Blessed with income tax incentives, it pays to know your compliance requirements

Sunday was the Feast of the Sto. Niño or the Child Jesus. While attending Sunday mass, we were reminded to be obedient like a child to be more worthy of the kingdom of God. Obey the rules and you will be rewarded.

Without question, the same is also very much true when availing of income tax incentives. Currently, Philippine Economic Zone Authority (PEZA) and Board of Investments (BoI)-registered enterprises have compliance requirements to verify their entitlement to income tax incentives. Together with the Bureau of Internal Revenue (BIR), these investment promotion agencies (IPAs) want to ensure that only those entitled can enjoy the incentives.

For PEZA-registered enterprises entitled to income tax holiday (ITH) and/or the 5% gross income tax (GIT) incentive, they are required to secure from PEZA, on an annual basis, a certification that the enterprise is a bona fide PEZA-registered enterprise entitled to ITH and/or the 5% GIT incentive. Based on PEZA’s implementing rules, the registered enterprise will only be issued the certification once it has complied with all the PEZA reportorial requirements, such as the Economic Zone Monthly Performance Report (EZMPR) and Tax Incentives Management and Transparency Act (TIMTA) reports. To avoid issues in securing the certificate of incentives, the enterprise must ensure that it has complied with all the reportorial requirements.

BoI-registered enterprises are required to secure a Certificate of ITH Entitlement (CoE). For both PEZA and BoI-registered enterprises, such certifications are required to be attached in the annual income tax return (ITR).

In addition, PEZA-registered enterprises are required to submit to PEZA a copy of their BIR-received annual ITRs, together with the Audited Financial Statements (AFS) within 30 days from filing of the annual ITR.

For BoI-registered enterprises, a copy of the BIR-received annual ITR and AFS are required to be attached to BoI Form S-1 (Annual Report on Actual Operations). The form is required to be filed within four months after the end of the taxable year or April 30 for enterprises that follow the calendar year.

Based on the BIR-received AFS and ITR, BoI and PEZA shall validate, on a per registered activity/project basis, that the period covered by the annual ITRs is covered by the ITH/5% GIT incentive. These IPAs shall also determine the income that should not be covered by ITH/5% GIT, if any. To determine if the enterprises complied with the minimum/maximum sales requirement, they shall also validate the actual percentage of export sales for export oriented enterprise, low-cost housing sales for real estate companies, and other sales requirement as agreed per their registration terms and conditions.

So, what if, based on the IPA’s evaluation, the enterprise actually failed to comply with the conditions for the income tax incentive? Can the BIR assess the enterprises based solely on PEZA or BoI’s evaluation?

In a recent case decided by the Court of Tax Appeals (CTA), CTA Case No. 9553, the CTA ruled that the BIR cannot simply proceed to issue assessment notices based solely on the evaluation done by PEZA or BoI. The enterprise’s books of account and other accounting records must be independently investigated and considered by the BIR.

According to the ruling, the BoI-registered enterprise is required to have at least 20% of the total subdivision area or total subdivision project cost allocated and developed for socialized housing within one year from the date of registration. Otherwise, its ITH incentive for the taxable year will be forfeited.

Based on the BoI’s evaluation, the enterprise failed to comply with the 20% socialized housing requirement. Thus, in several letters to the BIR, the BoI declared that the grant of ITH incentives to the BoI-registered enterprise has been denied.

Relying only on the forfeiture of the ITH incentive by the BoI, the BIR issued a Preliminary Assessment Notice (PAN) and Formal Letter of Demand (FLD) assessing the BoI-registered enterprise deficiency income tax and penalties. The BIR no longer issued a Letter of Authority (LoA) to assess. The BIR did not also conduct its own tax investigation.

Since no LoA providing the revenue officers/examiners with the authority to examine the BoI-registered enterprise and to recommend an assessment was issued, the assessment was considered null and void. Though it may be clear from the BoI’s evaluation that the BoI-registered enterprise was not entitled to ITH incentives for the taxable year, the BIR should have also conducted its own investigation to verify the facts for its assessment to be valid.

Nonetheless, though the assessment in this case was considered invalid, PEZA or BoI’s results of validation of income tax incentives may still be a basis for the BIR to initiate/conduct its own investigation. Thus, every taxpayer enjoying income tax incentives must always ensure that it complies with the PEZA/BoI’s conditions for the grant of incentives. It must also ensure compliance with PEZA, BoI, and BIR reporting requirements, as discussed above. It must obey rules like a child to ensure that it fully enjoys the rewards and benefits of the tax incentives it was granted.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Ma. Lourdes Politado-Aclan is a Director of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 21 January 2020