March 2010 Tax brief Contents Contents Contents Contents Contents 02 New Laws New Laws New Laws New Laws New Laws • Expanded Senior Citizens Act of 2010 • Reduction of taxes on life insurance policies 03 Cour Cour Cour Cour Court Decisions t Decisions t Decisions t Decisions t Decisions • Refund of excess creditable VAT withheld • VAT on cinema ticket sales • Tax on offline international carriers 04 BSP Circular BSP Circular BSP Circular BSP Circular BSP Circular • Guidelines for establishing cooperative banks 06 BIR Issuances BIR Issuances BIR Issuances BIR Issuances BIR Issuances • Amendments to the OSD regulations • Submission of “statement of management responsibility” • 2010 BIR strategy map • Joint IRR implementing RA 9520, otherwise known as Philippine Cooperative Code of 2008 • BIR RIP Project • Guidelines for monitoring big-ticket items • Minimum gross sales of motels for VAT purposes 09 BIR R BIR R BIR R BIR R BIR Rulings ulings ulings ulings ulings • Cellular phone allowance • Long-term UITF exempt from 20% FWT • Ascertaining worthlessness of bad debts 10 Highlight on P&A ser Highlight on P&A ser Highlight on P&A ser Highlight on P&A ser Highlight on P&A services vices vices vices vices • CTA litigation support
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RRRRReduction of taxes on life insuranceeduction of taxes on life insuranceeduction of taxes on life insuranceeduction of taxes on life insuranceeduction of taxes on life insurance
policiespoliciespoliciespoliciespolicies
With regard to life insurance policies, the
law has lowered the premium tax from
5% to 2%, and revised the documentary
stamp tax (DST).
The reduced premium tax shall apply to
all life insurance policies sold after the
effectivity of the new law, and to the
remaining balance for the remaining years
of the life insurance policies that were
issued before the law took effect but
whose premiums have not yet been fully
paid.
The new law also replaces the 0.25% DST
on premiums collected from life insurance
policies to the graduated DST rates, which
range from P10 to P100 based on the
value of the insurance policy. However,
the provision of the law that eliminates
the premium tax and DST on life
insurance policies after five years from its
effectivity was vetoed by the President.
(Republic Act No. 10001, February 23, 2010)
March 2010 33333
Court Decisions
RRRRRefund of excess creditable Vefund of excess creditable Vefund of excess creditable Vefund of excess creditable Vefund of excess creditable VAAAAATTTTT
withheldwithheldwithheldwithheldwithheld
Although the law does not expressly state
that excess creditable VAT withheld is
refundable, it may be the subject of a
claim for refund as an erroneously
collected tax under Sections 204(C) and
229 of the Tax Code.
In the instant case, the excess creditable
VAT withheld consists of amounts
withheld and remitted to the Bureau of
Internal Revenue (BIR) by government
agencies that applied the 6% withholding
rate on their payments to the
taxpayer-refund claimant. Since the
taxpayer had no more output VAT against
which the excess creditable VAT withheld
may be applied or credited, the taxpayer
claimed for refund of its excess creditable
VAT withheld.
The Supreme Court (SC) held that
creditable VAT withheld should be treated
as advance payment for the taxpayer-
refund claimant’s VAT liability payable
and, therefore, the difference should be
treated as the taxpayer’s overpaid taxes.
Citing Citibank N.A. v. Court of Appeals,
which dealt with excessive income taxes
withheld but considered applicable by the
SC, the Court held that tax withheld,
while collected legally, became untenable
and took on the nature of erroneously
collected taxes.
It was, however, clarified by the SC that its
ruling only refers to the creditable VAT
withheld imposed previously under
Section 114 of the Tax Code. After the
amendment by RA 9337, the amount
withheld under Section 114 will now be
treated as a final VAT and will thus no
longer be under the creditable
withholding tax system.
(Commissioner of Internal Revenue v. Ironcon
Builders and Development Corporation, GR
180042, February 8, 2010)
TTTTTax on offline international carriersax on offline international carriersax on offline international carriersax on offline international carriersax on offline international carriers
An offline international carrier selling
passage documents through an
independent sales agent in the Philippines
is considered engaged in trade or
business in the Philippines subject to the
32% (now 30%) tax imposed under
Section 28(A)(1) of the NIRC of 1997.
The SC held that although an offline
carrier, which does not maintain flights to
or from the Philippines, is not taxable to
the 2 ½% tax — having no gross
Philippine billings (GPB) as defined under
Sec. 28(A)(3)(a) of the 1997 NIRC — it is
not exempt from paying any income tax
for its sale of passage documents in the
Philippines. As the SC ruled, such offline
international carrier should be considered
a resident foreign corporation subject to
the 32% (now 30%) tax under Sec.
28(A)(3) of the Tax Code.
The rule promulgated by the SC is that, if
the 2 ½% tax on GPB under Sec.
28(A)(3)(a) is applicable to a taxpayer,
then the general rule imposing 32% tax
under Sec. 28(A)(1) of the Tax Code
would not apply. If, however, Sec.
28(A)(3)(a) does not apply, a resident
foreign corporation — whether an
international air carrier or not — shall be
liable to the 32% tax under Sec. 28(A)(1)
of the Tax Code. This means that an
international air carrier that maintains
flights to and from the Philippines shall
be taxed at the rate of 2 1/2% of its
GPB, while an international air carrier that
does not have flights to and from the
Philippines, although exempt from 2 ½%
tax on GPB, is subject to 32% (now 30%)
tax on its income earned from other
activities in the country.
(South African Airways v. Commissioner of
Internal Revenue, February 16, 2010, GR
180356)
VVVVVAAAAAT on cinema tickT on cinema tickT on cinema tickT on cinema tickT on cinema ticket saleset saleset saleset saleset sales
The activity of showing cinematographic
films is not a service covered by VAT under
the National Internal Revenue Code (NIRC)
of 1997, as amended, since it is not included
in the enumeration of sale or exchange of
services. The activity does not fall under the
phrase “similar services” either, which
would have subjected it to the VAT.
The SC held that the activity is instead
subject only to the amusement tax under RA
7160, otherwise known as the Local
Government Code (LGC) of 1991.
According to the SC, although it was the
national government that imposed the
amusement taxes on operators and
proprietors of theaters under the NIRC of
1939, this power to impose tax on
amusement has been transferred to, and
remains exclusively with, the local
government units (LGUs).
The SC pointed out that the legislature
never intended to impose VAT on operators
or proprietors of cinema/theater houses,
which are already covered by the
amusement tax under the LGC. It also
stressed that levying the 10% VAT, in
addition to the 30% amusement tax
imposed by Section 140 of the LGC, would
impose an unreasonable burden on
operators or proprietors of cinema/theater
houses, resulting in injustice since persons
taxed under the NIRC of 1997 would be in
a better position than those taxed under the
LGC of 1991. Hence, in the absence of any
provision of law imposing VAT on the gross
receipts of cinema/theater operators or
proprietors derived from admission tickets,
the SC upheld the cancellation of the
deficiency VAT assessment issued against
the taxpayer.
(Commissioner of
Internal Revenue v.
SM Prime Holdings
Inc., and First Asia
Realty Development
Corporation,
GR 183505,
February 26, 2010)
4 4 4 4 4 March 2010
BSP Circular
Guidelines for establishingGuidelines for establishingGuidelines for establishingGuidelines for establishingGuidelines for establishing
Amendments to the OSD regulationsAmendments to the OSD regulationsAmendments to the OSD regulationsAmendments to the OSD regulationsAmendments to the OSD regulations
The BIR has amended Revenue
Regulations No. (RR) 16-08 — the
Optional Standard Deduction (OSD)
regulations — relative to the manner of
claiming the OSD, which is allowed of
general professional partnerships (GPP)
and their partners, and to the procedure
for disclosing the election to use OSD in
the taxpayer’s income tax returns.
Under the new regulations, the type of
deduction used by the GPP must be the
same type of deduction availed of by the
partners. Previously, under RR 16-08, the
GPP and each of the partners were
allowed to choose their own method of
deductions. Specific rules that should be
followed by the GPP and partners in
electing deductions are as follows:
1. If the GPP chooses itemized
deductions, the partners
comprising it must also claim
itemized deductions, which are
in the nature of ordinary and
necessary expenses for the
practice of profession that were
not claimed by the GPP during
the year.
2. If the GPP avails of the OSD in
computing its net income, the
partners can no longer claim
further deductions from their
share in the net income of the
GPP.
3. If the partner derives other
gross income from trade,
business or practice of
profession apart and distinct
from his share in the net income
of the GPP, the deduction that
he can claim from his other
gross income would follow the
same deduction availed of from
his partnership income, provided
that if the GPP opts for the
OSD, the individual partner may
still claim 40% of his gross
income but not include his share
from the net income of the GPP.
The regulations likewise mandate all
GPPs and their individual partners to
signify their intention to claim either the
OSD or the itemized deduction by
checking the appropriate box in their
income tax return filed for the first
quarter of their taxable year. Once the
election is made, the same type of
deduction must be consistently applied
for all the succeeding quarterly returns
and in the final income tax return for the
taxable year. Any taxpayer who is required
to file the quarterly income tax return but
fails to do so shall be considered as having
availed of the itemized deductions option
for the taxable year.
(Revenue Regulations No. 02-10, February 24,
2010)
Submission of “statement ofSubmission of “statement ofSubmission of “statement ofSubmission of “statement ofSubmission of “statement of
2010 BIR strategy map2010 BIR strategy map2010 BIR strategy map2010 BIR strategy map2010 BIR strategy map
The BIR has formulated a strategy map
that identifies the programs, activities and
projects it will undertake for 2010 to
attain its revenue goals. The strategy map
includes three priority areas, 16 programs,
108 activities and projects, and 10
strategies.
The BIR’s priority areas include people
improvement, process improvement, and
taxpayer interaction improvement. As part
of its strategy to boost its collections, the
BIR shall implement the following
measures:
1. High-visibility public awareness
campaign on the enforcement
and service programs
2. Integrated approach in
administering the large taxpayers
3. Re-invigorating the Run After
Tax Evaders (RATE) program
4. Enhanced and strategic
enforcement approaches
5. Focus on big ticket items
6. More vigorous third-party
matching campaign
7. Expanded linkage with key
institutions
8. Effective partnership with
taxpayers and practitioners
9. Close monitoring of tax eroding
measures and investment
incentives programs
10. Motivating the BIR workforce
The strategy map also lists the activities
and projects that the BIR will implement
in support of its programs, which were
identified for each of the priority areas.
These include, among others, programs to
enhance enforcement such as audit of
conglomerates, transfer pricing, big-ticket
items monitoring, and computer-assisted
audit.
(Revenue Memorandum Circular 10-10,
February 2, 2010)
Joint IRR implementing RA 9520,Joint IRR implementing RA 9520,Joint IRR implementing RA 9520,Joint IRR implementing RA 9520,Joint IRR implementing RA 9520,
otherotherotherotherotherwise known as Philippinewise known as Philippinewise known as Philippinewise known as Philippinewise known as Philippine
Cooperative Code of 2008Cooperative Code of 2008Cooperative Code of 2008Cooperative Code of 2008Cooperative Code of 2008
Guidelines for monitoring big-tickGuidelines for monitoring big-tickGuidelines for monitoring big-tickGuidelines for monitoring big-tickGuidelines for monitoring big-ticketetetetet
itemsitemsitemsitemsitems
The order prescribes the policies and
guidelines on the monitoring, review and
determination of tax consequences of
big-ticket items (BTI).
A transaction is considered a BTI if the
amount involved exceeds P200 million.
The threshold amount is considered on a
per single and unrelated event or
transaction basis; it does not take into
account the summation or the total of
several unrelated and multiple events or
transactions. A transaction may also be
considered a BTI if it involves a request
for a BIR ruling where the amount of the
transaction is over P1 million.
The information on the occurrence of a
BTI shall be sourced from reports
published in the newspapers or
broadcasted over television and radio
stations, announcements and releases in
the websites of taxpayers, and disclosures
to and/or actions from government
regulatory authorities such as the
Securities and Exchange Commission
(SEC), the Board of Investments (BOI)
and the Bangko Sentral ng Pilipinas (BSP).
The offices that shall be responsible for
monitoring and communicating with the
taxpayer/s involved in the BTI within five
days from the date of transaction or date
of discovery of transaction, are as
follows:
a. Large Taxpayer (LT) office – if
transacting parties are a large
taxpayer and non-large taxpayer
b. Enforcement service – if
transacting parties are both non-
large taxpayers
c. Commissioner of Internal
Revenue – if transacting parties
are both large taxpayers
BIR Issuances
The concerned BIR office shall send an
Access to Records letter to the taxpayer
which, if not complied with, would result
in the issuance of subpoena duces tecum
(SDT). Upon receipt of documents, the
BIR shall evaluate the tax consequences
of the transaction and determine if the
relevant taxes are paid correctly and on
time, or if there are tax issues including
aggressive tax planning and avoiding
schemes implemented by the taxpayer. A
letter of authority for a short audit may
be issued if a more thorough verification
is needed to evaluate the transaction.
(Revenue Memorandum Order No. 11-10,
February 2, 2010)
Minimum gross sales of motels forMinimum gross sales of motels forMinimum gross sales of motels forMinimum gross sales of motels forMinimum gross sales of motels for
Long-term UITF exempt from 20%Long-term UITF exempt from 20%Long-term UITF exempt from 20%Long-term UITF exempt from 20%Long-term UITF exempt from 20%
FWTFWTFWTFWTFWT
Interest income derived by individual
citizens and individual resident aliens, as
well as non-resident aliens engaged in
trade or business in the Philippines, from
long-term unit investment trust fund
(UITF) that satisfies the conditions for
tax-exempt long-term deposits are exempt
from 20% final withholding tax under
Sections 24(B)(1) and 25(A)(2) of the
1997 Tax Code.
The long-term UITF was launched by the
bank to give clients access to higher
yielding investment instruments,
investment diversification and higher yield
potential. Under the declaration of trust
that governed the establishment of the
UITF, the UITF shall be limited to
individual trustors and investors who are
Filipino citizens or resident aliens. The
declaration of trust also provides that the
participation in the UITF shall be for a
period of at least five years. If
participation lasts for less than five years,
the interest income shall be subject to a
final tax based on schedule contained in
Section 24(b)(1) of the Tax Code.
Considering that the long-term UITF is in
full compliance with the requisites of
“long-term deposits or investment
certificate” as defined under Section
22(FF) of the Tax Code, the BIR ruled
that the interest income derived from the
long-term UITF by individual clients who
are Filipino citizens, resident aliens, or
non-resident aliens engaged in trade or
business within the Philippines, are
exempt from 20% final withholding tax.
However, the BIR requires the bank to set
up a separate numbering system in its
books for the long-term UITFs for
monitoring purposes.
[BIR Ruling No. DA(FIT-025) 836-2009,
December 23, 2009]
AscerAscerAscerAscerAscertaining wortaining wortaining wortaining wortaining worthlessness of badthlessness of badthlessness of badthlessness of badthlessness of bad
debtsdebtsdebtsdebtsdebts
In ascertaining the worthlessness of bad
debts, which is one of the requisites for
deductibility of bad debts, a taxpayer does
not need to go to court to ascertain that
the bad debt is worthless. What the
taxpayer must show is that it took
reasonable steps to collect the debt. If, in
the exercise of sound business judgment,
the taxpayer believes there is no likelihood
of recovery at any time in the future, the
debt may already be considered worthless.
In the instant case, the company, which is
engaged in the marketing, supply and
trade of electronic home appliances, and
its legal counsel sent demand letters to its
buyer in order to collect its accounts
receivable. Despite the demand letters, the
buyer was unable to fulfill its obligation to
pay. Considering that the company took
reasonable steps to collect the debt and
there appeared to be no likelihood of
recovery of the accounts receivable at any
time in the future, the BIR deemed the
debt worthless, which means the accounts
receivable may be written-off and claimed
as bad deduction from the company’s
gross income.
[BIR Ruling No. DA(C-296) 727-2009,
December 3, 2009]
10 10 10 10 10 March 2010
Highlight on P&A services
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