Recent Updates on Taxation 2010

7/31/2019 Recent Updates on Taxation 2010

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Updates on Taxation2010
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2/85

GENERAL PRINCIPLES

SILKAIR (SINGAPORE) PTE. LTD. VS. COMMISSIONER OF INTERNALREVENUE

Silkair was a Singapore corporation treated as an online international carrier inthe Philippines. It filed a claim for refund of excise taxes paid on its purchase of

aviation jet fuel from Petron.

??? Is Silkair entitled to file the claim for the refund of the excisetaxes passed-on by Petron?

!!! NO. The proper party to seek a refund of an indirect tax is thestatutory taxpayer, the person on whom the tax is imposed by law andwho paid the same even if he shifts the burden to another. Thus,Petron Corporation, not Silkair, being the statutory taxpayer, is entitledto claim a refund. Even if Petron Corporation passed on to Silkair theburden of the tax, the additional amount billed to Silkair for jet fuel isnot a tax but part of the price which Silkair had to pay as a purchaser.Even if the consumers or purchasers ultimately pay for the tax, they are

not considered the taxpayers.


3/85

GENERAL PRINCIPLES

BRITISH AMERICAN TOBACCO vs. CAMACHO

British American Tobacco (BAT) introduced in June 2001 its Lucky Strikecigarettes at which point new brands (introduced after October 1, 1996) were

being taxed based on their current net retail price while old brands (sold beforeOctober 1, 1996 or the Annex D brands) were taxed based on their net retailprice as of October 1, 1996. BAT questioned the implementation of Section 145and the regulations on the ground that they discriminate against new brands ofcigarettes in violation of the equal protection and uniformity provisions of theConstitution. BAT contended that the continued use of Annex D which includebrands such as Marlboro and Philip Morris gives undue protection to said brandswhich are still taxed based on their price as of October 1996 even if they arenow sold at the same or even at a higher price than new brands like Lucky Strike.

??? Does the classification freeze provision violate the equalprotection and uniformity of taxation clauses of theConstitution and the General Agreement on Tariffs and Trade(GATT) prohibiting discrimination of imported brands againstlocal ones?


4/85

GENERAL PRINCIPLES

!!!NO.The guaranty of equal protection of the laws is not violated by alegislation which is based on reasonable classification. Following therational basis test, the classification freeze provision addresses (i)Congress administrative concerns on the delegation of too muchpower to the DOF and BIR; (ii) simplification of tax administration of

sin products; (iii) elimination of potential areas for abuse andcorruption in tax collection; (iv) buoyant and stable revenuegeneration; and (v) ease of projection of revenues. The Court also saidthat price is not the only factor in the market for them to compete butother factors such as consumer preference, brand loyalty, etc. are alsoconsidered and consumers are willing to pay higher prices/taxes onthese bases. Even if the Court acknowledged that BAT products are

being taxed higher even if other brands are selling at a higher price, itsaid that is not enough to declare a law unconstitutional as it has notbeen shown that the classification freeze provision was precipitated byan attitude on the part of Congress to unduly favor older brands overnewer brands and instead it was impelled by an earnest desire toimprove efficiency of tax administration.


5/85

GENERAL PRINCIPLES

!!!The law does not violate the GATT since it uniformly applies to all newlyintroduced brands and does not purport to single out imported

cigarettes in order to unduly favor locally produced ones. Even

assuming there was such discrimination, the GATT being merely ratifiedby the Senate is just another statute and RA 9334, being a later and

special law dealing with excise taxes, must govern.


6/85

GENERAL PRINCIPLES

ABAKADA GURO PARTYLIST vs. PURISIMA

Petitioners question the Attrition Act of 2005 and contend that by establishing asystem of rewards and incentives when they exceed their revenue targets, thelaw (1) transforms the officials and employees of the BIR and BOC into

mercenaries and bounty hunters; (2) violates the constitutional guarantee ofequal protection as it limits the scope of the law to the BIR and BOC; (3) undulydelegates to the President the power to fix revenue targets without sufficientstandards; and (4) violates the doctrine of separation of powers by creating aCongressional Oversight Committee to approve the laws implementing rules.

??? Is R.A. No. 9335 constitutional?

!!!YES. R.A. No. 9335 is constitutional, except for Section 12 of the lawwhich creates a Joint Congressional Oversight Committee to review thelaws IRR.


7/85

GENERAL PRINCIPLES

!!! That RA No. 9335 will turn BIR and BOC employees and officials intobounty hunters and mercenaries is purely speculative as the lawestablishes safeguards by imposing liabilities on officers and employeeswho are guilty of negligence, abuses, malfeasance, etc. Neither is theequal protection clause violated since the law recognizes a valid

classification as only the BIR and BOC have the common distinctprimary function of revenue generation. There are sufficient policy andstandards to guide the President in fixing revenue targets as therevenue targets are based on the original estimated revenue collectionexpected of the BIR and the BOC.

However, the creation of a Joint Congressional Oversight Committeefor the purpose of reviewing the IRR formulated by agencies of the

executive branch (DOF, DBM, NEDA, etc.) is unconstitutional since itviolates the doctrine of separation of powers since Congress arrogatedjudicial power upon itself.


8/85

GENERAL PRINCIPLES

PLANTERS PRODUCTS, INC. vs. FERTIPHIL CORPORATION

President Marcos issued an LOI which provided the imposition of a capitalrecovery component (CRC) on the domestic sales of all fertilizer grades andwhich provided that the CRC shall be collected until adequate capital is raised

to make Petitioner PPI (a private company) viable.

??? Is the LOI a valid exercise of the power of taxation?

!!!NO. The CRC imposition is invalid. The LOI is an exercise of the powerof taxation. The primary purpose of the CRC is revenue generationgiven that the amounts collected were too excessive to serve a mereregulatory purpose given that it was collectible until adequate capitalis raised to make PPI viable. Given its nature as a tax imposition, thefact that the ultimate beneficiary is PPI, a private company, makes thelevy invalid for not serving a public purpose.


9/85

INCOME TAX

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. vs.EXECUTIVE SECRETARY

CREBA assails the imposition of the minimum corporate income tax (MCIT) asbeing 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) onsales of real properties classified as ordinary assets stating that (1) they ignorethe different treatment of ordinary assets and capital assets; (2) the use of grossselling price or fair market value as basis for the CWT and the collection of tax ona per transaction basis (and not on the net income at the end of the year) areinconsistent with the tax on ordinary real properties; (3) the government collectsincome tax even when the net income has not yet been determined; and (4) theCWT 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 andCWT on income from sales of real properties classified asordinary assets unconstitutional?


10/85

INCOME TAX

!!! NO. MCIT does not tax capital but only taxes income as shown by thefact that the MCIT is arrived at by deducting the capital spent by acorporation in the sale of its goods, i.e., the cost of goods and otherdirect expenses from gross sales. Besides, there are sufficientsafeguards that exist for the MCIT: (1) it is only imposed on the 4th yearof operations; (2) the law allows the carry forward of any excess MCIT

paid over the normal income tax; and (3) the Secretary of Finance cansuspend the imposition of MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estatebusiness income tax from net income to GSP or FMV of the propertysold since the taxes withheld are in the nature of advance tax paymentsand they are thus just installments on the annual tax which may be dueat 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 taxableincome and the use of the GSP or FMV is because these are the onlyfactors reasonably known to the buyer in connection with theperformance of the duties as a withholding agent.

Neither is there violation of equal protection even if the CWT is leviedonly on the real industry as the real estate industry is, by itself, a classon its own and can be validly treated different from other businesses.


11/85

INCOME TAX

SOUTH AFRICAN AIRWAYS vs. COMMISSIONER OF INTERNALREVENUE

Petitioner is an offline international air carrier but has a general sales agent inthe 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 PhilippineBillings (GPB) tax it paid. The CTA ruled that Petitioner was not liable for the GBPbut was liable to pay 32% tax on its net income derived from the sales of passagedocuments in the Philippines.

??? Is Petitioner liable for either the GPB or the 32% tax?

!!!32% tax.The Court reiterated the ruling in CIR vs. BOAC stating thatit is the sale of tickets which is the revenue-generating activity subjectto Philippine tax. The correct interpretation of the applicable rules isthat, if an international air carrier maintains flights to and from thePhilippines, it shall be taxed at the rate of 2 1/2% of its Gross PhilippineBillings, while international air carriers that do not have flights to and

from the Philippines but nonetheless earn income from other activitiesin the country will be taxed at the rate of 32% of such income.


12/85

INCOME TAX

DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs.COMMISSIONER OF INTERNAL REVENUE

Petitioner was assessed for deficiency withholding taxes on interest from savingsand time deposits of its members. The CTA ruled against the Petitioner and

claimed that the withholding of tax on income payments subject to finalwithholding tax includes the said interest as "interest from x x x similararrangements . . ."

??? Is Petitioner liable for the deficiency WT?

!!!NO.The BIR had earlier ruled without any qualification that sinceinterest from any Philippine currency bank deposit and yield or anyother monetary benefit from deposit substitutes are paid by banks,cooperatives are not required to withhold the corresponding tax on theinterest from savings and time deposits of their members. This isconsistent with the preferential treatment accorded to members ofcooperatives who are exempt in the same way as the cooperatives

themselves.


13/85

INCOME TAX

COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES,INC.

PAL paid the 10% Overseas Communications Tax (OCT) for overseas telephonecalls made through PLDT. It then later filed with the BIR a claim for refund of the

amount paid as OCT, claiming that other than being liable for basic corporateincome tax or the franchise tax, whichever was lower, it was exempted from allother taxes by virtue of the "in lieu of all taxes" clause in its charter.

??? Is PAL liable for the OCT?

!!!NO.The language of PALs franchise is clearly all-inclusive --- the basiccorporate income tax or franchise tax paid by respondent shall be "inlieu of all other taxes except only real property tax. It is not the fact oftax payment that exempts it, but the exercise of its option. In the eventthat respondent incurs a net loss, it shall have zero liability for basiccorporate income tax, the lowest possible tax liability. There being noqualification to the exercise of its options, then Respondent is free to

choose basic corporate income tax, even if it would have zero liability.


14/85

INCOME TAX

COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES,INC.

PAL had zero taxable income for 2000 but would have been liable for MCITbased on its gross income. However, PAL did not pay the MCIT using as basis its

franchise which exempts it from all other taxes upon payment of whichever islower of either (a) the basic corporate income tax based on the net taxableincome or (b) a franchise tax of 2%.

??? Is PAL liable for MCIT?

!!!NO.PALs franchise clearly refers to "basic corporate income tax"which refers to the general rate of 35% (now 30%). In addition, there isan apparent distinction under the Tax Code between taxable income,which is the basis for basic corporate income tax under Sec. 27 (A) andgross income, which is the basis for the MCIT under Section 27 (E). Thetwo terms have their respective technical meanings and cannot be usedinterchangeably. Not being covered by the Charter which makes PAL

liable only for basic corporate income tax, then MCIT is included in "allother taxes" from which PAL is exempted.


15/85


16/85

INCOME TAX

COMMISSIONER OF INTERNAL REVENUE vs. BANK OF THE

PHILIPPINES ISLANDS

BPI filed its final adjusted Annual Income Tax Return for 1998 and showed anoverpayment. This excess tax credit was then carried over to 1999, where ithowever ended up with a net loss and thus still had unapplied excess tax credit.For 2000, Respondent had zero taxable income and thus only carried over theexcess tax credit carried over from 1998, 1999, and 2000 but, however, failed toindicate in its ITR its choice of whether to carry over its excess tax credits or toclaim the refund of or issuance of a tax credit certificate for the said amounts.BPI then filed a claim for refund of its excess creditable income tax for 1998.

??? Can BPI claim for refund its excess credits from 1998?


17/85

INCOME TAX

!!! NO. BPIs choice to carry over its 1998 excess income tax credit tosucceeding taxable years is irrevocable, regardless of whether it wasable to actually apply the said amount to a tax liability. The Court ofAppeals mistakenly understood the phrase "for that taxable period" asa prescriptive period for the irrevocability rule i.e., that since the tax

credit in this case was acquired in 1998, and Respondent opted to carryit over to 1999, then the irrevocability of the option to carry overexpired by the end of 1999, leaving Respondent free to again takeanother option as regards its 1998 excess income tax credit. The Courtruled that this interpretation effectively renders nugatory theirrevocability rule.


18/85

INCOME TAX

PANSACOLA vs. COMMISSIONER OF INTERNAL REVENUE

??? Can the personal and additional exemptions that took effectin January 1, 1998 be availed of for taxable year 1997 since the

return for 1997 was filed in 1998 anyway?

!!!NO.The exemptions can only be claimed starting taxable year 1998and for returns filed in 1999. The income tax provisions clearly definestaxable year as calendar year considering that they refer toindividuals and not juridical entities. Likewise, the deductions are takenout in the taxable year in which they are paid or incurred. Thus, whatthe law considers is the personal status of the taxpayer (i.e., single,married, with dependent, etc.) at the close of the taxable year.


19/85

INCOME TAX

CARLOS SUPERDRUG CORP. vs. DEPARTMENT OF SOCIAL WELFARE& DEVELOPMENT

The Expanded Senior Citizens Act of 2003 which became effective on March 21,

2004 provided that the discounts granted to senior citizens may be claimed astax deductions, revising the previous treatment which was as tax credits.

??? Are the discounts extended to senior citizens claimable as taxcredits?

!!! NO. The entitlement is only for tax deduction and not tax credit. TheCourt distinguished tax credit vs. tax deduction by stating that a creditis a peso-for-peso deduction from the taxpayers tax liability or a fullrecovery while a tax deduction only benefits the taxpayer to theextent of 35% (now 30%) of the amount granted as discount. The Courtrecognized that the law is a legitimate exercise of police power. (Note:20% discount also applies to movie admission fees, transport fares,hotel services, restaurant bills, etc.)


20/85

INCOME TAX

!!! The March 3, 2008 case of M.E. Holdings Corporation vs. CIR & CTA

again 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 is treated as deductions.


21/85

INCOME TAX

PHILEX MINING CORPORATION vs. COMMISSIONER OF INTERNALREVENUE

Philex entered into an agreement with Baguio Gold entitled Power of Attorney

whereby Philex was made to manage and operate Baguio Golds mining claim inBenguet province. In return, Philex was to receive as compensation 50% of thenet profit. In the course of the project, Philex made advances of cash andproperty until the mine stopped operating due to losses. Philex wrote off theindebtedness to Baguio Gold. The BIR disallowed the write-off as the same wasconsidered as investment in a partnership rather than as a loan.

??? Is Philex entitled to the write-off of bad debts?


22/85

INCOME TAX

!!! NO.The uncollected amounts are investments, not debts. The Powerof Attorney shows that the intention was to enter into a partnership or

joint venture by creating a common fund and having a joint interest in

the profits by dividing it 50-50. There was nothing which would require

that Baguio Gold repay the advances made by Philex and the fact thatthe assets of the Sto. Nino project was to be distributed upon

dissolution evidences that it was not a loan but an investment. There

was also the absence of a collateral which negated a loan agreement.


23/85

INCOME TAX

REPUBLIC ACT 9856 --- REAL ESTATE INVESTMENT TRUST (TAXINCENTIVES)

!!! The taxable net income of REITs is the gross income under Section 32less (a) the deductions under Section 34 AND (b) dividends

distributed by the REIT out of its distributable income provided it (a)maintains its status as a public company; (b) maintains the listedstatus of the investor securities (shares issued by the REIT); and (c)distributes at least 90% of its distributable income.

!!! Other tax rules:

Not subject to the MCIT Income payments to REIT are subject to a lower CWT of 1%

Sale of real property to REITs subject to DST reduction of 50%

Dividends received by an OFW from the REIT is exempt from the10% WT for the first 7 years of the law.

VAT is imposed on sale of real property by the REIT but not of itssecurities as it is not considered a dealer in securities


24/85

INCOME TAX

REPUBLIC ACT NO. 9994 --- ADDITIONAL BENEFITS TO SENIORCITIZENS (TAX BENEFITS)

!!! The following transactions with senior citizens are exempt from VAT (asidefrom the 20% discount):

Professional fees of physicians, licensed health workers

Purchase of medicines

Medical and dental services and laboratory fees

Fare for any land transportation

Fare for domestic air and sea services

Utilization of hotels and similar lodging establishments Admission fees on theaters, concert halls, circuses, etc.

Funeral and burial services


25/85

INCOME TAX

!!! Discounts given are still considered as tax deductions and NOT tax credits

!!! Employment of senior citizens will entitle employer to additional tax

deduction of 15% of total amount paid as salaries and wages to seniorcitizens provided that the employment lasts for at least 6 months

!!! Realty tax holiday for the first 5 years is granted to those establishing foster

care facilities


26/85

INCOME TAX

REPUBLIC ACT NO. 10026 --- TAX EXEMPTION TO LOCAL WATERDISTRICTS

!!! Local water districts are now exempt from income taxes under Section 27provided that the amount saved by virtue of the exemption is to be used forcapital equipment expenditure to expand water services coverage

!!! All unpaid taxes starting August 13, 1996 are condoned provided (1) the BIRestablishes financial incapacity of the LWD and (2) the LWD submits toCongress a program of internal reforms.


27/85

INCOME TAX

REPUBLIC ACT NO. 9504 --- TAX EXEMPTION OF MINIMUM WAGEEARNES AND INCREASING PERSONAL/ADDITIONAL EXEMPTIONS /CHANGE IN OSD

!!! Minimum wage earners shall be exempt from income tax on their taxable

income including holiday pay, overtime, night shift differential pay, andhazard pay

!!! Increases the amount of personal exemption for all individuals to a fixedamount of P50,000.00 and the additional exemption toP25,000.00 for eachdependent, not exceeding four (4)

!!! Amends Section 34(L) to increase to 40% of gross sales or receipts theOperational Standard Deduction (OSD) allowed to individuals (exceptnonresident aliens) engaged in business or earning income in the exerciseof their profession

!!! Now allow corporations (except nonresident foreign corporations) to claim

OSD, instead of itemized deductions, in an amount not exceeding 40% oftheir gross income.


28/85

INCOME TAX

REPUBLIC ACT NO. 9505 --- PERSONAL EQUITY AND RETIREMENTACCOUNT (PERA)

!!! Contributor is given an income tax credit of 5% of the total PERA

contribution. There can be no refund of the said tax credit arising from thePERA contributions. The employer may contribute an amount allowed asmaximum which shall be allowed as a deduction to the employers grossincome.

!!! All income earned from the investments and reinvestments of the

maximum amount (P100,000 per year; if married, each spouse allowedP100,000 maximum; if overseas Filipino, maximum contribution is doublethe allowable maximum amount) is tax exempt. A Contributor has theoption to contribute more than the maximum amount but the excess shallno longer be entitled to the 5% tax credit.


29/85

ESTATE TAX

DIZON in his capacity as Administrator of deceased Fernandez vs.COMMISSIONER OF INTERNAL REVENUE

There were claims against the estate which the BIR contested stating that loweramounts were paid as compromise payments during the settlement of the

estate and these amounts should be what will be considered as deductions inarriving at the net estate.

??? Will the compromise amounts be the amounts considered asdeductions to the gross estate?

!!! NO. The deductions allowable are the amounts determined at thetime of death. Post-death developments are not material indetermining the amount of deduction. Thus, the Court applied thedate-of-death valuation rule which is the US rule on deductions andwhich is applicable also in the Philippines. The amount deductible is thedebt which could have been enforced against the deceased in hislifetime.


30/85

VALUE ADDED TAX

COMMISSIONER OF INTERNAL REVENUE vs. SM PRIME HOLDINGS,INC.

??? Are the gross receipts derived by operators or proprietors ofcinema/theater houses from admission tickets subject to VAT?

!!!NO.While (1) the enumeration under Section 108 on the VAT-taxableservices is not exhaustive and (2) the said list includes the lease ofmotion picture films, films, tapes and discs, the said activity however isnot the same as showing or exhibition of motion pictures or films. Thus,since the showing or exhibition of motion pictures or films is not in theenumeration, the CIR must show that it falls under the phrase similar

services.The repeal of the Local Tax Code by the LGC of 1991 is not a legal basisfor the imposition of VAT on the gross receipts of cinema/theateroperators or proprietors derived from admission tickets. The removal ofthe prohibition (on the national government to tax certain activities)under the Local Tax Code did not grant nor restore to the nationalgovernment the power to impose amusement tax on cinema/theater

operators or proprietors. Neither did it expand the coverage of VAT.


31/85

VALUE ADDED TAX

!!! Since the imposition of a tax is a burden on the taxpayer, it cannot be

presumed nor can it be extended by implication. A law will not be

construed as imposing a tax unless it does so clearly, expressly, and

unambiguously. As it is, the power to impose amusement tax oncinema/theater operators or proprietors remains with the local

government.


32/85

VALUE ADDED TAX

TAMBUNTING PAWNSHOP, INC. vs. COMMISSIONER OF INTERNALREVENUE

Petitioner was assessed for deficiency VAT and DST on the premise that, for theVAT, it was engaged in the sale of services.

??? (1) Is Petitioner liable for the VAT?

(2) Can the imposition of surcharge and interest be waived onthe imposition of deficiency DST?

!!! (1)

NO.Since Petitioner is considered a non-bank financial intermediary, it

is subject to 10% VAT for the tax years 1996 to 2002 but since the collectionof VAT from non-bank financial intermediaries was specifically deferred bylaw, Petitioner is not liable for VAT during these tax years. With the fullimplementation of the VAT system on non-bank financial intermediariesstarting January 1, 2003, Petitioner is liable for 10% VAT for said tax year.And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioneris no longer liable for VAT but it is subject to percentage tax on gross

receipts from 0% to 5%, as the case may be.


33/85

VALUE ADDED TAX

!!! (2) YES.Petitioner's argument against liability for surcharges andinterest that it was in good faith in not paying documentary stamp

taxes, it having relied on the rulings of respondent CIR and the CTA that

pawn tickets are not subject to documentary stamp taxes was found

to be meritorious. Good faith and honest belief that one is not subjectto tax on the basis of previous interpretations of government agencies

tasked to implement the tax law are sufficient justification to delete the

imposition of surcharges and interest.


34/85

VALUE ADDED TAX

FORT BONIFACIO DEVELOPMENT CORPORATION vs.COMMISSIONER OF INTERNAL REVENUE

Petitioner was a real estate developer that bought from the nationalgovernment a parcel of land that used to be the Fort Bonifacio military

reservation. At the time of the said sale there was as yet no VAT imposed soPetitioner did not pay any VAT on its purchase. Subsequently, Petitioner soldtwo parcels of land to Metro Pacific Corp. In reporting the said sale for VATpurposes (because the VAT had already been imposed in the interim), Petitionerclaimed presumptive input VAT corresponding to its inventory of land. The BIRdisallowed the claim of presumptive input VAT and thereby assessed Petitionerfor deficiency VAT.

??? Is Petitioner entitled to claim the transitional input VAT on itssale of real properties given its nature as a real estate dealerand if so (i) is the transitional input VAT applied only tothe improvements on the real property or is it applied on thevalue of the entire real property and (ii) should there have beena previous tax payment for the transitional input VAT to be

creditable?


35/85

VALUE ADDED TAX

!!!YES. Petitioner is entitled to claim transitional input VAT based on thevalue of not only the improvements but on the value of the entire realproperty and regardless of whether there was in fact actual paymenton the purchase of the real property or not.

The amendments to the VAT law do not show any intention to makethose in the real estate business subject to a different treatment fromthose engaged in the sale of other goods or properties or in any othercommercial trade or business. On the scope of the basis fordetermining the available transitional input VAT, the CIR has no powerto limit the meaning and coverage of the term "goods" in Section 105of the Tax Code without statutory authority or basis. The transitional

input tax credit operates to benefit newly VAT-registered persons,whether or not they previously paid taxes in the acquisition of theirbeginning inventory of goods, materials and supplies.


36/85

VALUE ADDED TAX

COMMISSIONER OF INTERNAL REVENUE vs. SEKISUI JUSHIPHILIPPINES, INC.

Sekisui Jushi is a PEZA entity engaged in manufacture and export ofstrapping bands and other packaging materials seeking for refund of

unutilized input taxes.

??? Being a PEZA exporter, can Petitioner claim its unutilized inputVAT?

!!! YES. PEZA entities can avail of two alternative or subsequent

incentives of ITH and 5% GIE. It is only in the latter where the VAT is notimposed on the PEZA entity on its sales. Being under ITH, it will besubject to VAT on sales and should VAT-register. However, (1) sales tothe PEZA entity, regardless of incentive availed, is zero-rated on thepart of the seller since PEZA is considered foreign soil and thus salesto them are considered as export sales and (2) if the PEZA entity is anexporter, its input VAT are subject to refund not by virtue of its PEZA

status (and thus regardless of whether its at 5% GIE or ITH) but due tothe nature of its transactions (i.e., export sales).


37/85

VALUE ADDED TAX

COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES,INC.

National Development Corporation (NDC), in pursuance of the government-mandated plan of privatization, sold to Respondent 5 of its ships.

??? Is the sale of the ships by NDC subject to VAT?

!!! NO. The sale is exempt for being an isolated transaction. Therequirement of the sale being in the course of trade or business ofthe seller is indispensable and the seller must be treated as having

done so not just from time to time but all the time. If the VAT isimposed on isolated transactions, there would be less chance of beingable to recover the VAT on its sale since no input VAT may have beenpassed-on to the seller given the nature of the transaction as notdoing business. Likewise, the enumeration of what are deemed saledoes not modify the requirement of the sale being in the ordinarycourse of trade or business and is thus irrelevant.


38/85

VALUE ADDED TAX

COMMISSIONER OF INTERNAL REVENUE vs. BURMEISTER ANDWAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC.

A foreign consortium, parent company of Burmeister, entered into an O&Mcontract with NPC. The foreign entity then subcontracted the actual O&M to

Burmeister. NPC paid the foreign consortium a mixture of currencies while theconsortium, in turn, paid Burmeister foreign currency inwardly remitted into thePhilippines. BIR did not want to grant refund since the services are not destinedfor consumption abroad (or the destination principle).

??? Are the receipts of Burmeister entitled to VAT zero-ratedstatus?

!!! PARTIALLY.Respondent is entitled to the refund prayed for BUTONLY for the period covered prior to the filing of CIRs Answer in theCTA.

The claim has no merit since the consortium, which was the recipientof services rendered by Burmeister, was deemed doing business within

the Philippines since its 15-year O&M with NPC can not be interpretedas an isolated transaction.


39/85

VALUE ADDED TAX

!!! In addition, the services referring to processing, manufacturing,repacking and services other than those in (1) of Sec. 102 bothrequire (i) payment in foreign currency; (ii) inward remittance; (iii)accounted for by the BSP; AND (iv) that the service recipient is doingbusiness outside the Philippines. The Court ruled that if this is not

the case, taxpayers can circumvent just by stipulating payment inforeign currency.

The refund was partially allowed since Burmeister secured a rulingfrom the BIR allowing zero-rating of its sales to foreign consortium.However, the ruling is only valid until the time that CIR filed itsAnswer in the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact sincenone of the instances in Section 246 (bad faith, omission of facts,etc.) are present.


40/85

VALUE ADDED TAX

COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE HEALTHCARE PROVIDERS, INC.

PhilHealth is a health maintenance organization (HMO). On June 1988, the BIRissued a VAT ruling stating that PhilHealth, as a provider of medical services, is

exempt from VAT. The CTA however ruled that PhilHealth is a service contractorsubject to VAT since it does not actually render medical services but merelyacts as a conduit between members and accredited hospitals.

??? Are PhilHealths services considered medical services toentitle it to VAT exemption?

!!!NO.But PhilHealth may exempt from VAT due only to a previouslyissued ruling.

The VAT-exempt transaction involved is medical, dental, hospital andveterinary services except those rendered by professionals. Given thatPetitioner is not the entity providing medical services and only (i) actsas a conduit; (ii) arranges for the provision of health care; (iii) contracts

services of doctors, etc.; and (iv) contracts and negotiates withhospitals, its services are not VAT-exempt.


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VALUE ADDED TAX

!!! However, the Court ruled that the revocation of the 1988 ruling can not

be applied retroactively since it will prejudice the taxpayer who has not

committed any of the acts (i.e., bad faith, omission of facts, etc.) to

merit retroactivity of rulings. The fact that the term health

maintenance organization only took on a technical definition in 1995

upon the passage of the National Health Insurance Act supports

PhilHealths good faith contention.


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REMEDIES

COMMISSIONER OF INTERNAL REVENUE vs. FIRST EXPRESSPAWNSHOP COMPANY, INC.

CIR issued assessment notices against Respondent for deficiency income tax,VAT and documentary stamp tax on deposit on subscription and on pawn

tickets. Respondent filed its written protest on the assessments. When CIR didnot act on the protest during the 180-day period, respondent filed a petitionbefore the CTA.

??? Has Respondents right to dispute the assessment in the CTAprescribed?

!!!NO.The assessment against Respondent has not become final andunappealable. It cannot be said that respondent failed to submitrelevant supporting documents that would render the assessment finalbecause when respondent submitted its protest, respondent attachedall the documents it felt were necessary to support its claim. Further,CIR cannot insist on the submission of proof of DST payment because

such document does not exist as respondent claims that it is not liableto pay, and has not paid, the DST on the deposit on subscription.


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REMEDIES

!!! The term "relevant supporting documents" are those documents

necessary to support the legal basis in disputing a tax assessment as

determined by the taxpayer. The BIR can only inform the taxpayer to

submit additional documents and cannot demand what type of

supporting documents should be submitted. Otherwise, a taxpayer will

be at the mercy of the BIR, which may require the production of

documents that a taxpayer cannot submit. Since the taxpayer is

deemed to have submitted all supporting documents at the time of

filing of its protest, the 180-day period likewise started to run on that

same date.


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REMEDIES

LUCAS ADAMSON vs. COURT OF APPEALS

A deficiency tax assessment was issued against Petitioners relating to theirpayment of capital gains tax and VAT on their sale of shares of stock and parcelsof land. Subsequent to the preliminary conference, the CIR filed with the

Department of Justice her Affidavit of Complaint against Petitioners. The Courtof Appeals ultimately ruled that, in a criminal prosecution for tax evasion,assessment of tax deficiency is not required because the offense of tax evasionis complete or consummated when the offender has knowingly and wilfully fileda fraudulent return with intent to evade the tax.

??? (1) Has the CIR issued an assessment?

(2) Must a criminal prosecution for tax evasion be preceded bya deficiency tax assessment?

(3) Does the CTA have jurisdiction on the case?


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REMEDIES

!!! (1) NO. The recommendation letter of the Commissioner cannot beconsidered a formal assessment as (a) it was not addressed to thetaxpayers; (b) there was no demand made on the taxpayers to pay thetax liability, nor a period for payment set therein; (c) the letter wasnever mailed or sent to the taxpayers by the Commissioner. It was onlyan affidavit of the computation of the alleged liabilities and thus merelyserved as prima facie basis for filing criminal informations.

(2) YES. When fraudulent tax returns are involved as in the cases atbar, a proceeding in court after the collection of such tax may be begunwithout assessment considering that upon investigation of theexaminers of the BIR, there was a preliminary finding of grossdiscrepancy in the computation of the capital gains taxes due from the

transactions. The Tax Code is clear that the remedies may proceedsimultaneously.

(3) NO. While the laws governing the CTA have expanded thejurisdiction of the Court, they did not change the jurisdiction of the CTAto entertain an appeal only from a final decision of the Commissioner,or in cases of inaction within the prescribed period. Since in the casesat bar, the Commissioner has not issued an assessment of the tax

liability of the Petitioners, the CTA has no jurisdiction.


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REMEDIES

COMMISSIONER OF INTERNAL REVENUE vs. ENRON SUBIC POWERCORPORATION

The BIR assessed Enron which countered by filing a Petition for Review with theCTA stating that the assessment disregarded the provisions of the Tax Code andof RR No. 12-99, when the assessment failed to provide the legal and factualbases of the assessment. The CTA and CA ruled that the assessment notice mustnot only refer to the supporting revenue laws or regulations for the assessmentbut must also justify their applicability to the factual milieu of the assessment.

??? Is the disputed assessment valid?

!!! NO.The assessment is not valid. Although the revenue examinersdiscussed their findings with Respondents representative during the

pre-assessment stage, the same, together with the Preliminary Five-DayLetter and Petitioners Annex G, were not sufficient to comply with the

procedural requirement of due process. The Tax Code provides that ataxpayer shall be informed (and not merely notified as was therequirement before) in writing of the law and the facts on which the

assessment is made; otherwise, the assessment shall be void. The use ofthe word shall indicates the mandatory nature of the requirement.


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REMEDIES

COMMISSIONER OF INTERNAL REVENUE vs. FMF DEVELOPMENTCORPORATION

CIR assessed FMF for taxable year 1995. On February 9, 1999, FMF Presidentexecuted a waiver of the 3-year prescriptive period to assess. When FMFreceived Petitioners assessment notice, it protested the same alleging

prescription based on its position that the waiver executed was invalid.

??? Has the CIRs right to assess prescribed?

!!!YES.The requirements for a valid waiver as laid down in RMO 20-90are mandatory to give effect to Section 222 of the Tax Code.Specifically, the flaws in the waiver executed by FMF were as follows:(a) it was not signed by the Commissioner even if the assessment ininvolves more than P1 million; (b) there is no stated date of acceptanceby the Commissioner or his representative; and (c) the taxpayer wasnot furnished a copy of the BIR-accepted waiver showing the date ofacceptance to show that it occurred prior to the lapse of the 3-yearperiod. Another defect discussed in the earlier case ofPhilippine

Journalists, Inc. is the failure to specify the validity period/duration ofthe waiver.


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REMEDIES

JUDY ANNE L. SANTOS vs. PEOPLE OF THE PHILIPPINES andBUREAU OF INTERNAL REVENUE

The CIR referred to the Department of Justice (DOJ) Secretary, for preliminaryinvestigation and filing of an Information in court, the case against Petitioner for

alleged violation of the Tax Code. The CIR alleged that Petitioner substantiallyunderdeclared her income. The DOJ filed an Information against Petitioner whothen filed with the CTA division a Motion to Quash the Information filed againsther on the grounds of (a) lack of authority of the prosecuting attorney to file theInformation, and (b) violation of Petitioners constitutional rights to due processand equal protection of the laws, when similar charges against ReginaEncarnacion Velasquez were dismissed by the DOJ on the ground thatVelasquezs tax liability was not yet fully determined when the charges were

filed against her. The CTA denied the Motion to Quash. Petitioner subsequentlyfiled the Petition for Review with the CTA en banc.

??? Is the resolution of the CTA First Division denying PetitionersMotion to Quash a proper subject of an appeal to the CTA enbanc?


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REMEDIES

!!! NO. The denial of a Motion to Quash is an interlocutory order which isnot the proper subject of an appeal or a petition for certiorari. TheRevised Rules of Court provide that only final judgments or orders shallbe subject to appeal to avoid multiplicity of suits. The test to determinewhether an order or judgment is interlocutory or final is whether theorder or judgment leaves something to be done in the trial court with

respect to the merits of the case. If it does, it is interlocutory; if it doesnot, it is final. The remedy of the accused from the denial of her Motionto Quash is to proceed with the trial of the case in court, and if final

judgment is rendered against her, she could then appeal, and uponsuch appeal, present the questions which she sought to be decided bythe appellate court in a petition for certiorari.

The Court also upheld the CTAs findings on the two points raised by

the Petitioner, viz: (1) the filing of the Information was approved by theCommissioner (which is the only requirement as the law does notprescribe the form of approval) as indicated in his letter to the DOJSecretary and (2) the more appropriate recourse Petitioner shouldhave taken, given the dismissal of similar charges against Velasquez,was to appeal to the DOJ Secretary the Resolution of the Office of theState Prosecutor recommending the filing of an Information against

her.


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REMEDIES

FAR EAST BANK AND TRUST COMPANY vs. COMMISSIONER OFINTERNAL REVENUE

FEBTC, as a trustee of various retirement plans, filed for the refund for the taxeswithheld on the interest income from various investments. FEBTC had an existingcase filed with the CTA which was filed in advance. To cover the additional claims

for refund, FEBTC filed a Supplemental Petition to cover the instant claims sincethe issues are the same. CTA denied motion to admit Supplemental Petition andasked that a new Petition be filed.

??? Will the filing of the Supplemental Petition be sufficient to tollthe prescriptive period for the claim

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