TAX ALERT
December 31, 2007
INTEREST PAYMENTS ON LOANS OBTAINED BY A CORPORATION ON
BEHALF OF ITS AFFILIATES AND SUBSIDIARIES DO NOT FORM PART OF
THE INCOME OF THE SAID CORPORATION, HENCE, NOT SUBJECT TO
INCOME TAX AND CONSEQUENTLY TO WITHHOLDING TAX.
S Corp. obtains loans from banks and other financial institutions on behalf of its affiliates
and subsidiaries. Funds obtained by S Corp. are then extended as advances to S Corp.’s
affiliates and subsidiaries. In turn S Corp. passes on to its affiliates and subsidiaries the
burden of paying the interest due on the loans. For purposes of expediency, S Corp.
remits and withholds the tax on the interest payments using its own tax identification
number. In this case, S Corp. merely acts as the withholding agent of the subsidiaries and
affiliates. S Corp. does not claim the interest expense as a deduction; instead the proper
subsidiary/affiliate claims the interest expense as a deductible business expense. The BIR
ruled that the interest payments received by S Corp. are not part of S. Corp.’s income
subject to income tax and consequently to withholding tax. Moreover, the BIR held that
taxes withheld and remitted by S Corp., for and on behalf of its affiliates, on interest
payments to the banks and financial institutions constitute substantial compliance with
the withholding tax requirements. BIR Ruling No. DA 672-2007 dated December 19,
2007.
MARKETING EQUIPMENT DISTRIBUTED TO RETAILERS AND SALES
OUTLETS ARE DEDUCTIBLE BUSINESS EXPENSES FOR INCOME TAX
PURPOSES.
P Corp. is engaged in the manufacture, sales and distribution of carbonated drinks and
other non-alcoholic drinks to retailers, wholesalers, restaurants and bars. As part of its
marketing strategy, P Corp. has been distributing marketing equipment (coolers,
dispensers, and power coolers) to its wholesalers, retailers and sales outlets. P Corp.
sought confirmation from the BIR that the said marketing equipment distributed as
marketing equipment should be considered ordinary and necessary business expenses.
The BIR rules that the said equipment can be considered ordinary and necessary business
expenses which are deductible pursuant to Section 34(A)(1)(a) of the Tax Code. BIR
Ruling No. DA 698-2007 dated December 12, 2007.
ROYALTY INCOME RECEIVED BY A RECORDING COMPANY IS NOT
PASSIVE INCOME, HENCE, SUBJECT TO 35% REGULAR CORPORATE
INCOME TAX.
Royalty income received by a recording company is subject to the 35% regular income
tax rate and not the 20% final tax applicable only to passive income. BIR Ruling No. DA
684-2007 dated December 27, 2007.
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PAYMENT OF INCOME TAX IS A PERSONAL LIABILITY OF THE
EMPLOYEES WHICH CANNOT BE PASSED ON TO THE EMPLOYER.
MOREOVER, IF THE EMPLOYER PAYS THE INCOME TAX, THE SAME
CANNOT BE CONSIDERED AN ORDINARY AND NECESSARY EXPENSE
DEDUCTIBLE FOR INCOME TAX PURPOSES.
I Corp. was assessed deficiency withholding taxes for failure to withhold the income tax
on its payment of salaries and wages. I Corp. claimed that the amount sought to be
assessed by the BIR was not subject to withholding tax because the disallowed amounts
do not represent salaries and wages but rather ordinary and necessary expenses. I Corp.
claimed that the bulk of the disallowed amount represents under-withheld taxes on the
salaries of its expatriate employees. The CTA disagreed with I Corp. and found that I
Corp. failed to withhold the tax from the salaries of its expatriate employees. Instead of
withholding the tax, I Corp. shouldered the tax and claimed it as an ordinary and
necessary expense. The CTA pointed out that the payment of income tax is the personal
liability of the employee and cannot be passed on to the employer. Nevertheless, the
employer, as withholding agent, becomes liable in case he fails to withhold and remit the
correct amount of tax required to be deducted and withheld. Intergen Management
Services (Philippines) Ltd. v. Commissioner of Internal Revenue, CTA Case Nos. 6893
dated November 19, 2007. Note: the U.S. case of Old Colony Trust Co. v.
Commissioner, 279 U.S. 716 (1929), held that income tax assumed by an employer for
and on behalf of an employee is additional taxable compensation income in the hands of
the employee. As such, since the assumed taxes are characterized as “salaries, wages
and other forms of compensation,” they should be deductible under Section
34(A)(1)(a)(i) of the Tax Code.
A SALE OR EXCHANGE OF ASSETS WILL HAVE AN INCOME TAX
INCIDENCE ONLY WHEN IT IS CONSUMMATED. THERE IS A SALE OR
EXCHANGE OF ASSETS WHEN THE FOLLOWING ELEMENTS ARE
PRESENT: (1) TRANSFER; AND (2) CONSIDERATION. FURTHERMORE, A
CONTRACT OF SALE IS PERFECTED BY MERE CONSENT, UPON A
MEETING OF THE MINDS ON THE OFFER AND THE ACCEPTANCE
THEREOF BASED ON SUBJECT MATTER, PRICE AND TERMS OF
PAYMENT. THE CONTRACT OF SALE IS CONSUMMATED WHEN BOTH
PARTIES HAVE FULLY COMPLIED WITH THEIR RESPECTIVE
OBLIGATIONS.
P Corp. was assessed deficiency expanded withholding tax (EWT) for failure to withhold
and remit EWT on its purchase of several parcels of land. P Corp. raised the defense that
it was not liable for EWT considering that the sale of land could not be perfected pending
resolution of the issue of ownership. The CTA ruled that generally, a sale or exchange of
assets will have an income tax incidence only when it is consummated. Based on
evidence submitted to the CTA, it found that the transactions entered into by P Corp.
were all consummated as there was proof of consideration received by the parties and the
titles to the parcels of land were transferred and registered in the name of its new owners.
Thus, there was consummation of the sales transactions giving rise to the liability for
EWT. Philippine Communications Satellite Corporation v. Commissioner of Internal
Revenue, CTA Case No. 6976 dated November 21, 2007.
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BUILDING OWNED BY A LIFE INSURANCE COMPANY IS CONSIDERED AN
ORDINARY ASSET, THE SALE OF WHICH IS SUBJECT TO CREDITABLE
WITHHOLDING TAX. HOWEVER, THE SALE OF THE SAID REAL
PROPERTY IS NOT SUBJECT TO VALUE-ADDED TAX AND TO PREMIUM
TAX.
A Corp. is a domestic corporation engaged in the life insurance business. A Corp. sought
confirmation from the BIR on the tax consequences of the proposed sale of its building.
The BIR held that the building was considered an ordinary asset of the corporation
subject to creditable withholding tax. However, the BIR ruled that the sale is subject to
percentage tax only because A Corp. is exempt from value-added tax (VAT) pursuant to
Section 4.108-3(i) of Revenue Regulations No. 16-2005 and Republic Act No. 9337. BIR
Ruling No. DA 696-2007 dated December 28, 2007.
THE ISSUANCE OF NEW SHARES OF STOCK TO REPLACE PREVIOUSLY
ISSUED AND OUTSTANDING SHARES OF STOCK PURSUANT TO A
DECREASE IN CAPITAL STOCK IS EXEMPT FROM THE PAYMENT OF
DOCUMENTARY STAMP TAX PURSUANT TO SECTION 174 OF THE TAX
CODE.
The issuance of new shares of stock to replace previously issued and outstanding shares
of stock pursuant to a decrease in capital stock is exempt from the payment of
documentary stamp tax (DST). The justification for the said exemption is that the
surrender of the certificates of stock by the stockholders is a necessary consequence of
the decrease in the capital stock of the corporation, and that in order to reflect the
corrected number of shares therein, the stockholders of record should transfer and
surrender their old certificates of stock to the corporation, without any monetary
consideration, but only for the purpose of replacing the old stock certificates into new
ones. In other words, there is no effective transfer of beneficial ownership over the said
shares. BIR Ruling No. DA 678-2007 dated December 20, 2007.
THE TRANSFER OF FUNDS FROM AN INTERNATIONAL BANK ACCOUNT
TO A LOCAL BANK ACCOUNT IS SUBJECT TO DST.
U Corp. is engaged in the money transfer business. U Corp. entered into an agreement
with W Corp. wherein W Corp.’s customers send funds from abroad through W Corp.’s
international bank account and the said funds are credited to U Corp.’s local bank
account. The BIR ruled that the material element, which gives rise to the DST liability is
the order for payment or transfer of funds, and not the underlying agreement which led to
the said payment being made. The transmission is characterized as a telegraphic transfer
for which DST is imposed under Section 182 of the Tax Code. BIR Ruling No. DA 6492007 dated December 14, 2007.
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TAXPAYERS ARE RESPONSIBLE FOR REPRESENTATIONS AND
STATEMENTS IN TAX RETURNS MADE ON THEIR BEHALF BY THEIR TAX
AGENTS.
Hence, the taxpayer cannot disown responsibility for errors discovered in, or audit
findings made on, such returns. Revenue Memorandum Circular No. 82-2007 dated
December 4, 2007.
BIR ISSUES REVENUE MEMORANDUM CIRCULAR ALLOWING
TAXPAYERS IN DEFICIT POSITION TO AVAIL OF THE TAX AMNESTY
PROGRAM.
Taxpayers in a deficit position (negative net worth) are now qualified to
avail of the tax amnesty provided that they declare an increase in net worth
or a reduction in the reported deficit and pay the amnesty tax.
However, if the taxpayer who is in a deficit position does not declare an
increase in net worth, he cannot qualify for amnesty availment. Revenue Memorandum
Circular No. 90-2007 dated December 3, 2007.
BIR ISSUES REVENUE MEMORANDUM ORDER ON THE ISSUANCE OF
WARRANTS OF DISTRAINT AND LEVY.
RMO 39-07 directs the issuance of warrants of distraint or levy upon the issuance of (1) a
final decision on disputed assessment by the CIR or the Regional Director and (2) a
decision by the CTA in division or en banc upholding an assessment. Revenue
Memorandum Order No. 39-2007 dated December 12, 2007.
BIR ISSUES REVENUE REGULATIONS ALLOWING ABATEMENT OF
PENALTIES/SURCHARGES AND INTERESTS ON DISPUTED/LITIGATED
ASSESSMENTS. Revenue Regulations No. 15-2007 dated November 29, 2007.
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. Suzette A. Celicious
Atty. Madeline L. Zialcita-Villapando
Atty. Kathleen L. Saga
Atty. Excelsis V. Antolin
Cheryll Ann R. Trinidad
Bernadette V. Quiroz
cgbaniqued@baniquedlaw.com
lvyusonlayug@baniquedlaw.com
thbello@baniquedlaw.com
sacelicious@baniquedlaw.com
mlzvillapando@baniquedlaw.com
klsaga@baniquedlaw.com
evantolin@baniquedlaw.com
crtrinidad@baniquedlaw.com
bvquiroz@baniquedlaw.com