*This article was originally published in Business Mirror on February 22, 2016 but was updated to reflect current dates.
Whenever the terms “Multi-Level Marketing” or “MLM”, also known as “network marketing”, is mentioned, most people cannot help but conjure up images of cunning scam artists, swindlers or estafadores in the likes of Ponzi or Madoff. We cannot blame the masses though because many unscrupulous people do indeed use these terms in presenting their illegal pyramiding schemes in order to pass it off as valid business models or at least give it some semblance of legitimacy. It has been part of my advocacy in spreading financial literacy to expose these sham companies that have been victimizing many Filipinos, especially overseas workers. In fact, just a few years ago, a popular registered financial planner and I were sued by one of these illegal business organizations for exposing them in our respective Facebook pages by sharing an advisory published by one of the top mutual fund investment companies here in the Philippines denying an alleged partnership with that sham company. It was a criminal complaint for libel. However, unlike my friend and colleague, I did not have to spend money by hiring a lawyer for my defense, being a lawyer myself. Anyway, as expected, the case was dismissed much to our delight.
Nevertheless, the MLM business model, which is a more sophisticated form of direct selling, is in and of itself definitely a legitimate one. It is characterized by face-to-face selling to the consumers through independent distributors, who in turn can recruit other distributors from whose sales the upline sponsors derive override commissions. It has been in existence in America since the 1970s but has only started to gain ground in the early 1990s. It democratized entrepreneurship and the business world which, until recently, used to be the sphere of only for the elite upper class of society. According to former Trade Undersecretary Ernesto M. Ordo, “Direct Selling necessitates the employment of a considerable number of people to effectively carry out the marketing and production activities of these companies. Consequently, not only will additional sales personnel be hired but factory workers as well. As a result, the direct selling sector has the potential to bring additional revenues to the government.” In any case, I will no longer belabor the history of the development of MLM in this article as good books have already been written on that subject such as the ones of Richard Poe entitled Wave 3: The New Era in Network Marketing and Wave 4: Network Marketing in the 21st Century. As for its viability as a legitimate business venture, famous author and celebrity financial coach Robert T. Kiyosaki also wrote the book The Business of the 21st Century. Now you know where I got the idea for the title of this article!
On the other hand, a pyramiding or Ponzi scheme is an illegal money scam where people are convinced to pay money for a chance to profit from the payments of others who might join later. Interestingly, in spite of the proliferation of scammers and the flak the network marketing industry has been getting, we still nonetheless see an unprecedented growth in the number of legitimate companies being established along with entrepreneur hopefuls who join their ranks. Albeit, one important question remains in people’s minds, i.e. “How can we distinguish the legitimate MLM companies from the scams?”
For the uninitiated, it would seem quite confusing because most, if not all MLM companies, including the scams, are duly registered corporations with the Securities and Exchange Commission (SEC). Such being the case, the first and easiest way to verify whether an MLM company you are interested in joining is a legit business or not is by keeping tabs on the public advisories issued by the SEC warning the public about dubious and unauthorized activities that are being carried upon by certain companies. The said advisories are periodically published in its website and in major newspapers. Of course, even though the SEC is a reliable government agency tasked to protect the investing public, its employees and officers are not omniscient being humans just like us. So, we also have to do our part and be aware of certain “marks of a scam” so as not to be duped into investing our hard-earned money into one of those companies.
The second way we can make use of the SEC is by verifying if the company that is soliciting investments through its officers or agents possesses a secondary license because only those, such as mutual fund representatives and stock brokers, are legally allowed to solicit investments from the public by selling securities.
To be sure, before joining an MLM company, ask yourself the following questions:
• Is there a real, good quality product that can be differentiated from others in the market and not just for the sake of having a product?
• Are commissions paid on sales of products and not on registration or joining fees?
• Is the intent to sell that of a product and not a position?
• Is there no direct correlation between the number of recruits and compensation?
• If recruitment were to be stopped today, will the distributors or members still make money?
• Is there a reasonable product return policy?
• Do products have fair market value?
• Is there a compelling reason to buy the product/s?
If the answer to all the questions is YES, then the company being evaluated is a legitimate company; but if the answer is NO, then there is a high probability that it is a pyramid scam or Ponzi/Madoff scheme. For guidance and consultation, I may be reached me thru my email adress firstname.lastname@example.org.
Unlike national taxes, which are under the jurisdiction of the Bureau of Internal Revenue (BIR), local taxes are levied and assessed by local government units (LGUs) such as cities, municipalities and provinces. As regards national taxes, the general governing law is the National Internal Revenue Code (NIRC) as amended by R.A. No. 10963, known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law. However, when it comes to local business taxes, the general governing law is the Local Government Code (LGC) and the respective tax ordinances of each LGU.
In this article, I will present the remedies taxpayers may avail of in any city, municipality or province as far as local business taxes are concerned as provided by the LGC.
SECTION 194. Periods of Assessment and Collection.— (a) Local taxes, fees, or charges shall be assessed within five(5) years from the date they become due. No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period: Provided, That taxes, fees, or charges which have accrued before the effectivity of this Code may be assessed within a period of three (3) years from the date they become due.
(b) In case of fraud or intent to evade the payment of taxes, fees or charges, the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment.
(c) Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of the said period: Provided, however, That, taxes, fees or charges assessed before the effectivity of this Code may be collected within a period of three (3) years from the date of assessment.
(d) The running of the periods of prescription provided in the preceding paragraphs shall be suspended for the time during which:
1) The treasurer is legally prevented from making the assessment or collection;
2) The taxpayer requests for a reinvestigation and executes a waiver in writing before the expiration of the period within which to assess or collect; and
3) The taxpayer is out of the country or otherwise cannot be located.
Generally, local taxes, fees and charges must be assessed within 5 years from the date they become due. However, the rule admits of two exceptions in that (1) if the taxes, fees or charges accrued before the effectivity of the LGC, they may be assessed within 3 years from the date they became due and (2) in case of fraud or intent to evade the payment of taxes, fees or charges, the assessment may be made within the allowable period of 10 years from the discovery of the fraud.
For purposes of this Section, it should be remembered that under Section 166 of the LGC, all local taxes, fees and charges accrue on the first day of January of each year unless otherwise provided for in the LGC and except in the case of new taxes, fees or charges, or changes in the rates thereof, which accrue on the first day of the quarter next following the effectivity of the ordinance imposing such new levies or rates.
As to collection of the local taxes, fees or charges, note that the required waiver in paragraph (d)(2) must not only be in writing but must also be executed before the expiration of the period within which to assess or collect.
SECTION 195. Protest of Assessment.—When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests and penalties. Within sixty (60) days from receipt of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory. The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice cancelling wholly or partly the assessment. However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty-day period prescribe herein within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable.
An assessment fixes and determines the tax liability of a taxpayer. It is a notice to the effect that the amount therein stated is due as tax and demand for payment thereof (Manila Electric Company v. Barlis; G.R. No. 114231; June 29, 2004). The notice of assessment, which stands as the first instance the taxpayer is officially made aware of the pending tax liability, should be sufficiently informative to apprise the taxpayer of the legal basis of the tax. Section 195 of the LGC does not go as far as to expressly require that the notice of assessment specifically cite the provision of the ordinance involved but it does require that it states the nature of the tax, fee or charge, the amount of deficiency, surcharges, interests and penalties (Yamane v. BA Lepanto Condominium Corporation; G.R. No. 154993; October 25, 2005).
Indeed, Section 195 does not specify the grounds with which a protest may be made. Nevertheless, the law requires that in case of non-payment of correct taxes, fee, and charges, the notice of assessment given to the taxpayer must state the nature of the tax, fee or charge, the amount of deficiency, surcharges, interests and penalties therefor. Hence, the fundamental ground upon which a protest may lie is that the assessment may not have factual basis, that it is contrary to the facts or that the taxpayer is not liable to pay the tax being exempted from it or not covered by it.
It should be emphasized that the filing of a protest with the local treasurer is a condition precedent before resort to the courts can be had. Popularly known as the doctrine of exhaustion of administrative remedies, the rule is that where the law provides for the remedies against the action of an administrative board, body or officer, relief to courts can be sought only after exhausting all remedies provided. The reason rests upon the presumption that the administrative body, if given the chance to correct its mistake or error, may amend its decision on a given matter and decide it properly. Therefore, where a remedy is available within the administrative machinery, this should be resorted to before resort can be made to the courts, not only to give the administrative agency the opportunity to decide the matter correctly, but also to prevent unnecessary and premature resort to the courts (Lopez v. City of Manila; G.R. No. 127139; June 29, 2004).
The court of competent jurisdiction referred to in Section 195 is the Regional Trial Court which exercises original jurisdiction in the issuance of writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction which may be enforced in any part of their respective regions.
Specifically, certiorari is a special civil action against a tribunal, board, or officer exercising judicial or quasi-judicial function which is alleged in a verified petition filed by an aggrieved party to have acted without jurisdiction or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law, praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board, or officer, and granting such incidental reliefs as law and justice may require (Section 1, Rule 65, 1997 Rules of Civil Procedure).
It should be pointed out that the jurisdiction exercised by the Regional Trial Court in deciding an appeal taken from a denial of a protest by the local treasurer is original in character as distinguished from an exercise of the court’s appellate jurisdiction. This should be emphasized despite the language of Section 195 which states that the remedy of the taxpayer whose protest is denied is to “appeal with the court of competent jurisdiction.”
Original jurisdiction is the power of the court to take judicial cognizance of a case instituted for judicial action for the first time under conditions provided by law. On the other hand, appellate jurisdiction is the authority of a court higher in rank to re-examine the final order or judgment of a lower court which tried the case now elevated for judicial review. With these definitions in mind, reviews taken by the RTC over denials of protests by the local treasurer would fall within the court’s original jurisdiction. Moreover, labeling these reviews as an exercise of appellate jurisdiction is inappropriate because the denial of the protest is not a judgment or order of a lower court, but of a local government official.
With the enactment of R.A. 9282 expanding the jurisdiction of the Court of Tax Appeals (CTA), the law has made it clear that the CTA now exercises exclusive appellate jurisdiction to review on appeal decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction (Section 7(a)(3), R.A. No. 9282).
SECTION 196. Claim for Refund or Tax Credit.—No case or proceeding shall be maintained in any court for the recovery of any tax, fee or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date the taxpayer is entitled to a refund or credit.
The doctrine of supervening cause applies to refunds of local taxes. In view of the language of Section 196, it would seem that the two-year period may be suspended by a supervening cause. An example of a supervening cause is the subsequent exemption of the taxpayer from which date the taxpayer is entitled to a refund or credit. Contrast this to the words of Section 229 of the NIRC wherein the two-year period cannot be suspended by any supervening cause, to wit:
“In any case, no suit or proceeding shall be filed after the expiration of the two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.”
There has been a lot of confusion among entrepreneurs, business managers and self-employed professionals with regard to the value-added tax (VAT). As Philippine-based income-earners on the “S” and “B” quadrants of the Cashflow Quadrant® conceptualized by world-renowned personal finance adviser Robert Kiyosaki, it is imperative for us to know the subtle nuances of the VAT regime. Being familiar with these concepts will help us avoid unnecessary expenses due to overpayment—or underpayment—of taxes. Remember, non-payment or underpayment shall also result in penalties and surcharges that may be slapped by the taxing authority on erring taxpayers.
So, how does a VAT-registered seller of goods or services know whether or not to pass on its VAT burden to its customers or clients? What if certain clients claim that we should not pass on to them the VAT burden because of their being VAT-exempt or VAT Zero-Rated? What are their differences and should they be treated?
Pursuant to Section 106 of the National Internal Revenue Code, a.k.a. the Tax Code, VAT is imposed on the gross selling price of the goods or services provided by the VAT-registered seller. It goes on further to define the term ‘gross selling price’, thus—
“The term ‘gross selling price’ means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.”
On the other hand, Section 108 of the NIRC defines the phrase ‘sale or exchange of services’, thus—
“The phrase ‘sale or exchange of services’ means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase ‘sale or exchange of services’ shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines.
The term “gross receipts” means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.”
For VAT-exempt or non-VAT purchasers, Revenue Regulations 12-2003 provides:
“SECTION 4. Treatment of the Output Tax Shifted to the Buyer of Services. – In general, the payor of the income/fee who is a VAT-registered person shall be entitled to claim the output tax paid by the financial institution as an input tax credit. On the other hand, if the payor is not a VAT-registered person, the VAT passed on by the payee shall form part of his cost. Provided, that a VAT receipt/invoice shall be issued by the payee for all the compensation for services received which shall be used as the evidence for the claim of input tax.” (underscoring mine)
For the tax (VAT) treatment of the sale, barter or exchange of goods or sale or exchange of services or lease of properties made by suppliers from the customs territory to the registered Freeport Zone enterprises in the Subic Freeport Zone (SFZ), including the Clark Freeport Zone (CFZ), as well as the Poro Point Freeport Zone (PPFZ), and vice versa pursuant to the provisions of Sections 12 and 15 of Republic Act (RA) No. 7227, as amended by RA 9400, in relation to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, as amended by RA 9337, and implemented by Sections 5, 6, 12, and 13 of Revenue Regulations (RR) No. 4-07 amending Sections 4.106-5, 4.106-6, and 4.108-6 of RR 16-2005, Revenue Memorandum Circular 50-2007 provides a Q&A guide, to wit:
Q1: How will the sale, barter or exchange of goods or properties into the Freeport Zone by suppliers/contractors from the Customs Territory be considered?
A1: Such transactions shall be considered as export sales in accordance with RA 7227, as amended by RA 9400, which provides that the Freeport Zones shall be operated and managed as a separate customs territory. Moreover, Executive Order (EO) No. 226 provides that sales from the Customs Territory to export processing zones are considered as “export sales”.
Q2: What will be the treatment of sale, barter, exchange or lease of goods, properties and sale or exchange of services to a registered Freeport Zone enterprise by sellers/contractors from the Customs Territory?
A2: If the seller is a VAT taxpayer, such sale, barter or exchange shall be subject to VAT at zero (0%) percent. If the seller is a non -VAT taxpayer, the transaction shall be exempt from VAT.
Q3: What is meant by a “zero-rated” sale and an “exempt” sale?
A3: A zero-rated sale of goods, properties and/or services (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulations. Under this type of sale, no VAT shall be shifted or passed-on by VAT-registered sellers/suppliers from the Customs Territory on their sale, barter or exchange of goods, properties or services to the subject registered Freeport Zone enterprises.
A VAT-exempt transaction, on the other hand, refers to the sale of goods, properties or services or the use or lease of properties that is not subject to VAT (output tax) under Section 109 of the Tax Code of 1997, and the seller/supplier is not allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.
Q4: What is the difference between an automatically zero-rated sale and an effectively zero-rated sale?
A4: An automatically zero-rated sale refers to a sale of goods, properties and services to a Freeport Zone-registered enterprise by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. An effectively zero-rated sale, on the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated.
Q5: What is the coverage of VAT zero-rating?
A5: The zero-rating will cover sale, barter, exchange or lease of all goods, properties and/or services by a VAT-registered seller/contractor from the Customs Territory to a Freeport Zone-registered enterprise and shall include, among others, the following:
- The sale/supply of ordinary cars, vehicles, automobiles, specialized vehicles or other transportation equipment, provided that these are used exclusively within the subject special Freeport Zones;
- The lease of properties by VAT-registered lessors, provided that such properties are located within the subject Freeport Zones;
- The sale/supply of electricity by the National Power Corporation (“NPC”) or by any other VAT-registered seller/supplier from the Customs Territory, to any registered Freeport Zone enterprise engaged in the distribution of power or electricity within the subject Freeport Zones; and
- The sale/supply of services, provided such services are rendered or performed within the Freeport Zone.
Q6: Since the Freeport Zones are considered as foreign soil and therefore, a separate tax jurisdiction, what is the VAT treatment of sale, exchange, barter or lease of goods, properties and/or services by a Freeport Zone-registered enterprise or Resident within the Freeport Zone?
A6: Such sale, exchange, barter or lease of goods, properties and services within the subject Freeport Zones shall be exempt from VAT. The following transactions are covered under this exemption:
- All transactions between and/or among two registered Freeport Zone Enterprises or Residents;
- Consumer goods purchased and consumed within the Freeport Zones;
- Sale/supply of services, including power or electricity, by a Freeport Zone-registered enterprise or resident within the Freeport Zone, regardless of whether or not the buyer or customer is a registered Freeport Zone enterprise or Zone Resident, provided that said power/electricity or services are rendered, used or consumed within the Freeport Zone ; and
- The lease of properties owned by Freeport Zone-registered enterprises or Residents, provided that such properties are located within the subject Freeport Zones.
Q7: What is the tax treatment for the income of Freeport Zone-registered enterprises derived from sources in the Customs Territory?
A7: Freeport Zone-registered enterprises may generate income from sources within the Customs Territory of up to thirty percent (30%) of its total income from all sources; provided, that should a Freeport Zone-registered enterprise’s income from sources within the Customs Territory exceed
thirty percent (30%) of its total income from all sources, then it shall be subject to the income tax laws of the Customs Territory; provided further, that in any case, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles to the Customs Territory and in the Customs Territory.
Q8: What is the tax treatment of sale, barter or exchange of goods and properties by Freeport Zone-registered enterprises to a buyer from the customs territory? (i.e. from the Freeport Zone into the Customs Territory)
A8: The sale, barter or exchange shall be treated as a technical importation made by the buyer in the customs territory. The buyer shall be treated as the importer and shall be imposed the corresponding import taxes and duties prior to release of the goods or merchandise from Customs custody. Any unpaid taxes thereon, aside from being the prime liability of the buyer-importer, shall constitute a lien on such goods or merchandise imported from the Freeport Zone.
Q9: What is the tax treatment of a sale of service or lease of properties (machineries and equipment) by Freeport Zone-registered enterprises to a customer or lessee from the Customs Territory?
A9: The sale of service shall be exempt from VAT if the service is performed or rendered within the Freeport Zone. The lease of properties, on the other hand, shall likewise be exempt from VAT if the property is located within the Freeport Zone. However, if the properties (machineries and equipment) leased by the Freeport Zone registered enterprise is located outside of the Freeport Zone, payments to such enterprise will be considered as royalties and subject to the final withholding VAT of 12%.
Q10: What are the documentary requirements to be submitted by Freeport Zone-registered enterprises to the BIR to be entitled to the tax benefits clarified in this Circular?
A10: 1. Certificate of Registration and Tax Exemption as a Freeport Zone registered Enterprise;
- Copies of relevant documentation of the legal status of the business enterprise (Articles of Incorporation, Partnership Agreement, SEC Registration and similar documents) showing, among others, beneficial ownership;
- If a corporation, partnership or other business enterprise is organized or constituted outside the Philippines, the name, address of the legal agent of the enterprise in the Freeport Zone accompanied by sworn proof of consent of the agent to serve as such;
- Evidence of the physical location of the business enterprise within the Freeport Zone, such as certificate of title, tax declaration, property deed, lease agreement and similar documents;
- If previously part of a larger business enterprise doing business elsewhere in the Philippines, evidence of restructuring to exclude all business operations taking place inside the boundaries of the Freeport Zone; and that the unit left to operate inside the Freeport Zone is organized as a separate legal entity.
- List of assets comprising the investment to be made; and
- Such other documents as the BIR may require.
Please take note that services performed by service providers outside the Freeport/Economic zones are VATable pursuant to the above-quoted RMC. In addition, please remember that VAT-exempt transactions, which are covered by Section 109 of the NIRC is different from VAT Zero-rated and are thus governed by different rules as can be seen from above.
Knowing these rules will help you avoid unnecessary headaches and heartaches brought about by stressful BIR tax audit assessments. Remember, “ignorance of the law excuses no one from compliance therewith” (Article 3, Civil Code).
It’s Christmas season once more! For a lot of people, Christmas brings forth feelings of trepidation, laughter and cheer. It is a time of joy as we get to see relatives we haven’t seen for a long time during family reunions. It is a time when both employees and students alike can relax and take a break from the stress of office or school work.
Yet, for most people, especially those living in urbanized cities, instead of being a time for relaxation, Christmas becomes a time of stress due to the hustle and bustle of several company parties, organizational parties, church parties, family reunions, not to mention the dreaded Christmas shopping for gifts! Although employees are supposedly richer during this time because of the release of their 13th month pay, expenses for these aforementioned party contributions and gifts eat up the otherwise extra inflow of cash. In fact, not only is the extra income brought about by the various bonuses eaten up, they even usually end up broke and buried deeper in debt as a result of excessive shopping for both themselves and their loved ones.
However, giving gifts and throwing parties this Christmas need not be too burdensome and stressful. Besides, just like giving birth, these things are not actually emergency situations but normal and regular events that we can prepare for by planning ahead. Creating a budget is not only for business operations, buying a home, a vehicle or preparing for your children’s college fund or one’s retirement. A budget may also be used in preparing for any event that entails expenses. As with any financial plan, preparing a Christmas budget begins with setting the goals relative to the target recipients and intended price limit per gift or contribution. The next step is to find out the place where the best deals can be found considering the most appropriate gifts that you intend to give the concerned persons. After determining the target amounts, recipients, and specific gifts, it is now time to start setting aside the money therefor. Take note that these things should be done at the start of the year or at the latest, six months before the next Christmas.
Ensuring the success of any endeavor depends on proper planning and execution. Sufficient planning helps enable us to avoid unwanted surprises and excessive expenses. Without a plan, we may be tempted to give gifts to everyone in our Facebook friends list. This is especially true once we are already inside the mall for our Christmas shopping spree. A budget limits our expenses to only those which we intended. It prevents impulsive spending. Keep in mind that we do not need to spend more than what we want to impress people we don’t even like.
Giving gifts this Christmas should not feel like such a heavy financial burden. The essence of giving gifts is its voluntariness. We should not give gifts just because we feel obliged to give but because God loves a cheerful giver. Just like the real reason for the season wherein for God so loved the world, that He gave His one and only Son, that whoever believes in Him shall not perish but have everlasting life (John 3:16). This is the Gospel of Salvation in Christ that we celebrate each year. God the Father did not sacrifice his only begotten Son, the ultimate gift that anyone could ever receive, because he felt obliged to but because of His great love for us. As sinners, we deserve only the punishment that a just God has in store for those who violate His commands and precepts. Nevertheless, because of God’s overflowing love for us, He did not want us to suffer eternal hell-fire reserved for Satan and his minions. In order to satisfy both his justice and love, the only solution was for the Father to let His Son Jesus, God the Son, receive the penalty for our sins. Let this be the same motivation why we likewise give gifts every Christmas season.
In the media, we would see medical professionals such as physicians getting lambasted for the exorbitant fees that they allegedly charge their patients. Even the Bureau of Internal Revenue (BIR) capitalizes on this public perception by placing television advertisements that depict physicians as irresponsible and greedy tax evaders. Of course, as with all other taxpayers, such an accusation is not without basis. However, we really cannot blame physicians, hospitals and other medical service providers for charging relatively high fees because of the amount of expenses they have incurred in acquiring their medical degrees, equipment, facilities, and other related tools of the trade. The thing is, whether you agree with their professional rates or not, the fact remains that availing adequate medical services either from hospitals, clinics, or through house calls entails that you shell out a substantial amount of money, which may ruin your budget and cripple your cash flow. The bad news is that we are all mortal humans and are therefore susceptible to various sicknesses and diseases. Heck, even Superman gets sick when exposed to Kryptonite!
However, the good news is that there are certain financial products that can help ordinary persons such as rank-and-file employees and contractual workers avail of otherwise costly medical services for a fraction of a price. These financial products come in the form of health maintenance organizations (HMO) and health insurance. For a small amount referred to as premiums, HMO members and critical illness insurance policy owners do not need to carry the burden of their own medical expenses nor that of their dependents if so covered by their plan.
Nonetheless, many people still get confused between health or medical insurance and HMOs. Some of them even think that HMOs are a sort of a pre-need plan much like education plans and memorial plans. Such confusion is exacerbated by the issuance of Executive Order 192 on November 12, 2015, which transfers the regulation and supervision over HMOs from the Department of Health (DOH) to the Insurance Commission (IC). Although a good move by PNoy, it really does not help when the IC division in charge thereof is the Pre-need Division, albeit temporarily.
Moreover, such confusion in the minds of our countrymen may cause some unnecessary damage to both industries in that health/medical insurance operates differently from that of HMOs. People desiring one or the other may be made to invest in a product that they did not intend to get in the first place then put the blame on the entire industry when they fail to receive the services or reimbursements they require.
According to Investopedia, “health maintenance organization is an organization that provides health coverage with providers under contract. A Health Maintenance Organization differs from traditional health insurance by the contracts it has with its providers. These contracts allow for premiums to be lower, because the health providers have the advantage of having patients directed to them; but these contracts also add additional restrictions to the HMO’s members.
HMO’s are believed to have been started in the early 1900s when companies began to offer employees plans of prepaid medical service, and have done very well since. The HMO Act of 1973 helped to cement the HMO into the U.S. health system by providing grants to start or expand HMOs, removing many restrictions imposed by the individual states, and required employers with more than 25 employees to offer a federally-certified HMO to employees.”
So which is better, HMO or health insurance? Neither, actually. HMOs and health insurance should not be perceived as exclusive from each other moreso as competitors. Inasmuch as health insurance policies provide higher benefit coverage than HMOs, the latter serve as a primary defense against medical costs because HMO members do not need to shell out their own money unlike in a health insurance policy which reimburses the insured only after they have paid for the hospitalization or medical services themselves. Therefore, as a financial planner, I would recommend that people both sign up with a reputable HMO and purchase a life insurance policy with a critical illness rider in order to cover for the medical expenses that may exceed the maximum benefit limit of the former.
“The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7, ESV).
“Owe nothing to anyone—except for your obligation to love one another. If you love your neighbor, you will fulfil the requirements of God’s law”
(Romans 13:8, NLT)
In my previous article, we talked about the first phase in the personal financial planning process: cashflow management. Now, we will be discussing the second phase, the “D” in the CD-RW process, which is debt management or what we call the “GOOD” plan, which stands for “Getting-Out-Of-Debt.” Nevertheless, remember what I have said before, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.
Unfortunately however, most people, even lawyers, get into the bad kinds of debts, particularly, consumer debts. Consumer debt comes in many forms, the most popular one being credit card debt. Believe me, I’ve been guilty of that as well! For those who are employed, your firm may also offer cooperative loans if you are a member of one. Moreover, as you get older and more successful in your law practice, you will also probably get a car loan or a housing loan, especially when you get married. And yes, having a nice car can definitely help you get more and better clients as it gives them the perception that you are successful and worth your salt.
According to the Bangko Sentral ng Pilipinas (BSP), there are over six million credit cards issued in the Philippines. The BSP reported that the Philippine banking system had P130 billion in credit card receivables as of September 2009, 13% of which were non-performing. Take note, that was 6 years ago. What more today? The problem arises when credit cards and other kinds of consumer loan facilities are abused. Ideally, credit cards should only be used for emergency purposes but if it really can’t be helped, you must at least make sure to pay the whole amount when the bill arrives and not just the minimum required amount. Paying only the minimum just buries you deeper and deeper into debt.
To make things worse, banks make it easier and easier for just about anyone to get a credit card these days. One day, you will just be surprised to find a pre-approved credit card under your name right at your doorstep (or mailbox), if you haven’t already! Verily, unexpectedly receiving those precious little plastic cards will make you feel like you have just won the lottery. But beware, what appears to be a blessing might actually turn out to be a curse!
New York Times best-selling author, wealth coach, and radio host, Dave Ramsey, said, “Personal finance is 80% is behavior and 20% head knowledge.” Daniel Kahneman, in his best-selling psychology book, Thinking, Fast and Slow, proved through experimental exercises that the emotional mind is more powerful than the rational mind. In other words, skill, although indispensable, is only the tip of the iceberg. No matter how skillful a person is, if his behavior or habits are terrible, then all those technical knowledge and skills go out the window. As celebrity wealth coach Chinkee Tan puts it, “It’s all in the attitude, dude!” Although, such a thing is also true for all other endeavors, it is more so for personal finance.
Getting in debt is a lot easier than getting out of it. It is easier to borrow money than pay it back. Debt is like a quicksand that is constantly trying to pull you down. The more you struggle, the harder it is to get out. Likewise, if we refuse to give up some of the comforts in life and change our spending habits, we will sink deeper and deeper into debt. For things to change, we have to change. In his book, Debtermined, personal development and success coach, Jayson Lo, discussed a three-pronged solution brothers Chip and Dan Hearth came up with.
- Direct the Rider
- Motivate the Elephant
- Shape the Path
The Rider represents the rational mind, the elephant, the emotional mind, and the Path is the direction a person wants or needs to go. The Rider holds the reins and seems to be the one in control, but the Rider’s control is unstable because he is so much smaller than the Elephant. The Rider and the Elephant need to come together and shape the Path by creating a detailed image of what the destination would look like once changes are made. Their book, Switch: How to Change Things When Change is Hard, calls it a “destination postcard.”
The tension arises, says Lo, when the Rider and the Elephant pull in different directions. Riders without Elephants produce understanding without motivation. Elephants without Riders produce passion without direction. Riders and Elephants without a clear path produce movement without progress.
According to my friend and internationally-renowned registered financial planner Randell Tiongson, author of No Nonsense Personal Finance, before we buy anything on credit, there are some things we must consider: First is purpose. What is the compelling reason why we need to borrow money? Don’t you have any other source of funds than credit? Is what you are planning to buy with the borrowed money a need or a want? If it is merely a want, wouldn’t it be better to just postpone the purchase until you have saved sufficient money for it? Avoid impulsive buying. There were a lot of times that I really felt that the thing that I wanted to buy was a need but after a good night’s sleep, I realized the following day that I can actually do fine without it.
Second is cost. Despite the disallowance of the Department of Trade and Industry (DTI) on charging additional fees for credit card purchases, merchants have since come up with cunning ways to circumvent the law. And yes, this includes “zero interest” purchases on installment. Instead of calling it “interest,” merchants would instead say that they will give you a discount if you purchase it using cash. That’s why it may still be wisest to purchase things on cash basis. If you want to learn more how this works and more, attend our Financial Planners’ Training leading to the globally-recognized Associate Financial Planner (AFP) professional certification.
Third is interest. We all know about legal fruits. No, not just the mangoes, bananas, strawberries and the like—although those are included. I am pertaining to civil fruits, industrial fruits, and yes, natural fruits. One of the most ubiquitous civil fruits aside from rent is interest. Interest is what debtors pay their creditors as compensation for the use of their money. The thing is, consumer loans, as opposed to business or corporate loans, often carry with it higher interest because of the risk factor. Most banks charge 3% to 3.5% per month as interests on credit card purchases. That would result in annual nominal interest rates of around 36% to 42%! Take note, we are only talking about banks. Non-institutional lenders such as loan sharks, 5-6, or other private lending companies can charge up to 20% per month! What’s worse is that interest on debts is usually compounded. Compounding interest is simply interest upon the interest upon interest. Many people do not realize the power of compounding interest in relation to time. Compounding interest can work for you or against you depending on which side of the balance sheet you are. The value of your money today, whether you borrowed it or invested it, will not be its value five, ten, or twenty years from now. This is what financial planners refer to as the time value of money.
But what if you are already waist or neck-deep in credit card debt? The first and foremost thing that you should do is to resolve within yourself. Resolve to get out of debt and stay out of debt. Insanity, as defined by Albert Einstein is “Doing the same things over and over again but expecting different results.” So, after resolving to get out of debt, it is time to act on that resolve. Start by making a list or inventory of all your outstanding debts including the balance, start date, and status. Then, using what financial planners call the snowball method, start paying off your debt with the lowest amount. Doing so is more achievable and realistic. After you have paid that off, you can now proceed to the next bigger debt and so on and so forth until you have paid off all your debts. When you see you debts getting paid off one by one, it encourages you to take on the next bigger debt unlike if you start with the largest debt, which might just end up in frustration due to its seeming impossibility.
There may be times of plenty when you will suddenly get to earn big bucks because of a lump sum payment such as an acceptance fee, packaged deal, success fee, or a new regular retainer fee. Other possible sources could be from bonuses, inheritance, awards, or even raffle prizes. Heck, you can even organize a garage sale for those stuff that you don’t actually use anymore and are just gathering dust in your attic or storage room! Be wise, pick your brain. Better yet, if you’re married, pick your spouse’s brain! Such unexpected income can be used to escalate your debt payments thereby accelerating your debt-extinguishment objective.
Be faithful in paying your debt; but more importantly, be faithful to God. Do not forget what we discussed previously. Tithe! God is the source of everything. If you worship him through your finances and acknowledge that the solution to your problem is him and not just money, then God will give you the ability to produce wealth (Deuteronomy 8:18). This isn’t easy, especially when you are in debt. Nevertheless, Jesus said that if we “seek first his kingdom and his righteousness…all these things will be given to you as well” (Matthew 6:33, NIV).
Last but definitely not the least—in fact, this should be the first thing you do—is pray. We cannot do it on our own strength. We need God’s wisdom and grace to help us in this situation. Remember to “Trust in the LORD with all your heart, and do not lean on your own understanding. In all your ways, acknowledge him, and he will make straight your paths” (Proverbs 3:5-6, ESV). For God promises that “If any of you lacks wisdom, let him ask God. Who gives generously to all without finding fault, and it will be given to you” (James 1:5, NIV).
May the LORD bless you and keep you;
May the LORD make his face shine upon you and be gracious to you;
May the LORD turn his face towards you and grant you peace. Amen.
A lot of people think that lawyers make a lot of money. People automatically think highly of you: “Oh, you’re a lawyer, you must be rich or at least you’re getting there.” However, there is nothing farther from the truth. Of course, there are those blessed few who have made it to the big leagues and are now founding or senior partners of large and prestigious law firms. Surely, without possessing other sets of skills, in-depth knowledge of the law alone will not and cannot guarantee financial freedom and prosperity.
Lawyers usually earn in one of three ways: a) as a purely compensation income earner, i.e. as an employee; b) as a fee-based self-employed professional; or c) a combination of the first two. The problem is, especially for self-employed lawyers, as well as other similarly situated professionals, our income is wholly dependent on how much man-hours we put into working. In other words, no work, no pay! Those who use the time-billing method know this particularly well. As such, most lawyers end up working all their lives because no matter how old we get, for as long as we’re alive, our cost of living just keeps on going up to no end! Sometimes, we even proudly use it as a battle cry, “Lawyers never retire!” Verily, the stereotypical image of the “Abogado de campanilla” comes to mind: An old thin man with unkempt gray or balding hair wearing a faded barong carrying his briefcase to court. Indeed, it is such a sad and sorry sight to behold. I know because I’ve seen them. And could you imagine what would happen to them if they become too old to work or permanently incapacitated?
Generally, lawyers, except for those who are at the same time finance professionals such as CPAs, CFAs, RFPs, RFCs, CFCs, CWMs, etc., abhor numbers. To be sure, one of the significant reasons why people take up law, among other things, is because they did poorly in math and science during their elementary and high school days. Wait, I might just be describing myself here! Nevertheless, studying law and passing the dreaded bar exams do not require one to be adept in numbers. There are no complicated formulas or computations save for the determination of an employee’s minimum wage, a stockholder’s shares of stocks, or the occasional computation of taxable income; although the last one is pretty much done by accountants. The point is, lawyers, nay; most people in fact, just tune out when numbers are involved. As behaviorist Daniel Kahneman said in his landmark book, Thinking, Fast and Slow, our brains usually take the shortcut or the easier route when we are faced with numerical problems, which he refers to as the “System One” mode of thinking.
No wonder, it is because of this numerical aversion that lawyers avoid thinking about personal finance. To make things worse, society’s high regard for lawyers along with the dignity of the profession leave lawyers with no other choice but to do their very best to project success and honorability in how they dress, walk and talk. These kinds of expectations, not to mention the challenges of life itself, put a strain on a lawyer’s finances, especially if that lawyer already has a family of his own.
Having said this, learning about personal financial planning is indispensable for a person who wants to achieve financial freedom and prosperity, regardless of occupation. But the big question in most people’s minds is, “Where do I begin?” And a very good question it is indeed because personal financial planning is a process. Being a process, you should not jump from one step to another without completing the previous step. At Personal Finance Advisers Philippines (PFA), we have what registered financial planner and seasoned investment adviser Efren Cruz, calls the CD-RW approach to personal finance. CD-RW stands for the phases of or major steps in the financial planning process, which are: Cash, Debt, Risk and Wealth. Not undertaking any one of the four areas of financial management will lead to instability in one’s personal finance. Other registered financial planners divide the steps into five or twelve as do Randell Tiongson and Alvin Tabaňag, respectively. For simplicity and ease, however, we shall summarize the process to the four steps. A person hoping to get out of debt should not be investing before he reduces his debts to manageable levels. In fact, he shouldn’t be investing at all if he hasn’t yet protected his downside risks through insurance. Let me briefly discuss each phase:
“Cash” pertains to improving one’s cashflow. There are many ways to do this such as getting a promotion, getting more clients, starting a business, or selling some stuff that you do not need anymore. In fact, Robert Kiyosaki refers to this as Financial Intelligence No. 1. Short-term and current savings also fall under this phase. In fact, these two steps under this phase may and should be done simultaneously if you can. In fact, being successful in this area alone would definitely have a strong and lasting impact in your financial well-being.
“Debt” pertains to getting out of debt. Albeit, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.
“Risk” pertains to protecting yourself and your family from life’s unexpected risks such as loss of job, total and permanent disability, and even death. The steps comprising this phase are setting up one’s emergency fund and insurance planning—both life and non-life. Although not usually done, I would also include here adequate asset protection planning.
“Wealth” pertains to the accumulation thereof through long-term saving and investing. In other words, it is how to make your money work for you and not just you working for money. This is the phase where if successful, can spell the difference between being rich, just right, or poor. The primary reason we should be investing is because we will not always have the ability to generate income. Investing can be in the form of real estate, business, commodities, or the most popular class, paper assets such as stocks, bonds, money market instruments and pooled funds. Of course, we cannot bring our wealth with us when we pass on from this life, hence, included in this phase is estate planning or how to legally pass on your property and money to your loved ones when that time comes.
For now, we will focus on the first phase, which is the foundation of the financial planning process, and that is cashflow management. Contrary to popular belief, cashflow management is not only about being frugal when it comes to one’s expenses but about being wise. In behavioral economics, it is said that finance is only 10% skill and 90% behavior. This means that while we may possess all the necessary technical skills, all of that will be for naught if we cannot control ourselves and exercise prudence when it comes to spending our hard-earned money.
For effective cashflow management, categorize your expenses into “needs” and “wants,” the latter also being referred to as “discretionary expenses.” One of the biggest mistakes people make is rushing into financial decisions without considering what’s really important for them. As many people get caught up in the responsibilities of their daily lives, they often do not have time for reflection. The easiest way to identify wants is to actually start with needs. Needs can be further broken down into two broad categories: absolute or bare necessities and near necessities. Absolute necessities are those that are important for our basic survival, things like food, shelter and clothing. On the other hand, near necessities include things like reliable transportation, insurance coverage, utilities, telecommunications, and personal care expenses. While these last items are not necessary for survival, they are fairly important for us to function as responsible and effective members of society. Now that we know what needs are, it would be easy to define our wants. Now, everything else that do not fall into the category of needs are therefore classified as wants and could be cut out if necessary. To be more specific, wants are items that are only nice to have. They are not things that you need to survive. Although sometimes, needs turn into wants when you take your needs beyond the basics, i.e. if you buy a home that is much larger or a car that costs more than you can afford. Carefully go through your expenses and determine which are truly needs, and which are actually wants the order them. After determining your needs and wants, create a plan for living within your means. This is important to finding success in your personal finance.
To reach a certain place, the first thing you must know is where you are right now. You simply cannot plot your course without knowing your starting point. In order to know where you are financially, you have to determine your net worth. Your net worth is an important barometer of your financial health. It indicates your capacity to accomplish major financial goals to be discussed later. Just as all government officials are mandated to submit their Statement of Assets, Liabilities and Net Worth (SALN), everyone would do well to follow suit as this is an excellent tool for financial planning. To compute your net worth, you just have to follow this simple formula: Assets – Liabilities = Net Worth. Your assets consist of everything you own, both real and personal properties including cash in bank and cash on hand; while your liabilities consist of everything you owe such as debts and taxes. For financial planning purposes however, it is generally recommended that you exclude your family home when figuring out your financial assets. Include your home only if you expect to someday sell it or otherwise have it leased out to generate passive income.
Once you have determined where you are, the next preparatory step is to know where you want to go. In short, determine your goals. Your goals will vary depending on the life stage you are in; whether you are a student, single professional, married, married with children, empty nester, or retired. Accordingly, your financial goals may be one or more of the following: income continuation, starting a business, children’s education fund, health fund, buying a house or a car, getting married, a family vacation, retirement fund or estate creation and preservation. It is important to determine your goals as each of these goals will have a corresponding cost that you will need to prepare for. Not knowing where you are or where you are going will only lead you nowhere fast! It would just be like driving around aimlessly with no purpose in mind except to waste precious fuel. Failure to plan is a plan to fail.
Once you have plotted your course, it is now time to gather your resources for the journey, and this is where saving money comes into play. Most people however, if not everyone, try to save only what is left, if any, of their salary or income after paying all the bills and cost of living expenses, sometimes even including their leisure expenses. And this is exactly why they fail. Instead of using the formula Income – Expenses = Savings, we should change our mindset to Income – Savings = Expenses. Better yet, I’ll let you in on the secret formula to prosperity: Income – Tithes – Savings = Expenses. Specifically, the apportionment should be as follows: 100% (Income) – 10% (Tithes) – 20% (Savings) = 70% (Living Expenses). Now why do I include the tithe? It is because I believe that because God is the one who gives us the ability to produce wealth (Deuteronomy 8:18), then giving back the tithe is one of the best ways we can honor Him with our wealth. To be sure, God told the prophet Malachi to instruct His people to “Bring the full tithe into the storehouse, that there may be food in my house. And thereby put me to the test, says the LORD of hosts, if I will not open the flood windows of heaven for you and pour down for you a blessing until there is no more need” (3:10, ESV). In fact, this is the only exception to God’s law against putting Him to the test (Luke 4:12). This principle of saving is referred to a “Paying God and yourself first.” Nonetheless, if saving 20% is really difficult for you right now, you can start small with just 10% and increase it later on when your cashflow improves.
Saving is an essential part of the process because the funds accumulated as a result of which is where you will source the money needed for your emergency fund, paying off your loans, insurance premiums, and investments, in that particular order if not simultaneously. Without improving your cashflow and saving money, any financial planning activity shall be futile for lack of the ability to execute the same. The strategy to saving effectively is quite simple and is no secret at all: “Spend less than you earn,” or to put it in another way, “Live below your means.” It never fails. One can choose to be a saver or a big spender. The big spender follows the incorrect formula for saving. I know, it’s so much easier said than done; but with God’s grace, it is truly possible!
Some people tend to blame their financial shortcomings on not earning more income. Such people believe that if only they earned more, their financial—and personal—problems would melt away. The thing is, as Robert Kiyosaki puts it, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” In short, it is all about increasing our financial I.Q. Remember, you cannot grow what you do not have. Regardless of your income or how you earn your income, you can make your money stretch further if you practice good financial habits and avoid mistakes. Effective and efficient cashflow management is essential to building wealth. In fact, the lower your income, the more important it is that you make the most of your income and savings because you don’t have the luxury of falling back on your next fat paycheck to bail you out. As aptly posited by Alvin Tabaňag, “A healthy amount of savings is the foundation on which you will build your personal wealth. Without any savings it is impossible for you to achieve financial security.”
There is so much more to learn about personal financial planning that this article can cover. Unfortunately, personal finance, for all its importance and practicality, is not generally taught in our schools. Yes, we have economics in high school and college, but the theories taught therein are usually either archaic or inapplicable in real life due to its extreme technicality. So, invest in yourself first. Read books, blogs and attend seminars of reputable finance professionals such as those mentioned above. The journey of a thousand miles begins with a single step. May the grace of our Lord be with you!
1. When does the audit process begin? The audit process commences with the issuance of a Letter of Authority to a taxpayer who has been selected for audit.
2. What is a Letter of Authority? The Letter of Authority is an official document that empowers a Revenue Officer to examine and scrutinize a Taxpayer’s books of accounts and other accounting records, in order to determine the Taxpayer’s correct internal revenue tax liabilities.
3. Who issues the Letter of Authority? Letter of Authority, for audit/investigation of taxpayers under the jurisdiction of National Office, shall be issued and approved by the Commissioner of Internal Revenue, while, for taxpayers under the jurisdiction of Regional Offices, it shall be issued by the Regional Director.
4. When must a Letter of Authority be served? A Letter of Authority must be served to the concerned Taxpayer within thirty (30) days from its date of issuance, otherwise, it shall become null and void. The Taxpayer shall then have the right to refuse the service of this LA, unless the LA is revalidated.
5. How often can a Letter of Authority be revalidated? A Letter of Authority is revalidated through the issuance of a new LA. However, a Letter of Authority can be revalidated—
Only once, for LAs issued in the Revenue Regional Offices or the Revenue District Offices; or
Twice, in the case of LAs issued by the National Office.
Any suspended LA(s) must be attached to the new LA issued (RMO 38-88).
6. How much time does a Revenue Officer have to conduct an audit? A Revenue Officer is allowed only one hundred twenty (120) days from the date of receipt of a Letter of Authority by the Taxpayer to conduct the audit and submit the required report of investigation. If the Revenue Officer is unable to submit his final report of investigation within the 120-day period, he must then submit a Progress Report to his Head of Office, and surrender the Letter of Authority for revalidation.
7. How is a particular taxpayer selected for audit? Officers of the Bureau (Revenue District Officers, Chief, Large Taxpayer Assessment Division, Chief, Excise Taxpayer Operations Division, Chief, Policy Cases and Tax Fraud Division) responsible for the conduct of audit/investigation shall prepare a list of all taxpayer who fall within the selection criteria prescribed in a Revenue Memorandum Order issued by the CIR to establish guidelines for the audit program of a particular year. The list of taxpayers shall then be submitted to their respective Assistant Commissioner for pre-approval and to the Commissioner of Internal Revenue for final approval. The list submitted by RDO shall be pre-approved by the Regional Director and finally approved by Assistant Commissioner, Assessment Service (RMOs 64-99, 67-99, 18-2000 and 19-2000).
8. How many times can a taxpayer be subjected to examination and inspection for the same taxable year? A taxpayer’s books of accounts shall be subjected to examination and inspection only once for a taxable year, except in the following cases:
When the Commissioner determines that fraud, irregularities, or mistakes were committed by Taxpayer;
When the Taxpayer himself requests a re-investigation or re-examination of his books of accounts;
When there is a need to verify the Taxpayer’s compliance with withholding and other internal revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner of Internal Revenue.
When the Taxpayer’s capital gains tax liabilities must be verified; and
When the Commissioner chooses to exercise his power to obtain information relative to the examination of other Taxpayers (Secs. 5 and 235, NIRC).
9. What are some of the powers of the Commissioner relative to the audit process? In addition to the authority of the Commissioner to examine and inspect the books of accounts of a Taxpayer who is being audited, the Commissioner may also:
Obtain data and information from private parties other than the Taxpayer himself (Sec.5, NIRC); and
Conduct inventory and surveillance, and prescribe presumptive gross sales and receipts (Sec. 6, NIRC).
10. Within what time period must an assessment be made? An assessment must be made within three (3) years from the last day prescribed by law for the filing of the tax return for the tax that is being subjected to assessment or from the day the return was filed if filed late. However, in cases involving tax fraud, the Bureau has ten (10) years from the date of discovery of such fraud within which to make the assessment.
Any assessments issued after the applicable period are deemed to have prescribed, and can no longer be collected from the Taxpayer, unless the Taxpayer has previously executed a Waiver of Statute of Limitations.
11. What is “Jeopardy Assessment”? A Jeopardy Assessment is a tax assessment made by an authorized Revenue Officer without the benefit of complete or partial audit, in light of the RO’s belief that the assessment and collection of a deficiency tax will be jeopardized by delay caused by the Taxpayer’s failure to:
Comply with audit and investigation requirements to present his books of accounts and/or pertinent records, or
Substantiate all or any of the deductions, exemptions or credits claimed in his return. A jeopardy assessment is illegal.
12. What is a Pre-Assessment Notice (PAN)? The Pre-Assessment Notice is a communication issued by the Regional Assessment Division, or any other concerned BIR Office, informing a Taxpayer who has been audited of the findings of the Revenue Officer, following the review of these findings.
If the Taxpayer disagrees with the findings stated in the PAN, he shall then have fifteen (15) days from his receipt of the PAN to file a written reply contesting the proposed assessment.
13. Under what instances is PAN no longer required? A Preliminary Assessment Notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer’s deficiency tax liability shall be sufficient:
When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or
When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
When the excise tax due on excisable articles has not been paid; or
When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
14. What is a Notice of Assessment/Formal Letter of Demand?
A Notice of Assessment is a declaration of deficiency taxes issued to a Taxpayer who fails to respond to a Pre-Assessment Notice within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the Taxpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and the notice of assessment shall be void.
15. What is required of a taxpayer who is being audited? A Taxpayer who is being audited is obliged to:
Duly acknowledge his receipt of the appropriate Letter of Authority upon its presentation by the Revenue Officer authorized to conduct the audit by affixing in the Letter of Authority the name of the recipient and the date of receipt.
Present within a reasonable period of time, his books of accounts and other related accounting records that may be required by the Revenue Officer; and
Submit the necessary schedules as may be requested by the Revenue Officer within a reasonable amount of time from his (Taxpayer’s) receipt of the Letter of Authority.
16. What is the recourse of a Taxpayer who cannot submit the documents being required of him within the prescribed period of time? If a Taxpayer, believing that he cannot present his books of accounts and/or other accounting records, intends to request for more time to present these documents in order to avoid the issuance of a Jeopardy Assessment, the Taxpayer may execute what is referred to as a Waiver of the Statute of Limitations.
17. What is a Waiver of the Statute of Limitations? The Waiver of the Statute of Limitations is a signed statement whereby the Taxpayer conveys his agreement to extend the period within which the Bureau may validly issue an assessment for deficiency taxes. If a Taxpayer opts to execute a Waiver of the Statute of Limitations, he shall likewise be, in effect, waiving his right to invoke the defense of prescription for assessments issued after the reglementary period.
No Waiver of the Statute of Limitations shall be considered valid unless it is accepted by a duly authorized Bureau official.
18. If a Taxpayer does not agree with the assessment made following an audit, can he protest this Assessment?Yes, he can. A Taxpayer has the right to contest an assessment, and may do so by filing a letter of protest stating in detail his reasons for contesting the assessment.
19. What are the characteristics of a valid protest? A protest is considered valid if it satisfies the following conditions:
It is made in writing, and addressed to the Commissioner of Internal Revenue;
It contains the information, and complies with the conditions required by Sec. 6 of Revenue Regulations No. 12-85; to wit:
a.) Name of the taxpayer and address for the immediate past three (3) taxable year.
b.) Nature of request whether reinvestigation or reconsideration specifying newly discovered evidence he intends to present if it is a request for investigation.
c.) The taxable periods covered.
d.) Assessment number.
e.) Date of receipt of assessment notice or letter of demand.
f.) Itemized statement of the findings to which the taxpayer agrees as a basis for computing the tax due, which amount should be paid immediately upon the filing of the protest. For this purpose, the protest shall not be deemed validly filed unless payment of the agreed portion of the tax is paid first.
g.) The itemized schedule of the adjustments with which the taxpayer does not agree.
h.) A statement of facts and/or law in support of the protest.
The taxpayer shall state the facts, applicable law, rules and regulations or jurisprudence on which his protest is based, otherwise, his protest shall be considered void and without force and effect on the event the letter of protest submitted by the taxpayer is accepted, the taxpayer shall submit the required documents in support of his protest within sixty (60) days from date of filing of his letter of protest, otherwise, the assessment shall become final, executory and demandable.
It is filed within thirty (30) days from the Taxpayer’s receipt of the Notice of Assessment and formal Letter of Demand.
20. In the event the Commissioner’s duly authorized representative denies a Taxpayer’s protest, what alternative course of action is open to the Taxpayer? If a protest filed by a Taxpayer be denied by the Commissioner’s duly authorized representative, the Taxpayer may request the Commissioner for a reconsideration of such denial and that his tax case be referred to the Bureau’s Appellate Division. The Appellate Division serves as a “Court”, where both parties, i.e. the Revenue Officer on one hand, and the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to support their respective claims.
21. What recourse is open to a Taxpayer if his request for reconsideration is denied or his protest is not acted?
Should the Taxpayer’s request for reconsideration be denied or his protest is not acted upon within 180 days from submission of documents by the Commissioner, the Taxpayer has the right to appeal with the Court of Tax Appeals (CTA).
Any appeal must be done within thirty (30) days from the date of the Taxpayer’s receipt of the Commissioner’s decision denying the request for reconsideration or from the lapse of the 180 day period counted from the submission of the documents. (Sec. 228 of the Tax Code, as amended).
22. If the Taxpayer is not satisfied with the CTA’s decision, can he appeal the decision to a higher Court? Yes, he can. Decisions of the Court of Tax Appeals may be appealed with the Court of Appeals within fifteen (15) days from the Taxpayer’s receipt of the CTA’s decision. In the event that the Taxpayer is likewise unsatisfied with the decision of the Court of Appeals, he may appeal this decision with the Supreme Court.
23. Can a Taxpayer claim a refund or tax credit for erroneously or illegally collected taxes? Yes, he can. The Taxpayer may file such a claim with the Commissioner of Internal Revenue (Sec.229, NIRC), within two (2) years from the payment of the tax or penalty sought to be refunded. Failure of the Taxpayer to file such a claim within this prescribed period shall result in the forfeiture of his right to the refund or tax credit.
24. If a Taxpayer has filed a claim for refund and the Bureau has yet to render a decision on this claim, can the Taxpayer elevate his claim to the CTA?
25. What means are available to the Bureau to compel a Taxpayer to produce his books of accounts and other records? A Taxpayer shall be requested, in writing, not more than two (2) times, to produce his books of accounts and other pertinent accounting records, for inspection. If, after the Taxpayer’s receipt of the second written request, he still fails to comply with the requirements of the notice, the Bureau shall then issue him a Subpoena Duces Tecum.
26. What course of action shall the Bureau take if the Taxpayer fails to comply with the Subpoena Duces Tecum?
If, after the Taxpayer fails, refuses, or neglects to comply with the requirements of the Subpoena Duces Tecum, the Bureau may:
File a criminal case against the Taxpayer for violation of Section 5 as it relates to Sections 14 and 266, of the NIRC, as amended; and/or
Initiate proceedings to cite the Taxpayer for contempt, under Section 3(f), Rule 71 of the Revised Rules of Court.
27. What alternatives are open to Government for the collection of delinquent accounts?
Once an assessment becomes final and demandable, the Government may employ any, or all, of the following remedies for the collection of delinquent accounts:
Distraint of personal property;
Levy of real property belonging to the Taxpayer;
Civil Action; and
28. What is “Distraint of Personal Property”? Distraint of personal property involves the seizure by the Government of personal property – tangible or intangible – to enforce the payment of taxes, followed by the public sale of such property, if the Taxpayer fails to pay the taxes voluntarily.
29. What is “Levy of Real Property”? Levy of real property refers to the same act of seizure, but in this case of real property, and interest in or rights to such property in order to enforce the payment of taxes. As in the distraint of personal property, the real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid following such levy.
30. In what time period must collection be made? Any internal revenue tax, which has been assessed within the period prescribed shall be collected within three (3) years from date of assessment. However, tax fraud cases may be collected by distraint or levy or by a court proceeding within five (5) years from assessment of the tax or from the last waiver.
I first heard about Robert Kiyosaki was when I was in high school. My older brother was raving about it during one of our Sunday family gatherings. He was so amazed with the unorthodox ideas that Mr. Kiyosaki shared in his first book, Rich Dad, Poor Dad. However, being young and carefree back then, it wasn’t until after several years when I was already in law school that I began reading his books. Indeed, in communicating his point of view on why ‘old’ advice – get a job, save money, get out of debt, invest for the long term, and diversify – is ‘bad’ (both obsolete and flawed) advice, Robert has earned a reputation for straight talk, irreverence and courage. So revolutionary were his teachings that when I shared them with my dad, he simply shot them down for being a bunch of nonsense. Of course, now that I am a licensed attorney and financial planner, I realized that Mr. Kiyosaki’s teachings actually made a lot of sense.
Nevertheless, in late A.D. 2012, news began to spread all over social media that Rich Dad® Robert Kiyosaki is now a bankrupt dad because in August of that year, his company, Rich Global LLC, just filed for bankruptcy. So does this really mean that one of the world’s most famous, if not the most famous, personal finance gurus, the one who was allegedly mentored by his best friend’s rich dad several decades ago as a child, failed and became poor all of a sudden? Before we get to that, let me first give you an idea on what filing for corporate bankruptcy really means.
Title 11, of the United States Code, a.k.a. the United States Bankruptcy Code, is the main source of bankruptcy law in the United States. Chapter 7 thereof governs the process of liquidation and is the most popular and common form of bankruptcy. When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business ceases operations unless continued by the Chapter 7 trustee. A trustee is appointed almost immediately, with broad powers to examine the business’s financial affairs. The trustee generally liquidates all the assets and distributes the proceeds to the creditors. In a Chapter 7 case, a corporation or partnership does not receive a bankruptcy discharge—instead, the entity is dissolved. Only an individual can receive a discharge. Once all assets of the corporate or partnership debtor have been fully administered, the case is closed.
Here in the Philippines, our laws refer to bankruptcy proceedings as ‘insolvency’ proceedings. In fact, just five years ago, the Financial Rehabilitation and Insolvency Act of 2010 or FRIA was passed. The new law provides for the substantive and procedural requirements for the rehabilitation or liquidation of financially distressed enterprises and individuals. The FRIA defines “insolvent” as the “financial condition of a debtor that is generally unable to pay its or its liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.” Now you may ask, why would a very rich man like Robert Kiyosaki allow the company he built to go bankrupt or insolvent?
It was reported that the founder of Learning Annex, Bill Zanker, sued Rich Global for $24 million. Learning Annex was one of his supporters when he was still starting as a businessman. Actually, Robert Kiyosaki owns many businesses and Rich Global LLC is just one of those corporations. Robert now runs most of his businesses under his other company, Rich Dad Co. In fact, Rich Dad Co. CEO Mike Sullivan informed the New York Post in an interview that Robert Kiyosaki would not be putting any of his personal fortune toward the settlement. Now, that is the beauty of using a corporate entity as a vehicle for one’s business. It provides a layer of protection against asset raiders such as legal plaintiffs. You see, when a company files for bankruptcy or insolvency, its creditors, including its judgment creditors, cannot just simply collect from the company nor seize it assets legally without first complying with the requirements of the law. That is why Robert Kiyosaki is still quite rich even after filing for bankruptcy with an estimated net worth of $80 million. Having his company Rich Global LLC file for bankruptcy was merely a legal strategy in order to protect his personal assets.
Instead of losing his credibility as a personal finance coach and wealth advisor, such a bold move by Robert Kiyosaki just proves that he is indeed financially intelligent. So much so that he is certainly more financially intelligent than most people, especially those who immediately jumped the gun in judgment against him upon reading the news headlines about his company filing for bankruptcy. Although I have my differences with some of his theories, I along with my colleagues in the financial services industry consider his books as indispensable reading in personal finance and entrepreneurship. It is truly undeniable that all of us, in one way or another, were illuminated and inspired by his teachings.
I am so excited about his upcoming event, Robert Kiyosaki Live in Manila: Masters of Wealth, which will be held on November 30, 2015 at the SMX, Mall of Asia. It’s a once in a lifetime opportunity to learn not only from the master himself but also from other world class wealth coaches, economists, businessmen and educators. I believe that to be financially successful, the first asset that we should invest in is ourselves.