Client Advisory Letter April 2016

Client advisory letter

Isla Lipana & Co.

ISSN 2094-1226/April 2016No WTC on cellphone allowances p4 | CTA clarifies that deficiency interest applies to all taxes p5 | PWDs are now VAT-exempt p6 | Unappealed void assessment attains finality p7 | New guidelines on waivers of prescription p10

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2 Client advisory letter 2016

At a glanceUpdates, reiterations and clarifications on selected topics

Disclosure initiative: Improving the effectiveness of disclosure in financial reporting

Latest on income tax and other taxes Salaries variance not an income; rather an out-of-period expense .................................................................... 4No WTC on cellphone allowances ................................................ 4Receipts must show VAT amount for input tax credit ................. 4CTA clarifies that deficiency interest applies to all taxes ............. 5Simultaneous deficiency and deliquency interest valid ............... 5Ancillary revenue of NS/NP school is tax-exempt ...................... 5Income of retirement fund is tax-exempt ..................................... 5Projects under the GADC are either 0% or VAT-exempt ............. 6Mandatory information disclosure in ITR moved to 2016 ............ 6PWDs are now VAT-exempt ........................................................... 6

Latest on tax assessments/ refund procedures Warrant of distraint is void if FAN is not received ......................... 7BIR Form 2307 is not the only support for TCC claims ............... 7Unappealed void assessment attains finality ............................... 7Delivery to wrong address renders assessment void.................. 7Filing of refund with BIR is prerequisite to CTA appeal ................ 8

Latest on regulatory landscapeBIR’s new system for registration of non-individual taxpayers ... 8BIR’s streamlined process of registration ..................................... 9Roles of OIC in BIR ......................................................................... 9Policies on ATRIGs for imported cars ........................................... 9New guidelines for waivers of prescription ................................. 10Minimum requirements for pre-need products .......................... 10Changes on e-Commerce of insurance products ..................... 10Valuation of real properties for insurance purposes ...................11BOC requires advance cargo declaration ...................................11Call for unpaid subscriptions ........................................................11Board quorum under the law is the minimum ............................ 12BSP approves Basel III framework on liquidity standards ........ 12Amendment to regulations on reserves against TOFA-others.. 13Amendment to the UITF regulations .......................................... 13Implementing the agricultural value chain financing framework 13BSP revises foreign loan registration rules ................................ 13BOI-registered entities are required to file through eFPS ......... 14New compensation system for GOCCs ..................................... 14

Amendments to IAS 1, ‘Presentation of financial statements’

In December 2014, the International Accounting Standards Board (IASB) issued amendments to IAS 1, ‘Presentation of Financial Statements’. These amendments clarify guidance in IAS 1 on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. The amendments form a part of the IASB’s Disclosure Initiative, which explores how disclosures in International Financial Reporting Standards (IFRS) financial reporting can be improved.

Background

Responding to the challenge of improving the effectiveness of disclosures in financial reports, the IASB completed the first step in its Disclosure Initiative with the publication of Disclosure Initiative (Amendments to IAS 1). The Disclosure Initiative, which started in 2013, is made up of a number of implementation and research projects that includes targeted actions as well as a broad and ambitious review of disclosure requirements.

The narrow-focus amendments to IAS 1 are designed to further encourage companies to apply professional judgement in determining what information to disclose in their financial statements. Moreover, these are intended to clarify, rather than significantly change, existing IAS 1 requirements. In most cases the amendments respond to excessively rigid interpretations of the wording in IAS 1.

Impact

The following is a summary of the key changes.

1. Materiality

An entity should not aggregate or disaggregate information in a manner that obscures useful information, for example, by aggregating items that have different characteristics or disclosing a large amount of immaterial detail.

When management determines an item is material, the amendments require assessment of which specific disclosures set out in the relevant standard should be presented, and whether additional information is necessary to understand the impact on the financial position or performance.

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Disclosure initiative: Improving the effectiveness of disclosure in financial reporting

2. Disaggregation and subtotals

The amendments clarify that it may be necessary to disaggregate some of the line items specified in IAS 1 paragraphs 54 (statement of financial position) and 82 (profit or loss). That disaggregation is required where it is relevant to an understanding of the entity’s financial position or performance.

The amendments address additional subtotals in the statement of financial position or the statement of profit or loss and other comprehensive income. The amendments give guidance on what additional subtotals are acceptable and how they are presented. The revised guidance captures common subtotals that are not specifically required by IFRS, such as operating profit or profit before interest and tax. Additional subtotals should:

• be made up of items recognized and measured in accordance with IFRS

• be presented and labelled in a manner that makes the components of the subtotal understandable

• be consistent from period to period

• not be displayed with more prominence than the subtotals and totals specified in IAS 1.

The amendments require that additional subtotals in the statement of profit or loss and other comprehensive income should be reconciled to the subtotals and totals required by IAS 1.

3. Notes

Management should consider the understandability and comparability of the financial statements when it determines the order of the notes. An entity is not required to present the notes to the financial statements in a particular order. An entity might, for example, present more significant notes first, or present linked areas sequentially. Such flexibility, which is already permitted by IAS 1, allows management to tailor their presentation to their circumstances.

4. Disclosure of accounting policies

The amendments clarify how to identify a significant accounting policy by removing unhelpful examples from IAS 1.

5. OCI arising from investments accounted for under the equity method

The amendments require that the share of other comprehensive income arising from investments accounted for under the equity method is grouped based on whether the items will or will not subsequently be reclassified to profit or loss. Each group should then be presented as a single line item in the statement of other comprehensive income.

Effective date and transitional provision

The amendments are effective for annual periods beginning on or after 1 January 2016. The transition provisions state that the disclosures in paragraphs 28-30 of IAS 8, that is, those regarding adoption of a new standard/policy are not required. Early application is permitted. The amendments have been adopted in the Philippines and shall also be effective for annual periods beginning on or after 1 January 2016.

Key messages

The amendments will affect every entity preparing IFRS financial statements. The amendments do not require specific changes. However, they clarify a number of presentation issues and highlight that preparers are permitted to tailor the format and presentation of the financial statements to their circumstances and the needs of users.

The order of the notes needs to balance understandability and comparability and changes should generally result from a specific change in facts and circumstances.

Together with the amendments to IAS 1, preparers should also carefully consider recent Philippine Securities and Exchange Commission (SEC) guidelines on financial statement disclosures. These includes test of materiality (SEC Memorandum Circular No. 8 series of 2009), certain presentation format of related party disclosures (SEC Financial Reporting Bulletin No. 013), and recent compilation of material findings on audited financial statements as reviewed by the SEC (http://www.sec.gov.ph/accountants-information/findings-on-financial-statement).

In conclusion, preparers should review compliance of their financial statements in light of these amendments to and the SEC guidelines on financial statement disclosures.

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Receipts must show VAT amount for input tax creditA taxpayer filed an administrative claim for refund or issuance of TCC for its unutilized excess input VAT attributable to zero-rated sales for the second quarter of 2009.

The CTA denied a portion of the claimed input VAT that failed to meet the requirements for substantiation; more specifically, the VAT amount that was not separately indicated in the invoices or official receipts. Under the Tax Code2, the amount of the tax, in this case VAT, should be shown as a separate line item in the invoice or official receipt.

Citing an SC case3, the CTA en banc held that the invoicing and substantiation requirements must be strictly observed to determine the veracity of the taxpayer’s claims. Failure on the part of the taxpayer to prove that all the requirements for entitlement had been met will merit a denial of the refund claim in whole or in part.(CTA EB No. 1241 & 1243 dated 30 March 2016)

2 Section 113(B)(2)(a) of the Tax Code3 G.R. No. 181858 dated 24 November 2010

Latest on income tax and other taxes

Salaries variance not an income; rather an out-of-period expenseThe BIR alleged that the taxpayer has unaccounted source of cash or undeclared income because the total salaries reflected in the alphalist of employees is higher than the salaries in its AFS.

The CTA did not agree. The court noted that the taxpayer is using the accrual method of accounting and that the discrepancy is related to accrued bonus in 2004 but deducted as expense in 2005 when the same was actually paid out to the employees. According to the CTA, this doesn’t give rise to income but rather an over-claimed expense in 2005, citing an SC case1 which recognized the rule in RAMO No. 1-2000 stating that under the accrual method of accounting, expenses not claimed as deduction in the year that they were accrued cannot be claimed as deduction in the following year. (CTA Case No. 8372 dated 31 March 2016)

No WTC on cellphone allowancesIn this case, the CTA en banc ruled that mobile phone allowances that redound to the benefit of the employer are not considered compensation subject to withholding tax on compensation (WTC) nor fringe benefit tax (FBT). Under the rules, business expenses which are necessary to the conduct of trade or business should not be reflected as compensation benefits of the employee, as they ultimately benefit the employer.

Lastly, payments for training and conference expenses are not subject to withholding tax as they are not among those enumerated in RR No. 2-98.(CTA EB No. 1169 dated 30 March 2016)

1 G.R. No. 172231 dated 12 February 2007

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AFS - Audited Financial StatementsBIR - Bureau of Internal RevenueCTA - Court of Tax AppealsNS/NP - Non-stock, non-profitRAMO - Revenue Audit Memorandum OrderRR - Revenue RegulationSC - Supreme CourtTCC - Tax Credit CertificateVAT - Value-Added TaxWTC - Withholding Tax on Compensation

Glossary

CTA clarifies that deficiency interest applies to all taxesThe CTA en banc now rules that under Section 247(a) of the 1997 Tax Code, additions to the tax, such as deficiency interest and delinquency interest, shall apply to all taxes imposed in the Tax Code. This provision was first legislated as a revision to the 1977 Tax Code, which at that time authorized the imposition of interest and surcharge only on taxes within Title II of the Code (Income Tax).

Simultaneous deficiency and deliquency interest validDeficiency interest and delinquency interest may be simultaneously imposed until full payment of the tax since there is no indication in Section 249 that the imposition of one suspends the application of the other.

Deficiency interest is computed from the date prescribed for the payment of tax, until the date of full payment. As for delinquency interest, it shall run from the due date appearing in the notice and demand of the Commissioner until the date of full payment. Thus the simultaneous application of deficiency and delinquency tax shall start, from the due date appearing in the notice and demand of the Commissioner until full payment.

Note: Please see contradicting ruling in CTA EB 1117 dated 21 September 2015.(CTA EB No. 1218 dated 11 April 2016)

Ancillary revenue of NS/NP school is tax-exempt Revenues and assets of a non-stock, non-profit educational (NS/NP) institution actually, directly and exclusively used for educational purposes shall be exempt from payment of internal revenue taxes and duties. This shall include exemption from VAT pursuant to the Tax Code4.

Also exempt are revenue from assets used in its ancillary activities located within its premises, provided these are incidental to and reasonably necessary for the accomplishment of the objectives as an educational institution. In this case, the revenues generated by the cafeterias/canteens and bookstores are exempt from tax because they are owned and operated by the NS/NP entity, are necessary to the nature of its activities and are located within its premises.

4 Section 109(1)(H) of the Tax Code

Nonetheless, the educational institution is still required to withhold tax on the compensation income of its employees or on income payments enumerated under RR No. 2-98 pursuant to Section 57 of the Tax Code, as amended.

Other income resulting from unrelated activities, the conduct of which is not substantially related to the exercise or performance by the educational institution of its primary purpose, shall be subject to the applicable internal revenue taxes.(BIR Ruling No. 431-2015/ BIR Ruling No. 411-2015 dated 14 and 17 December 2015)

Income of retirement fund is tax-exempt Interest income derived by a retirement fund from its investments and exclusively used for the benefit of the member-employees/officials or their beneficiaries shall be exempt from withholding tax.

For a retirement fund to be exempt from withholding tax, Section 60(B) of the Tax Code, as amended, requires a) that contributions made by the employer/employee or both are made solely for the purpose of distributing back to the employees the earnings and funds accumulated by said trust; b) that no part of the capital or income earned by the fund shall be used for other purposes, except for the exclusive benefit of the employees; and c) that under the trust instrument, it is impossible for any part of the corpus or income to be used for, or diverted to, purposes other than for the exclusive benefit of the employees. (BIR Ruling No. 87-2016 dated 14 March 2016)

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BIR - Bureau of Internal RevenueCTA - Court of Tax AppealsFAN - Final Assessment NoticeFLD - Formal Letter of DemandGADC - General Agreement on Development CooperationGOA - Government of AustraliaITR - Income Tax ReturnPAN - Preliminary Assessment NoticePWD - Persons with DisabilityRA - Republic ActRR - Revenue RegulationSC - Supreme CourtTCC - Tax Credit CertificateVAT - Value-Added Tax

Glossary

Projects under the GADC are either 0% or VAT-exemptSupplies purchased for use in projects under the coverage of the Philippine-Australia General Agreement on Development Cooperation (GADC) and funded by the Government of Australia (GOA) shall either be subject to VAT zero-rating if procured domestically or VAT-exempt if imported from outside. Services will be subject to zero percent VAT only when rendered by individuals or general partnerships registered in the Philippines, while professional and technical materials will be exempted from VAT if these are imported by Australian personnel or Australian institutions, firms and organizations, for their professional use while engaged in an activity under the GADC and paid for from funds provided by the GOA.

Under Sections 106(A)(2)(c) and 109(1)(K)of the Tax Code, certain transactions involving the sale of goods or properties are exempted or subject to VAT at zero percent if they are treated as such under special laws or international agreements to which the Philippines is a signatory.(BIR Ruling No. ITAD 33-16 dated 21 March 2016)

Mandatory information disclosure in ITR moved to 2016Disclosure of supplemental information under BIR Form Nos. 1700 and 1701 is optional for filing of income tax, on or before 15 April 2016. However, for income tax filing covering and starting with calendar year 2016, the disclosure of supplemental information will be mandatory.

Taxpayers are advised to demand from their payors and to properly document their BIR Form No. 2307 (Certificate of Creditable Tax Withheld at Source) and other evidence for final taxes withheld. Those engaged in business should properly receipt and book all income, whether they are subject to final withholding tax or whether the income is tax-exempt.(Revenue Memorandum Circular No. 41-2016 dated 1 April 2016)

PWDs are now VAT-exemptOn 23 March 2016, the President signed into law RA No. 107545, which expands the benefits and privileges of persons with disability (PWD). Among the notable privileges of PWDs who are Filipino citizens is the VAT exemption on certain sale of goods and services for the exclusive use and enjoyment of the PWD.

PWDs may avail of the privileges upon submission of any proof of entitlement, such as: ID card issued by the city or municipal mayor or barangay captain of the place where the PWD resides, passport, or transportation discount ID issued by the National Council for the Welfare of Disabled Persons.

The discounts granted to PWDs may be claimed by establishments as tax deductions from the gross income for the same taxable year the discount was granted.

Furthermore, those caring for and living with a PWD may treat the PWDs (i.e. those who are within the taxpayer’s fourth civil degree of consanguinity or affinity, regardless of age, who are not gainfully employed and chiefly dependent on the taxpayer) as dependents under Section 35(B) of the Tax Code6.(Republic Act No. 10754 approved on 23 March 2016)

5 Amending the Magna Carta for Persons with Disability (RA No. 7277)

6 Section 35(B) of the Tax Code allows an additional exemption of PHP25,000 for each dependent not exceeding four.

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Warrant of distraint is void if FAN is not receivedIn this case, the issue is the validity of a warrant of distraint and/or levy issued by the BIR against a taxpayer. On appeal, the SC ruled that the warrant of distraint was void due to the failure of the BIR to prove that the FAN was received by the taxpayer. Whenever a taxpayer denies having received an assessment, the burden of proof shifts to the BIR to show that the assessment was indeed received by the taxpayer. Records show that the BIR failed to present the testimony of the person who allegedly prepared and signed the transmittal letter. Moreover, based on the postmaster’s certification submitted in evidence by the BIR, the mail matter received by the taxpayer before the end of the three-year prescriptive period to assess could not have been the PAN, nor the FAN, because of inconsistencies in the relevant dates. The release, mailing or sending of the assessment must still be clearly and satisfactorily proved. In the absence of adequate supporting evidence, the SC denied the BIR’s petition and ordered the cancellation of the warrant of distraint and/or levy.(G.R. No. 202695 dated 29 February 2016)

BIR Form 2307 is not the only support for TCC claimsWith regard to probative value, BIR Form No. 2307 establishes the fact of withholding of the claimed creditable withholding tax. However, other BIR forms (such as BIR Form No. 1606), which also contains the same key information that may be gathered from BIR Form No. 2307, can likewise prove the fact of withholding and support TCC claims. (CTA EB No. 1194 & 1199 dated 21 March 2016)

Latest on tax assessments/ refund procedures

Unappealed void assessment attains finalityA taxpayer who is dissatisfied with the local treasurer’s denial or inaction over an assessment has 30 days to appeal to the court of competent jurisdiction. This is even if the assessment is void. An assessment, whether valid or void, shall become final and executory if the taxpayer fails to appeal the denial of the protest within the prescribed period. Thus, a void assessment can attain finality if not appealed.(CTA EB No. 1250 dated 8 April 2016)

Delivery to wrong address renders assessment voidNotice of assessment is not proper when delivery of the PAN, FAN and FLD is made to the wrong address. In this case, the BIR was previously made aware of the new address but continued to send the assessment notice to the taxpayer’s former address. The BIR already acquired knowledge of the change in address prior to sending the FAN and FLD and such knowledge was also admitted in the stipulation of facts.

For an assessment notice to be valid, it must be properly addressed to the taxpayer. Section 288 of the Tax Code provides that, the taxpayer shall be informed in writing on the basis of the assessment made; otherwise, failure of the BIR to do so would violate the taxpayer’s right to due process. Section 3 of RR No. 12-99 requires the actual receipt of notice by the taxpayer for the assessment to be binding.(CTA Case No. 7999 dated 17 March 2016)Isl

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ATRIG - Authority to Release Imported GoodsBIR - Bureau of Internal RevenueBOC - Bureau of CustomsCTA - Court of Tax AppealsCSS - Client Support SectioneFPS - Electronic Filing and Payment SystemeTIS1-TRS - Electronic Tax Information System - Taxpayer Registration SystemELTRD - Excise Large Taxpayers Regulatory DivisionLTAD - Large Taxpayers Assistance DivisionLTD - Large Taxpayers DivisionOIC - Officer-in-ChargeRDO - Revenue District OfficerRR - Revenue RegulationsVAT - Value-Added Tax

Glossary

Latest on regulatory landscape

Filing of refund with BIR is prerequisite to CTA appealIn a case involving an application for abatement of VAT surcharge liability with the BIR, the taxpayer filed a petition with the CTA to overturn the denial of the abatement. An amended petition was later filed with the CTA to reflect payment of the VAT surcharge during the pendency of the case with an additional prayer, asking the CTA to grant the taxpayer’s claim for refund of its VAT surcharge payment. The CTA decided in favor of the BIR by declaring that an administrative claim, filed within two years from payment of the penalty, is a condition precedent to the filing of a claim for refund before the courts. There was no evidence that any administrative claim for the VAT surcharge was filed with the BIR before the amended petition containing the claim for refund was filed with the CTA. Since the CTA cannot exercise its jurisdiction to review on appeal, the petition was denied.(CTA Case No. 8609 dated 6 April 2016)

BIR’s new system for registration of non-individual taxpayersTo ensure efficiency in the processing time for the registration of non-individual taxpayers under the eTIS1-TRS pilot district offices, the BIR issued policies and procedures for encoding and scanning of relevant documents and other information.

As per this order, each pilot district office using the eTIS1-TRS shall be provided with one scanner that should be connected with a designated desktop computer to be solely used for the registration of non-individual taxpayers. The scanner shall be located in the Client Support Section (CSS) or Registration Section of the district office. To minimize processing time in the frontline services, the scanning and encoding of applicant’s information and documents shall be done at the back-end. All hard copies and scanned documents shall be kept following the policies on safekeeping and the records disposition schedule of the Bureau.

After receiving and validating the application for registration (BIR Form No. 1903) with the required documents, the CSS/LTAD/ELTRD/LTD of Makati and Cebu shall encode the information per application form in the eTIS1-TRS except for the stockholders/members/partners’ information. Scanned copies of the documentary requirements in portable document format (.pdf) shall be stored in a shared directory created by the Revenue Data Center. It will be saved in a folder with a uniformed name format. Updating of all applications (BIR Form No. 1903) shall be done before the end of the day based on the image of all scanned documents.(Revenue Memorandum Order No. 13-2016 dated 14 April 2016)Isl

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Latest on regulatory landscape

BIR’s streamlined process of registrationTo reduce processing time of business registration and to optimize overall registration sequence, the BIR had integrated some procedures that can be undertaken simultaneously by the taxpayer.

The application for authority to print manual receipts/invoices, the registration of manual books of accounts and the issuance of the Certificate of Registration (COR) can be simultaneously processed in one day or within eight working hours provided that the documentary requirements are complete upon submission and are accomplished according to BIR policies. Forms can be downloaded from the BIR website and the annual registration fee can be paid through electronic and mobile payment, i.e. GCash or other ePayment modes.

In lieu of issuance of manual receipts and maintaining manual book of accounts, the taxpayer may opt to use Computerized Accounting System (CAS) and/or Computerized Books of Accounts (CBA) using Cash Register Machines (CRM) or Point of Sale (POS) machines provided that the devices were acquired from a BIR-accredited supplier with Permit To Use (PTU). As a precautionary measure in case of system downtime or technical difficulties, taxpayers may secure manual receipts and invoices, which may be applied for after primary registration with the BIR.(Revenue Memorandum Circular No. 43-2016 dated 7 April 2016)

Roles of OIC in BIRUnder this memorandum, all internal revenue personnel assigned in an officer-in-charge (OIC) capacity shall exercise authority and discharge responsibilities as if they are holding the employment item for the particular office, subject to legal and internal limitations.

Furthermore, an OIC-Regional Director is equally authorized and responsible as a regular Regional Director

for the issuance of electronic Letters of Authority and assessment or demand notices, among others. Likewise, an OIC-Revenue District Officer will have the same authorization and responsibility as a regular RDO for the issuance of an electronic Certificate Authorizing Registration.(Revenue Memorandum Order No. 9-2016 dated 11 March 2016)

Policies on ATRIGs for imported carsThe following are the prescribed policies, procedures and guidelines in the issuance of Authority to Release Imported Goods (ATRIGs) for imported automobiles already released from customs custody:

• Policies and guidelines for issuance

The registered owner of the automobiles shall file for the issuance of ATRIG on or before the deadline mandated in RR No. 2-2016 for each automobile owned. If the automobiles were already released by the Bureau of Customs (BOC) without an issued ATRIG, a duly notarized application for ATRIG signed by the registered owner or his/her authorized representative, shall be filed with the ELTRD.

No ATRIG shall be issued unless the correct taxes, including 50% surcharge and 20% interest, have been paid. Prior payments from previously issued ATRIG for the same automobile shall be credited against the amount that should have been paid before computation of surcharges and interest as indicated in the certificate of payment. The duplicate copy of the proof of payment (i.e. Confirmation of Banks for eFPS or bank validated payment form for eBIRForm user) shall be submitted for validation. Thereafter, the ELTRD shall reconcile all applications received from the BOC with the certificate of payments to verify the accuracy of the documents. The ELTRD shall obtain these documents from the BOC not later than 31 May 2016. After verification of all requirements, the Manual ATRIG Form (BIR Form No. 1918) shall be prepared and issued to be signed by the Commissioner of Internal Revenue.

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• Procedures for ELTRD, Office of HREA/ACIR and Office of the Commissioner

The ELTRD shall be responsible for receiving, checking and evaluating applications for ATRIG. Thereafter, the corresponding taxes including surcharges and interest shall be computed and payments to BOC, if any, shall be validated. Payment must be made on or before 30 April 2016 through Authorized Agent Banks (AABs), and the original copy of the payment forms should be submitted and attached to the dockets for verification. After reconciliation of all documents, the Manual ATRIG Form shall be issued in three copies, i.e. the original copy for BOC and two copies for the issuing office (ELTRD). The Manual ATRIG Form shall then be transmitted to the Office of the HREA, Assistant Commissioner and Large Taxpayers Service for review and initials, and finally to the Office of the Commissioner of Internal Revenue for signature.

A “one ATRIG-one automobile” policy shall be enforced to ensure that the importation of automobiles is accounted for.(Revenue Memorandum Order No. 12-2016 dated 29 March 2016)

New guidelines for waivers of prescriptionThe following are the revised guidelines in the execution of a “Waiver of the Statute of Limitations” to extend the prescriptive period for assessment or collection of taxes:

1. No prescribed format is required for a waiver to be valid. Non-compliance with the format stated in RMO No. 20-90 or RDAO No. 5-01 does not invalidate a waiver provided that:

- It is executed before the expiration of the period to assess or to collect taxes;

- It is signed by the taxpayer himself, his duly authorized representative, or in the case of a corporation, any of its responsible officials; and

- It indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription.

2. Waivers extending the period to collect taxes must state the particular taxes being assessed. However, waivers for tax assessment cases need not specify the particular taxes to be assessed or its amount, i.e. it may simply state “all internal revenue taxes”.

3. Taxpayers have the burden of ensuring that their waivers are validly executed by their authorized representative.

4. A waiver may be notarized.

5. A waiver is effective and binding on the taxpayer upon its execution.

6. Taxpayers have the duty to submit to and have the duly executed waiver signed by the proper BIR officer. Waivers are to be executed and duly accepted prior to the expiration of the period to assess or to collect.

7. There are only two material dates that need to be present in the waiver, namely:

- The date of execution of the waiver by the taxpayer or its authorized representative

- The date of expiration of the period the taxpayer waives the statute of limitations

(Revenue Memorandum Order No. 14-2016 dated 4 April 2016)

Minimum requirements for pre-need productsTo simplify the process of approval of pre-need products, the following are the minimum requirements prescribed to implement Sections 15 and 17 of the Pre-need Code of the Philippines (RA No. 9829), namely: (1) submission of pre-need products for approval with the duly accomplished Checklist of Minimum Requirements for the Approval of Pre-Need Plans (Annex “A”), and (2) submission of the Actuary’s Certification (Annex “B”). All pre-need plan contracts, application forms, certificate, sales materials, and other related forms shall strictly comply with the substantive requirements of the Pre-Need Code, its implementing rules and regulations and pertinent circulars and guidelines issued by the Insurance Commission.(Insurance Commission Circular Letter No. 2016-10 dated 8 March 2016)

Changes on e-Commerce of insurance productsThe guidelines on e-Commerce of insurance products are amended to read as follows: (1) Section 7.9 of CL No. 2014-47: for variable life insurance products, the insurance providers shall refer the consumer to a licensed agent for servicing and product advice provided that if the product contains the following features, servicing by a licensed agent is at the option of the consumer: (a) single premium product and single premium up to PHP125,000, (b) death benefit shall be subject to the minimum guaranteed benefit and no other benefits shall be provided, (c) only one investment fund shall be offered, (d) no fund-switching, fund top-up, partial withdrawal, and other similar transactions, and (e) other features as may be determined by the Commission; (2) Section 14 of CL No. 2014-47: insurance companies shall ensure that the

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Philippines shall retain jurisdiction regardless of its data servers; (3) Section 7.20 on renewal of policies in electronic format is newly added, allowing the issuance of insurance policy in electronic form provided it has the consent of the insured; (4) Section 7.21 on issuance of electronic policy in traditional sale is also added, allowing the issuance of insurance policy in electronic form in a traditional non-internet insurance sales provided it has the consent of the insured.(Insurance Commission Circular Letter No. 2016-15 dated 15 March 2016)

Valuation of real properties for insurance purposesFor processing of requests for approval of the valuation of real estate properties, the procedures are as follows: (1) the property being requested for appraisal shall be duly registered in the company’s name and free from any lien or encumbrance; (2) the limitations and conditions set forth in the new Insurance Code shall be strictly observed; (3) foreclosed properties shall be disposed of within 20 years after the title had been vested in it; (4) together with the written request for approval, the appraisal report of an appraisal company duly accredited by the SEC and photocopy of the Transfer Certificate Title and/or Condominium Certificate of Title shall be submitted to the Insurance Commission. The request for approval shall be subject to a filing fee of PHP5,050 inclusive of the 1% legal reserve fund.(Insurance Commission Circular Letter No. 2016-16 dated 23 March 2016)

BOC requires advance cargo declarationTo enable the BOC to track the movement of cargoes from the port of origin and evaluate the risk of incoming shipments, the BOC now requires all shipping lines/ship agents, non-vessel operating common carriers (NVOCCs), freight forwarders/cargo consolidator/co-loaders to electronically transmit all cargo information within 24 hours from the time of departure of the carrying vessel from the port of origin.

Certain information such as bill of lading number, marks and numbers of cartons, drums, boxes, crates and other packages, container and seal number, contents of cargo, shipper, consignee, gross weight in metric tons, among others should appear in the Inward Foreign Manifest (IFM) and Consolidated Cargo Manifest (CCM).

For containerized cargoes loaded to the mother vessel from the port of origin, both the shipping line/ship agent and NVOCC/freight forwarder/consolidator shall electronically

submit Cargo Declaration, IFM and CCM to the BOC within 24 hours from the time of departure of the mother vessel from the exporting port of origin. On the other hand, for cargoes transported by a feeder vessel or any vessel with any port in the Philippines, the shipping line/ship agent shall electronically submit the IFM within 24 hours, and the CCM for NVOCC/freight forwarders/consolidator within 36 hours from the time of departure from the last port of call destined to any importing port in the Philippines.

For non-containerized cargoes, the shipping line/ship agent shall electronically submit the IFM within 24 hours, and the CCM by the NVOCC, if any, within 36 hours from the actual exporting port of origin.(Customs Administrative Order No. 1-2016 dated 22 January 2016)

Call for unpaid subscriptions• Calls for unpaid subscription may be made in full payment

or by installment

Under the Corporation Code of the Philippines7, a call by the board of directors may require the payment of the entire unpaid subscription or only a certain percentage of it on the date specified for payment. However, it does not give the Board absolute power since calls for payment is required only when there is no fixed date for payment in the contract of subscription. Otherwise, the balance will only become due and payable upon the arrival of the fixed date provided in the contract.

7 Section 67 of the Corporation Code of the Philippines

ACIR - Assistant Commissioner of Internal RevenueATRIG - Authority to Release Imported GoodsBOC - Bureau of CustomsCCM - Consolidated Cargo ManifestCL - Circular LetterELTRD - Excise Large Taxpayers Regulatory DivisionHREA - Head Revenue Executive AssistantsIFM - Inward Foreign ManifestNVOCC - Non-vessel Operating Common CarriersRA - Republic ActRDAO - Revenue Delegation Authority OrderRMO - Revenue Memorandum OrderSEC - Securities and Exchange Commission

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• Indivisibility of subscription contract

A stockholder shall only be entitled to the issuance of his certificate of stock upon full payment, together with interest and expenses. Therefore, a company cannot issue stock certificates representing the amount equivalent to the partially paid subscriptions. In the same manner, a stockholder who has not fully paid cannot transfer part of his subscription. However, the entire subscription, although not fully paid, may be transferred to a single transferee who shall also assume the unpaid balance. In such circumstance, the consent of the corporation has to be secured first as it contemplates a novation of the contract.

• Dividends cannot be used to pay for unpaid subscriptions

Cash dividends cannot be withheld from a subscriber who is not fully paid unless they are delinquent on their unpaid subscriptions or the stockholder concerned gave his consent. Also, stock dividends in the same corporation, cannot be used to compensate for the due subscription as there is no relation between the creditor and debtor with regard to such share.

• Failure to pay an installment shall render the whole subscription delinquent

If a stockholder fails to pay the unpaid subscription upon the expiration of the 30-day period from the date specified in the contract or the date stated in the call, the whole subscription, and not just the portion of the subscription which is due, shall automatically be rendered delinquent. However, the board of directors may order the removal of the delinquent status of unpaid subscription, provided that calls must operate uniformly upon all shareholders. A call cannot be made discriminatorily that would allow directors to practice favoritism or act oppressively.

• Remedies for unpaid subscription

Failure of the stockholder to pay renders the entire balance due and payable and makes all the stocks covered by the said subscriptions delinquent and subject to sale at a public auction. There are two remedies for the corporation to enforce liability. The first remedy is to put up the delinquent shares for sale. The second remedy is by an action in court to recover the unpaid subscription8. An unsuccessful attempt to sell the shares will not bar an action in court.(SEC-OGC Opinion No. 16-05 dated 31 March 2016)


Board quorum under the law is the minimumThe quorum in board meetings as provided by law is the majority of the number of directors or trustees. However, the articles of incorporation or by-laws of the corporation may fix a greater number than the majority of the number of board members to constitute a quorum necessary for the valid transaction of business9.

Under the given facts, if there are five members of the Board of Trustees, a majority to constitute a quorum should be at least three. If what was provided in the by-laws is that the majority is only two, then the by-laws contradict the law. Where there is conflict between the Corporation Code and the by-laws, the former shall prevail.(SEC-OGC Opinion No. 16-07 dated 4 April 2016)

BSP approves Basel III framework on liquidity standards On 18 February 2016, the Monetary Board approved the liquidity standards, which includes the liquidity coverage ratio (LCR), and LCR disclosure standards consistent with the Basel III framework.

Under the new rules, all universal and commercial banks are required to maintain, over a 30-calendar day horizon, an adequate level of unencumbered high-quality liquid assets (HQLAs) that can be easily converted to cash to protect them in case of a liquidity stress scenario. The LCR is the ratio of HQLAs to total net cash outflows, which should be no lower than 100% on a daily basis under a normal situation.

For reporting purposes, banks are required to report to the BSP their LCR position through the Supervisory Data Center and to submit a sworn certification of compliance with LCR


BSFI - BSP-Supervised Financial InstitutionsBSP - Bangko Sentral ng PilipinasCIS - Collected Investment SchemesLCR - Liquidity Coverage RatioMORB - Manual of Regulations for BanksTOFA - Trust and Other Fiduciary AccountsUITF - Unit Investment Trust Fund

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requirements. Banks are also required to publicly disclose information related to the LCR by publishing in a quarterly balance sheet, and either, on the bank’s website or in other published financial reports or publicly available regulatory reports.

To facilitate compliance of banks, the LCR shall be implemented in a phased-in arrangement. During the observation period (1 July 2016 to 31 December 2017), banks are not yet required to present a sworn certification of compliance as no minimum ratio is required. Starting 1 January 2018, the prescribed minimum shall be set initially at 90%, and will be increased to 100% beginning 1 January 2019.(BSP Circular No. 905, Series of 2016 dated 10 March 2016)

Amendment to regulations on reserves against TOFA-othersSubsections X405.5b/4405Q.5b of the MORB is amended to allow banks or institutions authorized to engage in trust and other fiduciary business to maintain reserves on Trust and Other Fiduciary Accounts (TOFA)-Others, except accounts held under 1) administratorship, 2) trust under indenture, 3) custodianship and safekeeping, 4) depository and reorganization, 5) employee benefit plans under trust, 6) escrow, 7) personal trust, 8) executorship, 9) guardianship, 10) life insurance trust, 11) pre-need plans, 12) Personal Equity and Retirement Account (PERA); and 13) legislated and quasi-judicial trust.(BSP Circular No. 906, Series of 2016 dated 10 March 2016)

Amendment to the UITF regulations Subsections X410.8/4410Q.8 of the MORB is amended allowing the exposure limit for feeder fund and fund-of-funds to be applied to the target fund’s underlying investments. The investments in any one target fund shall not exceed 10% of the total net asset value of the target fund. However, the exposure limit prescribed by the regulatory authority shall apply should the target fund be allowed by its respective regulatory authority to invest in units/shares of other open-ended collected investment schemes (CIS).

Item g(3) in Subsections X410.9/4410Q.9 is likewise amended to read that units/shares in CIS, i.e. target fund, shall include exchange traded fund (ETF) and other CIS, provided it is neither structured nor similarly structured as a feeder fund or fund-of-funds.(BSP Circular No. 907, Series of 2016 dated 10 March 2016)

Implementing the agricultural value chain financing frameworkThe MORB was amended to include the features and regulatory incentives of the agricultural value chain financing framework which is intended to channel financing to the agriculture and fisheries sectors and promote financial inclusion.

Under the rules, Bangko Sentral supervised financial institutions (BSFIs) that plan to engage in this type of financing are required to establish adequate policies and procedures to cover the identification and analysis of value chains and design of appropriate financial products and services, among others. To mitigate the impact of any adverse effects of disasters and calamities, BSFI’s may put in place disaster contingency mechanisms.

In return, incentives are granted to BSFI’s that engage in agricultural value chain financing and comply with the regulatory requirements. Loans granted to qualified borrowers shall be considered as either direct or allowable alternative compliance to the mandatory agriculture and agrarian reform credit allocation. In addition, there shall be a 25% increase in Single Borrower’s Limit for loans, other credit accommodations and guarantees granted to entities which act as value chain aggregators for a period of three years.(BSP Circular No. 908, Series of 2016 dated 14 March 2016)

BSP revises foreign loan registration rules In amending the rules on foreign loan registration, the BSP streamlined the focus of Circular No. 618 from foreign loan agreements to public and publicly-guaranteed foreign loans. Also, it required additional documents needed for the registration of foreign loans of private sector entities.

Public and publicly-guaranteed loans or simply public debt in general refers only to what the government owes, while foreign loan is a vast concept covering all debts owed by the government and its entities (government agencies, corporations and citizens) to foreigners.

Aside from the form that needs to be filled up as per Annex D.2 of the Manual of Regulations on Foreign Exchange Transactions, the BSP now requires the filer to submit a copy of the signed loan/credit agreement and other related documents.(BSP Circular no. 909, Series of 2016 dated 30 March 2016)

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BOI-registered entities are required to file through eFPSThe Board of Investments (BOI) has mandated BOI-registered entities to file their tax returns and pay their corresponding tax liabilities through the eFPS of the BIR. This measure seeks to enable the government to monitor and analyze the economic impact of the government’s fiscal exposure on its granted tax incentives.

All BOI-registered entities shall file a complete annual tax incentives report of their income-based tax incentives, VAT and duty exemptions, deductions, credits or exclusions from the tax base with the BOI within 30 days from the statutory deadline for filing of their tax returns and payment of taxes. Non-compliance with the reportorial requirements shall merit the imposition of penalties.(BOI Memorandum Circular No. 2016-001, Series of 2016 dated 9 March 2016)

New compensation system for GOCCsA new compensation system for the employees of government-owned and controlled corporations (GOCC) was approved by the President. It aims to standardize and to provide a competitive compensation system that will attract and retain talents.

The new Compensation and Position Classification System (CPCS) standardizes the GOCCs compensation framework into four basic types, namely:

a. basic salary;

b. standard allowances and benefits;

c. specific purpose allowance that depends on the job; and

d. variable pay or performance-based bonus (PBB).

The bulk of compensation has been reflected in the basic salary, and the number of allowances has been streamlined to five types.

The Governing Boards of GOCCs, whether chartered or not, are not allowed to negotiate with their employees and officers the economic terms of their Collective Bargaining Agreement. In the implementation of the CPCS, there should be no diminution in the authorized salaries as of 31 December 2015 for incumbent employees. Funding shall depend on the financial capacity of the GOCC as approved by the Governance Commission for Government-Owned or -Controlled Corporations (GCG) and the Department

of Budget and Management (DBM). Should the GCG wish to provide additional incentives outside the CPCS in consideration of good performance, it may do so by recommending to the President, provided that the GOCC is not delinquent in its respective tax and dividend liabilities. (Executive Order No. 203 dated 22 March 2016)

BIR - Bureau of Internal RevenueBOI - Board of InvestmentsCPCS - Compensation and Position Classification SystemeFPS - Electronic Filing and Payment SystemGOCC - Government-Owned and Controlled CorporationVAT - Value-Added Tax

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Isla Lipana & Co. in BusinessWorld’s “Philippines’ Trusted Auditing Firms” special feature

Meet us

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Isla Lipana & Co. in BusinessWorld’s “Philippines’ Trusted Auditing Firms” special feature

The firm takes its place as a major player in the auditing industry in today’s special feature by BusinessWorld entitled “Philippines’ Trusted Auditing Firms”.

The supplement opens with the main story “One for the books”, which discusses the challenges and outlook in the auditing industry.

Chairman and Senior Partner Alex Cabrera, in a recent interview by the newspaper, commented on tight regulations and corporate governance.

Our firm received a prominent page 2 placement for our advertisement and firm profile.

Talk to us

For further discussion on the contents of this issue of the Client Advisory Letter, please contact any of our partners.

For tax and related regulatory matters

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Request for copies of text

You may ask for the full text of the Client Advisory Letter by writing our Tax Department, Isla Lipana & Co., 29th Floor, Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City, Philippines. T: +63 (2) 845 2728. F: +63 (2) 845 2806. Email [email protected].

John-John Patrick V. LimAssurance PartnerT: +63 (2) 459 3023 [email protected]

Alexander B. CabreraChairman & Senior Partner, concurrent Tax PartnerT: +63 (2) 459 2002 [email protected]

Gina S. DeteraAssurance PartnerT: +63 (2) 459 3063 [email protected]

Ma. Lois M. Gregorio-AbadAssurance Partner T: +63 (2) 459 3023 [email protected]

Roselle Yu CaraigTax PartnerT: +63 (2) 459 2023 roselle.y.caraig@ ph.pwc.com

Harold S. OcampoTax PrincipalT: +63 (2) 459 2029 [email protected]

Fedna B. ParallagTax PartnerT: +63 (2) 459 3109 fedna.parallag@ ph.pwc.com

Lawrence C. BiscochoTax PartnerT: +63 (2) 459 2007 lawrence.biscocho@ ph.pwc.com

Carlos T. Carado IITax PartnerT: +63 (2) 459 2020 carlos.carado@ ph.pwc.com

Malou P. LimTax Managing PartnerT: +63 (2) 459 2016 [email protected]

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www.pwc.com/ph© 2016 Isla Lipana & Co. All rights reserved.

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

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Disclaimer The contents of this advisory letter are summaries, in general terms, of selected issuances from various government agencies. They do not necessarily reflect the official position of Isla Lipana & Co. They are intended for guidance only and as such should not be regarded as a substitute for professional advice.

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Client Advisory Letter April 2016

Documents

Transcript of Client Advisory Letter April 2016