www.pwc.com/ph
Tax Updates: Threshing
Out the Gray Areas
Lawrence C. Biscocho
15 July 2015
Agenda
Recent court decisions
Supreme Court
• CTA may decide on proper tax category in refund cases
• In CWT refund, presentation of succeeding quarterly ITR is not
required
• Foreign equity: suspicion of “dummy” triggers grandfather rule
• Request for reinvestigation must be granted to toll prescription
• SC may rule on prescription even on appeal
• Government may be estopped from collecting taxes
• Withholding agent can refund an erroneously withheld and remitted
tax
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
2
Agenda
Recent court decisions
Court of Tax Appeals
• Reporting the revenues related to the CWT refund is critical;
Certificates of creditable tax are sufficient proof
• A BIR ruling cannot amend a Revenue Regulation
• Cockpit arena is not subject to amusement tax
• Issuance of FAN without considering taxpayer’s reply to PAN violates
due process
• Remitting foreign currency on zero-rated sales is vital in input tax
refund
• Consider net loss in deficiency income tax assessment
• Deficiency withholding tax on compensation may be computed using
employees’ effective tax rate
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
3
Agenda
Recent court decisions
Court of Tax Appeals
• Valid LOA a prerequisite for tax assessment
• Constructive service of PAN and FAN when proper; Letter of
Authority for “unverified prior years” is void
• Services to international shipping company are zero-rated; no other
proof required
• Intent to evade tax is not vital in falsity
• FWT paid on recalled interim dividends is refundable
• Deficiency withholding tax is not a penalty
• FDDA issued before the 60-day period to submit documents is void
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
4
Agenda
Recent court decisions
Court of Tax Appeals
• An RDO letter is not a CIR decision appealable to CTA
• Oral testimony is not enough to support bad debts expense
• The 60-day period to submit documents is more appropriate in a
request for reinvestigation
• Zero-rating status at the time of sales crucial in a refund claim
• Appeal to the CIR does not refresh the 180-day period
• Overpaid tax under treaty is refundable
• Refund claim with ITAD valid if due to tax treaty
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
5
Agenda
Recent BIR and SEC issuances
• CARs not included in BIR list are not official
• Dividends paid subject to the preferential rate of 10% of the gross
amount
• Royalty payments subject to 10% preferential final withholding tax
rate
• Petroleum subcontractor is not exempted from 15% branch profit
remittance tax (BPRT)
• Verification of eCARs under LRA's PHILARIS
• Regular corporations or partnerships cannot use ‘investment’ as part
of their names
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
6
Supreme Court
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
7
SMI-Ed Philippines v. CIR
G.R. No. 175410 dated 12 November 2014
CTA may decide on proper tax category in refund
cases
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
8
SMI-Ed Philippines v. CIR
• In an action for refund of taxes allegedly erroneously paid, the CTA
may determine whether there are other taxes that should have been
paid in lieu of the taxes paid. Such is not an assessment but a
determination of the proper category of tax to be paid which is
merely incidental in determining the propriety of refund.
• If the taxpayer is found liable for taxes other than the ones alleged to
be erroneously paid, the amount of taxpayer’s liability should be
computed and deducted from the refundable amount.
• SC ruled that a PEZA-registered corporation that has never
commenced operations may not avail of the tax incentives and
preferential rates given to PEZA-registered enterprises.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
9
SMI-Ed Philippines v. CIR
• The difference between individual and corporate capital gains tax on
the sale of real properties:
o Individuals are taxed on capital gains from the sale of all real
properties located in the Philippines and classified as capital
assets.
o For domestic corporations, however, the capital gains tax is
imposed only on the presumed gain realized from the sale of lands
and/or buildings.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
10
Winebrenner & Inigo Insurance
Brokers, Inc. v. CIR
G.R. No. 206526 dated 28 January 2015
In CWT refund, presentation of succeeding quarterly
ITR is not required
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
11
Winebrenner & Inigo Insurance Brokers, Inc. v. CIR
• Section 76 of the Tax Code does not mandate the submission and
presentation of the quarterly ITRs of the succeeding quarters of a
taxable year in a claim for refund. The law merely requires the filing
of the ITR/Final Adjustment Return (FAR) for the preceding – not
the succeeding – taxable year.
• Likewise, RR No. 12-94 merely provides that claims for refund of
income taxes deducted and withheld from income payments shall be
given due course only when:
o it is shown on the ITR that the income payment received is being
declared as part of the taxpayer’s gross income; and
o the fact of withholding is established by a copy of the withholding
tax statement, duly issued by the payor to the payee, showing the
amount paid and the income tax withheld from that amount.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
12
Narra Nickel Mining and
Development Corp., Tesoro Mining
and Development, Inc. and McArthur
Mining, Inc. v. Redmont Consolidated
Mines Corp.
G.R. No. 195580 dated 28 January 2015
Foreign equity: suspicion of “dummy” triggers
grandfather rule
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
13
Narra Nickel Mining and Development Corp., Tesoro
Mining and Development, Inc. and McArthur Mining,
Inc. v. Redmont Consolidated Mines Corp.
• To check compliance with the 60%-40% Filipino-foreign nationality
rule for exploration of natural resources, the citizenship of the
individual stockholders of each layer of corporations investing in a
mining joint venture must first be determined. This is the Control
Test.
• However, in case of doubt despite having satisfied this requirement,
the Grandfather Rule (which requires that the citizenship of
individuals who ultimately own or control the shares of stock of the
corporation must be considered) remains applicable to accurately
determine actual foreign participation, whether direct or indirect.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
14
Narra Nickel Mining and Development Corp., Tesoro
Mining and Development, Inc. and McArthur Mining,
Inc. v. Redmont Consolidated Mines Corp.
• Filipinos should be the principal beneficiaries in the exploration of
natural resources. Suspicious indications that true beneficial
ownership and control of a corporation resides in foreign stakeholders
and not in Filipinos are the following:
o the foreign investors provide practically all the funds,
o they provide practically all the technological support for the joint
venture, and
o they manage the company and prepare all economic viability studies
while being minority stockholders.
• In these instances, computation of equity composition would be based
on common shareholdings, not on preferred or redeemable shares.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
15
China Banking Corporation v. CIR
G.R. No. 172509 dated 4 February 2015
Request for reinvestigation must be granted to toll
prescription
SC may rule on prescription even on appeal
Government may be estopped from collecting
taxes
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
16
China Banking Corporation v. CIR
Request for reinvestigation must be granted to toll prescription
• Two things must concur to suspend the statute of limitations:
1) There must be a request for reinvestigation, and
2) The CIR must have granted it
• In this case, there was no showing from the records that the CIR ever
granted the request for reinvestigation filed by the taxpayer.
• Hence, it cannot be said that the running of the prescriptive period
was effectively suspended.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
17
China Banking Corporation v. CIR
SC may rule on prescription even on appeal
• As a rule, the defense of prescription cannot be raised for the first
time on appeal.
Exception: when the pleadings or the evidence on record show that
the claim is barred by prescription.
• Relying on the evidence, SC ruled that prescription had set in based
on:
a) the date of receipt of the assessment notice which was not
disputed, and
b) the date of the attempt to collect as determined by merely
checking the records when the response of the CIR containing the
demand to pay the tax was filed.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
18
China Banking Corporation v. CIR
Government may be estopped from collecting taxes
• Where it took more than 12 years for the BIR to take steps to collect
the assessed tax and kept silent despite having the opportunity to
question the defense of prescription on appeal, its claim for
deficiency DST is now barred.
• The SC held that the BIR caused untold prejudice to the taxpayer,
keeping the latter in the dark for so long as to whether it is liable for
DST and, if so, for how much.
• While generally, the rule on estoppel or waiver does not apply to the
government in a tax collection case, the SC made an exception.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
19
Philippine National Bank v. CIR
G.R. No. 206019 dated 18 March 2015
Withholding agent can refund an erroneously
withheld and remitted tax
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
20
Philippine National Bank v. CIR
• The claimant-bank mistakenly withheld and remitted to the BIR
withholding taxes equivalent to 6% of the bid price of foreclosed real
properties, instead of only 5% EWT on sales of ordinary assets.
• In support of its refund claim, the bank presented evidence to show
that the developer had not utilized the withheld taxes, namely:
1.
Developer corporation’s audited financial statement reflecting
the mortgaged property as included in the asset account
“Properties and Equipment”.
2. Developer corporation’s ITR showing that the excess CWT
claimed for refund had never been utilized.
3. Testimony of the developer corporation’s accountant that the
amount, subject of the bank’s claim for refund, was not included
among the CWT stated in the developer corporation’s ITR.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
21
Philippine National Bank v. CIR
• The SC granted the refund of the excess 1% CWT because the
developer corporation never utilized the CWT certificates as tax
credit.
• Because the developer contested the validity of the foreclosure sale
via litigation, then it also did not recognize the foreclosure sale and
the CWT withheld from the sale price.
• The developer continues to recognize the land as its asset by
reflecting the mortgaged property in its financial statements and it
never included the CWT in its ITR.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
22
Court of Tax Appeals
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
23
Trans Pacific Air Service Corporation
v. CIR
CTA Case No. 8630 dated 30 January 2015
Reporting the revenues related to the CWT refund is
critical; Certificates of creditable tax are sufficient
proof
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
24
Trans Pacific Air Service Corporation v. CIR
• Presenting individual cash receipts journals is not enough to prove
that receipts of payments were issued.
• The taxpayer should have presented the detailed sales schedules and
reconciliation schedules of its revenue with corresponding tax
withheld as reported in its ITR and FS.
• Moreover, in its ITR, while revenue was reflected under Schedule 1
on the “Schedule of Sales/Revenues/Receipts/Fees”, there is no entry
whatsoever in the “Creditable Tax Withheld” column.
• This is also the case for the other income, which were reflected in
Schedule 4 or the “Schedule of Non-Operating and Taxable Other
Income” of the same ITR.
Tax Updates: Threshing Out the Gray Areas
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15 July 2015
25
Trans Pacific Air Service Corporation v. CIR
• Thus, said declarations can be taken to mean that no part of the
taxpayer’s revenue and other reported income were ever subjected to
creditable withholding tax.
• While it is incumbent upon the taxpayer to prove that the proper tax
was withheld on its income, said burden of evidence shifts to the CIR
when the taxpayer presents a withholding tax certificate complete
in its relevant details and with a written statement that it was made
under the penalties of perjury.
• There is no need to show actual remittance of taxes withheld.
• Proof of actual remittance is not a condition to claim for a refund of
unutilized tax credits.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
26
Nickel Asia Corporation v. CIR
CTA Case No. 8662 dated 2 February 2015
A BIR ruling cannot amend a Revenue Regulation
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
27
Nickel Asia Corporation v. CIR
Facts
• Petitioner rendered management services to mining companies
which were VAT-registered with the BIR as well as registered with
the BOI as 100% exporters pursuant to EO No. 226.
• Pursuant to RMO No. 9-2000, petitioner deemed its sale of services
as subject to 0% VAT when it billed the said firms for services.
• Petitioner received from respondent a Letter Notice for income tax
and VAT liabilities for calendar year 2010. Then respondent served
on petitioner a PAN for alleged basic deficiency VAT plus penalties
and interest, issued through OIC-Assistant Commissioner of the LTS.
• Petitioner disputed the PAN by filing a protest letter with the LTS,
invoking RR No. 16-2005, after which it also contested a FAN.
• In 2013, petitioner received respondent’s Final Decision on Disputed
Assessment (FDDA), which effectively denied the petitioner’s protest
with finality. Hence, this petition for review.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
28
Nickel Asia Corporation v. CIR
Ruling
• According to the CTA, an OIC-Assistant Commissioner has no
authority to “correct” an alleged error committed by the CIR and to
“change” by a mere letter to a taxpayer the import of RR No. 162005.
• He cannot give RR No. 16-2005 an interpretation that effectively held
the inclusion of “services” in Section 4.106-5 of RR No. 16-2005 to be
an inadvertent or typographical error.
• The OIC-Assistant Commissioner should have raised the matter to
the CIR for issuance of a ruling and/or to recommend to the
Secretary of Finance the issuance of the appropriate amendment or a
new revenue regulation.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
29
Nickel Asia Corporation v. CIR
Ruling
• It is the Secretary of Finance who possesses the mandate to issue
rules and regulations implementing the amended VAT provisions.
• Not even the CIR can unilaterally declare erroneous and immediately
amend any of the provisions of RR No. 16-2005 for want of authority;
the CIR can only interpret, but not amend, RRs issued by the
Secretary f Finance.
• Otherwise, the OIC-Assistant Commissioner (or other parties,
including the CIR or aggrieved taxpayers) should have obtained from
competent authorities, possibly from the courts, a ruling that an
administrative issuance, such as Section 4.106-5 of RR No. 16-2005,
is inconsistent with the Tax Code, as amended.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
30
Province of Camarines Sur v.
Fulgentes Cockpit Arena
CTA AC No. 110 dated 17 February 2015
Cockpit arena is not subject to amusement tax
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
31
Province of Camarines Sur v. Fulgentes Cockpit
Arena
• A cockpit arena does not fall under the catch-all phrase “other places
of amusement” for purposes of collecting amusement tax under the
LGC [Section 140 of the Local Government Code].
• In interpreting the catchall phrase, the SC [G.R. No. 183137 dated 10
April 2013] ruled that the enumeration of specific places of
amusement in the LGC must be considered.
• The enumeration is bound by a characteristic in that they are all
venues primarily for staging of spectacles or the holding of public
shows, exhibitions, performances, and other events meant to be
viewed by an audience.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
32
Province of Camarines Sur v. Fulgentes Cockpit
Arena
• For a cockpit to fall within the meaning of the phrase “other places of
amusement”, it must be shown that it is a venue:
o where one seeks admission to entertain oneself by seeing or
viewing the show or performances, or
o primarily used to stage spectacles or hold public shows,
exhibitions, performances, and other events meant to be viewed
by an audience for entertainment.
• Failing to satisfy these elements, a cockpit arena is not subject to
amusement tax.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
33
CIR v. Hermano (San) Miguel Febres
Cordero Medical Education
Foundation (De La Salle – Health
Science Institute), Inc.
CTA EB Case No. 1151 dated 17 February
2015 (Case No. 8095)
Issuance of FAN without considering taxpayer’s reply to
PAN violates due process
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
34
CIR v. Hermano (San) Miguel Febres Cordero
Medical Education Foundation (De La Salle –
Health Science Institute), Inc.
• The 15-day period for the taxpayer to respond to the PAN is
important to the due process requirement of issuing deficiency tax
assessments.
• The CTA cited an SC case where the high court held categorically that
the failure of the CIR to strictly comply with the requirements laid
down by law and its own rules (i.e., issuance of the PAN and giving
the taxpayer 15 days to respond) is a denial of due process.
• Providing the taxpayer with a copy of the PAN is meaningless if his
right to respond to it within the prescribed period would be ignored.
• Even if the taxpayer was able to respond to the PAN, such does not
cure the fact that the FAN was prematurely prepared before the lapse
of the 15-day period to respond.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
35
CIR v. Hermano (San) Miguel Febres Cordero
Medical Education Foundation (De La Salle –
Health Science Institute), Inc.
• In this case, the taxpayer received on 5 January 2009 a PAN dated 12
December 2008.
• It filed a protest letter on time (i.e., 20 January 2009); however, it
received the FAN and FLD both dated 9 January 2009, on 21 January
2009 — a day right after the filing of the protest.
• Evidently, the FAN and FLD were already prepared as early as 9
January 2009 or way before 20 January 2009 which was the lapse of
the 15-day period within which the taxpayer could file a reply or protest
to the PAN.
• This makes the assessment against the taxpayer void for violation of
procedural due process.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
36
Deutsche Knowledge Services Pte.
Ltd. v. CIR
CTA EB Case No. 1145 dated 18 February
2015 (CTA Case No. 8012)
Remitting foreign currency on zero-rated sales is
vital in input tax refund
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
37
Deutsche Knowledge Services Pte. Ltd. v. CIR
• A claim for refund of excess input tax must show that the remittances
of foreign currency payments correspond to its zero-rated sales.
• Where the inward remittances cannot be ascertained from the
company’s zero-rated sales for the period and how much of the
purported zero-rated sales were duly receipted, the claim for refund
must be denied.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
38
Transnational Plans, Inc. v. CIR
CTA Case No. 8291 dated 20 February 2015
Consider net loss in deficiency income tax
assessment
Deficiency withholding tax on compensation may
be computed using employees’ effective tax rate
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
39
Transnational Plans, Inc. v. CIR
Consider net loss in deficiency income tax assessment
• In this case, a review of the mathematical computation of the alleged
deficiency tax revealed that the net loss was not considered in the
assessment.
• Had the net loss been considered, it will offset the disallowed items.
• Consequently, the deficiency income tax assessment was cancelled
because the taxpayer, after offsetting the disallowed items, still
suffered a net loss.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
40
Transnational Plans, Inc. v. CIR
Deficiency withholding tax on compensation may be computed using
employees’ effective tax rate
• The CTA also allowed the use of effective tax rate for purposes of the
deficiency withholding tax on compensation, which is based on the
total withholding tax on compensation divided by the total net
taxable compensation during the taxable year.
• Thus, the CTA determined after computation that the effective tax
rate should be 24% (not 32%).
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
41
University of Santo Tomas Hospital,
Inc. v. CIR
CTA Case No. 8292 dated 2 March 2015
Valid LOA a prerequisite for tax assessment
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
42
University of Santo Tomas Hospital, Inc. v. CIR
• Section 13 of the Tax Code provides that an LOA grants authority to
the appropriate revenue officer assigned to perform assessment
functions.
• Accordingly, an LOA issued by the Revenue Regional Director shall
extend only to taxpayers within the jurisdiction of the district.
• In this case, the records show that the taxpayer was informed that it
was transferred from the jurisdiction of the Regional Director to the
Large Taxpayers Service.
• Despite this, the Regional Director proceeded with its assessment
and issued the PAN.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
43
University of Santo Tomas Hospital, Inc. v. CIR
• The CTA ruled that the assessment conducted by the Regional
Director was unauthorized because the LOA it issued did not have
any force and effect on a taxpayer who was already transferred to the
jurisdiction of the LTS.
• And even granting that the taxpayer was re-enlisted under the
jurisdiction of the Regional Director during the audit period, the
Region should have issued a new LOA before it can proceed with the
audit investigation.
• Any re-assignment/ transfer of cases to another Regional Director,
and revalidation of LOAs that have already expired, shall require the
issuance of a new LOA.
• Thus, the assessment against the taxpayer is void.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
44
People of the Philippines v. Edwin T.
So, Raymond R. Lee, Techpoint
Computer Corporation
CTA EB Crim Case No. 028 dated 6 March
2015
Constructive service of PAN and FAN when proper;
Letter of Authority for “unverified prior years” is void
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
45
People of the Philippines v. Edwin T. So, Raymond
R. Lee, Techpoint Computer Corporation
• Constructive service must be attested to, witnessed and signed by at
least two ROs other than the revenue officer who constructively
served the notice for delivery to be valid pursuant to RR No. 12-99.
• If a notice is served personally, but the taxpayer refused to
acknowledge receipt of the notice, the same shall be constructively
served by leaving it in the premises of the taxpayer as attested by two
ROs along with a written report of the matter, which shall form part
of the record of the case.
• The CTA clarified that failure to comply with the aforesaid
requirements is a violation of due process on the ground of improper
service of the notice.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
46
People of the Philippines v. Edwin T. So, Raymond
R. Lee, Techpoint Computer Corporation
• Where the BIR issued a Letter of Authority to examine a taxpayer’s
accounting records for "the period 1997 and unverified prior years", a
tax assessment based on records from January to March 1998 is
invalid.
• Under Section C of RMO No. 43-90, the practice of issuing LOAs
covering audit of "unverified prior years" is prohibited.
• If the audit of a taxpayer shall include more than one taxable period,
the other periods or years must be specifically indicated in the LOA.
• Thus, an LOA that goes beyond the authority given to it is invalid and
consequently renders the corresponding assessments void.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
47
Maersk Global Services Centers
(Philippines), Inc. v. CIR
CTA EB Case No. 8549 dated 13 March 2015
Services to international shipping company are
zero-rated; no other proof required
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
48
Maersk Global Services Centers (Philippines), Inc.
v. CIR
• In this case, the CTA initially ruled that the taxpayer’s services to an
international shipping company cannot qualify as zero-rated because
the latter is actually doing business in the Philippines.
• The following documents were presented by the VAT taxpayer in its
claim for refund to prove that the recipient of its services was doing
business outside the Philippines:
1.
Certificate of non–registration issued by the Philippine SEC
2. Certificate of residency of the appropriate tax authority where the
company is doing business
3. Articles of association/incorporation
4. Compiled summary
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
49
Maersk Global Services Centers (Philippines), Inc.
v. CIR
• The CTA found these documents insufficient to prove that the
taxpayer’s foreign client was actually doing business outside the
Philippines, with portion of its total sales attributable to Philippine
operations.
• Nonetheless, after re-examination, the CTA granted the refund to the
input tax since the taxpayer’s services were rendered to a client
engaged in international shipping which is subject to zero percent
(0%) VAT under Section 108(B)(4) of the Tax Code.
• This provision does not require proof that the international shipping
company is doing business outside the Philippines.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
50
Next Mobile, Inc. v. CIR
CTA EB Case No. 1059 dated 16 March 2015
(CTA Case No. 7970)
Intent to evade tax is not vital in falsity
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
51
Next Mobile, Inc. v. CIR
• The taxpayer was assessed in 2009 for deficiency VAT for the taxable
year 2005 due to underdeclaration of gross receipts.
• To refute the charge of falsity and application of the 10-year
prescriptive period, the taxpayer argued that in the absence of proof
of intention to evade payment of tax, mere underdeclaration of gross
receipts did not render its VAT returns false.
• Citing an SC case, the CTA held that as long as there is a deviation
from the truth, whether intentional or not, the return filed is to be
considered a false one, and the ten-year prescriptive period under
Section 222(a) of the Tax Code applies.
• Consequently, an understatement in the taxpayer’s return makes the
said return false, subject to the ten-year period to assess VAT
deficiency from date of discovery of the falsity.
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
52
Carrier Air Conditioning Philippines,
Inc. v. CIR
CTA Case No. 8393 dated 17 March 2015
FWT paid on recalled interim dividends is
refundable
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
53
Carrier Air Conditioning Philippines, Inc. v. CIR
• A domestic company paid interim cash dividends to its foreign parent
company and consequently paid the corresponding FWT to the BIR.
• However, after the financial audit of its books, it was determined that
the unrestricted retained earnings available for dividend declaration
were insufficient to cover the dividends paid.
• Given that the dividends were already declared and remitted, the
company reversed the excess dividends and recorded the
overpayment as receivable from its parent in compliance with the
Corporation Code of the Philippines.
• Considering that there was proper reversal and disclosure of the
overpayment of dividends in the audited FS of the company, and that
the application of the 10% preferential tax rate was confirmed by the
BIR in a ruling, the CTA granted the request for refund/issuance of
TCC for the FWT paid on the excess cash dividends declared by the
company.
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CIR v. Systems Technology Institute,
Inc.
CTA EB Case No. 1050 dated 24 March
2015 (CTA Case No. 7984)
Deficiency withholding tax is not a penalty
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CIR v. Systems Technology Institute, Inc.
• CTA En Banc held that an assessment of withholding tax is not an
imposition of penalty; thus the principle of prescription applies.
• In this case, the BIR invoked an old SC decision which held that the
imposition of deficiency withholding tax is a penalty for failure to
withhold the required taxes. Hence, the three-year prescriptive
period does not apply.
• The CTA En Banc clarified that the cited SC ruling is not controlling
as it is merely an obiter (opinion of the Court) and the same was
decided under the old Tax Code.
• The CTA cited SC cases discussing the personal liability of the
withholding agent for the tax he should withhold.
• Citing another SC case, the CTA En Banc discussed that the validity
of waivers may not be questioned once the taxpayer embraced the
BIR findings through payment of reduced assessment.
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15 July 2015
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Ayala Hotels, Inc. v. CIR
CTA Case No. 8438 dated 31 March 2015
FDDA issued before the 60-day period to submit
documents is void
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Ayala Hotels, Inc. v. CIR
• The CTA, citing G.R. No. 172045-46, reiterated the prerogative of the
taxpayer to determine the sufficiency of its relevant documents
supporting its protest against tax assessments.
• In this case, the CTA held that the issuance of the FDDA was
premature considering that the 60-day period for submission of
relevant supporting documents had not expired.
• The taxpayer could have utilized the remaining 25- day period to
gather documents deemed to be relevant to support its claim and
thereafter, submit the same to the BIR.
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Ayala Hotels, Inc. v. CIR
• Despite the taxpayer’s failure to submit any documents for the BIR
examiner’s scrutiny, it is the BIR’s duty to remain passive until the
lapse of the 60-day period as provided under Section 228 of the Tax
Code and RR No. 12-99.
• Failure to observe the timetable means that the BIR had violated the
taxpayer’s rights to due process.
• The premature issuance of the FDDA rendered the deficiency
assessment invalid.
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15 July 2015
59
Brixton Investment Corporation v.
CIR
CTA EB Case No. 1099 dated 6 April 2015
An RDO letter is not a CIR decision appealable to
CTA
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Brixton Investment Corporation v. CIR
• In this case, the taxpayer duly protested a FLD and later received a
letter from the RDO containing merely a computation for the
taxpayer’s guidance rather than a formal assessment.
• Treating the RDO letter as a final decision, the taxpayer filed a
petition for review with the CTA.
• According to the CTA, in order to acquire jurisdiction, an assessment
must first be disputed by the taxpayer and ruled upon by the CIR to
warrant a decision in the form of a “final decision on disputed
assessment” from which a petition for review may be taken to the
CTA. The RDO letter had not ripened into an appealable decision.
• Hence, the Court ruled that without such decision or inaction, a
disputed assessment cannot be brought to the CTA under Section 228
of the Tax Code.
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ANSI Agricultural Products, Inc. v.
CIR
CTA Case No. 8541 dated 20 April 2015
Oral testimony is not enough to support bad debts
expense
The 60-day period to submit documents is
more appropriate in a request for
reinvestigation
Tax Updates: Threshing Out the Gray Areas
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15 July 2015
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ANSI Agricultural Products, Inc. v. CIR
Oral testimony is not enough to support bad debts expense
• Under existing policies and Section 3 of RR No. 5-99 in relation to
Sec. 34(e) of the Tax Code, bad debts expense may be validly deducted
from gross income if the following requisites are established:
• (1) existence of indebtedness due to the taxpayer which must be
valid and legally demandable;
• (2) the same must be connected with the taxpayer's trade, business
or practice of profession;
• (3) the same must not be sustained in a transaction entered into
between related parties as enumerated under Section 36(B) of the
Tax Code;
• (4) the same must be actually charged off the books of accounts of
the taxpayer as of the end of the taxable year; and
• (5) the same must be actually ascertained to be worthless and
uncollectible as of the end of the taxable year.
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ANSI Agricultural Products, Inc. v. CIR
Oral testimony is not enough to support bad debts expense
• Citing an SC case, the CTA reiterated the following steps to prove that
a taxpayer exerted diligent efforts to collect the debts:
•
•
•
•
(1) sending of statement of accounts;
(2) sending of collection letters;
(3) giving the account to a lawyer for collection; and
(4) filing a collection case in court.
• Hence, in the absence of supporting documentary evidence, the
related bad debt expenses will be disallowed for purposes of
deduction from gross income.
• Mere testimony of the accountant explaining the worthlessness and
the efforts taken to collect the accounts, without documentary proof,
is simply self-serving and lacks probative value.
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ANSI Agricultural Products, Inc. v. CIR
The 60-day period to submit documents is more appropriate in a
request for reinvestigation
• The CTA reiterated the ruling of the SC that if a protest letter does
not specify whether the taxpayer is requesting for "reinvestigation"
(based on newly-discovered evidence) or "reconsideration" (based on
existing records), the same is to be treated as both letter of
reinvestigation and reconsideration.
• The alleged non-submission of supporting documents should not be
considered a fatal error since the protest is also in the nature of a
request for reconsideration which requires only the re-evaluation of
existing records.
• The 60-day requirement is more appropriately confined to protests
by way of a request for reinvestigation, rather than for
reconsideration.
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15 July 2015
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Total (Philippines) Corporation v.
CIR
CTA EB Case No. 1154 dated 21 April 2015
(CTA Case Nos. 7898, 7980 and 8008)
Zero-rating status at the time of sales crucial in a
refund claim
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15 July 2015
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Total (Philippines) Corporation v. CIR
• The claim for refund was denied by the court for failure on the part of
the company to prove the existence of excess or unutilized input tax
attributable to zero-rated sales (i.e., sales to PEZA/CDC/BOIregistered entities).
• To establish the fact that the sales were made to PEZA-registered
entities, and thus are VAT zero-rated, the taxpayer must submit
Certificates of Registration, indicating that its customers are duly
registered with PEZA/CDC/BOI during the period covered by the
claim.
• For purposes of determining the zero-rated sales, the court cannot
assume that the registrations cover the taxable year involved or are
still valid at the time the sales were made.
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Total (Philippines) Corporation v. CIR
• Furthermore, the court emphasized that the input taxes must not
only be duly substantiated but must also exceed the output tax.
• Under Section 112 of the Tax Code, it is only when the input tax
attributable to zero-rated sales exceeds the output tax that a refund
or credit is proper.
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15 July 2015
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CIR v. Sarangani Resources
Corporation
CTA EB Case No. 1098 dated 28 April 2015
(CTA Case No. 8105)
Appeal to the CIR does not refresh the 180-day
period
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15 July 2015
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CIR v. Sarangani Resources Corporation
• Under RR No. 12-99, if the Commissioner or his duly authorized
representative fails to act on the taxpayer‘s protest within 180 days
from date of submission of documents in support of the protest, the
taxpayer may appeal to the CTA within thirty (30) days from the
lapse of the 180-day period.
• In this case, the taxpayer received a decision from the BIR Regional
Office partially granting its protest based on the document
submitted.
• The taxpayer opted to file a request for reconsideration to the office
of the CIR.
• When the taxpayer elevated the case to the CIR, the 180-day period
from the original protest was about to end (barely 18 days left).
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CIR v. Sarangani Resources Corporation
• Instead of filing an appeal to the CTA, the taxpayer submitted
additional documents with the CIR and erroneously counted another
180-day period for the CIR to render her decision.
• Only after the lapse of the new 180-day period did the taxpayer
elevate the case to the CTA on appeal.
• The CTA ruled against the taxpayer since the period to appeal to the
CTA had already expired.
• The CTA clarified that the law provides only one “180-day period”
from submission of documents for the CIR to decide on the protest.
• Therefore, the CTA’s decision is a reminder that an appeal to the CIR
does not refresh the 180-day period and the period should still be
counted from the date when the taxpayer submitted the relevant
documents in support of its protest.
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15 July 2015
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CIR v. Lawl Pte. Ltd.
CTA EB Case No. 1118 dated 12 May 2015
(CTA Case No. 8307)
Overpaid tax under treaty is refundable
Refund claim with ITAD valid if due to tax treaty
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CIR v. Lawl Pte. Ltd.
Overpaid tax under treaty is refundable
• The SC defined an ‘erroneous or illegal tax’ within the scope of Sec.
229 of the NIRC as “one levied without statutory authority, or upon
property not subject to taxation or by some officer having no authority
to levy the tax, or one which in some other similar respect is illegal.”
• There is wrongful payment when what is paid, or at least part of it, is
not legally due.
• Tax payment under a mistake of fact is just an example of an
‘erroneous payment’.
• This does not imply that a claim for refund may be sustained only
when the tax payment was made under a mistake of fact.
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CIR v. Lawl Pte. Ltd.
Overpaid tax under treaty is refundable
• Erroneous or wrongful payment includes excessive payment because it
refers to payment of taxes not legally due.
• Thus, the taxpayer’s claim for tax credit/refund on erroneously
collected internal revenue taxes arising from the application of tax
treaty provisions was valid.
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CIR v. Lawl Pte. Ltd.
Refund claim with ITAD valid if due to tax treaty
• The CTA pointed out that although Section 204 in relation to Section
229 of the Tax Code states that the written claim for refund must be
“filed with the Commissioner”, it does not necessarily follow that all of
such claims must be filed with the said office, in order for the same to
be considered as filed “with the proper authority”.
• Par. III (E) (2.3) of RAO No. 11-00 specifically states that the ITAD is
the office of the BIR tasked to process claims for tax refund arising
from the application of tax treaty provisions.
• Thus, the taxpayer sufficiently complied with Sections 204(C) and 229
of the Tax Code, insofar as the filing of refund claim with the proper
office is concerned.
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BIR Issuances
Tax Updates: Threshing Out the Gray Areas
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Revenue Memorandum Order No. 10-2015
dated 24 March 2015
CARs not included in BIR list are not official
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Revenue Memorandum Order No. 10-2015
• To prevent the transfer of ownership of real properties without the
proper payment of transfer taxes, and to stop the usage of spurious
Certificates Authorizing Registration (CARs/eCARs), the BIR requires
all Revenue District Officers to furnish the concerned Register of
Deeds with a list of manually and electronically issued CARs that are
still valid for transfer as of 20 March 2015.
• The list of valid CARs shall be furnished weekly starting 23 March
2015 until the implementation of the BIR and Land Registration
Administration CAR Verification System.
• Any CARs not included in the list are deemed unauthentic and not
issued by the BIR.
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ITAD Ruling No. 58-15 dated 25 March
2015
Dividends paid subject to the preferential rate of
10% of the gross amount
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ITAD Ruling No. 58-15 dated 25 March 2015
• Citing the Supreme Court ruling [G.R. No. 188550 dated 19 August
2013] which voided the BIR’s prior filing of TTRA requirement, a
taxpayer requested the BIR to review the denial of its TTRA that was
not filed before the transaction.
• The BIR revised its previous ruling and allowed the taxpayer to apply
the 10% preferential tax treaty rate on dividends under the PHNetherlands Tax Treaty.
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ITAD Ruling No. 80-15 dated 25 March
2015
Royalty payments subject to 10% preferential
final withholding tax rate
Tax Updates: Threshing Out the Gray Areas
Isla Lipana & Co., PwC member firm
15 July 2015
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ITAD Ruling No. 80-15 dated 25 March 2015
• Generally, VAT is imposed on the royalties paid to a nonresident
licensor and the Philippine payor is required to withhold the VAT.
• However, the use of or lease of properties to person or entities exempt
from VAT under special law, e.g., P.D. No. 66 and R.A. No. 7916 (PEZA
Law) are effectively zero-rated [as defined under Section 108 of the
Tax Code, the phrase “sale or exchange of services” means the
performance of all kinds of services in the Philippines for others for a
fee, including the supply of scientific, technical or commercial
knowledge information].
• Given that zero-rating is not available to nonresident suppliers, the
VAT exemption under Section 109(K) of the Tax Code becomes
applicable.
• Thus, payment of royalty by a PEZA-registered entity to a nonresident
is exempt from VAT.
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BIR Ruling No. 122-2015 dated 17 April
2015
Petroleum subcontractor is not exempted from
15% branch profit remittance tax (BPRT)
Tax Updates: Threshing Out the Gray Areas
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15 July 2015
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BIR Ruling No. 122-2015
• According to the BIR, while a foreign subcontractor providing
maintenance and engineering services to a service contractor engaged
in petroleum operation is entitled to the 8% preferential final
withholding tax (instead of the 30% regular tax) in lieu of any and all
taxes, it is not exempt from the 15% branch profit remittance tax
(BPRT).
• The 8% final tax in lieu of any and all taxes as provided under
Presidential Decree No. 1354 applies only to a subcontractor’s gross
income derived from contracts with a service contractor engaged in
petroleum operations in the Philippines.
• On the other hand, the BPRT is a tax on profit realized for remittance
abroad.
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15 July 2015
84
Revenue Memorandum Circular No. 282015 dated 17 April 2015
Verification of eCARs under LRA's PHILARIS
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Revenue Memorandum Circular No. 28-2015
• The CIR has issued a Circular publishing the full text of the Joint
Memorandum Circular between the BIR and LRA on the
implementation and use of the Philippine Land Registration and
Information System (PHILARIS) for the automated verification of
eCARs.
• The JMC covers all transactions involving transfers of real properties
before the Registry of Deeds, and discusses the operating procedures
and guidelines of the BIR and LRA with respect to the issuance and
usage of eCARs.
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Revenue Memorandum Circular No. 28-2015
• Among the salient portions of the JMC are as follows:
• There should be one eCAR per title in case of registered land and/or
improvements and one eCAR per tax declaration for unregistered
land/improvements.
• For estate and donor’s taxes on transfers of real properties, eCARs
shall be issued by the RDO having jurisdiction over the
domicile/residence of the decedent/donor.
• Any subsequent modification by the BIR of an eCAR that has been
entered in and verified by the RD shall not affect any transaction
already approved by the RD.
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SEC Memorandum Circular No. 5 dated 29
May 2015
Regular corporations or partnerships cannot
use ‘investment’ as part of their names
Tax Updates: Threshing Out the Gray Areas
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15 July 2015
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SEC Memorandum Circular No. 5
• In a Circular amending paragraph 11(a) of SEC Memorandum
Circular No. 21 (Series of 2013) , the SEC clarified that entities
organized as holding companies cannot use the term ‘investments’ as
part of their corporate or partnership name, but may use the term
‘capital’ instead.
• The word ‘investment’ refers only to entities organized as an
investment house or investment company.
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Thank you.
This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained
in this publication, and, to the extent permitted by law, Isla Lipana & Co., its members,
employees and agents do not accept or assume any liability, responsibility or duty of care for
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information contained in this publication or for any decision based on it.
© 2015 Isla Lipana & Co. All rights reserved. In this document, “PwC” refers to Isla Lipana &
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firm of which is a separate legal entity.