A bucket list for BIR

The title of a Dow Jones article last July 22, “Philippines unveils plans to double investment proposals by 2014,” pointed to a key goal of the present national leadership.

The dismal state of the foreign direct investment (FDI) in our country was highlighted in the said news item when it quoted the World Investment Report 2009 of the United Nations Conference on Trade and Development, citing the Philippines as last among six select members of the Association of Southeast Asian Nations in attracting FDIs in 2007 and 2008, and as falling behind Vietnam which held the bottom spot in 2006.

Worse, it further reported that, in 2008, the $1.52-billion FDI of the Philippines was less than a fifth of Vietnam’s $8.05 billion and less than 7% of Singapore’s $22.73 billion.

Among the factors cited for this poor ranking of the Philippines in the war rooms of these foreign investors were the high cost of electricity, poor infrastructure, changing investment policy and corruption.

Accompanying this gloomy picture is the current budget gap of P196.7 billion for the first half which P-Noy’s government inherited. Chronic poor tax collections, which have failed to keep up with rising state spending, had triggered the rapid turnover of leadership at the Bureau of Internal Revenue (BIR), with two previous Commissioners of Internal Revenue (CIR) holding office for very short periods.

They had issued quite a number of revenue rules that overturned precedents, resulting in damaging consequences in exchange for increased tax collections. This midstream changing of the rules of the game has dismayed the business community, not the least foreign investors.

Thus, the following is a bucket list of policy changes which the incumbent BIR Commissioner will hopefully reconsider. In doing so, the bureau may send a positive, encouraging message to foreign investors that the present leadership recognizes them as an indispensable partner in nation building and, consequently, entice more of them to come in, besides retaining existing ones.

Revenue Memorandum Circular 41-2009

This issuance directly revoked a particular BIR ruling covering regional operating headquarters (ROHQ) and, indirectly, all other rulings of similar nature which applied the 15% preferential tax rate on the income of certain Filipino personnel of multinational companies under Section 25 (C) of the 1997 Tax Code, as amended (NIRC).

Specifically, this RMC limited the applicability of the 15% preferential income tax rate to those occupying managerial and highly technical positions, a qualifier which is not found in the Republic Act (RA) No. 8756, the law covering ROHQ and regional or area headquarters (RHQ), and under Section 25( C) of the NIRC.

Although the amendment does not per se affect ROHQs or RHQs, but their employees holding managerial and technical positions, it nonetheless exposed ROHQs/RHQs to potential deficiency withholding tax assessment with surcharge and penalties due to non-withholding of the applicable tax.

This is a classic example of changing investment policies by changing legal interpretations contained in precedent BIR rulings just to preempt preferential tax treatment and for the sake of imposing regular income tax rates.

To be sure, the equity principle underlying this tax provision for ROHQs must not be overlooked, as it seeks to adopt parity and equality in the tax treatment of both expatriate and Filipino employees holding managerial and technical positions in ROHQs and RHQs.

RMC 16-2010/Revenue Regulations (RR) 2-2010

These issuances delimited the irrevocability of the option to choose either the itemized deduction or optional standard deduction (OSD) for purposes of computing the net taxable income to the initial quarterly income tax return (ITR) filed by taxpayers.

The earlier RR 16-2008, which implemented the OSD provision introduced by RA 9504, allowed the option to be exercised at the final or yearend adjustment return, which was more in keeping with the law.

Considering that the final income tax liability is determined at the end of the taxable year, it would be improper that the irrevocability of the option to use the OSD or the itemized deduction method be applied to the quarterly ITR.

Furthermore, making the effectivity of RMC 16-2010 and RR 2-1010 retroactive certainly prejudices the rights of the taxpayers who relied on the pronouncements made under the earlier RR 16-2008.

This again, is another instance wherein a taxpayer’s compliance with an existing RR is prejudiced by the midstream issuance of a contrary RR, in violation of the taxpayer’s right to due process.

Tax treaty relief application

A third item that is close to the heart of foreign investors is the availment of preferential tax treatment, i.e., either tax exemption or reduced tax rate, under existing tax treaties, also known as Agreements for the Avoidance of Double Income Taxation which the Philippines has entered into with the governments of foreign countries.

Currently, the Philippines has 37 tax treaties in force.

Under Revenue Memorandum Order (RMO) No. 01-2000, as amended by RMO No. 30-2002, a tax ruling confirming the application of the relief under the applicable treaty is required before one can avail of such relief. A list of supporting documents that need to be attached to the application for treaty relief, e.g., authenticated corporate registration papers and copy of the contract, among others, is provided in the RMO.

In practice, however, the RMO is not faithfully implemented since additional requirements not included in the list are required even at the initial filing stage; not to mention the fact that processing of the application can take months, even years.

The inefficiency of this process has created a lot of confusion and disappointment among many foreign investors, who view the deviation as a lack of transparency on the part of the government.

A move to dispense with the requirement to secure an advance tax treaty relief ruling had been initiated by the BIR before, but this never materialized.

The depleted state of the nation’s coffers, as succinctly described by the President of the Philippines during his State of the Nation Address last Monday, is a truly tough challenge not just for the BIR but for the entire country.

Funds for development cannot be sourced just from internal revenue taxes, but also from foreign capital that can finance much-needed infrastructure which, in turn, will prod business and economic activity.

Putting a stop to the midstream changing of investment and tax rules and adopting consistent, transparent tax polices will go a long way to luring more FDIs which, in turn, can ease the chronic lack of funds that has always saddled the government’s development priorities. –Taxwise Or Otherwise — By Catherine T. Manahan

(The author is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback via e-mail to catherine.t.manahan@ph.pwc.com.)