Clarification on business taxes on professionals

The Bureau of Internal Revenue (BIR) issued the following clarifications on the applicable business taxes on the services performed by persons engaged in the practice of profession or calling.

a. Value-added tax (VAT) – A professional shall be liable to VAT at the rate of 12% if his gross receipts/professional fees for the past 12 months amount to more than P1,919,500. He is likewise liable to register as a VAT-taxpayer if there are reasonable grounds to believe that his gross receipts/ professional fees for the next 12 months will exceed P1,919,500.

For purposes of the P1,919,500 VAT threshold, a husband and wife shall be considered separate taxpayers. If the professional fails to register as a VAT-taxpayer, he shall be liable to pay the 12% output tax as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered.

b. Percentage tax – A professional is liable to the 3% percentage tax if his gross receipts  /professional fees for the past 12 months do not exceed P1,919,500 and he is not a VAT-registered person.

If the professional registers as a VAT-person, he shall be liable to VAT upon registration as a VAT taxpayer, and not to percentage tax, regardless of the amount of his gross receipts/professional fees. A person who is not required to register for VAT may elect to be VAT-registered but he shall not be allowed to cancel such registration for the next three years from the quarter the election was made.

(Revenue Memorandum Circular No. 64-2012, October 31, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Change in useful life of property used in business

The estimated useful life of the fixed assets used by an enterprise registered with the Philippine Economic Zone Authority (PEZA) for its manufacturing activities may be changed for purposes of claiming depreciation deduction, both for tax and financial accounting purposes, if the estimated useful life of the asset previously adopted is no longer reasonable.

Under Section 34(F)(3) of the Tax Code, the taxpayer and Commissioner of Internal Revenue may enter into an agreement in writing on the estimated useful life and rate of depreciation of any  property. The rate so agreed upon shall be binding on both the taxpayer and the BIR.

However, if it develops that the useful life of the property originally estimated under previous factual conditions is no longer reasonable, the law allows the taxpayer to lengthen or shorten the useful life of the property in light of prevailing factual considerations.

(BIR Ruling No. 598-2012, October 25, 2012)

 Tax Brief – December 2012

Punongbayan and Araullo

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