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Tax Bulletin
January 2012
2 Tax Bulletin
Highlights
BIR Rulings
Dividends paid by domestic corporations to a Swiss foundation are subject to
15% fnal withholding tax (FWT) under Section 28(B)(5)(b) of the Tax Code.
(Page 3)
Honoraria received by barangay offcials as remuneration for services are
subject to withholding tax (WT) on compensation. (Page 4)
Interest income derived by a Savings and Loan Association from its bank
deposits, or any other monetary beneft from deposit substitutes, is exempt
from the 20% FWT imposed under Section 27(D)(1) of the Tax Code. (Page 4)
A corporation belonging to the top 20,000 corporations that pays its suppliers
through credit card is not required to withhold expanded withholding tax (EWT)
when presenting its credit card to the suppliers. (Page 4)
BIR Ruling No. 039-02 on liquidating dividends, and the BIR rulings cited
therein, are reversed and set aside. (Page 5)
When a sale of land by an ecozone developer/operator violates the developer/
operators registration agreement with the Philippine Economic Zone Authority
(PEZA), profts from such sale cannot be subject to 5% preferential tax rate.
(Page 6)
BIR Issuance
Revenue Memorandum Circular (RMC) No. 57-2011 was issued to clarify
certain tax issues involving general professional partnerships (GPPs). (Page 6)
BOC Issuance
Customs Memorandum Order (CMO) No. 1-2012 prescribes guidelines to
strengthen the Run After the Smugglers (RATS) Group and intensify the BOCs
anti-smuggling efforts. (Page 7)
BSP Issuance
Circular No. 745 prescribes the reporting requirements on the write-off of
loans, other credit accommodations, advances and other assets. (Page 8)
SEC Issuances
SEC Memorandum Circular (MC) No. 9 prescribes the rules on the election of
independent directors in listed, public and mutual fund companies. (Page 9)
A holding company cannot engage in mining activities unless specifed in its
Articles of Incorporation (AOI). (Page 10)
A Foundation can receive and transfer donations from foreign sources as
provided in its AOI. (Page 11)
A directors term is fxed while his tenure survives until a successor is duly
elected and qualifed. The holdover period the time from the lapse of one year
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from a members election to the Board and until his successors election and
qualifcation is not part of the directors original term, nor is it a new term but
constitutes part of his tenure. (Page 12)
An investment contract is a security, which is subject to regulation by and
registration with the SEC, consisting of the following elements: (1) an
investment of money; (2) in a common enterprise; (3) with expectation of
profts; and (4) primarily from efforts of others. (Page 13)
Court Decisions
The Attrition Act of 2005 and its implementing rules and regulations (IRR) are
constitutional. (Page 14)
The date on which the court actually received the pleadings delivered through
a private letter-forwarding agency is considered the date of fling in court, not
the date of delivery to the agency. (Page 16)
The absence of a Preliminary Assessment Notice (PAN) duly received by a
taxpayer nullifes any defciency tax assessment issued by the BIR. (Page 17)
A taxpayer may, on appeal to the CTA, question the validity of a waiver even if
the issue was not raised in its protest at the BIR.
To be valid, a waiver of the defense of prescription must (a) be signed by an
authorized offcial, (b) indicate receipt by the taxpayer on the original copy, and
(c) indicate the specifc kind and amount of tax due. (Page 18)
BIR Rulings
BIR Ruling No. 420-2011 dated November 3, 2011
Facts:
P Foundation is an undertaking of the Swiss Confederation, which was established
to insure employees against the economic consequences of old age, invalidity and
death. P Foundation owns investments in domestic Philippine companies from
which it receives dividends. The tax authorities of Switzerland issued a certifcation
confrming that the tax exemption granted to P Foundation extends to dividends
from shares in Philippine companies.
Issue:
Are the dividends paid by domestic companies to P Foundation subject to the 15%
FWT rate under Section 28(B)(5)(b) of the Tax Code?
Ruling:
Yes. Under Section 28(B)(5)(b) of the Tax Code, cash and/or property dividends
received by a non-resident foreign corporation from a domestic corporation shall
be subject to 15% FWT, subject to the condition that the country in which the
non-resident foreign corporation is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation taxes deemed to have been paid
in the Philippines, equivalent to 15% of the dividend. The preferential 15% FWT
rate applies since Switzerland exempts from tax dividends received from shares in
Philippine companies.
Dividends paid by domestic
corporations to a Swiss foundation
are subject to 15% FWT under Section
28(B)(5)(b) of the Tax Code.
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Interest income derived by a Savings
and Loan Association from its bank
deposits, or any other monetary
beneft from deposit substitutes, is
exempt from the 20% FWT imposed
under Section 27(D)(1) of the Tax
Code.
A corporation belonging to the top
20,000 corporations that pays its
suppliers through credit card is not
required to withhold EWT when
presenting its credit card to the
suppliers.
BIR Ruling No. 422-11 dated November 4, 2011
Facts:
Some barangay offcials in Dumaguete City are requesting for the suspension of the
WT on the honoraria they receive as remuneration for services.
Issue:
Are the honoraria received by barangay offcials subject to WT on compensation?
Ruling:
Yes. Honoraria, no matter how negligible the amount, is wealth that fows into the
hands of a barangay offcial. Thus, these honoraria are subject to income tax and,
consequently, WT on compensation. Barangay offcials fall under the defnition of
employees under Section 2.78.3 of Revenue Regulations (RR) No. 2-98.
BIR Ruling No. 443-2011 dated November 11, 2011
Facts:
S Savings and Loan Association (S-SLA) derives interest income from bank deposits
and monetary beneft from deposit substitutes.
Issue:
Is S-SLA exempt from the 20% FWT on interest income from bank deposit and yield,
or any monetary beneft from deposit substitutes imposed under Section 27(D)(1)
of the Tax Code?
Ruling:
Yes. Under Section 5 of Republic Act (RA) No. 8367, otherwise known as the
Revised Non-Stock Savings and Loan Associations Act of 1997, an association
shall be exempt from payment of tax with respect to income it receives, including
interest on its deposits with any bank.
BIR Ruling No. 456-2011 dated November 16, 2011
Facts:
S Co. is a domestic corporation classifed by the BIR as one of the top 10,000
(now top 20,000) private corporations. S Co. purchases goods and services from
suppliers and pays them through credit card. The suppliers collect payment from the
credit card company, which in turn collects payment from S Co.
Issues:
1. Is S Co. required to withhold 1% or 2% EWT imposed under Section 2.57.2 of RR
No. 2-98 on payments to suppliers upon presentation of the credit card?
2. Is S Co. required to withhold 2% EWT on interest payment and/or service fee
and other charges imposed by the credit card company?
3. Is the credit card company required to withhold any tax on payments to the
suppliers of S Co?
Honoraria received by barangay
offcials as remuneration for services
are subject to WT on compensation.

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Ruling:
1. No. Under RMC No. 72-2004, a top 20,000 corporation is not required to withhold
1% or 2% EWT on payments to suppliers upon presentation of the credit card. In a
credit card transaction, the merchant/service establishment allows the cardholder
to make the purchases on credit. The merchant/service establishment assigns its
receivables from the cardholder to the credit card company at a discount for early
payment or settlement of the transaction. What is being sold to and purchased by
the credit card company are the receivables from the cardholder. Hence, payments
made by S Co. to the credit card company, which are termed settlement of
accounts, are for those receivables assigned to them by the merchant/service
establishment. Clearly, the payments are not payments for the purchase of goods
or services.
2. Yes. Under RMC No. 72-2004, a top 20,000 corporation is required to withhold
2% EWT on interest payments and/or service fees and other charges imposed
by the credit card company. Considering that a credit card company is engaged
in fnancing activities with respect to discounting of receivables, and that it
generates revenues principally from the discount granted by the merchant/service
establishment and incidentally from fees paid by the cardholder, the cardholder is
required to withhold 2% EWT on interest payments and/or service fees and other
charges imposed by the credit card company.
3. Yes. Under Section 2.57.2(L) of RR No. 2-98 and RMC No. 72-2004, a credit card
company in the Philippines shall withhold 1% tax on one half of the gross amounts
paid to any business entity, whether natural or juridical, representing sales of goods
or services made by the business entity to the cardholder.
BIR Ruling No. 479-2011 dated December 5, 2011
Facts:
A Co.s corporate term expired in December 2006. In December 2009, the Board of
Directors of A Co., in their capacity as trustees of the corporate assets, ordered the
distribution of the remaining assets to its stockholders by way of liquidating dividends.
Consequently, A Co. transferred a parcel of land to B Co. as liquidating dividend. Citing
BIR Ruling No. 039-02, A Co. wants to confrm that: (1) it is not liable for income
tax on either the transfer of the parcel of land to B Co. or on its receipt of the shares
surrendered by B Co.; (2) no documentary stamp tax (DST) is due on the surrender and
cancellation of B Co.s shares; (3) no DST is due on the transfer of the parcel of land to B
Co; and (4) B Co. shall realize capital gain or loss from the transfer of the parcel of land.
Issue:
Can A Co.s opinions be confrmed on the basis of BIR Ruling No. 039-02?
Ruling:
No. A Co.s opinions cannot be confrmed due to lack of legal basis under the Tax Code.
BIR Ruling No. 039-02 and the BIR rulings cited are reversed and set aside.
[Editors Note: BIR Ruling No. 479-2011 departs from several previous rulings and court
decisions, such as BIR Rulings No. 039-02, 028-02,092-99,171-92, 059-90, 136-88,
and 019-80, and Wise & Co, Inc., et al vs Bibiano L. Meer, CIR, G.R. No. 48231, June 30,
1947 (SC) and Oranbo Realty Corporation v. CIR, C.T.A. Case No. 4820, January 23,
1995 (CTA), without clarifying why the previous rulings are being revoked; it only said
that the tax treatment requested by the taxpayer cannot be granted for lack of legal
basis under the Tax Code.]
BIR Ruling No. 039-02 on liquidating
dividends, and the BIR rulings cited
therein, are reversed and set aside.
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BIR Ruling No. 504-2011 dated December 19, 2011
Facts:
A Co. is registered with PEZA as an ecozone developer/operator subject to 5%
preferential tax rate on gross income earned. A Co. entered into a Contract to
Sell with B Co., a company not registered, nor entitled to be registered, with the
PEZA, where A Co. will sell to B Co. a parcel of land covered by its registration
agreement with PEZA. The parcel of land is classifed as commercial and will be
utilized for commercial purposes.
Issue:
Are the profts from the sale of land to B Co. included in the computation of
gross income subject to 5% preferential tax rate?
Ruling:
No. The fscal incentives provided under RA No. 7916 (PEZA Law) must be read
in conjunction with its implementing rules. The implementing rules state that
the availment of incentives shall continue for as long as the registrant remains
in good standing and commits no violation of the PEZA Law or the terms and
conditions of its registration agreement with PEZA. At the time of the sale of
the property, B Co. was neither PEZA-registered nor entitled to be registered
with PEZA. It has also not been issued a permit to locate in an ecozone.
Entering into a contract with B Co. was a violation of A Co.s registration
agreement, which states that it may only sell land to entities who are registered
or are entitled to be registered with the PEZA, and who, in fact, subsequently
register with the PEZA, or entities that are issued permits to locate by the
PEZA. Moreover, since B Co. will utilize the area for commercial purposes, the
sale of the land may not be granted fscal incentives since areas in the ecozone
are intended to be used for industrial purposes only.
BIR Issuance
Revenue Memorandum Circular No. 3-2012 issued on January 12, 2012
Income payments made to general professional partnerships (GPPs) for its
professional services are not subject to income tax and, consequently, to
WT. It is the individual partners who shall be subject to such taxes in their
separate and individual capacities.
Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
Income payments made periodically or at the end of the taxable year by a
GPP to the partners, such as drawings, advances, allowances and the like,
are subject to 15% creditable withholding tax (CWT) if the payments to the
partner for the current year exceed P720,000 while payments that do not
exceed P720,000 are subject to 10% CWT.
When a sale of land by an ecozone
developer/operator violates the
developer/operators registration
agreement with PEZA, profts from
such sale cannot be subject to 5%
preferential tax rate.
RMC No. 57-2011 was issued to clarify
certain tax issues involving GPPs.
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BOC Issuance
Customs Memorandum Order No. 1-2012 dated January 12, 2012
To coordinate the activities of the Run After Smugglers (RATS) Group, a
Secretariat shall be constituted as follows:
1. Case Evaluation Team
2. Profling Team
3. Prosecution/Litigation Team
As head of the RATS, the Deputy Commissioner for Revenue Collection
Monitoring Group (RCMG) is directed to immediately form and organize the
Secretariat.
Additional members or technical support staff from other BOC offces shall be
assigned to the RATS Group upon request of the Deputy Commissioner, RCMG,
and the approval of the Commissioner of Customs.
The functions of the RATS Group are the following:
1. Investigate, profle and gather evidence against Customs personnel,
importers, brokers and other persons suspected to be involved in
smuggling activities;
2. Investigate, recommend to the Commissioner, and initiate the fling with
the Department of Justice (DOJ) of criminal cases against Customs
personnel, importers, brokers and other suspected individuals, and
monitor the progress of said cases;
3. Develop a database for information related to smuggling activities;
4. Research and monitor smuggling activities and establish a database of all
shipments alerted, apprehended, abandoned, forfeited and so on;
5. Conduct trainings designed to enhance the programs capacity to
effectively target, profle, evaluate and litigate cases against trade law
violators;
6. Recommend, subject to the approval of the Commissioner, internal rules in
building, profling, monitoring and investigating smuggling cases and other
violations of customs and allied laws;
7. Recommend issuance of orders as may be necessary to effectively perform
the mandated functions;
8. Recommend Letters of Authority or issue Alert/Hold Orders against
shipments or establishments suspected to be in violation of the Tariff and
Customs Code of the Philippines (TCCP) and other related laws; and
9. Recommend the conduct of post-entry audit of importers suspected of
engaging in smuggling activities.
CMO No. 1-2012 prescribes guidelines
to strengthen the RATS Group and
intensify the BOCs anti-smuggling
efforts.
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Upon the effectivity of CMO No. 1-2012, all case folders, fles and records
pertaining to the operation of RATS and prosecution of criminal cases shall be
turned over to the RATS Group.
Within 48 hours after apprehension, the apprehending units shall furnish the
Head of the RATS Group certifed true copies of the Apprehension Reports,
other pertinent documents and pieces of evidence related thereto.
All District Collectors and Port Collectors shall, within 48 hours from the
issuance of a Warrant of Seizure and Detention, furnish the RATS Group a
certifed copy of the warrant with the recommendation of the apprehending
unit, Examination Report, Offcer on Case Report and Apprehension Report
and other supporting documents, for immediate profling, evaluation and
initiation of appropriate cases.
All apprehending and investigating offcers, as well as other customs
personnel, shall cooperate with the designated RATS personnel and, if
required, execute an affdavit to support the administrative or criminal cases to
be fled with the proper courts, tribunals or administrative bodies.
Pursuant to Section 3503 of the TCCP, as amended, the Deputy Commissioner,
as Head of the RATS Group, is authorized to issue a subpoena duces tecum
and/or ad testifcandum to secure the production of witnesses, records and
documents necessary for the investigation and prosecution of cases.
Failure by responsible customs offcials or personnel to promptly comply
with any of the directives stated in CMO No. 1-2012 shall be dealt with in
accordance with Section 3604 of the TCCP, as amended and civil service rules
and regulations.
All orders, rules and regulations inconsistent with CMO No. 1-2012 are
repealed, superseded and modifed accordingly.
CMO No. 1-2012 shall take effect immediately.
BSP Issuance
BSP Circular No. 745 dated 10 January 2012
Subsection 4306Q.5 of the Manual of Regulations for Non-Bank Financial
Institutions (MORNBFI) on the write-off of loans, other credit accommodations,
advances and other assets is amended to read, as follows:
Subsection 4306Q.5 (2008 4308Q.5) Write-off of loans, other credit
accommodations, advances and other assets as bad debts
a. x x x
b. x x x
c. Reporting requirements. Notice of write-off of loans, other credit
accommodations, advances and other assets shall be submitted in the
prescribed form to the appropriate department of the SES concerned
within 30 business days after every write-off with (i) a sworn
Circular No. 745 prescribes the
reporting requirements on the write-off
of loans, other credit accommodations,
advances and other assets.

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statement signed by the President of the QB, or officer of equivalent
rank, stating that the write-off did not include transactions with
DOSRI, and (ii) a copy of the Board Resolution approving the write-off.
x x x
d. Verification of write-offs. Write-offs of loans, other credit
accommodations, advances and other assets shall be subject to
verification during examination.
Appendix Q-3 of the MORNBFI on the list of reports required of QBs is
amended to revise the deadline for the submission of the Notice/Application for
Write-off of Loans, Other Credit Accommodations, Advances and Other Assets
to within 30 business days after every write-off.
Subsection X306.5 of the Manual of Regulations for Banks (MORB) is amended
to read, as follows:
Subsection X306.5 Write-off of loans, other credit accommodations,
advances and other assets as bad debts
a. x x x
b. x x x
c. Reporting requirements. Notice of write-off of loans, other credit
accommodations, advances and other assets shall be submitted in the
prescribed form to the appropriate department of the SES concerned
within 30 banking days after every write-off with (i) a sworn
statement signed by the President of the bank, or officer of equivalent
rank, stating that the write-off did not include transactions with
DOSRI, and (ii) a copy of the Board Resolution approving the write-off.
x x x.
Appendix 6 of the MORB on the list of reports required of banks is amended to
revise the deadline on the submission of the Notice/Application for Write-off of
Loans, Other Credit Accommodations, Advances and Other Assets to within 30
banking days after every write-off.
This Circular shall take effect 15 calendar days following its publication either
in the Offcial Gazette or in a newspaper of general circulation.
[Editors Note: Circular No. 745 was published in the Business Mirror on January
13-14, 2012.]
SEC Issuances
SEC Memorandum Circular No. 9 dated December 5, 2011
Pursuant to the authority of the SEC under Section 72 in relation to Section
38 of the Securities Regulation Code (SRC), and to enhance the effectiveness
of independent directors and to encourage the infusion of fresh ideas in the
boards of directors, the SEC promulgates the following rules on the election of
independent directors in listed, public and mutual fund companies:
SEC MC No. 9 prescribes the rules on
the election of independent directors
in listed, public and mutual fund
companies.
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1. There shall be no limit in the number of covered companies that a
person may be elected as Independent Director (ID), except in business
conglomerates where an ID can be elected to only 5 companies of the
conglomerate, i.e., parent company, subsidiary, affliate.
2. IDs can serve for 5 consecutive years, provided that service for a period of
at least 6 months shall be equivalent to 1 year, regardless of the manner
by which the ID position was relinquished or terminated.
3. After completion of the 5-year service period, an ID shall be ineligible for
election in the same company unless the ID has undergone a cooling off
period of 2 years, provided that during such period, the ID concerned has
not engaged in any activity that under existing rules disqualifes a person
from being elected as ID in the same company.
4. An ID re-elected in the same company after the cooling off period can
serve for another 5 consecutive years under the conditions mentioned in
paragraph 2 above.
5. After serving as ID for 10 years, the ID shall be perpetually barred from
being elected in the same company, without prejudice to being elected
as ID in other companies outside of the business conglomerate, where
applicable, under the same conditions provided for in this Circular.
6. The foregoing rules shall take effect on January 2, 2012. All previous
terms served by existing IDs shall not be included in the application of the
term limits subject of this Circular.
7. All past resolutions or circulars of the SEC that are inconsistent with this
Circular shall be deemed repealed or modifed accordingly.
[Editors Note: SEC MC No. 9 was published in the Manila Bulletin on December 15,
2011.]
SEC Opinion No. 11-46 dated November 11, 2011
Facts:
C Co. is a domestic corporation whose primary purpose as stated in its Articles of
Incorporation (AOI) is as follows:
To promote, establish, operate, manage, hold, own or invest in corporations
or entities that are engaged in mining activities or mining-related activities,
in power and energy activities or power and energy related activities and
real estate business or assist or participate in the organization, merger or
consolidation thereof and in connection with such activities to subscribe, to
purchase, or otherwise acquire, shares of stock or other evidence of equity
participation in any such business or enterprise or to purchase or otherwise
acquire all or part of the assets, franchise, concession, licenses or goodwill of
said frm or establishment and assume or otherwise provide for the settlement
of its obligation and liabilities.
Issue:
Can C Co. engage in mining activities by itself under its primary purpose as stated
in its AOI?
A holding company cannot engage in
mining activities unless specifed in its
AOI.
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Ruling:
No. C Co.s AOI does not specifcally state that it shall engage in the business of
mining by itself, but merely promote, establish, operate, manage, hold, own or
invest in corporations or entities that are engaged in mining activities or mining-
related activities. The phrase to promote, establish, operate, manage, hold, own
or invest in corporations or entities taken as a whole, strongly shows that the
primary purpose is to engage in holding interests in the said companies. This is
reinforced by the statement that it can assist or participate in the organization,
merger, or consolidation of these companies, and that, in connection with
such activities, it is authorized to subscribe, to purchase, or otherwise acquire
shares of stock or other evidence of equity participation in any such business or
enterprise or to purchase or otherwise acquire all or part of the assets, franchise,
concession, licenses or goodwill of said frm or establishment and assume or
otherwise provide for the settlement of its obligation and liabilities. The use of
the words manage and operate is not inconsistent with the idea of a holding
company.
Moreover, C Co.s name refers to its primary purpose, which is that of a holding
company. In addition, its AOI does not state any secondary purpose for which it
may also be classifed. Inasmuch as C Co.s AOI does not state that it shall engage
in mining activities, it is thus a mere holding company of corporations or entities
that are engaged in mining activities or mining-related activities, in power and
energy activities or power and energy related activities and real estate business.
Therefore, C Co. cannot engage in mining activities by itself.
SEC-OGC Opinion No. 11-47 dated November 25, 2011
Facts:
P Foundation is a domestic foundation that received funds from a foreign
foundation for the construction of a memorial. It was arranged that the funds will
be donated to P foundation, who will then donate them to D Committee and P
Academy since both are government institutions. Under the primary purpose in
its AOI, P Foundation can engage in the following activities:
xxx
e) Assisting in strengthening the xxx other facilities of the P Academy.
In the furtherance of the aforesaid purpose and activities, and not in
limitation of the powers granted by the laws of the Philippines, the
foundation shall have the powers:
a) To solicit and/or accept any donation, contribution, gift,
endowment, bequest, legacy or inheritance, or any other assets
from any source whatsoever, and to make use or dispose of them
as may be necessary to carry out the purpose and activities of the
Foundation;
xxx
P Foundations by-laws provide that Funds of the Foundation shall come
from donations, contributions, gifts, bequests, legacies, endowments, loans,
investment income and proceeds from fund drives.
A foundation can receive and transfer
donations from foreign sources as
provided in its AOI.
12 Tax Bulletin
Issues:
1. Can P Foundation receive donations from a foreign source?
2. Can P Foundation transfer the donations from a foreign source to D
Committee or to P Academy?
Ruling:
1. Yes. P Foundations AOI and by-laws provide that it can receive donations
from a foreign source.
2. Yes. P Foundations AOI provides that it has the power to make use or dispose
of donations accepted as may be necessary to carry out its purpose and
activities. Considering that the funds donated will be used in building a
memorial, such donation furthers its objective of assisting in the scholastic
progress and strengthening of P Academys facilities. However, whether D
Committee and P Academy, who are both government agencies, have the
power to receive such donations is a matter within their own jurisdiction
and discretion. The SEC can only interpret the laws and rules it enforces and
implements.
SEC-OGC Opinion No. 11-48 dated December 2, 2011
Facts:

P Co. is a domestic corporation. The present members of the board of directors
were elected to their positions in 2000 and have continued to discharge their
functions and responsibilities without re-election, in the absence of their
successors having been elected or qualifed. The By-Laws of P Co. provide for the
re-election of its offcers and directors for not more than two successive terms.
Issue:
Are the members of the board of directors of P Co. qualifed to run for re-election?
Ruling:
Yes. Under the Corporation Code, while a directors term is fxed, the tenure of a
director survives until a successor is duly elected and qualifed. Term is the time
during which the offcer may claim to hold the offce as of right, and fxes the
interval after which the several incumbents shall succeed one another. Tenure
represents the time during which the incumbent actually holds offce.
Under Section 23 of the Corporation Code, the board of directors shall hold offce
for one year until their successors are elected and qualifed. This means that the
term of the members of the board shall be for only one year; their term expires
one year after their election to the offce. The holdover period the time from the
lapse of one year from a members election to the Board and until his successors
election and qualifcation is not part of the directors original term, nor is it a
new term. The holdover period constitutes part of his tenure.
Based on the foregoing, the incumbent directors of P Co. are qualifed to run for
re-election provided that the term which they currently hold is not by virtue of a
second consecutive re-election pursuant to its By-Laws.
A directors term is fxed while his
tenure survives until a successor is duly
elected and qualifed. The holdover
period the time from the lapse of one
year from a members election to the
Board and until his successors election
and qualifcation is not part of the
directors original term, nor is it a new
term but constitutes part of his tenure.
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An investment contract is a security,
which is subject to regulation by and
registration with the SEC, consisting
of the following elements: (1) an
investment of money; (2) in a common
enterprise; (3) with expectation of
profts; and (4) primarily from efforts of
others.
SEC-OGC Opinion No. 11-49 dated December 21, 2011
Facts:

T Co. is a domestic corporation. It is the assignee of all the rights and
obligations of R Co. for the development, operation and management of
65.5 hectares of leased land. Under the Agreement, a portion of the leased
property is designated and utilized for the development of a real estate project
where T Co. will assign its leasehold rights over subdivided and individual
lots to interested assignees. T Co. is now contemplating on expanding the
real estate component of the Agreement to include the construction and
development of a condominium-hotel (condotel) project. Under the condotel
project, T Co. will build condotel units and assign both its leasehold rights
over the lots and the units to interested assignees for valuable consideration.
The condotel units will be enrolled by the assignees in the pool of units to be
rented out as hotel rooms. The condotel project will be managed by T Co. or
its authorized operator.
Issue:
Is the condotel project of T Co. considered an investment contract and
therefore a sale of securities under the Securities Regulation Code (SRC)?
Ruling:
Yes. The SRC defnes securities to include investments contracts, certifcates
of interest or participation in proft-sharing agreements. Under the SRC, the
term investment contract means a contract, transaction, or scheme where a
person invests his money in a common enterprise and is led to expect profts
primarily from the efforts of others. Thus, an investment contract consists
of the following elements: (1) an investment of money; (2) in a common
enterprise; (3) with expectation of profts; and (4) primarily from efforts of
others.
An agreement in which a buyer purchases income-producing property and
authorizes the seller to manage the property and to remit the net profts to
the buyer is considered an investment contract. It is unimportant that the
purchase or lease agreement may be separate from the management contract
since both agreements will be considered as part of an overall scheme to pool
funds of a number of individuals in a common venture managed by persons
other than the investors or buyers.
Based on the foregoing, T Co.s condotel project is an investment contract
because it involves (1) an investment of funds, which in this case is the
valuable consideration for the assignment of the condotel units and the lot; (2)
a common enterprise or proft-making venture, which is the lease to the public
and its common areas to be managed by T Co. or its authorized operator; (3)
with expectation of proft, which is revenue to be generated on the lease of the
condotel units; and (4) primarily from the efforts of others, which is apparent
in the services to be offered by T Co. or its authorized operator pursuant to
the management contract.
Hence, since T Co.s condotel project is an investment contract, it is a security
subject to regulation by and registration with the SEC.
14 Tax Bulletin
Court Decisions
Bureau of Customs Employees Association (BOCEA) vs.
Hon. Margarito B. Teves, et. al.
Supreme Court (En Banc) G.R. No. 181704 promulgated December 6, 2011
Facts:
RA No. 9335, otherwise known as the Attrition Act of 2005, took effect on
February 11, 2005, while its implementing rules and regulations (IRR) became
effective in June 2006.
Enacted to optimize the revenue-generation capability and collection of the BIR
and the BOC, the law intends to encourage BIR and BOC offcials and employees
to exceed their revenue targets by providing a system of rewards and sanctions,
through the creation of a Rewards and Incentives Fund (Fund) and a Revenue
Performance Evaluation Board (Board). It covers all BIR and BOC offcials and
employees with at least 6 months of service, regardless of employment status.
Each Board in the BIR and the BOC has the duty to:
(1) Prescribe the rules and guidelines for the allocation, distribution and release
of the Fund;
(2) Set criteria and procedures for removing from the service offcials and
employees whose revenue collection falls short of the target;
(3) Terminate personnel in accordance with the criteria adopted by the Board;
(4) Prescribe a system for performance evaluation;
(5) Perform other functions, including the issuance of rules and regulations; and
(6) Submit an annual report to Congress.

In its petition with the Supreme Court, petitioner Bureau of Customs Employees
Association (BOCEA), an association of rank-and-fle employees of the BOC,
argues that the law is unconstitutional.
In the earlier case of Abakada Guro Party List vs. Purisima (G.R. No. 166715,
promulgated on August 14, 2008), which similarly involved the constitutionality
of RA No. 9335, Section 12 of the law creating a Joint Congressional Oversight
Committee to approve the IRR was declared unconstitutional and violative of the
principle of separation of powers. However, the constitutionality of the remaining
provisions of the law was upheld. [The parties failed to have the present case
consolidated with the Abakada case in a timely manner.]
BOCEA argues that RA No. 9335 and its IRR are unconstitutional because:
(1) There is undue delegation of legislative power to the Board;
(2) The law and its IRR violate the rights of BOCEAs members to equal protection
of the laws, security of tenure and due process; and
(3) The law is a bill of attainder (i.e., a legislative act which inficts punishment on
individuals or members of a particular group without a judicial trial).
Issues:
1. Is there undue delegation of legislative power to the Board?
2. Do the law and its IRR violate the rights of BOCEAs members to equal
protection of the laws, security of tenure and due process?
3. Is RA No. 9335 a bill of attainder?
The Attrition Act of 2005 and its IRR
are constitutional.
15
Ruling:
1. No. An exception to the principle of non-delegation of powers is the delegation
of legislative power to various specialized administrative agencies like the
Boards in this case.
The two tests to determine the validity of the delegation of legislative power,
i.e., the completeness test and the suffcient standard test, were fully satisfed.
The law sets forth the policy and the standards to guide the President in fxing
revenue targets and the implementing agencies in carrying out the provisions
of the law. RA No. 9335 clearly provides the policy of optimizing the revenue-
generation capability and collection of the BIR and the BOC by providing for
a system of rewards and sanctions through the creation of a Rewards and
Incentives Fund and a Revenue Performance Evaluation Board in each agency
for the purpose of encouraging their offcials and employees to exceed their
revenue targets.
The determination of the revenue targets does not rest solely on the President
as it undergoes scrutiny by the Development Budget and Coordinating
Committee.
Moreover, the law limits the Boards authority and identifes the conditions
under which offcials and employees whose revenue collection falls short of the
target by at least 7.5% may be removed from service.
2. No, the law and its IRR do not violate the rights of BOCEAs members to equal
protection of the laws, security of tenure and due process.
On the matter of equal protection, since the subject of the law is the revenue-
generation capability and collection of the BIR and the BOC, agencies which
have the distinct primary function of generating revenues for the government,
the incentives and/or sanctions provided under the law pertain only to the said
agencies.
On the guarantee of security of tenure, an employee cannot be dismissed
from the service for causes other than those provided by law and only after
due process is accorded the employee. RA No. 9335 lays down a reasonable
yardstick for removal (when the revenue collection falls short of the target by
at least 7.5%) with due consideration for all relevant factors affecting the level
of collection. This standard is analogous to ineffciency and incompetence in
the performance of offcial duties, which is a ground for disciplinary action
under civil service laws. The action for removal is also subject to civil service
laws, rules and regulations and compliance with substantive and procedural
due process.

On due process, this simply means an opportunity to be heard or, as applied
to administrative proceedings, a fair and reasonable opportunity to explain
ones side. The law does not simply give the concerned BIR or BOC offcial or
employee a target revenue collection but also provides for the consideration of
all relevant factors that may affect the level of collection. Exemptions from the
target were also set. And the employee retains his rights to be heard and to
appeal.
3. No, the law is not a bill of attainder. Instead, the law merely lays down the
grounds for the termination of a BIR or BOC offcial or employee and provides
for the consequences. The democratic processes are still followed and the
constitutional rights of the concerned employee are amply protected.
16 Tax Bulletin
The date on which the court actually
received the pleadings delivered
through a private letter-forwarding
agency is considered the date of fling
in court, not the date of delivery to the
agency.
Philippine National Bank vs. Commissioner of Internal Revenue
Supreme Court (First Division) G.R. 172458 promulgated December 14, 2011
Facts:
The Philippine National Bank (PNB) fled with the Commissioner of Internal
Revenue (CIR) a claim for refund of overpaid income tax for calendar year
1998. When the BIR did not act on the claim, PNB fled a Petition for Review
with the Court of Tax Appeals (CTA).
The CTA Division partially granted the claim and Petitioner PNB moved for a
reconsideration to the extent of the denial. After the CTA Division affrmed
its decision, PNB appealed to the CTA En Banc, which denied the appeal for
having been fled 4 days beyond the additional 15 days granted to PNB to fle
its petition. Moreover, in dismissing the case, the CTA En Banc ruled that PNB
failed to attach to the petition the duplicate originals or certifed true copies of
the assailed CTA Division Decisions and an Affdavit of Service.
PNB argued that the petition was fled in a timely manner, via LBC Express, on
the last day of the additional 15-day period granted by CTA En Banc. On its non-
compliance with the other rules of procedure, PNB claimed that these were due
to inadvertence and oversight.
Issue:
Is the date of delivery of a pleading to a private letter-forwarding agency
considered the date of fling with the court?
Ruling:
No. What constitutes the date of fling of a pleading is the date of actual receipt
by the court.
The rules provide that a pleading shall be fled by presenting the original copy
personally to the clerk of court or by sending it through registered mail. Service
by ordinary mail is allowed only in instances where no registry service exists.
Moreover, attaching to a Petition for Review the duplicate original or certifed
true copy of the assailed decision is mandatory, and non-compliance is a
suffcient ground to dismiss the petition.
Although the failure to attach the required Affdavit of Service is not fatal if
the registry receipt attached to the petition clearly shows service to the other
party, this was not the only rule of procedure which PNB failed to satisfy.

Rules of procedure must be faithfully followed except only when, for persuasive
reasons, these may be relaxed to relieve a litigant of an injustice commensurate
with his failure to comply with the prescribed procedure. The party invoking
liberality on the application of the rules must adequately explain his failure to
abide by the rules.
17
Laurence Lee V. Luang vs. Commissioner of Internal Revenue
Court of Tax Appeals (Second Division) Case No. 7967 promulgated
January 5, 2012
Facts:
Respondent CIR issued a Letter Notice dated April 30, 2007 to Petitioner
Laurence Lee V. Luang (Mr. Luang) as a result of a computerized matching
of information which disclosed that Mr. Luang allegedly under-declared his
purchases for taxable year 2005.
On November 5, 2008, Mr. Luang received a Formal Letter of Demand and
a Final Assessment Notice (FAN) for alleged defciency value-added tax
(VAT) and income tax for taxable year 2005. On December 5, 2008, Mr.
Luang protested the FAN. Since the CIR failed to act on the protest, Mr.
Luang fled on August 28, 2009 a Petition for Review with the CTA.
Mr. Luang argued that the assessment is void since he did not receive
a Preliminary Assessment Notice (PAN) as prescribed under Revenue
Regulations (RR) No. 12-99. On the other hand, the CIR asserted that the
absence of a PAN did not invalidate the assessment since Mr. Luang was
able to fle his protest to the FAN within the period provided by law and
regulations.
Issue:
Did the absence of a PAN invalidate the assessment?
Ruling:
Yes. The receipt by the taxpayer of a PAN is part of the due process
requirement in the issuance of a defciency tax assessment, the absence of
which nullifes any assessment made by tax authorities.
Section 228 of the Tax Code requires that the taxpayer must frst be
informed that he is liable for defciency taxes through the sending of a
PAN. Revenue Memorandum Order No. 42-2003, which prescribes the
guidelines for assessments covered by Letter Notice, also provides that
a PAN and FAN shall be issued following the procedure under RR No. 12-
99. Under RR No. 12-99, if after review and evaluation, it is determined
that there exists suffcient basis to assess defciency taxes, a PAN shall
be issued to the taxpayer showing in detail, the facts and the law, rules
and regulations, or jurisprudence on which the proposed assessments
are based. Failure to strictly comply with notice requirements prescribed
under Section 228 of the Tax Code and RR No. 12-99 is tantamount to a
denial of due process.
Although a copy of an undated PAN was presented during trial, the CIR did
not present clear evidence rebutting Mr. Luangs categorical denial that
he received the said PAN either personally or by registered mail. The CIR
therefore failed to observe due process in issuing the assessment.
The absence of a PAN duly received by
a taxpayer nullifes any defciency tax
assessment issued by the BIR.
18 Tax Bulletin
Union Cement Corporation vs. Commissioner of Internal Revenue
Court of Tax Appeals (Second Division) Case No. 6842 promulgated
January 18, 2012
Facts:
On March 28, 2003, Petitioner Union Cement Corporation (UCC) received
a PAN from Respondent CIR for alleged defciency income tax and VAT for
the taxable period June 1999 to April 22, 2000. On April 14, 2003, UCC
protested the PAN and executed a waiver of the defense of prescription
under the statute of limitations, extending the assessment period until
June 30, 2003.
On June 30, 2003, UCC received a Formal Letter of Demand from the CIR
for alleged defciency income tax for the taxable period June to December
31, 1999. On July 10, 2003, UCC protested the said assessment.
On December 4, 2003, the CIR issued a Final Decision on Disputed
Assessment denying UCCs protest.
On December 30, 2003, UCC fled a Petition for Review with the CTA
and argued, among others, that the assessment was issued beyond the
prescriptive period as the waiver is defective. On the other hand, the CIR
argued that the waiver is valid and further asserted that UCC is barred
from questioning the validity of the waiver since the same was raised for
the frst time on appeal.
Issues:
1. Is UCC barred from contesting on appeal the validity of the waiver?
2. Was the waiver valid?
Ruling:
1. No. UCC can question the validity of the waiver for the frst time on
appeal at the CTA. The CTA may resolve the issue of prescription even
if the issue was not raised in the administrative protest fled by UCC.
The CTA cited rulings of the Supreme Court which held that the Court
is authorized to entertain issues or matters not raised in the lower
courts in the interest of substantial justice. Moreover, the CTA is a
court of record that is required to conduct a formal trial where the
parties must present their evidence for consideration. The CIR had the
opportunity to present evidence to prove validity of the waiver.
2. No, the waiver is defective and therefore did not toll the 3-year
prescriptive period for the BIR to issue an assessment. The waiver
failed to comply with the requisites prescribed for its validity as the
following defects were noted in its execution:
a. The waiver was signed by Ms. Flor Mercado for then Assistant
Commissioner of the BIR Large Taxpayers Service, Atty. Edwin R.
Abella;
A taxpayer may, on appeal to the CTA,
question the validity of a waiver even if
the issue was not raised in its protest at
the BIR.
To be valid, a waiver of the defense of
prescription must (a) be signed by an
authorized offcial, (b) indicate receipt
by the taxpayer on the original copy,
and (c) indicate the specifc kind and
amount of tax due.
19
b. The original copy of the waiver does not indicate the fact of receipt by
the taxpayer; and
c. The waiver failed to indicate the specifc kind of tax and the amount of
tax due.
Revenue Delegation Authority Order (RDAO) No. 05-01 authorizes
certain offcials to sign and accept a waiver. The CIR, however, failed to
prove that Ms. Mercado was authorized to sign the waiver executed by
UCC.
RMO No. 20-90 specifcally provides that receipt by the taxpayer of his
fle copy must be indicated in the original copy of the waiver. The CIR
did not present evidence to show UCCs receipt of the signed waiver.
The purpose of this requirement is to notify taxpayers of the existence
of the document, the acceptance by the BIR, as well as the perfection
of the agreement.
The waiver also failed to state the specifc kind of tax and the amount
of the tax due. The purpose of stating the specifc kind of tax and the
amount of tax due is for the taxpayer to pinpoint which among the
proposed tax assessments may subsequently be issued without him
invoking the defense of prescription. RMO No. 20-90 requires specifc
information which cannot be substituted with general statements.
Lastly, the BIR cannot hide behind the Doctrine of Estoppel to cover
its failure to comply with RMO No. 20-90 and RDAO No. 05-01. Having
caused the defects in the waiver, the BIR must bear the consequences.
20 Tax Bulletin
We welcome your comments, ideas and
questions. Please contact
Ma. Fides A. Balili via e-mail at
Ma.Fides.A.Balili@ph.ey.com or at
telephone number 894-8113 and
Mark Anthony P. Tamayo via e-mail at
Mark.Anthony.P.Tamayo@ph.ey.com or
at telephone number 894-8391.
SyCip Gorres Velayo & Co.
6760 Ayala Avenue, Makati City,
Philippines
Telephone: (632) 891-0307
Fax: (632) 819-0872
2012 SyCip Gorres Velayo & Co.
All Rights Reserved.
FEA no. 1000041
SGV & Co. maintains offces in Makati,
Cebu, Davao, Bacolod, Cagayan de Oro,
Baguio, General Santos and Cavite.
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or for further information about Tax
Services, please visit our website
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