The resilient taxpayer: Not an ode

The longest busy season for income tax filing has finally come to a close. Amidst the sleepless nights and pandemic-induced stress, tax practitioners, tax authorities, and taxpayers alike can only remind themselves that the dictum “taxes are the lifeblood of the nation” rings ever more true.

As with the rest of the world, the Philippine economy is expected to shrink. COVID-19 has unleashed an economic contagion that has spread almost as fast as the virus itself. I do not need to be graphic in describing the damage the outbreak has unleashed, as I am sure we see and feel it around us. We are all heartsick over what is happening.

Our economic managers are working hard to find solutions to propel us through the crisis. Various fiscal initiatives, including several tax measures, are being implemented or proposed. Some are emergency measures, some are meant to bring in much-needed revenue, and some are being positioned to set the stage for recovery and rehabilitation.

The more current tax initiatives are meant to raise revenue to help mitigate the need to take on too much debt to fund the stimulus. One is the extension of the deadline for availing of the tax amnesty on delinquencies. Taxpayers with delinquencies, as defined in Bureau of Internal Revenue (BIR) Revenue Regulations No. 4-2019, covering the taxable years 2017 and earlier, still have the opportunity to avail of the tax amnesty until Dec. 31, 2020. At this writing, the BIR also still allows the online withdrawal of protests to qualify assessments as delinquent accounts, to enable taxpayers to avail of the amnesty.

A bigger measure is House Bill (HB) No. 6765 or the Digital Economy Taxation Act. HB No. 6765 seeks to institutionalize the tax rules for the digital economy, with provisions such as imposing value-added tax (VAT) on digital advertising services, subscription-based services, and other services rendered electronically. Another provision in the bill requires suppliers of digital services, network orchestrators, and electronic commerce platform providers to have a representative office or an agent in the Philippines. This measure seems to allow regulators to catch up with developments in electronic or technology-based transactions.

The digital economy is said to be the new frontier of taxation. Thus, it is to be expected that the government will adopt new tax measures to seek an allocation of taxing rights. However, challenges on the implementation of the related tax measures are expected, as transactions could cut across multiple countries. Perhaps some things must be threshed out before Netflix becomes more expensive.

Taxation does not always mean higher taxes; sometimes, it means less if it is to foster recovery and growth. With the Corporate Income Tax and Incentives Reform Act (CITIRA) repackaged as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), there is a proposed outright cut in corporate income tax (from 30% to 25%) effective July, along with succeeding rate reductions (1 percentage point decrease at a time) starting with 24% in 2023 until the rate reaches 20% by 2027. The idea being that the cash savings from the tax cut could benefit workers in the form of higher wages or reduced layoffs. Companies may even be left with funds to invest in productive assets.

CREATE also has a proposed “enhanced” Net Operating Loss Carry Over (NOLCO) provision. The “enhanced” NOLCO will extend the carry-over period of net losses (for non-large taxpayers) in 2020 from the current three years to five years. This will allow non-large taxpayers to deploy their losses in 2020 as additional deductions to their taxable income between 2021 and 2025.

However, as the scale of the problems brought about by the pandemic is unprecedented, both large and non-large taxpayers may need the longer carryforward. Some might have considered five years not long enough. Even before the pandemic, other Asian countries were allowing five-year carryforwards of losses. Developed countries are allowing operating losses to be carried forward indefinitely. NOLCO provisions are built into the tax codes of most countries so that companies are taxed on average profitability over time. Through NOLCO, it is hoped that a business that sustains losses in a recession is able to deduct those losses against profits when the firm recovers.

How about a “loss carryback” provision? This would allow a taxpayer to carry its loss back to offset taxable income during the prior year, generating a refund of taxes paid in that earlier year. While carryforwards are good for times of recovery, carrybacks can provide added relief during a crisis — relief that is badly needed by our micro, small and medium enterprises.

Our tax policies are rapidly evolving along with the new norms. Who knows, tomorrow, we may be talking about VAT cuts for certain products and services, as other countries are doing.

There is no playbook to get us through the crisis. The most we can do is to anticipate, prepare for, respond, and adapt to the ever-changing landscape if we are to rebuild a better tomorrow. I believe the Filipino can do this. We are, after all, fabled for our resilience — maybe not by choice — but resilient nonetheless. Hang in there, taxpayer.

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.

Diana Elaine Bataller-Simbulan is a manager of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

As published in BusinessWorld, dated 30 June 2020