Client Advisory Letter

Inconsequential failure

Non-submission of supporting documents within sixty days from filing of protest

The CTA, citing a 2009 Supreme Court decision, affirmed that the mere failure of the taxpayer to submit supporting documents within sixty (60) days after filing a protest (request for reinvestigation) against a Formal Letter of Demand/Final Assessment Notice (FLD/FAN) does not render said FLD/FAN final and unappealable.

(CTA Case No. 9729, promulgated 08 October 2020)

Ordinary and necessary

When an expense is considered ordinary and necessary

In order to be deductible, an expense must be both ordinary and necessary. Under Revenue Regulations No. 9-1983, an ordinary expense is one that is normal usual or customary (in size and character) for the taxpayer’s trade or business while a necessary expense is one that is appropriate and helps develop and maintain the taxpayer’s business.

The Supreme Court[1] laid down the following guiding principles in determining whether an expense is ordinary and necessary:

• An expense is “ordinary” when it pertains to a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term “ordinary” does not require that the payments be habitual or normal. Hence, the payment may be unique or non-recurring.
• An expense will be considered “necessary” when it is appropriate and helpful in the development of a taxpayer’s business.
• The right to a deduction depends in each case on the particular facts and the relationship of the payment to the type of business. The taxpayer’s intention often may be the controlling fact in making the determination.

(CTA Case No. 9729, promulgated 08 October 2020)

[1] G.R. No. L-26911, promulgated 27 January 1981.

Steps to recovery

Implementing tax relief measures under the Bayanihan to Recover as One Act

The BIR issued implementing rules for the following tax exemptions under the Bayanihan to Recover as One Act:

1. Retirement benefits received by officials and employees of private firms from 5 June 2020 until
   31 December 2020, in accordance with a retirement plan duly-registered with the BIR

   1. Taxes withheld from retirement benefits given to an employee from 5 June 2020 to 31 December 2020 shall be refunded by the employer to the employee.

   2. If, within the succeeding 12-month period, the retired employee is re-employed by the same employer or by the employer’s affiliate, the retirement benefits will constitute gross income of the employee.

      1. If re-employment occurs in 2020, the retirement benefits should be included in the 2020 annual ITR of the employee who shall no longer be qualified for substituted filing.

      2. If re-employment occurs in 2021, the income taxes due on the retirement benefits should be paid within 30 days from re-employment date or on the deadline for the payment of the second installment of the 2020 income tax, whichever comes later.

2. COVID-19 Special Risk Allowance paid to health workers directly catering to or in contact with COVID-19 patients for every month of service during the state of national emergency.

3. Actual Hazard Duty Pay given to temporary Human Resources for Health (complementing or supplementing the current health workforce) serving on the front line during the state of emergency

4. Compensation of health workers who have contracted COVID-19 in the line of duty or who died while fighting COVID-19 amounting to:

   1. PHP1m in case of death

   2. PHP100,000 in case of severe or critical illness

   3. PHP15,000 in case of mild or moderate sickness

In case of death, the above compensation shall not form part of the gross estate of the decedent subject to estate tax.

Employers or payors are required to:

• include the above payments in the Alphabetical List of Employees/Payees submitted annually;

• submit a one-time list of recipients to the Revenue District Office/concerned Large Taxpayers office on or before 15 January 2021, which must indicate the names and taxpayer identification numbers of the recipients; the nature of compensation paid, amount and date of payment; and must be attested to by the employer/payor; and

• submit within thirty (30) days from the close of all quarters in 2021, a quarterly list of employees who received retirement benefits but are re-employed during the 12-month period.

(Revenue Regulations No. 29-2020, published 17 October 2020)

Critical condition

Tax exemption of critical equipment, supplies and essential goods

The BIR issued the following rules to implement Sections 4(cc) and 18 of the Bayanihan to Recover as One Act regarding the tax exemptions on the importation and manufacture of critical or needed equipment, supplies or essential goods:

1. Importations of the following goods from 25 June 2020 to 19 December 2020 shall be exempt from VAT, excise tax and other fees:

   1. Personal protective equipment; surgical equipment and supplies; laboratory equipment and its reagents; medical equipment and devices; support and maintenance for laboratory and medical equipment, surgical equipment and supplies; medical supplies, tools and consumables; testing kits; and other supplies and equipment as determined by the DOH and DTI;

   2. Equipment for waste management as approved by the DENR, DOH or other concerned agencies; and

   3. Inputs, raw materials and equipment necessary for the manufacture or production of essential goods enumerated in Section 1.a above.

2. To qualify for exemption, the taxpayer must present a certification from the DTI to the effect that the equipment and supplies being imported are not locally available or are of insufficient quality and preference.

3. The importation shall not be subject to the issuance of Authority to Release Imported Goods (ATRIG) under RMO No. 35-2002 and may be released by the BOC without need of the ATRIG.

4. Donations of the above imported articles to or for the use of the National Government or any non-profit entity created by its agencies, or to any political subdivision of the Government are exempt from donor’s tax and subject to the ordinary rules of deductibility.

5. The above exemptions are effective starting 25 June 2020. Hence, VAT paid from 25 June 2020 up to 14 September 2020 on qualified importations shall be refunded in accordance with existing procedures for refund of VAT on importations.

6. Inputs, raw materials and equipment necessary for the manufacture of essential goods of medical grade referred to in Section 1.a above, as determined by the Food and Drug Administration (FDA), shall be VAT-exempt.

7. To qualify for the exemption, the supplier of inputs, raw materials and equipment must submit a certified true copy of the manufacturer’s License to Operate issued by the FDA and a Sworn Declaration from the manufacturer to the effect that the items shall be used in the manufacture of essential goods.

8. The sale of finished foods/products in Section 1.a above, whether locally manufactured or imported, shall be subject to VAT.

 (Revenue Regulations No. 28-2020, published 17 October 2020)

Moving deadlines

Extending the deadlines of VAT refund claims for the 3rd and 4th quarters of 2018

In line with Section 4(tt) of the Bayanihan to Recover as One Act which allows the moving of statutory deadlines for the filing of documents, the deadlines for filing VAT refund claims covering the following taxable quarters have been extended by the BIR:

Expected losses

Five-year net operating loss carry-over (NOLCO) and requirements

The BIR issued regulations implementing Section 4(bbbb) of the Bayanihan to Recover as One Act regarding the five-year carry-over of 2020 and 2021 net operating losses. The regulations provide for the following:

• Net operating loss means the excess of allowable deductions over the gross income of the business in a taxable year.

• Businesses suffering net operating losses for taxable years 2020 and 2021 shall be allowed to carry-over the same as deductions from gross income for the next five (5) consecutive taxable years immediately following the year of loss notwithstanding the expiration of the Bayanihan to Recover Act.

• The taxpayer is required to:

  • Separately show the net operating loss carry-over (NOLCO) in the income tax return (also in the Reconciliation Section thereof); and

  • Present unused NOLCO in the Notes to the Financial Statements showing, in detail, the taxable year when the net operating loss was incurred and any amount thereof claimed as NOLCO deduction within 5 consecutive years immediately following the year of such loss.

  • Failure to comply with these requirements shall disqualify the taxpayer from claiming the NOLCO.

(Revenue Regulations No. 25-2020, published 2 October 2020)

Unpaid debts

DST exemption of loan term extensions or restructuring

The BIR issued regulations implementing Section 4(uu) of the Bayanihan to Recover as One Act regarding the documentary stamp tax (DST) exemption of loan term extensions or restructuring.

The regulations provide as follows:

• No additional DST, including those under Sections 179, 195 and 198 of the Tax Code, shall be imposed on the following:

  • all extensions of payments and/or maturity period of all loans including salary, personal, housing, commercial and motor vehicle loans, amortizations, financial lease payments, premium payments and credit card payments falling due or any part thereof on or before
    31 December 2020;

  • extensions of maturity periods resulting from the grant of grace periods whether or not such maturity periods originally fall due on or before 31 December 2020; and

  • credit restructuring and micro-lending including those obtained from pawnshops and extensions thereof made on or before 31 December 2020

• Interbank loans and bank borrowing shall be subject to the DST imposed under Sections 179, 195 and 198 of the Tax Code.

(Revenue Regulations No. 24-2020, published 2 October 2020)

Short notice

Replacing the Notice of Informal Conference with the Notice of Discrepancy

The BIR amended Revenue Regulations No 12-1999 by replacing the Notice of Informal Conference with the Notice of Discrepancy. Here are the features of the Notice of Discrepancy:

• If a taxpayer is found liable for deficiency taxes in the course of a tax investigation, the taxpayer shall be issued a Notice of Discrepancy (NOD) and invited to a Discussion of Discrepancy within five (5) days from receipt of the NOD in order to present and explain its side and submit supporting documents.

• The Discussion of Discrepancy shall not exceed thirty (30) days from receipt of the Notice of Discrepancy. If the taxpayer disagrees with the findings, it must present its explanations and submit supporting documents within said 30-day period.

• If, after the Discussion of Discrepancy, the taxpayer is still liable for deficiency taxes, the investigating BIR office shall endorse the case for issuance of a Preliminary Assessment Notice within ten (10) days from the conclusion of the discussion.

• Revenue Memorandum Circular No. 102-2020 prescribes the revised format of the Notice of Discrepancy.

• If an authorized representative will appear during the Discussion of Discrepancy, he/she should present written proof of authorization.

(Revenue Regulations No. 22-2020, published 17 September 2020 and Revenue Memorandum Circular No. 102-2020, issued 25 September 2020)

IPO tax

Repeal of the percentage tax on share transfers via initial public offering

The BIR issued regulations to implement Section 6 of the Bayanihan to Recover as One Act which repealed the tax under Section 127(B) of the Tax Code on shares of stock sold, bartered, exchanged or disposed through initial public offering (IPO). Hence, such sale, barter, exchange or disposition shares in closely held corporations through IPO shall no longer be subject to the percentage tax imposed by Section 127(B) of the Tax Code.

(Revenue Regulations No. 23-2020, published 2 October 2020)

Voluntary contribution

Launching the Voluntary Assessment and Payment Program for taxable year 2018

The BIR is offering a Voluntary Assessment and Payment Program (VAPP) for taxable year 2018. Here are the VAPP guidelines and subsequent clarifications:

1. VAPP Benefits

   1. A taxpayer who pays the additional tax under the VAPP and secures a duly issued Certificate of Availment shall not be audited for taxable year 2018.

   2. In case there is already an ongoing tax investigation, the Letter of Authority, Tax Verification Notice, Discrepancy Notice, Notice for Informal Conference, Preliminary Assessment Notice or Final Assessment Notice shall be withdrawn and cancelled.

   3. The payment of the VAPP tax shall not be deemed as an admission that there was fraud in the declaration of taxes and/or there was an intention to pay the tax erroneously.

2. For purposes of the VAPP, taxable year 2018 covers:

   1. taxable year ending 31 December 2018; and

   2. fiscal years ending on the last day of the months of July 2018 to June 2019.

3. All taxes are covered including One-Time Transaction (ONETT)-related taxes. Availment should cover all tax types and is not allowed on a piece-meal or per tax-type basis. However, the VAPP can be availed for ONETT-related taxes only.

4. All taxpayers who erroneously paid taxes or failed to file tax returns/pay taxes during 2018, with or without a tax investigation, may avail of the VAPP except:

1. Those who have already received Final Assessment Notices that have become final and executory;

2. Persons under investigation as a result of verified information filed by a Tax Informer;

3. Those with cases involving tax fraud filed and pending with the Department of Justice or in the courts; and

4. Those with pending cases involving tax evasion and other criminal offenses.

1. The period of availment of VAPP benefits is until 31 December 2020. If the VAPP tax is paid before 31 December 2020 but the application is submitted after such date, the VAPP can still be considered as timely availed of.
   

2. To avail the VAPP benefits, the following requirements should be submitted:

   1. Duly accomplished Application Form (BIR Form No. 2119);

   2. Payment Form (BIR Form No. 0622) with proof of payment;

   3. Additional submissions

      1. For taxpayers availing the VAPP for income tax, value-added tax (VAT), percentage tax, excise tax and documentary stamp tax (DST) (except ONETT-related DST)

         1. 2017 tax returns with proof of payment

         2. 2018 tax returns with proof of payment

         3. 2018 audited financial statements

      2. Those who failed to file tax returns and/or pay their taxes in 2018 should first file the unfiled tax returns and/or pay the unpaid taxes plus corresponding penalties for late filing and payment

      3. For taxpayers availing the VAPP for final withholding tax (FWT) and creditable withholding tax (CWT) (except ONETT-related CWT)

         1. 2018 CWT returns

         2. 2018 FWT returns

      4. For taxpayers availing the VAPP for estate tax, donor’s tax, capital gains tax and ONETT-related CWT and DST

         1. ONETT tax returns with documentary requirements for the ONETT

         2. Copy of duly paid BIR Form No. 0605 and proof of payment representing any settlement of previous deficiency tax, with or without an assessment notice, covering taxable year 2018

3. Determination and computation of VAPP tax

   1. For taxpayers availing the VAPP for all taxes, the VAPP tax with respect to income tax, VAT, percentage tax, excise tax and DST (except ONETT-related DST) ranges from 1% to 5% of gross sales or 5% to 9% of net taxable income, whichever is higher, depending on the percentage increase or decrease of total taxes due from 2017 to 2018.

   2. Minimum VAPP tax amounts have been fixed ranging from PHP100,000 to PHP1m depending on the amount of subscribed capital of stock corporations. For individuals, estates, trusts and other juridical entities, the minimum VAPP tax is PHP75,000.

   3. The VAPP tax with respect to FWT and CWT (except ONETT-related CWT) is equivalent to 5% of total basic withholding tax remittance during 2018.

   4. For taxpayers availing the VAPP for estate tax, donor’s tax, capital gains tax and ONETT-related CWT and DST, the VAPP tax is equivalent to the basic tax due plus 5% thereof.

   5. Gross sales are equivalent to sales net of sales returns, allowances and discounts per annual income tax return.

   6. If the taxpayer is only in its first year of operations, it will be classified under “net increase of more than 30%” for purposes of determining the VAPP tax.

   7. Improperly accumulated earnings tax will be included in computing the percentage increase/decrease.

   8. If ONETT assessment only involves penalties, the VAPP tax shall be 5% of the basic tax paid.

   9. If net VAT due was a negative amount, total taxes due for the year should not be reduced by such negative amount for purposes of computing the percentage increase/decrease.

   10. Any payments for basic deficiency taxes assessed for 2017 shall not be added to taxes due for 2017 for purposes of computing the percentage increase/decrease.

4. A taxpayer who failed to withhold and remit taxes in 2018 may avail of the VAPP on the condition that the amount not withheld and not remitted is paid.

5. The VAPP tax may be made in cash or in check provided that the same conforms with BIR requirements. Payment through Tax Remittance Advice is not considered as cash payment.
   

6. Procedure

   1. Payment of the VAPP additional tax using Payment Form (BIR Form No. 0622)

   2. Submission of the above requirements to the concerned Large Taxpayers (LT) office or Revenue District Office either personally or through courier

   3. The assigned Revenue Officer has 30 working days to evaluate the application.

   4. The application will be reviewed by the Assistant Chief, LT office/Assistant Revenue District Officer and approved by the Chief, LT office/Revenue District Officer who will sign the BIR Form No. 2119.

   5. The taxpayer will be notified via email in case deficiencies and defects are noted during review, in which case, the taxpayer has ten working days to rectify/comply.

   6. The Certificate for Availment shall be issued within three working days from approval of the application.

7. If there are deficiencies or defects in the availment, the BIR will notify the taxpayer through the email address provided in BIR Form No. 2119 within fifteen (15) working days from receipt of the application. The taxpayer must rectify the defects and/or remedy/pay the deficiencies within ten (10) working days from receipt of the notification email.  Otherwise, the application will be recommended for disapproval.

8. Despite the issuance of a Certificate of Availment, the availment of the VAPP shall be rendered invalid and a tax investigation shall be triggered in the following instances:

   1. When there is strong evidence or findings of under-declaration of sales, receipts or income or overstatement of deductions by more than 30% based on a written report of the appropriate revenue official stating the facts with supporting documents; and/or

   2. When there is verifiable information that the taxpayer has withheld but failed to remit withholding taxes.

In such case, however, the VAPP tax paid may be applied against any deficiency taxes assessed during the tax investigation.

1. If a taxpayer with Final Assessment Notice has a VAPP Certificate of Availment, an Authority to Cancel Assessment should be approved and issued.

2. The internal BIR policies, guidelines and procedure in the processing of VAPP applications are detailed in Revenue Memorandum Order No. 39-2020.

For purposes of the collecting the VAPP tax, the BIR has advised all Authorized Agent Banks to accept BIR Form No. 0622 (VAPP Payment Form) and follow the procedures in Bank Bulletin No. 1-2018.

(Revenue Regulations No. 21-2020, published 5 September 2020 and Revenue Memorandum Circular No. 111-2020, issued 15 October 2020, Revenue Memorandum Order No. 39-2020, issued 26 October 2020 and Bank Bulletin No. 14-2020, dated 11 September 2020)

Bittersweet

Mandatory filing of BIR Form No. 2200-S in the eFPS

The BIR issued guidelines and procedures in filing BIR Form No. 2200-S in the eFPS for excise taxes on sweetened beverages to address the following scenarios:

1. Scenario 1 - With beginning balance of PHP1m and additional payment of PHP1m for payment on
   16 July 2020

2. Scenario 2 - With PHP2m carried forward balance from Scenario 1 and application of Excise Tax Due for Plant A (assumed at PHP450,000) for the same day, 16 July 2020

3. Scenario 3 - With PHP1.55m carried forward balance from Scenario 2, application of Excise Tax Due for Plant B (assumed at PHP300,000) for the same day, 16 July 2020 and additional tax payment of PHP1m for payment on the same day, 16 July 2020

4. Scenario 4 - Filed tax return for the immediately preceding day, 15 July 2020

Using the above scenarios, Revenue Memorandum Circular No. 114-2020 provides for detailed steps and procedures on the filings:

• for a deposit/advance payment;

• for the removal of excisable articles of Plant A;

• for the removal of excisable articles of Plant B with deposit/advance payment; and

• of tax return for the immediate preceding date or a later date for Plant C removal.

(Revenue Memorandum Circular No. 114-2020, issued 20 October 2020)

Validity date

Taking effect upon publication in the Official Gazette website

The Commissioner of Internal Revenue published the letter dated 18 August 2020 from the Department of Finance clarifying that the complete publication of Republic Act (RA) No. 11467 in the Official Gazette website complies with the publication requirement. Hence, the effectivity date of RA No. 11467 is
23 January 2020, the date of publication in the Official Gazette website.

Accordingly, Revenue Memorandum Circular No. 65-2020 which provided for a 27 January 2020 effectivity date is hereby amended.

(Revenue Memorandum Circular No. 113-2020, issued 19 October 2020)

Interim measures

Clarifications regarding the suspended list of Large Taxpayers

In connection with the postponement of the effectivity of the enlisted and delisted taxpayers of the Large Taxpayers Service (LTS) to 1 January 2021, the BIR clarified as follows:

• All transactions of affected taxpayers shall be handled by the Revenue District Offices or concerned offices of the LTS where they are registered prior to 1 July 2020.

• All Certificates of Registration issued on or after
  1 July 2020 to affected Large Taxpayers shall be valid and may be posted at the principal place of business.

• Principal and supplementary receipts/invoices printed based on duly approved Authority to Print issued on or after 1 July 2020 shall remain valid.

(Revenue Memorandum Circular No. 112-2020, issued 16 October 2020)

Getting served

Clarifying the proper service of the electronic Letter of Authority

The BIR issued the following clarifications regarding the proper service of the electronic Letter of Authority (eLA):

1. The eLA shall be served through personal service by delivering a copy of the eLA at the taxpayer’s registered address or known address which is either a place other than the registered address where business activities are conducted or the place of residence.

Personal or substituted service shall be effected by the assigned Revenue Officer or by any BIR employee duly authorized for the purpose.

1. If personal service is not possible, the eLA shall be served either by substituted service or by mail.

Substituted service can only be resorted to when the party is not present at the registered or known address and shall be done as follows:

1. By leaving the eLA at the registered address with his clerk or with a person having charge thereof;

2. If the known address is a place where business activities are conducted, by leaving the eLA with his clerk or with a person having charge thereof;

3. If the known address is the place of residence, by leaving the eLA with a person of legal age residing therein;

4. If no person is found in the registered or known address, by bringing a barangay official and two disinterested witnesses to the address to attest to such absence and giving an original copy of the eLA to the barangay official; or

5. In case of refusal to receive the eLA, by bringing a barangay official and two disinterested witnesses to the address to attest to such refusal and giving an original copy of the eLA to the barangay official.

Service by mail shall be done by sending a copy of the eLA through registered mail, reputable professional courier services, or ordinary mail, if no registry or reputable courier is available.

1. Personal service shall be complete upon actual delivery of the eLA to the taxpayer or his representative. Service by registered mail is complete upon actual receipt by the taxpayer or after five days from the date of receipt of the first notice of the postmaster, whichever date is earlier. Service by ordinary mail is complete upon the expiration of ten days after mailing.

2. Service to the appointed or authorized tax agent/practitioner shall be deemed service to the taxpayer.

(Revenue Memorandum Circular No. 110-2020, issued 6 October 2020)

Codes

Modified and new ATCs for excise taxes, the VAPP and Fuel Marking Program

The Commissioner of Internal Revenue has modified/created the following Alphanumeric Tax Codes (ATCs):

1. Excise taxes in BIR Form No. 2200-M (Excise Tax Return for Mineral Products):

Medicinal value

Guidelines and procedures in the refund of VAT paid on VAT-exempt drugs

The Commissioner of Internal Revenue prescribed uniform policies, guidelines and procedures in the processing, verification, approval and payment of claims for refund of erroneously paid VAT on imported drugs prescribed for diabetes, high cholesterol and hypertension as implemented by Revenue Regulations No. 18-2020. The policies, guidelines and policies provide for the following:

• The claims for refund for erroneously paid VAT cover imported drugs included in the approved DOH-FDA list from 23 January 2020 up to 9 July 2020.

• The claim for refund or credit must be filed within two years after the payment of the tax with the Revenue District Office or Large Taxpayers Audi Division where the taxpayer-claimant is registered.

• Documentary requirements

• Procedure for the processing and verification of claims

(Revenue Memorandum Order No. 36-2020, issued 15 October 2020)

Digital PERA

How overseas Filipinos can secure TINs for purposes of investing in the PERA

The BSP and BIR launched the Digital Personal Equity and Retirement Account (PERA) platform which requires overseas Filipino investors to secure Taxpayer Identification Numbers (TINs) before they can open a bank account and become eligible to invest in the PERA. In this light, overseas Filipinos may apply for TIN/registration through the following:

1. Manually, through an authorized representative

The BIR Form No. 1904 duly stamped received indicating the TIN issued shall serve as proof of registration.

1. Via electronic mail (email) at rdo_39css@bir.gov.ph by the overseas Filipino himself/herself

The acknowledgment receipt/reply to the email is sufficient proof of receipt of the application.

Overseas Filipinos shall not be issued any TIN card.

(Revenue Memorandum Circular No. 103-2020, issued 29 September 2020)

Cheap cure

Supplement to the initial list of VAT-exempt drugs

The BIR has published the Food and Drug Administration (FDA) letter dated 28 May 2020 containing the Addendum to the List of VAT-Exempt Drugs for Hypertension, Diabetes and High Cholesterol. This is a supplement to the initial list of VAT-exempt drugs in the FDA letter dated 2 March 2020 and published in Revenue Memorandum Circular No. 62-2020.