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

Let’s Talk Tax

Punongbayan and Araullo

Beware of the new BIR audit program

More than a decade ago, a taxpayer could expect only one tax investigation by the Bureau of Internal Revenue (BIR) in a given year, and seldom for two successive years.

But now, a taxpayer can be investigated up to three times in the same year: first, under a normal tax audit (i.e., covering all taxes); second, under a value-added tax (VAT) audit; and third, under a Letter Notice audit (which is based on discrepancies arising from the computerized matching of data between the taxpayer’s records and its customers and suppliers).

In the worst case, a taxpayer can be investigated every year without reprieve.

Taxpayers who are subjected to successive tax audits will finally obtain relief from the BIR’s new Audit Program under Revenue Memorandum Order (RMO) 19-2015. Under the RMO, taxpayers who were subjected to tax audit for two successive years will no longer be subject to tax audit on the third year, unless the taxpayer has under-declared sales/income or overstated expenses/deductions by at least 30% (which is considered prima facie evidence of fraud).

The RMO also provides that a full tax audit will no longer include taxes that had been previously examined (e.g., VAT audit under the VAT Audit Program or under a claim for VAT refund).

However, tax examiners are now required to investigate taxpayers who have not been audited but have been in operation for more than three years.

The foregoing new policies appear reasonable as successive tax audits will likely result in lower deficiency taxes among frequently audited taxpayers due to a progressive learning curve. Moreover, rather than concentrating on a limited few, the similarly limited manpower of the BIR would be optimized by targeting other taxpayers, achieving a more inclusive audit.

The RMO also provides that the following cases are subject to mandatory audit:

• Claims for refund (e.g., VAT, income tax, erroneous payment);

• Applications for tax clearance for dissolution or retirement of businesses with gross sales/receipts exceeding P1 million or with more than P3 million in gross assets ;

• Cases with unresolved Letter Notices;

• Request for tax clearance of taxpayers undergoing merger/consolidation and other types of corporate reorganizations;

• Estate tax returns; and

• Policy cases identified by the Commissioner of Internal Revenue.

On the other hand, the following are considered priority cases:

• Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive years;

• Taxpayers with income tax due of less than 2% of gross sales/revenues;

• Taxpayers with increase in assets of more than 50% from the previous year but with reported net loss;

• Professionals;

• Sellers of goods and services via e-commerce;

• Taxpayers with intelligence information such as specific business knowledge, third party data and publicly available information (e.g., from media press releases vs. actual revenue/tax declaration per return, etc.);

• Taxpayers who have failed to comply with the submission of information returns required under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, Summary List of Sales/Summary List of Purchases, eSales);

• Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting, industry issues, etc.);

• Taxpayers whose compliance is below the established benchmark rate;

• Taxpayers enjoying tax exemptions/incentives;

• Taxpayers with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliate in a conglomerate;

• Specific industries: Hospitals, Advertising Agencies, BPOs, Insurance, Amusement Centers, Restaurants, Telecommunication, Real Estate; and

• Other priority audits that may be identified by the BIR.

The list is so extensive in scope that it seems to include most individual and corporate taxpayers.

Finally, the RMO requires examiners to strictly comply with the prescribed periods in the completion of their audit (reinvestigation) and submission of their reports; failure to do so will result to administrative sanctions. For instance, a report on the results of a tax investigation must be submitted not later than 180 days (for non-Large Taxpayers) or 240 days (for Large Taxpayers) from the issuance of the Letter of Authority.

With these new rules and the BIR’s increasing revenue targets, one could expect a BIR audit sooner than later. Accordingly, it would be wise for businesses to improve tax compliance by being informed of the pertinent tax laws and rules affecting them, and to check accounting records vis-a-vis tax returns, as well as the adequacy and completeness thereof for submission during a tax audit.

The foregoing steps can be undertaken internally or thru the assistance of a trusted and competent tax advisor.

As we all know, taxation is the life blood of the government. Without taxes, the government cannot spend for basic social services, and infrastructure. Let’s do our share in nation-building by paying correctly our taxes so we can then have the right to demand the government to improve its services.

The views or opinions presented 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.

Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

Taxwise or Otherwise : Carlos R. Mateo

Economy : Business World

December 2, 2015

Are we giving up on income tax cuts?

Last week, congressmen reportedly gave up on their bid for tax cuts after repeated indications of opposition from Malacañang.

We can hardly accuse Congress of not trying, with not less than 10 bills filed proposing tax reform. Various versions of these bills have appeared and been discussed in due course. Not one of them has been approved by the President.

Many are asking why securing the President’s approval is difficult. Did President Benigno S. C. Aquino III not promise to listen to his “bosses,” and does Congress not represent the voice of these bosses -- the Filipino people?

The main stumbling block to the approval of the proposed tax reform appears to be the anticipated loss of government revenue without compensatory measures to replace the lost collections. According to the latest version of the proposed bill on individual income tax, the top tax bracket paying 32% will now apply to those with an annual income of more than P1 million as against the current threshold of only P500,000, dating back to 1997. The lower brackets were likewise recalibrated to reflect the impact of inflation. The Executive department believes that the updating of individual income tax brackets would slash the government’s revenue significantly, on the expectation that most Filipinos will see their income tax payments reduced.

Supporters of the reform see the alleviation of the plight of the working class by increasing take-home pay. The latest version of the proposed bill would see an employee earning P20,833 per month (or P250,000 per year), shift to a bracket charging 20%, rather than 25%. While 5 percentage points may not seem much, to the working classes this represents a significant amount.

It has also been argued that foregone government revenue will be replaced by increased individual spending, which the government will benefit from in the form of more transaction taxes like value-added tax. Any lost government revenue will flow back into the economy and eventually find its way into the treasury.

To add a further argument, higher take-home pay will make the Philippines competitive in the era of accelerating international trade and investment. More money in employees’ pockets will reduce pressure on employers to raise wages, keeping labor costs down and making the country more attractive to investors. These investors could ultimately boost our economy.

These are of course some of the more obvious points raised in what has been along drawn-out debate. Unfortunately, the Executive department seems to be viewing the proposed reform from a different perspective. Pro-tax reform economists, accountants, lawyers, data analysts, and other experts have said their piece, but it appears they cannot good news about tax reform this holiday season.

In any event, do we really need any more experts to say that the 18-year-old 1997 Tax Code income tax bracket is outdated? Is it not obvious that the value of salaries has changed significantly since 1997?

Set aside the statistics on foregone revenue... Setting aside the politics... Remove counter-arguments involving international trade... and at the end of the day the reform is about social justice, an issue that connects with many Filipinos.

The 16th Congress will recess between Dec. 19 and Jan. 18. Next year’s Congressional work will be disrupted by campaigning. Any last-ditch efforts by members of Congress will need to be done within a very limited time. Will they try to convince the Executive department once more? Will they decide to override Presidential opposition? Could they do something else? We don’t know yet.

We can take comfort in the fact that certain members of Congress have vowed to re-file the bill when the next administration comes along if nothing happens to the current legislation. Many hope that the reform will be given high priority, possibly to take effect within the 2016 tax year. After all, the voice and interest of the Filipino people, as represented by the Congress, ought to be heard in a republic like ours.

When it comes to reducing taxes, we are not giving up.

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo.

Let’s Talk Tax : Olivier D. Aznar

Economy : Business World

December 1, 2015

Updates on employee taxes

December is just around the corner, the month of giving and spending extravagantly. Employees like me are very much eager to get hold of their 13th month pay, Christmas bonuses and final pay checks for the year. By this time, employers should already be preparing for the annualization of their employees’ compensation, which will determine the adjusted withholding tax due on compensation, and the employees’ net final pay for the year.

On the annualization of compensation, it is important to take note of the several tax regulations issued this year which affect the taxability of employees’ compensation income.

The most significant among these is the passage of Republic Act (RA) 10653 on Feb. 12, 2015, increasing the tax exemption threshold from P30,000 to P82,000 for 13th month pay and other benefits. This will be enjoyed by compensation income earners starting this year.

Employers should be wary, however, about which benefits the increased threshold is applied to. Among the other benefits covered by the new tax exemption threshold include productivity incentives, Christmas bonus, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private entities. This also covers the excess amount of the de minimis benefits. Revenue Regulation (RR) No. 3-2015, which implements RA 10653, also clarified that the P82,000 exemption shall neither apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances, nor to self-employed individuals and income generated from business.

Also at the beginning of this year, the Bureau of Internal Revenue (BIR) issued RR No. 1-2015, which added to the list of non-taxable de minimis benefits those benefits provided under a collective bargaining agreement (CBA) and productivity incentive schemes amounting to P10,000 per employee per annum. This issuance has raised some concerns of the taxpayer-employers on how certain benefits or incentives shall be classified. One of the concerns is the award given to a sales employee who was able to meet or exceed his sales quota. Will such sales award be classified under the other benefits subject to the P82,000 exemption threshold; the employee achievement awards subject to P10,000 de minimis threshold; or the productivity incentive scheme amounting to P10,000 provided under RR 1-2015? Considering that the three classifications vary in the ceilings involved as well as the required form of the benefit to be provided (whether in cash or in kind, or strictly in the form of a tangible property only), it is important that the BIR issue a clarification to avoid any dispute on interpretation and implementation.

Other than the increases in tax-exempt thresholds for certain employee benefits, the BIR also released several issuances during the year which provide for certain changes in the submission of documents in relation to employees’ compensation and registration information.

On March 2015, the BIR issued RR No. 2-2015 which sets forth the mandatory submission of employee’s certificate of compensation payment/taxes withheld or BIR Form 2316 in soft copies or “PDF” file format to be stored in a Digital Versatile Disk-Recordable (DVD-R). The duly accomplished DVD-R shall be submitted to the BIR Office where the taxpayer-employer is registered not later than Feb. 28 following the close of the calendar year, together with a notarized certification stating that the DVD-R is submitted in compliance with RR No. 2-2015; that the contents of the DVD-R being submitted conforms to the conditions/specifications requirements set by the BIR; and, that the soft copies contained therein are complete and exact copies of the original document. The mandatory submission of BIR Form 2316 in soft copy is required for all taxpayers registered with the large taxpayers service (LTS). However, should any non-LTS taxpayer opt to adopt the requirements prescribed by this regulation, he may freely do so but such option may no longer be revoked.

Another recent change initiated by the BIR is the electronic updating of employee’s exemption registration. Under Revenue Memorandum Circular (RMC) No. 59-2015, employees shall no longer file their certificate of update of exemption. Instead, the filing of BIR Form 2305 shall now be coursed through the employer. Using the Update of Exemption of Employees Data Entry Module, which can be downloaded from the BIR Web site, or the Microsoft Excel program, the employer inputs all registration updates of its employees one by one.

Updates in the employees registration covered by this electronic submission are limited only to additional exemption for qualified dependents, change of marital status, and execution of the “waiver to claim the additional exemption” by the husband or revocation of the previously executed “waiver to claim the additional exemption by the husband”.

After validating the CSV file using the 2305 Batch File Validation Module, the CSV file shall then be transmitted to the BIR via e-mail to BIRFORM_2305@bir.gov.ph. In addition to the electronic submission of updates in employees’ registration, employers are required to submit with the RDO/LTD having jurisdiction over the place of its office the following documents on or before the 10th day of the following month:

(i) accomplished BIR Form 2305 signed by both the employee and employer together with the required documentary requirements (e.g. NSO certified birth certificate/marriage contract);

(ii) systems-generated e-mail notification of electronically filed BIR Form No. 2305; and

(iii) printed alphalist of employees and information update report listing the names of those with changes for the month only which can be generated from the data entry module or printed excel file following the lay-out prescribed under Annex F of the circular.

Although no specific penalties in case of failure to comply with the electronic submission of the BIR Form 2305 was mentioned in the RMC, taxpayer-employers shall take into consideration the consequence of failure to update the employee’s registration, more particularly with regard to claiming of additional exemption. Section 2.79.2 of RR No. 2-1998, as amended, provides that in case of failure to file BIR Form No. 2305, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the appropriate penalties under the pertinent provisions of the Tax Code, as amended, and the applicable regulations issued by the BIR.

The above-mentioned are only updates on employee taxes which took effect this year. Considering the many tax rules on compensation income, a taxpayer-employer must ensure, among others, that it observes the proper tax treatment on various benefits provided to employees to avoid possible assessment for deficiency withholding tax and disallowance of expense in case of failure to subject any taxable compensation income to withholding tax.

One way to avoid reporting the incorrect amount of taxable compensation, non-taxable compensation or withholding tax due, is to prepare the annualization of employees’ compensation on or before the end of the calendar year to avoid cramming, especially in the case of taxpayers with a significant number of employees. In any case, the employer shall ensure that the payment of compensation for the last payroll period is considered in the annualization. Ideally, the correct amount of compensation and withholding tax due, as adjusted for the year, shall be reflected in the December BIR Form 1601C, as it is the last tax remittance return for withholding tax on compensation that will be filed for the year.

Lastly, the employer shall also see to it that all administrative requirements in relation to employees’ compensation and registration information are strictly complied with to avoid any penalties.

Keeping abreast of all the latest tax issuances should always be a top priority for all taxpayers.

With all these new developments concerning employee taxes, employers shall take full responsibility for determining the correct amount of taxes to be withheld from their employees’ compensation income. Not only are we, the employees, concerned with simply receiving our net pay checks, but also with that significant portion of our hard-earned income that is remitted to the government.

Arianne Cyril L. Mandac is a senior with 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.

Let’s Talk Tax : Arianne Cyril L. Mandac

Economy : Business World 

November 23, 2015

Defenses for common tax audit issues

While it is indisputable that taxes are vital to the country’s growth, one of the most unpleasant experiences for a taxpayer is to receive a large and baseless assessment which requires a defense. Those experiencing it for the first time may be filled with fear and panic. Further aggravating a taxpayer’s situation is the fact that during discussions, the tax examiners may continue to insist on their position despite clear and factual evidence to the contrary.

Indeed, a tax assessment issued by the Bureau of Internal Revenue (BIR) is an unavoidable and serious matter that one cannot ignore. As such, the key to effectively handling tax assessments is to know the process and the various legal remedies available to a taxpayer. Although it is recommended that one obtain the services of a tax professional, it would be prudent for a taxpayer to have a basic idea, not only of the BIR’s procedures, but more importantly of the defenses which it may raise to protest an assessment.

Below are examples of possible defenses which a taxpayer may raise against a couple of common issues raised by a tax examiner during a tax investigation.

Readers may be aware that the BIR conducts computerized consolidation and matching of data contained in a taxpayer’s tax returns and reports against those submitted by its customers and suppliers (i.e., the BIR’s Reconciliation of Listing for Enforcement (RELIEF) System). Any discrepancies are then considered grounds for deficiency tax assessment. In such cases, the concerned taxpayer may raise the defense that the assessment is based on mere presumption. The use of such ‘presumption’ as the sole basis for assessing deficiency taxes does not satisfy the due process requirement under the Tax Code. An assessment, to be valid, must have legal and factual bases. It cannot be based on mere conjecture no matter how reasonable or logical the rationale may be behind the said presumptions.

In fact, in one recent case, our Court of Tax Appeals (CTA) held that this type of assessment lacks basis, especially if a taxpayer was not provided with the corresponding information reported in the tax returns and reports filed by its customers or suppliers. As explained in that decision, such computerized data matching program of the BIR does not include the checking of the substance or contents in the returns or reports generated from the BIR’s system against other source documents. Accordingly, these data are considered to be doubtful, inconclusive and unreliable since the tax examiners do not, in anyway, validate the information fed into the system.

Another common issue raised by tax examiners against taxpayers relates to net operating loss carryover (NOLCO) that under the law, may be carried over and claimed as a deduction by taxpayers in the next three succeeding years. During tax audits, examiners disallow taxpayers from utilizing these available NOLCO on the presumption that these have been utilized in the succeeding period. In a 2013 tax assessment case, the CTA ruled that such disallowance is improper. Taxpayers should be allowed to claim the losses/credit in the current year under audit and, at most, be assessed only in the succeeding year. While it was not mentioned in the said case, it can also be inferred that the court considered the assessment to be based mainly on the presumption that the taxpayer already benefitted from the “disallowed” credit.

As mentioned earlier, assessments cannot be based on mere presumption. In a 2015 tax assessment case, the CTA maintained its position regarding the improper disallowance of NOLCO. In addition, the court ruled similarly on the proposed disallowance of the excess Minimum Corporate Income Tax or MCIT carried over to the succeeding period.

Any of the above defenses notwithstanding, a taxpayer under audit must invariably know whether the BIR complied with the proper procedures for tax assessments as laid down by our tax laws and regulations. Failure of the tax authorities to comply with their own rules and regulations is a violation of a taxpayer’s constitutionally protected right to due process, which a taxpayer may use as a ground to invalidate an assessment.

Although deficiency tax assessments are presumed correct and made in good faith, it should not be forgotten that an assessment must be conducted in accordance with our tax laws and regulations. Otherwise, such presumption of correctness can be overturned. This is where taxpayers may find some comfort -- in the knowledge that only valid assessments that are issued according to the law are a matter of real concern.

The views or opinions 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.

Jocelyn T. Tsang is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. jocelyn.t.tsang@ph.pwc.com

Taxwise or Otherwise : Jocelyn T. Tsang

Economy : Business World

November 25, 2015

APEC and Philippine taxes for investors

We have been expecting for a couple of months now the Asia-Pacific Economic Cooperation (APEC) meeting which shall be held tomorrow. The government has been prepping more than ever. It is all over the news how the authorities plan the use of the streets to pave the way for the arrival of guests. New bollards have been installed in our main thoroughfares, not to mention the closure of some roads and re-routing. And of course there is the creation of Mabuhay Lane and APEC lane. Passing through EDSA every day and being caught up in the various dry runs, I can make out this event to be a really big deal.

During one of the dry runs, I was caught in terrible traffic and almost missed one of my important appointments. Of course, I blamed it on the summit. What’s behind this event? Well, as the name suggests, it is a meeting of heads of economies within the Asia-Pacific Region for the purpose of uplifting the economic welfare among members. This also means that APEC leaders will help determine policies and agreements that will promote progression of free trade and cross border investments among the members. Every economy is interconnected and there are no more hermits.

A couple of ads on a global news channel promote more investment in the Philippines. The tagline of the ad is “Your investment, our people”. Truly, the Philippine’s most promising asset is its people. Our country boasts a wide range of skilled and professional workers with high levels of technical knowledge and English proficiency.

For more than two decades, our government has constantly improved the investment environment to entice both foreign and local investors. Among the more prominent measures are the creation of economic zones and the liberalization of trade. We know that more investment will bring more jobs. More job means more taxes, which in the end will make it truly more fun in the Philippines.

WHAT CAN AN INVESTOR EXPECT WHEN PUTTING MONEY INTO THE PHILIPPINES?

Foreign Investors. On the tax side, when a foreign investor sets up a corporation, it is by default exposed to the regular corporate tax rate of 30%. Aside from which, a corporation is also required to withhold taxes for certain income payments. It can also be required to remit 12% value-added tax (VAT) on its sale of goods and services in the Philippines.

Depending on the type of activity, foreign-owned enterprises may register with the Philippine Economic Zone Authority (PEZA) or Board of Investments (BoI). The government awards both fiscal and non-fiscal incentives to these entities.

Among the fiscal incentives that can be granted to a PEZA- or BoI-registered enterprise is the income tax holiday (ITH) for the first four years of operation. This means that the entity is exempt from paying income tax on its registered activities. For a PEZA-registered enterprise, after operating for four years under the ITH regime, the registered entity may transition to a special tax incentive of 5% gross income tax (GIT) in lieu of national and local taxes.

In general, PEZA entities are subjected to 0% VAT on its sales and purchases. BoI enterprises which are engaged primarily in export are likewise entitled to 0% VAT on the sale of exported goods or services. However, for purchases of local goods or services of BoI entities, the rate is 12% VAT. Input VAT attributable to VAT zero-rated sales may be refunded or claimed as a tax credit certificate (TCC), but the claimant must be warned that the refund or credit process involves significant documentary and technical hurdles.

Other fiscal incentives for both PEZA and BoI enterprises may include, subject to certain conditions, exemption from taxes and duties on importation of raw materials, capital equipment, machinery and spare parts; and exemption from wharfage dues and export tax, duty, impost and fees.

The above discussion merely provides a glimpse of what a foreign investor can expect when doing business in the Philippines. It would be best to ask experts or consultants for a more detailed discussion on the prospective investment.

Local Investors. Local investors benefit as well from liberalized trade between APEC nations. From the tax perspective, local investors engaging in the export of goods or services may also opt to become a PEZA- or BoI-registered entity, and be entitled also to tax incentives granted by those agencies.

Nonetheless, even if an enterprise is not registered with the incentive-granting agencies, export sales may still be subject to 0% VAT. Note again that the excess or unutilized input VAT attributable to VAT zero-rated sales can be refunded or claimed as a tax credit, subject to documentary and technical requirements, as previously mentioned.

With the upcoming APEC event, we expect our President to lay on the table the many advantages of investing in the Philippines. We are expecting as well that by enticing investors to fund enterprises, our State, through our regulators, will consistently abide to its promises by making regulatory processes less complicated and more efficient.

The Philippines has posted rapid economic growth in recent years and it is not going to slow anytime soon. It is true that the Philippines has a lot to improve in terms of economic policy, infrastructure and processes to facilitate seamless trade. We struggle every day to do so, even in terms of traffic flow in the streets. Nevertheless, with conviction, I strongly believe that the Philippines is investment worthy, as we have excellent individuals working hard to get things done. And that’s one sure thing an investor can count on.

Eliezer P. Ambatali is an associate with 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.

Let’s Talk Tax : Economy

Business World : November 17, 2015