updates on new court decisions atty. luis jose p....

UPDATES on NEW COURT DECISIONS

Atty. Luis Jose P. Ferrer, CPA

Partner, SGV & Co.

PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS(PICPA)

TAX COMMITTEE

Seminar on Tax Updates

October 12, 2016

EDSA, Shangri-la Hotel

Mandaluyong City

OUTLINE

I. Income Tax

II. Withholding Tax

III. Tax Treaty

IV. Value-Added Tax

V. Remedies

Income Tax

Income Tax –Taxable Persons and Entities

Income of PAGCOR’s contractees and licensees fromgaming operations is subject only to 5% franchise tax andnot to both 5% franchise tax and corporate income tax

Bloomberry Resorts and Hotels, Inc. vs CIR

G.R. No. 212530 promulgated on August 10, 2016

Facts:

► April 17, 2013 - BIR issued Revenue Memorandum Circular (RMC)

No. 33-2013, which clarifies the “Income Tax and Franchise Tax Due

from the Philippine Amusement and Gaming Corporation (PAGCOR),

its Contractees and Licensees.”

► RMC No. 33-2013 provides that contractees and licensees of

PAGCOR are subject to income tax.

► Bloomberry, a contractee of PAGCOR, filed a Petition for Certiorari

and Prohibition under Rule 65, seeking to annul RMC No. 33-2013




Issue:

► Is the income of PAGCOR’s contractees and licensees from gaming

operations and from other related services subject to the corporate

income tax under the NIRC?

Ruling:

► Gaming income is exempt from RCIT.

► Income from other related services are subject to RCIT.




Ruling:

► The PAGCOR Charter states that exemptions granted for earnings

derived from the operations conducted under the franchise specifically

from the payment of any tax, income or otherwise, as well as any form

of charges, fees or levies, shall inure to the benefit of and extend

to corporation(s), association(s), agency(ies), or individual(s) with

whom PAGCOR or operator has any contractual relationship in

connection with the operations of the casino(s) authorized to be

conducted under such Franchise, so it must be that all contractees

and licensees of PAGCOR, upon payment of the 5% franchise tax,

shall likewise be exempted from all other taxes, including corporate

income tax realized from the operation of casinos.




Ruling:

► For the related services, the SC in Division held that since PAGCOR

is subjected to RCIT on its related services per its past decision in

G.R. No. 215427, December 10, the SC found that it is logical to

subject to RCIT PAGCOR’s contractees and licensees for "other

related services"

Income Tax –Exempt Transactions

A BIR Ruling is not required to avail of Section 40(C)(2) ofthe Tax Code

Lucio Co vs CIR

CTA Case [Third Division] No. 8831 June 2, 2016

Facts:

► On May 11, 2012, Lucio Co, Susan Co, Ferdinand Co and Pamela

Justice Co (Co Family) entered into a Deed of Exchange with

Puregold Price Club (Puregold)

► They agreed to transfer 1,703,125 shares in Kareila Management

Corporation (KMC) in exchange for 766,406,250 shares in Puregold.

► On June 26 and 28, 2012, the Co Family collectively paid CGT on the

share transfer including interest and penalties of P1,647,615,290.07.

► On May 21, 2014, the Co Family separately filed with the BIR claims

for refund of alleged erroneously paid CGT


Lucio Co vs CIR

CTA Case [Third Division] No. 8831 June 2, 2016

Facts:

► Reason:

► the share transfer was exempt from CGT under Section 40 (C)(2)

of the Tax Code.

► BIR failed to act on the claims

► Co Family filed a Petition for Review with the CTA

► CIR sought the denial of the refund

A BIR Ruling is not required to avail of Section 40(C)(2) of the Tax Code

Facts:

► CIR Reason:

to qualify as a tax-free exchange, a prior application for certification or

ruling from the BIR must be secured pursuant to RR No. 18-2001 and

RMO Nos. 32-2001 and 17-2002

Issue:

► Is a BIR Ruling required to qualify for CGT exemption under Section

40(C)(2) of the Tax Code?

A BIR Ruling is not required to avail of Section 40(C)(2) of the Tax Code

Held:

► No. A BIR ruling is not a precondition to qualify for CGT exemption

under Section 40(C)(2) of the Tax Code.

► The requisites under Section 40(C)(2) of the Tax Code are:

1. The transferee is a corporation

2. The transferee exchanges shares of stock for property of the transferor;

3. The transfer is made by a person, acting alone or together with others not

exceeding 4 persons; and

4. As a result of the exchange, the transferor, alone or together with others not

exceeding 4, gains control of the transferee corporation.

► All requisites have been complied with. These are:


Held (contd):

1.The transferee is a corporation Puregold Corporation, as transferee is a

corporation, duly registered with SEC

2.The transferee exchanges shares of stock for

property of the transferor

Puregold, as transferee, exchanged shares of

stock for shares in KMC

3.The transfer is made by a person, acting alone

or together with others not exceeding 4 persons

there were 4 persons as transferors, Lucio,

Susan, Ferdinand and Pamela, all surnamed Co.

Co Family, who prior to the exchange of shares

already collectively owned 66.55% of the

outstanding capital stock of Puregold, increased

their stockholdings to 75.83% after the exchange

of shares, gained “further control”.

4.As a result of the exchange, the transferor,

alone or together with others not exceeding 4,

gains control of the transferee corporation

Income Tax –Deductions

PEZA-registered enterprises may be allowed to deductexpenses such as royalty payments

CIR vs Lear Automotive Services

CTA EB Case No. 1346 June 2, 2016

Facts:

CIR assessed Lear Automotive Services (Netherlands) B.V. –

Philippine Branch (Lear Ph) for, among others, deficiency income tax

for taxable years 2007 and 2008

CIR disallowed royalty expense from Lear Ph’s gross income subject

to the 5% GIT.

Issue:

Are royalty fees paid by Lear PH to Lear BV deductible for purposes

of computing the 5% GIT?

PEZA-registered enterprises may be allowed to deductexpenses such as royalty payments

CIR vs Lear Automotive Services

CTA EB Case No. 1346 June 2, 2016

Held:

Yes. Lear Ph’s royalty payments form part of its direct cost that

are deductible for purposes of computing the 5% GIT.

RR 11-05 is not meant to be an all-inclusive list but merely

enumerates the expenses that can be considered as direct

costs.

Under the accrual method of accounting, expenses not claimed asdeductions in year incurred cannot be claimed as deduction fromincome for the succeeding year

Acer Philippines, Inc. vs. CIR

CTA Case No. 8372 , 31 March 2016

Facts:

► Acer Philippines, Inc was assessed by BIR with deficiency income

tax, among others, for calendar year 2005.

► BIR's comparison of the salaries and wages reflected in Acer’s

Alphalist vs AFS disclosed a discrepancy in the amount of

P1,887,603.30, and treated the discrepancy as undeclared income.

► Acer’s reason that the said discrepancy is not subject to IT:

1. Difference is a permanent reconciling item in determining the income

per tax return against income per AFS, as a result accrual basis of

accounting.




Facts:

► Acer’s reason

2. Annual ITR for 2005 shows that P1,890,604.00, accrued bonus, was

deducted from the net income per books for 2005, hence, an additional

expense, to arrive at the taxable income/loss for the year 2005.


Acer Philippines, Inc. vs. CIRCTA Case No. 8372 , 31 March 2016

Issue:

► Is the discrepancy between the Alphalist and AFS subject to IT?

Held:

► No, the difference does not represent undeclared income.

► Reason:

1. Income, in a broad sense, means all wealth which flows into the

taxpayer other than as return of capital. The accrual of the

P1,890,604.00 bonus due to employees does not involve an inflow of

wealth.




Held:

2. However, the accrued bonus of P1,890,604.00 was a proper deduction

in 2004, not in 2005.

3. Acer is liable for deficiency income tax on the over-claimed salaries and

allowances of P1,887,603.30 for taxable year 2005.

Royalty income generated from the active pursuit and performanceof the corporation’s primary purpose is subject to regular corporateincome tax

Iconic Beverage Inc. vs. CIR

CTA Case No. 8607, January 6, 2016

Facts:

► Iconic Beverage, Inc. sought to cancel the assessment issued against

it by the BIR for alleged deficiency income tax.

► Iconic’s Reason:

it properly declared its royalties as passive income subject to FWT of 20%

on the gross amount because:

1. the mere fact that royalty income was the only income derived by

Iconic for taxable year 2009 does not and should not transform the

royalty income, which is by nature a passive income, to ordinary

income, and that




Facts:

2. If it is liable to pay the 30% tax rate as prescribed under Section

27 (A), and not 20% FWT for passive income under Section 27

(D) (1), the Court should apply the provisions of Section 34 (L)

on optional standard deduction (OSD), as the said application

would show that Iconic is still not liable to any deficiency

income tax.

Issues:

1. Are the royalty payments received by Iconic subject to income tax?

2. Is taxpayer allowed to use the 40% OSD?




Held:

1. Yes. The royalty payments are subject to income tax.

Ruling:

The royalty payments received by Iconic are generated from the main

purpose of its business, part of which is “owning, purchasing, licensing,

acquiring trademarks and other IP rights, necessary for its business.”

► The rates of tax provided under Section 27(D) of the Tax Code pertain to

certain passive income. If the income is generated in the active pursuit

and performance of the corporation’s primary purposes, the same is not

passive income.




Ruling:

► In this case, the CTA found that Iconic has (1) no operating expenses

incurred for its alleged main trade or business; (2) no other sources of

income other than royalty and interest; and (3) cash flows from its

operating activities consist only of royalty and interest income.

► Hence, the royalties it received shall be considered earned from the

active pursuit of business and shall be subject to the normal corporate

income tax rate of 30%.

Taxpayer should signify in its ITR the intention to elect the optionalstandard deduction (OSD) to avail of the 40% standard deduction



Held:

2. No, Iconic is not allowed to use the 40% OSD.

Ruling:

► Section 34 (L) of the NIRC of 1997, as amended, dictates that the

taxpayer should signify in its return the intention to elect the optional

standard deduction. Otherwise, it shall be considered to have availed

of the other deductions allowed in Section 34 of the NIRC of 1997, as

amended.

Taxpayer should signify in its ITR the intention to elect the optionalstandard deduction (OSD) to avail of the 40% standard deduction


CTA Case No. 8607 , January 6, 2016

► 2009 ITR of Iconic shows that it declared itemized deductions in the

total amount of 150,009,617.40 which resulted to a net loss in the

same amount. There was nothing in ITR which would show that it

opted to avail of the OSD. Thus, OSD should not be applied.

Income Tax –Others

Computation of deficiency IAET is based on Section 29of the Tax Code

Roca Security and Investigation Agency, Inc. vs CIR

CTA Case No. 8718 July 21, 2016

Facts:

► Roca Security and Investigation Agency, Inc. (Roca) was assessed by

the BIR for deficiency taxes, including improperly accumulated

earnings tax for taxable year 2009.

► CIR’s computation of IAET is as follows:Taxable Income for the year Php 1,266,967.95

Less: Income tax paid 380,090.39

Net Income after tax 886,877.56

Add: Retained earnings from previous year 4,375,885.16

Accumulated earnings as of December 31, 2009 5,262,762.72

Less: Amount that may be retained - capital stock 50,000.00

Earnings in excess of capital stock 5,212,762.72

Less: Appropriated retained earnings -

Improperly accumulated earnings 5,212,762.72

Multiply by IAET rate 10%

Basic Deficiency IAET Php 521,276.27




Facts:

► Roca’s reason why not liable to IAET:

1. Entitled to retain earnings for corporate expansion projects and/or

programs requiring considerable capital expenditure

2. As a security agency, it is required to keep substantial amount of

contingency funds

Issue:

► Is Roca liable to IAET?




Held:

► Yes, Roca is liable to IAET.

Reasons:

1. Roca was not able to prove that its BOD reserved the earnings for

corporate expansion projects or programs.

2. Roca failed to prove that there is an immediate need for the accumulation

of the earnings and profits.

► CTA noted that the formula used by BIR in computing deficiency IAET

is not in accordance with Section 29 of the NIRC of 1997, as

amended.

Computation of deficiency IAET is based on Section 29 of the Tax Code



Held:

► CTA computed deficiency IAET as:

Taxable income for the year Php 1,266,967.95

Add:

Income exempt from tax -

Income excluded from gross income -

Income subject to final tax -

The amount of NOLCO deducted -

Less:

Dividends actually or constructively paid -

Income Tax paid for the taxable year 380,090.39

Improperly Accumulated Taxable Income 886,877.56

Multiply by IAET rate 10%

Basic Deficiency IAET Php 88,687.76

Forex gains derived by a contact center from currency hedgingcontracts, which are not part of its registered activity, are notcovered by ITH incentive

Aegis People Support, Inc. vs CIR

CTA EB Case No. 1231 May 17, 2016

Facts:

► Aegis People Support, Inc (Aegis) was registered with PEZA

► Aegis is enjoying ITH incentive as a contact center providing customer

care and business process outsourcing services

► Aegis filed with CIR a claim for refund or tax credits for alleged

erroneously paid income tax on foreign exchange gain realized from

its hedging contract with Citibank in 2008

► Aegis hedging activity involves the sale of specified amounts of

dollars to the bank on pre-determined dates and at pre-determined

exchange rates.




Facts (contd):

► CIR failed to act on the claim

► Aegis filed a Petition for Review with the CTA

► Aegis Reason:

► foreign exchange gain is covered by its ITH incentive considering that the

income was realized from the sale of US dollars earned from its registered

activity

► the purchase of Philippine pesos was needed to pay operational expenses

Issue: Is the foreign exchange gain derived by Aegis from its

currency hedging contract covered by the ITH incentive?




Held:

► No. The ITH incentive does not necessarily include all kinds of income

which Aegis may receive during the period of entitlement.

► CTA held that for the income to qualify under ITH, the income must be

effectively related with the conduct of its registered trade or business.

► While Aegis may have shown that it derived US dollar service fees

from its clients, and these were used to purchase pesos to pay for the

ordinary and necessary expenses of its customer-support business,

the foreign exchange gain derived from the hedging contracts is

not related to its registered activity as a contact center.




Held (contd):

► Aegis hedging activity involves the sale of specified amounts of

dollars to the bank on pre-determined dates and at pre-determined

exchange rates. The hedging activity is outside of its business

registered with PEZA.

Goodwill is a capital asset, sale of which is subject to CGT,not RCIT

CIR vs The Hongkong and Shanghai Banking Corporation

Ltd –Phil Branch


Facts:

► HSBC-Philippines sold its Merchant Acquiring Business at a premium

to GPAP-Singapore

► As per agreement, HSBC-Phils created GPAP-Philippines

► HSBC-Phils, transferred the Merchant Acquiring Business and

Transferred Asset (including the point of sale terminal valued at

P13,964,100.00) of HSBC-Phils in exchange of 139,641 shares of

GPAP-Phils valued at P13,964,100.00.



Ltd –Phil Branch


Facts:

Thereafter, the shares of GPAP-Phils were assigned by HSBC-Phils

to GPAP-Singapore.

► The consideration of the Merchant Acquiring Business was

P899,342,921.00

► CIR assessed RCIT (35%) on the sale of goodwill valued at

P885,378,821 (P899,342,921 less P13,964,100)



Ltd –Phil Branch


Facts (contd):

► CIR Reason:

The sale involves a transfer of goodwill which is an ordinary asset

subject to 35% RCIT.

Issue:

► Is the sale of goodwill subject to CGT or RCIT?



Ltd –Phil Branch


Held:

► Sale of goodwill is a sale of capital asset, subject to CGT.

► CTA Reasons:

Goodwill forms part of the capital with which it was established and once it

is valuated and used, becomes a part of the assets.

Goodwill is not an ordinary asset as it is not among the exceptions under

the definition of capital assets.



Ltd –Phil Branch


Held (contd):

(1) it is not included in stock in trade which would properly be included in the

inventory at the close of the taxable year,

(2) it is not held primarily for sale to customers in the ordinary course of trade

or business,

(3) it is not a property used in the trade or business, of a character which is

subject to the allowance for depreciation provided in subsection (f) of

Section 34 of the NIRC, and

(4) it is not a real property used in the trade or business.

Withholding Tax

Withholding Tax –Expanded Withholding Tax

No EWT on condominium dues on payments made beforeissuance of RMC 65-2012

CIR vs Officemetro Philippines, Inc.

CTA EB Case No. 1213 March 7, 2016

Facts:

► Officemetro Philippines, Inc. (Officemetro) was assessed by the CIR

with deficiency EWT, among others, on the payments for

condominium dues, for taxable year 2005.

► BIR’s argument:

condominium dues are subject to EWT because the previous BIR

Rulings exempting it from EWT was already repealed by Revenue

Memorandum Circular No. 65-2012 (RMC 65-2012).




Issue:

► Whether or not the condominium dues should be excluded from

Officemetro's rentals subject to EWT.

Held:

► Officemetro's condominium dues are not subject to EWT.

Reasons:

1. The covered period is taxable year 2005, and the basis of the

BIR’s assessment is RMC No. 65-2012 which was still inexistent

at the time the assessment was issued.

2. The prevailing ruling at that time is the issued BIR Rulings




Held:

that condo dues are exempt from EWT

3. RMC No. 65-2012 was still inexistent at the time when the FAN

and FDDA was issued on September 23, 2009 and on October 24,

2011, respectively

4. The power of the CIR to issue rulings of first impression or to

reverse, revoke or modify any existing ruling of the Bureau should

be read with Section 246 8(9) of NIRC, where it provides that any

revocation, modification or reversal of any of the rules and

regulations promulgated by the CIR shall not be given retroactive

application if such will cause prejudice to taxpayers




Held (contd):

► Thus, the reversal of the CIR's previous and consistent position that

condominium dues are not subject to income tax and to withholding

tax in RMC No. 65-2012, will cause undue prejudice to Officemetro for

its taxable year 2005.

Income payments to agricultural supplier of goods is notsubject to 1% EWT

Kerry Food Ingredients Cebu, Inc. vs CIR

CTA Case No. 8593 February 9, 2016

Facts:

► Kerry Food Ingredients Cebu, Inc. (Kerry) was assessed by the CIR

with deficiency EWT, among others, on the income payments made to

agricultural supplier of goods, for taxable year 2007.

► Kerry’s argument:

1. the 1% withholding tax on income payments by taxpayers to

suppliers of agricultural products under Section 2.57.2 (S) of

RR No. 2-98, as amended, was indefinitely suspended

pursuant to Section 3 of RR No. 3-2004.




► Kerry’s argument:

2. Kerry was not informed of the clarifications made in Revenue

Memorandum Circular (RMC) No. 44-2007 issued in July

2007, with respect to payments to agricultural suppliers as it

was addressed and directed only to all internal revenue

officers for compliance.

3. Kerry was not liable for the 1% WT on income payments made

by a Top 10,000 corporation to its regular supplier of goods

under Section 2.57.2 (M) of RR No. 2-98, as amended, as said

Section clearly states that it applies to a supplier of goods

"other than those covered by other rates of withholding tax".




Issue:

Whether or not income payments made to suppliers of agricultural

goods are subject to the 1% WT applicable to a top 10,000

corporation for purchases of goods in taxable year 2007

Held:

No.

Reasons:

RMC No.44-2007 is not interpretative in nature. It was incumbent

upon the taxing power to duly inform taxpayers directly affected by it

and accord them the opportunity to be heard.



[CTA Case No. 8593 February 9, 2016

Held (contd):

► There is no indication in the record or in any of the documentary and

testimonial evidence presented by any of the parties that the BIR

complied with such basic requirement insofar as RMC No. 44-2007

was concerned.

► Thus, the assessment of EWT on income payments made by Kerry to

its suppliers of agricultural products should be cancelled.

Either BIR Form 2307 or BIR Form 1606 may be used toprove the fact of withholding

Philippine Bank of Communications vs CIR

[CTA EB Case No. 1194 and 1199 March 21, 2016]

Facts:

► On April 15, 2010, PBCom filed its ITR for CY 2009 which shows:

1. net loss of P592,038,205.25

2. an overpayment of income tax of P85,374,026.88, comprising of:

a) Prior Year's Excess Credits - P40,811,031.83

b) Creditable Tax Withheld per BIR Form 2307 -4th Qtr - P44,562,995.05

► On March 15, 2012, PBCom filed a claim for issuance of TCC with the

BIR

Reason: Excess/unutilized CWT for taxable year 2009 of P44,562,995.05

Either BIR Form 2307 or BIR Form 1606 may be used to prove thefact of withholding



Facts:

► Subsequently, PBCom filed a Petition for Review with the CTA on April

12, 2012, to toll the running of the prescriptive period to file a judicial

claim.

► CTA Second Division granted the claim but only up to P14,387,759.96

► PBCom filed an MR to CTA EB.

Reason:

1. BIR Form No. 1706 was erroneously used by PBCom's

representatives in filing the withholding taxes, as the forms were

provided by the BIR agents who computed the taxes to be withheld




2. there is nothing in Revenue Regulations No. 2-98 that would prejudice

PBCom from claiming a refund/issuance of TCC despite the erroneous

use of other BIR Forms

3. RR No. 2-98 does not specifically prohibit a taxpayer from introducing

evidence other than the said prescribed form to support its claim for

refund

► BIR’s reason, among others:

PBCom failed to submit complete documents in support of its

administrative claim for refund.




Issue:

► Is BIR Form 1606 considered as a proper support to establish the fact

of withholding?

Held:

► Yes.

► Either BIR Form 2307 or BIR Form 1606 may be used to prove the

fact of withholding.

► BIR Form No. 1606 contains the key information that could be

gathered from BIR Form No. 2307.



[CTA EB Case No. 1194 and 1199 March 21, 2016

Held (contd):

► BIR Form No. 1606 is a withholding tax remittance return required by

law to be filed by the buyer in triplicate copies as a requirement for the

transfer of title to the buyer.

► BIR Form No. 1606 supports the certification (BIR Form No. 2307)

attesting to the fact of withholding.

COMELEC is liable to withhold EWT on its payments toSmartmatic and Avante under the lease contracts

COMELEC vs CIR

[CTA Case No. 8929, August 2, 2016]

Facts:

► COMELEC is a constitutional commission mandated to enforce and

administer all laws and regulations relative to conduct of elections,

among others.

► Republic Act No. 8436, as amended by RA 9369, authorized the

COMELEC to use an Automated Election System in the May 11, 1998

Elections and local elections.

► BIR assessed COMELEC with deficiency EWT for TY2008 for its

failure to withhold on the lease contracts with Smartmatic and Avante.


COMELEC vs CIR


Facts:

► COMELEC’s reason for non-withholding:

1. COMELEC is granted tax-exempt status on all taxes abd import duties in

relation to procurement of an automated election system pursuant to RA

8436

Section 12 of RA 8436 provides that the Commission is authorized to

procure, in accordance with existing laws, by purchase, lease, rent, or

other forms of acquisition, supplies, equipment, materials, software,

facilities and other services, from local or foreign sources free from taxes

and import duties, subject to accounting and auditing rules and

regulations.


COMELEC vs CIR


Issue:

► Is COMELEC required to withhold EWT on its lease payments for

optical mark readers to Smartmatic and Avante?

Held:

► Yes.

► COMELEC’s exemption refers only to the direct taxes imposed

uponthe purchase, lease, rent or other forms of acquisition, supplies,

equipment, etc, from local and foreign sources, absent any showing

that indirect taxes are included therein.


COMELEC vs CIR


Held:

► Also, even though indirect taxes are included in RA 8436, deficiency

EWT is not an indirect tax that has been passed on to COMELEC by

its suppliers, as withholding tax is a method of collecting income tax in

advance.

► Exemption granted to COMELEC does not include an exemption from

its duty to withhold taxes fro its income payments to its suppliers.

Withholding Tax -Final Withholding Tax

Self-withholding by the payee does not relieve thewithholding agent/payor of its duty to withhold


[CTA Case No. 8593 February 9, 2016]

Facts:

► Kerry Food Ingredients Cebu, Inc. (Kerry) was assessed by the CIR

with deficiency FWT (10%), among others, on the interest paid by

Kerry from bank borrowings on foreign currency denominated loans to

Citibank, for taxable year 2007.

► Kerry’s Reason:

• per loan agreement with Citibank, the obligation for the payment of

withholding tax rested either with Kerry or its transacting bank. The

transacting bank remitted and paid the required withholding tax on the

loan transaction as evidenced by the Certification it issued, hence,

Kerry is relieved of the obligation to withhold.




Issue:

► Whether or not Kerry should be held liable for 10% FWT on interest

payments made on its foreign currency denominated loan for taxable

year 2007




Held:

► Yes, Kerry is liable for deficiency FWT on interest payments.

► Kerry was under legal obligation to withhold the corresponding tax for

the loan transaction.

► Kerry had the burden of proving that proper taxes had actually been

withheld and subsequently remitted to BIR.

► The Certification presented, standing alone, was not sufficient to

establish compliance with such requirements.

Timing of payment of FWT on cash dividends

Hoya Glass Disk Philippines, Inc. vs CIR

CTA (First Division) Case No.8703 April 25, 2016

Facts:

► Hoya was assessed by CIR for penalties (interest and 50%

surcharge) arising from the alleged late payment of the final

withholding tax (FWT) on cash dividends paid to stockholders.

► Hoya protested the assessment, and filed a PFR with CTA.

► Hoya’s Reason:

1. Not late in filing the FWT return and payment of the

corresponding final tax due because -




Facts:

Timeline:

December 22, 2006 - cash dividends were declared by the BOD to

stockholders of record as of March 31, 2006, and payable on or before

January 31, 2007.

February 2, 2007 - actual payment of dividends

March 10, 2007 – payment of FWT on dividends




Issue:

► Is Hoya liable for penalties for the late payment of FWT?

Ruling:

► Yes.

Hoya should have withheld the final tax on the cash dividends on

January 31, 2007, the date when the cash dividends became

payable, and not on February 2, 2007 when the cash dividends were

paid to its stockholders.




Ruling (contd)

► Section 2.57.4 of RR No. 2-98, as amended by RR No. 12-01,

provides that the obligation of the payor to deduct and withhold the tax

arises at the time an income is paid or payable, or the income

payment is accrued or recorded as an expense or asset, whichever is

applicable, in the payor’s books, whichever comes first. The term

“payable” refers to the date the obligation becomes due, demandable

or legally enforceable.

Tax Treaty

Royalties and business profits

Fluor Daniel, Inc. - Philippines vs. CIR

CTA (Third Division) Case No. 8444, July 11, 2016

Facts:

► CIR assessed Fluor Daniel, Inc. – Philippines (FDIP) for,

deficiency FWT on software maintenance service fees

paid to Fluor Intercontinental, Inc. (FII). The CIR claims

that the payments constitute royalties within the definition

of RMC No. 77-2003, as amended by RMC 44-2005.

► FDIP protested the assessment. Upon receipt of the

FDDA denying its protest, FDIP filed a Petition for Review

with the CTA.


Fluor Daniel, Inc. - Philippines vs. CIR (cont.)

► FDIP argued that it is not liable for deficiency FWT as its

payments to FII constitute business income.

► Under their agreement, FDIP was granted free authority to

access and use a suite of software helpful and necessary

to its operations and activities. FDIP, however, is required

to pay its share in the software maintenance (at cost,

with no markup) computed based on project hours for

trouble shooting, periodic system checking and related

services to ensure proper operation of the software.



► FDIP further argued that the contract is in the nature of

compensation for services rendered abroad, hence

beyond the jurisdiction of the Philippine taxing authority.

Assuming that the fees are Philippine sourced, FDIP

insisted that the payments are not taxable pursuant to the

RP-US Tax Treaty as FII has no PE in the Philippines.

Issue:

► Are the software maintenance fees paid by FDIP to FII

considered royalties subject to FWT?



Ruling:

► No. The nature of the payments by FDIP to FII is for“business support services.” A plain reading of theLicensing Contract shows that the use of the software isfree and that FDIP will only pay FII a fee to shoulder itsshare in the maintenance of the software. The contractalso shows that FII does not transfer all its substantialrights in the software.

► The contract deals with both “know-how” for the use of thesuite of software, which FII did not receive incomepayment, and services for maintenance of the software.



► As to the service contract, the business profits of FII shall

be taxable only in the US unless it has a PE in the

Philippines. Since FII has no PE in the Philippines

pursuant to Article 5 of the RP-US Tax Treaty, the

maintenance service fee is exempt from FWT.

► The CTA further held that since the services were

rendered in the US or outside the Philippines, the

maintenance service fees paid by FDIP to FII are beyond

the taxing jurisdiction of the BIR and exempt from FWT.

Tax Treaty Relief - Capital Gains

► Keppel Philippines Properties, Inc. (for itself and on

behalf of Keppel Land Limited) vs. Commissioner of

Internal Revenue, CTA (Third Division) Case 8908

promulgated July 19, 2016

Facts:

► Petitioner Keppel Philippines Properties, Inc. (KPPI) for

itself and on behalf of Keppel Land Limited (KLL) filed a

claim for refund of P21,420,000 representing erroneously

paid Final Withholding Tax on the redemption of 13.6

Million preferred KPPI shares held by KLL pursuant to the

Philippines-Singapore Tax Treaty.


Keppel Philippines Properties, Inc. - contd

► Due to the inaction of the BIR and to toll the 2-year

prescriptive period, KPPI filed a Petition for Review at the

CTA.

► KPPI argued that the redemption of 13.6 Million preferred

shares resulted in capital gains and not dividends. The

capital gain realized from redemption of preferred shares

is exempt from income tax pursuant to Article 13 of the

Treaty. It filed a tax treaty relief application (TTRA) with

the International Tax Affairs Division (ITAD) of the BIR and

at the time of the filing of the Petition for Review, the ITAD

has yet to act on the TTRA.



► The BIR, on the other hand, argued that it is incumbent

upon KPPI to prove its entitlement to the refund sought

because a claim for refund is not automatically grated

upon filing of the claim. It insisted that KPPI failed to prove

that FWT paid was erroneously or illegally collected.

► Issues:

► 1. Is the net capital gain from redemption of preferred

shares a dividend under Article 10 (4) of the Philippines-

Singapore Tax Treaty?



► Issues:

► 2. Is the net capital gain realized from the redemption of

preferred shares exempt from income tax under the

Philippines-Singapore Tax Treaty?

► Ruling:

► 1. No. A net capital gain cannot be treated as dividend

subject to the 15% FWT, since an ordinary dividend is a

distribution in the nature of a recurring return of stock,

made in the ordinary course of business and with intent to

maintain the corporation as a going concern.



► Ruling:

► The only instance where the gain derived from redemption

may be treated as dividend is the case of redemption of

stock dividends, whether pursuant to partial or complete

liquidation. If a corporation cancels or redeems stock

issued as dividend at such time and in such manner as to

make the distribution and cancellation or redemption, in

whole or in part, essentially equivalent to the distribution

of a taxable dividend, the amount so distributed in

redemption or cancellation of stock shall be considered as

taxable income to the extent of earnings or profits.(CIR vs. Goodyear Philippines, Inc. promulgated on January 5, 2015)



► Ruling:

► In the instant case, KLL’s net capital gain could not be

classified as dividends since it did not represent a

recurring return on the shares redeemed. Furthermore, it

is clear that the preferred shares redeemed by KPPI from

KLL are not stock dividends but were subscribed and paid

by way of conversion of shares by KLL.

► Moreover, the mere fact that the redemption price came

from KPPI’s retained earnings is incidental. Without

KPPI’s redemption of its preferred shares, KLL would not

have derived the capital gain.



► Ruling:

► 2. Yes. Under Article 13 of the Treaty, if KPPI’s assets are

principally immovable property located in the Philippines,

the gain may be taxed in the Philippines.

► Considering the redemption took place in 2012, the CTA

computed the real property components based on KPPI’s

2011 and 2012 audited financial statements

► CTA sustained KPPI and noted that the entire values of

the property and equipment for 2011 and 2012 comprised

less than 50% of its total assets for said years.



► Ruling:

► Considering KPPI’s assets do not consist primarily of

immovable property, the net capital gain derived by KLL in

the redemption of 136,000 preferred shares is beyond the

taxing jurisdiction of the Philippines pursuant to Article

13(4) of the Treaty.

Tax treatment of gain from redemption of shares

Commissioner of Internal Revenue vs. Goodyear Philippines, Inc.

Supreme Court G.R. No. 216130 promulgated August 3, 2016

► Goodyear Philippines, Inc. (Goodyear PH) authorized the redemption

of its 3,729,216 preferred shares held by Goodyear Tire and Rubber

Company (GTRC), a company organized and existing under the laws

of the State of Ohio, United States of America.

► Of the total redemption price of P470,653,914, the amount of

P372,921,600 represented the total par value of the preferred shares,

while P97,732,314 pertained to accrued and unpaid dividends.

► Goodyear PH filed a tax treaty relief application with the BIR to

confirm that the redemption of the preferred shares is not subject to

tax under the Philippines – United States (PH-US) Tax Treaty.

Tax treatment of gain from redemption of shares

CIR vs. Goodyear Philippines, Inc. (Cont.)

► Notwithstanding, Goodyear withheld 15% final withholding tax (FWT)

for dividends prescribed under the Tax Code, on the difference

between the redemption price and the aggregate par value of the

shares.

► Goodyear filed a refund claim for the 15% FWT remitted to the BIR,

on the ground that the gain from the redemption of the shares is

exempt from tax under the PH-US Tax Treaty.

Gains from redemption of shares not subject to FWT for dividends


Is the gain derived by GTRC from the redemption of preferred

shares subject to 15% FWT?

Ruling:

► No, the gain from the redemption is not subject to 15% FWT.

► Under the PH-US Tax Treaty, the term “dividends” should be

understood according to the laws of the State where the corporation

distributing the dividends is a resident.

► The Tax Code defines “dividends” as any distribution made by a

corporation to its shareholders out of its earnings or profits and

payable to its shareholders, whether in money or in other property.

Gain from redemption of shares cannot be considered as accumulated dividends


► The redemption price received by GTRC cannot be considered as

accumulated dividends that can be subjected to 15% FWT.

► Goodyear PH’s audited financial statements from 2003 to 2009

showed that it did not have unrestricted retained earnings. Absent the

availability of unrestricted retained earnings, Goodyear PH cannot

distribute dividends.

► In addition, the primary feature of an ordinary dividend is that the

distribution should be made in the nature of a recurring return on

stock. This cannot be applied in this case since the payment received

by GTRC represented a payment for the redemption of shares.

Value-Added Tax

Value-Added Tax –Exempt Transactions

Microfinance NGOs under Sec. 20 of RA 10693 are exemptfrom VAT effective November 3, 2015

Tulay sa Pag-unlad vs. CIR, CTA (First Division) Case No. 8480

(Amended Decision) promulgated June 20, 2016

Facts:

► Tulay sa Pag-unlad (Tulay), a microfinance NGO, was assessed by BIR

for VAT deficiency for its alleged lending activities for taxable year 2008.

► Tulay argues that the “Social Lending Activity” it performs is beyond that

of a commercial ‘lending investor’, as defined under Section 4.108-3(g)

of RR 16-2005.

► It further argued that with the passage of RA 10693, a microfinance NGO

is sui generis, that it’s a class of its own, separate and distinct from the

definition of “lending investor”.

Microfinance NGOs under Sec. 20 of RA 10693 are exemptfrom VAT effective November 3, 2015

Tulay sa Pag-unlad vs. CIR, CTA Case No. 8480 (Amended

Decision), (cont’d.)

Issue:

► Is Tulay exempt from VAT?

Ruling:

► No.

► Undeniably, microfinance NGOs under Sec. 20 of RA 10693 enjoy a

preferential tax of 2% based on gross receipts in lieu of all national taxes.

However, the law was passed only on November 3, 2015 while the

disputed assessment covers taxable year 2008. The law has no

indication that beneficial tax treatment may be given retroactive effect.

Value-Added Tax –Zero-rated Transactions

A foreign corporation who sells services to a domesticcorporation is deemed engaged in trade or business in thePhilippinesAmadeus Marketing Philippines, Inc. (AMPI) vs. CIR, CTA (First

Division) Case No. 8628 promulgated January 22, 2016

Facts:

► AMPI filed a claim for refund for unutilized input VAT attributable to zero-

rated sales of services to Amadeus IT Group S.A. (AIGS), a corporation

organized in Spain.

► BIR argued that AMPI’s sales to AIGS are not considered VAT zero-rated

as it failed to prove that AIGS is a foreign corporation doing business

outside the Philippines.

► AMPI’s quarterly VAT returns show that it reported input VAT on services

rendered by AIGS. AIGS is therefore an entity that both provided services

to AMPI and to whom AMPI claims to have its zero-rated sales.

A foreign corporation who sells services to a domesticcorporation is deemed engaged in trade or business in thePhilippinesAmadeus Marketing Philippines, Inc. (AMPI) vs. CIR, (cont’d.)

Issue:

► Is AMPI sale to AIGS zero-rated?

Ruling:

► No. AIGS is engaged in business in the Philippines, AMPI’s sales to

AIGS cannot be considered VAT zero-rated hence, the claim for refund

has no legal basis.

► While the Articles of Association of AIGS and the Certificate of Non-

registration issued by the SEC established that AIGS is a foreign entity

incorporated in Spain, the CTA ruled that AIGS conducts business in the

Philippines.

Required documents to prove that a nonresident foreigncorporation is not doing business in the Philippines

Nokia (Philippines), Inc. (Nokia) vs. CIR, CTA En Banc No. 1313

(CTA Case No. 8405), September 22, 2016

• Nokia filed an administrative claim for refund or issuance of TCC for its unutilized input VAT attributable to zero-rated sales for the 3rd and 4th quarters of 2009. For a refund of input VAT attributable to zero-rated sales, an essential condition is that the recipient of the services must be doing business outside the Philippines.

• Nokia presented the Certificate of Nonregistration issued by the Securities and Exchange Commission (SEC), Extract from the Trade Register of Finland and Certificate of Fiscal Residence issued by the Tax Authority of Finland to prove that Nokia Corporation (Finland) (“Nokia Finland”), a recipient of Nokia’s services, is a nonresident foreign corporation (NRFC) doing business outside the Philippines.

• The CTA denied Nokia’s claim for lack of merit declaring that Nokia Finland is doing business in the Philippines based on Note 1 in its Financial Statements for the years ended 2009 and 2008 and concluded that part of the business of Nokia (Philippines) is to handle any specific matter that may arise with respect to Nokia Finland’s business in the Philippines.


Nokia vs. CIR (cont’d)

Issue:

► What evidence shall prove that a nonresident foreign corporation is doing

business outside the Philippines, for purposes of VAT zero-rating?

Ruling:

► Whether or not Nokia Finland is doing business in the Philippines may

not be inferred from Note 1 of the FS. The notes to FS were based on

documents submitted for the purpose of conducting an audit and may not

fairly determine whether or not Nokia Finland is doing business in the

Philippines.



Ruling:

For easy reference, the pertinent portions of Note 1 of the Notes to Financial Statements as of

and for the years ended December 31, 2009 and 2008 of petitioner, are reproduced, viz.:

"1.1 General information

xxx xxx xxx

The Company's parent company is Nokia Corporation (Nokia), incorporated in Finland and

which shares of stock are listed in the Stock Exchanges of Helsinki, Frankfurt and New York.

1.2 Change of business structure

xxx xxx xxx

With the change of business structure, the Company's business operations are now focused

in providing support services to Nokia and other affiliates. The Company has an existing

agreement with Nokia which states that Company shall provide services to Nokia in handling

any specific or general business matter that may arise with respect to Nokia's business in the

Philippines and other territories defined in the agreement. These services include marketing

support service related to Nokia products and solutions, market research in the Philippines

and other support services as defined in the service agreement.

xxx xxx xxx."



Ruling:

► The CTA En Banc reiterated that it has consistently held in numerous

cases that to prove that a NRFC is doing business outside the

Philippines, the said entity must be supported at the very least by:

1) The Certificate of Nonregistration of the Corporation/Partnership

duly issued by the SEC; and

2) Proof of incorporation or registration in a foreign country (e.g.,

Certificate of Incorporation, Memorandum and Articles of Association,

and Certificate of Registration) or any other equivalent document.

Value-Added Tax –Transactions subject to 12% VAT

Arrastre and wharfage duties are considered “othercharges” included in the tax base for VAT on importation

Colgate-Palmolive Philippines, Inc. (CPPI) vs. Commissioner of

Customs, CTA (First Division) Case No. 7806, January 26, 2016

Issue:

► Are arrastre and wharfage duties subject to VAT on importation?

• CPPI was assessed for unpaid VAT on arrastre and wharfage fees pursuant to NIRC

Arrastre and wharfage duties are considered “othercharges” included in the tax base for VAT on importation

Colgate-Palmolive Philippines, Inc. (CPPI) vs. Commissioner of

Customs, (cont’d.)

Ruling:

► Yes. Arrastre and wharfage fees are considered “other charges” included

in the tax base for VAT on importation.

► Sec. 107 of the NIRC imposes the 12% VAT on every importation of

goods “based on the total value used by the BOC in determining tariff

and customs duties, plus customs duties, excise taxes, if any, and other

charges.”

► There is no double taxation as the VAT on “other charges” under Sec.

108 of the NIRC is imposed on the sale of service based on gross

receipts derived from such sale of service. The VAT on “other charges”

under Sec. 107 of the NIRC for the importation of goods.

Value-Added Tax –Withholding VAT

VAT is not covered by the exemption under Article 7(Business Profits) of RP-Singapore Tax Treaty

Willore Pharma Corporation (WPC) vs. CIR, CTA (First

Division) Case No. 8602, June 22, 2016

• WPC was assessed for deficiency Final Withholding VAT, representing advertising expense paid to a NRFC.

• WPC argued that its supplier of service, CMP, is a NRFC registered in Singapore and does not have a PE in the Philippines pursuant to Article 7 (1) of the RP-Singapore Tax Treaty. Thus, WPC argues that any income derived by CMP in the Philippines is not taxable in this jurisdiction.


Willore Pharma Corporation (WPC) vs. CIR, (cont’d.)

This allegedly applies even to VAT since in Article 2(4) provides:

“4. The Convention shall apply also to any identical or substantially similar

taxes on income which are imposed after the date of signature of this

Convention in addition to, or in place of, the existing taxes. The Competent

Authorities of the Contracting States shall notify each other of the changes which

have been made to their respective taxation laws.”


Willore Pharma Corporation (WPC) vs. CIR, (cont’d.)

Issue:

► Is WPC liable for deficiency Final Withholding VAT?

Ruling:

► Yes. The phrase "identical or substantially similar taxes on income”

under Article 2(4) of the Philippines-Singapore Tax Treaty does not

contemplate the inclusion of VAT for the simple reason that VAT is not

a tax on income.

Value-Added Tax –Refund

VAT Updates

Non-observance of the 120-day waiting period will

render judicial claim premature

CIR vs. Mirant Pagbilao Corporation (now TeaM Energy

Corporation), G.R. No. 180434, January 20, 2016

Issue:

► Is the CTA petition premature?

• In March 2002, MPC filed a claim for administrative refund for excess input VAT attributable to zero-rated sales for taxable year 2000.

• 15 days from filing its administrative claim, MPC instituted its judicial claim for refund before the CTA without waiting for CIR’s decision.

Non-observance of the 120-day waiting period will

render judicial claim premature

CIR vs. Mirant Pagbilao Corporation (now TeaM Energy

Corporation), (cont’d.)

Ruling:

► Yes. Citing CIR vs. Aichi Forging Company of Asia, Inc. and CIR vs.

San Roque Power Corporation, the court reiterated that the 120+30-

day period (Sec. 112(D), NIRC) is mandatory and jurisdictional.

► Non-observance of the 120-day waiting period will render its petition

before the CTA premature.

► Also, MPC’s claim for refund or credit was filed in March 2002. Hence,

it does not fall within the exception to the 120+30-day period rule, i.e.,

from the date of issuance of BIR Ruling No. DA-489-03 on December

10, 2003 until the promulgation of the Aichi case on October 6, 2010.

Value-Added Tax –Other Issues

VAT Updates

Any alteration to the VAT invoice or OR must be counter-signed orcounter-signature verified to comply with invoicing requirements

Coral Bay Nickel Corporation (CBNC) vs. CIR, CTA (En Banc)

Case No. 1269, June 29, 2016

Issue:

► Is a counter-signature required for any alteration to the VAT invoice or

OR in order to comply with the VAT invoicing requirements?

• CBNC filed with the CTA a claim for refund of unutilized input VAT attributable to zero-rated sales. CTA disallowed input VAT covered by ORs and invoices that were altered without proper counter-signatures.

• CBNC argued that the NIRC and regulations do not require counter-signatures for any alteration or addition to the VAT invoice or OR.

Any alteration to the VAT invoice or OR must be counter-signed orcounter-signature verified to comply with invoicing requirements

Coral Bay Nickel Corporation (CBNC) vs. CIR, (cont’d.)

Ruling:

► Yes. While CBNC has the right to request its supplier to issue compliant

receipt/invoice, it has the corresponding obligation to check whether the

insertions/alterations were properly validated or countersigned by the

authorized signatory.

► Well-settled is the rule that tax refunds, when based on statutes granting

tax exemption/refund, partake of the nature of exemptions. The rule of

strict interpretation against taxpayer-claimant applies to refund cases.

CBNC has the burden of proof to establish factual basis of its claim for

tax refund.

Remedies

Remedies –Tax Assessment/Investigation

May the BIR disallow 50% of expenses if there is unjustified refusal by taxpayer to produce books of accounts?

1

• BIR assessed Village Green Hog Farm, Inc. (VGHFI) for deficiency income tax for taxable year 2007. VGHFI protested the assessments.

2

• Per the Final Decision on Disputed Assessment (FDDA), 50% of VGHFI’s business expenses were disallowed due to its alleged “unjustified refusal” to produce the books of accounts and other accounting records.

3

• The BIR based its application of the 50% rule of approximation on disallowed expenses on the Best Evidence Obtainable Rule under Revenue Memorandum Circular (RMC) 23-2000.

4

• VGHFI challenged the use of the Best Evidence Obtainable Rule in determining its deficiency tax liabilities, insisting that it submitted and made available to the BIR the documentary requirements.

Village Green Hog Farm, Inc. vs. Commissioner of Internal Revenue

CTA (En Banc) Case No. 1252 promulgated 17 May 2016

Best evidence obtainable ruleWhen may BIR properly apply the rule

Village Green Hog Farm, Inc. vs. CIR (Cont.)

Issue: Did the BIR correctly disallow 50% of VGHFI’s claimed

deductions from gross income?

Ruling: Yes, under the Best Evidence Obtainable Rule pursuant to

Section 6(B) of the Tax Code, as implemented by Sections 2.3 and 2.4(c)

of RMC 23-2000.

► The Best Evidence Obtainable Rule applies when a tax report

required by law for the purpose of assessment is not available or

when the tax report is incomplete or fraudulent.

Best evidence obtainable ruleWhen may BIR properly apply the rule

Village Green Hog Farm, Inc. vs. CIR (Cont.)

► The BIR sent, and VGHFI received, three requests for submission of

certain documents/schedules, and the presentation of books of

accounts for examination.

► There was clear refusal to present accounting records, especially in

relation to its expenses and purchases.

► Thus, the BIR was justified in disallowing 50% of VGHFI’s expense

based on the Best Evidence Obtainable Rule prescribed under RMC

23-2000.

► See also the case of Farcon Marketing Corporation vs.

Bureau of Internal RevenueCTA (2nd Division) Case 8367 promulgated February 3, 2015

Will the receipt of warrants of garnishment prior to issuance of FAN invalidate assessment?

1

• The BIR assessed Petitioner Vargas for alleged deficiency income tax and VAT for 2007 based on a computerized matching of information from third party sources as against the taxpayer’s declarations per VAT returns. The BIR alleged that Vargas under declared his purchases in 2007, resulting in undeclared income, which should be subject to income tax and VAT.

2

• The BIR issued a Final Assessment Notice (FAN) but prior to Vargas’ receipt of the FAN, it enforced at least one of the several Warrants of Garnishment issued against Vargas’ bank accounts. Vargas learned of the garnishment on the same day it secured a copy of the FAN. Vargas filed a Petition for Review at the CTA with an application for a Temporary Restraining Order and Writ of Preliminary Injunction.

3

• At the CTA, Vargas argued that the BIR failed to comply with the due process requirements, as he was not notified in writing of his liability for deficiency taxes. As such, the assessments were null and void and could not become final, executory and demandable. He also prayed for actual damages against the BIR in the form of filing fees and attorney’s fees for its oppressive assessment and the illegal garnishment of his bank account, where he incurred costs to protect his interest.

Esper R. Vargas, Jr. vs. Commissioner of Internal Revenue

CTA (Third Division) Case No. 8750 promulgated 8 March 2016

Can CIR be held liable for actual damages arising from assessment case?

4

• The BIR countered that Vargas should have filed a protest to the FAN instead of a Petition for Review and having failed to do so, the CTA did not acquire jurisdiction over the case.


CTA (Third Division) Case No. 8750 promulgated 8 March 2016

Issues:

1. Are the deficiency tax assessments valid?

2. Can the CIR be held liable for actual damages resulting from the

assessment?

Assessments that are void for failure to comply with due process cannot become final, executory & demandable

Esper R. Vargas, Jr. vs. Commissioner of Internal Revenue (Cont.)

Ruling:

► 1. No. The assessments were void for failure to comply with due

process and cannot become final, executory and demandable. To be

valid, an assessment must actually be received by the taxpayer.

► The assessments and the subsequent collection violated the right to

due process of Vargas, who had no opportunity to assail the

assessment as he was not even aware that assessments were issued

against him. There was no valid notice of assessment sent to the

taxpayer.

►

CIR cannot be held liable for actual damages as he is immune from suit under the doctrine of sovereign immunity.


Ruling:

► 2. No. The CTA has consistently disallowed the award of actual damages in

tax cases. In the case of Farolan, Jr. v. CTA, GR 42204 dated 21 January

1993, the Supreme Court ruled that the CIR cannot be held liable for actual

damages as he is immune from suit following the doctrine of sovereign

immunity.

► It is the BIR’s prime duty to perform tax assessments and tax collections. In

issuing the subject assessment and enforcing its collection, the CIR was

merely exercising the authority accorded to her under the Tax Code.

Attorney’s fees and expenses of litigation cannot be recovered unless the

claimant is compelled to litigate or incur expenses to protest his interest.

However, Vargas did not offer a compelling reason for the award of filing fees

and attorney’s fees.

Effect of a void FDDA on the tax assessment

Commissioner or Internal Revenue (CIR) vs. Liquigaz Philippines

Corporation / Liquigaz Philippines Corporation vs. CIR

G.R. No. 215534/G.R. No. 215557, April 18, 2016

1

• Liquigaz was assessed for EWT, FBT and WTC for taxable year 2005. Liquigaz accordingly received a copy of the LOA in 2006 and the corresponding PAN and FLD/FAN in 2008.

2

• Liquigaz filed its protest against the FLD/FAN and subsequently filed a Petition for Review with the CTA after receiving the FDDA denying its protest on July 1, 2010.

3

• In 2012, the CTA Division, while maintaining the WTC assessment, cancelled the EWT and FBT assessments noting that unlike the PAN and the FLD/FAN, the FDDA issued did not provide the details thereof, hence, Liquigaz had no way of knowing what items were considered by the CIR in arriving at the deficiency assessments.

Effect of a void FDDA on the tax assessmentAssessment vs. Decision

Commissioner of Internal Revenue (CIR) vs. Liquigaz (Cont.)

4• The CTA En Banc affirmed the decision of the CTA Division.

Is the CTA correct in cancelling the EWT and FBT assessments due to a

void FDDA?

No. The CTA erred in cancelling the EWT and FBT assessments. In

resolving the issue on the effects of a void FDDA, the SC noted that it is

necessary to differentiate an “assessment” from a “decision.” Citing a 1958

case, the SC explained that:

The nullity of an FDDA does not result in the nullification of the entire assessment

Commissioner or Internal Revenue (CIR) vs. Liquigaz (Cont.)

Assessment vs. Decision

“An assessment becomes a disputed assessment after a taxpayer has

filed its protest to the assessment in the administrative level.

Thereafter, the CIR either issues a decision on the disputed

assessment or fails to act on it and, is, therefor, considered denied.

The taxpayer may then appeal the decision on the disputed

assessment or the inaction of the CIR. As such, the FDDA is not the

only means that the final tax liability of a taxpayer is fixed, which may

then be appealed by the taxpayer. xxx”

Clearly, a decision of the CIR on a disputed assessment differs from

the assessment itself. Hence, the invalidity of one does not

necessarily result in the invalidity of the other – unless the law or

regulations otherwise provide.

The nullity of an FDDA does not result in the nullification of the entire assessment

Commissioner of Internal Revenue (CIR) vs. Liquigaz (Cont.)

► Section 228 of the NIRC provides that an assessment shall be void if

the taxpayer is not informed in writing of the law and the facts on

which it is based. It is, however, silent with regard to a decision on a

disputed assessment by the CIR which fails to state the law and the

facts on which it is based.

► This void is filled by RR 12-99 where it is stated that the failure of the

FDDA to reflect the facts and the law on which it is based will make

the decision void. It, however, does not extend to the nullification of

the entire assessment.

Void FDDA is tantamount to a denial by inaction by the CIR

Commissioner or Internal Revenue (CIR) vs. Liquigaz (Cont.)

► Interestingly, the SC went on to state that:

“xxx it is as if there was no decision rendered by the CIR. It is

tantamount to a denial by inaction by the CIR, which may still be

appealed before the CTA and the assessment evaluated on the basis

of the available evidence and documents.”

* Note, however, that the FDDA is void only insofar as the EWT and FBT

assessments are concerned. The WTC assessment was upheld.

Can taxpayer validly assail results of Oplan Kandadowith the CTA?

1

• The BIR assessed Respondent Elric Auxiliary Services Corporation (EASC) for deficiency VAT after a surveillance was conducted on EASC’s gasoline station for 10 days under the BIR’s Oplan Kandado Program. The BIR issued a 48-hour notice for EASC to explain why the business establishment should not be closed

2

• . After submission of its explanation, EASC received VAT Compliance Notice requiring the payment of alleged deficiency VAT within 5 days. EASC filed a letter-explanation under oath disputing the assessment. Upon receipt of the BIR’s denial of its explanation, EASC filed a Petition for Review with the Court of Tax Appeals (CTA) within 30 days.

3

• EASC questioned the basis and the method of computation of its sales during the period of surveillance for being arbitrary, and sought the cancellation of the VAT assessment. The CIR argued, among others, that the CTA has no jurisdiction to review its administrative enforcement of the provisions of the Tax Code, such as Oplan Kandado, which imposes administrative sanctions on taxpayers for non- compliance with essential VAT requirements.

4 • The CTA Second Division ruled in favor of EASC, prompting the CIR to elevate to case to the CTA En Banc.

Commissioner of Internal Revenue vs. Elric Auxiliary Services

Corporation/Sacred Heart Services Gas Station

CTA (En Banc) Case No. 1174 promulgated March 3, 2016

Validity of Oplan Kandado program may be appealed to CTA under "other matters arising under the NIRC"


Issues:

1. Does the CTA have jurisdiction over cases arising from BIR’s Oplan Kandado

Program?

2. Are the 48-hour Notice and 5-day VAT Compliance Notice valid?

Ruling:

1. Yes. The CTA’s jurisdiction is not limited to a decision, ruling or inaction of the

CIR on disputed assessments.

The CTA can determine the validity of the 48-hour Notice and 5-day VAT

Compliance Notice issued by the BIR under its Oplan Kandado Program. Oplan

Kandado is based on Section 115 of the Tax Code, which empowers the CIR to

suspend the business operations of a taxpayer. As such it falls within the

meaning of “other matters arising under the NIRC” under Section 7 RA No. 1125,

which is covered by the jurisdiction of the CTA.

BIR should explain surveillance methods used in arriving at sales estimates; otherwise deemed arrived without basis


2. No. In the absence of any explanation on the factual basis of the results of the

surveillance, the taxpayer cannot be deemed to be sufficiently informed on the

basis of the assessment of the VAT liability. Without such basis, the taxpayer

cannot adequately respond or specifically refute the deficiency VAT assessment.

Other than a statement that the result of the surveillance resulted in a VAT

liability, the basis and the method of computation of the liability must likewise be

disclosed. The BIR neither described how the surveillance was conducted nor

explained the methods used in arriving at the sales estimates. There was no way

for the Court to determine whether the factual basis gives rise to a reasonable

estimate. Without such information, the sales amounts used by the BIR cannot

be considered prima facie valid as they appear to have been arrived at without

any basis.

1

• BIR Revenue District Office No. 43 issued a Letter of Authority (LA) for the audit of Manny Pacquiao’s books for 2008 and 2009. Pacquiao failed to include in his 2009 ITR, income from his winnings in the US.

2

• During pendency of RDO No. 43 audit, the Commissioner of Internal Revenue (CIR) issued another LA authorizing the BIR’s National Investigation Division (NID) to examine the books of both Pacquiao and his wife, Jinkee Pacquiao (or Jinkee), from 1995 to 2009.

3

• The BIR alleged that fraud had been established. The CIR also justified the reinvestigation of the years prior to 2007 pursuant to a fraud investigation under the Run After Tax Evaders (RATE) program of the BIR.

Spouses Emmanuel D. Pacquiao and Jinkee J. Pacquiao vs. The Court of

Tax Appeals and the Commissioner of Internal Revenue

Supreme Court (Second Division) G.R. No. 213394 promulgated 06 April 2016

On what bases may the CTA dispense with the cash bond requirement in appealed tax cases?


4

• The BIR assessed Manny and Jinkee Pacquiao for deficiency income tax and VAT for 2008 and 2009, based on the best evidence obtainable, totaling Php2.26 billion inclusive of interests and charges. The Spouses Pacquiao requested that they be allowed to pay their deficiency VAT liabilities in installments, which they eventually did. They appealed the deficiency income tax assessments to the CTA

5

• Pending resolution of their appeal, they sought the suspension of the issuance of warrants of distraint and/or levy and warrants of garnishment. The BIR denied the request to defer the collection enforcement for lack of legal basis and proceeded to issue the warrants.

6

• The Spouses asked the CTA to lift the warrants and to dispense with the requirement for a cash deposit or the filing of a bond arguing that the CIR’s assessment of their liabilities was highly questionable. They manifested that they were willing to file a bond for such reasonable amount to be fixed by the Court.

Spouses Pacquiao vs. CTA and CIR


7

• The CTA ordered the CIR to desist from collecting the deficiency tax assessments and noted that the amount sought to be collected was way beyond the Spouses’ net worth of P1.18 billion, based on Pacquiao’s Statement of Assets, Liabilities and Net Worth.

8

• However, the CTA ruled that there was no justification for the Spouses to deposit less than the amount of P3.3 billion or post a bond of less than the amount of P4.9 billion..

9

• The Spouses Pacquiao appealed to the Supreme Court.

Spouses Pacquiao vs. CTA and CIR


Spouses Pacquiao vs. CTA and CIR (Cont.)

Issues:

► 1. Is there an exception to the cash deposit or bond requirement under

Section 11 of RA 1125?

► 2. If so, does the exception apply in this case?

Ruling:

► Yes, there is an exception to the requirement for a cash deposit or bond.

► Pursuant to the case of Collector of Internal Revenue vs. Jose Avelino, the

courts may dispense with the requirement “if the method employed by the

Collector of Internal Revenue in the collection of tax is not sanctioned by law.”

In the Avelino case, the demand of then CIR was made without authority of

law because it was made five years and 35 days after the last two returns of

Jose Avelino were filed, which is clearly beyond the three-year prescriptive

period to assess.

Cash bond may not be required when method employed by BIR in the collection of tax is not sanctioned by law


► In Collector of Internal Revenue vs. Aurelio Reyes, the Supreme

Court ruled that the cash deposit or bond requirement applies only

where the collection is carried out in consonance with law. It should

not be required “when the said processes are obviously in violation of

the law to the extreme that they have to be SUSPENDED for

jeopardizing the interests of the taxpayer.”

► The authority of the courts to dispense with the deposit of the amount

claimed or filing of the required bond is not confined to cases where

prescription has set in. Instead, whenever it is determined that the

method employed by the CIR in the collection of tax is not sanctioned

by law, the bond requirement should be dispensed with.

Case is remanded to the CTA for determination of whether the dispensation or the reduction of cash bond is proper


► It would be absurd for the CTA to declare that the collection was made

in violation of law and, in the same breath, require the taxpayer to

make the deposit or to file the bond as a prerequisite to stop the said

illegal collection.

► It cannot be determined, however, if the exception applies in this case

as there is no sufficient factual basis in the records to determine

whether the cash deposit or bond requirement should be dispensed

with.

► Hence, the case is remanded to the CTA for a preliminary

determination of whether the dispensation or the reduction of the

required cash deposit or bond is proper.

Remedies –Deficiency interest and

delinquency interest

Deficiency interest may be imposed on all types of taxes

CIR vs. Philippine Tobacco Flue-Curing and Redrying Corporation

CTA (En Banc) Case No. 1218 and 1220 promulgated April 11, 2016

1

• The CIR assessed Philippine Tobacco Flue-Curing and Redrying Corporation (PTFC) for deficiency income tax, VAT, withholding tax on compensation (WTC), expanded withholding tax (EWT), final withholding tax (FWT), documentary stamp tax (DST), and inspection fees. PTFRC protested the assessments and after reinvestigation, the BIR issued a Final Decision on Disputed Assessment (FDDA) reducing the tax deficiency.

2

• PTFC filed a Petition for Review with the CTA. The CTA First Division reduced the BIR’s deficiency tax assessment and imposed penalties including 25% surcharge, 20% deficiency interest, and 20% delinquency interest. Aggrieved, PTFC elevated the case to the CTA En Banc.


CIR vs. Philippine Tobacco (Cont.)

Can the 20% deficiency interest be imposed on all types of taxes?

► Yes, the Tax Code authorizes the imposition of deficiency interest on

all tax types.

► Section 247 (a) of the Tax Code provides that the imposition of

additions to the tax applies to all taxes. The authority to impose

additions [such as surcharges under Section 248, deficiency interest

under Section 249 (B), delinquency interest under Section 249 (C) and

interest on extended payment under Section 249 (D)] extends to all

taxes regardless of the title under which they are classified. The law

does not limit these additions only to income tax, estate tax and

donor’s tax.



► Accordingly, the additions to the deficiency tax such as, surcharge,

deficiency interest, and delinquency interest, are applicable to the

deficiency income tax, VAT, WTC, EWT, DST and inspection fees of

PTFC.

Deficiency and delinquency interest may be imposed simultaneously


Can deficiency interest and delinquency interest be imposed

simultaneously?

► Yes, the Tax Code authorizes the simultaneous imposition of deficiency

interest and delinquency interest.

► The CTA En Banc held that a plain reading of Section 249 of the Tax

Code justifies the simultaneous imposition of deficiency interest and

delinquency interest. Section 249 (B) and (C) are clear that both

deficiency interest and delinquency interest are to be reckoned from

the date prescribed for their payment and until the full payment

thereof.

Computation of imposable interests in case of deficiency assessments

Liquigaz Philippines Corporation vs. Commissioner of Internal

Revenue/Commissioner of Internal Revenue vs. Liquigaz

Philippines Corporation

CTA EB Case Nos. 1117, Amended Decision, promulgated June 03, 2016

1

• Through a Formal Letter of Demand dated October 16, 2009 and assessment notices dated on the same date, the BIR assessed Liquigaz Corporation, Inc. for deficiency income tax, VAT, expanded withholding tax (EWT), and withholding tax on compensation (WTC) for taxable year 2006, and demanded that the deficiency taxes be paid on or before October 31, 2009.

2

• Liquigaz protested such assessment on November 19, 2009 and on January 18, 2010, it submitted to the BIR the documents in support of the protest letter.

Computation of imposable Interests in case of deficiency

assessments

Liquigaz Philippines Corporation vs. CIR (Cont.)

Tax Type Basic Deficiency 25% Surcharge Total

Income Tax 55,939,514.83 13,984,878.71 69,924,393.54

Value-Added Tax 5,774,369.52 1,443,592.38 7,217,961.90

Expanded Withholding Tax 2,642,579.68 660,644.92 3,303,224.60

Withholding Tax on Compensation 1,088,401.32 272,100.33 1,360,501.65

Total P65,444,865.35 P16,361,216.34 P81,806,081.69

3

• Since the BIR failed to act on Liquigaz’s protest, Liquigaz filed a Petition for Review with the CTA. The CTA Special Third Division affirmed the assessment on Liquigaz, as follows:

Is deficiency interest applicable also on deficiency VAT,

EWT and WTC?


5

• Pending appeal, Liquigaz made a partial payment to the BIR in the amount of P54,806,640.74, representing a portion of the adjudged award by the CTA Special Third Division

4

• The CTA Special Third Division also ordered Liquigaz to pay deficiency interest on all items of assessment computed from the time of filing of return until fully payment, as well as delinquency interest computed from October 31, 2009 until full payment.

Deficiency interest must be imposed not just on deficiency

income tax but also on deficiency VAT, EWT and WTC


Is Liquigaz liable for deficiency interests on the foregoing assessments?

► Yes, Liquigaz is liable for deficiency interest, citing the case of

Takenaka Corporation Philippine Branch vs. CIR (CTA EB Case No.

745, Sep. 4, 2012), stating that the issue is not novel and has been

sufficiently discussed by the Supreme Court in a 1995 case where it

declared that deficiency interest embraces failure to pay all taxes

imposed in the Tax Code, without regard to the Title of the Code

where the provisions imposing particular taxes are textually located.

► Thus, deficiency interest must be imposed not just on deficiency

income tax but also on deficiency VAT, EWT and WTC.

Reckoning period for the imposition of deficiency

interest and delinquency interest


When is the reckoning period for the imposition of deficiency interests

and delinquency interests?

► Again, citing the Takenaka case, the CTA En Banc affirmed the

simultaneous imposition of the deficiency and delinquency interests,

which shall be reckoned from the date prescribed for their payment

until full payment thereof.

• Deficiency interest – from the date prescribed for its payment

until full payment thereof

• Delinquency interest – from the due date appearing in the notice

and demand of the Commissioner until the amount is fully paid

Imposition of deficiency interest and delinquency

interest on tax assessments


► In this case, the CTA En Banc, in its amended decision, held that

the imposition of the 20% deficiency interest on the deficiency

income tax in the reduced amount of P81,806,081.69 including the

25% surcharge, shall accrue from April 15, 2007 until full payment

thereof.

► The delinquency interest of 20% shall be applied to the total

amount of: (1) P81,806,081.69, plus (2) the deficiency interest

computed beginning November 1, 2009 until full payment.

Remedies –Prescription

1

• Bureau of Internal Revenue assessed Petitioner Urbano Velasco (Velasco) for deficiency donor’s tax on the sale of his shares of stock in Gervel, Inc. (Gervel) and Metropolitan Management Corporation (MMC) in 2008.

2• The BIR demanded payment of the donor’s tax due based on the

difference between the book value and the selling price of the shares (selling price is lower than book value).

3• BIR issued a Preliminary Assessment Notice (PAN) assessing

donor’s tax. Velasco protested the assessment.

Urbano L. Velasco vs. Bureau of Internal Revenue

CTA (First Division) Case No. 8497 promulgated May 17, 2016

The prescriptive period for deficiency donor’s tax on the sale of shares is reckoned from filing of CGT return

The prescriptive period for deficiency donor’s tax on the sale of shares is reckoned from filing of CGT return

Urbano L. Velasco vs. Bureau of Internal Revenue (cont’d.)

Issue: Is Velasco subject to deficiency donor’s tax?

4• On October 14, 2011, BIR issued a Final Assessment Notice.

Velasco raised prescription and argued that since he filed the corresponding Capital Gains Tax (CGT) Returns on September 24, 2008, the BIR only had until September 24, 2011 to assess.

5 • The BIR countered that since Velasco failed to file a donor’s tax return, it has 10 years to assess the deficiency donor’s tax.

Excess of fair market value over the consideration received for the stocks sold is subject to donor’s tax

Urbano L. Velasco vs. Bureau of Internal Revenue (cont’d)

Ruling: No. The right of the BIR to assess Velasco for the deficiency

donor’s tax has prescribed.

Donor’s tax is imposed upon the transfer by any person of the property

by gift as provided under Section 98 of the Tax Code. The excess in the

fair market value over the consideration received for the stocks sold is

deemed gift subject to donor’s tax.

Even if TP fails to file donor’s tax return, prescriptive period to assess donor’s tax is 3 years from filing of CGT return

Urbano L. Velasco vs. Bureau of Internal Revenue (cont’d)

► However, the CTA ruled that the donor’s tax assessment against

Velasco should be cancelled due to prescription.

► Although the assessment was for donor’s tax, Velasco’s filing of the

CGT Returns constitutes sufficient compliance with the requirement of

filing a tax return under Section 103 of the Tax Code, as amended, for

the purpose of computing prescription covering the transaction. The

FAN was dated October 13, 2011 or more than 3 years after the filing

of the CGT Returns on September 24, 2008.

What BIR notices may be protested to constitute disputed assessment; appealable to the CTA?

1

• The BIR assessed the Landbank of the Philippines (Landbank) for deficiency expanded withholding tax (EWT) and documentary stamp tax (DST) on the consolidation of a land title in its name as the winning bidder. The BIR also imposed a 25% surcharge of the basic tax, interest of 20% per annum, and compromise penalties for alleged late payment of the taxes due.

2

• Landbank paid the taxes and penalties as computed in the One-Time Transaction (ONETT) Computation Sheet. Landbank then filed a protest with the BIR against the imposition of the surcharge, interest and compromise penalties. In the same protest letter, Landbank sought the refund of the penalties paid.

3• Upon denial of its protest, Landbank filed a Petition for Review with

the CTA.

Landbank of the Philippines vs. Commissioner of Internal Revenue

CTA (Second Division) Case 8684 promulgated 21 January 2016

Can a claim for refund prosper if it was raised in

taxpayer's protest letter to an assessment?

4

• Records show that the redemption period expired on September 29, 2012, a Saturday, and both Landbank and the CIR agreed that the right to redeem could still be legally exercised until October 1, 2012. As such, Landbank argued that its deadline to pay the EWT and DST was extended to 10th and 5th day, respectively, of the month following the sale or on November 10 and 5, respectively. On the other hand, the CIR asserted that the extension of the right to redeem does not apply to the remittance of the EWT and DST, which were nonetheless due on October 10 and October 5, respectively.

Landbank of the Philippines vs. CIR

Issues:

1.Does the CTA have jurisdiction over the CIR’s inaction on Landbank’s

protest based on the ONETT Computation Sheet?

2. Is Landbank entitled to a refund of the penalties paid?

ONETT computation sheet is not an assessment

contemplated under Section 228; CTA has no jurisdiction


Rulings:

► No. The CTA has jurisdiction only on the inaction of the CIR over Landbank’s

disputed assessment pursuant to Section 228 of the Tax Code, as amended.

The ONETT Computation Sheet is not the assessment contemplated under

Section 228 that would require a protest. It does not formally inform a

taxpayer of its tax liabilities and there is no formal demand to pay the same.

Without the formal demand for payment, Landbank has no way to determine

the period within which to protest the tax liabilities computed by the CIR.

► Thus, the CTA did not acquire jurisdiction over the Petition. In CIR vs.

PASCO Realty and Development Corp., GR No. 128315 promulgated on

June 29, 1999, the Supreme Court explained that not all documents coming

from the BIR containing a computation of the tax liability can be deemed

assessments. An assessment contains not only a computation of tax

liabilities, but also a demand for payment within a prescribed period.

Claim for refund should have been filed instead of protest to recover penalties paid


Rulings:

► 2. No. To be able to claim a refund under Section 229 of the Tax Code,

Landbank must have filed an administrative claim before the BIR. No such

administrative claim for refund or issuance of a tax credit certificate was filed

by Landbank with the BIR.

Questions?

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