(Conclusion)
Did the Filinvest case really put to rest the issues relating to DST on intercompany advances or did it just create other concerns?
For one, we now have to consider whether the doctrine in the Filinvest case applies only prospectively or also retroactively. A more conservative view would be to consider a retroactive application. Maybe advocates of a retroactive application may argue that the Filinvest case merely spelled out the DST implications, which DST was in any case already imposed and in effect under the Tax Code and pertinent regulations existing at the time the transaction occurred. On the other hand, it may be argued that the Filinvest doctrine should only apply prospectively. This is in line with the principle of prospectivity of Supreme Court decisions as explained in various cases.
At this point, there is no clear indication on how the BIR will apply the Filinvest case. However, as the BIR’s thrust is the collection of more taxes, it is more likely than not that they will consider looking at and reviewing intercompany advances of related entities that were availed of prior to the Filinvest decision.
Also, could taxpayers who have secured BIR rulings relating to the imposition/non-imposition of DST on intercompany advances (evidenced by inter-office memoranda, cash vouchers, board resolutions, and instructional letters, etc.) still safely rely on such rulings despite the promulgation of the Filinvest case? Perhaps it may be argued that a reliance on such rulings should be given credit by the BIR obviously because it was also the BIR who opined on the DST exemption. Or at least penalties and interests, if not the basic DST due, should already be waived. Another perspective on this issue would be that the previously secured ruling is only applicable so long as the same is not revoked either by the BIR itself or by higher authorities. The Filinvest case may be said to have revoked these rulings.
Another concern that immediately comes to mind is whether the basis of the Supreme Court in holding that the DST was due on the Filinvest advances still applies considering that the Filinvest case considered only the old DST regulations (i.e. Revenue Regulations No. 09-04 dated 08 March 1994). It should be noted that in 2004, Revenue Regulations No. 13-04 which was issued by the BIR implements the then new Republic Act No. 9243 (RA 9243), dated 17 February 2004. RA 9243 amended the DST provisions of the Tax Code.
We have to accept the fact that the resolution of these issues is not forthcoming. No one knows when the tax authorities will provide the answers to these concerns. Remedies may not be formulated overnight. It is for these reasons why taxpayers must study not only how the Filinvest decision affects the previously incurred or future intercompany advances, but also how to manage possible DST exposures.
In anticipation of a tax investigation, the taxpayer must break down the intercompany advances by taking into consideration the time when cash advances were made, the nature of each cash advance and the amounts of cash advances.
First, a determination of the period of time when cash advances were made gives the taxpayer a chance to ascertain its true DST liability at any given time. With this, it would be easier to evaluate the amount of interest and surcharge that may be applicable. This allows the taxpayer to plan its actions moving forward, such as possibly raising the defense of out-of-period coverage.
Second, characterization of the intercompany advances reflected in the taxpayers’ books must be verified. An “advance”, used in its loose sense, may not always mean a loan as reflected in the taxpayers’ books. An appropriate determination of the nature of the advances will prepare the taxpayers when confronted with factual antecedents different from the Filinvest case. There could be cases when not all advances payable to affiliates are intercompany advances as contemplated in the Filinvest case. Necessarily, not all amounts reflected as intercompany advances are subject to DST. There are BIR rulings that made mention that the DST should apply only on debt instruments that are defined as instruments representing borrowing and lending transactions.
Third, determination of the amount of cash advances will enable the taxpayers to manage their cash flows, to decide on the timing of settlement of possible DST liability, and to set up a provision in its books, if necessary. This will also give a chance to check whether the amount of advances appearing in the taxpayers’ books at year-end is net of account movements within the year. This is helpful under the consideration that DST is not based on the year-end balance of the intercompany advances account.
These considerations are also true when there is a pending investigation, which may result to a finding on deficiency DST, as it would help the taxpayers weigh possible options.
Moving forward, it is relevant that taxpayers should be more cautious in obtaining intercompany advances. Appropriate cash planning should be undertaken to ensure that intercompany advances are obtained only when needed. The taxpayer should make sure that intercompany transactions are correctly identified in the taxpayers’ books. This is to minimize the risk that in a subsequent examination, the BIR may impose DST on the entire amount reflected as intercompany advances. Moreover, intercompany advances must be carefully and properly documented. Taxpayers must ensure that all advances are substantiated, so as ready support is available in the event of an assessment. These supporting documents must already include a stipulation as to who among the related parties will actually shoulder the payment of DST.
The practical approach is to look at the positive side of the business impact of securing intercompany advances in contrast with the DST liability. Taxpayers must bear in mind the benefits and convenience of obtaining intercompany advances. The DST liability imposed at a rate of P1 on each P200, or fractional part thereof, of the value of the debt instrument, is insignificant in contrast to the rewards of being a financially-viable corporation as a result of the cash advance obtained.
Vida Cortez is a supervisor of tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.comor vacortez@kpmg.com