This is a publication about developments in Philippine taxation. The contents usually include latest Republic Acts, Bureau of Internal Revenue issuances, Customs regulations, Court decisions, BSP circulars, SEC circulars, Department of Justice opinions and Executive Orders relevant to Tax practice.
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The IASB’s new guidance changes the definition of a business and will likely result in more transactions being recorded as asset acquisitions. The new definition of a business could have a significant impact in the real estate (RE) industry.
New guidance
PFRS 3, ‘Business Combinations’, has been amended to update the definition of a business. The new model introduces an optional concentration test that, if met, eliminates the need for further assessment. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present.
Under the concentration test, companies consider whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset (or a group of similar assets). If so, the assets acquired would not represent a business and no further analysis is required. Gross assets acquired exclude cash, deferred tax assets and any goodwill that results from the effects of deferred tax liabilities. The fair value of the gross assets acquired can usually be determined based on the consideration transferred (plus the fair value of any non-controlling interest and previously held interest, if any) plus the fair value of any liabilities assumed, other than deferred tax liabilities. In order to compare like with like, any items excluded from the “gross assets acquired” would also be excluded from the fair value of gross assets acquired calculation.
The optional concentration test includes the concept of aggregating ‘similar’ assets. In the RE industry, it is common for acquisitions to include several properties. Companies should carefully consider the specific facts and circumstances, including class of property and location when concluding whether assets purchased in a transaction are similar. A group of properties are not similar if they have significantly different risk characteristics.
Property Co purchases a portfolio of 10 residential homes. Each home is considered to be a separate investment property for accounting purposes. All homes are leased out to separate tenants and comprise land and buildings. Each home has a different design and layout but all homes are located in the same geographical area and the risk profile of the real estate market across that area is similar. No employees, other assets or other activities are transferred.
Analysis
No. Property Co elects to apply the optional concentration test and would conclude that this is an asset acquisition, because substantially all of the fair value is concentrated in a group of similar assets. Property Co would treat this as an asset acquisition, assuming that it opted to use the concentration test.
A transaction is not automatically a business combination if the optional concentration test does not result in an asset classification. An entity would then need to assess the transaction under the full framework in PFRS 3.
PFRS 3 requires a business to include, as a minimum, an input and a substantive process that together significantly contribute to the ability to create output. The new guidance provides a framework to evaluate when an input and a substantive process are present, differentiating between transactions with outputs and those with no outputs. Outputs are defined as “the results of inputs and processes applied to those inputs that provide goods or services to customers, generate investment income (such as dividends or interest) or generate other income from ordinary activities”.
Property Co purchases a portfolio of 10 residential homes (the nature of these homes being as outlined in the example above) as well as an office park containing 5 fully let office buildings. In addition, an outsourcing contract for maintenance services for the office park is also acquired. The maintenance services are considered ancillary or minor in the context of generating rental income at the office park. No employees, other assets or other activities are transferred.
Analysis
No, Property Co would conclude that this is an asset acquisition.
The concentration test is not passed, since all of the fair value is not concentrated in a single identifiable asset or a group of similar identifiable assets; this is because two dissimilar classes of real estate with different risk profiles are acquired.
Since there are leases in place for both the residential homes and office park buildings, Property Co would then analyse the transaction, referring to the framework with outputs and considering whether the acquired processes are substantive. No organized workforce is acquired and the maintenance services are considered ancillary or minor in the context of generating rental income. Further, the maintenance services do not significantly contribute to the ability to generate rental income and also could be replaced without significant cost.
Analysis
No, Property Co would still conclude this is an asset acquisition.
In order for the definition of a business to be met when there are no outputs, an organized workforce with the necessary skills critical to the ability to develop and convert the inputs into outputs would need to be present. As no such organized workforce is acquired, the definition of a business is not met.
Property Co acquires a portfolio of residential and office assets (the nature of these assets being as outlined in the example above) and also acquires employees that are responsible for operational management of the assets as well as all tenant management and leasing activity
Analysis
Yes. Property Co would conclude that this is a business combination.
The concentration test is not applied, because the fair value of the assets acquired is not concentrated in a single asset or a group of similar identifiable assets. Further analysis is required, following the framework with outputs, to assess whether a process is acquired and whether the process is substantive. A business is acquired, because the organized workforce is a substantive process with the necessary skills that is critical to the ability to develop and convert the inputs (land, buildings and in-place leases) into outputs.
The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions. There are a number of accounting differences between business combinations and asset acquisitions; these include the recognition of goodwill and the divergent treatment of deferred taxes, contingent consideration and transaction costs, amongst others.
Application of the changes will also affect the accounting for disposal transactions, since the requirements of PFRS 10 apply to the recognition of proceeds from the sale of a business, whereas the requirements of PFRS 15 apply to the recognition of proceeds from the sale of an asset. PFRS 10 requires the consideration received to be recognised at fair value; PFRS 15 constrains variable consideration where it is highly probable to reverse.
Entities are required to apply the amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020.
Tax exemption of certain educational institutions
An educational institution shall be entitled to tax exemption if:
It will not be considered profit-driven simply because it generates profit. In this relation, the Constitution does not require that exempt revenues must be earned from educational activities or activities related to the purposes of an educational institution. All revenues shall be exempt as long as they are used actually, directly and exclusively for educational purposes.
(G.R. No. 202792, promulgated 27 February 2019)
The BIR cannot create additional exceptions from the tax amnesty coverage
In 2007, RA No. 9480 was enacted granting a tax amnesty for unpaid taxes during taxable year 2005 and prior years. Section 8 thereof specifies the persons and cases which are not covered by the tax amnesty.
However, RMC No. 19-2008[1] included “Delinquent Accounts / Accounts Receivable considered as assets of the BIR/Government, including self-assessed tax” as additional exceptions from the coverage.
The Supreme Court held that the CIR cannot insert such exceptions where there are none under the law. Although a tax amnesty is interpreted strictly against the taxpayer, the rule-making powers of the BIR cannot be extended to expand the requirements under the law or include matters not encompassed by the law.
(G.R. No. 211449, promulgated 16 January 2019)
EWT overpaid in a prior period cannot be offset against current EWT liabilities
If EWT was erroneously remitted to the BIR, the withholding agent may opt to file a claim for refund or issuance of tax credit certificate. The withholding agent does not have the option to treat such over-remittance as an advance payment to be credited against succeeding EWT liabilities.
PwC Note: However, the current Quarterly Remittance Return of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601-EQ) prescribed starting 2018 already provides for an option to carry-over overpaid EWT to the next quarter but only within the same calendar year.
(CTA EB No. 1758, promulgated 15 April 2019)
Requirements for tax-free exchange status
In order to qualify as a tax-free exchange under Section 40(C)(2) of the Tax Code, the following conditions must be satisfied:
(CTA EB No. 1755, promulgated 22 April 2019)
A generation company claiming input VAT refund should present its COC
Under the EPIRA Law[1], sales of generated power by generation companies are subject to the VAT zero rate. In a judicial claim for refund/credit of input VAT attributable to such VAT zero-rated sales, the generation company must present the Certificate of Compliance (COC) issued by the ERC to prove that it is, in fact, a generation company under the EPIRA Law. Otherwise, its sales will not qualify as VAT zero-rated sales and consequently, the claim for refund/credit of attributable input VAT will be denied.
(CTA EB No. 1751, promulgated 29 April 2019)
Granting of cash refund in consideration of dissolution during judicial proceedings
During the pendency of the judicial claim for refund or issuance of tax credit certificate for unutilized input VAT, the closure and dissolution of the taxpayer was approved by the BIR and the SEC. Citing the BIR-approved closure, the CTA ordered a cash refund based on legal and equitable grounds.
(CTA Case No. 7180 & 7279, promulgated 16 May 2019)
Continuous heavy losses are not grounds for abatement
The CIR may abate a tax liability only when the tax appears to be unjustly or excessively assessed, or when the costs of administration and collection do not justify the collection of the tax due. In this light, the CTA ruled that continuous heavy losses are not grounds for abatement.
Accordingly, Section 2.3.6 of RR No. 13-2001, which includes ”continuous heavy losses for the last two (2) years” as grounds for abatement, is inconsistent with the Tax Code and cannot be relied upon by the taxpayer.
(CTA EB No. 1720, promulgated 3 May 2019)
Issuing the implementing rules and regulations of the estate tax amnesty
The BIR issued rules and regulations implementing the estate tax amnesty under the Tax Amnesty Act[1]. Said regulations touch on the following:
(Revenue Regulations No. 6-2019, published 31 May 2019)
BIR policies, guidelines and procedures in processing applications for tax amnesty
The CIR issued detailed policies, guidelines and procedures to be observed by various concerned BIR offices in processing applications for tax amnesty on delinquencies.
(Revenue Memorandum Order No. 23-2019, issued 9 May 2019)
Implementing the ninety (90)-day period to process VAT refund/credit claims
The BIR issued policies and procedures to implement the 90-day period to process and grant claims for VAT refund/credit pursuant to Section 112 of the Tax Code. The policies and procedures refer to the following:
(Revenue Memorandum Order No. 25-2019, issued 16 May 2019)
Modification of ATCs pursuant to TRAIN Law and Tax Amnesty Act
To facilitate the proper identification and monitoring of tax collection, the BIR created/modified the following Alphanumeric Tax Codes:
| ATC | Description | BIR Form No. |
II012 |
Business Income – Graduated Rates | 1701/1701A/1701Q |
| II014 | Income from Profession - Graduated Rates | |
| II015 | Business Income 8% Rate | |
| II017 | Income from Profession - 8% Rate |
| ATC | Description | Tax Rate | BIR Form No. |
| PT010 | Persons exempt from value-added tax (VAT) under Sec. 109(BB) (Sec. 116) | 3% | 2551M/2551Q |
| PT040 | Domestic carriers and keepers of garages (Sec. 117) | 3% | |
| PT041 | International carriers (Sec. 118) | 3% | |
| PT060 | Franchises on gas and water utilities (Sec. 119) | 2% | |
| PT070 | Franchises on radio/television broadcasting companies whose annual gross receipts do not exceed PHP10m (Sec. 119) | 3% | |
PT105 PT101
PT102
|
Tax on banks and non-bank financial intermediaries performing quasi-banking functions
|
5% 1%
7%
7% |
|
PT113
PT114
PT115 |
Tax on other bank financial intermediaries not performing quasi-banking functions
|
5%
1% 5% |
|
| PT120 | Life insurance premium |
5% | |
PT130 PT132 |
Agents of foreign insurance companies
|
10%
|
2551M/ 2551Q |
| ATC | Description |
BIR Form No |
| MC320 | Estate Tax Amnesty | 0621-EA 2118-EA |
| MC330 | Tax Amnesty on Delinquencies | 0621-DA 2118-DA |
(Revenue Memorandum Order Nos. 22-2019 dated 10 April 2019; 20-2019, dated 1 April 2019; and 19-2019, dated 3 April 2019)
Clarifying the cut-off date and other issues regarding the tax amnesty on delinquencies
The BIR addressed frequently-asked questions regarding the tax amnesty on delinquencies as implemented by RR No. 4-2019. Among others, the following were clarified:
(Revenue Memorandum Circular No. 57-2019, issued 31 May 2019)
Reckoning date for deadline of DST on original issuance of shares
New corporations are required to file the DST due on their original issue of shares within five (5) days after the close of the month of the date of SEC registration as reflected in the Certificate of Incorporation / Certificate of Recording / License to Do Business in the Philippines.
(Revenue Memorandum Circular No. 56-2019, issued 29 May 2019)
Clarifying what “Business Style” refers for purposes of invoicing requirements
For purposes of complying with the requirements for official receipts and invoices, “Business Style” refers to the business name registered with the concerned regulatory body (e.g., SEC or DTI) used by the taxpayer other than its registered name or company name.
(Revenue Memorandum Circular No. 55-2019, issued 22 May 2019)
Revised donor’s tax and estate tax returns
The BIR issued the revised donor’s tax return (BIR Form No. 1800) and estate tax return (BIR Form No. 1801). Although the manual returns are already available at www.bir.gov.ph under BIR Forms – Transfer Tax Return, they are not yet available in the eBIRForms. Accordingly, manual and eBIRForms filers should download the PDF version of the form, print and then complete the same.
Manual payment may be made with an AAB or with the concerned RCO. On the other hand, online payment may be made through GCash Mobile Payment, LBP Linkbiz Portal or DBP Tax Online. “No payment” returns shall be filed with the appropriate RDO.
(Revenue Memorandum Circular No. 54-2019, issued 21 May 2019)
