Updates on Taxation

1. 2011 Updates on Taxation

2. GENERAL PRINCIPLES • EXXONMOBIL PETROLEUM AND CHEMICAL HOLDINGS, INC. – PHILIPPINE BRANCH VS. COMMISSIONER OF INTERNAL REVENUE … Exxonmobil was a US corporation engaged in selling petroleum products to domestic and international carriers. It purchased petroleum products from local suppliers (Caltex and Petron), the excise taxes on which were remitted by the said suppliers but the amount of which were, however, passed-on to Exxonmobil. It then filed a claim for refund of excise taxes paid on its purchase of petroleum products from its suppliers. ??? Is Exxonmobil entitled to file the claim for the refund of the excise taxes passed-on by Caltex and Petron?

3. GENERAL PRINCIPLES !!! NO.The proper party to seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden to another. Although the burden of an indirect tax can be shifted to the purchaser, the amount added or shifted becomes part of the price. Thus, the purchaser does not really pay the tax per se but only the price of the commodity. Indirect taxes were defined as those that are demanded, in the first instance, from, or are paid by, one person to someone else. When the seller passes on the tax to the buyer he in effect shifts only the tax burden and not the liability to pay for it.

4. GENERAL PRINCIPLES • ABAKADA GURO PARTYLIST vs. PURISIMA …Petitioners question the Attrition Act of 2005 and contend that by establishing a system of rewards and incentives when they exceed their revenue targets, the law (1) transforms the officials and employees of the BIR and BOC into mercenaries and bounty hunters; (2) violates the constitutional guarantee of equal protection as it limits the scope of the law to the BIR and BOC; (3) unduly delegates to the President the power to fix revenue targets without sufficient standards; and (4) violates the doctrine of separation of powers by creating a Congressional Oversight Committee to approve the law’s implementing rules. ???Is R.A. No. 9335 constitutional? !!!YES. R.A. No. 9335 is constitutional, except for Section 12 of the law which creates a Joint Congressional Oversight Committee to review the law’s IRR.

5. GENERAL PRINCIPLES !!! That RA No. 9335 will turn BIR and BOC employees and officials into “bounty hunters and mercenaries” is purely speculative as the law establishes safeguards by imposing liabilities on officers and employees who are guilty of negligence, abuses, malfeasance, etc. Neither is the equal protection clause violated since the law recognizes a valid classification as only the BIR and BOC have the common distinct primary function of revenue generation. There are sufficient policy and standards to guide the President in fixing revenue targets as the revenue targets are based on the original estimated revenue collection expected of the BIR and the BOC. However, the creation of a Joint Congressional Oversight Committee for the purpose of reviewing the IRR formulated by agencies of the executive branch (DOF, DBM, NEDA, etc.) is unconstitutional since it violates the doctrine of separation of powers since Congress arrogated judicial power upon itself.

6. GENERAL PRINCIPLES • REPUBLIC ACT NO. 10143 --- PHILIPPINE TAX ACADEMY !!! Serves as a learning institution for tax collectors and administrators of the government and selected applicants from the private sector. !!! It shall handle all trainings, continuing education programs and other courses for all officials and personnel of the BIR, BOC, and BLGF. All existing officials and personnel of the said agencies shall be required to undergo the re-tooling and enhancement seminars and training programs. !!! The Board of Trustees will be composed of representatives from the DOF (ex officio Chairman), BIR, BOC, BLGF, and 3 representatives from the academe with at least 5 years of teaching experience. The first 3 will be Presidential appointees.

7. INCOME TAX • PHILIPPINE AMUSEMENT AND GAMING CORPORATION VS. BUREAU OF INTERNAL REVENUE ??? Is Republic Act 9337 constitutional insofar as it excluded PAGCOR from the enumeration of GOCCs exempt from the payment of corporate income tax? !!! YES.The original exemption of PAGCOR from corporate income tax was not made pursuant to a valid classification based on substantial distinctions so that the law may operate only on some and not on all. Instead, the same was merely granted due to the acquiescence of the House Committee on Ways and Means to the request of PAGCOR. The argument that the withdrawal of the exemption also violates the non-impairment clause will not hold since any franchise is subject to amendment, alteration or repeal by Congress. However, the Court made it clear that PAGCOR remains exempt from payment of indirect taxes and as such its purchases remain not subject to VAT, reiterating the rule laid down in the Acesite case.

8. INCOME TAX • COMMISSIONER OF INTERNAL REVENUE VS. FILINVEST DEVELOPMENT CORPORATION … Filinvest Development Corporation extended advances in favor of its affiliates and supported the same with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for deficiency income tax by imputing an “arm’s length” interest rate on its advances to affiliates. Filinvest disputed this by saying that the CIR lacks the authority to impute theoretical interest and that the rule is that interests cannot be demanded in the absence of a stipulation to the effect. ???Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

9. INCOME TAX !!! NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross income under (now) Section 50 of the Tax Code, the same does not include the power to impute theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the CIR is able to prove that interest expense (on its own loans) was in fact claimed by the lending entity. The term in the definition of gross income that even those income “from whatever source derived” is covered still requires that there must be actual or at least probable receipt or realization of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also applied in this case. The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan agreements that are subject to DST.

10. INCOME TAX • MERCURY DRUG CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE … Mercury Drug granted 20% sales discount to qualified senior citizens on their purchases of medicines. They subsequently filed a refund for taxable years 1993 and 1994 given that the then prevailing rule allowed that the sales discounts be claimed as tax credits. ???Is the claim for tax credit to be based on the full amount of the 20% senior citizen discount or the acquisition cost of the item sold?

11. INCOME TAX !!! The tax credit should be equivalent to the actual 20% sales discount granted to the senior citizens. The previous ruling of the CTA that the tax credit is based only on the “cost of the discount” which was interpreted to cover only direct acquisition cost, excluding administrative and other incremental costs, was struck down by the Court. N.B. The March 3, 2008 case of M.E. Holdings Corporation vs. CIR & CTA clarified that the rule will be -- (i) prior to March 21, 2004 (effectivity of Expanded Senior Citizens Act) the discounts are treated as tax credit; (ii) after March 21, 2004 the same are treated as deductions.

12. INCOME TAX • CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION, INC. vs. EXECUTIVE SECRETARY … CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of the due process clause as it levies income tax even if there is no realized gain. They also question the creditable withholding tax (CWT) on sales of real properties classified as ordinary assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2) the use of gross selling price or fair market value as basis for the CWT and the collection of tax on a per transaction basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real properties; (3) the government collects income tax even when the net income has not yet been determined; and (4) the CWT is being levied upon real estate enterprises but not on other enterprises, more particularly those in the manufacturing sector. ???Are the impositions of the MCIT on domestic corporations and CWT on income from sales of real properties classified as ordinary assets unconstitutional?

13. INCOME TAX !!! NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Besides, there are sufficient safeguards that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can suspend the imposition of MCIT in justifiable instances. The regulations on CWT did not shift the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance tax payments and they are thus just installments on the annual tax which may be due at the end of the taxable year. As such the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because these are the only factors reasonably known to the buyer in connection with the performance of the duties as a withholding agent. Neither is there violation of equal protection even if the CWT is levied only on the real industry as the real estate industry is, by itself, a class on its own and can be validly treated different from other businesses.

14. INCOME TAX • COMMISSIONER OF INTERNAL REVENUE VS.SMART COMMUNICATION, INC. … Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism will provide programming and consultancy services to Smart. Thinking that the payments to Prism were royalties, Smart withheld 25% under the RP-Malaysia Tax Treaty. Smart then filed a refund with the BIR alleging that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid to an entity without a permanent establishment in the Philippines. ???Does Smart have the right to file the claim for refund?

15. INCOME TAX !!! YES. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes he believes were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., nonresident), the authority as agent is held to include the filing of a claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes. Smart was granted a refund given that only a portion of its payments represented royalties since it is only that portion over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to Smart and were thus treated as business profits of Prism.

16. INCOME TAX • UNITED AIRLINES, INC. vs. COMMISSIONER OF INTERNAL REVENUE …Petitioner used to be an online carrier but ceased operating cargo flights from the Philippines starting 2001. It is now an offline international air carrier but has a general sales agent in the Philippines which sells passage documents for its off-line flights for carriage of passengers and cargo. It filed a claim for refund on the Gross Philippine Billings (GPB) tax it paid. The CTA ruled that Petitioner was not liable for the GBP but was liable to pay 32% tax on its net income derived from the sales of passage documents in the Philippines. ???Is Petitioner liable for either the GPB or the 32% tax?

17. INCOME TAX !!! 32% tax.The Court reiterated the ruling in South African Airways and BOAC stating that it is the sale of tickets which is the revenue-generating activity subject to Philippine tax. The correct interpretation of the applicable rules is that, if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% of such income. The Court also ruled that “to avoid multiplicity of suits and unnecessary difficulties and expenses” the issue of deficiency tax assessment be resolved jointly with the its claim for refund – and doing so does not violate the rule against offsetting of taxes.

18. INCOME TAX • DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs. COMMISSIONER OF INTERNAL REVENUE … Petitioner was assessed for deficiency withholding taxes on interest from savings and time deposits of its members. The CTA ruled against the Petitioner and claimed that the withholding of tax on income payments subject to final withholding tax includes the said interest as "interest from x x x similar arrangements . . ." ??? Is Petitioner liable for the deficiency WT? !!!NO.The BIR had earlier ruled without any qualification that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. The fact that “similar arrangements” is preceded by banking terms means that that those subject to withholding must have deposit peculiarities. This is consistent with the preferential treatment accorded to members of cooperatives who are exempt in the same way as the cooperatives themselves.

19. INCOME TAX • COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES, INC. … PAL paid the 10% Overseas Communications Tax (OCT) for overseas telephone calls made through PLDT. It then later filed with the BIR a claim for refund of the amount paid as OCT, claiming that other than being liable for basic corporate income tax or the franchise tax, whichever was lower, it was exempted from all other taxes by virtue of the "in lieu of all taxes" clause in its charter. ???Is PAL liable for the OCT? !!!NO.The language of PAL’s franchise is clearly all-inclusive --- the basic corporate income tax or franchise tax paid by respondent shall be "in lieu of all other taxes” except only real property tax. It is not the fact of tax payment that exempts it, but the exercise of its option. In the event that respondent incurs a net loss, it shall have zero liability for basic corporate income tax, the lowest possible tax liability. There being no qualification to the exercise of its options, then Respondent is free to choose basic corporate income tax, even if it would have zero liability.

20. INCOME TAX • COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE AIRLINES, INC. … PAL had zero taxable income for 2000 but would have been liable for MCIT based on its gross income. However, PAL did not pay the MCIT using as basis its franchise which exempts it from “all other taxes” upon payment of whichever is lower of either (a) the basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%. ???Is PAL liable for MCIT? !!!NO.PAL’s franchise clearly refers to "basic corporate income tax" which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for the MCIT under Section 27 (E). The two terms have their respective technical meanings and cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted.

21. INCOME TAX !!! The CIR also can not point to the “Substitution Theory” which states that Respondent may not invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero liability would not and said that there is really no substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a previous regulation and goes beyond mere internal administration and thus cannot be given effect without previous notice or publication to those who will be affected thereby.

22. INCOME TAX • SUPREME TRANSLINER, INC. VS. BPI FAMILY SAVINGS BANK, INC. … Supreme Transliner took out a loan from respondent and was unable to pay. The respondent bank extrajudicially foreclosed the collateral and, before the expiration of the one-year redemption period, the mortgagors notified the bank of its intention to redeem the property. ??? Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the certificate of sale and before the expiry of the redemption period? !!!NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and title is consolidated in the name of the mortgagee in case of non-redemption. This is because before the period expires there is yet no transfer of title and no profit or gain is realized by the mortgagor.

23. INCOME TAX • COMMISSIONER OF INTERNAL REVENUE vs. MIRANT (PHILIPPINES) OPERATIONS, CORPORATION …Mirant filed its final adjusted Annual Income Tax Return for fiscal year ending 1999 declaring a net loss. It then amended the said return this time reflecting an increased net loss and showing that it opted to carry over as tax credit its overpayment to the succeeding taxable year. This excess tax credit was unutilized in 2000 as Mirant still reported a net loss. Mirant then filed a claim for refund of its excess creditable income tax for 1999. ??? Can Mirant claim for refund its excess credits from 1999?

24. INCOME TAX !!! NO.Mirant’s choice to carry over its 1999 excess income tax credit to succeeding taxable years is irrevocable, regardless of whether it was able to actually apply the said amount to a tax liability. It is a mistake to understand the phrase "for that taxable period" as a prescriptive period for the irrevocability rule – i.e., that since the tax credit in this case was acquired in 1999, and Respondent opted to carry it over to 2000, then the irrevocability of the option to carry over expired by the end of 2000, leaving Respondent free to again take another option as regards its 1999 excess income tax credit. The Court ruled that this interpretation effectively renders nugatory the irrevocability rule.

25. INCOME TAX • REPUBLIC ACT 9856 --- REAL ESTATE INVESTMENT TRUST (TAX INCENTIVES) !!! The taxable net income of REITs is the gross income under Section 32 less (a) the deductions under Section 34 AND (b) dividends distributed by the REIT out of its distributable income provided it (a) maintains its status as a public company; (b) maintains the listed status of the investor securities (shares issued by the REIT); and (c) distributes at least 90% of its distributable income. !!! Other tax rules: • Not subject to the MCIT • Income payments to REIT are subject to a lower CWT of 1% • Sale of real property to REITs subject to DST reduction of 50% • Dividends received by an OFW from the REIT is exempt from the 10% WT for the first 7 years of the law. • VAT is imposed on sale of real property by the REIT but not of its securities as it is not considered a dealer in securities

26. INCOME TAX • REPUBLIC ACT NO. 9994 --- ADDITIONAL BENEFITS TO SENIOR CITIZENS (TAX BENEFITS) !!!The following transactions with senior citizens are exempt from VAT (aside from the 20% discount): • Professional fees of physicians, licensed health workers • Purchase of medicines • Medical and dental services and laboratory fees • Fare for any land transportation • Fare for domestic air and sea services • Utilization of hotels and similar lodging establishments • Admission fees on theaters, concert halls, circuses, etc. • Funeral and burial services

27. INCOME TAX !!! Discounts given are still considered as tax deductions and NOT tax credits !!! Employment of senior citizens will entitle employer to additional tax deduction of 15% of total amount paid as salaries and wages to senior citizens provided that the employment lasts for at least 6 months !!! Realty tax holiday for the first 5 years is granted to those establishing foster care facilities

28. INCOME TAX • REPUBLIC ACT NO. 10026 --- TAX EXEMPTION TO LOCAL WATER DISTRICTS !!!Local water districts are now exempt from income taxes under Section 27 provided that the amount saved by virtue of the exemption is to be used for capital equipment expenditure to expand water services coverage !!! All unpaid taxes starting August 13, 1996 are condoned provided (1) the BIR establishes financial incapacity of the LWD and (2) the LWD submits to Congress a program of internal reforms.

29. INCOME TAX • REPUBLIC ACT NO. 9504 --- TAX EXEMPTION OF MINIMUM WAGE EARNES AND INCREASING PERSONAL/ADDITIONAL EXEMPTIONS / CHANGE IN OSD !!! “Minimum wage earners” shall be exempt from income tax on their taxable income including holiday pay, overtime, night shift differential pay, and hazard pay !!! Increases the amount of personal exemption for all individuals to a fixed amount of P50,000.00 and the additional exemption toP25,000.00 for each dependent, not exceeding four (4) !!! Amends Section 34(L) to increase to 40% of gross sales or receipts the Operational Standard Deduction (OSD) allowed to individuals (except nonresident aliens) engaged in business or earning income in the exercise of their profession !!! Now allow corporations (except nonresident foreign corporations) to claim OSD, instead of itemized deductions, in an amount not exceeding 40% of their gross income.

30. ESTATE TAX • DIZON in his capacity as Administrator of deceased Fernandez vs. COMMISSIONER OF INTERNAL REVENUE …There were claims against the estate which the BIR contested stating that lower amounts were paid as compromise payments during the settlement of the estate and these amounts should be what will be considered as deductions in arriving at the net estate. ???Will the compromise amounts be the amounts considered as deductions to the gross estate? !!! NO. The deductions allowable are the amounts determined at the time of death. Post-death developments are not material in determining the amount of deduction. Thus, the Court applied the “date-of-death valuation rule” which is the US rule on deductions and which is applicable also in the Philippines. The amount deductible is the debt which could have been enforced against the deceased in his lifetime.

31. VALUE ADDED TAX • DIAZ VS. SECRETARY OF FINANCE ??? May toll fees collected by tollway operators be subject to VAT? !!! YES. (1) VAT is imposed on “all kinds of services” and tollway operators who are engaged in constructing, maintaining, and operating expressways are no different from lessors of property, transportation contractors, etc. (2) Not only do they fall under the broad term under (1) but also come under those described as “all other franchise grantees” which is not confined only to legislative franchise grantees since the law does not distinguish. They are also not a franchise grantee under Section 119 which would have made them subject to percentage tax and not VAT. (3) Neither are the services part of the enumeration under Section 109 on VAT-exempt transactions.

32. VALUE ADDED TAX (4) The toll fee is not a user’s tax and thus it is permissible to impose a VAT on the said fee. The MIAA case does not apply and the Court emphasized that toll fees are not taxes since they are not assessed by the BIR and do not go the general coffers of the government. Toll fees are collected by private operators as reimbursement for their costs and expenses with a view to a profit while taxes are imposed by the government as an attribute of its sovereignty. Even if the toll fees were treated as user’s tax, the VAT can not be deemed as a ‘tax on tax’ since the VAT is imposed on the tollway operator and the fact that it might pass-on the same to the tollway user, it will not make the latter directly liable for VAT since the shifted VAT simply becomes part of the cost to use the tollways. (5) The assertion that the VAT imposed is not administratively feasible given the manner by which the BIR intends to implement the VAT (i.e., rounding off the toll rates and putting any excess collection in an escrow account) is not enough to invalidate the law. Non-observance of the canon of administrative feasibility will not render a tax imposition invalid “except to the extent that specific constitutional or statutory limitations are impaired”.

33. VALUE ADDED TAX • COMMISSIONER OF INTERNAL REVENUE VS. SONY PHILIPPINES, INC. …Sony Philippines was ordered examined for “the period 1997 and unverified prior years” as indicated in the Letter of Authority . The audit yielded assessments against Sony Philippines for deficiency VAT and FWT, viz: (1) late remittance of FWT on royalties for the period January to March 1998 and (2) deficiency VAT on reimbursable received by Sony Philippines from its offshore affiliate, Sony International Singapore (SIS). ??? (1) Is Petitioner liable for deficiency VAT? (2) Was the investigation of its 1998 FWT return valid?

34. VALUE ADDED TAX !!!(1) NO.Sony Philippines did in fact incur expenses supported by valid VAT invoices when it paid for certain advertising costs. This is sufficient to accord it the benefit of input VAT credits and where the money came from to satisfy said advertising billings is another matter but does not alter the VAT effect. In the same way, Sony Philippines can not be deemed to have received the reimbursable as a fee for a VAT-taxable activity. The reimbursable was couched as an aid for Sony Philippines by SIS in view of the company’s “dire or adverse economic conditions”. More importantly, the absence of a sale, barter or exchange of goods or properties supports the non-VAT nature of the reimbursement. This was distinguished from the COMASERCO case where even if there was similarly a reimbursement-on-cost arrangement between affiliates, there was in fact an underlying service. Here, the advertising services were rendered in favor of Sony Philippines not SIS.

35. VALUE ADDED TAX !!!(2) NO.A Letter of Authority should cover a taxable period not exceeding one year and to indicate that it covers ‘unverified prior years’ should be enough to invalidate it. In addition, even if the FWT was covered by Sony Philippines’ fiscal year ending March 1998, the same fell outside of ‘the period 1997’ and was thus not validly covered by the LOA.

36. VALUE ADDED TAX • COMMISSIONER OF INTERNAL REVENUE vs. SM PRIME HOLDINGS, INC. ??? Are the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets subject to VAT? !!!NO.While (1) the enumeration under Section 108 on the VAT-taxable services is not exhaustive and (2) the said list includes “the lease of motion picture films, films, tapes and discs”, the said activity however is not the same as showing or exhibition of motion pictures or films. Thus, since the showing or exhibition of motion pictures or films is not in the enumeration, the CIR must show that it falls under the phrase “similar services”. The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition of VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets. The removal of the prohibition (on the national government to tax certain activities) under the Local Tax Code did not grant nor restore to the national government the power to impose amusement tax on cinema/theater operators or proprietors. Neither did it expand the coverage of VAT.

37. VALUE ADDED TAX • TAMBUNTING PAWNSHOP, INC. vs. COMMISSIONER OF INTERNAL REVENUE …Petitioner was assessed for deficiency VAT and DST on the premise that, for the VAT, it was engaged in the sale of services. ???(1) Is Petitioner liable for the VAT? (2) Can the imposition of surcharge and interest be waived on the imposition of deficiency DST? !!!(1) NO.Since Petitioner is considered a non-bank financial intermediary, it is subject to 10% VAT for the tax years 1996 to 2002 but since the collection of VAT from non-bank financial intermediaries was specifically deferred by law, Petitioner is not liable for VAT during these tax years. With the full implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, Petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5%, as the case may be.

38. VALUE ADDED TAX !!! (2) YES.Petitioner's argument against liability for surcharges and interest — that it was in good faith in not paying documentary stamp taxes, it having relied on the rulings of respondent CIR and the CTA that pawn tickets are not subject to documentary stamp taxes — was found to be meritorious. Good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the imposition of surcharges and interest.

39. VALUE ADDED TAX • FORT BONIFACIO DEVELOPMENT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE …Petitioner was a real estate developer that bought from the national government a parcel of land that used to be the Fort Bonifacio military reservation. At the time of the said sale there was as yet no VAT imposed so Petitioner did not pay any VAT on its purchase. Subsequently, Petitioner sold two parcels of land to Metro Pacific Corp. In reporting the said sale for VAT purposes (because the VAT had already been imposed in the interim), Petitioner claimed transitional input VAT corresponding to its inventory of land. The BIR disallowed the claim of presumptive input VAT and thereby assessed Petitioner for deficiency VAT. ??? Is Petitioner entitled to claim the transitional input VAT on its sale of real properties given its nature as a real estate dealer and if so (i) is the transitional input VAT applied only to the improvements on the real property or is it applied on the value of the entire real property and (ii) should there have been a previous tax payment for the transitional input VAT to be creditable?

40. VALUE ADDED TAX !!!YES. Petitioner is entitled to claim transitional input VAT based on the value of not only the improvements but on the value of the entire real property and regardless of whether there was in fact actual payment on the purchase of the real property or not. The amendments to the VAT law do not show any intention to make those in the real estate business subject to a different treatment from those engaged in the sale of other goods or properties or in any other commercial trade or business. On the scope of the basis for determining the available transitional input VAT, the CIR has no power to limit the meaning and coverage of the term "goods" in Section 105 of the Tax Code without statutory authority or basis. The transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies.

41. VALUE ADDED TAX • COMMISSIONER OF INTERNAL REVENUE vs. SEKISUI JUSHI PHILIPPINES, INC. … Sekisui Jushi is a PEZA entity engaged in manufacture and export of strapping bands and other packaging materials seeking for refund of unutilized input taxes. ??? Being a PEZA exporter, can Petitioner claim its unutilized input VAT? !!! YES. PEZA entities can avail of two alternative or subsequent incentives of ITH and 5% GIE. It is only in the latter where the VAT is not imposed on the PEZA entity on its sales. Being under ITH, it will be subject to VAT on sales and should VAT-register. However, (1) sales to the PEZA entity, regardless of incentive availed, is zero-rated on the part of the seller since PEZA is considered “foreign soil” and thus sales to them are considered as “export sales” and (2) if the PEZA entity is an exporter, its input VAT are subject to refund not by virtue of its PEZA status (and thus regardless of whether it’s at 5% GIE or ITH) but due to the nature of its transactions (i.e., export sales).

42. VALUE ADDED TAX • MICROSOFT PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE … Microsoft renders marketing services to two affiliated nonresident foreign corporations with their services being paid for in foreign currency. Microsoft filed a claim for refund for unutilized input VAT but the CTA denied the same on the basis that the official receipts issued did not bear the imprinted word “zero-rated” on its face and are thus not valid evidence of Microsoft’s sales. ??? Is Microsoft entitled to a refund? !!! NO. The regulations in effect when the sales were made by Microsoft clearly indicate in the portion outlining the “Invoicing Requirements” that the word “zero-rated” must be imprinted in the invoice. Without such, the invoice are not considered as VAT invoices and thus could not give rise to any input tax. The Court added that the reason for enforcing this rule even if only based on regulation is that it prevents buyers from falsely claiming input VAT from their purchases when no VAT is actually paid.

43. VALUE ADDED TAX • COMMISSIONER OF INTERNAL REVENUE vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. …A foreign consortium, parent company of Burmeister, entered into an O&M contract with NPC. The foreign entity then subcontracted the actual O&M to Burmeister. NPC paid the foreign consortium a mixture of currencies while the consortium, in turn, paid Burmeister foreign currency inwardly remitted into the Philippines. BIR did not want to grant refund since the services are “not destined for consumption abroad” (or the destination principle). ???Are the receipts of Burmeister entitled to VAT zero-rated status? !!!PARTIALLY.Respondent is entitled to the refund prayed for BUT ONLY for the period covered prior to the filing of CIR’s Answer in the CTA. The claim has no merit since the consortium, which was the recipient of services rendered by Burmeister, was deemed doing business within the Philippines since its 15-year O&M with NPC can not be interpreted as an isolated transaction.

44. VALUE ADDED TAX !!! In addition, the services referring to ‘processing, manufacturing, repacking’ and ‘services other than those in (1)’ of Sec. 102 both require (i) payment in foreign currency; (ii) inward remittance; (iii) accounted for by the BSP; AND (iv) that the service recipient is doing business outside the Philippines. The Court ruled that if this is not the case, taxpayers can circumvent just by stipulating payment in foreign currency. The refund was partially allowed since Burmeister secured a ruling from the BIR allowing zero-rating of its sales to foreign consortium. However, the ruling is only valid until the time that CIR filed its Answer in the CTA which is deemed revocation of the previously-issued ruling. The Court said the revocation can not retroact since none of the instances in Section 246 (bad faith, omission of facts, etc.) are present.

45. REMEDIES • RIZAL COMMERCIAL BANKING CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE ??? Whether a taxpayer, by paying the other tax assessments covered by a Waiver of the Statute of Limitations, is consider estopped from questioning the validity of the said waiver (on the basis that the CIR did not sign it) with respect to the other covered but unsettled assessments? !!!YES.RCBC is considered estopped through its partial payment of the revised assessments within the extended period provided in the said waivers. Thus, it had impliedly admitted the validity of the said waivers. Had it believed that the waiver was invalid and that the period to assess had effectively prescribed, RCBC could have refused to make any payment based on any assessment against it.

46. REMEDIES • ALLIED BANKING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE …Allied Banking Corporation received a PAN from the BIR which it timely disputed. In response, the BIR issued a Formal Letter of Demand with Assessment Notices. Instead of protesting the FAN, the petitioner filed a Petition for Review with the CTA. The CTA dismissed the Petition stating that it is neither the assessment nor the formal demand letter itself that is appealable before it but instead it should be the decision of the CIR on the disputed assessment ???Can the Formal Letter of Demand be construed as the final decision of the CIR appealable to the CTA under Republic Act 9282?

47. REMEDIES !!! YES. This is considered an exception to the general rule on exhaustion of administrative remedies since the CIR is considered estopped from claiming the same principle applies in its case. The tenor of the demand letter is clear that the CIR had already made a final decision and that the remedy of the Petitioner was to appeal the same within 30 days of receipt. This can be gleaned from the use of the terms “final decision” and “appeal” which were deemed unequivocal language pointing to the finality of the decision. While the Court cited the rules relative to (a) protesting the FAN and not the PAN and (b) counting the 30 day period to appeal to the CTA from receipt of the decision of the CIR and not issuance of the assessment, this particular case was deemed a clear exception in view of the CIR’s own actions.

48. REMEDIES • COMMISSIONER OF INTERNAL REVENUE vs. HAMBRECHT & QUIST PHILIPPINES, INC. …The assessment against Hambrecht & Quist had become final and unappelable since there was a failure to protest the same within the 30-day period provided by law. However, the CTA held that the BIR failed to collect within the prescribed time and thus ordered the cancellation of the assessment notice. The CIR disputed the jurisdiction of the CTA arguing that since the assessment had become final and unappealable, the taxpayer can no longer dispute the correctness of the assessment even before the CTA. ???Can the CTA still take cognizance of an assessment case which has become ‘final and unappealable’ for failure of the taxpayer to protest within the 30-day protest period?

49. REMEDIES !!! YES. The appellate jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. The CTA law clearly bestows jurisdiction to the CTA even on “other matters arising under the National Internal Revenue Code”. Thus, the issue of whether the right of the CIR to collect has prescribed, collection being one of the duties of the BIR, is considered covered by the term “other matters”. The fact that assessment has become final for failure to protest only means that the validity or correctness of the assessment may no longer be questioned on appeal. However, this issue is entirely distinct from the issue of whether the right to collect has in fact prescribed. The Court ruled that the right to collect has indeed prescribed since there was no proof that the request for reinvestigation was in fact granted/acted upon by the CIR. Thus, the period to collect was never suspended.

50. REMEDIES • COMMISSIONER OF INTERNAL REVENUE vs. FIRST EXPRESS PAWNSHOP COMPANY, INC. … CIR issued assessment notices against Respondent for deficiency income tax, VAT and documentary stamp tax on deposit on subscription and on pawn tickets. Respondent filed its written protest on the assessments. When CIR did not act on the protest during the 180-day period, respondent filed a petition before the CTA. ???Has Respondent’s right to dispute the assessment in the CTA prescribed? !!!NO.The assessment against Respondent has not become final and unappealable. It cannot be said that respondent failed to submit relevant supporting documents that would render the assessment final because when respondent submitted its protest, respondent attached all the documents it felt were necessary to support its claim. Further, CIR cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription.