april 2010 tax brief
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TaxationTRANSCRIPT
April 2010 11111
April 2010
Tax brief
ContentsContentsContentsContentsContents
02 New LawsNew LawsNew LawsNew LawsNew Laws
• Incentives to lawyers for free
legal services
• Exchange of information on
tax matters
• Income tax exemption of
LWDs
• Expanded Breastfeeding Act
03 SEC CircularSEC CircularSEC CircularSEC CircularSEC Circular
• Adoption of broker-dealer
chart of accounts
03 PPPPPresidential Issuanceresidential Issuanceresidential Issuanceresidential Issuanceresidential Issuance
• Review committee for
smuggling and tax evasion
cases
04 BIR IssuancesBIR IssuancesBIR IssuancesBIR IssuancesBIR Issuances
• OSD disclosure requirement
• Coverage of amusement
taxes
• Tax investigation of
cooperatives
• Employer withholding tax
obligations and penalties
• Taxpayers’ lifestyle check
system (TLCS)
• Replacement of expired CAR
• Further deferral of eDST
• BIR Industry Champion
Program
• Reinvigorated RATE program
• Audit of conglomerates
08 BIR RBIR RBIR RBIR RBIR Rulingsulingsulingsulingsulings
• Stipends of resident
physicians
• VAT on hotel services to
international airlines
• CWT on manpower services
• DST on credit facility
09 CourCourCourCourCourt Decisionst Decisionst Decisionst Decisionst Decisions
• Incidental transaction for
VAT purposes
• Contesting a real property
tax assessment
10 Highlight on P&A serHighlight on P&A serHighlight on P&A serHighlight on P&A serHighlight on P&A servicesvicesvicesvicesvices
• Customs compliance review
2 2 2 2 2 April 2010
New Laws
Incentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legal
serserserserservicesvicesvicesvicesvices
This law grants to lawyers or professional
partnerships providing pro bono legal
services a tax deduction equivalent to
waived professional fee or 10% of their
gross income from legal services,
whichever is lower.
The actual free legal services shall be
exclusive of the 60-hour mandatory legal
aid services for indigent litigants required
under the Rule on Mandatory Legal Aid
Service for Practicing Lawyers.
The lawyer or professional partnership
should submit to the BIR and the
Department of Justice (DOJ)
certifications issued by the Public
Attorney’s Office (PAO), the DOJ or an
accredited association of the Supreme
Court (SC) indicating qualification of the
legal services provided, and the inability
of the DOJ and PAO to provide legal
services.
(Republic Act No. 9999, February 25, 2010)
Exchange of information on taxExchange of information on taxExchange of information on taxExchange of information on taxExchange of information on tax
mattersmattersmattersmattersmatters
The law authorizes the BIR to inquire into
bank deposits and other related
information held by financial institutions,
and supply such information to a
requesting foreign tax authority pursuant
to an international convention or
agreement on tax matters entered into by
the Philippines with its tax treaty partners.
The law also allows a foreign tax authority
to examine the income tax returns of
specific taxpayers in the Philippines that
are the subject of request for exchange of
tax information under the rules prescribed
by the Secretary of Finance as
recommended by the Commissioner of
Internal Revenue (CIR).
Taxpayers who are subject of the request
of a foreign tax authority for exchange of
information shall be notified by the CIR.
The requesting foreign tax authority is
mandated to maintain absolute
confidentiality of the information
received.
The law imposes sanctions on officers of
the bank who refuse to supply the
information, as well as BIR personnel
who unlawfully divulge information
obtained from banks to persons other
than the requesting foreign tax authority.
(Republic Act No. 10021, March 19, 2010)
Income tax exemption of LIncome tax exemption of LIncome tax exemption of LIncome tax exemption of LIncome tax exemption of LWDsWDsWDsWDsWDs
Local water districts (LWDs) have become
exempt from income tax with their
inclusion in the list of income tax-exempt
government-owned or -controlled
corporations, under Section 27(C) of the
Tax Code.
The law, however, mandates that any
amount of savings from the income tax
exemption should be used for capital
equipment expenditure to expand water
services coverage and provide safe and
clean water. To be tax-exempt, an LWD
should limit the increase in its
appropriation for personal services as well
as travel, transportation, or representation
expenses and purchase of motor vehicles
to not more than 20% a year, and adopt
internal control reforms to ensure its
economic and financial viability.
The law also condones all unpaid taxes of
LWDs from August 13, 1996 up to the
effectivity of the law subject to the
condition that the financial incapacity of
the LWD to meet its tax obligations is
established by the BIR, and the LWD
submits to Congress a program of
internal reforms as duly certified by the
Local Water Utilities Administration.
(Republic Act No. 10026, March 22, 2010)
Expanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding Act
To promote the practice of breastfeeding,
the law mandates all health and non-
health facilities, establishments and
institutions to establish lactation stations
and provide breaks for nursing employees
to breastfeed or extract milk for storage.
The law amends Republic Act No. (RA)
7600, or the Rooming in and
Breastfeeding Act of 1992, which requires
the setting up of rooming-in and
breast-feeding areas in all private and
government health institutions.
Under the law, the expenses incurred by
an establishment to set up lactation
stations shall be deductible for income tax
purposes in the year incurred up to twice
their actual amount. However, prior to
availing of the tax incentive, the law
requires that the establishments set up
lactation stations within six months after
the approval of the law and secure first a
“Working Mother- Baby-Friendly
Certificate” from the Department of
Health (DOH), which should be filed with
the BIR.
Establishments may be exempt from the
requirement if they can prove that this is
not feasible or not necessary based on the
peculiar circumstances of the workplace
and considering the number of women
employees or average number of women
who visit the establishment. Applications
for exemption may be filed with the
Department of Labor and Employment
(DOLE) or the Civil Service Commission,
in case of government agencies. The
exemption is valid for a renewable period
of two years.
(Republic Act No. 10028, March 16, 2010)
April 2010 33333
Presidential Issuance
SEC Circular
RRRRReview committee for smuggling andeview committee for smuggling andeview committee for smuggling andeview committee for smuggling andeview committee for smuggling and
tax evasion casestax evasion casestax evasion casestax evasion casestax evasion cases
An independent committee has been
formed by the President to review all
smuggling and tax evasion cases handled
by the BIR and the Bureau of Customs
(BOC). The committee is composed of a
retired member of the judiciary and two
representatives each from the private
sector and the media.
Among the functions of the committee
are the following:
1. Review, evaluate and assess all
important smuggling and tax
evasion cases handled by the BIR
and the BOC that resulted in a
decision that is unfavorable to
the government;
2. Determine causes of the
unfavorable decision both at the
administrative and judicial levels;
3. Conduct an inventory of all
pending smuggling and tax
evasion cases and identify
priority cases for intensified
prosecution or for immediate
resolution; and
4. Formulate recommendations to
further improve the success rate
of the BIR and the BOC in the
prosecution of the cases.
The Committee shall submit its findings
and recommendations to the President
within 90 days from the appointment of
at least three of the committee members,
after which the Committee shall cease to
exist unless otherwise directed by the
President.
[Administrative Order Nos.277 (January 29,
2010) and 277-A, February 19, 2010]
Adoption of brokAdoption of brokAdoption of brokAdoption of brokAdoption of brokererererer-dealer char-dealer char-dealer char-dealer char-dealer chart oft oft oft oft of
accountsaccountsaccountsaccountsaccounts
The SEC has approved the adoption of
the broker-dealers chart of accounts
(BDCA) for implementation by all
registered brokers-dealers in securities,
including trading and non-trading
participants of the Philippine Stock
Exchange (PSE). The BDCA shall apply
to all financial statements of brokers-
dealers starting January 1, 2011.
Failure to comply with the BDCA shall
subject the erring party to the sanctions
under Securities and Exchange
Commission (SEC) Memorandum
Circular No. 8, series of 2009, or the scale
of fines imposed on non-compliance with
the SEC financial reporting requirements.
(SEC Memorandum Circular No. 1, Series of
2010, March 18, 2010)
4 4 4 4 4 April 2010
BIR Issuances
OSD disclosure requirementOSD disclosure requirementOSD disclosure requirementOSD disclosure requirementOSD disclosure requirement
This Circular was issued to remind
taxpayers of the requirement to disclose
their election to use the optional standard
deduction (OSD) starting taxable year
2009 by checking the appropriate box in
their income tax return (ITR) for the first
quarter of taxable year 2009, whether the
taxpayer adopts calendar or fiscal year. In
the case of newly-registered taxpayers, the
election to avail of the OSD should be
indicated in the initial quarterly ITR,
which is required for taxable year 2009.
Under the Circular, the type of deduction
availed of in the first quarter ITR should
be consistently applied for the succeeding
quarters and in the final return for taxable
year 2009.
For failure to do so, a taxpayer shall be
deemed as having availed of the itemized
deductions for the taxable year 2009. The
type of deduction availed of shall be
irrevocable for taxable year 2009,
notwithstanding any subsequent
amendment of such first quarter/initial
ITR filed.
(Revenue Memorandum Circular 16-10, March
1, 2010)
Coverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxes
The BIR has clarified that the 18%
amusement tax imposed on proprietors,
lessees or operators of cabaret, night or
day clubs under Section 125 (b) of the
Tax Code covers similar amusement
places that offer the same entertainment
and function such as videoke bars,
karaoke bars, karaoke televisions, karaoke
boxes and music lounges. Hence, these
amusement places shall be subject to the
18% amusement tax, and not to the 12%
VAT.
(Revenue Memorandum Circular No. 18-10,
March 8, 2010)
TTTTTax investigation of cooperativesax investigation of cooperativesax investigation of cooperativesax investigation of cooperativesax investigation of cooperatives
Following the issuance of joint rules and
regulations implementing RA 9520,
otherwise known as the Philippine
Cooperative Code of 2008, the BIR has
authorized the continuation of all
pending tax investigations and the
issuance of tax assessments against
cooperatives in accordance with the
following guidelines:
a. Tax cases that existed prior to
the effectivity of RA 9520 shall
be governed by the old
Cooperative Code (RA 6938).
b. For 2008 tax returns and fiscal
period ended before March 22,
2009, notice of investigations
shall be issued based on the
existing audit program.
c. For periods beyond March 22,
2009, the BIR offices are
required to obtain prior
authorization from the
Cooperative Development
Authority (CDA) or its extension
office that has jurisdiction over
the cooperative, which should be
issued within 20 days from
receipt of request, copy
furnished the concerned
cooperative.
(Revenue Memorandum Circular 19-10, March
8, 2010)
Employer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligations
and penaltiesand penaltiesand penaltiesand penaltiesand penalties
This Circular was issued to remind
employers of their obligation to withhold
and remit taxes on employees’
compensation income, to perform year-
end adjustments, and to refund excess tax
withheld. Non-compliance will result in
the following violations, for which there
are applicable penalties such as surcharge,
interest, and, in certain cases, compromise
penalty in lieu of criminal liability,
depending on the violation:
1. Non-withholding of tax -
when there is failure to withhold
any tax
2. Underwithholding - when
employer fails to withhold in full
the tax due
3. Non-remittance - when
employer fails to remit total
amount withheld
4. Late remittance - when
employer remits beyond the due
date
5. Failure or refusal to refund
excess taxes withheld
(Revenue Memorandum Circular 21-10, March
9, 2010)
April 2010 55555
BIR Issuances
TTTTTaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check system
(TLCS)(TLCS)(TLCS)(TLCS)(TLCS)
This Order prescribes the policies and
guidelines in the conduct of investigations
on individual taxpayers with substantial
investments and assets or conspicuous
lifestyles, but who declared relatively small
income and tax payments.
When direct evidence is inadequate, not
available or inaccurate, the BIR will use
third party information. The National
Investigation Division (NID) shall verify
the existence of a taxpayer’s higher value
assets and/or conspicuous spending by
accessing the records of government
entities such as the Land Transportation
Office, Bureau of Immigration, Maritime
Industry Authority, Civil Aeronautics
Board, Land Registration Authority, and
registries of deeds.
The BIR shall also access the records of
private entities like airline and shipping
companies, resorts, membership clubs and
similar establishments; homeowners’
associations; real estate firms; credit card
companies; as well as statement of assets,
liabilities and net worth and/or amnesty
returns filed under RA 9480.
All the information gathered in the TLCS
shall be stored in an electronic data
warehouse and evaluated vis-à-vis the data
extracted from the BIR’s integrated tax
system (ITS). After verification, and if the
evidence warrants, the investigators shall
request the issuance of a Letter of
Authority (LA) from the Assistant
Commissioner of Internal Revenue
(ACIR) - Enforcement Service for
approval of the authorized officials. The
Special Investigation Division (SID) of
the Regional Offices and other BIR audit
offices shall implement the TLCS upon
approval of the CIR.
(Revenue Memorandum Order 19-10, March 9,
2010)
RRRRReplacement of expired Cereplacement of expired Cereplacement of expired Cereplacement of expired Cereplacement of expired Certificatestificatestificatestificatestificates
Authorizing RAuthorizing RAuthorizing RAuthorizing RAuthorizing Registration (CAR)egistration (CAR)egistration (CAR)egistration (CAR)egistration (CAR)
The Order provides the guidelines on the
issuance, replacement or revalidation of
Certificates Authorizing Registration
(CAR) pursuant to Revenue Regulations
No. (RR) 24-02.
Under RR 24-02, a CAR is valid for two
years from the original date of issuance.
The Order enumerates the documents
that should be submitted for the
replacement of an expired CAR:
1. Written request for the issuance
of a new CAR addressed to the
RDO or BIR office authorized
to issue the CAR
2. Original and duplicate copies of
the expired CAR
3. Original document of sale,
exchange or transfer (e.g., deed
of sale, deed of assignment,
deed of donation, deed of
extrajudicial settlement of estate,
etc.)
4. Photocopies of the proof of tax
payments previously made, or
certification issued by the
BIR’s revenue accounting
division indicating
taxes paid, date
of payment and
amount
The RDO/concerned BIR office shall
cancel the expired CAR, and issue a new
CAR containing the serial number and
original issue date of the expired CAR
with a statement that the CAR is a
replacement CAR. The replacement CAR
shall be valid for one year from issue date.
(Revenue Memorandum Order 23-10, March
15, 2010)
FFFFFurururururther deferral of eDSTther deferral of eDSTther deferral of eDSTther deferral of eDSTther deferral of eDST
The mandatory use of electronic
documentary stamp tax (eDST) system
was further suspended until June 30, 2010
in response to the numerous issues and
requests of users. The implementation
was earlier extended to February 28, 2010
under RMC 24-10.
Under RMC 31-10, the BIR clarified that
taxpayers/users who have implemented
the eDST in lieu of the Documentary
Stamp Electronic Imprinting Machine
(DSEIM) should have affixed the
rectangular black DST on all taxable
documents effective January 2010. For
taxpayers/users who still cannot comply
with the requirements of the eDST, the
constructive stamping/receipt system
(CS/RS), which involves attaching the
DST return (BIR Form 2000) and the
duly issued confirmation receipt/deposit
slip by the authorized agent bank (AAB)
to the taxable document, is still allowed
until the full implementation of eDST on
June 30, 2010.
[Revenue Memorandum Circular Nos. 24-10
(March 16, 2010) and 31-10 (March 30,
2010)]
6 6 6 6 6 April 2010
BIR Issuances
BIR IndustrBIR IndustrBIR IndustrBIR IndustrBIR Industry Champion Py Champion Py Champion Py Champion Py Champion Programrogramrogramrogramrogram
To develop in-depth expertise/
specialization in various industries, the
BIR shall implement the industry
champion program, which is aimed at
identifying tax issues to improve voluntary
compliance and enforcement in selected
industries.
BIR personnel shall be assigned as
industry champions for each specific
industry. They shall be responsible for,
among others, tapping experts to assist in
the identification and training of
personnel; coordinating with government
regulatory offices for tapping data
sources; conducting training for BIR
personnel; and organizing tax audit task
forces for selective industry audit.
The program will initially cover banking
and insurance, telecommunications,
power, petroleum, cement, shipping,
health maintenance organizations,
semiconductor, business process
outsourcing, mining, real estate, schools,
show business and entertainment,
tourism, foundations, enterprises enjoying
tax incentives, and professionals.
(Revenue Memorandum Order 24-10, March
15, 2010)
RRRRReinvigorated RAeinvigorated RAeinvigorated RAeinvigorated RAeinvigorated RATE programTE programTE programTE programTE program
The following policies and guidelines have
been issued to reinvigorate the run after
tax evaders (RATE) program:
1. Development of RATE cases
This shall be the principal
responsibility of the NID and
the SIDs. The TLCS shall be
used in developing RATE cases.
BIR offices that fail to provide
the information required by the
NID or SIDs within 15 working
days from request may be
subjected to administrative
disciplinary action.
2. Issuance of Letters of
Authority (LA) for RATE
cases
The conduct of a preliminary
investigation is required to
establish prima facie evidence of
fraud or tax evasion in all RATE
cases. If prima facie evidence is
found, an LA shall be issued.
3. Reopening/reassignment of
investigations
If an LA has been issued
previously and investigation has
already commenced or been
concluded, the Deputy
Commissioner of Internal
Revenue Legal Inspection Group
(DCIR-LIG) shall include in the
request for issuance of LA to the
CIR a recommendation and
justification for the
re-assignment to, or re-opening
of, the investigation. All LAs
issued for RATE cases shall be
signed by the DCIR-LIG.
4. Conduct of investigation
Formal investigation of a RATE
case shall commence only after
prima facie evidence of fraud or
tax evasion has been established.
In case evidence is not sufficient
to prove the guilt of a taxpayer
beyond reasonable doubt, but
there exists clear and convincing
evidence that fraud has been
committed, a 50% surcharge
shall be imposed, together with
the deficiency tax assessment.
5. Evaluation of RATE cases
After conclusion of a formal
investigation, the NID or the
SIDs shall refer the RATE case
to the National Office (NO) -
RATE Team/Legal Division for
evaluation and appropriate
action.
If insufficient in form and
substance, the cases shall be
returned to the NID or the SIDs
for further investigation or
strengthening of the case.
However, in case the RATE case
is found to be sufficient, NO-
RATE Team/Legal Division
shall prepare the compliant
affidavit (CA) and referral letter
(RL), and submit it to the DCIR-
LIG for review and evaluation.
The NID must be able to report
at least two cases per month that
have been submitted by the NO-
RATE Team to the DCIR-LIG
for prosecution. On the other
hand, the SIDs must be able to
report at least three cases per
quarter that have been submitted
by Regional Legal Divisions to
the DCIR-LIG, for prosecution.
April 2010 77777
BIR Issuances
6. Prosecution of RATE cases/
civil remedies
RATE cases recommended for
criminal prosecution shall be
forwarded to the CIR for final
review and signature. The
prosecution of RATE cases that
were developed by the NID shall
be carried out by the NO-RATE
Team, while that of SIDs shall
be handled by the legal divisions.
The criminal prosecution
proceedings should be executed
in coordination with the DOJ.
To protect the interest of
government over the tax
liabilities of a taxpayer
undergoing RATE prosecution,
the CIR or any other authorized
officer shall issue the warrants
of distraint and/or levy/
warrants of garnishment.
(Revenue Memorandum Order 27-10, March
17, 2010)
Audit of conglomeratesAudit of conglomeratesAudit of conglomeratesAudit of conglomeratesAudit of conglomerates
The Order provides the guidelines for the
conduct of investigation/audit of
conglomerates, their affiliates and
subsidiaries for taxable year 2009. The
term “conglomerate” means a group of
corporations that has diversified business
activities in varied industries controlled
and managed by a parent corporate entity.
It shall be the responsibility of the Large
Taxpayer Service (LTS) and the
Enforcement Service (ES) to identify the
conglomerates that will be subject to
audit. Special audit teams headed by the
ACIR-Large Taxpayers Service (LTS)-
Regular, LT-Excise and Enforcement
Service (ES) shall conduct the audit. The
revenue officers under each team shall
undertake a simultaneous, joint, and
coordinated examination of the books of
accounts of the related companies
assigned to them.
LAs shall be signed by the CIR under the
LA Monitoring System (LAMS). In case
an LA has already been issued by the
Regional Office (RO), this shall
automatically be considered invalidated
and the entire docket of the case should
be forwarded to the LTS or the ES.
Taxpayers that are subject to the audit but
are not under the LTS jurisdiction shall be
notified by the LTS and ES of the change
of jurisdiction for audit/investigation.
The audit should follow the procedures in
the BIR’s audit manual. The use of
Computer-Assisted Audit Tools and
Techniques (CAATS) for taxpayers with
computerized accounting systems (CAS)
is enjoined although limited to data
gathering, summarizing, and obtaining
discrepancy reports. Other special
procedures peculiar to related-party audit
that are necessary to reflect the true
taxable income of controlled entities may
also be undertaken. All preliminary
findings shall be reviewed by the ACIR or
by the respective Head Revenue Executive
Assistants (HREAs) before any Confer-
ence Letter is issued. Conference for
interrelated group of taxpayers shall be
conducted simultaneously, unless there are
justifiable reasons to conduct it separately.
All assessment notices (ANs) shall be
issued by the CIR upon approval of the
final reports of investigation. All ANs
should be conducted simultaneously,
unless there are justifiable reasons to
conduct them separately. ANs that remain
unpaid after the specified due date shall
be transmitted for collection to the
respective collection units having
jurisdiction over the taxpayers within 15
days from the date of delinquency.
Payment forms may be signed by the
ACIR or the respective HREAs.
All investigations should be completed
and the reports on such investigations
should be submitted to the CIR not later
than six months from the issuance of the
LA.
(Revenue Memorandum Order 36-10, March
30, 2010)
8 8 8 8 8 April 2010
BIR Rulings
Stipends of resident physiciansStipends of resident physiciansStipends of resident physiciansStipends of resident physiciansStipends of resident physicians
The stipends received by resident
physicians during their intensive training
in the residency program of a hospital are
subject to creditable withholding tax
(CWT) imposed at the rate of 15% if the
gross income of the resident physicians
for the current year exceeds P720,000,
and 10% if otherwise pursuant to Section
2.57.2 (A)(1) of RR 2-98.
The BIR previously held (BIR Ruling No.
12-86) that stipend and allowances paid to
resident trainees are considered
compensation income subject to
withholding if these are received as a
result of an employer-employee
relationship. However, the BIR has
clarified that the taxability of stipends
received by resident physicians has
become apparent under RR 2-98.
Under Section 2.57.2 (A)(1) of RR 2-98,
income payments derived by individuals
engaged in the practice of profession or
calling like doctors of medicine are
subject to 10% or 15% CWT. The amount
subject to CWT shall include not only
fees, but also per diems, allowances, and
any other form of income payments not
subject to withholding tax on compensa-
tion.
Such stipends are considered income
subject to CWT even in the absence of an
employer-employee relationship since in
the present withholding tax regulations,
any other form of income payments not
subject to the withholding tax on
compensation are now subject to the
CWT prescribed under RR 02-98. In the
instant case, the applicable CWT rate shall
be 10% considering that the resident
physicians are receiving stipends in the
amount of P10,000 per month or a gross
annual income less than P720,000.
[BIR Ruling No. DA (C-004)024-2010,
February 4, 2010]
VVVVVAAAAAT on hotel serT on hotel serT on hotel serT on hotel serT on hotel services to internationalvices to internationalvices to internationalvices to internationalvices to international
airlinesairlinesairlinesairlinesairlines
The room accommodation and food and
beverage services rendered by a hotel for
clients engaged in international transport
operations are subject to VAT at 12%, not
at 0%. The BIR upheld its position under
BIR VAT ruling No. 02-01 that the VAT
zero-rated services contemplated in the
VAT Law refer to services rendered
directly in relation to the international
vessel itself. Since the hotel services are
rendered within the hotel’s premises and
have no direct connection with the
transport of goods or passengers, the BIR
held that the services cannot be deemed
as services directly attributable to the
transport of goods and passengers from a
Philippine port directly to a foreign port
entitled to VAT zero-rating under Section
108(B)(4) of the Tax Code.
[BIR Ruling No. DA(VAT-003)016-2010,
January 28, 2010]
CWT on manpower serCWT on manpower serCWT on manpower serCWT on manpower serCWT on manpower servicesvicesvicesvicesvices
Income payments to companies providing
personnel, manpower and general
maintenance services are subject to 2%
CWT imposed on business agencies
pursuant to Section 2.57.2(E)(4)(g) of RR
02-98 based on gross receipts, which
should include the agency commission
plus salaries and the contributions (SSS,
PhilHealth, and Pag-IBIG).
The rule under RMC 39-2007 that limits
the coverage of the 2% CWT to the
agency fee, excluding the salaries of
security guards, does not apply to
manpower service companies. Unlike in
the case of security agencies wherein the
primary obligation to pay the salaries of
the security guards rests on the clients, the
primary obligation to pay the salaries of
the workers of other service providers
rests on the service providers themselves.
The BIR explained that there is nothing in
the RMC indicating its applicability to
manpower agencies, i.e., janitorial and
clerical services, other than security
agencies. Thus, the RMC cannot apply to
agencies other than security agencies.
[BIR Ruling No. DA(C-003)020-2010,
January 29, 2010]
DST on credit facilityDST on credit facilityDST on credit facilityDST on credit facilityDST on credit facility
In order to finance its project, a coal
power plant company secured credit
facilities from various lenders. The facility
agreements are embodied in one master
agreement referred to as the omnibus
agreement, which sets forth the terms and
conditions upon which the various lenders
have agreed to provide loans to the
borrower.
The BIR held that while the omnibus
agreement, being a credit facility, is among
the agreements included in the definition
of a loan agreement under RR 09-94, a
credit facility per se is not considered a
loan agreement subject to DST under
Section 179 of the Tax Code, unless the
borrower makes actual drawings
considered as the operative act that gives
rise to DST liability.
There must be another document to
prove that such credit facility has indeed
been converted into a loan agreement,
either by the execution of a formal loan
agreement or a promissory note, or even
by a credit/debit memo, advice or
drawings. The DST shall be due on the
amount actually drawn.
[BIR Ruling No. DA(C-001)01-2010,
January 1, 2010]
April 2010 99999
Court Decisions
Incidental transaction for VIncidental transaction for VIncidental transaction for VIncidental transaction for VIncidental transaction for VAAAAATTTTT
purposespurposespurposespurposespurposes
Under Section 105 of the NIRC of 1997,
VAT is imposed on a sale or transaction
entered into by a person in the course of
any trade or business. A transaction is
characterized as having been entered into
by a person in the course of trade or
business if it is: (a) regularly conducted,
and (2) undertaken in pursuit of a
commercial or economic activity.
Transactions that are made incidental to
the pursuit of a commercial activity are
considered as entered into in the course
of trade or business, and are subject to
the 12% VAT.
In carrying out its business, a power
generating company acquired a motor
vehicle that formed part of its assets used
in its business operations. When the
motor vehicle was already fully
depreciated, the company sold the motor
vehicle, which is considered a one-time
sale transaction. The Court of Tax
Appeals (CTA) held that the sale of the
company’s fully depreciated motor vehicle
is considered an incidental transaction
since the vehicle was purchased and used
in the furtherance of the company’s
business. Hence, the sale should be
subject to the 12% VAT.
(Mindanao II Geothermal Partnership v.
Commissioner of Internal Revenue, CTA EB
No. 513 re CTA Case Nos. 7227, 7287, and
7317, March 10, 2010)
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Payment of tax under protest pursuant to
Section 252 of the Local Government
Code (LGC) before appealing an
assessment with the Local Board of
Assessment Appeals (LBAA) and Central
Board of Assessment Appeals (CBAA) is
not required when what is being
questioned is the legality and not the
reasonableness of the real property tax
(RPT) assessment. Also, while a taxpayer
may be excused from exhausting
administrative remedies of lodging an
appeal before the LBAA and CBAA in
cases involving purely legal questions, he
cannot be excused if the resolution of the
case requires the presentation and
evaluation of evidence. Otherwise, the
appeal to the court will be considered
premature and not yet ripe for judicial
determination.
The CTA en banc dismissed the petition of
a power company that claimed exemption
from real property tax imposed on its
machineries and equipment, due to its
failure to exhaust the administrative
remedy of appealing the assessment to
the LBAA and CBAA pursuant to Section
226 and 229 of the LGC. The CTA en
banc held that although cases raising
purely legal questions may be excused
from exhausting administrative remedies
before going to the courts (Ty vs. Trampe,
GR N0. 117577, December 1, 1995), the
legal questions raised by the taxpayer
require proof of facts to prove its claim
for exemption (Figuerres vs. Court of
Appeals, et. Al., GR No. 119172, March 25,
1999). According to the CTA en banc the
taxpayer raises a question on the legality
of the RPT assessment based on its claim
that its machineries and equipment are
exempted from RPT. The Court noted
that this claim must be proven by the
taxpayer with sufficient and competent
evidence.
Under Section 206 of the LGC, every
person by or for whom real property is
declared, who shall claim tax exemption
for such property, should file with the
provincial, city or municipal assessor
sufficient documentary evidence in
support of its claim of exemption within
30 days from the date of declaration of
real property. Thus, a taxpayer claiming
exemption from RPT has to file a claim
before the provincial, city or municipal
assessor, and the latter officers have the
authority to determine the validity of the
claim through pieces of evidence
submitted by the taxpayer.
According to the CTA en banc, the
decision of the provincial, city or
municipal assessor on the taxability of
property can be appealed to the LBAA
and CBAA pursuant to Section 226 and
229 of the LGC. In the instant case, the
taxpayer sought judicial relief by filing a
petition with the Regional Trial Court
(RTC) after receiving the notice of
assessment by the municipal assessor
when what it should have done was to
first appeal the assessment to the LBAA
and then elevate the case to the CBAA
before going to the court.
On the requirement under Section 252 of
LGC that the tax due must be paid first
before initiating any protest to an
assessment, the CTA en banc held that
since the legality is at issue, and not the
excessiveness or reasonableness of the
real property tax assessment, there is no
need for the taxpayer to pay first the real
property tax assessment before initiating a
protest. Hence, the taxpayer is not
required to “first pay the tax” under
protest before initiating a protest or
appeal to the LBAA.
(National Power Corporation v. Municipal
Government of Navotas, et.al., CTA EB No.
461 re CTA AC No. 37, March 10, 2010)
10 10 10 10 10 April 2010
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