“As simple as can be” by Ma. Victoria A. Villaluz (February 28, 2011)

SUITS THE C-SUITE By Ma. Victoria A. Villaluz
Business World (02/28/2011)

Like many jurisdictions, the Philippine tax laws, rules and regulations appear to be complex. Whether this is mere perception or hard fact, the Ways and Means Committee of the Lower House, headed by Rep. Hermilando I. Mandanas (second district, Batangas), is attempting to simplify the tax system.

Not so long ago, the Ways and Means Committee proposed House Bill No. 1970 on the Value Simplified Tax System, which seeks to amend the Tax Code by, among other things, reducing to 6% the current 12% Value-Added Tax rate. More recently, the Committee opened House Bill No. 3927, an Act Simplifying the Availment of the Gross Income Tax for Corporations, for public hearing. Under this bill, corporations have the option to be taxed at 18% of gross income. The bill defines the term “gross income” as being equivalent to gross sales less sales returns, discounts and allowances, and “cost of goods sold” as defined by the Tax Code. The term “cost of goods sold” includes all business expenses directly incurred to produce and bring the merchandise to their present location and use.

For a trading or merchandising concern, “cost of goods sold” includes the invoice price of the goods, plus import duties and freight in transporting the goods to the place where they are actually sold, including insurance while the goods are in transit.

In the case of a manufacturing concern, “cost of goods manufactured and sold” includes all production costs, such as raw materials, direct labor, manufacturing overhead, freight cost, insurance premiums, and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, “gross income” means gross receipts less sales returns, allowances, discounts and cost of services. The bill defines “cost of services” as all direct costs and expenses necessarily incurred to provide the services required by the customers and clients, including: (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service; and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies, except that in the case of banks, “cost of services” shall include interest expense.

If a corporation chooses to be taxed at 18%, the said election shall be irrevocable for the taxable year for which the return is made. Furthermore, the bill provides that the corporation shall not be required to submit with his tax return such financial statements otherwise required by the Bureau of Internal Revenue (BIR). The corporation shall keep such records pertaining to its gross income, except when the Commissioner otherwise permits.

Another of the committee’s attempts at tax simplification is House Bill No. 3510, likewise authored by Mr. Mandanas, which is referred to as the Simplified Income Tax Return Audit Act of 2010 or SITRA. Mr. Mandanas explains that the basic premise of the bill is that “government revenues from voluntary taxation like income tax will be increased by simplifying the audit requirements and reducing occasions for corruption.”

Under the proposed bill, if an individual or a corporate taxpayer wants to be exempted from income tax audit or investigation by the BIR, the said taxpayer must file an application and register with the BIR. The exemption is granted only if the taxpayer pays the prior year’s income tax payment plus an additional: 20% for the first year; 15% for the second year; and 12% for the succeeding years.

The bill provides for the following schedule of payment in order for the exemption to apply:

1. Individuals, (whether resident or nonresident citizens, including resident or nonresident aliens) and Trusts and Estates — Applicable rate or P100,000, whichever is higher;
2. Corporations with:

a. Subscribed capital of above P50 million — Applicable rate or P500,000, whichever is higher

b. Subscribed capital of above P20 million up to P50 million — Applicable rate or P250,000, whichever is higher

c. Subscribed capital of P20 million and below — Applicable rate or P100,000, whichever is higher

d. Other juridical entities, including partnerships, but not limited to, cooperatives and foundations that have become taxable as of Dec. 31, 2009 — Applicable rate or P100,000, whichever is higher

However, the exemption from tax investigation is not available to all taxpayers, notably:

• A taxpayer who has already been issued a Final Assessment Notice (FAN) with respect to his income tax applicable to the taxable period(s) covered by the FAN;

• A taxpayer under investigation as a result of verified information filed by a Tax Informer, duly processed and recorded in the BIR Official Registry Book;

• A taxpayer with tax fraud cases filed and pending in the Department of Justice or in courts;

• A taxpayer with unpaid income tax liabilities as admitted and reflected in his books of accounts/records, or financial statements and tax returns in a particular taxable period, unless he first pays the said income tax liabilities.

• A taxpayer with a pending case under the Run After Tax Evaders Program.

Furthermore, the bill provides protection for taxpayers who availed themselves of the exemption under the SITRA. The bill provides a penalty in the form of a fine of not less than P50,000 and imprisonment of not less than six years for whoever divulges the income tax return.

While the committee’s objective of simplifying certain aspects of taxation is indeed commendable, it is nevertheless important for taxpayers, to do a deeper analysis of the implications of the proposed bills and to participate in the discussions on the proposed bills. For laws to truly work, it is essential that there be open dialogue between the people and the state.

(Ma. Victoria A. Villaluz is a Tax Principal of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.