Tax Articles

Tax highlights in 2020 and some year-end reminders

By: Atty. Rodel C. Unciano

In response to Covid-19 pandemic, two significant laws were enacted providing certain tax reliefs on certain activities. One significant tax relief is the extension of the application of the net operating loss carry over (NOLCO) to five (5) years, as provided under Republic Act (RA) 11494 or the “Bayanihan to Recover as One Act” and as implemented by Revenue Regulations (RR) 25-2020. Thus, business or enterprise which incurred net operating loss for taxable years 2020 and 2021 shall be allowed to carry over the same as a deduction from its gross income for the next five (5) consecutive taxable years immediately following the year of such loss.

Also, under RA 11494, retirement benefits received by officials and employees of private firms from June 5, 2020 until December 31, 2020 shall be excluded from gross income and shall be exempt from taxation, provided that any re-employment of such official or employee in the same firm within the succeeding twelve (12)-month period shall be considered proof of non-retirement and shall subject the benefits received to appropriate taxes. Under RR 29-2020, the amount received should be in accordance with a retirement plan duly registered with the Bureau of Internal Revenue (BIR).

During the middle part of the year, the BIR introduced and prescribed the use of BIR Form 1709 under RR 19-2020 to ensure that proper disclosure of related party transactions are made and that the transactions are conducted at arm’s length. This Form is a required attachment to the Annual Income Tax Return for fiscal year ending March 31, 2020 and onwards. This requirement is aimed at improving and strengthening the BIR’s transfer pricing audit.

The regulations provided some rules to be considered in determining whether a person or entity is a related party. So that if there are related party transactions based on the criteria laid down in the regulations, it must be reported in BIR Form 1709. In all cases, the substance of relationship between the entities shall be taken into account.

In another development, the BIR modified the due process requirement in the issuance of deficiency tax assessment pursuant to RR 22-2020. Under this regulations, the BIR again deleted the issuance of Notice for Informal Conference (NIC) as part of due process requirement in tax investigation cases but replaced it with a document called Notice of Discrepancy (NOD).

In essence, the NOD is similar with the NIC as to purpose whereby the taxpayer is given the opportunity to present and explain his defenses on the findings of the BIR. The discussion of discrepancy should be conducted within thirty (30) days from the taxpayer’s receipt of the NOD. What is crucial here is that the taxpayer is likewise required to submit supporting documents within the 30-day period. There was no similar provision on this under the old rule. But what is important to note here is that the NOD, similar to the NIC, is not yet an assessment. However, within ten (10) days from the conclusion of the discussion, the case shall be endorsed for review and approval for issuance of deficiency assessment in the form of Preliminary Assessment Notice (PAN), if warranted.

In August, the BIR issued its Voluntary Assessment and Payment Program (VAPP) under RR 21-2020, offering taxpayers to avail voluntary payment of additional taxes which the BIR could otherwise collect through audit and enforcement effort.

The program shall apply to all internal revenue taxes covering taxable year ending December 31, 2018 and fiscal year 2018 ending on the last day on the months of July to June 2019, including taxes on one-time transactions such as estate tax, donor’s tax and capital gains tax. Any person, natural or juridical, including estates and trusts, may avail of this program except those taxpayers who have already been issued a Final Assessment Notice (FAN) that have become final and executory, persons under investigation as a result of verified information filed by an informer, those with cases involving tax fraud and those with pending cases involving tax evasion and other criminal offenses.

A taxpayer who validly avails of the program and issued a certificate of availment shall not be audited for the taxable year 2018 for the tax types covered by the availment. Note that qualified taxpayers can still avail of the benefits of the VAPP until December 31, 2020, unless extended by the Secretary of Finance.

Another significant development is the approval by the Senate of the Corporate Recovery and Tax Incentives for Enterprises Act or “CREATE”, which proposed to reduce corporate income tax effective July 1, 2020. Once the bill is signed into law, corporate income tax shall be reduced from the current rate of thirty percent (30%) to twenty five percent (25%) and the lower twenty percent (20%) rate for domestic corporations with total assets of one hundred million pesos and below (excluding land on which the business office, plant and equipment are situated), and total net taxable income of five million pesos (P5M) and below. Other proposed changes would be the reduction of the Minimum Corporate Income Tax (MCIT) rate to one percent (1%), reduction of the percentage tax rate to one percent (1%) and the repeal of the Improperly Accumulated Earnings Tax (IAET).

Finally, under the latest extension of availment of the tax amnesty on delinquencies (TAD), taxpayers may still avail TAD until December 31, 2020. Recall that pursuant to Section 19 of RA 11213 or the Tax Amnesty Act of 2019, taxpayers who have delinquent accounts for taxable year 2017 and prior years may avail themselves of the TAD within one year from the effectivity of the implementing rules and regulations of the Act. As RR 4-2019, the implementing rules and regulations of the law, became effective on April 24, 2019, the original deadline for the availment thereof was until April 23, 2020. However, in consideration of the effect of Covid-19 pandemic, the BIR made several extensions for the availment of the same. And under the latest extension in RR 15-2020, taxpayers still have until December 31, 2020 within which to avail of the TAD.