TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ TAX & OTHER UPDATES FOR MARCH 2013 (Prepared by Isla Lipana & Co., a member firm of PwC) BIR Issuances Revenue Memorandum Order (RMO) RMO No. 2-2013 dated 18 February 2013 prescribes the policies, guidelines and procedures in processing specific requests for information pursuant to the exchange of information provision of Philippine Tax Treaties. The following are the salient features: 1.
Exchange of information (EOI) shall only be between competent authorities or their authorized representatives. For EOI purposes, the recognized competent authority for the Philippines is the Commissioner of Internal Revenue (CIR) and the Secretary of Finance or his duly authorized representative(s) under most existing DTAs.
2. EOI covers any information that is necessary or foreseeably relevant to the administration or enforcement of the domestic laws of the contracting parties concerning income taxes and other taxes. 3. The obligation to exchange information is mandatory and may cover information contained within or outside the tax files held by the BIR. Outside information shall be obtained subject to the BIR’s internal laws and administrative practice. 4. All requests for information made by a treaty partner shall be coursed through and processed by the International Tax Affairs Division (ITAD). All requests for information by the different offices of the BIR shall be coursed through the ITAD. In both instances, no revenue official shall communicate directly with the requesting or requested foreign tax authority (or representative thereof) on matters pertaining to the requested information without the prior approval of the CIR. 5.
All taxpayer information obtained pursuant to the EOI arrangement are confidential in nature and may only be disclosed to persons or authorities concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes on income, and only for such purposes.
6. The mere gathering by the BIR of information requested by a foreign tax authority does not generally constitute an actual investigation of the BIR on the subject taxpayer nor authorizes the BIR to issue corresponding Letters of Authority on the request. However, if so warranted, the BIR may carry out subsequent investigations. Revenue Memorandum Circular (RMC) RMC No. 21-2013 dated 05 March 2013 informs taxpayers that disclosure of Supplemental Information (consisting of other income not subject to 5% to 32% income tax rates such as capital gains subject to capital gains tax, passive income subject to final withholding tax, and exempt income) in their annual income tax returns is optional for purposes of income tax filing covering calendar year 2012, due on or before April 15, 2013. BIR Forms 1700 (Annual Income Tax Return for Individuals Earning Purely Compensation Income) and 1701 (Annual Income Tax Return for Self-Employed, Professionals, Estates,
1
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ and Trusts) are thereby amended accordingly. BIR Form 1702 (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual Taxpayer) is likewise renamed as a November 2011 version. However, in the case of individual taxpayers who report their income using BIR Forms No. 1700 and 1701, the requirement to disclose Supplemental Information will already be mandatory for income tax filing covering and starting calendar year 2013. RMC No. 18-2012 dated 15 February 2013 provides that excise tax shall apply to the importation of ethyl alcohol or ethanol intended for resale or for manufacture of compounded liquors, and the domestic sale of ethyl alcohol/ethanol by duly registered manufacturers thereof (distilleries) directly to manufacturers of compounded liquors. However, excise tax shall not apply if – 1) the importer is a holder of a BIR Permit to Operate either as importer of ethyl alcohol/ethanol or as a manufacturer of compounded liquor, and has posted a surety bond, in addition to the importer’s bond prescribed under Section 160 of the Tax Code in an amount equivalent to the average total value of ethyl alcohol or ethanol imported for a two (2)-month period computed by the estimated total value of ethyl alcohol/ethanol for the year divided by six (6) months; or 2) the duly registered distillery has posted a surety bond, in addition to the manufacturer’s bond prescribed under Section 160 of the Tax Code, equivalent to the total value, per sales invoice, of ethyl alcohol or ethanol sold to the manufacturers of compounded liquors for two (2)-month period computed by the estimated total value of ethyl alcohol or ethanol sold during the year divided by six (6) months. Excise tax shall not also apply to the following: 1) Sale of ethyl alcohol/ethanol to be used as raw material in the manufacture of compounded liquors to a buyer who is a holder of a BIR Permit to Operate as manufacturer of compounded liquors. 2) Removal of ethyl alcohol or ethanol from the distilleries for use as blending component for gasoline under the Biofuel Act of 2006, or for industrial and pharmaceutical purposes. RMC No. 17-2013 dated 15 February 2013 clarifies the taxes due from contractors under a Financial or Technical Assistance Agreement (FTAA) with the government during the “Recovery Period”. The salient provisions are as follows: 1. FTAA contractors are liable to pay taxes under the Tax Code within and after the recovery period. 2. The provision of Section 81 of the RA 7942 (the “Mining Act”) on the collection of the Government share in the FTAA which includes taxes, duties and fees is not an express grant of tax exemption. 3. Sections 83 and 84 of the Mining Act provides that FTAA contractors are liable to pay income tax after the expiration of the income tax holiday (if applicable) and excise taxes in accordance with Section 151 of the Tax Code. 4. Compliance by the FTAA contractors of their tax obligations is not in the nature of settling the “government share” under the FTAA. 5. All previous revenue issuances inconsistent with the Circular are repealed, amended or modified.
2
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ RMC No. 16-2013 dated 8 February 2013 provides the guidelines clarifying the tax implications and manner of accounting and recording of deposits/advances for the payment of the pertinent expenses received by taxpayers who are not classified as GPPs. The following are the rules: 1.
When cash deposits or advances are received by Non GPP Taxpayers from their Client/Customer, a corresponding Official Receipt must be issued in accordance with Section 113 of the Tax Code. The amount received shall then be booked as income and shall form part of the Non-GPP Taxpayer’s Gross Receipts and subject to Value-added Tax (VAT) or Percentage Tax (Gross Receipt Tax), whichever is applicable.
2. Receipts incurred, paid for and issued in the name of the Taxpayer shall be recorded as its own expenses and may be claimed as deductions from gross income provided these are duly substantiated by Official Receipts/Invoices issued by third-party establishments pursuant to Section 34(A)(1) of the Tax Code. 3. For VAT Taxpayers, the VAT Official Receipt covering the cash deposits/advances will constitute the Output Tax for the Non-GPP Taxpayer and in turn, the input tax of its Client/Customer. 4. The Client/Customer shall, upon payment of the cash deposits/advances, withhold tax in accordance with the rates provided under Revenue Regulations No. 2-98, as amended, which shall be remitted/paid on or before the 10th day of the following month except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year pursuant to RR No. 2-98, as amended. For those filing using the Electronic Filing and Payment System (EFPS), the regulations pertaining to EFPS filers shall apply. 5.
The RMC likewise provides for the pro forma accounting entries of the cash deposits/advances in the books of the Non-GPP Taxpayer and the Client/Customer.
BIR Rulings BIR ITAD Ruling No. 029-2013 dated 18 February 2013 Interest on cash deposit falls within the definition of “interests” under the RP-Singapore Tax Treaty and as such, is subject to preferential tax rate of 15% A Singapore-based company opened and maintains a Philippine Peso current account in the Philippines which has already accrued interests over the years. The BIR confirmed that the term “debt-claims of every kind” included in the definition of “interests” under Article 11 of the RP-Singapore Tax Treaty, includes cash deposits and security in the form of money, as stated in the commentaries of the OECD Model Tax Convention on Income and Capital (Condensed Version, 22 July 2010). Accordingly, interest accrued on the Singapore Company’s Peso Account shall be subject to the preferential treaty rate of 15%. BIR ITAD Ruling No. 024-2013 dated 11 February 2013 Royalties paid to a US resident is subject to preferential income tax rate of 10% pursuant to the Most Favored Nation (MFN) clause under the RP-US Tax Treaty in relation to the RP-Czech Tax Treaty
3
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ Philippine Company and US Company entered into a License Agreement which provided for the payment of royalties on the licensed products sold in the Philippines. US Company invoked the application of the lowest tax rate on royalties of 10% based on Article 13(3) of the RP-US Tax Treaty or the MFN Clause, in relation to Article 12 of the RP-Czech Tax Treaty. Under the MFN clause, royalties paid by a Philippine resident to a US resident may be taxed at the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. The BIR confirmed that the 10% royalty tax under the RP-Czech Tax Treaty applies to the royalties paid to the US Company based on the MFN clause of the RP-US Tax Treaty since the conditions for application of said provision have been complied with in relation to the RP-Czech Tax Treaty. First, the RP-US and RPCzech Treaties adopt a common definition of “royalties” subject to preferential tax, which therefore makes the royalties of the same kind. Second, both treaties provide the same mitigating effects against double taxation to their residents, which therefore makes payment of royalties to residents of the US and Czech Republic done under similar circumstances. Court decisions Supreme Court (SC) GR No. 169899 dated 06 February 2013 Mere acceptance and transfer/assignment of promissory notes are not subject to DST; In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. P Company is a domestic corporation engaged in the business of retail financing. P Company conducts a credit investigation and approves the buyer’s application. Thereafter, the buyer executes a unilateral promissory note (PN) in favor of the appliance dealer, and the same PN is subsequently assigned by the appliance dealer to P Company. P Company was assessed for deficiency taxes covering fiscal year 1993 which included, among others, DST on the issuance of the PN made by the buyers in favor of the appliance dealer and their subsequent transfer or assignment to P Company. P Company protested the assessment at the administrative level and later elevated the case to the CTA. The CTA ruled that P Company is liable to the DST assessments being the transferee which “accepted” the PNs as provided under Section 180 of Presidential Decree No. 1158, as amended (1986 Tax Code), and as a person which “used” the PNs under Section 42 of Regulations No. 26. The SC reversed the decision of the CTA and held that while it is undisputable that issuances of PNs are subject to DST under Section 180 of the 1986 Tax Code (the law applicable to the transaction), P Company is not the person liable to said tax. Section 173 clearly provides that the persons primarily liable for the payment of the DST are the persons making, signing, issuing, accepting, or transferring the taxable documents, instruments, or papers, and that should these parties be exempted from paying the tax, the other party who is not exempt shall then be liable to the tax. The acts mentioned as giving rise to the DST are unambiguous, except for “acceptance", which according to the SC is an act that is not applicable to PNs, but only to bills of exchange, citing as basis Section 132 of the Tax Code and a BIR ruling issued in 1955 where acceptance has already been given a narrow definition with respect to incoming foreign bills of exchange, not the common usage of the word “accepting” as in receiving.
4
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ Since P Company merely received the PNs, it cannot be made liable for the DST. In addition, even Section 2 of RR 9-2000, which appears to interpret the law more widely by applying the DST to all parties to the transaction, does not justify P Company’s liability since it is not a party named in the PNs, but the appliance buyer (issuer) and the appliance dealer (payee). In other words, in the case of issuance of PNs, the persons liable to the DST are the parties to the issuance of the PN, i.e., the parties named in the instrument, excluding those who are merely using or benefiting from it, which is the clear intention of the law. On the assignment of the PNs, the SC clarified that there is nothing in Section 180 of the 1986 Tax Code that supports the BIR’s position that the DST is levied on the exercise of privileges through the execution of specific instruments, or the privilege to enter into a transaction. While DST is imposed on the transfer and/or assignment of documents evidencing particular transactions, said transactions do not, however, include evidence of indebtedness or PNs. DST is only imposed on PN issuances and renewals, but not on their assignment or transfer. Court of Tax Appeals (CTA) CTA Case AC No. 84 dated 1 March 2013 Period to assess and collect local taxes should be made within five (5) years from the date they become due N Corp is a government-owned and controlled corporation engaged in the business of power generation. It was privatized pursuant to the Electric Power Industry Reform Act of 2001 (EPIRA), which took effect on 26 June 2001. The Province of Cagayan (Province) issued assessment letters dated 18 March 2008 to N Corp for deficiency franchise tax covering taxable years 2001 to 2007. N Corp protested the assessment on the ground that with the enactment of the EPIRA, its activity is no longer classifiable as a public utility operation subject to franchise tax. When the Province failed to resolve NPC’s protest within the 60-day reglementary period, N Corp elevated its case before the RTC of Cagayan (RTC) questioning the assessment. The RTC ruled in favor of the Province which prompted N Corp to appeal to the CTA. The CTA ruled that N Corp is liable for the franchise tax. However, the assessments issued for the years 2001 to 2003 had already prescribed pursuant to Sec. 194(a) of the Local Government Code (LGC), which provided that local taxes fees or charges should be assessed within five (5) years from the date they become due. Under Section 167 of the LGC, local taxes are due on the first 20 days of January or of each subsequent quarter as the case may be. As the assessment letters were dated 18 March 2008, the right of the Province to assess for the years 2001 to 2003 already lapsed. CTA EB No. 844 dated February 18, 2013 The 180-day period within which the protest must be acted upon, should be counted from the date when the protest was filed with the CIR or her ‘duly authorized representative’; Elevating the protest to the
5
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ CIR is not a step espoused in the procedure for protesting an assessment, it is an unnecessary and superfluous act. On 17 January 2008, P Corp received a Formal Assessment Notice (FAN) dated 14 January 2008 for deficiency fringe benefits tax (FBT). On 24 January 2008, P Corp filed a protest with the Regional Director (RD). On 14 August 2008, petitioner ‘elevated’ its protest to respondent CIR there being no action taken by the RD as of that date. On 11 March 2009, P Corp elevated the assessment to the CTA. The CTA Division dismissed the case for having been filed out of time. P Corp filed a motion for reconsideration with the CTA En Banc P Corp argued that the reckoning of the 180-day period should be counted from the time the protest was elevated to the CIR, who failed to act on the protest, not from the time the protest was filed with the RD. Petitioner asserts that it is the CIR's inaction on its protest that serves as basis for the petition for review filed with the CTA. The CTA held that under Section 228 of the Tax Code, the CIR or her duly authorized representative has 180 days to act on the protest. After the expiration of the 180-day period without action on the protest, the taxpayerp has 30 days to assail the non-determination of its protest. The protest filed by P Corp with the RD is a validly filed protest. There was no necessity of elevating the same to the CIR since it is not a step espoused in the procedure for protesting an assessment. As such, the 180-day period within which the protest must be acted upon should be counted from the date when it was filed, which was on 24 January 2008. Accordingly, the RD had until 22 July 2008 to act on the protest afterwhich P Corp can already file an appeal to the CTA within 30 days. There is no basis to count the 180-day period from the time petitioner elevated its protest to the CIR. CTA EB No. 828 dated 08 February 2013 Option to carry-over excess tax credit under Section 76 of the Tax Code is irrevocable and does not admit of any exceptions U Company’s 2006 annual ITR reflected an overpayment of approximately PHP5.2M. U Company subsequently filed on 14 November 2007 an Annual ITR for the short period fiscal year ended 31 March 2007, reflecting the PHP 5.2M 2006 income tax overpayment as “Prior Year’s Excess Credits”. Realizing the error, U Company immediately filed on the same day, an amended annual short period ITR which changed the amount of the “Prior Year’s Excess Credits” to PHP2.2M. U Company subsequently filed a claim for refund/issuance of a TCC for the amount of PHP2.9M, representing the balance of the prior year’s excess credit that was removed in the amended short period ITR. Since the BIR failed to act on the claim for refund, U Company filed a Petition for Review with the CTA.
6
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ The CTA denied U Company’s claim for refund on the ground that it has already opted to carry over its excess tax credits for taxable year 2006 to the succeeding quarters of 2007 as indicated in its annual return for the short period ended 31 March 2007. Although the carry-over was a mistake and immediately corrected through the filing of an amended return on the same day, U Company is already barred from claiming a refund of such excess tax credits. Citing existing jurisprudence, the CTA emphasized that the option to carry over excess tax credit provided under Section 76 of the Tax Code is irrevocable, which means that once this option is exercised, whether actually or constructively, or even at least once, the same can no longer be taken back, cancelled, or rescinded. There is no exception to this rule, even if the option to carry over was done inadvertently or merely as a consequence of clerical errors, or the taxpayer was not benefitted from such error, or the inadvertence was immediately rectified on the same day, such as in the present case. Although the amendment of U Company’s short period return was in accordance with Section 6(A) of the Tax Code, the same will not have the effect of changing U Company’s chosen option to carry over its 2006 excess tax credits to 2007 since Section 76 is a special provision which deals with the treatment of excess income tax credits; while Section 6(A) is a general provision dealing on amendment of returns regardless of the type of tax. Securities and Exchange Commission SEC Memorandum Circular No. 4 dated 7 March 2013 Amendment of Part I, paragraphs 4(A) & (B) of Rule 68 of the Securities Regulation Code (SRC) The amendment basically requires that the annual audited financial statements and interim financial statements of Non-Stock and Non-Profit Organizations and Foundations shall be accompanied by a sworn statement of the organization’s President and Treasurer on the accuracy and completeness of the supporting schedules, as follows: 1.
Schedule of Receipts or Income Other Than Contributions and Donations indicating the nature and amount of each item; 2. Schedule of Contributions and Donations prepared in accordance with the SEC prescribed Form; and 3. Schedule of Disbursements according to sources and activities indicating the nature and amount of each item and details of material disbursements (10% or more of the total). The contributions or donations reportable on the Schedule of Contributions and Donations (no. 2 above) shall consist of grants, bequests, devises, and gifts of money or property, amounting to PHP100,000.00 or more from each contributor or donor. A contributor or donor may include individuals, partnerships, corporations, associations, trusts and organizations. In the case of Foundations, the sworn statement of the President and Treasurer shall, in addition to the foregoing, also certify the accuracy and completeness of the schedule of application of funds containing the relevant information on activities accomplished, on-going and planned, i.e., (a) complete name, address, and contact number of project officer-in-charge; and (b) complete address and contact number of project office; including the relevant supporting documents such as copies of the certifications from the Office of the Mayor or the Head of either the Department of Social Welfare and Development or Department of Health, on the existence of the subject program or activity in the locality on which it exercises jurisdiction.
7
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ This Circular shall cover annual financial statements for the period ended December 31, 2012 and onwards. Republic Act (RA) RA No. 10365 published on 20 February 2012 Additional amendments to the Anti-Money Laundering Law RA No. 10365 is the third installment of the amendatory laws adopted by the Philippine Congress to comply with the global anti-money laundering standards and for the Philippines to be removed from the “gray list” of nations of International Financial Action Task Force (FATF), considered non-compliant with global anti-money laundering standards. The law contains the following salient features: 1.
The law broadened the term “covered persons” who are required to report the AMLC suspicious and covered transactions.
2. Covered institutions now include foreign exchange dealers, pawnshops, money changers, remittance agents, pre-need firms, persons managing securities, jewelry dealers in precious metals and stones in the amount of P1 million and above, and company service providers which, as a business, provide any of the following services to third parties: i. acting as a formation agent of juridical persons; ii. acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a partnership, or a similar position in relation to other juridical persons; iii. providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; iv. acting as (or arranging for another person to act as) a nominee shareholder for another person. 3. Trust entities within the coverage of “covered persons”, has been expanded to include persons who (a) manage their client’s money, security or other assets, (b) manage bank or securities accounts, (c) organize funds for the creation, operation or management of companies, (d) create, operate or manage entities or relationships, or (e) buy and sell business entities. 4. The term “unlawful activity” also covers environmental crimes, human trafficking, bribery, corruption of public official, currency counterfeiting, sexual exploitation of minors, and terrorism financing. 5.
“Money laundering” as an offense, now includes the act of knowing, possessing, using, transporting, acquiring, concealing, moving, and disguising criminal proceeds.
6. The AMLC has the power to require the Land Registration Authority and all Registries of Deeds to submit to the AMLC all reports on real estate transactions involving an amount in excess of
8
TAX MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
__________________________________________________ P500,000 within 15 days from the date of registration of the transaction in a form to be prescribed by the AMLC, including copies of relevant transactions of all real estate transactions. 7.
Lawyers and accountants acting as independent legal professionals are not required to report covered and suspicious transaction if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.
**********
9