Accounting, Audit and Tax Matters

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Tax rates on Japan-based companies

Reduced tax rates on payments to Japan-based companies
By Deo D. Saludario


With the complexities caused by increasing international transactions and growing cross-border economic activities, it has become imperative to amend the existing international tax treaty to address the issue on double taxation and to afford relief to affected taxpayers.

The Philippine and Japanese governments recently approved the protocol amending the RP-Japan tax treaty, which was originally signed on February 13, 1980 and implemented in 1981. The amendments to the tax treaty shall take effect beginning January 1, 2009.

Salient amendments to the tax treaty are as follows:

1. The tax treaty deems that an enterprise has created a permanent establishment (PE) in the other contracting state if it furnishes consultancy services or supervisory services relative to a contract for building, construction or installation project through employees or personnel, except through an agent with independent status, and in pursuance of the agent’s ordinary course of business, for an aggregate period of more than six months within any 12-month period. Under the old provision, the six-month period is determined within any taxable period.

2. The treaty considered any profit derived from an inter-company transaction — which has not been recognized by the other entity — by reason of such relationship, as part of that entity’s taxable income.

With the agreement of the other contracting state on such transfer pricing adjustment and the taxes imposed thereon, the treaty now provides that such other contracting state shall allow a corresponding tax adjustment to the other entity domiciled in the latter’s jurisdiction.

3. The protocol reduced the general rate on dividend payments from 25% to 15%. Likewise, the shareholdings requirement for the applicability of the 10% rate on dividends received by the stockholders is reduced from 25% to 10%. However, the protocol retained the 10% rate on dividends paid by firms registered with the Board of Investments (BoI).

4. The tax treaty reduced the general rate on interest payments from 15% to 10%. Under the old treaty, the 10% rate is applicable only to interest paid in respect to government securities, bonds or debentures and those paid by BoI-registered firms.

5. The general rate on royalties is reduced from 15% to 10%. However, the treaty retained the 15% rate on royalties for the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, as well as the 10% rate on royalty payments made by BoI-registered entities.

6. In addition to the reduction on the general rates applicable to payments of dividends, interests and royalties, the tax treaty also expanded the coverage of the tax sparing credit scheme.

Under this scheme, the Philippine tax payable on income derived from the Philippines shall be allowed as a credit against Japanese tax payable on that income. For this purpose, the Philippine tax shall always be considered as having been paid at the rate of 20% in the case of dividends, and 15% in the case of interest and royalties. The treaty expanded the applicability to cover all payments of dividends, interest and royalties. Prior to the Protocol, this covered only dividends, interest and royalties paid by BoI-registered firms, as well as interest paid for government securities.

The amended tax sparing scheme, however, shall be effective only for a period of 10 years beginning year 2009.

As the foregoing amendments are already in effect, it is with more reason that corporations take advantage of the relief accorded under the treaty. It is, however, advisable that a request for a tax treaty relief from the International Tax Affairs Division of the Bureau of Internal Revenue be secured to confirm the application of the preferential tax rates under the said tax treaty.

Punongbayan & Araullo - Tax rates on Japan-based companies

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January 06, 2009

P&A tax alert
Revised version of BIR Form 1604CF (and alphalist)

The BIR has issued the revised BIR Form 1604 CF (Annual Information Return
of Income Taxes Withheld on Compensation and Final Withholding Taxes) and
format of alphabetical list (alphalist) of employees/payees which should
be attached to BIR Form 1604 CF. The revisions were made in accordance
with the amendment introduced by Republic Act 9504 as implemented by
Revenue Regulations No. 10-08.

The alphalist can be prepared using either of three formats:

1. Excel format pursuant to BIR's technical specifications
2. The Company's own extract program
3. The BIR data entry system

For companies using the excel format and the company's own extract
program, revisions to the format can now be introduced based on these
revised versions of the form and alphalist. For companies using the BIR
data entry system, you may have to wait for BIR to upload the revised data
entry module before you can start preparing your annual information return
and alphalist.

The due date for filing BIR Form 1604 CF is on February 02, 2009.

For a copy of the updated version of BIR Form 1604 CF (and alphalist),
please access the link below.

Punongbayan & Araullo - Revised version of BIR Form 1604CF and alphalist

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Off to a good start

By Shirley S. Go

What a long holiday break that was! It has been a while since I enjoyed a break that long, so it was with excitement that I reported back to work today. It felt like going back to school again after the summer break, and I was eager to see my comfortable corner in the office. However, as I switched on my computer, it dawned on me that the tax season has also started.

A lot of reports and returns have to be prepared and filed in the next coming weeks. There will be a frenzy of activities focused on complying with tax filing requirements from this month until April.

So, for those of you who are still on vacation mode, let me share a few pointers that you may want to include in your 2009 Tax Season to-do list, particularly if your tax accounting period ends on December 31:

1. The December withholding tax return on compensation is required to be filed on January 15, while the Alphalist of employees must be filed on or before February 2, 2009. In relation to these filing requirements, employers must annualize the withholding taxes due from their employees. It is, thus, advisable to remind your employees to update their tax status. Any additional change in status for the employees in the month of December may still be considered if the update is made before the company remits the withholding taxes on compensation for the month of December.

Review the tax status of your expatriate officers and employees. Remember that if the expat’s stay in the Philippines exceeds 180 days during the year, he shall be classified as a nonresident alien engaged in trade or business in the Philippines and his tax rate would change from the final withholding rate of 25% to the graduated rates of 5%-32% on compensation income. Your company may have to make amendments if there is such a change in your expat employee’s tax status during the year.

In case taxes have been over-withheld, refund the excess taxes to your employees on or before January 21, 2009.

Don’t forget to issue to your employees the certificates for the taxes that you withheld from them by February 2, 2009. Be sure to consider the requirements for substituted filing before signing on the designated portion in the certificate.

2. Require your executives and employees to liquidate their advances if these were spent in 2008. It is important that these expenses are properly recorded and claimed as deduction in 2008. The company will need supporting official receipts to claim the expense, or input VAT, if any.

Also, in relation to accruing of expenses, check if there are other expenses that you have incurred in 2008, the invoices or billings for which have not yet been submitted to you by your supplier or contractor. Provisional or acknowledgment receipts as basis for deduction are generally viewed by the Bureau of Internal Revenue (BIR) with skepticism.

3. Determine if you have properly withheld taxes on your purchases in 2008. If you have recently been notified by the BIR as belonging to the top 20,000 corporations, you are required to withhold the 1% or 2% creditable tax on your total purchases during the year, beginning on date of receipt of such notification, unless the purchases are made from a casual supplier and the total price does not exceed P10,000.

4. Plan the utilization of your net operating loss carryover and minimum corporate income tax credits. These can be carried forward only to the next three succeeding taxable years.

5. Register your books for 2009. New manual books that will be used in 2009 should be registered before being used. Previously registered books with unused pages can still be used without having to re-register, provided the new fiscal year is properly labeled. The bound computer-generated/loose leaf books of accounts and other records pertaining to year 2008, on the other hand, should be registered with the BIR on or before January 15, 2009.

6. Prepare your inventory listing, as this is due for submission to the BIR on January 30, 2009.

7. Demand for the certificates of creditable taxes withheld (BIR Form No. 2307) from you by your clients/customers. And, equally, don’t forget your responsibility to issue certificates to suppliers/contractors for the taxes that you withheld from them.

8. If you have VAT zero-rated sales, consider whether you need to apply for a refund or tax credit of unutilized input taxes related to your zero-rated sales in 2006 and 2007. Such applications have to be filed within two years from the close of the taxable quarter.

9. Pay in full or the first installment of your local business tax for calendar year 2009 on or before January 20, 2009. Likewise, plan for the payment of your real property taxes.

For a complete list of requirements for this tax season, you may view the P&A Tax Calendar posted in our Web site at Punongbayan & Araullo - Home.

I hope this will help you prepare well for this tax season. Happy New Year!

(The author is a tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail Shirley.Go@pna.ph or call 886-5511.)

Punongbayan & Araullo - Off to a good start