpayers intending to close their business must ensure that: (a) the open taxable years are supported by complete accounting records arranged by year and easily retrievable; (b) the reportorial requirements are consistently filed; (c) taxes are correctly paid; (c) some employees are maintained to assist in the tax investigation process; and (d) a high level compliance review is performed to explain any discrepancies usually raised during a tax audit.

Charity Mandap

Let’s Talk Tax

Punongbayan and Araullo

BIR's right to collect has expired

WHEN one is facing a tax assessment case we resort to exhaust all possible and available legal remedies that the law provides for the taxpayer. One of the possible and available remedies is for the taxpayer to request for a reinvestigation of the case.

Under Revenue Regulations (RR) No. 18-2013, request for reinvestigation refers to a plea of re-evaluation of an assessment on the basis of newly discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or of law or both.

This request, however, cannot be granted without a return of favor to the Bureau of Internal Revenue (BIR).As a rule, when the taxpayer requests for a reinvestigation which is granted by the Commissioner of the BIR, the running of prescriptive period of the BIR to assess and collect shall be suspended. Consequently, the five (5)-year prescriptive period for BIR to collect the tax assessment shall be suspended.

WHEN DOES THE SUSPENSION OF THE FIVE (5)-YEAR PRESCRIPTION PERIOD TO COLLECT COMMENCE?

In G.R. No. 197515 (Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc.), the Supreme Court (SC) said that the request for reinvestigation should be granted or at least acted upon in due course before the suspension of the statute of limitations to collect may set in.

In the instant case, the final assessment notice (FAN) was issued by the BIR on January 9, 1996 and the taxpayer requested for a reinvestigation on March 14, 1997. However, the BIR granted such request only on January 22, 2001 or after five (5) years from the date of the issuance of the FAN. Further, the BIR issued Preliminary Collection Letter only on February 21, 2002.

The BIR argued that its right to collect the tax assessment has not yet prescribed. The five (5)-year prescriptive period to collect was interrupted when the taxpayer filed its request for reinvestigation. Thus, the period for tax collection should have begun to run from the date of the reconsidered or modified assessment.

This argument failed to persuade the SC. The Court emphasized the rule that the Commissioner of the BIR must first grant the request for reinvestigation as a requirement for the suspension of the statute of limitations. The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension.

The Court pointed out that while the request for reinvestigation was made on March 14, 1997, the same was only acted upon by the BIR on January 22, 2001 which is beyond the three (3) year statute of limitations from the issuance of the FAN on January 9, 1996. Further, the Court stressed that the Preliminary Collection Letter was only issued on February 21, 2002 which is clearly five (5) long years had already lapsed before collection was pursued by the BIR.

Moreover, the Court rejected the BIR’s argument that the taxpayer’s act of elevating its protest to the Court of Tax Appeals has fortified the continuing interruption of the BIR’s prescriptive period to collect. The Court found the argument flawed at best because the taxpayer was merely exercising its right to resort to the proper Court and does not in any way deter the BIR’s right to collect taxes from the taxpayer under existing laws.

The Court also elucidated that the statute of limitations on the collection of taxes was enacted to benefit and protect the taxpayers. Just as the government is interested in the stability of its collections, the taxpayers are also entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time.

While it is true that taxes are the lifeblood of the government, it must be exercised fairly, equally and uniformly so as not for the tax collector to kill the “hen that lays the golden egg.”

Nikkolai F. Canceran

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Punongbayan and Araullo

Fair and relaxed tax exemption rulings for NSNP entities

THE BUREAU of Internal Revenue (BIR) is in a surprisingly merry mood these days. The reason could be one of three things:

1) the nearing yuletide season;

2) the P9.45 billion increase in revenue collection as of August 2014 compared to August 2013;

3) the P62 billion worth of tax evasion cases filed in the courts as of July 2014.

  

Whatever the reason is, taxpayers surely felt the good vibes with the issuance of Revenue Memorandum Order No. (RMO) 34-2014 on September 18, 2014, which helpfully eased the burden of nonstock, nonprofit (NSNP) corporations and associations, falling under Section 30 of the Tax Code, namely:

a. Labor, agricultural or horticultural organizations not organized for profit

b. Mutual savings banks and cooperative banks without capital stock and organized not for profit

c. Beneficiary societies or associations operating for the exclusive benefit of the members

d. Cemetery companies owned and operated for the exclusive benefit of the members

e. NSNP corporations or associations operated exclusively for religious, charitable, scientific, athletic or cultural purposes,    no part of net income or asset inures to the benefit of any member or officer

f. Business leagues, chambers of commerce or boards of trade not organized for profit

g. Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare

h. NSNP educational institutions

i. Government educational institutions

j. Farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative    telephone companies or like organizations of a purely local character, the income of which consists solely of assessments,    dues, and fees collected from members for the sole purpose of covering expenses

k. Farmers’, fruit growers’ and like associations organized and operated as sales agents in marketing products of the members    and returning the proceeds to the members

As explained in RMO 34-2014, the tax exemption rulings granted to NSNP entities will serve as confirmation, rather than approval, on whether the conditions for tax exemption set forth by law are appropriately complied.

This means that during the preparation of income tax returns, NSNP entities are not precluded from treating income derived from registered activities as exempt from income tax in the absence of a valid, current, and subsisting BIR ruling or tax exemption certificate. Likewise, NSNP entities are still required to subject income derived from unregistered activities to 30% regular corporate income tax.

This is a welcome relief from the BIR’s previous directive in RMO 20-2013 -- as amended by RMO 28-2013 -- which strictly requires the procurement of a BIR ruling or tax exemption certificate before NSNP entities can avail of the tax exemption.

The issuance also allowed umbrella organizations duly recognized by the BIR to apply for tax exemption rulings on behalf of any of their members that are NSNP entities. This is reasonably practical and fair to NSNP entities given that most, if not all of these entities, do not have adequate budget for a relatively costly BIR ruling.

However, RMO 34-2014 does not negate the purpose of the issuance of tax exemption rulings -- i.e., to minimize tax leakages caused by inaccurate interpretation of existing tax laws and administrative issuances. Therefore, in case of a BIR tax investigation in any given period, the NSNP entities are required to present a valid, current and subsisting BIR ruling or tax exemption certificate as proof of compliance of the conditions for tax exemption. Failure to do so will expose NSNP entities to deficiency in income tax due.

NSNP entities are also required to present the same to the withholding agents in order to be exempt from applicable final and creditable withholding taxes due on their transactions. Failure to do so will likewise expose NSNP entities to deficiency in withholding taxes due. In the same manner, failure on the part of the withholding agents will lead to payment equivalent of the total amount of tax not withheld plus penalties up to P25,000.

To fully take advantage of the tax benefits given to them, qualified NSNP entities should, therefore, carefully examine the nature of their revenue-generating activities, timely check the relevance of their duly issued tax exemption rulings with the newest tax issuances and properly comply with documentary requirements.

All in all, the fair and well-thought-out interpretation of the BIR on tax exemption rulings for NSNP entities has earned the nods of the public.

RMO 34-2014 has provided an efficient way for complying with BIR requirements, which, in effect, has given NSNP entities more time, funds and energy in realizing the purposes for which the NSNP entities were established.

Could the entities under special laws be next? Will the BIR fairly see the certificates of exemption issued by the Philippine Economic Zone Authority and the Board of Investments as practical and sufficient documentation for availing tax exemption under the BIR?

We can only hope that the BIR, as one of the influential pillars of the government in running the economy, continues to set regulations and guidelines that will not only boost the revenue collections of the government, but also boost the growth and sustainability of both for profit and not-for-profit entities.

After all, it wouldn’t be “more fun in the Philippines” if there is imbalance in any of the key economic players.

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Punongbayan and Araullo

Not considered incidental transaction for VAT purposes

Under Section 105 of the Tax Code, VAT is imposed on the sale or transaction entered into by a person in the course of any trade or business, including transactions that are made incidental to the pursuit of a commercial activity.

Deemed by the BIR as incidental transaction subject to VAT is the loan extended by an individual taxpayer to a microfinance and lending company where the taxpayer sits as one of the board of directors.

The BIR maintained that due to the active involvement of the taxpayer in the management of the microfinance company, his act of extending the loan to the company is an incidental transaction that is subject to VAT. Likewise, since the subject individual is engaged in the business of motorcycle sales, the funds utilized to extend the loan are necessarily connected to the taxpayer’s actual trade or business, which makes the transaction incidental to his business.

The Court of Tax Appeals (CTA) held that the interest income from the loan extended to the company is not subject to VAT, since the taxpayer’s act of extending the loan cannot be considered an “incidental” transaction” under Section 105 of the Tax Code. The CTA held that based on Black’s Law Dictionary definition of the word “incidental,” for a transaction to be considered an incidental transaction in the context of Section 105 of the Tax Code, it must be “dependent upon or appertaining to” the taxpayer’s primary business transactions or activities.

The CTA noted that at the time of the extension of the loan, the taxpayer’s business was not yet in existence, and thus, it is absurd to conclude that such act of extending the said loan is incidental to the business of selling motorcycles. The CTA further held that the active involvement of the individual in the management of the microfinancing company as a member of the board of directors cannot be treated as the principal business to which the act of extending a loan can be made to depend upon or appertain to.

The CTA cited RMC 77-2008, which clarified that the performance of a director’s functions in a corporation cannot be said as being done “in the course of trade or business,” in holding that the act of the taxpayer of extending loan to the company cannot be considered the principal business to which the extension of loan may be considered incidental.

Hence, the CTA held that the member of the Board of Directors is not subject to VAT on the interest income from the loan paid by the company.

(Commissioner of Internal Revenue v. Thomas C. Ongtenco, CTA EB 995 re: CTA Case No. 8190, June 30, 2014)

Tax Brief

Punongbayan and Araullo