June 2012

Tax brief
Contents 02 BIR Rulings Sale of fixed assets by a PEZA-registered enterprise VAT on crewing services to international vessels Tax treatment of retirement benefits under RA 7641 03 BIR Issuances Higher tax-exempt uniform allowance Clarification on binding effect of BIR rulings issued prior to January 1, 1998 2009 and 2010 LN guidelines eSales reporting guidelines 05 Court Decisions Court VAT on sale of drugs to in-patients Imposition of 15% branch profit remittance tax Supervening cause rule on tax refund claims 07 DTI-BOI IRR on extension of duty free importation privilege of BOI enterprises 08 Highlight on P&A services Assistance during tax audit/contesting an assessment

June 2012

BIR Rulings
Sale of fixed assets by a PEZA-register egistered PEZA-registered enterprise Sale of fixed assets by an enterprise registered with the Philippine Economic Zone Authority (PEZA) and engaged in the manufacture of electronic products is subject to regular income tax, value-added tax (VAT) and documentary stamp tax (DST). The transaction involved fixed assets composed of buildings, machinery and installations and commercial inventories, which are used in the projects registered under the 5% preferential regime and income tax holiday incentive of the seller-PEZA company. The buyer is another PEZA-registered enterprise. The Bureau of Internal Revenue (BIR) held that although the seller, being a PEZA-registered enterprise, is granted preferential tax treatment, the tax incentives enjoyed by the company only apply to its registered activities. Hence, considering that the sale of fixed assets is not included among its registered activities, the BIR held that the sale of fixed assets should be subject to the 30% regular income tax rate, and consequently, to creditable withholding tax. The transaction shall also be subject to VAT and DST. (BIR Ruling No. 291-2012, April 25, 2012) crewing VAT on crewing services to international vessels Under Section 108(b)(4) of the Tax Code, zero percent VAT applies on sale of service performed in the Philippines by VAT-registered persons to vessels engaged in international shipping or international air transport operations, including leases of property thereof. Thus, crewing services rendered by a VAT-registered company to a foreign ocean-going vessel that is paid for in foreign currency is subject to VAT at 0%. The BIR, however, clarified that the VAT zero-rating does not extend to services rendered to common carriers by sea with respect to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to VAT in accordance with Section 4.108-5 (b)(4) of Revenue Regulations No. (RR) 16-2005, as amended by RR 04-2007. (BIR Ruling No. 295-2012, May 3, 2012) treatment retir etirement Tax treatment of retirement benefits under RA 7641 Under Section 32(B)(6)(a) of the Tax Code, retirement benefits received under Republic Act (RA) 7641 shall not be included in the gross income of the retiring employee and are therefore exempt from tax. However, this provision only applies in the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment. Moreover, in order to be exempt from tax, the employee should have reached 60 years of age, but should not be beyond 65 years and should have spent at least five years in the service of the same employer. In the instant case, the company does not maintain a retirement plan and there is no existing collective bargaining agreement between the employer and employee. Hence, the conditions under RA 7641 shall govern the taxation of employees retirement benefits. As held by the BIR, considering that the employees have reached 60 years of age and have rendered at least five years of service in the company, the retirement benefits received by employees from the company are not subject to tax and, consequently, to withholding tax. However, the terminal pay, i.e., commutation and payment of monetized unused vacation leave credits exceeding 10 days, and sick leave credits regardless of number of days, are subject to income tax. The exemption does not include the payment to the employees of their salaries and 13th month pay and other benefits in excess of P30,000 threshold under Section 2.78.1(A)(3)(a) and (A)(7) of RR 2-98. (BIR Ruling No. 297-2012, May 3, 2012)

2 June 2012

BIR Issuances
Higher tax-exempt uniform allowance The BIR has increased the threshold amount of tax-exempt de minimis uniform and clothing allowance from P4,000 to P5,000 per annum. The new exemption level took effect on January 1, 2012. (Revenue Regulations No. 8-2012, May 11, 2012) effect Clarification on binding effect of BIR rulings issued prior to January 1, 1998 The BIR has issued the following clarifications on the proper interpretation of RR 5-2012 on the non-binding effect of BIR rulings issued prior to January 1, 1998.
A. On the use of BIR rulings as precedent

2009 and 2010 LN guidelines The BIR has issued the following guidelines and procedures in handling Letter Notices (LN) generated through third-party information data matching with tax returns. These guidelines shall be used for resolving issues on 2009 and 2010 LNs issued prior to the effectivity of these guidelines. Among the significant features of the guidelines are as follows: 1. LNs shall be handled by the investigating office (Revenue District Office or Audit Division under the Large Taxpayers Service) having jurisdiction over the taxpayer. An LN issued to a taxpayer can be considered a notice of audit of investigation, which shall disqualify the taxpayer from amending the return covering the period referred to in the LN upon its issuance. 2. A taxpayer who refutes the accuracy of the figures in the LN (due to erroneous encoding or timing difference) is given 10 days from receipt of LN to submit documentary proofs and reconciliation schedules. If the taxpayer cannot submit documentary proofs or provides incomplete documentary requirements within the prescribed period in support of his/her/its protest, the Revenue Officer (RO) shall endorse the docket and recommend the issuance of Notice of Informal Conference, which shall be served to the taxpayer within 30 days from its issuance. 3. If the taxpayer fails to settle his/ her/its liabilities within five days from receipt of the Notice of Informal Conference, the investigation office shall immediately endorse the docket to the appropriate BIR office for any

or a combination of the following actions: a. Issuance of Preliminary Assessment Notice (PAN)/Final Assessment Notice (FAN) in accordance with RR 12-99 b. Imposition of administrative sanction of suspension and temporary closure of business establishments (Oplan Kandado) if the underdeclaration of sales, receipts and income amounts to 30% or more c. Issuance and enforcement of subpoena duces tecum (SDT) in strict compliance with procedures under Revenue Memorandum Order No. (RMO) 88-2010 4. If there is an ongoing audit/ investigation pursuant to an electronic Letter of Authority (eLA) prior to the LN assignment, the RO handling the eLA shall also be assigned the LN. The LN shall not be considered closed but shall be consolidated with the eLA. 5. If an eLA is terminated before an LN is issued, the investigating office shall request the tax docket from the Assessment Division or Administrative Division, as the case may be, for non-large taxpayers and Records Division for large taxpayers and shall ascertain whether the discrepancies reflected in the LN are in the report of investigation. If the discrepancies are not included, the RO shall pursue action on the LN based on the prescribed procedures. If the discrepancies are considered, the RO shall recommend cancellation of the LN and the tax docket shall contain the LN and other required documents.

All BIR rulings issued prior to January 1, 1998 may not be used as precedent basis by taxpayers to secure their own rulings for current business transactions or tax assessments. The same rulings may also not be used by a BIR action lawyer in issuing new rulings involving current business transactions.
B. On its effect on taxpayers to whom the rulings were issued

The BIR rulings issued prior to January 1, 1988 remain valid but only to the taxpayer who was issued the ruling and covering the specific transactions that are the subject of the ruling. The rulings also stand unless the taxpayer is expressly notified of its revocation or the legal basis in law for such issuance has already been repealed/amended in the current Tax Code. (Revenue Memorandum Circular No. 22-2012, May 7, 2012)

June 2012

BIR Issuances
6. The surcharge, interest and compromise penalty assessed against the taxpayer may be abated by paying the basic deficiency tax(es) within 30 days from receipt of the LN using BIR Form 0611-A. If deficiency tax is paid beyond the 30-day period, the taxpayer shall be assessed with the corresponding surcharge (if applicable), interest and compromise penalty. In both cases, an Agreement Form shall be executed by the taxpayer or his/her/ its duly authorized representative indicating therein the amount and date when the deficiency tax(es) shall be paid. 7. Installment payment shall be allowed as settlement of tax deficiencies arising from LN in case the total tax liabilities exceed P500,000 for non-large taxpayers or P10 million for large taxpayers. A written request for installment payment of basic tax due plus increments using the prescribed Application for Installment Payment must be accomplished. The corresponding interest on the basic tax due per installment shall be computed up to the date of payment as shown in the application. The payment shall be made using Payment Form, i.e., BIR Form 0611-A. In case of default of any installment payment, the remaining balance of basic tax plus the increments shall become due and demandable immediately without prior notice to the taxpayer. (Revenue Memorandum Order No. 13-2012, May 16, 2012) repor eporting eSales reporting guidelines The BIR has issued the following guidelines and procedures in the reporting of gross monthly sales generated from cash register machines (CRM), point of sales (POS) machines and other invoice/ receipt generating machines using the Electronic Sales Reporting (eSales) System.
eSales reporting requirement Reporting of monthly sales

All taxpayers using CRMs, POS machines and other invoice/receipt generating machines enrolled in the eSales System, with or without sales transactions, are required to submit a monthly sales report per machine to the BIR through the eSales System. The monthly sales report per machine shall be submitted on or before the 8th day of the month following the sales period for taxpayers whose last digit of the nine-digit tax identification number (TIN) is an even number; and the 10th day of the month for taxpayers whose last digit of the nine-digit TIN is an odd number. Non-large taxpayers shall file their initial report for the months of January to June on July 8 or 10, 2012, whichever is applicable.
Enrollment of authorized user to eSales System

All machines enrolled in the eSales System with or without sales transactions shall comply with the monthly sales reporting until such time that the permit to use the Machine Identification Number (MIN) has been cancelled. Sales reporting can be done using either the online encoding or file upload method. The file format for the monthly sales report using the file upload method can be downloaded from the BIR website using the eSales System. In case the eSales System is unavailable on the submission deadline, the taxpayer must submit the monthly sales report in soft copy (CD format) using the prescribed format to the concerned Large Taxpayer Service (LTS) Office/RDO following the prescribed procedures on or before the third day following the deadline. eSales System shall assign a Sales Report Number (SRN) for every submission of the monthly sales report to acknowledge receipt of report by the BIR. Submission of monthly sales report can be done up to 11:59 pm on the due date. In case the deadline falls on a non-working day, the next working day shall automatically be considered the due date. Amendments of monthly sales report for a particular month can be done up to three times. Machines whose monthly sales report have been amended more than three times for the same sales period shall be subject to validation/inspection by the concerned LTS Office/RDO, provided that no eLA/LN has been issued covering the particular month. Otherwise, the incident report must be consolidated with the ongoing audit/ investigation covered by the eLA/LN.

All taxpayers using CRMs, POS machines and other invoice/receipt generating machines are required to enroll their authorized user in the eSales System in order to access the system. Only one user for the head office and one for each branch shall be allowed to enroll in the eSales System. However, taxpayers may request for additional user subject to the approval of the Head of the concerned Large Taxpayers Office/RDO considering its policy on who will be submitting the monthly sales report.

4 June 2012

BIR Issuances
Registration in the Electronic Accreditation and Registration System (eAccReg) Penalties

All existing CRMs, POS machines and other invoice/receipt generating machines without MIN shall be required to be registered through the Electronic Accreditation and Registration (eAccReg) System following the procedures under Revenue Memorandum Circular No. 19-2009. Upon generation of the new permit to use, the manually issued/old permit to use shall be deemed revoked. Any taxpayer found to still be using the cancelled old permit to use shall be subject to applicable penalty under existing revenue issuances.

Any taxpayer who fails to submit the required monthly sales report for three consecutive months per machine shall be subjected to the following sanctions in addition to the penalty under RR 05-2005. 1st offense Reminder letter 2nd offense Machine inspection/ post evaluation 3rd offense Revocation of permit to use/cancellation of MIN

The payment of penalty shall not relieve the taxpayer of his responsibility to submit the monthly sales report. To compel the taxpayer to submit its monthly report, the BIR may issue and enforce an SDT and adopt other enforcement measures. (Revenue Memorandum Order No. 12-2012, May 16, 2012)

Court Decisions
VAT on sale of drugs to in-patients The sale of pharmacy drugs or medicines to in-patients is not subject to value-added tax (VAT). The sale of drugs to a hospitals in-patients is considered part of the term hospital services covered by the exemption from VAT under Section 109(G) of the Tax Code. The Court of Tax Appeals (CTA) held that the maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients. Thus, unlike the sale of retailing drugs or medicines by drugstores which involves the buying of goods the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy for in-patients amounts to the availment of services of the hospital by the in-patients. [Hermano (San) Miguel Febres Cordero Medical (De La Salle Health Services Institute), Inc. v. Commissioner of Internal Revenue, CTA Case No. 8194, May 15, 2012]
June 2012 5

profit Imposition of 15% branch profit remittance tax A registered Philippine branch of a foreign corporation was assessed for deficiency taxes on its failure to withhold the 15% branch profit remittance tax (BPRT) on its alleged indirect profit remittance under Section 28(A)(5) of the Tax Code. The BIR alleged that based on the branchs audited financial statement, which showed the composition of its home office account, there is disclosed a net income in the head office account that partakes of the nature of indirect remittances to the head office. In assessing the branch for BPRT, the BIR relied on its previous ruling (BIR Ruling No. 039-2005), which held that an increase in the head offices assigned capital to its Philippine branch by transferring net profits of the branch to the assigned capital account should be

subject to BPRT, despite the fact that the profit from operation will not be physically remitted to the head office abroad. The CTA held that although the audited financial statement of the branch revealed a net income, it did not show that it was transferred or had become part of the assigned capital. The CTA agreed with the explanation made by the branch that in line with branch accounting principles of the Philippines, the home office account in the audited financial statement is comprised of different items (i.e., assigned capital, transactions with head office and accumulated income). As gleaned from the audited financial statement, the net income is separate from the assigned capital. Thus, although the net income is included in the home office account, it did not result in an increase in assigned capital account.

Court Decisions
Considering that no transfer of the net income to the assigned capital had taken place, the CTA maintained that the ruling invoked by the BIR cannot apply to the case because the scenario (i.e., increase in the head office assigned capital to the Philippine branch by transferring net profits of the branch to the assigned capital account) is not present in the case. The CTA also found no evidence that the branch remitted, earmarked or applied for remittance of its net income. The CTA further held that the BPRT may not be imposed just because there is income. Section 28(A)(5) of the Tax Code speaks of any profit remitted, which pertains to that portion of the branch profits sent to the head office as distinguished from the total net income or profits of the branch. Thus, for the provision of the law to apply, there must be a remittance of the branch profits by the branch to the head office; the mere existence of an income does not in any way justify the imposition of the BPRT. (Commissioner of Internal Revenue v. United Parcel Service Co., CTA EB No. 721 re CTA Case No. 7667, May 16, 2012) refund Supervening cause rule on tax refund claims A claim for refund of erroneously, illegally, excessively or wrongfully collected taxes or penalty must be filed within two years from date of payment of the tax or penalty regardless of any supervening cause that may arise after the payment of tax or penalty pursuant to Section 229 of the Tax Code. In the instant case, the taxpayer-refund claimant, an electric distribution company, filed an application for provisional increase of its electric rate schedules in 1994 with the Energy Regulatory Board (ERB). Acting on its petition, the ERB issued an order granting the company a provisional increase subject to the condition that after hearing and evaluation, should the company be entitled to a lesser increase, all excess amount should be refunded to its customers or credited to their future consumption. When it imposed the provisional increase upon its consumers, the company declared the revenue from the provisional increase in its income tax returns and paid the corresponding income tax. However, after consultation and hearing, the ERB rendered a decision in 1998 granting a lesser increase in rates, and ordered the company to refund or credit to its customers the overcharged amount. The company appealed the ERB decision to the Court of Appeals (CA), which ruled in 1999 in its favor by reversing the ERB decision. The CA decision was reversed in 2002 by the Supreme Court (SC), and became final and executory on May 5, 2003. As a result of the SC decision, the companys gross electric revenue, taxable income and income tax liability during the taxable years 1994-1998 and 2000-2001 were reduced, resulting in excess income tax payments. To recover its erroneously paid tax, the company filed with the BIR its administrative claim for refund in 2003, while its judicial claim with the CTA was filed in 2005. The second division of the CTA entitled the company to claim for tax refund due to the special circumstances prevailing in the instant case. Hence, the BIR appealed the decision to the CTA en banc. In its claim for refund, the company asserted that the two-year period for claiming its refund should be reckoned from the time the SC decision came out in 2003, and not from the date of payment of income taxes. The company also invoked the rule of solutio indebiti to justify its right to claim for refund. The CTA en banc held that the companys claim for refund should have been filed within the two-year prescribed period, reckoned from the dates the income taxes had been paid, and not on May 5, 2003, the date the decision of the SC had become final and executory. According to the CTA en banc, Section 229 of the Tax Code is clear and does not provide for exception or qualification, i.e., the two-year period for claiming refund reckoned from date of payment of tax cannot be stretched to allow for other special circumstances. The CTA en banc further held that the rule of solutio indebiti does not apply to the claim for refund since the elements of solutio indebiti are lacking in the case. There is solutio indebiti where: (1) payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. According to the CTA en banc, the elements of solutio indebiti are not prevailing in the instant case. First, the company as a taxpayer has a binding relation with the Commissioner of Internal Revenue (CIR). It is a taxpayer obligated to pay income taxes on the income it declared in its income tax returns for the years 1994-1998 and 2000. And second, there was no mistake on the part of the company when it paid income taxes to the BIR, being fully aware that the increase initially granted to it was merely provisional. [Commissioner of Internal Revenue v. Manila Electric Company, Inc, CTA EB No. 773 (CTA Case No. 7242), May 8, 2012]

6 June 2012

DTI-BOI
free IRR on extension of duty free importation importation privilege of BOI enterprises The Department of Trade and Industry (DTI) and Board of Investments (BOI) have jointly issued the implementing rules and regulations (IRR) of Executive Order No. (EO) 70, series of 2012, which provided for the duty-free importation of capital equipment, spare parts and accessories by BOI-registered enterprises. The duty-free importation of capital equipment, spare parts and accessories shall be available to BOI-registered enterprises of good standing, and with project/s qualified as new or expanding under EO 226. Qualified activities are those listed under the Investment Priorities Plan (IPP) that is in force during the effectivity of EO 70. The following are the conditions that must be satisfied by qualified BOI-registered enterprises in order to avail of the duty-free exemption privilege: a. The capital equipment, spare parts and accessories to be imported are not manufactured domestically in sufficient quantity, of comparable quality and reasonable prices b. The capital equipment, spare parts and accessories are reasonably needed and will be used exclusively by the enterprise in its registered activity c. The approval of the BOI was obtained by the registered enterprise for the importation of such capital equipment, spare parts and accessories before the purchase order was made or before the corresponding letters of credit were opened d. The rated capacity of the capital equipment to be imported, if applicable, is within the registered capacity of the registered enterprise subject to reasonable allowance BOI-registered enterprises availing of the duty-free exemption privilege must secure a Certificate of Authority to import by submitting an application for importation with the BOI. The application must be accompanied by a quotation/pro forma invoice in the name of the applicant as consignee to whom the shipment will be released by the Customs authorities before the BOI approval may be secured for the importation of the capital equipment. The Certificate of Authority shall be valid for a period of one year from date of issuance. Extension of the validity of the Certificate of Authority may be granted in extremely meritorious cases (e.g., force majeure or customized or specialty fabricated equipment) subject to the approval of the BOI Board. Any sale, transfer, assignment, donation of capital equipment, spare parts and accessories imported under EO 70 within five years from date of acquisition shall require approval of the BOI. However, BOI approval may only be granted if sale or disposition is made to another qualified enterprise, the reason for disposition being technical obsolescence as determined by BOI, and for purposes of replacement to improve and/or expand the operations of the registered enterprise. In case the duty-free imported capital equipment, spare parts or accessories are sold, transferred or disposed without prior BOI approval within five years from date of acquisition, the BOI-registered enterprise and vendee, transferee or assignee shall be solely liable to pay twice the amount of the duties foregone, or P500,000, whichever is higher, without prejudice to other applicable penalties under EO 226. The duty-free importation privilege under EO 70 shall be availed of by qualified enterprises for a period of five years from date of their registration or until the expiration of EO 70, whichever is earlier. Any violation by a registered enterprise of the provisions of EO 70 shall result in the suspension within the taxable year of all BOI incentives that are available for the particular project. Corresponding penalties shall be meted whenever warranted. In the event that the penalties are not paid, the imported capital equipment, spare parts and accessories shall be confiscated. (DTI-BOI Administrative Order No. 12-01, Series of 2012, May 10, 2012)

June 2012

Highlight on P&A services

Assistance during tax audit/ contesting an assessment We assist clients in handling audits by the BIR, Bureau of Customs (BOC) and local government units (LGUs) in a systematic and efficient manner. We help evaluate the validity of assessments, determine the appropriate documents and analyses to be submitted, prepare protests, and represent clients in meetings and discussions with government agencies. With our knowledge of tax laws and audit procedures, we help safeguard the substantive and procedural rights of taxpayers and prevent unwarranted assessments.

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. Figueroa Lina Figueroa Tax Principal, Tax Advisory & Compliance Division T +632 886-5511 ext. 507 F +632 886-5506 ext. 606 E Lina.Figueroa@ph.gt.com

If you would like to know more about how we can assist you during tax audit or in contesting an assessment, please contact: Nelson S. Gargoles Manager, Tax Advisory & Compliance T + 632 886 5511 ext. 531 F + 632 886 5511 ext. 606 E Nelson.Gargoles@ph.gt.com

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8 June 2012