PUBLIC COMPANIES AND REGISTERED ISSUERS ARE REQUIRED TO SUBMIT A NEW MANUAL ON CORPORATE GOVERNANCE UNTIL 30 SEPTEMBER 2020.

• Public  companies  (PCs)  and  registered  issuers  (RIs)  are  mandated  to  submit  a  new  Manual  on Corporate  Governance  (MCG) within  six  (6) months  from  the  effectivity  date  thereof,  or  until 12  July 2020, but extended up to 30 September 2020.
  • Signatories  of  the  MCG  shall be the company’s Chairman  of the  Board  and  Compliance  Officer.
• MCGs  submitted  with  incomplete  and/or  incorrect  signatories  shall be  deemed  as not  filed.
  • The  imposable  penalties  for non- or late  submission of the  MCG  shall be P10,000 (basic penalty) and P1,000 (monthly penalty). The  monthly penalty  shall accrue  until the  MCG is submitted  to  the  SEC.
  • PCs and  RIs  which  are  publicly listed  in  the  Philippine  Stock  Exchange shall  not  be  covered  by  this Memorandum  Circular  and  shall  continue  to  be  governed  by  SEC  Memorandum  Circular  No.  19,  Series  of 2016,  or  the  Code  of Corporate  Governance  for Publicly -Listed  Companies,  and  related  issuances. The Circular may be accessed HERE(SEC Memorandum Circular No. 19)

REGULATED FINANCIAL INTERMEDIARIES’ ONBOARDING PROCEDURES FOR LOW RISK ACCOUNTS.

• The SEC provides rules on simplified onboarding procedures for low risk accounts. It applies to regulated entities authorized by the SEC  to  intermediate and  effect securities  transactions for  and on  behalf  of customers and  are  required  to  conduct  customer  due  diligence.  It includes financial intermediaries  such  as Broker Dealers in Securities, Government  Securities Eligible Dealers,  Investment Houses, Underwriters of  Securities, Investment Company Advisers and Mutual Fund Distributors(“Regulated FIs”).
• The purpose of the memorandum is to have simplified onboarding procedures for Low Risk customers of Financial Intermediaries.
• An account opened and maintained by an individual investor with an initial and subsequent deposit, investment or re-investment amounting to a total of not more than P50,000 shall be considered a “low risk account”
  • The investor shall be allowed to invest in excess of the prescribed limit only for the purpose of exercising his right as a holder of securities (e.g. participation in a stock rights offering, exercise of pre-emptive right, and other similar acts, the non-exercise of which shall result in the dilution or diminution of his holdings)
• Only  individual Filipino investors  shall  be  allowed  to  open  low  risk  accounts. These investors shall be presumed to beneficially own the said accounts. The process for the opening of an account by any legal person such as a corporation or a trust  shall  follow  the  regular  requisites  and  procedures required by the  concerned regulated  FI in  accordance  with  the  relevant  rules  and  regulations  and its internal procedures. Nothing  herein  prevents  a  Regulated  FI  from  adopting a  different  risk-based  approach following  the  said  regular  requisites  and  procedures  in  determining  other  accounts as being low-risk accounts
• Minimum information and documents required in account opening: Complete name of customer, birthdate, e-mail address, address, mobile number, source of income, identification card, signature card
• FI shall implement measures to establish true identity of the customer, during or after the opening of account but not later than 15 days from the date the account is opened
• FI shall review the low risk account in random fashion or otherwise.
  • If an account ceases to be low-risk, normal/regular or enhanced due diligence, should be conducted immediately in accordance with the prescribed rules within 1 month.
  • Low risk accounts showing more than average activities trading activities shall be automatically subject to review of its low risk status.
• The Memorandum is issued in accordance with the SEC’s rules which prescribe a definite customer due diligence (Know Your Customer) requirements for broker dealers in securities, with focus on establishing the customer’s real identity and credit worthiness and elicit information necessary to comply with the suitability requirements.
• The Circular may be accessed (SEC Memorandum Circular No. 31, August 13, 2020)

EXCHANGES AND OTHER ORGANIZED MARKETS ARE MANDATED TO HAVE INDEPENDENT DIRECTORS THAT CONSTITUTE 1/3 OF THE MEMBERS OF THE BOARD OF DIRECTORS; AND 4 SECTORAL REPRESENTATIVES.

• SEC promulgates the rules on the number of independent directors and sectoral representatives of exchanges and other organized markets
• Independent Directors shall constitute at least 1/3 of the members of the board of directors of exchanges and other organized markets
  • The independent director of an exchange and organized market shall have relevant experience for at least 3 years prior to his election
• There shall be at least 4 Sectoral Representatives.
  • Sectoral Representatives refer to persons who represent the interests of issuers, investors and other market participants. He is affiliated with an entity that has issued securities traded in the organized market or engaged in the business of investing or investment management, or engaged individually in trading or investing in securities which are traded in an exchange or in an organized market; or engaged in the promotion, development and operation of capital or financial market-related activities other than being an issuer or investor
  • He must have at least 3 years of experience in or working knowledge of the related sector and the capital or financial markets
  • Directors representing the sectors may be elected for a maximum period of 10 years with mandatory cooling off period of at least 1 year after the first 5 years.
• A copy of the Memorandum Circular may be accessed HERE(SEC Memorandum Circular No. 20, 13 August 2020)

Bureau of Internal Revenue

BIR DEADLINES from AUGUST 16 to AUGUST 23, 2020. A gentle reminder on the following deadlines, as may be applicable:

BIR makes available the use of e-AUDITED FINANCIAL STATEMENT (“E-AFS”) System for the submission of attachments to the Income Tax Returns of Taxpayers with Fiscal-Year Accounting Period and in the Submission of Attachments to the Quarterly Income Tax Returns.

• All concerned taxpayers, availing the facilities of the eAFS System, whether or not registered under the Large Taxpayers Service, shall scan the required documents and comply with the BIR-prescribed procedures
  • Taxpayers shall keep the original copies of the digitally submitted documents in accordance. The same shall be presented, upon request, to the BIR. For your reference, the procedure may be accessed (Revenue Memorandum Circular No. 82-2020, August 11, 2020)

Court of Tax Appeals Decisions

EXCESS TAX CREDIT IN THE CURRENT YEAR CANNOT BE DISALLOWED BY THE BIR AS TAX BENEFIT ACCRUES IN THE SUBSEQUENT YEAR; BIR FORM 2307 MUST BE USED AS CREDIT IN THE SAME QUARTER OF THE TAXABLE YEAR IN WHICH THE INCOME IS EARNED OR RECEIVED, OTHERWISE DISALLOWED.

• The CTA En Bancpartially reversed the decision of the CTA Division with respect to the cancellation of the assessment. Among others, it ruled:
• The examination of books must be limited only to the period indicated in the LOA.
  • The assessment on excess tax credit is void because the coverage of tax assessment is 2009, but the tax benefit from the excess tax credits will be in the succeeding year (2010).
• Tax credits relating to income recognized in the prior year were properly disallowed.
  • In this case, the taxpayer used the BIR Form 2307 in the current year (2009) for the income recognized in the previous year (2008).
  • The Court held that the amount of creditable taxes withheld must be claimed as credit against the income tax liability of the payee in the same quarter of the taxable year in which it was earned or received. The declaration of income earned or received must be made in the same period with the claiming of the related tax credit. The taxpayer, as a payee, should ask for a copy of the BIR Form 2307 within 20 days from the close of the taxable quarter or simultaneous with the income payment.
  • The taxpayer has the duty to prove that the income was recognized in the same period that the related credit was claimed, otherwise, the credit will be disallowed (CIR v. Ayala Property Management Corporation, CTA EB No. 2053, CTA Case No. 9298, July 7, 2020).

PHP 13 MILLION DOCUMENTARY STAMP TAX (DST) REFUND DENIED: EXEMPTION FROM DOCUMENTARY STAMP TAX MUST BE CLEARLY ESTABLISHED; A LENDER’S EXEMPTION FROM DST SHIFTS THE LIABILITY TO A NON-EXEMPT BORROWER.

• The CTA denied the taxpayer’s DST refund. In this case, the taxpayer borrowed a loan from a lender, who is granted tax exemption.
• The law provides that a loan agreement is subject to DST. It is paid by the person making, signing, issuing, accepting or transferring the instrument. In other words, Any of the parties to the transaction shall be liable for the DST. When one of the parties to a loan agreement is exempt from tax, the other party not exempt from tax shall be directly liable for the DST.
  • In this case, the loan agreement is subject to DST. While the lender is granted tax exemption, being a specialized agency of the United Nations and member of the World Bank Group, its exemption is limited to authorized transactions, and loan is not one of them.
  • Even if the transaction is exempt from tax, the borrower-taxpayer in this case is liable as when one of the parties is exempt from tax, the other party not exempt shall be directly liable (South Negros Biopower, Inc. v. CIR, CTA Case no. 9921, July 8, 2020)

PHP 10 MILLION TAX ASSESSMENT PARTIALLY REDUCED; BUSINESS LEAGUE, CHAMBER OF COMMERCE OR BOARD OF TRADE’S EXEMPTION FROM INCOME TAX AND VAT, REQUISITES; REIMBURSEMENT OF EXPENSES IS NOT SUBJECT TO EXPANDED WITHHOLDING TAX (“EWT”); ANNUAL MEMBERSHIP IS NOT SUBJECT TO VAT; REGISTRATION FEES AND SPONSORSHIPS ARE SUBJECT TO VAT.

• The CTA partially reduced the taxpayer’s assessment.
• For business league, chamber of commerce, or board of trade to be exempt from income tax, the following should be established:
  • The entity is not organized for profit. The Certificate of Incorporation must establish the nature of the organization.
  • No part of the net income inures to the benefit of any private stockholder or individual; and
  • The income must not be from any of the properties, real or personal, or from any of their activities conducted for profit.
    • The source of income is a factor in determining whether the income is exempt from tax.
    • The entity must establish that the income is not subject to income tax. If the taxpayer fails to prove exemption, the assessment is valid.
  • Absence of tax exemption certificate does not operate to divest a taxpayer of the exemption that is specifically granted by the law. A Memorandum Circular by the BIR cannot add a registration requirement where there is none to begin with. The Tax Exemption Certificate should merely operate to confirm taxpayer’s entitlement to income exemption.
  • On Expanded Withholding Tax (EWT)
    • Income payments made by top withholding agents to their local/resident suppliers of goods other than those covered by other rates of withholding tax is subject to EWT. If the BIR fails to submit evidence that the taxpayer is a top withholding agent, the taxpayer is not required to withhold tax.
    • Reimbursement of expenses is not subject to withholding. Mere reimbursement of actual expenses/costs without any mark-up or profit element does not constitute income payments, and are, therefore, not subject to income tax and consequently, to withholding tax. Further, reimbursement of expenses, by its very nature, is not income but a mere return of capital.
    • Honorarium is subject to withholding tax.
    • Gift certificates are not subject to withholding tax.
    • Payments for hotel accommodation is not among those items of income payments subject to withholding tax.
  • On Value-Added tax
    • VAT is imposed on sale, barters, exchanges, among others, in the course of trade or business. The phrase in the course of trade or business means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock nonprofit private organization.
    • Even though the taxpayer proved that it is a business league, chamber of commerce or board state that is exempt from income tax, it must prove that the receipts were derived solely from the mandatory contributions of the members for its operating expenses, and not from rendering services in the course of trade or business.
      • Annual membership fees are not subject to VAT because they are treated as capital and not income. They are held in trust and used for the furtherance of the primary purpose for which the association is incorporated.
      • Registration fees collected from non-members in relation to the conduct of taxpayer’s event is subject to VAT because it is considered as performance of service for a fee as the non-member is permitted to join and participate in the event.
      • Sponsorship fee is also subject to VAT because it is paid in exchange for some benefits relative to the sponsor’s participation in the events of the taxpayer (CTA Case No. 9666, July 8, 2020).

COMPROMISE PENALTY REQUIRES CONFORMITY OF THE TAXPAYER.

• CTA En Bancupheld the CTA amended decision removing the compromise penalty.
• The compromise penalty can only be collected or imposed by agreement between the taxpayer and the BIR. It cannot be imposed without the agreement or conformity of the taxpayer. Otherwise, the imposition is illegal and unauthorized.The fact that the BIR uses the term “compromise penalty” connotes that there should have been prior conformity by the taxpayer. Compromise implies agreement (CIR v. Batangas Electric I Cooperative 1, CTA EB No. 1939, CTA Case No. 8423, July 8, 2020).

5-YEAR PRESCRIPTIVE PERIOD IN CRIMINAL CASES RELATED TO TAX RUNS FROM THE DATE OF TAX VIOLATION, OR IF UNKNOWN, FROM THE DATE OF DISCOVERY THEREOF UP TO THE DATE WHEN CASE IS FILED WITH THE DEPARTMENT OF JUSTICE.

• The CTA En Bancaffirmed the decision of the CTA Division dismissing the criminal case on the ground of prescription.
• Section 281 of the NIRC provides that all violations of any provision of the Tax Code shall prescribe after 5 years. The commencement of the prescriptive period shall run from the a) day of commission of the violation of the law; and (2) if the same is unknown at that time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment.
  • In the second mode, both the date of discovery and the institution of judicial proceedings for investigation and punishment are significant events in the prosecution of any infraction of the Tax Code. As long as the period from the discovery and institution of judicial proceedings for its investigation and punishment up to the filing of the Information in Court does not exceed 5 years, the government’s right to file a criminal action does not prescribe. Conversely, if the period from the institution of judicial proceedings for its investigation up to the filing of the information in court exceeds 5 years, then the government’s right to file an action has been prescribed.
  • In this case, the accused received the FAN in February 2007, and it became final when it failed to file its protest in March 2007. The date when FAN attained finality is the date of discovery of the violation.
  • The complaint affidavit against the accused was filed with the DOJ for preliminary investigation in 2011.
  • The 5-year prescriptive period begins to run in 2011 until 2016. However, the information was filed with the Court in 2018. Therefore, the 5-year prescriptive period had already lapsed (People of the Philippines v. Virgilio Castillo, CTA EB Crim No. 053, CTA Crim Case No. O-663, July 8, 2020).

PHP 94 MILLION TAX ASSESSMENT CANCELLED; RE-ASSIGNMENT OF TAX AUDIT REQUIRES ISSUANCE OF NEW LETTER OF AUTHORITY (LOA)

• The Court cancelled the tax assessment for lack of LOA.
• The law requires that any re-assignment/transfer of cases to another revenue officer shall require the issuance of a new Letter of Authority.
• In this case, the BIR re-assigned the taxpayer’s audit to other examiners without a LOA and in the form of  Memorandum of Assignment (MOA).
• The Court ruled that the MOA cannot be treated as an LOA as any re-assignment requires a new LOA. The said MOA’s fatal infirmity is further highlighted by the fact that it was signed and issued by a Revenue District Officer only and not by a Revenue Regional Director (Jed Marketing Corporation v. CIR, CTA Case No. 9709, July 9, 2020)

PHP 332 MILLION  EXCESS AND UNUTILIZED CWT GRANTED; REFUND MUST BE FILED WITHIN THE 2-YEAR PRESCRIPTIVE PERIOD; FACT OF WITHHOLDING MUST BE ESTABLISHED BY BIR FROM 2307; INCOME MUST BE INCLUDED IN THE TAX RETURN.

• The law grants two (2) options to a taxable corporation whose total quarterly income tax payments in a given taxable year exceed its total income tax due. The taxpayer may either:
  • file a tax refund (either in the form of cash or tax credit certificate) or
  • carry over the excess credit.
    • However, once the carry-over option is chosen actually or constructively it becomes irrevocable for that taxable period.
    • The phrase “for that taxable period” refers to the taxable year when the excess income tax, subject of the option, was acquired by the taxpayer
    • In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, either to carry over the excess credit or to claim a refund. To facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other.
  • Jurisprudence on claims of refund has dictated the following additional requirements:
    • The claim for refund must be filed within the two- year prescriptive period;
    • The fact of withholding must be established BIR Form 2307, showing the amount paid and the amount of tax withheld therefrom; and
    • The income upon which the taxes were withheld must be included in the return of the recipient (Procter & Gamble Distributing (Philippines), Inc. v. CIR, CTA No. 9634, July 9, 2020).

CRIMINAL CASE DISMISSED: THE BIR MUST ATTACH THE RELEVANT PLEADINGS AND DOCUMENTS IN ITS PETITION; AN APPEAL TO THE DEPARTMENT OF JUSTICE (DOJ) OUTSIDE THE 15-DAY PERIOD SHOULD BE DISMISSED.

• The CTA has jurisdiction over the Petition for Certiorari assailing DOJ’s resolution which affirms the dismissal of a criminal case against a taxpayer.
• The rules require that relevant pleadings and documents be attached and failure to comply with any of the documentary requirements, will be a sufficient ground for the dismissal of the petition. In the case, the BIR failed to attach the Motion for Extension of Time is an omission and a fatal infirmity.
• The DOJ correctly dismissed the criminal case for being filed out of time. Appeal should be taken within 15 days from receipt of the resolution. The period to file an appeal is non-extendible. The BIR filed its appeal beyond the 15-day period. (CIR v. Secretary of Justice, CTA Case No. 10101)

PHP 33 MILLION TAX ASSESSMENT CANCELLED; 180-DAY PERIOD WITHIN WHICH TO ACT ON THE PROTEST MAY BE RESET IF THE BIR SENDS ANOTHER NOTICE GIVING THE TAXPAYER TO SUBMIT ADDITIONAL DOCUMENTS SANS TAXPAYER’S REQUEST; THE BIR MUST AWAIT THE LAPSE OF 15-DAY PERIOD GIVEN TO THE TAXPAYER TO RESPOND TO THE PRELIMINARY ASSESSMENT NOTICE (PAN) BEFORE IT ISSUES THE FORMAL ASSESSMENT NOTICE, OTHERWISE ASSESSMENT IS VOID.

• In cases where the BIR failed to act on taxpayer’s protest with request for reinvestigation, the taxpayer has 30 days to appeal to the CTA from the lapse of 180-day period counted the date of submission of additional documents, which shall be made within 60 days from the filing of the protest.
• In this case, the taxpayer submitted supporting documents on April 11, 2014 and the BIR did not act on the protest within 180 days or until October 8, 2014. Supposedly, the taxpayer has 30 days or until November 7, 2014 to appeal to the CTA. Yet, the taxpayer filed the appeal only on January 21, 2015.
• Nevertheless, the court ruled that the appeal was filed within the reglementary period. It based its ruling on the fact that the BIR sent a letter to the taxpayer on June 11, 2014 giving the taxpayer 15 days to submit additional documents. The taxpayer submitted documents on June 25, 2014. Therefore, the BIR had 180 days or until December 22, 2014 to act on the protest. Considering that the BIR failed to act on it, the taxpayer has 30 days or until January 21, 2015 to elevate the case to the court.
  • The Court ruled that it cannot close its eyes to the glaring injustice should it allow the BIR to benefit from his mischievous scheme. Parenthetically, the BIR should not, on its own, have extended the period to submit relevant supporting documents in support of the protest but – having done so – it cannot thereafter escape from its consequence and righteously argue that taxpayer’s appeal was filed out of time.
  • The FAN was issued in violation of the taxpayer’s right to due process; therefore, the assessment is void.
    • The taxpayer has 15 days within which to reply to the PAN. However, it received the PAN 6 days after the PAN was issued or within the 15-day period. PAN is an important part of the due process.
    • The fatal infirmity that attended the issuance of the FLDs and Assessment Notices prior to the lapse of the fifteen (15)-day period to respond to the PAN was not cured by petitioner’s filing of a protest to the FAN (Solutions Using Renewable Energy, Inc. v. CIR, CTA Case No. 8974, July 9, 2020).