TAX ALERT
June 30, 2005
COURT OF APPEALS DECLARES THE IRREVOCABILITY RULE OF SECTION
76 OF THE 1997 TAX CODE AS LIMITED TO A PARTICULAR TAXABLE
PERIOD.
Facts: B Company opted to carry over its overpaid income taxes in taxable year 1998 to the
succeeding taxable year. In 1999, it declared a net loss. Considering that it still had the prior
year’s overpaid income taxes and excess tax credits, B Company once again opted to carry
over the excess income taxes and tax credits to the following year. For taxable year 2000, B
Company continued to have nil income tax liability. In its return, it did not indicate its
choice to carry over the overpaid income tax or to claim for refund/tax credit certificate.
When it filed a claim for refund of the excess income and creditable withholding taxes for
taxable year 1998, both the BIR and the CTA denied the claim citing the “irrevocability rule”
under Section 76 of the 1997 Tax Code. Held: Even if Section 76 of the 1997 Tax Code is
construed strictly and literally, the “irrevocability rule” does not operate to bar B Company
from asking for a tax refund. The phrase, “for that taxable period”, in the “irrevocability
rule” provision qualifies the irrevocability option exercised by the taxpayer to carry-over the
excess creditable tax. The taxpayer cannot alter his option to carry-over the excess creditable
tax with that of a claim for refund only during the entire taxable period for which he
exercised his option. But once such taxable period lapses, the irrevocability of the option to
carry-over also expires. As such, for the next taxable period, the taxpayer can opt to claim
for tax refund. This is especially true if no actual carrying-over of the excess creditable tax
transpired due to a loss in the taxable year to which the excess creditable tax is to be carriedover. Bank of the Philippine Islands vs. Commissioner of Internal Revenue, CA-G.R. SP
No. 77655, April 29, 2005.
INTEREST PAYMENTS MADE BY A PHILIPPINE CORPORATION TO THE
BERMUDA BRANCH OF A SWISS CORPORATION ARE SUBJECT TO THE 10%
PREFERENTIAL TAX RATE ON INTEREST UNDER THE RP-SWITZERLAND
TAX TREATY.
C Corp., a Philippine corporation obtained a loan facility from T Corp. a U.S. corporation.
Later, T Corp. was acquired by another entity and the loan facility was eventually assigned to
X Corp, a Swiss corporation with a branch in Bermuda. During the initial months after
acquisition of the loan, interest payments were made to the Bermuda branch of X Corp. As a
result of corporate restructuring, the Bermuda branch ceased its operations and interest
payments were sent by C Corp. to the bank account of X Corp. in New York, USA. The BIR
ruled that the interest payments made by C Corp. to the Bermuda Bank of X Corp, a Swiss
corporation, or to its New York bank account are subject to the preferential tax rate of 10%
pursuant to the RP-Switzerland Tax Treaty. BIR ITAD Ruling No. 52-2005, June 9, 2005.
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8/F Jollibee Centre, San Miguel Avenue, Ortigas Center, Pasig City, 1605 Philippines
Telephone: (632) 633-9418 ‚ Facsimile: (632) 633-1911
E-mail: baniqued@info.com.ph
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THE CONVERSION OF A LOAN INTO PAID-IN SURPLUS WITHOUT THE
CORRESPONDING ISSUANCE OF ADDITIONAL SHARES IS A CAPITAL
TRANSACTION NOT SUBJECT TO INCOME OR DONOR’S TAX. BIR Ruling No.
DA-212-2005, April 27, 2005.
ROYALTY PAYMENTS MADE BY A PEZA-REGISTERED COMPANY TO A
NON-RESIDENT CORPORATION IS EXEMPT FROM VAT.
I-Japan Corp. and I-Phils. Corp., a PEZA-registered corporation, entered into a Technical and
Assistance Agreement whereby I-Phils. Corp. will pay I-Japan Corp. royalty fees monthly.
The BIR ruled that the royalty fees paid by I-Phils Corp. is subject to income tax at the rate
of 25% as provided under Article 12 of the RP-Japan Tax Treaty. With respect to VAT, the
BIR ruled that the sale of service to a PEZA-registered entity may be considered effectively
zero-rated for VAT purposes but subject to the limitation that the sale of service is made to
persons or entities who enjoy indirect tax exemption. Since there is no express provision
under the PEZA law granting exemption from indirect taxes to Ecozone Enterprises, the
recognition of zero-rated sales is made to rest on the Cross Border Doctrine. However, in the
present case, the zero-rating cannot be availed of by the non-resident corporation (I-Japan
Corp.) and the I-Phils.Corp is a PEZA-registered entity that may not be passed on with nor
claim input VAT, then its payments of royalties to a non-resident should be exempt from
VAT. BIR ITAD Ruling No. DA 40-50, May 9, 2005.
TAXPAYER WAS ALLOWED TO RECOGNIZE CREDITABLE INPUT TAX
WHICH WAS NOT RECORDED IN ITS BOOKS AND REPORTED IN ITS VAT
RETURNS BECAUSE OUTPUT VAT WAS DECLARED BY THE SELLER IN ITS
VAT RETURNS.
O Inc. purchased two parcels of land from F Corp., O Inc. paid input VAT on the purchase of
the land but inadvertently included the input VAT in the recording of the cost of the land.
Thus, the input VAT was not recorded separately in the books of O Inc. and in its VAT
returns. O Inc. sought confirmation from the BIR that it be allowed to recognize creditable
input VAT on its purchase of the two parcels of land. O Inc. submitted the deeds of absolute
sale over the said parcels of land and the VAT returns of F Corp. showing that F Corp.
declared the sale of the parcels of land. The BIR ruled that O Inc. is allowed to recognize as
creditable input tax the VAT paid on its purchase of land from F Corp. pursuant to Section
110 of the Tax Code. BIR Ruling No. DA 227-2005, May 19, 2005.
IMPORTATION OF PARTS AND EQUIPMENT INTO THE PHILIPPINES IN THE
NAME OF THE PROJECT OWNER DOES NOT VIOLATE THE TURNKEY
NATURE OF THE CONTRACT.
FGP Corp. is a corporation tasked to build, own and operate a power plant. FGP Corp.
entered into a turnkey agreement with S Corp-Germany for the construction of the power
plant. The turnkey contract was divided into onshore and offshore portions. The offshore
portion consisted of importing parts and equipment exclusively designed, engineered and
fabricated for FGP Corp. while the onshore portion consisted of the installation of the parts
and equipment. Since S Corp-Germany had no permanent establishment in the Philippines, it
subcontracted the onshore portion to its subsidiary S Corp-Phils. When the parts and
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equipment were imported into the Philippines, it was consigned to FGP Corp because under
the agreement between FGP Corp. and S Corp-Germany title to the said parts and equipment
passed to FGP Corp. at the time of the loading of the parts and equipment for shipment to the
Philippines. BIR Ruling No. DA 229-2005, May 19, 2005.
THE CONSIGNEE-IMPORTER OF THE PARTS AND EQUIPMENT SHALL BE
LIABLE FOR VAT ON IMPORTATION. Ibid.
THE OFFICIAL RECEIPTS ISSUED BY THE BUREAU OF CUSTOMS FOR THE
VAT PAID ON THE IMPORTATION OF THE PARTS AND EQUIPMENT, ALONG
WITH OTHER SUPPORTING IMPORTATION DOCUMENTS ARE SUFFICIENT
PROOF OF THE INPUT VAT PAID BY FGP CORP. AND SHALL BE THE BASIS
OF ITS CLAIM FOR ISSUANCE OF TAX CREDIT CERTIFICATE OR REFUND
UNDER SECTION 112(B) OF THE TAX CODE. Ibid.
OFFICIAL RECEIPTS WHICH CONTAINED ERASURES/CORRECTIONS IN
ORDER TO REFLECT THE NAME OF FGP CORP.
AS PAYOR ARE
CONSIDERED VALID PROOF OF THE TRANSACTIONS BETWEEN FGP CORP.
AND S-CORP. PHILS.
FGP Corp. belatedly discovered that the official receipts issued by S Corp. Phils. indicated
the name FGPC, a corporation entirely distinct from FGP Corp. Upon discovery of the error,
FGP Corp. called the attention of S-Corp Phils. and corrections were made. S-Corp.
Philippines executed an affidavit explaining and accounting for the erasures/corrections in
the official receipts. Ibid.
OFFICIAL RECEIPTS CONTAINING ALTERATIONS IN THE ADDRESS OF SCORP. PHILS WILL NOT AFFECT FGP CORP’S CLAIM FOR REFUND/TAX
CREDIT CERTIFICATE.
The BIR ruled that the alterations in the official receipts issued by S-Corp Phils. to reflect its
new address should not prejudice the claim for refund/tax credit certificate of FGP Corp
since the buyer (FGP Corp) is not required to verify whether the alteration made is
authorized or not. On the other hand, S Corp-Phils. should have notified both the old and new
Revenue District Officers (RDOs) concerned of its change of address by applying for
cancellation of with the former RDO and a new application for registration with the latter
RDO. FGP Corp. is required to secure a copy of the clearance/approval issued by the new
RDO concerned regarding the use of the official receipts reflecting the new address. Ibid.
A ZERO-RATED VAT STATUS IS NOT AN EXEMPTION FROM WITHHOLDING
TAX LABILITY.
W is a 100% indirect exporter being a subcontractor of Y, a 100% exporter. W has been
granted a zero-rated VAT status for its services for the year 2004, in view of which, it was
issued tax credit certificates (TCC) for input tax refunds. W sought confirmation from the
BIR if income payments its receives it is exempt from creditable withholding on income on
the ground that it will have to carry-over withholding tax every year because of the VAT
TCC it obtains every year. The BIR ruled that a zero-rated VAT status does not exempt W’s
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income receipts from the appropriate withholding taxes. BIR Ruling No. DA-210-2005,
April 27, 2005.
FEES PAID TO A NONRESIDENT FOR SERVICES RENDERED IN THE
PHILIPPINES IS SUBJECT TO VAT.
Fees paid by a domestic corporation, which is a PEZA-registered export enterprise, to a
nonresident foreign corporation not licensed to do business in the Philippines for services
actually rendered in the Philippines are subject to the 10% VAT pursuant to Section 108 of
the 1997 Tax Code. The domestic company, being the resident withholding agent and payor
in control of payment, shall be responsible for the withholding of the 10% final VAT on such
fees before making any payment to the nonresident foreign company. BIR Ruling No. DAITAD 47-05, May 31, 2005.
BUYERS OF REAL PROPERTY WHO AGREED TO SHOULDER CGT AND DST
CANNOT AVAIL OF THE BENEFITS OF SEC. 204 OF THE 1997 TAX CODE ON
COMPROMISE SETTLEMENT OF INTERNAL REVENUE TAXES.
Mr. D, a buyer of real property, requested the BIR for a favorable ruling allowing Mr. D to
pay 50% of the capital gains tax (CGT) and documentary stamp tax (DST) on the sale of real
property and allow him to settle the remaining balance on installment basis because his
savings are not enough to pay the taxes involved in the transfer of real property. The BIR
ruled that while the parties to a sale transaction may agree on who will ultimately shoulder
applicable taxes, Section 204(A)(2) of the 1997 Tax Code [on compromise of payment of
tax] is for the benefit of the person liable under the law to pay the tax. Under the law, it is
the seller who is liable to pay the CGT. It appears that the financial position of the seller
does not demonstrate a clear inability to pay the assessed tax. Thus, there is no basis for
compromise insofar as the seller is concerned. To rule otherwise would provide an
opportunity for circumventing the law. BIR Ruling No. DA-208-2005, April 26, 2005.
LOST TCC WHILE UNDER THE CUSTODY OF THE BIR RETAINS VALIDITY
EVEN IF IT WAS NOT REVALIDATED WITHIN FIVE YEARS FROM ISSUANCE
AS THE OWNER WAS NOT IN A POSITION TO REQUEST FOR
REVALIDATION.
Facts: On February 1, 1995, B Inc. was issued a TCC. In 1996, B Inc. requested for the cash
conversion of the TCC. However, the TCC was lost while in the custody of the BIR. The
BIR recommended the replacement of the TCC by the One-Stop Shop Inter-Agency Tax
Credit and Duty Drawback Center (OSS Center). Upon the recommendation of the BIR,
OSS Center issued a replacement TCC on February 24, 2005, which TCC bears the notation
that the TCC “expired last February 1, 2005.” Ruling: The BIR ruled that B Inc. could use
the replacement TCC in payment of its internal revenue tax notwithstanding the information
stated in the TCC that it expired on February 1, 2005. It is undeniably clear that B Inc. did
not waste time in exercising its right as the owner of the issued TCC during the validity
period. All the recorded delay in the processing of every request should not be faulted
against B Inc.; otherwise, it would be unfair and unjust to B Inc. Moreover, TCCs issued
under the pertinent provisions of the Tax Code may be used as payment of any internal
revenue tax, except withholding tax, within five years from the date of issue. After which,
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the TCC may no longer be utilized unless it has been revalidated prior to the expiration of the
five-year period. It was impossible on the part of B Inc. to request for revalidation
considering that the TCC was lost and its request for replacement was still in process. BIR
Ruling No. DA-206-2005, April 25, 2005.
NOTE:
The information provided herein is general and may not be applicable in all situations. It
should not be acted upon without specific legal advice based on particular situations. If you
have any questions, please feel free to contact any of the following at telephone number
(632) 633-9418, facsimile number (632) 633-1911, or at the indicated e-mail address:
Atty. Carlos G. Baniqued
Atty. Laura Victoria A.S. Yuson-Layug
Atty. Terence Conrad H. Bello
Atty. Ma. Carlota Christina G. Laiño-Santiago
Atty. Suzette A. Celicious
Atty. Madeline L. Zialcita-Villapando
Atty. Kathleen L. Saga
cgbaniqued@baniquedlaw.com
lvyusonlayug@baniquedlaw.com
thbello@baniquedlaw.com
cglaino@baniquedlaw.com
sacelicious@baniquedlaw.com
mlzvillapando@baniquedlaw.com
klsaga@baniquedlaw.com