Deficiency interest doesn’t apply to all deficiency taxes ... to the CTA, although PAGCOR has been...

Client advisory letter

ISSN 2094-1226/October 2015Deficiency interest doesn’t apply to all deficiency taxes p4| A foreign corporation may be treated as an NRFC even if it has a branch or RO p5| Disallowance of NOLCO and MCIT doesn’t give rise to deficiency income tax p6 | Request for tax payment is not an assessment p6

Isla Lipana & Co.

2 Client advisory letter 2015

At a glanceUpdates, reiterations and clarifications on selected topics

Defined benefit plansAmendments to PAS 19, ‘Employee contributions’

Latest on income tax, VAT, and other taxesSales to PAGCOR are VAT zero-rated ......................................... 4Deficiency interest doesn’t apply to all deficiency taxes ............ 4BIR Form No. 2307 is necessary to prove the fact of withholding ...................................................................................... 4Counting of days for PE purposes ................................................ 4Supply of services and royalties distinguished ............................ 5A foreign corporation may be treated as an NRFC even if it has a branch or RO ................................................................... 5

Latest on tax assessments/refund procedures Taxpayer must specifically point out which tax assessment had prescribed ................................................................................ 6Disallowance of NOLCO and MCIT doesn’t give rise to deficiency income tax .................................................................... 6Request for tax payment is not an assessment ........................... 6BIR not giving due consideration to the reply to PAN doesn’t violate due process ........................................................... 750% expense disallowance valid if the amount can’t be ascertained ................................................................................ 7

Latest on regulatory landscape Approval of compensation for trustees of non-stock savings and loan association....................................................................... 8Senior citizens’ identification not limited to OSCA ID card ......... 8Extension of period on the use of non-thermal paper for invoice/receipt ................................................................................. 8Reiteration of required information on VAT receipts/invoices ..... 9

• Effective date - Annual periods beginning on or after 1 July 2014

What is the issue?

This amendment clarifies the application of PAS 19, ‘Employee contributions’ (2011) - referred to as ‘PAS 19R’, to plans that require employees or third parties to contribute towards the cost of benefits. The amendment does not affect the accounting for voluntary contributions.

Some pension plans require employees or third parties to contribute to the plan. These contributions reduce the cost to the employer of providing the benefits. Common practice under the previous version of PAS 19 was to deduct the contributions from the cost of the benefits earned in the year in which the contributions were paid.

PAS 19R, which is applicable to periods commencing on or after 1 January 2013, was intended to clarify the treatment of contributions from employees or third parties. However, the revised guidance is open to a range of potentially complex interpretations, and could require most entities to change the way in which they account for these contributions.

The 2011 revisions to PAS 19 distinguished between employee contributions related to service and those not linked to service. The current amendment further distinguishes between contributions that are linked to service only in the period in which they arise and those linked to service in more than one period. In our view, a contribution that is payable out of current salary is linked to service.

The amendment allows contributions that are linked to service, and do not vary with the length of service, and do not vary with the length of employee service, to be deducted from the cost of benefits earned in the period that the service is provided.

The amendment will allow (but not require) many entities to continue accounting for employee contributions using their existing accounting policy, rather than spreading them over the employees’ working lives.


Defined benefit plansAmendments to PAS 19, ‘Employee contributions’

Contributions that are linked to service, and vary according to the length of employee service, must be spread over the service period using the same attribution method that is applied to the benefits; that means either in accordance with the formula in the pension plan, or, where the plan provides a materially higher level of benefit for service in later years, on a straight line basis.

The benefit of employee contributions linked to the length of service is recognized in profit or loss over the employee’s working life. It is not clear how this should be done, and a variety of approaches are likely to develop. Contributions that are not linked to service are reflected in the measurement of the benefit obligation.

Insight

The amendment to IAS 19R will affect any post-employment benefit plans where employees or third parties are required to meet some of the cost of the plan. The amendment clarifies the accounting by entities with plans that require contributions linked only to service in each period. Entities with plans that require contributions that vary with service will be required to recognize the benefit of those contributions over employees’ working lives. Management should consider how it will apply that model.

Example 1

A plan that requires employees to contribute 4% of salary if they are below age 40, and 7% of salary if they are 40 or above, is an example of a plan in which employee contributions are not linked to the length of service.

The contributions are linked to age and salary, but are not dependent on the length of service. So the contributions would be recognized as a reduction of pension expense in the year in which the related service is delivered.

Example 2

A plan that provides a lump sum benefit on retirement of 10% of final salary for the first ten years of service, plus 20% of final salary for each subsequent year of service, and requires employee contributions equal to 5% of salary for the first ten years of service and 8% thereafter, is a plan in which contributions are linked to the length of service. The contributions vary with the length of service, as well as salary, and so they have to be recognized over the working life. The benefit earned and the employee contributions would be recognized on a straight line basis over the employee’s working life in this example.

Example 3

A post-employment medical insurance plan, where the employee is required to meet the first PHP2,000 per month of the insurance premium, is an arrangement in which the contributions are not linked to service. The expected future contributions from the employee, which would be payable after retirement, would be included in the measurement of the benefit obligation.


BIR Form No. 2307 is necessary to prove the fact of withholdingIn a claim for excess CWT refund, BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) issued by the withholding agent must be presented to establish the amount paid and the tax withheld from it. It cannot be replaced by any other document or evidence.

Thus, testimonies as to the existence of the said withholding tax statements are considered self-serving without the actual presentation and identification of such documents (BIR Form 2307).(CTA Case Nos. 8505 and 8575 dated 12 October 2015)

Counting of days for PE purposesUnder the Philippines-Japan tax treaty, a company is considered to have a permanent establishment if it rendered services in the Philippines for a period aggregating more than six months within any 12-month period. A period of six months means 180 days, computed at 30 days in a month. The tabulation of the 180-day period takes into account the days of physical presence of the personnel sent by the company, regardless of the number of personnel. The days of physical presence may include a part of a day, the day of arrival, day of departure and all other days spent inside the State of activity such as Saturdays and Sundays, national holidays, holidays before, during and after the activity, short breaks (training, strikes, lock-out, delays in supplies), days of sickness, and death or sickness in the family.(BIR Ruling No. ITAD 244-15 dated 28 August 2015)

Latest on income tax, VAT, and other taxes

Sales to PAGCOR are VAT zero-ratedAccording to the CTA, although PAGCOR has been excluded from the specific government institutions that are exempt from income tax under the Tax Code1, it is still exempt from taxes under its Charter2. As such, sales of a VAT-registered taxpayer to PAGCOR shall be treated as VAT zero-rated. The Tax Code imposes 0% rate for sale of goods and services rendered by VAT-registered persons to entities who are exempted under special laws3.(CTA EB Case No. 1060 dated 15 September 2015)

Deficiency interest doesn’t apply to all deficiency taxes • The 20% annual deficiency interest can be imposed only

on income tax, estate tax, and donor’s tax and not on VAT, EWT, and WTC

Section 249(B) of the Tax Code imposes a 20% interest on any deficiency tax as defined in the Tax Code. The CTA recognized that the term deficiency tax has been used in the Tax Code only in relation to income tax, estate tax, and donor’s tax. Thus, the deficiency interest should only apply to said taxes. It should not be imposed on deficiency VAT, EWT and WTC.(CTA EB Case No. 1117 dated 21 September 2015)

1 Section 27(C) of the Tax Code2 P.D. No. 1869, as amended3 Sections 106(2)(C) and 108(B)(3)


BIR - Bureau of Internal RevenueCTA - Court of Tax AppealsCWT - Creditable Withholding TaxEWT - Expanded Withholding TaxNRFC - Non-resident Foreign CorporationPAGCOR - Philippine Amusement and Gaming CorporationPE - Permanent EstablishmentRO - Representative OfficeVAT - Value-Added TaxWTC - Withholding Tax on Compensation

Glossary

Supply of services and royalties distinguishedUnder the Philippines-Japan tax treaty, payments for the supply of services are treated as business profits, unless otherwise treated as royalties relative to the use of know-how or other intangible property such as copyright, patent, trademark, design or model, plan, secret formula or process design.

To distinguish between payments for the supply of services and payments for know-how, the supplier in a contract for the supply of services undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party.(BIR Ruling No. ITAD 245-15 dated 28 August 2015)

A foreign corporation may be treated as an NRFC even if it has a branch or ROAs a rule, dividends paid to a foreign corporation are subject to an income tax rate of 30%. However, these dividends may be subjected to a reduced or preferential tax rate to the extent required by any treaty obligation on the Philippines.In these rulings, the treaty applied was the Philippines-Japan tax treaty which provides that if the dividends are paid to a company that has a PE in the Philippines, and the same are effectively connected with the PE, the treaty rate shall not apply. Instead, the dividends shall be subject to 30% income tax rate. The BIR, in these rulings, held that the dividends came from transactions that are separate and independent from the Philippine branch and RO of the foreign company. Thus, the dividends are covered by the preferential treaty rates.(BIR Ruling No. ITAD 274-15 and 269-15 dated 11 September 2015)


Taxpayer must specifically point out which tax assessment had prescribedWhile the CTA Division found that the CIR’s right to assess some of the months in the taxable year had prescribed, the taxpayer has the burden of showing which portions of the deficiency taxes pertain to the months that had prescribed. Mere allegations without identifying which documents and transactions relate to the prescribed months are not sufficient. For failure of the taxpayer to specifically identify which portion of the tax assessment has prescribed, the CTA en banc upheld the validity of the assessment and considered the entire assessment as pertaining to the taxable year that had not prescribed.(CTA EB No. 1117 dated 21 September 2015)

Disallowance of NOLCO and MCIT doesn’t give rise to deficiency income tax• Income tax assessment is proper only in the year when the

NOLCO and MCIT were claimed as deduction or credit and not in the year they were incurred

Under the Tax Code, companies are entitled to carry over net operating loss and deduct the same against their gross income for the next three consecutive years. Meanwhile, MCIT may be credited against the normal income tax for the three immediately succeeding years.

In this case, the BIR questioned the validity of the taxpayer’s NOLCO and MCIT and assessed them for deficiency income. The BIR added back the NOLCO in the taxpayer’s gross taxable income for 2008. The BIR also disallowed the MCIT (and excess MCIT) as credit against its deficiency income tax saying that it was already carried over and credited against the normal income tax for the three immediately succeeding years.

BIR - Bureau of Internal RevenueCIR - Commissioner of Internal RevenueCTA - Court of Tax AppealsFAN - Final Assessment NoticeFLD - Final Letter of DemandMCIT - Minimum Corporate Income TaxNOLCO - Net Operating Loss Carry-OverPAN - Preliminary Assessment NoticeRMC - Revenue Memorandum CircularRR - Revenue Regulations

Glossary

On appeal, the CTA held that adding back the NOLCO in 2008 was erroneous. Instead, it should be disallowed in the succeeding years when it was claimed as deduction from gross income. Likewise, it was improper to disallow the MCIT and the excess MCIT carry-over because any tax benefits derived therefrom redounds to the succeeding year. Given that the tax benefit will be in the succeeding year, at most, the taxpayer may only be assessed in the said succeeding year when the same were claimed as deductions or when the taxpayer utilized the tax benefits.(CTA Case No. 8551 dated 2 October 2015)

Request for tax payment is not an assessment• FLD containing only a request for payment of deficiency

tax is not a valid assessment

In this case, the taxpayer was not furnished a copy of the FAN, but only received an FLD. A review of the FLD shows that it did not make a categorical demand for payment of the alleged tax liabilities but merely contained a request for payment. The date indicated on the FLD, i.e. 16 October 2009, cannot be considered as a deadline for payment of deficiency taxes since the FLD simply states that the indicated interest runs only up to 16 October

Latest on tax assessments/refund procedures


2009 and payment of deficiency taxes beyond that would require an adjustment of the interest and, consequently, the total due amount.

The absence of a valid FAN results in a void assessment which cannot give rise to an obligation for the taxpayer to pay deficiency taxes.(CTA EB No. 1147 dated 5 October 2015)

BIR not giving due consideration to the reply to PAN doesn’t violate due processThe CTA now holds that it’s not a violation of due process even if the FAN and FLD were issued before the lapse of the 15-day period for a taxpayer to file a protest to the PAN. The CTA found that the procedures undertaken by the revenue officers in the issuance of deficiency assessments under Section 3 of RR No. 12-99 have been substantially complied with. Prior to the issuance of the PAN, a Notice of Informal Conference was served on the taxpayer and an informal conference was thereafter held, giving the taxpayer the opportunity to present his side of the case and rebut the findings of the BIR. The taxpayer was also able to file his protest to the FAN. Hence, the taxpayer’s right to procedural due process was not violated. What the law prohibits is absolute absence of opportunity to be heard.

50% expense disallowance valid if the amount can’t be ascertainedExpenses that may be deducted from gross income must be substantiated. If there is a showing that expenses had been incurred but the exact amount cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of the deduction that may be allowed in computing the taxpayer’s taxable income. Thus, the disallowance of 50% of the taxpayer’s claimed deduction is valid under Section 2.4(c) of RMC No. 23-00.(CTA Case No. 8516 dated 14 October 2015)


ACIR - Assistant Commissioner of Internal RevenueBSP - Bangko Sentral ng PilipinasCIR - Commissioner of Internal RevenueCRM - Cash Register MachineGSIS - Government Service Insurance SystemIBP - Integrated Bar of the PhilippinesOSCA - Office of Senior Citizens AffairPOS - Point-of-SalePRC - Professional Regulation CommissionRA - Republic ActSSS - Social Security SystemTIN - Tax Identification NumberVAT - Value-Added Tax

Glossary

Latest on regulatory landscape

Approval of compensation for trustees of non-stock savings and loan associationNon-stock corporations may provide compensation to their trustees either thru: (1) a specific provision under the by-laws; or (2) when the majority of the members agree, at a regular or special meeting to that effect.

However, a non-stock savings and loan association is governed primarily by RA No. 8367 which provides that increases in the compensation of all trustees and trustee-officers in excess of 10% per annum shall require the approval of the BSP.(SEC-OGC Opinion No. 15-12 dated 22 September 2015)

Senior citizens’ identification not limited to OSCA ID card • Senior citizens are now allowed to present other

identification documents in availing of benefits

The regulation added the term “Identification Document” which is defined as any document or proof of being a senior citizen which may be used to avail of benefits and privileges provided by law. It shall be any of the following documents:

• Senior Citizens’ Identification Card issued by the Office of Senior Citizens Affairs (OSCA) in the city or municipality where the elderly resides

• The Philippine passport of the elderly person or senior citizen concerned

• Government-issued identification card which reflects on its face the name, picture, date of birth and nationality of the senior citizen (e.g., Digitized SSS ID, GSIS ID, PRC ID, IBP ID, Unified Multi-Purpose ID (UMID) and Driver’s License).

Such “Identification Document”, which may not necessarily be the OSCA ID, may be used in the record of sales of business establishments that gave sales discount to qualified senior citizens.(Revenue Regulations No. 11-2015 dated 29 September 2015)

Extension of period on the use of non-thermal paper for invoice/receiptTo provide ample time for the reconfiguration of Cash Register Machines (CRM)/ Point-of-Sale (POS) machines and systems, the effectivity period for the use of non-thermal paper to generate official receipts/invoices had been extended until 31 October 2015. Any extension due to enhancements of systems required to be undertaken abroad should be approved by the concerned Regional Director or ACIR, Large Taxpayer Service. (Revenue Regulations No. 12-2015 dated 29 September 2015)


Reiteration of required information on VAT receipts/invoicesThe CIR reiterated that for sales amounting to PHP1,000 or more and made to a VAT-registered person, the VAT receipts/invoices/other commercial invoices must contain the following information:

• Name of client, purchaser or customer• Address• Taxpayer Identification Number (TIN)• Business style, if any

The above information must also be reflected in receipts/invoices generated from CRM/POS machines. If the CRM/POS machine is incapable of showing such requirements, a manually pre-printed receipt/invoice with approved Authority to Print (ATP) must be issued to the client.

Any purchases of goods/services with receipts/invoices generated from CRM/POS machines/software are mandated to show the said requisites for the valid claim of input tax credit by VAT-registered taxpayers.

Non-compliance with the said requirements shall be subject to corresponding penalties pursuant to existing revenue issuances.(Revenue Memorandum Circular No. 64-2015 dated 2 October 2015)


Meet us

PwC FY15 global revenues increase 10% to US$35.4bnThe PwC network reported total global gross revenues of US$35.4 billion for the fiscal year ended on 30 June 2015. At constant exchange rates, PwC’s total global revenues rose by 10%. This is up markedly from the previous year and the strongest year-on-year growth that the network has seen since FY07. Growth was strong across all lines of business and in all geographic regions.

“The global business environment remains challenging, with a continuing patchy economic picture, geopolitical issues creating uncertainty for business and fierce competition in the professional services market. Despite these challenges the PwC network performed exceptionally well in FY15 with growth of 10%, pushing revenues over the US$35 billion mark for the first time,” said Dennis M. Nally, Chairman of PricewaterhouseCoopers International Ltd.

“Our strongest growth for eight years is a result of the significant investment we have made in recruiting the best people, enhancing the quality of our services and building new product offerings such as data analytics. We have also continued to make key strategic acquisitions to complement and expand our core business.

“Technology is transforming all aspects of our lives and every business, so we are working in alliances with market leaders such as Google and others, to bring the latest and best technology thinking to our clients.

“The PwC brand has been acknowledged as the strongest professional services brand in the world and this reputation is built on the energy, enthusiasm and quality of our 208,000 people and their commitment to working with all of our stakeholders to build trust and to solve important problems.

“There’s much to be proud of and I think we have strong momentum going into FY16 with many significant accomplishments to build on. All of our lines of business and geographic regions are growing, the acquisition of Booz & Company (now Strategy&) has provided a major boost to our capabilities and we are now the leading organisation in

our ability to provide services ranging from strategy right through to execution. We recruited 53,000 new people last year and plan to recruit even more in FY16 from a broader range of countries and with a wide range of skills, as we expand our capabilities to match the increasingly diverse demands of our stakeholders.

“While there is large variation around the world and some countries will continue to struggle, overall we predict stronger global economic growth of 3.6% in 2016,” added Dennis Nally.

Revenue growth in Asia was also strong in FY15 up by 9% to US$4.1 billion. PwC’s continued focus on service development and expansion in Asia paid dividends with PwC’s firms in China and Hong Kong growing by 8% and India by 17%. While the economic situation in China looks more challenging in the year ahead, we continue to be optimistic and believe we are well placed to enjoy growth in the year ahead.

Growth was also good across the Australasia and the Pacific Islands region with revenues up by 11% with strong growth in Australia where revenues grew by 10%.

Lines of businessThe PwC network’s Assurance operations are our most significant business and the bedrock of our operations and reputation across the world. Revenues from PwC’s Assurance operations grew very strongly, up 6% to US$15.2 billion. This was in the face of a very competitive market and the changes taking place in the European audit market due to the introduction of mandatory audit firm rotation.


In addition to a volatile market for audit around the world, there is increasing demand for broader Assurance services and in particular assurance over business risks. Our investment in technology continues to expand the market for Assurance services into new areas such as IT and data assurance and security.

Quality is at the heart of PwC’s operations around the world. In FY15 alone we invested US$450 million (similar to investments in previous years) to further enhance the quality of our assurance services, develop innovative tools and technologies, and train our people.

PwC’s Advisory operations posted very strong growth in FY15 increasing by 18% to US$11.2 billion. Advisory now accounts for more than 30% of PwC’s revenues, and we anticipate that it will continue to grow strongly into the future.

The acquisition of Strategy& (formerly Booz & Company) in April 2014 has helped cement PwC’s position as the leading organisation which can provide advice from strategy through execution. PwC now has over 3,000 strategy consulting professionals under the Strategy& brand.

PwC’s Tax operations also grew strongly in FY15, with revenues increasing by 7% to US$8.9 billion. Tax operations benefited from increased mergers and acquisitions related work due to the robust deals environment, and strong demand for transfer pricing work globally.

Our peopleBeing the number one professional services network, PwC needs the best talent. PwC welcomed record numbers to the network, adding 53,049 people in FY15, including 24,600 graduates. Our global headcount grew 6% to more than 208,000 people, which reflects the exceptional opportunities for development and advancement PwC offers.

In FY15, PwC firms and people donated nearly US$58 million to community activities and more than 58,000 PwC people donated more than 537,000 hours in professional services and skilled volunteer activities.

Talk to us

For further discussion on the contents of this issue of the Client Advisory Letter, please contact any of our partners.

For tax and related regulatory matters

For accounting matters

Request for copies of text

You may ask for the full text of the Client Advisory Letter by writing our Tax Department, Isla Lipana & Co., 29th Floor, Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City, Philippines. T: +63 (2) 845 2728. F: +63 (2) 845 2806. Email [email protected].

John-John Patrick V. LimAssurance PartnerT: +63 (2) 459 3023 [email protected]

Alexander B. CabreraChairman & Senior Partner, concurrent Tax PartnerT: +63 (2) 459 2002 [email protected]

Gina S. DeteraAssurance PartnerT: +63 (2) 459 3063 [email protected]

Ma. Lois M. Gregorio-AbadAssurance Partner T: +63 (2) 459 3023 [email protected]

Roselle K. Yu-CaraigTax PartnerT: +63 (2) 459 2023 [email protected]

Harold S. OcampoTax PrincipalT: +63 (2) 459 2029 [email protected]

Fedna B. ParallagTax PartnerT: +63 (2) 459 3109 fedna.parallag@ ph.pwc.com

Lawrence C. BiscochoTax PartnerT: +63 (2) 459 2007 lawrence.biscocho@ ph.pwc.com

Carlos T. Carado IITax PartnerT: +63 (2) 459 2020 carlos.carado@ ph.pwc.com

Malou P. LimTax Managing PartnerT: +63 (2) 459 2016 [email protected]

www.pwc.com/ph© 2015 Isla Lipana & Co. All rights reserved.

PwC refers to the Philippines member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

PwC Philippines helps organizations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more by visiting us at pwc.com/ph.

Disclaimer The contents of this advisory letter are summaries, in general terms, of selected issuances from various government agencies. They do not necessarily reflect the official position of Isla Lipana & Co. They are intended for guidance only and as such should not be regarded as a substitute for professional advice.

Deficiency interest doesn’t apply to all deficiency taxes ... to the CTA, although PAGCOR has been...

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