Weekly Tax Updates[October 1-5, 2018]

MOST RECENT UPDATE ON TRABAHO BILL: A SUBSTITUTE BILL ON TRAIN 2

Dear Clients & Friends,

We are sending the following relevant tax updates for this week, for your reference and information:

BIR ISSUES NEW ALPHANUMERIC TAX CODE (ATC)

The BIR has issued Revenue Memorandum Order (RMO) No. 38-2018 dated April 3, 2018 [with released date on September 3, 2018] which creates, modifies, and drops Alphanumeric Tax Code (ATC) of selected revenue source under TRAIN Law. The changes are aligned to the objective of the BIR in facilitating the proper identification and monitoring of tax collection from income payments subject to creditable and final withholding taxes pursuant to TRAIN Law and the issuance of Implementing Rules on Regulations on Withholding Tax (i.e. RR 11-2018).

BIR ISSUANCE ON VALIDATION OF SALES DECLARATION OF TAXPAYERS GENERATED FROM POS, CRM, SPM & OTHER SALES RECEIPTING SOFTWARE

The BIR has issued Revenue Regulations (RMC) No. 72-2018 dated June 18 [with released date on August 30, 2018] to reiterate or supplement the existing policies relative to the validation of sales generated from Point of Sale (POS)/Cash Register Machines (CRM)/Special Purpose Machines (SPM)/Other Sales Receipting System Software (collectively referred to as “Machines”), receipting/invoicing of Computerized Accounting System (CAS), online sales transactions and from manual invoices/receipts/supplemental commercial documents. The circular discusses the following:

• Post Evaluation of machines may be conducted simultaneously with other enforcement activities.
• Reconciliation of inventory of all machines with the list from the BIR database.
• Generation of Z-Reading and Electronic Sales Journal (e-Journal) per machine shall be performed
  simultaneously with the conduct of physical inventory of machines. The taxpayer shall submit the
  extracted Z-Reading and e-Journal not later than the second day of the Post-Evaluation
• Validation and extraction of sales from all sources.
• Guidelines on extraction of sales in case of:
  • unregistered machines
  • machines that are subject of application for withdrawal from its use
  • machines that are in different locations/branches
  • in case the BIR representative is not available to inspect the machine applied for withdrawal from use on the date requested by the taxpayer
• Issuance of Subpoena Duces Tecum (SDT) to compel submission and presentation of documents/machines not yet available after the required compliance date
• Reconciliation of the taxpayer’s extracted data (Z-Reading/e-Journal) against the list of sales data
  provided by the BIR.
• Monthly/quarterly comparison of sales data from all sources with the taxpayer’s sales declaration
  in the VAT Returns/Income Tax Returns/eSales Reports/Summary List of Sales and data analysis
  using Computer Assisted Audit Tools and Techniques (CAATTs).
• Penalties imposed for the violation of this circular.

SUPREME COURT (SC) DIGEST

DOCKET FEE IS JURISDICTIONAL BUT FAILURE TO PAY THE SAME DOES NOT AUTOMATICALLY CAUSE THE DISMISSAL OF THE CASE

The Petitioner Macario Lim Gaw, Jr., filed a Petition for Review on Certiorari assailing the Decision and Resolution of the CTA En Banc in the CTA EB Criminal Case No. 26 where the latter dismissed the Petition for failure of the Petitioner to pay docket fees. Petitioner acquired 10 parcels of land through a Short Term Loan Facility from Banco De Oro. Petitioner then entered into an Agreement to Sell with Azure Corporation for the sale and transfer of real properties to Eagle I Landholdings, Inc., a joint venture company. Upon transfer, the Petitioner requested the BIR RDO No. 52 for the respective computations of the tax liabilities due on the sale of the lands. In accordance with the One Time Transactions (ONETT) Computation sheets, Petitioner paid Capital Gains Tax (CGT) and Documentary Stamp Tax (DST) and was issued the corresponding Certificates Authorizing Registration and Tax Clearance Certificates. Two years later, Respondent Commissioner of Internal Revenue (CIR) opined that Petitioner was not liable for the 6% CGT but for the 32% Regular Corporate Income Tax (RCIT) and 12% VAT, on the theory that the properties sold were ordinary assets and not capital assets resulting to the assessment of deficiency RCIT and VAT up to the issuance of FDDA. In addition, Respondent also found that the Petitioner misdeclared his income, misclassified the properties and used multiple Tax Identification Numbers to avoid being assessed of the correct amount of taxes, prompting the Department of Justice to file a criminal complaint for tax evasion. The Supreme Court ruled that, the CTA En Banc erred in dismissing the Petition due to nonpayment of the required docket fees since mere failure to pay the same at the time of the filing of the Petition does not automatically cause the dismissal of the case even if the same is jurisdictional as long as the party had no intention to defraud the government and the same are paid within reasonable period of time. On the issue of tax type which the Petitioner should be subjected, the court found that the proper remedy is to remand the case to the CTA First Division to conduct a full-blown trial where both parties are given the chance to present evidence of their respective claims. The Petition for Review is partially GRANTED. The case is remanded back to the CTA 1st Division to conduct further proceedings in CTA Case No. 8503 and to ORDER the Clerk of Court to assess the correct docket fees. Petitioner Mariano Lim Gaw, Jr., is likewise ORDERED to pay the correct docket fees within ten (10) days from the receipt of the correct assessment of the Clerk of Court. [MACARIO LIM GAR JR. VS COMMISSIONER OF INTERNAL REVENUE, G.R. NO. 222837, JULY 23, 2018]

COURT OF TAX APPEALS (CTA) DIGEST

• Post Evaluation of machines may be conducted simultaneously with other enforcement activities.
• Reconciliation of inventory of all machines with the list from the BIR database.

FAILURE OF THE PROSECUTION TO PROVE WILLFULNESS OF THE TAXPAYER TO FILE INCORRECT & INACCURATE INFORMATION IN THE ITR & AFS WOULD LEAD TO THE ACQUITTAL OF THE ACCUSED

The accused Leonila Tolentino Arceo, doing business under the name of L.T Arceo Trading, was charged for violation Section 255 of the Tax Code for her alleged failure to supply correct and accurate information on her Income Tax Returns (ITR) and Audited Financial Statements (AFS) for taxable years 2004 and 2005. The allegations stem from the findings of the BIR that the accused entered into a Contract of Sale with the government which commenced in the year 2004 thru public bidding while the execution of Deed of Sale and full payment happened in 2005. Applying the expenditure method of assessment of income, the ITR and AFS of the accused are far less than the purchase amount in transacting with the government, and therefore the prosecution found that the accused willfully and unlawfully filed a false and fraudulent ITR and AFS. The accused, on the other hand, countered that the she did not know any of the transactions nor was she personally involved. She further argued that her husband and the latter’s partners were the ones who transacted with the government using the name of L.T. Arceo Trading without the consent of the accused. The latter only learned about the same when her husband told her that a case has been filed by the BIR. In resolving the case, the Court enumerated the elements of the offense of willful failure to supply correct and accurate information: (1) a person is required to supply correct and accurate information, (2) there is failure to supply and (3) such failure to supply is done willfully. Upon examination of evidences, it was noted that the accused was aware of her obligation to supply correct and accurate information. Further, nondisclosure of the purchase transaction with the government proves that there was a failure to supply the information. Lastly, the Court citing a number of Supreme Court cases has defined “willful” as an act or omission that is executed voluntarily and intentionally with specific intent to do something the law forbids. As to how willfulness is proven, it can be shown by circumstantial evidences alone. Since the accused has absence of knowledge of the transaction, this points to the lack of intent to willfully fail to report the said purchase in the ITR and AFS. Considering the foregoing, the accused is ACQUITTED for failure of the prosecution to establish her guilt beyond reasonable doubt. [PEOPLE OF THE PHILIPPINES VS. LEONILA TOLENTINO ARCEO, CTA CRIMINAL CASE NO. 0-271, SEPTEMBER 03, 2018]

DONATIONS MAY BE DISALLOWED IF THE TAXPAYER-DONOR SUFFERS LOSSES

The Petitioner Manila Genesis Entertainment & Management, Inc. filed a Petition for Review seeking the cancellation of the Respondent Commissioner of Internal Revenue assessment in the amount of Php 9,909,307.60. Several assessment findings were contained in the assessment but the bulk is centered on the disallowance of donations made to its affiliated entity Shining Light Foundation, Inc., unaccounted payables and advances from affiliates, and disallowance of zero-rating sales for concerts and events performed abroad. On disallowance of donations, the Respondent disallowed the Petitioner’s donations for the reason that the latter showed a net loss; hence no donations and contributions can be claimed for income tax purposes. However, the Petitioner countered that there is no basis for the disallowance since Shining Light Foundation, Inc. is an accredited NGO for the upliftment of the marginalized and vulnerable sector of the society as evidenced by the certifications issued by PCNC and DSWD. In the resolution, the Court denied the certifications as admissible in evidence for failure to present their originals for comparison. On findings of unaccounted payables and advances from affiliates, the Petitioner argued that these can be accounted and should not be considered income as these are liabilities to suppliers of goods and services as well as advances from G.V. Productions, Inc., an affiliate, for all concert production expenses in pursuit of business. In the resolution, the Court sustained the BIR findings for failure of the Petitioner to submit any supporting documents. Likewise, on the findings of disallowance of zero-rating of management fees pertaining to concerts and events abroad, the same was disallowed for failure to submit supporting documents. Consequently, the Petition was PARTIALLY GRANTED holding the Petitioner liable to a reduced assessment of Php 8,703,966.21 exclusive of delinquency interest at the rate of 12%. [MANILA GENESIS ENTERTAINMENT & MANAGEMENT, INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 9259, AUGUST 31, 2018]

SECURITIES & EXCHANGE COMMISSION (SEC) LEGAL OPINION

OPERATION OF ICE COLD STORAGE FACILITIES & COLD LOGISTICS WHICH IS OPEN FOR PUBLIC IS CONSIDERED AS A PUBLIC UTILITY

Igloo Philippines, a company engaged in the operation of ice cold storage facilities and cold logistics, requested for an opinion on whether or not in providing logistics services and owning lands and warehouses, is considered as engaged in a nationalized or partially nationalized activity. In reference to Iloilo Ice and Cold Storage Co., v. Public Utility Board, the Supreme Court ruled that “the essential feature of a public utility is that, it is not confined to privilege individuals, but is open to the indefinite public”. With this the SEC opined that Igloo Philippines, as an ice-refrigeration plant, is considered a public utility as they indiscriminately offer their services to the public for compensation. As such, Igloo Philippines is also considered engaged in partially nationalized activity. As for being an owner of a land, it should also be considered as a partially nationalized corporation pursuant to Section2-A of the Anti-Dummy Law which provides that, a corporation having its name and control over a property, where enjoyment of which is reserved by the Constitution to Filipinos, is in effect nationalized. [SEC OFFICE OF THE GENERAL COUNSEL OPINION NO. 18-15, AUGUST 24, 2018]

IGNORANCE OF THE LAW EXCUSES NO ONE EVEN IF THE TAXPAYER IS A HIGH SCHOOL GRADUATE; SERVICE OF BIR ASSESSMENT NOTICES TO REGISTERED BUSINESS ADDRESS OF TAXPAYER
SUFFICIENT EVEN IF NOT ACTUALLY OR CONSTRUCTIVELY RECEIVED BY THE TAXPAYER

The Accused Benedicto P. Caguimbal was charged with the criminal case of tax evasion under Section 255 of the Tax Code of 1997, as amended for failure to pay his income tax and VAT. In the course of trial, it was noted that the accused is a high school graduate. He is a sole proprietor and is engaged in the business that contracts electrical works. He admitted that he earned income from his business without declaring his earnings and paying the taxes thereon. He represented that he has registered business address at 2240-B Severino Reyes Street, Sta. Cruz, Manila, in which he represented that he only stayed there once for he rendered services to different places where he gets contracts. Accordingly, he never received any assessment notices from the BIR. In ruling, the Court ruled that even though the accused’s highest educational attainment is high school and without the knowledge of the nitty-gritty aspects of the business and government compliance does not excuse him from compliance therewith. Consequently, the Court found the Accused GUILTY BEYOND REASONABLE DOUBT for violating Section 255 of the Tax Code of 1997, as amended, and is ordered to pay the assessment inclusive of 50% surcharge and interest. [PEOPLE OF THE PHILIPPINES VS. BENEDICTO P. CAGUIMBAL, CTA CRIMINAL CASE NOs. O-546 & O-547, SEPTEMBER 26, 2018] If you wish to get the complete text of the above digests, please e-mail us.

TAX NEWS

• Auto sales remain in slump 7 months after TRAIN Law
• Tax measures must ‘move in next 8 weeks’–Diokno
• Japanese firms seek tax perk extension to deal with difficult PH economy
• Ecozone developers warn vs passage of ‘trabaho’
• Dominguez admits tax reforms facing ‘uphill climb’
• DOF eyes end-2018 OK of tax bills in Congress
• Foreign investors buck new tax reform

Thanks and best regards.

WILLIE B. SANTIAGO
Lawyer and Certified Public Accountant
Tax & Corporate Services Division