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8/F Jollibee Centre, San Miguel Avenue, Ortigas Center, Pasig
City, 1605 PhilippinesTelephone: (632) 633-9418 Facsimile: (632)
633-1911
E-mail: [email protected]
TAX ALERTOctober 31, 2006
BUREAU OF INTERNAL REVENUE (BIR) CONFIRMS THAT REVENUE
REGULATIONS (REV. REGS.) NO. 16-2005 HAS AMENDED REVENUE
MEMORANDUM CIRCULAR (RMC) NO. 74-99 IN THAT SALES TO PEZA-
REGISTERED ENTERPRISES NOW REQUIRE PRIOR APPLICATION FOR
EFFECTIVE ZERO-RATING WITH THE APPROPRIATE BIR OFFICE.
Revenue Memorandum Order (RMO) No. 7-2006, dated December 15,
2005, was likewise
issued to prescribe guidelines and procedures for the processing
of applications for zero-rating of effectively zero-rated
transactions. Without an approved application for
effectivezero-rating, a transaction that would otherwise be
entitled to zero-rating shall be considered
exempt.BIR Rulings No. DA-463-2006 and DA-464-2006 both dated
July 28, 2006.
COURT OF TAX APPEALS (CTA) RULES THAT THE CITY OF MANILA
CITY
CANNOT IMPOSE A BUSINESS TAX ON A MANUFACTURER UNDER SECTION
143(a) OF THE LOCAL GOVERNMENT CODE AND AT THE SAME TIME
SUBJECT SUCH MANUFACTURER TO LOCAL TAX UNDER 143(h) OF THE
SAME CODE.
Section 143(a) of the Local Government Code provides that cities
and municipalities may
impose taxes on manufacturers of any article of commerce. On the
other hand, Section143(h) of the same code provides that cities or
municipalities may impose taxes on any
business, not otherwise specified in the preceding paragraphs,
which the sanggunian
concerned may deem proper to tax. Hence, if a manufacturer,
pursuant to an ordinance, isalready imposed a local business tax
under Section 143(a) of the Local Government Code, it
can no longer be subject to local tax under Section 143(h) of
the same code. The authority
under Section 143(h) to impose local tax on any business is
limited by the proviso not
otherwise specified in the preceding paragraphs. Imposing local
taxes on a business under both Section 143(a) and (h) of the Local
Government Code constitutes double taxation.
Furthermore, the CTA emphasized that the publication requirement
under the Local
Government Code relative to local ordinances is mandatory and
indispensable for purposesof giving effect to an ordinance. Alcan
Packaging Starpack Corporation (formerly
Starpack Philippines Corporation) vs. The Treasurer of the City
of Manila, CTA AC No.
17, September 11, 2006.
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A BIR CERTIFICATE OF DESTRUCTION IS NOT ABSOLUTELY NECESSARY
TO CLAIM A DEDUCTION FOR INVENTORY WRITTEN-OFF, HOWEVER, THE
TAXPAYER MUST SUBSTANTIATE THE AMOUNT WRITTEN-OFF AS
ACTUALLY PERTAINING TO DESTROYED OBSOLETE INVENTORY.
Hence, for failing to substantiate the amount deducted with
competent documentary evidence
establishing that the deduction pertained to destroyed obsolete
inventory, the CTA sustained
the BIRs disallowance of the inventory written-off as a
deduction from gross income. Nidec
Copal Philippines Corporations v. Commissioner of Internal
Revenue, CTA Case No.
6577, September 25, 2006.
REAL PROPERTIES OF A DISSOLVED REALTY COMPANY THAT ARE IDLE,
UNPRODUCTIVE AND UNIMPROVED SINCE THE TIME OF ACQUISITION
ARE CLASSIFIED AS CAPITAL ASSETS.
Thus, the sale of said properties is not subject to VAT but is
subject to 6% capital gains tax
and 1.5% DST. BIR Ruling No. DA-542-2006 dated September 11,
2006.
LOSSES REALIZED BY STOCKHOLDERS OF A LIQUIDATING CORPORATION
IN A CAPITAL DEFICIT POSITION ARE IN THE NATURE OF A CAPITAL
LOSS
DEDUCTIBLE ONLY TO THE EXTENT OF CAPITAL GAINS FROM THE SALE
OF CAPITAL ASSETS.
The stockholders of a corporation in a capital deficit position
realize a capital loss upon the
corporations liquidation measured by their respective costs in
the shares. The liquidating
loss is in the nature of a capital loss deductible only to the
extent of capital gains realizedfrom the sale of capital assets.
BIR Ruling No. DA-537-2006 dated September 5, 2006.
ADVANCES TO A SUBSIDIARY THAT HAS CEASED OPERATIONS,
WHICHADVANCES WERE ASCERTAINED TO BE WORTHLESS, ARE DEDUCTIBLE
FROM GROSS INCOME AS BAD DEBTS.
The ascertainment of worthlessness should be pegged as of the
end of the taxable year the
subsidiary actually ceased business operations or its corporate
life ceased to exist, regardless
of the date the Securities and Exchange Commission approves the
shortening of corporatelife. If, after the parent corporation
writes-off the bad debt, it receives additional payments
on the advances, the parent corporation should recognize income
as of the year the payment
was received.Ibid.
PAYMENTS FOR A NON-EXCLUSIVE, NON-TRANSFERABLE LICENSE TO
USE
SOFTWARE WHERE THE LICENSOR RETAINS TITLE AND OWNERSHIPTHERETO,
INCLUDING PERTINENT RIGHTS PROTECTED UNDER
RELEVANT INTELLECTUAL PROPERTY LAWS, CONSTITUTE BUSINESS
INCOME.
Under RMC No. 44-2005, if a person acquires a copy of a software
but does not acquire anyof the rights described above [i.e., (1)
right to make copies of the software for purposes of
distribution to the public by sale or other transfer of
ownership, or by rental, lease or lending;
(2) right to prepare derivative computer programs based upon the
copyrighted software; (3)
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right to make a public performance of the software; (4) right to
publicly display the computer
program; or (5) any other rights of the copyright owner, the
exercise of which by another
without his authority shall constitute infringement of said
copyright], or only acquires a de
minimis grant of such rights, and the transaction does not
involve the provision of services orof know-how, the transfer of
the copy of the software is classified solely as a transfer of
a
copyrighted article and payments for which constitute business
income. However,
considering that the licensor, which is a resident of India, has
no permanent establishment inthe Philippines, any profits earned
from the sale of the software in the Philippines shall not
be subject to Philippine income tax, pursuant to the RP-India
Tax Treaty. Nonetheless, the
transfer of software from the non-resident supplier constitutes
importation of software and issubject to VAT on importation. BIR
Ruling No. DA-ITAD-94-2006 dated August 22, 2006.
COURT OF TAX APPEALS EN BANCSUBJECTS DEMMURAGE TO 35%
CORPORATE INCOME TAX.
Striking down the contention that gross Philippine billings tax
is the only income taxapplicable to international shipping
carriers, the CTAEn Banc ruled that that the 2.5% grossPhilippine
billings tax imposed on international carriers does not preclude
the imposition on
them of the 35% regular corporate income tax applicable to
resident foreign corporations on
income that does not constitute gross Philippine billings.
Demurrage fees, which are
collected by international carriers from consignees who fail to
return the carriers containerswithin the allotted time and which do
not fall within the definition of gross Philippine
billings, definitely constitute income accruing to international
carriers. Even if demurrage
fees were meant to serve as a penalty, such fees consist of an
inflow of funds to theinternational carriers, which are neither
capital contributions nor incurrence of liabilities.
Since the demurrage fees are income derived from sources within
the Philippines, they are
subject to tax in the Philippines. Steamship Company of
Svendborg and SteamshipCompany of 1912, vs. Commissioner of
Internal Revenue, CTA E.B. No. 117 (CTA Case
No. 6567), September 12, 2006.
PREMIUM PAYMENTS BY A CORPORATION TO A HEALTH MAINTENANCE
ORGANIZATION PURSUANT TO A GROUP INSURANCE PLAN FOR ITS
EMPLOYEES ARE NOT SUBJECT TO FRINGE BENEFITS TAX.
Section 33(C) of the 1997 NIRC provides that contributions of
the employer to retirement,
insurance and hospitalization benefit plans for the benefit of
the employee are non-taxable
fringe benefits. BIR Ruling No. DA-469-2006 dated August 1,
2006.
THE ANNUAL CEILING FOR DE MINIMISBENEFITS GIVEN AS CASHALLOWANCE
TO DEPENDENTS OF EMPLOYEES IS P1,500.00 PER
EMPLOYEE. ANY AMOUNT IN EXCESS OF THE CEILING MAY FURTHER BE
CONSIDERED AS PART OF OTHER BENEFITS, PROVIDED THAT THE
TOTAL
BENEFITS SHALL NOT EXCEED P30,000.00. BUT THE AMOUNT IN EXCESS
OF
THE P30,000.00 THRESHOLD OF THE TOTAL OF OTHER BENEFITS
SHALL
BE INCLUDED AS PART OF THE TAXABLE COMPENSATION OF THE
EMPLOYEE-TAXPAYER.Ibid.
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PAYMENTS RECEIVED BY A CORPORATION FROM SUBSIDIARIES AND
AFFILIATES FOR THE LATTERS SHARE IN COMMON PURCHASES ARE NOT
INCOME ON THE PART OF THE CORPORATION AND HENCE NOT SUBJECT
TO WITHHOLDING TAX BY ITS SUBSIDIARIES AND AFFILIATES.
Furthermore, the withholding and remittance by the corporation
of withholding taxes on
gross payments to the suppliers of its subsidiaries and
affiliates constitute substantialcompliance with the withholding
tax requirements under Sec. 2.57.3 of Rev. Regs. No. 2-98,
as amended by Sec. 5 of Rev. Regs. No. 30-03. Thus, upon proof
of the withholding and
remittance of taxes by the corporation, the said amount may be
credited for the account of itssubsidiaries and affiliates, being
the withholding agent-payor. BIR Ruling No. DA -507-
2006 dated August 22, 2006.
PAYMENTS MADE BY THE ASSIGNEE OF AN INTEREST OVER
CONDOMINIUM UNITS ARE NOT SUBJECT TO WITHHOLDING TAX WHENTHE
INCOME TAX ARISING FROM THE SALE OF THE CONDOMINIUM UNITS
HAVE ALREADY BEEN PAID BY THE SELLER THEREOF IN THE YEAR OF
SALE.
A Corp., developer of M condominium, was previously issued a BIR
ruling stating that since
all its sales and income therefrom during the period 1996 to
1999 were already reported infull in the year of sale and the
income taxes thereon for the said years were already paid, it
is
no longer subject to creditable withholding tax on the transfer
of CCTs upon its full payment.
Before the completion of payment, a buyer of 3 condominium units
proposed to assign hisright over the units. The BIR ruled that the
Deeds of Assignment and Deeds of Sale for the
condominium units would no longer be subject to expanded
withholding tax. The assignee
merely steps into the shoes of the assignor. The execution of
the Deeds of Sale are nottaxable events inasmuch as the income on
the sale of the condominium units had been
reported by the seller in the year of the sale. BIR Ruling No.
DA -512-2006 dated August
25, 2006.
AS THE ENTITY HAVING CONTROL, CUSTODY AND DISPOSAL OF FUNDS,
THE WITHHOLDING AGENT SHALL BE LIABLE FOR THE FILING OF
WITHHOLDING TAX RETURNS AND REMITTANCE OF WITHHOLDING
TAXES TO THE BIR.
Consequently, the withholding agent shall be liable for
deficiency tax assessments,surcharges and penalties should it fail
to withhold and remit the tax on income payments
from its funds. BIR Ruling DA No. 479-2006 dated August 8,
2006.
THE PREFERENTIAL TAX RATE OF 5% OF GROSS INCOME APPLICABLE
TO
PEZA-REGISTERED ENTERPRISES APPLIES ONLY TO PEZA-REGISTERED
ACTIVITY.
The sale of scrap materials and income from other activities
fall outside the registered
activity as a PEZA enterprise and should be subjected to the
regular income tax rate of 34%
(in 1999). Moreover, under Section 8, Rule VIII, Part V of the
PEZA Rules, rejects,
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seconds and recoverable wastes shall, when taken from the
restricted areas of the
ECOZONES to the customs territory, or to the non-restricted
areas of the ECOZONE, be
taxed in accordance with the applicable provisions of the
customs and internal revenue laws
and regulations of the Philippines.Nidec Copal Philippines
Corporations v. Commissionerof Internal Revenue, CTA Case No. 6577,
September 25, 2006.
COMMUNICATION EXPENSE IS NOT AN ALLOWABLE DEDUCTION FOR
PURPOSES OF COMPUTING THE 5% PREFERENTIAL TAX ON GROSS
INCOME IMPOSED ON PEZA-REGISTERED ENTERPRISES.
Facts: The BIR examiner disallowed the deduction of
communication expense from thegross income of a PEZA-registered
taxpayer since it is not allowable under Republic Act
(RA) No. 7916 (the PEZA Law). The taxpayer contended that
PEZA-registered
enterprises are akin to enterprises registered with the Subic
Economic Freeport Zone(SSEFZ) created under RA No. 7227 (Bases
Conversion and Development Act of 1992)
which are also subject to the 5% preferential tax rate. SSEFZ
are allowed to deductcommunication expenses under Rev. Regs. No.
16-99. Moreover, Section 51 of the PEZALaw provides that, all
privileges, benefits, advantages or exemptions granted to
special
economic zones under Republic Act No. 7227 shall ipso facto be
accorded to special
economic zones already created or to be created under this Act.
Held: While Rev. Regs.
No. 16-99 included communication expense as one of the allowable
deductions for purposesof computing the 5% tax on gross income
earned by SSEFZ enterprises, Rev. Regs. No. 02-
05 repealed the provisions of Rev. Regs. No. 16-99 and excluded
communication expense as
one of the allowable deductions. Thus, the disallowance of
communication expense isproper. Ibid.
RENTALS PAID BY A PEZA-REGISTERED LESSEE TO A
PEZA-REGISTEREDLESSOR BY WAY OF APPLYING THE LESSEES SECURITY
DEPOSIT, AS
WELL AS BY OFFSETTING THE LOAN EXTENDED BY THE LESSEE TO THE
LESSOR, SHALL BE SUBJECT TO 5% PREFERENTIAL TAX (IN LIEU OF
ALL
TAXES) AT THE TIME OF APPLICATION OF THE DEPOSIT AND OFF-
SETTING OF THE LOAN.
Moreover, as the parties are both PEZA-registered taxpayers, the
rental payments shall not be
subject to creditable withholding tax and documentary stamp tax
and shall be exempt from
value-added tax (VAT).BIR Ruling No. DA-509-2006 dated August
25, 2006.
A CORPORATION EXEMPT FROM VAT CAN REGISTER ITS EXPORT SALES
AS ZERO-RATED AND AT THE SAME TIME HAVE ITS LOCAL SALES
REMAINEXEMPT FROM VAT.
A taxpayer may register as VAT taxpayer subject to 0% VAT with
respect to its export sales
and, at the same time, remain exempt from VAT on its local
sales. While its corresponding
input taxes on purchases of goods and services directly
attributable to zero-rated transactionsmay be the subject of a
claim for refund or tax credit, input taxes attributable to its
local sales
cannot, however, refunded or credited. Rather, the input taxes
attributable to local sales shall
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form part of cost of goods deductible as an expense for income
tax purposes. BIR Ruling
No. DA-539-2006 dated September 7, 2006.
WHEN A PARTNERSHIP IS DISSOLVED AND A NEW CORPORATION IS
FORMED WITH THE FORMER PARTNERS CONTINUING TO HAVE THE
CONTROLLING INTEREST IN THE NEW CORPORATION, NO OUTPUT VAT
IS
DUE ON THE TRANSFER OF THE MERCHANDISE INVENTORY AND OTHER
ASSETS OWNED BY THE PARTNERSHIP TO THE CORPORATION. BIR
Ruling
No. DA-465-2006 dated July 28, 2006.
ADVANCE PAYMENTS OF INPUT VAT MADE BY A LOGISTICS COMPANY TO
THE BUREAU OF CUSTOMS ON BEHALF OF ITS CLIENTS FOR WHICH THE
LOGISTICS COMPANY IS SUBSEQUENTLY REIMBURSED BY ITS CLIENTS
DO
NOT FORM PART OF THE LOGISTICS COMPANYS INPUT VAT. BIR
Ruling No. DA-462-2006 dated July 28, 2006.
THE BIRS DECISION ON A MOTION FOR RECONSIDERATION/
REINVESTIGATION OF A PRELIMINARY ASSESSMENT NOTICE IS NOT
EQUIVALENT TO THE COMMISSIONERS DECISION ON A DISPUTED
ASSESSMENT THAT MAY BE APPEALED TO THE COURT OF TAX APPEALS.
Petitioner received a letter dated July 15, 2004 informing
petitioner of the result of the
reinvestigation conducted pursuant to petitioners Motion for
Reconsideration/Reinvestigation of a Preliminary Assessment
Notice, with a demand for thepayment of the deficiency taxes per
the attached assessment notice. Instead of filing a protest
on the result of the reinvestigation and assessment notice,
petitioner filed a petition for
review with the CTA. The CTA dismissed the petition for lack of
jurisdiction. The CTAheld that the decision which may be appealed
to the CTA refers to the decision of the
Commissioner on the protest of the taxpayer against an
assessment notice; it does not signifythe assessment itself. The
CTA has no jurisdiction to entertain the petitioners appeal of
an
assessment notice. Inasmuch as the petitioner failed to timely
protest the assessment notice
and instead immediately elevated the same to the CTA, the
assessment notice became final,executory and unappealable.
DA-Region 02, Multi-Purpose Cooperative vs. Commissioner
of Internal Revenue et al., CTA E.B. 163 (CTA Case No. 7041),
September 15, 2006.
DESPITE A TAXPAYERS DENIAL OF HIS RECEIPT OF ASSESSMENT
NOTICES, THE CTA AFFIRMS HIS CONVICTION FOR VIOLATING
SECTIONS
16(a) AND 102 OF THE TAX CODE (FAILURE TO PAY TAXES).Facts:
Criminal cases were filed against the accused for his failure to
pay his deficiencyincome tax and VAT. For his defense, the accused
alleged that he had no knowledge of the
deficiency tax assessments because he did not receive the
assessment notices. The BIR
countered that it sent the assessment notices by registered mail
as shown by the transmittallist containing the name and address of
the accused, and the mail was not returned to the BIR
by the post office. The trial court convicted the accused. Held:
The CTA declared that the
trial courts ruling was in accordance with the pronouncement of
the Supreme Court that an
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assessment is deemed made only when the collector of internal
revenue releases, mails or
sends such notice to the taxpayer. The taxpayer may be presumed
to have received an
assessment notwithstanding the denial of its receipt upon proof
that it was properly addressed
and mailed by registered mail. The CTA likewise noted that the
bare denial by the accusedthat he did not receive the assessment
notices lacked credibility. As such, it could not prevail
over the evidence on record. Aside from the fact that the
accused testified that he gave
money to men who claimed to be BIR employees to fix his tax
problem, the evidence showedthat the accused personally received
the BIRs letter of authority, the Warrant of Distraint
and Levy and the demand letter. Dissenting Opinion of J. Uy: The
prosecution has the
primordial duty not only to prove that a tax is due but also to
establish that the accusedwillfully failed to pay the tax due. The
presumption that the taxpayer received the
assessment when the original assessment notice was not returned
to the BIR after its release
and mailing to the taxpayer is a disputable one. A direct denial
by the taxpayer of the receiptof the assessment notice shifts the
burden to the BIR to prove that the taxpayer received the
mailed letter. The transmittal list presented by the prosecution
is not sufficient to establishthat the accused actually received
the assessment notices. It bears no probative value for itfails to
state the nature of the document supposedly mailed to the accused.
There is no
corroborative evidence establishing the contents of the mailed
envelope. Neither is there any
clear proof to prove that the mailed letter was indeed sent to,
and received by, the accused.
There was also no compliance with the prescribed procedures
under the Rules on Evidence toestablish the receipt of the mailed
document to the addressee. Therefore, the prosecution
failed to prove the guilt of the accused beyond reasonable
doubt. People of the Philippines
vs. Ernesto S. Mallari, CTA CRIM. Case Nos. A-1 & A-2,
September 4, 2006.
CTA EN BANC INVALIDATES AN ASSESSMENT FOR BEING BARRED BY
PRESCRIPTION ON ACCOUNT OF INVALID WAIVERS.The CTA found the
following defects in the Waivers executed by the taxpayer: (1)
the
signatory to the first waiver is not the duly authorized
representative of the taxpayer as shehas no written notarized
authority from its Board of Directors to waive the prescriptive
period under the Tax Code; (2) the waiver was not signed by the
Commissioner of Internal
Revenue as required by RMO 20-90; (3) the date of acceptance by
the AssistantCommissioner-Enforcement Service was not indicated on
the waiver; (4) the taxpayer was
not provided a copy of the waiver as shown by the lack of
acknowledgment receipt on the
original copy attached to the BIR docket of the case; (5) the
waiver did not specify the kind
of tax and the amount of the tax due; (6) failure to comply with
Revenue DelegationAuthority Order (RDAO) No. 5-2001 which requires
the notarized authority of the signatory
to the waiver and notarization of the waiver; and (7) the second
waiver is also null and voidsince the signatory was without written
notarized authority and, assuming that the firstwaiver is valid,
the second waiver was executed after the lapse of the alleged
period agreed
upon in the first waiver. Commissioner of Internal Revenue v.
Kudos Marketing
Corporation, CTA E.B. Case No. 176 (CTA Case No. 7045),
September 25, 2006.
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NOTE:
The information provided herein is general and may not be
applicable in all situations. It
should not be acted upon without specific legal advice based on
particular situations. If youhave any questions, please feel free
to contact any of the following at telephone number
(632) 633-9418, facsimile number (632) 633-1911, or at the
indicated e-mail address:
Atty. Carlos G. Baniqued [email protected]
Atty. Laura Victoria A.S. Yuson-Layug
[email protected]
Atty. Terence Conrad H. Bello [email protected]. Ma.
Carlota Christina G. Laio-Santiago [email protected]
Atty. Suzette A. Celicious-Sy [email protected]
Atty. Madeline L. Zialcita-Villapando
[email protected]. Kathleen L. Saga
[email protected]
