PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT Pampanga Chapter

PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT Pampanga Chapter TAX UPDATES and SUGGESTED TAXPAYERS STRATEGIC ACTIONS ATTY. RAYMUND S. GALLARDO, CPA August 18, 2017 1

OUTLINE I. REVENUE ISSUANCES ( January – July 2017) A. Revenue Regulations B. Revenue Memorandum Order C. Revenue Memorandum Circular II. COURT DECISIONS (January – July 2017) III. TAXPAYERS STRATEGIC ACTIONS 2

Revenue Issuances I. Revenue Regulations (RR) II. Revenue Memorandum Order (RMO) III. Revenue Memorandum Circular (RMC) 3

RR 1 -2017 - Rules governing VAT credit/refund application pending prior to RMC 54 -2014 ( Jan. 18, 2017) BACKGROUND: RMC 49 -2003 – Provides that it is only upon the submission by the claimant of the complete documents that the 120 day period to administratively process the claim commences. RMC 54 -2014 – Provides that the Commissioner have 120 days from date of submission of complete documents to grant or deny claim. It also provides that application of the claim must already be accompanied by complete documents and claimant is barred from submitting additional documents after filing of application. It further provides that inaction by the Commissioner within 120 days is deemed a denial of the claim. Pilipinas Total Gas vs BIR – SC rules that taxpayers have every right to pursue their claims in the manner provided by existing regulations at the time it was filed. RMC 54 -2014 cannot be applied retroactively 4

RR 1 -2017 - Rules governing VAT credit/refund application pending prior to RMC 54 -2014 The VAT application filed and pending prior to the effectivity of RMC 54 -2014 shall be processed and approved under the following rules: 1. Claimant has 2 years after the close of the taxable quarter to apply for refund/credit and to submit complete documents in support of the application 2. The Commissioner will decide on the claim within 120 days from the date of submission of complete documents or from date of filing of application if claimant did not submit additional documents. And the result shall be communicated in writing by the concerned revenue official. Hence, claims made prior to RMC 54 -2014 shall be processed based on available documents submitted within the 2 year period. 5

RR 1 -2017 - Rules governing VAT credit/refund application pending prior to RMC 54 -2014 Claims filed and pending before RMC 54 -2011 not covered by RR 1 -2017: a. Claims filed beyond the 2 year prescriptive period b. Claims denied in writing by the approving authority c. Claims approved and granted fully/partially by approving authority d. Claims appealed to and pending with the CTA unless there is proof of withdrawal from CTA 6

RR 2 -2017 - Payment of Taxes through credit/debit/prepaid card (Feb. 8, 2017) Payment of taxes through credit/debit/prepaid cards is deemed made and received by BIR on the date and time appearing in the system generated payment confirmation receipt issued by the authorized agent bank In case of late or non-remittance to the BIR by the agent bank despite the issuance of the confirmation receipt, the liability rest on the agent bank considering that the latter is deemed the trustee of the government to remit payment to the BIR. 7

RR 3 -2017 - Tax Provision of Republic Act (RA) No. 10693 “Microfinance NGOs Act” (Feb. 24, 2017) Requirements to avail the preferential tax treatment/incentive: 1. Secure a Certificate of Accreditation from the Microfinance Regulatory Council 2. Must be a non stock, non profit organization with a capital contribution of at least 1 million 3. The Articles of Incorporation shall specifically state the following: a. The word “Microfinance” indicated in the corporate and trade name b. Non stock, non profit c. Primary purpose is to implement a microenterprise development strategy and provide microfinance program, products and services for the poor. d. Upon dissolution, net assets shall be distributed to another NGO organized for same purpose , or the State for public purpose or as maybe determined by the court of justice 8

RR 3 -2017 - Tax Provision of Republic Act (RA) No. 10693 “Microfinance NGOs Act” (Feb. 24, 2017) Requirements to avail the preferential tax treatment/incentive: 4. The Articles of Incorporation shall specifically state the following: e. No part of the property or income shall inure to the benefit of any member, officer, organizer or any individual person f. Trustees shall not receive any compensation or remuneration, except reasonable per diem g. Administrative expense shall not exceed 30% of the total expenses for the taxable year 9

RR 3 -2017 - Tax Provision of Republic Act (RA) No. 10693 “Microfinance NGOs Act” (Feb. 24, 2017) Tax Provisions: 1. 2. 3. 4. 5. Subject to the preferential GRT rate of 2% and in lieu of all national taxes The 2% GRT is based on gross receipts only from its lending activities and insurance commission bundled or forming part of the qualified lending activities of the Microfinance NGO All other income shall be subject to all applicable taxes It shall also be constituted as a withholding agent – compensation and income payments Its books of accounts and other pertinent records is subject to periodic examination by the BIR 10

RR 4 -2017 - Rules on the issuance of ATRIG on imported vehicles already released from customs territory (Mar. 7, 2017) Automobiles subsequently sold or transferred to a non-exempt persons, including the introduction or re-introduction into customs territory , the purchaser or transferee, owner/possessor of the automobiles shall be considered the importer and is liable for the Excise Tax on importation Foreign embassies or recognized international organizations should first secure a one-time ruling confirming exemption from ATRIG on the importation of automobiles with ITAD of the BIR before release of imported automobiles from customs custody. 11

RR 5 -2017 – Rules implementing RA 10754 “An Act Expanding the Benefits and privileges of PWD” (Apr. 20, 2017) BENEFITS GRANTED: 1. Discount of 20% on the sale of goods and services for the exclusive use, enjoyment and availment of the PWD. ( Exclusive List) - Hotels, restaurants and recreation centers - all drugstores in the purchase of generic and branded medicines - medical and dental services including diagnosis and lab fees - domestic air and sea transport ( whichever is higher between the 20% discount or offered discount - land transport -Funeral and burial services 12

RR 5 -2017 – Rules implementing RA 10754 “An Act Expanding the Benefits and privileges of PWD” (Apr. 20, 2017) BENEFITS GRANTED: 2. The discount is claimed as a deduction from gross income 3. Establishments are required to keep record of sale indicating Name, PWD ID card number, gross sales/receipt, discount granted, date of transaction, invoice number for the discount to be allowed as deduction 4. For percentage taxpayers, the discount shall be excluded in computing the 3% percentage tax but included as part of gross sales and shall be accounted as a deduction from gross income (operating exp) 5. The discount is considered necessary and ordinary expense deductible (part of itemized deduction) from gross income and cannot be accounted as deduction for OSD 6. The discount cannot be claimed in addition or in combination of other discounts 7. Sales are considered VAT exempt. The input tax attributed to the sale is considered part of cost or expense 13

RR 5 -2017 – Rules implementing RA 10754 “An Act Expanding the Benefits and privileges of PWD” (Apr. 20, 2017) BENEFITS GRANTED: 8. The exemption from business tax does not cover indirect taxes passed on by the seller such as percentage tax, excise tax, etc. 9. Effective 2016, the benefactor of a qualified PWD may claim additional exemption of P 25, 000 . However, benefactor should not claim more than 4 additional exemption 14

RMO 7 -2017 – Procedures for claiming tax treaty benefits for dividend, interest and royalty income of non-resident earners ( Mar. 28, 2017) In lieu of the mandatory TTRA , the preferential treaty rates on dividends, interests and royalties shall be applied and used outright by the withholding agents (withholding final tax) upon submission of the Certificate of Residence for Tax Treat Relief ( CORTT) Form by the non-resident or the certificate of residency by the non resident issued by their country. CORTT form for dividend is valid for 2 years from date of issuance unless the certificate of residency of the country of residence used is more than 2 years. CORTT form for interest and royalty income is valid per contract. 15

RMO 7 -2017 – Procedures for claiming tax treaty benefits for dividend, interest and royalty income of non-resident earners ( Mar. 28, 2017) Compliance check and confirmation of appropriateness of the availment of the treaty rates shall be part of the regular audit investigation Non compliance and failure to supply accurate and complete information in the CORTT and BIR Forms 1601 F and 1604 F shall be a ground for denial of the use of the preferential treaty rates and disallowance of the expense 16

RMC 8 -2017 – Tax treatment of VAT on government money payments of OECF-Funded Projects between the Governments of the Philippines and Japan ( Jan. 11, 2017) Under the Exchange of Notes, Japanese suppliers, contractors and national engaged in OECD-funded projects in the Phil. are not required to shoulder any fiscal levies and/or taxes associated to the project, and all taxes associated with the project shall be assumed by the executing government agencies. Thus VAT registered suppliers and subcontractors of the Japanese Companies shall pass the same to the Japanese Company and in turn the Japanese Company shall include in their billing the vat and pass it on to the concerned executing agencies of the Phil. Since the VAT is passed on to the executing agencies of the Phil. , the Japanese company can claim input taxes and shall be credited against the output vat passed on to the government of the Philippines. 17

RMC 18 -2017 – Issuance of Certificate of Tax Exemption to Service Cooperatives ( Mar. 1, 2017) Service Cooperatives can avail of the tax incentives provided under RA 9520 provided they are duly registered with the Cooperative Development Authority and have been issued the Certificate of Good Standing to show that they are bona fide cooperatives falling under RA 9520. Service Cooperatives are subject to post audit verification to check on whether or not they are just being used as a tax shield to avoid payment of taxes. Fully compliant service cooperatives maybe given tax exemption certificate 18

RMC 27 -2017 – Clarifies that the tax on sale, exchange or other disposition of capital or ordinary asset shall be based on the gross selling price or current FMV whichever is higher ( Mar. 28, 2017) In no case shall the BIR apply any other basis for the imposition of Capital Gains Tax / Withholding tax on the sale, exchange or other disposition of real property other than the GSP or current FMV as determined in accordance with Section 6(E) of the Tax Code – Zonal value, whichever is higher. 19

RMC 35 -2017 – Clarifies the imposition of Capital Gains Tax on the sales, exchanges or transfers of real properties classified as capital assets ( Apr. 27, 2017) A final tax of 6% is imposed on the capital gains presumed to have been realized by the seller from the sale, exchange or other disposition of real properties classified as capital assets based on the gross selling price or FMV, whichever is higher. The mere issuance of a tax declaration in the absence of any sale, exchange or other forms of conveyance is not subject to CGT. The payment of CGT is dependent and is a direct consequence of the sale or transfer. It is not the transfer of ownership or possession per se that subjects the sale or transfer to CGT but the profit or gain presumed to have been realized by the seller by means of said transfer. 20

RMC 38 -2017 – Clarifies the imposition of taxes upon Freeport and Economic Zone Enterprises ( May 5, 2017) The Supreme Court in the case BIR vs. Ecozone Plastic Enterprises Corporation ( G. R. No. 210588) declares RR 2 -2012 as null and void and unconstitutional because it illegally imposes tax upon Freeport and Economic Zones enterprises , which by law enjoy tax exempt status and by doing so effectively amends the law ( RA 7227 as amended by RA 9400) thereby encroaching upon the legislative authority reserved exclusively for Congress by the Constitution. 21

COURT DECISIONS 22

Coral Bay Nickel Corp vs. CIR CTA case No. 8756 January 13, 2017 The Filing of a TTRA is not necessary before a taxpayer can avail of the preferential tax treatment under a Tax Treaty The TTRA filed with the BIR merely serves as a request for confirmation of the taxpayer’s entitlement to the relief granted under the tax treaties. The filing thereof is not a prerequisite to, and should not affect, the taxpayer’s right to avail of the preferential tax treatment granted pursuant to the tax treaty. Treaties are binding obligations of the State and the imposition of additional conditions for the availment of the benefits therein is unconstitutional 23

Mc. Kinsey & Co. Phils vs. CIR CTA case No. 8805 January 13, 2017 Proof of actual remittance is not a condition sine qua non for claiming a refund of unutilized tax credit Sections 57 and 58 of the Tax Code provides that the duty to withhold and remit income taxes is vested with the payor-withholding agent. The failure of the withholding agent to remit taxes so withheld should not prejudice the payee. In such case, the Certificates of Creditable Tax Withheld at Source issued by the withholding agent to the payee are prima facie proof of actual payment to the government and is sufficient to support taxpayer’s claim for refund. 24

Mannasoft Corp. vs. CIR CTA case No. 8805 January 13, 2017 Proof of actual remittance is not a condition sine qua non for claiming a refund of unutilized tax credit Sections 57 and 58 of the Tax Code provides that the duty to withhold and remit income taxes is vested with the payor-withholding agent. The failure of the withholding agent to remit taxes so withheld should not prejudice the payee. In such case, the Certificates of Creditable Tax Withheld at Source issued by the withholding agent to the payee are prima facie proof of actual payment to the government and is sufficient to support taxpayer’s claim for refund. 25

CIR vs. ST. LUKES MEDICAL CENTER INC. SC Case G. R. 203514 February 13, 2017 An institution to be completely exempt from income tax under Sec. 30(E) and (G) of the Tax Code, requires said institution to operate EXCLUSIVELY for charitable or social welfare purpose. SLMC does not operate exclusively for charitable or social welfare purposes in so far as its revenue from paying patients are concerned. As such it failed to meet the requirements under Sec 30 (E) and (G) of exclusively operating for charitable or social welfare purposes. However, it does not lose its exemption on activities that are for charitable and social welfare purposes but its income from “for-profit” activities will be subject to the preferential rate of 10% pursuant to Sec. 27 (B) as a proprietary non-profit hospital. 26

San Paolo Dev Corp. vs. CIR CTA Case EB No. 1388 Mar 15, 2017 A property continues to be classified as an ordinary asset and is not converted into a capital asset even if the same has not been used and remained idle. San Paolo is engaged in a real estate business and sold a parcel of land it classified as a capital asset because it remained vacant and idle. This was subjected to income tax, vat and EWT as the court considered is as an ordinary asset pursuant to RR 1 -2013 , to wit; “ Sec 3 (e). Treatment of abandoned and idle real properties – Real properties formerly forming part of the stock in trade of a taxpayer engaged in real estate business, or formerly being used in trade or business of a taxpayer engaged or not engaged in real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary asset. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. “ 27

CIR vs. Global Quickservice Restaurant Inc. CTA Case EB Nos. 1393 and 1405 Mar 15, 2017 Compromise penalty is voluntary and cannot be imposed without the Taxpayer’s (TP) consent Even if the TP partly paid the compromise penalty, it may not be imposed or exacted in the event the TP refuses the same. It is well-settled that the Court has no jurisdiction to compel a TP to pay the compromise penalty because, by its very nature, it implies a mutual agreement between the parties in respect to the thing or the subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the TP. The imposition of the same without the conformity of the TP is illegal and unauthorized. 28

CIR vs. Starmash Badminton Center CTA Case EB No. 1379 Mar 23, 2017 Requisites of constructive service of assessment notice Constructive service maybe effected by: 1. Leaving the same in the premises of the taxpayer 2. The fact of constructive service should be attested to, witnessed and signed by at least 2 revenue officers other than the revenue officer who constructively served the same 3. The revenue officer who constructively served the same shall make a written report on the matter which shall form part of the docket of the case. 29

Modern Imaging vs. CIR CTA Case EB No. 8987 Mar 21, 2017 When the taxpayer opted not to submit supporting documents in his assessment protest It is the taxpayer who determines what documents are relevant and necessary to support its protest. Should the taxpayer decide not to submit any supporting documents within 60 days from the date of filing the protest, the same does not render the assessment final and executory and the 180 day period shall be counted from the date of filing the protest. 30

CIR vs. Daily Inquirer SC G. R. No 213943 Mar 22, 2017 Clarifying the grounds when to apply the 10 -year prescriptive period In this case, the BIR issued the vat and income tax assessment after the lapse of the 3 year prescriptive period The entry of wrong information due to mistake, carelessness or ignorance without the intent to evade taxes does not constitute a false return 31

Medicard vs. CIR SC G. R. No 222743 April 5, 2017 HMOs should pay VAT on receipts net of payments to medical service providers The HMOs membership fees are allocated into 80% for the medical utilization and the remaining 20% for the sale of services. The court ruled that the services rendered by an HMO is primarily to arrange for the coverage or to manage care services to its members. It is this service that is taxable under the NIRC. Gross receipts for VAT purposes is limited only to the amount that the taxpayer receive for the services it performed. Part of the membership fees allocated or earmarked as fiduciary funds for medical utilization of its members is excluded from computing the receipts subject to VAT. 32

Asia Trust Dev. Bank vs. CIR SC G. R. No 201530 ( Apr 19, 2017) Abatement is approved via termination letter The taxpayer’s claim that it had settled its tax liabilities thru abatement is erroneous because the taxpayer did not present a termination letter from the BIR. Under the guidelines, the last step in the tax abatement process is the issuance of the termination letter which proves the approval of the taxpayer’s application for tax abatement. In this case, the taxpayer presented a BIR certificate recognizing their payment of certain taxes but failed to present a termination letter. 33

General Motors Phil. vs. CIR CTA Case No. 8976 ( May 2, 2017) Official Receipts should indicate nature of service to claim input tax The court disallowed the taxpayer’s claim for input VAT for failure to indicate the nature of business of the services rendered in the supporting official receipts, which is in violation of Sec. 113 (B) (3) of the Tax code. The Court only allowed the input VAT claim that complied with the invoicing requirement. 34

Lepanto Consolidated Mining Co. vs. CIR CTA Case No. 8889 ( May 8, 2017) Financial Losses is a ground for compromise of penalties but not for abatement Taxpayer requested for abatement of penalties on his tax liabilities assessed on the ground of continuous losses from 2006 -2010. Court ruled that while continuous losses maybe a ground for compromise as it may demonstrate the taxpayer’s inability to pay the assessed tax, it is not a ground for abatement. Abatement or cancellation of tax penalties on the bases of excessive or erroneous assessment maybe granted in 2 instances : (1) when the assessed tax or penalty has been levied without statutory authority or without a legal anchor, (2) when the tax or penalty appears to have been assessed beyond or outside the limits of statutory authority. Both conditions are not present in the case. 35

CIR vs. Merial Philippines Inc CTA EB No. 1398 ( May 9, 2017) Proper observance of response period to the assessment notice CTA held that the BIR violated the company’s right to due process, resulting to the nullification of the FLD issued. This is because the FAN/FLD was issued a mere 9 days after the PAN was received by the taxpayer. RR 12 -99 provides for a 15 day period for taxpayer to respond to or protest the PAN. Failure of the tax authority to observe the lapse of said period prior to issuing the FAN deprives the taxpayer of due process. 36

CIR vs. Phil. Bank of Communication CTA EB No. 1421 and 1423 ( May 23, 2017) CWT with erasures cannot support a refund claim The Court disallowed the claims for refund supported by BIR Form 2307 that are without TIN , with erasures or with countersignature different from the signature appearing in the blank provided for in the space “ Payor/Payor’s representative”. The TIN servers as the identification of the taxpayer in relation to their payment with the BIR. Without the TIN, it cannot be verified if the taxpayer had paid the correct amount of taxes. Claims for refund or credit are strictly construed against the taxpayer. Hence claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. 37

CIR vs. IP Contact Center CTA EB no. 1415 ( June 5, 20187) Validity of waiver cannot be questioned if both parties are in pari delicto In this case, the first waiver was issued beyond the prescriptive period. The Court noted that by virtue of the waiver, the taxpayer was given time to submit additional documents and argue its case. Taxpayer was able to defer payment of the assessed taxes. Yet, the taxpayer challenged the validity when the effect is not in its favor. The BIR, on the other hand, despite having knowledge of the rules governing waivers, did not raise the issue on the defect and proceeded to issue as assessment. Considering that the waiver of statute of limitation is, in law and in fact, a bilateral agreement between CIR and the taxpayer, both of them should thus be held responsible in ensuring that their agreement faithfully complies with the law. Failing which, they should both suffer the consequences. Since both did not challenge the waiver’s defect, in order to pursue their own interest, they are already estopped from raising the issue of the waiver’s defect. 38

BJ Well Services Co. vs. CIR CTA Case no. 8859 ( June 5, 20187) Documentation of input VAT from prior periods in a claim for VAT refund The Court was correct when it disallowed input vat carry over as part of the refund application for failure to present VAT invoices or receipts to prove existence of such input VAT. Pursuant to Sec. 110 (A) (1) and (B), input tax is creditable against the output vat if it is evidenced by a VAT invoice or receipt. Failure to support prior year’s input vat with the corresponding invoices or receipts can result to a denial of the claim for refund of input VAT from current period. Tax refunds/credit are construed strictly against the taxpayer. Tax refunds are in the nature of tax exemption, hence the taxpayer has the burden of proof through submission of evidence that he has complied with the requirements in the NIRC and Revenue Regulations. 39

Century Peak Property and Kingsville Vs. Sec of Finance and CIR CTA Case no. 9145( July 24, 2017) Properties assigned in consideration of subscription of shares in a still to be formed corporation is not subject to VAT. BIR Certification Ruling SN 013 -2012 ruled that a Deed of Assignment executed involving the assignment of parcels of land in consideration of subscription of shares of stocks was considered subject to VAT as the transfer constitutes an exchange of property within the meaning of sale, barter, or exchange of property subject to VAT. The court ruled that the subject transaction is in the nature of preincorporation stock subscription and not a transaction-deemed sale. Further, the Tax Code (Sec 106) in line with Corporation Code (Sec 61 and 62) does not impose VAT on subscription of shares pursuant to incorporation of a corporation-still-to-be-formed. Also the assignment of properties was not a sale but an investment which should not be subject to VAT. 40

TAX REFORM FOR ACCELERATION AND INCLUSION (T R A I N ) HOUSE BILL 5636 41

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Sec. 5 Commissioner’s power to obtain information, and to summon, examine, and take testimony of persons Proposed Tax Reform Additional provisions on: a. Establishment of electronic interconnectivity by and among BIR, other national government agencies, LGUs and government agencies and instrumentalities that will allow relevant exchange of info. b. Publication of lists of TPs and filers in case data requirements consists of info found in the ITR c. Submission of a tax incentive report by the Cooperative Development Authority to the BIR and DOF. 42

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Proposed Tax Reform Sec 6 (F) Commissioner’s Revised/additional coverage: authority to inquire and receive taxpayer’s information a. A specific taxpayer or taxpayers, upon an held by financial institution obligation to exchange tax information to a foreign tax authority, whether on request or automatic; and b. Any taxpayer upon order of any competent court in cases involving tax evasion offenses. 43

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Proposed Tax Reform Secs. 22 (G) and (HH); Sec. 24 Removal of definition and tax exemption (A) (2) - On minimum wage provisions on earnings by MWEs, to wit: earners (“MWEs”) provisions a. income tax on their compensation, b. holiday pay, c. overtime pay, d. night shift differential pay and e. hazard pay 44

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Sec, 24 (A) (2) On personal income tax table Proposed Tax Reform Separate tax table: A. Compensation Income earners Effective January 1, 2018 Not over 250 K - 0% 250 K not over 400 - 20% in excess of 250 K 400 K not over 800 K- 30 K + 25% in excess of 400 K 800 K not over 2 mil - 13 o. K+30% in excess of 800 K 2 Mil not over 5 mil - 490 K + 32% in excess of 2 mil Over 5 mil - 1, 450 K + 35% in excess of 5 mil 45

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Proposed Tax Reform Sec, 24 (A) (2) On personal Separate tax table: income tax table Effective January 1, 2021 Not over 250 K - 0% 250 K not over 400 K - 15% in excess of 250 K 400 K not over 800 K – 22. 5 K + 20% in excess of 400 K 800 K not over 2 mil – 102. 5 K + 25% in excess of 800 K 2 mil not over 5 mil – 402. 5 K + 30% in excess of 2 mil Over 5 mil - 1, 450 K + 35% in excess of 5 mil Note: after 2022, income levels and base be adjusted every 3 years 46

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Proposed Tax Reform Sec, 24 (A) (2) On personal Separate tax table: income tax table B. Self-employed/Professionals Gross sales or receipts less than VAT of 3 Mil – 8% on gross sales or receipts in excess of 250 K (in lieu of percentage tax) Gross sales or receipts exceed 3 Mil – taxed as corporation as to rate, minimum income tax and allowable deductions Note: Professionals required to present either certificate of tax payment from BIR or CTC of latest ITR for renewal of license 47

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Proposed Tax Reform Sec, 24 (B) (1) On passive Removal of the tax exemption ( FWT of 20%) on income and other winnings from PCSO and Lotto Sec 25 ( C ), (D), and (E) On alien individuals and qualified filipinos employed by specific employers Sec 32 (B) (7) (e) On 13 th month pay and other benefits exemption Removal of 15% income tax on: a. Regional or Area HQ of multinational companies b. Offshore banking units c. Petroleum contractors and subcontractors Amount of income tax exemption of 13 th month pay and other benefits is increased to 100 K 48

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Sec. 33 (A) (1) (a) (i) On fringe benefit tax given to non-rank and file employees Proposed Tax Reform Effective January 1, 2018 , fringe benefit given to nonrank and file employees are subject to 30% final tax rate The gross up monetary value is determined by dividing the actual monetary value by 70% In 2022 onwards, fringe benefit will form part of the GI of reciepeint employees subject to regular income tax rates and the actual monetary value ( not grossed up) will be considered as allowable deduction 49

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Sec 34 (L) On optional standard deduction Proposed Tax Reform Deletion of OSD for individuals Note however that self-employed or professionals whose gross sales or receipts exceed the vat threshold (3 mil) shall be taxed as a corporation which are allowed OSD of 40 -% based on gross income 50

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (INCOME) Sec 34 (M) Additional personal exemption and health premium payments Proposed Tax Reform The following exemptions are removed: Personal exemption - P 50, 000 Additional Personal exemption – P 25, 000 per qualified child not exceeding 4 Extate or trust - P 20, 000 Premium payment on health/hospitalization – P 2, 400 per year or P 200 per month of premium payment 51

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (ESTATE TAX) Sec 84 On estate tax rates Proposed Tax Reform Removal of estate tax table Estate tax rate fixed at 6% based on net estate Sec 86 (A) (5) on family home deduction Famiy Home deduction for citizens and residents increased to 3 Mil with indexation every 3 years starting 2018 Sec 86 (B) Nonresident estate deduction from gross estate For nonresident estates- expenses, losses, indebtedness and taxes are removed from the list of allowable deductions from gross estate 52

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (DONORS TAX) Sec 99 (A) and (B) On donor’s tax rates Proposed Tax Reform Retention of the tax exemption on Php 100, 000 annual net gifts Removal of the donor’s tax table Donor’s tax rate fixed at 6% based on annual net gifts, regardless of whether the donee is a stranger or not 53

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Sec 106 (A) (2) On zerorated sales Proposed Tax Reform • Sale of gold to BSP is reclassified from export sales to zero rated sales • Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations will qualify as export sales provided these are used for international shipping and air transport operations • Foreign currency denominated sales are removed from zero-rated sales 54

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Sec 106 (A) (2) On zerorated sales of goods Proposed Tax Reform • Upon the establishment and implementation of an enhanced VAT refund system that gives the TP the actual refund or denial of the application within 90 days from filing of the refund application, the following are no longer export sales: 1. sale of raw or packing materials to non resident buyer for delivery to a resident local export-oriented enterprise 2. sale of raw or packing materials to exportoriented enterprise whose export sales exceed 70% of total annual production 3. Export sales under EO No. 226 and other special laws 55

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Sec 108 (A) On the defination of sale or exchange of services Proposed Tax Reform Inclusion of sale of electricity by electric cooperatives in the definition of sale or exchange of services 56

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Sec 108 (B) On zero rated sales of services Proposed Tax Reform • Services rendered to persons engaged in international shipping or international air transport operations will qualify as zero rated sales if these services are exclusively for international shipping and air transport operations • Zero rating for transport of passengers and cargo from Phil to foreign country shall also apply to domestic air and sea vessels • services performed by subcontractors/contractors in processing, converting or manufacturing of goods for an enterprise whose export sales exceed 70% of total annual production shall be subject to 12% vat upon the establishment and implementation of an enhanced vat refund system where refund is denied or actually given within 90 days from application of refund 57

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Sec 109 (1) On Vat Exemptions Proposed Tax Reform • Expansion of the importation exemption on professional instruments to include those belonging to overseas Filipinos and their families and descendants • Removal of exemption on sale of low cost housing ( P 1, 919, 500), other residential dwellings (P 3, 199, 200) , lease of residential unit ( P 12, 800/mo) • Exemption on the importation of fuel, goods and supplies shall only apply if such are used for international shipping or air transport operations • Additional exemption on sale or lease of goods and services to senior citizens and PWDs • VAT threshold increased to 3 Mil with indexation every 3 years starting 2021 • Sale of real property utilized for socialized housing subject to VAT upon the establishment of a housing voucher system which benefits buyers of socialized housing 58

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars (Expansion of VAT Base) Proposed Tax Reform Sec, 116 Tax on persons • Self employed and/or professionals whose gross sales exempt from vat ( sales less or gross receipts do not exceed the vat threshold shall than Vat threshold and not also be exempt from the 3% percentage tax vat registered – subject to 3%) 59

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adjustments Proposed Tax Reform in Excise Tax) Sec. 116 On excise tax of petroleum products • Increase in excise tax on manufactured oils and other fuel starting Jan. 1, 2018 and will increased again in Jan. 1, 2019 and Jan. 1, 2020 • Imposition of zero excise tax on LPG that is used as raw material in the production of petrochemical products or as a replacement fuel for natural gas firedcombined cycle power plant, in lieu of locally extracted natural gas during its unavailability • Excise taxes paid on the purchased feedstock (bunker) used in the manufacture of excisable articles shall be credited against the excise tax due thereon • Scheduled increase in excise tax on fuel covering 2018 to 2020 shall be suspended if Dubai Crude oil price reach US$80 per barrel or more 60

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adjustments Proposed Tax Reform in Excise Tax) On mandatory marking of All petroleum products shall be marked with the petroleum products ( new ) official marking agent designated by DOF Sec. 149 On excise tax on automibiles Increase will be made for 2 years: • Jan 1, 2018 – Rates will be 3%, 30%, 50%, 80% and 90% spread across the price range of 600 K to 3. 1 Mil • Jan 1, 2019 – Rates will be 4%, 40%, 60%, 100% and 120% spread across the price range 600 K to 1. 824 Mil Automobiles shall include motive powered vehicles but not (1) those powered purely by electricity (2) hybrid articles A pick up shall now be considered a truck, hence an automobile 61

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adjustments Proposed Tax Reform in Excise Tax) On excise taxes on Effective January 1, 2018: sweetened beverages (new) • Beverage containing purely locally produced sugar – P 10/liter • Other sugar sweetened beverages – P 20/liter Rates shall be adjusted once every 3 years 62

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adjustments Proposed Tax Reform in Excise Tax) Sec 155 On having mandatory counting devices for importers of excisable products Importers of excisable products are also required to have counting or metering devices to accurately measure the volume, quantity, or number of articles imported Sec 171 On authority of BIR in searching for taxable articles BIR may conduct periodic random field tests on fuels required to be marked. 63

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform e Provisions) Sec. 232(A) On keeping of books of account • Those whose quarterly sales , earnings, receipts or output do not exceed P 250, 000 ( 50, 000 before) shall keep and use simplified set of bookkeeping records • Those whose gross quarterly sales, earnings, receipts or output exceed P 750, 000 ( 150, 000 before) shall have their books of accounts audited and examined yearly by an independent CPA and their ITRs accompanied with duly accomplished Account Information Form. 64

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform e Provisions) Sec. 237 On Electronic receipts ( e-receipts) or electronic sales or commercial invoices ( einvoices) E receipts shall be required and shall contain the ff: • For sales valued at P 25 or more – shall contain date, quantity, unit cost and description of mdse or service • For sales valued at P 100 or more ; or regardless of amount where sales is made by a person liable to vat to another person liable to vat – shall contain the name, business style, address, and TIN of purchaser 65

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform e Provisions) Sec. 237 On Electronic receipts ( e-receipts) or electronic sales or commercial invoices ( einvoices) The e-receipt or e-invoice issued shall be accomplished either electronically or by tendering a printed copy to the buyer This shall be kept by the issuer and purchaser/customer/client for a period of 3 years from the close of the taxable year in which the same invoice was issued This shall be transmitted directly to the BIR at the same time and same date of each transaction The CIR may in meritorious cases exempt any person from this compliance 66

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform e Provisions) Electronic sales reporting system (New) Taxpayers are required to electronically report their sales data to the BIR’s electronic system through CRM/POS machines The BIR shall establish a system within 3 years from effectivity of this Act 67

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform e Provisions) Penalties Sec 254 On attempt to evade or defeat tax Admin fine of not less than 500 K but not more than 10 Mil and imprisonment of 6 -10 years Sec 264 On failure or refusal to issue receipts or commercial invoices Included/added as a violation is printing of other fraudulent receipts/sales or other commercial invoices New penal provision: a. failure to transmit sales data entered on CRM/POS machines to BIRs electronic sales reporting system b. Purchase, use, possession, sale or offer to sell, installment of sales suppression devices 68 c. Offenses relating to fuel marking

House Bill on Tax Reform for Acceleration and Inclusion ( HB 5636) Tax Particulars(Adminstrativ Proposed Tax Reform Earmarking of incremental revenues (New) Petroleum Fund • For 4 years, 40% of yearly incremental revenues from petroleum excise tax allocated to a social benefit program ( e. g cash transfers, discounts on PUV fares, medicine, etc) and fuel vouchers to qualified transport franchise holders • For same period and succeeding years, remaining incremental revenues allocated to infrastructure, health, education and social protection expenditures e Provisions) Health Promotion Fund • 85% of tax collection allocated for gov’t priority programs • 15% shall fund programs for the welfare and benefit of 69 sugar planters/ farmers

Taxpayers Strategic Actions 1. Refer to the COR on the types of tax liability registered and corresponding filing requirements 2. Comply religiously with the filing and reporting requirements of the BIR (monthly/quarterly/annual) 3. Answer/reply to any BIR letter within the reglementary period. 70

Taxpayers Strategic Actions 4. Be updated on recent Court decisions on significant tax issues, BIR issuances and requirements, any amendments of the Tax Code 4. Consult with your accountant/lawyer on the accounting and legal implications of “out of the box” or aggressive tax treatment of business transactions or plans. 71

THANK YOU! RS Gallardo Law Office Fernando Gallardo & Co. Address: Unit 12 and 300 , Valero Plaza Valero St. , Salcedo Village Makati City Tel Nos: 817 -64 -93 / 771 -12 -29 Email Address: rsgallardo@gallardosongco. com 72