Taxation of treasury bonds p4 p8 p9 p10 Client advisory letter · PDF fileClient . advisory...

Client advisory letter

ISSN 2094-1226/March 2015Taxation of treasury bonds p4 | CTA may determine category of tax in refund cases p8 | Information in source document prevails p9 | Refund of excess input taxes as erroneous tax payment p10

Isla Lipana & Co.

2 Client advisory letter 2015

At a glanceUpdates, reiterations and clarifications on selected topics

A closer look at IFRIC 21 - Levies

Latest on income and withholding taxes US resident teacher’s salaries are tax-exempt ............................ 4Qatar airlines exempt from GPB tax on carriage of persons ..... 4PHP82,000 employee’s tax exemption starts on 1 January 2015 .......................................................................... 4SC rules on taxation of treasury bonds ........................................ 4

Latest on VAT and other taxes Purchase of services by UN agency is not VAT exempt .............. 5Advance VAT imposed on sale of sugar ....................................... 5Cockpit arena is not subject to amusement tax .......................... 5PAGCOR is subject to corporate income tax only on other income ...................................................................... 6

Latest on tax compliance matters New BIR registration forms ............................................................ 6New procedures for submission of BIR Form Nos. 2307 and 2316 ........................................................................ 7Mandatory filing of tax returns under the eFPS ........................... 7

Latest on tax assessments/refund procedures Request for reinvestigation must be granted to toll prescription ........................................................................... 8SC may rule on prescription even on appeal ............................... 8Government may be estopped from collecting taxes ................. 8CTA may decide on proper tax category in refund cases ........... 8Issuing of FAN without considering taxpayer’s reply to PAN violates due process ................................................ 9120+30 day rule applies to refund claims filed before BIR Ruling No. DA-489-03 ................................................. 9Information in source document prevails ..................................... 9Excess input tax may be refunded as erroneous tax payment ........................................................... 10CTA has no jurisdiction over final and executory assessment .. 10Valid LOA a prerequisite for tax assessment .............................. 10Consider net loss in deficiency income tax assessment ...........11Deficiency withholding tax on compensation may be computed using employees’ effective tax rate ..............11Remitting foreign currency on 0% sales is vital in input tax refund ..................................................................11Assessments under the Best Evidence Obtainable Rule should be based on sufficient evidence .............................11

Latest on regulatory landscape 2014 guidelines for the valuation of equity investments ............ 12Minimum wage increase in the National Capital Region ........... 12Conditions for exempting banks from business name requirements ....................................................................... 13New guidelines for internal control and audit of financial institutions .................................................................. 13

One of the new interpretations that came into effect for 2014 is IFRIC 21 ‘Levies’. It was published by the IFRS Interpretations Committee (IC) in May 2013 to address diversity in practice in the recognition of the liability to pay a levy. The interpretation is effective for annual periods on or after 1 January 2014.

Let us take a closer look at the new interpretation to know what does it mean to you and how are you going to be affected.

The scope - Am I affected?In general, IFRIC 21 will affect entities that are subject to levies that are not income taxes within the scope of IAS 12. These are common in many countries and in many industries like banking, retail and transportation, among others.

This interpretation addresses the accounting for a liability to pay a levy, which is recognized in accordance with IAS 37 ‘Provisions’, and the liability to pay a levy whose timing and/or amount is certain.

It is often difficult to identify what items are within the scope of the interpretations as “levies” are often called differently and given different names such as tax, fees, contributions or even royalties.

IFRIC 21 defines levies as “an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation (i.e. laws and/or regulations)” but it excludes (1) income taxes in the scope of IAS 12 ‘Income Taxes’, (2) fines or penalties for breaches of the legislation, and (3) payments in exchange for an asset or service. It is often measured by reference to an entity’s revenues, assets or liabilities (i.e., 1% of revenue).

The following transactions are likely to be within the scope of IFRIC 21:

• Levies on receipts• Capital taxes• Property taxes• Production taxes• Non-deductible VAT• Non-refundable import duties


A closer look at IFRIC 21 - Levies

• Oil pollution tax• Bank levies• Other taxes based on assets, liabilities or physical

measures

The interpretation does not address whether the liability to pay a levy gives rise to an asset or an expense. Entities will need to apply other standards to determine the accounting for the expense.

The key provisions - How do I now treat/account for levies?

What is the obligating event that gives rise to a liability to pay a levy?The obligating event that gives rise to a liability to pay a levy is the event identified by the legislation that triggers the obligation to pay the levy.

The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern principle, does not create an obligation to pay a levy that will arise from operating in the future. When is a liability to pay a levy recognized?A liability to pay a levy is recognized when the obligating event occurs. This might arise at a point in time or progressively over time.

The interpretation also requires that an obligation to pay a levy triggered by a minimum threshold is recognized when the threshold is reached.

What is the obligating event that gives rise to the recognition of a liability to pay a levy that is triggered if a minimum threshold is reached?Some levies might be more complex (for example, if they include a threshold). IFRIC 21 is explicit that the same principles should be applied for obligations with a minimum threshold.

Here is an example:

Facts: A government imposes a levy of 1% of current year revenues but only if current year revenue exceeds PHP20m.

Analysis: In the case above, the obligating event occurs in this example when revenue exceeds PHP20m. Thus the provision for the levy on the first PHP20m will be recognized at that point in time. This means that, if the entity exceeds the PHP20m in Q3, a catch-up adjustment of PHP200,000 will be recognized when the threshold is reached. The liability is then remeasured progressively as revenue over PHP20m is generated and the subsequent recognition takes place over time.

Does economic compulsion to continue operating in a future period create a constructive obligation?The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern principle, does not create an obligation to pay a levy that will arise from operating in the future.

The interpretation is clear that only those obligations arising from past events that exist independently of an entity’s future activities should be recognized as provisions.

The IC considered cases where an entity would need to take unrealistic action to avoid paying a levy - for example, a levy that would be triggered merely by operating for one more day. The IC considered whether a constructive obligation to pay the levy exists, and concluded that there is no constructive obligation, noting that this rationale would bring many types of future expenditure within the scope of IAS 37.

Is the accounting at an interim reporting date the same as at year end?The same recognition principles apply in interim and annual financial statements. The obligation should not be anticipated or deferred in the interim financial report if it would not be anticipated or deferred in annual financial statements.

Effective date and transitionEntities should apply IFRIC 21 for annual periods on or after 1 January 2014.

Changes in accounting policies relating to the adoption of IFRIC 21 should be accounted for retrospectively in accordance with IAS 8.


PHP82,000 employee’s tax exemption starts on 1 January 2015The BIR has issued the RR on the increase from PHP30,000 to PHP82,000 of the total amount of exclusion from gross income of 13th month pay and other benefits received by salaried employees under Section 32 (B) of the Tax Code. The RR stated that the exclusion of PHP82,000 shall apply only to 13th month pay and other benefits of salaried employees paid or accrued beginning 1 January 2015, and not to other types of compensation under an employer-employee relationship, such as basic salary and other allowances. It does not also apply to gross income of self-employed individuals and income generated from business.

The RR shall take effect 15 days after its publication on 16 March 2015 in the Manila Bulletin.(Revenue Regulations No. 3-2015 dated 9 March 2015)

SC rules on taxation of treasury bondsThe SC addressed the issue on the proper tax treatment of the discount or interest income from a 10-year zero-coupon treasury bonds issued by the Bureau of Treasury (denominated as the Poverty Eradication and Alleviation Certificates or the PEACe Bonds).

Under the Tax Code5, a 20% FWT rate is imposed on interest on any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements. However, according to the SC not all treasury bonds may be considered deposit substitutes subject to FWT.

5 Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the Tax Code

Latest on income and withholding taxes

US resident teacher’s salaries are tax-exemptAccording to BIR, salaries and other remunerations received by a resident of the United States hired by an international school to teach for two years are exempt from Philippine income tax. The tax exemption is based on the PH-US tax treaty1, which essentially states that any income and benefits derived by a US resident invited to teach and do research at an educational institution in the Philippines for not more than two years are exempt from income tax.(BIR Ruling No. ITAD 010-15 dated 21 January 2015)

Qatar airlines exempt from GPB tax on carriage of persons BIR recognized the GPB tax exemption of a Qatar international airline on its carriage of persons and their excess baggage based on the principle of reciprocity as provided under RA No. 103782. To support this, the taxpayer submitted proof that the Qatar government grants reciprocal tax exemption to Philippine air carriers.

As a condition, the BIR requires the taxpayer to submit to the BIR-ITAD a sworn certification that there is no change in the laws in Qatar granting reciprocal tax exemption to Philippine air carriers before 31 January of each year.

However, the BIR ruled that the Qatar air carrier is subject to 2.5%3 GPB tax and 3% common carrier tax on carriage of cargo and mail matters4.(BIR Ruling No. ITAD 011-15 dated 21 January 2015)

1 Paragraph 1, Article 21 of the RP-US tax treaty2 “An Act Recognizing the Principle of Reciprocity as Basis for

the Grant of Income Tax Exemptions to International Carriers and Rationalizing other Taxes Imposed Thereon by Amending Sections 28(A)(3)(a), 109, 118 and 236 of The National Internal Revenue Code (NIRC), as amended, and for other purposes”

3 1.5% under Article 8 of the Philippine-Qatar Tax Treaty4 Sections 28(A)(3)(a) and 118 of the Tax Code

SC rules on taxation of treasury bonds to be continued to page 6


Purchase of services by UN agency is not VAT exemptThe BIR acknowledged the VAT exemption of all purchases of articles intended for official use of the International Organization for Migration under its Cooperation Agreement of the Philippines. However, the BIR says that the exemption does not extend to purchases of services, such as lease of properties, association dues, membership fees, and other assessments/charges collected by a condominium corporation which constitute income payment or compensation for the beneficial services it provides to its members and tenants under RMC No. 65-2012 dated 12 October 2012.(BIR Ruling No. ITAD 015-15 dated 24 February 2015)

Advance VAT imposed on sale of sugarThe BIR now requires owners/sellers of refined sugar and raw sugar to pay VAT in advance before the sugar is withdrawn from any sugar refinery/mill. Only raw cane sugar or muscovado shall be exempt from VAT under the Tax Code6.

6 Section 109(1)(A) of the Tax Code

BIR - Bureau of Internal RevenueFWT - Final Withholding TaxGPB - Gross Philippine BillingsITAD - International Tax Affairs DivisionLGC - Local Government CodeRA- Republic ActRMC - Revenue Memorandum CircularRR - Revenue RegulationsSC - Supreme CourtUN - United NationsVAT - Value-Added Tax

Glossary

Latest on VAT and other taxes

Raw cane sugar shall refer to sugar produced by simple process of conversion of sugar cane without need of any mechanical or similar device. On the other hand, raw sugar shall mean sugar whose content of sucrose by weight in dry state, corresponds to a polarimeter reading of less than 99.5 degrees, while sugar shall pertain to sugar other than raw cane sugar.(Revenue Regulations No. 4-2015 dated 13 March 2015)

Cockpit arena is not subject to amusement taxA cockpit arena does not fall under the catch-all phrase “other places of amusement” for purposes of collecting amusement tax under the LGC7. In interpreting the catch-all phrase, the SC8 ruled that the enumeration of specific places of amusement in the LGC must be considered. The enumeration is bound by a characteristic in that they are all venues primarily for staging of spectacles or the holding of public shows, exhibitions, performances, and other events meant to be viewed by an audience.

For a cockpit to fall within the meaning of the phrase “other places of amusement”, it must be shown that it is a venue (1) where one seeks admission to entertain oneself by seeing or viewing the show or performances or (2) primarily used to stage spectacles or hold public shows, exhibitions, performances, and other events meant to be viewed by an audience for entertainment. Failing to satisfy these elements, a cockpit arena is not subject to amusement tax. (CTA AC No. 110 dated 17 February 2015)

7 Section 140 of the Local Government Code8 G.R. No. 183137 dated 10 April 2013


PAGCOR is subject to corporate income tax only on other incomeThe SC declared that under PD No. 1869, as amended, PAGCOR’s income is classified into two: (1) income from its operations conducted under its franchise (income from gaming operations) and (2) income from its operation of necessary and related services (income from other related services).

The SC clarified that PAGCOR’s income from gaming operations is subject to 5% franchise tax in lieu of all taxes. However, its income from other related services is subject to corporate income tax under RA No. 9337.

Further, there is no conflict between PD No. 1869 and RA No. 9337. The former lays down the taxes imposable on PAGCOR: (1) a five percent (5%) franchise tax on the earnings from gaming operations and (2) income tax on income realized from other related services; in supplement, RA No. 9337 withdrew the tax exemption on income from operation of related services under RA No. 8424. (G.R. No. 215427 dated 20 December 2014)

New BIR registration formsThe BIR released the enhanced version of registration forms specifically for the implementation of the Taxpayer Registration System (TRS) under the Electronic Tax Information System (eTIS-1). The forms available include the application for registration for self-employed, mixed income individuals, marginal income earner, non-resident alien engaged in business, estate and trust (1901); individuals earning purely compensation income (1902); corporations and partnerships (1903); one-time taxpayers and foreign nationals (1904); as well as application for registration information update/correction/cancellation (1905) and certificate of update of exemption and employer/employee information (1906).

BIR - Bureau of Internal RevenueCIR - Commissioner of Internal RevenueCSV - Comma-separated ValueeFPS - Electronic Filing & Payment SystemGOCC - Government-Owned and Controlled

CorporationLGU - Local Government UnitLTS - Large Taxpayers ServiceLWUA - Local Water Utilities AdministrationNEA - National Electrification AdministrationONETT - One-Time TransactionPAGCOR - Philippine Amusement and Gaming

CorporationPD - Presidential DecreePEACe - Poverty Education and Alleviation

CertificatesRA - Republic ActSAWT - Summary Alphalist of Withholding TaxesSC - Supreme CourtTIN - Tax Identification Number

Glossary

The term ‘deposit substitutes’ essentially means an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from 20 or more individual or corporate lenders at any one time), other than deposits. The SC ruled that the phrase “at any one time” applies to the primary and secondary market of debt instruments.

The SC noted that the PEACe bonds had been issued to one singular lender (underwriter) but the underwriting agreement and term sheet of the underwriter reflected that there were several undisclosed number of investors to whom the PEACe bonds were distributed. However, the SC could not determine how many investors the bond was sold to. As such, the SC was not able to conclussively determine the taxability of the PEACe bonds. The SC also clarified that, interest income on bonds is different from “gains” from trading, redemption, or retirement of long-term securities which are tax exempt under Section 32(B)(7)(g) of the Tax Code. Interest represents forbearance of money, while “gains” are those (i) realized from trading of the bonds before their maturity date and (ii) the redemption gains of the last bondholder who acquired the bond at the secondary trading. (G.R. No. 198756 dated 13 January 2015)

Latest on tax compliance matters

SC rules on taxation of treasury bonds continued from page 4


Additional registration information were inserted to conform to the BIR’s requirements such as place of birth, mother’s maiden name, father’s name, identification details, incentive details, contact information, and a valid e-mail account.(RMC No. 9-2015 dated 10 March 2015)

New procedures for submission of BIR Form Nos. 2307 and 2316RR Nos. 2-2006 and 11-2013 on the submission of BIR Form Nos. 2307 and 2316, which apply to taxpayers registered with the LTS, are amended as follows:

1. The SAWT under RR No. 2-2006 should be submitted through the following modes: (i) eFPS, (ii) submission to BIR’s website address, and (iii) email at dedicated BIR addresses using the prescribed CSV data file format.

2. In lieu of the submission of hard copies of Certificate of Creditable Tax Withheld at Source (Form No. 2307) and Certificate of Compensation Payment/Tax Withheld (Form No. 2316), the BIR requires storage of the soft copies in “PDF” file format alphabetically arranged in a DVD-R with the file name containing (i) the name of taxpayer/surname of employee, (ii) TIN, including the head office or branch code, and (iii) taxable period. It shall be labelled in accordance with the format prescribed by the regulation (Annex A for BIR Form No. 2307 or Annex B for BIR Form No. 2316). The duly accomplished DVD-R shall be submitted to the BIR office where the taxpayer is registered together with a notarized sworn declaration, duly signed by the authorized representative, in the format prescribed under Annex C of the regulation. The certification shall state that the soft copies are complete and are exact copies of the original.

(Revenue Regulations No. 2-2015 dated 17 December 2014)

Latest on tax compliance matters

Mandatory filing of tax returns under the eFPS• Non-eFPS filers are mandatorily required to use the

e-BIRForms facility in electronically submitting and filing all their tax returns.

The use of the e-BIRForms facility is now mandatory for the non-eFPS filers identified under RR No. 6-2014, namely: Accredited Tax Agents/Practitioners and all its client-taxpayers; Accredited Printers of Principal and Supplementary Receipts/Invoices; ONETT taxpayers; filers of “No Payment” Returns; GOCCs; LGUs, except barangays; and Cooperatives registered with NEA and LWUA.

Upon successful validation of the accomplished tax returns, non-EFPS taxpayers shall receive a system-generated notification email which acknowledges that their tax return had been successfully filed. They should print the Filing Reference Number (FRN) generated by the system and submit the printed form to the Authorized Agent Banks for payment of taxes9.

All taxpayers who are mandated to file their returns using eFPS or eBIRForms, but failed to do so, shall be subject to a penalty of PHP1,000 per return10 with civil penalties equivalent to 25% of the tax due to be paid.(Revenue Regulations No. 5-2015 dated 17 March 2015)

9 A copy of the sample printed FRN is attached as Annex “A” of the regulation

10 Pursuant to Section 250 of the Tax Code


Request for reinvestigation must be granted to toll prescription• A request for reinvestigation that is not granted will not

suspend the statute of limitations.

The SC clarified that two things must concur to suspend the statute of limitations, namely: there must be a request for reinvestigation and the CIR must have granted it. In this case, there was no showing from the records that the CIR ever granted the request for reinvestigation filed by the taxpayer. Hence, it cannot be said that the running of the prescriptive period was effectively suspended.

SC may rule on prescription even on appeal• When the pleadings or the evidence on record show that the

claim is barred by prescription, the court must dismiss the claim even if prescription is not raised as a defense.

As a rule, the defense of prescription cannot be raised for the first time on appeal. However, the exception arises when the pleadings or the evidence on record show that the claim is barred by prescription.

Relying on the evidence on record, the SC ruled that prescription had set in based on the date of receipt of the assessment notice which was not disputed, and the date of the attempt to collect as determined by merely checking the records when the response of the CIR containing the demand to pay the tax was filed.

Government may be estopped from collecting taxesWhere it took more than 12 years for the BIR to take steps to collect the assessed tax and kept silent despite having the opportunity to question the defense of prescription on appeal, its claim for deficiency DST is now barred. The SC held that the BIR definitely caused untold prejudice to the taxpayer, keeping the latter in the dark for so long, as to whether it is liable for DST and, if so, for how much.

While generally, the rule on estoppel or waiver does not apply to the government in a tax collection case, the SC made an exception, where the acts of the government caused an injustice to the taxpayer. (G.R. No. 172509 dated 4 February 2015)

CTA may decide on proper tax category in refund casesIn an action for refund of taxes allegedly erroneously paid, the CTA may determine whether there are other taxes that should have been paid in lieu of the taxes paid. Such is not an assessment but a determination of the proper category of tax to be paid which is merely incidental in determining the propriety of refund.

If the taxpayer is found liable for taxes other than the ones alleged to be erroneously paid, the amount of taxpayer’s liability should be computed and deducted from the refundable amount. Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of the taxpayer’s entitlement to refund. The question of tax deficiency is distinct and unrelated to the question of entitlement to refund.

The SC also ruled that a PEZA-registered corporation that has never commenced operations may not avail of the tax incentives and preferential rates given to PEZA-registered

Latest on tax assessments/refund procedures


BIR - Bureau of Internal RevenueCIR - Commissioner of Internal RevenueCTA - Court of Tax AppealsDST - Documentary Stamp TaxFAN - Final Assessment NoticeFLD - Formal Letter of DemandPAN - Preliminary Assessment NoticePEZA - Philippine Economic Zone AuthoritySC - Supreme CourtVAT - Value-Added Tax

Glossary

enterprises. Such corporation is subject to ordinary tax rates under the Tax Code.

Further, the SC discussed the difference between individual and corporate capital gains tax on the sale of real properties. Individuals are taxed on capital gains from the sale of all real properties located in the Philippines and classified as capital assets. For domestic corporations, however, the capital gains tax is imposed only on the presumed gain realized from the sale of lands and/or buildings.

However, due to the lapse of the prescriptive period for assessment, the BIR can no longer collect from the taxpayer the capital gains tax in excess of the amount claimed for refund. The BIR should have assessed the taxes within three years from the filing of the taxpayer’s final tax return in 2000. Thus, the BIR was ordered to refund the amount erroneously paid by the taxpayer without any right to recover capital gains tax that had not been timely assessed. (G.R. No. 175410 dated 12 November 2014)

Issuing of FAN without considering taxpayer’s reply to PAN violates due processThe 15-day period for the taxpayer to respond to the PAN is important to the due process requirement of issuing deficiency tax assessments.

The CTA cited an SC case11 decision where the high court held categorically that the failure of the CIR to strictly comply with the requirements laid down by law and its own rules (i.e., issuance of the PAN and giving the taxpayer 15 days to respond) is a denial of due process. Providing the taxpayer with a copy of the PAN is meaningless if his right to respond to it within the prescribed period would be ignored.

Even if the taxpayer was able to respond to the PAN, such does not cure the fact that the FAN was prematurely prepared before the lapse of the 15-day period to respond.

In this case, the taxpayer received on 5 January 2009 a PAN dated 12 December 2008. It filed a protest letter on time (i.e., 20 January 2009); however, it received the FAN and FLD both dated 9 January 2009, on 21 January 2009 — a day right after the filing of the protest. Evidently, the FAN and FLD were already prepared as early as 9 January 2009 or way before 20 January 2009 which was the lapse of the 15-day period within which the taxpayer could file a reply or protest to the PAN. This makes the assessment against the taxpayer void for violation of procedural due process.(CTA EB No. 1151 dated 17 February 2015)

11 G.R. 185371 dated 8 December 2010

120+30 day rule applies to refund claims filed before BIR Ruling No. DA-489-03Under Section 112(D) of the Tax Code, a denial of a claim or failure of the CIR to act on a claim may be appealed by the VAT taxpayer with the CTA within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day period from the date of submission of complete documents in support of the application.

As previously held by the SC12, compliance with the 120+30 day rule is mandatory and jurisdictional. The only exception to this is for claims made during the effectivity of BIR Ruling No. DA-489-03, i.e. judicial claims filed from 10 December 2003 to 5 October 2010.

Considering that the taxpayer’s judicial claim was filed before the CTA only on 24 April 2002, which was way beyond the mandatory 120+30 days, such noncompliance is fatal to its refund claim on the ground of prescription. Consequently, the CTA had no jurisdiction over the instant claim.(G.R. No. 185666 dated 4 February 2015)

Information in source document prevails• Source document should prevail over the Summary List of

Importation.

The CTA reiterated the ruling of the SC13 on the primacy of source documents, which states that in case of variance between the source document and the general ledger, the former is preferred. The rationale is that information contained in the general ledger is only gathered from source documents.

12 G.R. No. 193301 dated 11 March 201313 Kepco Philippines Corp. vs. CIR, G.R. No. 179356, 14

December 2009


BIR - Bureau of Internal RevenueCTA - Court of Tax AppealsFAN - Final Assessment NoticeLOA - Letter of AuthorityLTS - Large Taxpayers ServicePAN - Preliminary Assessment NoticeRMC - Revenue Memorandum CircularRMO - Revenue Memorandum OrderRR - Revenue RegulationsVAT - Value Added Tax

Glossary

Applying the foregoing ruling to this case, the Import Entry Internal Revenue Declaration (IEIRD), being the source document, should prevail over the Summary List of Importation (SLI) which merely reports the transaction reflected in the said IEIRD. Given that the CIR never disputed the taxpayer’s claim of its inadvertent error in recording the amount in the IEIRD, the amount in the IEIRD as source document was correctly taken up in the computation of the taxable gross income.(CTA Case No. 8445 dated 12 February 2015)

Excess input tax may be refunded as erroneous tax paymentUnder Section 229 of the Tax Code, the prescriptive period for filing a judicial claim for refund is two (2) years from the date of payment of the tax erroneously, illegally, excessively, or in any manner wrongfully collected. The prescriptive period is reckoned from the date the person liable pays the tax. Thus, if the input VAT is in fact “excessively” collected, that is, the amount actually paid is more than what is legally due, then the taxpayer must file a judicial claim for refund within the two-year prescriptive period from date of payment. Only the person legally liable to pay the tax can file the judicial claim for refund.(CTA EB Case No. 1044 dated 12 February 2015)

CTA has no jurisdiction over final and executory assessment• Under the law, when the FAN becomes final and

demandable, the CTA has no jurisdiction to hear and decide the case.

Where the FAN became final for failure of the taxpayer to file a protest, the CTA has no jurisdiction to review the assessment. RR No. 12-99 provides that the taxpayer or his duly authorized representative may administratively protest the formal demand letter and assessment notice. If the taxpayer fails to file a valid protest within 30 days from date of its receipt, the assessment shall become final and demandable. If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the CTA within 30 days from date of receipt of the said decision; otherwise, the assessment shall become final and executory.(CTA Case No. 8518 dated 24 February 2015)

Valid LOA a prerequisite for tax assessment• Letter of Authority (LOA), to be valid, must be issued by the

BIR office having jurisdiction over the taxpayer

Section 13 of the Tax Code provides that an LOA grants authority to the appropriate revenue officer assigned to perform assessment functions. Accordingly, an LOA issued by the Revenue Regional Director shall extend only to taxpayers within the jurisdiction of the district.

In this case, the records show that the taxpayer was informed that it was transferred from the jurisdiction of the Regional Director to the LTS. Despite this, the Regional Director proceeded with its assessment and issued the PAN.

The CTA ruled that the assessment conducted by the Regional Director was unauthorized because the LOA it issued did not have any force and effect on a taxpayer who was already transferred to the jurisdiction of the LTS. And even granting that the taxpayer was re-enlisted under the jurisdiction of the Regional Director during the audit period, the Region should have issued a new LOA before it can proceed with the audit investigation. Any re-assignment/transfer of cases to another Regional Director, and revalidation of LOAs that have already expired, shall require the issuance of a new LOA. Thus, the assessment against the taxpayer is void.(CTA Case No. 8292 dated 2 March 2015)


Consider net loss in deficiency income tax assessmentIn this case, a review of the mathematical computation of the alleged deficiency tax revealed that the net loss was not considered in the assessment. Had the net loss been considered, it will offset the disallowed items. Consequently, the deficiency income tax assessment was cancelled because the taxpayer, after offsetting the disallowed items, still suffered a net loss.

Deficiency withholding tax on compensation may be computed using employees’ effective tax rateThe CTA, in this case, also allowed the use of effective tax rate for purposes of the deficiency withholding tax on compensation, which is based on the total withholding tax on compensation divided by the total net taxable compensation during the taxable year. Thus, the CTA determined after computation that the effective tax rate should be 24% (not 32%). (CTA Case No. 8291 dated 20 February 2015)

Remitting foreign currency on 0% sales is vital in input tax refundA claim for refund of excess input tax must show that the remittances of foreign currency payments correspond to its zero-rated sales. Where the inward remittances cannot be ascertained from the company’s zero-rated sales for the period and how much of the purported zero-rated sales were duly receipted, the claim for refund must be denied. (CTA EB Case No. 1145 dated 18 February 2015)

Assessments under the Best Evidence Obtainable Rule should be based on sufficient evidenceIn an action disputing the validity of the FAN issued to the taxpayer, the CTA ruled that while the Tax Code and RMC No. 23-2000 allow wide latitude to the BIR in resorting to the Best Evidence Obtainable Rule when circumstances warrant, such power is not without limitation.

The CTA reiterated that an assessment must be based on sufficient evidence. In the absence of the accounting records of a taxpayer, the tax liability may be determined by estimation or approximation in the calculation of the taxes due. However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously. Where the deficiency assessment was based on unauthenticated machine copies of the taxpayer’s consumption entries, the assessment is “barren of factual basis, arbitrary and illegal.”

In this case, the taxpayer’s accounting records were lost due to typhoons Ondoy and Pepeng. The BIR could adopt the Best Evidence Obtainable Rule and could have determined the tax liability through estimation. However, such estimation should be based on sufficient evidence and cannot be made to rest on mere presumption. Given that the BIR failed to present any evidence which it used as basis or foundation for the subject deficiency assessment, the CTA found the assessment void for lack of factual basis.(CTA Case No. 8367 dated 3 February 2015)


BSP - Bangko Sentral ng PilipinasFVTOCI - Fair Value Through Other Comprehensive

IncomeFVTPL - Fair Value Through Profit or LossIC - Insurance CommissionNCR - National Capital Region

Glossary

2014 guidelines for the valuation of equity investmentsThe Insurance Commission advised all pre-need companies doing business in the Philippines on the valuation of equity investments as of yearend 2014. The salient points are:

• Equity investments in listed companies shall be valued at fair value through profit or loss (FVTPL) if held for trading; otherwise, the same shall be valued at fair value plus transaction costs or using the recommended values of stocks under IC Circular Letter 2015-03 dated 22 January 2015.

• Investments in related parties shall be valued at FVTPL or fair value through other comprehensive income (FVTOCI) if the investment is less than 20% of the voting power of the investee’s total capital stock; otherwise, the equity method of valuation shall be used.

• Investments in preferred shares regardless of percentage of control shall be valued at FVTPL or FVTOCI.

• Equity investments in unlisted companies shall be valued at cost.

(IC Circular Letter No. 2015-08 dated 6 March 2015)

Minimum wage increase in the National Capital RegionThe Wage Board14 provided a wage increase for all minimum wage earners in the private sector of the NCR, regardless of position, designation or status of employment and irrespective of the method of payment.

14 Regional Tripartite Wages and Productivity Board-National Capital Region

Highlights of the Wage Order are as follows:

1. All private sector minimum wage workers and employees in the NCR, including workers paid by result and qualified handicapped workers, shall receive an increase in the existing basic wage in the amount of PHP15.00 per day, for the normal eight (8) working hours.

2. The new minimum wage rates are as follows: - PHP481.00 for the non-agriculture sector and - PHP444.00 for the agriculture sector (including

private hospitals with bed capacity of 100 or less, retail/service establishments employing 15 workers or less, and manufacturing establishments regularly employing less than ten workers).

3. All entities engaged in business should submit to the Board a verified report on their wage structure not later than 31 January 2016 and every year thereafter.

Other provisions on exempted establishments, liabilities for payment of wages and penalties for non-compliance under previous wage orders are reiterated.

The Wage Order shall take effect on 5 April 2015.(Wage Order No. NCR-19 dated 16 March 2015)

Latest on regulatory landscape


Conditions for exempting banks from business name requirementsSubject to BSP’s approval, banks (thrift, rural and cooperative) may apply for exemption from the BSP’s general requirements in adopting and using a business name. Prior to the circular, these banks were required to include identifying words/phrases in their business name to distinguish them as thrift, rural or cooperative banks. For rural and coop banks, the phrases must be at least one-half of the size of their business name when appearing in print.

To be exempted, the bank must file an application letter showing compliance with the following:

• The new business name must reasonably describe the bank’s business activities, should not be misleading or giving a false impression to the public, and should not be identical or confusingly similar with existing corporate names;

• The bank must meet the minimum capitalization requirements at the time of filing;

• The bank must not have any major concerns threatening its solvency or liquidity; and

• The bank must submit the supporting documents required by the BSP.

(BSP Circular No. 872 dated 13 March 2015)

New guidelines for internal control and audit of financial institutionsTo align with international standards and promote strong control environments among financial institutions, the BSP issued its revised guidelines on internal control and internal audit, which include management oversight and control culture, risk recognition and assessment, control activities, information and communications, monitoring activities, and correcting deficiencies. The amended guidelines provide a wider coverage especially in terms of accountability of the board of directors and personnel in the control process. The guidelines also include amendments on internal audit function which shall both assess and complement operational management, risk management, compliance, and other control functions. Internal audits shall be conducted at a rate depending on the assessed levels of risk in specific banking areas. Furthermore, internal audit activities, except those covered by the law on secrecy of deposits, may be outsourced in order to have access to certain areas of expertise or address resource constraints.

In expanding the qualifications of key personnel, the head of the internal audit function of a universal/commercial bank should be a certified public accountant (CPA) or certified internal auditor (CIA), while those of thrift, rural, and cooperative banks should be a graduate of any accounting, business, finance, or economics course with technical proficiency in the conduct of internal audit. (BSP Circular No. 871 dated 5 March 2015)


Iligan City-based business wins Developmental Social Enterprise Awards

Isla Lipana & Co., the Philippine member firm of the PwC global network, and CSR thought leader, the Benita & Catalino Yap Foundation (BCY Foundation) recognized the winning Filipino enterprises committed to social objectives through its enterprise activities.

The Ecosystems Work for Essential Benefits, Inc. (ECOWEB) was named the overall winner of the Developmental Social Enterprise Awards given out last 4 March 2015 at the Club Filipino, Greenhills, San Juan City. Organized in 2006 to respond to interlinking problems of poverty, conflict, environmental degradation and poor governance, ECOWEB partnered with a number of farmers and women to produce natural fertilizers and pest repellent under the trade name “EcOrganic”.

Also recognized as finalists were: 3846 Social Enterprises, Inc., a sustainable program providing scholarship grants to poor but deserving Filipino students; Coffee for Peace, a mission agency focused on peace advocacy that grows and

markets Coffee Arabica here and overseas; Global Organic and Wellness Corporation, which empowers farmers by helping them create a common marketing platform for organic products; and Good Food Community, Inc., which works with farmers in Tarlac, Benguet and Mountain Province in creating an alternative distribution system to connect them with city-based consumers.

Due to their unique and impressive achievements in social entrepreneurship, special recognition was given to a health cooperative facility Medical Mission Group Metro Manila East Hospital & Health Services Cooperative; technology development organization Alternative Indigenous Development Foundation, Inc. (AIDFI); microfinance enabler SEDPI Development Finance, Inc.; and manpower provider Staff Search Asia Service Cooperative.

The DSE Awards cites enterprises embodying the values of citizenship, sustainability and social responsibility, as well as those that put central importance on human dignity.

Alexander Cabrera, Chairman and Senior Partner of Isla Lipana & Co., said: “We believe that the DSE Awards will be a new venue to showcase Social Enterprises that are committed to delivering impactful ways to solve social challenges. We want to be part of their growth and be part of that solution by providing developmental opportunities to these enterprises.”

Antonio Yap, Chairman of the BCY Foundation says: “We are much honored to partner with PwC Philippines in encouraging the growth of the social enterprise sector, which we think will also be a key player in the national development of the Philippines.” He adds: “It shows our Foundation’s commitment to creating innovative social solutions through responsible business, sustainability, social responsibility, environmental stewardship and social entrepreneurship.”

Since its launch in August 2014, the DSE Awards received nominations — corporations, partnerships, cooperatives in the Philippines — that have operated for two to five years through its website, www.dseawards.com. A screening committee, composed of eight judges from various sectors such as the academe, social enterprise sector, government, private business and media, selected the finalists and top winner last February 2015. Senator Paolo Benigno “Bam” Aquino headed the panel of judges.

For more information, visit www.dseawards.com

Meet us

Shown from left to right: BCY Foundation Chairman Antonio Yap, DSE Awards jury head Sen. Paolo Benigno “Bam” Aquino IV, Eleanor Pinugu of 3846 Social Enterprises Inc. (finalist), Paulo Sandoval of Good Food Community Inc. (finalist), Executive Director Regina Salvador-Antequisa of Ecosystems Work for Essential Benefits, Inc. (ECOWEB) (top winner), Joji Pantoja of Coffee for Peace (finalist), Melody Caoile of 3846 Social Enterprises Inc., Bernie Berondo of Global Organic and Wellness Corporation (finalist), Michelle de Vera and Mark Patrick Santillan of 3846 Social Enterprises Inc., and Isla Lipana & Co./PwC Philippines Chairman and Senior Partner Alex Cabrera.


Talk to us

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

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

Malou P. LimTax Managing PartnerT: +63 (2) 459 2016 malou.p.lim@ ph.pwc.com

Lawrence C. BiscochoT: +63 (2) 459 2007 [email protected]

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

Fedna B. ParallagT: +63 (2) 459 3109 [email protected]

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].

Alex Cabrera talks at Workshop on Good Business Practices for SMEs

A workshop organized to help boost the competitiveness of small and medium-sized enterprises (SMEs) in regional and global markets was held at the Radisson Blu Hotel in Cebu City last 10 March.

The event provided Philippine entrepreneurs an opportunity to interact with leaders from large US firms and successful local companies and learn good business practices that will help boost their competitiveness.

Participants also listened to expert resource speakers talk about what is required to succeed in the ASEAN integration.

One of the invited speakers was Isla Lipana & Co./PwC Philippines Chairman and Senior Partner Alex Cabrera (in photo) who gave a presentation on “Tax Audit and Planning for SMEs”.

Some 200 local entrepreneurs attended the workshop co-organized by the US-ASEAN Business Council, US Agency for International Development, Department of Trade & Industry, Philippine Chamber of Commerce and Industry, Cebu Chamber of Commerce and Industry, Mandaue Chamber of Commerce and Industry, Cebu Business Club and the Philippine Exporters Confederation.

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.

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