TAX ALERT

October 31, 2006

BUREAU OF INTERNAL REVENUE (BIR) CONFIRMS THAT REVENUE REGULATIONS (REV. REGS.) NO. 16-2005 HAS AMENDED REVENUE MEMORANDUM CIRCULAR (RMC) NO. 74-99 IN THAT SALES TO PEZAREGISTERED ENTERPRISES NOW REQUIRE PRIOR APPLICATION FOR EFFECTIVE ZERO-RATING WITH THE APPROPRIATE BIR OFFICE. Revenue Memorandum Order (RMO) No. 7-2006, dated December 15, 2005, was likewise issued to prescribe guidelines and procedures for the processing of applications for zerorating of effectively zero-rated transactions. Without an approved application for effective zero-rating, a transaction that would otherwise be entitled to zero-rating shall be considered exempt. BIR Rulings No. DA-463-2006 and DA-464-2006 both dated July 28, 2006. COURT OF TAX APPEALS (CTA) RULES THAT THE CITY OF MANILA CITY CANNOT IMPOSE A BUSINESS TAX ON A MANUFACTURER UNDER SECTION 143(a) OF THE LOCAL GOVERNMENT CODE AND AT THE SAME TIME SUBJECT SUCH MANUFACTURER TO LOCAL TAX UNDER 143(h) OF THE SAME CODE. Section 143(a) of the Local Government Code provides that cities and municipalities may impose taxes on manufacturers of any article of commerce. On the other hand, Section 143(h) of the same code provides that cities or municipalities may impose taxes on any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax. Hence, if a manufacturer, pursuant to an ordinance, is already imposed a local business tax under Section 143(a) of the Local Government Code, it can no longer be subject to local tax under Section 143(h) of the same code. The authority under Section 143(h) to impose local tax on any business is limited by the proviso not otherwise specified in the preceding paragraphs. Imposing local taxes on a business under both Section 143(a) and (h) of the Local Government Code constitutes double taxation. Furthermore, the CTA emphasized that the publication requirement under the Local Government Code relative to local ordinances is mandatory and indispensable for purposes of giving effect to an ordinance. Alcan Packaging Starpack Corporation (formerly Starpack Philippines Corporation) vs. The Treasurer of the City of Manila, CTA AC No. 17, September 11, 2006.

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A BIR CERTIFICATE OF DESTRUCTION IS NOT ABSOLUTELY NECESSARY TO CLAIM A DEDUCTION FOR INVENTORY WRITTEN-OFF, HOWEVER, THE TAXPAYER MUST SUBSTANTIATE THE AMOUNT WRITTEN-OFF AS ACTUALLY PERTAINING TO DESTROYED OBSOLETE INVENTORY. Hence, for failing to substantiate the amount deducted with competent documentary evidence establishing that the deduction pertained to destroyed obsolete inventory, the CTA sustained the BIRs disallowance of the inventory written-off as a deduction from gross income. Nidec Copal Philippines Corporations v. Commissioner of Internal Revenue, CTA Case No. 6577, September 25, 2006. REAL PROPERTIES OF A DISSOLVED REALTY COMPANY THAT ARE IDLE, UNPRODUCTIVE AND UNIMPROVED SINCE THE TIME OF ACQUISITION ARE CLASSIFIED AS CAPITAL ASSETS. Thus, the sale of said properties is not subject to VAT but is subject to 6% capital gains tax and 1.5% DST. BIR Ruling No. DA-542-2006 dated September 11, 2006. LOSSES REALIZED BY STOCKHOLDERS OF A LIQUIDATING CORPORATION IN A CAPITAL DEFICIT POSITION ARE IN THE NATURE OF A CAPITAL LOSS DEDUCTIBLE ONLY TO THE EXTENT OF CAPITAL GAINS FROM THE SALE OF CAPITAL ASSETS. The stockholders of a corporation in a capital deficit position realize a capital loss upon the corporations liquidation measured by their respective costs in the shares. The liquidating loss is in the nature of a capital loss deductible only to the extent of capital gains realized from the sale of capital assets. BIR Ruling No. DA-537-2006 dated September 5, 2006. ADVANCES TO A SUBSIDIARY THAT HAS CEASED OPERATIONS, WHICH ADVANCES WERE ASCERTAINED TO BE WORTHLESS, ARE DEDUCTIBLE FROM GROSS INCOME AS BAD DEBTS. The ascertainment of worthlessness should be pegged as of the end of the taxable year the subsidiary actually ceased business operations or its corporate life ceased to exist, regardless of the date the Securities and Exchange Commission approves the shortening of corporate life. If, after the parent corporation writes-off the bad debt, it receives additional payments on the advances, the parent corporation should recognize income as of the year the payment was received. Ibid. PAYMENTS FOR A NON-EXCLUSIVE, NON-TRANSFERABLE LICENSE TO USE SOFTWARE WHERE THE LICENSOR RETAINS TITLE AND OWNERSHIP THERETO, INCLUDING PERTINENT RIGHTS PROTECTED UNDER RELEVANT INTELLECTUAL PROPERTY LAWS, CONSTITUTE BUSINESS INCOME. Under RMC No. 44-2005, if a person acquires a copy of a software but does not acquire any of the rights described above [i.e., (1) right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; (2) right to prepare derivative computer programs based upon the copyrighted software; (3)

right to make a public performance of the software; (4) right to publicly display the computer program; or (5) any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright], or only acquires a de minimis grant of such rights, and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. However, considering that the licensor, which is a resident of India, has no permanent establishment in the Philippines, any profits earned from the sale of the software in the Philippines shall not be subject to Philippine income tax, pursuant to the RP-India Tax Treaty. Nonetheless, the transfer of software from the non-resident supplier constitutes importation of software and is subject to VAT on importation. BIR Ruling No. DA-ITAD-94-2006 dated August 22, 2006. COURT OF TAX APPEALS EN BANC SUBJECTS DEMMURAGE TO 35% CORPORATE INCOME TAX. Striking down the contention that gross Philippine billings tax is the only income tax applicable to international shipping carriers, the CTA En Banc ruled that that the 2.5% gross Philippine billings tax imposed on international carriers does not preclude the imposition on them of the 35% regular corporate income tax applicable to resident foreign corporations on income that does not constitute gross Philippine billings. Demurrage fees, which are collected by international carriers from consignees who fail to return the carriers containers within the allotted time and which do not fall within the definition of gross Philippine billings, definitely constitute income accruing to international carriers. Even if demurrage fees were meant to serve as a penalty, such fees consist of an inflow of funds to the international carriers, which are neither capital contributions nor incurrence of liabilities. Since the demurrage fees are income derived from sources within the Philippines, they are subject to tax in the Philippines. Steamship Company of Svendborg and Steamship Company of 1912, vs. Commissioner of Internal Revenue, CTA E.B. No. 117 (CTA Case No. 6567), September 12, 2006. PREMIUM PAYMENTS BY A CORPORATION TO A HEALTH MAINTENANCE ORGANIZATION PURSUANT TO A GROUP INSURANCE PLAN FOR ITS EMPLOYEES ARE NOT SUBJECT TO FRINGE BENEFITS TAX. Section 33(C) of the 1997 NIRC provides that contributions of the employer to retirement, insurance and hospitalization benefit plans for the benefit of the employee are non-taxable fringe benefits. BIR Ruling No. DA-469-2006 dated August 1, 2006. THE ANNUAL CEILING FOR DE MINIMIS BENEFITS GIVEN AS CASH ALLOWANCE TO DEPENDENTS OF EMPLOYEES IS P1,500.00 PER EMPLOYEE. ANY AMOUNT IN EXCESS OF THE CEILING MAY FURTHER BE CONSIDERED AS PART OF OTHER BENEFITS, PROVIDED THAT THE TOTAL BENEFITS SHALL NOT EXCEED P30,000.00. BUT THE AMOUNT IN EXCESS OF THE P30,000.00 THRESHOLD OF THE TOTAL OF OTHER BENEFITS SHALL BE INCLUDED AS PART OF THE TAXABLE COMPENSATION OF THE EMPLOYEE-TAXPAYER. Ibid.

PAYMENTS RECEIVED BY A CORPORATION FROM SUBSIDIARIES AND AFFILIATES FOR THE LATTERS SHARE IN COMMON PURCHASES ARE NOT INCOME ON THE PART OF THE CORPORATION AND HENCE NOT SUBJECT TO WITHHOLDING TAX BY ITS SUBSIDIARIES AND AFFILIATES. Furthermore, the withholding and remittance by the corporation of withholding taxes on gross payments to the suppliers of its subsidiaries and affiliates constitute substantial compliance with the withholding tax requirements under Sec. 2.57.3 of Rev. Regs. No. 2-98, as amended by Sec. 5 of Rev. Regs. No. 30-03. Thus, upon proof of the withholding and remittance of taxes by the corporation, the said amount may be credited for the account of its subsidiaries and affiliates, being the withholding agent-payor. BIR Ruling No. DA -5072006 dated August 22, 2006. PAYMENTS MADE BY THE ASSIGNEE OF AN INTEREST OVER CONDOMINIUM UNITS ARE NOT SUBJECT TO WITHHOLDING TAX WHEN THE INCOME TAX ARISING FROM THE SALE OF THE CONDOMINIUM UNITS HAVE ALREADY BEEN PAID BY THE SELLER THEREOF IN THE YEAR OF SALE. A Corp., developer of M condominium, was previously issued a BIR ruling stating that since all its sales and income therefrom during the period 1996 to 1999 were already reported in full in the year of sale and the income taxes thereon for the said years were already paid, it is no longer subject to creditable withholding tax on the transfer of CCTs upon its full payment. Before the completion of payment, a buyer of 3 condominium units proposed to assign his right over the units. The BIR ruled that the Deeds of Assignment and Deeds of Sale for the condominium units would no longer be subject to expanded withholding tax. The assignee merely steps into the shoes of the assignor. The execution of the Deeds of Sale are not taxable events inasmuch as the income on the sale of the condominium units had been reported by the seller in the year of the sale. BIR Ruling No. DA -512-2006 dated August 25, 2006. AS THE ENTITY HAVING CONTROL, CUSTODY AND DISPOSAL OF FUNDS, THE WITHHOLDING AGENT SHALL BE LIABLE FOR THE FILING OF WITHHOLDING TAX RETURNS AND REMITTANCE OF WITHHOLDING TAXES TO THE BIR. Consequently, the withholding agent shall be liable for deficiency tax assessments, surcharges and penalties should it fail to withhold and remit the tax on income payments from its funds. BIR Ruling DA No. 479-2006 dated August 8, 2006. THE PREFERENTIAL TAX RATE OF 5% OF GROSS INCOME APPLICABLE TO PEZA-REGISTERED ENTERPRISES APPLIES ONLY TO PEZA-REGISTERED ACTIVITY. The sale of scrap materials and income from other activities fall outside the registered activity as a PEZA enterprise and should be subjected to the regular income tax rate of 34% (in 1999). Moreover, under Section 8, Rule VIII, Part V of the PEZA Rules, rejects,

seconds and recoverable wastes shall, when taken from the restricted areas of the ECOZONES to the customs territory, or to the non-restricted areas of the ECOZONE, be taxed in accordance with the applicable provisions of the customs and internal revenue laws and regulations of the Philippines. Nidec Copal Philippines Corporations v. Commissioner of Internal Revenue, CTA Case No. 6577, September 25, 2006. COMMUNICATION EXPENSE IS NOT AN ALLOWABLE DEDUCTION FOR PURPOSES OF COMPUTING THE 5% PREFERENTIAL TAX ON GROSS INCOME IMPOSED ON PEZA-REGISTERED ENTERPRISES. Facts: The BIR examiner disallowed the deduction of communication expense from the gross income of a PEZA-registered taxpayer since it is not allowable under Republic Act (RA) No. 7916 (the PEZA Law). The taxpayer contended that PEZA-registered enterprises are akin to enterprises registered with the Subic Economic Freeport Zone (SSEFZ) created under RA No. 7227 (Bases Conversion and Development Act of 1992) which are also subject to the 5% preferential tax rate. SSEFZ are allowed to deduct communication expenses under Rev. Regs. No. 16-99. Moreover, Section 51 of the PEZA Law provides that, all privileges, benefits, advantages or exemptions granted to special economic zones under Republic Act No. 7227 shall ipso facto be accorded to special economic zones already created or to be created under this Act. Held: While Rev. Regs. No. 16-99 included communication expense as one of the allowable deductions for purposes of computing the 5% tax on gross income earned by SSEFZ enterprises, Rev. Regs. No. 0205 repealed the provisions of Rev. Regs. No. 16-99 and excluded communication expense as one of the allowable deductions. Thus, the disallowance of communication expense is proper. Ibid. RENTALS PAID BY A PEZA-REGISTERED LESSEE TO A PEZA-REGISTERED LESSOR BY WAY OF APPLYING THE LESSEES SECURITY DEPOSIT, AS WELL AS BY OFFSETTING THE LOAN EXTENDED BY THE LESSEE TO THE LESSOR, SHALL BE SUBJECT TO 5% PREFERENTIAL TAX (IN LIEU OF ALL TAXES) AT THE TIME OF APPLICATION OF THE DEPOSIT AND OFFSETTING OF THE LOAN. Moreover, as the parties are both PEZA-registered taxpayers, the rental payments shall not be subject to creditable withholding tax and documentary stamp tax and shall be exempt from value-added tax (VAT). BIR Ruling No. DA-509-2006 dated August 25, 2006. A CORPORATION EXEMPT FROM VAT CAN REGISTER ITS EXPORT SALES AS ZERO-RATED AND AT THE SAME TIME HAVE ITS LOCAL SALES REMAIN EXEMPT FROM VAT. A taxpayer may register as VAT taxpayer subject to 0% VAT with respect to its export sales and, at the same time, remain exempt from VAT on its local sales. While its corresponding input taxes on purchases of goods and services directly attributable to zero-rated transactions may be the subject of a claim for refund or tax credit, input taxes attributable to its local sales cannot, however, refunded or credited. Rather, the input taxes attributable to local sales shall

form part of cost of goods deductible as an expense for income tax purposes. BIR Ruling No. DA-539-2006 dated September 7, 2006. WHEN A PARTNERSHIP IS DISSOLVED AND A NEW CORPORATION IS FORMED WITH THE FORMER PARTNERS CONTINUING TO HAVE THE CONTROLLING INTEREST IN THE NEW CORPORATION, NO OUTPUT VAT IS DUE ON THE TRANSFER OF THE MERCHANDISE INVENTORY AND OTHER ASSETS OWNED BY THE PARTNERSHIP TO THE CORPORATION. BIR Ruling No. DA-465-2006 dated July 28, 2006. ADVANCE PAYMENTS OF INPUT VAT MADE BY A LOGISTICS COMPANY TO THE BUREAU OF CUSTOMS ON BEHALF OF ITS CLIENTS FOR WHICH THE LOGISTICS COMPANY IS SUBSEQUENTLY REIMBURSED BY ITS CLIENTS DO NOT FORM PART OF THE LOGISTICS COMPANYS INPUT VAT. BIR Ruling No. DA-462-2006 dated July 28, 2006. THE BIRS DECISION ON A MOTION FOR RECONSIDERATION/ REINVESTIGATION OF A PRELIMINARY ASSESSMENT NOTICE IS NOT EQUIVALENT TO THE COMMISSIONERS DECISION ON A DISPUTED ASSESSMENT THAT MAY BE APPEALED TO THE COURT OF TAX APPEALS. Petitioner received a letter dated July 15, 2004 informing petitioner of the result of the reinvestigation conducted pursuant to petitioners Motion for Reconsideration/Reinvestigation of a Preliminary Assessment Notice, with a demand for the payment of the deficiency taxes per the attached assessment notice. Instead of filing a protest on the result of the reinvestigation and assessment notice, petitioner filed a petition for review with the CTA. The CTA dismissed the petition for lack of jurisdiction. The CTA held that the decision which may be appealed to the CTA refers to the decision of the Commissioner on the protest of the taxpayer against an assessment notice; it does not signify the assessment itself. The CTA has no jurisdiction to entertain the petitioners appeal of an assessment notice. Inasmuch as the petitioner failed to timely protest the assessment notice and instead immediately elevated the same to the CTA, the assessment notice became final, executory and unappealable. DA-Region 02, Multi-Purpose Cooperative vs. Commissioner of Internal Revenue et al., CTA E.B. 163 (CTA Case No. 7041), September 15, 2006. DESPITE A TAXPAYERS DENIAL OF HIS RECEIPT OF ASSESSMENT NOTICES, THE CTA AFFIRMS HIS CONVICTION FOR VIOLATING SECTIONS 16(a) AND 102 OF THE TAX CODE (FAILURE TO PAY TAXES). Facts: Criminal cases were filed against the accused for his failure to pay his deficiency income tax and VAT. For his defense, the accused alleged that he had no knowledge of the deficiency tax assessments because he did not receive the assessment notices. The BIR countered that it sent the assessment notices by registered mail as shown by the transmittal list containing the name and address of the accused, and the mail was not returned to the BIR by the post office. The trial court convicted the accused. Held: The CTA declared that the trial courts ruling was in accordance with the pronouncement of the Supreme Court that an

assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. The taxpayer may be presumed to have received an assessment notwithstanding the denial of its receipt upon proof that it was properly addressed and mailed by registered mail. The CTA likewise noted that the bare denial by the accused that he did not receive the assessment notices lacked credibility. As such, it could not prevail over the evidence on record. Aside from the fact that the accused testified that he gave money to men who claimed to be BIR employees to fix his tax problem, the evidence showed that the accused personally received the BIRs letter of authority, the Warrant of Distraint and Levy and the demand letter. Dissenting Opinion of J. Uy: The prosecution has the primordial duty not only to prove that a tax is due but also to establish that the accused willfully failed to pay the tax due. The presumption that the taxpayer received the assessment when the original assessment notice was not returned to the BIR after its release and mailing to the taxpayer is a disputable one. A direct denial by the taxpayer of the receipt of the assessment notice shifts the burden to the BIR to prove that the taxpayer received the mailed letter. The transmittal list presented by the prosecution is not sufficient to establish that the accused actually received the assessment notices. It bears no probative value for it fails to state the nature of the document supposedly mailed to the accused. There is no corroborative evidence establishing the contents of the mailed envelope. Neither is there any clear proof to prove that the mailed letter was indeed sent to, and received by, the accused. There was also no compliance with the prescribed procedures under the Rules on Evidence to establish the receipt of the mailed document to the addressee. Therefore, the prosecution failed to prove the guilt of the accused beyond reasonable doubt. People of the Philippines vs. Ernesto S. Mallari, CTA CRIM. Case Nos. A-1 & A-2, September 4, 2006. CTA EN BANC INVALIDATES AN ASSESSMENT FOR BEING BARRED BY PRESCRIPTION ON ACCOUNT OF INVALID WAIVERS. The CTA found the following defects in the Waivers executed by the taxpayer: (1) the signatory to the first waiver is not the duly authorized representative of the taxpayer as she has no written notarized authority from its Board of Directors to waive the prescriptive period under the Tax Code; (2) the waiver was not signed by the Commissioner of Internal Revenue as required by RMO 20-90; (3) the date of acceptance by the Assistant Commissioner-Enforcement Service was not indicated on the waiver; (4) the taxpayer was not provided a copy of the waiver as shown by the lack of acknowledgment receipt on the original copy attached to the BIR docket of the case; (5) the waiver did not specify the kind of tax and the amount of the tax due; (6) failure to comply with Revenue Delegation Authority Order (RDAO) No. 5-2001 which requires the notarized authority of the signatory to the waiver and notarization of the waiver; and (7) the second waiver is also null and void since the signatory was without written notarized authority and, assuming that the first waiver is valid, the second waiver was executed after the lapse of the alleged period agreed upon in the first waiver. Commissioner of Internal Revenue v. Kudos Marketing Corporation, CTA E.B. Case No. 176 (CTA Case No. 7045), September 25, 2006.

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