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February 2012

Tax brief
Contents 02 BIR Rulings Royalties non-deductible for PEZA enterprises FBT on cash housing allowance 03 BIR Issuances Clarification on taxability of GPPs Rule on acceptance of tax payments by RCOs t Decisions 04 Cour Court Statutory taxpayer is the proper party to claim excise tax refund Due process in tax assessments Proof of receipt of assessment Proof of remittance not required for FWT refunds 06 Highlight on P&A services Tax opinion and studies
February 2012 1

BIR Rulings
Royalties non-deductible for PEZA enterprises Royalty payments made by an export enterprise registered with the Philippine Economic Zone Authority (PEZA) to a nonresident foreign corporation under a trademark license agreement are not allowed as deduction for purposes of computing the taxable gross income of the PEZA-registered enterprise under the 5% preferential tax rate. The Bureau of Internal Revenue (BIR) held that the list of allowable deductions for ecozone export enterprises under Section 2, Rule XX of the PEZA implementing rules and regulations (IRR) is exclusive. Since royalties are not included in the allowable deductions, it may not be deducted from the gross income subject to the 5% preferential tax rate under the maxim expressio unius est exclusion alterius, i.e., the mention of one thing implies the exclusion of another thing not mentioned. All other rulings that treat royalties as allowable deductions are considered revoked by this BIR ruling. (BIR Ruling No. 014-2012, January 4, 2012) FBT on cash housing allowance Housing privilege granted to expatriate employees holding managerial/ supervisory posts in the form of a fixed monthly allowance is treated as fringe benefit subject to fringe benefit tax (FBT) imposed under Section 33 of the Tax Code of 1997, as implemented by Revenue Regulations No. (RR) 3-98. In determining whether the housing privilege is subject to FBT or not, it is immaterial whether the lease contract was entered under the name of the employer or under the name of the employee. As long as the grant of the housing allowance was given in addition to the basic salary of the employee, such benefit shall be considered fringe benefit subject to FBT. However, where the actual amount of housing allowance exceeds the actual amount of rent, the excess shall be treated as part of the employees income subject to income tax and consequently to the withholding tax on compensation prescribed under Section 79 of the Tax Code. (BIR Ruling No. 512-2011, December 20, 2011)

2 February 2012

BIR Issuances
Clarification on taxability of GPPs The BIR issued the following clarifications on the tax liability of general professional partnerships (GPPs) and their partners.
1. Income tax liability of GPPs and partners - A GPP is not subject to

Rule on acceptance of tax payments by RCOs The BIR reiterated the rules to be observed in the acceptance of tax payments and issuance of Revenue Official Receipts (RORs) by Revenue Collection Officers (RCOs). Pursuant to Section III.2 of Revenue Memorandum Order No. (RMO) 042007, as amended by RMO 02-2010, the BIR clarified that the authority of RCOs to issue RORs shall apply only on the following deadlines: a. On January 31 - for the payment of Annual Registration Fee b. On the 10th day of the month - for the remittance of withholding taxes c. On the 20th day of the month - for the filing and payment of quarterly VAT d. For the annual income tax payment of individual taxpayers as well as calendar-period corporate taxpayers,

the issuance of RORs shall start five working days prior to and until April 15. The BIR further clarified that pursuant to RMO 04-2007 as amended, RORs by RCOs shall be limited to cash not exceeding P20,000. However, there shall be no limit to the amount if payment is made through checks. Non-compliance with the rules, policies and guidelines on the acceptance of tax payments by RCOs assigned in areas where there are authorized agent banks (AABs) will subject the concerned revenue officials and employees to administrative disciplinary action under the Revised Code of Conduct for BIR officials and employees. (Revenue Memorandum Circular No. 02-2012, January 3, 2012)

income tax. It is the partners who are liable to income tax on their separate and individual capacities. For income tax purposes, each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
2. Creditable withholding tax on GPPs and partners - Since a GPP

is not subject to income tax, it is exempt from withholding tax prescribed in RR 2-98 on income payments it receives in consideration for its professional services. However, income payments made periodically or at the end of the taxable year by a GPP to its partners, such as drawings, advances, sharings, allowances, stipends and the like, are subject to the 15% creditable withholding tax (CWT) if payments to the partner exceed P720,000, and 10% if otherwise. (Revenue Memorandum Circular No. 03-2012, January 12, 2012)

February 2012

Court Decisions
Statutory taxpayer is the proper party to claim excise tax refund The proper party to question or seek a refund of erroneously paid excise taxes on petroleum products is the statutory taxpayer. The statutory taxpayer is the person on whom the tax is imposed by law and who paid the same even when the burden is shifted to the buyer. Excise taxes, which apply to articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines, is basically an indirect tax. While the tax is directly levied upon the manufacturer/importer upon removal of the taxable goods from its place of production or from the customs custody, the tax, in reality, is actually passed on to the end consumer as part of the transfer value or selling price of the goods sold, bartered or exchanged. Thus, while a foreign airline company is not liable to excise tax on the petroleum products it purchased and consumed in its international flight under Section 135(b) of the Tax Code, it cannot claim for refund of the erroneously paid excise taxes because it is not the proper party to claim such excise tax refund. Rather, it is the supplier i.e., the petroleum company that is the proper party to claim the tax refund and accordingly refund to the foreign airline company the excise tax erroneously passed on to the latter. [Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue, GR 166482, January 25, 2012] Due process in tax assessments Under Section 228 of the Tax Code and Section 3.1.4 of RR 12-99, a taxpayer must be informed of the facts and the laws upon which an assessment is made. Failure to do so shall void the assessment. In the appeal of its tax assessment, the taxpayer argued that the final assessment notice (FAN) and assessment notice (BIR Form No. 1708) issued by the BIR are void since they merely showed mathematical computation of the alleged deficiency income tax and VAT discovered from the BIRs Reconciliation of Listing for Enforcement (RELIEF) and Third Party MatchingBOC Data Program. The notices did not state the factual and legal bases of the assessment in violation of Section 228 of the Tax Code. The taxpayer further argued that the details of discrepancy attached to the FAN failed to explain how the underdeclaration was determined except that there is a discrepancy. It merely provides a statement that the assessment was made in accordance with Sections 31, 32, 106 and 108 of the Tax Code, and RMO 32-2007. In its ruling, the Court of Tax Appeals (CTA) held that the FAN, assessment notice, and details of discrepancies attached to the FAN sufficiently complied with Section 228 of the Tax Code since they contained the factual basis for the assessment; that is, the assessment was based on discrepancy from RELIEF and Third-Party Matching. The details of discrepancy likewise provided the legal basis for assessing the taxpayer by citing Sections 31, 32, 106 and 108 of the Tax Code, as amended and RMO 32-2007. According to the CTA, the requirement of the law to inform the taxpayer of the basis of the assessment does not necessarily mean that a full narration of the facts and laws on which the assessment is based is needed. As long as the parties are notified and given the opportunity to explain their side, the requirements of due process are satisfactorily complied with. In the instant case, the taxpayer was able to intelligently make its protest by stating that its sale transactions are exempt from VAT. This circumstance proves that the taxpayer was sufficiently informed of the facts and the law as to why the assessment has been issued against it. (Hermano Miguel Febres Cordero Medical Education Foundation v. Commissioner of Internal Revenue, CTA Case No. 8194, January 9, 2012)

4 February 2012

Court Decisions
Proof of receipt of assessment Sending a preliminary assessment notice (PAN) to a taxpayer is part of the due process requirement in the issuance of deficiency tax assessment. Its absence would render nugatory any assessment made by the tax authorities. Thus, in case of denial of receipt of PAN, it is incumbent upon the BIR to prove by competent evidence that the PAN was indeed received by the addressee in the due course of mail. To prove receipt of PAN, the BIR should present the copy of registry return receipt or other evidence that the taxpayer personally received the assessment. For failure to establish that the PAN was actually received by the taxpayer, either personally or by registered mail the assessment was deemed void. (Laurence Lee V. Luang v. Commissioner of Internal Revenue, CTA Case No. 7967, January 5, 2012) Proof of remittance not required for FWT refunds A final withholding tax (FWT) is of the same genre as CWT. This is clear under RR 2-98 where both provisions of FWT and CWT appear under the subject/ heading Withholding of tax at source. Considering that FWT and CWT are of the same nature, the CTA held that the conditions for entitlement to refund of CWT should likewise apply in a case of refund of FWT. To be entitled to refund of unutilized CWT, the Supreme Court held in the case of Banco Filipino Savings and Mortgage Bank v. Court of Appeals, CTA and Commissioner of Internal Revenue (CIR), that there are three conditions that must be established by the taxpayer-refund claimant, to wit: a. the claim is filed with the CIR within the two-year period from the date of payment of tax; b. it is shown on the return of the recipient that the income payment received was declared as part of the gross income; and c. the fact of withholding is established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. To establish the fact of withholding, the document that may be accepted as evidence must emanate from the payor and not from the payee, and must indicate the name of the payor, the income payment basis of the tax withheld, the amount of tax withheld, and the nature of the tax paid. In a number of cases, the Supreme Court and CTA held that proof of actual remittances of the taxes withheld is not required to prove entitlement to refund of CWT. Hence, the same rule should apply to claims for refund of FWT. The taxpayer-refund claimant is likewise not required to present supporting documents to prove that the corresponding FWT on its interest on currency bank deposits has been remitted to the BIR in order to be entitled to tax refund. The certificates of final tax withheld at source (BIR Form 2306) should suffice. (Philippine Airlines, Inc. v. Commissioner of Internal Revenue, CTA En Banc Case No. 665 re CTA Case No. 7224, January 5, 2012)

February 2012

Highlight on P&A services

Tax opinion and studies We conduct tax studies and provide advice to clients on the tax implications of specific transactions based on relevant laws, regulations, court decisions, rulings, and other relevant issuances. We likewise provide recommendations to address or mitigate tax issues arising from said transactions.

Tax Brief is a regular publication of Punongbayan & Araullo (P&A) that aims to keep its clientele, as well as the general public, informed of various developments in taxation and other related matters. This publication is not intended to be a substitute for competent professional advice. Even though careful effort has been exercised to ensure the accuracy of the contents of this publication, it should not be used as the basis for formulating business decisions. Government pronouncements, laws, especially on taxation, and official interpretations are all subject to change. Matters relating to taxation, law and business regulation require professional counsel. We welcome your suggestions and feedback so that the Tax Brief may be made even more useful to you. Please get in touch with us if you have any comments and if it would help you to have the full text of the materials in the Tax Brief. Lina Figuer oa Figueroa Principal, T ax Advisory & Compliance Division Tax T +632 886-5511 ext. 507 F +632 886-5506 ext. 606 E

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6 February 2012