Thursday, September 23, 2010

Allowable deductions for PEZA IT enterprises

by: Arnold P. Supilanas 
(Published in BusinessWorld on September 26, 2006)

In today’s computer age, information technology (“IT”) has become the emerging industry in the global economy.  And with the country’s English-speaking and highly-skilled IT professionals, the Philippines has become a favorite investment destination for most IT and IT-enabled companies.

Due to this competitive advantage, the Philippines is now hosting a number of business process outsourcing (“BPO”) firms, contact centers (popularly known as “call centers”),  software research and development enterprises, medical and legal transcription firms, design engineering companies and other IT and IT-enabled firms.

Most of these IT and IT-enabled firms are registered with the Philippine Economic Zone Authority (“PEZA”) obviously for the availment of certain fiscal and non-fiscal incentives.  As in the case of any other PEZA-registered entity, the IT industry is also entitled to the 5% special tax regime based on the gross income earned. Under the existing PEZA rules, “gross income” refers to the gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period. For export enterprises, the direct costs are enumerated in Section 2, Rule XX of the Implementing Rules and Regulations of Republic Act No. 7916, as follows:

1.   Direct salaries, wages or labor expenses
2.   Production supervision salaries
3.   Raw materials used in the manufacture of products
4.   Goods in process (intermediate goods)
5.   Finished goods
6.   Supplies and fuels used in production
7.   Depreciation of machinery and equipment used in production, and buildings owned or constructed by an ECOZONE Enterprise
8.   Rent and utility charges associated with building, equipment and warehouses, or handling of goods
9.   Financing charges associated with fixed assets

Notably, the list of allowable deductions for export enterprises is more applicable to manufacturing companies rather than to service, such as IT or IT-enabled companies. Are these deductions intended to be all-inclusive or are these merely enumeration of the typical expenses that can be considered as direct costs?  Should PEZA-registered IT enterprises be allowed to deduct direct costs and other expenses which are in the nature of direct costs, although not included in the list?

The Bureau of Internal Revenue (BIR) attempted to address this concern when it issued Revenue Regulations (“RR”) No. 2-2005 where it inserted the word “only” in the enumeration of the allowable deductions, thus, limiting the deductible costs to those listed. But the implementation of the said regulations was suspended. In trying to arrest the issue, the BIR subsequently issued RR No. 11-2005 which deleted the word “only” in the list.  Going through the content of RR No. 11-2005, it can be observed that the list of expenses provided under the BIR regulations and the PEZA implementing regulations are the same, except for the clarification that the depreciation and financing charges allowed as deductions shall be limited to those relating to fixed assets used in the production of goods and the deductible portion of goods in process and finished goods accounts.

On the other hand, the removal of the word “only” in the list was understood by most PEZA-registered companies, particularly the IT enterprises, that the BIR has conceded that the allowable deductions are not only limited to those listed in the regulation and, as such, other expenses that are in the nature of direct costs, depending on the nature of the business, can also be claimed as deduction. Consequently, PEZA IT Enterprises may deduct other expenses which are in the nature of direct cost for purposes of computing the gross income earned.

The justification of a specific cost as a direct cost could be an issue. Under the generally accepted accounting principles, the underlying principle in determining the item of cost or expense as part of direct cost is the direct relation of such item in the production of the product or service.  If such item of cost or expense is a prerequisite element in the production of the product or service, then it should be considered as direct cost.  Hence, it may be significant to understand the production processes of a certain company to properly determine which item of cost or expense is classifiable as direct cost.

In the absence of a specific regulations, it would be prudent for PEZA IT enterprises to secure a ruling from the BIR should they decide to claim expenses, other than those listed in the regulations, as deductions for purposes of computing the 5% special tax.

Our regulators, however, should consider that formulation of specific regulations on the allowable deductions for PEZA IT Enterprise would foster a uniform application of the PEZA incentives. With a well defined incentive system, the Philippines will not be far from being the number one investment destination in the IT industry.

High-tech BIR examination

by Arnold P. Supilanas 
(Published in BusinessWorld on October 31, 2006)

Taxpayers that have adopted computerized accounting systems (CAS) should brace up for high-tech conduct of BIR audit.

The Bureau of Internal Revenue (BIR) has recently issued Revenue Regulations (RR) No. 16-2006 signalling a more extensive utilization of computer technology in conducting audit and examination of the books and accounting records of taxpayers with CAS. 

The regulations will govern taxpayers’ submission of books of accounts and other accounting records to the BIR in electronic format during examination.

Under the regulations, computerized accounting books/records required for submission to the BIR will be stored in recordable compact discs (CD-R), digital video discs (DVD-R) or other optical media, depending on the volume of the transactions or size of the business, and in a format that is readable by the BIR audit tools, as specified in the letter request for submission of data, e.g. dBase, delimited or flat file format.

Submission of these records will be required within five days from the receipt of the documents authorizing the investigation such as Letter of Authority, Audit Notice, etc., the same deadline imposed under manual tax examination.

These computerized books of accounts and other accounting records in electronic format that are required to be submitted to the BIR upon audit/investigation are the same records that are submitted and registered with the concerned BIR office within 30 days from the close of the taxable year pursuant to Revenue Memorandum Order (RMO) No. 29-2002. 

The BIR however is not precluded from requesting other transaction files which may contain information or transactions that occurred during the particular taxable year covered by the examination, that were not included in the original data submitted.

It may be recalled that pursuant to RMO 29-2002 in relation to Republic Act (R.A.) No. 8792 also known as the Electronic Commerce Act of 2000, the BIR repealed the requirement for binding and stamping of computerized books of accounts and/or receipts and invoices generated by a duly approved CAS.  Instead, a soft copy of the computerized books of accounts and other accounting records/documents in text file format will be submitted.

Will it now be a paperless tax examination? Will the tax authority employ a completely no-contact-audit approach?

The regulations provide that the taxpayer is still required to present the documents supporting the entries made in the CAS during verification process. 

Likewise, if there are discrepancies found upon tax audit that result to tax assessments, the Revenue Officers/Examiners may request for certified true copies, in hard copy and/or electronic format, of the portion of the accounting books and pertinent accounting records that would serve as evidence or proof of the audit findings.

Furthermore, as a rule, the tax examination should be done at the taxpayer’s premises.  With these regulations, BIR examiners may perform their audit procedures outside of the taxpayer’s place, such as in the BIR offices or even in their homes.

Certainly, this exercise will improve BIR audit efficiency that would translate to an increase in revenue collection and reduce graft and corruption. 

On the other hand, it is claimed that the process will also somehow unburden taxpayers. The process will require less of the time of the taxpayers as contact between the taxpayer and the examiner is minimized.

Many taxpayers, however, are seeking for more reassurance that the confidentiality of their files will be strictly protected.

Ensuring the correct availment of incentives

By: Arnold P. Supilanas
(Published in BusinessWorld on April 10, 2007)

In an attempt to address the concerns being raised on tax leakages arising from incorrect or, sometimes, fraudulent claims for  tax incentives, the Bureau of Internal Revenue (BIR), signed last  March 1, 2007 separate memoranda of agreement (MoA) with the Board of Investments (BoI) and the Philippine Economic Zone Authority (PEZA) aimed at establishing an efficient, effective system of implementing the income tax holiday (ITH) and the 5% gross income tax (GIT).

The MoA requires a BoI- or PEZA-registered enterprise to secure annually and attach to its annual income tax return (ITR) a certificate of entitlement to incentives for  ITH or 5% GIT in the case of PEZA-registered enterprises enjoying the 5% preferential tax rate.

Moreover, registered firms are required to apply for ITH or 5% GIT incentives with BoI or PEZA within six  months (for BoI) or 30 days (for PEZA) from the BIR due date for the annual ITR or the actual date of filing, whichever comes later.

Failure to comply with these requirements may forfeit the tax incentives entitlement and subject the registered firms to immediate BIR investigation.

BoI and PEZA also agreed to furnish  the BIR a masterlist of firms entitled to ITH or GIT, a list of firms that availed of the ITH or GIT, and a list of firms whose ITH incentives have expired.

The MoA likewise directed these agencies to evaluate the ITRs submitted by the registered companies and endorse to the BIR within one and a half year for BOI and within one year for PEZA their findings on the correctness of the availment of incentives.

BIR, on the other hand, will conduct post-audit/review of the evaluation bearing on incentive availment submitted by BoI and PEZA within one year prior to the prescription of the three-year period to assess, and transmit any findings of deficiency taxes to the Revenue District Office concerned for collection. 

Furthermore, the MoA authorizes the tax authority to conduct immediate audit of enterprises that did not comply with the required submissions and enforce collection of taxes arising from invalidated incentives.
As these compliance requirements are not all new, PEZA and BOI will still be required to submit to BIR the ITRs and their evaluation of the compliance of the registered enterprises for taxable years 2004 and 2005.  PEZA and BOI companies are therefore well advised to secure the required certification and submit these, together with their ITRs.  PEZA’s deadline for the 2004 and 2005 returns are July 31, 2007 and May 31, 2008, respectively. 

Non-compliant BoI enterprises are given until this May 31, 2007 to file these requirements for ITH availment.  BOI’s evaluation is due on or before August 31, 2007.

With the signing of the MoA, it is expected that some loopholes in the fiscal incentives structure of PEZA and BoI registered companies will finally be plugged, and consequently, revenue leakages minimized if not eliminated.  With these collaborative effort with the incentive-giving bodies, BIR has once again clearly conveyed  its intent not to leave any stone unturned in its efforts to strengthen tax administration.

It is undoubtedly a valid objective on the part of government to ensure that only the companies legitimately entitled to fiscal incentives would benefit therefrom.  Taxpayers claiming tax exemptions must be able to prove that they are entitled to such exemptions. Statutorily, a claim for tax exemption should be construed against the taxpayer.  This is but fair.

But the government should ensure that it does not “kill the goose that lays the golden egg” by causing compliance or administrative bottlenecks for companies or increasing their cost of doing business in the Philippines.

Local taxation of PEZA-registered locators

by: Arnold P. Supilanas
(Published in BusinessWorld on October 16, 2007)

The impact of taxation has always been a major consideration why some taxpayers decide to register with the Philippine Economic Zone Authority (PEZA) and locate in a PEZA zone.

The tax savings may indeed be substantial because of the tax incentives accorded to qualified PEZA-registered firms.

Instead of paying the usual 35% income tax, a PEZA-registered enterprise will enjoy an income tax holiday for the first years of its operation. After the lapse of this income tax holiday period, the entity would be subject to 5% tax on gross income. Other firms  may opt to be subjected directly to the 5% tax on gross income.
These national taxes are usually the issues considered by taxpayers in evaluating whether or not it is worthwhile to locate in a PEZA zone. What about the local taxes? Are PEZA-registered entities subject to local business taxes and other local charges that these are not usually considered?

In the past, there have indeed been disputes on this matter between PEZA-registered enterprises and some local government units (LGUs) in areas where the PEZA zones are located. Also, some PEZA-registered enterprises are uncertain whether or not they qualify for exemption from local taxes.

For companies paying the 5% tax on gross income, no less than the Special Economic Zone Act of 1995 or the PEZA Law has declared that no taxes, both local and national, shall be imposed on business establishments operating within the ECOZONE. The 5% tax is in lieu of all taxes, including local taxes. It is clear therefore that PEZA-registered enterprises paying the 5% tax on gross income are not liable for local business taxes and other charges normally due to the local government units.  However, this exemption only covers companies under the 5% tax regime.

What about the PEZA-registered entities enjoying income tax holiday?  Income tax holiday incentives imply exemption from income tax. This would mean that an entity entitled to it enjoys exemption from income tax only, unless also expressly exempted from other taxes.

This is not so for enterprises registered with PEZA and operating within a PEZA zone.  As mentioned earlier, a PEZA-registered entity may opt to be subjected directly to the 5% tax on gross income or avail of the income tax holiday incentives first. This income tax holiday incentive is based on Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987.   EO 226 exempts zone registered enterprises, to the extent of their construction, operation or production inside the zone, from the payment of any and all local government imposts, fees, licenses or taxes except real property taxes.

There is therefore no distinction between a PEZA-registered entity enjoying an income tax holiday or subject to the 5% tax on gross income in so far as local taxation is concerned. Both are exempt from the payment of any and all local government imposts, fees, licenses or taxes.

The Philippine Economic Zone Authority itself clarified  in its  Memorandum Circular No. 2004-024, dated September 24, 2004,  that PEZA-registered enterprises including those availing of the income tax holiday incentives, are exempted from payment of all local taxes, licenses, imposts, and fees, except real estate taxes.

The said circular even exempts PEZA-registered companies from securing the required local government permits. Despite this pronouncement though, there are still some cities and municipalities requiring PEZA-registered entities to obtain local government permits and pay the corresponding permit fees. If you are a locator within these cities and municipalities, you would still be required to obtain business permits and pay the corresponding permit fees, but not the local business tax.

While local business tax rates are insignificant when compared with the national taxes, the amounts could also be substantial considering that they are based on the gross sales/receipts. Local business taxes should also be considered by these companies in evaluating whether or not to locate in a PEZA zone.

On the part of the local government units, while they have the power to create their sources of revenue, they should grant the PEZA locators  the  incentives accorded under the law and free these locators from the dilemma of paying or not paying local taxes, fees and charges.

Monday, September 20, 2010

Implementation issues in the new income tax law

by: Arnold P. Supilanas
(Published in BusinessWorld on July 1, 2008)

The long wait of over half a million minimum-wage earners for the much-needed tax relief is now over as the President signed into law last June 17 Republic Act (RA) No. 9504, exempting minimum-wage earners from income tax.

This law is, indeed, a welcome relief for the minimum-wage earners given the current rice crisis in our country as well as the never-ending increase in prices of fuel which often leads to price increases in almost all our basic needs.

The term "minimum wage earner," as defined in the new law, refers to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector whose compensation income of not more than the statutory minimum wage for the non-agricultural sector in the locality or region where he/she is assigned.
Other salient features of the new law, aside from the income tax exemption of the minimum-wage earners, are:

          § the increase in the basic personal exemption for individual taxpayers from the previous P20,000 for single, P25,000 for head of the family and P32,000 for married individual to P50,000 regardless of the civil status;

           § the increase in additional exemption for qualified dependents from P8,000 to P25,000;

           § the increase of the rate of the optional standard deductions (OSD) for self-employed individuals from 10% of gross income to 40% of gross sales or receipts; and,

           § the inclusion of the corporation in the 40% OSD coverage, in lieu of the itemized deductions.

Apparently, the income tax exemptions and increases in personal and additional exemptions would cost the government billions of pesos in foregone revenues. However, as justified by the legislature, the increase of the rate of the OSD for individuals and the inclusion of corporations in the OSD coverage are expected to generate additional revenues more than enough to offset the aforementioned foregone revenues.

Whether this objective can be achieved depends on how the new law, particularly the provisions pertaining to the OSD, will be implemented. For this reason, the implementing rules that the BIR will be issuing is much awaited.

From a careful reading of the new law, certain questions and critiques have been raised relative to the implementation of the OSD. Examples of these are the following:

          1. When should individuals or corporate taxpayers decide whether to use itemized deductions or 40% OSD? Should this be made when they prepare their annual income tax returns at the end of their taxable year, or even earlier when they file their first quarterly income tax return for the year? Can they use the itemized deductions in the first three quarters and then make a final choice on their final adjusted return to adopt the OSD?

For that matter, for this year of implementation, will BIR allow taxpayers that have been filing their quarterly income tax returns using itemized deductions to elect the 40% OSD when they compute for their annual income tax?

           2. There is an interesting observation that the Tax Code provision enumerating the deductions supposed to be replaced by the OSD, if the latter is elected, refers to "deductions from gross income" and not deductions from gross sales. Gross income, under existing tax rules and regulations, is defined as gross sales or gross revenue minus cost of goods sold or cost of services.

Following this logic, will a taxpayer be allowed to claim cost of sales or cost of services against its gross sales or revenues to arrive at gross income and then, deduct a standard deduction equal to 40% of its gross income? Or will the 40% OSD be the only deduction to be allowed against gross sales or revenues?

An equally interesting observation is that the law provided dif ferent bases for the OSD — for individuals, the 40% is based on his gross sales/receipts, while for cor poration, this is based on its gross income. How will these different tax bases affect the tax liability of e ach type of taxpayer?

           3. Will a corporate taxpayer that opted to avail the 40% OSD still be subject to the 2% minimum corporate income tax (MCIT)? Can the unexpired excess of MCIT over the normal income tax in prior years be used as credit against the normal income tax computed based on the 40% OSD?

           4. Can companies registered with the Philippine Economic Zone Authority and under the 5% special tax regime avail of the 40% OSD? What would be the basis of the 40% OSD?

Considering that government expects to entice a greater level of tax compliance with the introduction of the OSD, it is hoped that the tax rules to be introduced by BIR will be simple for taxpayers to comply.
It is also hoped that, in coming up with the rules, BIR will keep in mind the provisions and intent of the new law and not how it believes the law should be implemented.

The power given to them is not the discretion to determine what the law should be, but how the law may be enforced and executed.

Friday, September 17, 2010

Dissolving a corporation

By: Arnold P. Supilanas
(Published in BusinessWorld on March 11, 2009)

The crisis has forced companies across the globe to find ways to ease the impact of recession. Some are forced to implement work day reductions to cut costs, restructure through merger or consolidation, downsize, or even shut down.

The most painful of options, closing a business, is most tedious in the country. The nod of state agencies — such as the Bureau of Internal Revenue (BIR), the Securities and Exchange Commission (SEC), the Social Security System, the Philippine Health Insurance Corp., Home Development Mutual Fund, and local governments — are required. For firms with special registrations, the nod of specific agencies, such as the Philippine Economic Zone Authority (PEZA), the Board of Investments and the Bangko Sentral ng Pilipinas, is also required.

Each agency has distinct requirements and procedures. In the case of PEZA, the business must submit a letter to the PEZA chief with supporting documents.

For the BIR, the procedures are outlined in Revenue Regulations 11-2008 issued on August 15, 2008. Under the rules, canceling a registration requires the filing of a Notice of Closure or Cessation of Business with the large taxpayers unit or the revenue district office where the taxpayer is registered.

The supporting documents required are a board resolution authorizing a shortened corporate term in the case of a domestic corporation, or the dissolution of the Philippine entity in the case of branches or representative offices of foreign firms; an application for Information Registration Update (BIR Form 1905); an inventory of goods, supplies, and capital goods; a list of unused sales invoices or official receipts and all other accounting forms such as vouchers, debit/credit memos, delivery receipts, purchase orders; the surrender of original copies of unused sales invoices or official receipts and all other unused accounting forms; and the surrender of original copies of all business notices and permits.

Taxpayers seeking the cancellation of their registration are automatically investigated by the BIR for tax liabilities.

This audit is the same as regular audits and governed by the same rules on prescription. Hence, the assessment should be issued within three years from the date of filing of the return and payment of the tax due. It may be prudent for the taxpayer planning to cease operations to review compliance with tax laws and regulations to estimate the tax exposure, and perhaps set aside that amount.

When liabilities are settled, the BIR will cancel the firm’s Certificate of Registration and TIN, and issue the Tax Clearance or Certificate of No Outstanding Tax Liability.

An application for dissolution with the SEC cannot commence until all the requirements, including the tax clearance, are complied with. This is the major cause of delay in most dissolution procedures. In the meantime, the company technically remains a registered non-operating entity. This, however, does not prevent the company from pursuing the liquidation of its properties and inventories, subject to taxes.

The proof of cancellation of business registration and tax clearance are also required if a company to be dissolved wants tax credit certificates (TCC) from the BIR for unutilized input value-added tax. In a recent case, the Court of Tax Appeals ruled that the "registration" of the company must be cancelled first before it can apply for TCCs.

The tax clearance is a mechanism to ensure that no corporation escapes taxes and liabilities simply through dissolution.

Firms planning to close operations must be aware of the tax implications as well as the requirements of government agencies to avoid shelling out money unnecessarily. In these challenging times, every peso counts.

Abatement program of the BIR

(Revenue Regulations No. 9-2010 dated September 13, 2010)

To deter tax evasion practices and encourage and improve voluntary compliance of the internal revenue tax laws, the BIR has launched a one-time abatement program for taxpayers who will voluntarily file or amend their tax returns and pay the correct taxes on or before October 29, 2010.

Under this program, the BIR will waive the imposition of the 25% surcharge and compromise penalty but not the interest.

To know more about the program, full text of the Revenue Regulations is accessible at the link below. 9-2010.pdf

Wednesday, September 8, 2010

Basis for depreciation of property, plant and equipment

(Revenue Memorandum Circular No. 70-2010, August 09, 2010)

The BIR, in the recently issued Revenue Memorandum Circular (RMC) No. 70-2010,  clarified that the concept of depreciation as a mere recovery of cost has not changed from the old Tax Code to the present. Hence, taxpayers using the reappraised value as basis for computing depreciation of property, plant and equipment for tax purposes may consider amending its previously filed income tax returns if no letter of authority for tax audit has been issued by the BIR.

Under the said circular, the BIR has ordered all revenue officers to disallow claims for depreciation based on the appraised increase of property, plant and equipment, and to assess corresponding deficiency against the concerned taxpayers. 
This circular also revoked  previously issued BIR Ruling Nos. DA-413-04 (July 30, 2004) and DA-436-04 (August 24, 2004). 

Please click the link below to access the complete text of the circular.

Tuesday, September 7, 2010

2009 year-end tax reminders

by: Arnold P. Supilanas
(Published in BusinessWorld on December 22, 2009)

The year 2009 is about to end. Aside from Christmas-related activities, companies also start planning for year-end activities related to various compliance requirements of the Bureau of Internal Revenue (BIR).  Some of these compliance requirements are the filing of annual returns, lists and schedules.

Here are some tax reminders for the year ending 2009 and the coming year 2010.

Registration of Manual Books of Accounts.  Taxpayers using manual books of accounts are required to register their books before using it. Manual books of accounts that are intended for use in 2010 should be registered with the BIR on or before December 31, 2009. 

However, the BIR simplified its rules when they issued Revenue Memorandum Circular (RMC) No. 82-2008. Under the said regulations, manual books that have been registered by a taxpayer but have not yet been fully utilized can still be used in the succeeding years without the need for re-stamping. 

The only requirement is to label the pages applicable to a particular period for proper monitoring.  In other words, a new set of books shall be registered only when the previously registered books have been fully utilized.  Therefore, taxpayers are not required to register a new set of books every year.

Annualization of Withholding Taxes of Employees.  This process involves the preparation of the:
           - monthly withholding tax return (BIR Form 1601-C) for December which is due on January 15, 2010 for manual filers or on January 12 to 15 for those under the Electronic Filing and Payment System (EFPS), depending on their industry grouping; (
          - Annual Information Return of Income Taxes Withheld on Compensation (BIR Form 1604-CF) including the alphabetical listing of employees which is due on February 1, 2010;
          - Certificates of Compensation Payment/Tax Withheld (BIR Form 2316) which is also due for distribution to employees on or before February 1, 2010.

Those preparing these returns have to remember the increased amount of basic personal and additional exemptions of individual taxpayers amounting to P50,000 and P25,000, respectively, regardless of status (i.e., single, head of family or married) and the tax exemption of minimum wage earners.

Preparation of Inventory List.  Under existing tax regulations, taxpayers are required to file an inventory list of stocks-in-trade, raw materials, goods in process, supplies, and other goods not later than 30 days after the close of the taxable year. 

Hence, taxpayers whose accounting period ends on December 31, 2009 should file their annual inventory list on or before January 30, 2010. In preparing the inventory list, taxpayers should ensure that the amount of ending inventory declared in the list will be the same amount reported in the audited financial statements as well as in the annual income tax return.

Since the inventory balances in the list are unaudited, it is advisable to submit an amended list in case there will be material audit adjustments.  It is important that the inventory balances in the inventory listing should tally with the inventory balances in audited financial statements and annual income tax return.

Compliance with eDST System.  Taxpayers who are mandated to use the web-based electronic documentary stamp tax (eDST) system in the payment/remittance of their documentary stamp tax (DST) liabilities and the affixture of the prescribed documentary stamp on taxable documents have until December 31, 2009 to comply with the transitory provisions of Revenue Regulations (RR) No. 07-2009. Under the said regulations, eDST system will be fully implemented by the BIR beginning January 1, 2010. 

It is never early to prepare for your taxes. If your company wa nts to have a smooth year-end and begin 2010 stress-free, it is best to start preparing for all the BIR requirements before the year ends to get a head start on your tax preparation next year.

Monday, September 6, 2010

Tax treaty relief application guidelines

The BIR recently issued Revenue Memorandum Order (RMO) No. 72-2010 streamlining the processing of Tax Treaty Relief Applications (TTRA) and prescribing its revised documentary requirements.

Under this RMO, TTRA should be filed before the occurrence of the first taxable event with the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue (BIR) National Office. Failure to file within the prescribed period shall have the effect of disqualifying the TTRA under this RMO.  In the absence of TTRA, payment to non-residents will be subject to regular corporate income tax at 30%.

Please click the link below to access the copy of the RMO. 72-2010.pdf

Sometime in 2008, I wrote an article regarding the proposed rules on tax treaty relief application. Below is the copy of the article for your reference.


Proposed new rules on tax treaty relief application

by:  Arnold P. Supilanas
(Published in BusinessWorld on October 28, 2008)

A number of conventions or agreements for the avoidance of double taxation have been concluded by the Philippine government and the governments of other countries. Commonly known as tax treaties, these conventions provide rules and guidelines on the taxation of income derived by a resident of a contracting state from another contracting state.

Subject to certain conditions, such income may be entitled to some tax relief, such as exemption from income tax or lower/preferential tax rate. Since the availment of tax treaty relief is a form of tax exemption, such exemption cannot be granted if the entitlement remains unproven and unsubstantiated. This rule is aligned with the basic tenet in taxation that tax exemptions shall be construed strictly against the taxpayer, and liberally in favor of the government.

The relevant issuance in the availment of the tax treaty relief is Revenue Memorandum Order (RMO) No. 1-2000. Under this Order, any availment of the tax treaty provisions shall be preceded by an application for treaty relief with the International Tax Affairs Division (ITAD). The said application must be filed at least 15 days before the occurrence of the transaction.  This requirement has been confirmed by the Court of Tax Appeals in a number of decisions.

From the foregoing premises, it appears that securing a ruling from the ITAD of the Bureau of Internal Revenue (BIR) is a mandatory requirement before one can avail of the tax treaty benefits; failure to secure a ruling may invalidate the treaty relief availed of in case of an audit by the tax authority.

A new draft Revenue Memorandum Circular (RMC) prescribing the guidelines for the processing of applications for relief from double taxation pursuant to existing tax treaties has just been exposed to the public for comment. The draft includes a list of documentations required to support claims for application for relief from double taxation.

There is also a new twist in the draft—the availment of preferential tax rates and exemptions provided under Philippine tax treaties need not be preceded by an application for tax treaty relief. In other words, tax exemptions and preferential tax rates provided under the tax treaties may be invoked outright without the need of securing a ruling from the BIR. However, if it is later revealed to the tax authority that the facts surrounding the subject transaction do not warrant the application of the preferential tax rate or exemption from income tax under tax treaties, the correct amount of taxes and appropriate penalties may be collected from the concerned taxpayers. Nonetheless, it is still to the best interest of both the taxpayer and the BIR that a tax treaty relief is secured to avoid any erroneous interpretation and/or application of the treaty provisions.
Another significant feature of the draft RMC is the required period within which to file the application for tax treaty relief—i.e., within 30 days from the occurrence of the first taxable event, complete with all the documentary requirements. The phrase “first taxable event” refers to the very first time or the only time when the payor of the dividend, interest, or royalty is required to withhold the income tax thereon, and in the case of capital gains, the date when the deed of sale or deed transferring the subject shares of stock is executed.  In the absence of complete documents, the request may be treated as “No Ruling Area”.

A significant improvement in the draft is the provision that requires the ruling to be available for release after 45 working days from the date of the receipt of the application for tax treaty relief, of which period the ITAD has 30 working days to process and evaluate the application while the legal service has 10 working days.

The exposure draft is a welcome initiative. It is hoped that this would simplify or streamline the processing of tax treaty relief applications. If this proposed circular will b e finalized and issued, taxpayers will have clear guidelines on how to avail of the tax treaty relief. This also simplifies the processing of tax treaty relief applications, identifies the documents that should accompany the applications for tax treaty relief, and provides for a faster and more efficient processing of applications.

Saturday, September 4, 2010

Handling BIR letter notices efficiently

by: Arnold P. Supilanas
(Published in BusinessWorld on February 23, 2010)

To harmonize procedures and minimize processing time in handling Letter Notices (LNs), the Bureau of Internal Revenue (BIR) has issued several Revenue Memorandum Orders (RMOs) prescribing the guidelines and procedures in handling LNs generated through the BIR’s Tax Reconciliation System (TRS), Reconciliation of Listing for Enforcement System (RELIEF)-Summary List of Sales and Purchases (SLSP), and the Third Party Matching-Bureau of Customs (TPM-BOC) Data Program.

Separate RMOs cover the  Gguidelines and procedures in handling LNs for each year starting taxable year 2006 are covered by a separate RMO.  In 2007, RMO No. 32-2007 was issued for LNs covering the taxable year 2006; .  RMO No. 17-2009 was also issued for LNs covering the taxable year 2007; and .  Just recently, RMO No. 07-2010 was issued prescribing the guidelines and procedures in handling LNs coveringfor the taxable year 2008.

To further enhance the guidelines and proceduresT, the BIR has introduced modifications to the originally issued RMO No. 32-2007 to further enhance the guidelines and procedures. 

Among others, the following modifications are implemented in RMO No. 17-2009 and carried over in the recently issued RMO No. 07-2010:

1.  Unlike the previously issued RMO No. 32-2007 wherein the 2006 LNs cannot be converted to a Letter of Authority (LA) or a Tax Verification Notice (TVN), RMO Nos. 17-2009 and RMO No. 07-2010 allow the consolidation of the 2007 and 2008 LNs with the previously issued LA upon written request for consolidation, subject to approval by the Deputy Commissioner- – Operations Group.  The Third Party Information (TPI) reflected in the said LNs shall be properly utilized and the extent of its utilization shall be included in the report of investigation by the concerned Revenue Officer (RO).

2.  RMO Nos. 17-2009 and 07-2010 also provide that TRS-LNs shall be consolidated with RELIEF-LNs and shall be handled by the same investigating office (the RO who shall to handle TRS-LN shall be the same RO to handle RELIEF-LN) wherein the report of investigation/verification shall be forwarded to the Office of the Deputy Commissioner-Operations Group for proper disposition.  RMO No. 32-2007 did not provide the same.

3. RMO Nos. 17-2009 and 07-2010, unlike RMO No. 32-2007, further provide that in the event the case with LA is already terminated before LN is issued, the Assessment Division (AD)/Reviewing Office – Large Taxpayer Service (RO-LTS) is required to ascertain whether the discrepancies reflected in the LNs were considered in the report of investigation. 

If they were not considered, the AD/RO-LTS shall forward the LA docket together with the LN/s to: the Office of the Deputy Commissioner of Internal Revenue-Operations Group (ODCIR-OG) thru the Office of the Regional Director (ORD) for non-large taxpayers; or to the Commissioner of Internal Revenue (CIR) thru the Associate Commissioner of Internal Revenue (ACIR)-LTS for large taxpayers for appropriate action. 
If the discrepancies were considered, the same shall be forwarded to the ORD/ACIR-LTS and recommend for the cancellation of the said LN/s to the ODCIR-OG/ACIR-LTS together with LA docket.  ODCIR-OG/ACIR-LTS shall refer the same to AITEID for validation and/or cancellation.

While this development would could somehow lessens the taxpayer’s time that will be spent in dealing with the BIR, this may also allow the tax authority to relate, associate and match information gathered in the LN and the LA especially with the mandate of fully utilizing the Third Party IInformation.

Hence, the most prudent thing to do is to ensure compliance with the existing tax rules and regulations including the substantiation and documentary requirements.

Since tax rules and regulations are changing very often, taxpayers may seek assistance from tax experts in evaluating their tax compliance and/or attending forums/seminar to enhance the ir knowledge in taxation.
Taxpayers must also be aware of these other equally important guidelines and procedures in handling LNs, as follows:

1. Taxpayers who decides to settle his liabilities within 30 days from receipt of the LN shall be entitled to certain privileges such as the abatement of interest and penalties.

2. Installment payment is allowed in cases where the tax liabilities exceeds five hundred thousand pesos (P500,000.00).

3. Payment of deficiency tax (es) under the LN shall be credited against any assessment that may be made by the investigating office pursuant to an LA/TVN provided the discrepancies disclosed by said audit/investigation are of the same nature as the discrepancies reflected in the LN.

4. A Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN) shall be issued If a taxpayer fails to response to the LN, the fFollow-up lLetter, or the Notice of Informal Conference within the prescribed period, or fails to settle his tax liabilities, a Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN) shall be issued. The taxpayer, however, may file a protest against the PAN/FAN and request for a reinvestigation or reconsideration. If the protest is valid, it shall be acted upon by the revenue officer. Otherwise, the taxpayer shall be informed in writing that his/her/its request has been denied and the case shall be referred to the appropriate BIR office to effect collection of the deficiency taxes.

5. LNs issued to taxpayers are considered notices of audit/investigation and therefore  insofar asbar any  the amendment toof any returns covering the period referred to in the LN.  Accordingly, a taxpayer is disqualified from amending his/her/its returns covering the period referred to in the LN upon issuance of the same.
Awareness of the manner by which the BIR handles LNs and knowledge of your rights as taxpayers are very important in handling the LNs efficiently and successfully.

Importance of prescriptive period for VAT refund cases

by: Arnold P. Supilanas
(Published in BusinessWorld on August 31, 2010)

Under Section 112(A) of the Tax Code, any (value-added tax) VAT-registered taxpayer may file a claim for refund or issuance of tax credit of its input VAT attributable to zero-rated or effectively zero-rated sales, within two years reckoned from the close of the taxable quarter when the sales were made.

The claim must be administratively filed with the Bureau of Internal Revenue (BIR).

The Commissioner of Internal Revenue (CIR) is given 120 days from the date of submission of complete documents to grant, in proper cases, a refund or to issue a tax credit certificate for creditable input taxes due or paid attributable to zero-rated or effectively zero-rated sales.

In case of full or partial denial of the claim for tax refund or tax credit, or failure to act on the application within the 120-day period, the affected taxpayer may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day period, appeal the decision or the unacted claim with the Court of Tax Appeal (CTA).

This rule on prescriptive periods for judicial claim of excess input VAT was reaffirmed by the CTA in the case of Third Millenium Oil Mill, Inc. vs. CIR (CTA Case No. 7583, dated July 7, 2010).

In the said case, the taxpayer filed its administrative claim for issuance of tax credit for its unutilized input taxes for the four quarters of taxable year 2005 on June 26, 2006, which is within the two-year prescriptive period under Section 112(A) of the Tax Code.

Although the date of filing of the administrative claim is separate and distinct from the date of submission of the complete documents in support thereof, the CTA concluded that the taxpayer, upon filing its administrative claim, simultaneously submitted the complete documents in support of its claim. Thus, under Section 112(C) of the Tax Code, the taxpayer has 120 days from June 26, 2006 or up to October 24, 2006 to wait for the decision or ruling of the CIR denying its claim for issuance of tax credit.

Since there was no action on the part of the CIR, the taxpayer has 30 days from October 24, 2006 or until November 23, 2006 to file a petition for review with the CTA.  However, the taxpayer, in this case, filed its petition for review with the CTA on March 28, 2007 — months beyond the 30-day period to appeal the presumed denial of the taxpayer’s claim for tax refund through the inaction of the CIR.  Hence, the CTA had no more appellate jurisdiction to entertain the case.

In dismissing the case, the CTA quoted the Supreme Court ruling in Yao vs. Court of Appeals (GR No. 132428, October 24, 2000), thus:

“The right to appeal is not a constitutional, natural or inherent right.  It is a statutory privilege of statutory origin and, therefore, available only if granted or provided by statute.  Since the right to appeal is not a natural right nor a part of due process, it may be exercised only in the manner and in accordance with the provisions of law.  Corollarily, its requirements must be strictly complied with.

“That an appeal must be perfected in the manner and within the period fixed by law is not only mandatory but jurisdictional.  Non-compliance with such legal requirements is fatal, for it renders the decision sought to be appealed final and executory, with the end result that no court can exercise appellate jurisdiction to review the decision.”

It can be gleaned from the above decision that strict compliance with the legal requirements provided by the statute which grants the privilege to make an appeal plays an important role in making judicial claim for excess input VAT.  Taxpayers should be mindful of these legal requirements particularly the prescriptive periods in making an appeal, otherwise, they will lose their statutory privilege to appeal VAT refund cases with the CTA.