A tax amnesty is an opportunity to start over with a clean slate. Taxpayers with ongoing audits would consider this an opportunity to settle deficiency taxes more efficiently. An audit, even for taxpayers who are compliant, is costly and stressful. To quantify the degree of relief on offer, some tax accountants and managers have computed the savings that can be realized and even prepared position papers to argue the benefits of availing of a tax amnesty, noting that they outweigh the costs.
With legislation transmitted to the Office of the President on Jan. 17, the proposed Tax Amnesty Act (TAA) will either be vetoed, signed or lapsed into law within the next couple of weeks. Assuming it will become law, in whole or in part, the Bureau of Internal Revenue (BIR) must issue implementing rules and regulations (IRR) within 90 days from its effectivity. Taxpayers can avail of the tax amnesty within one year from effectivity of the IRR, except for estate tax amnesty where taxpayers will be given two years to avail.
While we await the signing of the proposed TAA, we can prepare initial computations based on the provisions of the proposed TAA. The TAA covers estate tax, general tax amnesty, and tax amnesty on delinquencies.
For those availing of the general tax amnesty, the proposed TAA provides an option to the taxpayer to pay amnesty tax of either 2% based on total assets or 5% based on net worth as of Dec. 31, 2017. If the computed net worth is negative, the taxpayer may still avail of the benefits of tax amnesty, and pay the minimum amnesty tax of between P75,000 and P1 million.
It might be easy to compute for the 2% and 5% based on the audited financial statement of the taxpayer. However, there are peculiarities on how to compute for the value of assets and liabilities under the proposed TAA. In this regard, some taxpayers planning to avail of the tax amnesty have raised the following questions:
1. Do assets cover all of those in or out of the Philippines, whether or not used in trade or business?
Many foreign individuals and corporations are concerned whether assets outside the Philippines are to be included in the Statement of Total Assets (STA) or Statement of Assets, Liabilities and Net Worth (SALN).
Some expatriates note that most of their foreign assets were purchased from income earned prior to their assignment to the Philippines. In filling out the STA, should the expat identify the assets purchased from income sourced only in the Philippines?
Considering that only citizens and domestic corporations are taxed on their worldwide income, aliens and foreign corporations do not generally declare their foreign assets to the Philippine government. Are we to assume that the same rules will be followed in preparing the STA or the SALN?
On the other hand, are married individuals required to file a joint STA or SALN? If a spouse is availing of the tax amnesty, is he required to declare the assets and/or liabilities of the non-availing spouse or only the assets that are under his name?
2. Real properties shall be accompanied by a description of their classification, exact location, and valued at acquisition cost if acquired by purchase, or the zonal valuation of fair market value as shown in the schedule of values of the provincial, city or municipal assessors at the time of inheritance or donation, whichever is higher if acquired through inheritance or donation.
This means that a taxpayer who bought land at P100 per square meter in 1990s, but with a fair market value (FMV) of P10,000 per square meter in 2017, would happily declare the land in his STA or SALN, thinking he will save a lot of tax. However, he may think otherwise if he came to know that the manufacturing plant or the office built on such land is also valued at cost even though such building is nearly fully depreciated.
The same is true with inherited or donated land and/or buildings. Under the TAA, the said real properties are to be declared based on zonal or FMV at the time of inheritance and/or donation, and not the book value or FMV as of Dec. 31, 2017. As an additional concern for those inherited/donated buildings, the schedule of values of the provincial/city/municipal assessors do not necessarily contain the FMV for all types of buildings. Will the BIR’s IRR provide an alternative source of FMV in this case?
3. Personal property, other than money, shall be accompanied by a specific description of the kind and number of assets, or other investments, indicating the acquisition cost less the accumulated depreciation or amortization.
Corporations with significant receivables might ask whether the allowance for bad debts can be used to reduce the expected receivables. A similar question arises with inventories — can the allowance for damage or decline in value due to obsolescence be deducted from the value of the inventories?
4. Inherited shares of stock are valued at FMV, and assets/cash denominated in foreign currency are converted to pesos at the date of STA or SALN.
This is a tricky provision which requires that the above assets held as of Dec. 31, 2017 are valued at book as of a later date, i.e. date of the STA or SALN, which may result in lower or higher values.
5. All existing liabilities, which are legitimate and enforceable, disclosing or indicating clearly the name and address of the creditor and the amount of corresponding liability.
With the requirement that the name of the creditor be specifically stated, the question arises of whether estimated and/or provisions for future obligations, such as contingencies for warranty or repairs and maintenance to customers, although included in the financial statement of the taxpayer, may be included as liabilities for SALN purposes.
The above calculation clearly shows that asset or net worth in the financial statement may not be the same asset or net worth computed for purposes of tax amnesty. These questions will probably be addressed by the BIR in the implementing rules and regulations for the TAA. While we wait for a clearer interpretation on how the assets and liabilities will be valued or stated, taxpayers thinking of availing of the tax amnesty need to start diligently preparing the STA or SALN based on the proposed tax amnesty act.
Marie Fe F. Dangiwan is a senior manager of the Tax Advisory and Compliance Division of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.