Survey of Cases Taxation_Montero

7/24/2019 Survey of Cases Taxation_Montero

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Updates onTaxation

2015

+AMDG
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GENERAL PRINCIPLESLa Suerte Cigar & Cigarette Factory vs. CIR

The cigarette manufacturers contend that for a long timeprior to the transactions involved in the case, the CIR hadnever subjected their purchases and importations of stemmedleaf tobacco to excise taxes.

??? Will an erroneous interpretation by a BIR officer based ona misapprehension of law put the government in estoppel?

!!! NO. Prolonged practice of the BIR in not collecting specific

tax on stemmed leaf tobacco cannot validate what is anotherwise erroneous application and enforcement of the law.The government is never estopped from collecting legitimatetaxes because of the error committed by its agents. The BIR isnot precluded from making a new interpretation of the law,especially when the old interpretation was flawed.

+AMDG


3/120

GENERAL PRINCIPLESAngeles University Foundation vs. City ofAngeles

Petitioner is a non-stock, non-profit educational foundation. Itreceived a Building Permit Fee assessment for the construction ofthe AUF Medical Center but claimed exemption from the same aswell as from other permits and fees. Respondent disputed theclaimed exemption by stating that the impositions are regulatoryin nature and not taxes from which Petitioner is exempt under the

said law.

??? Is the building permit fee a tax from which Petitioner isexempt?

!!! It is a REGULATORY FEE. The DPWH has in fact issued

implementing rules which provide the bases for the assessment offees and Petitioner has failed to show that they were arbitrarilydetermined or unrelated to the activity being regulated. Neitherhas there been proof that the fee was unreasonable or in excessof the cost of regulation or inspection. The Court added that evenif there was incidental revenue, the same is deemed not tochange the nature of the charge. Thus, the City of Angeles was

justified in its assessment.

+AMDG


4/120

GENERAL PRINCIPLESCIR vs. Pilipinas Shell Petroleum Corporation

Shell filed a claim for refund for excise taxes it paid on salesof gas and fuel oils to various international carriers. The Courtinitially denied the claims but the Respondent filed a Motionfor Reconsideration

??? Is Shell entitled to refund the excise taxes?

!!! YES. Section 135 is concerned with the exemption of thearticle itself and not the ostensible exemption of theinternational carrier-buyer. In addition, the failure to grant

exemption will cause adverse impact on the domestic oilindustry (similar to the practice of tankering) as well as resultto violations of international agreements on aviation. Thus,Respondent, as the statutory taxpayer who is directly liable topay the excise tax is entitled to a refund or credit for taxespaid on products sold to international carriers. +

AMDG


5/120

GENERAL PRINCIPLESPhilippine Airlines, Inc. vs. CIR

Caltex sold aviation fuel to PAL and included excise taxes in itsbillings. PAL filed for a refund of the excise taxes passed-on to it byCaltex. The claim was based on PALs franchise which confersupon PAL tax exemption on purchases of fuel. The CTA deniedPALs claim using as basis the earlier decision in Silkair.

??? Does PAL have standing to refund the excise taxes passed-onby Caltex?

!!! YES. The case of Silkair is not applicable since PALs franchiseprovides it with tax exemption privileges from both direct and

indirect taxes. While there have been previous cases discussingwhich party is entitled to a refund in the case of excise taxes soldto exempt entities, the Court reiterated the statement in Silkairwhich said that it is primarily the statutory taxpayer which has theright to file the claim. However, the above rule was deemed notto apply in PALs case since the law/franchise clearly grants theparty 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 ofMaceda.

+AMDG


6/120

GENERAL PRINCIPLESDeutsche Bank AG Manila Branch vs. CIR

Petitioner withheld a 15% tax on its remittances to itshead office in Germany using as basis the Tax Codeprovision on BPRT. Believing that it overpaid the BPRTsince the RP-Germany provides for a lower rate of 10%

on branch remittances, the Petitioner filed a refundwith the BIR and subsequently with the CTA. Both theBIR and the CTA denied the claim stating that thebranch office should have filed a tax treaty reliefapplication prior to availing of the preferential treatyrate in view of the existing doctrine in theMirant case.

??? Is Deutsche Bank entitled to the claim for refundeven if it did not file a tax treaty relief application withthe BIR?

+AMDG


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GENERAL PRINCIPLESDeutsche Bank AG Manila Branch vs. CIR

!!! YES. The Court said that the principle of pacta suntservanda requires the performance in good faith oftreaty obligations. Thus, to require that taxpayersmust first comply with an administrative requirement(under RMO 1-2000) is not in consonance with theperformance in good faith. The obligation to complywith a tax treaty must take precedence over theobjectives of the said RMO. In addition, it waspointed out that the prior application becomes

illogical if the premise of the claim was an erroneouspayment since the taxpayer could not have knownit would be entitled to the refund since precisely itwas using a different basis when it paid the taxesdue. +

AMDG


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GENERAL PRINCIPLESSwedish Match Philippines, Inc. vs.Treasurer of the City of Manila

The City of Manila sought to enforce both Sections 14 and 21 ofthe Manila Revenue Code claiming that the former is a tax onmanufacturers, etc. while the latter applies to business subject toexcise, VAT or percentage tax.

??? Will the imposition of both sections amount to invalid doubletaxation?

!!! YES. There is in fact double taxation since both sections arebeing imposed on the same subject matter (privilege of doingbusiness within the city), for the same purpose, by the same taxing

authority, within the same taxing jurisdiction, for the same taxingperiod, and of the same kind or character (a local business taximposed on gross sales or receipts). The Court further said that theLGC provision applicable (Section 143) clearly states that Section143 (h) may be imposed only on businesses that are subject toexcise tax, VAT, and percentage tax and that are not otherwisespecified in the preceding paragraphs.

+AMDG


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GENERAL PRINCIPLESLand Bank of the Philippines vs. Cacayuran

The Municipality of Agoo, La Union passed a resolutionauthorizing its mayor to obtain a loan from the Petitioner andmortgage as collateral a portion of the Agoo plaza. As additionalsecurity, the municipality assigned a portion of its internal revenueallotment (IRA) in favor of the Petitioner. The loan proceeds wereused 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 nullificationof the loan?

!!! YES. The two requisites for a taxpayers suit have been complied

with. First, even if the construction of the commercial centerwould be sourced from the loan proceeds from the Petitioner, thesaid funds were already converted into public funds upon receiptby the municipality, and the assignment of the IRA likewisecharacterized the funds as public. Second, since the plaza is forpublic use, the Respondent, like all other Agoo residents, is directlyaffected. Besides it has been held that as long as taxes areinvolved, people have a right to question government contracts

even if they are not party to the contract/s.

+AMDG


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INCOME TAXCIR vs. Julia Campos Benedicto

After the PCGG filed cases to recover the ill-gotten wealth ofthe late husband of the Respondent, a compromise agreementwas reached wherein the parties agreed that Swiss casesinvolving Respondents husbands bank deposits would beterminated in exchange for the PCGG unfreezing all of thedeposits so that Benedicto could get his 49% share from the

deposits. The CIR assessed the amount of the unfrozen accountsclaiming that the same was income subject to tax.

??? Did the Respondents husband realize income as a result ofthe compromise agreement which led to him receiving 49% of thedeposits?

!!! NO. The 49% was in no way income because the Respondentshusband did not gain any wealth nor did he become any richerthan he was before as in fact his wealth diminished to the extentof the 51% which he ceded to the PCGG. The 49% was a merereturn of capital not subject to income tax. The Court ruled that itis only the interest income of the deposits which may besubjected to income tax as the same is the only gain.

+AMDG


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INCOME TAXCIR vs. Spouses Manly

The CIR filed criminal charges against the spouses claimingthat there was unreported income after applying theexpenditure method of reconstructing income which is doneby reconstructing a taxpayers income by deducting theaggregate yearly expenditures from the declared yearly

income. This method is resorted to when the recordssubmitted by taxpayers are inadequate or inaccurate.

??? Did the CIR erroneously base the criminal charges on itsuse of the expenditure method?

!!! NO. The Court ruled that there is probable cause to indictrespondent for tax evasion since the method clearly yielded ahuge disparity between respondents reported income andtheir cash acquisitions. The use of the expenditure methodwas thus upheld.

+AMDG


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INCOME TAXOfficemetro Philippines, Inc. vs. CIR

??? Are condominium dues, membership fees andother assessment/charges considered as income?

!!! NO. The said payments which are merely held intrust and which are to be used solely foradministrative expenses in implementing theirpurposes (i.e., safeguard the welfare of the owners,provide utilities and amenities, etc.) and from which

the corporation could not realize any gain or profitas a result of their receipt thereof, must not beincluded in said corporations gross income. As such,payments of the said dues are not subject towithholding taxes.

+AMDG


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INCOME TAXSMI-Ed Philippines Technology, Inc. vs. CIR

Petitioner constructed buildings and purchasedmachineries for its microprocessor factory within the PEZAzone. However, the company failed to commence operationsand it then sold its machineries to another PEZA entity,subjecting the sale to the 5% preferential tax applicable tosome PEZA enterprises. Petitioner thereafter filed for a refund

of the taxes paid on the sale but the BIR failed to act on theclaim and thus an appeal was filed with the CTA. The CTAthen decided that the Petitioner was liable for capital gainstax (CGT) on the sale. The company objected to the CTAsfinding claiming that it cannot on its own make theassessment against the Petitioner.

??? (1) Was the sale subject to CGT?

(2) Did the CTA commit an error when it made anassessment?

(3) Has the right to assess by the BIR prescribed? +AMDG


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INCOME TAXSMI-Ed Philippines Technology, Inc. vs. CIR

!!! (1) The sale was subject to both CGT and ordinaryincome tax. As the Petitioner did not do business, it was notentitled to the incentives under the PEZA law. The Court alsopointed out that the CGT imposed on individuals andcorporations is different in that the CGT for individuals isimposed on all real properties while CGT on corporations is

imposed only on sale of lands and/or buildings. The incomefrom the sale of machineries was thus subject to the regularcorporate income tax.

(2) The CTA acquired jurisdiction because of the inactionof the BIR. As such, the CTA was not making an assessmentbut was merely determining the proper category of tax thepetitioner should have paid which became an incidental

matter.(3) YES. The filing of the refund by the taxpayer was not a

bar to the BIRs exercise of its assessment powers. Since, morethan 10 years have lapsed from the filing of the returns, theright to assess has lapsed. +

AMDG


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INCOME TAXDPWH vs. Soriano

??? In expropriation proceedings, which party isliable for the taxes due on the transfer of theproperty taken?

!!! The buyer-owner is still the party liable for the CGTin expropriation proceedings, although the saidliability is enforced is via a withholding tax obligationimposed on DPWH as the withholding agent.

However, the DST is a liability of the governmentsince the DPWHs guide in acquiring propertythrough expropriation clearly provides that thegovernment should shoulder this tax. +

AMDG


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INCOME TAXBanco de Oro vs. CIR

The BIR initially issued a BIR ruling in 2001to CODE-NGO confirming that the PEACe Bonds are not depositsubstitutes and as such were not subject to withholdingtax. In 2011, another ruling was issued in reply to thequery of the Secretary of Finance this time stating that

the bonds are in fact deposit substitutes since thedetermination of the 20 or more lenders is at any onetime which means that it is the entire term of the bondand not merely the point of origination or issuance.

??? (1) Does the Supreme Court have jurisdiction?

(2) At what point is the 20 lender rule determined?

(3) Is the interest from the bonds exempt under theexclusion provision on trading gains?

+AMDG


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INCOME TAXBanco de Oro vs. CIR

!!! (1) YES. While BIR rulings are generally reviewable by theSecretary of Finance, the rule on exhaustion of administrativeremedies does not apply since (1) it involved a pure questionof law and (2) an appeal to the SOF is deemed futile becausethe request for ruling in 2011 was filed by the SOF himself.

(2) The phrase at any one time for purposes of determiningthe 20 or more lenders would mean every transactionexecuted in the primary and secondary market in connectionwith the sale of the bonds. The Court also mentioned thatincome from debt instruments that are not deposit substitutesare nevertheless subject to the regular income tax rates.

(3) NO. The term gains as used in Section 32 does notinclude interests which represents forbearance for the use ofmoney. The exclusion covers gains representing the differencebetween the selling price and the purchase price of thebonds in cases where the said securities are transferred/sold. +

AMDG


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INCOME TAXCIR vs. St. Lukes Medical Center, Inc.

St. Lukes is a non-stock non-profit hospital. The BIR assessed St.Lukes based on the argument that Section 27 (B) of the Tax Codeshould apply to it and hence all of St. Lukes income should be subjectto the 10% tax therein as it is a more specific provision and shouldprevail over Section 30 which is a general provision. St. Lukescountered by saying that its free services to patients was 65% of itsoperating 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 ofthe Tax Code and should instead be subject to a preferential rate of10% on its entire income?

!!! NO. The enactment of Section 27 (B) does not remove the possibleincome tax exemption of proprietary non-profit hospitals. The onlything that Section 27 (B) captures (at 10% tax) in the case of qualifiedhospitals is in the instance where the income realized by the hospitalfalls under the last paragraph of Section 30 such as when the entityconducts any activity for profit. The revenues derived by St. Lukesfrom pay patients are clearly income from activities conducted forprofit.

+AMDG


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INCOME TAXING Bank N.V. vs. CIR

Petitioner accrued some bonuses to be paid to itsemployees in 1996 and 1997 and claimed the same asdeductible expenses but did not withhold taxes claiming thatthe same were only paid in 1997 and 1998.

??? Is Petitioner liable for deficiency withholding tax onaccrued bonuses for taxable years 1996 and 1997?

!!! YES. The Tax Code expressly requires as a condition fordeductibility of an expense that the tax required to bewithheld on the amount paid or payable is shown to have

been remitted to the BIR by the withholding agent. Theobligation of the payor-employer to deduct and withhold therelated withholding tax arises at the time the income was paidor accrued or recorded as an expense in the payor-employers books, whichever comes first. As Petitioneraccrued or recorded the bonuses as a deduction in 1996 and1997, its obligation to withhold arose in those years and notlater (1997 and 1998) when it actually paid the bonuses.

+AMDG


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INCOME TAXTambunting Pawnshop vs. CIR

Petitioner claimed losses as deductions arising from theauction sales it conducted. To prove the same, Petitionersubmitted in evidence its Rematado book containing arecord of items foreclosed and Subasta book containinga record of the auction sale of pawned items foreclosed.

??? Is Petitioner entitled to the losses as deductions?

!!! NO. Petitioner did not properly prove its losses since theSubasta books did not reflect the true amounts of theproceeds and the Rematado books did not reflect the

capital since the only amounts therein were those given tothe pawnees. The losses claimed from fire and theft werealso disallowed since while certifications from the policeand fire departments and a list of the properties lost weresubmitted, the Petitioner did not submit sworndeclarations. +

AMDG


21/120

INCOME TAXManila Memorial Park, Inc. vs. Secretaries of DSWD &DOF

??? Is the law providing that the 20% senior citizen discountmay be claimed only as a tax deduction unconstitutional?

!!! NO. The law is a legitimate exercise of police power whichhas general welfare for its object. This is despite the claim ofPetitioner that the law has the effect of imposing upon privateentities the burden of partly subsidizing a governmentprogram. Even if the current rule does not provide the entitiesproviding discounts a peso for peso reimbursement, nopayment of just compensation is warranted for being anexercise of police power and not eminent domain, which is asimilar characterization for similar rules such as price controllaws.

The law has also not been shown to be unreasonable,oppressive or confiscatory and doe not necessarily affectcompanies rates of return since (1) not all customers aresenior citizens; (2) the level of profit margin of the goods andservices offered to the public; and (3) the entities ability torecoup the discounts through higher mark-ups or from other

products not subject to discounts.

+AMDG


22/120

INCOME TAXPAGCOR vs. BIR

??? Did Republic Act 9337 have the effect of totallywithdrawing the income tax exemption of PAGCOR?

!!! NO. The income of PAGCOR from its gaming

operations conducted under its franchise is still subjectonly to the 5% franchise tax under PD 1869 while its incomefrom other related services (such as licensing income,private internet casino gaming, etc.) is subject tocorporate income tax based on R.A. 9337. The Court ruledthat the grant of exemption under R.A. 8424 was

unnecessary since PAGCORs exemption under itsfranchise was retained as having emanated from aspecial law. It was only Petitioners income from otherrelated services that was affected by the provisions ofboth R.A. 8424 (grant of exemption) and 9337 (withdrawalof exemption).

+AMDG


23/120

INCOME TAXCIR vs. Far East Bank & Trust Company

Far East Bank filed a claim for refund of overpaidcreditable withholding taxes which included CWT onrental income allegedly earned by the Petitioner as lessor.

???Can a claim for refund be granted notwithstandingclaimants failure to show in the return that that incomeupon which the creditable taxes withheld were based wasin 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 withcopies of the CWT certificates; and (3) showing that theincome received was declared as part of gross income.Here the Petitioner failed to prove (3) as the return in factshowed Not Applicable under the portion referring toRental Income. In addition, some certificates were likewise

not submitted as evidence.

+AMDG


24/120

INCOME TAXWeinbrenner & Inigo Insurance Brokers, Inc. vs. CIR

??? Is the submission and presentation of the quarterly ITRsof the succeeding quarters of a taxable yearindispensable in a claim for refund?

!!! NO. While presenting the succeeding quarterly ITRs

significantly help claimants cause in proving that it did notcarry-over the excess income tax, they are not absolutelyneeded as Section 76 of the Tax Code does not mandateit. Also, the 3 requirements (discussed in the Far East Bankcase) for a claim of overpaid income tax does not includepresenting the subsequent quarterly returns. The Court saidthat the presentation of the annual ITR would suffice inproving that prior years excess credits were not utilized forthe current taxable year.

+AMDG


25/120

INCOME TAXCIR vs. Smart Communications, Inc.

Smart entered into an Agreement with Prism, anonresident foreign corporation domiciled in Malaysia,whereby Prism will provide programming and consultancyservices to Smart. Thinking that the payments to Prism wereroyalties, Smart withheld 25% under the RP-Malaysia TaxTreaty. Smart then filed a refund with the BIR alleging thatthe payments were not subject to Philippine withholding

taxes given that they constituted business profits paid toan entity without a permanent establishment in thePhilippines.

??? Does Smart have the right to file the claim for refund?

!!! YES. The Court reiterated the ruling in Procter & Gamblestating that a person liable for tax has sufficient legalinterest to bring a suit for refund of taxes he believes wereillegally collected from him. Since the withholding agent isan agent of the beneficial owner of the payments (i.e.,nonresident), the authority as agent is held to include thefiling of a claim for refund. The Silkaircase was heldinapplicable as it involved excise taxes and notwithholding taxes.

+AMDG


26/120

INCOME TAXUnited Airlines, Inc. vs. CIR

Petitioner used to be an online carrier butceased operating cargo flights from the Philippinesstarting 2001. It is now an offline international aircarrier but has a general sales agent in the

Philippines which sells passage documents for its off-line flights for carriage of passengers and cargo. Itfiled a claim for refund on the Gross Philippine Billings(GPB) tax it paid. The CTA ruled that Petitioner wasnot liable for the GBP but was liable to pay 32% taxon its net income derived from the sales of passagedocuments in the Philippines.

??? Is Petitioner liable for either the GPB orthe 32% tax? +

AMDG


27/120

INCOME TAXUnited Airlines, Inc. vs. CIR

!!! 32% tax.The Court reiterated the ruling in SouthAfrican Airwaysstating that it is the sale of tickets whichis the revenue-generating activity subject to Philippinetax. The correct interpretation of the applicable rules isthat, if an international air carrier maintains flights to

and from the Philippines, it shall be taxed at the rate of2 1/2% of its Gross Philippine Billings, while internationalair carriers that do not have flights to and from thePhilippines but nonetheless earn income from otheractivities in the country will be taxed at the rate of 32%of such income.

The Court also ruled that to avoid multiplicity of suitsand unnecessary difficulties and expenses the issue ofdeficiency tax assessment be resolved jointly with the itsclaim for refundand doing so does not violate therule against offsetting of taxes.

+AMDG


28/120

INCOME TAXRepublic Act 10653Increasing the 13thmonth pay exclusion

!!! The 13thmonth pay and other benefits exclusion fromgross income has been increased from P30,000 to P82,000.

!!! This will cover other benefits such as productivityincentives and Christmas bonus.

!!! The increased amount applies to bonuses and otherbenefits paid or accrued beginning January 1, 2015.

+AMDG


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INCOME TAXRepublic Act 10378Exemption ofInternational Air Carriers

!!! international air carriers doing business in the Philippinesmay avail of a preferential rate or exemption on the basis of atax treaty or international agreement to which the Philippines

is a signatory or on the basis of reciprocity such that aninternational carrier, whose home country grants income taxexemption to Philippine carriers, shall likewise be exempt fromthe tax on Gross Philippine Billings.

!!! Transport of passengers by international carriers are now

exempt from VAT.

!!! International air and shipping carriers doing business in thePhilippines are now subject to the 3% percentage only on theirgross receipts derived from the transport of cargo and not ontheir transport of passengers.

+AMDG


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INCOME TAXRepublic Act 10026Exemption of LocalWater Districts

!!! Local water districts are now exempt from income taxesunder Section 27 provided that the amount saved byvirtue of the exemption is to be used for capital equipment

expenditure to expand water services coverage

!!! All unpaid taxes starting August 13, 1996 are condonedprovided (1) the BIR establishes financial incapacity of theLWD and (2) the LWD submits to Congress a program ofinternal reforms.

+AMDG


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INCOME TAXRR 01-2015Amendment to De MinimisBenefits

!!! Benefits received by an employee under a CBA andproductivity incentive schemes with a combinedmaximum amount of P10,000 per employee.

+AMDG


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INCOME TAXRMC 51-2014Inurement Prohibition underSection 30

!!! Non-profit under Section 30 means that no net income orasset accrues to or benefits any member or specific person.Thus, the earnings or assets shall not inure to the benefit of anyof its trustees, organizers, officers, members, or any specificperson.

!!! The following are considered inurements:

payment of compensation, salaries, or honorarium to itstrustees or organizers

payment of exorbitant or unreasonable compensation to itsemployees

provision of welfare aid and financial assistance to its

members donation to any person or entity (except those to other entities

with similar purposes)

purchase of goods or services for amounts in excess of fairmarket value from an entity which one of its trustees or officershas an interest

Where upon dissolution its assets are distributed to its trustees,organizers, officers, or members

+AMDG


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INCOME TAXRMC 79-2014Tax Treatment of Stock OptionPlans

!!! The difference between book value/fair market value ofthe shares at the time of the exercise of the option and theprice fixed on the grant date is subject to ---

income tax and withholding tax on compensation if

the grantee is a rank-and-file employee

fringe benefits tax if the grantee occupies asupervisory or managerial position

!!! The transfer of the option is subject to ---

CGT if the same is transferred for a consideration

donors tax if transferred without any consideration

+AMDG


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INCOME TAXRMC 31-2013 --- Taxation of Compensation Income ofPhilippine Nationals and Alien Individuals Employed

by Embassies, International Organizations, etc.

!!! Foreign governments, embassies, diplomatic missions,and international organizations as employers in thePhilippines are immune from being withholding agents onthe salaries of their employees based on international

comity.

!!! However, this immunity does not translate into allemployees of these entities being exempt from incometax. Only the individuals specifically named in the treaties,

international agreements, and laws are exempt fromincome taxes while those not covered are not relieved oftheir duty to report their income and pay the taxes butmust do so on their own. +

AMDG


35/120

INCOME TAXRMC 31-2013 --- Taxation of Compensation Income ofPhilippine Nationals and Alien Individuals Employed

by Embassies, International Organizations, etc.

!!! 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 nationalityand residence --- AUSAID / UN / ILO / FAO-UN / UNESCO /WHO / UNDP.

Philippine nationals claiming exemptions under the above

laws, agreements must file an application for confirmationof tax exemption with the ITAD of the BIR.

The following entities only exempt those that are notPhilippine nationals --- JICA (must be from Japan) RedCross / AUSAID / CIDA / ADB / IMF / IBRD / UNICEF / IRRI /Ford Foundation / Rockefeller Foundation.

+AMDG


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INCOME TAXRR 2-2013Transfer Pricing Guidelines

!!! Critical features of the TP regulations ---

1) The rules apply to cross border and domestictransactions.

2) For purposes of applying the rules, the parties areconsidered related if one participates directly or indirectlyin the management, control or capital of another. Controlrefers to any kind of control, direct or indirect, whetherexercised or not, and shall be assumed if income or

deductions have been arbitrarily shifted.

3) The transactions between related parties must be atarms length otherwise BIR will make adjustments on thebasis of the rules.

+AMDG


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INCOME TAXRR 2-2013Transfer Pricing Guidelines

4) Advance Pricing Arrangement --- either unilateral (onlythe taxpayer and the BIR) or bilateral/multilateral (involvesthe Philippines and one or more treaty partner/s)

5) The documentation requirements need not besubmitted to the BIR but must be retained. The same mustbe contemporaneous which means it exists or is broughtinto existence at the time the associated enterprisesimplement any arrangement that might raise transferpricing issues. The documentation will contain theorganizational structure, nature of business, assumptions,comparability analysis, TP method, application, etc.

6) There are no safe harbor rates/rules in the TP regulations.

+AMDG


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INCOME TAXOther Significant Issuances

!!! RMC 9-2013 --- Provides for the possible income tax andVAT exemption of association dues and income derivedfrom rentals of homeowners associations properties if (i)constituted as an association under RA 9904; (ii) the LGUhaving 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 usedcannot be provided by the said LGU; and (iii) thehomeowners association presents proof that the dues areused for the aforesaid basic services.

!!! RR 12-2012 --- For motor vehicles allowed for use of anemployee, the company providing the same can onlytake up as a deductible expense (via depreciation) theamount representing one vehicle and the value of whichshould not exceed P2,400,000.

+AMDG


39/120

ESTATE TAXDizon vs. CIR

There were claims against the estate which the BIRcontested stating that lower amounts were paid ascompromise payments during the settlement of the estateand these are amounts that should be considered asdeductions in arriving at the net estate.

??? Will the compromise amounts be the amountsconsidered as deductions to the gross estate?

!!! NO. The deductions allowable are the amountsdetermined at the time of death. Post-deathdevelopments are not material in determining the amount

of deduction. Thus, the Court applied the date-of-deathvaluation rule which is the US rule on deductions andwhich is applicable also in the Philippines. The amountdeductible is the debt which could have been enforcedagainst the deceased in his lifetime. +

AMDG


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DONORS TAXMetro Pacific Corporation vs. CIR

Petitioner sold its shares in Bonifacio Land Corporationfor around P400M when the book value of the unlistedshares was at around P850M. The BIR assessed thePetitioner for donors tax on the difference between theconsideration and the book value citing Section 100 of theTax Code. The parties claimed that the donors tax is notdue since it was an ordinary commercial transactionnegotiated in good faith between unrelated parties and

motivated by legitimate business reasons.

??? Is the transfer of the shares subject to donors tax?

!!! YES. The Court upheld the use of the book value of theshares as the fair market value for purposes of applying

Section 100 of the Tax Code. Likewise, the same provisionshows that no exemption/exception is permitted. TheCourt also pointed out that the ruling upholding thePetitioners position cannot be relied upon since it was aruling of first impression which was issued by the AssistantCommissioner and not the CIR herself, in violation ofSection 7 on the non-delegability of the power to issuerulings of first impression.

+AMDG


41/120

VALUE-ADDED TAXMindanao II Geothermal Partnership vs. CIR

??? Is the sale of a fully depreciated motor vehicle anisolated transaction which should not be subject to VAT inthe 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 asan incidental transaction which satisfies the requirement toattract VAT liability. The Court deemed that the sale of themotor vehicle was in the course of its business ofconverting steam into electricity for supply to NPC. Thecase ofMagsaysaycannot apply since the sale of thevessels therein was not in the course of business of NDC

and the same was involuntary for having been madepursuant to the Governments policy of privatization.(Note:At the time whenMagsaysay was decided the TaxCode did not cover incidental transactions.)

+AMDG


42/120

VALUE-ADDED TAXCIR vs. Sony Philippines, Inc.

Sony Philippines was ordered examined for the period 1997and unverified prior years as indicated in the Letter of Authority .The audit yielded assessments against Sony Philippines fordeficiency VAT and FWT, viz: (1) late remittance of FWT onroyalties for the period January to March 1998 and (2) deficiencyVAT 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 byvalid VAT invoices when it paid for certain advertising costs. This issufficient to accord it the benefit of input VAT credits and wherethe money came from to satisfy said advertising billings is anothermatter but does not alter the VAT effect. In the same way, SonyPhilippines can not be deemed to have received thereimbursable as a fee for a VAT-taxable activity.

+AMDG


43/120

VALUE-ADDED TAXCIR vs. Sony Philippines, Inc.

The reimbursable was couched as an aid for Sony Philippines bySIS in view of the companys dire or adverse economicconditions. More importantly, the absence of a sale, barter orexchange of goods or properties supports the non-VAT nature ofthe reimbursement. This was distinguished from the COMASERCOcase where even if there was similarly a reimbursement-on-cost

arrangement between affiliates, there was in fact an underlyingservice. Here, the advertising services were rendered in favor ofSony Philippines not SIS.

!!! (2) NO. A Letter of Authority should cover a taxable period notexceeding one year and to indicate that it covers unverified prioryears should be enough to invalidate it. In addition, even if the

FWT was covered by Sony Philippines fiscal year ending March1998, the same fell outside of the period 1997 and was thus notvalidly covered by the LOA.

+AMDG


44/120

VALUE-ADDED TAXMaxicare Healthcare Corporation vs. CIR

Petitioner claims that the portion of the enrollment fees (80%)which is earmarked for medical/hospital utilization expenses doesnot belong nor does it redound to its benefit and should thus notbe considered as part of its gross receipts for VAT purposes.

??? Is the total amount of enrollment fees collected by Petitionersubject to VAT?

!!! YES. The difference of this case with that of Tours Specialistswhere the tourists asked the local tour agency to pay for theirlodging accommodations is that in that case the local agencyhad nothing to do at all with contract between the payors

(tourists) and the payees (hotels) and was only making thepayment as an accommodation. On the other hand, in theinstant case, the alleged amounts earmarked for payment formpart and parcel of the entire package offered to its members.Thus, there is no portion of the funds that go into the hands of thepetitioner is delineated for delivery to a third party. The membersare deemed to have prepaid only the HMO and not the doctorsor hospitals. All these negate the concept of money in trust as

used in Tours Specialists.

+AMDG


45/120

VALUE-ADDED TAXKepco Philippines Corporation vs. CIR

Kepco filed a claim for refund of unutilized input VAT based onits zero-rated sale of power to NPC. A substantial portion of theclaim was disallowed for having been supported by VAT invoiceswhich only had the TIN-VAT stamped and not printed. There werealso certain sales by Kepco which failed to indicate the wordszero-rated. Lastly, they also alleged that invoices and receiptsare interchangeable and either should suffice as proof ofpurchase and consequently as support for a claim for refund.

??? Is Petitioner entitled to the claim for refund on the disallowedportion?

!!! NO. The requirement that the TIN be imprinted and not merelystamped is a reasonable requirement imposed by the BIR. Moreimportantly, the requirement of the appearance of the wordszero-rated on the face of the invoice prevents buyers fromfalsely claiming input VAT from their purchases when no VAT wasactually paid. The failure to adhere to the said rules will not onlyexpose the taxpayer to penalties but should also serve to disallowthe claim. Finally, the Court disagreed with the position thatinvoices and receipts are interchangeable since the formerclearly refers to sales of goods while the latter to services.

+AMDG


46/120

VALUE-ADDED TAXFort Bonifacio Development Corporation vs. CIR

Petitioner was a real estate developer that bought from thenational government a parcel of land that used to be the FortBonifacio military reservation. At the time of the said sale therewas as yet no VAT imposed so Petitioner did not pay any VAT onits purchase. Subsequently, Petitioner sold two parcels of land toMetro Pacific Corp. In reporting the said sale for VAT purposes(because the VAT had already been imposed in the interim),Petitioner claimed transitional input VAT corresponding to its

inventory of land. The BIR disallowed the claim of presumptiveinput VAT and thereby assessed Petitioner for deficiency VAT.

??? Is Petitioner entitled to claim the transitional input VAT on itssale of real properties given its nature as a real estate dealer andif so (i) is the transitional input VAT applied only to theimprovements on the real property or is it applied on the value of

the entire real property and (ii) should there have been a previoustax payment for the transitional input VAT to be creditable?

+AMDG


47/120

VALUE-ADDED TAXFort Bonifacio Development Corporation vs. CIR

!!! YES. Petitioner is entitled to claim transitional input VAT basedon the value of not only the improvements but on the value of the

entire real property and regardless of whether there was in fact

actual payment on the purchase of the real property or not.

The amendments to the VAT law do not show any intention tomake those in the real estate business subject to a different

treatment from those engaged in the sale of other goods or

properties or in any other commercial trade or business. On the

scope of the basis for determining the available transitional input

VAT, the CIR has no power to limit the meaning and coverage of

the term "goods" in Section 105 of the Tax Code without statutory

authority or basis. The transitional input tax credit operates tobenefit newly VAT-registered persons, whether or not they

previously paid taxes in the acquisition of their beginning inventory

of goods, materials and supplies. +AMDG


48/120

VALUE-ADDED TAXAccenture, Inc. vs. CIR

Accenture filed a VAT claim for refund on unutilized inputVAT premised on its claim that its sales were zero-rated forbeing in connection with services rendered to nonresidentrecipients. The CIR denied the claim stating that Accenturefailed to prove that its foreign clients did business outside thePhilippines.

??? Is Accenture entitled to the VAT refund?

!!! NO. Accenture failed to prove that services were renderedfor nonresident. TheAmex case did not rule that the servicesrecipients need not be doing business outside the Philippinesbut only that the consumption need not be abroad. However,

Accenture failed to prove that the clients/service recipientsare doing business outside the Philippines as they onlysubmitted SEC certifications showing that their clients havenot established any branch offices in the Philippines andbilling statements issued to the said clients. The Court ruledthat while it did prove that its clients are foreign, there was noproof that they were doing business outside the Philippines.

+AMDG


49/120

VALUE-ADDED TAXLuzon Hydro Corporation vs. CIR

Petitioner filed a VAT claim for refund on unutilized inputVAT arising from its alleged zero-rated sales of electricity toNPC. The claims were denied since Petitioner failed toshow proof of the actual zero-rated sales since they didnot present as evidence the VAT official receipts and VATreturns.

??? Is Petitioner entitled to the VAT refund?

!!! NO. The Court reiterated the requirements for a validinput VAT refund from zero-rated sales as follows: (a) thetaxpayer is VAT-registered; (b) the taxpayer is engaged inzero-rated sales; (c) the input taxes are paid; (d) inputtaxes are not transitional input taxes; (e) the input taxesare attributable to zero-rated transactions; (f) input taxes

have been unapplied; (g) filing the claim within 2 years.

+AMDG


50/120

VALUE-ADDED TAXSignificant issuances

!!! RMC 057-2013 --- Unutilized creditable input taxesattributable to zero-rated sales can only be recoveredthrough the application for refund or tax credit. Thepractice of claiming as an outright (income tax) expense

accumulated and unapplied input VAT credits after theexpiration of the 2-year period to process to claim doesnot have legal basis.

!!! RR 08-2015 --- Only raw cane sugar (natural sugar

extracted from sugarcane through simple mechanicalprocess by pressing the juice, boiled to crystallize, filteredusing centrifuge)and muscovado shall be considered asbeing entitled to VAT exemption. +

AMDG


51/120

REMEDIESCIR vs. Gonzalez

An investigation was conducted against LMCEC for taxableyears 1997 to 1999. The assessments that came out of the saidinvestigation was disputed by the taxpayers on the groundsthat (i) the assessment notices issued were invalid for notbearing serial numbers and (ii) the examinations made on thebooks of accounts and other records were done more thanonce in the relevant taxable years.

???Are the assessments invalid?

!!! NO. The formality of a control number in the assessmentnotice is not a requirement for its validity but rather it is thecontents which should inform the taxpayer of the deficiencyand which should contain the facts and the laws on thewhich the assessment is based. Likewise, this case is anexception to the general rule of having the books examinedonly once in a year. Section 235 of the Tax Code allows themultiple examinations when (a) there is fraud or irregularity;(b) the taxpayer requests for reinvestigation; (c) there is arequired verification of compliance with withholding taxesand capital gains tax liabilities.

+AMDG


52/120

REMEDIESRizal Commercial Banking Corporation vs. CIR

??? Whether a taxpayer, by paying the other taxassessments covered by a Waiver of the Statute ofLimitations, is considered estopped from questioning thevalidity of the said waiver (on the basis that the CIR did notsign it) with respect to the other covered but unsettledassessments?

!!! YES. RCBC is considered estopped through its partialpayment of the revised assessments within the extendedperiod provided in the said waivers. Thus, it had impliedlyadmitted the validity of the said waivers. Had it believedthat the waiver was invalid and that the period to assesshad effectively prescribed, RCBC could have refused to

make any payment based on any assessment against it.

(Note: In the more recent case of CIR vs. StandardChartered Bank, the Court said that the taxpayer did notwaive the defense of prescription based on a defectivewaiver as it continued to raise the issue of prescription.)

+AMDG


53/120

REMEDIESSamar-I Electric Cooperative vs. CIR

The FAN and demand letter issued to Petitioner were notaccompanied by a written explanation of the legal andfactual bases of the deficiency taxes assessed against thePetitioner. However, the CIRs response to Petitioners protestof the FAN did explain at length the factual and legal basesof the deficiency tax assessments in denying the protest.

??? Was the Petitioner accorded the required due process?

!!! YES. Considering the exchange of correspondence anddocuments between the parties, the Court found that therequirement of Section 228 was substantially complied with.The CIR had fully informed the company in writing of thefactual and legal bases of the assessment which enabled thetaxpayer to file an effective protest, much unlike thetaxpayers situation in Enron. Thus, there was no finding of anyviolation of due process.

The Court likewise upheld the application of theAznardoctrine in saying that the substantial under declaration ofwithholding taxes constituted falsity in the subject returnswhich this justified the use of the 10-year period to assess.

+AMDG


54/120

REMEDIESFluor Daniel Philippines, Inc. vs. CIR

Fluor Daniel was initially assessed for deficiency EWT onits software maintenance fees paid to an offshore affiliate.In response to Petitioners protest, the CIR issued a FinalDecision on Disputed Assessment (FDDA) cancelling thedeficiency EWT assessment but issuing an assessment forFWT on the same software fees albeit using a lower 15%rate under the RP-US Tax Treaty.

???Was the Petitioner deprived of due process when theFDDA changed the assessment from deficiency EWT todeficiency FWT?

!!! YES. The change of the assessment in the FDDA itselfconstituted a new assessment. As such, the taxpayer

should have been given the chance to dispute the samevia the process laid down in the Tax Code which is by wayof filing a protest. Given that this was not complied with aswhat was issued was already an FDDA, the circumstancescertainly deprived the Petitioner of a reasonableopportunity to be heard and submit evidence in supportof its defense which is a clear violation of due processrequirements.

+AMDG


55/120

REMEDIESLascona Land Co., Inc. vs. CIR

Lascona Land appealed a decision by the CIR holdingthat the assessment against it has become final andexecutory for failure to appeal to the CTA within 30 daysfrom the lapse of the 180-day period provided for underthe Tax Code.

???In cases of inaction on disputed assessments, can the

taxpayer still file an appeal with the CTA even after thelapse of the 180-day period?

!!! YES. In case the CIR fails to act on a disputedassessment within the 180-day period from the submissionof documents, the taxpayer can either (a) file an appealwith the CTA within 30 days after the expiry of the 180-day

period or (b) await the final decision of the CIR and thenappeal the same within 30 days. These options aremutually exclusive and resort to one bars the applicationof the other. A taxpayer can not be prejudiced if hechooses to wait for the final decision of the CIR as this isthe normal expectation when a protest is filed. Thus, anappeal filed within the 30-day period from the receipt ofthe decision, even if made after the 180-day period, is still

considered as having been filed on time.

+AMDG


56/120

REMEDIESAllied Banking Corporation vs. CIR

Allied Banking Corporation received a PAN from the BIRwhich it timely disputed. In response, the BIR issued aFormal Letter of Demand with Assessment Notices. Insteadof protesting the FAN, the petitioner filed a Petition forReview with the CTA. The CTA dismissed the Petition statingthat it is neither the assessment nor the formal demandletter itself that is appealable before it but instead it should

be the decision of the CIR on the disputed assessment.

??? Can the Formal Letter of Demand be construed as thefinal decision of the CIR appealable to the CTA underRepublic Act 9282?

+AMDG


57/120

REMEDIESAllied Banking Corporation vs. CIR

!!! YES. This is considered an exception to the general ruleon exhaustion of administrative remedies since the CIR isconsidered estopped from claiming the same principleapplies in its case. The tenor of the demand letter is clearthat the CIR had already made a final decision and thatthe remedy of the Petitioner was to appeal the samewithin 30 days of receipt. This can be gleaned from the useof the terms final decision and appeal which weredeemed unequivocal language pointing to the finality ofthe decision. While the Court cited the rules relative to (a)protesting the FAN and not the PAN and (b) counting the

30 day period to appeal to the CTA from receipt of thedecision of the CIR and not issuance of the assessment,this particular case was deemed a clear exception in viewof the CIRs own actions.

+AMDG


58/120

REMEDIESV.Y. Domingo Jewellers, Inc. vs. CIR

Petitioner initially received a PAN which it protested. Subsequent tothe filing of the protest and instead of serving a FAN on the taxpayer,the CIR sent Petitioner a Preliminary Collection Letter (PCL) informingthe Petitioner of the existence of two assessment notices the details ofwhich may be viewed in the BIRs office. Subsequently, the taxpayerfiled a petition with the CTA attaching the assessment notices. The CIRmoved to dismiss the petition claiming lack of jurisdiction since it isneither the assessment nor the PCL that is appealable to the CTA butthe decision of the CIR on the disputed assessment.

??? Did the CTA have jurisdiction on the petition filed by the taxpayer?

!!! YES. The contention of the CIR that the taxpayer should have

appealed the decision of the CIR on the disputed assessment cannothold water since there was no assessment notice issued by the BIR inthe first place. In fact, the burden is on the CIR to prove that thetaxpayer received the FAN required under Section 228 of the TaxCode. Thus, the Court allowed the CTA to take cognizance of thecase as it falls under other matters given the peculiarity of the case.

+AMDG


59/120

REMEDIESCIR vs. Hambrecht & Quist Philippines, Inc.

The assessment against Hambrecht & Quist hadbecome final and unappelable since there was a failureto protest the same within the 30-day period provided bylaw. However, the CTA held that the BIR failed to collectwithin the prescribed time and thus ordered thecancellation of the assessment notice. The CIR disputedthe jurisdiction of the CTA arguing that since the

assessment had become final and unappealable, thetaxpayer can no longer dispute the correctness of theassessment even before the CTA.

??? Can the CTA still take cognizance of an assessmentcase which has become final and unappealable for

failure of the taxpayer to protest within the 30-day protestperiod?

+AMDG


60/120

REMEDIESCIR vs. Hambrecht & Quist Philippines, Inc.

!!! YES. The appellate jurisdiction of the CTA is not limited tocases which involve decisions of the CIR on mattersrelating to assessments or refunds. The CTA law clearlybestows jurisdiction to the CTA even on other mattersarising under the National Internal Revenue Code. Thus,the issue of whether the right of the CIR to collect has

prescribed, collection being one of the duties of the BIR, isconsidered covered by the term other matters. The factthat assessment has become final for failure to protest onlymeans that the validity or correctness of the assessmentmay no longer be questioned on appeal. However, thisissue is entirely distinct from the issue of whether the rightto collect has in fact prescribed.

The Court ruled that the right to collect has indeedprescribed since there was no proof that the request forreinvestigation was in fact granted/acted upon by theCIR. Thus, the period to collect was never suspended.

+AMDG


61/120

REMEDIESFesto Holdings, Inc. vs. CIR

???Is the FDDA issued by the Revenue District Officer(RDO) appealable to the CTA?

!!! NO. The RDOs decision can not be considered as theCIRs decision appealable to the CTA in the absence ofany proof that the RDO was authorized to decide and act

on behalf of the CIR on the protest of a taxpayer. This isnotwithstanding the fact that Section 7 of the Tax Codeallows the CIR to delegate her vested powers (exceptthose specifically enumerated as non-delegable) to anysubordinate official with the rank equivalent to a divisionchief or higher. Lastly, Sections 11 and 13 of the Tax Codewhich enumerate the duties and authority of the RDO do

not, by themselves, provide that an RDO can issuedecisions that are appealable to the CTA.

Note: The RDO has a rank of Division Chief. +AMDG


62/120

REMEDIESCIR vs. BASF Coating + Inks Phils., Inc.

??? Is the period to assess suspended if the taxpayer failedto formally notify of the BIR of its change of address even ifthe BIR is in fact aware of the said change?

!!! NO. The rule that the periods to assess and collect aresuspended if the taxpayer cannot be located does notapply even if the taxpayer failed to follow the process forthe notification on the change of address as long as thereis proof that the BIR in fact was aware of the whereaboutsof the taxpayer. In this case, all indications point to the

fact that the CIR knew of the change in address giventhat several submissions of various records already showthe new address and, more importantly, the BIR alreadyconducted an inspection in the taxpayers new address.

+AMDG


63/120

REMEDIESChina Banking Corporation vs. CIRBank of the Philippine Islands vs. CIR

??? Will the filing of an Answer in the case filed before theCTA by the taxpayer being assessed be considered ascollection on the part of the BIR?

!!! While previous cases have in fact upheld the rule thatthe filing of an Answer by the CIR may constitute thecollection contemplated by law required to be donewithin the prescribed period, the same must have beendone properly to be effective. In this case, the Answer wasdeemed ineffective since the case was filed with the CTA

at the time (i.e., before 2004 or the effective date of R.A.9282) when the judicial actions for collection of internalrevenue taxes was within the jurisdiction of the regularcourts. Thus, the right to collect had indeed prescribed.

+AMDG


64/120

REMEDIESPeople of the Philippines vs. Kintanar

The spouses Kintanar were charged for alleged taxevasion and non-filing of income tax returns. GloriaKintanarsdefense was that she did not have personalknowledge of the actual filing of the said returns since itwas her husband who filed their ITRs. The husband in turnalleged that their ITRs were in fact prepared by theiraccountant and that they necessarily just relied on thesaid accountant. These facts supposedly contradicted theclaim that their failure to file the returns was willful.

??? Was the defendant guilty of tax evasion?

!!! YES. The elements of a violation under Section 255 havebeen satisfied. These are (1) that the accused is a personrequired to make or file a return; (2) that the accusedfailed to file the return at the time required by law; and (3)that th

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