Penalty for failure to segreggate VAT

Under Revenue Regulations No. 18-2011 dated September 21, 2011, VAT-registered taxpayers who shall fail to separate the value-added tax (VAT) component in the sales invoice (for goods), or official receipts (for services) shall be penalized upon conviction as follows:

a. Fine of not less than P1,000 but not more than P50,000, and,
b. Suffer imprisonment of not less than two (2) years but not more than ten (10) years.


Comment:

This is not actually a new requirement to separate the VAT component in the invoice or receipt for transparency purposes, but only to penalize those who do not comply the same. Problem may arise if the seller does not indicate the VAT passed on because if a VAT receipt/invoice is issued, it presupposes that a VAT is imposed so the tendency of the business buyer is to divide by 112% and multiply to get the 12% VAT. As such, in mixed transactions where there are non-VATable sales, the buyer would claim VAT where there is none and the government will be deprived.

With the VAT specifically indicated in the VAT-registered invoice/receipt, the business buyer could easily determine how much input VAT was passed on and will rightfully claim what is allowed.

I encourage VAT-registered taxpayers to simply comply and separate the VAT component. Why waste your hard-earned money in penalties? Notably, the penalty imposed in the regulation is on every invoice/receipt issued.



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Income Taxation of Proprietary Educational Institutions

For tax income tax purposes, educational institutions are classified as follows:

• Proprietary educational institution;
• Non-stock, non-profit educational institution; or,
  
• Government educational institution.

In this Article, let us uncover how a proprietary educational institution is being subjected to income tax.

Definition

Under the Tax Code, 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

Income tax rates

As a rule, it is subject to a special income tax rate of ten percent (10%) on their taxable income except on certain passive income. Notably, this is much lower than the regular corporate income tax rate of 30% of taxable net income. However, they must dedicate their operations to providing educational services because if they does not, then, they will cease to enjoy the benefit of 10%. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources, they shall be taxed at 30% on the entire taxable income. 'Unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution of its primary purpose or function.

Allowable deductions

It is allowed to claim from its gross income, allowable deductions in like manner as an ordinary taxpayer engaged in trade or business. In addition to the expenses allowable as deductions, it may at its option elect either:

(a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or

(b) to deduct allowance for depreciation thereof.

In other words, capital outlays which would have been normally considered as an asset subject to depreciation maybe claimed by proprietary educational institutions as an outright deduction from its gross income.

Passive income

Finally, passive income of proprietary educational institutions is taxed in the same manner as ordinary corporations. Examples of passive income are interest income from Philippine bank deposits and royalties.

Resources:

Tax Code of the Philippines

• Section 27(B)

• Section 34 (A)(2)

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BIR Tax Agent Practitioner (TAP) Accreditation

Tax practitioner/Agent – The following shall be deemed to be in tax practice and required to apply for accreditation

• those who are engaged in the regular preparation, certification, audit and filing of tax returns, information returns and other statements or reports required by the Code or Regulations;
• those who are engaged in the regular preparation requests for rulings, requests for reinvestigations, protests, requests for refunds or tax credit certificates, compromise settlement and/or abatement of tax liabilities, and other official papers and correspondence with the Bureau of Internal Revenue (BIR), and other similar related activities; or
• those who regularly appears in meetings, conferences, or hearings before any office of the Bureau of Internal Revenue officially in behalf of the taxpayer or client in all matters relating to client’s rights, privileges, or liabilities under the laws or regulations administered by the Bureau of Internal Revenue. (Section 2(e), Revenue Regulations No. 11-2006)

Only those Tax Agents/Practitioners, Partners or officers of General Professional Partnerships, or Officers or Directors of corporate entities engaged in tax practice who have been issued Certificate of Accreditation or ID card shall be allowed to represent a taxpayer or transact business with the Bureau of Internal Revenue in representation of a taxpayer for the purposes defined in Revenue Regulations NO. 11-2006. The BIR can refuse to transact official business with tax practitioners who are not accredited and shall require that certain official documents filed with the BIR on behalf of the taxpayers shall bear the TIN number and accreditation details. (Section 9, Revenue Regulations No. 11-2006)

Who are required to register:

a. Individual tax practitioners

b. Partners of GPPs engaged in tax practice;

c. GPPs engaged in tax practice, accounting, or auditing;

d. Officers or authorized representatives of incorporated business entities engaged in accounting, auditing or tax consultancies.

Application for accreditation of practitioners who are duly accredited by the BOA and SEC, as evidenced by a copy of the BOA Certificate of Registration and SEC Certificate of Accreditation shall, upon payment of the processing fee, be automatically issued a BIR Certificate of Accreditation by the RNAB (Revenue National Accreditation Board)

Related BIR Issuances:

• Revenue Regulations No. 15-99;
• Revenue Regulations No. 11-2006 superseding RR 15-99 - Accreditation requirements
• Revenue Regulations No. 4-2010 – CPE requirements
• Revenue Memorandum Order No. 29-2010 – CPE guidelines

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Change in Accounting Period under RR No. 3-11

Revenue Regulations No. 3-2011 dated March 7, 2011 - "Regulations Providing for Policies, Guidelines and Procedures on the Application for Change in Accounting Period under Section 46 of the National Internal Revenue Code (NIRC) of 1997, as amended"

Under Section 46 of the Tax Code, as amended, it provides and hereunder quoted:

SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47.

Implementing the above provision, requirements of RR No. 3-11 may be summarized as follows:

a. While a choice of accounting period is a management discretion, change thereof must be approved by the Commissioner of Internal Revenue through the Revenue District Office of registration;
b. The reason for change must be duly stated in the application;
c. Submission of the final adjustment return; and,
d. Duly approved amended By-laws for corporate taxpayers with the new accounting period.

Accordingly, hereunder are the documentary requirements for the application to be filed at anytime not less than sixty (60) days prior to the beginning of the proposed new accounting period:

1. Letter request addressed to the Revenue District Officer of registration indicating the (a) original accounting period and the new accounting period to be adopted, and (b) the reason for desiring to change the accounting period;
2. Duly filled-up BIR Form No. 1905;
3. Certified True Copy of the Amended By-laws with the new accounting period duly approved by the Securities and Exchange Commission (SEC);
4. Sworn certification of "non-forum shopping" stating that the request has not been filed or previously acted upon by the BIR National Office, signed by the taxpayer or authorized representative; and,
5. Sword undertaking by a responsible officer of the taxpayer to file a separate final or adjustment return for the period between the close of the original accounting period and the date designated as the close of the new accounting period on or before the 15th day of the fourth month following the end of the period covered by the final/adjustment return.
   

Under Section 6 of RR 3-11, the Certification approving the adoption of a new accounting period must be released within thirty (30) working days from the date of receipt of the complete documentary requirements.

Procedure wise, the first thing to do is to secure SEC amendment of By-laws, then, file the application with the BIR.

Resources:

Revenue Regulations No. 3-2011
BIR Form No. 1905


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Overseas Communication Tax Under RR 11 - 2011

Revenue Regulations No. 11-2011 entitled "Revenue Regulations Defining Gross Receipts for Common Carrier's Tax for International Carriers pursuant to Section 118 of the Tax Code amending Section 10 of Revenue Regulations No. 15-2011" finally came up with a formal definition of Gross Receipts for International Carriers under Section 118 of the Tax Code as follows:

"Gross receipts" shall include, but shall not be limited to, the total amount of money or its equivalent representing the contract or ticket prize, excess baggage fees, freight/cargo fees, mail fees, rental, penalties, deposit applied as payments, advance payments and other service charges and fees actually or constructively received during the taxable quarter from the passage of persons, excess baggage, cargo and/or mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage documents.

Provided, that ticket revalidated, exchanged and/or endorsed to another international airline shall likewise form part of the gross receipts if the passenger boards a plane in a port or point in the Philippines.

Provided, further, that for a flight which originates from the Philippines, but where transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Receipts.

Said definition amended Section 10 of Revenue Regulations No. 15-2002. Notably, Section 118 of the Tax Code simply provides as follows:

SEC. 118 Percentage Tax on International Carriers. -

(A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their quarterly gross receipts.

(B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.

Thus, the above definition under Revenue Regulations No. 11-2011 amending Section 10 of Revenue Regulations No. 15-2002 would serve as a guide for international carriers in determining their gross receipts for percentage tax purposes.

This may not have much impact for passengers of international flights because percentage tax imposed by the Bureau of Internal Revenue (BIR) is a direct tax where the airline company is the one directly liable. It is not like with the Value Added Tax (VAT) that could be passed on to the buyer.

Resources:

Revenue Regulations No. 11-2011
Revenue Regulations No. 15-2001



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VAT on tax-free transfer under RR No. 10-2011

Revenue Regulations No. 10-2011 dated July 1, 2011 entitled "Amending Certain Provisions of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, Otherwise Known as the Consolidated Value Added Tax Regulations of 2005, as amended" finally settled the issue of VAT on tax-free transfers of real property used in trade or business of a taxpayer.

Section 2 of RR No. 10-2011 reworded part of Section 4.106-8 of RR No. 16-05, as last amended by RR No. 4-07, as follows:

"X x x

However, the exchange of goods or properties including the real estate properties used in business or held for sale or for lease by the transferor, for shares of stocks, whether resulting in corporate control or not, is subject to VAT"

X x x"

Based on the above provision, a real property that is used in trade or business or held for lease in the ordinary course of trade or business of the owner-transferor, shall be subject to 12% Value Added Tax (VAT) if transferred to a corporation in exchange for shares of stocks, irregardless of whether or not the owner-transferor acquired control in accordance with Section 40 of the Tax Code of the Philippines, as amended.

Reference:

Revenue Regulations No. 10-2011


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Lessee Information Statement under RR No. 12-2011

Revenue Regulations No. 12-2011 dated July 25, 2011 entitled "Reportorial Requirements for Establishments Leasing or Renting Out Spaces for Commercial Activities" now requires a new reportorial requirement for lessors of commercial spaces.

All owners, or sub-lessors of commercial establishments/buildings/spaces to ensure that persons intending to lease is a BIR- registered taxpayer with tax identification number (TIN), BIR Certificate of Registration (COR), and duly registered official receipts or invoices.

Every 31st day of January and 31st day of July of the year, they are required to submit the following information, under oath, in hard and soft copies to the Revenue District Office (RDO) where the commercial establishment/building/space is located:

1. Building/space layout of the entire area being leased with proper unit/space address or reference;
2. Certified True Contract or Contract of Lease per tenant; and,
3. Lease Information System (LIS) in prescribed format (Printed copy and excel format in CD-R for softcopy)

The first filing of tenants profile as of July 31, 2011 through the LIS shall be on or before November 2, 2011 (As amended by Revenue Regulations No. 15-2011). Failure to submit is subject to penalties.


Resources:

Revenue Regulations No. 12-2011 dated July 25, 2011
Revenue Regulations No. 15-2011 dated August 26, 2011

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Tax Credit Certificates (TCC) under RR No. 14-2011

A Tax Credit Certificate (TCC) may be used by the grantee or his assignee in the payment of his direct internal revenue tax liability except the following:

1. payment or remittance for any kind of withholding tax;
   
2. payment arising from the availment of tax amnesty declared under a legislative enactment;
   
3. payment of deposits on withdrawal of exciseable articles;
   
4. payment of taxes not administered or collected by the Bureau of Internal Revenue; and
   
5. payment of compromise penalty.

Under Revenue Regulations 5-2000 dated August 15, 2000, BIR issued Tax Credit Certificates (TCCs) may be transferred in favor of an assignee based on the following conditions:

1. the transfer of a valid TCC must be with prior approval of the Commissioner or his duly authorized representative;
2. the transfer should be limited to one transfer only; and
   
3. the transferee shall use the TCC assigned to him strictly in payment of his direct internal revenue tax liability and in no case shall the same be available for conversion to cash in his hands.

In practice, transfers or assignment of TCCs has been an industry for quite a time. The grantee normally would transfer the same at a discount of say 10% to 15% because it is after the cash it could generate and make use in its operations. For the buyer or transferee, it is after the gain on the discount because it will utilize every peso of TCC with a lesser cost so it would benefit on the discount. The broker then, would earn a professional fee out of the completed transactions. In this instance, taxable gains and income are being realized, and a deductible loss is likewise incurred.

For the government, the use of TCCs would reduce cash collections because transferring the TCCs to taxpayers with much tax liabilities would maximize the use of the same thereby negatively affecting collections. Without transferring, grantees without much direct liabilities would tend to consume the TCC's in a long period of time. To my mind, this scenario prompted the BIR to issue the new regulations, disallowing its transfer.

Thus, in Section 2 Revenue Regulations No. 14-2011 dated July 29, 2011 amended Section 4 of the RR No. 5-00 and hereunder provides that:

"All Tax Credit Certificates (TCCs) issued by the BIR shall not be allowed to be transferred or assigned to any person"

Accordingly, grantees of the TCC would themselves use the TCCs. Without much direct liabilities, it would take them quite a long time to consume unless they could eye on some alternative tax minimization schemes in accordance with law.

Sources:

• Revenue Regulations No. 14-2011
• Revenue Regulations No. 5-2000

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Tax on Corporate Dividends

In a corporate world, dividends is not a new topic. As a matter of fact, it is one of the major consideration for an investor to purchase shares of stock of a company. It represents the share in the net earnings distribution of a stockholders who own shares of stocks of a company. It could be in the form of cash, property, company's own shares or stock dividends and liquidating dividends upon liquidation and dissolution. It is basically sourced from the unrestricted or free retained earnings of the company made available through an action of the Board of Directors.

Taxability of cash and/or property dividends would normally depend on the classification of the company and the recipient stockholders. Company for determining tax on dividends may be classified as either a domestic corporation or as a foreign corporation. Stockholders may be classified as either an individual or a corporation, and the latter may further be classified as a domestic corporation, resident foreign, and non-resident foreign corporation. Determining the classification would depend on the state where the same is organized or constituted and existing. Domestic corporations are those organized and existing under the laws of the Philippines. Those organized and existing under the laws other than the Philippines are referred to as foreign corporation. Foreign corporations doing business in the Philippines are normally classified as resident foreign corporation, otherwise, the same shall be referred to as a non-resident foreign corporation.

Dividends distributed by a DOMESTIC corporation to the following stockholders are taxed as follows:

* Individuals, whether Pinoy or not, is subject to 10%;
* Domestic corporations - exempt;
* Resident foreign corporation - EXEMPT from income tax; and
* Non-resident foreign corporation - 15% subject to the rule on tax-sparing credit and/or Tax Treaty rules

On the other hand, dividends distributed by a FOREIGN corporation to the following stockholders are taxes as follows:

* Pinoy individuals residing in Philippines is subject to 5-32% normal income tax;
* Pinoy individuals not a resident of the Philippines is EXEMPT from income tax;
* Domestic corporations subject to 30% corporate income tax;
* Resident foreign corporation is EXEMPT from income tax; and
* Non-resident foreign corporation is EXEMPT from income tax.

Stock dividends are, as a rule EXEMPT from income tax as there is no flow of wealth to the stockholder before and after the stock dividend. The increase in the number of shares as a result of the stock dividend is not necessary income until after such shares are actually sold. However, if such stock dividend distribution would constitute as an income distribution (e.g. increase in the equity percentage of a stockholder), then, the same shall be taxed in the same manner above.

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15% income tax to expats, when applicable?

Revenue Memorandum Circular No. 41 – 2009 dated July 23, 2009 (RMC 41-2009) was issued to clarify the meaning of “Managerial and Technical Positions” under Section 25(C) of the Tax Code, as amended. This RMC sets out the qualifications and requirements in order that an alien employee (or Filipino employees) of a Regional Headquarters (RHQ) or Regional Operating Headquarters (ROHQ) of a multinational corporation shall be eligible for the 15% income tax rate on its gross compensation income. Hereunder is the summary of the RMC.

Compared to the normal tax rate of 5-32% bracket 5-32%, if a resident alien or non-resident alien engaged in trade or business, or 25%, if a non-resident alien not engaged in trade or business, the 15% rate is a good break because of a material rate gap on rates of income tax on compensation of approximately 17% (32%-15%), and 10% (25%-15%), respectively. Thus, the BIR saw the need to clarify the bounds of the term “Managerial and Technical Positions” to avoid abuse and misapplication of the above rule to minimize taxes, if not escape or evade.

Under the Labor Code, employment of non-resident aliens commonly referred to as “expatriate employees”, is limited to positions which are managerial, confidential, or highly technical in nature, or where there are no Filipinos who are competent, able and willing to perform the services for which aliens are desired. To be considered managerial employee, it must possess authority to act in the interest of its employer requiring the use of independent judgment and not merely routinary or clerical in nature. The case of Villuga vs. NLRC, 225 SCRA 537 provides the following elements to be considered managerial employee:

a. primary duty consist of performance o work directly related to management policies;
b. customarily and regularly exercise discretion and independent judgment;
c. regularly and directly assist in the management of the establishment;
d. does not devote 20% of his time to work other than those prescribed above.

The employees are not managerial employees if they only execute approved and established policies, leaving little or no discretion at all whether to implement said policies or not. On the other hand, RMC did not elaborate very well on “technical position” other than saying that it is limited to positions which are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which aliens are desired.

By implication, all other BIR rulings issued inconsistent with the RMC are revoked accordingly. As a matter of fact, BIR Ruling No. DA-061-04 is revoked by the RMC. Thus, it is suggested that a review of existing employee structure and job descriptions in relation to their tax treatments is hereby recommended to ensure that the same is in compliance with the RMC.

Suggested readings:
a. Villuga vs. NLRC, 225 SCRA 537
b. Republic Act No. 8756, amending E.O. No. 226

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