STRATEGIC TAX MANAGEMENT

Kezia Mordeno | Wednesday 6:00-9:00PM

Chapter 1: Framework of Understanding Taxes in domestic

(4), Tax Code
corporation
the Philippines Gain on sale, exchange or
disposition of lands and/or
buildings which are not actually Section 27(D)
Topic Outline: 6%
used in the business of a (5), Tax Code
● Understand the importance of taxes in decision corporation and are treated as
making capital assets
● Know the types of taxes
● Understand the basic principles of taxation 4. Improperly Accumulated Earnings Tax
● Know source of tax laws In addition to the other taxes imposed on domestic
● Know the SAVANT Framework corporations, the Tax Code imposes a 10% tax on “improperly
accumulated taxable income” of corporations formed or availed
The provisions on Philippine national internal revenue taxes for the purpose of avoiding the income tax with respect to its
are codified in the National Internal Revenue Code (the “Tax shareholders or the shareholders of any other corporation by
Code”) as amended by RA 10963 beginning January 1, 2018, permitting earnings and profits to accumulate instead of being
or the Tax Reform for Acceleration and Inclusion (the divided or distributed.
“TRAIN”). The national internal revenue taxes are administered
by the Bureau of Internal Revenue (“BIR”). This tax, however, does not apply to publicly held corporations,
banks and other non-bank financial intermediaries and
insurance companies.
INCOME TAXATION
Improperly accumulated taxable income means taxable income
1. Regular Income Tax adjusted by:
A domestic corporation is taxable on all income derived from (i) income exempt from tax;
sources within and without the Philippines. The general (ii) income excluded from gross income;
corporate income tax rate on taxable income is 30%. For (iii) income subject to final tax;
(iv) the amount of net
purposes of computing taxable income, the Tax Code allows
certain deductions. In lieu of an itemized deduction, the Tax
Operating loss carry-over deducted; and reduced by the sum
Code allows a standard deduction of 40% of the gross income.
of:
(i) dividends actually or constructively paid; and
2. Minimum Corporate Income Tax (ii) income tax paid for the taxable year
Under the Tax Code, a minimum corporate income tax
(“MCIT”) of 2% of the gross income of a corporation is imposed The fact that a corporation is a mere holding company, or an
beginning on the 4th taxable year immediately following the investment company is prima facie evidence of a purpose to
corporation’s commencement of business operations, when avoid the tax upon its shareholders or members. Generally,
such MCIT is greater than the tax computed using the 30% however, the fact that earnings or profits of a corporation are
regular or normal tax rate.7 Any excess MCIT over the regular permitted to accumulate beyond the reasonable needs of the
income tax is carried forward and credited against the regular business is determinative of the purpose to avoid the tax upon
income tax of the corporation for the three immediately its shareholders or members unless the corporation, by clear
succeeding taxable years. preponderance of evidence, proves the contrary. The phrase
“reasonable needs of the business” includes the reasonably
3. Final Tax on Passive Income anticipated needs of the business.
Income Tax Rate Basis
Interest on currency bank VALUE-ADDED TAX
deposit and yield or any other Value-added tax (“VAT”) is a tax on consumption levied on the
Section 27(D)
monetary benefit from deposit sale, barter, exchange or lease of goods or properties and
20% (1), Tax Code,
substitutes and from trust funds services in the Philippines and on importation of goods into the
as amended
and similar arrangements from Philippines. VAT is imposed upon the seller, who may pass on
sources within the Philippines
the same to the buyer, transferee or lessee of the goods,
Section 27(D)
Royalties derived from sources
20% (1), Tax Code,
properties or services.
within the Philippines
as amended
Interest income from a VAT is based on the gross selling price or gross value in
Section 27(D) money of the goods or properties sold, bartered or exchanged,
depository bank under the
15% (1), Tax Code,
expanded foreign currency or the gross receipts derived from the sale or exchange of
as amended
deposit system services or the use or lease of properties.
Net capital gains from the sale,
exchange or other disposition of Section 27(D) For a transaction to be subject to VAT, the sale, exchange,
shares of stock in a domestic 15% (2), Tax Code, barter or lease of goods, properties or services or the
corporation other than through as amended
importation of goods must be during trade or business.
the stock exchange
Dividends received from a Exempt Section 27(D)
The phrase “in the course of trade or business” means the
regular conduct or pursuit of a commercial or economic
A. Esguerra | 1
activity, including transactions incidental thereto, by any person The Philippines follows the pay-as-you-file system in the
regardless of whether the person engaged therein is a non- enforcement and collection of taxes. The pay-as-you-file
stock, non- profit private organization or government entity. system obliges the taxpayer to conduct self-assessment to
determine and declare the amount to be used as the basis for
As a general rule, VAT is imposed at the rate of 12%. the computation of the tax liability, any deductions therefrom,
and finally, the tax to be paid.
However, there are sales which are subject to VAT at the rate
of 0%. These include export sales or services, foreign currency 1. Prescriptive Period for Assessment
denominated sales, and sales to persons or entities whose The assessment for national internal revenue taxes must be
exemption under special laws or international agreements to made within three years from the last day provided by law for
which the Philippines is a signatory effectively subjects such the filing of tax return. When a return is filed beyond the period
sales to zero rate.22 Certain transactions, however, are laid down by law, the period will commence to run on the day
exempt from VAT. the return is filed. However, if the return is filed before the last
day of filing, the three-year period will be counted on such last
DONOR’S TAX day.
Donor's tax is imposed upon the transfer by any person of
property by gift as provided under Section 98 of the Tax Code. Section 222 of the Tax Code provides exceptions on the three-
year prescriptive period to assess internal revenue taxes. In
While the Tax Code does not define transfer of property by gift, case of false or fraudulent return with intent to evade tax or in
donation is defined in Article 725 of the Civil Code as an act of case of failure to file a return, the tax may be assessed within a
liberality whereby a person disposes gratuitously of a thing or ten-year period commencing from the discovery of the falsity,
right in favor of another, who accepts it. fraud or omission.

Donation has the following elements: A “false return” is that which contains wrong information due to
(a) the reduction of the patrimony of the donor; mistake, carelessness or ignorance; while a “fraudulent return
(b) the increase in the patrimony of the donee; and, with intent to evade tax” is a crime involving moral turpitude as
(c) the intent to do an act of liberality or animus donandi it entails willfulness and fraudulent intent on the part of the
individual.
In a sale transaction where the fair market value of the
property sold exceeds its selling price, the excess is Fraud may be established by the:
considered a donation even in the absence of animus donandi. (a) intentional and substantial understatement of tax liability
by the taxpayer;
When the donee or beneficiary is a stranger, the tax payable (b) intentional and substantial overstatement of deductions
by the donor shall be thirty percent (30%) of the net gifts. or exemptions; or
For donor’s tax, a 'stranger', is a person who is not a: (c) the recurrence of the foregoing circumstances
(1) Brother, sister (whether by whole or half-blood), spouse,
ancestor and lineal descendant; or As for “failure to file a return,” the mere omission is already a
(2) Relative by consanguinity in the collateral line within the violation regardless of the fraudulent intent or willfulness of the
fourth degree of relationship individual.

The Donor’s Tax Return (BIR Form No. 1800) must be filed The running of the prescriptive period for making an
within thirty (30) days after the date the gift (donation) is made. assessment and the beginning of distraint or levy is suspended
for the period during which:
DOCUMENTARY STAMP TAX (a) the BIR is prohibited from making an assessment or
The documentary stamp tax (“DST”) is an excise tax levied on beginning distraint or levy or a proceeding in court and for 60
documents, instruments, loan agreements and papers days thereafter;
evidencing the acceptance, assignment, sale or transfer of an (b) the taxpayer requests for a reinvestigation which is
granted by the BIR;
obligation, rights, or property incident thereto. (c) the taxpayer cannot be located in the address given by
him in the return;
The tax is paid by the person making, signing, issuing, (d) the warrant of distraint and levy is duly served and no
accepting or transferring the documents. However, whenever property could be located; and
one party to the taxable document enjoys exemption from the (e) when the taxpayer is out of the Philippines
tax, the other party thereto who is not exempt shall be the one
directly liable for the tax. 2. Procedure in the Assurance of Deficiency Tax
Assessment
The tax return must be filed and the tax due paid at the same
time within five (5) days after the close of the month when Letter of Authority
the taxable document was signed, issued, accepted or (“LOA”) against a taxpayer pursuant to Section 5 of the Tax
transferred. Failure to stamp a taxable document does not Code which shall authorize the BIR, in ascertaining the
invalidate the same. However, it shall not be recorded or correctness of any entry in the tax return, or in making a return
admitted or used as evidence in any court until the requisite where none has been filed, or in ascertaining the liability of any
stamp is paid. person for internal revenue taxes, or in collecting tax liability or
in determining tax compliance, to:
No notary or other officer authorized to administer oaths (a) examine any book, paper, record, or other data which
shall add his jurat or acknowledgment to the document unless maybe relevant or material to the inquiry;
the proper documentary stamp has been paid. (b) obtain on a regular basis any relevant information
concerning a taxpayer from any person other than the
ASSESSMENT OF NATIONAL INTERVAL REVENUE TAXES taxpayer whose tax liability is in question;

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 (c) summon the person liable for tax or required to file a Letter of Demand (“FLD”) and Assessment Notice will
return or any officer or employee of such person to appear thereafter be issued by the concerned office.
before the BIR or its duly authorized representative and to
produce relevant books, papers, records or other data, and
An Assessment Notice is a declaration of deficiency taxes
to give testimony;
(d) take the testimony of the person concerned under oath; issued to a taxpayer who fails to respond to the PAN or whose
and reply thereto was found not to be meritorious. The FLD must
(e) cause revenue agents to canvass any revenue district or state the facts, the law, rules and regulations or jurisprudence
region and inquire after and concerning all persons therein on which the assessment is based. It must also include a
who may be liable for internal revenue taxes and all persons demand for payment of deficiency taxes, otherwise, the FLD
owning, managing or in possession of any taxable object and Assessment Notice will be void.

As a general rule, the taxpayer’s books of accounts and Administrative Protest

accounting records may be audited only once every taxable A taxpayer has 30 days from receipt of the FLD and
year except in the following instances: Assessment Notice to protest the same administratively
(a) fraud, irregularity, or mistakes, as determined by the BIR;
(b) the taxpayer requests re-investigation;
through either a request for reconsideration or a request for
(c) verification of compliance with withholding tax laws and reinvestigation. All the relevant supporting documents to the
regulations; protest must be submitted within 60 days from filing of the
(d) verification of capital gains tax liabilities; and request for reinvestigation. Otherwise, the assessment will
(e) in the exercise of the BIR’s power under Section 5(B) of the become final, executory and demandable.
Tax Code to obtain information from other persons in which case,
another or separate examination and inspection may be made Appeal to the Court of Tax Appeals
If the BIR denies the protest, in whole or in part, the taxpayer
Notice of Informal Conference may appeal to the Court of Tax Appeals (“CTA”) Division within
After the examination of the taxpayer’s books of accounts and 30 days from the receipt of the decision by filing a petition for
accounting records pursuant to the LOA, a notice of informal review. Otherwise, the decision will become final and
conference, informing the taxpayer that the findings of the demandable.
audit indicate that deficiency taxes has to be paid, must be
issued to the taxpayer. A second conference is allowed to A taxpayer may likewise appeal a disputed assessment without
enable the taxpayer to examine his position and gather awaiting the decision of the BIR. If the BIR or its duly
evidence to support his claim. The taxpayer is given a period of authorized representative fails to act on the protest, a
15 days within which to respond, counted from the receipt of petition for review may be filed within 30 days from the
the notice of informal conference, otherwise, the taxpayer will expiration of 180 days counted from the date of submission of
be considered in default. the required documents in the case of a request for
reinvestigation or from the submission of the request for
In such a case, the matter will be endorsed with the least reconsideration. Otherwise, the assessment shall become
possible delay to the Assessment Division of the BIR for review final and demandable.
and issuance of deficiency tax assessment, if necessary.
If the taxpayer is not satisfied with the decision of the CTA
Preliminary Assessment Notice Division, a motion for reconsideration can be filed with the
The Assessment Division of the BIR will determine if there is CTA Division within 15 days from receipt of the decision.
sufficient basis to issue a deficiency tax assessment. If there
is, a Preliminary Assessment Notice (“PAN”) will be issued If the taxpayer is still dissatisfied with the decision, a Petition
to the taxpayer, at least by registered mail. A PAN informs the for Review can be filed with the CTA En Banc within 15 days
taxpayer of the audit findings of the Revenue Officer after a from receipt of the decision.
review of the said findings.
From the decision of the CTA En Banc, a motion for
Notice of Informal Conference and PAN are not necessary in reconsideration can be filed within 15 days from receipt of the
the following instances: decision.
(a) when the finding for any deficiency tax is the result of
mathematical error in the computation of the tax appearing Appeal to the Supreme Court
on the face of the tax return filed by the taxpayer;
(b) when a discrepancy has been determined between the The decision of the CTA En Banc can be questioned before
tax withheld and the amount actually remitted by the the Supreme Court by filing a Petition for Review within 15
withholding agent; days from receipt of the decision.
(c) when a taxpayer who opted to claim a refund or tax credit
of excess creditable withholding tax for a taxable period was Collection of National Internal Revenue Taxes
determined to have carried over and automatically applied
Once the assessment becomes final, executory, and
the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable demandable by failure to protest the same administratively
year; and/or judicially, or the protest or appeal is denied or decided
(d) when the excise tax due on excisable articles has not against the taxpayer, the government may avail of the following
been paid; or remedies to collect deficiency taxes:
(e) when an article locally purchased or imported by an (a) distraint of personal property;
exempt person, such as, but not limited to, vehicles, capital (b) levy of real property;
equipment, machineries and spare parts, has been sold, (c) civil action; and
traded or transferred to non- exempt persons (d) criminal action

Formal Letter of Demand and Assessment Notice Revenue Memorandum Order (“RMO”) No. 39-200755
If the taxpayer fails to respond within 15 days from receipt of authorizes the immediate issuance and service of warrants of
the PAN, the taxpayer will be considered in default. A Formal distraint and garnishment and/or levy upon the issuance of the
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final decision on the disputed assessment against the taxpayer Local taxes, fees or charges must be assessed within five
by the Commissioner of Internal Revenue or the Regional years from the date they became due. In case of fraud or intent
Director of the BIR or by the CTA Division or CTA En Banc of to evade the payment of taxes, fees, or charges, the same may
its decision upholding the assessment against the taxpayer. be assessed within ten years from discovery of the fraud or
intent to evade payment.

LOCAL BUSINESS TAXES The running of the prescriptive period will be suspended for the
The provisions on local business taxes are codified in the Local time during which:
Government Code of 1991 (the “Local Government Code”). (a) the treasurer is legally prevented from making the
Under Section 129 of the Local Government Code, each local assessment or collection;
government unit (“LGU”) has the power to create its own (b) the taxpayer requests for a reinvestigation and executes
a waiver in writing before expiration of the period within
sources of revenue and to levy taxes, fees and charges.
which to assess or collect; and
(c) the taxpayer is out of the country or otherwise cannot be
COMMUNITY TAX located
Every corporation is required to pay annually not later than the
last day of February a basic community tax of PhP500.00 and 2. Procedure Governing Protest of Assessment
an additional tax which in no case shall exceed PhP10,000.00, The procedure for protesting an assessment of local business
depending on the amount of gross receipts or earnings during tax by the City/Municipal Treasurer is as follows:
the preceding year. (a) issuance by the Treasurer or his duly authorized
representative of a Notice of Assessment;
BUSINESS TAX (b) filing of a written protest by the taxpayer within 60 days
Corporations also have to pay the annual business tax and from receipt of the Notice of Assessment;
(c) rendering of decision by the City/Municipal Treasurer
other fees imposed by the LGU having jurisdiction over the within 60 days from filing of the written protest;
corporation. These local taxes and fees must be paid within the (d) filing by the taxpayer of an appeal to the Regional Trial
first 20 days of January each year. Court within 30 days from receipt of the denial of the protest
or from the lapse of the 60 day period within which to decide
The rates of business tax vary depending on the business of the protest;
the corporation and on the amount of gross sales or receipts. (e) filing of a Motion for Reconsideration with the Regional
The taxes levied by cities may exceed the maximum rates Trial Court within fifteen (15) days from notice of the
prescribe for other municipalities by not more than 50%. decision;
(f) filing of a Petition for Review with the CTA Division within
30days from receipt of the Regional Trial Court’s decision;
For businesses maintaining or operating branch or sales (g) filing of a Motion for Reconsideration with the CTA
outlets in various LGUs, the sale is recorded in the branch or Division within 15 days from notice of the decision;
sales outlet making the sale or transaction and the tax thereon (h) filing of a Petition for Review with the CTA En Banc
will accrue and be paid to the LGU where such branch or sales within 15 days from receipt of the decision;
outlet is located. In cases where there is no branch or sales (i) filing of a motion for reconsideration within 15 days from
outlet in the LGU where the sale or transaction is made, the receipt of the decision with the CTA En Banc; and
sale should be recorded in the principal office and the taxes (j) filing of a Petition for Review with the Supreme Court
within 15 days from receipt of the decision
due will accrue and be paid to such LGU.
COLLECTION OF LOCAL BUSINESS TAX
For manufacturers, assemblers, contractors, producers and
exporters with factories, project offices, plants and plantations, Local business taxes may be collected within five years from
the following sales allocation must be followed in determining the date of assessment by administrative or judicial action.
the amount of business taxes due for each LGU:
(a) 30% of all sales recorded in the principal office is taxable The civil remedies for collection of local taxes may be:
by the LGU where the principal office is located; and (a) by administrative action through distraint of goods,
(b) 70% of all sales recorded in the principal office is taxable chattels, or effects, and other personal property of whatever
by the city or municipality where the factory, project, office, character, and by levy upon real property or interests in or
plant or plantation is located rights to real property; and
(b) by judicial action
Where the plantation is located at a place other than the place
where the factory is located, the 70% mentioned in the REAL PROPERTY TAX
preceding sentence will be divided as follows: The Local Government Code authorizes provinces to levy real
(a) 60% to the LGU where the factory is located; and property tax on real property such as land, building, machinery
(b) 40% to the LGU where the plantation is located and other improvements at the rate not exceeding 1% of the
assessed value of the said property annually while for cities,
Where a manufacturer, assembler, producer, exporter or including municipalities within the Metropolitan Manila Area at
contractor has two or more factories, project offices, plants and the rate not exceeding 2% of the assessed value of the
plantations located in different LGUs, the 70% mentioned property.
above will be prorated among the localities where the factories,
project offices, plants and plantations are located in proportion In addition, provinces, cities, including municipalities within the
to their volume of production during the period for which the tax Metropolitan Manila Area may levy and collect an annual tax of
is due. 1% on real property as Special Education Fund (“SEF”) over
and above the real property tax. The real property tax accrues
ASSESSMENT OF LOCAL BUSINESS TAXES on the first day of January every year.

The real property tax and the additional tax for the SEF may be
1. Prescriptive of Local Business Taxes paid in four installments without interest: the first installment
payable on or before March 31; the second installment on or
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before June 30; the third installment on or before September
30 and the last installment on or before December 31.

In case of failure to pay the said taxes on the dates mentioned

above, the taxpayer will be liable to pay interest at the rate of
2% per month on the unpaid amount until full payment is
made. However, the total interest should not exceed 36
months. Chapter 2: The SAVANT Framework
In addition, the real property tax and the tax for the SEF
constitutes a lien on the real property superior to all liens, Topic Outline:
charges or encumbrances in favor of any person which can be ● Be able to use the SAVANT Framework to guide
enforced by administrative or judicial action and will only be tax planning
extinguished upon payment of taxes, and related interests and ● Know each element of SAVANT Framework
expenses.

COLLECTION OF REAL PROPERTY TAX To produce revenue, investors should have assets. To
Real property tax must be collected within five years from the increase firm value, managers engage in transactions. Of
date they become due. In case of fraud or intent to evade the course, firm value can increase for other reasons. On the other
payment of taxes, fees, or charges, the action for collection hand, for every transaction that managers and owners would
must be instituted within ten years from discovery of the fraud enter, there is always its invisible partner – the government.
or intent to evade payment.

The running of the prescriptive period will be suspended for the SAVANT stands for Strategy, Anticipation, Value-adding,
time during which: Negotiating and Transforming.
(a) the treasurer is legally prevented from collecting the tax;
(b) the owner of the property or the person having legal STRATEGY
interest therein requests for a reinvestigation and executes a
waiver in writing before expiration of the period within which Tax management should strive to enhance the firm’s strategy
to collect; and and should not cause the firm to engage in tax-minimizing
(c) the owner of the property or the person having legal transactions illegally that deter it from its strategic plan. A key
interest therein is out of the country or otherwise cannot be
to a successful organization is having a simple yet effective
located
strategy with efficient implementation. One could think that in
PROTEST OF REAL PROPERTY TAX order not to pay taxes, the firm should also minimize profits.
A protest can only be entertained if the taxpayer pays the real
property tax. The words “paid under protest” must be From the business point of view, it may be aligned with SWOT
annotated on the tax receipts for payment of real property tax. analysis, that is, matching Strengths and Weakness to
The protest must be filed within 30 days from payment of the
business’ Opportunities and Threats.
real property tax to the provincial, city treasurer or municipal
treasurer. The protest must be decided by the treasurer within
60 days from receipt thereof. Strategic management curves the firms’ path on where it wants
to go. Typically, the firm’s business-level strategy is typically
Any owner or person having legal interest in the property who detailed in operations-level, corporate-level, and international-
is not satisfied with the action of the treasurer may, within 60 level strategies.
days from the date of receipt of the decision or from the lapse
of the 60 day period without any decision, appeal to the Local
At the operations level, the firm’s strategy involves gaining an
Board of Assessment Appeals (“LBAA”) by filing a petition. The
advantage over competitors to create value for its customers
LBAA has 120 days from receipt thereof to decide the appeal.
through its products or services.
If the owner of the property or the person having legal interest
therein or the assessor is not satisfied with the decision of the In its competitive analysis, the firm needs to understand
LBAA, an appeal to the Central Board of Assessment Appeals whether it has a tax advantage or disadvantage in relation to
(“CBAA”) may be filed. its rivals.
A party adversely affected by a decision or ruling of CBAA in
the exercise of their appellate jurisdiction may appeal to the Corporate strategy focuses on diversification of the business.
CTA En Banc by filing a petition for review within 30 days from Ideally, diversification strategies improve the structural position
receipt of the questioned decision or ruling. or process execution of existing units, or, in a new business
unit, stresses competitive advantage and consumer value.
From the decision of the CTA En Banc, a motion for
reconsideration can be filed within 15 days from receipt of the International strategy focuses on taking advantage of
decision. The decision of the CTA En Banc can be questioned
corporate and business strengths in global markets. It requires
before the Supreme Court by filing a Petition for Review within
15 days from receipt of the decision. an understanding of local countries and relies on working with
foreign governments.

ANTICIPATION
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As the firm curves out its strategy, they should also anticipate interpretation. With Internet availability, important changes can
actions that may be done by their competitors, markets and be monitored constantly.
even the government. Tax firms are advising their clients
based on what the government will legislate together with the
market behavior. In short, they are anticipating tax changes.

Firms should also attempt to anticipate price effects resulting Chapter 3: Choosing a Legal Entity, Risk
from tax changes. The magnitude of price effects depends on Management, Raising Capital, and Tax Management
a number of conditions. These include the elasticities of supply
and demand and whether additional suppliers can enter the
market. Topic Outline:
● Apply SAVANT to Entity Choice
VALUE ADDING ● Determine application of the Framework in
Every goal of effective tax management for each transaction specialized legal forms
should at least add value. Financial Statement analysis,
together with others, is one which the management can derive The entity choice for tax purposes should be based on a
if there’s value-adding. strategic planning process that considers a host of nontax
strategic goals as well. Considering the entity’s strategic plan,
On a year-to-year basis, investors as well as creditors monitor they have to consider also those non-tax attributes such as:
the firm’s financial performance. Popular methods would be the 1. Risk Management
financial statement analysis such as Return on Equity (ROE) 2. Managerial Control
and Earnings per share (EPS). However, both risk in business 3. Raising Capital
and tax law changes should be taken into consideration. 4. Pretax Return
Therefore, it is correct to say that for value adding purposes,
this is somehow flexible and should be assessed over time. CAPITAL RAISING
Raising capital essentially means getting the money you need
NEGOTIATING to grow your business from investors. Raising capital is
Negotiating tax benefits and costs is a function with the other another way of talking about financing your business. You can
who also has control over their functions. Contracting with raise capital through investors, or you can take out debts, like
another which is not a governmental authority. Before an entity loans or credit cards, to finance your business venture.
enters a contract with another, the firm’s tax management must
think of how they can minimize their tax exposure legally by Capital also refers to financial assets, including funds that are
way of shifting burdens to another or shared tax costs. This held in an account, that are used to build wealth in your
ability is called tax shifting. This can be done by negotiating business. Note that materials that are consumed or used as
purchase price and transacting with PEZA registered to enjoy part of a process aren’t capital.
their benefits, among others.
Capital investments that generate wealth and can be sold off
TRANSFORMING can be a brand name or software. Also, a piece of
Tax management should effectively think of ways to transform manufacturing equipment because it will generate wealth and
certain tax types to another. Like for instance, a non-deductible can be sold off as assets. Equipment is still capital, even
expense to a deductible one, a taxable income to a gain and though it depreciates in value. Equity capital in the form of
expenses into losses. We have learned that losses on sale of investments doesn’t have to be paid back and is used to grow
capital assets are deductible only to the extent that the wealth in the business.
company has capital gains. Ordinary losses cannot be, hence,
deductible from this. One could think about converting their MANAGEMENT CONTROL
capital losses to ordinary losses. Unlike in a sole proprietorship which he has the sole control of
the business, the other type of business such as partnership
TAX MANAGEMENT and corporation invites more decision makers that will make
Effective tax management is putting all together the SAVANT judgment on the firm’s venture.
Framework in all its endeavors and important business
transactions. This means the management must assess from Thus, they will all be decision makers responsible to the path
time to time the change in tax environment to see what has where the business will go. Investors and shareholders are
changed and eventually adjust the strategy. able to have a voice only through voting. From there, the latter
has to choose who will represent their voices.
As discussed, tax law changes in 2018 made a great impact on
the tax environment. Tax rate changes have paved the way for ANTICIPATION AND TIMING ISSUES
the adjustment of many firms in every industry to adopt. Taxes In a corporate setting, it can control the timing of income to its
constantly evolve through deliberate government policy and shareholders. (Similarly, the corporation can choose to
through administrative and judicial modifications and repurchase its shares rather than paying dividends.) This
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allows shareholders to control when to reap the benefits of
corporate earnings in their decisions about when to sell shares,
but they have to consider the probable imposition of improperly
accumulated earnings tax.

THE SAVANT FRAMEWORK

For example, you and your friend want to start a business.
Putting it all together: Raising Capital and Management
Control. Let us use the SAVANT Framework for better Chapter 4: Financing a New Venture
understanding.
INTERNAL FINANCING
Strategy A company may use this strategy when it has available
To retain control, you probably invite other people to raise retained earnings to finance a firm’s growth. However, as part
capital but not to include them as partners but rather investors of its long-run planning, an organization may plan to transition
to the firm. In some cases, a limited partner may be true but from external to internal financing eventually.
then again, this kind of partner may exercise certain control in
the management of the business. Strategy
Retained earnings are not generally subject to payout and
Anticipation control restrictions compared to external financing. Debt
In anticipation of a new tax law change, you probably retain or financing requires periodic payment of interest. Equity
rather put up an Ordinary Partnership rather than a General financing will dilute earnings per share as well as control.
Professional Partnership for better tax set up. This can be
assessed through allowed deductibles and difference in tax Anticipation
rates for income purposes. Anticipated tax law changes affect internal financing choice.
Similarly, anticipated tax decreases will release additional
Value Adding funds for internal financing.
Ordinary Partnership is treated as an ordinary corporation. For
every business transaction, the way a corporation does is no Using internal financing, the company can control the timing of
way different except the absence of shares of stock. In this tax benefits and deductions in response to anticipated changes
regard, one could think that a good financial performance will in the taxes.
reap better benefits minus the various tax types a corporation
is more exposed. To recap, an ordinary corporation, though the Value-Adding
same tax rates of 30% is relieved of paying dividends, IAET The value added through internal financing is potentially higher
and the like. This can help add value to the firm as the than from external financing. This is because neither the
business transaction are basically the same as if a corporation. enhanced cash flows nor the increased value of the firm is
shared with anyone other than the original owners.
Negotiating
Because of the nature of the business, you anticipate tax net Negotiation
operating losses for the first few years just like a corporation. Negotiation of tax benefits is not really affected by the use of
Though there is no difference in tax exposures, one could think internal financing, but as also discussed later, it is an important
that an Ordinary Partnership will have better standing as it has factor in structuring debt financing.
less tax types to pay and not as complex as a corporate set-
up. Transforming
While there are no direct transforming advantages to internal
Transforming financing, there is a definite advantage in the absence of
In the event of liquidation, an Ordinary Partnership has to transaction costs (as discussed in the next section). However,
liquidate only the assets and distribute the remaining assets to increases in firm value are not usually taxed until there is an
the Partners once the creditors are paid and settled. In a exchange transaction, such as a sale of corporate stock. Thus,
corporate set-up, the shareholders are the last to be paid up an internal financing strategy that bolsters the value of a firm’s
once the secured and unsecured creditors are settled. One equity held by existing owners can be quite tax advantaged.
could imagine the difficulty of liquidating a corporation than
ordinary partnership. Also, as an ordinary asset, it can be EXTERNAL FINANCING: DEBT VS. EQUIT
deduced that any losses may be deducted to other ordinary Debt may be in the form of short-term debt or long-term debt.
losses unlike in a corporate set-up where shareholders treat Short-term debts are expected to be settled within a year. It is
their earnings as a passive income. This is not deductible but characterized overall by higher interest rates than long-term
an income subject to final taxes, hence, will never be debt but can be interest free. Suppliers usually offer a credit
deductible. term of 30 days where buyers can purchase on account and
can pay interest free for 30 days. Long-term debt consists of

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bonds (secured by specific assets) and debentures (not By issuing stock or securities that are convertible to equity,
secured by specific assets). firms can enable either themselves or their investors to
transform ordinary income into capital gains or taxable income
Equity financing may be in the form of contribution in cash or in into nontaxable income.
property by partners in a partnership or issuance of capital
stock by a corporation. Owners of common stock most often
have voting control of the corporation, yet, they have residual
interest in the assets of the corporation. Owners of preferred
stock usually have no voting rights but must be paid a specific Chapter 5: New Products: Development, Promotion,
dividend before common stock gets its shares. and Advertising
Strategy For a business to stay competitive, it must deliver products or
Managers search for an optimal capital structure in the long services that are perceived to be better, less expensive, or
run. The optimal capital structure depends on the objective of more convenient. Given competitors with the same objectives,
the organization. A not-for-profit organization will minimize its this implies a constant evolution in products. This chapter
debt financing wile a for-profit organization will seek optimal examines the tax aspects of this process using the SAVANT
debt-to-equity mix to maximize shareholders’ wealth. framework.

Value-Adding NEW PRODUCT AND PRODUCT DEVELOPMENT

A key aspect of debt financing is leverage. Debt adds value The typical product/process development process typically
when debt increases operating cash flows in excess of the consists of research and development, then, promotion and
required periodic payments of interest and repayments of advertising.
principal. Also, firms with higher effective tax rates benefit
more from debt because of the tax shield. Ordinary and necessary expenses which are not chargeable to
the capital account require that it must be
Negotiation a. Paid or incurred by the taxpayer during the taxable year
Tax benefits from losses suffered by start-up companies are b. In connection with his trade, business, or profession and
good negotiating tool. Businesses that suffer operating losses c. The expenditures so treated shall be allowed as deduction
during the taxable year when paid or incurred
can get immediate tax benefits by carrying those losses back
to offset profits. Net Operating Loss (or the excess of allowable
Research and development expenses may be treated as
deduction over gross income) may be carried over as
deferred expenses or expenses chargeable to capital account
deductions from gross income for the next three consecutive
(optional on the part of the taxpayer) and requires that it must
years immediately following the year of such loss. If these tax
be
deductions can be transferred to investors, they will effectively
a. Paid or incurred by the taxpayer in connection with his
reap a higher return on capital. trade, business, or profession
b. Not treated as expenses
Anticipation c. Chargeable to capital account but not chargeable to
The company should anticipate macroeconomic changes that property of a character which is subject to depreciation or
will affect interest rates or tax law changes affecting interest depletion.
deductions or tax rates on investors.
In computing taxable income, the deferred expenses shall be
Moreover, under the TRAIN Law transfer of property pursuant allowed as deduction ratably distributed over a period of not
to Section 40(C)(2) of the NIRC is already exempt from VAT, less than 60 months as may be elected by the taxpayer. The
hence, a sole proprietorship or a partnership may defer the deduction begins with the month in which the taxpayer first
incorporation of its business until January 1, 2018 to avail the realizes benefits from such expenditures.
tax-free exchange of property to a corporation by a person in
exchange for stock or unit of participation in such a corporation Republic Act No. 7459
of which as a result of such exchange said person, alone or  Known as Investors and Invention Incentives Act of the
together with others, not exceeding four (4) persons, gains Philippines, provides incentives to Filipino investors
 Inventors, as certified by the Filipino Inventors Society and
control of said corporation.
duly confirmed by the Screening Committee, shall be
exempt from payment of license fees, permit fees and
Transaction Cost Effects on Value-Adding other business taxes in the development of their particular
Debt offerings typically are cheaper than equity (5% versus inventions
10%, depending on circumstances). Because these costs are  This is an exception to the taxing power of the local
present at each offering, it makes sense for the firm to try to government units
anticipate future capital needs in order to minimize the number  Inventors shall exempt from paying any fees involved in
their application for registration of their inventions
of issuances.
To promote, encourage, develop and accelerate
Transforming commercialization of technologies developed by local
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researchers shall be exempted from all kinds of taxes during There are few opportunities for the firm to convert sales
the first ten (10) years from the date of the first sale. Provided, income into tax-favored capital gains. However, if a new
that this tax exemption privilege pertaining to invention product turns out to be unsellable, all costs of unsold inventory,
shall be extended to the legal heir or assignee upon the supplies, and equipment can be written off as ordinary losses.
death of the inventor.
Firms seeking conversion can try using the collapsible
“The technologies, their manufacture or sale, shall also be corporation technique. Here, instead of selling products
exempt from payment of license, permit fees, customs individually, a product is developed in an entity and the entity is
duties and charges on imports.” sold. Classic examples are having a corporation make a film,
develop software, or purchase a cellar of newly bottled wine.
An important part of strategic analysis is the company’s tax When the film is finished, the software works, or the wine is
status. If the company is in a net operating loss (NOL) sufficiently aged, it is not sold directly. Instead, the common
carryforward situation, the tax advantages of deductions may stock of the corporation is sold.
be low or nonexistent.
This will be treated as sale of capital asset. The sale of shares
Conversely, if the company is in the highest income tax of stock not treaded in local stock exchange is subject to
bracket, cost and risk sharing is maximized. In that case, capital gains tax of 15% on net capital gain.
depending on the tax status of the company, it can choose
whether to claim Research and development expenditures as SAVANT and RESEARCH AND DEVELOPMENT
ordinary and necessary expenses or as deferred expenses. Because R&D is risky, managers sometimes like to separate it
into a separate entity (such as a subsidiary corporation or an
ANTICIPATION LLC).
To evaluate potential tax benefits from new product
development, actions by competitors and governments should This can get the R&D off the parent company’s financial
be anticipated. Tax rate and rule changes also should be statements, which may also be useful for hiding R&D from
considered in the planning process. competitors. If an R&D subsidiary corporation is used, the
related tax benefits will not be recognized unless either the
Another topic requiring anticipation is the taxation of electronic subsidiary has income.
commerce. The Philippines House of Representatives has
introduced a Bill, the Digital Economy Taxation Act of 2020 In terms of timing and time value, the firm may want to perform
(DETA 2020 Bill), which aims to subject the value created in R&D in years without NOL carryforwards.
the digital economy to withholding/income tax and value-added
tax (VAT).
Chapter 6: Attracting and Motivating Employees and
Pursuant to the DETA 2020 Bill, digital or electronic goods, Managers: Company and Employee Tax Planning
services rendered electronically, digital advertising services,
internet-based subscription services, and transactions made
on electronic commerce (e-commerce) platforms will be Topic Outline:
subject to a 12% VAT. ● Understand the forms of compensation
● Distinguish executive and nonexecutive employee
VALUE-ADDING compensation
Like any other investment, product development must pass the ● Know the limits on deductibility on executive
value-adding test. The comparison suggests that new product compensation
development through R&D is a better investment than ● Apply SAVANT to executive compensation
acquiring new machine because of the tax benefits.

Adjusting Value-Adding for Risk. Many aspects of product There are two fundamental approaches to accomplish the
development are risky in the sense that the manager does not basic goal which is to improve labor productivity over that
know if it will be a commercial success. derived from simply paying wages. The first is based on better
matching rewards with employee needs. Some of these
Value-Adding and Transactions Costs. The costs of starting a schemes — such as lifetime employment. Others — such as
new product are currently deductible unless they are capital in
job enrichment and job sharing.
nature.

NEGOTIATING The second fundamental approach is to align employee

If the firm is in an NOL carryforward setting, it may want to performance more with a firm's strategic goals. Some of these
back-load payments in an advertising contract so that more plans, such as piecemeal bonuses for machinists or assembly-
payments are made in years in which the firm is taxable and line workers, reflect Taylor's conception of the value of
thus the payments are currently tax deductible. rewarding measures of enhanced tangible output.

By engineering tax benefits, the firm implicitly changes a

Taxes have also been a key factor in designing nonwage forms
product’s price. By promoting the product’s tax advantages, the
firm can segment the market. Other negotiations can occur to of employee compensation. As with investment, it is not just
transfer benefits between buyer and seller. what one earns those matters, but also what one keeps. It is
the expected after-tax net present value of an employee's total
TRANSFORMING compensation that matters.

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Executive/Managers Compensation:
Schemes for compensating executives/managers have
become important in many companies' strategic plans. The
scope of these packages can be seen in annual surveys
reported in the business press. The array of factors can be
generalized, however, into six basic components:
1. Annual base wages
2. Year- end bonuses
3. Long-term equity participation
4. Deferred compensation
5. Fringe benefits
6. Employment security arrangement

There are advantages and disadvantages to each component

in satisfying employee needs and motivating labor productivity.
For example: Salary can be adjusted annually. But because it
is contracted for ahead of time, salary is not ideal as a direct
motivator for future performance. Annual bonus payments can
fill this role better. Equity compensation may be more
preferable, particularly for senior executives.

The three main statutory contributions deducted from

employee salaries each month are:
1. Social Security
2. PhilHealth
3. Home Development Mutual Fund

Putting It All Together: Applying SAVANT to Executive

Compensation
You are on the compensation committee of a Fortune 500
company, and you are trying to hire a top executive away from
a competitor. You estimate that the executive would bring $5
million per year of additional value-added to the corporation.
Your firm has a tax NOLCO which is due to expire this year.
The company’s financial earnings are positive.

INTRODUCTION
TOPIC
SUB-TOPIC

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