Updates on Taxation 2014

1. Updates on Taxation 2014 + AMDG

2. CHEVRON PHILIPPINES, INC. vs. BCDA & CDC GENERAL PRINCIPLES … CDC imposed on Chevron a royalty fee of P0.50 per liter on fuel deliveries made to customers inside the CSEZ. Chevron protested stating that the imposition is a tax which CDC has no power to impose. ??? Is the royalty fee a tax or a regulatory measure? !!! It is a REGULATORY FEE. The royalty fee was deemed imposed primarily for regulatory purposes and not for generation of income which is the primary feature of a tax levy. The Court mentioned that the oil industry is “greatly imbued with public interest” and that the highly combustible product “poses serious threat to life and property”. It also upheld the reasonable relation between the fee and the regulation sought to be attained given the high volume of fuel entering the CSEZ and the fact that the increasing administrative costs were triggered by security risks arising from possible terrorist strikes. Thus, CDC was authorized to impose the fee. + AMDG

3. ANGELES UNIVERSITY FOUNDATION vs. CITY OF ANGELES GENERAL PRINCIPLES … Petitioner is a non-stock, non-profit educational foundation. It received a Building Permit Fee assessment for the construction of the AUF Medical Center but claimed exemption from the same as well as from other permits and fees by virtue of Republic Act 6055. Respondent disputed the claimed exemption by stating that the impositions are regulatory in nature and not taxes from which Petitioner is exempt under the said law. ??? Is the building permit fee a tax from which Petitioner is exempt? !!! It is a REGULATORY FEE. The DPWH has in fact issued implementing rules which provide the bases for the assessment of fees and Petitioner has failed to show that they were arbitrarily determined or unrelated to the activity being regulated. Neither has there been proof that the fee was unreasonable or in excess of the cost of regulation or inspection. The Court added that even if there was incidental revenue, the same is deemed not to change the nature of the charge. Thus, the City of Angeles was justified in its assessment. + AMDG

4. CIR vs. PILIPINAS SHELL PETROLEUM CORPORATION GENERAL PRINCIPLES … Shell filed a claim for refund for excise taxes it paid on sales of gas and fuel oils to various international carriers. The Court initially denied the claims but the Respondent filed a Motion for Reconsideration. ??? Is Shell entitled to refund the excise taxes? !!! YES. Section 135 is concerned with the exemption of the article itself and not the ostensible exemption of the international carrier-buyer. In addition, the failure to grant exemption will cause adverse impact on the domestic oil industry (similar to the practice of “tankering”) as well as result to violations of international agreements on aviation. Thus, Respondent, as the statutory taxpayer who is directly liable to pay the excise tax, is entitled to a refund or credit for taxes paid on products sold to international carriers. *** The subsequent sale of the taxable goods to international carriers confirms the proper tax treatment of the goods previously subjected to the excise tax. + AMDG

5. PHILIPPINE AIRLINES INC. vs. CIR GENERAL PRINCIPLES … Caltex sold aviation fuel to PAL and included excise taxes in its billings. PAL filed for a refund of the excise taxes passed-on to it by Caltex. The claim was based on PAL’s franchise (P.D. 1590) which confers upon PAL tax exemption on purchases of fuel. The CTA denied PAL’s claim using as basis the earlier decision in Silkair. ??? Does PAL have standing to refund the excise taxes passed-on by Caltex? !!! YES. The case of Silkairis not applicable since PAL’s franchise provides it with tax exemption privileges from both direct and indirect taxes. While there have been previous cases discussing which party is entitled to a refund in the case of excise taxes sold to exempt entities, the Court reiterated the statement in Silkairwhich said that it is primarily the statutory taxpayer which has the right to file the claim. However, the above rule was deemed not to apply in PAL’s case since the law/franchise clearly grants the party to which the economic burden of the tax is shifted (i.e., PAL) an exemption from both direct and indirect taxes, thus following the principle laid down in the earlier case of Maceda. + AMDG

6. BUREAU OF CUSTOMS EMPLOYEES ASSOCIATION (BOCEA) vs. TEVES GENERAL PRINCIPLES … BOCEA questions R.A. 9335 (Attrition Act of 2005) and states that the law violates their rights to (1) due process; (2) equal protection of the laws; and (3) security of tenure. They likewise claim that the same is an undue delegation of legislative power and is a bill of attainder. ??? Is the law unconstitutional? !!! NO. Given the clear parameters on revenue targets, rewards, removal levels, etc., R.A. 9335 is complete in all its essential terms and conditions and contains sufficient standards that negate a claim of undue delegation. BOC and BIR are both revenue-generating agencies that are both under the DOF. Such substantial distinction Is germane and related to the purpose of the law. The law does not deny the BOC employees their right to be heard and they still can not be arbitrarily removed. It is not a bill of attainder as the same does not seek to punish without a judicial trial as all it does is lays down the grounds for possible termination. + AMDG

7. ASIA INTERNATIONAL AUCTIONEERS, INC. vs. CIR GENERAL PRINCIPLES ??? Is a deficiency VAT assessment tantamount to a an assessment for withholding tax liabilities such that the taxpayer cannot avail of a tax amnesty program? !!! NO. The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is “deemed” a withholding agent for these deficiency taxes is fallacious. Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. + AMDG

8. DEUTSCHE BANK AG MANILA BRANCH vs. CIR GENERAL PRINCIPLES … Petitioner withheld a 15% tax on its remittances to its head office in Germany using as basis the Tax Code provision on BPRT. Believing that it overpaid the BPRT since the RP-Germany provides for a lower rate of 10% on branch remittances, the Petitioner filed a refund with the BIR and subsequently with the CTA. Both the BIR and the CTA denied stating that the branch office should have filed a tax treaty relief application prior to availing of the preferential treaty rate in view of the existing doctrine in the Mirant case. ??? Is Deutsche Bank entitled to the claim for refund even if it did not file a tax treaty relief application with the BIR? + AMDG

9. DEUTSCHE BANK AG MANILA BRANCH vs. CIR GENERAL PRINCIPLES !!! YES! The Court initially stated that the minute resolution upholding the doctrine in Mirant is not a binding precedent specially since there are differences in the parties, taxable period, etc.On the substantive issue, the Court said that the principle of pactasuntservanda requires the performance in good faith of treaty obligations. Thus, to require that taxpayers must first comply with an administrative requirement (under RMO 1-2000) is not in consonance with the performance in good faith. The obligation to comply with a tax treaty must take precedence over the objectives of the said RMO. In addition, it was pointed out that the prior application becomes illogical if the premise of the claim was an erroneous payment since the taxpayer could not have known it would be entitled to the refund since precisely it was using a different basis when it paid the taxes due. + AMDG

10. SWEDISH MATCH PHILIPPINES, INC. vs. TREASURER OF THE CITY OF MANILA GENERAL PRINCIPLES … The City of Manila sought to enforce both Sections 14 and 21 of the Manila Revenue Code claiming that the former is a tax on manufacturers, etc. while the latter applies to business subject to excise, VAT or percentage tax. ??? Will the imposition of both sections amount to invalid double taxation? !!! YES. There is in fact double taxation since both sections are being imposed on the same subject matter (privilege of doing business within the city), for the same purpose, by the same taxing authority, within the same taxing jurisdiction, for the same taxing period, and of the same kind or character (a local business tax imposed on gross sales or receipts). The Court further said that the LGC provision applicable (Section 143) clearly states that Section 143 (h) may be imposed only on businesses that are subject to excise tax, VAT, and percentage tax “and that are not otherwise specified in the preceding paragraphs”. + AMDG

11. LAND BANK OF THE PHILIPPINES vs. CACAYURAN GENERAL PRINCIPLES … The Municipality of Agoo in La Union province passed a resolution authorizing its mayor to obtain a loan from the Petitioner and mortgaging as collateral a portion of the Agoo plaza. As additional security, the municipality assigned a portion of its internal revenue allotment (IRA) in favor of the Petitioner. The loan proceeds were used to construct a commercial center on the plaza which was objected to by the local residents including the Respondent. ??? Did the Respondent have standing to file for the nullification of the loan? !!! YES. The two requisites for a taxpayer’s suit have been complied with. First, even if the construction of the commercial center would be sourced from the loan proceeds from the Petitioner, the said funds were already converted into public funds upon receipt by the municipality and the assignment of the IRA likewise characterized the funds as public. Second, since the plaza is for public use, the Respondent, like all other Agoo residents, is directly affected. Besides it has been held that as long as taxes are involved, people have a right to question government contracts even if they are not party to the contract/s. + AMDG

12. CIR vs. JULIA CAMPOS BENEDICTO INCOME TAX … After the PCGG filed cases to recover the ill-gotten wealth of the late husband of the Respondent, a compromise agreement was reached wherein the parties agreed that Swiss cases involving Respondent’s husband’s bank deposits would be terminated in exchange for the PCGG unfreezing all of the deposits so that Benedicto could get his 49% share from the deposits. The CIR assessed the amount of the unfrozen accounts claiming that the same was income subject to tax. ??? Did the Respondent’s husband realize income as a result of the compromise agreement which led to him receiving 49% of the deposits? !!! NO. The 49% was in no way income because the Respondent’s husband did not gain any wealth nor did he become any richer than he was before as in fact his wealth diminished to the extent of the 51% which he ceded to the PCGG. The 49% was a mere return of capital not subject to income tax. The Court ruled that it is only the interest income of the deposits which may be subjected to income tax as the same is the only gain. + AMDG

13. CIR vs. ST. LUKE’S MEDICAL CENTER, INC. INCOME TAX … St. Luke’s is a non-stock non-profit hospital. The BIR assessed St. Luke’s based on the argument that Section 27 (B) of the Tax Code should apply to it and hence all of St. Luke’s income should be subject to the 10% tax therein as it is a more specific provision and should prevail over Section 30 which is a general provision. St. Luke’s countered by saying that its free services to patients was 65% of its operating income and that no part of its income inures to the benefit of any individual. ??? Does Section 27 (B) have the effect of taking proprietary non-profit hospitals out of the income tax exemption under Section 30 of the Tax Code and should instead be subject to a preferential rate of 10% on its entire income? !!! NO. The enactment of Section 27 (B) does not remove the possible income tax exemption of proprietary non-profit hospitals. The only thing that Section 27 (B) captures (at 10% tax) in the case of qualified hospitals is in the instance where the income realized by the hospital falls under the last paragraph of Section 30 such as when the entity conducts any activity for profit. The revenues derived by St. Luke’s from pay patients are clearly income from activities conducted for profit. + AMDG

14. CIR vs. ST. LUKE’S MEDICAL CENTER, INC. INCOME TAX + AMDG

15. CIR vs. ST. LUKE’S MEDICAL CENTER, INC. INCOME TAX !!! Some significant definitions --- “Proprietary” – means a private entity maintained and administered by private individuals or groups. “Non-stock” – means that no part of the income is distributable as dividends to its members, trustees, or officers “Non profit” – means no net income or asset inures to or benefits any member or specific person, with all the net income or asset devoted to the institution’s purposes and all its activities conducted not for profit. d. “Inurement” – means (i) any form of payment to its trustees; (ii) exorbitant compensation to its employees; (iii) provision of financial assistance to its members; (iv) donations to entities not having a similar purpose as its own; (v) purchase of goods in its excess of its fair value from entities where its trustees has an interest in; and (vi) distribution of its assets to its members upon dissolution . + AMDG

16. DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs. CIR INCOME TAX … Petitioner was assessed for deficiency withholding taxes on interest from savings and time deposits of its members. The CTA ruled against the Petitioner and said that the withholding of tax on income payments subject to final withholding tax includes the said interest as "interest from x xx similar arrangements . . ." . ??? Is Petitioner liable for the deficiency WT? !!! NO. The BIR had earlier ruled without any qualification that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, other entities such as cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. The fact that “similar arrangements” is preceded by banking terms means that that those subject to withholding must have deposit peculiarities. This is also consistent with the preferential treatment accorded to members of cooperatives who are exempt in the same way as the cooperatives themselves. + AMDG

17. CIR vs. FILINVEST DEVELOPMENT CORPORATION INCOME TAX … Filinvest Development Corporation extended advances in favor of its affiliates and supported the same with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for deficiency income tax by unilaterally imputing an “arm’s length” interest rate on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the authority to impute theoretical interest and that the rule is that interests cannot be demanded in the absence of a stipulation to that effect. ???Can the CIR unilaterally impute theoretical interest on the advances made by Filinvest to its affiliates? !!! NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to prove that interest expense (on FDC’s own loans) was in fact claimed by FDC. + AMDG

18. INCOME TAX The term in the definition of gross income that even those income “from whatever source derived” is covered still requires that there must be actual or at least probable receipt or realization of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also applied in this case. The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan agreements that are subject to DST. + AMDG

19. TAMBUNTING PAWNSHOP vs. CIR INCOME TAX … Petitioner claimed losses as deductions arising from the auction sales it conducted. To prove the same, Petitioner submitted in evidence its “Rematado” book containing a record of items foreclosed and “Subasta” book containing a record of the auction sale of pawned items foreclosed. Petitioner likewise claimed the gain or loss on auction sale represents the difference between the capital (amount loaned to the pawnee, unpaid interest, and other expenses) and the price for which the pawned articles were sold. ??? Is Petitioner entitled to the losses as deductions? !!! NO. Petitioner did not properly prove its losses since the Subasta books did not reflect the true amounts of the proceeds and the Rematado books did not reflect the capital since the only amounts therein were those given to the pawnees. The losses claimed from fire and theft were also disallowed since while certifications from the police and fire departments and a list of the properties lost were submitted, the Petitioner did not submit sworn declarations describing the loss. + AMDG

20. CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION, INC. vs. EXECUTIVE SECRETARY INCOME TAX … CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of the due process clause as it levies income tax even if there is no realized gain. They also question the creditable withholding tax (CWT) on sales of real properties classified as ordinary assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2) the use of gross selling price or fair market value as basis for the CWT and the collection of tax on a per transaction basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real properties; (3) the government collects income tax even when the net income has not yet been determined; and (4) the CWT is being levied upon real estate enterprises but not on other enterprises, more particularly those in the manufacturing sector. ??? Are the impositions of the MCIT on domestic corporations and CWT on income from sales of real properties classified as ordinary assets unconstitutional? + AMDG

21. INCOME TAX !!! NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Besides, there are sufficient safeguards that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can suspend the imposition of MCIT in justifiable instances. The regulations on CWT did not shift the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance tax payments and they are thus just installments on the annual tax which may be due at the end of the taxable year. As such the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because these are the only factors reasonably known to the buyer, at the time of sale, in connection with the performance of his duties as a withholding agent. The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Neither is there violation of equal protection even if the CWT is levied only on the real industry as the real estate industry is, by itself, a class on its own and can be validly treated differently from other businesses. + AMDG

22. MANILA MEMORIAL PARK, INC. vs. SECRETARIES OF DSWD & DOF INCOME TAX ??? Is the law providing that the 20% senior citizen discount may be claimed only as a tax deduction unconstitutional? !!! NO. The law is a legitimate exercise of police power which has general welfare for its object. This is despite the claim of Petitioner that the law has the effect of imposing upon private entities the burden of partly subsidizing a government program. Even if the current rule does not provide the entities providing discounts a peso for peso reimbursement, no payment of just compensation is warranted for being an exercise of police power and not eminent domain, which is a similar characterization for similar rules such as price control laws. The law has also not been shown to be unreasonable, oppressive or confiscatory and doe not necessarily affect companies’ rates of return since (1) not all customers are senior citizens; (2) the level of profit margin of the goods and services offered to the public varies; and (3) the entities’ ability to recoup the discounts through higher mark-ups or from other products not subject to discounts. + AMDG

23. MERCURY DRUG CORPORATION vs. CIR INCOME TAX … Mercury Drug granted 20% sales discount to qualified senior citizens on their purchases of medicines. They subsequently filed a refund for taxable years 1993 and 1994 given that the then prevailing rule allowed that the sales discounts be claimed as tax credits. ??? Is the claim for tax credit to be based on the full amount of the 20% senior citizen discount or the acquisition cost of the item sold? !!! The tax credit should be equivalent to the actual 20% sales discount granted to the senior citizens. The previous ruling of the CTA that the tax credit is based only on the “cost of the discount” which was interpreted to cover only direct acquisition cost, excluding administrative and other incremental costs, was struck down by the Court. Note: The case of M.E. Holdings Corporation vs. CIR & CTA clarified that the rule will be -- (i) prior to March 21, 2004 (effectivity of Expanded Senior Citizens Act) the discounts are treated as tax credit; (ii) after March 21, 2004 the same are treated as deductions. + AMDG

24. CIR vs. PHILIPPINE AIRLINES, INC. INCOME TAX … Respondent’s charter entitled it to an incentive which would make it liable for either the basic corporate income tax or the 2% franchise tax based on gross revenue, whichever is lower, and that the payment under either of the alternatives shall be in lieu of other taxes except real property tax. For the year 2000, it had zero taxable income. CIR assessed Petitioner for MCIT stating that the Petitioner chose to be covered by the income tax provision (and not the franchise tax) and the MCIT does not belong to the category of “other taxes”. Respondent argued that MCIT is not the corporate income tax covered by its charter and is thus part of “other taxes”. ??? Is MCIT considered similar to the corporate income tax such that Respondent’s selection of the same will make it liable to MCIT? + AMDG

25. CIR vs. PHILIPPINE AIRLINES, INC. INCOME TAX !!! NO. The taxable income which is the basis for basic corporate income tax and the gross income which is the basis for MCIT have their respective technical meanings and cannot be used interchangeably. The rates for the taxes are different as well. Thus, the basis corporate income tax under Respondent’s charter cannot cover MCIT and the only interpretation is that MCIT is included in “all other taxes” from which Respondent is exempt. Neither can CIR argue that the “in lieu of all other taxes” proviso is a mere proviso that applies only when Respondent actually pays something. The Court ruled that it is not the fact of tax payment that exempts it, but the exercise of the option. + AMDG

26. CIR vs. FAR EAST BANK & TRUST COMPANY INCOME TAX … Far East Bank filed a claim for refund of overpaid creditable withholding taxes which included CWT on rental income allegedly earned by the Petitioner as lessor. ???Can a claim for refund be granted notwithstanding claimant’s failure to show in the return that that income upon which the creditable taxes withheld were based was in fact reported? !!! NO. The 3 essential requirements for a claim for refund of this nature to prosper are (1) filing the same within the 2-year period; (2) establishing the fact of withholding with copies of the CWT certificates; and (3) showing that the income received was declared as part of gross income. Here the Petitioner failed to prove (3) as the return in fact showed “Not Applicable” under the portion referring to Rental Income. In addition, some certificates were likewise not submitted as evidence. + AMDG

27. CIR vs. TEAM (PHILIPPINES) OPERATIONS CORPORATION INCOME TAX ??? Is it necessary for the person who executed and prepared the withholding tax certificates to be presented and to testify personally on the authenticity of the certificates? !!! NO. The copies of the withholding tax certificates when found by the duly commissioned independent certified public accountant to be faithful reproductions of the original copies would suffice to establish the fact of withholding. This is in accordance with Rule 13 of the Revised Rules of the Court of Tax Appeals. While the Rules further state that the documents may be subject to verification and comparison, the CIR was not deprived of the opportunity to examine the certificates since Respondent manifested that the original copies of the documents are available at the Respondent’s office but the CIR made no effort to examine the same and verify their authenticity. + AMDG

28. ASIAWORLD PROPERTIES PHILIPPINE CORPORATION vs. CIR INCOME TAX … Asiaworld filed its 2001 ITR stating that a portion of the amount representing Prior Year’s Excess Credits was the 1999 excess creditable withholding tax which it is now seeking to refund. The said 1999 excess payment was previously treated as having been carried over to 2000. Asiaworld posits its claim on the portion of the provision which states that the “such option shall be considered irrevocable for that taxable period” in that the same refers to only a one-year prohibition for the action of the claim for refund. ??? Is the irrevocability rule under Section 76 of the Tax Code only applicable to the next taxable year which in this case was the year 2000? !!! NO. The option to carry-over is not limited to the following taxable year of 2000 but will apply to the succeeding taxable years until the whole amount of the 1999 creditable withholding tax overpayment is fully utilized. + AMDG

29. CIR vs. SMART COMMUNICATIONS, INC. INCOME TAX … Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism will provide programming and consultancy services to Smart. Thinking that the payments to Prism were royalties, Smart withheld 25% under the RP-Malaysia Tax Treaty. Smart then filed a refund with the BIR alleging that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid to an entity without a permanent establishment in the Philippines. ??? Does Smart have the right to file the claim for refund? !!! YES. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes he believes were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., nonresident), the authority as agent is held to include the filing of a claim for refund. Smart was granted a refund given that only a portion of its payments represented royalties since it is only that portion over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to Smart and were thus treated as business profits of Prism. + AMDG

30. INCOME TAX Smart was granted a refund given that only a portion of its payments represented royalties since it is only that portion over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to Smart and were thus treated as business profits of Prism. + AMDG

31. SUPREME TRANSLINER, INC. vs. BPI FAMILY SAVINGS BANK, INC. INCOME TAX … Supreme Transliner took out a loan from respondent but was unable to pay the same. The respondent bank extrajudicially foreclosed the collateral and, before the expiration of the one-year redemption period, the mortgagors notified the bank of its intention to redeem the property. ??? Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the certificate of sale and before the expiry of the redemption period? !!! NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption. This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor. Note: Remember that in extrajudicial foreclosures, the mortgagee-bank is the statutory seller who is liable for the CGT. + AMDG

32. CHINA BANKING CORPORATION vs. CIR INCOME TAX ??? Is the 20% final tax withheld on a bank’s passive income included in the computation of its GRT? !!! YES. The claim of the Petitioner for the exclusion of the final withholding tax from gross receipts operates as a tax exemption which the law must explicitly grant. Also, the Court has held that the term “gross receipts” must be used in its plain and ordinary meaning and should be taken to refer to total (without deduction) and not the net amount. + AMDG

33. UNITED AIRLINES, INC. vs. CIR INCOME TAX … Petitioner used to be an online carrier but ceased operating cargo flights from the Philippines starting 2001. It is now an offline international air carrier but has a general sales agent in the Philippines which sells passage documents for its off-line flights for carriage of passengers and cargo. It filed a claim for refund on the Gross Philippine Billings (GPB) tax it paid. The CTA ruled that Petitioner was not liable for the GBP but was liable to pay 32% tax on its net income derived from the sales of passage documents in the Philippines. ??? Is Petitioner liable for either the GPB or the 32% tax? + AMDG

34. UNITED AIRLINES, INC. vs. CIR INCOME TAX !!! 32% tax. The Court reiterated the ruling in South African Airways and BOAC stating that it is the sale of tickets which is the revenue-generating activity subject to Philippine tax. The correct interpretation of the applicable rules is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income. The Court also ruled that “to avoid multiplicity of suits and unnecessary difficulties and expenses” the issue of deficiency tax assessment be resolved jointly with the its claim for refund – and doing so does not violate the rule against offsetting of taxes. + AMDG

35. PHILIPPINE DEPOSIT INSURANCE CORPORATION vs. BIR INCOME TAX ??? Is the requirement for a tax clearance provided under Section 52 of Tax Code applicable to a bank subject of liquidation proceedings? !!! NO. Closed banks placed under liquidation under the Central Bank law are not “corporations contemplating liquidation” under the Tax Code over which the SEC has jurisdiction. It is the Monetary Board, not the SEC, which has the power to order and approve the closure and liquidation of banks. A tax clearance is not a prerequisite to the approval of the project of distribution of the assets of a bank under liquidation by the PDIC. Another reason is that, given the timelines involved, it is unreasonable for the liquidation court to require that a tax clearance be first secured as a condition for the approval of a project of distribution of bank under liquidation. Lastly, to require that a tax clearance be secured first prior to distribution ignores the preference of credits under the Civil Code where debts and claims (of creditors) enjoy preference over taxes and assessments due to the government if not in reference to a specific movable property. + AMDG

36. REPUBLIC ACT 10378 EXEMPTION OF INTERNATIONAL AIR CARRIERS INCOME TAX !!! international air carriers doing business in the Philippines may avail of a preferential rate or exemption on the basis of a tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from the tax on Gross Philippine Billings. !!! Transport of passengers by international carriers are now exempt from VAT. !!! International air and shipping carriers doing business in the Philippines are now subject to the 3% percentage only on their gross receipts derived from the transport of cargo and not on their transport of passengers. + AMDG

37. REPUBLIC ACT 10026 TAX EXEMPTION TO LOCAL WATER DISTRICTS INCOME TAX !!! Local water districts are now exempt from income taxes under Section 27 provided that the amount saved by virtue of the exemption is to be used for capital equipment expenditure to expand water services coverage !!! All unpaid taxes starting August 13, 1996 are condoned provided (1) the BIR establishes financial incapacity of the LWD and (2) the LWD submits to Congress a program of internal reforms. + AMDG

38. RMC 31-2013 --- TAXATION OF COMPENSATION INCOME OF PHILIPPINE NATIONALS AND ALIEN INDIVIDUALS EMPLOYED BY EMBASSIES, INTERNATIONAL ORGANIZATIONS, ETC. INCOME TAX !!! Foreign governments, embassies, diplomatic missions, and international organizations as employers in the Philippines are immune from being withholding agents on the salaries of their employees based on international comity. !!! However, this immunity does not translate into all employees of these entities being exempt from income tax. Only the individuals specifically named in the treaties, international agreements, and laws are exempt from income taxes while those not covered are not relieved of their duty to report their income and pay the taxes but must do so on their own. + AMDG

39. RMC 31-2013 --- TAXATION OF COMPENSATION INCOME OF PHILIPPINE NATIONALS AND ALIEN INDIVIDUALS EMPLOYED BU EMBASSIES, INTERNATIONAL ORGANIZATIONS, ETC. INCOME TAX !!! Some examples of those exempted are diplomats (including family, staff, servants if not nationals or permanent residents of the Philippines). All employees of the following regardless of nationality and residence --- AUSAID / UN / ILO / FAO-UN / UNESCO / WHO / UNDP. The following entities only exempt those that are not Philippine nationals --- JICA (must be from Japan) Red Cross / AUSAID / CIDA / ADB / IMF / IBRD / UNICEF / IRRI / Ford Foundation / Rockefeller Foundation. Philippine nationals claiming exemptions under the above laws, agreements must file an application for confirmation of tax exemption with the ITAD of the BIR. + AMDG

40. RR 2-2013 --- TRANSFER PRICING GUIDELINES INCOME TAX !!! Critical features of the TP regulations --- 1) The rules apply to cross border and domestic transactions. 2) For purposes of applying the rules, the parties are considered related if one participates directly or indirectly in the management, control or capital of another. Control refers to any kind of control, direct or indirect, whether exercised or not, and shall be assumed if income or deductions have been arbitrarily shifted. 3) The transactions between related parties must be at arm’s length otherwise BIR will make adjustments on the basis of the rules. 4) Step 1 – comparability analysis (same goods, risks, commercial conditions / Step 2 – determine tested party and appropriate TP method (CUP, RPM, CPM, PSM, TNMM) / Step 3 – determine arm’s length results + AMDG

41. RMO 20-2013 --- TRANSFER PRICING GUIDELINES INCOME TAX !!! Critical features of the TP regulations --- 5) Advance Pricing Arrangement --- either unilateral (only the taxpayer and the BIR) or bilateral/multilateral (involves the Philippines and one or more treaty partner/s) 6) The documentation requirements need not be submitted to the BIR but must be retained. The same must be contemporaneous which means it exists or is brought into existence at the time the associated enterprises implement any arrangement that might raise transfer pricing issues. The documentation will contain the organizational structure, nature of business, assumptions, comparability analysis, TP method, application, etc. The retention period follows the rule in the Tax Code. 7) There are no safe harbor rates/rules in the TP regulations. + AMDG

42. RR 014-2012 --- TAX TREATMENT OF INTEREST INCOME EARNINGS ON FINANCIAL INSTRUMENTS INCOME TAX !!! Critical features of the regulations --- 1) Interest income from government debt instruments/securities (T-bills, treasury bonds, etc.) are subject to WT of --- 20% --- if received by citizens, RA, NRAETB, DC, RFC 25% --- NRANETB 30% --- NRFC (Note: Government debt issuances are considered as deposit substitutes regardless of the number of lenders at the time of origination as long as the same will be traded in the secondary marked which thus upholds PEACE Bonds ruling) 2) Interest Income from Peso bank deposits, deposit substitutes, trust funds, similar arrangements are subject to WT of --- 20% --- if received by citizens, RA, NRAETB, DC, RFC 25% --- NRANETB 30% --- NRFC except if interest income from foreign loan in which case 20% + AMDG

43. RR 014-2012 --- TAX TREATMENT OF INTEREST INCOME EARNINGS ON FINANCIAL INSTRUMENTS INCOME TAX !!! Critical features of the regulations --- 3) Interest income from Long Term Deposits Exempt if term is 5 years or more, 5% if 4-5years, 12% if 3-4 years, 20% if less than 3 years Conditions = all individuals covered except NRANETB which is at 25%/ certificate is in the name of the depositor and not the bank / issued by banks / denominations of P10,000 / etc. if any condition is absent, then same rates apply as any interest income from bank deposit which is 20% for all individuals except NRANETB which is 25%. 4) Interest Income under FCDU/OBU account 7.5% --- if received by citizens, RA, DC, RFC exempt --- if received by nonresidents 50/50 (exempt/7.5%) --- if account is joint between resident citizen and OFW + AMDG

44. RR 014-2012 --- TAX TREATMENT OF INTEREST INCOME EARNINGS ON FINANCIAL INSTRUMENTS INCOME TAX !!! Critical features of the regulations --- exempt --- income derived BY depository banks from dealings (loans) with nonresidents, OBUs, other FCDUs 10% --- income derived BY depository banks from dealings (loans) with residents 30% --- income from other activities (ex. consulting) 5) Interest Income from all other instruments that are not deposit substitutes such as interest earned by banks from loans extended by them, etc. are subject to the following --- 2% CWT - if the borrower is a top 20,000 corporation 20% CWT - if the borrower is not a top 20,000 corporation + AMDG

45. OTHER SIGNIFICANT ISSUANCES INCOME TAX !!! RMO 20-2013 --- Requires the issuance of Tax Exemption rulings to qualified non-stock, non-profit corporations and associations under Section 30 of the Tax Code. There must be submitted a certificate of utilization to prove compliance with the law. The ruling is valid for 3 years and shall be subject to renewal thereafter. !!! RMC 35-2012 --- Clarifies that clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes are subject to income tax and VAT on all their income and gross receipts from whatever source including membership fees, assessment dues, rental income, etc. !!! RMC 9-2013 --- Provides for the possible income tax and VAT exemption of association dues and income derived from rentals of homeowners’ association’s properties if (i) constituted as an association under RA 9904; (ii) the LGU having jurisdiction certifies that the basic services (i.e., security, street lights, maintenance and repair of streets, garbage disposal, etc.) for which the dues are being used cannot be provided by the said LGU; and (iii) the homeowners’ association presents proof that the dues are used for the aforesaid basic services. + AMDG

46. OTHER SIGNIFICANT ISSUANCES INCOME TAX !!! RR 10-2012 --- States that joint ventures engaged in construction projects are now considered not taxable as corporations only if the partners are local contractors licensed by the Philippine Contractors Accreditation Board (PCAB); otherwise the joint venture will be treated as a taxable corporation. !!! RR 12-2012 --- For motor vehicles allowed for use of an employee, the company providing the same can only take up as a deductible expense (via depreciation) the amount representing one vehicle and the value of which should not exceed P2,400,000. !!! RR 016-2012 --- Requiring all publicly-listed companies to maintain at all times a minimum public ownership of 10% of their issued and outstanding shares and stipulating that failure to comply therewith will subject the sale of the said shares to the capital gains tax due on unlisted shares. !!! RMC 039-2012 --- Provides that in instances when the judgment award in a labor dispute is enforced through garnishment of debts due to the employer or other credits, the garnishee shall withhold 5% of the judgment amount released. + AMDG

47. DIZON vs. CIR ESTATE TAX … There were claims against the estate which the BIR contested stating that lower amounts were paid as compromise payments during the settlement of the estate and these are amounts that should be considered as deductions in arriving at the net estate. ??? Will the compromise amounts be the amounts considered as deductions to the gross estate? !!! NO. The deductions allowable are the amounts determined at the time of death. Post-death developments are not material in determining the amount of deduction. Thus, the Court applied the “date-of-death valuation rule” which is the US rule on deductions and which is applicable also in the Philippines. The amount deductible is the debt which could have been enforced against the deceased in his lifetime. + AMDG

48. METRO PACIFIC CORPORATION vs. CIR DONOR’S TAX … Petitioner sold its shares with a par value of P100 per share in Bonifacio Land Corporation to a third party in the amount of P158 per share even while it was established that the book value of the shares was at P332 per share. Petitioner countered by saying that donor’s tax should not be imposed as it was “an ordinary business transaction negotiated in good faith by unrelated parties for legitimate business purposes”. It was also stated that the acquisition cost was higher than the book value. ??? Is donor’s tax due on the sale? !!! YES. The rules clearly define fair market value of unlisted shares as its book value. Thus, a 30% donor’s tax is due on the difference between the selling price and the BV/FMV. The par value and acquisition cost are irrelevant in determining the imposition of the donor’s tax. Also, it was pointed out that the lack of any exception/exemption under Section 100 deprives the Petitioner its basis in claiming its aforesaid defense. + AMDG

49. MINDANAO II GEOTHERMAL PARTNERHSIP vs. CIR VALUE ADDED TAX ??? Is the sale of a fully depreciated motor vehicle an isolated transaction which should not be subject to VAT in the hands of a power generation company? !!! NO. While the sale is admittedly an isolated transaction, it does not follow that the same cannot be considered as an incidental transaction which satisfies the requirement to attract VAT liability. The Court deemed that the sale of the motor vehicle was in the course of its business of converting steam into electricity for supply to NPC. The case of Magsaysay cannot apply since the sale of the vessels therein was not in the course of business of NDC and the same was involuntary for having been made pursuant to the Government’s policy of privatization. (Note: At the time when Magsaysay was decided the Tax Code did not cover “incidental transactions”.) + AMDG

50. CIR vs. SONY PHILIPPINES, INC. VALUE ADDED TAX … Sony Philippines was ordered examined for “the period 1997 and unverified prior years” as indicated in the Letter of Authority . The audit yielded assessments against Sony Philippines for deficiency VAT and FWT, viz: (1) late remittance of FWT on royalties for the period January to March 1998 and (2) deficiency VAT on reimbursable received by Sony Philippines from its offshore affiliate, Sony International Singapore (SIS). ??? (1) Is Petitioner liable for deficiency VAT? (2) Was the investigation of its 1998 FWT return valid? !!! (1) NO. Sony Philippines did in fact incur expenses supported by valid VAT invoices when it paid for certain advertising costs. This is sufficient to accord it the benefit of input VAT credits and where the money came from to satisfy said advertising billings is another matter but does not alter the VAT effect. In the same way, Sony Philippines can not be deemed to have received the reimbursable as a fee for a VAT-taxable activity. + AMDG