Tax refund based on “solutio indebiti”

A claim for refund of erroneously, illegally, excessively or wrongfully collected taxes or penalty must be filed within two years from date of payment of the tax or penalty regardless of any supervening cause that may arise after the payment of tax or penalty pursuant to Section 229 of the Tax Code.

In the instant case, the taxpayer-refund claimant — an electric distribution company — filed an application for provisional increase of its electric rate schedules in 1994 with the Energy Regulatory Board (ERB). Acting on its petition, the ERB issued an order granting the company a provisional increase subject to the condition that after hearing and evaluation, should the company be entitled to a lesser increase, all excess amount should be refunded to its customers or credited to their future consumption.

When it imposed the provisional increase upon its consumers, the company declared the provisional increase in its income tax returns and paid the corresponding income tax. However, after consultation and hearing, the ERB rendered a decision in 1998 granting a lesser increase in rates, and thus, it ordered the company to refund or credit to its customers the overcharged amount.

The company appealed the ERB decision to the Court of Appeals (CA), which ruled in 1999 in its favor by reversing the ERB decision. The CA decision was reversed in 2002 by the Supreme Court (SC), and became final and executory on May 5, 2003.

As a result of the mandated refund or credit, the company’s gross electric revenue, taxable income and income tax liability during the taxable years 1994-1998 and 2000-2001 were reduced, resulting in excess income tax payments.  To recover its erroneously paid tax, the company filed with the BIR its administrative claim for refund in 2003 while its judicial claim with the CTA was filed in 2005.

The second division of the CTA entitled the company to claim for tax refund due to the special circumstances prevailing in the instant case. An appeal was made to the CTA en banc, which held that the rule of solutio indebiti does not apply to the claim for refund since the elements of solutio indebiti are lacking in the case. The CTA en banc also held that the two-year prescriptive period for the company to claim refund had lapsed reckoned from the dates the income taxes had been paid without consideration to any supervening cause that arose after the payment of the tax.

In response to the motion for reconsideration of the decision of the CTA en banc, the CTA en banc held that the twoyear prescriptive period under Section 229 of the Tax Code may be suspended for reasons of equity and other special circumstances. It held that considering the SC decision ordering the company to refund or credit to future consumption the overcharged amount became final and executory only on May 5, 2003, it will be iniquitous to rule that the two-year prescriptive period was not interrupted, but instead commenced to run from the date of payment of the taxes sought to be refunded.

In its amended decision, the CTA en banc further held that the principle of solution indebiti is applicable to refund or illegally collected or assessed tax. Based on jurisprudential pronouncements cited by the CTA en banc, it held that the rule on solutio indebiti may be applied to the refund claim of the taxpayer.

(Commissioner of Internal Revenue v. Manila Electric Company, Inc, CTA EB No. 773, November 13, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Expiration of invoices/receipts

Following the BIR’s adoption of the online system for authority to print (ATP), all unused or unissued receipts and invoices which were printed prior to January 18, 2013 (date of effectivity of RR 18-2012) shall be deemed valid only until June 30, 2013.

By implication, which we will further clarify with the BIR,  all taxpayers whose ATPs were issued prior to January 18, 2013 may be liable to apply for new ATP under the new system on or before May 1, 2013 or 60 days before the expiry date.
Under the regulations, application for ATPs and submission of required documents shall be done through the on-line ATP system.

This shall cover all principal and supplementary receipts/invoices.  Under RR 18-2012, the term “principal receipts/invoices” refers to written accounts evidencing the sale of goods and/or services issued to customers in the ordinary course of business which include VAT sales invoice/receipts and Non-VAT sales invoice/receipts.

On the other hand, supplementary receipts/invoices, also known as commercial invoices, are written accounts evidencing that a transaction has been made between the seller and buyer of goods forming part of the books of accounts of a business taxpayer for recording, monitoring and control purposes. These include, among others, delivery receipts, order slips, debit and/or credit memo, purchase order, job order, provisional/temporary receipt, acknowledgment receipt, collection receipt, cash receipt, bill of lading, billing statement, and statement of account.

The application for ATP should be filed not later than 60 days prior to the actual expiry date.

The unused /unissued receipts/invoices shall be surrendered to the taxpayer’s RDO on or before the 10th day after the expiration of the receipts/invoices for destruction.  An inventory listing of these unused/unissued receipts and invoices shall also be submitted to the BIR.

The approved ATP shall be valid only until full usage of the approved serial numbers or five (5) years from its issuance, whichever comes first.

Revenue Regulations No. 18-2012

Punongbayan and Araullo

 

Donation by foreigner

Si Richard ay isang foreigner na naging kaibigan ni Rene dahil magka relihiyon sila. Dahil sa nakikita ng foreigner na si Rene ay nag aalaga ng baka at bina buy and sell dahil dito nagka interes din ang foreigner na bumili ng baka at ipinagkatiwala sa ilalim na pangangalaga ni Rene at napagkasunduan na maghahati sa kikitain sa  bawat na ibebentang baka.

Para magkaroon ng malawak na pastulan at kural ng mga baka bumili sa sariling pera ang foreigner ng 5,200 sq. mtr. Agri lot at ipinangalan ang TCT sa kanilang dalawa ni Rene. 

Lumipas ang mga taon ang napagkasunduan hatian sa tutubuin ay hindi na natutupad ni Rene dahil dito napagkasunduan na ibenta na lamang ang nabili lupa.

Una inialok ng foreigner na ibenta ang lupa pangsakahan kay Rene subalit walang kapasidad na bilhin dahil sa kakulangan ng pera pambili. Ilang taon ang lumipas hindi naibenta ang lupain dahil walang nagka interes na bumibili. 

Dahil walang bumili sa lupa nagpasya ang foreigner na donate na lamang ang nasabing lupain sa matagal niyang kaibigan at trustee na si Ruben pumayag naman si Rene.

Si Ruben ay matagal nanilbihan sa foreigner noong nanirahan ang huli sa bansa subali’t si Ruben ay nagkasakit at ipinakiusap sa foreigner na idonate na lamang ang lupain sa anak niyang  bunso lalake na may edad na 19 yrs old, pumayag naman ang foreigner at Rene.

Tanong:

1.    Ano ang unang hakbang na gagawin nina Rene, anak ni Ruben at foreigner para mailipat sa pangalan ang titulo pabor sa anak ni Ruben?

2.    Sa kasalukuyan ang foreigner ay nasa ibang bansa pero may SPA na ginawa noong huling bumalik ng bansa para kay Ruben kabilang na nakasaad sa SPA na puwede ibenta ni Rene ang lupain sa ngalan ng principal pero hindi nakasaad ang donasyon.

3.    Pabalik sa bansa ang foreigner ano mang araw at buwan sa susunod na taon pa, hihintayin na lamang bumalik para pumirma sa dokumento para sa paglilipat sa pangalan ng anak ni Ruben?

Mga sagot:

1. Kailangan pumirma sina Richard and Ruben ng Deed of Donation para sa anak ni Ruben.  Ang Deed of Donation ay dapat notaryado.  Dapat dalhin ang nasabing Deed of Donation sa Bureau of Internal Revenue para mabayaran ang Donor’s Tax at para mabigyan ang anak ni Ruben ng Certificate of Authority to Register.
2. Ang Special Power of Attorney para magbenta ng lupain ay hindi sakop ang pagdonate ng nasabing lupain.  Sa pagbebenta merong perang tatanggapin ang may-ari na halaga ng napagbentahan subalit sa pagdonate walang perang matatanggap ang may-ari.
3. Kahit hindi hintayin ang pagdating ni Richard sa bansa para i-donate nila ni Ruben sa anak ni Rene.  Dahil sa makabagong paraan ng pakipag-ugnayan, maaaring ipadala sa pamamagitan ng email ang Deed of Donation para pirmahan ni Richard at doon ipanotaryo sa kanyang bansa. Para kilalanin ang dokumento sa Pilipinas, kailangang ipa-authenticate ito sa Embahada ng Pilipinas doon sa bansa niya.  Ang pirmado, notaryado at authenticated Deed of Donation ay maaari ng i-registro sa Register of Deeds pagkatapos mabayaran ang donors tax sa Bureau of Internal Revenue.

Lotto tickets subject to DST

The sale of lotto tickets is subject to documentary stamp tax (DST) based on the cost of the ticket, pursuant to Section 190 of the Tax Code, as amended. They are not covered by the tax exemption granted to horse races and sale of tickets in the horse race sweepstakes under the Philippine Charity Sweepstakes Office (PCSO) charter (Republic Act No. 1169).

Under Section 4 of RA 1169, i.e., PCSO Charter, horse races and sale of tickets in the said sweepstakes are exempt from all taxes, except that each ticket shall bear a 12-centavo internal revenue stamp. According to the Court of Tax Appeals (CTA), since the statute expressly limits the exemption to horse races and sale of horse race sweepstakes, it may not, by interpretation or construction, be extended to others, i.e., lotto tickets.

On the contention that Section 4 of RA 1169, which grants tax exemption to “horse races tickets and sale of sweepstakes,” is inconsistent with Section 190 of the Tax Code, which imposes tax on lotto, the CTA held that there is no inconsistency between Section 190 of the Tax Code and Section 4 of RA 1169 since the latter expressly exempts only horse races and sale of sweepstakes tickets, and does not include lotto tickets.

The CTA further held that Section 190 of the Tax Code is clear that the cost of the ticket should be the basis for the computation of the DST. According to the CTA, the cost of the ticket is equivalent to the gross sales without deducting the commission and rent due the third parties, and not the net receipts.

(PCSO v. CIR and Assistant Commissioner of Internal Revenue, Large Taxpayers Service, CTA EB Case No. 807 re Case No. 8036, October 1, 2012)

Tax Brief - November 2012

Punongbayan and Araullo

Proof of service of assessment notice

Under Section 228 of the Tax Code, when the Commissioner of Internal Revenue (CIR) or his duly authorized representative finds that the proper taxes should be assessed, the taxpayer must be notified of his liability for deficiency taxes through the sending of a Preliminary Assessment Notice (PAN).

In CIR vs. Metro Star Superama, Inc., cited by the CTA, the Supreme Court (SC) held that the sending of a PAN to a taxpayer to inform him of the assessment made is part of the due process requirement in the issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by tax authorities.

In its argument against the assessment issued by the BIR, the taxpayer claimed that the BIR’s assessment did not become final, demandable and executory since the taxpayer did not receive the PAN. To prove receipt of PAN by the taxpayer, the BIR submitted the judicial affidavit and presented as witness the BIR personnel who was in charge of checking the mailing, among others, of assessment notices.

To prove service by registered mail, the CTA held that Sections 7 and 13 of 1997 Rules of Civil Procedure require that the following evidence be presented: (a) an affidavit from the BIR personnel stating, among others, that the notice was in a sealed envelope, the postage was fully prepaid, and there were instructions to the postmaster to return the mail to the sender after 10 days if the mail is delivered in compliance with Section 7 of 1997 Rules of Civil Procedure; (b) the registry receipt issued by the mailing office.

The CTA held that the judicial affidavit and testimony of the BIR personnel do not show compliance with the provisions of Section 7, Rule 13 of the 1997 Rules of Civil Procedure. According to the CTA, the judicial affidavit of the BIR personnel failed to state that the PAN was in a sealed envelope, the postage was fully prepaid, and there were instructions to the postmaster to return the mail to the sender after 10 days if the mail is undelivered. Moreover, there was no indication that the BIR presented the registry receipt issued by the mailing office for the PAN.

For failure to establish that the taxpayer received the PAN in accordance with the provisions of Section 13 in relation to Section 7, both of Rule 13 of the Rules of Court, the assessment made by the CIR is void.

(People of the Philippines v. Katherine M. Lim and Edelyn Coronacion, CTA EB Criminal Case No. 019, re CTA Criminal Case No. 0- 113, October 1, 2012

Tax Brief – November 2012

Punongbayan and Araullo

The modern Service Desk

8:30 AM The marketing assistant calls for a password reset and the service desk representative logs it on his manual call logging spreadsheet

8:33 AM A branch executive requests for assistance on application installation

8:34 AM A sales representative complains about her laptop’s dead LCD screen

8:44 AM Emails start to flood in - from service and status requests to inquiries and complaints

10:20 AM Calls are already abandoned, several calls are declined, requests are left in the queue, and the list of unresolved infrastructure problems piles up

This is a typical morning for your information technology (IT) department’s service desk unit. Based on various industry reports, an end user calls the service desk an average of 0.8 to 1.2 times per month. And when these calls and requests are neither resolved nor fulfilled, end users are usually left with an impression of dissatisfaction towards the quality of service that the IT department is providing. Service level agreements are also not met and end-users are unable to efficiently perform their business functions.

The importance of a Service Desk

Based on the Information Technology Infrastructure Library (ITIL), an approach for IT service management that is widely used by big businesses, “the value of an effective Service Desk should not be underrated - a good Service Desk can often compensate for deficiencies elsewhere in an organization’s IT department, but a poor Service Desk (or the lack of a Service Desk) can give a poor impression of an otherwise very effective organization.” This emphasizes the importance of the Service Desk’s role within an organization’s quality service delivery.

The current state of Service Desks

Responding to service requests and proactively managing IT infrastructure (through event, incident and problem management, to name a few) has become an increasingly important IT Service Desk function. However, organizations still struggle to align IT service support with business expectations, costs cutting, high end-user satisfaction, and streamlining processes -- making it all possible with a limited IT Service Management (ITSM) toolset.

Need for transformation

The customer service operations are no exception to automation and optimization. In order to provide quality service, organizations may have to transform their IT Service Desk functions into a robust and capable business unit.

Where to look for ITSM tools

When organizations go out in the IT market place today they’ll be greeted by a dizzying number of software products that promise to deliver critical IT Service Desk functions. Without the right strategy, it can be challenging, and at times frustrating, for organizations to navigate the myriad of vendors and products. So the question remains, what solution is right for your organization?

Choosing the right ITSM solution

Here are some practical steps in choosing the right ITSM solution:

1. Conduct a needs assessment.

It is always important to conduct a business case or a needs assessment. There are still a number of organizations that start with product search as opposed to clearly defining needs at the onset. This is similar to adopting ITIL best practices without assessing the organization’s current state and capabilities, as well as its desired future state of operations. A business case is fundamental in defining the organizational needs and the strategic benefits before an acquisition of a new software. It is critical to understand the various processes in your organization and identify areas where opportunities for improvement exist.

2. Define your requirements.

Determining requirements is not about choosing features from the vendors’ marketing materials, brochures, data sheets or whitepapers as if you’re ordering off their catalogue. The organization must be able to generate a comprehensive list of requirements that details the features and functionalities of the needed product including report requirements, audit trails, data integration, performance, scalability, usability and cosmetics, backup and archiving requirements, and security aspects. This list of requirements should include what the solutions are expected to provide, limitations of the current tools, and how future processes are expected to operate.

3. Look at the market and do your research.

The IT Service Desk market is dynamic. As more players enter the market, the vendor landscape changes and shifts, making it harder for organizations to navigate. Conducting thorough research on the current IT Service Desk market and the trends that are causing the shifts -- e.g., vendor consolidation, tool acquisition and service desk business plans, newer licensing cost models, service support scope and ITSM tool integrations -- will help you understand and make a sound decision in choosing your IT service desk provider.

4. Short-list your solutions providers

Vendors are currently looking to differentiate themselves through innovative features and functionalities, ease of implementation, licensing model flexibility, embedded best practices, and integration with ITSM tools. By listing and defining selection criteria that reflect the identified requirements, you can vet, compare, grade and evaluate vendors in an organized manner. You can then narrow down the solutions that are responsive and aligned to your overall business needs.

5. Call for a proof of concept(s) and identify the need for customization.

Vendors are more than willing to provide proof of their products’ concepts. So go ahead and require a demonstration to be able to perform a detailed evaluation of the product. The comprehensive requirements list that you have prepared can be drilled down to determine the product’s actual capabilities in meeting your requirements. It is important to remember that more often than not, some necessary tweaks are required for new products to work. Identifying what works and what calls for further configuration is vital in identifying the most suitable solution to your requirements.

Implementing the right ITSM solution

Choosing the right solution for your Service Desk is primarily dependent on the organization and not on the solutions provider.  It is critical for organizations to understand their needs, identify their requirements, do diligent research, select eligible vendors and validate the product’s functionalities, features and capabilities. With the proper strategies, an organization can successfully identify and implement the right ITSM solution.

By Paul L. Gonzales CPA, CIA, CISA is a Managing Consultant with the Advisory Services Division of Punongbayan & Araullo.

Executive Brief – September 2012

Punongbayan and Araullo

Why are you so controlling?

“I can’t move. These things that they call controls make my life miserable. I feel like I’m being heavily guarded. Don’t they trust me? A process with three steps becomes four, and four steps become three. I don’t think there’s a difference at all. This just consumes my time and effort.”

-Typical reaction of process owners, protesting in silence

No one likes to be controlled. Autonomy and freedom are sought for by individuals especially when it comes to performing their work. However, controls are indispensable to the success of organizations. According to the Internal Control – Integrated Framework, a report on internal control prepared by the Committee of Sponsoring Organizations of the Treadway Commission, internal control is in place to provide reasonable assurance on the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

In order for companies to attain their goals and spur growth, they have to manage risks through robust internal controls. But while executive management appreciates and understands the need to have these controls in place, this appreciation is not necessarily shared by process owners who have to deal with these controls on a daily basis.

When the value of controls is not fully understood, process owners may perceive them as unnecessary and counterproductive. They may also feel that controls are there so that management can nitpick on their errors and mistakes. At times, process owners feel offended by the imposition of safeguards especially when this leads to a more stringent review and approval of their work, the addition of performance metrics, access revocation, divestment of incompatible duties, and other changes in the normal operating procedures. In worst cases, hostility may arise causing process owners to disregard the controls and impede operations.

In a simpler and similar context, this initial resistance may be likened to the rebellion of teens when parents impose curfews, regulate allowances, limit the use of gadgets, or require target grades. But as teens mature and grow in a family that fosters open dialogue, they eventually understand that rules are meant for their safety and well-being.

In the same manner, in order to effectively handle adverse reactions towards controls, management should properly communicate and demonstrate the benefits of implementing controls. With open and consistent communication, management can inculcate in its employees the overall control objectives.  According to Nitin Nohria, Dean of Harvard Business School, “Communication is the real work of leadership.” When effective communication is in place, process owners can better appreciate controls and work towards helping management implement them successfully.

The following are some ways by which the value of controls can be communicated:

• Mission and values statements

• Standards or codes of conduct

• Policies and practices

• Operating principles

• Directives, guidelines and other supporting communications

• Actions and decisions of the board of directors and of management at various levels

• Attitudes and responses to deviations from expected standards of conduct

• Informal and routine actions and communication of leaders at all levels of the entity

Regardless of the forms of communication that you use, the tone must be consistent — from executive management down to the front-liners — to ensure that values, business drivers, and resulting behaviors are shared among all employees and partners of the organization. Management should make sure process owners understand that controls are designed to help accomplish specific goals and objectives, and that they are essential in preventing and detecting minor problems before they become catastrophes. Having a unified direction helps process owners grasp that the minutest control is an important piece in the armor of organizations against risks.

In the quest for effective risk management and growth, companies will always face the challenge of dealing with different levels of maturity and comprehension amongst process owners when organizational changes are made to accommodate controls. But while birthing pains and initial resistance are inevitable, they can be mitigated through dynamic dialogue and clear communication. If the message is effectively packaged, everyone in the organization will appreciate that controls are there to aid, not suffocate.

Irish Ching CPA is a Lead Consultant with the Advisory Services Division of Punongbayan & Araullo.

Executive Brief – October 2012

Punongbayan and Araullo