Business Mirror

Atty. Rodel Unciano summarizes the significant developments made in Tax in 2022 and clarifications to its implementing rules and regulations.

Tax highlights in 2022

By Atty. Rodel C. Unciano

To recall, the implementation of the provisions of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) on the taxability of proprietary educational institutions and hospitals created confusion particularly for those in the education sector. This confusion led to the enactment of Republic Act (RA) 11635, which was signed into law last December 2021. This law amended Section 27(B) of the Tax Code, which provides special tax treatment of hospitals which are nonprofit and proprietary educational institutions.

As provided in RA 11635, hospitals which are nonprofit and proprietary educational institutions shall pay a tax of ten percent (10%) on their taxable income, provided that beginning July 1, 2020 until June 30, 2023, the tax shall be one percent (1%), provided further that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the regular rate shall be imposed on the entire taxable income.

Revenue Regulations (RR) No. 3-2022, that was issued to implement RA 11635, clarified that the preferential corporate income tax rate of ten percent (10%) shall apply to: 1) Proprietary educational institutions, 2) Hospitals which are non-profit, and 3) Non-stock, non-profit educational institutions whose net income or assets accrue/inure to or benefit any member or specific person. Beginning July 1, 2020 up to June 30, 2023, a special rate of one percent (1%) shall apply. After June 30, 2023, the rate shall revert to the preferential corporate income tax rate of 10%.

However, the regular corporate income tax rate of twenty-five percent (25%) shall be imposed on the entire taxable income of the covered institutions if their gross income from unrelated trade, business, or other activity exceeds fifty percent (50%) of the total gross income they derive from all sources. On the other hand, a non-stock, non-profit educational institution shall be subject to the regular corporate income tax of twenty-five percent (25%) on the portion of its revenues or assets not used actually, directly, and exclusively for educational purposes.

On another development, Revenue Memorandum Circular (RMC) No. 19-2022, which was issued by the BIR in February 2022, provided clarification and guidance on the tax-free exchanges of properties under Section 40(C)(2) of the Tax Code, as amended by CREATE.

To recall, for the purpose of tax-free exchange of properties under Section 40(C)(2) of the Tax Code, the requirement for application for prior BIR ruling to confirm tax exemption is no longer required pursuant to the amendment introduced by CREATE. Under RR No. 5-2021, the concerned parties can already implement the tax-free exchange transaction by applying for the issuance of the Certificate Authorizing Registration (CAR) with the Revenue District Office (RDO) where the property is located, in case of real properties, or to the RDO where the business is registered, in case of shares of stocks, subject to post-transaction audit by the BIR.

In another development, towards the middle part of the year, RR 6-2022 was issued, removing the five (5) year validity period of receipts and invoices. With the issuance of RR 6-2022, the five-year validity period of Permit to Use (PTU) and/or system-generated receipts/invoices has been removed and hence, all PTUs to be issued shall be valid unless revoked by the BIR on certain grounds such as tampering of sales data, modification/alteration without prior notification and approval by the BIR, and violation on the policies and procedures for registration, among others.

Another significant update was the issuance of RR 7-2022 which clarified the policies and guidelines in the availment of the tax-incentives provisions of RA 9513 or the Renewable Energy Act of 2008. RR 7-2022 clarified that local suppliers/sellers of goods, properties, and services of duly registered RE developers should not pass on the 12% VAT on the latter's purchases of goods, properties and services that will be used for the development, construction and installation of their power plant facilities. And this includes the whole process of exploring and developing renewable energy services up to its conversion into power, including but not limited to the services performed by subcontractors and contractors.

In RMC 43-2022 issued in April 2022, the BIR clarified that the twenty-five percent (25%) surcharge imposed under Section 248 of the Tax Code shall no longer be imposed to an amendment of tax return if the taxpayer was able to file the initial tax return on or before the prescribed due date for its filing. The twenty-five percent (25%) surcharge shall be imposed only on a tax deficiency found during the audit if the particular tax return being audited was found to have been filed beyond the prescribed period or due date.

In RR 13-2022, the Department of Finance (DOF) prescribed the guidelines, procedures and requirements for the proper Income Tax treatment of equity-based compensation of any kind. As defined, equity-based compensation includes all types of employee equity schemes in various forms, such as stock options, restricted stock units, stock appreciation rights, and restricted share awards, which may or may not pertain to the share of stock of the grantor, but have the feature of being granted to existing employees of the grantor as a performance incentive for services rendered by the employees.

Pursuant to the rules laid down in RR 13-2022, the equity-based compensation granted to employees, whether holding rank-and-file or supervisory or managerial position, shall be considered as compensation which shall be subject to withholding tax on compensation. RR 13-2022 ratiocinated that Section 32 of the 1997 Tax Code, as amended, does not make a distinction for purposes of applying the tax implication on all forms of compensation, including equity-based compensation.

RMC 143-2022 issued during the latter part of the year clarified that the difference between the book value/fair market value of the shares, whichever is higher, at the time of the exercise of the equity-based compensation, and the price fixed on the grant date, shall be considered as additional compensation subject to income tax and to withholding tax on compensation. No capital gains tax (CGT) shall be imposed since there is no realized capital gain on the part of the employer-grantor. No documentary stamp tax (DST) shall likewise be imposed upon grant by employers of equity-based compensation to its employees. However, DST shall be imposed upon the actual issuance of shares to the employee-grantee in accordance with Sections 174 and 175 of the Tax Code.

Upon sale, barter or exchange by the employee-grantee of the equity-based compensation, the same is treated as sale, barter, or exchange of stocks not listed in the stock exchange subject to CGT under Section 24(C) of the Tax Code. If the equity-based compensation was granted for a price, the difference between the sales price and the option price shall be the basis of the CGT, while if it was granted without a price, the cost for purposes of computing the CGT shall be zero. On the other hand, if the transfer is without consideration, the same shall be treated as donation of shares of stock subject to donor’s tax based on the fair market value at the time of the donation.

And in relation to the taxability of individual taxpayers, the imposition of lower income tax rates for individual taxpayers will start in January next year. While the maximum tax rate for taxable income of individual taxpayers will remain at 35% for income in excess of eight (8) million pesos, income of eight (8) million pesos and below will now enjoy a lower tax rate of up to 30% only. This will give a sigh of relief to individual income earners especially those in the lower income bracket.

Happy New Year to all!

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