April 2011 1 11 11

April 2011
Tax brief
Contents Contents Contents Contents Contents
02 SEC Circular SEC Circular SEC Circular SEC Circular SEC Circular
Reckoning date of penalty for
non-compliance with SEC
financial reporting
requirements
02 Cour Cour Cour Cour Court Decisions t Decisions t Decisions t Decisions t Decisions
PAGCOR subject to income
tax, exempt from VAT
CDA registration not
essential for entitlement to
DST exemption of mutual life
insurance companies
Requisites for the grant of
claims for refund of excess
CWT
Imposition of delinquency
interests on assessments
ruled by courts
04 BIR Issuances BIR Issuances BIR Issuances BIR Issuances BIR Issuances
Allocation of costs and
expenses of banks and
financial institutions
Amendments to de minimis
benefits tax exemption rule
Suspension of filing of
Annual Information Return
(AIR)
VAT on sale of company cars
BIR stamping of additional
copies of AFS for SEC filing
05 BIR R BIR R BIR R BIR R BIR Rulings ulings ulings ulings ulings
DST on PEZA-registered
enterprises
VAT on indent sales
06 Highlight on P&A ser Highlight on P&A ser Highlight on P&A ser Highlight on P&A ser Highlight on P&A services vices vices vices vices
Tax seminars and training
2 2 2 2 2 April 2011
SEC Circular
P PP PPAGCOR subject to income tax, AGCOR subject to income tax, AGCOR subject to income tax, AGCOR subject to income tax, AGCOR subject to income tax,
exempt from V exempt from V exempt from V exempt from V exempt from VA AA AAT TT TT
With the passage of Republic Act No.
(RA) 9337, the Philippine Amusement
and Gaming Corporation (PAGCOR) has
been excluded from the list of
government-owned and -controlled
corporations (GOCCs) that are exempt
from tax under Section 27(c) of the Tax
Code; PAGCOR is now subject to
corporate income tax.
The Supreme Court (SC) held that the
omission of PAGCOR from the list of
tax-exempt GOCCs by RA 9337 does not
violate the right to equal protection of the
laws under Section 1, Article III of the
Constitution, because PAGCORs
exemption from payment of corporate
income tax was not based on classification
showing substantial distinctions; rather, it
was granted upon the corporations own
request to be exempted from corporate
income tax. Legislative records likewise
reveal that the legislative intention is to
require PAGCOR to pay corporate
income tax.
With regard to the issue that the removal
of PAGCOR from the exempted list
violates the non-impairment clause
contained in Section 10, Article III of the
Constitution which provides that no
law impairing the obligation of contracts
shall be passed the SC explained that
following its previous ruling in the case of
Manila Electric Company v. Province of Laguna
366 Phil. 428 (1999), this does not apply.
Franchises such as that granted to
PAGCOR partake of the nature of a
grant, and is thus beyond the purview of
the non-impairment clause of the
Constitution.
As regards the liability of PAGCOR to
VAT, the SC finds Section 4.108-3 of
Revenue Regulations No. (RR) 16-2005,
which subjects PAGCOR and its licensees
and franchisees to VAT, null and void for
being contrary to the National Internal
Revenue Code (NIRC), as amended by
RA 9337. According to the SC, RA 9337
does not contain any provision that
subjects PAGCOR to VAT. Instead, the
SC finds support to the VAT exemption
of PAGCOR under Section 109(k) of the
Tax Code, which provides that
transactions exempt under international
agreements to which the Philippines is a
signatory or under special laws [except
Presidential Decree No. (PD) 529] are
exempt from VAT. Considering that
PAGCORs charter, i.e., PD 1869
which grants PAGCOR exemption from
taxes is a special law, it is exempt from
payment of VAT.
Accordingly, the SC held that the BIR
exceeded its authority in subjecting
PAGCOR to VAT, and thus declared RR
16-05 null and void insofar as it
subjects PAGCOR to VAT for being
contrary to the NIRC, as amended by RA
9337.
[Philippine Amusement and Gaming
Corporation (PAGCOR) v. the Bureau of
Internal Revenue (BIR), et. al., GR 172087,
March 15, 2011]
Court Decisions
R RR RReck eck eck eck eckoning date of penalty for oning date of penalty for oning date of penalty for oning date of penalty for oning date of penalty for
non-compliance with SEC financial non-compliance with SEC financial non-compliance with SEC financial non-compliance with SEC financial non-compliance with SEC financial
repor repor repor repor reporting requirements ting requirements ting requirements ting requirements ting requirements
The Securities and Exchange Commission
(SEC) has revised the reckoning date in
computing the penalty for corporations
that fail to comply with the financial
reporting requirements from the date of
receipt of the letter informing the
company of its non-compliance with the
reporting requirements to the date the
violation is discovered, as indicated in the
comment letter of the SEC.
Under the Circular, the computation of
daily penalty shall cease upon the
companys submission of the following
documents: (a) sufficient explanation for
non-compliance; (b) an audit committee
or board resolution taking cognizance of
the non-compliance; and (c) corrective
measures the company shall undertake to
prevent future violations.
(SEC Memorandum Circular No. 1, series of
2011, March 17, 2011)
April 2011 3 33 33
Court Decisions
CDA registration not essential for CDA registration not essential for CDA registration not essential for CDA registration not essential for CDA registration not essential for
entitlement to DST exemption of entitlement to DST exemption of entitlement to DST exemption of entitlement to DST exemption of entitlement to DST exemption of
mutual life insurance companies mutual life insurance companies mutual life insurance companies mutual life insurance companies mutual life insurance companies
Registration with the Cooperative
Development Authority (CDA) is not a
requisite before a mutual life insurance
company may be considered a cooperative
company and avail itself of the
documentary stamp tax (DST) exemption
under Section 199(a) of the Tax Code.
Section 199(a) grants, among others,
exemption from DST on policies of
insurance or annuities made or granted by,
among others, a cooperative company
organized and conducted solely by the
members for the exclusive benefit of each
member and not for profit.
Neither the Tax Code nor the Insurance
Code of the Philippines prescribes the
registration of a mutual life insurance
company with the CDA for it to be
considered a cooperative company. The
Court of Tax Appeals (CTA) held that it
is sufficient that a mutual life insurance
company be able to prove that it is a bona
fide cooperative under the requirements
of the Tax Code, which defines a
cooperative as an association conducted
by the members thereof with the money
collected among themselves and solely for
their own protection and not for profit.
Having sufficiently established that a
mutual life insurance company is a purely
cooperative company, it being managed by
its members and operated with premiums
collected from policyholders for their
exclusive benefit and protection, the CTA
held that insurance policies issued by
mutual life insurance companies to its
members are exempt from DST under
Section 199(a) of the Tax Code.
(Commissioner of Internal Revenue v. The
Insular Life Assurance Co., Ltd., CTA EB
Case No. 585 re CTA Case No. 7292, March
14, 2011)
R RR RRequisites for the grant of claims for equisites for the grant of claims for equisites for the grant of claims for equisites for the grant of claims for equisites for the grant of claims for
refund of excess CWT refund of excess CWT refund of excess CWT refund of excess CWT refund of excess CWT
The existence of excess creditable
withholding taxes (CWT) does not per se
entitle a taxpayer to a refund. In order to
be entitled to a refund or issuance of tax
credit certificate on its excess/unutilized
CWT, the taxpayer-refund claimant must:
(1) prove that its claim for refund was
filed within the two-year period from the
date of payment of tax under Section
204(C) of the Tax Code; (2) establish the
fact of withholding by providing copies
of statement duly issued by payors
showing the amount of taxes withheld;
and (3) show in the return that the income
payment received was declared as part of
the gross income.
In the instant case, the claim for refund
was filed within the two-year prescriptive
period prescribed under Section 204(C)
of the Tax Code, and the taxpayer was
able to prove the existence of its tax
credits by submitting its various
Certificates of Creditable Tax Withheld at
Source (BIR Form 2307). However, the
taxpayer failed to reconcile the
discrepancy discovered between the
income payments per its income tax
return and BIR Form 2307 issued by its
payors.
The CTA held that the taxpayer should
have presented proof such as, but not
limited to, detailed general ledger, sales
register, reconciliation schedules or other
documents to trace the discrepancy and
prove that the claimed CWT formed part
of its taxable gross income. Hence, for
failure to prove that the income payments
subjected to withholding tax were
included or declared as part of the gross
income of the taxpayer, the claim for tax
refund or issuance of tax credit certificate
was denied by the CTA.
(Philam Insurance Agency and Call Center
Services, Inc., v. CIR, CTA Case No. 7904,
March 21, 2011)
Imposition of delinquency interests on Imposition of delinquency interests on Imposition of delinquency interests on Imposition of delinquency interests on Imposition of delinquency interests on
assessments ruled by cour assessments ruled by cour assessments ruled by cour assessments ruled by cour assessments ruled by courts ts ts ts ts
A taxpayer is not relieved from payment
of delinquency interest even if the formal
letter of demand sent by the BIR imposed
only the basic deficiency taxes and it was
only the CTA that mentioned the payment
of delinquency interest.
The imposition of delinquency interest is
prescribed under Section 249(C)(3) of the
Tax Code, which provides that
delinquency interest shall be collected and
assessed on the unpaid amount until the
amount is fully paid. The CTA cited the
ruling issued by the SC where it ruled that
the deliquency interest should still be
imposed from the time the BIR made the
demand even if the assessment was
appealed at the CTA.
Considering that the taxpayer failed to pay
the corresponding deficiency taxes within
30 days from receipt of the formal letter
of demand, the CTA deemed it proper to
direct the taxpayer to pay delinquency
interest of 20% under Section 249(C)(3)
of the Tax Code.
(First Lepanto Taisho Insurance Corporation v.
Commissioner of Internal Revenue, CTA EB
No. 563 re CTA Case No. 6200, March 1,
2011)
4 4 4 4 4 April 2011
BIR Issuances
Allocation of costs and expenses of Allocation of costs and expenses of Allocation of costs and expenses of Allocation of costs and expenses of Allocation of costs and expenses of
banks and financial institutions banks and financial institutions banks and financial institutions banks and financial institutions banks and financial institutions
The BIR has set the following guidelines
on the proper allocation of costs and
expenses among the regular banking unit
(RBU) or foreign currency deposit unit
(FCDU)/expanded FCDU or offshore
banking unit (OBU) operations of banks.
Under the regulations, only costs
attributable to operations of banks from
their RBU can be claimed as deduction to
arrive at the taxable income from RBU,
which is subject to the regular income tax.
Hence, costs or expenses incurred by
banks from operations of their FCDU/
EFCDU/OBU are not allowed as
deduction from their taxable income
arising from RBU operations.
In case of expenses incurred by banks
that cannot be directly attributed to their
RBU orFCDU/EFCDU/OBU
operations, the following method of
allocating their common costs and
expenses should be employed by banks.
1. By specific identification - Expenses
that can be specifically identified to
a particular unit (RBU, FCDU/
EFCDU or OBU) shall be reported
and declared as the cost or expenses
of the unit.
2. By allocation - Common expenses or
expenses that cannot be
specifically identified to a particular
unit shall be allocated based on
percentage share of gross income
earnings of a unit to the total gross
income earnings subject to regular
income tax and final tax including
those exempt from income tax.
The same method of allocation should be
employed by other financial institutions in
allocating costs and expenses among the
income derived from their active business
under the regular income tax, passive
activities subject to final tax, and other
activities producing income that are
exempt from income tax.
(Revenue Regulations No. 04-2011, March 15,
2011)
Amendments to Amendments to Amendments to Amendments to Amendments to de minimis de minimis de minimis de minimis de minimis
benefits tax exemption rule benefits tax exemption rule benefits tax exemption rule benefits tax exemption rule benefits tax exemption rule
The BIR introduced the following
changes on the tax treatment of de minimis
benefits under RR 2-98 and RR 3-98,
which shall apply to the benefits earned
by employees starting year 2011.
1. To be considered de minimis benefit,
actual yearly medical benefits
granted to employees in the amount
not exceeding P10,000 should cover
medical and health care needs,
annual medical/executive check-up,
maternity assistance, and routine
consultations of employees.
2. Flowers, fruits, books or similar
items given to employees under
special circumstances (e.g., on
account of illness, marriage, birth
of a baby, etc.) has been removed
from the list of de minimis benefits.
3. Daily meal allowance shall be
considered de minimis benefit if
granted to employees for overtime
work and night/graveyard shift not
exceeding 25% of the basic
minimum wage on a per region
basis.
Note: In previous BIR rulings, meal
and food benefits granted, although
not intended to be used for
overtime work, were considered de
minimis benefits exempt from tax on
compensation and fringe benefits
tax (FBT).
4. Benefits or allowances that are
considered de minimis benefits have
been restricted to those benefits
listed or enumerated under RR 2-98
and 3-98. This means that all other
benefits granted to employees that
are not included in the enumeration
shall not be considered de minimis
benefits and, hence, shall be subject
to income tax as well as withholding
tax on compensation.
(Revenue Regulations No. 05-2011, March 16,
2011)
Suspension of filing of Annual Suspension of filing of Annual Suspension of filing of Annual Suspension of filing of Annual Suspension of filing of Annual
Information R Information R Information R Information R Information Return (AIR) eturn (AIR) eturn (AIR) eturn (AIR) eturn (AIR)
The BIR has suspended the
implementation of RR 02-2010, which
requires the filing of annual information
return (AIR) by individual taxpayers
starting taxable year 2010.
Under RR 02-2011, the AIR should be
submitted together with the annual
income tax return (BIR Form 1700 or
1701) of individual taxpayers, estates and
trusts that are required to file income tax
returns (ITRs). The AIR shall also be
submitted by the following individuals
even if they are exempt from filing annual
income tax reutrns:
1. Individual taxpayers earning purely
compensation income from sources
within the Philippines whose annual
taxable income exceeds P500,000
2. Individuals, estates and trusts whose
sole income has been subjected to
final withholding tax with total
amount withheld exceeding
P125,000 in a year
3. Individuals whose sole income is
exempt from income tax and whose
total annual exempted income
exceeds P500,000
Prior to its suspension, the BIR set the
deadline for submission of AIR of
individual taxpayers, estates and trusts
required to file their ITRs on or before
April 15, 2011. Other individual taxpayers
were given up to May 15, 2010 to submit
their AIR.
(Revenue Regulations No. 06-2011, March 16,
2011)
April 2011 5 55 55
BIR Issuances
V VV VVA AA AAT on sale of company cars T on sale of company cars T on sale of company cars T on sale of company cars T on sale of company cars
The BIR has revoked BIR Ruling No.
DA-563-2006, which exempts from VAT
the sale of the cars of a company engaged
in the manufacture and export of
custom-made dental products. The
exemption was earlier granted on grounds
that the sale is not made on a regular basis
and is incidental to the manufacturing
and/or export of dental products.
The BIR cited as basis for revoking BIR
Ruling No. DA-563-2006 the decision of
the CTA in CTA EB Case No. 287
(CS Garments, Inc. v. Commisioner of Internal
Revenue), where it held that although the
sale of a car is not done on a regular basis
or is not the primary business of a
company, the sale of a motor vehicle is
considered an incidental transaction
subject to VAT if it is purchased and used
in carrying out the companys business.
In the books of the company, the motor
vehicle formed part of its capital assets
and was recorded under the account
property, plant and equipment (PPE).
(PPEs are tangible assets that are held for
use in the production or supply of goods
or services, and are expected to be used
during more than one period.) The CTA
considered the sale of a motor vehicle as
an incidental transaction because the
vehicle was acquired and used in the
furtherance of the companys business.
The BIR revocation shall likewise apply to
all other existing rulings that are
inconsistent with the circular.
(Revenue Memorandum Circular 15-2011,
March 16, 2011)
BIR stamping of additional copies of BIR stamping of additional copies of BIR stamping of additional copies of BIR stamping of additional copies of BIR stamping of additional copies of
AFS for SEC filing AFS for SEC filing AFS for SEC filing AFS for SEC filing AFS for SEC filing
In addition to the three copies of audited
financial statements (AFS) that are
required to be attached to the ITR and
filed with the BIR or Authorized Agent
Banks (AABs), the BIR has agreed to
receive and stamp at least two extra copies
of the AFS submitted by corporations
and juridical persons for filing with the
SEC.
The extra copies of the AFS shall be
stamped received by the BIR or AABs
upon filing of the ITR by the corporation
or juridical person.
(Revenue Memorandum Order No. 13-2011,
March 16, 2011)
DST on PEZA-registered enterprises DST on PEZA-registered enterprises DST on PEZA-registered enterprises DST on PEZA-registered enterprises DST on PEZA-registered enterprises
An enterpise registered with the
Philippine Economic Zone Authority
(PEZA) that is engaged in leasing
activities and enjoys 5% preferential tax
regime is exempt from the documentary
stamp tax (DST) on its lease agreements.
The 5% income tax on its gross income is
in lieu of all national and local taxes, and
the activity of leasing is its registered
activity.
However, while the PEZA-registered
enterprise as lessor is exempt from DST,
its tenant or lessees which are ecozone
IT enterprises and are, thus, either under
income tax holiday (ITH) or 5% tax
regime are subject to DST as the other
party in the contract of lease. The BIR
ruled that based on Section 173 of the
Tax Code of 1997, when the other party
to the contract of lease is exempt, the
other party who is not exempt shall be the
one directly liable to DST. Thus, although
some of the PEZA-registered enterprises
pay the 5% tax, which is in lieu of all
taxes, the BIR held that they are liable to
the DST on the lease agreement as leasing
is not part of their registered activities.
(BIR Ruling No. 050-2011, February 16,
2011)
BIR Rulings
6 6 6 6 6 April 2011
BIR Rulings
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Highlight on P&A services
V VV VVA AA AAT on indent sales T on indent sales T on indent sales T on indent sales T on indent sales
Under Section 108(B)(2) of the Tax Code
as implemented by Section 4.108-5(b)(2)
of RR 16-05, for services to qualify for
VAT zerorating, it must be rendered to
persons engaged in business conducted
outside the Philippines or to non-resident
foreign clients not engaged in business
who are outside the Philippines when the
services are performed. The fees to be
paid should be in acceptable foreign
currency and accounted for in accordance
with the Bangko Sentral ng Pilipinas
(BSP) rules and regulations.
A domestic corporation engaged in the
sale of pumps to local customers earned a
commission from its indent sales or for
acting as a mediator between the
Philippine customer and its parent
company abroad. The commission
income earned by the company was
deducted from its payable to the parent
company and was recorded in the books
as part of its other income subject to
income tax.
The BIR held that the commissions for
services rendered in the Philippines by the
company to its parent company abroad
does not qualify for VAT zero-rating
under Section 108(B)(2) of the Tax Code
since the commissions were not paid in
foreign currency and were inwardly
remitted to the Philippines in accordance
with the BSP rules and regulations. As
such, the commissions should be subject
to 12% VAT, and should form part of its
gross income subject to income tax.
(BIR Ruling No. 048-2011, February 16,
2011)