October 23, 2017

Contents
Gamboa v. Teves (2011)...................................................................................................9
Gamboa v. Teves (2012)..................................................................................................10
Narra Nickel Mining v. Redmont (2014).............................................................................10
Narra Nickel Mining v. Redmont (2015).............................................................................11
(Scanmar) Application of control test to Manning Companies................................................11
BIR Ruling DA-393-03 (International Legal Advocates)........................................................12
B. Van Zuiden Bros v. GTVL Manufacturing.........................................................................20
Agilent Technologies v. Integrated Silicon Technology.........................................................20
Communication Materials v. CA........................................................................................21
Top Weld Manufacturing v. ECED......................................................................................21
BIR Rul. 217-12 Aquino Foundation, Inc...................................................................................35
BIR Ruling No. DA-034-07 (Ligaya ng Panginoon Foundation).........................................................41
RMC 7-2012 (Implementing Mary Immaculate Development Foundation, Inc.) .....................................42
DOF-Bureau of LG Finance Opinion March 4, 2011 (Manila North Tollways) .........................................49
DOF-Bureau of LG Finance Opinion March 7, 1994 (Colgate-Palmolive)..............................................51
DOF-Bureau of LG Finance Opinion February 26, 1993 (Magnolia Corp)..............................................51
DOF-Bureau of LG Finance Opinion September 14, 1998 (Nestle Philippines) .......................................52
Mobil Philippines v The City Treasurer of Makati..........................................................................53
ITAD Ruling No. 086-05 (AMKOR Technology)............................................................................63
Manila Banking Corp v CIR...................................................................................................69
BIR Ruling DA-445-05 (Global Brands).....................................................................................69
China Banking Corp v CA.....................................................................................................73
BIR Ruling No. DA-049-07 (Arquitectonica International Corp).........................................................73
BIR Rul. 345-11 (Socoin Ingeniera Y Construccion)......................................................................77
BIR ITAD Ruling No. 39-07 (Latitude Broadband, Inc.)..................................................................78
BIR Ruling No. DA-002-07 (International Hotel Licensing Company)..................................................78
BIR Ruling No. DA-667-06 (Koppers Wood Products)....................................................................82
Lapanday Foods Corp v CIR..................................................................................................88
CIR v. Ongtengco..............................................................................................................88
KEPCO v. CIR...................................................................................................................89
Philippine National Oil Company v CIR.....................................................................................89
CIR v Isabela Cultural Corp.................................................................................................102
CIR v Central Luzon Drug Corp.............................................................................................104
Kapatiran ng mga Naglilinkgod sa Pamahalaan ng Pilipinas v Tan....................................................129
Abakada Guro v Ermita......................................................................................................130
BIR Ruling No. DA-053-08 (BRANDERS.COM)...........................................................................154
BIR Ruling No. 048-11 (Grundfos Pumps)................................................................................156
BIR Ruling No. 099-11 (Delta Air Lines)..................................................................................157
BIR Ruling DA-066-08 (Diamond Star Agro Products)..................................................................158
CIR v Seagate Technology..................................................................................................159
CIR v Cebu Toyo Corporation...............................................................................................159
CIR v Acesite (Philippines) Hotel Corporation............................................................................160
PAGCOR v BIR................................................................................................................160
VAT Ruling 005-99 Gulf Express Corporation (GEC)....................................................................163
VAT Ruling 040-98 Marsman Tours and Travel Corporation...........................................................163
CIR v American Express.....................................................................................................165
CIR v Burmeister and Wain Scandinavian Contractor Mindanao......................................................169
CIR v. Placer Dome Technical Services...................................................................................170
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BIR Ruling No. DA-646-06 (Ilo Land)......................................................................................179
CIR v Mirant Pagbilao Corp..................................................................................................185
CIR v Aichi Forging Co.......................................................................................................185
Intel Technology v CIR......................................................................................................186
CIR v Rosemarie Acosta.....................................................................................................186

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MODULE 2: THE CORPORATION AND TAXES
1. STATE POLICY & GENERAL PRINCIPLES OF INCOME TAXATION
RA 8424
Section 2. State Policy. - It is hereby declared the policy of
the State to promote sustainable economic growth through
the rationalization of the Philippine internal revenue tax
system, including tax administration; to provide, as much as
possible, an equitable relief to a greater number of
taxpayers in order to improve levels of disposable income
and increase economic activity; and to create a robust
environment for business to enable firms to compete better
in the regional as well as the global market, at the same
time that the State ensures that Government is able to
provide for the needs of those under its jurisdiction and
care.
NIRC 23
SEC. 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on
all income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived
from sources within the Philippines;
(C) An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas
contract worker is taxable only on income derived from
sources within the Philippines: Provided, That a seaman
who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member
of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
(E) A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
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(F) A foreign corporation, whether engaged or not in trade
or business in the Philippines, is taxable only on income
derived from sources within the Philippines.
x------------------------------------x
2. IMPORTANT BASIC TERMS IN GENERAL (NIRC 22)
2.1 Taxable Year
(P) The term "taxable year" means the calendar year, or the
fiscal year ending during such calendar year, upon the
basis of which the net income is computed under this
Title. 'Taxable year' includes, in the case of a return
made for a fractional part of a year under the provisions
of this Title or under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the
commissioner, the period for which such return is made.
2.2 Fiscal Year
(Q) The term "fiscal year" means an accounting period of
twelve (12) months ending on the last day of any month
other than December.
2.3 Securities
(T) The term "securities" means shares of stock in a
corporation and rights to subscribe for or to receive such
shares. The term includes bonds, debentures, notes or
certificates, or other evidence or indebtedness, issued by
any corporation, including those issued by a government
or political subdivision thereof, with interest coupons or
in registered form.
2.4 Ordinary Income
(Z) The term "ordinary income" includes any gain from the
sale or exchange of property which is not a capital asset
or property described in Section 39(A)(1). Any gain from
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the sale or exchange of property which is treated or
considered, under other provisions of this Title, as
'ordinary income' shall be treated as gain from the sale
or exchange of property which is not a capital asset as
defined in Section 39(A)(1).
Sec. 39 (A) (1) NIRC
Capital assets are those that are NOT (WON for business
or not) RPDS (rapids not long term)
Stock in trade included in the inventory of the
taxpayer if on hand at the close of the taxable year
Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business
Property used in the trade or business, of a character
which is subject to the allowance for depreciation
Real property used in trade or business of the
taxpayer
2.5 Gross Income - 27(A) & (E)(4)
SEC. 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code,
an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each
taxable year from all sources within and without the
Philippines by every corporation, as defined in Section
22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of
the Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
specific sales, purchases and other transactions occur.
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Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each
month of the period.
The reduced corporate income tax rates shall be applied
on the amount computed by multiplying the number of
months covered by the new rates within the fiscal year
by the taxable income of the corporation for the period,
divided by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option
to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been
satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
(2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed
fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified
under the scheme.
For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross sales
less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all
business expenses directly incurred to produce the
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merchandise to bring them to their present location and
use.
For a trading or merchandising concern, "cost of
goods" sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the
goods to the place where the goods are actually sold,
including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of
service, 'gross income' means gross receipts less sales
returns, allowances and discounts. No deduction of
direct expenses as compared to MCIT definition on GI.
XXX
(E) Minimum Corporate Income Tax on Domestic
Corporations.
XXX
(4) Gross Income Defined. - For purposes of applying
the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to
produce the merchandise to bring them to their present
location and use.
For a trading or merchandising concern, "cost of goods
sold' shall include the invoice cost of the goods sold,
plus import duties, freight in transporting the goods to
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the place where the goods are actually sold including
insurance while the goods are in transit.
For a manufacturing concern, cost of "goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of
service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services.
"Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services
required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants
and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and
cost of supplies: Provided, however, That in the case of
banks, "cost of services" shall include interest expense.
2.6 Ordinary Loss
(Z) The term 'ordinary loss' includes any loss from the sale
or exchange of property which is not a capital asset. Any
loss from the sale or exchange of property which is
treated or considered, under other provisions of this
Title, as 'ordinary loss' shall be treated as loss from the
sale or exchange of property which is not a capital asset.
2.7 Capital Assets - 39(A)(1)
SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term "capital assets" means
property held by the taxpayer (whether or not
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connected with his trade or business), but does not
include: RPDS (rapids not long term)
o Stock in trade included in the inventory of the
taxpayer if on hand at the close of the taxable
year
o Property held by the taxpayer primarily for
sale to customers in the ordinary course of his
trade or business
o Property used in the trade or business, of a
character which is subject to the allowance for
depreciation
o Real property used in trade or business of the
taxpayer
2.8 Taxable Income - 31
SEC. 31. Taxable Income Defined. - The term taxable
income means the pertinent items of gross income specified
in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of
income by this Code or other special laws.
2.9 Withholding Agent
(K) The term "withholding agent" means any person
required to deduct and withhold any tax under the
provisions of Section 57.
2.10 Differentiate between Capital Asses and an
Ordinary Asset
RR No. 07-03 (Dec. 27, 2002)
SEC. 2. DEFINITIONS.
xxx Real properties acquired by bank through foreclosure
are ordinary assets. But banks not to be considered as
habitually ETB in real estate business xxx
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SEC. 3. GUIDELINES IN DETERMINING WHETHER A
PARTICULAR REAL PROPERTY IS A CAPITAL ASSET OR
ORDINARY ASSET.
a. Taxpayers engaged in the real estate business.
Real property shall be classified with respect to
taxpayers engaged in the real estate business as
follows:
1. Real Estate Dealer. - All real properties acquired by
the real estate dealer shall be considered as ordinary
assets.
2. Real Estate Developer. All real properties acquired
by the real estate developer, whether developed or
undeveloped as of the time of acquisition, and all
real properties which are held by the real estate
developer primarily for sale or for lease to customers
in the ordinary course of his trade or business or
which would properly be included in the inventory of
the taxpayer if on hand at the close of the taxable
year and all real properties used in the trade or
business, whether in the form of land, building, or
other improvements, shall be considered as ordinary
assets.
3. Real Estate Lessor. All real properties of the real
estate lessor, whether land and/or improvements,
which are for lease/rent or being offered for
lease/rent, or otherwise for use or being used in the
trade or business shall likewise be considered as
ordinary assets.
4. Taxpayers habitually engaged in the real estate
business. - All real properties acquired in the course
of trade or business by a taxpayer habitually
engaged in the sale of real estate shall be
considered as ordinary assets. Registration with the
HLURB or HUDCC as a real estate dealer or
developer shall be sufficient for a taxpayer to be
considered as habitually engaged in the sale of real
estate. If the taxpayer is not registered with the
HLURB or HUDCC as a real estate dealer or
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developer, he/it may nevertheless be deemed to be
engaged in the real estate business through the
establishment of substantial relevant evidence (such
as consummation during the preceding year of at
least six (6) taxable real estate sale transactions,
regardless of amount; registration as habitually
engaged in real estate business with the Local
Government Unit or the Bureau of Internal Revenue,
etc.,).
A property purchased for future use in the business,
even though this purpose is later thwarted by
circumstances beyond the taxpayers control, does not
lose its character as an ordinary asset. Nor does a mere
discontinuance of the active use of the property change
its character previously established as a business
property.
b. Taxpayer not engaged in the real estate business. -
In the case of a taxpayer not engaged in the real estate
business, real properties, whether land, building, or
other improvements, which are used or being used or
have been previously used in the trade or business of
the taxpayer shall be considered as ordinary assets.
These include buildings and/or improvements subject to
depreciation and lands used in the trade or business of
the taxpayer.
A depreciable asset does not lose its character as an
ordinary asset, for purposes of the instant provision,
even if it becomes fully depreciated, or there is failure to
take depreciation during the period of ownership.
Monetary consideration or the presence or absence of
profit in the operation of the property is not significant in
the characterization of the property. So long as the
property is or has been used for business purposes,
whether for the benefit of the owner or any of its
members or stockholders, it shall still be considered as
an ordinary asset. Real property used by an exempt
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corporation in its exempt operations, such as a
corporation included in the enumeration of Section 30 of
the Code, shall not be considered used for business
purposes, and therefore, considered as capital asset
under these Regulations.
Section 30. NIRC Exemptions from Tax on Corporations .
- The following organizations shall not be taxed under
this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural
organization not organized principally for profit;
(B) Mutual savings bank not having a capital
stock represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit;
(C) A beneficiary society, order or association,
operating fort he exclusive benefit of the members
such as a fraternal organization operating under the
lodge system, or mutual aid association or a
nonstock corporation organized by employees
providing for the payment of life, sickness, accident,
or other benefits exclusively to the members of such
society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated
exclusively for the benefit of its members;
(E) Nonstock corporation or association
organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes,
or for the rehabilitation of veterans, no part of its
net income or asset shall belong to or inures to the
benefit of any member, organizer, officer or any
specific person;
(F) Business league chamber of commerce, or
board of trade, not organized for profit and no part
of the net income of which inures to the benefit of
any private stock-holder, or individual;
(G) Civic league or organization not organized
for profit but operated exclusively for the promotion
of social welfare;
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(H) A nonstock and nonprofit educational
institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organization of a purely local
character, the income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses; and
(K) Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its members
and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the
quantity of produce finished by them;
Real property, whether single detached; townhouse; or
condominium unit, not used in trade or business as
evidenced by a certification from the Barangay Chairman
or from the head of administration, in case of
condominium unit, townhouse or apartment, and as
validated from the existing available records of the
Bureau of Internal Revenue, owned by an individual
engaged in business, shall be treated as capital asset.
c. Taxpayers changing business from real estate
business to non-real estate business. In the case
of a taxpayer who changed its real estate business to a
non-real estate business, or who amended its Articles of
Incorporation from a real estate business to a non-real
estate business, such as a holding company,
manufacturing company, trading company, etc., the
change of business or amendment of the primary
purpose of the business shall not result in the re-
classification of real property held by it from ordinary
asset to capital asset. For purposes of issuing the
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certificate authorizing registration (CAR) or tax clearance
certificate (TCL), as the case may be, the appropriate
officer of the BIR shall at all times determine whether a
corporation purporting to be not engaged in the real
estate business has at any time amended its primary
purpose from a real estate business to a non-real estate
business.
d. Taxpayers originally registered to be engaged in the
real estate business but failed to subsequently
operate. In the case of subsequent non- operation by
taxpayers originally registered to be engaged in the real
estate business, all real properties originally acquired by
it shall continue to be treated as ordinary assets.
e. Treatment of abandoned and idle real properties. -
Real properties formerly forming part of the stock in
trade of a taxpayer engaged in the real estate business,
or formerly being used in the trade or business of a
taxpayer engaged or not engaged in the real estate
business, which were later on abandoned and became
idle, shall continue to be treated as ordinary assets. Real
property initially acquired by a taxpayer engaged in the
real estate business shall not result in its conversion into
a capital asset even if the same is subsequently
abandoned or becomes idle.
Provided however, that properties classified as ordinary
assets for being used in business by a taxpayer engaged
in business other than real estate business as defined in
Section 2 (g) hereof are automatically converted into
capital assets upon showing of proof that the same have
not been used in business for more than two (2) years
prior to the consummation of the taxable transactions
involving said properties.
f. Treatment of real properties that have been
transferred to a buyer/transferee, whether the
transfer is through sale, barter or exchange, inheritance,
donation or declaration of property dividends.
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Real properties classified as capital or ordinary asset in
the hands of the seller/transferor may change their
character in the hands of the buyer/transferee. The
classification of such property in the hands of the
buyer/transferee shall be determined in accordance with
the following rules:
1. Real property transferred through succession or
donation to the heir or donee who is not engaged in
the real estate business with respect to the real
property inherited or donated, and who does not
subsequently use such property in trade or business,
shall be considered as a capital asset in the hands of
the heir or donee.
2. Real property received as dividend by the
stockholders who are not engaged in the real estate
business and who do not subsequently use such real
property in trade or business shall be treated as
capital assets in the hands of the recipients even if
the corporation which declared the real property
dividend is engaged in real estate business.
3. The real property received in an exchange shall be
treated as ordinary asset in the hands of the
transferee in the case of a tax- free exchange by
taxpayer not engaged in real estate business to a
taxpayer who is engaged in real estate business, or
to a taxpayer who, even if not engaged in real
estate business, will use in business the property
received in the exchange.
g. Treatment of real property subject of involuntary
transfer. - In the case of involuntary transfers of real
properties, including expropriation or foreclosure sale,
the involuntariness of such sale shall have no effect on
the classification of such real property in the hands of
the involuntary seller, either as capital asset or ordinary
asset, as the case may be.
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For example, real properties forming part of the
inventory of a real estate dealer, which are foreclosed,
shall, for purposes of determining the applicable tax on
such foreclosure sale, be treated as ordinary assets. On
the other hand, the nature of such real property in the
hands of the foreclosure buyer shall be determined in
accordance with the rules stated in sub-paragraph (f)
hereof.
Art. 415 CC
Immovable property: LTESMAFMDC
1. Land, buildings, roads and construction adhered to soil
2. Trees, plants, growing fruits attached to land or integral
part of immovable
3. Everything attached to immovable cannot be separated
without breaking or deterioration of object
4. Statues, reliefs, paintings, ornamentation in buildings
intention to attach permanently
5. Machinery, receptacles, instruments, implements meet
needs of industry or work
6. Animal houses, pigeon houses, beehives, fish ponds,
breeding places ANIMALS INCLUDED
7. Fertilizer actually used
8. Mines, quarries, slag dumps, waters (running or stagnant)
9. Docks, structures (though floating) intend to be fixed on
river, lake or coast
10. Contracts for public works, real rights over immovable
x------------------------------------x
3. CORPORATIONS AND FOREIGN CORPORATIONS (NIRC 22)
3.1 Person
(A) The term "person" means an individual, a trust, estate
or corporation.
3.2 Corporation
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Atty. Jose Cochingyan III
(B) The term "corporation" shall include partnerships, no
matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), association, or
insurance companies, but does not include general
professional partnerships and a joint venture or
consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating consortium agreement under a service
contract with the Government. "General professional
partnerships" are partnerships formed by persons for the
sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in
any trade or business.
3.3 Domestic
(C) The term "domestic", when applied to a corporation,
means created or organized in the Philippines or under
its laws.
3.4 Foreign
(D) The term "foreign", when applied to a corporation,
means a corporation which is not domestic.
3.5 Resident Foreign Corporation
(H) The term "resident foreign corporation" applies to a
foreign corporation engaged in trade or business within
the Philippines.
3.6 Non-resident Foreign Corporation
(I) The term 'nonresident foreign corporation' applies to a
foreign corporation not engaged in trade or business
within the Philippines.
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3.7 Shareholder
(M) The term "shareholder" shall include holders of a share/s
of stock, warrant/s and/or option/s to purchase shares
of stock of a corporation, as well as a holder of a unit of
participation in a partnership (except general
professional partnerships) in a joint stock company, a
joint account, a taxable joint venture, a member of an
association, recreation or amusement club (such as golf,
polo or similar clubs) and a holder of a mutual fund
certificate, a member in an association, joint-stock
company, or insurance company.
3.8 Taxpayer
(N) The term "taxpayer" means any person subject to tax
imposed by this Title.
3.9 Regional or Area Headquarters
(DD) The term "regional or area headquarters" shall mean a
branch established in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
3.10 Regional Operation Headquarters
(EE) The term "regional operating headquarters" shall mean
a branch established in the Philippines by multinational
companies which are engaged in any of the following
services: general administration and planning; business
planning and coordination; sourcing and procurement of
raw materials and components; corporate finance
advisory services; marketing control and sales
promotion; training and personnel management; logistic
services; research and development services and
product development; technical support and
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maintenance; data processing and communications; and
business development.
3.11 Compare with Philippine National
Foreign Investments Act of 1991 3(a)
The term "Philippine national" shall mean a citizen of the
Philippines; of a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other
employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned
and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines,
in order that the corporation, shall be considered a
"Philippine national."
Implementing Rules and Regulations, Rule 1, 1(b)
"Philippine national" shall mean a citizen of the Philippines or
a domestic partnership or association wholly owned by the
citizens of the Philippines; or a corporation organized under
the laws of the Philippines of which at least sixty percent
[60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of
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funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine
national and at least sixty percent [60%] of the fund will
accrue to the benefit of the Philippine nationals; Provided,
that where a corporation its non-Filipino stockholders own
stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the
capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members
of the Board of Directors of each of both corporation must
be citizens of the Philippines, in order that the corporation
shall be considered a Philippine national. The control test
shall be applied for this purpose.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough
to meet the required Filipino equity. Full beneficial ownership
of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held
by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals.
Gamboa v. Teves (2011)
Facts:
PLDT common shares are held by foreigners (exceeding the
statutory 40% limit). Gamboa claims that this violates the
constitutional requirement on public utilities. Respondent claims
that the limit on equity interest be measured on the total
outstanding stock of the corporation.
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GTE is American company and major SH of PLDT. Sold
26% of PLDT shares to PTIC. PTIC was sold to Prime
Holdings who is now holding 46%. PCGG declared
ownership of Prime Holdings as owned by the state.
First Pacific (HK based and registered in Bermuda)
acquired the remaining 54% of PTIC. State sold its 46%.
First Pacific used its ROFR.
Gamboa opposed the sale to First Pacific because it
would increase its holding in PLDT from 30.7% to 37%
resulting to 51% foreign SH in PLDT (there was another
Japanese company); thus, violating the limit of 40%
ownership of foreign nationals
Held:
Petition GRANTED.
Limits on equity interest is based on the common shares only
(those allowed to vote).
Does the term capital include non-voting shares?
No.
Pertain only to those stocks that are entitled to vote for BOD.
Under the CPN, common shares cannot be deprived of the right
to vote.
The right to control or management of the corporation is
exercised through the right to vote in the election of BOD as it is
the BOD who controls or manages the corporation.
Gamboa v. Teves (2012)
Held:
The Constitution provides for the Filipinization of public utilities
by requiring that any from of authorization for the operation of
public utilities should be granted only to citizens of the
Philippines or to corporation or associations organized under the
laws of the Philippines at least sixty per centum of whose capital
is owned by such citizens. The provision is [an express]
recognition of the sensitive and vital position of public
utilities both in the national economy and for national
security. The evident purpose of the citizenship requirement is
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to prevent aliens from assuming control of public utilities, which
may be inimical to the national interest. . . .We rule that the
term capital in Sec. 11, Art. XII of the Constitution should
cover both; (a) the control test that covers only shares of stock
entitled to vote in the election of directors; and the beneficial
interest test, that the 60%-40% equity in favor of Filipinos shall
apply to each and every class of shares, to common shares, to
preferred non-voting shares, to preferred voting shares, and
other classes of shares. Gamboa v. Teves, 652 SCRA 690
(2011), expanded in 682 SCRA 397 (2012).
Narra Nickel Mining v. Redmont (2014)
Facts:
Respondent applied for mining but it discovered that the
respondents were also applying for the same. Now seeks to
nullify the application because the petitioners do not meet the
statutory requirement for limits on ownership on operation of
public utilities.
Redmont took interest of mining in Palawan but
discovered that there was an already pending
application of a sharing agreement among Narra, Tesoro
and McArthur
Redmont filed denial alleging that 60% of Narra, Tesoro
and McArthur are owned by MBMI, foreign Canadian
corporation
Petitioners argue that only 40% is owned by MBMI in
each of the petitioner; best tool is the control test
Panel of Arbitrators disqualified petitioner for being a
foreign corporation
Held:
Petition DENIED.
Petitioners are foreigners based on grandfather rule test.
Is the petitioner foreign corporation?
Yes.
There was a web corporate layering.
Control test liberal rule
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Atty. Jose Cochingyan III
Grandfather rule test stricter rule
Through a web of corporate layering, is clear that the controlling
investor of the petitioner is a foreigner.
Although the control test is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of 1987
Constitution are entitled to undertake the exploration,
development and utilization of the natural resources of the
Philippines; however, when there is doubt in the minds of the
court, based on the attendant facts and circumstances of the
case, in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the grandfather rule.
Narra Nickel Mining v. Redmont (2015)
Held:
Eschewed the control test?
No. Grandfather rule test implements the intent of the
Filipinization in the constitution.
Unlike the two-tier test in Gamboa, no need to have a two-tier
test because there is only one kind of share in this case.
The application of the grandfather rule does not eschew the
control test. The grandfather rule implements the intent of the
Filipinization provisions of the Constitution. There should be a
distinction between the beneficial ownership test from the
control test.
SEC Memo 8-13
New SEC Control Test: As a result of the Gamboa rulings, SEC
Memorandum Circular No. 8, s. 2013, was issued and provides
that: all covered corporations shall, at all times, observe the
constitutional or statutory ownership requirement in that the
required percentage of Filipino ownership shall be applied to BOTH
(a) the total number of outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the election of
directors.
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SEC OCG Opinion 16-19
(Scanmar) Application of control test to Manning Companies
Facts:
Scanmar (manning company) has 100,000 shares which
is required by law to have 75% Filipino ownership
Navigo (SH of Scanmar) is 60-40% Filipino-Alien
Held:
Absent doubt as to control, the grandfather rule will not be applied.
Control test is enough.
Since Navigo is 60% Filipino, its existing holding in Scanmar is
considered as fully Filipino for the purpose of computing the
requirement of ownership for manning agencies.
3.12 Corporation Corporation Code 2
A corporation is an artificial being created by operation of
law, having the right of succession and the powers,
attributes and properties expressly authorized by law or
incident to its existence.
3.13 Stock Corporation Corporation Code 12, 13, 14(8)
Stock corporations incorporated under this Code shall not be
required to have any minimum authorized capital stock
except as otherwise specifically provided for by special law,
and subject to the provisions of the following section.
At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be
subscribed at the time of incorporation, and at least twenty-
five (25%) per cent of the total subscription must be paid
upon subscription, the balance to be payable on a date or
dates fixed in the contract of subscription without need of
call, or in the absence of a fixed date or dates, upon call for
payment by the board of directors: Provided, however, That
in no case shall the paid-up capital be less than five
Thousand (P5,000.00) pesos.
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XXX
If it be a stock corporation, the amount of its authorized
capital stock in lawful money of the Philippines, the number
of shares into which it is divided, and in case the share are
par value shares, the par value of each, the names,
nationalities and residences of the original subscribers, and
the amount subscribed and paid by each on his subscription,
and if some or all of the shares are without par value, such
fact must be stated;
XXX
3.14 Foreign Corporation
Corporation Code 123
For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own country
or state. It shall have the right to transact business in the
Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a
certificate of authority from the appropriate government
agency.
Implementing Rules and Regulations, Rule 1, 1(c), 1st
"Foreign corporation" shall mean one which is formed,
organized or existing under laws other than those of the
Philippines.
3.15 Branch Office
Implementing Rules and Regulations, Rule 1, 1(c), 2nd
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Branch office of a foreign company carries out the business
activities of the head office and derives income from the
host country.
3.16 Representative/Liaison Office
Implementing Rules and Regulations, Rule 1, 1(c), 2nd
Representative or liaison office deals directly with the clients
of the parent company but does not derive income from the
host country and is fully subsidized by its head office. It
undertakes activities such as but not limited to information
dissemination and promotion of the company's products as
well as quality control of products.
BIR Ruling DA-393-03 (International Legal Advocates)
It is represented that your client, Obtech Asia Pacific Pte.
Ltd. ("Obtech") is a foreign corporation organized and
existing under the laws of Singapore; that by virtue of SEC
Reg. No. A 20017820, the Securities and Exchange
Commission granted to your client a LICENSE TO TRANSACT
BUSINESS in the Philippines in accordance with the
Corporation Code (Batas Pambansa No. 68) and the Foreign
Investment Act of 1991 (Republic Act No. 7042; that
consequently, your client established a representative office
in the Philippines with address at 24th Floor, Pacific Star
Building, Makati Avenue, Makati City; that said office shall
perform in particular activities, which promote the interests
of its parent company; that your client conducts:
1) conferences and dialogues for the purpose
disseminating information regarding the company
and its products;
2) promotion of the products and services of the
company, through the process of demonstrations;
and
3) referral of orders and technical assistance to persons
or personnel who have the requisite, expertise and
knowledge of the products and services.
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In reply, please be informed that a representative office is a
non-resident foreign corporation not engaged in any income
generation business in the Philippines. As can be viewed by
its licensed activities, Obtech is a representative office.
Accordingly, your client, Obtech is not subject to income tax.
Hence, it is exempt from filing of the corporate income tax
return.
A person is subject to VAT if it renders service "in the course
of trade or business" (Section 105, 1997 Tax Code).
Inasmuch as the operation of the representative office is
similar to regional or area headquarters of multinational
corporations which are exempt from VAT under Section
109(p) of the 1997 Tax Code, representative offices are also
exempt from VAT. Moreover, since Obtech Manila Office
merely enables the overseas head office to maintain some
presence in the country, and is not engaged in any income-
generating activity in the Philippines further qualifies said
office for exemption from VAT. However, this exemption
applies only to VAT directly due from representative offices.
On the other hand, please be advised that if you will remit
technical service fees to your parent company, the said fees
are considered royalties (Section 42(A)(4)(f), 1997 Tax
Code). Being Philippine source income of a representative
office, the technical service fees are subject to Philippine
corporate income tax at the rate of 32% (Section 28(B)(1),
Ibid) which you will withhold as the payor-corporation and
paid in the same manner and subject to the same conditions
as provided in Section 59 of the 1997 Tax Code (Section 58,
Ibid) (BIR Ruling No. 136-89 dated July 4, 1989).
3.17 Multinational Company RA 8756 2(1)
Multinational Company shall mean a foreign company or a
group of foreign companies with business establishments in
two or more countries.
3.18 Regional or Area Headquarters
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RA 8756 2(2)
Regional or Area Headquarters (RHQ) shall mean an office
whose purpose is to act as an administrative branch of a
multinational company engaged in international trade which
principally serves as a supervision, communications and
coordination center for its subsidiaries, branches or affiliates
in the Asia-Pacific Region and other foreign markets and
which does not earn or derive income in the Philippines.
NIRC 22(DD)
The term "regional or area headquarters" shall mean a
branch established in the Philippines by multinational
companies and which headquarters do not earn or derive
income from the Philippines and which act as supervisory,
communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and other
foreign markets.
3.19 Regional Operating Headquarters
RA 8756 2(3), 4
Regional Operating Headquarters (ROHQ) shall mean a
foreign business entity which is allowed to derive income in
the Philippines by performing qualifying services to its
affiliates, subsidiaries or branches in the Philippines, in the
Asia-Pacific Region and in other foreign markets.
Any foreign business entity formed, organized and existing
under any laws other than those of the Philippines may
establish a regional operating headquarters in the Philippines
to service its own affiliates, subsidiaries or branches in the
Philippines, in the Asia-Pacific Region and other foreign
markets. ROHQs will be allowed to derive income by
performing the qualifying services enumerated under
paragraph (b) 1 hereunder. ROHQs of non-banking and non-
financial institutions are required to secure a license from
the Securities and Exchange Commission, upon the favorable
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Atty. Jose Cochingyan III
recommendation of the Board of Investments. ROHQs of
banking and financial institutions, on the other hand, are
required to secure licenses from the Securities and Exchange
Commission and the Bangko Sentral ng Pilipinas, upon the
favorable recommendation of the Board of Investments.
The following minimum requirements shall be complied with
by the said foreign entity:
(a) A certification from the Philippine Consulate/ Embassy,
or a duly authenticated certification from the
Department of Trade and Industry or its equivalent in
the foreign firm's home country that said foreign firm is
an entity engaged in international trade with affiliates,
subsidiaries or branch offices in the Asia-Pacific Region
and other foreign markets.
(b) A duly authenticated certification from the principal
officer of the foreign entity to the effect that the said
foreign entity has been authorized by its Board of
Directors or governing body to establish its regional
operating headquarters in the Philippines, specifying
that:
(1) The regional operating headquarters may engage in
any of the following qualifying services:
- General administration and planning;
- Business planning and coordination;
- Sourcing/procurement of raw materials and
components;
- Corporate finance advisory services;
- Marketing control and sales promotion;
- Training and personnel management;
- Logistics services;
- Research and development services, and
product development;
- Technical support and maintenance;
- Data processing and communication; and
- Business development.
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ROHQs are prohibited from offering qualifying
services to entities other than their affiliates,
branches or subsidiaries, as declared in their
registration with the Securities and Exchange
Commission nor shall they be allowed to directly and
indirectly solicit or market goods and services
whether on behalf of their mother company,
branches, affiliates, subsidiaries or any other
company.
(2) The regional operating headquarters shall notify the
Board of Investments, the Securities and Exchange
Commission and the Bangko Sentral ng Pilipinas, as
the case may be, of any decision to close down or
suspend operations of its headquarters at least
fifteen (15) days before the same is effected.
(c) An undertaking that the multinational company will
initially remit into the country such amount as may be
necessary to cover its operations in the Philippines but
which amount will not be less than Two hundred
thousand United States dollars ($200,000) or its
equivalent in other foreign currencies.
Within thirty (30) days from receipt of certificate of
registration, the multinational company will submit to
the Securities and Exchange Commission a certificate of
inward remittance from a local bank showing that it has
remitted to the Philippines the amount of at least Two
hundred thousand United States dollars ($200,000) or its
equivalent in other foreign currencies and converted the
same to Philippine currency.
(d) Any violation by the regional operating headquarters of
a multinational company of the provisions of this Code,
or its implementing rules and regulations, or other terms
and conditions of its registration, or any provision of
existing laws, shall constitute a sufficient cause for the
cancellation of its license or registration.
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NIRC 22(EE)
The term "regional operating headquarters" shall mean a
branch established in the Philippines by multinational
companies which are engaged in any of the following
services: general administration and planning; business
planning and coordination; sourcing and procurement of raw
materials and components; corporate finance advisory
services; marketing control and sales promotion; training
and personnel management; logistic services; research and
development services and product development; technical
support and maintenance; data processing and
communications; and business development.
3.20 Regional Warehouse RA8756 7
Art. 68. Qualifications. - A multinational company organized
and existing under any laws other than those of the
Philippines which is engaged in international trade and
supplies spare parts, components, semi-finished products
and raw materials to its distributors or markets in the Asia-
Pacific area and other foreign areas and which has
established or will simultaneously establish a regional or
area headquarters and/or regional operating headquarters in
the Philippines in accordance with the provisions of Book III
of this Code and the rules and regulations implementing the
same may also establish a regional warehouse or
warehouses in ecozones in the Philippines, after securing a
license therefor from the Philippine Economic Zone Authority
(PEZA). With respect to regional warehouses located or will
locate in ecozones with special charters, such license shall
be secured from the concerned ecozone authorities. For
existing regional warehouses, said license shall be secured
from the Board of Investments unless they choose to
relocate inside ecozones: Provided, That:
(1) The activities of the regional warehouse shall be limited
to serving as a supply depot for the storage, deposit,
safekeeping of its spare parts, components, semi-
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finished products and raw materials including the
packing, covering, putting up, marking, labelling and
cutting or altering to customer's specification, mounting
and/or packaging into kits or marketable lots thereof, to
fill up transactions and sales made by its head offices or
parent companies and to serving as a storage or
warehouse of goods purchased locally by the home
office of the multinational for export abroad. The
regional warehouse shall not directly engage in trade
nor directly solicit business, promote any sale, nor enter
into any contract for the sale or disposition of goods in
the Philippines: Provided, That a regional warehouse
may be allowed to withdraw imported goods from said
warehouse/s for delivery to an authorized distributor in
the Philippines: Provided, however, That the
corresponding taxes, customs duties and charges under
the Tariff and Customs Code have been paid by the
headquarters of the said multinational upon arrival of
such goods: Provided, further, That the delivery of said
goods to the aforesaid distributor in the Philippines shall
be treated as a sale made by the headquarters rather
than that of its head office, and shall be reflected in a
separate book of accounts, any representation as to who
is the seller to the contrary notwithstanding: Provided,
furthermore, That the aforementioned sale shall be
governed by the provisions on value-added tax in
accordance with the National Internal Revenue Code, as
amended by Republic Act No. 8424: Provided, finally,
That the income from the aforementioned sale to said
distributor shall be treated as income derived by the said
headquarters from sources within the Philippines and
shall be subject to the corporate income tax of a
resident foreign corporation under the National Internal
Revenue Code, as amended, the provision of any law to
the contrary notwithstanding.
(2) The personnel of a regional warehouse will not
participate in any manner in the management of any
subsidiary, affiliate or branch office it might have in the
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Atty. Jose Cochingyan III
Philippines other than the activities allowed under this
Act.
(3) The personnel of the regional or area headquarters or
regional operating headquarters shall be responsible for
the operation of the regional warehouse subject to the
provisions of this Code.
(4) The multinational company shall pay the Board of
Investments, the PEZA or concerned ecozone
authorities, as the case may be, and the appropriate
Collector of Customs concerned the corresponding
license fees and storage fees to be determined by said
offices.
(5) An application for the establishment of a regional
warehouse located outside an ecozone shall be made in
writing to the Board of Investments, to the PEZA, or to
concerned ecozone authorities in the case of regional
warehouses located in ecozones. The application shall
describe the premises, the location and capacity of the
regional warehouse and the purpose for which the
building is to be used.
The jurisdiction and responsibility of supervising the regional
warehouses located outside ecozones shall be vested on the
Bureau of Customs, and the Board of Investments, or the
PEZA or concerned ecozone authorities for warehouses
within ecozones.
The Board of Investments, the PEZA or concerned ecozone
authorities, in consultation with the Regional Director of
Customs of the district where the warehouse will be situated
shall cause an examination of the premises to be made and
if found satisfactory, it may authorize its establishment
without complying with the requirements of any other
government body, subject to the following conditions:
(1) That the articles to be stored in the warehouse are spare
parts, components, semi-finished products and raw
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materials of the multinational company operator for
distribution and supply to its Asia-Pacific and other
foreign markets including packaging, coverings, brands,
labels and warehouse equipment as provided in Article
69(a) hereof;
(2) That the entry or importation, storage or re-export of
the goods destined for or to be stored in the regional
warehouse will not involve any dollar outlay from
Philippine sources;
(3) That they are of such character as to be readily
identifiable for re-export; and in case of local distribution
they shall be subject to Article 68(1), Article 69
paragraph (b) and the guidelines implementing Book IV
of this Code;
(4) That it shall file an ordinary warehousing bond in an
amount equal to one hundred percent (100%) of the
ascertained customs duties on the articles imported
without prejudice to its filing a general warehousing
bond in lieu of the ordinary warehousing bond;
(5) The percentage of annual allowable withdrawal from
warehouses located outside ecozones for domestic use
shall be subject to the approval of the Board of
Investments, or of the PEZA or concerned ecozone
authorities with respect to warehouses located within
the ecozones of their jurisdiction: Provided, however,
That in the case of existing warehouses, in no case shall
their withdrawals exceed thirty percent (30%) of the
value of goods they have brought in for any given year
and the payment of the corresponding taxes and duties
shall have been made upon the arrival of such goods
imported: Provided, further, That the PEZA or concerned
ecozone authorities may allow withdrawal exceeding
thirty percent (30%) of the value of goods under such
terms and conditions the PEZA or concerned ecozone
authorities may impose.
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Art. 69. Tax Treatment of Imported Articles in the Regional
Warehouse. -
(a) Tax Incentives for Qualified Goods Destined for
Reexportation to the Asia-Pacific and Other Foreign
Markets. - Except as otherwise provided in this Code,
imported spare parts, components, semi-finished
products, raw materials and other items including any
packages, coverings, brands and labels and warehouse
equipment as may be allowed by the Board of
Investments, the PEZA or concerned ecozone
authorities, as the case may be, for use exclusively on
the goods stored, except those prohibited by law,
brought into the regional warehouse from abroad to be
kept, stored and/or deposited or used therein and re-
exported directly therefrom under the supervision of the
Collector of Customs concerned for distribution to its
Asia-Pacific and other foreign markets in accordance
with the guidelines implementing Book IV of this Code
including to a bonded manufacturing warehouse in the
Philippines and eventually re-exported shall not be
subject to customs duty, internal revenue tax, export tax
nor to local taxes, the provisions of law to the contrary
notwithstanding.
(b) Payment of Applicable Duties and Taxes on Qualified
Goods Subject to Laws and Regulations Covering
Imported Merchandise if Destined for the Local Market. -
Any spare parts, components, semi-finished products,
raw materials and other items sent, delivered, released
or taken from the regional warehouse to the local
market in accordance with the guidelines implementing
Book IV of this Code shall be subject to the payment of
income taxes, customs duties, taxes and other charges
provided for under Section 68 hereof and for which
purpose, the proper commercial invoice of the head
offices or parent companies shall be submitted to the
Collector of Customs concerned; and shall be subject to
laws and regulations governing imported merchandise:
Provided, That in case any of the foregoing items are
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sold, bartered, hired or used for purposes other than
they were intended for without prior compliance with the
guidelines implementing Book IV of this Code and
without prior payment of the duty, tax or other charges
which would have been due and payable at the time of
entry if the articles had been entered without the benefit
of this Order, shall be subject to forfeiture and the
importation shall constitute a fraudulent practice against
customs revenue punishable under Section 3602, as
amended, of the Tariff and Customs Code of the
Philippines: Provided, further, That a sale pursuant to a
judicial order shall not be subject to the preceding
proviso without prejudice to the payment of duties,
taxes and other charges.
Art. 70. Exemption From the Maximum Storage Period Under
the Tariff and Customs Code; Period of Storage in the
Regional Warehouse. - The provision of the law in Section
1908 of the Tariff and Customs Code of the Philippines, as
amended, to the contrary notwithstanding, articles duly
entered for warehousing may remain in the regional
warehouses for a period of two (2) years from the time of
their transfer to the regional warehouse, which period may
be extended with the approval of the Board of Investments
for an additional period of one (1) year upon payment of the
corresponding storage fee on the unexported articles, as
provided for under Article 68(4) for each extension until they
are re-exported in accordance with the guidelines
implementing Book IV of this Code. Any articles withdrawn,
released or removed contrary to the provisions of said
guidelines shall be forfeited pursuant to the provisions of
Article 69, paragraph (b) hereof.
Art. 71. Rules and Regulations on the Jurisdiction, Operation
and Control Over Qualified Goods in the Regional
Warehouse. - The Board of Investments, the PEZA,
concerned ecozone authorities and the Bureau of Customs
shall jointly issue special rules and regulations on the
receiving, handling, custody, entry, examination,
classifications, delivery, storage, warehousing, manipulation
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Atty. Jose Cochingyan III
and packaging, release for reexportation or for importation
and delivery to a Philippine distributor and for the
safekeeping, recording, inventory and liquidation of said
qualified goods, any existing law notwithstanding. Such rules
and regulations shall be formulated in consultation with the
applicants/operators of regional warehouses.
Art. 72. Cancellation of License or Registration. - Any willful
violation by the regional or area headquarters or regional
operating headquarters of a multinational company which
has established a regional warehouse or warehouses
contrary to or in violation of the provisions of existing laws
and the implementing guidelines of Book IV of this Code
shall constitute a sufficient cause for the cancellation of its
license or registration in addition to the penalties
hereinabove provided in Article 69, paragraph (b) hereof.
The Board, the PEZA or concerned ecozone authorities, as
the case may be, shall have the authority to impose such
fines in amounts that are just and reasonable in cases of late
submission or non-compliance on the part of registered
enterprises, with reporting and other requirements under
this Code and its implementing rules and regulations.
3.21 Domestic Market Enterprise
Foreign Investments Act 3(f)
The term "domestic market enterprise" shall mean an
enterprise which produces goods for sale, or renders
services to the domestic market entirely or if exporting a
portion of its output fails to consistency export at least sixty
percent (60%) thereof.
3.22 Investment
Foreign Investments Act 3(b)
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The term "investment" shall mean equity participation in any
enterprise organized or existing under the laws of the
Philippines.
Implementing Rules and Regulations, Rule 1, 1(d)
Investment shall mean equity participation in any enterprise
organized or existing under the laws of the Philippines. It
includes both original and additional investments, whether
made directly as in stock subscription, or indirectly through
the transfer of equity from one investor to another as in
stock purchase. Ownership of bonds [including income
bonds], debentures, notes or other evidences of
indebtedness does not qualify as investments.
The purchase of stock options or stock warrants is not an
investment until the holder thereof exercises his option and
actually acquires stock from the corporation.
3.23 Foreign Investment
Foreign Investments Act 3(c)
The term "foreign investment" shall mean an equity
investment made by non-Philippine national in the form of
foreign exchange and/or other assets actually transferred to
the Philippines and duly registered with the Central Bank
which shall assess and appraise the value of such assets
other than foreign exchange.
Implementing Rules and Regulations, Rule 1, 1 (e)
"Foreign investment" shall mean an equity investment made
by a non-Philippine national; Provided, however, That for
purposes of determining foreign ownership, peso
investments made by non-Philippine nationals shall be
considered; Provided, further, That only foreign investments
in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the
Central Bank (CB) and profits derived therefrom can be
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Atty. Jose Cochingyan III
repatriated; and Provided, finally, That, for purposes of
Section 8 of the Act, and Rule VIII, Section 6 of these Rules
and Regulations, "Existing Foreign Investments" shall mean
an equity investments made by a non-Philippine national
duly registered with the SEC or the Bureau of Trade
Regulation and Consumer Protection (BTRCP) in the form of
foreign exchange and/or other assets transferred to the
Philippines.
3.24 Doing Business
Foreign Investments Act 3(c)
The phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison"
offices or branches; appointing representatives or
distributors domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods
totaling one hundred eighty [180] days or more;
participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity
of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in
progressive prosecution of commercial gain or of the
purpose and object of the business organization: Provided,
however, That the phrase "doing business" shall not be
deemed to include mere investment as a shareholder by a
foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests
in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts
business in its own name and for its own account;
Implementing Rules and Regulations, Rule 1, 1 (f)
"Doing business" shall include soliciting orders, service
contracts, opening offices, whether liaison offices or
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branches; appointing representatives or distributors,
operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year stay
in the country for a period totaling one hundred eighty [180]
days or more; participating in the management, supervision
or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally
incident to and in progressive prosecution of commercial
gain or of the purpose and object of the business
organization.
The following acts shall not be deemed "doing business" in
the Philippines:
1. Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business,
and/or the exercise of rights as such investor;
2. Having a nominee director or officer to represent its
interest in such corporation;
3. Appointing a representative or distributor domiciled in
the Philippines which transacts business in the
representative's or distributor's own name and account;
4. The publication of a general advertisement through any
print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely for
the purpose of having the same processed by another
entity in the Philippines;
6. Consignment by a foreign entity of equipment with a
local company to be used in the processing of products
for export;
7. Collecting information in the Philippines; and
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Atty. Jose Cochingyan III AY 2011-2012

8. Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis,
such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing
the same, training domestic workers to operate it, and
similar incidental services.
P, without license, sues R (on replevin) but was dismissed by CA for lack of
capacity to sue. P assumed the contract entered into by R with HP.
Petition GRANTED.
P, not doing business, needs no license to sue in Philippines.
Not doing business since it only maintained stocks in Philippines and
consigned equipment with R.

B. Van Zuiden Bros v. GTVL Manufacturing FC doing business without license is not ipso facto incapacitated to
Facts: bring action.
Zuiden is HK Company (without license) selling lace products to Can bring suit under estoppel where the person contracting with
GTVL who instructs that delivery be made to Kaisen who is also the FC is not allowed to assail its personality.
in HK; Kaisen is the one who delivers the product to PH
GTVL refused payment; invokes that Zuiden cannot sue it in Does P have capacity to sue?
Philippine courts Yes.
Need to have license?
Issue: No.
Can Zuiden sue under Philippines courts? Not doing business.
P is only maintained stocks in Philippines and consigned equipment
Held: with R.
Petition GRANTED.
P is NETB. Sale consummated in Hong Kong. Doing business under FIA 1991
If NETB, no need to have license in order to sue in Philippines. a. Soliciting orders, service contracts, opening offices (WON
liaison offices or branches)
Unlicensed foreign corporation NETB can sue before Philippine b. Appointing representatives or distributors who stays for 180
courts. days or more in any calendar year
c. Participating in the management, supervision or control of
It is NETB because perfection and consummation of these domestic corporation
transactions were done outside the Philippines. It should actually d. Other acts implying continuity of commercial dealings
transact business in the Philippines, that is, perform specific business
transactions. Not doing business under FIA 1991
a. Mere investment
CLV: To be transaction business in the Philippines for purposes of b. Having nominee director
Section 133, the foreign corporation must actually transact business c. Representative or distributor transacts in his own name
in the Philippines, that is, perform specific business transactions
within the Philippine territory on a continuing basis in its own name Not doing business under DTI IRR
and for its own account. a. Publication of general ads
b. Maintaining a stock of goods
Agilent Technologies v. Integrated Silicon Technology c. Consignment by FC of equipment of local company to be
used in processing of products for export
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Business Law Practice
Atty. Jose Cochingyan III
d. Collecting information
e. Auxiliary to an existing COS
CLV: Although each case must be judged in light of its attendant
circumstances, jurisprudence has evolved several guiding principles
for the application of these tests. By and large, to constitute doing
business, the activity to be undertaken in the Philippines is one that
is for profit-making.
Communication Materials v. CA
P (domestic corporation) is the exclusive representative of ITEC (FC,
unlicensed). ITEC decided to terminate the agreement because P
violated agreement (i.e., using the knowledge of ITEC on Ps own
operations). ITEC sues P but P invokes that lack of license of ITEC
bars it from suing P.
Petition DISMISSED.
FC (even if no license) is allowed to sue P for violating the
agreement.
License requirement not to favor domestic corporation who knew of
the lack of license of the FC but still decided to transact with it (i.e.,
estoppel).
Is ITEC ETB?
Yes.
P does not transact in its own name. In fact, makes known to the
public that the seller is actually ITEC. Also, Ps employees has ITEC
IDs, gives report to ITEC, answer telephone with ITEC technical
center, etc.
Cannot sue because lack of license?
No.
If the party whom the FC has contracted had benefit, such party is
estopped to challenge.
License requirement never intended to favor domestic corporations
who enter into solitary transactions with unwary foreign firms.
EGR to the license requirement is when the representative in the
country maintained an independent status during the existence of
the disputed contract.
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In this case, P appears to be independent.
CLV: Under the principle of estoppel, a foreign corporation doing
business in the Philippines may sue in Philippine courts even without
license to do business against a Philippine citizen who had
contracted with and been benefited by said corporation and knew it
to be without the necessary license to do business.
Top Weld Manufacturing v. ECED
P is domestic corporation suing FC because it found out that it will
be replaced by other corporation. FC set up affirmative defenses
(e.g., non-payment of royalties, substandard products of P).
Petition DENIED.
P and R are in pari delicto.
Can P ask redress?
No.
In pari delicto. Cannot sue FC because it dealt with an FC which it
knew to have no license.
Leave them as they are.
CLV: The local party to a contract with a foreign corporation that
does business in the Philippines without license cannot maintain suit
against the foreign corporation just as the foreign corporation cannot
maintain suit, under the principle of pari delicto.
3.25 Export Enterprise
Foreign Investments Act 3(e)
The term "export enterprise" shall mean an enterprise
wherein a manufacturer, processor or service [including
tourism] enterprise exports sixty percent (60%) or more of
its output, or wherein a trader purchases products
domestically and exports sixty per cent (60%) or more of
such purchases.
Implementing Rules and Regulations, Rule 1, 1 (g)
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Business Law Practice
Atty. Jose Cochingyan III
"Export enterprise" shall mean an enterprise wherein a
manufacturer, processor or service [including tourism]
enterprise exports sixty percent [60%] or more of its output,
or wherein a trader purchases products domestically and
exports sixty percent [60%] or more of such purchases.
3.26 Advanced Technology
Implementing Rules and Regulations, Rule 1, 1 (o)
"Advanced technology" refers to a higher degree or form of
technology than what is domestically available and needed
for the development of certain industries as subject to
guidelines of the Department of Science and Technology
[DOST]. Its introduction into the country through foreign
investments under the terms and conditions of the Act must
be linked to its appropriateness and adaptability to local
conditions with a view towards eventual transfer and
applicability including the upgrading of the indigenous
technology available.
3.27 Paid-in Equity Capital
Implementing Rules and Regulations, Rule 1, 1 (p)
"Paid-in equity capital" shall mean the total investment in a
business that has been paid-in in a corporation or
partnership or invested in a single proprietorship, which may
be in cash or in property. It shall also refer to inward
remittance or assigned capital in the case of foreign
corporations.
3.28 Direct Employees
Implementing Rules and Regulations, Rule 1, 1 (z)
"Direct employees" shall mean Filipino personnel hired and
engaged under the control and supervision of the applicant
investor/employer in the production of goods or
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performance of services. Excluded from this definition are
personnel hired as casual, seasonal, learner, apprentice or
any employee of subcontractor or those under fixed term
employment.
3.29 Former Natural Born Filipinos
Implementing Rules and Regulations, Rule 1, 1 (x)
"Former natural born Filipino" shall mean those who have
lost Philippine citizenship but were previously citizens of the
Philippines falling in either of the following categories:
[a] from birth without having to perform any act to
acquire or perfect their Philippine citizenship; or
[b] by having elected Philippine citizenship upon
reaching the age of majority, if born before January
17, 1973, of Filipino mothers.
3.30 Foreign Investments Negative List
Foreign Investments Act 3(g)
The term "Foreign Investments Negative List" or "Negative
List" shall mean a list of areas of economic activity whose
foreign ownership is limited to a maximum of forty percent
(40%) of the equity capital of the enterprises engaged
therein.
EO No. 858 (February 2010)
SECTION 1. Only the investment areas and/or activities
listed in Annex A hereof shall be reserved to Philippine
nationals, and hereafter shall be referred to as the Seventh
Regular Foreign Investment Negative List. The extent of
foreign equity in these areas shall be limited to the
percentages indicated in the List.
SECTION 2. Any amendment to List A may be made at any
time to reflect changes instituted in specific laws while
amendments to List B shall not be made more often than
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once every two years, pursuant to Section 8 of RA 7042 (as d) Architecture

amended) and its revised Implementing Rules and e) Criminology
Regulations. f) Chemistry
g) Customs Brokerage
LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OF h) Environmental Planning
THE CONSTITUTION AND SPECIFIC LAWS i) Forestry
j) Geology
No Foreign Equity k) Interior Design
1. Mass Media except recording (Art. XVI, Sec. 11 of l) Landscape Architecture
the Constitution; Presidential Memorandum dated 04 m) Law
May 1994) n) Librarianship
2. Practice of all professions1 o) MarineDeckOfficers
a) Engineering p) MarineEngineOfficers
i. Aeronautical q) Master Plumbing
ii. Agricultural r) Sugar Technology
iii. Chemical s) Social Work
iv. Civil t) Teaching
v. Electrical u) Agriculture
vi. Electronics and Communication v) Fisheries
vii. Geodetic (Art. XII, Sec. 14 of the Constitution; Sec. 1 of RA
viii. Mechanical 5181)
ix. Metallurgical 3. Retail trade enterprises with paid-up capital of less
x. Mining than US$2,500,000(Sec. 5 of RA 8762)2
xi. Naval Architecture and Marine 4. Cooperatives (Ch.III,Art.26ofRA6938)
xii. Sanitary 5. Private Security Agencies (Sec. 4 of RA 5487)
b) Medicine and Allied Professions 6. Small-scale Mining (Sec.3ofRA7076)
i. Medicine 7. Utilization of Marine Resources in archipelagic
ii. Medical Technology waters, territorial sea, and exclusive economic zone
iii. Dentistry as well as small-scale utilization of natural resources
iv. Midwifery in rivers, lakes, bays, and lagoons (Art. XII, Sec. 2 of
v. Nursing the Constitution)
vi. Nutrition and Dietetics 8. Ownership, operation and management of cockpits
vii. Optometry (Sec. 5 of PD 449)
viii. Pharmacy 9. Manufacture, repair, stockpiling and/or distribution
ix. Physicaland Occupational Therapy of nuclear weapons (Art.II,Sec.8 of the Constitution)
x. Radiologic and X-ray Technology
xi. Veterinary Medicine 2
Full foreign participation is allowed for retail trade enterprises: (a) with paid-up capital of
c) Accountancy US$2,500,000 or more provided that investments for establishing a store is not less than
US$830,000; or (b) specializing in high end or luxury products, provided that the paid-up
capital per store is not less than US$250,000
1
This is limited to Filipino citizens save in cases prescribed by law
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10. Manufacture, repair, stockpiling and/or distribution 18. Ownership of private lands (Art. XII, Sec. 7 of the
of biological, chemical and radiological weapons and Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA
anti-personnel mines (Various treaties to which the 9182)
Philippines is a signatory and conventions supported 19. Operation and management of public utilities (Art.
by the Philippines)3 XII, Sec. 11 of the Constitution; Sec. 16 of CA 146)
11. Manufacture of firecrackers and other pyrotechnic 20. Ownership/establishment and administration of
devices (Sec. 5 of RA 7183) educational institutions (Art. XIV, Sec. 4 of the
Constitution)
Up to Twenty Percent (20%) Foreign Equity 21. Culture, production, milling, processing, trading
excepting retailing, of rice and corn and acquiring,
12. Private radio communications network (RA 3846) by barter, purchase or otherwise, rice and corn and
the by-products thereof (Sec. 5 of PD 194;Sec. 15 of
Up to Twenty-Five Percent (25%) Foreign Equity RA 8762)5
22. Contracts for the supply of materials, goods and
13. Private recruitment, whether for local or overseas commodities to government-owned or controlled
employment (Art. 27 of PD 442) corporation, company, agency or municipal
14. Contracts for the construction and repair of locally- corporation (Sec. 1 of RA 5183)
funded public works (Sec. 1 of CA 541, LOI 630) 23. Project Proponent and Facility Operator of a BOT
except: project requiring a public utilities franchise (Art. XII,
a) infrastructure/development projects covered in Sec. 11 of the Constitution; Sec. 2a of RA 7718)
RA7718; and 24. Operation of deep sea commercial fishing vessels
b) projects which are foreign funded or assisted (Sec. 27 of RA 8550)
and required to undergo international 25. Adjustment Companies (Sec. 323 of PD 612 as
competitive bidding (Sec. 2a of RA 7718) amended by PD 1814)
15. Contracts for the construction of defense-related 26. Ownership of condominium units where the common
structures (Sec. 1 of CA 541) areas in the condominium project are co-owned by
the owners of the separate units or owned by a
Up to Thirty Percent (30%) Foreign Equity corporation (Sec. 5 of RA 4726)

16. Advertising (Art. XVI, Sec. 11 of the Constitution) Up to Sixty Percent (60%) Foreign Equity

Up to Forty Percent (40%) Foreign Equity 27. Financing companies regulated by the Securities and
Exchange Commission (Sec. 6 of RA 5980 as
17. Exploration, development and utilization of natural amended by RA 8556)6
resources (Art. XII, Sec. 2 of the Constitution)4 28. Investment houses regulated by the SEC (Sec. 5 of
PD 129 as amended by RA 8366)6

3
Domestic investments are also prohibited 5
Full foreign participation is allowed provided that within the 30-year period from start of
4
Full foreign participation is allowed through financial or technical assistance agreement with operation, the foreign investor shall divest a minimum of 60 percent of their equity to Filipino
the President citizens
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Atty. Jose Cochingyan III AY 2011-2012

LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS However, the manufacture or repair of these items may
OF SECURITY, DEFENSE, RISK TO HEALTH AND MORALS be authorized by the Chief of the PNP to non-Philippine
AND PROTECTION OF SMALL- AND MEDIUM-SCALE nationals; Provided that a substantial percentage of
ENTERPRISES output, as determined by the said agency, is exported.
Provided further that the extent of foreign equity
Up to Forty Percent (40 %) Foreign Equity ownership allowed shall be specified in the said
authority/clearance (RA 7042 as amended by RA 8179).
1. Manufacture, repair, storage, and/or distribution of
products and/or ingredients requiring Philippine 2. Manufacture, repair, storage and/or distribution of
National Police (PNP) clearance: products requiring Department of National Defense
a) Firearms (handguns to shotguns), parts of (DND) clearance:
firearms and ammunition therefor, instruments a) Guns and ammunition for warfare
or implements used or intended to be used in b) Military ordinance and parts thereof (e.g.,
the manufacture of firearms torpedoes, depth charges, bombs, grenades,
b) Gunpowder missiles)
c) Dynamite c) Gunnery, bombing and fire control systems and
d) Blasting supplies components
e) Ingredients used in making explosives: d) Guided missiles/missile systems and components
i. Chlorates of potassium and sodium e) Tactical aircraft (fixed and rotary-winged), parts and
ii. Nitrates of ammonium, potassium, sodium, components thereof
barium, copper (11), lead (11), calcium and f) Space vehicles and component systems
cuprite g) Combat vessels (air, land and naval) and auxiliaries
iii. Nitricacid h) Weapons repair and maintenance equipment
iv. Nitrocellulose i) Military communications equipment
v. Perchlorates of ammonium, potassium and j) Night vision equipment
sodium k) Stimulated coherent radiation devices, components
vi. Dinitrocellulose and accessories
vii. Glycerol l) Armament training devices
viii. Amorphous phosphorus m) Other as may be determined by the Secretary of the
ix. Hydrogen peroxide DND
x. Strontium nitrate powder
xi. Toluene However, the manufacture or repair of these items may
f) Telescopic sights, sniper scope and other similar be authorized by the Secretary of the DND to non-
devices Philippine nationals; Provided that a substantial
percentage of output, as determined by the said agency,
is exported. Provided further that the extent of foreign
equity ownership allowed shall be specified in the said
6
No foreign national may be allowed to own stock in financing companies or investment authority/clearance (RA 7042 as amended by RA 8179).
houses unless the country of which he is a national accords the same reciprocal rights to
Filipinos (Sec. 6 of RA 5980 as amended by RA 8556; PD 129 as amended by RA 8366)
3. Manufacture and distribution of dangerous drugs
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Business Law Practice
Atty. Jose Cochingyan III
4. Sauna and steam bathhouses, massage clinics and other
like activities regulated by law because of risks posed to
public health and morals
5. All forms of gambling, e.g. race track operation
6. Domestic market enterprises with paid-in equity capital
of less than the equivalent of US$200,000
7. Domestic market enterprises which involve advanced
technology or employ at least fifty (50) direct employees
with paid-in-equity capital of less than the equivalent of
US$100,000
3.31 Applicable Laws to Foreign Corporations
Corporation Code 129
Any foreign corporation lawfully doing business in the
Philippines shall be bound by all laws, rules and regulations
applicable to domestic corporations of the same class,
except such only as provide for the creation, formation,
organization or dissolution of corporations or those which fix
the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each
other or to the corporation.
3.32 Doing Business without a License
Corporation Code 133
No foreign corporation transacting business in the Philippines
without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals
on any valid cause of action recognized under Philippine
laws.
3.33 Export Enterprises
Foreign Investments Act 6, 7 2nd
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Foreign investment in export enterprises whose products
and services do not fall within Lists A and B of the Foreign
Investment Negative List provided under Section 8 hereof is
allowed up to one hundred percent [100%] ownership.
Export enterprises which are non-Philippine nationals shall
register with BOI and submit the reports that may be
required to ensure continuing compliance of the export
enterprise with its export requirement. BOI shall advise SEC
or Bureau of Trade Regulation and Consumer Protection, as
the case may be, of any export enterprise that fails to meet
the export ratio requirement. The SEC or BTRCP shall
thereupon order the non-complying export enterprise to
reduce its sales to the domestic market to not more than
forty percent [40%] of its total production; failure to comply
with such SEC or BTRCP order, without justifiable reason,
shall subject the enterprise to cancellation of SEC or BTRCP
registration, and/or the penalties provided in Section 14
hereof.
3.34 Foreign Investments in a Domestic Market
Enterprise
Foreign Investments Act 7
Non-Philippine nationals may own up to one hundred
percent [100%] of domestic market enterprises unless
foreign ownership therein is prohibited or limited by the
Constitution and existing law or the Foreign Investment
Negative List under Section 8 hereof.
3.35 Rights of Former Natural Born Filipinos
Foreign Investments Act 10
Any natural-born citizen who has lost his Philippine
citizenship and who has the legal capacity to enter into a
contract under Philippine laws may be a transferee of a
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Atty. Jose Cochingyan III
private land up to a maximum area of five thousand [5,000]
square meters in the case of urban land or three [3]
hectares in the case of rural land to be used by him for
business or other purposes. In the case of married couples,
one of them may avail of the privilege herein granted:
Provided, That if both shall avail of the same, the total area
acquired shall not exceed the maximum herein fixed.
In case the transferee already owns urban or rural land for
business or other purposes, he shall still be entitled to be a
transferee of additional urban or rural land for business or
other purposes which when added to those already owned
by him shall not exceed the maximum areas herein
authorized.
A transferee under this Act may acquire not more than two
[2] lots which should be situated in different municipalities
or cities anywhere in the Philippines: Provided, That the total
land area thereof shall not exceed five thousand [5,000]
square meters in the case of urban land or three [3]
hectares in the case of rural land for use by him for business
or other purposes. A transferee who has already acquired
urban land shall be disqualified from acquiring rural land and
vice versa.
3.36 Permanent Establishment
BIR Website
PE is defined as a fixed place of business through which the
business of the enterprise is wholly or partly carried on. The
concept of permanent establishment is used to determine
the rights of a Contracting State to tax the business profits
of enterprises of the other Contracting State. Under this
concept, profits of an enterprise of a Contracting State are
not taxable by the other Contracting State, unless the
enterprise carries on business through a permanent
establishment situated in the other Contracting State.
RP-US Tax Treaty (1983)
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ARTICLE 5 Permanent Establishment
(1) For the purposes of this Convention, the term
permanent establishment means a fixed place of
business through which a resident of one of the
Contracting States engages in a trade or business.
(2) The term "fixed place of business'' includes but is not
limited to:
(a) A seat of management;
(b) A branch;
(c) An office;
(d) A store or other sales outlet;
(e) A factory;
(f) A workshop;
(g) A warehouse;
(h) A mine, quarry, or other place of extraction of
natural resources;
(i) A building site or construction or assembly project or
supervisory activities in connection therewith,
provided such site, project or activity continues for a
period of more than 183 days; and
(j) The furnishing of services, including consultancy
services, by a resident of one of the Contracting
States through employees or other personnel,
provided activities of that nature continue (for the
same or a connected project) within the other
Contracting State for a period or periods
aggregating more than 183 days.
(3) Notwithstanding paragraphs (1), (2), and (4), a
permanent establishment shall be deemed not to include
any one or more of the following:
(a) The use of facilities solely for the purpose of
storage, display, or occasional delivery of goods or
merchandise belonging to the resident;
(b) The maintenance of a stock of goods or
merchandise belonging to the resident solely for the
purpose of storage, display, or occasional delivery;
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Atty. Jose Cochingyan III
(c) The maintenance of a stock of goods or
merchandise belonging to the resident solely for the
purpose of processing by another person;
(d) The maintenance of a fixed place of business solely
for the purpose of purchasing goods or
merchandise, or for collecting information, for the
resident;
(e) The maintenance of a fixed place of business solely
for the purpose of advertising, for the supply of
information, for scientific research, or for similar
activities which have a preparatory or auxiliary
character, for the resident; or
(f) The furnishing of services, including the provision of
equipment, in one of the Contracting States by a
resident of the other Contracting State, including
consultancy firms, in accordance with, or in the
implementation of, an agreement between the
Contracting States regarding technical cooperation.
(4) A person acting in one of the Contracting States on
behalf of a resident of the other Contracting State, other
than an agent of an independent status to whom
paragraph (5) applies, shall be deemed to give rise to a
permanent establishment in the first-mentioned
Contracting State if-
(a) Such person has, and habitually exercises in the
first-mentioned Contracting State, an authority to
conclude contracts in the name of that resident,
unless the exercise of such authority is limited to the
purchase of goods or merchandise for that resident;
or
(b) He has no such authority, but habitually maintains in
the first-mentioned State a stock of goods or
merchandise from which he regularly delivers goods
and merchandise on behalf of the resident.
(5) A resident of one of the Contracting States shall not be
deemed to have a permanent establishment in the other
Contracting State merely because such resident carries
on business in that other Contracting State through a
broker, general commission agent, or any other agent of
an independent status, where such broker or agent is
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acting in the ordinary course of his business. However,
when the activities of such an agent are devoted wholly
or almost wholly on behalf of that resident, he shall not
be considered an agent of independent status within the
meaning of this paragraph if the transactions between
the agent and the resident were not made under arm's
length conditions.
(6) Except with respect to reinsurance, a resident of a
Contracting State shall be deemed to have a permanent
establishment in the other Contracting State if it collects
premiums in that other State, or insures risks situated
therein, through an employee or representative situated
therein who is not an agent of independent status to
whom paragraph (5) applies.
(7) A resident of one of the Contracting States shall not be
deemed to have a permanent establishment in the other
Contracting State merely because such resident sells at
the termination of a trade fair or convention in such
other Contracting State goods or merchandise which
such resident displayed at such trade fair or convention.
(8) The fact that a corporation of one of the Contracting
States controls or is controlled by or is under common
control with-
(a) A corporation of the other Contracting State, or
(b) A corporation which carries on business in that other
Contracting State
(whether through a permanent establishment or
otherwise).
shall not be taken into account in determining whether
the activities or fixed place of business of either
corporation constitutes a permanent establishment of
the other corporation.
(9) The principles set forth in paragraphs (1) through (8)
shall be applied in determining for purposes of this
Convention whether there is a permanent establishment
in a State other than one of the Contracting States or
whether a person other than a resident of one of the
Contracting States has a permanent establishment in
one of the Contracting States.
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RP-UK Tax Treaty (1978)
(1) For the purposes of this Convention, the term
`permanent establishment` means a fixed place of
business in which the business of the enterprise is
wholly or partly carried on.
(2) the term `permanent establishment` shall include
especially:
a place of management;
a branch;
an office;
a factory;
a workshop;
a mine, oil well, quarry or other place of extraction of
natural resources;
an installation or structure used for the exploration of
natural resources;
a building site or construction or assembly project which
exists for more than 183 days.
(3) An enterprise of a Contracting State shall likewise be
deemed to have a permanent establishment in the other
Contracting State if:
a. it carries on supervisory activities within that other
Contracting State for more than 183 days in
connection with a building site, or a construction or
assembly project which is being undertaken. in that
other Contracting State; or
b. it furnishes services, including consultancy services,
in that other Contracting State through its
employees or other personnel (other than agents of
an independent status within the meaning of
paragraph (7) of this Article) for a period exceeding
in the aggregate 183 days within any twelve-month
period.
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(4) The term `permanent establishment` shall not be
deemed to include:
a. the use of facilities solely for the purpose of storage,
display or delivery of goods or merchandise
belonging to the enterprise;
b. the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
storage, display or delivery;
c. the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
d. the maintenance of a fixed place of business solely
for the purpose of purchasing goods or
merchandise, or for collecting information, for the
enterprise;
e. the maintenance of a fixed place of business solely
for the purpose of advertising, for the supply of
information, for scientific research or for similar
activities which have a preparatory or auxiliary
character, for the enterprise.
(5) A person acting in a Contracting State on behalf of an
enterprise of the other Contracting State--other than an
agent of an independent status to whom the provisions
of paragraph (7) of this Article apply shall be deemed to
be a permanent establishment in the first-mentioned
State if:
a. he has, and habitually exercises in that first-
mentioned State, an authority to conclude contracts
in the name of the enterprise, unless his activities
are limited to the purchase of goods or merchandise
for the enterprise; or
b. he has no such authority but habitually maintains in
that first-mentioned State a stock of goods or
merchandise belonging to the enterprise from which
he regularly delivers goods or merchandise on
behalf of that enterprise.
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(6) An insurance enterprise of a Contracting State shall,
except with regard to reinsurance, be deemed to have a
permanent establishment in the other Contracting State
if it collects premiums in the territory of that other State
or insures risks situated there through an employee or
representative established therein who is not an agent
of an independent status within the meaning of
paragraph (7) of this Article.
(7) An enterprise of a Contracting State shall not be deemed
to have a permanent establishment in the other
Contracting State merely because it carries on business
in that other State through a broker, general commission
agent or any other agent of an independent status,
where such persons are acting in the ordinary course of
their business. However, when the activities of such an
agent are devoted wholly or almost wholly on behalf of
that enterprise, he shall not be considered an agent of
an independent status within the meaning of this
paragraph.
(8) The fact that a company which is a resident of a
Contracting State controls or is controlled by a company
which is a resident of the other Contracting State, or
which carries on business in that other State (whether
through a permanent establishment or otherwise), shall
not of itself constitute either company a permanent
establishment of the other.
RP-Brazil Tax Treaty
1. For the purpose of this Convention, the term
permanent establishment means a fixed place of
business in which the business of the enterprise is
wholly or partly carried on.
2. The term permanent establishment shall include
especially:
a) a place of management;
b) a branch;
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c) an office;
d) a factory;
e) a workshop
f) a mine, quarry or other place of exploration or
extraction of natural resources;
g) a building site or construction or assembly project,
which exists for more than 6 months;
h) a warehouse, in relation to a person providing
storage facilities for others.
3. The term permanent establishment shall not be
deemed to include:
a) the use of facilities solely for the purpose of storage
or display of goods or merchandise belonging to the
enterprise;
b) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
storage or display;
c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
d) the maintenance of a fixed place of business solely
for the purpose of purchasing goods or
merchandise, or for collecting information, for the
enterprise;
e) the maintenance of a fixed place of business solely
for the purpose of advertising, for the supply of
information, for scientific research or for similar
activities which have a preparatory or auxiliary
character, for the enterprise.
4. A person acting in a Contracting State on behalf of an
enterprise of the other Contracting State other than an
agent of independent status to whom paragraph 5
applies shall be deemed to be a permanent
establishment in the first-mentioned State if he has, and
habitually exercises in that State, an authority to
conclude contracts in the name of the enterprise, unless
his activities are limited to the purchase of goods or
merchandise for the enterprise.
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However, an insurance company of a Contracting State
shall, except in regard to reinsurance, be deemed to
have a permanent establishment in the other
Contracting State provided that it receives premium or
insures risks in the other State.
5. An enterprise of a Contracting State shall not be deemed
to have a permanent establishment in the other
Contracting State merely because it carries on business
in that other State through a broker, general commission
agent or any other agent of independent status, where
such persons are acting in the ordinary course of their
business.
6. The fact that a company which is a resident of a
Contracting State controls or is controlled by a company
which is a resident of the other Contracting State, or
which carries on business in that other State (whether
through a permanent establishment or otherwise), shall
not of itself constitute either company a permanent
establishment of the other.
RP-Thailand Tax Treaty
In determining the existence of a permanent establishment
(PE) under the RP- Thailand Tax Treaty, the 183-day period
should be counted based on the total number of days that
services are rendered in the Philippines, including all periods
resulting from the automatic renewal of a service contract,
which renewal shall be deemed the same or a connected
project.
RP-Malaysia Tax Treaty
The term permanent establishment is defined as a fixed
place of business where the enterprise is wholly or partly
carried on. However, even if there is no fixed place of
business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting
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State if it carries on supervisory activities in that other State
for more than 6 months in connection with a construction,
installation or assembly project which is being undertaken in
that other State.
x------------------------------------x
4. NON-STOCK CORPORATIONS
4.1 Definition (Corporation Code 87)
For the purposes of this Code, a non-stock corporation is
one where no part of its income is distributable as dividends
to its members, trustees, or officers, subject to the
provisions of this Code on dissolution: Provided, That any
profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject
to the provisions of this Title.
The provisions governing stock corporation, when pertinent,
shall be applicable to non-stock corporations, except as may
be covered by specific provisions of this Title.
4.2 Purposes (Corporation Code 88)
Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar
purposes, like trade, industry, agricultural and like
chambers, or any combination thereof, subject to the special
provisions of this Title governing particular classes of non-
stock corporations. CREP CF LSSC TIALC
4.3 Funding Requirement
SEC MC No. 08-06
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SECTION 1. A "Foundation" is a non-stock, non-profit
corporation established for the purpose of extending grants
or endowments to support its goals or raising funds to
accomplish charitable, religious, educational, athletic,
cultural, literary, scientific, social welfare or other similar
objectives.
SECTION 2. A Foundation applying for registration with the
Commission shall, in addition to the requirements for non-
stock, non-profit corporations, submit the following
documents:
a. Notarized Certification of Bank Deposit of the
amount of not less than One Million Pesos
(P1,000,000.00); and
b. Statement of willingness to allow the Commission to
conduct an audit.
SECTION 3. The applicant's corporate name shall contain the
word "Foundation".
SECTION 4. Upon the effectivity of this Circular, all
registered Foundations shall submit, in addition to the
General Information Sheet, its Audited Financial Statement
which shall include a sworn Statement of its President and
Treasurer on the following information that relates to the
preceding fiscal year:
a. Source and Amount of Funds;
b. Program/Activity planned, ongoing and
accomplished;
i. Complete name, address and contact number of
project officer-in-charge;
ii. Complete address and contact number of
project office; and
c. Application of Funds.
NIRC 30
SECTION 5. A registered Foundation shall attach to the
sworn statement mentioned in the immediately preceding
paragraph a Certification from the Office of the Mayor, or
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the Office of the Barangay Captain, or the Head of either the
Department of Social Welfare and Development or
Department of Health, on the existence of the subject
Program/Activity in the locality on which it exercises
jurisdiction.
SECTION 6. In case a registered Foundation has not yet
submitted to the Commission a statement of willingness to
allow the conduct of an audit, it shall attach such statement
when it submits the documents required in Sections 4 and 5.
SECTION 7. For purposes of the audit to be conducted, a
registered Foundation shall allow the Commission's
representatives access to its corporate and accounting
books, records, names of beneficiaries, agreements entered
into, correspondences and all pertinent documents for the
preceding five (5) years.
SECTION 8. All funds of the Foundation shall be deposited in
a banking institution regulated by the Bangko Sentral ng
Pilipinas.
SECTION 9. Failure to comply with any of these rules or any
violation of the provisions hereof shall render the Foundation
liable to pay a fine in an amount that shall be determined by
the Commission which shall not be less than Ten Thousand
Pesos (P10,000.00). In case the Foundation fails to submit
the required documents for two (2) consecutive years, the
Commission may, after due notice and hearing, revoke the
registration of the Foundation. The penalties enumerated
herein shall be without prejudice to whatever other legal
action may be available under existing laws.
4.4 Exemptions from tax on Corporations in General
The following organizations shall not be taxed under this
Title in respect to income received by them as such:
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(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without
capital stock organized and operated for mutual
purposes and without profit;
(C) A beneficiary society, order or association, operating fort
he exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or
mutual aid association or a nonstock corporation
organized by employees providing for the payment of
life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or
nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for
the benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong
to or inures to the benefit of any member, organizer,
officer or any specific person;
(F) Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
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(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
purely local character, the income of which consists
solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses;
and
(K) Farmers', fruit growers', or like association organized
and operated as a sales agent for the purpose of
marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce
finished by them;
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless
of the disposition made of such income, shall be subject to
tax imposed under this Code.
4.5 Non-stock non-profit Corporation or Organization
NIRC 30(E) & (G); 34(H)(2)(c)
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong
to or inures to the benefit of any member, organizer,
officer or any specific person;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(2) Contributions Deductible in Full. - Notwithstanding the
provisions of the preceding subparagraph, donations to
the following institutions or entities shall be deductible in
full;
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XXX
(c) Donations to Accredited Nongovernment
Organizations. - The term "nongovernment
organization" means a non profit domestic
corporation:
(1) Organized and operated exclusively for scientific,
research, educational, character-building and
youth and sports development, health, social
welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income
of which inures to the benefit of any private
individual;
(2) Which, not later than the 15th day of the third
month after the close of the accredited
nongovernment organizations taxable year in
which contributions are received, makes
utilization directly for the active conduct of the
activities constituting the purpose or function for
which it is organized and operated, unless an
extended period is granted by the Secretary of
Finance in accordance with the rules and
regulations to be promulgated, upon
recommendation of the Commissioner;
(3) The level of administrative expense of which
shall, on an annual basis, conform with the rules
and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution,
would be distributed to another nonprofit
domestic corporation organized for similar
purpose or purposes, or to the state for public
purpose, or would be distributed by a court to
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another organization to be used in such manner
as in the judgment of said court shall best
accomplish the general purpose for which the
dissolved organization was organized.
Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term
"utilization" means:
(i) Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited nongovernment organization was
created or organized.
(ii) Any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more
purposes for which the accredited
nongovernment organization was created or
organized.
An amount set aside for a specific project which
comes within one or more purposes of the
accredited nongovernment organization may be
treated as a utilization, but only if at the time such
amount is set aside, the accredited nongovernment
organization has established to the satisfaction of
the Commissioner that the amount will be paid for
the specific project within a period to be prescribed
in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and
the project is one which can be better accomplished
by setting aside such amount than by immediate
payment of funds.
BIR Rul. 217-12 Aquino Foundation, Inc.
The foundation qualifies under Sec. 30, hence, exempt from ITx.
However, it shall be liable for:
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Atty. Jose Cochingyan III
20% FWT on interest
7.5% FWT on FCDS
Filing of P/L Statement and Balance Sheet with Annual
Information Return
Payment of annual registration fee
Withholding agents if it has employees
VAT (indirect tax)
Donations to it are exempt from donors tax subject to rules.
4.6 Requirement on Utilization of Donations
NIRC 34(H)(2)(c)(2)
(2) Which, not later than the 15th day of the third month
after the close of the accredited nongovernment
organizations taxable year in which contributions are
received, makes utilization directly for the active conduct
of the activities constituting the purpose or function for
which it is organized and operated, unless an extended
period is granted by the Secretary of Finance in
accordance with the rules and regulations to be
promulgated, upon recommendation of
Commissioner;
Subject to such terms and conditions as may be prescribed
by the Secretary of Finance, the term "utilization" means:
(i) Any amount in cash or in kind (including administrative
expenses) paid or utilized to accomplish one or more
purposes for which the accredited nongovernment
organization was created or organized.
(ii) Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for
which the accredited nongovernment organization was
created or organized.
An amount set aside for a specific project which comes
within one or more purposes of the accredited
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nongovernment organization may be treated as a utilization,
but only if at the time such amount is set aside, the
accredited nongovernment organization has established to
the satisfaction of the Commissioner that the amount will be
paid for the specific project within a period to be prescribed
in rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the Commissioner, but
not to exceed five (5) years, and the project is one which
can be better accomplished by setting aside such amount
than by immediate payment of funds.
4.7 Exemption from Donors Tax
NIRC 101(A)(3)
Exemption of Certain Gifts. - The following gifts or donations
shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -
XXX
the (3) Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or
philanthrophic organization or research institution or
organization: Provided, however, That not more than thirty
percent (30%) of said gifts shall be used by such donee for
administration purposes. For the purpose of the exemption,
a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or
philanthrophic organization and/or research institution or
organization' is a school, college or university and/or
charitable corporation, accredited nongovernment
organization, trust or philanthrophic organization and/or
research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees
who receive no compensation, and devoting all its income,
whether students' fees or gifts, donation, subsidies or other
forms of philanthrophy, to the accomplishment and
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Atty. Jose Cochingyan III
promotion of the purposes enumerated in its Articles of
Incorporation.
NIRC 101(B)(2)
(B) In the Case of Gifts Made by a Nonresident not a Citizen of
the Philippines.
XXX
(2) Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution,
foundation, trust or philanthrophic organization or research
institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by
such donee for administration purposes.
4.8 Benefit of Registration: deduction & its limits
NIRC 34(H) (1) & (2)
(1) In General. - Contributions or gifts actually paid or made
within the taxable year to, or for the use of the
Government of the Philippines or any of its agencies or
any political subdivision thereof exclusively for public
purposes, or to accredited domestic corporation or
associations organized and operated exclusively for
religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for the
rehabilitation of veterans, or to social welfare
institutions, or to non-government organizations, in
accordance with rules and regulations promulgated by
the Secretary of finance, upon recommendation of the
Commissioner, no part of the net income of which inures
to the benefit of any private stockholder or individual in
an amount not in excess of ten percent (10%) in the
case of an individual, and five percent (5%) in the case
of a corporation, of the taxpayer's taxable income
derived from trade, business or profession as computed
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without the benefit of this and the following
subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding the
provisions of the preceding subparagraph, donations to
the following institutions or entities shall be deductible in
full;
(a) Donations to the Government. - Donations to the
Government of the Philippines or to any of its
agencies or political subdivisions, including fully-
owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking
priority activities in education, health, youth and
sports development, human settlements, science
and culture, and in economic development according
to a National Priority Plan determined by the
National Economic and Development Authority
(NEDA), In consultation with appropriate
government agencies, including its regional
development councils and private philantrophic
persons and institutions: Provided, That any
donation which is made to the Government or to any
of its agencies or political subdivisions not in
accordance with the said annual priority plan shall
be subject to the limitations prescribed in paragraph
(1) of this Subsection;
(b) Donations to Certain Foreign Institutions or
International Organizations. - Donations to foreign
institutions or international organizations which are
fully deductible in pursuance of or in compliance
with agreements, treaties, or commitments entered
into by the Government of the Philippines and the
foreign institutions or international organizations or
in pursuance of special laws;
(c) Donations to Accredited Nongovernment
Organizations. - The term "nongovernment
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Atty. Jose Cochingyan III
organization" means a non profit domestic
corporation:
(1) Organized and operated exclusively for scientific,
research, educational, character-building and
youth and sports development, health, social
welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income
of which inures to the benefit of any private
individual;
(2) Which, not later than the 15th day of the third
month after the close of the accredited
nongovernment organizations taxable year in
which contributions are received, makes
utilization directly for the active conduct of the
activities constituting the purpose or function for
which it is organized and operated, unless an
extended period is granted by the Secretary of
Finance in accordance with the rules and
regulations to be promulgated, upon
recommendation of the Commissioner;
(3) The level of administrative expense of which
shall, on an annual basis, conform with the rules
and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses; and
(4) The assets of which, in the even of dissolution,
would be distributed to another nonprofit
domestic corporation organized for similar
purpose or purposes, or to the state for public
purpose, or would be distributed by a court to
another organization to be used in such manner
as in the judgment of said court shall best
accomplish the general purpose for which the
dissolved organization was organized.
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Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term
"utilization" means:
(i) Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited nongovernment organization was
created or organized.
(ii) Any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more
purposes for which the accredited
nongovernment organization was created or
organized.
An amount set aside for a specific project which
comes within one or more purposes of the
accredited nongovernment organization may be
treated as a utilization, but only if at the time such
amount is set aside, the accredited nongovernment
organization has established to the satisfaction of
the Commissioner that the amount will be paid for
the specific project within a period to be prescribed
in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and
the project is one which can be better accomplished
by setting aside such amount than by immediate
payment of funds.
4.9 Requirement of Registration of Donee Institutions
RR No. 13-98
SECTION 2. Accreditation of non-stock, non-profit
corporations/NGOs by the Accrediting Entity.
a) The Accrediting Entity shall examine, evaluate and
accredit non-stock, non-profit corporations and NGOs as
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Atty. Jose Cochingyan III
a pre-requisite for their registration with the BIR as
qualified-donee institutions under Section 34 (H)(1) and
(2)(c) of the Tax Code.
(b) Newly-organized and existing non-stock, non-profit
corporations and NGOs shall apply with the Accrediting
Entity for accreditation and submit to a process of
examination and evaluation. The application for
accreditation shall be accompanied by the following
documents:
(i) Articles of Incorporation and By-laws;
(ii) Certificate of Registration with the Securities and
Exchange Commission;
(iii) Affidavit of Modus Operandi showing:
1. the character of the organization;
2. the purpose for which it is organized;
3. the lists of projects/activities for the past two (2)
years, or list of proposed projects/activities for
the first two (2) years of operations for newly-
organized non-stock, non-profit corporations/
NGOs;
4. the source of income and the utilization thereof,
or target fund sources for newly-organized non-
stock, non-profit corporations/NGOs; and
5. other facts relating to their operations which are
relevant to their qualification as donee institutions;
(iv) Duly audited financial statements for the past two
(2) years showing the assets, liabilities, receipts and
disbursements of existing organizations, or financial
projections for the first two (2) years for newly-
organized non-stock, non-profit corporations/NGOs.
(c) The Accrediting Entity shall evaluate and accredit non-
stock, non-profit corporations/NGOs using the following
major criteria:
(i) Mission and Goals
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The mission and goals of the non-stock, non-profit
corporation/NGO should justify its existence.
Statements of mission and goals shall serve as
guideposts for its planning and operations and a
framework for decision-making.
(ii) Resources
The criterion focuses on the adequacy of the
resources and the effectiveness of the structure and
systems of the non-stock, non-profit
corporation/NGO. Areas that should be evaluated
under this criterion include the organization
structure, human, financial and physical resources.
Evaluation shall take into account the names,
positions and qualifications of the individuals or
committee members who manage and make
decisions for the non-stock, non-profit
corporation/NGO, its sources of funds and
distribution of financial resources, and the following
exhibits at the time of examination, among others:
1. Minutes of the Board meetings
2. Table of organization;
3. Policy Manual, if any;
4. Personnel Manual, if any;
5. Budget for the past two (2) years, or proposed
projects for the first two (2) years of operations
for newly-organized non-stock, non-profit
corporations/NGOs; and
6. Audited financial statements for the past two
years for existing non-stock, non-profit
corporations/NGOs.
(iii) Program Implementation and Evaluation
The non-stock, non-profit corporation/NGO must
demonstrate that it is effectively using its resources
to accomplish the purposes for which it was created.
There should be clearly defined policies, priorities
and guidelines for implementing the various
programs and projects. Evaluation shall consider
programs and projects implemented within the last
two years; description of how its
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programs/projects/services are managed; how the
following procedures are carried out; record
keeping, monitoring, evaluating and contingency
planning; programs/projects vis-a-vis the needs and
priorities of its beneficiaries; the present
documentation or results of evaluation and
provisions for adequate training, people
participation, development of leaders and eventual
self-sufficiency.
(iv) Planning for the Future
The non-stock, non-profit corporation/NGO must
provide evidence that it has the capability to plan,
implement and monitor its programs and projects.
Evaluation shall provide evidence that the non-profit
corporation/NGO has mechanisms for planning,
implementing and monitoring its programs and
projects and for ensuring the continuity of
programs/projects even when external funding has
ceased. Evaluation shall also rely on the
presentation of the following exhibits at the time of
visit:
1. Organizational plan
2. Monitoring and evaluation tools
(d) The Secretary of Finance, upon the recommendation of
the Board of Trustees of the Accrediting Entity can waive
the submission of duly audited financial statements for
newly-organized non-stock, non-profit corporations/
NGOs which have been organized to carry out programs
of national significance, e.g. foundation to build the
National Museum. They shall be eligible to apply for a
three (3)-year probationary accreditation and
registration as qualified donee institutions with the
Accrediting Entity.
(e) Existing non-stock, non-profit corporations/NGOs which
have qualified as donee institutions under BIR-NEDA
Regulations 1-81, as amended , shall have three (3)
years beginning the effectivity of these rules and
regulations within which to secure a Certificate of
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Accreditation from the Accrediting Entity. Failure by the
said non-stock, non-profit corporations/NGOs to secure
accreditation within the three-year period shall be a
ground for the cancellation by the BIR of their
Certificates of Registration as qualified-donee
institutions: Provided, however, That donations and
contributions to the said non-stock, non-profit
corporations/NGOs during the three-year period shall
still be allowed as deductible expense on the part of the
donors subject to the provisions of Sec. 4 of these
Regulations: Provided, further, That after the three-year
period, only donations and contributions to non-stock,
non-profit corporations/NGOs which have been
accredited under these Regulations, shall be allowed as
deductible expense on the part of the donors.
(f) The Accrediting Entity shall issue a Certificate of
Accreditation to a non-stock, non-profit corporation/NGO
upon determination that it meets the criteria for
accreditation; Provided, that the Certificate of
Accreditation shall be valid for a maximum period of five
(5) years for existing non-stock, non-profit
corporations/NGOs and three (3) years for newly-
organized non-stock, non-profit corporations/NGOs.
(g) The Accrediting Entity shall deny the applications of any
non-stock, non-profit corporation/NGO which does not
meet the criteria for accreditation. The Private
Accrediting Entity shall notify the non-stock, non-profit
corporation/NGO of the denial of the application, the
reasons therefor, and the evaluators' recommendation in
order that the non-stock, non-profit corporation/NGO
may meet the criteria for accreditation. A non-stock,
non-profit corporation/NGO whose application for
accreditation has been denied by the Private Accrediting
Entity shall have one (1) year within which to implement
the evaluator's recommendations. After the one-year
implementation period, the non-stock, non-profit
corporation/NGO may re-apply for accreditation.
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(h) The Secretary of Finance and the Commissioner of
Internal Revenue shall oversee, monitor and coordinate
with the Accrediting Entity to ensure that the provisions
of these Regulations are complied with.
EO No. 720 (April 11, 2008)
To acquire donee institution status, an NGO must first
receive certification from the Philippine Council for NGO
Certification (PCNC), an accrediting entity, on the basis of
which the Bureau of Internal Revenue will issue the
Certification of Registration as a Qualified Donee Institution.
Under a prior executive order, several government agencies,
including the Department of Science and Technology
(DoST), the Department of Social Welfare and Development
(DSWD), and the Commission on Higher Education (CHED),
were responsible for accrediting qualified donee institutions.
The relevant agency depended on the focus area of the
donee.
RR No. 02-03 13(C)
Filing Of Returns And Payment Of Donor's Tax.
(A) Requirements. Any person making a donation
(whether direct or indirect), unless the donation is
specifically exempt under the Code or other special laws,
is required, for every donation, to accomplish under oath
a donor's tax return in duplicate. The return shall set
forth:
(1) Each gift made during the calendar year which is to
be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same
calendar year,
(4) The name of the donee;
(5) Relationship of the donor to the donee; and
(6) Such further information as the Commissioner may
require.
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(B) Time and place of filing and payment. The donor's tax
return shall be filed within thirty (30) days after the date
the gift is made or completed and the tax due thereon
shall be paid at the same time that the return is filed.
Unless the Commissioner otherwise permits, the return
shall be filed and the tax paid to an authorized agent
bank, the Revenue District Officer, Revenue Collection
Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time
of the transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In the
case of gifts made by a non-resident, the return may be
filed with the Philippine Embassy or Consulate in the
country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.
For this purpose, the term "OFFICE OF THE
COMMISSIONER" shall refer to the Revenue District
Office (RDO) having jurisdiction over the BIR-National
Office Building which houses the Office of the
Commissioner, or presently, to the Revenue District
Office No. 39 South Quezon City.
(C) Notice of donation by a donor engaged in business.
In order to be exempt from donor's tax and to claim full
deduction of the donation given to qualified donee
institutions duly accredited by the Philippine Council for
NGO Certification, Inc. (PCNC), the donor engaged in
business shall give a notice of donation on every
donation worth at least Fifty Thousand Pesos (P50,000)
to the Revenue District Office (RDO) which has
jurisdiction over his place of business within thirty (30)
days after receipt of the qualified donee institution's duly
issued Certificate of Donation, which shall be attached to
the said Notice of Donation, stating that not more than
thirty percent (30%) of the said donation/gifts for the
taxable year shall be used by such accredited non-stock,
non-profit corporation/NGO institution (qualified-donee
institution) for administration purposes pursuant to the
provisions of Section 101(A)(3) and (B)(2) of the Code.
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RMO 20-2013 5
SECTION 5. General Guidelines in the Evaluation of the
Applications for Tax
Exemptions/Revalidation. The Revenue District Officer
(RDO) shall:
a. Ascertain whether or not the corporation or association
falls under any of the organizations enumerated under
Section 30 of the NIRC, as amended, by examining its
Articles of Incorporation and By-Laws and other constitutive
documents. The Articles of Incorporation must clearly
state that:
i. It is a non-stock, non-profit corporation or association;
ii. The purpose for which it was created is one of those
enumerated under Section 30 of the NIRC, as amended;
iii. No part of the corporation or association's net income
shall inure to the benefit of any private individual; and
iv. The trustees of the non-profit corporation or
association do not receive any compensation or
remuneration.
The corporation or association's constitutive documents
shall:
i. Limit its purpose to those described in Section 30 of
the NIRC, as amended;
ii. Not expressly permit activities that do not further its
tax-exempt purposes; and
iii. Permanently dedicate its assets to its tax-exempt
purposes.
A branch office of a foreign non-stock, non-profit corporation
cannot qualify as a tax-exempt corporation under Section 30
of the NIRC, as amended.
BIR Ruling No. DA-034-07 (Ligaya ng Panginoon Foundation)
b. Determine whether or not the corporation or association
is operating as an organization under Section 30 of the
NIRC, as amended, by examining its modus operandi,
financial statements and other relevant documents. The
examination must show that:
i. Its earnings do not inure to the benefit of any private
individual;
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ii. It does not operate for the benefit of private interest
such as those of its founder or the
founder's family; and
iii. It does not operate for the purpose of conducting a
trade or business that is not related to its tax-exempt
purpose.
c. Verify the corporation or association's sources of revenues
and other transactions to determine which are taxable and
non-taxable. Despite its being a tax-exempt institution, it is
subject to the corresponding internal revenue taxes imposed
under the NIRC, as amended, on its income derived from
any of its properties, real or personal, or any activity
conducted for profit regardless of the disposition thereof
(i.e., rental payment from their building/premises), which
income is subject to income tax.
d. Verify whether or not the corporation or association has
stop-filer cases, accounts receivable (AR) cases, etc. and
require compliance by the corporation or association.
e. Verify whether or not the corporation or association is the
subject of any pending investigation, on-going audit,
pending tax assessment, administrative protest, claim for
refund or issuance of tax credit certificate, collection
proceedings, or a judicial appeal; and determine if the issues
involved therein warrant a denial of the application for tax
exemption/revalidation.
4.10 Liability for VAT
This refers to your letter dated August 2, 2006, in effect
requesting for an opinion that Ligaya ng Panginoon
Foundation, Inc., a non-stock, non-profit domestic
corporation accredited by the Philippine Council for NGO
Certification (PCNC) as a donee institution is exempt from
value-added tax (VAT).
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In reply, please be informed that Section 105 of the Tax
Code of 1997 provides that any person who, in the course of
trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added (VAT) imposed in
Sections 106 to 108 of the same Code.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged
therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether
or not it sells exclusively to members or their guests), or
government entity.
Accordingly, if Ligaya ng Panginoon Foundation, Inc. is
engaged in the sale of goods or services in the course of a
business pursuit, including transactions incidental thereto, in
general, it shall also be liable for VAT (BIR Ruling No. S30-
27-2003 dated November 21, 2003 & DA-043-2004 dated
February 4, 2004).
Moreover, any tax exemption granted to it as a non-stock,
non-profit corporation under Section 30 of the Tax Code of
1997 covers only income taxes for which it is directly liable.
It should be noted that VAT is an indirect tax payable by the
seller and not by the purchaser of goods. However, being an
indirect tax, it can be shifted or passed on to the
buyer/purchaser, transferee or lessee of the goods,
properties or services. Once shifted to the buyer/customer
as an addition to the cost of goods or services sold, it is no
longer a tax but an additional cost which the buyer/customer
has to pay in order to obtain the goods or services.
Thus, the shifting of the VAT does not make Ligaya ng
Panginoon Foundation, Inc. the person directly liable and
therefore, you cannot invoke your tax exemption privilege
under Section 30 of the Tax Code of 1997 to avoid the
passing on or shifting of the VAT.
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Revenue from contributions and donations, not being
derived from sale of services or sale of goods made in the
course of business but rather in connection with its non-
stock, non-profit activities, is exempt from the 12% (then
10%) VAT. However, the above exemption from the 12%
VAT does not extend to its purchase of goods or properties
or services and importation of goods. Hence,
notwithstanding that it is a non-stock, non-profit
corporation, its purchase of goods or properties or services
and importation of goods shall nevertheless be subject to
the 12% VAT pursuant to Section 107 of the said Code
4.11 Liability for CGT
RMC 7-2012 (Implementing Mary Immaculate Development
Foundation, Inc.)
Sale of MIDFI of land (a real property which is not exempt from
income tax) is subject to CGT.
4.12 Issuance of Tax Exemption Rulings
RMO 20-2013
Tax exempt status given by way of confirmatory BIR rulings or
certificates issued after due evaluation of documents submitted by
corporation or associations.
Sec. 3 General Documentary Requirements
a. Original copy of application letter for issuance of tax
exemption ruling
b. Certified true copy of latest AOI and BL issued by SEC
c. Original copy of certification under oath by an executive
officer as to (i) previous amendments in AOI/BL; (ii) manner
of activities; (iii) sources and disposition of income. If there
are no amendments, the certification shall state this fact.
d. Certified true copy COR with BIR
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Atty. Jose Cochingyan III
e. Original copy of certification under oath by treasurer as to
income, compensation, salaries to trustees. Exempted from
this are corporation sole which do not have trustees.
f. Original copy of certification issued by RDO that it is not
subject to any audit investigation
g. Certified true copies of ITR and FS for the last 3 years
h. Original copy of statement under oath by executive officer of
the modus operandi (i) description of the past, present and
proposed activities; (ii) narrative description of anticipated
receipts and expenditures; (iii) detailed description of
revenues which it seeks to be exempted.
Sec. 4 Additional Requirements for Educational Institutions
a. Certification from CHED/DepED/TESDA
b. If certification was issued five year prior, proof submitted
that nonstock and nonprofit educational institution is
currently operating as such
c. Original certificate of annual revenues and assets and
indicate breakdown of utilization
Sec. 9 Validity of Tax Exemption Ruling
Be valid for 3 years from date of effectivity stated in the ruling.
Sec. 10 Renewal
Same requirements as application.
Failure to renew shall be deemed revocation upon the expiration of
the 3 year period.
Sec. 11 Failure to File Annual Information Return
Automatically lose its tax-exempt status beginning the taxable year
for which it failed to file the annual return, in addition to sanctions
imposed under Sec. 250.
x------------------------------------x
5. LOCAL BUSINESS TAXES
5.1 Scope of Taxing Powers
5.1.1 Municipality (LGC 142)
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Except as otherwise provided in this Code, municipalities may levy
taxes, fees, and charges not otherwise levied by provinces.
5.1.2 City (LGC 151)
Except as otherwise provided in this Code, the city, may levy
the taxes, fees, and charges which the province or
municipality may impose: Provided, however, That the
taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of
this Code. The rates of taxes that the city may levy may
exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the
rates of professional and amusement taxes.
5.2 Business Taxes
5.2.1 Basic Taxes (LGC 143)
The municipality may impose taxes on the following
businesses:
(a) On manufacturers, assemblers, repackers, processors,
brewers, distillers, rectifiers, and compounders of
liquors, distilled spirits, and wines or manufacturers of
any article of commerce of whatever kind or nature, in
accordance with the following schedule: With gross sales
or receipts for the Amount of Tax preceding calendar
year in the amount of:
Per Annum
Less than 10,000.00 165.00
P 10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 302.00
20,000.00 or more but less than 30,000.00 440.00
30,000.00 or more but less than 40,000.00 660.00
40,000.00 or more but less than 50,000.00 825.00
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50,000.00 or more but less than 75,000.00 1,320.00
75,000.00 or more but less than 100,000.00 1,650.00
100,000.00 or more but less than 150,000.00 2,200.00
150,000.00 or more but less than 200,000.00 2,750.00
200,000.00 or more but less than 300,000.00 3,850.00
300,000.00 or more but less than 500,000.00 5,500.00
500,000.00 or more but less than 750,000.00 8,000.00
750,000.00 or more but less than 1,000,000.00 10,000.00
1,000,000.00 or more but less than 2,000,000.00 13,750.00
2,000,000.00 or more but less than 3,000,000.00 16,500.00
3,000,000.00 or more but less than 4,000,000.00 19,800.00
4,000,000.00 or more but less than 5,000,000.00 23,100.00
5,000,000.00 or more but less than 6,500,000.00 24,375.00
6,500,000.00 or more at a rate not exceeding thirty-seven and a
half percent (37 1/2%) of one percent (1%)
(b) On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature in accordance
with the following schedule: With gross sales or receipts
for the Amount of Tax preceding calendar year in the
amount of:
Per Annum
Less than P1,000.00 18.00
P 1,000.00 or more but less than P 2,000.00 33.00
2,000.00 or more but less than 3,000.00 50.00
3,000.00 or more but less than 4,000.00 72.00
4,000.00 or more but less than 5,000.00 100.00
5,000.00 or more but less than 6,000.00 121.00
6,000.00 or more but less than 7,000.00 143.00
7,000.00 or more but less than 8,000.00 165.00
8,000.00 or more but less than 10,000.00 187.00
10,000.00 or more but less than 15,000.00 220.00
15,000.00 or more but less than 20,000.00 275.00
20,000.00 or more but less than 30,000.00 330.00
30,000.00 or more but less than 40,000.00 440.00
40,000.00 or more but less than 50,000.00 660.00
50,000.00 or more but less than 75,000.00 990.00
75,000.00 or more but less than 100,000.00 1320.00
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100,000.00 or more but less than 150,000.00 1870.00
150,000.00 or more but less than 200,000.00 2420.00
200,000.00 or more but less than 300,000.00 3300.00
300,000.00 or more but less than 500,000.00 4400.00
500,000.00 or more but less than 750,000.00 6600.00
750,000.00 or more but less than 1,000,000.00 8800.00
1,000,000.00 or more but less than 2,000,000.00 10000.00
2,000,000.00 or more at a rate not exceeding fifty percent
(50%) of one percent (1%).
(c) On exporters, and on manufacturers, millers, producers,
wholesalers, distributors, dealers or retailers of essential
commodities enumerated hereunder at a rate not
exceeding one-half (1/2) of the rates prescribed under
subsections (a), (b) and (d) of this Section:
(1) Rice and corn;
(2) Wheat or cassava flour, meat, dairy products, locally
manufactured, processed or preserved food, sugar,
salt and other agricultural, marine, and fresh water
products, whether in their original state or not;
(3) Cooking oil and cooking gas;
(4) Laundry soap, detergents, and medicine;
(5) Agricultural implements, equipment and post-
harvest facilities, fertilizers, pesticides, insecticides,
herbicides and other farm inputs;
(6) Poultry feeds and other animal feeds;
(7) School supplies; and
(8) Cement.
(d) On retailers, With gross sales or receipts Rate of tax for
the preceding calendar year of:
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Per annum
P400,000.00 or less 2%
more than P400,000.00 1%
Provided, however, That barangays shall have the
exclusive power to levy taxes, as provided under Section
152 hereof, on gross sales or receipts of the preceding
calendar year of Fifty thousand pesos (P=50,000.00) or
less, in the case of cities, and Thirty thousand pesos
(P=30,000.00) or less, in the case of municipalities.
(e) On contractors and other independent contractors, in
accordance with the following schedule:
With gross receipts for the preceding calendar year in
the amount of:
Amount of Tax Per Annum
Less than P= 5,000.00 27.50
P 5,000.00 or more but less than P 10,000.00 61.60
10,000.00 or more but less than 15,000.00 104.50
15,000.00 or more but less than 20,000.00 165.00
20,000.00 or more but less than 30,000.00 275.00
30,000.00 or more but less than 40,000.00 385.00
40,000.00 or more but less than 50,000.00 550.00
50,000.00 or more but less than 75,000.00 880.00
75,000.00 or more but less than 100,000.00 1320.00
100,000.00 or more but less than 150,000.00 1980.00
150,000.00 or more but less than 200,000.00 2640.00
200,000.00 or more but less than 250,000.00 3630.00
250,000.00 or more but less than 300,000.00 4620.00
300,000.00 or more but less than 400,000.00 6160.00
400,000.00 or more but less than 500,000.00 8250.00
500,000.00 or more but less than 750,000.00 9250.00
750,000.00 or more but less than 1,000,000.00 10250.00
1,000,000.00 or more but less than 2,000,000.00 11500.00
2,000,000.00 or more at a rate not exceeding fifty percent
(50%) of one percent (1%)
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(f) On banks and other financial institutions, at a rate not
exceeding fifty percent (50%) of one percent (1%) on
the gross receipts of the preceding calendar year derived
from interest, commissions and discounts from lending
activities, income from financial leasing, dividends,
rentals on property and profit from exchange or sale of
property, insurance premium.
(g) On peddlers engaged in the sale of any merchandise or
article of commerce, at a rate not exceeding Fifty pesos
(P50.00) per peddler annually.
(h) On any business, not otherwise specified in the
preceding paragraphs, which the sanggunian concerned
may deem proper to tax: Provided, That on any business
subject to the excise, value-added or percentage tax
under the National Internal Revenue Code, as amended,
the rate of tax shall not exceed two percent (2%) of
gross sales or receipts of the preceding calendar year.
The sanggunian concerned may prescribe a schedule of
graduated tax rates but in no case to exceed the rates
prescribed herein.
5.2.2 Tax Rate in Metro Manila (LGC 144)
The municipalities within the Metropolitan Manila Area may
levy taxes at rates which shall not exceed by fifty percent
(50%) the maximum rates prescribed in the preceding
Section.
5.2.3 Payment (LGC 146)
(a) The taxes imposed under Section 143 shall be payable
for every separate or distinct establishment or place
where business subject to the tax is conducted and one
line of business does not become exempt by being
conducted with some other business for which such tax
has been paid. The tax on a business must be paid by
the person conducting the same.
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(b) In cases where a person conducts or operates two (2) or
more of the businesses mentioned in Section 143 of this
Code which are subject to the same rate of tax, the tax
shall be computed on the combined total gross sales or
receipts of the said two (2) or more related businesses.
(c) In cases where a person conducts or operates two (2) or
more businesses mentioned in Section 143 of this Code
which are subject to different rates of tax, the gross
sales or receipts of each business shall be separately
reported for the purpose of computing the tax due from
each business.
5.2.4 Situs and Allocation
LGC 150
(a) For purposes of collection of the taxes under Section
143 of this Code, manufacturers, assemblers, repackers,
brewers, distillers, rectifiers and compounders of liquor,
distilled spirits and wines, millers, producers, exporters,
wholesalers, distributors, dealers, contractors, banks and
other financial institutions, and other businesses,
maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales
outlet making the sale or transaction, and the tax
thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located. In cases
where there is no such branch or sales outlet in the city
or municipality where the sale or transaction is made,
the sale shall be duly recorded in the principal office and
the taxes due shall accrue and shall be paid to such city
or municipality.
(b) The following sales allocation shall apply to
manufacturers, assemblers, contractors, producers, and
exporters with factories, project offices, plants, and
plantations in the pursuit of their business:
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(1) Thirty percent (30%) of all sales recorded in the
principal office shall be taxable by the city or
municipality where the principal office is located;
and
(2) Seventy percent (70%) of all sales recorded in the
principal office shall be taxable by the city or city or
municipality where the factory is located; and
(3) Forty percent (40%) to the city or municipality
where the plantation is located.
(c) In cases where a manufacturer, assembler, producer,
exporter or contractor has two (2) or more factories,
project offices, plants, or plantations located in different
localities, the seventy percent (70%) sales allocation
mentioned in subparagraph (b) of subsection (2) above
shall be prorated among the localities where the
factories, project offices, plants, and plantations are
located in proportion to their respective volumes of
production during the period for which the tax is due.
(d) The foregoing sales allocation shall be applied
irrespective of whether or not sales are made in the
locality where the factory, project office, plant, or plan is
located.
AO No. 270, Art. 243
(a) Definition of Terms -
(1) Principal Office. - the head or main office of the
business appearing in the pertinent documents
submitted to the Securities and Exchange
Commission, or the Department of Trade and
Industry, or other appropriate agencies, as the case
may be.
The city or municipality specifically mentioned in the
articles of incorporation of official registration papers
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Atty. Jose Cochingyan III
as being the official address of said principal office
shall be considered as the situs thereof.
In case there is a transfer or relocation of the
principal office to another city or municipality, it shall
be the duty of the owner, operator or manager of
the business to give due notice of such transfer or
relocation to the local chief executives of the cities
or municipalities concerned within fifteen (15) days
after such transfer or relocation is effected.
(2) Branch or Sales Office - a fixed place in a locality
which conducts operations of the business as an
extension of the principal office. Offices used only as
display areas of the products where no stocks or
items are stored for sale, although orders for the
products may be received thereat, are not branch or
sales offices as herein contemplated. A warehouse
which accepts orders and/or issues sales invoices
independent of a branch with sales office shall be
considered as a sales office.
(3) Warehouse - a building utilized for the storage of
products for sale and from which goods or
merchandise are withdrawn for delivery to
customers or dealers, or by persons acting in behalf
of the business. A warehouse that does not accept
orders and/or issue sales invoices as aforementioned
shall not be considered a branch or sales office.
(4) Plantation - a tract of agricultural land planted to
trees or seedlings whether fruit bearing or not,
uniformly spaced or seeded by broadcast methods
or normally arranged to allow highest production.
For purposes of this Article, inland fishing ground
shall be considered as plantation.
(5) Experimental Farms - agricultural land utilized by a
business or corporation to conduct studies, tests,
researches or experiments involving agricultural,
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agribusiness, marine, or aquatic, livestock, poultry,
dairy and other similar products for the purpose of
improving the quality and quantity of goods or
products.
On-site sales of commercial quantity made in
experimental farms shall be similarly imposed the
corresponding tax under Article 233 and allocated in
paragraph (b) of this Article.
(b) Sales Allocation -
(1) All sales made in a locality where there is a branch
or sales office or warehouse shall be recorded in
said branch or sales office or warehouse and the tax
shall be payable to the city or municipality where the
same is located.
(2) In cases where there is no such branch, sales office,
or warehouse in the locality where the sale is made,
the sale shall be recorded in the principal office
along with the sales made by said principal office
and the tax shall accrue to the city or municipality
where said principal office is located.
(3) In cases where there is a factory, project office,
plant or plantation in pursuit of business, thirty
percent (30%) of all sales recorded in the principal
office shall be taxable by the city or municipality
where the principal office is located and seventy
percent (70%) of all sales recorded in the principal
office shall be taxable by the city or municipality
where the factory, project office, plant or plantation
is located. LGUs where only experimental farms are
located shall not entitled to the sales allocation
provided in this subparagraph.
(4) In case of a plantation located in a locality other
than that where the factory is located, the seventy
percent (70%) sales allocation shall be divided as
follows:
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Atty. Jose Cochingyan III
(i) Sixty percent (60%) to the city or municipality
where the factory is located; and
(ii) Forty percent (40%) to the city or municipality
where the plantation is located.
(5) In cases where there are two (2) or more factories,
project offices, plants or plantations located in
different localities, the seventy percent (70%) sales
allocation shall be prorated among the localities
where such factories, project offices, plants, and
plantations are located in proportion to their
respective volumes of production during the period
for which the tax is due. In the case of project
offices of service and other independent contractors,
the term production shall refer to the cost of
projects actually undertaken during the tax period.
(6) The sales allocation in paragraph (b) hereof shall be
applied irrespective of whether or not sales are
made in the locality where the factory, project
office, plant or plantation is located. In case of sales
made by the factory, project office, plant or
plantation, the sale shall be covered by
subparagraphs (1) or (2) above.
(7) In case of manufacturers or producers which engage
the services of an independent contractor to
produce or manufacture some of their products,
these rules on situs of taxation shall apply except
that the factory or plant and warehouse of the
contractor utilized for the production and storage of
the manufacturers' products shall be considered as
the factory or plant and warehouse of the
manufacturer.
(c) Port of Loading - The city or municipality where the port
of loading is located shall not levy and collect the tax
imposable in Article 233 of this Rule unless the exporter
maintains in said city or municipality its principal office, a
branch, sales office or warehouse, factory, plant, or
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plantation in which case, the rule on the matter shall
apply accordingly.
(d) Sales made by route trucks, vans, or vehicles -
(1) For route sales made in a locality where a
manufacturer, producer, wholesaler, retailer or
dealer has a branch or sales office or warehouse,
the sale are recorded in the branch, sales office or
warehouse and the tax due thereon is paid to the
LGU where such branch, sales office or warehouse is
located.
(2) For route sales made in a locality where a
manufacturer, producer, wholesaler, retailer or
dealer has no branch, sales office or warehouse the
sales are recorded in the branch, sales office or
warehouse from where the route trucks withdraw
their products for sale, and the tax due on such
sales is paid to the LGU where such branch, sales
office or warehouse is located.
(3) Based on subparagraphs (1) and (2) above, LGUs
where route trucks deliver merchandise cannot
impose any tax on said trucks except the annual
fixed tax authorized to be imposed by the province
in Article 231 of this Rule on every delivery truck or
van or any motor vehicle used by manufacturers,
producers, wholesalers, dealers, or retailers, in the
delivery or distribution of distilled spirits, fermented
liquors, soft drinks, cigars and cigarettes, and other
products as may be determined by the sangguniang
panlalawigan, and by the city, pursuant to Article
223 of this Rule.
(4) In addition to this annual fixed tax, cities may also
collect from same manufacturers, producers,
wholesalers, retailers, and dealers using route trucks
a mayor's permit fee which shall be imposed in a
local tax ordinance pursuant to Article 234 in relation
to Article 223 of this Rule.
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DOF-Bureau of LG Finance Opinion March 4, 2011 (Manila North Tollways)
Indispensable therefore, to the resolution of the issue is the
determination of whether toll plazas, which are strategically
situated along the stretch of the NLEX can be considered as
branch or sales offices/outlets. Undeniably, these toll booths
perform functions/services that the principal or head office
may otherwise perform if not for the impracticality, taking
into consideration the proximity of these toll booths in the
entry/exit points along the expressway system. Needless to
say, toll plazas are vital installations in carrying out MNTC's
contractual obligations with PNCC in the operation of the
NLEX.
Banking on the implication of the first sentence of Section
150 (a) of the LGC requiring two (2) elements for its
application, namely: 1) there must be a branch or sales
outlet "elsewhere"; and 2) the sale or transaction must be
made in such branch or sale outlet, it is contended that
these are not present in the case of MNTC's operation within
the NLEX.
In support hereto are the following submissions:
1) MNTC does not maintain or operate a single branch
office or sales outlet outside of Caloocan City.
2) All day to day business activities of MNTC are conducted
in its one and only office and the entire business
organization, senior management, staff, records, files,
computer system servers are housed in its current office
at Balintawak, Caloocan City.
3) MNTC does not have personnel, records or files
deployed elsewhere.
4) All MNTC corporate functions covering marketing,
accounting, auditing, operations and maintenance
assurance services, corporate communications, legal
services, contracts management and procurement,
finance, administrative services, human resource
development and security are done in the same office.
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5) Other physical facilities and toll plazas that exist in other
areas of the Expressway do not have separate
organizations and staff, nor do they keep and maintain
separate sales records, books of account and the like.
6) Toll plazas simply provide support functions and are not
authorized to conduct business nor generate any "sales"
income on their own.
7) The toll plazas are transit ticket dispensing stations
when the motorist enters the closed system, as well as
venues for cash payment in the open system. Toll plazas
also house the electronic readers of the EC Tax for
cashless transactions and accept payment for reloading
the stored value of the EC Tax in both systems. Some
toll plazas also have weighing stations for enforcement
of truck overloading and storage facilities for equipment
and immobilized vehicles.
Viewed in the light of all the foregoing propositions, it is
concluded that while toll plazas are an essential part of the
automated expressway system, they do not have the
capability to earn business income. Toll plazas are neither
branches nor sales outlets citing as basis the second
sentence of Section 150 (a) of the LGC, as follows: "In cases
where there is no such branch or sales outlet in the city or
municipality where the sale or transaction is made, the sale
shall be duly recorded in the principal office and the taxes
due shall accrue and shall be paid to such city or
municipality".
From your contention, toll plazas, although they are
essential parts of the facility do not earn business income.
They are only transit ticket dispensing stations, which
among others, house the electronic readers of the EC Tag
for cashless transactions as well as accept payments for
reloading the stored value of the same, in both the closed
and open systems.
If in spite of the functions and services toll plazas render to
MNTC's clients and being mere installations along the
expressway as stated, they cannot be considered as
performing the functions of the head or principal office,
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Atty. Jose Cochingyan III
supra, therefore the definition of the term branch or sales
office under Article 243 (a) (2) of the IRR of the LGC, would
be considered pointless and defies logic. As a matter of
right, the entire gross receipts of MNTC should be allocated
to Caloocan City.
With due respect to the position taken by that office, we beg
to disagree. Toll plazas are not mere installations, as you
would want to project and whose functions do not suitably
fit that of branches or sales offices/outlets.
Viewed in the context of the definition of a branch or sales
office under Article 243 (a) (2) as follows "a fixed place in a
locality which conducts operations of the business as an
extension of the principal office . . .", the functions and
services performed by the toll plazas satisfy the
requirements for these installations to be considered as
branch or sales offices/outlets.
Toll plazas need not be independent with the principal or
head office to be considered as branch or sales outlet.
To support our position, the two (2) basic requisites in the
definition of the term "branch or sales outlet" have been
met.
The toll plazas are fixed structures in the locality inside the
expressway system and they conduct the operations of
MNTC as an extension of MNTC's principal office in Caloocan
City.
As to the contention that toll booths do not generate income
of their own, we also disagree. Logically, toll plazas need not
generate income of their own because they are performing
the functions as extensions of the head or principal office.
The collection function is a task that these toll plazas
perform for and in behalf of the head or principal office.
Therefore, whether their collection function is for their own
account or that of the head or principal office is immaterial.
As previously stated, toll booths not only serve as transit
ticket dispensing stations, house the electronic readers for
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the EC Tax for cashless transactions, and accept payment
for reloading the stored value for the EC Tax in both closed
and open systems but also accept cash payments from both
open and closed system patrons. In fact, during the meeting
with MNTC official on April 6, 2010, it was categorically
admitted to the BLGF Team by one officer that the daily
collections of each toll booth is readily available and its
actual collection can be produced if needed.
Further, during the inspection tour at the MNTC facility in
Balintawak, Caloocan City, it was observed that each
computer unit at the toll booths is connected to the main
server at MNTC's head office through a computer network
and to where each and every transaction is recorded. The
team was clarified further that the computer system can
produce both the consolidated and individual statement of
collections which only means that the total daily or periodic
collections of each and every toll plaza or toll booth in
particular can be easily generated. For this particular record
to be available, the computer system is also programmed to
record every transaction of a particular location as recording
and maintaining a consolidated recording of all the collection
transactions generated by all the collection booths of the
entire tollways system.
With regard to the determination of the source of income,
and without prejudice to LGUs that do not host any toll plaza
or booth, it is viewed that the citations which determine the
source of income of personal services are unnecessary. The
provisions of the LGC will suffice to determine whether the
collections made by toll booths at the designated toll plazas
can be considered as business transactions attributable, for
taxation purposes, to the locality where such toll plaza or
booth is situated.
In this regard, the 30%-70% share allocation of the gross
receipts realized by MNTC in the operation of NLEX based on
the kilometrage traversed in each LGU along the expressway
system is not appropriately applicable.
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DOF-Bureau of LG Finance Opinion March 7, 1994 (Colgate-Palmolive)
Representations are made that CPI is engaged in the
business of manufacturing and marketing personal and
household care products. It secured the services of an
independent contractor the PBE Industries, Inc. (PBE) to
provide the CPI the local physical distribution facilities within
specified places in the Philippines. However, it is understood
that CPI may also make deliveries of its products in other
places in the country.
It is further represented that CPI has a warehouse within its
compound in Makati, from where finished products are
transferred to the warehouse of PBE in Tacloban. Sales are
booked by the company's salesmen with various customers
within and out of Tacloban City. The sales orders are then
submitted to PBE for processing. PBE processes the sales
orders received from salesmen and prepares the sales
invoices on the basis of which goods are withdrawn from its
warehouse in Tacloban City for delivery to the various
customers.
On the basis of the foregoing, the Office of the City
Treasurer of Tacloban City contends that CPI is liable for the
tax on its total sales of goods taken from the Tacloban City
warehouse.
Accordingly, this Department hereby expresses the view that
the Warehousing and Physical Distribution contract
aforementioned is a contract between the parties concerned
but which can not be contrary to the provisions of the law
on the matter. Stated otherwise, while said contract may be
enforceable as between the parties thereto, the same should
not apply on cases that are expressly or fully covered by
existing law or rule, such as the warehouse of PBE in
Tacloban City where sales invoices are issued to cover goods
withdrawn therefrom. Thus, the products taken from the
warehouse of PBE in Tacloban City and delivered to CPI's
customers outside the city should be recorded and the tax
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thereon paid in Tacloban City where said warehouse is
situated.
As to the deliveries or sales made by CPI of products taken
from its warehouse in Makati to places where it does not
have any branch, sales office, or another warehouse, the
same should be recorded in Makati where its principal office
is located and the taxes due thereon should likewise be paid
to said municipality.
DOF-Bureau of LG Finance Opinion February 26, 1993 (Magnolia Corp)
It is represented that Magnolia Corporation (MC) is a
subsidiary company of San Miguel Corporation and that MC
is a manufacturer with a principal office in Pasig maintained
for management and administrative purposes. It has a
factory and sales office in Quezon City, where said route
trucks withdraw their products for delivery to the customers
in Pasig. Thus, the sales of said rout trucks are recorded in
Quezon City and the local business taxes are paid therein.
It appears, however, that the Officer-in-Charge, Municipal
Treasurer's Office of Pasig insists that MC should pay
business taxes in said municipality representing 30% of its
gross receipts for maintaining therein its principal office.
On the other hand, MC contends that in previous years said
Company paid only the charges and fees for maintaining its
principal office in Pasig. It maintains the view that the
Company is not liable for business taxes to the said
municipality as its principal office is merely for management
and administrative purposes, and no sales are made nor
recorded therein upon which tax is to be based.
Considering the above provision of law and the
representations made in your letter, it is the view of this
Department that Magnolia Corporation should pay business
taxes to Quezon City and not to the Municipality of Pasig.
However, the said municipality may levy and collect the
annual fixed tax P500.00 per annum for every delivery truck
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Atty. Jose Cochingyan III
or van of said Company delivering goods within the
municipality under Section 141 of the aforecited Code, in
relation with Article 236 (b) of the said IRR, as well as
Mayor's permit fee and other regulation fees provided for
under existing local tax ordinances of the municipality.
DOF-Bureau of LG Finance Opinion September 14, 1998 (Nestle Philippines)
In January 1998, NESTLE declared a Net Sales for 1997 in
the amount of P8,128,000.64 which is very much lower than
the sales declared in 1996 in the amount of
P133,060,184.00.
That Office has accepted their payment for business taxes
for 1998, however, said company was required to present
their sales book for verification. It appears that the sales
made in Laoag City was paid thereat in a 70%-30%
allocation. Hence, the following query:
"Considering that the Sales Office is located in San Nicolas,
will the sales be declared and paid in full in San Nicolas or
partly in Laoag City? It is our view that the Sales should be
paid in full and paid in San Nicolas."
Accordingly, this Bureau expresses the following views:
1. All sales made in its sales office in San Nicolas shall be
recorded thereat where such sales office is located and
shall be 100% taxable by San Nicolas.
2. The goods sourced from said sales office and delivered
to buyers outside said municipality, where there is no
branch, sales office or warehouse, should be considered
as sales made by route trucks and should be recorded
and the tax thereon paid in San Nicolas where said sales
office is located.
3. The City of Laoag may levy and collect an annual fixed
tax for every delivery truck of NESTLE imposed under
the existing local tax ordinance of the city.
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5.2.5 Tax Period (LGC 165)
Unless otherwise provided in this Code, the tax period of all local
taxes, fees and charges shall be the calendar year. Such taxes, fees
and charges may be paid in quarterly installments.
5.2.6 Accrual of Tax (LGC 166)
Unless otherwise provided in this Code, all local taxes, fees, and
charges shall accrue on the first (1st) day of January of each year.
However, new taxes, fees or charges, or changes in the rates
thereof, shall accrue on the first (1st) day of the quarter next
following the effectivity of the ordinance imposing such new levies or
rates.
5.2.7 Time of Payment (LGC 167)
Unless otherwise provided in this Code, all local taxes, fees, and
charges shall be paid within the first twenty (20) days of January or
of each subsequent quarter, as the case may be. The sanggunian
concerned may, for a justifiable reason or cause, extend the time for
payment of such taxes, fees, or charges without surcharges or
penalties, but only for a period not exceeding six (6) months.
5.2.8 Collection by the Treasurer (LGC 170)
All local taxes, fees, and charges shall be collected by the provincial,
city, municipal, or barangay treasurer, or their duly authorized
deputies. The provincial, city or municipal treasurer may designate
the barangay treasurer as his deputy to collect local taxes, fees, or
charges. In case a bond is required for the purpose, the provincial,
city or municipal government shall pay the premiums thereon in
addition to the premiums of bond that may be required under this
Code.
5.2.9 Power to Examine Books of Account (LGC 171)
The provincial, city, municipal or barangay treasurer may, by himself
or through any of his deputies duly authorized in writing, examine
the books, accounts, and other pertinent records of any person,
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Atty. Jose Cochingyan III
partnership, corporation, or association subject to local taxes, fees
and charges in order to ascertain, assess, and collect the correct
amount of the tax, fee, or charge. Such examination shall be made
during regular business hours, only once for every tax period, and
shall be certified to by the examining official. Such certificate shall be
made of record in the books of accounts of the taxpayer examined.
In case the examination herein authorized is made by a duly
authorized deputy of the local treasurer, the written authority of the
deputy concerned shall specifically state the name, address, and
business of the taxpayer whose books, accounts, and pertinent
records are to be examined, the date and place of such examination,
and the procedure to be followed in conducting the same. For this
purpose, the records of the revenue district office of the Bureau of
Internal Revenue shall be made available to the local treasurer, his
deputy or duly authorized representative.
Mobil Philippines v The City Treasurer of Makati
Mobils office was located in Makati City when it filed an application with the
City Treasurer for retirement of business within Makati as it moved its
business to Pasig City on September 2008. After evaluation, Mobil was
assessed with business tax of PhP 1.9 million. Mobil paid the tax under
protest and claimed a refund therefrom in 1999. The RTC denied the petition
for refund ratiocinating that the payments made by Mobil in 1998 are
payments for business tax for 1997 which was paid in January of 1998.
The issue in this case is: W/N the business taxes paid by Mobil in 1998,
business taxes for 1997 or 1998?
The SC distinguished business taxes and incomes taxes. Business taxes
imposed in the exercise of police power for regulatory purposes are paid for
the privilege of carrying on a business in the year the tax was paid . It is paid
at the beginning of the year as a fee to allow the business to operate for the
rest of the year. It is deemed a prerequisite to the conduct of business.
Income tax, on the other hand, is a tax on all yearly profits arising from
property, professions, trades or offices, or as a tax on a person's income,
emoluments, profits and the like. It is tax on income, whether net or gross
realized in one taxable year.
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The business taxes paid in the year 1998 is for the privilege of engaging in
business for the same year. Thus, the SC held that the Treasurer of Makati
erroneously treated the assessment and collection of business tax as if it
were income tax, by rendering an additional assessment of PhP1.3million for
the revenue generated for the year 1998.
5.3 The Barangay
5.3.1 Clearance (LGC 152(c))
No city or municipality may issue any license or permit for any
business or activity unless a clearance is first obtained from the
barangay where such business or activity is located or conducted.
For such clearance, the sangguniang barangay may impose a
reasonable fee. The application for clearance shall be acted upon
within seven (7) working days from the filing thereof. In the event
that the clearance is not issued within the said period, the city or
municipality may issue the said license or permit.
5.3.2 Billboards and Signages (LGC 152(d)(3))
The barangay may levy reasonable fees and charges on billboards,
signboards, neon signs, and outdoor advertisements.
5.4 Community Tax
5.4.1 Who may levy (LGC 156)
Cities or municipalities may levy a community tax in accordance with
the provisions of this Article.
5.4.2 Liability of Corporations for Tax (LGC 158)
Every corporation no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in the
Philippines shall pay an annual community tax of Five hundred pesos
(P=500.00) and an annual additional tax, which, in no case, shall
exceed Ten thousand pesos (P=10,000.00) in accordance with the
following schedule:
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(1) For every Five thousand pesos (P=5,000.00) worth of real
property in the Philippines owned by it during the preceding year
based on the valuation used for the payment of the real property
tax under existing laws, found in the assessment rolls of the city
or municipality where the real property is situated - Two pesos
(P=2.00); and
(2) For every Five thousand pesos (P=5,000.00) of gross receipts or
earnings derived by it from its business in the Philippines during
the preceding year - Two pesos (P=2.00). The dividends
received by a corporation from another corporation however
shall, for the purpose of the additional tax, be considered as part
of the gross receipts or earnings of said corporation.
5.4.3 Time & Place of Payment (LGC 160, 161)
The community tax shall be paid in the place of residence of the
individual, or in the place where the principal office of the juridical
entity is located.
The community tax shall accrue on the first (1st) day of January of
each year which shall be paid not later than the last day of February
of each year. If a person reaches the age of eighteen (18) years or
otherwise loses the benefit of exemption on or before the last day of
June, he shall be liable for the community tax on the day he reaches
such age or upon the day the exemption ends. However, if a person
reaches the age of eighteen (18) years or loses the benefit of
exemption on or before the last day of March, he shall have twenty
(20) days to pay the community tax without becoming delinquent.
Persons who come to reside in the Philippines or reach the age of
eighteen (18) years on or after the first (1st) day of July of any year,
or who cease to belong to an exempt class on or after the same
date, shall not be subject to the community tax for that year.
Corporations established and organized on or before the last day of
June shall be liable for the community tax for that year. But
corporations established and organized on or before the last day of
March shall have twenty (20) days within which to pay the
community tax without becoming delinquent. Corporations
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established and organized on or after the first day of July shall not
be subject to the community tax for that year. If the tax is not paid
within the time prescribed above, there shall be added to the unpaid
amount an interest of twenty-four percent (24%) per annum from
the due date until it is paid.
5.4.4 Penalty for Non-payment (LGC 161 last )
Corporations established and organized on or before the last day of
June shall be liable for the community tax for that year. But
corporations established and organized on or before the last day of
March shall have twenty (20) days within which to pay the
community tax without becoming delinquent. Corporations
established and organized on or after the first day of July shall not
be subject to the community tax for that year. If the tax is not paid
within the time prescribed above, there shall be added to the unpaid
amount an interest of twenty-four percent (24%) per annum from
the due date until it is paid.
5.4.5 Community Tax Certificate (LGC 162)
A community tax certificate shall be issued to every person or
corporation upon payment of the community tax. A community tax
certificate may also be issued to any person or corporation not
subject to the community tax upon payment of One peso (P=1.00).
5.4.6 When CTC is Necessary (LGC 163)
(a) When an individual subject to the community tax acknowledges
any document before a notary public, takes the oath of office
upon election or appointment to any position in the government
service; receives any license, certificate, or permit from any
public authority; pays any tax or fee; receives any money from
any public fund; transacts other official business; or receives any
salary or wage from any person or corporation, it shall be the
duty of any person, officer, or corporation with whom such
transaction is made or business done or from whom any salary
or wage is received to require such individual to exhibit the
community tax certificate. The presentation of community tax
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Atty. Jose Cochingyan III
certificate shall not be required in connection with the
registration of a voter.
(b) When, through its authorized officers, any corporation subject to
the community tax receives any license, certificate, or permit
from any public authority, pays any tax or fee, receives money
from public funds, or transacts other official business, it shall be
the duty of the public official with whom such transaction is
made or business done, to require such corporation to exhibit
the community tax certificate.
(c) The community tax certificate required in the two preceding
paragraphs shall be the one issued for the current year, except
for the period from January until the fifteenth (15th) of April
each year, in which case, the certificate issued for the preceding
year shall suffice.
5.5 Exemption of export processing zone registered enterprises
Omnibus Investment Code, Art. 78(a)
Article 78. Additional Incentives.
A zone registered enterprise shall also enjoy all the incentive benefits
provided in Article 39 hereof under the same terms and conditions stated
therein. In addition zone registered enterprises shall also be entitled to the
following:
(a) Exemption from Local Taxes and Licenses. Notwithstanding the
provisions of law to the contrary, zone registered enterprise shall, to the
extent of their construction, operation or production inside the zone be
exempt from the payment of any and all local government imposts, fees,
licenses or taxes except real estate taxes which shall be collected by the
Province/City/Municipality responsible for the collection thereof under the
provisions of the Real Property Tax Code: Provided, That machineries
owned by zone registered enterprises which are actually installed and
operated in the Zone for manufacturing, processing or for industrial
purposes shall not be subject to the payment of real estate taxes for the
first three (3) years of operation of such machineries: Provided, further,
That fifty percent (50%) of the proceeds of the real estate taxes
collected from all real properties located in the Zone and such other
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areas owned or administered by the Authority shall be remitted to the
Authority by the province/city/municipality responsible for the collection
of such taxes under the provisions of the Real Property Tax Code. All real
estate taxes accruing to the Authority as herein provided shall be
expanded for such community facilities, utilities and/or services as the
Authority may determine.
x------------------------------------x
6. CORPORATE INCOME TAX
6.1 Gross Income (NIRC 27(A) & (E)(4))
Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the
taxable income derived during each taxable year from all
sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two
percent (32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be computed
without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and
expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on
the amount computed by multiplying the number of months
covered by the new rates within the fiscal year by the
taxable income of the corporation for the period, divided by
twelve.
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Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed
at fifteen percent (15%) of gross income as defined herein,
after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
(2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to gross
sales or receipts from all sources does not exceed fifty-five
percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under
the scheme.
For purposes of this Section, the term 'gross income' derived
from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of goods sold.
"Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, "cost of goods" sold
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold, including insurance while the
goods are in transit.
For a manufacturing concern, "cost of goods manufactured
and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and
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manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances and discounts.
XXX
For purposes of applying the minimum corporate income tax
provided under Subsection (E) hereof, the term 'gross
income' shall mean gross sales less sales returns, discounts
and allowances and cost of goods sold. "Cost of goods sold'
shall include all business expenses directly incurred to
produce the merchandise to bring them to their present
location and use.
For a trading or merchandising concern, "cost of goods sold'
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold including insurance while the
goods are in transit.
For a manufacturing concern, cost of "goods manufactured
and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services"
shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients
including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and
(B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of
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supplies: Provided, however, That in the case of banks, "cost
of services" shall include interest expense.
6.2 Domestic Corporations (NIRC 27)
(A) In General. - Except as otherwise provided in this Code,
an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each
taxable year from all sources within and without the
Philippines by every corporation, as defined in Section
22(B) of this Code and taxable under this Title as a
corporation, organized in, or existing under the laws of
the Philippines: Provided, That effective January 1,
1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
specific sales, purchases and other transactions occur.
Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each
month of the period.
The reduced corporate income tax rates shall be applied
on the amount computed by multiplying the number of
months covered by the new rates within the fiscal year
by the taxable income of the corporation for the period,
divided by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option
to be taxed at fifteen percent (15%) of gross income as
defined herein, after the following conditions have been
satisfied:
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(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
(2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated
Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed
fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified
under the scheme.
For purposes of this Section, the term 'gross income'
derived from business shall be equivalent to gross sales
less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all
business expenses directly incurred to produce the
merchandise to bring them to their present location and
use.
For a trading or merchandising concern, "cost of goods"
sold shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the
place where the goods are actually sold, including
insurance while the goods are in transit.
For a manufacturing concern, "cost of goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
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In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances and discounts.
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which
are nonprofit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection
(D) hereof: Provided, that if the gross income from
unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the
tax prescribed in Subsection (A) hereof shall be imposed
on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the
conduct of which is not substantially related to the
exercise or performance by such educational institution
or hospital of its primary purpose or function. A
"Proprietary educational institution" is any private school
maintained and administered by private individuals or
groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or
the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with
existing laws and regulations.
(C) Government-owned or Controlled-Corporations, Agencies
or Instrumentalities. - The provisions of existing special
or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance
Corporation (PHIC), the Philippine Charity Sweepstakes
Office (PCSO) and the Philippine Amusement and
Gaming Corporation (PAGCOR), shall pay such rate of
tax upon their taxable income as are imposed by this
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Section upon corporations or associations engaged in s
similar business, industry, or activity.
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and
Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and
from trust funds and similar arrangements received
by domestic corporations, and royalties, derived
from sources within the Philippines: Provided,
however, That interest income derived by a
domestic corporation from a depository bank under
the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest
income.
(2) Capital Gains from the Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net
capital gains realized during the taxable year from
the sale, exchange or other disposition of shares of
stock in a domestic corporation except shares sold
or disposed of through the stock exchange:
Not over P100,000..... 5%
Amount in excess of P100,000.. 10%
(3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign
currency deposit system from foreign currency
transactions with local commercial banks, including
branches of foreign banks that may be authorized by
the Bangko Sentral ng Pilipinas (BSP) to transact
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Atty. Jose Cochingyan III
business with foreign currency depository system
units and other depository banks under the
expanded foreign currency deposit system, including
interest income from foreign currency loans granted
by such depository banks under said expanded
foreign currency deposit system to residents, shall
be subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
(4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic
corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or
Disposition of Lands and/or Buildings. - A final tax of
six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale,
exchange or disposition of lands and/or buildings
which are not actually used in the business of a
corporation and are treated as capital assets, based
on the gross selling price of fair market value as
determined in accordance with Section 6(E) of this
Code, whichever is higher, of such lands and/or
buildings.
(E) Minimum Corporate Income Tax on Domestic
Corporations. -
(1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
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when the minimum income tax is greater than the
tax computed under Subsection (A) of this Section
for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess
of the minimum corporate income tax over the
normal income tax as computed under Subsection
(A) of this Section shall be carried forward and
credited against the normal income tax for the three
(3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of
the minimum corporate income tax on any
corporation which suffers losses on account of
prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation
that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income tax in a meritorious
case.
(4) Gross Income Defined. - For purposes of applying
the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods
sold' shall include all business expenses directly
incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern , "cost of goods
sold' shall include the invoice cost of the goods sold,
plus import duties, freight in transporting the goods to
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the place where the goods are actually sold including
insurance while the goods are in transit.
For a manufacturing concern, cost of "goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses
necessarily incurred to provide the services required by
the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of
supplies: Provided, however, That in the case of banks,
"cost of services" shall include interest expense.
6.3 Foreign Corporations (NIRC 28)
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this
Code, a corporation organized, authorized, or
existing under the laws of any foreign country,
engaged in trade or business within the Philippines,
shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all
sources within the Philippines: Provided, That
effective January 1, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January
1, 1999, the rate shall be thirty-three percent
(33%), and effective January 1, 2000 and
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thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be
computed without regard to the specific date when
sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for
each month of the period.
The reduced corporate income tax rates shall be
applied on the amount computed by multiplying the
number of months covered by the new rates within
the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
Provided, however, That a resident foreign
corporation shall be granted the option to be taxed
at fifteen percent (15%) on gross income under the
same conditions, as provided in Section 27 (A).
(2) Minimum Corporate Income Tax on Resident Foreign
Corporations. - A minimum corporate income tax of
two percent (2%) of gross income, as prescribed
under Section 27 (E) of this Code, shall be imposed,
under the same conditions, on a resident foreign
corporation taxable under paragraph (1) of this
Subsection.
(3) International Carrier. - An international carrier doing
business in the Philippines shall pay a tax of two and
one-half percent (2 1/2%) on its "Gross Philippine
Billings" as defined hereunder:
(a) International Air Carrier. - "Gross Philippine
Billings" refers to the amount of gross revenue
derived from carriage of persons, excess
baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted
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flight, irrespective of the place of sale or issue
and the place of payment of the ticket or
passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to
another international airline form part of the
Gross Philippine Billings if the passenger boards
a plane in a port or point in the Philippines:
Provided, further, That for a flight which
originates from the Philippines, but
transshipment of passenger takes place at any
port outside the Philippines on another airline,
only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment shall
form part of Gross Philippine Billings.
(b) International Shipping. - "Gross Philippine
Billings" means gross revenue whether for
passenger, cargo or mail originating from the
Philippines up to final destination, regardless of
the place of sale or payments of the passage or
freight documents.
(4) Offshore Banking Units. - The provisions of any law
to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
offshore banking units, including any interest income
derived from foreign currency loans granted to
residents, shall be subject to a final income tax at
the rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore
banking units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be
based on the total profits applied or earmarked for
remittance without any deduction for the tax
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component thereof (except those activities which
are registered with the Philippine Economic Zone
Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of
this Code: provided, that interests, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received by a foreign corporation during each
taxable year from all sources within the Philippines
shall not be treated as branch profits unless the
same are effectively connected with the conduct of
its trade or business in the Philippines.
(6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies.
(a) Regional or area headquarters as defined in
Section 22(DD) shall not be subject to income
tax.
(b) Regional operating headquarters as defined in
Section 22(EE) shall pay a tax of ten percent
(10%) of their taxable income.
(7) Tax on Certain Incomes Received by a Resident
Foreign Corporation. -
(a) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. -
Interest from any currency bank deposit and
yield or any other monetary benefit from deposit
substitutes and from trust funds and similar
arrangements and royalties derived from
sources within the Philippines shall be subject to
a final income tax at the rate of twenty percent
(20%) of such interest: Provided, however, That
interest income derived by a resident foreign
corporation from a depository bank under the
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Atty. Jose Cochingyan III
expanded foreign currency deposit system shall
be subject to a final income tax at the rate of
seven and one-half percent (7 1/2%) of such
interest income.
(b) Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign
currency deposit system from foreign currency
transactions with local commercial banks
including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency
deposit system units, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be
subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals
or corporations, from transactions with
depository banks under the expanded system
shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at
the rates prescribed below is hereby imposed
upon the net capital gains realized during the
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000...... 5%
On any amount in excess of P100,000. 10%
(d) Intercorporate Dividends. - Dividends received
by a resident foreign corporation from a
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domestic corporation liable to tax under this
Code shall not be subject to tax under this Title.
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this
Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income
received during each taxable year from all sources
within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or
casual gains, profits and income, and capital gains,
except capital gains subject to tax under
subparagraphs (C) and (d): Provided, That effective
1, 1998, the rate of income tax shall be thirty-four
percent (34%); effective January 1, 1999, the rate
shall be thirty-three percent (33%); and, effective
January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or
Distributor. - A cinematographic film owner, lessor,
or distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within
the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered
by Philippine Nationals. - A nonresident owner or
lessor of vessels shall be subject to a tax of four and
one-half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino
citizens or corporations, as approved by the
Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries
and Other Equipment. - Rentals, charters and other
fees derived by a nonresident lessor of aircraft,
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Atty. Jose Cochingyan III
machineries and other equipment shall be subject to
a tax of seven and one-half percent (7 1/2%) of
gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident
Foreign Corporation. -
(a) Interest on Foreign Loans. - A final withholding
tax at the rate of twenty percent (20%) is
hereby imposed on the amount of interest on
foreign loans contracted on or after August 1,
1986;
(b) Intercorporate Dividends. - A final withholding
tax at the rate of fifteen percent (15%) is
hereby imposed on the amount of cash and/or
property dividends received from a domestic
corporation, which shall be collected and paid as
provided in Section 57 (A) of this Code, subject
to the condition that the country in which the
nonresident foreign corporation is domiciled,
shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to
have been paid in the Philippines equivalent to
twenty percent (20%) for 1997, nineteen
percent (19%) for 1998, eighteen percent
(18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference
between the regular income tax of thirty-five
percent (35%) in 1997, thirty-four percent
(34%) in 1998, and thirty-three percent (33%)
in 1999, and thirty-two percent (32%) thereafter
on corporations and the fifteen percent (15%)
tax on dividends as provided in this
subparagraph;
(c) Capital Gains from Sale of Shares of Stock not
Traded in the Stock Exchange. - A final tax at
the rates prescribed below is hereby imposed
upon the net capital gains realized during the
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taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of
through the stock exchange:
Not over P100,000............5%
On any amount in excess of P100,000.10%
ITAD Ruling No. 086-05 (AMKOR Technology)
It is represented that ATI-US (formerly AMKOR
ELECTRONICS, INC.) is a corporation organized and existing
under the laws of the State of Pennsylvania, U.S.A. with
principal office address at 1345 Enterprise Drive, West
Chester PA 19380; that ATI-US was licensed to establish a
regional or area headquarters in the Philippines with
Securities and Exchange Commission (SEC) License No.
BSFM-064 dated May 8, 1992 per certification issued by the
SEC dated August 29, 2002; that the activities of the
regional or area headquarters shall be limited to acting as
supervisory, communications and coordinating center for its
affiliates, subsidiaries or branches in the region, and that it
will not derive any income from sources within the
Philippines and will not participate in any manner in the
management of any subsidiary or branch of the foreign
entity in the Philippines; that P1/P2 and P3/P4 are
corporations organized and existing under and by virtue of
Philippine laws; that both companies are wholly-owned
subsidiaries of P-Four, Inc. (PFI) and C.I.L. Ltd. (CIL), with a
respective sixty-forty percent (60-40%) ownership
distribution in both subsidiaries; that PFI is a corporation
organized and existing under Philippine laws whereas CIL is
a non-resident foreign corporation duly organized and
existing under and by virtue of the laws of the Cayman
Islands; that both PFI and CIL are in turn owned by ATI-US.
It is further represented that on January 01, 2000, an
Agreement was executed and entered into between ATI-US
and its affiliates, which include P1/P2 and P3/P4, to provide
mechanisms for the sharing of costs, risks and rights among
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Atty. Jose Cochingyan III
the participants therein with respect to certain research and
development activities; that under the said Agreement, a
Research Program, wherein research and development
activities which are to be performed predominantly within
the United States, will be undertaken by ATI-US to develop
new intellectual property rights or "developed technology" 1
as the term is defined in the Agreement; that the
participants shall retain all beneficial and economic title and
interest to all "developed technology" under the Agreement
while the bare legal title thereto shall be in the name of any
participant identified under any subsequent agreement as
one which is best able to protect the intellectual property
rights associated with the "developed technology", holding
said bare legal title on behalf of the other participants; that
each participant is granted full rights to utilize any and all
"developed technology" or other intangibles resulting from
the efforts and expenditures covered by the Agreement; that
this interest in "developed technology" may be relinquished,
abandoned or transferred to another participant where
actual benefit therefrom is identified; that such benefited
participant shall make an arm's length consideration to the
relinquishing participant; that the parties shall share among
themselves the cost and risk of research and development
using a reasonable allocation formula based on the benefits
anticipated to be derived by each party in exploiting the
"developed technology;" that the cost which may be
identified as potentially benefiting only one participant shall
be allocated solely to that participant and removed from the
pool of costs to be shared by all participants; that such cost
allocation shall be subject to adjustments to account for
changes in economic conditions and the business operations
and practices of the parties so that the allocations shall
continue to reflect a reasonable effort to share costs in
proportion to benefits over time; that the research and
development costs ("R&D Costs") which are to be allocated
among the participants shall consist mainly of the following:
(i) All cost for the conduct by ATI-US of the Research
Program and the development of intangibles thereunder
as determined under U.S. generally accepted accounting
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principles, including the costs and risk of unsuccessful
related development, support costs and corporate
overhead costs, and any legal costs, court costs, and
other costs incurred in defense of any intangibles
developed in the course of the Research Program;
(ii) Amounts paid or incurred by ATI-US for the acquisition,
by purchase, license, or otherwise, of technology
relating to a Product which is, or thereafter becomes
covered by the Agreement;
(iii) Costs for product design and development services in
support of the products manufactured by Participant,
performed exclusively outside of the participant's
country of organization;
that the cost advanced by ATI-US with respect to the
Research Program shall be reimbursed by each participant
identified to derive benefit therefrom within sixty (60) days
following the close of an R&D Calendar Year as defined in
the Agreement; that following the close of each calendar
quarter, or at such other times as agreed by the parties,
each party shall make interim payments of the estimated
cost sharing amount to ATI-US with respect to the cost
incurred by ATI-US during such period; that such interim
payments shall be an advance payment of the amount
ultimately determined to be payable by the respective
parties under the Agreement for the R&D Calendar Year;
that the parties shall likewise share in the risks of failure and
financial loss associated with the Research Program and risk
arising directly as a result of the development and/or
exploitation of intangibles including the risk of loss as a
result of product liability, patent infringement and other
claims which may arise in connection with the development,
manufacture or sale of products utilizing the intangible.
In the light of the above representations, you now request
for a ruling that: (1) the cost-sharing payments to be made
by P1/P2 and P3/P4 to ATI-US for the cost of the research
and development activities pursuant to the Agreement are
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not considered as royalties subject to Philippine tax under
the RP-US tax treaty; and (2) that the said payments being
mere reimbursements of cost or that the same constitute
gross income not attributable to a permanent establishment
of ATI-US in addition to being foreign-source income, shall
not be subject to Philippine withholding tax.
In the instant case, no transfer of technology of which ATI-
US has proprietary interest or know-how or any undivulged
technical information will take place but rather a
development thereof, with the corresponding rights or
interest being retained by all participants in the venture.
Article VI of the Agreement provides that the participating
corporations will own all beneficial and economic title and
interest to all Developed Technology. Thus, if as a result of
the venture, ATI-US develops new intellectual property
right/technology, the contributing corporations, which
includes P1/P2 and P3/P4 shall have the beneficial and
economic title and interest to such newly developed
technology. As beneficial and economic title holders, each
participating corporation has full rights to utilize, relinquish,
abandon or transfer said technology in the concept of an
owner and not as a mere user or recipient of all undivulged
technical information concerning industrial, commercial, or
scientific experience for a consideration. Such being the
case, the said cost-sharing payments by P1/P2 and P3/P4
cannot be considered "royalties" under the RP-US tax treaty.
Whether the said cost-sharing payments are reimbursement
of cost or gross income not attributable to a permanent
establishment of ATI-US in addition to being foreign-source
income, not subject to Philippine income tax.
Based on the representation, the research and development
activities by ATI-US are to be performed predominantly
within the United States, then the RP-US tax treaty finds no
application inasmuch as the herein transaction does not
result in a case of double taxation for which a tax treaty
relief is sought. Considering that the services of ATI-US to
P1/P2 and P3/P4 under the said Service Agreement are
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rendered outside the Philippines, the payments by P1/P2 and
P3/P4 to ATI-US are considered income derived from
sources outside the Philippines.
In view thereof, this Office is of the opinion and so holds
that the subject amounts paid by P1/P2 and P3/P4 to ATI-US
are in consideration for services performed in the US and, as
such, are considered income derived from sources outside
the Philippines and therefore, are not subject to Philippine
income tax and consequently to withholding tax.
However, while the above subject payments are considered
as reimbursements by P1/P2 and P3/P4 of costs advanced
by ATI-US with respect to the Research Program not subject
to tax in the Philippines, the matter of identifying the said
expense of P1/P2 and P3/P4 as accurately pertaining to the
said Research and Development Cost Sharing Agreement is
a question of fact subject to confirmation through audit or
investigation, as the case may be.
6.4 Minimum Corporate Income Tax
NIRC 27(E) & 28(A)(2)
(E) Minimum Corporate Income Tax on Domestic
Corporations. -
(1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than the
tax computed under Subsection (A) of this Section
for the taxable year.
(2) Carry Forward of Excess Minimum Tax. - Any excess
of the minimum corporate income tax over the
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normal income tax as computed under Subsection
(A) of this Section shall be carried forward and
credited against the normal income tax for the three
(3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of
the minimum corporate income tax on any
corporation which suffers losses on account of
prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation
that shall define the terms and conditions under
which he may suspend the imposition of the
minimum corporate income tax in a meritorious
case.
(4) Gross Income Defined. - For purposes of applying
the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods
sold' shall include all business expenses directly
incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, "cost of goods
sold' shall include the invoice cost of the goods sold,
plus import duties, freight in transporting the goods to
the place where the goods are actually sold including
insurance while the goods are in transit.
For a manufacturing concern, cost of "goods
manufactured and sold" shall include all costs of
production of finished goods, such as raw materials
used, direct labor and manufacturing overhead, freight
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cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service,
'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses
necessarily incurred to provide the services required by
the customers and clients including (A) salaries and
employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of
supplies: Provided, however, That in the case of banks,
"cost of services" shall include interest expense.
XXX
Minimum Corporate Income Tax on Resident Foreign
Corporations. - A minimum corporate income tax of two
percent (2%) of gross income, as prescribed under
Section 27 (E) of this Code, shall be imposed, under the
same conditions, on a resident foreign corporation
taxable under paragraph (1) of this Subsection.
RR No. 09-98 (Amended by RR No. 12-2007, RMC 24-2008)
REVENUE REGULATIONS NO. 9-98 issued September 2,
1998 prescribes the regulations to implement RA No. 8424
relative to the imposition of the Minimum Corporate Income
Tax (MCIT) on domestic corporations and resident foreign
corporations. Specifically, an MCIT of 2% of the gross
income as of the end of the taxable year is imposed upon
any domestic corporations beginning the 4th taxable year
immediately following the taxable year in which such
corporation commenced its business operations. The MCIT
will be imposed whenever such operation has zero or
negative taxable income or whenever the amount of MCIT is
greater than the normal income tax due from such
operation. In the case of a domestic corporation whose
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operations or activities are partly covered by the regular
income tax system and partly covered under a special
income tax system, the MCIT will apply on operations
covered by the regular income tax system.
The Regulations will apply to domestic and resident foreign
corporations on their aforementioned taxable income derived
beginning January 1, 1998 pursuant to the pertinent
provisions of RA 8424, provided, however, that corporations
using the fiscal year accounting period and which are subject
to MCIT on income derived pertaining to any month or
months of the year 1998 will not be imposed with penalties
for late payment of the tax.
REVENUE REGULATIONS NO. 12-2007 issued on October 17,
2007 amends certain provisions of Revenue Regulations
(RR) No. 9-98 relative to the due date within which to pay
the Minimum Corporate Income Tax (MCIT) imposed on
domestic corporations and resident foreign corporations
pursuant to Sections 27(E) and 28(A)(2) of the Tax Code, as
amended.
An MCIT of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year,
depending on the accounting period employed) is imposed
upon any domestic corporation beginning on the 4th taxable
year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of MCIT is
greater than the normal Income Tax due from such
corporation.
Notwithstanding the above provision, however, the
computation and the payment of MCIT, shall likewise apply
at the time of filing the quarterly corporate Income Tax as
prescribed under Sections 75 and 77 of the Tax Code, as
amended.
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Thus, in the computation of the tax due for the taxable
quarter, if the computed quarterly MCIT is higher than the
quarterly normal Income Tax, the tax due to be paid for
such taxable quarter at the time of filing the quarterly
corporate Income Tax Return (ITR) shall be the MCIT, which
is 2% of the gross income as of the end of the taxable
quarter. In the payment of said quarterly MCIT, excess MCIT
from the previous taxable year/s shall not be allowed to be
credited. Expanded withholding tax, quarterly corporate
Income Tax payments under the normal Income Tax and the
MCIT paid in the previous taxable quarter/s are allowed to
be applied against the quarterly MCIT due.
The quarterly MCIT paid on the quarterly ITR shall be
credited against the normal Income Tax at year end if in the
preparation and filing of the annual ITR and in the final
computation of the annual Income Tax due, it appears that
the normal Income Tax due is higher than the computed
annual MCIT. Moreover, in addition to the quarterly MCIT
paid and quarterly normal Income Tax payments in the
taxable quarters of the same taxable year, excess MCIT in
the prior year/s (subject to the prescriptive period allowed
for its creditability), expanded withholding taxes in the
current year and excess expanded withholding taxes in the
prior year shall be allowed to be credited against the annual
Income Tax computed under the normal Income Tax rules.
However, if in the computation of the annual Income Tax
due, the computed annual MCIT due appears to be higher
than the annual normal Income Tax due, what may be
credited against the annual MCIT due shall only be the
quarterly MCIT payments of the current taxable quarters,
the quarterly normal Income Tax payments in the quarters
of the current taxable year, the expanded withholding taxes
in the current year and excess expanded withholding taxes
in the prior year. Excess MCIT from the previous taxable
year/s shall not be allowed to be credited therefrom as the
same can only be applied against normal Income Tax.
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For purposes of these Regulations, the term, normal
Income Tax means the income tax rates prescribed under
Sections 27(A) and 28(A)(1) of the Code at 34% on January
1, 1998; 33% effective January 1, 1999; at 32% effective
January 1, 2000 and 35% effective November 1, 2005 and
thereafter. Provided, however, that effective January 1, 2009
the rate of Income Tax shall be 30% pursuant to RA No.
9337.
The taxpayer shall pay the MCIT whenever it is greater than
the regular or normal corporate Income Tax which is
imposed under Sections 27(A) and 28(A)(1) of the Tax Code.
The final comparison between the normal Income Tax
payable by the corporation and the MCIT shall be made at
the end of the taxable year and the payable or excess
payment in the annual ITR shall be computed taking into
consideration corporate Income Tax payment made at the
time of filing of quarterly corporate ITR whether this be
MCIT or normal Income Tax.
The term gross income means gross sales less sales
returns, discounts and allowances and cost of goods sold, in
case of sale of goods, or gross revenue less sales returns,
discounts, allowances and cost of services/direct cost, in
case of sale of services. This rule, notwithstanding, if apart
from deriving income from these core business activities
there are other
1 computed for the same period. Excess normal Income Tax
items of gross income realized or earned by the taxpayer
during the taxable period which are subject to the normal
corporate Income Tax, the same items must be included as
part of the taxpayers gross income for computing MCIT.
This means that the term gross income will also include all
items of gross income enumerated under Section 32(A) of
the Tax Code, as amended, except income exempt from
Income Tax and income subject to final withholding tax.
The MCIT shall be paid in the same manner prescribed for
the payment of the normal corporate Income Tax which is
on a quarterly and on a yearly basis. It shall be covered by a
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tax return designed for the purpose, which will be submitted
together with the corporation's annual final adjustment ITR.
Domestic corporations shall be required to pay the MCIT on
a quarterly basis, pursuant to the provisions of Sections 75
and 77 of the Tax Code in relation to Section 245 of the
same Code, as amended.
In the filing of the quarterly ITR for the taxable quarter
which is due for filing after the effectivity of these
Regulations, the computation of the MCIT shall be done on
cumulative basis covering not only the current taxable
quarter but also the previous taxable quarters of the same
taxable year. Such computed MCIT shall be compared with
the cumulative normal Income Tax, whereupon the higher
amount between the two shall be the basis of the quarterly
Income Tax payment to be made for said taxable quarter.
Thus, for those using calendar year basis accounting period,
in the filing of the quarterly ITR for the third quarter ended
September 2007, which is due for filing on or before
November 29, 2007, the gross income for the 1st and 2nd
quarters shall be added to the gross income for the quarter
ended September 2007, the total of which shall be the basis
of the 2% MCIT which shall then be compared with the
computed cumulative normal Income Tax. The cumulative
MCIT for the three (3) said quarters shall be paid in case the
same appears to be higher than the normal Income Tax
carried over from previous taxable year and payments made
for the previous quarters of the same taxable year, including
withholding tax credits claimed for said previous quarters of
same taxable year shall be credited against the computed
tax due in the cumulative quarterly tax return.
REVENUE MEMORANDUM CIRCULAR 024-08 As provided for
by Section 27 (E) and Section 28 (A) (2) of the 1997 Tax
Code, as amended, in computing the gross income subject
to the 2% MCIT for sellers of services, "'gross income'
means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean
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all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of
supplies: . . .".
As can be gleaned from the above definition of "cost of
services" of the sellers of services, "direct costs and
expenses" shall only pertain to those costs exclusively and
directly incurred in relation to the revenue realized by the
sellers of services. In fine, these refer to costs which are
considered indispensable to the earning of the revenue such
that without such costs, no revenue can be generated. Thus,
expenses and other costs dispensed outside the ambit of
what has been defined herein as "direct costs and expenses"
are not items allowed for inclusion to "cost of services", for
purposes of computing the gross income subject to the 2%
MCIT.
Manila Banking Corp v CIR
Manila Banking Corporation (MBC) was incorporated in 1961 and since then
engaged in commercial banking until 1987 when the Bangko Sentral ng
Pilipinas (BSP) has prohibited it to operate as such because of insolvency.
After 12 years or on 1999, the BSP has authorized MBC to operate as a thrift
bank. MBC wrote the BIR requesting a ruling in its favor to entitle it the 4-
year grace period reckoned from 1999. The BIR issued a favorable ruling and
held that the MCIT may be imposed not earlier than 2002, i.e. the fourth
taxable year beginning 1999.
Pursuant to this ruling, MBC filed with the BIR a claim for refund of the sum
of PhP 33.8 million erroneously paid as MICT for taxable year 1999. Due to
BIRs inaction, MBC filed with the CTA a petition for review. The CTA denied
MBCs petition and held that it is not entitled to the 4-year grace period
because it was not a new corporation.
The SC ruled in favor MBC and cited Rev Reg. No. 4-95 which provided that
the date of the commencement of operations of a thrift bank is the date it
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was registered with the SEC or the date when the Certificate of Authority to
Operate was issued by the BSP, whichever comes later. In the case at bar,
MBC was issued by the BIR a Certificate of Authority to Operate as a thrift
bank and filed with the SEC its Articles of Incorporation, which was
approved, in 1999.
BIR Ruling DA-445-05 (Global Brands)
GBCI is incorporated in Philippines with its first fiscal year end on
March 31, 2001 (same time as its BIR registration). Now asks for the
period when MCIT become applicable.
MCIT is counted after the end of the taxable year (either calendar or
fiscal) of the commencement of the corporation's business
operations.
Commencement of taxable year shall be the year in which the
domestic corporation registered with the Bureau of Internal Revenue
(BIR).
Hence, since registration was on the fiscal year ended March 2001,
application of MCIT should be on the fiscal year ended March 2005.
6.5 Regional or Area HQ & Regional Operating HQ
RA 8756 6
Section 6. Chapter III of the same Code is hereby amended
and designated as Chapter IV. Articles 63, 64, 65, 66 and 67
are hereby amended to read as follows:
"CHAPTER IV
"INCENTIVES TO REGIONAL OR AREA HEADQUARTERS AND
REGIONAL OPERATING HEADQUARTERS
"Art. 64. Corporate Income Tax Incentive to Regional or
Area Headquarters and Regional Operating Headquarters. -
Regional or area headquarters established in the Philippines
by multinational companies and which headquarters do not
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earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for
their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets shall not be subject to
income tax. Regional operating headquarters shall be
subject to a tax rate of ten percent (10%) of their taxable
income as provided for under the National Internal Revenue
Code, as amended by Republic Act No. 8424: Provided, That
any income derived from Philippine sources by the ROHQ
when remitted to the parent company shall be subject to the
tax on branch profit remittances as provided for in Section
28(a)(5) of the National Internal Revenue Code.
"Art. 65. Value-Added Tax. - The regional or area
headquarters established in the Philippines by multinational
companies shall be exempted from the value-added tax. In
addition, the sale or lease of goods and property and the
rendition of services to regional or area headquarters shall
be subject to zero percent (0%) VAT rate as provided for in
the National Internal Revenue Code, as amended.
"Regional operating headquarters shall be subject to the ten
percent (10%) value-added tax as provided for under the
National Internal Revenue Code, as amended.
"Art. 66. Exemption From All Kinds of Local Taxes, Fees, or
Charges. - The regional or area headquarters and regional
operating headquarters of multinational companies shall be
exempt from all kinds of local taxes, fees, or charges
imposed by a local government unit except real property tax
on land improvements and equipment.
"Art. 67. Tax and Duty Free Importation of Training
Materials and Equipment; Importation of Motor Vehicles. -
Regional or area headquarters and regional operating
headquarters shall enjoy tax and duty free importation of
equipment and materials for training and conferences which
are needed and used solely for their functions as regional or
area headquarters or regional operating headquarters and
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which are not locally available subject to the prior approval
of the Board of Investments.
"The sale or disposition of equipment within two (2) years
after importation, entered tax and duty free, shall require
prior approval of the Board of Investments and prior
payment of applicable taxes and duties waived in favor of
RHQ/ROHQ.
"Regional or area headquarters and regional operating
headquarters shall be entitled to the importation of new
motor vehicles subject to the payment of the corresponding
taxes and duties.
"BOOK IV
"INCENTIVES TO MULTINATIONAL COMPANIES
ESTABLISHING REGIONAL WAREHOUSES TO SUPPLY SPARE
PARTS, COMPONENTS, SEMI-FINISHED PRODUCTS AND
RAW MATERIALS TO THE ASIA-PACIFIC REGION AND
OTHER FOREIGN MARKETS"
NIRC 28(6)
Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. -
(a) Regional or area headquarters as defined in Section
22(DD) shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their
taxable income.
6.6 Special Provisions for Insurance Companies (NIRC 37)
(A) Special Deduction Allowed to Insurance Companies. - In the case
of insurance companies, whether domestic or foreign doing
business in the Philippines, the net additions, if any, required by
law to be made within the year to reserve funds and the sums
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other than dividends paid within the year on policy and annuity
contracts may be deducted from their gross income: Provided,
however, That the released reserve be treated as income for the
year of release.
(B) Mutual Insurance Companies. - In the case of mutual fire and
mutual employers' liability and mutual workmen's compensation
and mutual casualty insurance companies requiring their
members to make premium deposits to provide for losses and
expenses, said companies shall not return as income any portion
of the premium deposits returned to their policyholders, but shall
return as taxable income all income received by them from all
other sources plus such portion of the premium deposits as are
retained by the companies for purposes other than the payment
of losses and expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual marine insurance
companies shall include in their return of gross income, gross
premiums collected and received by them less amounts paid to
policyholders on account of premiums previously paid by them
and interest paid upon those amounts between the
ascertainment and payment thereof.
(D) Assessment Insurance Companies.- Assessment insurance
companies, whether domestic or foreign, may deduct from their
gross income the actual deposit of sums with the officers of the
Government of the Philippines pursuant to law, as additions to
guarantee or reserve funds.
6.7 Special Provisions for BOI and PEZA registered enterprises
Omnibus Investment Code, Art.39(a)
ART. 39. Incentives to Registered Enterprises. - All
registered enterprises shall be granted the following
incentives to the extent engaged in a preferred area of
investment:
RA 7916 24
(a) Income Tax Holiday. -
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(1) For six (6) years from commercial operation for
pioneer firms and four (4) years for non-pioneer
firms, new registered firms shall be fully exempt
from income taxes levied by the National
Government. Subject to such guidelines as may be
prescribed by the Board, the income tax exemption
will be extended for another year in each of the
following cases:
i. the project meets the prescribed ratio of capital
equipment to number of workers set by the
Board;
ii. utilization of indigenous raw materials at rates
set by the Board;
iii. the net foreign exchange savings or earnings
amount to at least US$500,000.00 annually
during the first three(3) years of operation.
The preceding paragraph notwithstanding, no registered
pioneer firm may avail of this incentive for a period
exceeding eight (8) years.
(2) For a period of three (3) years from commercial
operation, registered expanding firms shall be
entitled to an exemption from income taxes levied
by the National Government proportionate to their
expansion under such terms and conditions as the
Board may determine; Provided, however, That
during the period within which this incentive is
availed of by the expanding firm it shall not be
entitled to additional deduction for incremental labor
expense.
(3) The Provision of Article 7 (14) notwithstanding,
registered firms shall not be entitled to any
extension of this incentive.
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Except for real property taxes on land owned by developers,
no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu
thereof, five percent (5%) of the gross income earned by all
business enterprises within the ECOZONE shall be paid and
remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by
the business establishments to the treasurers office of
the municipality or city where the enterprise is located.
x------------------------------------x
7. CAPITAL GAINS AND LOSSES (NIRC 39)
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term "capital assets" means
property held by the taxpayer (whether or not
connected with his trade or business), but does not
include stock in trade of the taxpayer or other
property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property
used in the trade or business, of a character which
is subject to the allowance for depreciation provided
in Subsection (F) of Section 34; or real property
used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term "net capital gain"
means the excess of the gains from sales or
exchanges of capital assets over the losses from
such sales or exchanges.
(3) Net Capital Loss. - The term "net capital loss" means
the excess of the losses from sales or exchanges of
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capital assets over the gains from such sales or
exchanges.
(B) Percentage Taken Into Account. - In the case of a
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale
or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss,
and net income:
(1) One hundred percent (100%) if the capital asset has
been held for not more than twelve (12) months;
and
(2) Fifty percent (50%) if the capital asset has been
held for more than twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or
exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a
bank or trust company incorporated under the laws of
the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture, note,
or certificate or other evidence of indebtedness issued
by any corporation (including one issued by a
government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting
from such sale shall not be subject to the foregoing
limitation and shall not be included in determining the
applicability of such limitation to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other
than a corporation, sustains in any taxable year a net
capital loss, such loss (in an amount not in excess of the
net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or
exchange of a capital asset held for not more than
twelve (12) months.
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(E) Retirement of Bonds, Etc. - For purposes of this Title,
amounts received by the holder upon the retirement of
bonds, debentures, notes or certificates or other
evidences of indebtedness issued by any corporation
(including those issued by a government or political
subdivision thereof) with interest coupons or in
registered form, shall be considered as amounts
received in exchange therefor.
(F) Gains or Losses From Short Sales, Etc. - For purposes of
this Title -
(1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or
exchanges of capital assets; and
(2) Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be
considered as capital gains or losses.
China Banking Corp v CA
Facts:
China Banking Corp made a 53% equity investment (worth
P16M) in its HK subsidiary, First CBC Capital Asia, engaged
in financing and investment, with deposit-taking functions.
6 years later, upon examination of the books & portfolio of
petitioner, Bangko Sentral declared that First CBC was
insolvent.
Petitioner, with the approval of Bangko Sentral, wrote off its
53% investment as being worthless, thereby treating it as a
bad debt or ordinary loss deductible from its gross income.
CIR disallowed the deduction and assessed petitioner for
income tax deficiency of about P8M.
CIR averred that it should be treated as a capital loss, and
not an ordinary loss, there being no indebtedness between
petitioner and its subsidiary.
CTA ruled in favor of CIR. CA affirmed.
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Issue: W/N the loss can be considered an ordinary loss deductible
from its gross income?
Held: NO. It is a capital loss.
An equity investment is a capital asset, the sale of which
may result in a capital gain or loss. Shares of stock, when
not in the hands of one whose trade or business deals with
the sale, barter or exchange of such shares, is considered a
capital asset. Thus, when the shares become worthless, the
loss is deemed to be a capital loss.
In addition, capital losses may be deducted only to the
extent of capital gains from the sale or exchange of capital
assets. Since the equity investment does not constitute a
loan extended by petitioner to its subsidiary, nor is it a debt
subject to obligatory payment by the latter, it is rightfully
considered a long term investment, or a capital asset.
BIR Ruling No. DA-049-07 (Arquitectonica International Corp)
Arquitectonica International Corporation (the
"Arquitectonica") is a non-resident foreign corporation
organized and existing under the laws of the State of
Florida, United States engaged in the business of
manufacturing, building, purchasing, investing in, trading in,
dealing in and with, goods, wares, merchandise, real and
personal property and services of every class, kind and
description and in international trade with affiliates,
subsidiaries, or branch offices in the Asia-Pacific Region.
Arquitectonica has been engaged by domestic entities to
prepare conceptual design and schematic design for several
projects in the Philippines, the related services for which are
all performed by Arquitectonica's architects and personnel in
Miami, Florida.
In 2005, Arquitectonica acquired from Fort Bonifacio
Development Corporation (FBDC), five (5) condominium
units (Subject Units) in its project in Bonifacio Ridge
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intended to be used as temporary lodging of its architects
for their visits to the Philippines which visits, averaging 10
day man trips (including travel time), are limited to site
inspections, coordination with engineers, local architects and
other professionals, in relation to the preparation and
approval of plans for a specific project.
Due to a change in its business direction, Arquitectonica is
intending to dispose of said units and sell the same to
interested third-party buyers.
You now request for a confirmation of the following, that:
(1) The gain from the sale of the Subject Units by
Arquitectonica to third party buyers shall be subject to
35% final withholding tax pursuant to Section 4(e) of
Revenue Regulations No. 07-03 in relation to Section
28(B)(1) of the 1997 National Internal Revenue Code, as
amended by Republic Act No. 9337 (the "Tax Code").
The gain from the sale shall be the excess of the selling
price over the acquisition cost of said units.
(2) The sale by Arquitectonica of the Subject Units to third-
party buyers shall not be subject to 12% VAT imposed
under Section 109(P) of the Tax Code since said units
are not primarily held for sale or lease in the ordinary
course of business of Arquitectonica.
In reply, please be informed as follows:
(1) Under Section 28 (B) (1) of the 1997 National Internal
Revenue Code, as amended by Republic Act No. 9337
(the "Tax Code"), Arquitectonica being a non-resident
foreign corporation shall be subject to 35% on its gross
income from all source within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments
or other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains, except
capital gains realized from sale, exchange or disposition
of shares of stock in a domestic corporation not traded
in the exchange.
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It should be noted that capital and income are different.
Capital is wealth or fund; whereas income is profit or
gain or the flow of wealth. The determining factor for
the imposition of income tax is whether any gain or
profit was derived from a transaction.
In another case involving the sale of real property, albeit
by an individual, the Court of Appeals expressly stated
that the gross income in the sale of said real property is
the gain derived from said sale and not the selling price.
Further, it ruled that the acquisition cost must be
deducted from the selling price of the property, the
balance of which is the gross income subject to income
tax.
Consistent with the foregoing, the gross income in
relation to sale of real property located in the Philippines
was interpreted by Revenue Regulations No. 7-03 as the
gain from the sale thereof, i.e., the difference between
the gross selling price and the cost.
Consequently, only the gain from the sale by
Arquitectonica of the units to third-party buyers shall be
subject to 35% final withholding tax pursuant to Section
4 (e) of RR 7-03 and Section 2.57 (I) (1) of RR 2-98, as
amended in relation to Section 28 (B) (1) of the Tax
Code.
(2) With regard to the value added tax, given that the
subject units were acquired primarily for the purpose of
housing its visiting personnel and not for sale or lease in
the ordinary course of its trade or business, the
subsequent sale thereof by Arquitectonica shall not be
subject to 12% VAT.
x------------------------------------x
8. INCOME FROM SOURCES WITHIN THE PHILIPPINES
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NIRC 42
(A) Gross Income From Sources Within the Philippines. -
The following items of gross income shall be treated as
gross income from sources within the Philippines:
(1) Interests. - Interests derived from sources within the
Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents, corporate or
otherwise;
(2) Dividends. - The amount received as dividends:
(a) from a domestic corporation; and
(b) from a foreign corporation, unless less than fifty
percent (50%) of the gross income of such
foreign corporation for the three-year period
ending with the close of its taxable year
preceding the declaration of such dividends or
for such part of such period as the corporation
has been in existence) was derived from sources
within the Philippines as determined under the
provisions of this Section; but only in an amount
which bears the same ration to such dividends
as the gross income of the corporation for such
period derived from sources within the
Philippines bears to its gross income from all
sources.
(3) Services. - Compensation for labor or personal
services performed in the Philippines;
(4) Rentals and Royalties. - Rentals and royalties from
property located in the Philippines or from any
interest in such property, including rentals or
royalties for -
(a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or
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model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
(b) The use of, or the right to use in the Philippines
any industrial, commercial or scientific
equipment;
(c) The supply of scientific, technical, industrial or
commercial knowledge or information;
(d) The supply of any assistance that is ancillary
and subsidiary to, and is furnished as a means
of enabling the application or enjoyment of, any
such property or right as is mentioned in
paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such
knowledge or information as is mentioned in
paragraph (c);
(e) The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand, machinery
or other apparatus purchased from such
nonresident person;
(f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme; and
(g) The use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection
with television; and
(iii) Tapes for use in connection with radio
broadcasting.
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(5) Sale of Real Property. - Gains, profits and income
from the sale of real property located in the
Philippines; and
(6) Sale of Personal Property. - Gains; profits and
income from the sale of personal property, as
determined in Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
(1) General Rule. - From the items of gross income
specified in Subsection (A) of this Section, there
shall be deducted the expenses, losses and other
deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other
deductions effectively connected with the business
or trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items
or class of gross income: Provided, That such items
of deductions shall be allowed only if fully
substantiated by all the information necessary for its
calculation. The remainder, if any, shall be treated in
full as taxable income from sources within the
Philippines.
(2) Exception. - No deductions for interest paid or
incurred abroad shall be allowed from the item of
gross income specified in subsection (A) unless
indebtedness was actually incurred to provide funds
for use in connection with the conduct or operation
of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. -
The following items of gross income shall be treated as
income from sources without the Philippines:
(1) Interests other than those derived from sources
within the Philippines as provided in paragraph (1)
of Subsection (A) of this Section;
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(2) Dividends other than those derived from sources
within the Philippines as provided in paragraph (2)
of Subsection (A) of this Section;
(3) Compensation for labor or personal services
performed without the Philippines;
(4) Rentals or royalties from property located without
the Philippines or from any interest in such property
including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like
properties; and
(5) Gains, profits and income from the sale of real
property located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. -
From the items of gross income specified in Subsection
(C) of this Section there shall be deducted the expenses,
losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any expense, loss
or other deduction which cannot definitely be allocated
to some items or classes of gross income. The
remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without
the Philippines.- Items of gross income, expenses, losses
and deductions, other than those specified in
Subsections (A) and (C) of this Section, shall be
allocated or apportioned to sources within or without the
Philippines, under the rules and regulations prescribed
by the Secretary of Finance, upon recommendation of
the Commissioner. Where items of gross income are
separately allocated to sources within the Philippines,
there shall be deducted (for the purpose of computing
the taxable income therefrom) the expenses, losses and
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other deductions properly apportioned or allocated
thereto and a ratable part of other expenses, losses or
other deductions which cannot definitely be allocated to
some items or classes of gross income. The remainder, if
any, shall be included in full as taxable income from
sources within the Philippines. In the case of gross
income derived from sources partly within and partly
without the Philippines, the taxable income may first be
computed by deducting the expenses, losses or other
deductions apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or
classes of gross income; and the portion of such taxable
income attributable to sources within the Philippines
may be determined by processes or formulas of general
apportionment prescribed by the Secretary of Finance.
Gains, profits and income from the sale of personal
property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in
whole or in part) by the taxpayer without and sold
within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the
Philippines.
Gains, profits and income derived from the purchase of
personal property within and its sale without the
Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be
treated as derived entirely form sources within the
country in which sold: Provided, however, That gain
from the sale of shares of stock in a domestic
corporation shall be treated as derived entirely form
sources within the Philippines regardless of where the
said shares are sold. The transfer by a nonresident alien
or a foreign corporation to anyone of any share of stock
issued by a domestic corporation shall not be effected or
made in its book unless: (1) the transferor has filed with
the Commissioner a bond conditioned upon the future
payment by him of any income tax that may be due on
the gains derived from such transfer, or (2) the
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Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from
such sale or transfer have been paid. It shall be the duty
of the transferor and the corporation the shares of which
are sold or transferred, to advise the transferee of this
requirement.
(F) Definitions. - As used in this Section the words "sale" or
"sold" include "exchange" or "exchanged"; and the word
"produced" includes "created", "fabricated",
"manufactured", "extracted", "processed", "cured" or
"aged".
BIR Rul. 345-11 (Socoin Ingeniera Y Construccion)
Socoin Ingeniera Y Construccion (Spain) and Hedcor Sibulan
Inc. (Philippines) entered into several agreements (with
supplemental agreement) to complete generating equipment
supply. The project has onshore and offshore component.
Offshore component are neither subject to 30% FWT on ITx
nor to 12% VAT. This pertains to activities (procurement,
design, testing, engineering, manufacturing) done outside
the Philippines. Also, this pertains to sale where both the
perfection and consummation are done outside the
Philippines.
Onshore component are subject to both 30% FWT on ITx
and to 12% VAT. This pertains to erection of the plant,
installation and supply of the plant within the Philippines.
For both the FWT and VAT, Hedcor will be the withholding
agent.
BIR ITAD Ruling No. 39-07 (Latitude Broadband, Inc.)
This refers to your letter dated August 14, 2006 requesting
exemption from payment of income tax and value-added tax
(VAT) on the rental payment made by Latitude Broadband,
Inc. (Latitude - Philippines) to International Telecom-
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munications Union (ITU).
It is represented that ITU is a specialized agency of the
United Nations with office address at Places des Nations,
CH-1211 Geneva 20, Switzerland; that Latitude-Philippines is
a domestic corporation with office address at U2101 21st
Floor, Citibank Tower, Paseo de Roxas, Makati City 1226.
It is further represented that Latitude-Philippines, as
exhibitor, rented an exhibition space located in Hong Kong,
from ITU, as organizer of ITU Telecom World 2006, in
consideration of Swiss Francs 25,200.00 last April 6, 2006.
A foreign corporation like ITU is taxable only on income
derived from sources within the Philippines.
Such being the case and since the subject international
event will be held in Hong Kong, the rental payment to be
paid therefore by Latitude-Philippines to ITU, being income
derived from sources without the Philippines by a foreign
corporation, is not subject to Philippine income tax.
Moreover, the rental payment by Latitude-Philippines to ITU
is not subject to the twelve percent (12%) VAT.
Section 108 (A) clearly states that the sale or exchange of
services, including the use or lease of properties, subject to
VAT includes only those services that are performed in the
Philippines. Accordingly, the said rental payment for the
lease of an exhibition space in Hong Kong is therefore
exempt from VAT.
BIR Ruling No. DA-002-07 (International Hotel Licensing Company)
It is represented that Cebu Insular is a corporation
organized and existing under the laws of the Philippines;
that it entered into an International Services Agreement
(Agreement) with Marriott International, Inc., (Marriott) a
corporation organized and existing under the laws of the
United States of America; that subsequently, Marriott
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assigned its rights under the Agreement to International
Hotel, a non-resident foreign corporation organized and
existing under the laws of Luxembourg; that the Agreement
in part provides for the rendition of marketing services that
consists primarily of the promotion and marketing of Cebu
Insular in international markets; that all the marketing work
under the Agreement is to be performed outside the
Philippines; and that in consideration for such services, Cebu
Insular pays a fee equivalent to 1.5% of hotel revenues.
In reply, please be informed as follows:
1. The Marketing fees paid by Cebu Insular to International
Hotel for services rendered under the Agreement are
considered income from sources without the Philippines
under the Tax Code of 1997 and, as such, are not
subject to income tax and consequently, to withholding
tax.
Since the marketing and promotional services which
shall be provided by International Hotel for the hotel, in
relation to the promotion, marketing and publicity of the
Hotels in international markets world-wide, shall be
undertaken and rendered in areas exclusively outside
the Philippines and shall not be related to the activities
or to promotion, marketing and publicity of the Hotels
within the territorial limits of the Philippines, the
marketing fees to be paid by Cebu Insular to
International Hotel for services performed outside the
Philippines shall be considered as income from sources
without the Philippines which shall not be subject to
Philippine income tax.
2. Marketing fees to be paid for services which shall be
rendered outside the Philippines shall not be subject to
the 12% VAT since VAT is imposed only on the sale or
exchange of goods and services performed in the
Philippines, in accordance with the provisions of Section
106 and 108 of the Tax Code of 1997.
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Under Sections 106 and 108 of the Tax Code of 1997, as
amended, VAT shall be imposed only on services
performed in the Philippines. Since services to be
rendered by International Hotel to Cebu Insular under
the Agreement shall be rendered outside the Philippines,
Marketing fees paid to Cebu Insular for said services
shall not be subject to the 12% VAT.
x------------------------------------x
9. ALLOCATION OF INCOME AND DEDUCTIONS BETWEEN 2 OR
MORE CORPORATIONS OWNED/CONTROLLED BY THE SAME
INTERESTS (NIRC 50)
In the case of two or more organizations, trades or
businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner is
authorized to distribute, apportion or allocate gross income
or deductions between or among such organization, trade or
business, if he determined that such distribution,
apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such
organization, trade or business.
9.1 Transfer Pricing and Interrelated Companies
Revenue Audit Memorandum Order No. 1-98
1. BACKGROUND
1.1 The remarkable decrease in collection from
interrelated group of companies has seriously
affected the collection efforts of the Bureau.
Statistics showed that while 'inter-related
transaction' accounts for a big percentage of the
transfer of goods and services in the country, the
revenue collection from related-party groups
continue to go on a downtrend.
1.2 The magnitude of revenue lost has become so
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alarming that there is a need to immediately address
this problem. It is a fact that, because these
companies are more interested in their net income
as a whole (rather than as individual corporations)
there is a desire to minimize tax payments by taking
advantage of the loopholes in our tax system and by
making use of schemes that allow them to move
around the law in order to reduce their tax
obligations.
1.3 It is therefore necessary to conduct a joint and
coordinated examination of interrelated group of
companies in order to identify the tax avoidance
schemes and be able to prescribe the necessary
measures in order to avoid the erosion of revenues.
2. GENERAL GUIDELINES
2.1 General Procedures. The provisions laid down in
Volume 1 of the Handbook on Audit Procedures and
Techniques must be followed with respect to:
a. Basic reportorial requirements; and
b. general audit procedures and techniques.
2.2 Special Audit Procedures. In addition, focus must be
made on the following audit issues:
2.2.1 Use of tax shelters (such as a foundation or
a tax-exempt company) in order to avail of tax
exemptions or of lower tax rates;
2.2.2 Shifting income and/or expenses in favor of
a related company with special tax privileges
(e.g. BOI Incentives, Tax Holidays, and etc.);
2.2.3 Transfer pricing in inter-company supply of
goods (tangible and intangible) and services;
2.2.4 Inter-company loans and advances, and
financing arrangements where the interest
charged for the use of money is not at arm's
length;
2.2.5 Arbitrary cost-sharing arrangements for
common expenses;
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2.2.6 Tax avoidance through resale and agency
arrangements; and
2.2.7 Thin capitalization and earning stripping.
2.3 Use of Section 50 of the NIRC, as amended
2.3.1 The authority for allocating income and
expenses between or among related parties is
laid down in Section 50 of the NIRC, as
amended. This Section gives the Commissioner
of Internal Revenue the authority to make
allocation of income and expenses between or
among controlled group of companies, if a
related taxpayer has not reported its true
taxable income.
2.3.2 The purpose of Section 50 is to ensure that
taxpayers clearly reflect income attributable to
controlled transactions and to prevent the
avoidance of taxes with respect to such
transactions. It places a controlled taxpayer in
tax parity with an uncontrolled taxpayer by
determining the arm's-length price of inter-
company transactions.
2.4 Determination of Arm's Length Price
a. The method to be used in determining the arm's-
length price depends on the type of transaction
whether the transaction involves a transfer of
property, services, loans, advances, rentals or other
arrangements. Accordingly, proper judgment must
be used taking into consideration the peculiarity of
the transaction and the presence of available
information that would reliably determine the correct
income of a controlled taxpayer.
b. The different methods of determining the arm's
length price of a controlled transaction under the
OECD Rules on transfer pricing may be used as a
reference. This includes the use of Comparable
Uncontrolled Price Method, Resale Method, Cost-plus
Method and Gross Profit Margin Method (these are
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discussed in detail in the next Section).
c. In addition, the following must be considered:
Data and Assumptions consider the completeness
and accuracy of available data and information and
the reliability of assumptions that are to be made.
Comparability consider similar transactions
between unrelated parties. Factors of comparability
to be considered in the examination include:
a. Functional analysis factors such as product
design and engineering, manufacturing,
production and process, marketing and
distribution, advertising and etc.
b. Contractual terms this include sales and
purchase agreements, volume, nature of
warranties, credit and payment terms and other
commercial arrangements.
c. Risks market risks including fluctuations in
demand, financial risks, collection risk and
commercial risks.
d. Economic conditions refers to the prevailing
conditions in the market.
2.5 Definition of Terms
2.5.2 The term 'controlled' for purposes of this
RAMO shall mean any kind of control, direct or
indirect, whether legally enforceable and
however exercisable or exercised. It is the
reality of the control which is decisive, not its
form or the mode of its exercise or ownership. A
presumption of control arises if income and
expenses have been arbitrarily shifted.
2.5.3 The term 'controlled taxpayer' means any
one or two or more organizations or trade, or
businesses owned or controlled directly or
indirectly by the same interests;
2.5.4 The term 'true taxable income' means, the
taxable income which would have been reported
by the controlled taxpayer, had it in the conduct
of its affairs dealt with the other member or
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members of the group at arm's-length.
3. AUDIT PROCEDURES
3.1 Transfer Pricing in interrelated supply of goods or
services. This is relevant if one of the related-party
enjoys certain privileges such as tax exemption,
lower tax rates, incentives, or is a losing company.
3.1.1 In General. The method to be used in
determining the arm's-length price of a
controlled transaction shall rely primarily on the
best judgment of the examiner after taking into
consideration the prevailing circumstances as
well as the availability of information at the time
of transaction.
3.1.2 As a guide, the methods under the OECD
Guidelines on transfer Pricing may be used, as
follows:
a. The comparable uncontrolled price method
(CUP) this evaluates the arm's length by
reference to the amount charged in a
comparable uncontrolled transaction. In
evaluating comparability, consider the
following:
trademark
product differences
geographical differences, and
extraordinary market conditions;
b. The Resale Price Method (RPM) it
evaluates arm's length by reference to the
gross profit margin realized in comparable
transactions.
c. The Cost Plus Method (CPM) it evaluates
the arm's-length by adding the appropriate
gross profit to the controlled taxpayer's cost
of producing the property involved in the
controlled transaction and then impose the
applicable profit rate.
d. The Profit Split Method this is done
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simply by dividing the profit between the
members involved in the transaction taking
into consideration the extent of their
participation in the realization of the
transaction.
3.2 Loans and Advances, and financing arrangements
between or among related parties
3.2.1. In General. When one member of a group
makes a loan or advance directly or indirectly to,
or otherwise becomes a creditor of another
member and either party charges an interest
which is not at arm's length, there may be a tax
advantage to either the lender or borrower.
3.2.2 Loans and Advances may be in the form of :
a. Bona fide indebtedness such as loans or
advances of money or other considerations;
b. Indebtedness arising in the ordinary course
of business from sales, leases, or the
rendition of services by and between
members of the group, or any other similar
extension of credit;
c. Alleged indebtedness
For purposes of this Section, an "arm's length
rate of interest" is the rate of interest which
would have been charged in independent
transactions between unrelated parties under
similar circumstances.
3.2.3 Financing Arrangements.
3.2.3.1 A common element in related-party
groups is the presence of a finance company
(usually a holding company) to provide
financial services for the members of the
group.
3.2.3.2 Financial services by a holding company
may range from serving as a central lender
for the group, in which capacity, it may
borrow funds from unrelated financial
institutions and on-loan such amounts to its
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subsidiaries. It may also perform financial
intermediary services for the group including
factoring and hedging.
3.2.3.3 Where one member of a group of
controlled entities makes a loan or advance
directly or indirectly, or otherwise becomes
the creditor of another member of such
group, an arm's length price for the use of
money should be charged. The same is true
in the case of indebtedness arising in the
ordinary course of business such as sales,
leases, provision of services and other
similar extension of credits.
3.3 Performance of Services for Another
3.3.1 In general under this scheme, one
member of the group performs marketing,
managerial, administrative, technical or other
services for the benefit of, or on behalf of
another member of the group without charge or
at a charge which is not arm's-length.
3.3.2 To determine the arm's length price for the
service, the "Benefit Test" may be considered.
Under this test, the direct benefit to the member
which received the service must be considered.
It is necessary to take into account on some
reasonable basis all the costs or deductions
which are directly or indirectly related to the
service performed.
3.3.3 Where tangible or intangible property is
transferred, sold, assigned, loaned, leased or
otherwise made available in any manner by one
member of a group to another member of the
group and services are rendered by the
transferor in connection with such transfer, the
services rendered in such transaction, provided
it is not ancillary, must be valued.
3.4 Sharing of Costs
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3.4.1 In general. A cost sharing arrangement is an
agreement under which the parties agree to
share the costs in proportion to their respective
share of anticipated benefits. This is very
common in joint undertaking and in expenses
such as research and development, office and
factory spaces, legal and consultancy services
and etc.
3.4.2 In determining the appropriateness of the
sharing arrangement, factors such as benefits-
received, size of the company, participation in
the venture, and etc. should be considered.
BIR Ruling No. DA-667-06 (Koppers Wood Products)
KWPPL-Philippine Branch (formerly Koppers Timber
Preservation Pty. Ltd.) is a corporation duly registered with
the Securities and Exchange Commission (SEC) as Philippine
branch of KWPPL-Australia, a foreign corporation duly
organized and existing under the laws of Republic of New
South Wales. Its is primarily engaged in the business of
selling treated timber and in particular treated poles to
electricity and telecommunication companies on a whole
basis.
KWPPL-Australia, as a parent-company, incurs certain
overhead expenses in connection with the finance,
administration, research and development, all of which
directly benefit its branches all over the world, including the
Philippines, which cannot be definitely allocated or identified
with the operations of a single branch. Due to this, KWPPL-
Australia charges a ratable portion of the said overhead
expenses to its branches, including the Philippines. The
share allocated to KWPPL-Philippine Branch is computed
based on ratio which KWPPL-Philippine Branch Sales bears
to Head Office Sales and evidenced by an external auditor's
certificate containing the necessary information under
Revenue Regulations No. 16-86.
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Based on the foregoing, you now request for confirmation of
your opinion that:
1. A branch office's ratable share in the overhead expenses
incurred by its parent company is a valid business
expense under pertinent Philippine tax laws, rules and
regulations; and
2. The remittance made by a branch office to its parent
company, representing its ratable share in the overhead
expenses incurred by the said parent company, being a
mere reimbursement, is likewise not subject to any
Philippine tax.
In reply thereto, please be informed, as follows:
1. Expenditures made by a foreign corporation in
conducting its business are deductible in computing its
taxable income from sources within the Philippines only
when allocable to the production of income from sources
within the Philippines or where a ratable part of the
general expenditures is apportioned to income from
sources within the Philippines. The net income of a
resident foreign corporation, is therefore determined by
deducting from the items of gross income specified in
Section 42 (E) [formerly Section 37(a)] of the National
Internal Revenue Code, as amended, treated as income
from sources within the Philippines, the expenses,
losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other
expenses, losses, or deductions which cannot definitely
be allocated to some item or class of gross income. The
remainder, if any, is included in full as net income from
sources within the Philippines. The ratable part is based
upon the ratio of gross income from sources within the
Philippines to the total gross income.
In view thereof, this Office hereby confirms your opinion
that a branch office's ratable share in the overhead
expenses incurred by its parent company is a valid
business expense under pertinent Philippine tax laws,
rules and regulations.
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Accordingly, prior to the claim of a branch's share from
worldwide overhead expenses as a deduction from its
gross income, it must provide the necessary documents
as required under the aforesaid regulations.
2. The remittance made by the KWPPL-Philippine Branch
represents the payment of its ratable share in the
expenses of the head office. Such payment is a mere
reimbursement of expenses incurred by its Head Office
(HO) or parent company through the cost sharing
arrangement. The said payment is made in order to
satisfy an existing obligation, that is, KWPPL-Philippine
Branch's share in head office expenses, and not to
distribute some of its earnings. This remittance is not
meant to transfer profits, income or revenues of KWPPL-
Philippine Branch to KWPPL-Australia. (BIR Ruling No.
197-82 dated June 17, 1982)
Such being the case, since the remittance discussed
above only represents the cost sharing arrangement and
not transfer of profits, income or revenues by a KWPPL-
Philippine Branch to KWPPL-Australia, the same is not
subject to income tax or withholding tax.
Moreover, for the expenses to be deductible on the part
of KWPPL-Philippine Branch, it is understood that
KWPPL-Australia and KWPPL-Philippine Branch have
exerted reasonable efforts to ensure that the method of
allocation and charges is consistent with the arm's
length principle as may be determined through adequate
documentation. Finally, in the event that transfer pricing
regulations implementing Section 50 of the Tax Code of
1997, as amended, are issued by the BIR, the parties
shall comply with the requirements thereof.
BIR Ruling No. DA-596-06 (Marubeni Corporation)
It is represented that MC is a corporation duly organized and
existing under the laws of Japan with principal business
address at 4-2 Ohtemachi 1-Chome, Chiyoda-ku, Tokyo,
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Atty. Jose Cochingyan III
Japan; that MC is licensed to do business in the Philippines
through its Philippine branch, Marubeni Corporation
Manila Branch (MC-Manila) duly registered with the
Securities and Exchange Commission (SEC); that MPC is a
corporation duly organized and existing under and by virtue
of the laws of the Philippines with registered office and
principal place of business at 8th and 9th Floors, L.V. Locsin
Bldg. Ayala Avenue corner Makati Avenue, Makati City; that
MPC is a 100% subsidiary of MC; that pursuant to the intra-
group services (IGS) charge policy between MC and its
domestic and foreign subsidiaries, MC and MPC entered into
a Service Agreement dated April 1, 2005 whereby MC's
Corporate Staff Division shall perform services in favor of
MPC, consisting in:
1. Information and advice with respect to general
administration, human resources, media relations &
advertisement, accounting, finance, risk management
and information with respect to legal matters and
economic & industrial research;
2. Services with respect to payroll and welfare for Japanese
expatriates;
3. Advice and assistance with regard to certain information
peculiar to each country by Regional Strategy &
Coordination Department of MC.
It is further represented that for all the abovementioned
services which will be performed by MC outside the
Philippines, MPC shall pay MC compensation for services to
be semi-annually agreed in writing by the parties based on
agreed allocation ratios without additional mark-up or profit;
that such compensation for services determined to be on
arm's-length basis, represents allocation or reimbursement
of actual costs by MC to MPC based on actual costs and
expenses incurred by staff of MC in providing the service to
MPC; and that MC-Manila Branch has no participation in the
Service Agreement between MC and MPC.
In this regard, you are requesting confirmation of your
opinion, as follows:
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1. The compensation to be derived by MC from MPC for
services rendered pursuant to the Service Agreement is
not subject to income/withholding tax since the same is
mere reimbursement of costs without mark-up or profit;
and
2. The said compensation to be paid by MPC to MC under
the Service Agreement is deductible from MPC's gross
income as a valid expense.
In reply, please be informed as follows:
1. The compensation for services being mere
reimbursement of costs without mark-up or profit and
rendered outside the Philippines shall be exempt from
Philippine income tax.
Inasmuch as it has been represented that the MPC shall
pay MC compensation for services based on agreed
allocation ratios without additional mark-up or profit, the
service fees, pursuant to the Service Agreement, are not
subject to Philippine income tax. Payments covering
actual and direct costs and expenses without mark-up or
profit are mere reimbursement of costs and therefore,
do not constitute taxable income. (BIR Ruling No. DA-
053-04 dated February 6, 2004) By its very nature,
reimbursement of costs is not income for being mere
returns of capital (BIR Ruling No. DA-384-98 dated
August 24, 1998). Accordingly, the service fees to be
paid by MPC to MC are not considered as taxable income
subject to Philippine income tax and consequently to
withholding tax.
Further, since the services are to be rendered by MC
outside the Philippines, the service fees pursuant to the
Service Agreement are not subject to Philippine income
tax pursuant to Section 28(B)(1) of the Tax Code of
1997, as amended.
2. The compensation for services is deductible from MPC's
gross income as a valid expense.
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The compensation for services to be paid by MPC to MC
is deductible from the gross income of MPC. The
services to be performed by MC to MPC pursuant to an
IGS charge policy between MC and its domestic and
foreign subsidiaries like MPC, which services include
information and advice with respect to general
administration, human resources, media relations &
advertisement, accounting, finance, risk management
and information with respect to legal matters and
economic & industrial research among others are
ordinary and necessary expenses deductible on the part
of MPC. The said expenses being directly connected with
and appropriate in the conduct of the business of MPC,
the same may thus be considered as ordinary and
necessary expenses pursuant to Section 34(A)(1) of the
Tax Code of 1997, as amended, which provides that
such ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are
directly attributable to the development, management,
operation and/or conduct of the trade, business or
exercise of profession are allowed as deduction from
gross income.
Moreover, for the expenses to be deductible on the part
of MPC, it is understood that the parties have exerted
reasonable efforts to ensure that the method of
allocation and charges is consistent with the arm's
length principle as may be determined through adequate
documentation. Finally, in the event that transfer pricing
regulations implementing Section 50 of the Tax Code of
1997, as amended, are issued by the BIR, the parties
shall comply with the requirements thereof.
9.2 Inter-Company Loans
RMO No. 63-99
1. Objectives:
1.1 To adopt the arm's length bargaining standard as
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the ultimate test for determining the correct gross
income and deductions between two or more
enterprises under common control.
1.2 To provide a means of redistributing or
reapportioning income and expenses of taxpayers
under common control after applying Section 50 of
the NIRC, as amended.
2. Coverage:
This paper applies to all forms of bona fide indebtedness
and includes:
2.1 Loans or advances of money or other consideration
(whether or not evidence by a written instrument);
2.2 Indebtedness arising in the ordinary course of
business out of sales, leases, or the rendition of
services by or between members of the group, or
any other similar extension;
2.3 But does not apply to alleged indebtedness which
was in fact a contribution of capital or a distribution
by a corporation with respect to its shares.
3. Applying Arm's Length on Section 50 of the NIRC, as
amended
3.1 Section 50. Allocation of income and deductions.
In any case of two or more organizations, trades, or
businesses (whether or not incorporated and
whether or not organized in the Philippines) owned
or controlled directly or indirectly by the same
interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion, or allocate gross
income or deductions between or among such
organizations, trades, or businesses, if he
determines that such distribution, apportionment, or
allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such
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organizations, trades or businesses.
3.2 Section 50 empowers the Commissioner to rectify
abnormalities and distortions in income brought
about by common control through the adoption of
standards considered fair, reasonable or at arm's
length.
3.3 This Order adopts the arm's length bargaining
standard as the ultimate test for determining the
fairness of related party transactions - i.e., "the
standard to be applied in every case is that of an
uncontrolled taxpayer dealing at arm's length with
another uncontrolled taxpayer".
4. Determination of Taxable Income on Inter-company
Loans or Advances
4.1 In general. Where one member of a group of
controlled entities makes a loan or advances directly
or indirectly, or otherwise becomes a creditor of
another member of such group, and charges no
interest, or charges interest at a rate which is not
equal to an arm's-length rate as defined in
subparagraph (2) of this paragraph, the
Commissioner may make appropriate allocations to
reflect an arm's length interest rate for the use of
such loan or advance.
4.1.1 If payments are made to parties under
common control according to a legally
enforceable contract, the contract may still be
recognized as valid. However, for purposes of
determining the true taxable income of the
parties involved, the interest rate charged may
be subjected to reallocation.
4.1.2 Section 50 does not apply only to taxable
entities. Reallocation may also apply to tax-
exempt organizations.
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4.2 Arm's Length interest rate.
4.2.1 In general. For purposes of this Order, the
arm's length interest rate shall be the rate of
interest which was charged or would have been
charged at the time the indebtedness arose in
independent transaction with or between
unrelated parties under similar circumstances.
All relevant factors will be considered, including
the amount and duration of the loan, the
security involved, the credit standing of the
borrower, and the interest rate prevailing at the
situs of the lender or creditor for comparable
loans.
4.2.2 For purposes of determining the arm's
length rate in domestic transactions, the interest
rate to be used is the Bank Reference Rate
(BRR) prescribed by the Bangko Sentral ng
Pilipinas (BSP).
4.2.3 The fact that the interest rate actually
charged on a loan or advance is expressly
indicated on a written instrument does not
preclude the application of Section 50 to such
loan or advance.
5. Interest Period
5.1 The interest period shall commence at the date the
indebtedness arises, except that with respect to
indebtedness arising in the ordinary course of
business out of sales, leases, or supply of goods and
services which are generally considered as trade
accounts receivables or payables, the interest period
shall not commence if the taxpayer is able to
establish that the normal trade practice in a given
industry is to allow balances, in the case of similar
transactions with unrelated parties, to remain
outstanding for a longer period without charging
interest.
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5.2 For purposes of determining the period of time for
which a balance is outstanding, payments or credits
shall be applied against the earliest balance
outstanding. The taxpayer may, in accordance with
an agreement, apply such payments or credits in
some other order in its books only after establishing
that the arrangement is customary for parties in that
particular business.
BIR Ruling No. DA-096-06 (Marubeni Corporation)
This refers to your letter dated August 15, 2005 stating that
on September 13, 2005, a Loan Agreement was entered into
between Marubeni Corporation (Marubeni), a corporation
organized and existing under the laws of Japan with
principal office at 4-2, Ohtemachi I-chome, Chiyoda-ku,
Tokyo, Japan, and Lipa Ecozone Properties, Inc. (LEPI), a
corporation organized and existing under the laws of the
Philippines with principal office at 17th Floor Liberty Center,
104 H.V. dela Costa Street, Salcedo Village, Makati City; that
LEPI's outstanding capital stock is forty percent (40%)
owned by Marubeni while the remaining sixty percent (60%)
is owned by Celestial Corporation (Celestial), a company
organized and existing under the laws of the Philippines; and
that pursuant to the said Loan Agreement, Marubeni lent to
LEPI a loan in the aggregate amount not exceeding Fifty
Million Japanese Yen.
Based on the foregoing representations, you now request
confirmation of your opinion that no interest income shall be
imputed on the interest-free loan extended by Marubeni to
LEPI considering that the said loan was extended solely to
finance the operational and capital expenditure of LEPI.
In reply thereto, please be informed that Section 50 of the
Tax Code of 1997 provides that
"Sec. 50. Allocation of Income and Deductions. In the
case of two or more organizations, trades or businesses
(whether or not incorporated and whether or not organized
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in the Philippines) owned or controlled directly or indirectly
by the same interests, the Commissioner is authorized to
distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if
he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion of taxes
or clearly to reflect the income of any such organization,
trade or business."
Corollarily, Revenue Memorandum Order No. 63-99 provides
that this applies to all forms of bona fide indebtedness and
includes:
1. Loans or advances of money or other consideration
(whether or not evidenced by a written instrument);
2. Indebtedness arising in the ordinary course of business
out of sales, leases, or the rendition of services by or
between members of the group, or any other similar
extension;
3. But does not apply to alleged indebtedness which was in
fact a contribution of capital or a distribution by a
corporation with respect to its shares.
This Office ruled that
". . . inter-corporate advances are not covered by Revenue
Memorandum Order (RMO) No. 63-99 dated July 19, 1999.
Section 2.3 of RMO states that it does not apply to
indebtedness which was in fact a contribution to capital. The
foregoing inter-corporate advances are analogous to capital
contribution since it is based on percentage of stockholdings
of the stockholders making the advances. The fact that
some individual stockholders in some instances are not able
to contribute to the fund constituting the advances does not
destroy its character as an analogous capital contribution. In
other instances where the advances are made due to
financial need of borrowing company and the financial ability
of the lending company, it is clear that these are emergency
loans to help a related company which is short of capital.
These are not the instances covered by Section 4.1. of the
RMO which would authorize the Commissioner of Internal
Revenue to allocate interest income under Section 50 of the
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Tax Code of 1997 because such inter-corporate loans are
clearly transactions, done for tax avoidance or evasion
purposes."
"Accordingly, the interest-free shareholder's advances/loans
made by RLI to RCBC Realty are in the nature of capital
contributions and therefore not covered by RMO No. 63-99
and consequently not subject to the imputed interest under
the aforesaid RMO. As such, any income received by RLI
from its shareholder's advances to RCBC Realty are not
subject to income tax and consequently to withholding tax.
"xxx xxx xxx"
The interest-free shareholder's advances/loans in the above-
cited ruling are in the same nature as those lent by Marubeni
to LEPI because the said loan shall only be utilized by the
latter for operational and capital expenditures and therefore
not covered by RMO No. 63-99 as such not subject to the
imputed interest under the aforesaid RMO.
WHEREFORE, in view of the foregoing, this Office hereby
confirms your opinion that no interest income should be
imputed on the interest-free loan extended by Marubeni
considering that the said loan was made in order for LEPI to
meet its various financial obligations.
Lapanday Foods Corp v CIR
P is engaged in managing, promoting, administering or
assisting in any business or activity of corporations,
partnerships, associations, individual or firm. P was assessed
for failure to impose VAT, EWT and DST to loans to its
affiliates.
Has right to assess prescribed?
No.
Prescription on VAT be counted from filing of QVAT, not
MVAT. Only in QVAT where final determination of input and
output tax are determined.
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Interests on loans are subject to VAT?
Yes.
But P is not a lending investor; not even done habitually?
No.
Although VAT primarily applies to those in the course of
trade or business, it also includes those that are incidental
to the main business.
Incidental means depending upon or appertaining to
something else primary.
Considering that petitioner's income from its management
services is subject to VAT, it necessarily follows then, that
the interests from loan which is an incidental income, is also
subject to VAT.
P just passes on the interest from banks to its affiliates (i.e.,
just an accommodation)?
No.
Sale of service as the performance of all kinds of services
for others for a fee, remuneration or consideration.
But no profit made by P?
No.
As long as P has provided financial assistance or services for
a fee.
How to compute for deficiency?
10% on gross receipts since P admitted that it did not
impose VAT on the interests charged to affiliates.
CIR v. Ongtengco
P: apply Lapanday case to the loan extended by R to
Intertrade Credit Corporation (ICC).
Ps loan is in regular or incidental to business?
No.
Neither regular nor incidental. In fact, at the time of
extending the loan in 2004, P is not yet engaged in his
motorcycle business. Thus, could not even be incidental.
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Rely on Lapanday?
No.
Cannot use as bases a CTA case. Only use SC cases.
Also, different facts between this case and Lapanday. In that
case, TP was really engaged in managing other firms. It was
natural for it to extend loans to affiliates (i.e., incidental).
In this case, the proprietor has no interest in extending
loans to ICC.
Loans were granted only as BOD. Being part of the BOD is
not a regular business. only an exercise of an ownership
right.
KEPCO v. CIR
KEPCO was extending loans to affiliates. Not assessed for
deficiency VAT and surcharge.
Simply a compensation for forbearance of money (i.e., not a
sale of performance of services)? Merely passive income?
No.
Law treats transactions undertaken incidental to the pursuit
of a commercial or economic activity as entered in the
course of trade or business.
Incidental to main business?
Yes.
incidental to petitioner's primary business of power
generation of its Malaya Power Complex in Rizal and other
power generating plants justifying the imposition of VAT.
Loans to KEILCO and KPHI are intended to be allocated for
the construction of the generating power plant to be located
in Ilijan, Batangas.
These loan transactions are in furtherance of petitioner's
main line of business of rehabilitation, operation,
maintenance, management not only of its power generating
plants but also "other power generating plants and related
facilities for the conversion into electricity of fuel.
Philippine National Oil Company v CIR
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PNOC is a GOCC. When it cannot get loans from banks, it
uses its own credit facilities to extend loans to its
subsidiaries. Now being assessed for VAT deficiency.
Appeal of PNOC to CTA filed within period?
No.
It filed the appeal 9 months after lapse of period.
Loans granted to subsidiaries VATable?
Yes.
Interest income received by a parent company from loans or
advances it has granted to its subsidiaries/affiliates is subject
to VAT.
Also, tax assessments made by revenue examiners are
presumed correct and made in good faith.
Presumptions are in favor of the correctness of tax
assessments.
x------------------------------------x
10. ALLOWABLE DEDUCTIONS (NIRC 34)
Except for taxpayers earning compensation income arising
from personal services rendered under an employer-
employee relationship where no deductions shall be allowed
under this Section other than under subsection (M) hereof,
in computing taxable income subject to income tax under
Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A)
(1), there shall be allowed the following deductions from
gross income;
(A) Expenses. -
(1) Ordinary and Necessary Trade, Business or
Professional Expenses.-
(a) In General. - There shall be allowed as
deduction from gross income all the ordinary
and necessary expenses paid or incurred during
the taxable year in carrying on or which are
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directly attributable to, the development,
management, operation and/or conduct of the
trade, business or exercise of a profession,
including:
(i) A reasonable allowance for salaries, wages,
and other forms of compensation for
personal services actually rendered,
including the grossed-up monetary value of
fringe benefit furnished or granted by the
employer to the employee: Provided, That
the final tax imposed under Section 33
hereof has been paid;
(ii) A reasonable allowance for travel expenses,
here and abroad, while away from home in
the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or
other payments which are required as a
condition for the continued use or
possession, for purposes of the trade,
business or profession, of property to which
the taxpayer has not taken or is not taking
title or in which he has no equity other than
that of a lessee, user or possessor;
(iv) A reasonable allowance for entertainment,
amusement and recreation expenses during
the taxable year, that are directly connected
to the development, management and
operation of the trade, business or
profession of the taxpayer, or that are
directly related to or in furtherance of the
conduct of his or its trade, business or
exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by
rules and regulations prescribe, upon
recommendation of the Commissioner,
taking into account the needs as well as the
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special circumstances, nature and character
of the industry, trade, business, or
profession of the taxpayer: Provided, That
any expense incurred for entertainment,
amusement or recreation that is contrary to
law, morals public policy or public order
shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction
from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as
official receipts or other adequate records: (i)
the amount of the expense being deducted, and
(ii) the direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer.
(c) Bribes, Kickbacks and Other Similar Payments. -
No deduction from gross income shall be
allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an
official or employee of the national government,
or to an official or employee of any local
government unit, or to an official or employee of
a government-owned or -controlled corporation,
or to an official or employee or representative of
a foreign government, or to a private
corporation, general professional partnership, or
a similar entity, if the payment constitutes a
bribe or kickback.
(2) Expenses Allowable to Private Educational
Institutions. - In addition to the expenses allowable
as deductions under this Chapter, a private
educational institution, referred to under Section 27
(B) of this Code, may at its option elect either: (a) to
deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the
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taxable year for the expansion of school facilities or
(b) to deduct allowance for depreciation thereof
under Subsection (F) hereof.
(B) Interest.-
(1) In General. - The amount of interest paid or incurred
within a taxable year on indebtedness in connection
with the taxpayer's profession, trade or business
shall be allowed as deduction from gross income:
Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be
reduced by an amount equal to the following
percentages of the interest income subjected to final
tax:
(41%) beginning January 1, 1998;
(39%) beginning January 1, 1999; and
(38%) beginning January 1, 2000;
(2) Exceptions. - No deduction shall be allowed in
respect of interest under the succeeding
subparagraphs:
(a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise:
Provided, That such interest shall be allowed as
a deduction in the year the indebtedness is paid:
Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount of
interest which corresponds to the amount of the
principal amortized or paid during the year shall
be allowed as deduction in such taxable year;
(b) If both the taxpayer and the person to whom
the payment has been made or is to be made
are persons specified under Section 36 (B); or
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(c) If the indebtedness is incurred to finance
petroleum exploration.
(3) Optional Treatment of Interest Expense. - At the
option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a
profession may be allowed as a deduction or treated
as a capital expenditure.
(C) Taxes.-
(1) In General. - Taxes paid or incurred within the
taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as
deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any
foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of
foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
Provided, That taxes allowed under this Subsection,
when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent
of the income tax benefit of said deduction.
(2) Limitations on Deductions. - In the case of a
nonresident alien individual engaged in trade or
business in the Philippines and a resident foreign
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corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed
only if and to the extent that they are connected
with income from sources within the Philippines.
(3) Credit Against Tax for Taxes of Foreign Countries. -
If the taxpayer signifies in his return his desire to
have the benefits of this paragraph, the tax imposed
by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case
of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or
incurred during the taxable year to any foreign
country; and
(b) Partnerships and Estates. - In the case of any
such individual who is a member of a general
professional partnership or a beneficiary of an
estate or trust, his proportionate share of such
taxes of the general professional partnership or
the estate or trust paid or incurred during the
taxable year to a foreign country, if his
distributive share of the income of such
partnership or trust is reported for taxation
under this Title.
An alien individual and a foreign corporation
shall not be allowed the credits against the tax
for the taxes of foreign countries allowed under
this paragraph.
(4) Limitations on Credit. - The amount of the credit
taken under this Section shall be subject to each of
the following limitations:
(a) The amount of the credit in respect to the tax
paid or incurred to any country shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer's
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taxable income from sources within such
country under this Title bears to his entire
taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer's
taxable income from sources without the
Philippines taxable under this Title bears to his
entire taxable income for the same taxable year.
(5) Adjustments on Payment of Incurred Taxes. - If
accrued taxes when paid differ from the amounts
claimed as credits by the taxpayer, or if any tax paid
is refunded in whole or in part, the taxpayer shall
notify the Commissioner; who shall redetermine the
amount of the tax for the year or years affected,
and the amount of tax due upon such
redetermination, if any, shall be paid by the
taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the
case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the
allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he
may require, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed
shall contain such further conditions as the
Commissioner may require.
(6) Year in Which Credit Taken. - The credits provided
for in Subsection (C)(3) of this Section may, at the
option of the taxpayer and irrespective of the
method of accounting employed in keeping his
books, be taken in the year which the taxes of the
foreign country were incurred, subject, however, to
the conditions prescribed in Subsection (C)(5) of this
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Section. If the taxpayer elects to take such credits in
the year in which the taxes of the foreign country
accrued, the credits for all subsequent years shall be
taken upon the same basis and no portion of any
such taxes shall be allowed as a deduction in the
same or any succeeding year.
(7) Proof of Credits. - The credits provided in Subsection
(C)(3) hereof shall be allowed only if the taxpayer
establishes to the satisfaction of the Commissioner
the following:
(a) The total amount of income derived from
sources without the Philippines;
(b) The amount of income derived from each
country, the tax paid or incurred to which is
claimed as a credit under said paragraph, such
amount to be determined under rules and
regulations prescribed by the Secretary of
Finance; and
(c) All other information necessary for the
verification and computation of such credits.
(D) Losses. -
(1) In General.- Losses actually sustained during the
taxable year and not compensated for by insurance
or other forms of indemnity shall be allowed as
deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business
or profession, if the loss arises from fires,
storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
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The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among
other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or
embezzlement during the taxable year: Provided,
however, That the time limit to be so prescribed in
the rules and regulations shall not be less than thirty
(30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under
this Subsection if at the time of the filing of the
return, such loss has been claimed as a
deduction for estate tax purposes in the estate
tax return.
(2) Proof of Loss. - In the case of a nonresident alien
individual or foreign corporation, the losses
deductible shall be those actually sustained during
the year incurred in business, trade or exercise of a
profession conducted within the Philippines, when
such losses are not compensated for by insurance or
other forms of indemnity. The Secretary of Finance,
upon recommendation of the Commissioner, is
hereby authorized to promulgate rules and
regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit
a declaration of loss sustained from casualty or from
robbery, theft or embezzlement during the taxable
year: Provided, That the time to be so prescribed in
the rules and regulations shall not be less than thirty
(30) days nor more than ninety (90) days from the
date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and
(3) Net Operating Loss Carry-Over. - The net operating
loss of the business or enterprise for any taxable
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year immediately preceding the current taxable
year, which had not been previously offset as
deduction from gross income shall be carried over as
a deduction from gross income for the next three (3)
consecutive taxable years immediately following the
year of such loss: Provided, however, That any net
loss incurred in a taxable year during which the
taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection:
Provided, further, That a net operating loss carry-
over shall be allowed only if there has been no
substantial change in the ownership of the business
or enterprise in that -
(i) Not less than seventy-five percent (75%) in
nominal value of outstanding issued shares., if
the business is in the name of a corporation, is
held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the
paid up capital of the corporation, if the
business is in the name of a corporation, is held
by or on behalf of the same persons.
For purposes of this subsection, the term "not
operating loss" shall mean the excess of allowable
deduction over gross income of the business in a
taxable year.
Provided, That for mines other than oil and gas
wells, a net operating loss without the benefit of
incentives provided for under Executive Order No.
226, as amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over
as a deduction from taxable income for the next five
(5) years immediately following the year of such
loss. The entire amount of the loss shall be carried
over to the first of the five (5) taxable years
following the loss, and any portion of such loss
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which exceeds, the taxable income of such first year
shall be deducted in like manner form the taxable
income of the next remaining four (4) years.
(4) Capital Losses. -
(a) Limitation. - Loss from sales or Exchanges of
capital assets shall be allowed only to the extent
provided in Section 39.
(b) Securities Becoming Worthless. - If securities as
defined in Section 22 (T) become worthless
during the taxable year and are capital assets,
the loss resulting therefrom shall, for purposes
of this Title, be considered as a loss from the
sale or exchange, on the last day of such
taxable year, of capital assets.
(5) Losses From Wash Sales of Stock or Securities. -
Losses from "wash sales" of stock or securities as
provided in Section 38.
(6) Wagering Losses. - Losses from wagering
transactions shall b allowed only to the extent of the
gains from such transactions.
(7) Abandonment Losses. -
(a) In the event a contract area where petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto
shall be allowed as a deduction: Provided, That
accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a
deduction only from any income derived from
the same contract area. In all cases, notices of
abandonment shall be filed with the
Commissioner.
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(b) In case a producing well is subsequently
abandoned, the unamortized costs thereof, as
well as the undepreciated costs of equipment
directly used therein, shall be allowed as a
deduction in the year such well, equipment or
facility is abandoned by the contractor:
Provided, That if such abandoned well is
reentered and production is resumed, or if such
equipment or facility is restored into service, the
said costs shall be included as part of gross
income in the year of resumption or restoration
and shall be amortized or depreciated, as the
case may be.
(E) Bad Debts. -
(1) In General. - Debts due to the taxpayer actually
ascertained to be worthless and charged off within
the taxable year except those not connected with
profession, trade or business and those sustained in
a transaction entered into between parties
mentioned under Section 36 (B) of this Code:
Provided, That recovery of bad debts previously
allowed as deduction in the preceding years shall be
included as part of the gross income in the year of
recovery to the extent of the income tax benefit of
said deduction.
(2) Securities Becoming Worthless. - If securities, as
defined in Section 22 (T), are ascertained to be
worthless and charged off within the taxable year
and are capital assets, the loss resulting therefrom
shall, in the case of a taxpayer other than a bank or
trust company incorporated under the laws of the
Philippines a substantial part of whose business is
the receipt of deposits, for the purpose of this Title,
be considered as a loss from the sale or exchange,
on the last day of such taxable year, of capital
assets.
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(F) Depreciation. -
(1) General Rule. - There shall be allowed as a
depreciation deduction a reasonable allowance for
the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the
trade or business. In the case of property held by
one person for life with remainder to another
person, the deduction shall be computed as if the
life tenant were the absolute owner of the property
and shall be allowed to the life tenant. In the case of
property held in trust, the allowable deduction shall
be apportioned between the income beneficiaries
and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in
the absence of such provisions, on the basis of the
trust income allowable to each.
(2) Use of Certain Methods and Rates. - The term
"reasonable allowance" as used in the preceding
paragraph shall include, but not limited to, an
allowance computed in accordance with rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, under
any of the following methods:
(a) The straight-line method;
(b) Declining-balance method, using a rate not
exceeding twice the rate which would have been
used had the annual allowance been computed
under the method described in Subsection (F)
(1);
(c) The sum-of-the-years-digit method; and
(d) any other method which may be prescribed by
the Secretary of Finance upon recommendation
of the Commissioner.
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(3) Agreement as to Useful Life on Which Depreciation
Rate is Based. - Where under rules and regulations
prescribed by the Secretary of Finance upon
recommendation of the Commissioner, the taxpayer
and the Commissioner have entered into an
agreement in writing specifically dealing with the
useful life and rate of depreciation of any property,
the rate so agreed upon shall be binding on both the
taxpayer and the national Government in the
absence of facts and circumstances not taken into
consideration during the adoption of such
agreement. The responsibility of establishing the
existence of such facts and circumstances shall rest
with the party initiating the modification. Any
change in the agreed rate and useful life of the
depreciable property as specified in the agreement
shall not be effective for taxable years prior to the
taxable year in which notice in writing by certified
mail or registered mail is served by the party
initiating such change to the other party to the
agreement:
Provided, however, that where the taxpayer has
adopted such useful life and depreciation rate for
any depreciable and claimed the depreciation
expenses as deduction from his gross income,
without any written objection on the part of the
Commissioner or his duly authorized representatives,
the aforesaid useful life and depreciation rate so
adopted by the taxpayer for the aforesaid
depreciable asset shall be considered binding for
purposes of this Subsection.
(4) Depreciation of Properties Used in Petroleum
Operations. - An allowance for depreciation in
respect of all properties directly related to
production of petroleum initially placed in service in
a taxable year shall be allowed under the straight-
line or declining-balance method of depreciation at
the option of the service contractor.
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However, if the service contractor initially elects the
declining-balance method, it may at any subsequent
date, shift to the straight-line method.
The useful life of properties used in or related to
production of petroleum shall be ten (10) years of
such shorter life as may be permitted by the
Commissioner.
Properties not used directly in the production of
petroleum shall be depreciated under the straight-
line method on the basis of an estimated useful life
of five (5) years.
(5) Depreciation of Properties Used in Mining
Operations. - an allowance for depreciation in
respect of all properties used in mining operations
other than petroleum operations, shall be computed
as follows:
(a) At the normal rate of depreciation if the
expected life is ten (10) years or less; or
(b) Depreciated over any number of years between
five (5) years and the expected life if the latter
is more than ten (10) years, and the
depreciation thereon allowed as deduction from
taxable income: Provided, That the contractor
notifies the Commissioner at the beginning of
the depreciation period which depreciation rate
allowed by this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens
Engaged in Trade or Business or Resident Foreign
Corporations. - In the case of a nonresident alien
individual engaged in trade or business or resident
foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or
employment or its non-use in the business trade or
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profession shall be permitted only when such
property is located in the Philippines.
(G) Depletion of Oil and Gas Wells and Mines. -
(1) In General. - In the case of oil and gas wells or
mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-
depletion method shall be granted under rules and
regulations to be prescribed by the Secretary of
finance, upon recommendation of the Commissioner.
Provided, That when the allowance for depletion
shall equal the capital invested no further allowance
shall be granted: Provided, further, That after
production in commercial quantities has
commenced, certain intangible exploration and
development drilling costs: (a) shall be deductible in
the year incurred if such expenditures are incurred
for non-producing wells and/or mines, or (b) shall be
deductible in full in the year paid or incurred or at
the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for
producing wells and/or mines in the same contract
area.
"Intangible costs in petroleum operations" refers to
any cost incurred in petroleum operations which in
itself has no salvage value and which is incidental to
and necessary for the drilling of wells and
preparation of wells for the production of petroleum:
Provided, That said costs shall not pertain to the
acquisition or improvement of property of a
character subject to the allowance for depreciation
except that the allowances for depreciation on such
property shall be deductible under this Subsection.
Any intangible exploration, drilling and development
expenses allowed as a deduction in computing
taxable income during the year shall not be taken
into consideration in computing the adjusted cost
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basis for the purpose of computing allowable cost
depletion.
(2) Election to Deduct Exploration and Development
Expenditures. - In computing taxable income from
mining operations, the taxpayer may at his option,
deduct exploration and development expenditures
accumulated as cost or adjusted basis for cost
depletion as of date of prospecting, as well as
exploration and development expenditures paid or
incurred during the taxable year: Provided, That the
amount deductible for exploration and development
expenditures shall not exceed twenty-five percent
(25%) of the net income from mining operations
computed without the benefit of any tax incentives
under existing laws. The actual exploration and
development expenditures minus twenty-five
percent (25%) of the net income from mining shall
be carried forward to the succeeding years until fully
deducted.
The election by the taxpayer to deduct the
exploration and development expenditures is
irrevocable and shall be binding in succeeding
taxable years.
"Net income from mining operations", as used in this
Subsection, shall mean gross income from
operations less "allowable deductions" which are
necessary or related to mining operations.
"Allowable deductions" shall include mining, milling
and marketing expenses, and depreciation of
properties directly used in the mining operations.
This paragraph shall not apply to expenditures for
the acquisition or improvement of property of a
character which is subject to the allowance for
depreciation.
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In no case shall this paragraph apply with respect to
amounts paid or incurred for the exploration and
development of oil and gas.
The term "exploration expenditures" means
expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent or quality
of any deposit of ore or other mineral, and paid or
incurred before the beginning of the development
stage of the mine or deposit.
The term "development expenditures" means
expenditures paid or incurred during the
development stage of the mine or other natural
deposits. The development stage of a mine or other
natural deposit shall begin at the time when deposits
of ore or other minerals are shown to exist in
sufficient commercial quantity and quality and shall
end upon commencement of actual commercial
extraction.
(3) Depletion of Oil and Gas Wells and Mines Deductible
by a Nonresident Alien individual or Foreign
Corporation. - In the case of a nonresident alien
individual engaged in trade or business in the
Philippines or a resident foreign corporation,
allowance for depletion of oil and gas wells or mines
under paragraph (1) of this Subsection shall be
authorized only in respect to oil and gas wells or
mines located within the Philippines.
(H) Charitable and Other Contributions. -
(1) In General. - Contributions or gifts actually paid or
made within the taxable year to, or for the use of
the Government of the Philippines or any of its
agencies or any political subdivision thereof
exclusively for public purposes, or to accredited
domestic corporation or associations organized and
operated exclusively for religious, charitable,
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scientific, youth and sports development, cultural or
educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to non-
government organizations, in accordance with rules
and regulations promulgated by the Secretary of
finance, upon recommendation of the Commissioner,
no part of the net income of which inures to the
benefit of any private stockholder or individual in an
amount not in excess of ten percent (10%) in the
case of an individual, and five percent (%) in the
case of a corporation, of the taxpayer's taxable
income derived from trade, business or profession
as computed without the benefit of this and the
following subparagraphs.
(2) Contributions Deductible in Full. - Notwithstanding
the provisions of the preceding subparagraph,
donations to the following institutions or entities
shall be deductible in full;
(a) Donations to the Government. - Donations to
the Government of the Philippines or to any of
its agencies or political subdivisions, including
fully-owned government corporations,
exclusively to finance, to provide for, or to be
used in undertaking priority activities in
education, health, youth and sports
development, human settlements, science and
culture, and in economic development according
to a National Priority Plan determined by the
National Economic and Development Authority
(NEDA), In consultation with appropriate
government agencies, including its regional
development councils and private philantrophic
persons and institutions: Provided, That any
donation which is made to the Government or to
any of its agencies or political subdivisions not in
accordance with the said annual priority plan
shall be subject to the limitations prescribed in
paragraph (1) of this Subsection;
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(b) Donations to Certain Foreign Institutions or
International Organizations. - Donations to
foreign institutions or international organizations
which are fully deductible in pursuance of or in
compliance with agreements, treaties, or
commitments entered into by the Government
of the Philippines and the foreign institutions or
international organizations or in pursuance of
special laws;
(c) Donations to Accredited Nongovernment
Organizations. - The term "nongovernment
organization" means a non profit domestic
corporation:
(1) Organized and operated exclusively for scientific,
research, educational, character-building and youth
and sports development, health, social welfare,
cultural or charitable purposes, or a combination
thereof, no part of the net income of which inures to
the benefit of any private individual;
(2) Which, not later than the 15th day of the third
month after the close of the accredited
nongovernment organizations taxable year in which
contributions are received, makes utilization directly
for the active conduct of the activities constituting
the purpose or function for which it is organized and
operated, unless an extended period is granted by
the Secretary of Finance in accordance with the
rules and regulations to be promulgated, upon
recommendation of the Commissioner;
(3) The level of administrative expense of which shall,
on an annual basis, conform with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, but in no case to exceed thirty
percent (30%) of the total expenses; and
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(4) The assets of which, in the even of dissolution,
would be distributed to another nonprofit domestic
corporation organized for similar purpose or
purposes, or to the state for public purpose, or
would be distributed by a court to another
organization to be used in such manner as in the
judgment of said court shall best accomplish the
general purpose for which the dissolved organization
was organized.
Subject to such terms and conditions as may be
prescribed by the Secretary of Finance, the term
"utilization" means:
(i) Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited nongovernment organization was
created or organized.
(ii) Any amount paid to acquire an asset used (or
held for use) directly in carrying out one or more
purposes for which the accredited
nongovernment organization was created or
organized.
An amount set aside for a specific project which
comes within one or more purposes of the
accredited nongovernment organization may be
treated as a utilization, but only if at the time
such amount is set aside, the accredited
nongovernment organization has established to
the satisfaction of the Commissioner that the
amount will be paid for the specific project
within a period to be prescribed in rules and
regulations to be promulgated by the Secretary
of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years,
and the project is one which can be better
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accomplished by setting aside such amount than
by immediate payment of funds.
(3) Valuation. - The amount of any charitable
contribution of property other than money shall be
based on the acquisition cost of said property.
(4) Proof of Deductions. - Contributions or gifts shall be
allowable as deductions only if verified under the
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner.
(I) Research and Development.-
(1) In General. - a taxpayer may treat research or
development expenditures which are paid or
incurred by him during the taxable year in
connection with his trade, business or profession as
ordinary and necessary expenses which are not
chargeable to capital account. The expenditures so
treated shall be allowed as deduction during the
taxable year when paid or incurred.
(2) Amortization of Certain Research and Development
Expenditures. - At the election of the taxpayer and
in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following
research and development expenditures may be
treated as deferred expenses:
(a) Paid or incurred by the taxpayer in connection
with his trade, business or profession;
(b) Not treated as expenses under paragraph (1)
hereof; and
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(c) Chargeable to capital account but not
chargeable to property of a character which is
subject to depreciation or depletion.
In computing taxable income, such deferred
expenses shall be allowed as deduction ratably
distributed over a period of not less than sixty (60)
months as may be elected by the taxpayer
(beginning with the month in which the taxpayer
first realizes benefits from such expenditures).
The election provided by paragraph (2) hereof may
be made for any taxable year beginning after the
effectivity of this Code, but only if made not later
than the time prescribed by law for filing the return
for such taxable year. The method so elected, and
the period selected by the taxpayer, shall be
adhered to in computing taxable income for the
taxable year for which the election is made and for
all subsequent taxable years unless with the
approval of the Commissioner, a change to a
different method is authorized with respect to a part
or all of such expenditures. The election shall not
apply to any expenditure paid or incurred during any
taxable year for which the taxpayer makes the
election.
(3) Limitations on Deduction. - This Subsection shall not
apply to:
(a) Any expenditure for the acquisition or
improvement of land, or for the improvement of
property to be used in connection with research
and development of a character which is subject
to depreciation and depletion; and
(b) Any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extent, or quality of any deposit of ore or other
mineral, including oil or gas.
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(J) Pension Trusts. - An employer establishing or
maintaining a pension trust to provide for the payment
of reasonable pensions to his employees shall be
allowed as a deduction (in addition to the contributions
to such trust during the taxable year to cover the
pension liability accruing during the year, allowed as a
deduction under Subsection (A) (1) of this Section ) a
reasonable amount transferred or paid into such trust
during the taxable year in excess of such contributions,
but only if such amount (1) has not theretofore been
allowed as a deduction, and (2) is apportioned in equal
parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or
payment is made.
(K) Additional Requirements for Deductibility of Certain
Payments. - Any amount paid or payable which is
otherwise deductible from, or taken into account in
computing gross income or for which depreciation or
amortization may be allowed under this Section, shall be
allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has
been paid to the Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction. - In lieu of the deductions
allowed under the preceding Subsections, an individual
subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an
amount not exceeding ten percent (10%) of his gross
income. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction, he
shall be considered as having availed himself of the
deductions allowed in the preceding Subsections. Such
election when made in the return shall be irrevocable for
the taxable year for which the return is made: Provided,
That an individual who is entitled to and claimed for the
optional standard deduction shall not be required to
submit with his tax return such financial statements
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otherwise required under this Code: Provided, further,
That except when the Commissioner otherwise permits,
the said individual shall keep such records pertaining to
his gross income during the taxable year, as may be
required by the rules and regulations promulgated by
the Secretary of Finance, upon recommendation of the
Commissioner.
(M) Premium Payments on Health and/or Hospitalization
Insurance of an Individual Taxpayer. - The amount of
premiums not to exceed Two thousand four hundred
pesos (P2,400) per family or Two hundred pesos (P200)
a month paid during the taxable year for health and/or
hospitalization insurance taken by the taxpayer for
himself, including his family, shall be allowed as a
deduction from his gross income: Provided, That said
family has a gross income of not more than Two
hundred fifty thousand pesos (P250,000) for the taxable
year: Provided, finally, That in the case of married
taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this
deduction.
Notwithstanding the provision of the preceding
Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a public
hearing shall have been held for this purpose, may
prescribe by rules and regulations, limitations or ceilings
for any of the itemized deductions under Subsections (A)
to (J) of this Section: Provided, That for purposes of
determining such ceilings or limitations, the Secretary of
Finance shall consider the following factors: (1)
adequacy of the prescribed limits on the actual
expenditure requirements of each particular industry;
and (2) effects of inflation on expenditure levels:
Provided, further, That no ceilings shall further be
imposed on items of expense already subject to ceilings
under present law.
Requisites for Deductibility
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CIR v Isabela Cultural Corp.
Facts: The ICC, received from the BIR an assessment for
deficiency income tax arising from the BIRs disallowance of
ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986 in the
amount of P333,196.86, to wit:
(a) Expenses for the auditing services of SGV & Co., for the
year ending December 31, 1985;
(b) Expenses for the legal services [inclusive of retainer
fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and 1985.
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May
1986.
(d) The alleged understatement of ICCs interest income on
the three promissory notes due from Realty Investment,
Inc. and for deficiency expanded withholding tax in the
amount of P4,897.79, inclusive of surcharges and
interest, both for the taxable year 1986 for alleged
failure of ICC to withhold 1% expanded withholding tax
on its claimed P244,890.00 deduction for security
services.
ICC sought a reconsideration of the subject assessments.
However, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. ICC then
went to the CTA which rendered a decision canceling and
setting aside the assessment notices issued against ICC. It
held that the claimed deductions for professional and
security services were properly claimed by ICC. BIR then
filed a petition for review with the CA, which affirmed the
CTA decision, thus the present case before the SC.
Issue: Are these deductions allowed?
Held:
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(1) The requisites for the deductibility of ordinary and
necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the
taxable year;
(c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other
pertinent papers.
(2) The requisite that it must have been paid or incurred
during the taxable year is further qualified by Section 45
of the National Internal Revenue Code (NIRC) which
states that: "[t]he deduction provided for in this Title
shall be taken for the taxable year in which paid or
accrued or paid or incurred, dependent upon the
method of accounting upon the basis of which the net
income is computed x x x". ICC uses the accrual method
of accounting and pursuant to Revenue
Audit Memorandum Order No. 1-2000, expenses not
being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but
failed to do so cannot deduct the same for the next
year.
The accrual of income and expense is permitted when
the all-events test has been met. This test requires:
(a) fixing of a right to income or liability to pay; and
(b) the availability of the reasonable accurate
determination of such income or liability. The test
does not demand that the amount of income or
liability be known absolutely, only that a taxpayer
has at his disposal the information necessary to
compute the amount with reasonable accuracy. The
all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the
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test is satisfied where a computation may be
unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not
have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly,
the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.
(3) The expenses for legal services pertain to the 1984 and
1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, and
for reimbursement of the expenses of said firm in
connection with ICCs tax problems for the year 1984.
From the nature of the claimed deductions and the span
of time during which the firm was retained since 1960,
ICC can be expected to have reasonably known the
retainer fees charged by the firm as well as the
compensation for its legal services. The failure to
determine the exact amount of the expense during the
taxable year when they could have been claimed as
deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one,
ICC, in the exercise of due diligence could have inquired
into the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting. For
another, it could have reasonably determined the
amount of legal and retainer fees owing to its familiarity
with the rates charged by their long time legal
consultant. The defense of delayed billing by the firm
and the company, which under the circumstances, is not
sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses
for legal and auditing services
(4) The professional fees of SGV & Co. for auditing the
financial statements of ICC for the year 1985 cannot be
validly claimed as expense deductions in 1986. This is so
because ICC failed to present evidence showing that
even with only "reasonable accuracy," as the standard to
ascertain its liability to SGV & Co. in the year 1985, it
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cannot determine the professional fees which said
company would charge for its services. ICC thus failed to
discharge the burden of proving that the claimed
expense deductions for the professional services were
allowable deductions for the taxable year 1986. Hence,
per Revenue Audit Memorandum Order No. 1-2000, they
cannot be validly deducted from its gross income for the
said year and were therefore properly disallowed by the
BIR.
(5) As to the expenses for security services, the records
show that these expenses were incurred by ICC in 1986
and could therefore be properly claimed as deductions
for the said year.
(6) On the purported understatement of interest income
from the promissory notes of Realty Investment, Inc.,
findings of the CTA and the Court of Appeals that no
such understatement exists are sustained and that only
simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no
stipulation between the latter and ICC on the application
of compounded interest. Under Article 1959 of the Civil
Code, unless there is a stipulation to the contrary,
interest due should not further earn interest.
(7) The findings of the CTA and the Court of Appeals that
ICC truly withheld the required withholding tax from its
claimed deductions for security services and remitted the
same to the BIR is supported by payment order and
confirmation receipts. Hence, the Assessment Notice for
deficiency expanded withholding tax was properly
cancelled and set aside.
Distinguished from Tax Credits
CIR v Central Luzon Drug Corp.
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The 20 percent discount required by the law to be given to
senior citizens is a tax credit, not merely a tax deduction
from the gross income or gross sale of the establishment
concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants
a tax credit to all covered entities. Thus, the provisions of
the revenue regulation that withdraw or modify such grant
are void. Basic is the rule that administrative regulations
cannot amend or revoke the law.
Central Luzon Drug Corp. (Central) is a domestic
corporation primarily engaged in retailing of medicines and
other pharmaceutical products. From January to December
1996, respondent granted 20 per cent sales discount to
qualified senior citizens on their purchases of medicines
pursuant to RA 7432 and its Implementing Rules and
Regulations. For the said period, the amount allegedly
representing the 20 per cent sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.
On January 16, 1998, respondent filed with petitioner a
claim for tax refund/credit in the amount of P904,769.00
allegedly arising from the 20 per cent sales discount granted
by respondent to qualified senior citizens in compliance with
RA 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax
Appeals via a Petition for Review. The Tax Court dismissed
respondents Petition for lack of merit. However, upon the
motion for reconsideration lodged by the respondent to the
CTA, the latter issued a Tax Credit Certificate in favor of the
former.
The CA affirmed in toto the Resolution of the CTA. It
reasoned that RA 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the
availment of a tax credit. Moreover, such credit is not
tantamount to an unintended benefit from the law, but
rather a just compensation for the taking of private property
for public use. Hence, this petition.
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Issue:
Whether the respondent, despite incurring a net loss, may
still claim the 20 percent sales discount as a tax credit.
Held: The petition is DENIED. The decision and resolution of
CA are AFFIRMED.
Section 4(a) of RA 7432 grants to senior citizens the
privilege of obtaining a 20 percent discount on their
purchase of medicine from any private establishment in the
country. The latter may then claim the cost of the discount
as a tax credit even though an establishment operates at a
loss.
Tax credit generally refers to an amount that is subtracted
directly from ones total tax liability. It is an allowance
against the tax itself or a deduction from what is owed by
a taxpayer to the government. It should be understood in
relation to other tax concepts. One of these is tax deduction
-- defined as a subtraction from income for tax purposes,
or an amount that is allowed by law to reduce income prior
to [the] application of the tax rate to compute the amount of
tax which is due. A tax credit differs from a tax deduction. A
tax credit reduces the tax due, including -- whenever
applicable -- the income tax that is determined after
applying the corresponding tax rates to taxable income. A
tax deduction, on the other hand, reduces the income that is
subject to tax in order to arrive at taxable income. A tax
credit is used only after the tax has been computed; a tax
deduction, before. Since a tax credit is used to reduce
directly the tax that is due, there ought to be a tax liability
before the tax credit can be applied. Without that liability,
any tax credit application will be useless. There will be no
reason for deducting the latter when there is, to begin with,
no existing obligation to the government. However, the
existence of a tax credit or its grant by law is not the same
as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.
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If a net loss is reported by, and no other taxes are currently
due from, a business establishment, there will obviously be
no tax liability against which any tax credit can be applied.
For the establishment to choose the immediate availment of
a tax credit will be premature and impracticable.
Nevertheless, the irrefutable fact remains that, under RA
7432, Congress has granted without conditions a tax credit
benefit to all covered establishments.
Although this tax credit benefit is available, it need not be
used by losing ventures, since there is no tax liability that
calls for its application. By its nature, the tax credit may still
be deducted from a future, not a present, tax liability,
without which it does not have any use. While a tax liability
is essential to the availment or use of any tax credit, prior
tax payments are not. On the contrary, for the existence or
grant solely of such credit, neither a tax liability nor a prior
tax payment is needed.
In addition to the provisions in the Tax Code, there are also
tax treaties and special laws that grant or allow tax credits,
even though no prior tax payments have been made. It is
evident that prior tax payments are not indispensable to the
availment of a tax credit. Availment under RA 7432 did not
require prior tax payments by private establishments
concerned. RA 7432 specifically allows private
establishments to claim as tax credit the amount of
discounts they grant. In turn, the Implementing Rules and
Regulations, issued pursuant thereto, provide the procedures
for its availment. To deny such credit, despite the plain
mandate of the law and the regulations carrying out that
mandate, is indefensible.
A discount is an abatement or reduction made from the
gross amount or value of anything. To be more precise, it is
in business parlance a deduction or lowering of an amount
of money; or a reduction from the full amount or value of
something, especially a price. A distinguishing feature of
the implementing rules of RA 7432 is the private
establishments outright deduction of the discount from the
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invoice price of the medicine sold to the senior citizen. It is,
therefore, expected that for each retail sale made under this
law, the discount period lasts no more than a day, because
such discount is given -- and the net amount thereof
collected -- immediately upon perfection of the sale.
Although prompt payment is made for an armslength
transaction by the senior citizen, the real and compelling
reason for the private establishment giving the discount is
that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount
privilege, not a sales discount or any of the above discounts
in particular. Prompt payment is not the reason for (although
a necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to
the tax credit benefit enjoyed by the private establishment
granting the discount. Yet, under the revenue regulations
promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may
be the same as that resulting from a sales discount.
However, to a private establishment, the effect is different
from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the
same as a sales discount. This benefit cannot and should not
be treated as a tax deduction.
To stress, the effect of a sales discount on the income
statement and income tax return of an establishment
covered by RA 7432 is different from that resulting from the
availment or use of its tax credit benefit. While the former is
a deduction before, the latter is a deduction after, the
income tax is computed. As mentioned earlier, a discount is
not necessarily a sales discount, and a tax credit for a simple
discount privilege should not be automatically treated like a
sales discount. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not
to distinguish.
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Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94
define tax credit as the 20 percent discount deductible from
gross income for income tax purposes, or from gross sales
for VAT or other percentage tax purposes. In effect, the tax
credit benefit under RA 7432 is related to a sales discount.
This contrived definition is improper, considering that the
latter has to be deducted from gross sales in order to
compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing
the income tax.
When the law says that the cost of the discount may be
claimed as a tax credit, it means that the amount -- when
claimed -- shall be treated as a reduction from any tax
liability. The option to avail of the tax credit benefit depends
upon the existence of a tax liability, but to limit the benefit
to a sales discount -- which is not even identical to the
discount privilege that is granted by law -- does not define it
at all and serves no useful purpose. The definition must,
therefore, be stricken down. The law cannot be amended by
a mere regulation. In fact, a regulation that operates to
create a rule out of harmony with the statute is a mere
nullity. It cannot prevail.
Our tax authorities fill in the details that Congress may not
have the opportunity or competence to provide. The
regulations these authorities issue are relied upon by
taxpayers, who are certain that these will be followed by the
courts. Courts, however, will not uphold these authorities
interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term
tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly
in contrast to what RA 7432 provides. Their interpretation
has muddled up the intent of Congress in granting a mere
discount privilege, not a sales discount. The administrative
agency issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the
legislature. In case of conflict, the law must prevail. A
regulation adopted pursuant to law is law. Conversely, a
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regulation or any portion thereof not adopted pursuant to
law is no law and has neither
the force nor the effect of law.
The word may in the text of the statute implies that the
availability of the tax credit benefit is neither unrestricted
nor mandatory. There is no absolute right conferred upon
the respondent, or any similar taxpayer, to avail itself of the
tax credit remedy whenever it chooses; neither does it
impose a duty on the part of the government to sit back and
allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer. For the tax
authorities to RECENT JURISPRUDENCE TAXATION LAW
compel respondent to deduct the 20 percent discount from
either its gross income or its gross salesis, therefore, not
only to make an imposition without basis in law, but also to
blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit
benefit is merely permissive, not imperative. The respondent
is given two options -- either to claim or not to claim the
cost of the discounts as a tax credit. In fact, it may even
ignore the credit and simply consider the gesture as an act
of beneficence, an expression of its social conscience. It is
the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax
credit. RA 7432 does not give respondent the unfettered
right to avail itself of the credit whenever it pleases. Neither
does it allow our tax administrators to expand or contract
the legislative mandate. The plain meaning rule or verba
legis in statutory construction is thus applicable x x x. Where
the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied
without attempted interpretation. Sections 2.i and 4 of RR
2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior
citizens does not come directly from the State, but rather
from the private establishments concerned. Accordingly, the
tax credit benefit granted to these establishments can be
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deemed as their just compensation for private property
taken by the State for public use.
The concept of public use is no longer confined to the
traditional notion of use by the public, but held synonymous
with public interest, public benefit, public welfare, and public
convenience. The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the
general public to which these citizens belong. The discounts
given would have entered the coffers and formed part of the
gross sales of the private establishments concerned, were it
not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking of
private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432,
the respondent becomes entitled to a just compensation.
This term refers not only to the issuance of a tax credit
certificate indicating the correct amount of the discounts
given, but also to the promptness in its release. Equivalent
to the payment of property taken by the State, such
issuance -- when not done within a reasonable time from the
grant of the discounts -- cannot be considered as just
compensation. The effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its
revenues.
While it is a declared commitment under Section 1 of RA
7432, social justice cannot be invoked to trample on the
rights of property owners who under our Constitution and
laws are also entitled to protection. The social justice
consecrated in our Constitution is not intended to take away
rights from a person and give them to another who is not
entitled thereto. For this reason, a just compensation for
income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body
can alter that fact.
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To put it differently, a private establishment that merely
breaks even-- without the discounts yet -- will surely start to
incur losses because of such discounts. The same effect is
expected if its mark-up is less than 20 percent, and if all its
sales come from retail purchases by RECENT
JURISPRUDENCE TAXATION LAW senior citizens. Aside
from the observation we have already raised earlier, it will
also be grossly unfair to an establishment if the discounts
will be treated merely as deductions from either its gross
income or its gross sales. Operating at a loss through no
fault of its own, it will realize that the tax credit limitation
under RR 2-94 is inutile, if not improper. Worse, profit-
generating businesses will be put in a better position if they
avail themselves of tax credits denied those that are losing,
because no taxes are due from the latter.
RA 7432 itself seeks to adopt measures whereby senior
citizens are assisted by the community as a whole and to
establish a program beneficial to them. These objectives are
consonant with the constitutional policy of making health x
x x services available to all the people at affordable cost
and of giving priority for the needs of the x x x elderly.
Sections 2.i and 4 of RR 2-94, however, contradict these
constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private
establishments a simple tax credit, not a deduction. In fact,
no cash outlay is required from the government for the
availment or use of such credit. The deliberations on
February 5, 1992 of the Bicameral Conference Committee
Meeting on Social Justice, which finalized RA 7432, disclose
the true intent of our legislators to treat the sales discounts
as a tax credit, rather than as a deduction from gross
income.
RA 7432 is a special law that should prevail over the Tax
Code -- a general law. RA 7432 is an earlier law not
expressly repealed by, and therefore remains an exception
to, the Tax Code -- a later law. When the former states that
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Atty. Jose Cochingyan III
a tax credit may be claimed, then the requirement of prior
tax payments under certain provisions of the latter, as
discussed above, cannot be made to apply. Neither can the
instances of or references to a tax deduction under the Tax
Code be made to restrict RA 7432. No provision of any
revenue regulation can supplant or modify the acts of
Congress
Entertainment, Amusement and Recreational Expense
Revenue Regulation No. 10-2002
SECTION 1. Coverage. These regulations shall cover
entertainment, amusement and recreation expenses of the
following taxpayers:
a. Individuals engaged in business, including taxable
estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships, including its
members.
SECTION 2. Definition of Terms. For purposes of these
Regulations, the term "Entertainment, Amusement and
Recreation Expenses" includes representation expenses
and/or depreciation or rental expense relating to
entertainment facilities, as described below.
The term "Representation Expenses" shall refer to expenses
incurred by a taxpayer in connection with the conduct of his
trade, business or exercise of profession, in entertaining,
providing amusement and recreation to, or meeting with, a
guest or guests at a dining place, place of amusement,
country club, theater, concert, play, sporting event, and
similar events or places. For purposes of these Regulations,
representation expenses shall not refer to fixed
representation allowances that are subject to withholding tax
on wages pursuant to appropriate revenue regulations.
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In the case particularly of a country, golf, sports club, or any
other similar club where the employee or officer of the
taxpayer is the registered member and the expenses
incurred in relation thereto are paid for by the taxpayer,
there shall be a presumption that such expenses are fringe
benefits subject to fringe benefits tax unless the taxpayer
can prove that these are actually representation expenses.
For purposes of proving that said expense is a
representation expense and not fringe benefits, the taxpayer
should maintain receipts and adequate records that indicate
the (a) amount of expense (b) date and place of expense (c)
purpose of expense (d) professional or business relationship
of expense (e) name of person and company entertained
with contact details.
The term "Entertainment Facilities" shall refer to (1) a yacht,
vacation home or condominium; and (2) any similar item of
real or personal property used by the taxpayer primarily for
the entertainment, amusement, or recreation of guests or
employees. To be considered an entertainment facility, such
yacht, vacation home or condominium, or item of real or
personal property must be owned or form part of the
taxpayer's trade, business or profession, or rented by such
taxpayer, for which the taxpayer claims a depreciation or
rental expense. A yacht shall be considered an
entertainment facility under these Regulations if its use is in
fact not restricted to specified officers or employees or
positions in such a manner as to make the same a fringe
benefit for purposes of imposing the fringe benefits tax.
The term "Guests" shall mean persons or entities with which
the taxpayer has direct business relations, such as but not
limited to, clients/customers or prospective
clients/customers. The term shall not include employees,
officers, partners, directors, stockholders, or trustees of the
taxpayer.
SECTION 3. Exclusions. The following expenses are not
considered entertainment, amusement and recreation
expenses as defined under Section 2 hereof.
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Atty. Jose Cochingyan III
a. Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship, pursuant to
Revenue Regulations 2-98 , 3-98 and amendments
thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of
stockholders, partners or directors;
d. Expenses for attending or sponsoring an employee
to a business league or professional organization
meeting;
e. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and
other similar events;
f. Other expenses of a similar nature.
Notwithstanding the foregoing, such items of exclusions
may, nonetheless, qualify as items of deduction under
Section 34 of the Tax Code of 1997, subject to
conditions for deductibility stated therein.
SECTION 4. Requisites of Deductibility of "Entertainment,
Amusement and Recreation Expense". The following are
the requisites for deductibility of entertainment, amusement
and recreation expense as defined above subject to the
ceiling prescribed under Section 5 of these Regulations:
a. It must be paid or incurred during the taxable year;
b. It must be: (i) directly connected to the
development, management and operation of the
trade, business or profession of the taxpayer; or (ii)
directly related to or in furtherance of the conduct of
his or its trade, business or exercise of a profession;
c. It must not be contrary to law, morals, good
customs, public policy or public order;
d. It must not have been paid, directly or indirectly, to
an official or employee of the national government,
or any local government unit, or of any government-
owned or controlled corporation (GOCC), or of a
foreign government, or to a private individual, or
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corporation, or general professional partnership
(GPP), or a similar entity, if it constitutes a bribe,
kickback or other similar payment;
e. It must be duly substantiated by adequate proof.
The official receipts, or invoices, or bills or
statements of accounts should be in the name of the
taxpayer claiming the deduction; and
f. The appropriate amount of withholding tax, if
applicable, should have been withheld therefrom
and paid to the Bureau of Internal Revenue.
SECTION 5. Ceiling on Entertainment, Amusement, and
Recreation Expense. There shall be allowed a deduction
from gross income for entertainment, amusement and
recreation expense, as defined in Section 2 of these
Regulations, in an amount equivalent to the actual
entertainment, amusement and recreation expense paid or
incurred within the taxable year by the taxpayer, but in no
case shall such deduction exceed 0.50 percent (%) of net
sales (i.e., gross sales less sales returns/allowances and
sales discounts) for taxpayers engaged in sale of goods or
properties; or 1.00 percent (%) of net revenue (i.e., gross
revenue less discounts) for taxpayers engaged in sale of
services, including exercise of profession and use or lease of
properties. However, if the taxpayer is deriving income from
both sale of goods/properties and services, the allowable
entertainment, amusement and recreation expense shall in
all cases be determined based on an apportionment formula
taking into consideration the percentage of the net sales/net
revenue to the total net sales/net revenue, but which in no
case shall exceed the maximum percentage ceiling provided
in these Regulations.
Apportionment Formula:
Net sales/net revenue
x Actual Expense
Total Net sales & net revenue
Illustration: ERA Corporation is engaged in the sale of goods
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Atty. Jose Cochingyan III AY 2011-2012

and services with net sales/net revenue of P200,000 and disallowed in its totality, without prejudice to such penalties
P100,000 respectively. The actual entertainment, as may be imposed by the Tax Code of 1997.
amusement and recreation expense for the second semester
of 2002 totaled to P3,000. SECTION 6. Reporting. The taxpayer is hereby required to
use in its financial statements and income tax return the
Allowable account title "entertainment, amusement and recreation
amount to expense", or in the alternative, to disclose in the notes to
Ent., be claimed financial statements the amount corresponding thereto when
Amusement Max as EAR exp. recording expenses paid or incurred of the nature as defined
Net Sales / & Rec. Exp. Percentage (whichever in Section 2 of these Regulations. However, such expense
Net (EAR) based of Ceiling is lower of should be reported in the taxpayer's income tax return as a
Revenues on formula* expense** col. 2 & 3) separate expense item.
(1) (2) (3) (4)
Sale of Motor Vehicle and Similar Expenses (RR 12-12)
P200,000 P2,000 P1,000 P1,000
Goods
Sale of Deductibility of Depreciation Expenses as it Relates to
100,000 1,000 1,000 1,000 Purchase of Vehicles and Other Expenses Related Thereto,
Services
TOTAL P300,000 P3,000 P2,000 P2,000 and Input Taxes Allowed Therefor

*Apportionment Formula SECTION 1. Scope. Pursuant to the provisions of Section

Sale of Goods (P200,000/P300,000) x P3,000 244 , in relation to Section 245 of the National Internal
Sale of Services(P100,000/P300,000) x P3,000 Revenue Code of 1997, these Regulations are hereby
promulgated to implement Sections 34 (F) and 110 of the
**Maximum Percentage Ceiling 1997 National Internal Revenue Code ("Tax Code"),
Sale of Goods (P200,000 x 0.50%) specifically to define depreciation expenses relating to
Sale of Services (P100,000 x 1%) taxpayer's purchase of Vehicles of all types (defined herein
as passenger vehicles of all type, whether by land, water, or
In the above illustration, ERA Corporation can only claim a air) providing for limits on the deductibility thereof and all
total of P2,000 as entertainment, amusement and recreation expenses related thereto, and the disallowance of input
expense. taxes for disallowed expenses.

Notwithstanding the ceiling imposed on such expense, the
claimed expense shall be subject to verification and audit for
purposes of determining its deductibility as well as
compliance with the substantiation requirements as provided
in these Regulations. However, if after verification a
taxpayer is found to have shifted the amount of the
entertainment, amusement and recreation expense to any
other expense in order to avoid being subjected to the
ceiling herein prescribed, the amount shifted shall be
SECTION 2. General Principles. Under Chapter VII, Section
34 (F) of the Tax Code, in computing taxable income, a
reasonable allowance for the exhaustion, wear and tear of
property used in business is allowed to be deducted from
gross income. Generally, it cannot be presumed that the
purchase of a Vehicle is a purchase of a property used in
business. In order for the deduction for depreciation for said
purchase, and all other expenses and input taxes incurred
on said Vehicle may be allowed, the rules as prescribed
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under these Regulations must be complied with.
SECTION 3. Rules on Deductibility of Depreciation on
Vehicles, Other Expenses Incurred Thereon, and Input Taxes
on Disallowed Expenses. The following guidelines shall be
observed in determining whether depreciation expense can
be claimed or not on account of Vehicles capitalized by the
taxpayer, or in claiming other expenses and input taxes on
account of said Vehicle:
A. No deduction from gross income for depreciation shall
be allowed unless the taxpayer substantiates the purchase
with sufficient evidence, such as official receipts or other
adequate records which contain the following, among
others:
i. Specific Motor Vehicle Identification Number,
Chassis Number, or other registrable identification
numbers of the Vehicle;
ii. The total price of the specific Vehicle subject to
depreciation; and cdll
iii. The direct connection or relation of the Vehicle to
the development, management, operation, and/or
conduct of the trade or business or profession of the
taxpayer;
B. Only one Vehicle for land transport is allowed for the use
of an official or employee, the value of which should not
exceed Two Million Four Hundred Thousand Pesos
(Php2,400,000.00);
C. No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicles which exceed
the above threshold amount, unless the taxpayer's main line
of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in said
operations;
D. All maintenance expenses on account of non-depreciable
Vehicles for taxation purposes are disallowed in its entirety;
E. The input taxes on the purchase of non-depreciable
Vehicles and all input taxes on maintenance expenses
incurred thereon are likewise disallowed for taxation
purposes.
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SECTION 4. Repealing Clause. All Rules and Regulations
or parts thereof inconsistent with the provisions of these
Regulations are hereby repealed accordingly.
SECTION 5. Effectivity. The provisions of these
Regulations shall take effect immediately.
Clarifying Certain Provisions of Revenue Regulations No.
12-2012 on the Deductibility of Depreciation Expenses
as it Relates to Purchase of Vehicles and Other Expenses
Related Thereto, and the Input Taxes Allowed Therefor
(RMC 2-13)
Q1. Does the RR apply to land vehicles purchased prior to its
effectivity where the purchased amount exceeded the threshold
of P2,400,000.00?
A1. No. The RR applies prospectively, thus, it applies to land
vehicles purchased upon its effectivity.
Q2. When is the effectivity-date of the RR?
A2. The RR was published last October 17, 2012 and, based on
its provisions, it shall take effect immediately. Hence, the RR
took effect on October 17, 2012.
Q3. In case the Vehicles (defined in the RR as passenger
vehicles of all type, whether by land, water, or air) which are not
allowed depreciation expense, or the non-depreciable Vehicles,
will be sold at a loss, will the loss to be incurred from such sale
deductible from gross income?
A3. No. Any loss that will be incurred as a result of a sale of the
non-depreciable Vehicles shall likewise be NOT allowed as a
deduction from gross income.
Q4. What are the other expenses that are also disallowed for
income tax and VAT purposes for the non-depreciable Vehicles?
A4. For income tax purposes, all expenses related to the non-
depreciable Vehicles such as but not limited to repairs and
maintenance, oil and lubricants, gasoline, spare parts, tires and
accessories, premium paid for insurance covering said vehicles
and registration fees shall not be allowed as a deduction in its
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entirety. For VAT purposes, all input taxes corresponding to the
disallowed expenses mentioned above for income tax purposes
are likewise not allowed.
NOLCO (Revenue Regulation No. 14-01)
SECTION 1. Scope. Pursuant to the provisions of Section
244 of the National Internal Revenue Code of 1997
(hereinafter referred to as the Code), these Regulations are
hereby promulgated to govern the deduction from gross
income of the Net Operating Loss Carry-Over (NOLCO)
pursuant to Section 34 (D) (3) of the Code, which provides:
Net Operating Loss Carry-over.- The net operating loss of
the business or enterprise for any taxable year immediately
preceding the current taxable year, which had not been
previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next
three (3) consecutive taxable years immediately following
the year of such loss: Provided, however, That any net loss
incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction
under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there has
been no substantial change in the ownership of the business
or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal
value of outstanding issued shares, if the business is in the
name of a corporation, is held by or on behalf of the same
persons; or
(ii) Not less than seventy-five percent (75%) of the paid up
capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
For purposes of this Subsection, the term net operating
loss shall mean the excess of allowable deduction over gross
income of the business in a taxable year:
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Provided, That for mines other than oil and gas wells, a net
operating loss without the benefit of incentives provided for
under Executive Order No. 226, as amended, otherwise
known as the Omnibus Investments Code of 1987, incurred
in any of the first ten (10) years of operation may be carried
over as a deduction from taxable income for the next five
(5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of
the five (5) taxable years following the loss, and any portion
of such loss which exceeds the taxable income of such first
year shall be deducted in like manner from the taxable
income of the next remaining four (4) years.
SEC. 2. General Principles and Policies. -
2.1 For purposes of these Regulations, the allowance for
deduction of NOLCO shall be limited only to net
operating losses accumulated beginning January 1,
1998.
2.2 In general, NOLCO shall be allowed as a deduction from
the gross income of the same taxpayer who sustained
and accumulated the net operating losses regardless of
the change in its ownership. This rule shall also apply in
the case of a merger where the taxpayer is the surviving
entity.
2.3 Unless otherwise provided in these Regulations, NOLCO
of the taxpayer shall not be transferred or assigned to
another person, whether directly or indirectly, such as,
but not limited to, the transfer or assignment thereof
through a merger, consolidation or any form of business
combination of such taxpayer with another person.
2.4 NOLCO shall also be allowed if there has been no
substantial change in the ownership of the business or
enterprise in that not less than 75% in nominal value of
outstanding issued shares or not less than 75% of the
paid up capital of the corporation, if the business is in
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the name of the corporation, is held by or on behalf of
the same persons.
The 75% equity, ownership or interest rule prescribed in
these Regulations shall only apply to a transfer or
assignment of the taxpayers net operating losses as a
result of or arising from the said taxpayers merger or
consolidation or business combination with another
person. In case the transfer or assignment of the
taxpayers net operating losses arises from the said
taxpayers merger, consolidation or combination with
another person, the transferee or assignee shall not be
entitled to claim the same as deduction from gross
income unless, as a result of the said merger,
consolidation or combination, the shareholders of the
transferor/assignor, or the transferor (in case of other
business combinations) gains control of at least 75% or
more in nominal value of the outstanding issued shares
or paid up capital of the transferee/assignee (in case the
transferee/assignee is a corporation) or 75% or more
interest in the business of the transferee/assignee (in
case the transferee/assignee is other than a
corporation).
2.5 Unless otherwise provided in these Regulations, an
individual (including estate or trust) engaged in trade or
business or in the exercise of profession, or a domestic
or resident foreign corporation may be allowed to claim
deduction of his/its corresponding NOLCO: Provided,
however, that an individual who claims the 10% optional
standard deduction shall not simultaneously claim
deduction of the NOLCO: Provided, further, that the
three-year reglementary period shall continue to run
notwithstanding the fact that the aforesaid individual
availed of the 10% optional standard deduction during
the said period.
2.6 The three-year reglementary period on the carry-over of
NOLCO shall continue to run notwithstanding the fact
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that the corporation paid its income tax under the
Minimum Corporate Income Tax computation.
2.7 NOLCO shall be availed of on a first-in, first-out basis.
2.8 The net operating loss incurred by a taxpayer in the year
in which a substantial change in ownership in such
taxpayer occurs shall not be affected by such change in
ownership, notwithstanding subsections 2.3 and 2.4.
SEC. 3. Definition of Terms. - For purposes of these
Regulations, the words and phrases herein provided shall
mean as follows:
3.1 Gross Income - Except as otherwise provided in these
Regulations, the term Gross Income means the
pertinent items of income referred to in Section 32(A) of
the Tax Code of 1997 which are required to be declared
in the taxpayers Income Tax Return for purposes of
computing his taxable income as defined in Section 31 of
the same Code. All exempt income and other items of
income subject to final tax shall not form part of the
gross income.
3.2 Allowable Deductions The term Allowable Deductions
means the items of deduction enumerated under Section
34(A) to (J) and Section 34(M), including the special
deductions allowed to insurance companies under
Section 37 of the Code, but excluding NOLCO and any
item of incentive deduction allowable under any special
law that does not actually involve cash outlay: Provided,
that, in the case of an individual entitled to claim the
Optional Standard Deduction (OSD) under Section 34(L),
in lieu of the deductions enumerated under Section
34(A) to (K), the term allowable deductions shall mean
the aforesaid OSD plus deduction of premium payments
on health and/or hospitalization insurance as provided
under Section 34(M) of the Code, if applicable.
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3.3 Net Operating Loss - The term Net Operating Loss
shall mean the excess of allowable deduction over gross
income of the business in a taxable year.
3.4 Nominal Value of Outstanding Issued Shares - The term
Nominal Value of Outstanding Issued Shares shall refer
to the par value (in case of par value shares of stock) or
stated value (in case of no par value shares of stock) of
shares of stock issued to the stockholders of the
corporation.
3.5 Paid Up Capital of the Corporation - The term Paid Up
Capital of the Corporation shall refer to the total
amount paid by stockholders for their subscriptions in
the shares of stock of the corporation, including any
amount paid over and above the par value or stated
value of the share of stock (e.g., premium on capital).
For this purpose, the taxpayers shall maintain complete
and accurate records of the paid-up capital of the
shareholders.
3.6 Taxable Income The term Taxable Income means
the excess amount of the pertinent items of gross
income over the allowable deductions and/or personal
and additional exemptions, if any, authorized under the
Code or under any special law.
3.7 Taxable Year - The term Taxable Year means the
calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is
computed under Title II of the Code. Taxable year
includes, in the case of a return made for a fractional
part of a year, the period for which such return is made.
The term Fiscal Year means an accounting period of
twelve (12) months ending on the last day of any month
other than December.
3.8 Substantial Change in the Ownership of the Business or
Enterprise - The term Substantial Change in the
Ownership of the Business or Enterprise shall refer to a
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change in the ownership of the business or enterprise as
a result of or arising from its merger or consolidation or
combination with another person in the manner as
provided in subsection 2.4 of these Regulations. Any
change in ownership as a result of or arising thereunder
shall not be treated as a substantial change for as long
as the stockholders of the party thereto, to whom the
net operating loss is attributable, gains or retains 75%
or more interest after such merger or consolidation or
combination.
3.9 Merger - For purposes of these Regulations, the term
Merger shall refer to the absorption of a corporation by
another corporation, the latter retaining its own name
and identity and acquiring the assets, liabilities,
franchises and powers of the former, and the absorbed
corporation ceasing to exist as a separate juridical
person.
3.10 Consolidation - For purposes of these Regulations,
the term Consolidation shall refer to a situation when
two or more corporations are extinguished, and by the
same process a new one is created, taking over the
assets and assuming the liabilities of the said
extinguished corporations; or the unification of two or
more corporations into a single new corporation, having
the combined capital, franchises and powers of all its
constituents.
3.11 Combination - For purposes of these Regulations,
the term Combination shall refer to a situation when
an owner of a business, organized as a sole
proprietorship, admits a partner in his business for the
purpose of forming a co-partnership, or any such
business combination which, in effect, is similar or
synonymous thereto.
3.12 By or on Behalf of the Same Persons - The term By
or on Behalf of the Same Persons shall refer to the
maintenance of ownership despite change as when:
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1. No actual change in ownership is involved in case
the transfer involves change from direct ownership
to indirect ownership, or vice versa.
Illustration:
Facts: P Corporation owns Q Corporation that has
NOLCO. P Corporation transfers Q Corporations
shares to R Corporation in exchange for 100% of R
Corporation shares.
Held: Q Corporations NOLCO is retained because Q
Corporations shares are held by R Corporation on
behalf of P Corporation, the original owner.
2. No actual change in ownership is involved as in the
case of merger of the subsidiary into the parent
company.
Illustration:
Facts: X Corporation owns 100% of Y Corporation. Y
Corporation owns 100% of Z Corporation. Z
Corporation has NOLCO. Z Corporation is merged
into Y Corporation.
Held: Z Corporations NOLCO should be retained and
transferred to Y Corporation. Prior to the merger, X
Corporation already indirectly owned Z Corporation,
i.e., Z Corporations shares were held by Y
Corporation on behalf of X Corporation. After the
merger, X now directly owns Z Corporation
[absorbed corporation] which continues to exist in Y
Corporation.
Any reference in these Regulations to the 75%
equity, ownership, or interest rule, 75% or more in
nominal value, 75% or more interest, and other
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similar terms shall be construed within the context
of this definition.
Notwithstanding the above, in determining whether
there is actual change in ownership in the above-
mentioned and similar cases, each and every step of
the transaction shall be considered and the whole
transaction or series of transactions shall be treated
as a single unit.
SEC. 4. Taxpayers Entitled to Deduct NOLCO from Gross
Income. Any individual (including estates and trusts)
engaged in trade or business or in the exercise of his
profession, and domestic and resident foreign corporations
subject to the normal income tax (e.g., manufacturers and
traders) or preferential tax rates under the Code (e.g.,
private educational institutions, hospitals, and regional
operating headquarters) on their taxable income as defined
in Section 3 of these Regulations shall be entitled to deduct
from his/its gross income for the current year his/its
accumulated net operating losses for the immediately
preceding three (3) consecutive taxable years: Provided,
however, that net operating losses incurred or sustained
prior to January 1, 1998 shall not qualify for purposes of the
NOLCO. Provided, further, that any provision of these
Regulations notwithstanding, the following shall not be
entitled to claim deduction of NOLCO:
4.1 Offshore Banking Unit (OBU) of a foreign banking
corporation, and Foreign Currency Deposit Unit (FCDU)
of a domestic or foreign banking corporation, duly
authorized as such by the Bangko Sentral ng Pilipinas
(BSP);
4.2 An enterprise registered with the Board of Investments
(BOI) with respect to its BOI-registered activity enjoying
the Income Tax Holiday incentive. Its accumulated net
operating losses incurred or sustained during the period
of such Income Tax Holiday shall not qualify for
purposes of the NOLCO;
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4.3 An enterprise registered with the Philippine Economic
Zone Authority (PEZA), pursuant to R.A. No. 7916, as
amended, with respect to its PEZA-registered business
activity. Its accumulated net operating losses incurred or
sustained during the period of its PEZA registration shall
not qualify for purposes of the NOLCO;
4.4 An enterprise registered under R.A. No. 7227, otherwise
known as the Bases Conversion and Development Act of
1992, e.g., SBMA-registered enterprises, with respect to
its registered business activity. Its accumulated net
operating losses incurred or sustained during the period
of its said registered operation shall not qualify for
purposes of the NOLCO;
4.5 Foreign corporations engaged in international shipping
or air carriage business in the Philippines; and
4.6 In general, any person, natural or juridical, enjoying
exemption from income tax, pursuant to the provisions
of the Code or any special law, with respect to its
operation during the period for which the aforesaid
exemption is applicable. Its accumulated net operating
losses incurred or sustained during the said period shall
not qualify for purposes of the NOLCO.
SEC. 5. Determination of Substantial Change in the
Ownership of the Business.
5.1 Time of Determination of Substantial Change in the
Ownership of the Business; Determined as of the End of
the Taxable Year. - The substantial change in the
ownership of the business or enterprise shall be
determined as of the end of the taxable year when
NOLCO is to be claimed as deduction. Whether or not
substantial change in ownership occurred shall be
determined on the basis of any change in the ownership
of interest in the said business or enterprise arising from
or incident to its merger, or consolidation, or
combination with another person (e.g., in the case of
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merger or consolidation of two or more corporations,
such change shall be determined based on the
ownership of the outstanding shares of stock issued or
based on paid-up capital as of the end of the taxable
year, and as a result of or arising from the said merger
or consolidation).
5.2 When Change Occurs. - A change in the ownership of
the business occurs when the person who sustained net
operating losses enters into a merger, or consolidation
or combination with another person, thereby resulting to
the transfer or conveyance of the said net operating
losses, to another person, in the course of the said
merger or consolidation or combination.
(a) When No Substantial Change Occurs. - No
substantial change in ownership of the business
occurs if, as a result of the said merger or
consolidation or combination, the stockholders of the
transferor, or the transferor, in case of other
business combinations, gains control of at least 75%
or more in nominal value of the outstanding issued
shares or paid-up capital of the transferee-assignee
(in case the transferee-assignee is a corporation) or
75% or more interest in the business of the
transferee-assignee (in case the transferee-assignee
is other than a corporation).
(b) When Substantial Change Occurs. - A substantial
change in ownership of the business occurs if, as a
result of the transaction referred to in subsection 5.2
(a) hereof, the stockholders of the transferor or the
transferor, in case of other business combinations,
gains control of the aforesaid transferee-assignee
only to the extent of less than 75%.
SEC. 6. Entitlement to Net Operating Loss Carry- Over. -
6.1 In General. - In general, only net operating losses
incurred by a qualified taxpayer for the period beginning
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January 1, 1998 may be carried over to the next three
(3) immediately succeeding taxable years following the
year of such loss for purposes of the NOLCO deduction.
Provided, however, that for mines other than oil and gas
wells, a net operating loss without the benefit of
incentives provided for under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of
1987, as amended , incurred in any of the first ten (10)
years of operation may be carried over as a deduction
from taxable income for the next five (5) years
immediately following the year of such loss. Provided,
further, that the entire amount of the loss shall be
carried over to the first of the five (5) taxable years
following the loss, and any portion of such loss which
exceeds the taxable income of such first year shall be
deducted in like manner from the taxable income of the
next remaining (4) four years.
6.2 Transitory Apportionment of NOLCO, in Case of
Corporation Using the Fiscal Year Accounting Period. - In
general, only net operating losses incurred beginning
January 1, 1998 may be claimed as a NOLCO deduction.
In the case of a corporation using a fiscal year
accounting period as of the said date, whose result of
operations for the fiscal year 1997-1998 shows a net
operating loss, the allowable NOLCO for the succeeding
fiscal years shall be determined, as follows:
NOLCO for the entire fiscal year (1997-1998) xxx
Multiplied by the ratio of: No. of months in 1998
12 mos. covering FY 97-98 xxx
NOLCO to be carried over to FYs 1998-1999,
1999-2000, and/or 2000-2001 xxx
6.3 Where Taxpayer is Exempt, or Partly Exempt from
Income Tax, or Enjoying Preferential Tax Treatment
Under Special Laws. - Net operating loss or losses
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incurred by any person who is exempt from income tax,
or enjoying preferential tax treatment pursuant to the
provisions of special laws, shall not be allowed a NOLCO
deduction (e.g., any BOI-registered enterprise enjoying
income tax holiday pursuant to E.O. No. 226, as
amended, otherwise known as the Omnibus Investments
Code of 1987; or any PEZA-registered enterprise
enjoying preferential tax treatment or income tax
holiday pursuant to R.A. No. 7916, as amended; any
person enjoying preferential tax treatment pursuant to
R.A. No. 7227, otherwise known as the Bases
Conversion and Development Act of 1992. See Section 4
of these Regulations for further discussion).
In case any of the aforementioned persons is engaged in
both registered and unregistered business activities
under any of the aforesaid laws (e.g., a corporation with
a BOI-registered activity enjoying income tax holiday;
and other unregistered business activities not enjoying
any BOI incentive) the net operating loss or losses
sustained or incurred by the said BOI-enterprise from its
registered activities shall not be allowed as NOLCO
deduction from its gross income derived from the
unregistered business activities.
6.4 Quarterly and Annual Availment of NOLCO. - NOLCO
shall be allowed as deduction in computing the
taxpayers income taxes per quarter and annual final
adjustment income tax returns: Provided, however, that
if per the taxpayers final annual adjustment income tax
return, the entire operations for the year resulted to a
net operating loss, such net operating loss may be
claimed as NOLCO deduction in the immediately
succeeding taxable year: Provided, further, that NOLCO
may be claimed as deduction only within a period of
three (3) consecutive taxable years immediately
following the year the net operating loss was sustained
or incurred. In order that compliance with this three-
year statutory requisite may be effectively monitored,
the taxpayer shall, at all times, show its NOLCO
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deduction, in its income tax return, as a separate item of
deduction. In no case may NOLCO be claimed, as a part
of the taxpayers other itemized deductions, like under
deduction of losses, in general.
6.5 NOLCO in Relation to the Minimum Corporate Income
Tax (MCIT). - In general, domestic and resident foreign
corporations subject to the normal income tax rate are
liable to the 2% MCIT, if applicable, computed based on
gross income, whenever the amount of the MCIT is
greater than the normal income tax due (computed with
the benefit of NOLCO, if any), pursuant to Sections 27 or
28 of the Code. Thus, such corporation cannot enjoy the
benefit of NOLCO for as long as it is subject to MCIT in
any taxable year. Provided, however, that the running of
the three-year period for the expiry of NOLCO is not
interrupted by the fact that such corporation is subject
to MCIT in any taxable year during such three-year
period.
SEC. 7. Presentation of NOLCO in the Tax Return and
Unused NOLCO in the Income Statement. The NOLCO shall
be separately shown in the taxpayers income tax return
(also shown in the Reconciliation Section of the Tax Return)
while the Unused NOLCO shall be presented in the Notes to
the Financial Statements showing, in detail, the taxable year
in which the net operating loss was sustained or incurred,
and any amount thereof claimed as NOLCO deduction within
three (3) consecutive years immediately following the year
of such loss. Failure to comply with this requirement will
disqualify the taxpayer from claiming the NOLCO.
RR 12-07
Excess MCIT be applied on quarterly basis also.
Bad Debts; Requisites for Deductability
RR No. 25-02 2 (amending RR No. 5-99 3)
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REVENUE REGULATIONS NO. 5-99 issued March 16, 1999
implements Section 34(E) of the Tax Code of 1997 relative
to the requirements for deductibility of bad debts from gross
income of a corporation or an individual engaged in trade or
business or a professional engaged in the practice of his
profession. The requisites for valid deduction of bad debts
from gross income are: a) there must be an existing
indebtedness due to the taxpayer which must be valid and
legally demandable; b) the same must be connected with
the taxpayer's trade, business or practice of profession; c)
the same must not be sustained in a transaction entered into
between related parties enumerated under Section 36(B) of
the Tax Code of 1997; d) the same must be actually charged
off the books of accounts of the taxpayer as of the end of
the taxable year; and e) the same must be actually
ascertained to be worthless and uncollectible as of the end
of the taxable year. The recovery of bad debts previously
allowed as deduction in the preceding year or years will be
included as part of the taxpayer's gross income in the year
of such recovery to the extent of the income tax benefit of
said deduction.
REVENUE REGULATIONS NO. 25-02
SEC. 2. AMENDMENT Section 3 of RR 5-99 on the
requisites for valid deduction of bad debts from gross
income is hereby amended by deleting the penultimate
paragraph of the said Section and should now read as
follows:
Sec. 3. Requisites for valid deduction of bad debts from
gross income. The requisites for deductibility of bad debts
are:
(1) There must be an existing indebtedness due to the
taxpayer which must be valid and legally demandable;
(2) The same must be connected with the taxpayers trade,
business or practice of profession;
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(3) The same must not be sustained in a transaction
entered into between related parties enumerated under
Sec. 36(B) of the Tax Code of 1997;
(4) The same must be actually charged off the books of
accounts of the taxpayer as of the end of the taxable
year; and
(5) The same must be actually ascertained to be worthless
and uncollectible as of the end of the taxable year.
Before a taxpayer may charge off and deduct a debt, he
must ascertain and be able to demonstrate with reasonable
degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider all pertinent
evidence, including the value of the collateral, if any,
securing the debt and the financial condition of the debtor in
determining whether a debt is worthless, or the assigning of
the case for collection to an independent collection lawyer
who is not under the employ of the taxpayer and who shall
report on the legal obstacle and the virtual impossibility of
collecting the same from the debtor and who shall issue a
statement under oath showing the propriety of the
deductions thereon made for alleged bad debts. Thus, where
the surrounding circumstances indicate that a debt is
worthless and uncollectible and that legal action to enforce
payment would in all probability not result in the satisfaction
of execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the
purpose of deduction.
In the case of banks, the Commissioner of Internal Revenue
shall determine whether or not bad debts are worthless and
uncollectible in the manner provided in the immediately
preceding paragraph. Without prejudice to the
Commissioners determination of the worthlessness and
uncollectibility of debts, the taxpayer shall submit a Bangko
Sentral ng Pilipinas/Monetary Board written approval of the
writing off of the indebtedness from the banks books of
accounts at the end of the taxable year.
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Also, in no case may a receivable from an insurance or
surety company be written-off from the taxpayers books
and claimed as bad debts deduction unless such company
has been declared closed due to insolvency or for any such
similar reason by the Insurance Commissioner.
Fringe Benefits (RR No. 03-98 2.33(D))
(D) Tax Accounting for the Fringe Benefit Furnished to the
Employee and the Fringe Benefit Tax Due Thereon.
As a general rule, the amount of taxable fringe benefit
and the fringe benefits tax shall constitute allowable
deductions from gross income of the employer.
However, if the basis for computation of the fringe
benefits tax is the depreciation value, the zonal value as
determined by the Commissioner pursuant to Section
6(E) of the Code or the fair market value as determined
in the current real property tax declaration of a certain
property, only the actual fringe benefits tax paid shall
constitute a deductible expense for the employer. The
value of the fringe benefit shall not be deductible and
shall be presumed to have been tacked on or actually
claimed as depreciation expense by the employer.
Provided, however, that if the aforesaid zonal value or
fair market value of the said property is greater than its
cost subject to depreciation, the excess amount shall be
allowed as a deduction from the employer's gross
income as fringe benefit expense.
Illustrations on fringe benefit furnished or granted by
the employer to an employee (other than a rank-and-file
employee)
(1) During the year 1998, ABC Corporation paid for the
monthly rental of a residential house of its branch
manager (Mr. Dela Cruz) amounting to P66,000.00.
In this case, the monthly taxable grossed-up monetary
value of the said fringe benefit furnished or granted to
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its branch manager (Mr. Dela Cruz) shall be P50,000.00,
computed as follows:
Monthly rental for the residential house P66,000.00
Grossed-up monetary benefit granted
(P66,000.00 divided by 66% factor for
calendar year 1998 times 50% taxable portion)
P50,000.00
Fringe benefit tax due thereon (34%) P17,000.00
=========
ABC Corporation shall take up in its books of accounts
the P66,000.00 fringe benefit furnished to Mr. Dela Cruz,
under account title "Fringe Benefit Expense" and the
amount of 17,000.00 under the account title "Fringe
Benefit Tax Expense". The aforesaid amounts shall be
fully allowed as deductions from the gross income of
ABC Corporation and shall be taken up in the said
employer's books of accounts as follows:
Debit: Fringe Benefit Expense P66,000
Debit: Fringe Benefit Tax Expense P17,000
Credit: Cash P83,000
To record fringe benefit expense and fringe benefit tax
paid on rental of the residential property furnished to
Mr. Dela Cruz for his residential use. (Note: If the fringe
benefit expense of P66,000.00 has already accrued but
not yet paid, use the account title "fringe benefit
payable". If the fringe benefit tax has already accrued
but not yet paid, use the account title "fringe benefit tax
payable").
(2) XYZ Corporation owns a condominium unit. During the
year 1998, the said corporation furnished and granted
the said property for the residential use of its Assistant
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Vice-President. The fair market value of the said
property as determined by the Commissioner pursuant
to Section 6(E) of the Code amounts P10,000,000.00
while its fair market value as shown in its current Real
Property Tax Declaration amounts to P8,000,000.00. In
this case, the higher fair market value of P10,000,000.00
as determined by the Commissioner shall be used in
computing the monetary of the fringe benefit so
furnished or granted to said employee and the fringe
benefit tax due thereon shall be computed as follows:
Monthly rental value of the property
(P10,000,000 times 5% thereof times 50%
divided by 12 months) P20,833.33
Grossed-up monetary value thereof as fringe
benefit (P20,833.33 divided by 66% factor for calendar
year 1998) P31,565.66
Fringe Benefit tax due thereon (34%) P10,732.32
=========
In general, under this illustration, the XYZ Corporation
shall not further claim deduction for allowing its
Assistant Vice-President the use of its residential
property since the cost for the use thereof has already
been recovered as deduction from its gross income
under "Depreciation Expense". However, since the fringe
benefit tax in the amount of P10,732.32, assumed and
paid by XYZ corporation has not as yet been recovered
by way of deduction from gross income, the same shall
be allowed as a deduction from its gross income. XYZ
Corporation shall take up the foregoing in its books of
accounts, as follows:
Debit: Fringe Benefit Tax Expense P10,732.32
Credit: Cash/Fringe Benefit Tax Payable P10,732.32
To record fringe benefit tax expense for the
residential property furnished to employees.
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However, if the cost of the aforesaid condominium unit
subject to depreciation allowance (example: its
acquisition cost is only P7,000,000.00) is lesser than its
fair market value as determined by the Commissioner
(i.e. P10,000,000.00), the excess amount (i.e.
P3,000,000.00) shall be amortized throughout the
remaining estimated useful life of the residential
property used in computing the said employer's
depreciation expense and allowed as a deduction from
the said employer's gross income as fringe benefit
expense. Thus, if the remaining estimated useful life
thereof during the year 1998 is fifteen (15) years, its
monthly amortization shall be computed as follows:
Monthly amortization (P3,000,000.00 divided by 15
years divided by 12 months) P16,666.67
In this case, XYZ Corporation shall take up the foregoing
in its books of accounts as follows:
Debit: Fringe benefit expense P16,666.67
Debit: Fringe benefit taxP10,732.32
Credit: Income constructively realized P16,666.67
Credit: Cash/Fringe benefit tax payable P10,732.32
To record fringe benefit and fringe benefit tax expenses
and income constructively realized from the use of
company-owned residential property furnished to
employees.
Optional Standard Deduction
RA 9504 3 (amending NIRC 34(L))
Section 34(L) of Republic Act No. 8424, as amended,
otherwise known as the National Internal Revenue Code of
1997, is hereby amended to read as follows:
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"SEC. 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from
personal services rendered under an employer-employee
relationship where no deductions shall be allowed under this
Section other than under Subsection (M)hereof, in
computing taxable income subject to income tax under
Sections 24(A); 25(A); 26; 27(A), (B), (C); and 28(A)(1),
there shall be allowed the following deductions from the
gross income:
"(A) Expenses. -
"x x x.
"(L) Optional Standard Deduction. - In lieu of the deductions
allowed under the preceding Subsections, an individual
subject to tax under Section 24, other than a nonresident
alien, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his gross sales or gross
receipts, as the case may be. In the case of a corporation
subject to tax under section 27(A) and 28(A)(1), it may elect
a standard deduction in an amount not exceeding forty
percent (40%) of it gross income as defined in Section 32 of
this Code. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction, he shall
be considered as having availed himself of the deductions
allowed in the preceding Subsections. Such election when
made in the return shall be irrevocable for the taxable year
for which the return is made: Provided, That an individual
who is entitled to and claimed for the optional standard shall
not be required to submit with his tax return such financial
statements otherwise required under this Code: Provided,
further, That except when the Commissioner otherwise
permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his gross
income as defined in Section 32 of this Code during the
taxable year, as may be required by the rules and
regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
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"(M) x x x."
"x x x."
RR No. 016-08
SECTION 1. Scope. Pursuant to Sec. 244, in relation to
Sec. 3 of Republic Act No. 9504 (RA 9504) amending Sec. 34
(L) of the Tax Code of 1997 (Code), as amended, these
Regulations are hereby promulgated in order to implement
the provisions on Optional Standard Deduction (OSD) for
individuals and corporations.
SECTION 2. Persons Covered. The following may be
allowed to claim OSD in lieu of the itemized deductions (i.e.
items of ordinary and necessary expenses allowed under
Sections 34 (A) to (J) and (M), Section 37, other special
laws, if applicable):
1. Individuals:
i. Resident Citizen
ii. Non-resident citizen
iii. Resident Alien
iv. Taxable estates and trusts
2. Corporations:
i. Domestic corporation
ii. Resident foreign corporation
SECTION 3. Determination of the Amount of Optional
Standard Deduction for Individuals. The OSD allowed to
individual taxpayers shall be a maximum of forty percent
(40%) of gross sales or gross receipts during the taxable
year. If the individual is on the accrual basis of accounting
for his income and deductions, the OSD shall be based on
the gross sales during the taxable year. On the other hand,
if the individual employs the cash basis of accounting for his
income and deductions, the OSD shall be based on his gross
receipts during the taxable year.
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It should be emphasized that the "cost of sales" in case of
individual seller of goods, or the "cost of services" in the
case of individual seller of services, are not allowed to be
deducted for purposes of determining the basis of the OSD
pursuant to this Section inasmuch as the law (RA 9504) is
specific as to the basis thereof which states that for
individuals, the basis of the 40% OSD shall be the "gross
sales" or "gross receipts" and not the "gross income".
For other individual taxpayers allowed by law to report their
income and deductions under a different method of
accounting (e.g. percentage of completion basis, etc.) other
than cash and accrual method of accounting, the "gross
sales" or "gross receipts" pursuant to this Section shall be
determined in accordance with said acceptable method of
accounting.
SECTION 4. Determination of the Amount of Optional
Standard Deduction for Corporations. In the case of
corporate taxpayers subject to tax under Sections 27 (A) and
28 (A) (1) of the Code, as amended, the OSD allowed shall
be in an amount not exceeding forty percent (40%) of their
gross income.
For purposes of these Regulations, "Gross Income" shall
mean the gross sales less sales returns, discounts and
allowances and cost of goods sold. "Gross sales" shall
include only sales contributory to income taxable under Sec.
27 (A) of the Code. "Cost of goods sold" shall include the
purchase price or cost to produce the merchandise and all
expenses directly incurred in bringing them to their present
location and use.
For trading or merchandising concern, "cost of goods sold"
means the invoice cost of goods sold, plus import duties,
freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods
are in transit.
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For manufacturing concern, "cost of goods sold" means all to this Section shall be determined in accordance with said
costs incurred in the production of the finished goods such acceptable method of accounting.
as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs SECTION 5. Illustrative Examples in Determining the Basis of
incurred to bring the raw materials to the factory or the 40% OSD for Individuals and Corporations. Suppose a
warehouse. The term may be used interchangeably with retailer of goods, whose accounting method is under the
"cost of goods manufactured and sold". accrual basis, has a gross sales of P1,000,000.00 with a cost
of sales amounting to P800,000. The computation of the
In the case of sellers of services, the term "gross income" OSD for individuals and corporations shall be determined as
means the "gross receipts" less sales returns, allowances, follows:
discounts and cost of services. "Cost of services" means all If IndividualIf Corporation
direct costs and expenses necessarily incurred to provide the Gross Sales P1,000,000 P1,000,000
services required by the customers and clients including (a) Less: Cost of Goods Sold 800,000
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service, and (b) cost of Basis of the OSD P1,000,000 P200,000
facilities directly utilized in providing the service such as X OSD Rate (maximum) .40 .40
depreciation or rental of equipment used and cost of
supplies: Provided, however, that "cost of services" shall not OSD Amount P400,000 P80,000
include interest expense except in the case of banks and ========= =========
other financial institutions. The term "gross receipts" as used If the taxpayer opts to use the OSD in lieu of the itemized
herein means amounts actually or constructively received deduction allowed under Section 34 of the Code, as
during the taxable year. However, for taxpayers engaged as amended, his/its net taxable income shall be as follows:
sellers of services but employing the accrual basis of
accounting for their income, the term "gross receipts" shall If IndividualIf Corporation
mean amounts earned as gross revenue during the taxable Gross Sales P1,000,000 P1,000,000
year. Less: Cost of Sales - 800,000

The items of gross income under Section 32 (A) of the Code, Gross Sales/Gross Income P1,000,000 P200,000
as amended, which are required to be declared in the Less: OSD (maximum) 400,00080,000
income tax return of the taxpayer for the taxable year are
part of the gross income against which the OSD may be Net Income P600,000 P120,000
deducted in arriving at taxable income. Passive incomes ========= =========
which have been subjected to a final tax at source shall not
form part of the gross income for purposes of computing the SECTION 6. Determination of the Optional Standard
forty percent (40%) optional standard deduction. DITEAc Deduction for General Professional Partnerships (GPPs) and
For other taxpayers allowed by law to report their income Partners of GPPs. Pursuant to Sec. 26 of the Code, a GPP
and deductions under a different method of accounting (e.g. is not subject to income tax imposed under Title II thereof.
percentage of completion basis, etc.) other than cash and However, the partners shall be liable to pay income tax on
accrual method of accounting, the "gross income" pursuant their separate and individual capacities for their respective
distributive share in the net income of the GPP.
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Sec. 26 of the Code likewise provides that "For purposes
of computing the distributive share of the partners, the net
income of the GPP shall be computed in the same manner as
a corporation." As such, a GPP may claim either the itemized
deductions allowed under Section 34 of the Code or in lieu
thereof, it can opt to avail of the OSD allowed to
corporations in claiming the deductions in an amount not
exceeding forty percent (40%) of its gross income. The net
income determined by either claiming the itemized deduction
or OSD from the GPP's gross income is the distributable net
income from which the share of each partner is to be
determined. Each partner shall report as gross income his
distributive share, actually or constructively received, in the
net income of the partnership.
The GPP is not a taxable entity for income tax purposes
since it is only acting as a "pass-through" entity where its
income is ultimately taxed to the partners comprising it. In
computing taxable income defined under Section 31 of the
Code, the individual partner can still claim either itemized
deductions or optional standard deduction from his share in
the net income of the GPP because said share is considered
as gross income in the hands of the partner (Section 32 (A)
(11) and Section 26, NIRC). If the GPP availed of the
itemized deduction in computing its net income, the partners
may still either claim itemized deduction or OSD from said
share, provided, that, in claiming itemized deductions, the
partner is precluded from claiming expenses already claimed
by the GPP. In fine, if the GPP claimed itemized deductions
and a partner is also claiming itemized deductions, the
deductions allowed to the partner must be the ordinary and
necessary expenses for the practice of profession which
were not yet claimed by the GPP in computing its net
income. The GPP and each of the partners are entitled to
their own election of deductions to claim during the taxable
year thereby resulting to four possibilities, namely: (1) the
GPP may claim itemized deductions in computing net income
and a partner may also claim itemized deductions in
computing his taxable income; or (2) the GPP may claim
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OSD in computing net income while a partner may claim
itemized deductions in computing his taxable income; or (3)
the GPP may claim itemized deductions in computing net
income while a partner may claim OSD in computing his
taxable income; or (4) the GPP may claim OSD in computing
net income and a partner may also claim OSD in computing
his taxable income. IcHDCS
SECTION 7. Other Implications of the Optional Standard
Deduction. A taxpayer who elected to avail of the OSD
not exceeding forty percent (40%) of gross sales or gross
receipts, in case of an individual taxable under Secs. 24 (A)
and 25 (A) (1) of the Tax Code, or forty percent (40%) of
gross income, in case of a corporation subject to tax under
Sec. 27 (A) or 28 (A) (1) of the same Code shall signify in
his/its return such intention, otherwise he/it shall be
considered as having availed himself of the itemized
deductions allowed under Sec. 34 of the Code. Once the
election to avail the OSD is signified in the return, it shall be
irrevocable for the taxable year for which the return is made.
This means that a taxpayer who initially filed a return
availing OSD is precluded from amending said return in
order to shift to the itemized deductions. An individual
taxpayer who is entitled to and claimed the OSD shall not be
required to submit with his tax return such financial
statements otherwise required under the Code. Provided,
that, except when the Commissioner otherwise permits, the
said individual shall keep such records pertaining to his gross
sales or gross receipts. In the case of a corporation,
however, said corporation is still required to submit its
financial statements when it files its annual income tax
return and to keep such records pertaining to its gross
income as herein defined.
In the filing of the quarterly income tax returns, the
taxpayer may opt to use either the itemized deduction or
OSD. However, in filing the final adjustment income tax
return, the taxpayer must make a choice as to what method
of deduction it or he shall employ for the purpose of
determining its/his taxable net income for the entire year.
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The taxpayer is, thus, not allowed to use a hybrid method of
claiming its/his deduction for one taxable year.
SECTION 8. Transitory Provisions. For taxable period 2008
which is the initial year of the implementation of the 40%
OSD under RA 9504 which modified the OSD for individuals
from 10% of gross income to 40% of gross sales/gross
receipts and introduced the OSD as an alternative deduction
for corporations, the 40% maximum deduction shall only
cover the period beginning the effectivity of RA 9504. RA
9504 became effective July 06, 2008. However, in order to
simplify and provide ease of administration during the
transition period, July 1, 2008 shall be considered as the
start of the period when the 40% OSD may be allowed.
In the case of an individual taxpayer, he is given the option
to either use the itemized method of deduction or the 40%
OSD in the filing of his quarterly income tax return covering
the third quarter ending September 30, 2008. However, if in
the filing of his annual income tax return and he chooses
OSD to be his method of deduction, the rate of OSD to be
applied for the period covering January 2008 to June 30,
2008 shall only be 10% of gross income (i.e., where gross
income is determined by deducting cost of sales from the
gross sales or gross receipts) while the rate of OSD for the
period covering July 01, 2008 to December 31, 2008 shall be
40% of gross sales/gross receipts.
Example. Mr. ERA, a retailer of goods, uses the accrual
method of accounting in reporting his income and expenses.
For the period January to June 30, 2008, he reported his net
income using the itemized method of deduction where his
gross sales for the period amounted to P1,000,000 and his
cost of sales for same period amounted to P600,000. With
the effectivity of RA 9504, he decided to use the 40% OSD
in claiming his business expenses for the third quarter
covering July 01 to September 30, 2008. His gross sales for
said period amounted to P700,000 where he claimed a 40%
OSD (P700,000 x 40%) or P280,000 in lieu of his actual
business expenses of P250,000 consisting of cost of sales of
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P200,000 and P50,000 operating expenses. For the last
quarter of Year 2008, his gross sales amounted to P900,000
while his cost of sales for the same last quarter amounted to
P500,000. If Mr. ERA decides to use the OSD method of
deduction when he files his annual income tax return, his net
income under the OSD method of determining deduction
shall be as follows: DAaIEc
(a) To compute for OSD allowed for the various periods
covering the Year 2008
Jan. to June 30 July 01 to Sept. Oct. to December
Gross Sales P1,000,000 P700,000 P900,000
Less: Cost of Sales 600,000- -
Gross Sales/Gross Income P400,000 P700,000
P900,000
X OSD rate (maximum) .10 .40 .40
OSD P40,000P280,000 P360,000
======== ======= =======
(b) To compute for the net income of Mr. ERA under OSD
the same shall be determined as follows:
Gross Sales (January to December 2008) P2,600,000
(P1,000,000 plus P700,000 plus P900,000)
Less: Cost of Sales
(from January to June 30, 2008)600,000
Less: OSD
(P40,000 plus P280,000 plus P360,000) 680,000
Net Income for Year 2008 P1,320,000
=========
As can be gleaned from the above illustration, an individual
taxpayer is not allowed to compute his net income for Year
2008 partly by claiming itemized deduction and partly by
using OSD. The choice of deduction to be used shall only be
for one method of deduction (i.e., either itemized or OSD) to
be applied for the entire year of Year 2008. ADTCaI
The provisions of Sec. 6 above preventing the use of the
hybrid method of deduction for the entire taxable year,
notwithstanding, a corporate taxpayer who opts to use the
OSD method in claiming its deductions when filing its annual
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income tax return for Year 2008 shall be allowed to use the
40% OSD only in respect to the period beginning July 01,
2008 while the method of deduction to be used prior thereof
shall remain to be under the itemized deduction method.
Example. GSV Corporation, a retailer of goods, uses the
accrual method of accounting in declaring its income and
expenses under calendar year basis. For the period January
to June 30, 2008, it reported its net income using the
itemized method of deduction where its gross sales for the
period amounted to P1,000,000 and its cost of sales for
same period amounted to P600,000 as well as operating
expenses of P100,000. With the effectivity of RA 9504, it
decided to use the 40% OSD in claiming its business
expenses for the third quarter covering July 01 to September
30, 2008. Its gross sales for said period amounted to
P700,000 where it claimed a 40% OSD of gross income with
cost of sales amounting to P300,000 or P160,000 (i.e.
P700,000 less P300,000 = P400,000 x 40% ) in lieu of its
actual operating expenses of P50,000. For the last quarter of
Year 2008, its gross sales amounted to P900,000 while its
cost of sales for the same last quarter amounted to
P600,000 and operating expenses of P150,000. If GSV
Corporation decides to use the OSD method of deduction
when it files its annual income tax return, its net income for
the year shall be computed as follows: aSADIC
(a) To compute for OSD allowed for the period from July 06
to December 31, 2008
July 01 to Sept. Oct. to December
Gross Sales P700,000 P900,000
Less: Cost of Sales 300,000600,000
permanent improvements, or betterments made to
Gross Sales/Gross Income P400,000 P300,000
X OSD rate (maximum) .40 .40
This Subsection shall not apply to intangible drilling
OSD P160,000 P120,000
======= =======
(b) To compute for the net income of GSV Corporation, the
net income for the period from January 1 to July 05, 2008
shall be computed using the itemized method of deduction
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while the 40% OSD shall be applied for the period covering
July 06, 2008 to December 31, 2008. AScHCD
Gross Sales (January to December 2008)
P2,600,000
(P1,000,000 plus P700,000 plus P900,000)
Less: Cost of Sales
January to June 30 P600,000
July 01 to September 30300,000
October 1 to December 31 600,000 1,500,000
Gross Income P1,100,000
Less: Deductions
Itemized Deductions
(Operating expenses
from January to June 30) 100,000
Optional Standard Deduction (OSD)
(July 01 to September 30) P160,000
(October 1 to December 31) 120,000280,000380,000
Net Income of GSV Corporation P720,000
=======
x------------------------------------x
11. ITEMS NOT DEDUCTIBLE (NIRC 36)
(A) General Rule. - In computing net income, no deduction
shall in any case be allowed in respect to -
(1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for
increase the value of any property or estate;
and development costs incurred in petroleum
operations which are deductible under Subsection
(G) (1) of Section 34 of this Code.
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Atty. Jose Cochingyan III
(3) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
(4) Premiums paid on any life insurance policy covering
the life of any officer or employee, or of any person
financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when
the taxpayer is directly or indirectly a beneficiary
under such policy.
(B) Losses from Sales or Exchanges of Property. - In
computing net income, no deductions shall in any case
be allowed in respect of losses from sales or exchanges
of property directly or indirectly -
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation,
between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale of exchange was
under the law applicable to such taxable year, a
personal holding company or a foreign personal
holding company;
(4) Between the grantor and a fiduciary of any trust; or
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(5) Between the fiduciary of and the fiduciary of a trust
and the fiduciary of another trust if the same person
is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of
such trust.
x------------------------------------x
12. VALUE ADDED TAXES
12.1 VAT, the basics
NIRC 105, 106(A) 1st , 108(A) 1st
SEC. 105. Persons Liable. - Any person who, in the course of
trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed
in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of
Republic Act No. 7716.
The phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged
therein is a nonstock, nonprofit private organization
(irrespective of the disposition of its net income and whether
or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the Philippines
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by nonresident foreign persons shall be considered as being
course of trade or business.
SEC. 106. Value-Added Tax on Sale of Goods or Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods
or properties, value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged,
such tax to be paid by the seller or transferor.
(1) The term "goods" or "properties" shall mean all
tangible and intangible objects which are capable of
pecuniary estimation and shall include:
(a) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(b) The right or the privilege to use patent,
copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or
other like property or right;
(c) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(d) The right or the privilege to use motion picture
films, tapes and discs; and
(e) Radio, television, satellite transmission and cable
television time.
The term "gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding
the value-added tax. The excise tax, if any, on such
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goods or properties shall form part of the gross selling
price.
SEC. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed
and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of
properties.
RMC No. 7-2006
MEMORANDUM FROM THE EXECUTIVE SECRETARY
TO : Secretary, Department of Finance
Cc : Commissioner, Bureau of Customs
Commissioner, Bureau of Internal Revenue
SUBJECT : RECOMMENDATION TO INCREASE THE VALUE
ADDED TAX RATE FROM 10 PERCENT TO 12
PERCENT EFFECTIVE FEBRUARY 1, 2006
DATE : January 31, 2006
Pursuant to your recommendation contained in your
Memorandum for the President dated January 30. 2006,
copy hereto attached, please be informed that the same has
been approved by the President, pursuant to Section 4 of
Republic Act (RA) No. 9337.
RMC 35-2012 Taxability of Clubs Organized for Pleasure, Recreation,
Non-profit activities
It is clear in Sec. 105 NIRC that even a nonstock nonprofit
organization or government entity is liable to pay VAT on sale of
goods or services.
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Immaterial WON primary purpose is indicates that it receives
services rendered for its affiliates on a reimbursement-on-cost
basis. As long as the entity provides services for a fee,
remuneration or consideration, then service rendered is subject
to VAT.
Hence, gross receipts of recreational clubs including membership
fees, assessment dues, rental income and service fee is subject
to VAT.
RR No. 16-05 4.105-1, 4.105-2, 4.105-3
SECTION 4.105-1. Persons Liable. Any person who, in the
course of his trade or business, sells, barters, exchanges or
leases goods or properties, or renders services, and any
person who imports goods, shall be liable to VAT imposed in
Secs. 106 to 108 of the Tax Code.
However, in the case of importation of taxable goods, the
importer, whether an individual or corporation and whether
or not made in the course of his trade or business, shall be
liable to VAT imposed in Sec. 107 of the Tax Code.
Person refers to any individual, trust, estate, partnership,
corporation, joint venture, cooperative or association.
Taxable person refers to any person liable for the payment
of VAT, whether registered or registrable in accordance with
Sec. 236 of the Tax Code.
VAT-registered person refers to any person who is
registered as a VAT taxpayer under Sec. 236 of the Tax
Code. His status as a VAT-registered person shall continue
until the cancellation of such registration.
Taxable sale refers to the sale, barter, exchange and/or
lease of goods or properties, including transactions deemed
sale and the performance of service for a consideration,
whether in cash or in kind, all of which are subject to tax
under Secs. 106 and 108 of the Tax Code.
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SEC. 4.105-2. Nature and Characteristics of VAT. VAT is a
tax on consumption levied on the sale, barter, exchange or
lease of goods or properties and services in the Philippines
and on importation of goods into the Philippines. The seller
is the one statutorily liable for the payment of the tax but
the amount of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of
sale or lease of goods, properties or services at the time of
the effectivity of RA No. 9337. However, in the case of
importation, the importer is the one liable for the VAT.
SEC. 4.105-3. Meaning of In the Course of Trade or
Business. The term in the course of trade or business
means the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental thereto,
by any person regardless of whether or not the person
engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their
guests), or government entity.
Non-resident persons who perform services in the Philippines
are deemed to be making sales in the course of trade or
business, even if the performance of services is not regular.
Kapatiran ng mga Naglilinkgod sa Pamahalaan ng Pilipinas v Tan
EO 273 on imposition of VAT as enacted on July 25 1987 was
being questioned.
Can the President enact such law?
Yes.
Congress convened on July 27, 1987. Also, Constitution had a
clear date as to when the President would lose her power to
enact laws.
VAT is new?
No.
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EO merely increased the VAT to 10% and simplified tax
administration. Said to have eliminated privilege taxes, multiple
rated sales tax on manufacturers and producers, advance sales
tax, and compensating tax on importations
Grave abuse on part of President to issue the law?
No.
Although enacted two days prior to the convening of Congress,
no GADALEJ shown by P. Legislative process started long before
the signing when the data were gathered, proposals were
weighed and the final wordings of the measure were drafted,
revised and finalized.
Satisfies valid tax?
Yes.
Applied similarly on all goods and services sold to the public,
which are not exempt (EQPC).
Also equitable (e.g., food and marine life products and sari-sari-
stores are exempt).
Unduly discriminates against customs broker under Sec. 103?
No.
Customs brokers are exempted from the exemption because
they there is already an imposition in Sec. 102. Otherwise, would
have conflict in provision.
Also, there is a material difference between professionals and
customs broker. Customs brokers are likely to do business.
Also, the fear that imposition of VAT would cause skyrocketing
prices did not happen. Already 5 months since the enactment of
VAT.
Abakada Guro v Ermita
Facts:
On May 24, 2005, the President signed into law Republic Act
9337 or the VAT Reform Act. Before the law was to take effect
on July 1, 2005, the Court issued a temporary restraining order
enjoining government from implementing the law in response to
a slew of petitions for certiorari and prohibition questioning the
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constitutionality of the new law.- NON-DELEGATION ISSUE: The
new law in its Sections 4, 5 and 6 granted the Secretary of
Finance the authority to ascertain whether by December31,
2005, the VAT collection as a percentage of GDP of the previous
year exceeds 2 and 4/5% or the national government deficit as a
percentage of GDP of the previous year exceeds 1 and 1/2%. If
either of these two instances has occurred, the Secretary of
Finance, must submit such information to the President. Then
the 12% VAT rate must be imposed by the President effective
January 1, 2006.
Issue:
W/N the RA 9337's stand-by authority to the Executive to
increase the VAT rate, especially on account of the
recommendatory power granted to the Secretary of Finance,
constitutes undue delegation of legislative power?
Held: NO.
Congress does not abdicate its functions or unduly delegate
power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy
that is frequently the only way in which the legislative process
can go forward.
The case before the Court is not a delegation of legislative
power. It is simply a delegation of ascertainment of facts upon
which enforcement and administration of the increased rate
under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent
upon a specified fact or condition. It leaves the entire operation
or non-operation of the 12% rate upon factual matters outside
of the control of the executive. No discretion would be exercised
by the President. Highlighting the absence of discretion is the
fact that the word shall is used in the common proviso. The use
of the word shall connote a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the
idea of discretion.- Thus, it is the ministerial duty of the
President to immediately impose the12% rate upon the
existence of any of the conditions specified by Congress. This is
a duty, which cannot be evaded by the President. It is a clear
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directive to impose the 12%VAT rate when the specified
conditions are present.- In making his recommendation to the
President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. He is acting as the agent of
the legislative department, to determine and declare the event
upon which its expressed will is to take effect. The Secretary of
Finance becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses all
the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to
gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by
Congress is present.- There is no undue delegation of legislative
power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress did not delegate
the power to tax but the mere implementation of the law. The
intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the
legislative policy.
(From A2010 class of Dean Carlota scribd.com)
12.2 On Goods and Properties
12.2.1 In General
NIRC 106(A) 1st
(A) Rate and Base of Tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods
or properties, value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged,
such tax to be paid by the seller or transferor.
(1) The term "goods" or "properties" shall mean all
tangible and intangible objects which are capable of
pecuniary estimation and shall include:
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(a) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(b) The right or the privilege to use patent,
copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or
other like property or right;
(c) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(d) The right or the privilege to use motion picture
films, tapes and discs; and
(e) Radio, television, satellite transmission and cable
television time.
The term "gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding the
value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
RR No. 16-05 4.106-1 (amended by RR No. 04-07 1)
VAT is imposed and collected on every sale, barter or
exchange, or transactions deemed sale of taxable goods or
properties at the rate of twelve percent (12%) (starting
February 1, 2006) of the gross selling price or gross value in
money of the goods or properties sold, bartered, or
exchanged, or deemed sold in the Philippines.
12.2.2 Goods or Properties
NIRC 106(A)(1)
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(1) The term "goods" or "properties" shall mean all tangible
and intangible objects which are capable of pecuniary
estimation and shall include:
(a) Real properties held primarily for sale to customers
or held for lease in the ordinary course of trade or
business;
(b) The right or the privilege to use patent, copyright,
design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
(c) The right or the privilege to use in the Philippines of
any industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films,
tapes and discs; and
(e) Radio, television, satellite transmission and cable
television time.
The term "gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding
the value-added tax. The excise tax, if any, on such
goods or properties shall form part of the gross selling
price.
RR No. 16-05 4.106-2
SEC. 4.106-2. Meaning of the Term Goods or Properties.
The term goods or properties refers to all tangible and
intangible objects which are capable of pecuniary estimation
and shall include, among others:
(1) Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or
business;
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(2) The right or the privilege to use patent, copyright,
design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property
or right;
(3) The right or the privilege to use any industrial
commercial or scientific equipment; (4) The right or the
privilege to use motion picture films, films, tapes and
discs; and (5) Radio, television, satellite transmission
and cable television time.
12.2.3 Gross Selling Price
NIRC 106(A)(1) last , (D)
The term "gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding the
value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
(D) Determination of the Tax. -
(1) The tax shall be computed by multiplying the total
amount indicated in the invoice by one-eleventh
(1/11).
(2) Sales Returns, Allowances and Sales Discounts. -
The value of goods or properties sold and
subsequently returned or for which allowances were
granted by a VAT-registered person may be
deducted from the gross sales or receipts for the
quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount
granted and indicated in the invoice at the time of
sale and the grant of which does not depend upon
the happening of a future event may be excluded
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from the gross sales within the same quarter it was
given.
(3) Authority of the Commissioner to Determine the
Appropriate Tax Base. - The Commissioner shall, by
rules and regulations prescribed by the Secretary of
Finance, determine the appropriate tax base in cases
where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection
(B) hereof, or where the gross selling price is
unreasonably lower than the actual market value.
RR No. 16-05 4.106-4 (amended by RR No. 04-07 4)
Section 4. GROSS SELLING PRICE. - Sec. 4.106-4 of RR No.
16-2005 is hereby amended to read as follows:
SEC. 4.106-4. Meaning of the Term Gross Selling Price.
The term gross selling price means the total amount of
money or its equivalent which the purchaser pays or is
obligated to pay to the seller in consideration of the sale,
barter or exchange of the goods or properties, excluding
VAT. The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
In the case of sale, barter or exchange of real property
subject to VAT, gross selling price shall mean the
consideration stated in the sales document or the fair market
value whichever is higher. If the VAT is not billed separately
in the document of sale, the selling price or the
consideration stated therein shall be deemed to be inclusive
of VAT. The term fair market value shall mean whichever is
higher of: 1) the fair market value as determined by the
Commissioner /zonal value, or 2) the fair market value as
shown in schedule of values of the Provincial and City
Assessors (real property tax declaration). However, in the
absence of zonal value/fair market value as determined by
the Commissioner, gross selling price refers to the market
value shown in the latest real property tax declaration or the
consideration, whichever is higher. If the gross selling price
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is based on the zonal value or market value of the property,
the zonal or market value shall be deemed exclusive of VAT.
Thus, the zonal value/market value, net of the output VAT,
should still be higher than the consideration in the document
of sale, exclusive of the VAT.
If the sale of real property is on installment plan where the
zonal value/fair market value is higher than the
consideration/selling price, exclusive of the VAT, the VAT
shall be based on the ratio of actual collection of the
consideration, exclusive of the VAT, against the agreed
consideration , exclusive of the VAT, appearing in the
Contract to Sell/Contract of Sale applied to the zonal
value/fair market value of the property at the time of the
execution of the Contract to Sell/Contract of Sale at the
inception of the contract. Thus, since the output VAT is
based on the market value of the property which is higher
than the consideration/selling price in the sales document,
exclusive of the VAT, the input VAT that can be claimed by
the buyer shall be the separately-billed output VAT in the
sales document issued by the seller. Therefore, the output
VAT which is based on the market value must be billed
separately by the seller in the sales document with specific
mention that the VAT billed separately is based on the
market value of the property.
Illustration:
ABC Corporation sold a parcel of land to XYZ Company on
July 2, 2006 for P1,000,000.00, plus the output VAT, with a
monthly installment payment of P10,000.00, plus the output
VAT. The zonal value of the subject property at the time of
sale amounted to P1,500,000.00. Compute for the output
tax due on the installment payment.
Formula:
Actual collection (exclusive of the VAT) x Zonal value x 12%
Agreed consideration (exc. of the VAT)
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P10,000.00 x P1,500,000.00 = P15,000.00
P1,000,000.00
P15,000.00 x 12% = P1,800.00
========
Selling price is the amount of consideration in a contract of
sale between the buyer and seller or the total price of the
sale which may include cash or property and evidence of
indebtedness issued by the buyer, excluding the VAT.
Allowable Deductions
NIRC 106(D)
Value-Added Tax on Sale of Goods or Properties
(D) Determination of the Tax. -
(1) The tax shall be computed by multiplying the total
amount indicated in the invoice by one-eleventh (1/11).
(2) Sales Returns, Allowances and Sales Discounts. - The
value of goods or properties sold and subsequently returned
or for which allowances were granted by a VAT-registered
person may be deducted from the gross sales or receipts for
the quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount granted
and indicated in the invoice at the time of sale and the grant
of which does not depend upon the happening of a future
event may be excluded from the gross sales within the same
quarter it was given.
(3) Authority of the Commissioner to Determine the
Appropriate Tax Base. - The Commissioner shall, by rules
and regulations prescribed by the Secretary of Finance,
determine the appropriate tax base in cases where a
transaction is deemed a sale, barter or exchange of goods or
properties under Subsection (B) hereof, or where the gross
selling price is unreasonably lower than the actual market
value.
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RR 16-05 Sec. 4.106-9
Allowable deductions
a. Discounts determined and granted at time of sale
o Expressly indicated in the invoice
o Amount thereof forming part of gross sales duly
recorded in the books of accounts
If sales discount is not contingent upon happening of a
future event, may be excluded from gross sales within the
same month or quarter.
b. Sales returns and allowances
o Proper credit or refund was made during the month
or quarter to the buyer for sale previously recorded
as taxable sales
12.2.4 On Importations
NIRC 107
(A) In General. - There shall be levied, assessed and
collected on every importation of goods a value-added
tax equivalent to ten percent (10%) based on the total
value used by the Bureau of Customs in determining
tariff and customs duties plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from
customs custody: Provided, That where the customs
duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based
on the landed cost plus excise taxes, If any.
(B) Transfer of Goods by Tax-Exempt Persons. - In the case
of tax-free importation of goods into the Philippines by
persons, entities or agencies exempt from tax where
such goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the purchasers, transferees or recipients shall
be considered the importers thereof, who shall be liable
for any internal revenue tax on such importation. The
tax due on such importation shall constitute a lien on the
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goods superior to all charges or liens on the goods,
irrespective of the possessor thereof.
RR No. 16-05 4.107-1
(a) In general. VAT is imposed on goods brought into the
Philippines, whether for use in business or not. The tax
shall be based on the total value used by the BOC in
determining tariff and customs duties, plus customs
duties, excise tax, if any, and other charges, such as
postage, commission, and similar charges, prior to the
release of the goods from customs custody.
In case the valuation used by the BOC in computing
customs duties is based on volume or quantity of the
imported goods, the landed cost shall be the basis for
computing VAT. Landed cost consists of the invoice
amount, customs duties, freight, insurance and other
charges. If the goods imported are subject to excise tax,
the excise tax shall form part of the tax base.
The same rule applies to technical importation of goods
sold by a person located in a Special Economic Zone to a
customer located in a customs territory.
No VAT shall be collected on importation of goods which
are specifically exempted under Sec. 109 (1) of the Tax
Code.
(b) Applicability and payment. The rates prescribed under
Sec. 107 (A) of the Tax Code shall be applicable to all
importations withdrawn from customs custody.
The VAT on importation shall be paid by the importer
prior to the release of such goods from customs
custody.
Importer refers to any person who brings goods into
the Philippines, whether or not made in the course of his
trade or business. It includes non-exempt persons or
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entities who acquire tax-free imported goods from
exempt persons, entities or agencies.
(c) Sale, transfer or exchange of imported goods by tax-
exempt persons. In the case of goods imported into
the Philippines by VAT-exempt persons, entities or
agencies which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the latter shall be considered the importers
thereof and shall be liable for VAT due on such
importation. The tax due on such importation shall
constitute a lien on the goods, superior to all charges/or
liens, irrespective of the possessor of said goods.
12.2.5 Special Provisions Applicable to Sale of Goods & Properties
12.2.5.1 Deemed Sale Transactions
NIRC 106(B)
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of
the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned; and
(4) Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation.
RR No. 16-05 4.106-7 (amended by RR No. 04-07 7)
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(a) The following transactions shall be deemed sale
pursuant to Sec. 106 (B) of the Tax Code:
(1) Transfer, use or consumption not in the course of
business of goods or properties originally intended
for sale or for use in the course of business.
Transfer of goods or properties not in the course of
business can take place when VAT-registered person
withdraws goods from his business for his personal
use;
(2) Distribution or transfer to:
i. Shareholders or investors share in the profits of
VAT-registered person;
Property dividends which constitute stocks in
trade or properties primarily held for sale or
lease declared out of retained earnings on or
after January 1, 1996 and distributed by the
company to its shareholders shall be subject to
VAT based on the zonal value or fair market
value at the time of distribution, whichever is
applicable.
ii. Creditors in payment of debt or obligation.
(3) Consignment of goods if actual sale is not made
within 60 days following the date such goods were
consigned. Consigned goods returned by the
consignee within the 60-day period are not deemed
sold;
(4) Retirement from or cessation of business with
respect to all goods on hand, whether capital goods,
stock-in-trade, supplies or materials as of the date
of such retirement or cessation, whether or not the
business is continued by the new owner or
successor. The following circumstances shall, among
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others, give rise to transactions deemed sale for
purposes of this Section;
i. Change of ownership of the business. There is a
change in the ownership of the business when a
single proprietorship incorporates; or the
proprietor of a single proprietorship sells his
entire business.
ii. Dissolution of a partnership and creation of a
new partnership which takes over the business.
(b) The Commissioner of Internal Revenue shall determine
the appropriate tax base in cases where a transaction is
deemed a sale, barter or exchange of goods or
properties under Sec. 4.106-7 paragraph (a) hereof, or
where the gross selling price is unreasonably lower than
the actual market value. The gross selling price is
unreasonably lower than the actual market value if it is
lower by more than 30% of the actual market value of
the same goods of the same quantity and quality sold in
the immediate locality on or nearest the date of sale.
For transactions deemed sale, the output tax shall be
based on the market value of the goods deemed sold as
of the time of the occurrence of the transactions
enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these
Regulations. However, in the case of retirement or
cessation of business, the tax base shall be the
acquisition cost or the current market price of the goods
or properties, whichever is lower.
In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the
actual market value shall be the tax base.
12.2.5.2 Change or Cessation of VAT Status
RR No. 16-05 4.106-8 (amended by RR No. 10-2011)
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(a) Subject to output tax
The VAT provided for in Sec. 106 of the Tax Code shall
apply to goods or properties originally intended for sale
or use in business, and capital goods which are existing
as of the occurrence of the following:
(1) Change of business activity from VAT taxable status
to VAT-exempt status. An example is a VAT-
registered person engaged in a taxable activity like
wholesaler or retailer who decides to discontinue
such activity and engages instead in life insurance
business or in any other business not subject to
VAT;
(2) Approval of a request for cancellation of registration
due to reversion to exempt status.
(3) Approval of a request for cancellation of registration
due to a desire to revert to exempt status after the
lapse of three (3) consecutive years from the time of
registration by a person who voluntarily registered
despite being exempt under Sec. 109 (2) of the Tax
Code.
(4) Approval of a request for cancellation of registration
of one who commenced business with the
expectation of gross sales or receipts exceeding
P1,500,000.00, but who failed to exceed this
amount during the first twelve months of operation.
(b) Not subject to output tax
The VAT shall not apply to goods or properties which are
originally intended for sale or for use in the course of
business existing as of the occurrence of the following:
(1) Change of control of a corporation by acquisition of
the controlling interest of such corporation by
another stockholder (individual or corporate) or
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group of stockholders. The goods or properties used
in business (including those held for lease) or those
comprising the stock in trade of the corporation
having a change in corporate control will not be
considered sold, bartered, or exchanged despite the
change in the ownership interest in the said
corporation.
However, the exchange of goods or properties
including the real estate properties used in business
or held for sale or for lease by the transferor, for
shares of stocks, whether resulting in corporate
control or not, is subject to VAT.
Illustration: Abel Corporation (transferee) is a
merchandising concern and has an inventory of
goods for sale amounting to PhP 1 Million. Nel
Corporation (transferor), a real estate developer,
exchanged its real properties for shares of stocks of
Abel Corporation resulting in the acquisition of
corporate control. The inventory of goods owned by
Abel Corporation is not subject to output tax despite
the change in corporate control because the same
corporation still owns them. This is in recognition of
the separate and distinct personality of the
corporation from its stockholders. However, the
exchange of real properties held for sale or lease by
Nel Corporation, for the shares of stocks of Abel
Corporation, whether resulting in corporate control
or not, is subject to VAT.
(2) Change in the trade or corporate name of the
business;
(3) Merger or consolidation of corporations. The unused
input tax of the dissolved corporation, as of the date
of merger or consolidation, shall be absorbed by the
surviving or new corporation.
NIRC 106(C)
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The tax imposed in Subsection (A) of this Section shall also
apply to goods disposed of or existing as of a certain date if
under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner, the status of a
person as a VAT-registered person changes or is terminated.
12.3 On Services
12.3.1 In General
NIRC 108(A) 1st
(A) Rate and Base of Tax. - There shall be levied, assessed
and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of
properties.
RR No. 16-05 4.108-1 (amended by RR No. 04-07 9)
SEC. 4.108-1. VAT on the Sale of Services and Use or Lease
of Properties. Sale or exchange of services, as well as the
use or lease of properties, as defined in Sec. 108 (A) of the
Tax Code shall be subject to VAT, equivalent to twelve
percent (12%) of the gross receipts (excluding VAT) starting
February 1, 2006.
12.3.2 Sale and Exchange of Services
NIRC 108(A) 2nd
The phrase "sale or exchange of services" means the
performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration,
including those performed or rendered by construction
and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of property,
whether personal or real; warehousing services; lessors
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or distributors of cinematographic films; persons
engaged in milling processing, manufacturing or
repacking goods for others; proprietors, operators or
keepers of hotels, motels, resthouses, pension houses,
inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their
transport of goods or cargoes, including persons who
transport goods or cargoes for hire another domestic
common carriers by land, air and water relative to their
transport of goods or cargoes; services of franchise
grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees
except those under Section 119 of this Code; services of
banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except
their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental
faculties. The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or privilege to
use any copyright, patent, design or model, plan
secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(2) The lease of the use of, or the right to use of
any industrial, commercial or scientific
equipment;
(3) The supply of scientific, technical, industrial or
commercial knowledge or information;
(4) The supply of any assistance that is ancillary
and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any
such property, or right as is mentioned in
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subparagraph (2) or any such knowledge or
information as is mentioned in subparagraph
(3);
(5) The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand, machinery
or other apparatus purchased from such
nonresident person.
(6) The supply of technical advice, assistance or
services rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme;
(7) The lease of motion picture films, films, tapes
and discs; and
(8) The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time.
RR No. 16-05 4.108-2
SEC. 4.108-2. Meaning of Sale or Exchange of Services.
The term sale or exchange of services means the
performance of all kind of services in the Philippines for
others for a fee, remuneration or consideration, whether in
kind or in cash, including those performed or rendered by
the following:
(1) construction and service contractors;
(2) stock, real estate, commercial, customs and immigration
brokers;
(3) lessors of property, whether personal or real;
(4) persons engaged in warehousing services;
(5) lessors or distributors of cinematographic films;
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(6) persons engaged in milling, processing, manufacturing
or repacking goods for others;
(7) proprietors, operators, or keepers of hotels, motels, rest
houses, pension houses, inns, resorts, theaters, and
movie houses;
(8) proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs
and caterers;
(9) dealers in securities;
(10) lending investors;
(11) transportation contractors on their transport of
goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or
cargoes;
(12) common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines;
(13) sales of electricity by generation, transmission,
and/or distribution companies;
(14) franchise grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting and all
other franchise grantees, except franchise grantees of
radio and/or television broadcasting whose annual gross
receipts of the preceding year do not exceed Ten Million
Pesos (P10,000,000.00), and franchise grantees of gas
and water utilities;
(15) non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies; and
(16) similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.
The phrase sale or exchange of services shall likewise
include:
(1) The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan, secret
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formula or process, goodwill, trademark, trade brand or
other like property or right;
(2) The lease or the use of, or the right to use any
industrial, commercial or scientific equipment;
(3) The supply of scientific, technical industrial or
commercial knowledge or information;
(4) The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling
the application or enjoyment of any such property, or
right as is mentioned in subparagraph (2) hereof or any
such knowledge or information as is mentioned in
subparagraph (3) hereof;
(5) The supply of services by a non-resident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person;
(6) The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes, and
discs; and
(8) The lease or the use of, or the right to use, radio,
television, satellite transmission and cable television
time.
12.3.3 Gross Receipts
NIRC 108(A) last
The term "gross receipts" means the total amount of money
or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively
received during the taxable quarter for the services
performed or to be performed for another person, excluding
value-added tax.
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RR No. 16-05 4.108-4 (amended by RR No. 04-07 11)
SEC. 4.108-4. Definition of Gross Receipts. -Gross receipts
refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials
supplied with the services and deposits applied as payments
for services rendered and advance payments actually or
constructively received during the taxable period for the
services performed or to be performed for another person,
excluding the VAT, except those amounts earmarked for
payment to unrelated third (3rd ) party or received as
reimbursement for advance payment on behalf of another
which do not redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same is
made to settle an obligation of another person, e.g.,
customer or client, to the said third party, which obligation is
evidenced by the sales invoice/official receipt issued by said
third party to the obligor/debtor (e.g., customer or client of
the payor of the obligation).
An advance payment is an advance payment on behalf of
another if the same is paid to a third (3rd) party for a
present or future obligation of said another party which
obligation is evidenced by a sales invoice/official receipt
issued by the obligee/creditor to the obligor/debtor (i.e., the
aforementioned another party) for the sale of goods or
services by the former to the latter.
For this purpose unrelated party shall not include taxpayers
employees, partners, affiliates (parent, subsidiary and other
related companies), relatives by consanguinity or affinity
within the fourth (4th) civil degree, and trust fund where the
taxpayer is the trustor, trustee or beneficiary, even if
covered by an agreement to the contrary.
Constructive receipt occurs when the money consideration
or its equivalent is placed at the control of the person who
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rendered the service without restrictions by the payor. The
following are examples of constructive receipts:
(1) deposit in banks which are made available to the
seller of services without restrictions;
(2) issuance by the debtor of a notice to offset any debt
or obligation and acceptance thereof by the seller as
payment for services rendered; and
(3) transfer of the amounts retained by the payor to the
account of the contractor.
12.4 Exempt, Zero-rated and Effectively Zero-rated
Transactions
12.4.1 Basic Statutes and Regulations
12.4.1.1 Exempt Transactions
NIRC 109, 116
Sec. 109 NIRC
The following are exempt transactions:
a. Sale or importation of agricultural and marine food
products in their original stateLivestock and poultry of or
kind generally used as, or yielding or producing foods for
human consumption
Breeding stock and genetic materials
Original state
o Even if they have undergone the simple processes
of preparation or preservation for the market
E.g.,
Freezing, drying, salting, broiling, roasting,
smoking or stripping
Polished and/or husked rice, corn grits, raw
cane sugar and molasses, and ordinary salt
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b. Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds,
including ingredients, whether locally produced or imported,
used in the manufacture of finished feeds
EGR: specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals and other animals generally
considered as pets
c. Importation of personal and household effects belonging
to
o Residents of the Philippines returning from abroad
o Nonresident citizens coming to resettle in the
Philippines
Provided that such goods are exempt from customs duties
under the Tariff and Customs Code of the Philippines.
d. Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects
o Belonging to persons coming to settle in the
Philippines
o For their own use and not for sale, barter or
exchange
o Accompanying such persons, or arriving within
ninety (90) days before or after their arrival
o Upon the production of evidence satisfactory to the
Commissioner
That such persons are actually coming to
settle in the Philippines and that the change
of residence is bona fide
EGR: Except any vehicle, vessel, aircraft, machinery other
goods for use in the manufacture and merchandise of any
kind in commercial quantity.
e. Services subject to OPT
f. Services by agricultural contractor growers and milling for
others of
o Palay into rice
o Corn into corn grits
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o Sugar cane into sugar
g. Medical, dental, hospital and veterinary services
EGR: Those rendered by professionals
h. Educational services rendered by
o Private educational institutions
Accredited by DepEd, CHED or TESDA
o Government education institutions
i. Services rendered under er-ee relationship
j. Services rendered by regional or area headquarters
established in the Philippines by MNCs
o Which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries
or branches
In the Asia-Pacific Region
Do not earn or derive income from the
Philippines
k. Transactions which are exempt under international
agreements
o To which the Philippines is a signatory or under
special laws
EGR: Except those under PD 529.
l. Sales by agricultural cooperatives to their members
Sale of their produce, whether in its original state or
processed form, to non-members
Importation of direct farm inputs, machineries and
equipment (including spare parts to be used directly and
exclusively in the production and/or processing of their
produce)
o But must be registered with the Cooperative
Development Authority
m. Gross receipts from lending activities
o By credit or multi-purpose cooperatives
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But must be registered with the Cooperative Development
Authority.
n. Sales by non-agricultural, non- electric and non-credit
cooperatives
o Registered with the Cooperative Development
Authority.
o Share capital contribution of each member does not
exceed P15,000
Regardless of the aggregate capital and net
surplus ratably distributed among the
members
o. Export sales by persons who are not VAT-registered
p. Sale of real properties
o Not primarily held for sale or held for lease in the
ordinary course of trade or business or
o Utilized for low-cost and socialized housing as
defined by Urban Development and Housing Act of
1992, and other related laws
Residential lot valued at P1,919,500 and below or
House and lot and other residential dwellings valued at
P3,199,200 and below
Amounts stated herein shall be readjusted using CPI
o Every three years (starting from January 31, 2012)
q. Lease of a residential unit with a monthly rental not
exceeding P12, 800
Amounts stated herein shall be readjusted using CPI
o Every three years (starting from January 31, 2012)
r. Sale, importation, printing or publication of
o Books and any newspaper, magazine review or
bulletin
Appears at regular intervals
Fixed prices for subscription sale
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Not devoted principally to the publication of
paid advertisements
s. Transport of passengers by international carriers (RA 10378)
t. Sale, importation or lease of passenger or cargo vehicles and
aircraft
o Including engine, equipment, and spare parts
For domestic and international transport
operations
u. Importation of fuel, goods and supplies
o By persons engaged in international shipping or air
transport operations
v. Services of banks, non-bank financial intermediaries
performing quasi-banking functions and other non-bank
financial intermediaries
w. Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the
preceding paragraphs
o With gross annual sales and/or receipts do not
exceeding P1,919,500
A VAT registered person may elect not to apply the exemption
Be irrevocable for three years from the quarter of election
SEC. 116. Tax on Persons Exempt From Value-Added Tax
(VAT). - Any person whose sales or receipts are exempt
under Section 109(z) of this Code from the payment of
value-added tax and who is not a VAT-registered person
shall pay a tax equivalent to three percent (3%) of his gross
quarterly sales or receipts: Provided, That cooperatives shall
be exempt from the three percent (3%)gross receipts tax
herein imposed.
RR No. 16-05 4.109-1 (amended by RR No. 04-07 14, 116-1)
(A) In general. VAT-exempt transactions refer to the
sale of goods or properties and/or services and the use
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or lease of properties that is not subject to VAT (output
tax) and the seller is not allowed any tax credit of VAT
(input tax) on purchases.
The person making the exempt sale of goods, properties
or services shall not bill any output tax to his customers
because the said transaction is not subject to VAT.
(B) Exempt transactions.
(1) Subject to the provisions of Section 4.109-2 hereof,
the following transactions shall be exempt from
VAT:
(a) Sale or importation of agricultural and marine
food products in their original state, livestock
and poultry of a kind generally used as, or
yielding or producing foods for human
consumption; and breeding stock and genetic
materials therefor.
Livestock shall include cows, bulls and calves,
pigs, sheep, goats and rabbits. Poultry shall
include fowls, ducks, geese and turkey.
Livestock or poultry does not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets.
Marine food products shall include fish and
crustaceans, such as, but not limited to, eels,
trout, lobster, shrimps, prawns, oysters, mussels
and clams.
Meat, fruit, fish, vegetables and other
agricultural and marine food products classified
under this paragraph shall be considered in their
original date even if they have undergone the
simple processes of preparation or preservation
for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including
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those using advanced technological means of
packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar
packaging methods.
Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt and
copra shall be considered as agricultural food
products in their original state.
Sugar whose content of sucrose by weight, in
the dry state, has a polarimeter reading of 99.5
and above are presumed to be refined sugar.
Cane sugar produced from the following shall be
presumed, for internal revenue purposes, to be
refined sugar:
(1) product of a refining process,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill
accredited by the BIR to be producing
and/or capable of producing sugar with
polarimeter reading of 99.5o and above, and
for which the quedan issued therefor, and
verified by the Sugar Regulatory
Administration, identifies the same to be of
a polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption
provided for under this section.
(b) Sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn, livestock
and poultry feeds, including ingredients,
whether locally produced or imported, used in
the manufacture of finished feeds (except
specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals and other animals
generally considered as pets);
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Specialty feeds refers to non-agricultural feeds
or food for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally
considered as pets.
(c) Importation of personal and household effects
belonging to residents of the Philippines
returning from abroad and non-resident citizens
coming to resettle in the Philippines; Provided,
that such goods are exempt from customs
duties under the Tariff and Customs Code of the
Philippines;
(d) Importation of professional instruments and
implements, wearing apparel, domestic animals,
and personal household effects (except any
vehicle, vessel, aircraft, machinery and other
goods for use in the manufacture and
merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the
Philippines, for their own use and not for sale,
barter or exchange, accompanying such
persons, or arriving within ninety (90) days
before or after their arrival, upon the production
of evidence satisfactory to the Commissioner of
Internal Revenue, that such persons are actually
coming to settle in the Philippines and that the
change of residence is bonafide;
(e) Services subject to percentage tax under Title V
of the Tax Code, as enumerated below:
(1) Sale or lease of goods or properties or the
performance of services of non-VAT-
registered persons, other than the
transactions mentioned in paragraphs (A) to
(U) of Sec. 109(1) of the Tax Code, the
gross annual sales and/or receipts of which
does not exceed the amount of One Million
Five Hundred Thousand Pesos
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(P1,500,000.00); Provided, That not later
than January 31, 2009 and every three (3)
years thereafter, the amount herein stated
shall be adjusted to its present value using
the Consumer Price Index, as published by
the National Statistics Office (NSO) (Sec.
116 of the Tax Code);
(2) Services rendered by domestic common
carriers by land, for the transport of
passengers and keepers of garages (Sec.
117);
(3) Services rendered by international air /
shipping carriers (Sec. 118);
(4) Services rendered by franchise grantees of
radio and/or television broadcasting whose
annual gross receipts of the preceding year
do not exceed Ten Million Pesos
(P10,000,000.00), and by franchise grantees
of gas and water utilities (Sec. 119);
(5) Service rendered for overseas dispatch,
message or conversation originating from
the Philippines (Sec. 120);
(6) Services rendered by any person, company
or corporation (except purely cooperative
companies or associations) doing life
insurance business of any sort in the
Philippines (Sec. 123);
(7) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies (Sec. 124);
(8) Services of proprietors, lessees or operators
of cockpits, cabarets, night or day clubs,
boxing exhibitions, professional basketball
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games, Jai-Alai and race tracks (Sec. 125);
and
(9) Receipts on sale, barter or exchange of
shares of stock listed and traded through
the local stock exchange or through initial
public offering (Sec. 127).
(f) Services by agricultural contract growers and
milling for others of palay into rice, corn into
grits, and sugar cane into raw sugar;
Agricultural contract growers refers to those
persons producing for others poultry, livestock
or other agricultural and marine food products in
their original state.
(g) Medical, dental, hospital and veterinary services,
except those rendered by professionals.
Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or drug
store, the sale of drugs and medicine is subject
to VAT.
(h) Educational services rendered by private
educational institutions duly accredited by the
Department of Education (DepED), the
Commission on Higher Education (CHED) and
the Technical Education and Skills Development
Authority (TESDA) and those rendered by
government educational institutions;
Educational services shall refer to academic,
technical or vocational education provided by
private educational institutions duly accredited
by the DepED, the CHED and TESDA and those
rendered by government educational institutions
and it does not include seminars, in-service
training, review classes and other similar
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services rendered by persons who are not
accredited by the DepED, the CHED and/or the
TESDA;
(i) Services rendered by individuals pursuant to an
employer-employee relationship;
(j) Services rendered by regional or area
headquarters established in the Philippines by
multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia Pacific Region and do not
earn or derive income from the Philippines;
(k) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special laws
except those granted under PD No. 529
Petroleum Exploration Concessionaires under
the Petroleum Act of 1949; and
(l) Sales by agricultural cooperatives duly
registered and in good standing with the
Cooperative Development Authority (CDA) to
their members, as well as sale of their produce,
whether in its original state or processed form,
to non-members, their importation of direct farm
inputs, machineries and equipment, including
spare parts thereof, to be used directly and
exclusively in the production and/or processing
of their produce.
Sale by agricultural cooperatives to non-
members can only be exempted from VAT if the
producer of the agricultural products sold is the
cooperative itself. If the cooperative is not the
producer (e.g., trader), then only those sales to
its members shall be exempted from VAT;
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It is to be reiterated however, that sale or
importation of agricultural food products in their
original state is exempt from VAT irrespective of
the seller and buyer thereof, pursuant to
Subsection (a) hereof.
(m) Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered and
in good standing with the Cooperative
Development Authority,
(n) Sales by non-agricultural, non-electric and non-
credit cooperatives duly registered with and in
good standing with the CDA; Provided, That the
share capital contribution of each member does
not exceed Fifteen Thousand Pesos
(P15,000.00) and regardless of the aggregate
capital and net surplus ratably distributed
among the members.
Importation by non-agricultural, non-electric and
non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be
used by them are subject to VAT.
(o) Export sales by persons who are not VAT-
registered;
(p) The following sales of real properties are exempt
from VAT, namely:
(1) Sale of real properties not primarily held for
sale to customers or held for lease in the
ordinary course of trade or business.
However, even if the real property is not
primarily held for sale to customers or held
for lease in the ordinary course of trade or
business but the same is used in the trade
or business of the seller, the sale thereof
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shall be subject to VAT being a transaction
incidental to the taxpayers main business.
(2) Sale of real properties utilized for low-cost
housing as defined by RA No. 7279,
otherwise known as the Urban
Development and Housing Act of 1992 and
other related laws, such as RA No. 7835 and
RA No. 8763.
Low-cost housing refers to housing
projects intended for homeless low-income
family beneficiaries, undertaken by the
Government or private developers, which
may either be a subdivision or a
condominium registered and licensed by the
Housing and Land Use Regulatory
Board/Housing (HLURB) under BP Blg. 220,
PD No. 957 or any other similar law,
wherein the unit selling price is within the
selling price ceiling per unit of P750,000.00
under RA No. 7279, otherwise known as the
Urban Development and Housing Act of
1992 and other laws, such as RA No. 7835
and RA No. 8763.
(3) Sale of real properties utilized for socialized
housing as defined under RA No. 7279, and
other related laws, such as RA No. 7835 and
RA No. 8763, wherein the price ceiling per
unit is P225,000.00 or as may from time to
time be determined by the HUDCC and the
NEDA and other related laws.
Socialized housing refers to housing
programs and projects covering houses and
lots or home lots only undertaken by the
Government or the private sector for the
underprivileged and homeless citizens which
shall include sites and services development,
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long-term financing, liberated terms on
interest payments, and such other benefits
in accordance with the provisions of RA No.
7279, otherwise known as the Urban
Development and Housing Act of 1992 and
RA No. 7835 and RA No. 8763. Socialized
housing shall also refer to projects intended
for the underprivileged and homeless
wherein the housing package selling price is
within the lowest interest rates under the
Unified Home Lending Program (UHLP) or
any equivalent housing program of the
Government, the private sector or non-
government organizations.
(4) Sale of residential lot valued at One Million
Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot
and other residential dwellings valued at
Two Million Five Hundred Thousand Pesos
(P2,500,000.00) and below where the
instrument of sale/transfer/disposition was
executed on or after November 1, 2005;
Provided, That not later than January 31,
2009 and every three (3) years thereafter,
the amounts stated herein shall be adjusted
to its present value using the Consumer
Price Index, as published by the National
Statistics Office (NSO); Provided, further,
that such adjustment shall be published
through revenue regulations to be issued
not later than March 31 of each year;
If two or more adjacent residential lots are
sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one
residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots
do not exceed P1,500,000.00. Adjacent
residential lots, although covered by
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separate titles and/or separate tax
declarations, when sold or disposed to one
and the same buyer, whether covered by
one or separate Deed of Conveyance, shall
be presumed as a sale of one residential lot.
(q) Lease of residential units with a monthly rental
per unit not exceeding Ten Thousand Pesos
(P10,000.00), regardless of the amount of
aggregate rentals received by the lessor during
the year; Provided, that not later than January
31, 2009 and every three (3) years thereafter,
the amount of P10,000.00 shall be adjusted to
its present value using the Consumer Price
Index, as published by the NSO;
The foregoing notwithstanding, lease of
residential units where the monthly rental per
unit exceeds Ten Thousand Pesos (P10,000.00)
but the aggregate of such rentals of the lessor
during the year do not exceed One Million Five
Hundred Pesos (P1,500,000.00) shall likewise be
exempt from VAT, however, the same shall be
subjected to three percent (3%) percentage tax.
In cases where a lessor has several residential
units for lease, some are leased out for a
monthly rental per unit of not exceeding
P10,000.00 while others are leased out for more
than P10,000.00 per unit, his tax liability will be
as follows:
1. The gross receipts from rentals not
exceeding P10,000.00 per month per unit
shall be exempt from VAT regardless of the
aggregate annual gross receipts.
2. The gross receipts from rentals exceeding
P10,000.00 per month per unit shall be
subject to VAT if the aggregate annual gross
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receipts from said units only (not including
the gross receipts from units leased for not
more than P10,000.00) exceeds
P1,500,000.00. Otherwise, the gross
receipts will be subject to the 3% tax
imposed under Section 116 of the Tax Code.
The term residential units shall refer to
apartments and houses & lots used for
residential purposes, and buildings or parts or
units thereof used solely as dwelling places
(e.g., dormitories, rooms and bed spaces)
except motels, motel rooms, hotels and hotel
rooms, lodging houses, inns and pension
houses.
The term unit shall mean an apartment unit in
the case of apartments, house in the case of
residential houses; per person in the case of
dormitories, boarding houses and bed spaces;
and per room in case of rooms for rent.
(r) Sale, importation, printing or publication of
books and any newspaper, magazine, review, or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which
is not devoted principally to the publication of
paid advertisements;
(s) Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or
international transport operations; Provided,
that the exemption from VAT on the importation
and local purchase of passenger and/or cargo
vessels shall be limited to those of one hundred
fifty (150) tons and above, including engine and
spare parts of said vessels; Provided, further,
that the vessels to be imported shall comply
with the age limit requirement, at the time of
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acquisition counted from the date of the vessels
original commissioning, as follows: (i) for
passenger and/or cargo vessels, the age limit is
fifteen (15) years old, (ii) for tankers, the age
limit is ten (10) years old, and (iii) For high-
speed passenger crafts, the age limit is five (5)
years old; Provided, finally, that exemption shall
be subject to the provisions of Section 4 of
Republic Act No. 9295, otherwise known as The
Domestic Shipping Development Act of 2004;
(t) Importation of life-saving equipment, safety and
rescue equipment and communication and
navigational safety equipment, steel plates and
other metal plates including marine-grade
aluminum plates, used for shipping transport
operations; Provided, that the exemption shall
be subject to the provisions of Section 4 of
Republic Act. No. 9295, otherwise known as
The Domestic Shipping Development Act of
2004;
(u) Importation of capital equipment, machinery,
spare parts, life- saving and navigational
equipment, steel plates and other metal plates
including marine-grade aluminum plates to be
used in the construction, repair, renovation or
alteration of any merchant marine vessel
operated or to be operated in the domestic
trade. Provided, that the exemption shall be
subject to the provisions of Section 19 of
Republic Act. No. 9295, otherwise known as
The Domestic Shipping Development Act of
2004;
(v) Importation of fuel, goods and supplies by
persons engaged in international shipping or air
transport operations; Provided, that the said
fuel, goods and supplies shall be used
exclusively or shall pertain to the transport of
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goods and/or passenger from a port in the
Philippines directly to a foreign port, or vice
versa, without docking or stopping at any other
port in the Philippines unless the docking or
stopping at any other Philippine port is for the
purpose of unloading passengers and/or cargoes
that originated from abroad, or to load
passengers and/or cargoes bound for abroad;
Provided, further, that if any portion of such
fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph,
such portion of fuel, goods and supplies shall be
subject to twelve percent (12%) VAT starting
February 1, 2006;
(w) Services of banks, non-bank financial
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries, such as money changers and
pawnshops, subject to percentage tax under
Secs. 121 and 122 , respectively, of the Tax
Code; and
(x) Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of One
Million Five Hundred Thousand Pesos
(P1,500,000.00); Provided, That not later than
January 31, 2009 and every three (3) years
thereafter, the amount of P1,500,000.00 shall
be adjusted to its present value using the
Consumer Price Index, as published by the NSO.
For purposes of the threshold of P1,500,000.00, the
husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each
taxpayer shall apply. For instance, if a professional,
aside from the practice of his profession, also
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derives revenue from other lines of business which
are otherwise subject to VAT, the same shall be
combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-
exempt sales shall not be included in determining
the threshold.
RR 13-08 as amended by RR 13-13
Refined sugar content of sucrose by weight in dry state
corresponds to polarimeter of 99.5o and above
Raw sugar refers to sugar produced by simple process of
conversion of sugar cane without a need for mechanical or
similar device such as muscovado.
Centrifugal processing is not a simple process (i.e., not
exempt from VAT).
Required to pay advance VAT on sale of refined sugar
EGR:
o Withdrawal of refined sugar made by accredited and
registered agricultural producer cooperative with
good standing
Needs to show: Sworn statement;
listing/abstract of official warehouse receipt
quedan (soft and hard copy); weekly
production report (soft and hard copy)
o Withdrawal of refined sugar by duly accredited and
registered agricultural cooperative which is sold to
another agricultural cooperative
Needs to show: Sworn statement; listing/abstract of
official warehouse receipt quedan (soft and hard
copy); weekly production report (soft and hard
copy)
12.4.1.2 Zero Rated Goods (persons) and Services
NIRC 106(A)(2) and 108(B)
The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
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(a) Export Sales. - The term "export sales" means:
(1) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon
which may influence or determine the transfer of
ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance
with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in
the Philippines of the said buyer's goods and paid
for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual
production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas
(BSP); and
(5) Those considered export sales under Executive
Order NO. 226, otherwise known as the Omnibus
Investment Code of 1987, and other special laws.
(b) Foreign Currency Denominated Sale. - The phrase
"foreign currency denominated sale" means sale to a
nonresident of goods, except those mentioned in
Sections 149 (automobiles) and 150 (non-essential
goods), assembled or manufactured in the Philippines
for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in
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accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales
to zero rate.
Transactions Subject to Zero Percent (0%) Rate. - The
following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%)
rate.
(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which
goods are subsequently exported, where the services
are paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding
paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero
percent (0%) rate;
(4) Services rendered to vessels engaged exclusively in
international shipping; and
(5) Services performed by subcontractors and/or contractors
in processing, converting, of manufacturing goods for an
enterprise whose export sales exceed seventy percent
(70%) of total annual production.
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(6) Transport of passengers and cargo by air or sea vessels
from Philippines to foreign country
(7) Sale of power or fuel generated through renewable
sources of energy (e.g., biomass, solar, wind,
hydropower, geothermal, ocean energy, other emerging
energy sources using fuel cells and hydrogen fuels)
RR No. 16-05 4.106-5 (amended by RR No. 04-07 5)
Zero-Rated Sales of Goods or Properties. A zero-rated sale
of goods or properties (by a VAT-registered person) is a
taxable transaction for VAT purposes, but shall not result in
any output tax. However, the input tax on purchases of
goods, properties or services, related to such zero-rated
sale, shall be available as tax credit or refund in accordance
with these Regulations.
The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
(a) Export sales. Export Sales shall mean:
(1) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon
which may influence or determine the transfer of
ownership of the goods so exported, paid for in
acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance
with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(2) The sale of raw materials or packaging materials to
a non-resident buyer for delivery to a resident local
export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in
the Philippines of the said buyers goods, paid for in
acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the
BSP;
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(3) The sale of raw materials or packaging materials to
an export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual
production;
Any enterprise whose export sales exceed 70% of
the total annual production of the preceding taxable
year shall be considered an export-oriented
enterprise.
(4) Sale of gold to the BSP; and
(5) Transactions considered export sales under
Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other
special laws.
Considered export sales under Executive Order No.
226 shall mean the Philippine port F.O.B. value
determined from invoices, bills of lading, inward
letters of credit, landing certificates, and other
commercial documents, of export products exported
directly by a registered export producer, or the net
selling price of export products sold by a registered
export producer to another export producer, or to an
export trader that subsequently exports the same;
Provided, That sales of export products to another
producer or to an export trader shall only be
deemed export sales when actually exported by the
latter, as evidenced by landing certificates or similar
commercial documents; Provided, further, That
pursuant to EO 226 and other special laws, even
without actual exportation, the following shall be
considered constructively exported: (1) sales to
bonded manufacturing warehouses of export-
oriented manufacturers; (2) sales to export
processing zones pursuant to Republic Act (RA) Nos.
7916, as amended, 7903, 7922 and other similar
export processing zones; (3) sale to enterprises duly
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registered and accredited with the Subic Bay
Metropolitan Authority pursuant to RA 7227; (4)
sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products under guidelines to
be set by the Board in consultation with the Bureau
of Internal Revenue (BIR) and the Bureau of
Customs (BOC); (5) sales to diplomatic missions and
other agencies and/or instrumentalities granted tax
immunities, of locally manufactured, assembled or
repacked products whether paid for in foreign
currency or not.
For purposes of zero-rating, the export sales of
registered export traders shall include commission
income. The exportation of goods on consignment
shall not be deemed export sales until the export
products consigned are in fact sold by the
consignee; and Provided, finally, that sales of goods,
properties or services made by a VAT-registered
supplier to a BOI- registered manufacturer/producer
whose products are 100% exported are considered
export sales. A certification to this effect must be
issued by the Board of Investment (BOI) which shall
be good for one year unless subsequently re-issued
by the BOI.
(6) The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or
international air transport operations; Provided, that
the same is limited to goods, supplies, equipment
and fuel pertaining to or attributable to the transport
of goods and passengers from a port in the
Philippines directly to a foreign port, or vice versa,
without docking or stopping at any other port in the
Philippines unless the docking or stopping at any
other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from
abroad, or to load passengers and/or cargoes bound
for abroad; Provided, further, that if any portion of
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such fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph, such
portion of fuel goods and supplies shall be subject to
twelve percent (12%) output VAT starting February
1, 2006.
(b) Foreign Currency Denominated Sale. Foreign
Currency Denominated Sale means the sale to a non-
resident of goods, except those mentioned in Secs. 149
and 150 of the Tax Code, assembled or manufactured in
the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the BSP.
Sales of locally manufactured or assembled goods for
household and personal use to Filipinos abroad and
other non-residents of the Philippines as well as
returning Overseas Filipinos under the Internal Export
Program of the government paid for in convertible
foreign currency and accounted for in accordance with
the rules and regulations of the BSP shall also be
considered export sales.
(c) Sales to Persons or Entities Deemed Tax-exempt under
Special Law or International Agreement. - Sales of
goods or property to persons or entities who are tax-
exempt under special laws, e.g. sales to enterprises duly
registered and accredited with the Subic Bay
Metropolitan Authority (SBMA) pursuant to R.A. No.
7227, sales to enterprises duly registered and accredited
with the Philippine Economic Zone Authority (PEZA) or
international agreements to which the Philippines is
signatory, such as, Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc., shall
be effectively subject to VAT at zero-rate.
RR No. 16-05 4.108-5 (amended by RR No. 04-07 12)
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(a) In general. - A zero-rated sale of service (by a VAT-
registered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax.
However, the input tax on purchases of goods,
properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance
with these Regulations.
(b) Transactions Subject to Zero Percent (0%) VAT Rate. -
The following services performed in the Philippines by a
VAT-registered person shall be subject to zero percent
(0%) VAT rate:
(1) Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines,
which goods are subsequently exported, where the
services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP;
(2) Services other than processing, manufacturing or
repacking rendered to a person engaged in business
conducted outside the Philippines or to a non-
resident person not engaged in business who is
outside the Philippines when the services are
performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
BSP;
(3) Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to
zero percent (0%) rate;
(4) Services rendered to persons engaged in
international shipping or air transport operations,
including leases of property for use thereof;
Provided, however, that the services referred to
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herein shall not pertain to those made to common
carriers by air and sea relative 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 twelve percent (12%) VAT
under Sec. 108 of the Tax Code starting Feb. 1,
2006;
(5) Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose export
sales exceed seventy percent (70%) of the total
annual production;
(6) Transport of passengers and cargo by domestic air
or sea carriers from the Philippines to a foreign
country. Gross receipts of international air carriers
doing business in the Philippines and international
sea carriers doing business in the Philippines are still
liable to a percentage tax of three percent (3%)
based on their gross receipts as provided for in Sec.
118 of the Tax Code but shall not to be liable to
VAT; and
(7) Sale of power or fuel generated through renewable
sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal and
steam, ocean energy, and other emerging sources
using technologies such as fuel cells and hydrogen
fuels; Provided, however, that zero-rating shall apply
strictly to the sale of power or fuel generated
through renewable sources of energy, and shall not
extend to the sale of services related to the
maintenance or operation of plants generating said
power.
Effects of Cost-sharing
BIR Ruling No. DA-053-08 (BRANDERS.COM)
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BRANDERS.COM (Philippines), Inc. (the PEZA Company), is a
company organized and existing under the laws of the
Philippines with business address at the 30th Floor, Union
Bank Plaza, Meralco Avenue corner Onyx Road, Ortigas
Center, Pasig City; that it is duly registered with the
Philippine Economic Zone Authority (PEZA) and is engaged
in business process outsourcing services using computer
based IT enabled systems to service the needs of its global
clients; that it is an affiliate of Branders.Com, Inc.; that on
the other hand, Branders.Com, Inc. (Branders-USA) is a US
entity engaged in the wholesale and design of various
business promotional items, gifts and giveaways on the
internet; that it has a Regional Operating Headquarters in
the Philippines, BRANDERS.COM (ROHQ), INC. (ROHQ); that
the ROHQ renders general administration,
sourcing/procurement, corporate finance advisory services
as well as engineering, IT and other technical support to
Branders-USA; that the ROHQ also handles order
management, product design, credit and collection, finance,
engineering, IT as well as merchandising and marketing
services for the PEZA Company; that the PEZA Company
leases from the Union Bank of the Philippines (Union Bank)
the 17th and 30th Floor of the Union Bank Plaza, with
rentable areas of one thousand four hundred and 10/100
(1,400.10) and one thousand five hundred nine and 68/100
(1,509.68) square meters, respectively; that the PEZA
Company occupies the 30th Floor of the building and
subleases the 17th Floor (the subleased property) to the
ROHQ; that being the lessee, the PEZA Company is billed by
Union Bank for the rentals on the 17th and 30th Floors; that
in turn, the PEZA Company bills the ROHQ for the latter's
share of the rental over the subleased property; that VAT
official receipts are issued by the PEZA Company for the
rental payments received from the ROHQ; that the collection
is recorded by the PEZA Company as rental income in its
books; that for its part, the ROHQ treats the same as its
rental expense; that the PEZA Company, likewise, owns
certain equipment consisting of servers, computers, printers
and such other office facilities which it leases to the ROHQ;
that the terms of this equipment leasing is embodied in the
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Memorandum of Agreement (MOA) dated June 6, 2007,
executed by the parties; that a rental fee for the use of the
equipment is charged by the PEZA Company to the ROHQ;
that as in the case of the office space being subleased to the
ROHQ, the PEZA Company issues VAT Official Receipts on
the rentals for these equipment; that the same is recorded
as other income in the books of the PEZA Company with the
corresponding output VAT; that in addition, the PEZA
Company pays for some expenses common to the PEZA
Company and the ROHQ, that the suppliers of goods and
services, such as electric and water companies, issue their
respective invoices and/or receipts only to the PEZA
Company since it is the PEZA Company that holds the
contract with such suppliers; that however, since some of
these costs and expenses pertain to the ROHQ, the PEZA
Company subsequently bills the ROHQ on a reimbursement
of cost basis; that this arrangement is embodied in a
separate MOA, dated March 21, 2007, between the PEZA
Company and the ROHQ; that it is stipulated in the said MOA
that the PEZA Company will advance ROHQ's share for the
following common expenses;
1. Rental/Facilities Expenses/Association Dues;
2. Travel Costs;
3. Professional Services Costs (such as consultants,
accounting and auditing services);
4. Office Expense and Supplies (including office, kitchen
supplies and toiletries);
5. Telephone/Communications;
6. Other Costs (including dues, licenses, fees, etc.)
that other than the receipt for the subleasing of office space
which is being treated as income by the PEZA Company and
as expense by the ROHQ, all other common expenses are
initially paid by the PEZA Company, subject to subsequent
reimbursement by the ROHQ for its share; that in short,
certain purchases are centralized with the PEZA Company;
that after paying the bills for these common expenses, the
PEZA Company bills and collects from the ROHQ for the
latter's proportionate share in these common expenses by
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issuing a billing statement and a non-VAT official receipt in
the name of the ROHQ; that in effect, the PEZA Company
only advances the payment of the utility bills and other
expenses corresponding to the ROHQ's share and then the
ROHQ subsequently reimburses the same at cost and
without any profit; and that the MOA contains the details on
how the PEZA Company and the ROHQ apportion these
common expenses, such as floor area, number of personnel,
etc.
Based on the foregoing representations, you now request
confirmation of your opinion that
1. The billings by the PEZA Company for a portion of the
office space subleased to the ROHQ as well as from the
lease of certain equipment to the latter are subject to
the 35% corporate income tax and 12% VAT;
2. The payments made by the ROHQ to the PEZA Company
representing reimbursement for certain common
expenses initially advanced by the PEZA Company are
mere reimbursements of costs and not service fees;
3. The amount paid by the ROHQ to the PEZA Company,
being "pure reimbursement of costs", i.e.,
reimbursements for certain common expenses initially
advanced by the PEZA Company, are not subject to
income tax, withholding tax and VAT.
In reply thereto, please be informed as follows:
1. Under the circumstances, the PEZA Company entered
into a Contract of Sublease with the ROHQ covering the
portion of the rented office space being used by the
ROHQ. Since it is the PEZA Company which contracted
with Union Bank for the rental of the office spaces being
used by both entities, the PEZA Company is billed by
Union Bank for the entire space being occupied by these
two companies. In this regard, the PEZA Company
records the entire rental payments as rental expense in
its books. Thereafter, the PEZA Company bills the ROHQ
for the latter's share in the office space rental under the
sublease agreement and records the billings as
rental/other income, together with the corresponding
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output VAT. With respect to the lease of the equipment,
the PEZA Company also records the rental as its income,
together with the corresponding output VAT. The leasing
activity is not one of the activities of the PEZA Company
registered with PEZA.
Accordingly, since the rental income is not derived from
a registered activity of the PEZA Company, it shall be
subject to the 35% regular corporate income tax.
Likewise, the PEZA Company shall be liable for 12% VAT
on the rental income which shall be passed on as input
tax to the ROHQ.
2. It is a common principle in taxation that reimbursement
of expenses, by its very nature, is not income but merely
a return of capital. In the instant case, the arrangement
between the PEZA Company and the ROHQ under the
MOA is similar to the above cost-sharing arrangement
since it is agreed that the PEZA Company will be
reimbursed by the ROHQ for its share in the common
expenses. The MOA between the PEZA Company clearly
states that the PEZA Company shall initially pay for the
common expenses * subsequent reimbursement by the
ROHQ of that portion allocated to * a reasonable cost-
benefit arrangement (i.e., floor area, number of
personnel, etc.). The payments made by the ROHQ to
the PEZA Company which actually represent
reimbursement for certain common expenses that were
initially advanced by the PEZA Company should be
treated as a reimbursement of cost. Accordingly, such
reimbursement is not income but merely a return of
capital.
3. Finally, reimbursement-at-cost transactions, expenses
which are incurred by the advancing party for the
benefit and for the account of the party accommodated
can be considered reimbursable expenses not forming
part of gross receipts of the advancing party subject to
tax. Since the party seeking reimbursement does not
sell, barter, exchange, nor lease any food or property,
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and neither does it render any service to the party
accommodated, the reimbursements are not subject to
the 12% VAT. DHcEAa
Such being the case, since payments received by the
PEZA Company from the ROHQ for the latter's share in
the common expenses do not represent income to the
PEZA Company, the said payments shall not be subject
to income tax and consequently to withholding tax.
Moreover, payments made by the ROHQ to the PEZA
Company are likewise not subject to VAT.
WHEREFORE, in view of the foregoing, this Office hereby
confirms your opinion that
1. The billings by the PEZA Company for a portion of the
office space subleased to the ROHQ as well as from the
lease of certain equipment to the latter are subject to
the 35% corporate income tax and 12% VAT;
2. The payments made by the ROHQ to the PEZA Company
representing reimbursement for certain common
expenses initially advanced by the PEZA Company are
mere reimbursements of costs and not service fees; and
3. The amount paid by the ROHQ to the PEZA Company,
being "pure reimbursement of costs", i.e.,
reimbursements for certain common expenses initially
advanced by the PEZA Company, are not subject to
income tax, withholding tax and VAT.
Commissions deducted from invoice
BIR Ruling No. 048-11 (Grundfos Pumps)
Facts:
G Co. is a VAT-registered domestic company engaged in
selling water pumps and pumping solutions to local
customers. G Co. also earns commission income from sales
executed by its parent company in Singapore to Philippine
customers, for which G Co. acts as a liaison between the
Singaporean company and its Philippine customers. The
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Atty. Jose Cochingyan III
commission income G Co. constructively receives is deducted
from its payables to the parent company.
Issue:
Is the commission income received by G Co. subject to 0%
VAT?
Ruling:
No; they are subject to 12% VAT. Under Section 108(B)(2)
of the Tax Code, services are subject to 0% VAT if: (1) the
services are rendered to persons engaged in business
conducted outside the Philippines or to non-resident foreign
clients not engaged in business who are outside the
Philippines when the services are performed; and (2) the
fees are paid in an acceptable foreign currency and
accounted for in accordance with the rules and regulations
of the BSP.
G Co. does not meet the requirements above since (1) its
commissions are for services rendered in the Philippines to
its parent company, a foreign entity outside the Philippines
at the time the services are rendered; and (2) the
commissions are not paid in foreign currency inwardly
remitted to the Philippines in accordance with the rules and
regulations of the BSP. Rather, the commissions are
deducted from its payables to the parent company. As such,
G Co.s commissions are subject to the 12% VAT.
(Editors Note: To qualify for zero-rating prior to RA No.
7716 [approved on May 5, 1994], the consideration for the
services should be paid for in acceptable foreign currency
which is inwardly remitted to the Philippines and accounted
for in accordance with the rules and regulations of the
Central Bank of the Philippines. However, RA No. 7716
removed the requirement for inward remittance. Section
108(B)(2) now reads: Services other than those mentioned
in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a non-
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resident person not engaged in business who is outside the
Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the BSP.)
(from SGV & Co. March 2011 Tax Bulletin,
http://www.ey.com/Publication/vwLUAssets/Tax_Bulletin_-
_March_2011/$FILE/taxbull-march11.pdf)
Hotel Services to Pilots/Cabin Crew
BIR Ruling No. 099-11 (Delta Air Lines)
Facts:
D Co., a US corporation with a branch office in the
Philippines, is engaged in international air transport services.
D Co. regularly procures hotel services such as
accommodation and lodging, including meals, for its pilots
and cabin crew during flight layovers in the Philippines.
Issue:
Is the sale of hotel services to D Co. subject to VAT at 0%?
Ruling:
No. Section 108(B)(4) of the Tax Code, as implemented by
Section 4.108-5(b)(4) of RR No. 16-2005, as amended, and
clarified by Item 11 of RMC No. 046-08, provides that to
qualify for VAT zero-rating, the services rendered by a VAT-
registered person to a person engaged in international air
transport operations must pertain to, or must be attributable
to, the transport of goods and passengers from a port in the
Philippines directly to a foreign port without docking or
stopping at any port in the Philippines.
The hotel services procured by D Co. pertain to room
accommodations, and food and beverage services. As these
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services are rendered within the hotels premises, the
services have no direct connection with the transport of
goods and passengers. As such, the services cannot be
considered as directly attributable to the transport of goods
and passengers from a Philippine port directly to a foreign
port. Therefore, the sale of these hotel services is subject to
12% VAT.
12.4.1.3 Effectively Zero-rated Transactions
RR No. 16-05 4.106-6 (amended by RR No. 04-07 6)
Meaning of the term Effectively Zero-Rated Sale of Goods
and Properties. The term effectively zero-rated sale of
goods and properties shall refer to the local sale of goods
and properties by a VAT- registered person to a person or
entity who was granted indirect tax exemption under special
laws or international agreement.
RR No. 16-05 4.108-6 (amended by RR No. 04-07 13)
Meaning of the term Effectively Zero-Rated Sale of
Services. The term effectively zero-rated sales of services
shall refer to the local sale of services by a VAT -registered
person to a person or entity who was granted in direct tax
exemption under special laws or international agreement.
BIR Ruling DA-066-08 (Diamond Star Agro Products)
This refers to your letter dated January 25, 2008 requesting
for confirmation of your opinion that the sale of goods,
properties or services by VAT-registered suppliers to
DIAMOND STAR AGRO PRODUCTS, INC. ("DIAMOND", for
brevity) being considered export sales shall be subject to
zero percent (0%) VAT rate without need of prior approved
application with the appropriate BIR office for effective zero-
rating. CaDATc
It is represented that DIAMOND is a domestic corporation
organized and existing under the laws of the Republic of the
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Philippines; that it is engaged in the processing of
agricultural products and as such, is a duly registered Value-
Added Tax (VAT) taxpayer; that it is likewise a BOI-
registered producer whose products are 100% exported;
that pursuant to Revenue Regulations No. 16-2005, sale of
goods, properties or services made by VAT-registered
suppliers to a BOI-registered manufacturer/producer whose
products are 100% exported are considered export sales,
which is subject to zero percent (0%) VAT rate; that, hence,
your local purchases of goods, materials, properties and
services used exclusively for the production of agricultural
food products, which are 100% exported, are subject to VAT
at zero percent (0%) rate; that, however, your VAT-
registered suppliers were denied by some BIR personnel the
status of VAT zero-rate because they failed to secure an
approved application for VAT zero-rating; and that in view of
the issuance of Revenue Regulations No. 4-2007, wherein
the requirements of securing approved applications for VAT
zero-rating under Revenue Regulations No. 16-2005 and
Revenue Memorandum Order No. 7-2006 was removed, you
are of the opinion that the approval for VAT zero-rating of
your VAT-registered suppliers is no longer required.
Hence, since the sales of goods, materials, properties and
services by VAT-registered suppliers to DIAMOND (a
registered 100% export producer), which are for the
exclusive use of the latter's production of agricultural food
products, fall within the definition of export sale under E.O.
No. 226 such sale is the export sale contemplated by Section
106 (A) (2) (a) (5) of the Tax Code of 1997 as implemented
by Section 4.106-5 (a) (5) of Revenue Regulations No. 16-
2005, which is subject to VAT zero-rating. (VAT Ruling Nos.
003-2002 dated February 6, 2002 and 010-2005 dated July
28, 2005).
That sales to BOI-registered enterprises whose
manufactured products are 100% exported to foreign
countries shall be accorded automatic zero-rating without
the necessity of applying for and securing prior approval for
zero-rating has been consistently ruled by this Office
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Furthermore, under Section 4.106-6 of RR 16-2005, sales to
a BOI-registered enterprise [Sec. 4.106-5 (a) above] whose
products are 100% exported which are subject to VAT at
zero percent (0%) rate do not require prior approved
application with the appropriate BIR office for VAT zero-
rating.
Accordingly, this Office is of the opinion and hereby holds
that the sales of goods, materials, properties and services by
VAT-registered suppliers to DIAMOND being considered
export sales shall be subject to zero percent (0%) VAT rate
without the necessity of applying for and securing prior
approval for VAT zero-rating.
12.4.1.4 Certain Distinctions zero-rated and
effectively zero-rated & exempt
CIR v Seagate Technology
Facts:
Seagate is a resident foreign corporation duly registered with the
SEC to do business in the Philippines, as well as with PEZA.
Seagate is also a VAT-registered company.
Seagate now seeks the refund of the unutilized input VAT (not
offset by any output VAT).
Issue: W/N Seagate is entitled to a tax refund for the unutilized
input VAT?
Held: YES. Seagate may validly claim a refund for the unutilized
input VAT.
As a PEZA-registered enterprise, Seagate is entitled to fiscal
incentives and benefits under PD 66 and EO 226, as well as
the exemptions granted under RA 7227 & RA 7844. These
laws give Seagate a preferential tax treatment such that it
shall be exempt from VAT, and it is also entitled to tax
credits.
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Zero-rated & effectively zero-rated are similar in effect, but
different in source. Zero-rated transactions refer to the
export sale of goods or supply of services. The tax rate is
zero, thus resulting in no tax liability against the purchaser.
The seller charges no output VAT. However, he may still
claim a refund for the input VAT previously charged by its
suppliers. An effectively zero-rated transaction is one
wherein the sale or supply is done to persons whose
exemptions granted by special law of international
agreements subject such a transaction to a zero tax rate,
resulting in no tax liability, as well. Similarly, the seller may
claim a refund of the input VAT previously charged by its
suppliers.
Zero-rating and Exemptions differ in the extent of relief that
results from each. In zero-rated transactions, there is a total
relief for the purchaser. However, in exempt transactions,
although the transaction itself is not subject to VAT, the
purchaser cannot claim a refund for input taxes paid.
Since Seagates transactions are effectively zero-rated, as
provided by special law, they may validly claim a tax refund
for the input VAT it previously paid to its suppliers.
CIR v Cebu Toyo Corporation
Facts:
Cebu Toyo is a domestic corporation engaged in the
manufacture of products for use in TVs, etc. It is also validly
registered with the PEZA.
80% of its sales are based on exports to its mother company in
Japan. The other 20% are sold to other business enterprises
doing business within the Mactan Export Processing Zone.
Issue: W/N it is entitled to a tax refund for the unutilized input
VAT?
Facts: YES. Cebu Toyo may validly claim a refund for the unutilized
input VAT.
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Since respondent is engaged in the export business, and is
validly registered as a VAT taxpayer, it is entitled to the 0%
tax rate, as well as to a refund for any unutilized input taxes.
Pass-on exemption of PAGCOR treated as automatically zero-rated
under NIRC 108(B)(3)
CIR v Acesite (Philippines) Hotel Corporation
Facts:
Acesite is the owner and operator of the Holiday Inn Manila,
where PAGCOR is a lessee. Acesite also caters food & bevarages
to PAGCORs patrons.
Acesite incurred VAT amounting to more than P30M. It tried to
shift it to PAGCOR, but PAGCOR refused payment, averring that
it was an exempt entity.
Acesite paid for the VAT instead, fearing the consequences of
non-payment.
Issue: W/N PAGCORs tax exemption includes an indirect tax, such
as VAT to entitle Acesite to 0% VAT rate?
Held: YES. Acesite is entitled to a refund of the VAT paid in
relation to its transactions with PAGCOR.
When transactions are entered into with tax-exempt entities,
the transaction becomes an effectively zero-rated one.
Although the tax liability stems from an indirect tax, such as
VAT, the special law granted PAGCOR a blanket exemption
such that there was no distinction between direct and
indirect taxes. Since Acesite contracted with PAGCOR, an
entity that is tax-exempt, all its transactions with the latter
are effectively zero-rated.
PAGCOR v BIR
Facts:
With the enactment of R.A. no. 9337 amending certain sections of
the NIRC, PAGCOR, formerly exempted from the payment of any
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type of tax, except a franchise tax of 5% of the gross revenue, is
now excluded from the enumeration of GOCCs that are exempt from
payment of corporate tax. [Section 1 of RA 9337 amended Section
27 (c) of the NIRC].
Also, BIR issued Revenue Regulations no. 16-2005 specifically
identifying PAGCOR as one of the franchisees subject to 10% VAT
imposed under Section 108 of the NIRC, as amended by RA no.
9337.
Issue: W/N PAGCOR is still exempt from corporate income tax and
VAT with the enactment of RA 9337
Held: PETITION PARTLY MERITORIOUS. Section 1 of Republic Act
No. 9337, amending Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner Philippine
Amusement and Gaming Corporation from the enumeration
of government-owned and controlled corporations exempted
from corporate income tax is valid and constitutional, while
BIR Revenue Regulations No. 16-2005 insofar as it subjects
PAGCOR to 10% VAT is null and void for being contrary to
the National Internal Revenue Code of 1997, as amended by
Republic Act No. 9337.
1. Corporate income tax
A perusal of the legislative records of the Bicameral
Conference Meeting of the Committee on Ways on Means
dated October 27, 1997 would show that the exemption of
PAGCOR from the payment of corporate income tax was due
to the acquiescence of the Committee on Ways on Means to
the request of PAGCOR that it be exempt from such tax.
Under R.A. No. 8424, the exemption of PAGCOR from paying
corporate income tax was not based on a classification
showing substantial distinctions which make for real
differences, but to reiterate, the exemption was granted
upon the request of PAGCOR that it be exempt from the
payment of corporate income tax.
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With the subsequent enactment of R.A. No. 9337, amending
R.A. No. 8424, PAGCOR has been excluded from the
enumeration of GOCCs that are exempt from paying
corporate income tax. The records of the Bicameral
Conference Meeting dated April 18, 2005, of the Committee
on the Disagreeing Provisions of Senate Bill No. 1950 and
House Bill No. 3555, show that it is the legislative intent that
PAGCOR be subject to the payment of corporate income tax.
Taxation is the rule and exemption is the exception. The
burden of proof rests upon the party claiming exemption to
prove that it is, in fact, covered by the exemption so
claimed. As a rule, tax exemptions are construed strongly
against the claimant. Exemptions must be shown to exist
clearly and categorically, and supported by clear legal
provision.
In this case, PAGCOR failed to prove that it is still exempt
from the payment of corporate income tax, considering that
Section 1 of R.A. No. 9337 amended Section 27 (c) of the
National Internal Revenue Code of 1997 by omitting
PAGCOR from the exemption. The legislative intent, as
shown by the discussions in the Bicameral Conference
Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption
from the payment of corporate income tax. It is a basic
precept of statutory construction that the express mention of
one person, thing, act, or consequence excludes all others
as expressed in the familiar maxim expressio unius est
exclusio alterius. Thus, the express mention of the GOCCs
exempted from payment of corporate income tax excludes
all others. Not being excepted, petitioner PAGCOR must be
regarded as coming within the purview of the general rule
that GOCCs shall pay corporate income tax, expressed in the
maxim: exceptio firmat regulam in casibus non exceptis.
No violation of equal protection clause: PAGCORs exemption
from payment of corporate income tax, as provided in
Section 27 (c) of R.A. No. 8424, or the National Internal
Revenue Code of 1997, was not made pursuant to a valid
classification based on substantial distinctions and the other
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requirements of a reasonable classification by legislative
bodies, so that the law may operate only on some, and not
all, without violating the equal protection clause. The
legislative records show that the basis of the grant of
exemption to PAGCOR from corporate income tax was
PAGCORs own request to be exempted.
No violation of non-impairment clause: As regards
franchises, Section 11, Article XII of the Constitution
provides that no franchise or right shall be granted except
under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common
good so requires.
Under Section 11, Article XII of the Constitution, PAGCORs
franchise is subject to amendment, alteration or repeal by
Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No.
9337, amending Section 27 (c) of R.A. No. 8424 by
withdrawing the exemption of PAGCOR from corporate
income tax, which may affect any benefits to PAGCORs
transactions with private parties, is not violative of the non-
impairment clause of the Constitution.
2. VAT
Anent the validity of RR No. 16-2005, the Court holds that
the provision subjecting PAGCOR to 10% VAT is invalid for
being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337
is it provided that petitioner can be subjected to VAT. R.A.
No. 9337 is clear only as to the removal of petitioner's
exemption from the payment of corporate income tax, which
was already addressed above by this Court.
As pointed out by the OSG, R.A. No. 9337 itself exempts
petitioner from VAT pursuant to Section 7 (k) thereof, which
reads:
Sec. 7. Section 109 of the same Code, as amended, is
hereby further amended to read as follows:
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Section 109. Exempt Transactions. - (1) Subject to the
provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value-added tax:
xxxx
(k) Transactions which are exempt under international
agreements to which the Philippines is a signatory or under
special laws, except Presidential Decree No. 529.37
Petitioner is exempt from the payment of VAT, because
PAGCORs charter, P.D. No. 1869, is a special law that grants
petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported
by Section 6 of R.A. No. 9337, which retained Section 108
(B) (3) of R.A. No. 8424.
[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A.
No. 8424), as amended, is hereby further amended to read
as follows:
SEC. 108. Value-Added Tax on Sale of Services and Use or
Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed
and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange
of services, including the use or lease of properties: x x x
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. The
following services performed in the Philippines by VAT-
registered persons shall be subject to zero percent (0%)
rate;
xxxx
(3) Services rendered to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;
xxxx
As pointed out by petitioner, although R.A. No. 9337
introduced amendments to Section 108 of R.A. No. 8424 by
imposing VAT on other services not previously covered, it
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did not amend the portion of Section 108 (B) (3) that
subjects to zero percent rate services performed by VAT-
registered persons to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to 0% rate.
Petitioner's exemption from VAT under Section 108 (B) (3)
of R.A. No. 8424 has been thoroughly and extensively
discussed in Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation.
It is settled rule that in case of discrepancy between the
basic law and a rule or regulation issued to implement said
law, the basic law prevails, because the said rule or
regulation cannot go beyond the terms and provisions of the
basic law. RR No. 16-2005, therefore, cannot go beyond the
provisions of R.A. No. 9337. Since PAGCOR is exempt from
VAT under R.A. No. 9337, the BIR exceeded its authority in
subjecting PAGCOR to 10% VAT under RR No. 16-2005;
hence, the said regulatory provision is hereby nullified.
12.4.1.5 Destination Principle [as regards zero-rated
services]
NIRC 108(B)(2) before amendment
Services other than those mentioned in the preceding
paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
NIRC 108(B)(2) after amendment by RA 9337
Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person
not engaged in business who is outside the Philippines when
the services are performed, the consideration for which is
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paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
Destination Principle or Cross Border Doctrine
VAT Ruling 005-99 Gulf Express Corporation (GEC)
It is represented that Gulf Express Corporation (GEC), a
domestic corporation duly organized and existing under
Philippine Laws, is a VAT-registered company; that it acts as
the general agent of Gulf Air Company (GAC), a foreign air
carrier with principal office in Bahrain, pursuant to a contract
executed by the parties on July 1, 1995; that its income are
foreign currency-denominated and purely commissions
earned as agent of GAC; that GAC's Branch Office in the
Philippines has been automatically deducting the
commissions due from its remittable revenues in effecting
the remittance to the Head Office thru authorized agent
banks; that, in effect, acceptable foreign currency is
constructively remitted to GEC by the foreign principal and
which is being accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP), and
that in view of these, you consider GEC as a zero-rated
taxpayer under the Section 102(a)(2) of the Tax Code of
1997, as amended.
In reply, please be informed that our VAT law, which was
first adopted and promulgated under E.O. 273, effective
January 1, 1988, is basically a Consumption Type VAT
System and, in general, follows the destination principle or
Cross Border Doctrine. Under the VAT System, VAT
exemption and VAT zero-rating are distinguished as follows:
". . . zero-rating should be used when the authorities really
wish to ensure that a product is to be free of VAT. Using an
exemption for VAT means that the tax is borne by the
trader, and if that trader sells to the public, he must pass on
the tax on input to the public in his PRICE or cut payments
to his factors of production (capital and labor). This suggests
that countries that generally wish to pass on to the
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consumer the benefits of VAT-free goods and services
should be allowed to use the zero rate." [VAT Tax
International Practice and Problems, Allan A. Tait,
International Monetary Fund, Washington D.C., 1988, p. 51]
Accordingly, the onus of taxation under our VAT System is in
that country where goods, property or services are destined,
used or consumed. This is the reason why under our VAT
law, goods, property or services destined to, used or
consumed in the Philippines are subject to the 10% VAT
whereas those destined, used or consumed abroad are
subject to zero percent (0%) VAT. (Sections 105 and 108,
Tax Code of 1997)
The sale of services subject to zero percent (0%) VAT under
Section 108(B)(2), of the Tax Code of 1997, are limited to
such sales which are destined for consumption outside of
the Philippines.
As sales agent of GULF AIR COMPANY, an international
airline company, GEC is paid commission for services
rendered in the Philippines in behalf of its foreign principal.
The situs of services rendered is within the Philippines and it
is here where such services are used or consumed.
Therefore, GEC's sale of services must be subject to the
10% VAT rather than the 0% VAT, regardless of whether its
compensation for services rendered be paid in foreign
currency actually or constructively remitted.
VAT Ruling 040-98 Marsman Tours and Travel Corporation
This refers to your letter dated February 24, August 17 and
August 23, 1998, requesting opinion \on whether or not your
client, Marsman Tours and Travel Corporation, is entitled to
zero-rated value-added-tax on its sales of services (tour
package, individual services, travel agency) to foreign
tourists.
It is represented that your client is engaged in the business
of Travel and Tours Agency, that it offers various services
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like (1) tour package, (2) individual services and (3) travel
agency, provided in the following manner;
(1) Tour Package Foreign tourists who come to the
Philippines are provided with various facilities like hotel
room, meals, transportation, tour guide, and other
related services by the facility provider or in some cases
by a sub-contractor contracted by your client. The
facility provider bills your client (in the latter's own
name) for services rendered and facilities provided
(inclusive of VAT, where applicable). Upon receipt of the
above billing, your client prepares the billing to its
foreign counterpart. Payments are made by its foreign
counterpart in foreign currency inwardly remitted to the
Philippines, inclusive of the portion payable by your
client to the facility provider. In some cases, your client
receives payments in foreign currency from the local
offices of multinational companies or private individuals.
(2) Individual Services Your client sells the tour
components to the tourists (not as a package) as
follows: (a) room only; (b) room with breakfast or full
board; (c) transportation only; (d) transportation with
guide. Your client derives income from these services in
the form of mark-up added to the amounts billed by the
facilities providers (such as hotels or transportation
contractors). Payments for services rendered to foreign
tourists are normally received by your client on foreign
exchange which are accounted for in accordance with
the Rules & Regulations of the Bangko Sentral Ng
Pilipinas while payments for services rendered to
domestic tourists are generally received by your client in
Philippine peso.
(3) Travel Agency As travel agents, your client sells
tickets or passage documents to its customers. Your
client's margin does not exceed 9% of the gross selling
price of such tickets or passage documents.
In reply, please be informed of the following:
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1. Under the Value-Added-Tax (VAT) System, exemption
from VAT and Zero Percent (0%) are distinguished, as
follows:
". . . , zero rating should be used when the authorities
really wish to ensure that a product is to be free of VAT.
Using an exemption for VAT means that the tax is borne
by the trader, and if that trader sells to the public, he
must pass on the tax on input to the public in his price
or cut payments to his factors of production (capital and
labor). This suggests that countries that generally wish
to pass on to the consumer the benefits of VAT-free
goods and services should be allowed to use the zero
rate." [Value Added Tax International Practice and
Problems, Allan A. Tait, International Monetary Fund,
Washington, D.C., 1988, p. 51]
Our VAT law, which was first adopted and promulgated
under EO No. 273 effective January 1, 1998, basically
adhered to the Consumption Type VAT Regime and, in
general, follows the destination principle.
The sales of services subject to zero percent (0%) VAT
under Section 108(B)(2), of the Tax Code of 1997, are
limited to such sales which are destined for consumption
outside of the Philippines in that such services are
tacked-in as part of the cost of goods exported. The
zero-rating also extends to project studies, information
services, engineering and architectural designs and
other similar services sold by a resident of the
Philippines to a non-resident foreign client because
these services are likewise destined to be consumed
abroad. The phrase "project studies, information
services, engineering and architectural designs and
other similar services" does not include services
rendered by travel agents to foreign tourists in the
Philippines following the doctrine of ejusdem generis,
since such services by travel agents are not of the same
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Atty. Jose Cochingyan III
class or of the same nature as those enumerated under
the aforesaid section.
Considering that the services by your client to foreign
tourists are basically and substantially rendered within
the Philippines, it follows that the onus of taxation of the
revenue arising therefore, for VAT purposes, is also
within the Philippines. For this reason, it is our
considered opinion that the tour package services of
your client to foreign tourists in the Philippines cannot
legally qualify for zero-rated (0%) VAT but rather
subject to the regular VAT rate of 10%.
2. With respect to the individual services offered by your
client, considering that the service is destined and
consumed substantially within the Philippines, for the
same rationale as discussed above, your client's gross
receipts from tourists (whether domestic or foreign
tourists and whether received in foreign exchange or in
Philippine peso) shall be subject to the 10% VAT.
However, your clients shall be entitled to input tax credit
on their purchases of goods and services from VAT-
registered suppliers and facilities providers provided the
same are covered by VAT-registered sales invoices or
receipts.
3. Relative to your client's sale of tickets or passage
documents to customers as travel agents, wherein your
clients' margin does not exceed 9% of the gross selling
price of such tickets or passage documents, your gross
receipts therefrom shall, likewise, be subject to 10%
VAT (limited to the said margin) pursuant to RMC No. 7-
98.
CIR v American Express
As a general rule, the value-added tax (VAT) system uses the destination
principle. However, our VAT law itself provides for a clear exception, under
which the supply of service shall be zero-rated when the following
requirements are met: (1) the service is performed in the Philippines; (2) the
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service falls under any of the categories provided in Section 102(b) of the
Tax Code; and (3) it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the Bangko Sentral ng
Pilipinas. Since respondents services meet these requirements, they are
zero-rated. Petitioners Revenue Regulations that alter or revoke the above
requirements are ultra vires and invalid.
Facts:
Respondent, a Philippine branch of American Express International,
Inc. (organized and existing under the laws of Delaware, USA), with
office in Makati City, is a servicing unit of American Express
International, Inc.- Hongkong Branch (Amex-HK) and is engaged
primarily to facilitate the collections of Amex-HK receivable from card
members situated in the Philippines and payment to service
establishments in the Philippines.
Amex Philippines registered itself with the BIR as a VAT taxpayer
and was issued VAT Registration Certificate. For year 1997, it filed
with the BIR its quarterly VAT returns which it subsequently
amended. On April 13, 1999, [respondent] filed with the BIR a letter-
request for the refund of its 1997 excess input taxes in the amount
of P3,751,067.04, which amount was arrived at after deducting from
its total input VAT paid of P3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to
P5,193.66 and P6,799.43, respectively. It cites as basis Section 110
(B) of the 1997 Tax Code:
(B) Excess Output or Input Tax. - If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters. Any input tax attributable to the purchase of
capital goods or to zero-rated sales by a VAT-registered person may
at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
Since there was no immediate action on the part of the BIR, Amex
Philippines filed a petition. It argued that:
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a. Export sales by a VAT-registered person, the consideration for
which is paid for in acceptable foreign currency inwardly remitted to
the Philippines and accounted for in accordance with existing
regulations of the Bangko Sentral ng Pilipinas, are subject to [VAT]
at zero percent (0%). Section 102.(sic) Value-added tax on
sale of services.- (a) Rate and base of tax. - There shall be levied,
assessed and collected, a value-added tax equivalent to 10%
percent of gross receipts derived by any person engaged in the sale
of services. x x x Provided That the following services performed in
the Philippines by VAT-registered persons shall be subject to 0%:
(1) x x x
(2) Services other than those mentioned in the preceding
subparagraph, the consideration is paid for in acceptable foreign
currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of
the BSP. x x x.
b. Input taxes on domestic purchases of taxable goods and services
related to zero-rated revenues are available as tax refund in
accordance with Section 106 (now Section 112) of the [Tax Code]
and Section 8(a) of [Revenue] Regulations [(RR)] No. 5-87, to state:
Section 106. Refunds or tax credits of input tax. -
(A) Zero-rated or effectively Zero-rated Sales. - Any VAT-registered
person, except those covered by paragraph (a) above, whose sales
are zero-rated or are effectively zero-rated, may, within two (2)
years after the close of the taxable quarter when such sales were
made, apply for the issuance of tax credit certificate or refund of the
input taxes due or attributable to such sales, to the extent that such
input tax has not been applied against output tax. x x x. [Section
106(a) of the Tax Code]
Section 8. Zero-rating. - (a) In general. - A zero-rated sale is a
taxable transaction for value-added tax purposes. A sale by a VAT-
registered person of goods and/or services taxed at zero rate shall
not result in any output tax. The input tax on his purchases of goods
or services related to such zero-rated sale shall be available as tax
credit or refundable in accordance with Section 16 of these
Regulations. x x x. [Section 8(a), [RR] 5-87]
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The CTA ruled in favour of Amex Philippines holding that its services
are subject to zero-rate pursuant to Section 108(b) of the Tax
Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue
Regulations 5-96.
The CA affirmed, saying that respondents services fell under the first
type enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended
by RR 5-96. The consideration in both types of service, however,
was paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas. Furthermore, the CA reasoned that reliance on VAT Ruling
No. 040-98 was unwarranted. By requiring that respondents services
be consumed abroad in order to be zero-rated, petitioner went
beyond the sphere of interpretation and into that of legislation.
Hence, this petition.
Issue: W/N the Court of Appeals committed reversible error in
holding that respondent is entitled to the refund of the
amount of P3,352,406.59 allegedly representing excess input
VAT for the year 1997?
Ruling: NO. Services performed by VAT-registered persons in the
Philippines (other than the processing, manufacturing or
repacking of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations
of the BSP, are zero-rated.
Respondent is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-
resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. Certainly, the
service it renders in the Philippines is not in the same
category as processing, manufacturing or repacking of
goods and should, therefore, be zero-rated.
Service has been defined as the art of doing something
useful for a person or company for a fee or useful labor or
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work rendered or to be rendered by one person to another.
For facilitating in the Philippines the collection and payment
of receivables belonging to its Hong Kong-based foreign
client, and getting paid for it in duly accounted acceptable
foreign currency, respondent renders service falling under
the category of zero rating. Pursuant to the Tax Code, a VAT
of zero percent should, therefore, be levied upon the supply
of that service.
In the present case, respondents role in the consumer credit
process described above primarily consists of gathering the
bills and credit card drafts of different service establishments
located in the Philippines and forwarding them to the ROCs
outside the country. Servicing the bill is not the same as
billing. For the former type of service alone, respondent
already gets paid.
The parent company -- to which the ROCs and respondent
belong -- takes charge not only of redeeming the drafts from
the ROCs and sending the checks to the service
establishments, but also of billing the credit card holders for
their respective drafts that it has redeemed. While it usually
imposes finance charge upon the holders, none may be
exacted by respondent upon either the ROCs or the card
holders.
The service partakes of the nature of export sales as applied
to goods, especially when rendered in the Philippines by a
VAT-registered person that gets paid in acceptable foreign
currency accounted for in accordance with BSP rules and
regulations.
VAT Requirements for
the Supply of Service
The VAT is a tax on consumption expressed as a
percentage of the value added to goods or services
purchased by the producer or taxpayer. As an indirect tax on
services, its main object is the transaction itself or, more
concretely, the performance of all kinds of services
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conducted in the course of trade or business in the
Philippines. These services must be regularly conducted in
this country; undertaken in pursuit of a commercial or an
economic activity; for a valuable consideration; and not
exempt under the Tax Code, other special laws, or any
international agreement.
Without doubt, the transactions respondent entered into
with its Hong Kong-based client meet all these requirements.
First, respondent regularly renders in the Philippines the
service of facilitating the collection and payment of
receivables belonging to a foreign company that is a clearly
separate and distinct entity.
Second, such service is commercial in nature; carried on
over a sustained period of time; on a significant scale; with a
reasonable degree of frequency; and not at random,
fortuitous or attenuated.
Third, for this service, respondent definitely receives
consideration in foreign currency that is accounted for in
conformity with law.
Finally, respondent is not an entity exempt under any of our
laws or international agreements.
Services Subject to
Zero VAT
As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they
are consumed. Thus, exports are zero-rated, while imports
are taxed.
Confusion in zero rating arises because petitioner equates
the performance of a particular type of service with the
consumption of its output abroad. In the present case, the
facilitation of the collection of receivables is different from
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the utilization or consumption of the outcome of such
service. While the facilitation is done in the Philippines, the
consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by
receiving the bills of service establishments located here in
the country and forwarding them to the ROCs abroad. The
consumption contemplated by law, contrary to petitioners
administrative interpretation, does not imply that the service
be done abroad in order to be zero-rated.
Consumption is the use of a thing in a way that thereby
exhausts it. Applied to services, the term means the
performance or successful completion of a contractual duty,
usually resulting in the performers release from any past or
future liability x x x. The services rendered by respondent
are performed or successfully completed upon its sending to
its foreign client the drafts and bills it has gathered from
service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in
the Philippines.
Unlike goods, services cannot be physically used in or bound
for a specific place when their destination is determined.
Instead, there can only be a predetermined end of a
course when determining the service location or position x
x x for legal purposes. Respondents facilitation service has
no physical existence, yet takes place upon rendition, and
therefore upon consumption, in the Philippines. Under the
destination principle, as petitioner asserts, such service is
subject to VAT at the rate of 10 percent.
Respondents Services Exempt
from the Destination Principle
However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for
services that are performed in the Philippines , paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the [BSP]. Thus, for the
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supply of service to be zero-rated as an exception, the law
merely requires that first, the service be performed in the
Philippines; second, the service fall under any of the
categories in Section 102(b) of the Tax Code; and, third, it
be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.
Indeed, these three requirements for exemption from the
destination principle are met by respondent. Its facilitation
service is performed in the Philippines. It falls under the
second category found in Section 102(b) of the Tax Code,
because it is a service other than processing, manufacturing
or repacking of goods as mentioned in the provision.
Undisputed is the fact that such service meets the statutory
condition that it be paid in acceptable foreign currency duly
accounted for in accordance with BSP rules. Thus, it should
be zero-rated.
Tax Situs of a
Zero-Rated Service
The law neither makes a qualification nor adds a condition in
determining the tax situs of a zero-rated service. Under this
criterion, the place where the service is rendered determines
the jurisdiction to impose the VAT. Performed in the
Philippines, such service is necessarily subject to its
jurisdiction, for the State necessarily has to have a
substantial connection to it, in order to enforce a zero rate.
The place of payment is immaterial; much less is the place
where the output of the service will be further or ultimately
used.
No Qualifications
Under RR 5-87
In implementing the VAT provisions of the Tax Code, RR 5-
87 provides for the zero rating of services other than the
processing, manufacturing or repacking of goods -- in
general and without qualifications -- when paid for by the
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person to whom such services are rendered in acceptable
foreign currency inwardly remitted and duly accounted for in
accordance with the BSP (then Central Bank) regulations.
In sum, having resolved that transactions of respondent are
zero-rated, the Court upholds the formers entitlement to the
refund as determined by the appellate court.
Furthermore, under a zero-rating scheme, the sale or
exchange of a particular service is completely freed from the
VAT, because the seller is entitled to recover, by way of a
refund or as an input tax credit, the tax that is included in
the cost of purchases attributable to the sale or exchange.
[T]he tax paid or withheld is not deducted from the tax
base. Having been applied for within the reglementary
period, respondents refund is in order.
Is the sale of services of R to HK branch zero-rated?
Yes.
Law is very clear. No need for statutory construction.
Zero-rated service transaction if:
1. Services performed in the Philippines by VAT registered
company
2. Other than the processing, manufacturing or repacking of
goods for persons doing business outside the Philippines
3. Paid in foreign currency in accordance with BSP rules
But we follow destination principle?
No.
Unlike goods, services destination cannot be determined.
In this case, Rs service is exempted from destination
principle by law.
Need to determine the tax situs (i.e., who has the taxing
jurisdiction)?
No.
Law does not distinguish as long as the three-fold
requirement is complied with.
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Place of payment is immaterial; much less is the place where
the output of the service will be further or ultimately used.
In fact, in Congress deliberations, What is important here
is that these services are paid in acceptable foreign currency
remitted inwardly to the Philippines
CIR v Burmeister and Wain Scandinavian Contractor Mindanao
Facts:
A foreign consortium, composed of Burmeister-Denmark &
others, entered into a 15-year contract with NAPOCOR for the
maintenance and operation of 2 power barges in Mindanao
Burmeister-Denmark, which was appointed the coordination
manager, established a Philippine subsidiary (respondent) and
subcontracted the actual operation & maintenance
NAPOCOR paid the consortium in a mixture of currencies, while
the consortium paid respondent in foreign currency inwardly
remitted to the Philippines through the banking system
Respondent registered as a VAT taxpayer pursuant to a BIR
Ruling, which stated that if it chooses to register as a VAT
taxpayer & its services are paid for in acceptable foreign
currency & accounted for pursuant to the rules of BSP, its
transactions shall be subject to VAT at zero-rate
Respondent availed of the Voluntary Assessment Program
wherein it subjected part of its sales to the 10% VAT, pursuant
to a subsequent Revenue Regulations
Respondent then paid the corresponding output VAT of a little
over P6M
The VAT Review Committee, however, reconfirmed that the
services being rendered by respondent are subject to VAT at
0%, instead of 10%
Issue: W/N respondent is entitled to a tax credit or refund for the
erroneously paid output VAT?
Held: NO. Respondent is not entitled to a refund of the output VAT
paid.
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Aside from registering as a VAT entity and complying with
the rules of BSP, another essential condition is that the
services should be rendered to a person or entity who is
doing business outside the Philippines. Although this phrase
is clearly stated in the 1st paragraph of the applicable
provision, it should be interpreted to also qualify the general
term services as mentioned in the next subsequent
paragraph of the same provision. Otherwise, the
requirement of payment of foreign currency will become
irrelevant.
Further, when both the provider and recipient of the services
are doing business in the Philippines, this would fall squarely
within the ambit of domestic sales or supply of services,
subject to the regular VAT rate of 10%. While the members
of the consortium may be non-resident foreign corporation,
the consortium itself, to whom respondent is supplying
services for, is actually doing business in the Philippines, as
evidenced by its 15-year contract with NAPOCOR.
Thus, although this jurisdiction generally follows the
destination principle with regard to VAT (exports are zero-
rated, while imports are taxed), as enunciated in American
Express, there is an exception to this rule. The services
enumerated, if performed in the Philippines, shall not be
allowed the zero-rated VAT, but shall be subjected to the
regular VAT rate of 10%.
Requirements for zero-rating:
1. Services be other than processing, manufacturing or
repacking of goods
2. Recipient of such services is doing business outside the
Philippines (more important aspect)
Why limited to foreign recipients?
Because paying in foreign currency is improbable in a local
sale.
Was there export sale?
No.
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Both R and NAPOCOR are in the Philippines.
Is R ETB?
Yes.
Stayed for 15 years already. Cannot be considered as an
isolated transaction.
Exemption to the destination principle
On zero-rated sales
o Services be performed in Philippines
o For person outside Philippines
o Paid in acceptable foreign currency
CIR v. Placer Dome Technical Services
Facts:
PTDSL (Canada) engaged R to do a cleanup of the Marcopper
mining. R asked for refund of input VAT arising from the zero-
rated service to PTDSL. CIR opposed. CIR: onus of taxation is in
the Philippines; not destined to be consumed abroad.
Held/Ratio:
Petition DENIED.
CIR not able to overcome the doctrine in American Express.
Services, though rendered and consumed in the Philippines, is
an exception to the destination principle.
NIRC provides for two activities that may be zero-rated:
1. Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods
are subsequently exported
o Where the services are paid for in acceptable foreign
currency and accounted for in accordance with the
rules and regulations of the BSP
2. Services other than those mentioned in the preceding
subparagraph
o The consideration for which is paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the BSP
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CIR able to rebut the doctrine in American Express?
No.
Stare decisis applies.
Consumption is the use of a thing in a way that thereby
exhausts it. Applied to services, the term means the
performance or successful completion of a contractual duty,
usually resulting in the performers release from any past or
future liability x x x The services rendered by respondent
are performed or successfully completed upon its sending to
its foreign client the drafts and bills it has gathered from
service establish ments here. Its services, having been
performed in the Philippines, are therefore also consumed in
the Philippines.
Unlike goods, services cannot be physically used in or bound
for a specific place when their destination is determined.
Instead, there can only be a predetermined end of a
course when determining the service location or position x
x x for legal purposes.
12.5 Tax Credits: Input/Output Tax
12.5.1 What is the nature of the Input VAT?
Abakada Guro v Ermita
Value-added tax due from or paid by a VAT-registered
person on the importation of goods or local purchase of
goods and services, including lease or use of property, in the
course of trade or business.
Input tax (inclusive of input VAT) carried over from the
previous quarter may be credited against the output
VAT, provided it shall not exceed 70% of the output
VAT.
Input tax is property which may not be confiscated?
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No. This is only a statutory privilege. No vested right. Merely
provides for method of amortization.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs VAT for a given
quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a
tax credit certificate under Section 112(B).
NIRC 110(A)
Creditable Input Tax. -
(1) Any input tax evidenced by a VAT invoice or official
receipt issued in accordance with Section 113 hereof on
the following transactions shall be creditable against the
output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a
finished product for sale including packaging
materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of
service; or
(v) For use in trade or business for which deduction
for depreciation or amortization is allowed under
this Code, except automobiles, aircraft and
yachts.
(b) Purchase of services on which a value-added tax has
been actually paid.
(2) The input tax on domestic purchase of goods or
properties shall be creditable:
(a) To the purchaser upon consummation of sale and on
importation of goods or properties; and
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(b) To the importer upon payment of the value-added
tax prior to the release of the goods from the
custody of the Bureau of Customs.
However, in the case of purchase of services, lease
or use of properties, the input tax shall be creditable
to the purchaser, lessee or licensee upon payment
of the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in
transactions not subject to the value-added tax shall be
allowed tax credit as follows:
(a) Total input tax which can be directly attributed to
transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be
directly attributed to either activity.
The term "input tax" means the value-added tax due
from or paid by a VAT-registered person in the
course of his trade or business on importation of
goods or local purchase of goods or services,
including lease or use of property, from a VAT-
registered person. It shall also include the
transitional input tax determined in accordance with
Section 111 of this Code.
The term "output tax" means the value-added tax
due on the sale or lease of taxable goods or
properties or services by any person registered or
required to register under Section 236 of this Code.
RR No. 16-05 4.110-1 & 4.110-2
Credits For Input Tax. -- Input tax means the VAT due on
or paid by a VAT-registered person on importation of goods
or local purchases of goods, properties, or services, including
lease or use of properties, in the course of his trade or
business. It shall also include the transitional input tax and
the presumptive input tax determined in accordance with
Sec. 111 of the Tax Code.
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It includes input taxes which can be directly attributed to
transactions subject to the VAT plus a ratable portion of any
input tax which cannot be directly attributed to either the
taxable or exempt activity.
Any input tax on the following transactions evidenced by a
VAT invoice or official receipt issued by a VAT-registered
person in accordance with Secs. 113 and 237 of the Tax
Code shall be creditable against the output tax:
(a) Purchase or importation of goods
(1) For sale; or
(2) For conversion into or intended to form part of a
finished product for sale, including packaging
materials; or
(3) For use as supplies in the course of business; or
(4) For use as raw materials supplied in the sale of
services; or
(5) For use in trade or business for which deduction for
depreciation or amortization is
(b) Purchase of real properties for which a VAT has actually
been paid;
(c) Purchase of services in which a VAT has actually been
paid;
(d) Transactions deemed sale under Sec. 106 (B) of the
Tax Code;
(e) Transitional input tax allowed under Sec. 4.111 (a) of
these Regulations;
(f) Presumptive input tax allowed under Sec. 4.111 (b) of
these Regulations;
(g) Transitional input tax credits allowed under the
transitory and other provisions of these Regulations.
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SEC. 4.110-2. Persons Who Can Avail of the Input Tax
Credit. -- The input tax credit on importation of goods or
local purchases of goods, properties or services by a VAT-
registered person shall be creditable:
(a) To the importer upon payment of VAT prior to the
release of goods from customs custody;
(b) To the purchaser of the domestic goods or properties
upon consummation of the sale; or
(c) To the purchaser of services or the lessee or licensee
upon payment of the compensation, rental, royalty or
fee allowed under the Tax Code,
12.5.2 On Depreciable Goods
NIRC 110(A)(2)(b) 2nd
However, in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser,
lessee or licensee upon payment of the compensation,
rental, royalty or fee.
RR No. 16-05 4.110-3 (amended by RR No. 04-07 16)
Claim for Input Tax on Depreciable Goods. -- Where a VAT-
registered person purchases or imports capital goods, which
are depreciable assets for income tax purposes, the
aggregate acquisition cost of which (exclusive of VAT) in a
calendar month exceeds One Million pesos (P1,000,000.00),
regardless of the acquisition cost of each capital good, shall
be claimed as credit against output tax in the following
manner:
(a) If the estimated useful life of a capital good is five (5)
years or more The input tax shall be spread evenly
over a period of sixty (60) months and the claim for
input tax credit will commence in the calendar month
when the capital good is acquired. The total input taxes
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on purchases or importations of this type of capital
goods shall be divided by 60 and the quotient will be the
amount to be claimed monthly.
(b) If the estimated useful life of a capital good is less than
five (5) years The input tax shall be spread evenly on
a monthly basis by dividing the input tax by the actual
number of months comprising the estimated useful life
of the capital good. The claim for input tax credit shall
commence in the calendar month that the capital goods
were acquired.
Where the aggregate acquisition cost (exclusive of VAT)
of the existing or finished depreciable capital goods
purchased or imported during any calendar month does
not exceed One million pesos (P 1,000,000.00), the total
input taxes will be allowable as credit against output tax
in the month of acquisition; Provided, however, that the
total amount of input taxes (input tax on depreciable
capital goods plus other allowable input taxes) allowed
to be claimed against the output tax in the quarterly VAT
Returns shall be subject to the limitation prescribed
under Sec. 4.110-7 of these Regulations.
Capital goods or properties refers to goods or properties
with estimated useful life greater than one (1) year and
which are treated as depreciable assets under Sec. 34(F)
of the Tax Code, used directly or indirectly in the
production or sale of taxable goods or services.
The aggregate acquisition cost of depreciable assets in
any calendar month refers to the total price, excluding
the VAT, agreed upon for one or more assets acquired
and not on the payments actually made during the
calendar month. Thus, an asset acquired on installment
for an acquisition cost of more than P1,000,000.00,
excluding the VAT, will be subject to the amortization of
input tax despite the fact that the monthly
payments/installments may not exceed P1,000,000.00.
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Illustration: LBH Corporation sold capital goods on
installment on October 1, 2005. It is agreed that the
selling price, including the VAT, shall be payable in five
(5) equal monthly installments. The data pertinent to the
sold assets are as follows:
Selling Price - P 5,000,000.00
(exclusive of VAT)
Passed-on VAT - 500,000.00
Original Cost of Asset - 3,000,000.00
Accumulated Depreciation - 1,000,000.00
at the time of sale
Unutilized Input Tax - 100,000.00
(Sold Asset)
The input tax of P 500,000.00 on the bought capital
goods worth P 5,000,000.00 shall be spread evenly over
a period of 60 months starting the month of purchase.
If the depreciable capital good is sold/transferred within a
period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input
tax on the capital goods sold/transferred can be claimed as
input tax credit during the month/quarter when the sale or
transfer was made but subject to the limitation prescribed
under Sec. 4.110-7 of these Regulations.
Construction in progress (CIP) is the cost of construction
work which is not yet completed. CIP is not depreciated until
the asset is placed in service. Normally, upon completion, a
CIP item is reclassified and the reclassified asset is
capitalized and depreciated.
CIP is considered, for purposes of claiming input tax, as a
purchase of service, the value of which shall be determined
based on the progress billings. Until such time the
construction has been completed, it will not qualify as capital
goods as herein defined, in which case, input tax credit on
such transaction can be recognized in the month the
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payment was made; Provided, that an official receipt of
payment has been issued based on the progress billings.
In case of contract for the sale of service where only the
labor will be supplied by the contractor and the materials will
be purchased by the contractee from other suppliers, input
tax credit on the labor contracted shall still be recognized on
the month the payment was made based on a progress
billings while input tax on the purchase of materials shall be
recognized at the time the materials were purchased.
Once the input tax has already been claimed while the
construction is still in progress, no additional input tax can
be claimed upon completion of the asset when it has been
reclassified as a depreciable capital asset and depreciated.
12.5.3 Excess Output or Input VAT and Determination of Creditable
Input VAT
NIRC 110(B) (amended by RA 9361 & 110(C))
Excess Output or Input Tax. - If at the end of any taxable
quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person. If the input tax
exceeds the output tax, the excess shall be carried over to
the succeeding quarter or quarters. any input tax
attributable to the purchase of capital goods or to zero-rated
sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes,
subject to the provisions of Section 112.
RR No. 16-05 4.110-5, 4.110-6 & 4.110-7 (amended by RR No.
02-07 & RR No. 04-07 19)
SEC. 4.110-5. Determination of Input Tax Creditable during
a Taxable Month or Quarter. -- The amount of input taxes
creditable during a month or quarter shall be determined in
the manner illustrated above by adding all creditable input
taxes arising from the transactions enumerated under the
preceding subsections of Sec. 4.110 during the month or
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quarter plus any amount of input tax carried-over from the
preceding month or quarter, reduced by the amount of claim
for VAT refund or tax credit certificate (whether filed with
the BIR, the Department of Finance, the Board of
Investments or the BOC) and other adjustments, such as
purchases returns or allowances, input tax attributable to
exempt sales and input tax attributable to sales subject to
final VAT withholding.
SEC. 4.110-6. Determination of the Output Tax and VAT
Payable and Computation of VAT Payable or Excess Tax
Credits. -- In a sale of goods or properties, the output tax is
computed by multiplying the gross selling price as defined in
these Regulations by the regular rate of VAT. For sellers of
services, the output tax is computed by multiplying the gross
receipts as defined in these Regulations by the regular rate
of VAT.
In all cases where the basis for computing the output tax is
either the gross selling price or the gross receipts, but the
amount of VAT is erroneously billed in the invoice, the total
invoice amount shall be presumed to be comprised of the
gross selling price/gross receipts plus the correct amount of
VAT. Hence, the output tax shall be computed by multiplying
the total invoice amount by a fraction using the rate of VAT
as numerator and one hundred percent (100%) plus rate of
VAT as the denominator. Accordingly, the input tax that can
be claimed by the buyer shall be the corrected amount of
VAT computed in accordance with the formula herein
prescribed.
There shall be allowed as a deduction from the output tax
the amount of input tax deductible as determined under Sec.
4.110-1 to 4.110-5 of these Regulations to arrive at VAT
payable on the monthly VAT declaration and the quarterly
VAT returns, subject to the limitations set forth in Section
4.110-7.
SEC. 4.110-7. VAT Payable (Excess Output) or Excess Input
Tax.
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(a) If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the
VAT-registered person.
Illustration:
For a given taxable quarter ABC Corp. has output VAT of 100
and input VAT of 80. Since output tax exceeds the input tax
for such taxable quarter, all of the input tax may be utilized
to offset against the output tax. Thus, the net VAT payable
is 100 minus 80 = 20.
(b) If the input tax inclusive of input tax carried over from
the previous quarter exceeds the output tax, the excess
input tax shall be carried over to the succeeding quarter
or quarters; Provided, however, that any input tax
attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or applied for a
tax credit certificate which may be used in the payment
of internal revenue taxes, subject to the limitations as
may be provided for by law, as well as, other
implementing rules.
Illustration:
For a given taxable quarter, XYZ Corporation has output VAT
of 100 and input VAT of 110. Since input tax exceeds the
output tax for such taxable quarter, there is an excess input
tax at the end of the quarter of 10 which may be carried
over to the next quarter or quarters.
12.5.4 Transitional/Presumptive Input Tax Credits
NIRC 111
(A) Transitional Input Tax Credits. - A person who becomes
liable to value-added tax or any person who elects to be
a VAT-registered person shall, subject to the filing of an
inventory according to rules and regulations prescribed
by the Secretary of finance, upon recommendation of
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the Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent for
eight percent (8%) of the value of such inventory or the
actual value-added tax paid on such goods, materials
and supplies, whichever is higher, which shall be
creditable against the output tax.
(B) Presumptive Input Tax Credits. -
(1) Persons or firms engaged in the processing of
sardines, mackerel and milk, and in manufacturing
refined sugar and cooking oil, shall be allowed a
presumptive input tax, creditable against the output
tax, equivalent to one and one-half percent (1
1/2%) of the gross value in money of their
purchases of primary agricultural products which are
used as inputs to their production.
As used in this Subsection, the term "processing"
shall mean pasteurization, canning and activities
which through physical or chemical process alter the
exterior texture or form or inner substance of a
product in such manner as to prepare it for special
use to which it could not have been put in its
original form or condition.
(2) Public works contractors shall be allowed a
presumptive input tax equivalent to one and one-
half percent (1 1/2%) of the contract price with
respect to government contracts only in lieu of
actual input taxes therefrom.
4% PIT on purchases of primarily agricultural products used as
inputs of production
Be claimed by persons or firms engaged in
Processing of
o Sardines
o Mackerel
o Milk
Manufacturing
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o Refined sugar
o Cooking oil
o Packed noodle-based instant meals
RR No. 16-05 4.111-1
(a) Transitional Input Tax Credits on Beginning Inventories
Taxpayers who became VAT-registered persons upon
exceeding the minimum turnover of P1,500,000.00 in
any 12-month period, or who voluntarily register even if
their turnover does not exceed P1,500,000.00 (except
franchise grantees of radio and television broadcasting
whose threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as of the
effectivity of their VAT registration, on the following:
(1) goods purchased for resale in their present
condition;
(2) materials purchased for further processing, but
which have not yet undergone processing;
(3) goods which have been manufactured by the
taxpayer;
(4) goods in process for sale; or
(5) goods and supplies for use in the course of the
taxpayers trade or business as a VAT-registered
person.
The transitional input tax shall be two percent (2%) of
the value of the beginning inventory on hand or actual
VAT paid on such, goods, materials and supplies,
whichever is higher, which amount shall be creditable
against the output tax of VAT-registered person. The
value allowed for income tax purposes on inventories
shall be the basis for the computation of the 2%
transitional input tax, excluding goods that are exempt
from VAT under Sec. 109 of the Tax Code.
The threshold amount of P1,500,000.00 shall be
adjusted, not later than January 31, 2009 and every
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three years thereafter, to its present value using the Claims for VAT refund/Tax Credit Certificate (TCC) with
Consumer Price Index as published by the NSO. the Bureau of Internal Revenue, Board of Investment,
and One-Stop-Shop and Duty Drawback Center of the
(b) Presumptive Input Tax Credits Dept. of Finance should be deducted from the allowable
input tax that are attributable to zero-rated sales.
Persons or firms engaged in the processing of sardines,
mackerel, and milk, and in manufacturing refined sugar, 2. If any input tax cannot be directly attributed to either a
cooking oil and packed noodle-based instant meals, shall VAT taxable or VAT- exempt transaction, the input tax
be allowed a presumptive input tax, creditable against shall be pro-rated to the VAT taxable and VAT-exempt
the output tax, equivalent to four percent (4%) of the transactions and only the ratable portion pertaining to
gross value in money of their purchases of primary transactions subject to VAT may be recognized for input
agricultural products which are used as inputs to their tax credit.
production.
Illustration: ERA Corporation has the following sales during
As used in this paragraph, the term processing shall the month:
mean pasteurization, canning and activities which
through physical or chemical process alter the exterior Sale to private entities subject - P 100,000.00
texture or form or inner substance of a product in such to 10%
manner as to prepare it for special use to which it could Sale to private entities subject - 100,000.00
not have been put in its original form or condition. to 0%
Sale of exempt goods - 100,000.00
12.5.5 Apportioning of Input VAT in Mixed Transactions Sale to govt. subjected to 5% - 100,000.00
final VAT Withholding
RR No. 16-05 4.110-4 (amended by RR No. 04-07 17) Total sales for the month - P 400,000.00

A VAT- registered person who is also engaged in The following input taxes were passed on by its VAT
transactions not subject to VAT shall be allowed to recognize suppliers:
input tax credit on transactions subject to VAT as follows:
Input tax on taxable goods - P 5,000.00
1. All the input taxes that can be directly attributed to (10%)
transactions subject to VAT may be recognized for input Input tax on zero-rated sales - 3,000.00
tax credit; Provided, that input taxes that can be directly Input tax on sale of exempt - 2,000.00
attributable to VAT taxable sales of goods and services goods
to the Government or any of its political subdivisions, Input tax on sale to government - 4,000.00
instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall not be Input tax on depreciable capital - P 20,000.00
credited against output taxes arising from sales to non- good not attributable to any
specific activity (monthly
Government entities.
amortization for 60 months)

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A. The creditable input tax for the month shall be

computed as follows:

Input tax on taxable goods (10%) - P 5,000.00

Input tax on zero-rated sales - 3,000.00
Ratable portion of the input tax not directly
attributable to any activity:

Taxable sales (0% and 10%) x Amount of input

Total Sales tax not directly
Attributable

P 200,000.00 x P 20,000.00
400,000.00 - 10,000.00
Total creditable input tax for the month - P 18,000.00

B. The input tax attributable to sales to government for the

month shall be computed as follows:

Input tax on sale to govt. - P 4,000.00

Ratable portion of the input tax not directly
attributable to any activity:

Taxable sales to government x Amount of input

Total Sales tax not directly
Attributable

P 100,000.00 x P 20,000.00
400,000.00 - 5,000.00
Total creditable input tax for the month - P 9,000.00

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C. The input tax attributable to VAT-exempt sales for the
month shall be computed as follows:
Input tax on VAT-exempt sales
Ratable portion of the input tax not directly
attributable to any activity:
VAT-exempt sales x Amount of input
Total Sales tax not directly
Attributable
P 100,000.00 x P 20,000.00
400,000.00
Total creditable input tax for the month
The table below shows a summary of the foregoing
transactions of ERA Corporation:
Notwithstanding the foregoing provisions, for persons
engaged in both zero-rated sales under Sec. 108(B)(6) of
the Tax Code and non-zero rated sales, the aggregate input
- P 2,000.00 taxes shall be allocated ratably between the zero-rated sale
and non-zero-rated sale.
BIR Ruling No. DA-646-06 (Ilo Land)
As represented, Ilo Land, Inc. is a PEZA-registered Ecozone
Facilities Enterprise with PEZA Registration Certificate No.
97-006-F dated August 15, 1997, engaged in the leasing of
real properties. It is registered with the BIR as a VAT
- 5,000.00 registered entity.
- P 7,000.00
The company has purchased materials for the construction
of a building classified as capital asset. Said building is not
intended for sale but as an investment. This capital asset is
likewise not related to VATable products, hence, you decided
to capitalize the VAT amounting to P2,975,289.87.

In reply, please be informed that pursuant to Section 112,

* These amounts are not available for input tax credit but
may be recognized as cost or expense.
** Standard input VAT of 5% on sales to Government as
provided in SEC. 4.114-2(a)
*** Withheld by Government entity as Final Withholding
VAT
The input tax attributable to VAT-exempt sales shall not be
allowed as credit against the output tax but should be
treated as part of cost or expense.
Tax Code of 1997, a VAT-registered person may, to the
extent such input taxes have not been applied against
output taxes, apply for the issuance of a tax credit certificate
or refund of input taxes which are (1) directly attributable to
zero-rated or effectively zero-rated sales, the acquisition of
capital goods, purchase of land, or cancellation of VAT
registration due to retirement, change or cessation of status
as a VAT-registered person and (2) paid on imported or
locally purchased capital goods.
In case a person is engaged in taxable as well as exempt
sales of goods, properties and services, only the input taxes
on purchases directly attributable to taxable transactions,
i.e., zero-rated and acquisition of capital goods, are eligible
for refund or issuance of tax credit certificate. The input
taxes directly attributable or allocable to exempt transactions
become part of the cost of capital goods purchased or of
operating expenses (cited in BIR Ruling No. DA234-2004
dated May 7, 2004) In other words, only the input tax
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attributable to VAT-exempt sales shall not be allowed as
credit against the output tax but should be treated as part of
cost or expense (Sec. 4.110-4, Rev. Regs. No. 16-2005).
Nowhere is it provided that input taxes on purchases directly
attributable to taxable transactions, cannot be treated as
part of the cost of capital goods purchased. What the law
provides is that said input taxes are eligible for refund or
issuance of tax credit certificate.
In view of the foregoing, this Office poses no objection to
the input VAT being added to cost of the building, provided,
that input taxes deducted shall not be reported/reflected in
the VAT return and provided, further, that such input taxes
shall not be claimed as input tax credit in any future VAT
returns. Moreover, the input tax treated as part of the cost
of capital goods purchased shall be removed from the
company's inventory of input taxes and should be clearly
reflected in the company's financial record. Furthermore, the
company is required to attach in its quarterly VAT returns a
separate sheet containing/reflecting the amount of input
VAT applied as deduction against its gross income.
In case, however, a claim for refund or credit has already
been resorted to, simultaneous with or subsequent to the
deduction, and such claim for refund or credit is granted, the
amount so deducted should be considered and declared as
income subject to the ordinary income tax prescribed under
Section 27 of the Tax Code of 1997, as amended. (Section
34(C)(1), 1997 Tax Code, as amended; BIR Ruling No. DA-
319-05 dated July 15, 2005; and BIR Ruling No. 008-7006
dated September 8, 2006).
12.5.6 Substantiation of Input Tax Credits, Invoicing
NIRC 113
(A) Invoicing Requirements
VAT-registered person shall issue:
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1. VAT invoice for every sale, barter or exchange of goods or properties
and
2. VAT OR for every lease of goods or properties and for every sale,
barter or exchange of services
(B) Information Contained in VAT Invoice or OR
1. Seller is a VAT-registered person, followed by TIN
2. Total amount which the purchaser pays or is obligated to pay
o With the indication that such amount includes the VAT
a. Amount of tax shown as a separate item
b. If sale is exempt, term VAT exempt sale be written or
printed prominently
c. If sale is zero-rated, term zero-rated sale be written or
printed prominently
d. If sale is mixed, clearly indicate the breakdown
But the seller may choose to issue separate invoices
or receipts for each component
3. Date of transaction, quantity, unit cost, description of goods or
properties or nature of service
4. If sales amount is P1,000 or more is a made to a VAT registered
person, additionally required to supply
o Name, business style, TIN of the purchaser, customer or
client
(C) Accounting Requirements
All persons subject to VAT
Shall maintain a subsidiary sales journal and subsidiary purchase
journal
o Daily sales and purchases are recorded
Contain such information as may be required by the SOF.
In addition to the regular accounting records required.
(D) Consequences of using erroneous VAT invoice or OR
1. If persons who is not VAT registered issues invoice or OR showing
TIN followed by the word VAT
a. Issuer, in addition to OPT, be liable for
i. VAT under Sec. 106 or 108
ii. 50% surcharge
b. As to the purchaser, input VAT may be recognized
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2. If VAT registered persons issues VAT invoice or OR for a VAT
exempt transaction but fails to prominently display such information
o Issue be liable to account for VAT under Sec. 106 or 108, as
if Sec. 109 does not apply
NIRC 237
All persons subject to an internal revenue tax shall, for each
sale or transfer of merchandise or for services rendered
valued at Twenty-five pesos (P25.00) or more, issue duly
registered receipts or sales or commercial invoices, prepared
at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature
of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos
(P100.00) or more, or regardless of the amount, where the
sale or transfer is made by a person liable to value-added
tax to another person also liable to value-added tax; or
where the receipt is issued to cover payment made as
rentals, commissions, compensations or fees, receipts or
invoices shall be issued which shall show the name, business
style, if any, and address of the purchaser, customer or
client: Provided, further, That where the purchaser is a VAT-
registered person, in addition to the information herein
required, the invoice or receipt shall further show the
Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the
purchaser, customer or client at the time the transaction is
effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of
business for a period of three (3) years from the close of the
taxable year in which such invoice or receipt was issued,
while the duplicate shall be kept and preserved by the
issuer, also in his place of business, for a like period.
The Commissioner may, in meritorious cases, exempt any
person subject to internal revenue tax from compliance with
the provisions of this Section.
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NIRC 113(A) & (B)
(A) Invoicing Requirements. - A VAT-registered person shall,
for every sale, issue an invoice or receipt. In addition to
the information required under Section 237, the
following information shall be indicated in the invoice or
receipt:
(1) A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN); and
(2) The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax.
(B) Accounting Requirements. - Notwithstanding the
provisions of Section 233, all persons subject to the
value-added tax under Sections 106 and 108 shall, in
addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary
purchase journal on which the daily sales and purchases
are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of
Finance.
RR No. 16-05 4.110-8 & 4.113-1
SEC. 4.110-8. Substantiation of Input Tax Credits. --
(a) Input taxes for the importation of goods or the domestic
purchase of goods, properties or services is made in the
course of trade or business, whether such input taxes
shall be credited against zero-rated sale, non-zero-rated
sales, or subjected to the 5% Final Withholding VAT,
must be substantiated and supported by the following
documents, and must be reported in the information
returns required to be submitted to the Bureau:
(1) For the importation of goods - import entry or other
equivalent document showing actual payment of
VAT on the imported goods.
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(2) For the domestic purchase of goods and properties
invoice showing the information required under
Secs. 113 and 237 of the Tax Code.
(3) For the purchase of real property public
instrument i.e., deed of absolute sale, deed of
conditional sale, contract/agreement to sell, etc.,
together with VAT invoice issued by the seller.
(4) For the purchase of services official receipt
showing the information required under Secs. 113
and 237 of the Tax Code.
A cash register machine tape issued to a registered
buyer shall constitute valid proof of substantiation of tax
credit only if it shows the information required under
Secs. 113 and 237 of the Tax Code.
(b) Transitional input tax shall be supported by an inventory
of goods as shown in a detailed list to be submitted to
the BIR.
(c) Input tax on deemed sale transactions shall be
substantiated with the invoice required under Sec.
4.113-2 of these Regulations.
(d) Input tax from payments made to non-residents (such
as for services, rentals and royalties) shall be supported
by a copy of the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-resident evidencing
remittance of VAT due which was withheld by the payor.
(e) Advance VAT on sugar shall be supported by the
Payment Order showing payment of the advance VAT.
SEC. 4.113-1. Invoicing Requirements. --
(A) A VAT-registered person shall issue: --
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(1) A VAT invoice for every sale, barter or exchange of
goods or properties; and
(2) A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange of
services.
Only VAT-registered persons are required to print their
TIN followed by the word VAT in their invoice or
official receipts. Said documents shall be considered as a
VAT Invoice or VAT official receipt. All purchases
covered by invoices/receipts other than VAT Invoice/VAT
Official Receipt shall not give rise to any input tax.
VAT invoice /official receipt shall be prepared at least in
duplicate, the original to be given to the buyer and the
duplicate to be retained by the seller as part of his
accounting records.
(B) Information contained in VAT invoice or VAT official
receipt. The following information shall be indicated in
VAT invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered
person, followed by his TIN;
(2) The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the VAT; Provided, That:
(a) The amount of tax shall be shown as a separate
item in the invoice or receipt;
(b) If the sale is exempt from VAT, the term VAT-
exempt sale shall be written or printed
prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) VAT,
the term zero-rated sale shall be written or
printed prominently on the invoice or receipt;
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(d) If the sale involves goods, properties or services
some of which are subject to and some of which
are VAT zero-rated or VAT-exempt, the invoice
or receipt shall clearly indicate the break-down
of the sale price between its taxable, exempt
and zero-rated components, and the calculation
of the VAT on each portion of the sale shall be
shown on the invoice or receipt. The seller has
the option to issue separate invoices or receipts
for the taxable, exempt, and zero-rated
components of the sale.
(3) In the case of sales in the amount of one thousand
pesos (P1,000.00) or more where the sale or
transfer is made to a VAT-registered person, the
name, business style, if any, address and TIN of the
purchaser, customer or client, shall be indicated in
addition to the information required in (1) and (2) of
this Section.
12.5.7 Not Deductible as an expense
RMC 57-2013
Recovery of unutilized creditable IVAT to VAT zero-rated
sales can only be refunded or be claimed as tax credit.
Nowhere is it in the NIRC that it may charged as expense.
12.5.8 Claims for Refund
NIRC 112 & 229
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - any VAT-
registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such
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sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section
108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further,
That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt
sale of goods of properties or services, and the amount
of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall
be allocated proportionately on the basis of the volume
of sales.
(B) Capital Goods. - A VAT-registered person may apply for
the issuance of a tax credit certificate or refund of input
taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not
been applied against output taxes. The application may
be made only within two (2) years after the close of the
taxable quarter when the importation or purchase was
made.
(C) Cancellation of VAT Registration. - A person whose
registration has been cancelled due to retirement from
or cessation of business, or due to changes in or
cessation of status under Section 106(C) of this Code
may, within two (2) years from the date of cancellation,
apply for the issuance of a tax credit certificate for any
unused input tax which may be used in payment of his
other internal revenue taxes.
(D) Period Within Which Refund or Tax Credit of Input Taxes
Shall be Made. - In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120)
days from the date of submission of compete documents
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in support of the application filed in accordance with
Subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the
Commissioner to act on the application within the period
prescribed above, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred
twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.-
(E) Manner of Giving Refund. - Refunds shall be made upon
warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit,
the provisions of the Administrative Code of 1987 to the
contrary notwithstanding: Provided, That refunds under
this paragraph shall be subject to post audit by the
Commission on Audit.
SEC. 229. Recovery of Tax Erroneously or Illegally Collected.
- no suit or proceeding shall be maintained in any court for
the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been
excessively or in any manner wrongfully collected without
authority, or of any sum alleged to have been excessively or
in any manner wrongfully collected, until a claim for refund
or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after
the expiration of two (2) years from the date of payment of
the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor,
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refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears
clearly to have been erroneously paid.
RR No. 16-05 4.112-1
SEC. 4.112-1. Claims for Refund/Tax Credit Certificate of
Input Tax.
(a) Zero-rated and Effectively Zero-rated Sales of Goods,
Properties or Services
A VAT-registered person whose sales of goods,
properties or services are zero-rated or effectively zero-
rated may apply for the issuance of a tax credit
certificate/refund of input tax attributable to such sales.
The input tax that may be subject of the claim shall
exclude the portion of input tax that has been applied
against the output tax. The application should be filed
within two (2) years after the close of the taxable
quarter when such sales were made.
In case of zero-rated sales under Secs. 106(A)(2)(a)(1)
and (2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1) and
(2) of the Tax Code, the payments for the sales must
have been made in acceptable foreign currency duly
accounted for in accordance with the BSP rules and
regulations.
Where the taxpayer is engaged in both zero-rated or
effectively zero-rated sales and in taxable (including
sales subject to final withholding VAT) or exempt sales
of goods, properties or services, and the amount of
creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, only
the proportionate share of input taxes allocated to zero-
rated or effectively zero-rated sales can be claimed for
refund or issuance of a tax credit certificate.
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In the case of a person engaged in the transport of
passenger and cargo by air or sea vessels from the
Philippines to a foreign country, the input taxes shall be
allocated ratably between his zero-rated sales and non-
zero-rated sales (sales subject to regular rate, subject to
final VAT withholding and VAT-exempt sales).
(b) Cancellation of VAT registration
A VAT-registered person whose registration has been
cancelled due to retirement from or cessation of
business, or due to changes in or cessation of status
under Sec. 106 (C) of the Tax Code may, within two (2)
years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input
tax which he may use in payment of his other internal
revenue taxes; Provided, however, that he shall be
entitled to a refund if he has no internal revenue tax
liabilities against which the tax credit certificate may be
utilized.
(c) Where to file the claim for refund/tax credit certificate
Claims for refunds/tax credit certificate shall be filed with
the appropriate BIR office (Large Taxpayers Service
(LTS) or Revenue District Office (RDO)) having
jurisdiction over the principal place of business of the
taxpayer; Provided, however, that direct exporters may
also file their claim for tax credit certificate with the One
Stop Shop Center of the Department of Finance;
Provided, finally, that the filing of the claim with one
office shall preclude the filing of the same claim with
another office.
(d) Period within which refund or tax credit
certificate/refund of input taxes shall be made
In proper cases, the Commissioner of Internal Revenue
shall grant a tax credit certificate/refund for creditable
input taxes within one hundred twenty (120) days from
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the date of submission of complete documents in
support of the application filed in accordance with
subparagraph (a) above.
In case of full or partial denial of the claim for tax credit
certificate/refund as decided by the Commissioner of
Internal Revenue, the taxpayer may appeal to the Court
of Tax Appeals (CTA) within thirty (30) days from the
receipt of said denial, otherwise the decision shall
become final. However, if no action on the claim for tax
credit certificate/refund has been taken by the
Commissioner of Internal Revenue after the one
hundred twenty (120) day period from the date of
submission of the application with complete documents,
the taxpayer may appeal to the CTA within 30 days from
the lapse of the 120-day period.
(e) Manner of giving refund
Refund shall be made upon warrants drawn by the
Commissioner of Internal Revenue or by his duly
authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit
(COA), the provision of the Revised Administrative Code
to the contrary notwithstanding; Provided, that refunds
under this paragraph shall be subject to post audit by
the COA.
CIR v Mirant Pagbilao Corp.
CIR v Aichi Forging Co.
12.5.9 Consequences
12.5.9.1 Issuing Erroneous VAT Invoice or VAT Receipt by a
non-VAT OR
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NIRC 113
Invoicing and Accounting Requirements for VAT-Registered
Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall,
for every sale, issue an invoice or receipt. In addition to
the information required under Section 237, the
following information shall be indicated in the invoice or
receipt:
(1) A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN); and
(2) The total amount which the purchaser pays or is
obligated to pay to the seller with the indication that
such amount includes the value-added tax.
(B) Accounting Requirements. - Notwithstanding the
provisions of Section 233, all persons subject to the
value-added tax under Sections 106 and 108 shall, in
addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary
purchase journal on which the daily sales and purchases
are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of
Finance.
RR No. 16-05 4.113-4 Intel Technology v CIR
Consequences of Issuing Erroneous VAT Invoice or VAT
Official Receipt. --
(A) Issuance of a VAT Invoice or VAT Receipt by a non-VAT
person. If a person who is not VAT-registered issues
an invoice or receipt showing his TIN, followed by the
word VAT, the erroneous issuance shall result to the
following:
(1) The non-VAT person shall be liable to:
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(i) the percentage taxes applicable to his
transactions;
(ii) VAT due on the transactions under Sec. 106 or
108 of the Tax Code, without the benefit of any
input tax credit; and
(iii) a 50% surcharge under Sec. 248 (B) of the Tax
Code;
(2) VAT shall be recognized as an input tax credit to the
purchaser under Sec. 110 of the Tax Code, provided
the requisite information required under Subsection
4.113 (B) of these Regulations is shown on the
invoice or receipt.
(B) Issuance of a VAT Invoice or VAT Receipt on an Exempt
Transaction by a VAT-registered Person If a VAT-
registered person issues a VAT invoice or VAT official
receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the words VAT-
exempt sale, the transaction shall become taxable and
the issuer shall be liable to pay VAT thereon. The
purchaser shall be entitled to claim an input tax credit
on his purchase.
12.5.9.2 BIR Authority to Print Receipt
12.5.9.3 Written Claim for Refund
CIR v Rosemarie Acosta
x------------------------------------x
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13. CORPORATE TAX MAANGEMENT
13.1 Registration Requirements, in general (NIRC 236)
(A) Requirements. - Every person subject to any internal
revenue tax shall register once with the appropriate
Revenue District Officer:
(1) Within ten (10) days from date of employment, or
(2) On or before the commencement of business,or
(3) Before payment of any tax due, or
(4) Upon filing of a return, statement or declaration as
required in this Code.
The registration shall contain the taxpayer's name, style,
place of residence, business and such other information
as may be required by the Commissioner in the form
prescribed therefor.
A person maintaining a head office, branch or facility
shall register with the Revenue District Officer having
jurisdiction over the head office, brand or facility. For
purposes of this Section, the term "facility" may include
but not be limited to sales outlets, places of production,
warehouses or storage places.
(B) Annual Registration Fee. - An annual registration fee in
the amount of Five hundred pesos (P500) for every
separate or distinct establishment or place of business,
including facility types where sales transactions occur,
shall be paid upon registration and every year thereafter
on or before the last day of January: Provided, however,
That cooperatives, individuals earning purely
compensation income, whether locally or abroad, and
overseas workers are not liable to the registration fee
herein imposed.
The registration fee shall be paid to an authorized agent
bank located within the revenue district, or to the
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Revenue Collection Officer, or duly authorized Treasurer
of the city of municipality where each place of business
or branch is registered.
(C) Registration of Each Type of Internal Revenue Tax. -
Every person who is required to register with the Bureau
of Internal Revenue under Subsection (A) hereof, shall
register each type of internal revenue tax for which he is
obligated, shall file a return and shall pay such taxes,
and shall updates such registration of any changes in
accordance with Subsection (E) hereof.
(D) Transfer of Registration. - In case a registered person
decides to transfer his place of business or his head
office or branches, it shall be his duty to update his
registration status by filing an application for registration
information update in the form prescribed therefor.
(E) Other Updates. - Any person registered in accordance
with this Section shall, whenever applicable, update his
registration information with the Revenue District Office
where he is registered, specifying therein any change in
type and other taxpayer details.
(F) Cancellation of Registration. - The registration of any
person who ceases to be liable to a tax type shall be
cancelled upon filing with the Revenue District Office
where he is registered an application for registration
information update in a form prescribed therefor.
(G) Persons Commencing Business. - Any person, who
expects to realize gross sales or receipts subject to
value-added tax in excess of the amount prescribed
under Section 109(z) of this Code for the next 12-month
period from the commencement of the business, shall
register with the Revenue District Office which has
jurisdiction over the head office or branch and shall pay
the annual registration fee prescribed in Subsection (B)
hereof.
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(H) Persons Becoming Liable to the Value-added Tax. - Any
person, whose gross sales or receipts in any 12-month
period exceeds the amount prescribed under Subsection
109(z) of this Code for exemption from the value-added
tax shall register in accordance with Subsection (A)
hereof, and shall pay the annual registration fee
prescribed within ten (10) days after the end of the last
month of that period, and shall be liable to the value-
added tax commencing from the first day of the month
following his registration.
(I) Optional Registration of Exempt Person. - Any person
whose transactions are exempt from value-added tax
under Section 109(z) of this Code; or any person whose
transactions are exempt from the value-added tax under
Section 109(a), (b), (c), and (d) of this Code, who opts
to register as a VAT taxpayer with respect to his export
sales only, may update his registration information in
accordance with Subsection (E) hereof, not later than
ten (10) days before the beginning of the taxable
quarter and shall pay the annual registration fee
prescribed in Subsection (B) hereof.
In any case, the Commissioner may, for administrative
reasons, deny any application for registration including
updates prescribed under Subsection (E) hereof.
For purposes of Title IV of this Code, any person who
has registered value-added tax as a tax type in
accordance with the provisions of Subsection (C) hereof
shall be referred to as VAT-registered person who shall
be assigned only one Taxpayer Identification Number.
(J) Supplying of Taxpayer Identification Number (TIN). -
Any person required under the authority of this Code to
make, render or file a return, statement or other
document shall be supplied with or assigned a Taxpayer
Identification Number (TIN) which he shall indicate in
such return, statement or document filed with the
Bureau of Internal Revenue for his proper identification
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for tax purposes, and which he shall indicate in certain
documents, such as, but not limited to the following:
(1) Sugar quedans, refined sugar release order or
similar instruments;
(2) Domestic bills of lading;
(3) Documents to be registered with the Register of
Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment
by land, sea or air;
(5) Documents to be registered with the Securities and
Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions,
or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department
of Trade & Industry; and
(10) Such other documents which may hereafter be
required under rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
In cases where a registered taxpayer dies, the
administrator or executor shall register the estate of the
decedent in accordance with Subsection (A) hereof and
a new Taxpayer Identification Number (TIN) shall be
supplied in accordance with the provisions of this
Section.
In the case of a nonresident decedent, the executor or
administrator of the estate shall register the estate with
the Revenue District Office where he is registered:
Provided, however, That in case such executor or
administrator is not registered, registration of the estate
shall be made with the Taxpayer Identification Number
(TIN) supplied by the Revenue District Office having
jurisdiction over his legal residence.
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Only one Taxpayer identification Number (TIN) shall be
assigned to a taxpayer. Any person who shall secure
more than one Taxpayer Identification Number shall be
criminally liable under the provision of Section 275 on
'Violation of Other Provisions of this Code or Regulations
in General'.
13.2 Accounting Requirements for VAT
13.2.1 Registration Requirements
RR No. 16-05 236-1 to 236-6 (amended by RR No. 04-07 24 & 25)
SEC. 9.236-1. Registration of VAT Taxpayers. --
(a) In general. Any person who, in the course of trade or
business, sells, barters, exchanges goods or properties,
or engages in the sale of services subject to VAT
imposed in Secs. 106 and 108 of the Tax Code shall
register with the appropriate RDO using the appropriate
BIR forms and pay an annual registration fee in the
amount of Five Hundred Pesos (P500) using BIR Form
No. 0605 for every separate or distinct establishment or
place of business (save a warehouse without sale
transactions) before the start of such business and every
year thereafter on or before the 31st day of January.
Separate or distinct establishment shall mean any
branch or facility where sale transactions occur.
Branch means a fixed establishment in a locality which
conducts sales operation of the business as an extension
of the principal office.
Principal place of business refers to the place where
the head or main office is located as appearing in the
corporations Articles of Incorporation. In the case of an
individual, the principal place of business shall be the
place where the head or main office is located and
where the books of accounts are kept.
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Warehouse means the place or premises where the
inventory of goods for sale are kept and from which
such goods are withdrawn for delivery to customers,
dealers, or persons acting in behalf of the business.
Any person who maintains a head or main office and
branches in different places shall register with the RDO
which has jurisdiction over the place wherein the main
or head office or branch is located. However, the
registration fee shall be paid to any accredited bank in
the Revenue District where the head office or branch is
registered provided that in areas where there are no
accredited banks, the same shall be paid to the RDO,
collection agent, or duly authorized treasurer of the
municipality where each place of business or branch is
situated.
Each VAT-registered person shall be assigned only one
TIN. The branch shall use the 9-digit TIN of the Head
Office plus a 3-digit Branch Code.
VAT-registered person refers to any person registered
in accordance with this section.
VAT-registrable person refers to any person who is
required to register under the provisions of this section
but failed to register.
(b) Mandatory:
Any person who, in the course of trade or business,
sells, barters or exchanges goods or properties or
engages in the sale or exchange of services shall be
liable to register if:
i. His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under
Sec. 109 (1)(A) to (U) of the Tax Code, have
exceeded One million five hundred thousand pesos
(P1,500,000.00); or
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ii. There are reasonable grounds to believe that his
gross sales or receipts for the next twelve (12)
months, other than those that are exempt under
Sec. 109 (1)(A) to (U) of the Tax Code, will exceed
One million five hundred thousand pesos
(P1,500,000.00).
Every person who becomes liable to be registered under
paragraph (1) of this subsection shall register with the
RDO which has jurisdiction over the head office or
branch of that person, and shall pay the annual
registration fee prescribed in subsection 9.236-1(a)
hereof. If he fails to register, he shall be liable to pay
the output tax under Secs. 106 and/or 108 of the Tax
Code as if he were a VAT-registered person, but without
the benefit of input tax credits for the period in which he
was not properly registered.
Moreover, franchise grantees of radio and television
broadcasting, whose gross annual receipt for the
preceding taxable year exceeded P10,000,000.00 shall
register within thirty (30) days from the end of the
taxable year.
(c) Optional VAT Registration.
(1) Any person who is VAT-exempt under Sec. 4.109-1
(B) (1) (V) not required to register for VAT may, in
relation to Sec. 4.109-2, elect to be VAT-registered
by registering with the RDO that has jurisdiction
over the head office of that person, and pay the
annual registration fee of P500.00 for every separate
and distinct establishment.
(2) Any person who is VAT-registered but enters into
transactions which are exempt from VAT (mixed
transactions) may opt that the VAT apply to his
transactions which would have been exempt under
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Section 109(1) of the Tax Code, as amended. [Sec.
109(2)]
(3) Franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the
preceding year do not exceed ten million pesos
(P10,000,000.00) derived from the business covered
by the law granting the franchise may opt for VAT
registration. This option, once exercised, shall be
irrevocable. (Sec. 119, Tax Code)
Any person who elects to register under this subsections
(1) and (2) above shall not be allowed to cancel his
registration for the next three (3) years.
The above-stated taxpayers may apply for VAT
registration not later than ten (10) days before the
beginning of the taxable quarter and shall pay the
registration fee prescribed under sub-paragraph (a) of
this Section, unless they have already paid at the
beginning of the year. In any case, the Commissioner of
Internal Revenue may, for administrative reason deny
any application for registration. Once registered as VAT
person, the taxpayer shall be liable to output tax and be
entitled to input tax credit beginning on the first day of
the month following registration.
SEC. 9.236-2. Registration of Non-VAT or Exempt Taxpayer.
Every person, other than those required to be registered
as VAT persons, engaged in any business, shall, on or before
the commencement of his business, or whenever he
transfers to another revenue district, register with the RDO
concerned within 10 days from the commencement of
business or transfer in the manner prescribed under this
Section and shall pay the applicable registration fee of Five
Hundred Pesos (P500.00) for every separate or distinct
establishment or place of business, if he has not paid the
registration fee in the beginning of the taxable year. The fee
shall be paid to any AAB, where each place of business or
branch is situated. In areas where there is no AAB, such
person shall pay the fee prescribed herein with the RDO,
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RCO, or authorized municipal treasurer. The registration
shall contain his name or style, place of residence, business,
the place where such business is carried on, and such
information as may be required by the Commissioner of
Internal Revenue in the form prescribed therefor.
The following are required to register as non-VAT persons
and pay the applicable registration fee:
1) VAT-exempt persons under Sec. 109 of the Tax Code
who did not opt to register as VAT taxpayers;
2) Individuals engaged in business where the gross sales or
receipts do not exceed One Hundred Thousand Pesos
P100,000.00 during any 12-month period. They are
required to register but will not be made to pay the
registration fee of FIVE HUNDRED PESOS (P500.00).
3) Non-stock, non-profit organizations and associations
engaged in trade or business whose gross sales or
receipts do not exceed P1,500,000.00 for any 12-month
period or in an amount as adjusted thereafter every
three (3) years depending on the annual Consumer Price
Index as published by the NSO;
4) Cooperatives other than electric cooperatives. However,
they are not required to pay the registration fee imposed
in these Regulations.
5) Radio and TV broadcasting whose gross annual receipts
do not exceed ten million pesos (P10,000,000) and
which do not opt to be VAT registered;
6) PEZA and other ecozone registered enterprises enjoying
the preferential tax rate of 5% in lieu of all taxes;
7) SBMA and other free port zone-registered enterprises
enjoying the preferential tax rate of 5% in lieu of all
taxes.
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SEC. 9.236-3. Application for Registration. -- The application
shall be filed with the RDO where the principal place of
business, branch, storage place or premises is located, as
the case may be, before commencement of business or
production or qualification as a withholding agent. In the
case of storage places, the application shall be filed within
thirty (30) days from the date the aforesaid premises have
been used for storage.
In any case, the Commissioner of Internal Revenue may, for
administrative and meritorious reasons, deny or revoke any
application for registration.
SEC. 9.236-4. Certificate of Registration. -- The certificate
shall be issued to the applicant by the BIR office concerned
upon compliance with the requirements for registration.
SEC. 9-236-5. Posting of Registration Certificate. -- Every
registered taxpayer shall post or exhibit his Registration
Certificate and duly validated Registration Fee Return at a
conspicuous place in his principal place of business and at
each branch in such a way that is clearly and easily visible to
the public.
SEC. 9.236-6. Cancellation of VAT Registration. -- A VAT-
Registered person may cancel his registration for VAT if:
a. He makes written application and can demonstrate to
the Commissioner of Internal Revenues satisfaction that
his gross sales or receipts for the following twelve (12)
months, other than those that are exempt under Sec.
109 (1) (A) to (U) of the Tax Code, will not exceed One
Million Five Hundred Thousand pesos (P1,500,000.00);
or
b. He has ceased to carry on his trade or business, and
does not expect to recommence any trade or business
within the next twelve (12) months.
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Some other instances where a VAT-registered person
may apply for cancellation of registration are:
1. A change of ownership, in the case of a single
proprietorship;
2. Dissolution of a partnership or corporation;
3. Merger or consolidation with respect to the dissolved
corporation(s);
4. A person who has registered prior to planned
business commencement, but failed to actually start
his business;
Some instances where taxpayer will update his
registration by submitting a duly accomplished
Registration Update Form (BIR Form No. 1905):
1. A persons business has become exempt in
accordance with Sec. 4.109-1(B) (1) of these
Regulations,
2. A change in the nature of the business itself from
sale of taxable goods and/or services to exempt
sales and/or services;
3. A person whose transactions are exempt from VAT
who voluntarily registered under VAT system, who
after the lapse of three years after his registration,
applies for cancellation of his registration as such;
and
4. A VAT-registered person whose gross sales or
receipts for three consecutive years did not exceed
P1,500,000.00 beginning November 1, 2005, which
amount shall be adjusted to its present value every
three years using the Consumer Price Index, as
published by the NSO. Upon updating his
registration, the taxpayer shall become liable to the
percentage tax imposed in Sec. 116 of the Tax
Code. A short period return for the remaining period
that he was VAT-registered shall be filed within
twenty five (25) days from the date of cancellation
of his registration.
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For purposes of the percentage tax, the taxpayer shall
file a monthly return. An initial return shall be filed for
the month following the month of cancellation / update
of his registration.
All applications for cancellation of registration due to
closure/cessation or termination of business shall be
subjected to immediate investigation by the BIR office
concerned to determine the taxpayers tax liabilities.
Any minor change in the original registration (such as
change of address within the same RDO, typographical
errors, and etc.) which may not necessitate cancellation
of the registration shall be effected by accomplishing the
Registration Update Form (BIR Form No. 1905).
Any person, who opted to be registered as a VAT
taxpayer, may apply for cancellation of such registration.
However, the optional registration as a VAT taxpayer of
a franchise grantee of radio and/or television
broadcasting whose gross receipts for the preceding
year did not exceed P10,000,000.00 shall not be
revocable.
13.2.2 Subsidiary Journals
NIRC 113(C)
Notwithstanding the provisions of Section 233, all persons
subject to the value-added tax under Sections 106 and 108
shall, in addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary purchase
journal on which the daily sales and purchases are recorded.
The subsidiary journals shall contain such information as
may be required by the Secretary of Finance.
RR No. 16-05 113-3
Notwithstanding the provisions of Sec. 233, all persons
subject to VAT under Sec. 106 and 108 of the Tax Code
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shall, in addition to the regular accounting records required,
maintain a subsidiary sales journal and subsidiary purchase
journal on which every sale or purchase on any given day is
recorded. The subsidiary journal shall contain such
information as may be required by the Commissioner of
Internal Revenue.
A subsidiary record in ledger form shall be maintained for
the acquisition, purchase or importation of depreciable
assets or capital goods which shall contain, among others,
information on the total input tax thereon as well as the
monthly input tax claimed in VAT declaration or return.
13.2.3 Returns
NIRC 114
(A) In General. - Every person liable to pay the value-added
tax imposed under this Title shall file a quarterly return
of the amount of his gross sales or receipts within
twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided,
however, That VAT-registered persons shall pay the
value-added tax on a monthly basis.
Any person, whose registration has been cancelled in
accordance with Section 236, shall file a return and pay
the tax due thereon within twenty-five (25) days from
the date of cancellation of registration: Provided, That
only one consolidated return shall be filed by the
taxpayer for his principal place of business or head office
and all branches.
(B) Where to File the Return and Pay the Tax. - Except as
the Commissioner otherwise permits, the return shall be
filed with and the tax paid to an authorized agent bank,
Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the
revenue district where the taxpayer is registered or
required to register.
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(C) Withholding of Creditable Value-Added Tax. - The
Government or any of its political subdivisions,
instrumentalities or agencies, including government-
owned or -controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods
from sellers and services rendered by contractors which
are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold the
value-added tax due at the rate of three percent (3%) of
the gross payment for the purchase of goods and six
percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which
shall be creditable against the value-added tax liability of
the seller or contractor: Provided, however, That in the
case of government public works contractors, the
withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or
use of properties or property rights to nonresident
owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment
shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the
month the withholding was made.
RR No. 16-05 114-1 (amended by RR No. 04-07 21); 114-2 (amended
by RR No. 04-07 22);
(A) Filing of Return. Every person liable to pay VAT shall
file a quarterly return of the amount of his quarterly
gross sales or receipts within twenty five (25) days
following the close of taxable quarter using the latest
version of Quarterly VAT Return. The term taxable
quarter shall mean the quarter that is synchronized to
the income tax quarter of the taxpayer (i.e., the
calendar quarter or fiscal quarter).
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Amounts reflected in the monthly VAT declarations for
the first two (2) months of the quarter shall still be
included in the quarterly VAT return which reflects the
cumulative figures for the taxable quarter. Payments in
the monthly VAT declarations shall, however, be
credited in the quarterly VAT return to arrive at the net
VAT payable or excess input tax/over-payment as of the
end of a quarter.
Example. Suppose the accounting period adopted by
the taxpayer is fiscal year ending October 2003, the
taxpayer has to file monthly VAT declarations for the
months of November 2002, December 2002, and for the
months of February, March, May, June, August, and
September for Year 2003, on or before the 20th day of
the month following the close of the taxable month. His
quarterly VAT returns corresponding to the quarters
ending January, April, July, and October 2003 shall, on
the other hand, be filed and taxes due thereon be paid,
after crediting payments reflected in the Monthly VAT
declarations, on or before February 25, May 25, August
25, and November 25, 2003, respectively.
The monthly VAT Declarations (BIR Form 2550M) of
taxpayers whether large or non- large shall be filed and
the taxes paid not later than the 20th day following the
end of each month.
For purposes of filing returns under the Electronic Filing
and Payment System (EFPS) the taxpayers classified
under the following business industries shall be required
to file Monthly VAT Declarations on or before the dates
prescribed as follows:
Group A
(Period for filing of Monthly VAT Declarations
25 days following the end of the month)
Insurance and Pension Funding
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Activities Auxiliary to Financial Intermediation Construction
Water Transport
Hotels and Restaurants
Land Transport
Group B
(Period for filing of Monthly VAT Declarations
24 days following the end of the month)
Manufacture & Repair of Furniture
Manufacture of Basic Metals
Manufacture of Chemicals and Chemical Products
Manufacture of Coke, Refined Petroleum & Fuel Products
Electrical Machinery & Apparatus N.E.C. Fabricated Metal
Products
Manufacture of Food, Products & Beverages
Manufacture of Machinery & Equipment NEC
Manufacture of Medical, Precision, Optical Instruments
Manufacture of Motor Vehicles, Trailers & Semi-Trailers
Manufacture of Office, Accounting & Computing Machinery
Manufacture of Other Non-Metallic Mineral Products
Manufacture of Other Transport Equipment
Manufacture of Other Wearing Apparel
Manufacture of Paper and Paper Products
Manufacture of Radio, TV & Communication
Equipment/Apparatus Rubber & Plastic Products
Manufacture of Textiles
Manufacture of Tobacco Products
Manufacture of Wood & Wood Products Manufacturing
N.E.C.
Metallic Ore Mining
Non-Metallic Mining & Quarrying
Group C
(Period for filing of Monthly VAT Declarations
23 days following the end of the month)
Retail Sale
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Wholesale Trade and Commission Trade Sale, Maintenance, (10th) day of the following month, which is likewise the due
Repair of Motor Vehicle, date for the payment of this type of withholding tax.
Sale of Automotive Fuel
Collection, Purification And Distribution of Water Computer To erase any doubt and to ensure receipt by the BIR before
and Related Activities midnight of the due dates prescribed above for the filing of a
Real Estate Activities return, the electronic return shall be filed on or before 10:00
p.m. of the above prescribed due dates.
Group D
For the electronic payment of tax for the returns required to
(Period for filing of Monthly VAT Declarations be filed earlier under the staggered filing system, the
22 days following the end of the month) taxpayer upon e-filing shall, still using the facilities of EFPS,
likewise give instruction to the Authorized Agent Bank (AAB)
Air Transport to debit its account for the amount of tax on or before the
Electricity, Gas, Steam & Hot Water Supply due date for payment thereof as prescribed under the
Postal & Telecommunications prevailing/applicable laws/regulations.
Publishing, Printing & Reproduction of Recorded Media
Recreational, Cultural & Sporting Activities For purposes of these Regulations, the industry of the
Recycling taxpayer is its primary line of business or the primary
Renting of Goods & Equipment purpose of its existence as stated in the Articles of
Supporting & Auxiliary Transport Activities Incorporation, for corporate taxpayers.

Group E (B) Payment of VAT

I. Advance Payment The following are subject to the
(Period for filing of Monthly VAT Declarations advance payment of VAT:
21 days following the end of the month)
1. Sale of Refined Sugar.
Activities of Membership Organizations Inc.
Health and Social Work a. Requirement to Pay Advance VAT on Sale of
Public Admin & Defense Compulsory Social Security Refined Sugar. An advance VAT on the sale of
Research and Development refined sugar shall be paid by the owner/seller
Agricultural, Hunting, and Forestry to the BIR through an AAB or to the Revenue
Farming of Animals Collection Officer (RCO) or deputized City or
Fishing Municipal Treasurer in places where there are
Other Service Activities no AABs before any refined sugar can be
Miscellaneous Business Activities withdrawn from any sugar refinery/mill.
Unclassified b. Prohibition of Withdrawal/Transfer of
Ownership. The proprietor or operator of a
It is reiterated and clarified, however, that the return for sugar mill/refinery shall not allow any
withholding of VAT shall be filed on or before the tenth withdrawal of refined sugar from its premises
without the advance payment of VAT and
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submission of proof of such payment, except
when the refined sugar is owned and withdrawn
by the cooperative, in which case the evidence
of ownership, Authorization Allowing the Release
and Sworn Statements provided in these
Regulations must be presented.
The Regional Director, upon the
recommendation of the RDO of the district
having jurisdiction over the physical location of
the sugar mill/refinery, may direct an internal
revenue officer to be present during the
withdrawal of refined sugar from the premises
of the sugar mill/refinery in order to confirm
and/or verify that the requirements of this
Section are complied with.
c. Basis for Determining the Amount of Advance
VAT Payment.
i. Base Price. - The amount of advance VAT
payment shall be determined by applying
VAT rate of 10% on the applicable base
price of P850.00 per 50 kg. bag for refined
sugar produced by a sugar refinery, and P
760.00 per 50 kg. bag for refined sugar
produced by a sugar mill.
ii. Subsequent Base Price Adjustments. The
base price upon which the advance payment
of VAT will be computed under the
preceding paragraph shall be adjusted when
deemed necessary by the Commissioner of
Internal Revenue, upon consultation with
the Chairman of the Sugar Regulatory
Administration.
d. Proof of Advance Payment. The RDO
concerned or the duly constituted unit in its
place such as the Regional Task Force on Sugar,
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as the Regional Director may decide, shall issue
a Certificate of Advance Payment of VAT. This
certificate shall serve as the authority of the
sugar mill/refinery to release the refined sugar
described therein, and together with the
payment form (BIR Form No. 0605 or its
equivalent) and the BIR-prescribed deposit slip
duly validated by the AAB, or the Revenue
Official Receipt (ROR) issued by the RCO or the
duly authorized City or Municipal Treasurer, as
the case may be, shall serve as proof of the
payment for the advance VAT which can be
credited against VAT liability/payable in VAT
return/s to be filed.
e. Proof of exemption from the advance payment.
If a duly-registered agricultural cooperative
claims ownership of refined sugar stocked in the
sugar mill/refinery, the latter shall not release
the said refined sugar unless an Authorization
Allowing the Release of Refined Sugar is first
secured from the RDO or any duly constituted
unit in its place such as the Regional Task Force
on Sugar created by the Regional Director as the
latter may decide, of the BIR office having
jurisdiction over the physical location of the
sugar mill/refinery. In securing such
authorization, the cooperative shall, in addition
to that of satisfying VAT-exemption
requirements under RR No. 20-2001, submit to
the RDO or Regional Task Force concerned a
Sworn Statement to the effect that-
(1) The sugar has not been bid, sold or
otherwise transferred in ownership, at
anytime prior to the removal from the
refinery, to a trader or another entity; and
(2) The refined sugar is the property of the
cooperative at the time of removal and it
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will not charge advance VAT or any other
tax to the future buyer.
If the cooperative invokes ownership over the
sugar cane and the milled/refined sugar, the
sugar quedans must be in the name of the
cooperative.
In the event the refined sugar is owned
and/or withdrawn from the mill/refinery by a
duly accredited and registered agricultural
cooperative of good standing and said
cooperative presents the Authorization
Allowing the Release of Refined Sugar, the
mill/refinery shall release the same but only
after notifying the RDO or the assigned duty
officer with jurisdiction over the mill of the
time and date of the release from the mill
and the names and plate numbers of the
carrying trucks so that the release can be
given proper supervision and that advance
VAT is collected from the
transferee/buyer/customer should evidence
show that the refined sugar has already
been sold by the cooperative.
f. Information Returns to be Filed by the
Proprietor or Operator of a Sugar Refinery and
Cooperatives.
Every proprietor or operator of a sugar refinery
or mill with production line accredited by the
BIR to be capable of producing sugar with a
polarimeter reading of 99.5o or above, or mill
producing sugar with polarimeter reading of
99.5o or above shall render an Information
Return to the RDO having jurisdiction over the
physical location of the said sugar refinery/mill
which issues the Certificate of Advance Payment
of VAT or Authorization Allowing the Release of
Refined Sugar not later than the 10th day
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following the end of the month. The aforesaid
Information Return shall reflect the following
information:
i. Name, TIN and RDO number of the Owner
of the Refined Sugar;
ii. Number of bags of refined sugar released;
iii. Amount of Advance VAT Paid.
Likewise, every cooperative shall submit to RDO
where it is registered a List of Buyers of Sugar
together with a copy of the Certificate of Advance
Payment of VAT, made by each of the respective
buyer appearing in the list, not later than the 10th
day following the end of the month with the
following information:
i. Name, address, TIN and RDO No. of the Buyer;
ii. Number of bags of refined sugar sold/LKG;
iii. Amount of sales.
iv. Amount of Advance VAT paid by the buyer.
2. Sale of Flour. --
Requirement to Pay in Advance VAT on Sale of Flour and
Time of Payment of Advance VAT.
i. release from the Bureau of Customs custody of the
wheat, which is imported and declared for flour milling.
VAT on the sale of flour milled from imported wheat
shall be paid prior to the
ii. Purchases by flour millers of imported wheat from
traders shall also be subjected to advance VAT and shall
be paid by the flour miller prior to delivery.
b. Prohibition of Withdrawal of Shipment Before Payment
of Advance VAT.-
Withdrawal, either partial or full of imported wheat to be
used in the milling of flour from customs custody shall
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not be allowed prior to payment of the Advance VAT and
submission of documentary proof of payment such as
the Authority to Release Imported Goods (ATRIG) issued
by the BIR and the BIR Payment Form No. 0605
together with the deposit slip issued by the AAB or the
ROR issued by the RCO in the absence of an AAB.
Importation of wheat by any trader shall still be exempt
from the payment of VAT. However, in order to monitor
all importation of wheat regardless of its intended use,
the importer, whether miller or trader, shall be required
to secure ATRIG from the BIR.
The BOC will require the submission of the ATRIG by the
importer before releasing the imported wheat from its
custody. For this purpose, importation of wheat shall be
treated as an exception to the list of imported articles
exempted from the issuance of ATRIG as contained in
the BIR-BOC Joint Memorandum Circular No. 1-2002
dated September 16, 2002.
c. Securing the ATRIG and the Payment Form of the
Advance VAT.
To afford expediency and to minimize delay in the
processing of ATRIG, the flour miller shall compute the
Advance VAT payable and fill up the Payment Form
Order (BIR Form No. 0605). The flour miller shall pay
the amount indicated in the Payment Order to the AAB
of the LTS/Large Taxpayers District Office (LTDO)/RDO
where the flour miller is registered. In the absence of an
AAB in the RDO where the flour miller is registered, the
payment shall be made to the RCO of said district.
Upon payment, the flour miller will then present a copy
of the duly validated payment form to the RDO having
jurisdiction over the port of entry. Upon receipt of the
properly validated and stamped Payment Order, the
RDO having jurisdiction over the port of entry shall issue
the ATRIG covering the importation of wheat by the
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flour miller in accordance with Revenue Memorandum
Order No. 35-2002, which prescribes the guidelines for
the issuance of ATRIG for Excise and VAT purposes.
For purchases of wheat from traders, the flour miller
shall be required to present proof of payment of
advance VAT to the trader prior to delivery or
withdrawal of wheat from the latters premises.
d. Basis for Determining the Amount of Advance VAT
Payment.
i. Determination of advance VAT. The amount of
advance VAT payment shall be determined by
applying VAT rate of 10% on the tax base.
ii. Tax Base Considering that in the course of the
milling process, not all wheat is turned into flour, the
tax base shall be as follows:
For wheat imported by the flour millers 75% of
the sum of: (a) the invoice value multiplied by the
currency exchange rate on the date of payment; (b)
estimated customs duties and other charges prior to
the release of the imported wheat from customs
custody, except for the advance VAT; and (c) Five
percent (5%) on the sum of (a) and (b).
iii. Subsequent tax base adjustments The tax base
shall be adjusted whenever deemed necessary by
the Commissioner of Internal Revenue, after proper
prior consultations with the flour milling industry
associations and upon approval by the Secretary of
Finance.
e. Credit for Advance VAT Payments The amount of
advance VAT payments made by the flour miller shall be
allowed as tax credit against VAT liability/payable of the
flour miller. The Payment Order, together with the
deposit slip issued by the AAB or the ROR issued by the
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RCO, shall serve as proof for the credit of such advance
payment.
f. Reporting Requirements All importers of wheat
regardless of use, whether miller or trader, shall submit
quarterly summary list of sales, purchases and
importations.
(C) Short Period Return
Any person who retires from business with due notice to
the BIR office where the taxpayer (head office) is
registered or whose VAT registration has been cancelled
shall file a final quarterly return and pay the tax due
thereon within twenty five (25) days from the end of the
month when the business ceases to operate or when
VAT registration has been officially cancelled; Provided,
however, that subsequent monthly
declarations/quarterly returns are still required to be
filed if the results of the winding up of the
affairs/business of the taxpayer reveal taxable
transactions. All persons first registered under Secs.
9.236-1 of these Regulations shall be liable to VAT on
the effective date of registration stated in their
Certificates of Registration; i.e., the first day of the
month following their registration. If the effective date
of registration falls on the first or second month of the
taxable quarter, initial monthly VAT declaration shall be
filed within twenty (20) days after the end of the month,
and the initial quarterly return shall be filed on or before
the 25th day after the end of the taxable quarter. On
the other hand, if the effective date of registration falls
on the third month of the taxable quarter the quarterly
returns shall be filed on or before the 25th day of the
month following the end of the taxable quarter, and no
monthly VAT declaration need be filed for the initial
quarter.
(D) Where to File and Pay
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The monthly VAT declaration and quarterly return shall
be filed with, and VAT due thereon paid to, an AAB
under the jurisdiction of the Revenue District/BIR Office
where the taxpayer (head office of the business
establishment) is required to be registered.
In cases where there are no duly accredited agent banks
within the municipality or city, the monthly VAT
declaration and quarterly VAT return, shall be filed with
and any amount due shall be paid to the RDO, Collection
Agent or duly authorized Treasurer of the
Municipality/City where such taxpayer (head office of the
business establishment) is required to be registered.
The quarterly VAT return and the monthly VAT
declaration, where no payment is involved, shall be filed
with the RDO/LTDO/Large Taxpayers Assistance Division
(LTAD), Collection Agent, duly authorized Municipal/City
Treasurer of Municipality/City where the taxpayer (head
office of the business establishment) is registered or
required to be registered.
Taxpayers filing via EFPS shall comply with the
provisions of the EFPS Regulations.
Only one consolidated quarterly VAT return or monthly
VAT declaration covering the results of operation of the
head office as well as the branches for all lines of
business subject to VAT shall be filed by the taxpayer,
for every return period, with the BIR office where said
taxpayer is required to be registered.
13.3 Corporate Returns
NIRC 52, 75, 76, 77
SEC. 52. Corporation Returns. -
(A) Requirements. - Every corporation subject to the tax
herein imposed, except foreign corporations not
engaged in trade or business in the Philippines, shall
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render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return in
accordance with the provisions of Chapter XII of this
Title. The return shall be filed by the president, vice-
president or other principal officer, and shall be sworn to
by such officer and by the treasurer or assistant
treasurer.
(B) Taxable Year of Corporation. - A corporation may
employ either calendar year or fiscal year as a basis for
filing its annual income tax return: Provided, That the
corporation shall not change the accounting period
employed without prior approval from the Commissioner
in accordance with the provisions of Section 47 of this
Code.
(C) Return of Corporation Contemplating Dissolution or
Reorganization. - Every corporation shall, within thirty
(30) days after the adoption by the corporation of a
resolution or plan for its dissolution, or for the liquidation
of the whole or any part of its capital stock, including a
corporation which has been notified of possible
involuntary dissolution by the Securities and Exchange
Commission, or for its reorganization, render a correct
return to the Commissioner, verified under oath, setting
forth the terms of such resolution or plan and such other
information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules
and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to
the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal
Revenue which certificate shall be submitted to the
Securities and Exchange Commission.
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(D) Return on Capital Gains Realized from Sale of Shares of
Stock not Traded in the Local Stock Exchange. - Every
corporation deriving capital gains from the sale or
exchange of shares of stock not traded thru a local stock
exchange as prescribed under Sections 24 (c), 25 (A)(3),
27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a
return within thirty (30) days after each transactions and
a final consolidated return of all transactions during the
taxable year on or before the fifteenth (15th) day of the
fourth (4th) month following the close of the taxable
year.
SEC. 75. Declaration of Quarterly Corporate Income Tax. -
Every corporation shall file in duplicate a quarterly summary
declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters upon
which the income tax, as provided in Title II of this Code,
shall be levied, collected and paid. The tax so computed
shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters and shall be paid not
later than sixty (60) days from the close of each of the first
three (3) quarters of the taxable year, whether calendar or
fiscal year.
SEC. 76. Final Adjustment Return. - Every corporation liable
to tax under Section 27 shall file a final adjustment return
covering the total taxable income for the preceding calendar
or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total
tax due on the entire taxable income of that year, the
corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as
the case may be.
In case the corporation is entitled to a tax credit or refund of
the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be
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carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable
for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor.
SEC. 77. Place and Time of Filing and Payment of Quarterly
Corporate Income Tax. -
(A) Place of Filing. - Except as the Commissioner other wise
permits, the quarterly income tax declaration required in
Section 75 and the final adjustment return required in
Section 76 shall be filed with the authorized agent banks
or Revenue District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality having
jurisdiction over the location of the principal office of the
corporation filing the return or place where its main
books of accounts and other data from which the return
is prepared are kept.
(B) Time of Filing the Income Tax Return. - The corporate
quarterly declaration shall be filed within sixty (60) days
following the close of each of the first three (3) quarters
of the taxable year. The final adjustment return shall be
filed on or before the fifteenth (15th) day of April, or on
or before the fifteenth (15th) day of the fourth (4th)
month following the close of the fiscal year, as the case
may be.
(C) Time of Payment of the Income Tax. - The income tax
due on the corporate quarterly returns and the final
adjustment income tax returns computed in accordance
with Sections 75 and 76 shall be paid at the time the
declaration or return is filed in a manner prescribed by
the Commissioner.
CIR v Mirant (Phils) Operations
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13.4 Expanded Withholding Tax
NIRC 57(A) & (B)
(A) Withholding of Final Tax on Certain Incomes. - Subject
to rules and regulations the Secretary of Finance may
promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return
by certain income payees, the tax imposed or prescribed
by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)
(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!),
27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)
(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)
(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. - The Secretary
of Finance may, upon the recommendation of the
Commissioner, require the withholding of a tax on the
items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons
as provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent
(32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.
RR No. 2-98 2.57.2;
2.57.4 (amended by RR No. 30-03, RR No. 12-01, RR No. 03-04, RR No.
06-09)
SECTION 2.57.4. Time of Withholding. The obligation
of the payor to deduct and withhold the tax under Section
2.57 of these Regulations arises at the time an income
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payment is paid or payable, or the income payment is
accrued or recorded as an expense or asset, whichever is
applicable, in the payor's books, whichever comes first. The
term "payable" refers to the date the obligation becomes
due, demandable or legally enforceable.
Provided, however, that where income is not yet paid or
payable but the same has been recorded as an expense or
asset, whichever is applicable, in the payor's books, the
obligation to withhold shall arise in the last month of the
return period in which the same is claimed as an expense or
amortized for tax purposes.
Example X Corporation, a domestic corporation which
reports income and expenses on a calendar year basis,
issues 2-year bonds with face value of P100,000,000 at a
discount amounting to P6,000,000 on January 1, 2002 to
twenty five (25) investors. It records in its books the
amortized portion of the discount as expense in the amount
of P250,000/month (P6,000,000 divided by 24 months).
Since the discount is not yet paid or payable but the aliquot
portion of which has already been recorded as expense for
tax purposes, the withholding of the 20% final tax shall be
done on the last month of the quarter when the same has
been claimed as an expense in the quarterly income tax
returns/final adjustments returns filed by X Corporation.
Thus, in the above illustration, the amortized discount to be recorded
by X Corporation for the months of January, February and March
2002 amounting to P750,000 shall be subject to 20% final tax of
P150,000 come March 2002, which tax shall be remitted within 10
days after the quarter ending March 2002 (that is, on or before April
10, 2002). The said withholding tax shall be reported in its Monthly
Remittance Return of Final Income Taxes Withheld required to be
filed in April 2002. On the other hand, for the calendar quarter
ending December 2002, the withholding of the final tax for the
amortized discount pertaining to the months of October, November
and December shall be done in December 2002 and the remittance
thereof shall be on or before January 15, 2003. The said withholding
tax shall be reported in its Monthly Remittance Return of Final
Income Taxes Withheld required to be filed in January 2003.
RR 11-14
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(M) Income payment made by the top twenty
thousand (20,000) private corporations to their
local/resident supplier of goods and local/resident
supplier of services other than those covered by
other rates of withholding tax. - Income payments
made by any of the top twenty thousand (20,000) private
corporations, as determined by the Commissioner, xxx. For
this purpose, an agricultural product in their original state as
used in these Regulations, shall only include corn, coconut,
copra, palay, rice, cassava, coffee, fruit, vegetable, marine
food product, poultry and livestock.
(S) Income payments made to suppliers of
agricultural products. Income payments made to
agricultural suppliers such as, but not limited to, payments
made by hotels, restaurants, resorts, caterers, food
processors, canneries, supermarkets, livestock, poultry, fish
and marine product dealers, hardwares, factories, furniture
shops and all other establishments, in excess of the
cumulative amount of Three Hundred Thousand Pesos
(P300,000.00) within the same taxable year. - One percent
(1%);The term agricultural suppliers refers to
suppliers/sellers of agricultural, forest and marine food and
non-food products, livestock and poultry of a kind generally
used as, or yielding or producing foods for human
consumption, and breeding stock and genetic materials
therefor. Livestock shall include cow, bull and calf, pig,
sheep, goat and other animals similar thereto. Poultry shall
include fowl, duck, goose, turkey and other animals similar
thereto. Marine product shall include fish and crustacean
such as, but not limited to, eel, trout, lobster, shrimp,
prawn, oyster, mussel and clam, shell and other aquatic
products. Meat, fruit, fish, vegetable and other agricultural
and marine food products, even if they have undergone the
simple processes of preparation or preservation for the
market, such as freezing, drying, salting, smoking or
stripping, including those using advanced technological
means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack and other similar packaging
method, shall still be covered by this subsection. An
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agricultural food product shall include, but shall not be
limited to the following: corn, coconut, copra, palay,
cassava, coffee, etc. Polished and/or husked rice, corn grits
and ordinary salt shall be considered as agricultural food
products.
(W) Income payments made by the top five thousand
(5,000) individual taxpayers to their local/resident
suppliers of goods and local/resident suppliers of
services other than those already covered by other
rates of withholding tax. - Income payments made by
the top 5,000 individual taxpayers engaged in trade or
business in the Philippines, as determined by the
Commissioner xxx For this purpose, agricultural products in
their original state as used in these Regulations, shall include
only corn, coconut, copra, palay, rice, cassava, coffee, fruit,
vegetable, marine food product, poultry and livestock.
(Z) Income payments to Real Estate Investment
Trust (REIT).
Income payments made to corporate taxpayers duly
registered with the Large Taxpayers Regular Audit Division 3
(now Regular LT Audit Division 3) of the Bureau of Internal
Revenue, as REITs for purposes of availing the incentive
provisions of Republic Act No. 9856, otherwise known as
The Real Estate Investment Trust Act of 2009, as
implemented by RR No. 13-2011. One percent (1%);
(AA) Income payments on locally produced raw
sugar. Proprietors or operators of sugar mills/refineries on
their mill share, and direct buyers of Quedans or Molasses
Storage Certificates from the sugar planters on locally
produced raw sugar and molasses shall withhold the
creditable income tax and remit the same to the BIR based
on the applicable base price of ONE THOUSAND PESOS
(P1,000.00) per FIFTY (50) kilogram (kg.) bag and FOUR
THOUSAND PESOS (P4,000.00) per metric ton, respectively,
subject, however, to adjustment, when deemed necessary
by the Commissioner, upon consultation with the
Administrator of the SRA. One percent (1%).For purposes
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of this subsection, the following terms shall have the
following meaning:(i) Buyers of Quedan or Molasses Storage
Certificates refer to traders or industry users duly
accredited by the SRA who bid and/or purchase the Quedans
or Molasses Storage Certificates from the sugar planters.(ii)
Mill Share refers to payment to sugar mill/refinery by the
sugar planter for the milling of sugarcane. As such, it is
equivalent to a sale of locally produced raw sugar.(iii)
Molasses Storage Certificate refers to the warehouse
receipt issued by a sugar mill/refinery to the owner, as
stated therein, attesting to the fact that the volume of
molasses is stored at the mills facilities, with the
commitment that it will be delivered to the holder of said
document upon demand.(iv) Sugar Mill/Refinery refers to a
domestic company engaged in the business of milling
sugarcane into raw sugar, or in the refining of raw sugar.(v)
Sugar Planter refers to the original owner of sugarcane
brought to the mill for milling purposes.(vi) Sugar Regulatory
Administration (SRA) refers to an agency of the Philippine
government under the Department of Agriculture,
responsible for promoting the growth and development of
the sugar industry, through greater participation of the
private sector, and for improving the working conditions of
the laborers, created by Executive Order No. 18, Series of
1986.(vii) Quedan refers to a warehouse receipt issued by
a sugar mill/refinery to the owner as stated therein,
attesting to the fact that the volume and class of sugar is
kept at the said sugar mill/refinery, and with the
commitment that it will be delivered to the holder of said
document by the sugar mills/refinerys warehouseman upon
demand. Quedan is issued in the name of the proprietor or
operator of the sugar mill/refinery, for its mill share, and to
the sugar planter, as owner of the sugarcane, as certified by
SRA representative at the sugar mill/refinery. (viii) Trader
refers to a domestic company or person given the authority
and license by the SRA to engage in the business of trading
sugar, molasses,or muscovado, as the case may be.The
Regional Director, through the recommendation of the
Revenue District Officer, which has jurisdiction over the
physical location of the sugarmills/refineries, shall issue the
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Authorization Allowing the Release of Locally Produced Raw
Sugar/Molasses (Annexes A or B, as applicable) to the
proprietors or operators, for purposes of allowing the
transfer/withdrawal of their mill share, or to the buyers of
Quedans or Molasses Storage Certificates on the locally
produced raw sugar, or molasses, for further processing into
a refined sugar, consumption or other purposes:
Provided, however, That, copies of proofsof payment of the
creditable withholding tax due thereon (i.e., duly validated
Monthly Remittance Return of Creditable Income Taxes
Withheld (Expanded) [BIR Form No. 1601-E] and Bank
Payment/Deposit Slip/Revenue Official Receipt [BIR Form
No. 2524]) shall have been submitted and attached to the
written request for said authorization. Provided, finally, That,
notwithstanding the presentation of proof of exemption from
the payment of income tax (e.g., BIR ruling, special law,
etc.), the concerned proprietor, or operator of the sugar
mill/refinery, or any buyer of Quedan or Molasses Storage
Certificate is still required to withhold and remit the
creditable withholding tax.
BIR Ruling No. 110-2011 (Masinloc Power Partners)
Facts:
A Co. and B Co. are domestic limited partnerships. B Co. is a
Large Taxpayer. A Co. extended a loan to B Co. with interest
at 8% per annum. A Co.s only transaction with B Co. is the
extension of the loan.
Issues:
1. Are the interest payments to be made by B Co. to A Co.
subject to the 2% CWT on income payments by Top
10,000* private corporations to local/resident suppliers
of goods or services?
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2. Are the interest payments subject to the 2% CWT on
interest payments made to banks, quasi-banks, financial
institutions or lending investors?
Ruling:
1. No. The interest payments are not subject to the 2%
CWT by Top 10,000 private corporations. Section 2.57.2
of RR No. 2-98, as amended, provides that income
payments made by Top 10,000 private corporations,
including corporate taxpayers who have been classified
as Large Taxpayers, to their local/resident suppliers of
goods or services are subject to the 1% CWT for
suppliers of goods and 2% CWT for suppliers of
services. The same section defines a local/resident
supplier as a supplier from whom any of the Top
10,000 private corporations regularly purchases goods.
The term regular suppliers, on the other hand, refers
to suppliers with whom the taxpayer-buyer has
transacted at least six transactions, regardless of the
amount per transaction, either in the previous or the
current year.
Since A Co.s only transaction with B Co. is the extension
of the loan, A Co. cannot be considered a regular
supplier of goods or services to B Co. Thus, the interest
payments to be made by B Co. to A Co. are not subject
to the 2% CWT.
2. No. The interest payments are not subject to the 2%
CWT on payments to banks, quasi-banks and so on. It is
evident from the business purpose of A. Co., as stated in
its Articles of Partnership, that A Co. is not a bank,
quasi-bank, financial institution or lending investor.
Hence, the interest payments made to it by B Co. are
not subject to the 2% CWT under RMC No. 72-04, which
applies only to payments to banks, quasi-banks, financial
institutions and lending investors.
13.5 Inventories
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NIRC 41
Inventories. - Whenever in the judgment of the
Commissioner, the use of inventories is necessary in order to
determine clearly the income of any taxpayer, inventories
shall be taken by such taxpayer upon such basis as the
Secretary of Finance, upon recommendation of the
Commissioner, may, by rules and regulations, prescribe as
conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly
reflecting the income.
If a taxpayer, after having complied with the terms and a
conditions prescribed by the Commissioner, uses a particular
method of valuing its inventory for any taxable year, then
such method shall be used in all subsequent taxable years
unless:
(i) with the approval of the Commissioner, a change to a
different method is authorized; or
(ii) the Commissioner finds that the nature of the stock on
hand (e.g., its scarcity, liquidity, marketability and price
movements) is such that inventory gains should be
considered realized for tax purposes and, therefore, it is
necessary to modify the valuation method for purposes
of ascertaining the income, profit, or loss in a more
realistic manner: Provided, however, That the
Commissioner shall not exercise his authority to require
a change in inventory method more often than once
every three (3) years: Provided, further, That any
change in an inventory valuation method must be
subject to approval by the Secretary of Finance.
BIR Ruling DA-191-07 (PTT Philippines Trading)
This refers to your letter dated March 22, 2007 requesting
on behalf of your client, PTT PHILIPPINES TRADING
CORPORATION (hereinafter referred to as "PTTPTC") for an
authority to change its accounting method on inventory
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costing from first-in-first-out method to weighted average
method.
Since it started business operations, PTTPTC has been using
the first-in-first-out (FIFO) method in the costing of its
inventories. Thereafter, PTTPTC changed its method for
determination of the cost of inventories from FIPO method
to weighted average method to fully comply with the
Accounting Policies of PTT Public Company Limited
("PTTPCL"). Such change also coincided with the change in
the Computerized Accounting System Program of the
company from Sun System to Microsoft Business Solutions-
Solomon, which is integrated with Average Inventory
valuation method.
In reply, please be informed that on the basis of the above
representations, PTTPTC is hereby granted permission to
change its accounting method from first-in-first-out (FIFO)
method to weighted average method pursuant to the
provisions of Section 41 of the Tax Code of 1997, as
amended, in relation to Section 145 of Revenue Regulations
No. 2.
Considering that the purpose of PTTPTC change of its
accounting method is for the company to fully comply with
the Accounting Policies of its parent company, PTT Public
Company Limited ("PTTPCL") and likewise to coincide with
the change in the Computerized Accounting System
Program, this Office hereby grants PTTPTC authority to use
the weighted average method in its inventory costing.
13.6 Power of CIR to suspend
NIRC 115
Power of the Commissioner to Suspend the Business
Operations of a Taxpayer. - The Commissioner or his
authorized representative is hereby empowered to suspend
the business operations and temporarily close the business
establishment of any person for any of the following
violations:
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(a) In the case of a VAT-registered Person. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under
Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as Required under
Section 236. -
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by
the Commissioner in the closure order.
RR 16-05 Sec.4.115-1
(b) Surcharge, interest and other penalties. The interest
on unpaid amount of tax, civil penalties and criminal
penalties imposed in Title XI of the Tax Code shall also apply
to violations of the provisions of Title IV (VAT) of the Tax
Code.
13.7 Preservation of Book of Accounts
NIRC 235
Section 235. Preservation of Books and
Accounts and Other Accounting Records. - All
the books of accounts, including the subsidiary
books and other accounting records of corporations,
partnerships, or persons, shall be preserved by them
for a period beginning from the last entry in each
book until the last day prescribed by Section 203
within which the Commissioner is authorized to
make an assessment. The said books and records
shall be subject to examination and inspection by
internal revenue officers: Provided, That for income
tax purposes, such examination and inspection shall
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be made only once in a taxable year, except in the
following cases:
(a) Fraud, irregularity or mistakes, as determined by
the Commissioner;
(b) The taxpayer requests reinvestigation;
(c) Verification of compliance with withholding tax
laws and regulations;
(d) Verification of capital gains tax liabilities; and
(e) In the exercise of the Commissioner's power
under Section 5(B) to obtain information from other
persons in which case, another or separate
examination and inspection may be made.
Examination and inspection of books of accounts
and other accounting records shall be done in the
taxpayer's office or place of business or in the office
of the Bureau of Internal Revenue. All corporations,
partnerships or persons that retire from business
shall, within ten (10) days from the date of
retirement or within such period of time as may be
allowed by the Commissioner in special cases,
submit their books of accounts, including the
subsidiary books and other accounting records to
the Commissioner or any of his deputies for
examination, after which they shall be returned.
Corporations and partnerships contemplating
dissolution must notify the Commissioner and shall
not be dissolved until cleared of any tax liability.
Any provision of existing general or special law to the
contrary notwithstanding, the books of accounts and other
pertinent records of tax-exempt organizations or grantees of
tax incentives shall be subject to examination by the Bureau
of Internal Revenue for purposes of ascertaining compliance
with the conditions under which they have been granted tax
exemptions or tax incentives, and their tax liability, if any.
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NIRC Sec. 203
Section 203. Period of Limitation Upon Assessment and
Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of
such period: Provided, That in a case where a return is filed
beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed.
For purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be
considered as filed on such last day.
RR 17-2013
It is in the best interest of the TP to keep the records for 10 years.
CPAs should keep the record for 10 years.
RR 05-2014
SECTION 2. RETENTION PERIODS. All taxpayers are
required to preserve their books of accounts, including
subsidiary books and other accounting records, for a period
of ten (10) years reckoned from the day following the
deadline in filing a return, or if filed after the deadline, from
the date of the filing of the return, for the taxable year when
the last entry was made in the books of accounts: Provided
that, within the first five (5) years reckoned from the day
following the deadline in filing a return, or if filed after the
deadline, from the date of the filing of the return, for the
taxable yearwhen the last entry was made in the books of
accounts, the taxpayer shallretain hardcopies of the books of
accounts, including subsidiary books and other accounting
records. Thereafter, the taxpayer may retain only
anelectronic copy of the hardcopy (paper) of the books of
accounts, subsidiary books and other accounting records in
an electronic storage system which complies with the
requirements set forth under Section 2-A hereof. The term
other accounting records includes the corresponding
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invoices, receipts, vouchers and returns, and other source
documents supporting the entries in the book of accounts.
The term last entry refers to a particular business
transaction or an item thereof that is entered or posted last
or latest in the books of accounts when the same was
closed.The foregoing notwithstanding, if the taxpayer has
any pending protest or claim for tax credit/refund of taxes,
and the books and records concerned are material to the
case, the taxpayer is required to preserve his/her/its books
of accounts and other accounting records until the case is
finally resolved.
Finally, unless a longer period of retention is required under
the NIRC or other relevant laws, the independent Certified
Public Accountant (CPA) who audited the records and
certified the financial statements of the taxpayer, equally as
the taxpayer, has the responsibility to maintain and preserve
electronic copies of the audited and certified financial
statements including the audit working papers for a period
of ten (10) years from the due date of filing the annual
income tax return or the actual date of filing thereof,
whichever comes later.
SECTION 2-A. ELECTRONIC STORAGE SYSTEM. An
electronic storage system to be used by the taxpayer or
independent CPA for preserving books of accounts and other
accounting records shall:1) Ensure an accurate and complete
transfer of the images of thehardcopy of the books of
accounts, including subsidiary books and other accounting
records to an electronic storage media; and2) Index, store,
preserve, retrieve, and reproduce the electronically stored
images of the hardcopy of the books of accounts, subsidiary
books and other accounting records.The electronic storage
system must include:1) Reasonable controls to ensure the
integrity, accuracy, and reliability of the electronic storage
system;2) Reasonable controls to prevent and detect any
unauthorized creation of, addition to, alteration of, deletion
of, or deterioration of electronically stored books of
accounts, subsidiary books and other accounting records; 3)
An inspection and quality assurance program evidenced by
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regular evaluations of the electronic storage system,
including periodic checks of electronically stored books of
accounts, subsidiary books and other accounting records;4)
A retrieval system that includes an indexing system; and 5)
The ability to reproduce legible and readable hardcopies of
electronically stored books of accounts, subsidiary books and
other accounting records.All books of accounts, subsidiary
books and other accounting records reproduced by the
electronic storage system must exhibit a high degree of
legibility and readability when displayed on a video display
terminal and when reproduced in hardcopy. The term
legibility means the observer must be able to identify all
letters and numerals positively and quickly to the exclusion
of all other letters or numerals.
The term readability means that the observer must be able
to recognize a group of letters or numerals as words or
complete numbers. The taxpayer must ensure that the
reproduction process maintains the legibility and readability
of the electronically stored books of accounts, subsidiary
books and other accounting records.For each electronic
storage system used, the taxpayer must maintain, and make
available to the Bureau of Internal Revenue upon request,
complete descriptions of: (a) the electronic storage system,
including all procedures relating to its use; and (b) the
indexing system. For purposes of these Revenue
Regulations, an indexing system is a system that permits
the identification and retrieval for viewing or reproducing of
relevant books of accounts, subsidiary books and other
accounting records maintained in an electronic storage
system. For example, an indexing system might consist of
assigning each electronically stored document a unique
identification number and maintaining a separate database
that contains descriptions of all electronically stored books
and records along with their identification numbers. In
addition, any system used to maintain, organize, or
coordinate multiple electronic storage systems is treated as
an indexing system under these Revenue Regulations. The
requirement to maintain an indexing system will be satisfied
if the indexing system is functionally comparable to a
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reasonable hardcopy filing system. The requirement to
maintain an indexing system does not require that a
separate electronically stored books and records description
database be maintained if comparable results can be
achieved without a separate description database.
Reasonable controls must be undertaken to protect the
indexing system against the unauthorized creation of,
addition to, alteration of, deletion of, or deterioration of any
entries.The Revenue District Office who has jurisdiction over
the taxpayer may periodically initiate tests of a taxpayers
electronic storage system. These tests may include an
evaluation (by actual use) of a taxpayers equipment and
software, as well as the procedures used by a taxpayer to
prepare, record, transfer, index, store, preserve, retrieve,
and reproduce electronically stored documents. The
Revenue District Office may choose to review the internal
controls, security procedures, and documentation associated
with the taxpayers electronic storage system. The
RevenueOfficer duly authorized to conduct the test must
inform the taxpayer within three (3) days from the
conclusion of the test the results thereof, otherwise, he shall
be liable administratively for failure to inform the taxpayer.
The taxpayer may appeal to the Regional Director within ten
(10) days from receipt of any adverse findings derived from
the tests conducted. The Regional Director shall resolve the
appeal within thirty (30) days from the submission of the
appeal.The aforementioned tests described in the
immediately preceding paragraph do not qualify as an
examination or inspection of the books and records
within the meaning of Section 235 of the Tax Code of 1997
because these tests do not involve a determination of the
tax liability of a taxpayer for a particular taxable period.A
taxpayers electronic storage system that fails to meet the
requirements of this Section shall maintain and preserve the
original hardcopy of their books of accounts, subsidiary
books and other accounting records.
13.8 On Royalties, Services & Lease of Properties (NIRC
108)
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Treatment of Royalties in general for non-resident
corporations
ITAD Ruling No. 78-04 (CTS Australia)
This refers to your application for relief from double taxation
dated May 11, 2004, on behalf of your client Computershare
Technology Services Pty Ltd. (CTS Australia) requesting
confirmation that the royalty payments made by
Computershare Technology Services (Philippines) Inc. (CTS
Philippines) to Computershare Australia, is subject only to a
25% preferential tax rate, pursuant to the Philippines-
Australia tax treaty.
It is represented that CTS Australia, is nonresident foreign
corporation organized and existing under the laws of
Australia with principal office at 18-62 Trenerry Crescent,
Abbotsford, Victoria, 3067, Australia; that it is not registered
either as a corporation or as a partnership engaged in trade
or business in the Philippines per certification issued by the
Securities and Exchange Commission dated February 4,
2004; that CTS Philippines is a corporation duly organized
and existing under the laws of the Philippines with principal
office address at Unit 17-62 Cititower, 8741 Paseo de Roxas,
Makati City, Philippines; that CTS Australia owns a software
known as "Computershare X-Stream" (Software) and all its
updates; that on October 20, 2003, CTS Australia and CTS
Philippines entered into an agreement wherein CTS Australia
agreed to grant CTS Philippines a non-exclusive license to
market the Software in the Philippines and to license any
person to use the Software in the Philippines; and that CTS
Philippines agreed to pay CTS Australia the amount of 70%
of the revenue, net of tax, received by CTS Philippines from
the licensed users of the Software;
Based on the above, royalties arising in the Philippines and
paid to a resident of Australia may be subject to Philippine
income tax at a rate not to exceed 15 per cent of the gross
amount of the royalties where such are paid by an
enterprise registered with the Philippine Board of
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Investments and engaged in preferred areas of activities, or
25 per cent of the gross amount of the royalties in all other
cases, where the recipient is the beneficial owner of the
royalties.
The license fees to be paid by CTS Philippines to CTS
Australia are considered "payments of any kind received as a
consideration for the use of, or the right to use information
concerning industrial, commercial or scientific experience"
and as such are royalties within the meaning of the
aforequoted Article. Since CTS Philippines is not an
enterprise registered with the Philippine Board of
Investments and engaged in preferred areas of activities,
this Office is of the opinion and so holds that the subject
license fees are subject to the preferential tax rate of 25 per
cent of the gross amount of royalties pursuant to the
Philippines-Australia tax treaty.
Moreover, the royalty payments by CTS Philippines to CTS
Australia pursuant to the Software license granted are
subject to the 10% value-added tax (VAT) pursuant to Sec.
108 of the Tax Code of 1997. Accordingly, CTS Philippines,
being the resident withholding agent and payor in control of
the payment, shall be responsible for the withholding of the
10% final VAT before making any payment to CTS Australia.
In remitting the VAT withheld, CTS Philippines shall use BIR
Form No. 1600 (Monthly Remittance Return of Value-Added
Tax and Other Percentage Taxes Withheld). The duly filed
BIR Form 1600 and proof of payment thereof shall serve as
documentary substantiation for the claim of input tax by CTS
Philippines upon filing its own VAT, if it is a VAT-registered
taxpayer. In case CTS Philippines in a non-VAT registered
taxpayer, the passed on VAT withheld shall form part of the
cost of the service purchased which may be treated as
"expense" or "asset" whichever is applicable. In addition,
CTS Philippines is required to issue the Certificate of Final
Tax Withheld at Source (BIR Form 2306) in quadruplicate
upon request of CTS Australia, the first three copies thereof
to be given to CTS Australia and the fourth copy to be
retained by CTS Philippines as its file copy.
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ITAD Ruling No. 109-05 (Puratos SA)
This refers to your application for relief from double taxation
dated May 13, 2005, on behalf of your client, Puratos S.A.
(Puratos N.V.), hereinafter Puratos S.A., requesting
confirmation of your opinion that the royalty payments to be
made by Puratos (Philippines), Inc. (PuratosPhils.) to
Puratos S.A. pursuant to their Production Contract is entitled
to the preferential tax rate of 15% under Article V of The
Protocol Amending the Philippines-Belgium tax treaty.
It is represented that Puratos S.A. is a nonresident foreign
corporation organized and existing under the laws of The
Kingdom of Belgium with principal office at Industrialaan 25-
Zone Maalbeek B-1702, Groot-Bijgaarden, Belgium; that it is
not registered either as a corporation or partnership licensed
to do business in the Philippines per certification issued by
the Securities and Exchange Commission dated April 11,
2005; that PuratosPhils. is a corporation duly organized and
existing under the laws of the Philippines with principal office
at Mangosteen Street, corner DBP Ave., FTI Complex
Taguig, Metro Manila; that Puratos S.A. entered into a
Production Contract (Contract) with PuratosPhils., the
effective date of which is January 1, 2003, wherein the
former authorized the latter to manufacture and sell its
products as stipulated therein provided that royalties are
paid therefor, in accordance with the said Contract.
Considering that Puratos S.A. is the beneficial owner of the
royalties arising in the Philippines under the subject
Contract, the royalty fees paid by PuratosPhils. toPuratos
S.A. are subject to Philippine income tax at the preferential
rate of 15% of the gross amount thereof, pursuant to Article
V of the Superceding Protocol on Article 12 of the
Philippines-Belgium tax treaty.
Finally, Section 108(A)(1) of the Tax Code of 1997 states
that "the lease or the use of the right or privilege to use any
copyright, patent, design or model, plan, secret formula or
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process, goodwill, trademark, trade brand or other like
property or right" falls within the definition of "sale or
exchange of services" subject to the 10 percent value-added
tax (VAT). Accordingly, the royalties paid by PuratosPhils.
toPuratos S.A. shall be subject to 10 percent VAT.
Moreover, PuratosPhils., being the resident withholding
agent and payor in control of the payment, shall be
responsible for the withholding of the 10 percent VAT on
such royalty payment before paying them to Puratos S.A. In
remitting the VAT withheld, PuratosPhils. shall use BIR Form
No. 1600 (Monthly Remittance Return of Value-Added Tax
and Other Percentage Taxes Withheld). If PuratosPhils. is a
VAT-registered taxpayer, the duly filed BIR Form No. 1600
and proof of payment thereof shall serve as documentary
substantiation for the claim of input VAT by the PuratosPhils.
upon filing its own VAT return. On the other hand, if
PuratosPhils. is not a VAT-registered taxpayer, the passed-
on VAT withheld shall form part of the cost of the service
purchased which may be treated as an "expense" or "asset"
on the part of the PuratosPhils., whichever is applicable. In
addition, the PuratosPhils.is required to issue the Certificate
of Final Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, upon the request of Puratos S.A., the first
three copies to be kept by the Puratos S.A. and the fourth
copy by PuratosPhils. as its file copy.
ITAD Ruling No. 024-09 (ACI Worldwide)
This refers to your letter dated 26 June 2008, on behalf of
ACI Worldwide Corp. (ACI Worldwide), applying for a
preferential tax rate of 10% in connection with the royalty
fees arising from the Distribution Agreement to be paid by
ACI Worldwide Philippine Islands, Inc. (ACI Philippines) to
ACI Worldwide, pursuant to the Convention between the
Government of the Republic of the Philippines and the
Government of the United States of America with Respect to
Taxes on Income (Philippines-United States tax treaty).
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It is represented that ACI Worldwide, formerly known as ACI
Worldwide Inc., is a nonresident foreign corporation
organized and existing under the laws of the United States
of America with TIN No. 47-0567215, as evidenced by a
certification issued by the Department of the Treasury,
Internal Revenue Service, Philadelphia, dated 5 May 2008;
that ACI Worldwide is not registered either as a corporation
or as a partnership in the Philippines as shown in the
Certification of Non-Registration issued by the Securities and
Exchange Commission on 25 June 2008; that ACI Worldwide
is engaged worldwide in the business of design,
manufacturing, marketing, licensing and distribution of
computer software, and has developed substantial expertise,
know-how and technical information relating to such
products and is engaged in continuing research and
development to improve its products and develop new
products; that ACI Philippines is a domestic corporation
organized and existing under the laws of the Philippines.
It is further represented that on 28 February 2007 ACI
Worldwide and ACI Philippines entered into a Distribution
Agreement whereby ACI Worldwide grants to ACI Philippines
the following licenses:
1) Intellectual Property a limited, non-exclusive, non-
transferable right and license to utilize the Intellectual
Property and Confidential Information 1 within the Territory
2 to (i) manufacture, market, distribute, sell and license
Product(s) 3 utilizing, embodying or incorporating the
Intellectual Property and (ii) provide technical support,
training, consulting and other services with respect to the
Products.
2) Trademarks a limited, non-exclusive, non-transferable
right and license to utilize the Trademarks 4 solely in
conjunction with ACI Philippines manufacturing, marketing,
distribution, sale, licensing, use and support of the Products,
and such other products as may be authorized in writing by
ACI Worldwide from time to time during the continuance of
the Agreement within the Territory, 5 solely in accordance
with the terms and conditions of the Agreement.
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3) Localization with the approval of ACI Worldwide and
subject to its customary procedures, ACI Philippines shall
have the right (i) to translate any product(s) into any
languages ACI Worldwide may authorize that are applicable
to the Territory and (ii) to conform any Product(s) to
required customer specifications that are applicable to
particular requirements in the Territory to create Localized
Product(s), 6 which Localized Product(s) may be reproduced
and may be licensed, packaged, distributed and sublicensed
by ACI Worldwide subject to the Agreement;
that the Agreement shall become effective on 28 February
2007 and shall remain in full force and effect for a period of
one (1) year thereafter, unless terminated; that in
consideration of the rights and licenses granted by ACI
Worldwide, ACI Philippines shall pay royalty fees equivalent
to 65% of net revenues; that the ACI Worldwide and ACI
Philippines agree that the royalty rate may be adjusted
periodically in order to conform with the arm's length
standard as articulated by section 482 of the United States
Internal Revenue Code and Treasury regulations thereunder;
and that the issue or transaction subject of the above
application is not under investigation, on-going audit,
administrative protest, claim for refund or issuance of a tax
credit certificate, collection proceedings, or a judicial appeal.
According to paragraph 2 (b), royalties arising in the
Philippines derived by a resident of the United States are
subject to either (a) 25% of the gross amount of royalties
for royalties in general, (b) 15% of the gross amount of the
royalties if they are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred
areas of activities, or (c) the lowest rate of Philippine tax
that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of the third States.
Being royalties, the payments to ACI Worldwide by ACI
Philippines under the Distribution Agreement are subject to
the income tax rates mentioned in paragraph 2 (b), Article
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13 of the Philippines-United States tax treaty; subparagraph
(iii) thereof provides that the payments are subject to the
lowest rate of income tax that may be imposed on the
royalties of the same kind paid under similar circumstances
to a resident of a third State (commonly known as the most-
favored-nation tax treatment of royalties).
In relation to the most-favored-nation tax treatment of
royalties, the Supreme Court, in Commissioner of Internal
Revenue vs. S.C. Johnson and Son, Inc. and Court of
Appeals (G.R. No. 127105 dated June 25, 1999), has cited
two conditions for royalties arising in the Philippines and
derived by a resident of another country (in this case, the
United States) to be subject to a most-favored-nation tax
treatment. First, the royalties in question derived by a
resident of the other country (the United States) must be of
the same kind as those derived by a resident of the third
country which are subject to a most-favored-nation tax
treatment under the existing tax treaty between the
Philippines and the third country. Secondly, the mechanism
employed by the other country (the United States) in
mitigating the effects of double taxation of foreign-sourced
income derived by its residents must be the same with that
employed by the third country, which can be determined by
taking into account and comparing the respective articles on
Elimination of Double Taxation of the other country (the
United States) and the third country under their respective
tax treaties with the Philippines.
According to paragraph 2, royalties arising in the Philippines
and derived by a resident of Czech are subject to income tax
at the rate of (a) 10% of the gross amount of the royalties
arising from the use of, or the right to use, any copyright of
literary, artistic or scientific work (except those for
cinematograph films, and films or tapes for television or
radio broadcasting), any patent, trade mark, design or
model, plan, secret formula or process, or from the use of,
or the right to use, industrial, commercial or scientific
equipment, or for information concerning industrial,
commercial or scientific experience, or (b) 15% of the gross
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amount of the royalties for royalties arising from the use of,
or the right to use, any copyright of cinematograph films,
and films or tapes for television or radio broadcasting.
Applying the Philippines-Czech tax treaty in relation to the
most-favored-nation clause of the Philippines-United States
tax treaty, the royalty fee to be paid by ACI Philippines to
ACI Worldwide for the use or the right to use of intellectual
properties, patents and trademarks, may be subject to 10%
based on the gross amount thereof, provided the two
conditions for the most-favored-nation tax treatment of
royalties (as described above) are both satisfied.
In the same manner, although lacking a separate paragraph
for the definition of royalties in its article, paragraph 2 (a),
Article 12 of the Philippines-Czech tax treaty, as quoted
above, provides that royalties arising from the use or the
right to use of patents, information concerning industrial,
commercial or scientific experience (know-how), and
copyright of literary, artistic or scientific work, among others,
are subject to income tax rate of 10% of the gross amount
thereof. This being the case, the first condition for the most-
favored-nation tax treatment of royalties is satisfied, which
requires that royalties derived by a resident of the United
States must be of the same kind as those derived by a
resident of Czech.
Under the ordinary credit method, the United States (as
country of residence) would limit a taxpayer's allowable tax
credit to that portion of the taxpayer's tax liability in the
United States that is attributable to the income that is taxed
in the Philippines (the country of source or country of situs).
As a result of this limitation, if the Philippines has an
effective tax rate that exceeds the effective tax rate of the
United States on a particular income, the United States
would not grant the taxpayer a full credit for the income tax
imposed by the Philippines on such income.
With regard to the procedures for withholding and paying
the VAT, pursuant to Section 4 and 6 of Revenue
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Atty. Jose Cochingyan III AY 2011-2012

Regulations No. 4-2002, Section 3 or Revenue Regulations

No. 8-2002, and Section 7 of Revenue Regulations No. 14-
2002, ACI Philippines shall be responsible for the withholding
of VAT on the royalties fee before remitting it to ACI
Worldwide. In remitting to the Bureau of Internal Revenue
the VAT withheld, ACI Philippines shall use BIR Form No.
1600 (Monthly Remittance Return of Value-Added Tax &
Other Percentage Taxes Withheld). If it is a VAT-registered
taxpayer, ACI Philippines may use as documentary
substantiation for its claim of input VAT the duly filed BIR
Form No. 1600 and the proof of payment accompanying
such form. On the other hand, if it is a non-VAT-registered
taxpayer, ACI Philippines may include as part of the cost of
the royalty fees it paid to ACI Worldwide the VAT
consequently shifted or passed on to it. In addition, ACI
Philippines is required to issue the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306) in quadruplicate,
the first three copies for ACI Worldwide and the fourth copy
for ACI Philippines as its file copy.

BIR 14-12
List of allowable deductions for PEZA 5% GIT is exclusive.
Hence, royalty payments are not included.

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