Month: March 2024

SALE OR IMPORTATION OF COVID-19 EQUIPMENT AND DRUGS ARE SUBJECT TO VAT STARTING JANUARY 1, 2024. RMC No. 7-2024, January 11, 2024

• The BIR reverses the Value-Added Tax exemption of transactions specified under Section 109 (BB) of the National Internal Revenue Code (Tax Code) of 1997, as amended.
• Sale or importation of the following shall no longer be exempt from VAT effective January 1, 2024:
  • Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes and shoe covers for COVID-19 prevention;
  • All drugs, vaccines, and medical devices specifically prescribed and directly used for the treatment of COVD-19; and
  • Drugs for the treatment of COVD-19 approved by the FDA for use in clinical trials, including raw materials directly necessary for the production of such drugs.

NO SURCHARGE WILL BE IMPOSED IN CASE OF AMENDED TAX RETURNS. RMC No. 9-2024, January 15, 2024

• The BIR clarifies surcharge computed in the filing of an amended return in the electronic Filing and Payment System (eFPS)
• RMC No. 42, 2022 states the non-imposition of surcharge on amended tax returns, provided, that the taxpayer was able to file the initial tax return on or before the prescribed due date for its filing.
• Taxpayers may disregard the surcharge computed by the system when filing an amended tax return.
• If there is an additional tax to be paid as a result of such amended, pay only the basic tax, computed interest and compromise, provided that the original tax return was filed on or before the set deadline.

BRANCH ACCOUNT REGISTRATION AND UPDATE IS AVAILABLE IN ORUS BEGINNING JANUARY 15, 2024 RMC No. 10-2024, January 22, 2024

• The BIR announces the availability of Branch Account Registration in Online Registration and Update System.
• Effective date: January 15, 2024
• Taxpayer branches can do the following transactions in ORUS:
  • Apply for ATP;
  • Register Books of Accounts;
  • Update information;
  • Enroll employer services link for the issuance of Employees’ TIN; and
  • Register a facility;
• ORUS Branch Account is separate from the Head Office’s ORUS account.

DEPRECIATION OF RIGHT-OF-USE ASSET AND INTEREST EXPENSE ON LEASE LIABILITY UNDER PHILIPPINE FINANCIAL REPORTING STANDARD (PFRS) 16 ARE NOT DEDUCTIBLE FOR TAX PURPOSES; ONLY ACTUAL RENT PAID OR INCURRED AND OTHER PAYMENTS TO THE LESSOR BASED ON THE LEASE AGREEMENTS ARE DEDUCTIBLE FOR TAX PURPOSES.. RMC No. 11-2024, January 22, 2024

• The BIR clarifies the tax treatment of lease accounting by lessees under Philippine Financial Reporting Standard 16 in relation to Sections 34(A), 34(K), 106, 108, 179, 194 of the Tax-code, as amended, RR No. 19-86, as amended, and RR No. 02-98, as amended
• Commencement date/Initial Recognition: Lessee to recognize Right of Use Asset (ROUA) and a lease liability.
  • Applicable to all leases, unless lessee elects the short-term lease and/or lease of low-value asset recognition exemptions available in PFRS 16
• Initial Measurement:
• Lease Liability: present value of the future lease payments discounted using the interest rate implicit in the lease, if that rate can be readily determined. If the rate cannot be readily determined, the lessee uses its incremental borrowing rate.
• ROUA – amount of lease liability adjusted for:
  • Payments to lessor at or before the start date of lease less any lease incentives received;
  • Any initial direct costs incurred by the lessee; and/or
  • An estimate of any decommissioning costs.
• Subsequent Measurement:
  • Lease liability – Carrying amount to be increased by interest on the lease liability and to be reduced by lease payment. Lessee to recognize profit or loss any interest incurred on lease liability.
  • ROUA – cost less accumulated depreciation and accumulated impairment losses.
  • Depreciation of the right-of-use asset is also recognized in profit or loss, unless depreciation is permitted to be capitalized (e.g. to inventory) under other PFRS
• Lease Modification
  • Means change in the scope of a lease or the consideration of the lease that was not part of the original terms and conditions of the lease.
  • Examples: adding or terminating the right of use; or extending or shortening the contractual lease term
  • Treatment:
    • If it does not decrease the scope of lease – lease liability will be recalculated with corresponding adjustment to the ROUA; will not normally result in gain or loss in the income statement.
    • If it decreases the scope of lease – partial derecognition of the ROUA and lease liability will be required.; difference between the amount of reduction is recognized immediately in profit or loss.
• Lease Exemptions
  • Applies for short-term leases and leases of low-value items.
  • Short term lease – lease term of 12 months or less, but takes into consideration lease renewal options.
  • Lease of low-value items – lease for which the underlying asset is of low vale (per the standard, with value of USD5,000.00 or the equivalent for new similar asset)
  • Effect: Lessees do not have to recognize ROUA and the related lease liability in the statement of financial position; instead, lease payments are recognized as expense, on a straight-line basis, or another systematic basis, if the basis is more representative of the pattern of the lessee’s benefit
• Operating Lease v. Finance Lease
  • Operating Lease
    • Asset is not wholly amortized during the primary period of the lease.
    • Lessor does not rely solely on the rental during the primary period but looks for recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period.
    • Lessee may deduct the amount of rent paid or accrued, including all expenses which, under the terms of the agreement, the lessee is required to pay to or for the account of the lessor. Advance rentals shall be duly apportioned or applied over the lease terms.
  • Finance Lease or full payout lease
    • Involves payment over an obligatory/primary/basic period (not less than 730 days of specified rental amounts for the use of a lessor’s property, sufficient in total to amortize the capital outlay of the lessor and provide for the lessor’s borrowing costs and profits
    • Lessee exercises the choice of the asset and is normally responsible for maintenance, insurance and such other expenses pertinent to the use, preservation and operation of the asset
    • May be extended after the expiration of the primary period, by non-cancellable secondary or subsequent periods with the rentals significantly reduced.
    • Residual value shall in no instance be less than 5% of the lessor’s acquisition cost of the leased asset
    • Same tax treatment as with the operating lease except that lessor may be allowed a depreciation during the primary lease period, but such period shall not be less than 60% of the depreciable life of the property; interest expenses computed based on the amortization are not accounted for separately from principal payments.
• Finance Lease v. Conditional Sale
  • If the contract is a lease in form but a conditional sale in substance, such contract will be considered as conditional sale.
  • Lease is considered conditional sale if one or more of the following compelling persuasive facts are present:
    • Option to purchase;
    • Automatic ownership;
    • Portions of the rent are credited to the purchase price;
    • Receipts indicate partial or full payment of asset
    • Other factors:
      • Portions of period payments are made specifically applicable to equity;
      • When there’s option to purchase but price is nominal or relatively small in relation to the total payments
• Treatment of ROUA depreciation and interest expense on lease liability for tax purposes – not deductible
• Deductible: only actual rent paid or incurred and other payments to the lessor based on the lease agreements shall be allowed as deduction
• Taxpayer is required to disclose information on the lease in the Notes to the Financial Statements.
• Treatment of Initial Direct Costs – Deductible as outright expense
• Treatment of expenses paid or incurred by the lessee for the account of the lessor (i.e. realty tax, association dues, etc.) – deductible as expense but lessor should issue invoice/receipts in the name of the lessee
• Treatment of short-term leases and lease of low-value assets – operating lease; only actual rents paid or incurred shall be recognized as deductible expense
• Treatment of gains and losses from lease modifications – not included in the determination of taxable income
• Security Deposit
  • Asset; or expense when the conditions occur, which is deductible based on the amount of applied deposit
• Treatment of estimated restoration cost – deductible expense in the year the same has been actually paid or incurred
• VAT Treatment
  • GR: upon payment of rent, evidenced by VAT OR
  • XPN: Conditional Sale
• Initial payment during the year exceeds 25% of the selling price – Entire selling price taxable; Less than 25% - VAT be recognized on installment payment
• Withholding Tax: 5%; if conditional sale – 1% for TWA and 15% on interest (but for real properties, rules on withholding applicable to the sale of real property applies)
• DST – DST on lease agreement; if finance lease, DST applicable to the debt instruments.

BIR ISSUANCES MAY BE PUBLISHED IN THE BIR OFFICIAL WEBSITE, OFFICIAL GAZETTE OR NEWSPAPER OF GENERAL CIRCULATION. RR No. 2-2024, February 28, 2024

• The BIR prescribes the policies and guidelines for the publication of revenue issuances and other information materials of the BIR pursuant to Section 245(i) of the Tax Code, as amended by RA No. 11976.
• The BIR may publish (electronically or otherwise) the BIR Issuances to implement and/or clarify relevant tax laws, rules and regulations, through the following means:
  • BIR Official Website;
  • Official Gazette; or
  • Newspaper of general circulation
• Revenue issuance and other information refer to:
  • Revenue Regulations
  • Revenue Memorandum Circulars
  • Revenue Memorandum Orders
  • Other revenue issuances;
  • Classification of taxpayers including, but not limited to, top withholding agents;
  • Cannot be located taxpayers
  • Revised Schedules of Zonal Values;
  • List of seized, foreclosed and acquired properties for sale
  • Notice of sale seized, foreclosed and acquired properties;
  • Information materials such as, but not limited to, press releases, announcements/advisories and flyers; and
  • Other similar documents or materials that require publication

NEWLY-HIRED EMPLOYEES ARE NOT REQUIRED TO VERIFY THEIR TIN AND GET A TIN VERIFICATION SLIP FROM THE RDO. RMC No. 31-2024, February 27, 2024

• The BIR clarifies TIN Verification being required by employers from newly-hired employees.
• The BIR does not require newly-hired employees to verify their TIN and get a TIN Verification Slip from the RDO.
• The RDOs shall not accept requests for manual TIN verification or issue TIN Verification Slip for employment purposes, except for the following cases:
  • The online TIN verification facility is not available or there is a prompt message that the user needs to visit the RDO; or
  • There is a need for the BIR personnel to further verify the correctness of taxpayer registration information; or
  • The taxpayer has an existing TIN or record; or
  • Possession of multiple or identical TIN.
• All employers are advised to use BIR’s ORUS or BIR Catbot to verify the validity and correct ownership of the TIN of their newly-hired employees.
• The verification result being displayed by ORUS or Revie is considered sufficient for verification purposes.
• Employers do not have to require their newly-hired employees to go to the RDO to get a TIN Verification Slip

NEW PRICE THRESHOLD FOR THE SALE OF HOUSE AND LOT AND OTHER RESIDENTIAL DWELLINGS FOR VAT-EXEMPT PURPOSES IS P3,600,000  RR NO. 1-2024, JANUARY15, 2024 

INCOME PAYMENTS MADE BY JV TO SUPPLIERS ARE SUBJECT TO WITHHOLDING TAX (1%/2%); SHARE OF CO-VENTURE FROM JV NOT TAXABLE AS CORPORATION IS SUBJECT TO 15% WITHHOLDING TAX RR No. 14-2023, November10, 2023

The BIR further amends the pertinent provisions of RR No. 2-98, as amended, to impose creditable withholding tax on certain income payments by joint ventures/consortiums.

THE BIR IMPOSES 1% WITHHOLDING TAX ON ½ GROSS REMITTANCE BY E-MARKETPLACE OPERATORS AND DIGITAL FINANCIAL SERVICE PROVIDERS TO ONLINE SELLERS/MERCHANTS FOR ANNUAL GROSS REMITTANCES EXCEEDING P500,000.00. RR No. 16-2023, December21, 2023

• The BIR further amends the provisions of Revenue Regulations No. 2-98, as amended, to impose withholding tax on gross remittances made by electronic marketplace operators and digital financial services providers to sellers/merchants.
• The BIR imposes withholding tax on gross remittances by e-marketplace operators and digital financial services providers to online sellers/merchants for goods and services sold/paid through the former’s platform/facility.
  • ½ of the gross remittance – 1%
• Not applicable when:
  • Annual total gross remittances to online seller/merchant for the past taxable year has not exceeded P500,000.00; or
  • If the cumulative gross remittances to an online seller/merchant in a taxable year has not exceeded P500,000.00; or
  • If the seller/merchant is duly exempt from or subject to a lower income tax rate pursuant to an existing law or treaty (certification/clearance/ruling required)
• Gross remittance refers to the total amount received by the operator/financial services provider. Excludes:
  • Sales returns and discounts;
  • Consideration for the use of the platform.
• Electronic marketplace covers:
  • Marketplace for online shopping;
  • Food delivery platform;
  • Platform for booking of resort, hotel, motel etc. located in the Philippines;
  • Other similar online service or product marketplaces.
• E-market operators and digital services providers shall also withhold taxes on payment to transportation contractors for the carriage of goods and merchandise and commission on the goods and services.
• Effective date – January 11, 2024
• Transitory period – 90 days for e-marketplace operators and DFSP to comply.
• P500,000 – consists of the total amount of remittances received from ALL e-marketplace operators and DFSPs; if gross remittances exceeded P500,000 anytime during the year, withholding tax shall be automatically deducted from the particular remittance exceeding the threshold and the same shall be imposed on subsequent remittances.
• Obligations of seller/merchants:
  • Register with the BIR and submit COR to the e-market operator prior to the use of e-market facility;
  • Submit sworn declaration (SD) duly received by the BIR if gross remittance is expected not to exceed P500,000 threshold (to be submitted on or before  20^th day of the first month of each taxable year; if exceeded, SD in a prescribed form shall be immediately submitted.
    • Failure to submit prescribed SD: withholding tax shall be automatically deducted.
• If seller/merchant is exempt from income tax or subject to a lower income tax rate, submit a certification as proof of exemption or entitlement to a lower tax rate.
• All existing unregistered sellers/merchants are required to register; otherwise, they shall not be allowed to sell goods and services in the platform/facility.
• Sellers/merchants are not allowed to receive payments through their personal/individual accounts instead of business account; account must be under BIR-registered tradename.

THE PRESIDENT VETOED EXEMPTION OF MICRO-ENTERPRISE FROM OBLIGATION TO WITHHOLD TAXES.

RMC No. 3-2024, January 10, 2024 The BIR circularizes RA No. 11976 (Ease of Paying Taxes Act) and the Veto Message of President Ferdinand R. Marcos Jr

INCOME OF NON-RESIDENT FOREIGN CORPORATION IS SUBJECT TO FINAL WITHHOLDING TAX. RMC No. 5-2024, January10, 2024

• The BIR further clarifies the proper tax treatment of cross-border services in light of the Supreme Court En Banc Decision in Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue, GR. No. 22668 (Aces).
• In Aces case, the Supreme Court subjected to final withholding tax the satellite airtime fee payments made by Aces Philippines (payor/withholding agent) to Aces Bermuda (payee/income earner), a non-resident foreign corporation (NRFC)
• The following are existing cross-border services akin to that of Aces case:
  • International Service Provision (or cross-border services, including: consulting services, IT sourcing, financial services, telecommunications, engineering and construction, education and training, tourism and hospitality, and other similar services)
    • Re. consulting services – the payment to the foreign consulting firm is considered an inflow of economic benefits to the foreign company. The income is sourced within the Philippines.
•  Situs of taxation for the cross-border services: within the Philippines.
• Treatment of reimbursable or allocable expenses, especially for cross-border services between or among related parties:
  • The reduction of expenses for a foreign corporation can be considered as income because it represents a financial gain or savings for the company. Thus foreign corporation’s net come or profit increased. Reduction in expenses is viewed as a form of income for foreign corporations.
•  Effect if no benefits was derived from the cross-border transactions:
  • If a Philippine company did not benefit, the payment is considered unnecessary for regular commercial activity and instead, it becomes a means of shifting profits to a foreign company. IT is an attempt to evade taxes or manipulate profits by funneling them to a foreign entity.
• Revenues generated from service fees paid to foreign companies or individuals, which are considered sources within the Philippines is subject to VAT.
• Our comments on RMC No. 5-2024: Invalid for being an unauthorized administrative legislation; for running counter to the rules of income under Section 42 of the Tax Code; for disregarding tax treaties; for being inconsistent with Section 108 (A), where payment for services rendered outside the Philippines are not subject to VAT.