TAX ALERT

July 31, 2004 VALID VAT INVOICES AND/OR VAT OFFICIAL RECEIPTS ARE THE BEST EVIDENCE FOR VALUE-ADDED TAX (VAT) SALE TRANSACTIONS. To claim for the refund of input taxes attributable to zero-rated sales, a taxpayer must foremost establish that it has zero-rated sales. In this case, the Court of Tax Appeals (CTA) denied the claim for refund on technical and substantive grounds. First, the taxpayers counsel failed to formally offer as evidence the alleged VAT official receipts. What was offered by the taxpayer as evidence to prove its zero-rated sales was the Schedule of Zero-Rated Sales. The official receipts were merely attached to the Schedule. They were not marked and identified during the trial. Neither were they pre-marked by the commissioned independent Certified Public Accountant. Second, even if the official receipts were formally offered in evidence, the CTA noted that these were invalid for VAT purposes. All the official receipts issued by the taxpayer to cover the alleged zero-rated sales for 1999 were printed on April 23, 1992. Under the Transitory Provisions of Revenue Regulations (Rev. Regs.) No. 7-95, the unused invoices or receipts as of December 31, 1995 can only be used up to June 30, 1996. Lastly, some of the official receipts do not reveal that the taxpayer is a VAT registered person. The address indicated in some of the official receipts was different from the address in the VAT registered certificate of the taxpayer. Overseas Ohsaki Construction Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6288 & 6317, dated May 19, 2004. See also Overseas Ohsaki Construction Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6347, dated May 25, 2004. OFFICIAL RECEIPTS COVERING ZERO-RATED SALES MUST COMPLY WITH THE INVOICING REQUIREMENTS OF REV. REGS. NO. 7-95. All VAT-registered persons shall, for every sale or lease of goods or property or services, issue duly registered receipts or sales or commercial invoices that show the taxpayers tax identification number (TIN) followed by the word VAT and the words zero-rated must be imprinted on the invoice covering zero-rated sales. In this case, the CTA declared that the taxpayers official receipts on alleged zero-rated sales failed to comply with the invoicing requirements of Section 4.108-1 of Rev. Regs. No. 7-95. The taxpayers official receipts do not bear the word VAT after the imprinted TIN. Likewise, the words ZERO-RATED SALES were merely stamped instead of imprinted on the face of each receipt. Ibid. TO BE ENTITLED TO A REFUND OR TAX CREDIT OF UNUTILIZED INPUT VAT, A TAXPAYER MUST PROVE THAT IT DID NOT APPLY THE CLAIMED INPUT VAT PAYMENTS ON CAPITAL GOODS AGAINST ANY OUTPUT VAT LIABILITY. Taxpayer A allegedly had unutilized input VAT paid on capital goods purchased in July and August 2000. It submitted to the CTA its Monthly VAT Declarations for July, August, October and November 2000 as well as its Quarterly VAT Returns for the third and fourth quarters of 2000. These Returns reflected no output VAT liability against which the claimed input VAT may be applied. The CTA, however, found these documents insufficient to prove Taxpayer As entitlement to a refund or tax credit. During the aforesaid period, Taxpayer A had no output VAT liability simply because it had not yet started its commercial operations. For the CTA to verify with certainty that Taxpayer A did not apply the claimed input VAT, Taxpayer A should have submitted, at the very least, its VAT

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Return for the third quarter of 2001 considering that the effectivity date of its commercial operations was on September 1, 2001. Moreover, the CTA noted that the claimed excess input VAT for the third quarter of 2000 was forwarded to the succeeding fourth quarter of 2000. Although under Section 110(B) of the Tax Code of 1997, a taxpayer is allowed to carry-over the excess input VAT of a given quarter to the succeeding quarter(s), Taxpayer A should have deducted the claimed input taxes from its accumulated input VAT as of the quarter when it opted to file a claim for refund. Rohm Apollo Semiconductor Philippines, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 6534, dated May 27, 2004. RESCISSION RESULTS IN THE TOTAL ABROGATION OF THE OBLIGATIONS ARISING FROM THE CONTRACT. Facts: Taxpayer B and the Spouses V entered into a Contract to Sell (Contract) covering a parcel of land. Spouses V gave Taxpayer B money for their down payment and the VAT. Taxpayer B, in turn, remitted to the Bureau of Internal Revenue (BIR) the VAT. Subsequently, Spouses V requested the cancellation of the Contract. Taxpayer B could not refund the amount of the VAT since this had been remitted to the BIR. Held: The Commissioner of Internal Revenues (Commissioner) refusal to grant Taxpayer Bs claim for tax refund or credit was unjustified. Upon rescission of the Contract, it was as if the parties never entered into the agreement. Taxpayer B had no obligation to remit the VAT to the BIR, and if payment of the VAT had been made, such payment must be returned. Benito Legarda, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 6617, dated April 29, 2004. SWAP ARRANGEMENTS OR FORWARD EXCHANGE AGREEMENTS WITH THE CENTRAL BANK OF THE PHILIPPINES (CB) ARE SUBJECT TO DOCUMENTARY STAMP TAX (DST). Facts: During the years 1982 to 1986, banks entered into SWAP Arrangements or Forward Exchange Arrangements (Forward Contracts) with the Central Bank of the Philippines. The BIR found the original Forward Contracts, their renewals, continuances and extensions of the maturity periods subject to DST. Held: The banks cabled instructions to their foreign correspondent banks to remit specific sums in dollars to the Federal Reserve Bank to be credited to the account of the CB are in the nature of a telegraphic transfer subject to DST under Section 195 of the then Tax Code (now Section 182 of the Tax Code of 1997). All renewals and continuances of the taxable instruments are also within the sphere of taxation. Metropolitan Bank & Trust Company, C.T.A. Case No. 6378, dated April 16, 2004; and Philippine National Bank vs. Commissioner of Internal Revenue, C.T.A. Case No. 6511, dated April 28, 2004. A SPECIAL SAVINGS ACCOUNT PASSBOOK IS THE SAME AS A CERTIFICATE OF DEPOSIT SUBJECT TO DST. Special Savings Deposits and Time Deposits are akin to each other in such a way that the bank acknowledges the receipt of a sum of money on deposit and which the bank promises to pay to the depositor, bearer or the order of a bearer on a specified period. The difference lies in the document issued to evidence the transaction. In a Special Savings Account, a passbook covers the transaction, while in a Time Deposit, it is through a certificate of deposit. The CTA considered that the transactions evidenced by the different documents are similar and that DST is an excise tax on the privilege to enter into a transaction. Hence, The CTA ruled that the certificate of time deposit and the passbook are subject to DST under Section 180 of the Tax Code for being clear evidence of such transaction in favor of the person whose name appears therein. United Overseas Bank Philippines vs. Commissioner of Internal Revenue, C.T.A. Case No. 6411, dated April 21, 2004; Traders Royal

Bank vs. Commissioner of Internal Revenue, C.T.A. Case No. 6392, dated April 28, 2004; and Keppel Bank Philippines, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. June 23, 2004. A TRUST INDENTURE AGREEMENT IS NOT SUBJECT TO DST. A trust indenture agreement has a different feature and concept from a certificate of deposit. When a banks depositor enters into a trust agreement, what is created is a trustor-trustee relationship. The money deposited is placed in trust to a common fund and then invested by the banks Trust Department into a profitable venture. The fact that there is an expected rate of return does not necessarily convert a trust agreement into a time deposit. There is no obligation on the part of the trustee to guarantee returns on the funds or property regardless of the results of the investment. Hence, the CTA cancelled the assessments for deficiency DST on trust fund against the taxpayerbank. Traders Royal Bank vs. Commissioner of Internal Revenue, C.T.A. Case No. 6392, dated April 28, 2004. THE PRESCRIPTIVE PERIOD FOR THE ISSUANCE OF AN ASSESSMENT IS RECKONED ON THE TAXPAYERS RECEIPT OF THE UNDATED ASSESSMENT NOTICES AND DEMAND LETTER. Under Section 203 of the Tax Code of 1997, the Commissioner may assess a taxpayers liability within three years reckoned after the last day prescribed by law for the filing of the return or from the day the return was filed. In this case, the CTA noted that the Assessment Notices and demand letter sent by the Commissioner to the taxpayer were all undated. Hence, it reckoned the counting of the three-year period on the date of the receipt by the taxpayer. Jardine Pacific Finance, Inc. (formerly MB Finance Corporation) vs. Commissioner of Internal Revenue, C.T.A. Case No. 6195, dated April 12, 2004. 20% FINAL WITHHOLDING TAX DOES NOT APPLY TO FINANCING COMPANIES WITH NO QUASI-BANKING LICENSE. The 20% final withholding tax applies only to interest payments on Philippine currency bank deposits as well as to the yield or monetary benefit arising from deposit substitutes, trust funds and similar arrangements based on Section 27(D)(1) of the Tax Code of 1997. The CTA agreed with the taxpayer, engaged in the general financing business, that its interest payments to creditors/lenders were not subject to the 20% final withholding tax. The CTA considered the following evidence: A) The taxpayer was a finance company not engaged in the quasi-banking business. It never had twenty or more lenders at any one time. It never engaged in the business of obtaining funds from the public. B) The Bangko Sentral ng Pilipinas issued a Certification that the taxpayer was not included in its list of entities authorized to engage in banking or quasi-banking functions. C) The Securities and Exchange Commission (SEC) certified that the taxpayer was not authorized to engage in quasibanking functions. It never exceeded the nineteen-lender limit. The SEC never received complaints that the taxpayer engaged in quasi-banking functions. D) The taxpayer never issued commercial papers which could give rise to money market transactions or debt instruments or be considered deposit substitutes, trust funds or other similar arrangements. Its interest expense arose from ordinary loans evidenced by promissory notes obtained from various banks and financial institutions to finance working capital requirements. E) Revenue Memorandum Circular (RMC) No. 39-85 declares that the 20% final withholding tax does not apply to financing companies with no quasi-banking license. Also, in RMC No. 39-85, the Commissioner further elucidated that traditional lending by banks shall not be subject to 15% (now 20%) final withholding tax. Ibid.

FAILURE TO PROVE THAT INCOME WAS INCLUDED AS PART OF THE INCOME DECLARED IN THE INCOME TAX RETURN IS FATAL TO CLAIM FOR TAX REFUND. In a case before the CTA, Taxpayer O admitted that it failed to declare in its 1999 Annual Income Tax Return (ITR) the income corresponding to the taxes it seeks to refund. It explained that no income was realized on its sales of real property to X and Y since these were sold at their book values. Hence, neither gain nor loss was reported in its ITR. It further justified its non-declaration of income by citing Section 32(3) of the Tax Code of 1997 where only the gains derived from dealings in property are included as part of the gross income for income tax purposes. Records show that the creditable income tax in the amount of P63,135,283.77 was withheld by X on real property sold by Taxpayer O. When the CTA grossed up the said tax, the said value of the property cost P1,262,705,675.40 (P63,135,283.77/5%). The latter amount was arrived at because the withholding tax on sale of real property, other than capital assets, of a corporation not habitually engaged in real estate business is 5% of gross selling price pursuant to Section 1(j)(iii) of Rev. Regs. No. 1-90. It follows that the aforementioned amount should also be the cost or book value of the property sold. After an examination of the documents presented by the Taxpayer O, the CTA found that the sum of P4,894,264,221.09 represents the total assets transferred by Taxpayer O to X at their book value. For verification purposes, the CTA checked whether the real estate sold to X (subject of the claim) formed part of the total amount transferred. Yet, the records do not show that Taxpayer O itemized the assets transferred to X. The CTA could not ascertain whether the real property sold to X was at its book value. In the same way, the basic creditable tax withheld on the sale of real property to Y amounted to P17,421,575.86, which, when grossed-up resulted in the amount of P348,431,517.20 (P17,421,575/5%) as the value of the property sold. This proved greater than the value of the consideration of P228,558,599.92 as reflected from the Deed of Absolute Sale. Hence, the impression was that Taxpayer O realized gain on the sale of such property. Furthermore, Taxpayer O failed to disclose the sale of the real property in its 1999 Annual ITR under Schedule 1 Gain/Loss from Sales/Exchange of Real Properties of the Annual Information Form. This may have possibly served as an alternative way of proving that the real properties sold to X and Y were at their book values. United Overseas Bank Philippines vs. CIR, C.T.A. Case No. 6393, dated April 13, 2004. TO BE EXEMPT FROM NATIONAL INTERNAL REVENUE TAXES ON INTEREST INCOME ARISING FROM LOANS BY PHILIPPINE NATIONALS FROM PRIVATE FINANCIAL INSTITUTIONS (DOMESTIC OR FOREIGN), A TAXPAYER MUST PROVE THAT THE LOAN PROCEEDS WERE UTILIZED FOR EQUITY INVESTMENT IN A CERTIFIED ENTERPRISE PURSUANT TO THE IRON AND STEEL INDISTRY ACT (R.A. No. 7103). Facts: During the taxable year 1999, Taxpayer C paid gross receipts tax (GRT). After the payments, it discovered an erroneous computation relating to the mistaken inclusion of the interest income from the loan account of one of its clients, S Corporation, which income is alleged to be exempt from taxation pursuant to R.A. No. 7103. Hence, it filed an amended return and claimed for the refund or a tax credit of the excess GRT payment. Held: A careful analysis of the incentives granted to steel and iron industries under Section 6 (e) of R.A. No. 7103 would reveal that the following are exempt from all national internal revenue taxes: a) loans from foreign private financial institutions or fund sources necessary to undertake the manufacturing activity described in Section

5(b) of the Act, and b) loans from domestic or foreign private financial institutions for equity investments of Philippine nationals in a certified enterprise. The loans extended by Taxpayer C to S Corporation are not the loans contemplated under Section 6(e). While S Corporation is a certified enterprise and the loans granted to it have a maturity period of more than 5 years, it bears stressing that for the interest income to be exempt from taxation, the loans should have been granted to a Philippine national which the latter shall use for equity investment in a certified enterprise. The record is bereft of any evidence to show that the loans were utilized by S Corporation for equity investment. China Banking Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6296, dated April 21, 2004.

PHILIPPINE AIRLINES, INC. (PAL) MUST PROVE THAT IT PAID EITHER THE CORPORATE INCOME TAX OR 2% FRANCHISE TAX TO BE EXEMPT FROM OVERSEAS COMMUNICATION TAX.
Facts: For its communications services necessary for its day-to-day operations, PAL engaged the services of Philippine Long Distance Telephone Company (PLDT). Aside from the basic fee which PLDT charges its customers for the use of the communications services it provides, it also includes in its monthly statements of account taxes, imposts and other governmental charges such as the 10% Tax on Overseas Dispatch, Message, or Conversation Originating from the Philippines in accordance with Section 120(A) of the Tax Code of 1997. Relying mainly on the provisions of its franchise, PAL filed a claim for refund of the 10% Overseas Communication Tax. Held: PAL failed to support its position. It did not present its annual ITR covering the period of the refund in case it chose to pay the basic corporate income tax instead of the franchise tax. As in its previous claim for refund of Overseas Communication Tax, it failed to prove that it has paid either of the two taxes provided for under Section 13 of its franchise, which is an indispensable requirement before it may enjoy the privileges granted therein. Separate Concurring Opinion: Section 13 of PALs franchise does not at all require payment by PAL of either the income tax or the franchise tax in order for its exemption to become effective. Pursuant to the franchise, PAL is subject to the basic corporate income tax or 2% franchise tax, whichever will result in a lower tax. Consequently, in the event that no basic corporate income tax is due, PAL is not in any way precluded from availing of the said alternative because obviously, choosing it would result to a lesser tax liability rather than paying the 2% franchise tax. PAL should therefore not be subject to overseas Communication Tax since the same falls under the category of all other taxes from which it has been given exemption by virtue of its franchise. However, the claim for refund should be denied due to the following reasons: (a) PAL failed to present any evidence to controvert the Revenue Officers statement in their Memorandum Report, dated May 23, 2001, that the Overseas Communication Tax was already claimed as an expense since it was part of the communications expense deducted from PALs gross income; (b) PAL failed to formally offer as evidence the independent Certified Public Accountants amended certification that the photocopies submitted to the CTA were compared with original documents; and (c) PAL failed to prove the remittance to BIR of the Overseas Communication Tax it paid to PLDT. Philippine Airlines, Inc. vs. Commissioner of Internal Revenue, C.T.A. Case No. 6298, dated April 23, 2004. INCOME UPON WHICH THE CREDITABLE TAXES WERE WITHHELD MUST BE INCLUDED AS PART OF THE GROSS INCOME DECLARED IN THE TAXPAYERS ITR. Inasmuch as Taxpayer Ms reported revenues from sale of services and lease of property were higher than those reflected in the certificates, it may be safely assumed that petitioner declared all the income from which the creditable taxes of P208,445.46 and P49,587,435.32 totaling P49,795,880.78 were withheld. However, since Taxpayer M reported no revenues from the sale of goods, the creditable

taxes of P17,380.56 shall be disallowed. Golden Arches Development Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6431, dated April 26, 2004.

CTA PRESUMED THE ACCURACY OF THE ITR SINCE THERE WAS NO REPORT OF AN INVESTIGATION WITH RESPECT TO THE FINAL ADJUSTMENT RETURN.
In a claim for issuance of a tax credit certificate representing overpaid income tax arising from unutilized creditable withholding taxes for the year ended December 31, 1999, the CTA held that it is convinced that the income upon which the creditable taxes were withheld was included as part of the gross income declared by Taxpayer R in its ITR. This finding is based on the presumption that there was no falsity in the preparation of the ITR. The CTA presumed the accuracy of ITR inasmuch as there was no report of investigation with respect to the 1999 final adjustment return of Taxpayer R. Moreover, records show that the 1999 ITR was filed on April 15, 2000. Therefore, the Commissioner had only up to April 15, 2003 to examine Taxpayer Rs accounting records. Obviously, the Commissioner is barred by law to examine Taxpayer Rs books of accounts because more than 3 years had already lapsed since Taxpayer R filed its ITR for the year 1999. Inasmuch as there is no report of investigation with respect to the 1999 final adjustment return of Taxpayer R, the CTA can presume that the business operation of Taxpayer R was accurately presented therein. Philippine Realty & Holdings Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6435, dated April 28, 2004. TAXPAYER IS NOT LIABLE FOR DEFICIENCY INCOME TAX IF ITS NET LOSS POSITION WILL NOT BE AFFECTED AFTER ADDING BACK DISALLOWED DEDUCTIONS. The unsupported deductions from the taxpayers gross income, even if disallowed and added back to petitioners net loss, would not considerably result in an increase in the net income of the taxpayer. In other words, there would still be no deficiency income tax despite such disallowance. ATR Kim Eng Financial Corporation (formerly Philtread Holdings Corporation) vs. Commissioner of Internal Revenue, C.T.A. Case No. 5722, dated May 31, 2004. COMMISSIONS PAID TO REINSURANCE COMPANIES ARE NOT SUBJECT TO EXPANDED WITHHOLDING TAX. Revenue Regulations 6-85 provides for the list of taxpayers who are subject to the expanded withholding tax. Section 1(a)(5) mentioned Insurance agents and insurance adjusters. It does not provide for reinsurance companies and the like. This is especially true that under Section 25 (now Section 2), reinsurance premiums are exempt from income tax. Apparently, what the law excludes, we cannot include. First Lepanto-Taisho Insurance Corp. vs. Commissioner of Internal Revenue, C.T.A. Case No. 6160, dated May 31, 2004. FOR THE INTEREST EXPENSE TO BE DEDUCTIBLE FROM GROSS INCOME, THE OBLIGATION MUST BE IN WRITING. Taxpayer submitted documents to substantiate its interest expense by bank statements, bank debit memoranda and letter of authority to debit its account, computations of interest and bank reconciliation, but it failed to submit in evidence a vital document, which is the loan agreement. Consequently, the Court was constrained to disallow the deduction from gross income of the interest expense for the failure of the taxpayer to substantiate its claim by clear and convincing proof. Goldstar Phils. Sales Corp. vs. Commissioner of Internal Revenue, C.T.A. Case No. 5715, dated May 11,2004.

WHILE RESPONDENT BIR ADDUCED PROOF THAT THE ASSESSMENT NOTICE WAS DULY ISSUED AND SENT TO THE TAXPAYER BY REGISTERED MAIL BEFORE THE EXPIRATION OF ITS RIGHT TO ASSESS, HE MUST ALSO PROVE THAT THE SAME WAS ACTUALLY RECEIVED BY THE TAXPAYER OR HIS AUTHORIZED REPRESENTATIVE. While the contention of the Commissioner is correct that a mailed letter is deemed received by the addressee in the ordinary course of mail, still, this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. The taxpayer in this case strongly claims that it did not receive any assessment notice. The Commissioner, however, has adduced proof that the subject assessment notice was duly issued and sent to petitioner prior to the expiration of his right to assess. However, he nevertheless failed to prove that the same was actually received by the taxpayer or his duly authorized representative. The Commissioners failure to establish the fact of receipt by the taxpayer of the subject assessment notice rendered the same invalid and without force and effect. Akitsu Shipping Co. Ltd. vs. Commissioner of Internal Revenue, C.T.A. Case No. 6360, dated May 2, 2004. PURSUANT TO RMO 20-90, IN CASE OF A CORPORATION, THE WAIVER MUST BE SIGNED BY ANY OF ITS RESPONSIBLE OFFICIALS AND MUST BEAR A DEFINITE EXPIRATION DATE. The waiver is an unlimited waiver as it did not mention a definite expiration date within which the Commissioner may effect the assessment/collection, rather, it merely mentioned indefinite on the space provided for the expiration date. Such waiver was invalid and did not extend the Commissioners right to assess the taxpayers tax liabilities. Ibid.

NOTE: The information provided herein is general and may not be applicable in all situations. It should not be acted upon without specific legal advice based on particular situations. If you have any questions, please feel free to contact any of the following at telephone number (632) 633-9418, facsimile number (632) 633-1911, or at the indicated e-mail address: Atty. Carlos G. Baniqued Atty. Laura Victoria A.S. Yuson-Layug Atty. Ma. Carlota Christina G. Laio-Santiago Atty. Suzette A. Celicious Atty. Madeline L. Zialcita-Villapando cgbaniqued@baniquedlaw.com lvyusonlayug@baniquedlaw.com cglaino@baniquedlaw.com sacelicious@baniquedlaw.com mlzvillapando@baniquedlaw.com