Original article is published in Rappler.
The Trabaho bill aims to reduce the corporate income tax rate from 30% to 20%
MANILA, Philippines – To complement the Tax Reform for Acceleration and Inclusion (TRAIN) law, House Bill 8083, which contains the Duterte administration's second tax reform package, is now up for plenary debate at the House of Representatives. It will be known as the Tax Reform for Attracting Better and High-Quality Opportunities or Trabaho.
Unlike TRAIN which focuses on personal taxes, the Trabaho bill deals with corporate taxation.
Specifically, it aims to reduce the corporate income tax rate from 30% to 20%.
At the same time, the Trabaho bill intends to broaden the tax base (income subject to tax) by removing some of the preferential or lower corporate tax rates under the Tax Code and setting stricter rules on transactions between related parties (affiliated/sister companies).
Another part of the Trabaho bill that will significantly broaden the tax base is the rationalization of tax incentives by making them performance-based, targeted, time-bound, and transparent.
Currently, the list of activities qualified for availment of tax incentives are scattered in various laws. Under the Trabaho Bill, only those activities included in the one Strategic Investment Priorities Plan (to be issued once every 3 years) may be granted tax incentives. There will also be a single menu of tax incentives (income, customs duty, and value-added tax incentives) to be contained in the Tax Code itself.
Reduction of corporate tax rate
Currently, the corporate income tax rate is 30%. Under the Trabaho bill, the rate will gradually be reduced by 2% every two years starting 2021 until 2029, when the rate will only be 20%.
Broadening of tax base
To compensate the projected revenue loss resulting from lowering of corporate income tax rate, the Trabaho bill seeks to broaden the tax base by amending several provisions of the Tax Code.
15% gross income tax option
At present, the Tax Code gives a corporation the option to be taxed at 15% based on gross income. Under the Trabaho bill, this will no longer be available starting 2019.
10% tax on proprietary educational institutions and hospitals
Proprietary educational institutions and hospitals which are nonprofit enjoy a preferential income tax rate of 10%. Under the Trabaho bill, the availment of this preferential rate will be subject to compliance with established performance criteria to be determined by the Commission on Higher Education (CHED), the Department of Education (DepEd), and the Department of Health (DOH). Otherwise, they may be subjected to higher income tax rate at 15% or 20%.
10% tax on regional operating headquarters of multinational companies
Two years after the effectivity of the proposed Trabaho law, the 10% preferential tax on regional operating headquarters (ROHQ) will no longer be available.
Accelerated depreciation for private educational institutions
Normally, capital expenses are not deductible outright in one taxable year. Instead, they are deductible gradually by way of yearly allowance for depreciation. However, when a private educational institution incurs a capital expense for expansion of school facilities, it has the option to deduct the capital expense outright.
Under the Trabaho bill, educational institutions can avail of the outright expense option only if they have met the criteria set by CHED, DepEd, and DOH.
Optional standard deduction
In income taxation, it is a basic rule that a deduction or expense must be supported with adequate records. However, when a taxpayer chooses optional standard deduction (OSD) over itemized deduction, the requirement of substantiation becomes irrelevant.
At present, the OSD rate for individual and corporate taxpayers is the same at 40%, but the bases are different. For individuals, the OSD is applied on the gross sales or receipts (before deduction of cost of sales/services). On the other hand, for corporations, OSD is applied on gross income (after deduction of cost of sales/services).
Under the Trabaho bill, the 40% OSD rate and base will be uniform for individual and corporate taxpayers at 40% of gross income. However, for corporations, availment of OSD will be limited to those classified as micro, small, and medium-sized enterprises as determined by the Department of Trade and Industry.
Related party transactions
When a transaction is between or among related parties (affiliated/sister companies), businesses have a tendency to arrange the transactions in such a way that their overall after-tax income is maximized. Thus, related-party transactions are sometimes done not at arm's length.
To address this gap, the current Tax Code empowers the BIR Commissioner to distribute, apportion, or allocate gross income or deductions between or among related parties if the Commissioner finds that such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or clearly to reflect the income of the taxpayer concerned.
Under Trabaho bill, the Commissioner will have an enhanced power to distribute, apportion, or allocate gross income or deductions, as he can exercise it not only to prevent evasion of taxes but also to prevent avoidance of taxes.
Moreover, if the transaction or arrangement between or among related parties has the purpose or effect of tax avoidance, the Commissioner may disregard and consider such transaction as void for income tax purposes.
Rationalization of tax incentives
Another major purpose of Trabaho bill is to rationalize tax incentives. Under the bill, only those projects listed in the Strategic Investments Priority Plan (SIPP) may be registered and given incentives.
Strategic Investments Priority Plan
Every 3 years, the BOI will formulate a SIPP for approval of the President. In crafting the SIPP, the BOI shall consider, among others, the following:
1. substantial amount of investments:
2. considerable generation of employment:
3. adoption of inclusive business activities and value-added production by MSMEs;
4. use of modern or new technology;
5. adoption of adequate environmental protection systems;
6. addressing missing gaps in the supply/value chain or moving up the value chain or product ladder;
7. promotion of market competitiveness
Single incentive menu
At present, the incentives given to investors depend on the law creating the Investment Promotion Agency (like PEZA, BOI, etc) granting the incentives. In the Trabaho bill, there will be one single incentive menu for income, customs duty and VAT incentives.
Income tax incentives
1. Income Tax Holiday (ITH) – The ITH shall be granted for a period not exceeding 3 years: provided, that after the expiration of the ITH, the other income tax incentives may be applied for a period not exceeding 5 years, which includes the period of ITH availment.
2. Other income tax incentives include:
a. reduced corporate income tax of 18%;
b. depreciation allowance for qualified capital expenditure;
c. up to 50% additional deduction on the increment of direct labor expense;
d. up to 100% additional deduction on research and development expenses;
e. up to 100% additional deduction on training expenses;
f. up to 100% deduction on infrastructure development;
g. deduction for reinvestment allowance to manufacturing industry;
h. enhanced net operating loss carry over (NOLCO) wherein the NOLCO during the first 3 years may be carried over within the next 5 years following the year of such loss
Customs duty incentives
Exemption from customs duty on importation of capital equipment and raw materials directly and exclusively used in the registered activity for a period not exceeding 5 years.
VAT incentives
Registered export enterprise whose export sales meet the 90% threshold and are located within an ecozone, freeport, or those utilizing customs bonded manufacturing warehouse may be given VAT zero-rating on export sales, or on importation or domestic purchases of capital equipment and raw materials used in the manufacture and processing of products.
Incentives granted prior to effectivity of Trabaho
With the rationalization of tax incentives, it is important to ask: What will happen to incentives granted prior to effectivity of the proposed Trabaho law?
The existing registered activities granted the ITH shall be allowed to continue availing the same for its remaining ITH period or for a period of 5 years only, whichever comes first. If other tax incentives are granted to existing registered activities, such as the 5% tax on gross income earned (5% GIE), they shall be allowed to continue enjoying the 5% GIE, as follows:
1. Two years for activities enjoying the tax incentive for more than 10 years;
2. Three years for activities enjoying the tax incentive between 5 and 10 years; and
3. Five years for activities enjoying the tax incentive below 5 years.
According to the Trabaho bill, this is applicable "provided that the 5% GIE shall commence after the ITH period has lapsed [but] only for the remaining years within the five-year period."
Original article published in Rappler.
Our tax laws allow casualty losses to be claimed as deduction for income tax purposes
MANILA, Philippines – Just recently we saw a lot of business establishments being flooded due to intense rain brought about by Tropical Storm Karding (Yagi) and the southwest monsoon or habagat. As a result, some taxpayers may have sustained losses in the form of damage to their equipment, machinery, or merchandise.
Fortunately, our tax laws recognize this problem by allowing casualty losses to be claimed as deduction for income tax purposes. However, there are specific guidelines on the time and manner by which the taxpayers should claim casualty losses. Noncompliance with these guidelines may result in the disallowance or rejection of the deduction during the audit examination of the Bureau of Internal Revenue (BIR).
To avoid the disallowance, it is important to know and comply with the deadline for reporting, the facts to be established, and the documentary requirements for claiming casualty losses.
Definition
Casualty loss refers to the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature, such as those arising from storm, fire, shipwreck, or other casualty, or from theft or robbery (Revenue Regulation 12-77).
Requisites for deductibility
Under BIR Revenue Memorandum Order Number 31-2009, the taxpayer claiming casualty losses must comply with the following requisites:
1. The losses were incurred for properties actually used in the business of the taxpayer. The loss of assets not used in business and/or are personal in nature shall not be allowed.
2. The concerned properties must have been reported as part of the taxpayer's assets based on accounting records and financial statements in the preceding year.
3. The amount of loss compensated by insurance cannot not be claimed as deductible loss.
4. The deduction of assets as capital losses must be properly recorded in the accounting reports (with the adjustment of the applicable accounts).
Documentary requirements
To establish the requisites, the following documents must be submitted to the BIR:
1. Sworn declaration of loss filed within 45 days after the date of the event causing the loss, stating the following:
a. nature of the event that gave rise to such loss and the time of its occurrence;
b. description and location of the damaged properties;
c. items needed to compute the losses (cost or other basis of the properties; depreciation allowed, if any; value of the property before and after the event; and cost of repair);
d. amount of insurance or other compensation received;
2. The Financial Statement for the year immediately preceding the event;
3. Proof of the elements of the losses claimed:
a. photographs of the properties before and after the typhoon to show the extent of the damage.
b. documentary evidence for determining the cost or valuation of the damaged properties (canceled checks, vouchers, receipts, and other evidence of costs);
c. insurance policy, in the event that there is an insurance coverage for the properties; and
d. police report, in cases of robbery/theft during the typhoon and/or as a consequence of looting
Failure to report a theft or robbery to the police can be held against the taxpayer. However, a mere report of an alleged theft or robbery to the police authorities is not considered as conclusive proof of the loss.
All documents and other evidence submitted to prove the losses shall be subject to verification by the concerned BIR office, and should be kept by the taxpayer as part of his tax records, and be made available to the duly-authorized Revenue Officer/s, upon audit of his Income Tax Return and the declaration of loss.
Weather advisories, like rainfall alerts from NDRRMC, are effective tools to save lives and avoid damage to properties. Yet loss is sometimes inevitable. For this reason, deduction for casualty loss is allowed in the computation of income tax provided that the taxpayer claiming it strictly complies with the requirements set by law and the BIR. – Rappler.com
Original article posted in Rappler.
Usually, the heirs realize the need to pay the estate tax after years or even decades have passed from a person's death
Notice of death
The first obligation of the heirs under the Tax Code is to give a written Notice of Death to the Bureau of Internal Revenue (BIR) within two months after the death.
The Notice of Death shall be filed with the BIR’s local office (Revenue District Office or RDO) that has jurisdiction over the place of decedent's residence at the time of death.
If the decedent is not a resident of the Philippines, the Notice of Death should be filed with the BIR office in South Quezon City (RDO Number 39).
Filing of return and payment of estate tax
Place of filing
Like the Notice of Death, the estate tax return shall be filed with the RDO (or other offices authorized by the BIR) in the city or municipality where the decedent was a resident at the time of death.
For a non-resident decedent (residing abroad at the time of death), the estate tax return is generally filed with RDO No. 39 in Quezon City.
Deadline of filing
The return should be filed within 6 months after the death. In meritorious cases, an extension of not more than 30 days may be granted by the BIR.
Deadline of payment
The estate tax shall also be paid at the same time the return is filed.
Payment by installment
The BIR may allow the payment by installment. However, the computation of estate tax shall always consider the entire estate and the corresponding penalty shall be imposed on any amount paid after the due date.
Extension of time to pay
The BIR may allow an extension of time to pay the estate tax.
The extension should not exceed 5 years in case the estate is settled through the court, or two years in case the estate is settled extrajudicially through the execution of an extrajudicial settlement.
Penalty
The late payment of estate tax will lead to the imposition of 25% to 50% surcharge, 20% interest per year, and a compromise penalty.
Computation of estate tax
Gross estate
It is the total value of all properties belonging to the decedent at the time of his or her death.
For citizens and resident foreigners, the gross estate consists of real and personal property regardless of location. Personal property includes tangible and intangible property like shares of stocks.
For non-resident foreigners, the gross estate comprises only of property located within the Philippines.
Deductions
The estate tax will not be based on the entire estate but on the net taxable estate. To arrive at net taxable estate, a number of deductions/expenses are allowed to be deducted from the gross estate.
The common deductions/expenses that may be availed of by the heirs are:
Net taxable estate
This is the remaining amount after deducting the applicable deductions/expenses from the gross estate.
Estate tax rates
After computing the net taxable estate, the rates below are applied to arrive at estate tax due.
Based on the table, a net taxable estate not exceeding P200,000 is exempt from estate tax. Any amount in excess of P200,000 shall be subject to graduated estate tax rate of 5% to 20%. – Rappler.com