Updates on Taxation2010

GENERAL PRINCIPLES

• SILKAIR (SINGAPORE) PTE. LTD. VS. COMMISSIONER OF INTERNAL REVENUE

… Silkair was a Singapore corporation treated as an online international carrier in the Philippines. It filed a claim for refund of excise taxes paid on its purchase of aviation jet fuel from Petron.

??? Is Silkair entitled to file the claim for the refund of the excise taxes passed-on by Petron?

!!! 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. Thus, Petron Corporation, not Silkair, being the statutory taxpayer, is entitled to claim a refund. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. Even if the consumers or purchasers ultimately pay for the tax, they are not considered the taxpayers.

GENERAL PRINCIPLES

• BRITISH AMERICAN TOBACCO vs. CAMACHO

… British American Tobacco (BAT) introduced in June 2001 its Lucky Strike cigarettes at which point “new” brands (introduced after October 1, 1996) were being taxed based on their current net retail price while old brands (sold before October 1, 1996 or the Annex “D” brands) were taxed based on their net retail price as of October 1, 1996. BAT questioned the implementation of Section 145 and the regulations on the ground that they discriminate against new brands of cigarettes in violation of the equal protection and uniformity provisions of the Constitution. BAT contended that the continued use of Annex “D” which include brands such as Marlboro and Philip Morris gives undue protection to said brands which are still taxed based on their price as of October 1996 even if they are now sold at the same or even at a higher price than new brands like Lucky Strike.

??? Does the classification freeze provision violate the equal protection and uniformity of taxation clauses of the

Constitution and the General Agreement on Tariffs and Trade (GATT) prohibiting discrimination of imported brands against local ones?

GENERAL PRINCIPLES

!!! NO. The guaranty of equal protection of the laws is not violated by a legislation which is based on reasonable classification. Following the ‘rational basis’ test, the classification freeze provision addresses (i) Congress’ administrative concerns on the delegation of too much power to the DOF and BIR; (ii) simplification of tax administration of sin products; (iii) elimination of potential areas for abuse and corruption in tax collection; (iv) buoyant and stable revenue generation; and (v) ease of projection of revenues. The Court also said that price is not the only factor in the market for them to compete but other factors such as consumer preference, brand loyalty, etc. are also considered and consumers are willing to pay higher prices/taxes on these bases. Even if the Court acknowledged that BAT products are being taxed higher even if other brands are selling at a higher price, it said that is not enough to declare a law unconstitutional as it has not been shown that the classification freeze provision was precipitated by an attitude on the part of Congress to unduly favor older brands over newer brands and instead it was impelled by an earnest desire to improve efficiency of tax administration.

GENERAL PRINCIPLES

!!! The law does not violate the GATT since it uniformly applies to all newly

introduced brands and does not purport to single out imported cigarettes in order to unduly favor locally produced ones. Even assuming there was such discrimination, the GATT being merely ratified by the Senate is just another statute and RA 9334, being a later and special law dealing with excise taxes, must govern.

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.

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.

GENERAL PRINCIPLES

• PLANTERS PRODUCTS, INC. vs. FERTIPHIL CORPORATION

… President Marcos issued an LOI which provided the imposition of a capital recovery component (CRC) on the domestic sales of all fertilizer grades and which provided that the CRC “shall be collected until adequate capital is raised to make Petitioner PPI (a private company) viable”.

??? Is the LOI a valid exercise of the power of taxation?

!!! NO. The CRC imposition is invalid. The LOI is an exercise of the power of taxation. The primary purpose of the CRC is revenue generation given that the amounts collected were too excessive to serve a mere regulatory purpose given that it was collectible “until adequate capital is raised to make PPI viable”. Given its nature as a tax imposition, the fact that the ultimate beneficiary is PPI, a private company, makes the levy invalid for not serving a public purpose.

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?

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.

INCOME TAX

• SOUTH AFRICAN AIRWAYS vs. COMMISSIONER OF INTERNAL REVENUE

… Petitioner is 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?

!!! 32% tax. The Court reiterated the ruling in CIR vs. 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.

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. This is consistent with the preferential treatment accorded to members of cooperatives who are exempt in the same way as the cooperatives themselves.

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.

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.

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.

INCOME TAX

• COMMISSIONER OF INTERNAL REVENUE vs. BANK OF THE PHILIPPINES ISLANDS

… BPI filed its final adjusted Annual Income Tax Return for 1998 and showed an overpayment. This excess tax credit was then carried over to 1999, where it however ended up with a net loss and thus still had unapplied excess tax credit. For 2000, Respondent had zero taxable income and thus only carried over the excess tax credit carried over from 1998, 1999, and 2000 but, however, failed to indicate in its ITR its choice of whether to carry over its excess tax credits or to claim the refund of or issuance of a tax credit certificate for the said amounts. BPI then filed a claim for refund of its excess creditable income tax for 1998.

??? Can BPI claim for refund its excess credits from 1998?

INCOME TAX

!!! NO. BPI’s choice to carry over its 1998 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. The Court of Appeals mistakenly understood 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 1998, and Respondent opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving Respondent free to again take another option as regards its 1998 excess income tax credit. The Court ruled that this interpretation effectively renders nugatory the irrevocability rule.

INCOME TAX

• PANSACOLA vs. COMMISSIONER OF INTERNAL REVENUE

??? Can the personal and additional exemptions that took effect in January 1, 1998 be availed of for taxable year 1997 since the return for 1997 was filed in 1998 anyway?

!!! NO. The exemptions can only be claimed starting taxable year 1998 and for returns filed in 1999. The income tax provisions clearly defines “taxable year” as calendar year – considering that they refer to individuals and not juridical entities. Likewise, the deductions are taken out in the taxable year in which they are “paid or incurred”. Thus, what the law considers is the personal status of the taxpayer (i.e., single, married, with dependent, etc.) at the “close of the taxable year”.

INCOME TAX

• CARLOS SUPERDRUG CORP. vs. DEPARTMENT OF SOCIAL WELFARE & DEVELOPMENT

… The Expanded Senior Citizens Act of 2003 which became effective on March 21, 2004 provided that the discounts granted to senior citizens may be claimed as tax deductions, revising the previous treatment which was as tax credits.

??? Are the discounts extended to senior citizens claimable as tax credits?

!!! NO. The entitlement is only for tax deduction and not tax credit. The Court distinguished tax credit vs. tax deduction by stating that a credit is a “peso-for-peso deduction from the taxpayer’s tax liability” or a “full recovery” while a tax deduction only benefits the taxpayer to the extent of 35% (now 30%) of the amount granted as discount. The Court recognized that the law is a legitimate exercise of police power. (Note: 20% discount also applies to movie admission fees, transport fares, hotel services, restaurant bills, etc.)

INCOME TAX

!!! The March 3, 2008 case of M.E. Holdings Corporation vs. CIR & CTA again 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 is treated as deductions.

INCOME TAX

• PHILEX MINING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE

… Philex entered into an agreement with Baguio Gold entitled “Power of Attorney” whereby Philex was made to manage and operate Baguio Gold’s mining claim in Benguet province. In return, Philex was to receive as compensation 50% of the net profit. In the course of the project, Philex made advances of cash and property until the mine stopped operating due to losses. Philex wrote off the indebtedness to Baguio Gold. The BIR disallowed the write-off as the same was considered as investment in a partnership rather than as a loan.

??? Is Philex entitled to the write-off of bad debts?

INCOME TAX

!!! NO. The uncollected amounts are investments, not debts. The Power of Attorney shows that the intention was to enter into a partnership or joint venture by creating a common fund and having a joint interest in the profits by dividing it 50-50. There was nothing which would require that Baguio Gold repay the advances made by Philex and the fact that the assets of the Sto. Nino project was to be distributed upon dissolution evidences that it was not a loan but an investment. There was also the absence of a collateral which negated a loan agreement.

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

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

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

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.

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.

INCOME TAX

• REPUBLIC ACT NO. 9505 --- PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)

!!! Contributor is given an income tax credit of 5% of the total PERA contribution. There can be no refund of the said tax credit arising from the PERA contributions. The employer may contribute an amount allowed as maximum which shall be allowed as a deduction to the employer’s gross income.

!!! All income earned from the investments and reinvestments of the maximum amount (P100,000 per year; if married, each spouse allowed P100,000 maximum; if overseas Filipino, maximum contribution is double the allowable maximum amount) is tax exempt. A Contributor has the option to contribute more than the maximum amount but the excess shall no longer be entitled to the 5% tax credit.

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.

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.

VALUE ADDED TAX

!!! Since the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be extended by implication. A law will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax on cinema/theater operators or proprietors remains with the local government.

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.

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.

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 presumptive 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?

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.

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).

VALUE ADDED TAX

• COMMISSIONER OF INTERNAL REVENUE vs. MAGSAYSAY LINES, INC.

… National Development Corporation (NDC), in pursuance of the government-mandated plan of privatization, sold to Respondent 5 of its ships.

??? Is the sale of the ships by NDC subject to VAT?

!!! NO. The sale is exempt for being an isolated transaction. The requirement of the sale being “in the course of trade or business” of the seller is indispensable and the seller must be treated as having done so “not just from time to time but all the time”. If the VAT is imposed on isolated transactions, there would be less chance of being able to recover the VAT on its sale since no input VAT may have been passed-on to the seller given the nature of the transaction as not “doing business”. Likewise, the enumeration of what are “deemed sale” does not modify the requirement of the sale being in the “ordinary course of trade or business” and is thus irrelevant.

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.

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.

VALUE ADDED TAX

• COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE HEALTH CARE PROVIDERS, INC.

… PhilHealth is a health maintenance organization (HMO). On June 1988, the BIR issued a VAT ruling stating that PhilHealth, as a provider of medical services, is exempt from VAT. The CTA however ruled that PhilHealth is a service contractor subject to VAT since it “does not actually render medical services but merely acts as a conduit between members and accredited hospitals”.

??? Are PhilHealth’s services considered “medical services” to entitle it to VAT exemption?

!!! NO. But PhilHealth may exempt from VAT due only to a previously issued ruling. The VAT-exempt transaction involved is “medical, dental, hospital and veterinary services except those rendered by professionals”. Given that Petitioner is not the entity providing medical services and only (i) acts as a conduit; (ii) arranges for the provision of health care; (iii) contracts services of doctors, etc.; and (iv) contracts and negotiates with hospitals, its services are not VAT-exempt.

VALUE ADDED TAX

!!! However, the Court ruled that the revocation of the 1988 ruling can not be applied retroactively since it will prejudice the taxpayer who has not committed any of the acts (i.e., bad faith, omission of facts, etc.) to merit retroactivity of rulings. The fact that the term “health maintenance organization” only took on a technical definition in 1995 upon the passage of the National Health Insurance Act supports PhilHealth’s good faith contention.

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.

REMEDIES

!!! The term "relevant supporting documents" are those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents and cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. Since the taxpayer is deemed to have submitted all supporting documents at the time of filing of its protest, the 180-day period likewise started to run on that same date.

REMEDIES

• LUCAS ADAMSON vs. COURT OF APPEALS

… A deficiency tax assessment was issued against Petitioners relating to their payment of capital gains tax and VAT on their sale of shares of stock and parcels of land. Subsequent to the preliminary conference, the CIR filed with the Department of Justice her Affidavit of Complaint against Petitioners. The Court of Appeals ultimately ruled that, in a criminal prosecution for tax evasion, assessment of tax deficiency is not required because the offense of tax evasion is complete or consummated when the offender has knowingly and wilfully filed a fraudulent return with intent to evade the tax.

??? (1) Has the CIR issued an assessment?(2) Must a criminal prosecution for tax evasion be

preceded by a deficiency tax assessment?(3) Does the CTA have jurisdiction on the case?

REMEDIES

!!! (1) NO. The recommendation letter of the Commissioner cannot be considered a formal assessment as (a) it was not addressed to the taxpayers; (b) there was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein; (c) the letter was never mailed or sent to the taxpayers by the Commissioner. It was only an affidavit of the computation of the alleged liabilities and thus merely served as prima facie basis for filing criminal informations. (2) YES. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without assessment considering that upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the transactions. The Tax Code is clear that the remedies may proceed simultaneously. (3) NO. While the laws governing the CTA have expanded the jurisdiction of the Court, they did not change the jurisdiction of the CTA to entertain an appeal only from a final decision of the Commissioner, or in cases of inaction within the prescribed period. Since in the cases at bar, the Commissioner has not issued an assessment of the tax liability of the Petitioners, the CTA has no jurisdiction.

REMEDIES

• COMMISSIONER OF INTERNAL REVENUE vs. ENRON SUBIC POWER CORPORATION

… The BIR assessed Enron which countered by filing a Petition for Review with the CTA stating that the assessment disregarded the provisions of the Tax Code and of RR No. 12-99, when the assessment failed to provide the legal and factual bases of the assessment. The CTA and CA ruled that the assessment notice must not only refer to the supporting revenue laws or regulations for the assessment but must also justify their applicability to the factual milieu of the assessment.

??? Is the disputed assessment valid?

!!! NO. The assessment is not valid. Although the revenue examiners discussed their findings with Respondent’s representative during the pre-assessment stage, the same, together with the Preliminary Five-Day Letter and Petitioner’s Annex G, were not sufficient to comply with the procedural requirement of due process. The Tax Code provides that a taxpayer shall be informed (and not merely “notified” as was the requirement before) in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. The use of the word “shall” indicates the mandatory nature of the requirement.

REMEDIES

• COMMISSIONER OF INTERNAL REVENUE vs. FMF DEVELOPMENT CORPORATION

… CIR assessed FMF for taxable year 1995. On February 9, 1999, FMF President executed a waiver of the 3-year prescriptive period to assess. When FMF received Petitioner’s assessment notice, it protested the same alleging prescription based on its position that the waiver executed was invalid.

??? Has the CIR’s right to assess prescribed?

!!! YES. The requirements for a valid waiver as laid down in RMO 20-90 are mandatory to give effect to Section 222 of the Tax Code. Specifically, the flaws in the waiver executed by FMF were as follows: (a) it was not signed by the Commissioner even if the assessment in involves more than P1 million; (b) there is no stated date of acceptance by the Commissioner or his representative; and (c) the taxpayer was not furnished a copy of the BIR-accepted waiver showing the date of acceptance to show that it occurred prior to the lapse of the 3-year period. Another defect discussed in the earlier case of Philippine Journalists, Inc. is the failure to specify the validity period/duration of the waiver.

REMEDIES

• JUDY ANNE L. SANTOS vs. PEOPLE OF THE PHILIPPINES and BUREAU OF INTERNAL REVENUE

… The CIR referred to the Department of Justice (DOJ) Secretary, for preliminary investigation and filing of an Information in court, the case against Petitioner for alleged violation of the Tax Code. The CIR alleged that Petitioner substantially underdeclared her income. The DOJ filed an Information against Petitioner who then filed with the CTA division a Motion to Quash the Information filed against her on the grounds of (a) lack of authority of the prosecuting attorney to file the Information, and (b) violation of Petitioner’s constitutional rights to due process and equal protection of the laws, when similar charges against Regina Encarnacion Velasquez were dismissed by the DOJ on the ground that Velasquez’s tax liability was not yet fully determined when the charges were filed against her. The CTA denied the Motion to Quash. Petitioner subsequently filed the Petition for Review with the CTA en banc.

??? Is the resolution of the CTA First Division denying Petitioner’s Motion to Quash a proper subject of an appeal to the CTA en banc?

REMEDIES

!!! NO. The denial of a Motion to Quash is an interlocutory order which is not the proper subject of an appeal or a petition for certiorari. The Revised Rules of Court provide that only final judgments or orders shall be subject to appeal to avoid multiplicity of suits. The test to determine whether an order or judgment is interlocutory or final is whether the order or judgment leaves something to be done in the trial court with respect to the merits of the case. If it does, it is interlocutory; if it does not, it is final. The remedy of the accused from the denial of her Motion to Quash is to proceed with the trial of the case in court, and if final judgment is rendered against her, she could then appeal, and upon such appeal, present the questions which she sought to be decided by the appellate court in a petition for certiorari. The Court also upheld the CTA’s findings on the two points raised by the Petitioner, viz: (1) the filing of the Information was approved by the Commissioner (which is the only requirement as the law does not prescribe the form of approval) as indicated in his letter to the DOJ Secretary and (2) the more appropriate recourse Petitioner should have taken, given the dismissal of similar charges against Velasquez, was to appeal to the DOJ Secretary the Resolution of the Office of the State Prosecutor recommending the filing of an Information against her.

REMEDIES

• FAR EAST BANK AND TRUST COMPANY vs. COMMISSIONER OF INTERNAL REVENUE

… FEBTC, as a trustee of various retirement plans, filed for the refund for the taxes withheld on the interest income from various investments. FEBTC had an existing case filed with the CTA which was filed in advance. To cover the additional claims for refund, FEBTC filed a Supplemental Petition to cover the instant claims since the issues are the same. CTA denied motion to admit Supplemental Petition and asked that a new Petition be filed.

??? Will the filing of the Supplemental Petition be sufficient to toll the prescriptive period for the claim for refund?

!!! NO. The claim for refund has been barred by prescription since the Supplemental Petition was not admitted. Petitioner’s claim was barred by prescription since the filing of Supplemental Petition (and not an original action) was not granted and therefore “it did not have any judicial effect” to toll the running of the 2-year period. It was only when a subsequent Petition for Review was filed did the prescriptive period toll. Also, this is not a case where 2-year period can be considered non-jurisdictional as there are no “exceptional circumstances” to speak of.

REMEDIES

• COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE GLOBAL COMMUNICATION, INC.

… April 14, 1994 --- Respondent received FAN May 6, 1994 --- 1st protest May 23, 1994 --- 2nd protestOctober 16, 2002 --- CIR issued Final Decision denying protestJanuary 9, 2003 --- CIR filed Answer to Respondent’s Petition for Review with the CA (deemed 1st attempt to collect)

??? Has the right to collect prescribed?

!!! YES. The right to collect has prescribed. More than 5 years have passed since assessment (April 1994) until the time CIR first tried to collect (January 2003). The CIR can not cite as an exception to this general rule the instance where “the taxpayer requests for reinvestigation which is granted by the CIR” since (1) they this was not requested by Respondent and (2) in fact, Respondent refused to submit any new evidence.

REMEDIES

!!! There is a difference between request for reconsideration and request for reinvestigation in that the first is a plea for re-evaluation of an assessment on the basis of existing records without need of additional evidence while the second is a re-evaluation on the basis of newly-discovered or additional evidence that the taxpayer wants to present. It is obviously in a reinvestigation where the BIR is expected to take more time which is why the prescriptive period to collect is suspended. In addition, it must be shown by concrete evidence that the BIR “acted upon” (which is the meaning of “granted”) the request including reception of evidence, conduct of new investigation.

REMEDIES

• PILIPINAS SHELL PETROLEUM CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE

… PSPC acquired some TCCs through the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center from other BOI-registered entities. PSPC then utilized the said TCCs for its excise taxes. However, the BIR assessed PSPC for delinquency excise taxes alleging that PSPC is not a qualified transferee of the TCCs.

??? Were the use of PSPC of the TCCs valid?

!!! YES. The use of TCC by PSPC is valid. The validity of the TCCs are not subject to a suspensive condition of a post-audit since they are immediately valid and effective after issuance. The only instance when the TCC can be affected (not invalidated) by a post-audit is when there is a computational discrepancy (errors in running balance, etc.).

REMEDIES

!!! In this case, it is shown that PSPC acted in good faith in the transfer and even had the Center issue the TDMs and the BIR issue the ATAPs. As such, there is no fraud to speak of which will extend the prescriptive period to 10 years. The Court also ruled that the BIR did not comply with the rules under RR 12-99 on informing the taxpayer of “the facts and the law on which the assessment is based”.

REMEDIES

• BANK OF THE PHILIPPINE ISLANDS vs. COMMISISONER OF INTERNAL REVENUE

… BPI was assessed for deficiency DST on its cabled instructionsNovember 26, 1986 --- PAN issuedNovember 29, 1986 --- BPI requested for details of amounts alleged as deficiency taxesApril 7, 1989 --- CIR issued demand noticeApril 20, 1989 --- BPI filed a protestMay 8, 1989 --- BPI filed supplemental protestMarch 12, 1993 --- BPI requested for opportunity to present additional documentsAugust 9, 2002 --- CIR issued final decision reiterating DST assessmentJanuary 15, 2003 --- BPI received decisionJanuary 24, 2003 – BPI filed Petition with the CTA

CIR was citing the Suyoc case by stating that BPI is estopped from claiming prescription in view of its repeated requests for reinvestigation which allegedly induced the CIR to delay collection of the taxes. BPI countered by saying that the CIR did not act upon the requests for reinvestigation within the (then) 3-year period to collect.

REMEDIES

??? Has the right to collect prescribed?

!!! YES. The right to collect has prescribed. Given that the demand notice was issued on April 7, 1989, CIR had only until April 6, 1992 (at that time, the law provided for 3 years) to collect the taxes. There was no evidence to support that BPI’s request for reinvestigation was acted upon by the BIR to suspend the running of the period to collect. The burden of proof to show that the request was acted upon rests with the BIR which was not overcome in this case since what only appears is proof that the BIR did not act on BPI’s requests. The Suyoc case is not applicable since in that case there were several requests which induced the BIR to delay the collection of taxes to “make the company feel that the demand was not unreasonable or that no harassment or injustice was meant by the government”.

REMEDIES

• REPUBLIC ACT NO. 10021 --- EXCHANGE OF INFORMATION BY THE BUREAU OF INTERNAL REVENUE ON INTERNATIONALLY-AGREED TAX STANDARDS

!!! The Commissioner can now inquire into bank deposits and other related information held by financial institutions when “A specific taxpayer or taxpayers subject of a request for supply of tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a signatory or a party”. The information may be used by the BIR for tax assessment, verification, audit, and enforcement purposes. The exchange of information shall be done in a secure manner to ensure confidentiality.

!!! The provision of information to a foreign tax authority requires that the requesting foreign tax authority has provided relevant information such as the identity of the taxpayer, the tax purpose, statement that the foreign authority has exhausted all means, etc.

!!! If the subject of the request are income tax returns, the same shall be open to inspection upon the order of the President of the Philippines.

CTA LAW

• FISHWEALTH CANNING CORPORATION vs. COMMISSIONER OF INTERNAL RVENUE

… Petitioner was assessed for income tax, VAT and withholding tax. After CIR issued a Final Decision on Disputed Assessment, Petitioner filed a Letter of Reconsideration with the CIR instead of appealing the same to the CTA within 30 days. The CIR then issued a Preliminary Collection Letter which prompted the Petitioner to file its Petition with the CTA. CIR argued that the Petition with the CTA was filed out of time.

??? Did the filing of a Reconsideration toll the running of the 30p- day period to appeal to the CTA?

!!! NO. A Motion for Reconsideration of the denial of the administrative protest does not toll the 30-day period to appeal to the CTA.

CTA LAW

• CITY OF MANILA vs. COCA-COLA BOTTLERS PHILIPPINES, INC. … Respondent paid the local business tax only as a manufacturers as it was

expressly exempted from the business tax under a different section and which applied to businesses subject to excise, VAT or percentage tax under the Tax Code. The City of Manila subsequently amended the ordinance by deleting the provision exempting businesses under the latter section if they have already paid taxes under a different section in the ordinance. This amending ordinance was later declared by the Supreme Court null and void. Respondent then filed a protest on the ground of double taxation. RTC decided in favor of Respondent and the decision was received by Petitioner on April 20, 2007. On May 4, 2007, Petitioner filed with the CTA a Motion for Extension of Time to File Petition for Review asking for a 15-day extension or until May 20, 2007 within which to file its Petition. A second Motion for Extension was filed on May 18, 2007, this time asking for a 10-day extension to file the Petition. Petitioner finally filed the Petition on May 30, 2007 even if the CTA had earlier issued a resolution dismissing the case for failure to timely file the Petition.

CTA LAW

??? (1) Has Petitioner’s the right to appeal with the CTA lapsed?

(2) Does the enforcement of the latter section of the tax ordinance constitute double taxation?

!!! (1) NO. Petitioner complied with the reglementary period for filing the petition. From April 20, 2007, Petitioner had 30 days, or until May 20, 2007, within which to file their Petition for Review with the CTA. The Motion for Extension filed by the petitioners on May 18, 2007, prior to the lapse of the 30-day period on 20 May 2007, in which they prayed for another extended period of 10 days, or until 30 May 2007, to file their Petition for Review was, in reality, only the first Motion for Extension of petitioners. Thus, when Petitioner filed their Petition via registered mail their Petition for Review on 30 May 2007, they were able to comply with the period for filing such a petition.

CTA LAW

!!! (2) YES. There is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of the tax ordinance since these are being imposed: (1) on the same subject matter — the privilege of doing business in the City of Manila; (2) for the same purpose — to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority — petitioner City of Manila; (4) within the same taxing jurisdiction — within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods — per calendar year; and (6) of the same kind or character — a local business tax imposed on gross sales or receipts of the business.

CTA LAW

• COMMISSIONER OF CUSTOMS vs. GELMART INDUSTRIES PHILIPPINES, INC .

… Respondent’s goods were issued seizure orders. Respondent filed a protest with the District Collector of Customs which ordered the forfeiture of the shipments which, upon appeal, the Customs Commissioner affirmed. The Court of Tax Appeals, through one of its divisions, reversed the decree of forfeiture issued by petitioner, lifted the Warrants of Seizure and Detention, and ordered the release to Gelmart of its imported fabrics on the condition that the correct duties, taxes, fees and other charges thereon be paid to the Bureau of Customs. Petitioner then filed a Petition direct with the Supreme Court to question the decision of the division of the Court of Tax Appeals

??? Has the decision of the CTA division become final and executory?

CTA LAW

!!! YES. Petitioner's failure to file a motion for reconsideration of the decision of the CTA First Division, or at least a petition for review with the CTA en banc, invoking the latter's exclusive appellate jurisdiction to review decisions of the CTA divisions, rendered the assailed decision final and executory.

CTA LAW

• RIZAL COMMERCIAL BANKING CORPORATION vs. COMMISSIONER OF INTERNAL RVENUE

… RCBC received the FAN on July 5, 2001. It filed a protest on July 20, 2001. As the protest was not acted upon, it filed a Petition for Review with the CTA on April 30, 2002, or more than 30 days after the lapse of the 180-day period reckoned from the submission of complete documents. The CTA dismissed the Petition for lack of jurisdiction since the appeal was filed out of time.

??? Has the action to protest the assessment judicially prescribed?

!!! YES. The assessment has become final. The jurisdiction of the CTA has been expanded to include not only decision but also inactions and both are jurisdictional such that failure to observe either is fatal.

CTA LAW

!!! However, if there has been inaction, the taxpayer can choose between (1) file a Petition with the CTA within 30 days from the lapse of the 180-day period OR (2) await the final decision of the CIR and appeal such decision to the CTA within 30 days after receipt of the decision. These options are mutually exclusive and resort to one bars the application of the other. Thus, if petitioner belatedly filed an action based on inaction, it can not subsequently file another petition once the decision comes out.

CTA LAW

• REPUBLIC ACT NO. 9503 --- AMENDMENT TO THE CTA LAW

!!! The CTA will now have three Divisions instead of two with each Division still being composed of three Justices.

!!! For en banc sessions, five Justices shall constitute a quorum. For sessions of a Division, the quorum (two Justices) remains the same.

!!! The affirmative vote of five members of the CTA en banc shall be necessary to reverse a decision of a Division. However, only a simple majority of the Justices present necessary to promulgate a resolution or decision in all other cases, or two members of a Division, as the case may be, shall be necessary for the rendition of a decision or resolution in the Division level. (Note: Before RA No. 9503, there was no mention of the votes necessary to reverse a decision.)

LOCAL BUSINESS TAX

• QUEZON CITY vs. ABS-CBN BROADCASTING CORPORATION

… ABS-CBN was granted a franchise which provides that it “shall pay a 3% franchise tax and the said percentage tax shall be “in lieu of all taxes on this franchise or earnings thereof”. It thus filed a complaint against the imposition of local franchise tax.

??? Does the “in lieu of all taxes” provision in ABS-CBN’s franchise exempt it from payment of the local franchise tax?

!!! NO. The right to exemption from local franchise tax must be clearly established beyond reasonable doubt and cannot be made out of

inference or implications.

LOCAL BUSINESS TAX

!!! The uncertainty over whether the “in lieu of all taxes” provision pertains to exemption from local or national taxes, or both, should be construed against Respondent who has the burden to prove that it is in fact covered by the exemption claimed. Furthermore, the “in lieu of all taxes” clause in Respondent’s franchise has become ineffective with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding P10 million as they are now subject to the VAT.

LOCAL BUSINESS TAX

• SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO

… Petitioner was granted a legislative franchise and on that basis filed a case stating that it was not liable for the franchise tax of 75% of 1% of gross annual receipts since its franchise states that it is only subject to franchise tax under the Tax Code (now, the VAT), income tax and real property tax. The same franchise referred to provides that Petitioner “shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of this franchise x x x “

??? Is Petitioner liable to pay the franchise tax to Davao City?

!!! YES. R.A. 7294 does not expressly provide what taxes Petitioner is exempt from and whether its exemption covers national or local taxes, or both. The Court noted that the “in lieu of all taxes” provisions has become functus officio with the abolition of franchise tax on telecommunication companies and its replacement with the VAT.

LOCAL BUSINESS TAX

• ERICSSON TELECOMMUNICATIONS, INC. vs. CITY OF PASIG

… Ericsson was assessed for deficiency LBT but countered that the assessment was erroneous for having been based on its gross revenues (which, on top of gross receipts, includes uncollected earnings) rather than just its gross receipts.

??? Can LGCs validly impose the LBT on the gross revenues rather than the gross receipts?

!!! NO. The LBT should be assessed based only on gross receipts which include money or its equivalent actually or constructively received. In contrast, gross revenue includes receivables which are “payments yet to be received” but are just “expected to be received”. Since Ericsson employs the accrual method of accounting, it books its receivables as part of gross revenue which exposes it to potential double taxation on these amounts since a taxpayers’ gross revenue will definitely include its gross receipts to be reported in a subsequent year (i.e., when it is already paid actually or constructively) and for which LBT will be paid again.

LOCAL BUSINESS TAX

• PETRON CORPORATION vs. TIANGCO

… Petron maintains a depot where it engages in the selling of diesel fuels to vessels used in commercial fishing. Navotas City thereafter levied business taxes on its sale of petroleum products.

??? Can LGUs levy local taxes on sale of petroleum?

!!! NO. LGUs can not impose any type of local tax on petroleum products. The LGC provides two possible bases for exemption when it states the LGCs can not impose --- (i) “excise taxes on articles enumerated under the Tax Code” and (ii) “taxes, fees or charges on petroleum products”. The reference to excise taxes in the LGC is not for “the performance, carrying on or exercise of an activity” but to those subjected to specific or ad valorem taxes under the Tax Code. The 2nd basis for exemption refers not only to direct or excise taxes to be levied by LGUs on petroleum products but on all types of taxes on petroleum products including business taxes. Thus, it is the 2nd basis which prohibits LGUs to levy taxes on petroleum.

LOCAL BUSINESS TAX

• REPUBLIC ACT NO. 9640 --- AMENDMENT TO THE AMUSEMENT TAX OF THE LGC

!!! The rate prescribed under the Section has been lowered from being “a rate of not more than 30% of the gross receipts from admission fees” to 10%.

REAL PROPERTY TAX

• GOVERNMENT SERVICE INSURANCE SYSTEM vs. CITY TREASURER OF MANILA

… Petitioner owned two parcels of land one of which it was occupying (Concepcion-Arroceros property) and the other it was leasing out (Katigbak property) to Manila Hotel. The city assessed Petitioner for unpaid RPT while Petitioner countered that it was exempt from all taxes, including realty taxes, under its charter.

??? Is Petitioner exempt from RPT on both the property it is utilizing and the one it is leasing out?

!!! ONE ONLY. While the previous exemption granted to Petitioner was withdrawn by the LGC, the subsequent reenactment of its full tax exemption under R.A. 8291 again established GSIS’ exemption from all taxes. In addition, GSIS was considered an instrumentality of the National Government (not a GOCC) and was thus outside the purview of local taxation similar to the earlier case of Manila International Airport Authority. The Katigbak property however was subject to RPT.

REAL PROPERTY TAX

• NATIONAL POWER CORPORATION vs. PROVINCE OF QUEZON

… NPC is a GOCC that entered into an Energy Conversion Agreement (ECA) under a build-operate-transfer (BOT) arrangement with Mirant Pagbilao Corp. Under the agreement, Mirant will build and finance a thermal power plant in Quezon, and operate and maintain the same for 25 years, after which, Mirant will transfer the power plant to the Respondent without compensation. NPC also undertook to pay all taxes that the government may impose on Mirant. Quezon then assessed Mirant real property taxes on the power plant and its machineries.

??? (1) Can Petitioner file the protest against the real property tax assessment?

(2) Can Petitioner claim exemption from the RPT given the BOT arrangement with Mirant?

(3) Is payment under protest required before an appeal to the LBAA is made?

REAL PROPERTY TAX

!!! (1) NO. The two entities vested with personality to contest an assessment are (a) the owner or (b) the person with legal interest in the property. NPC is neither the owner nor the possessor/user of the subject machineries even if it will acquire ownership of the plant at the end of 25 years. The Court said that legal interest should be an interest that is actual and material, direct and immediate, not simply contingent or expectant. While the Petitioner does indeed assume responsibility for the taxes due on the power plant and its machineries, the tax liability referred to is the liability arising from law that the local government unit can rightfully and successfully enforce, not the contractual liability that is enforceable between the parties to a contract. The local government units can neither be compelled to recognize the protest of a tax assessment from the Petitioner, an entity against whom it cannot enforce the tax liability.

REAL PROPERTY TAX

!!! (2) NO. To successfully claim exemption under Section 234 (c) of the LGC, the claimant must prove two elements: a) the machineries and equipment are actually, directly, and exclusively used by local water districts and government-owned or controlled corporations; and b) the local water districts and government-owned and controlled corporations claiming exemption must be engaged in the supply and distribution of water and/or the generation and transmission of electric power. Since neither the Petitioner nor Mirant satisfies both requirements, the claim for exemption must fall.

(3) YES. If a taxpayer disputes the reasonableness of an increase in a real property tax assessment, he is required to "first pay the tax" under protest. The case of Ty does not apply as it involved a situation where the taxpayer was questioning the very authority and power of the assessor, acting solely and independently, to impose the assessment and of the treasurer to collect the tax. A claim for tax exemption, whether full or partial, does not question the authority of local assessors to assess real property tax.

REAL PROPERTY TAX

• DIGITAL TELECOMMUNICATIONS, INC. vs. CITY GOVERNMENT OF BATANGAS

… Petitioner was granted a 25-year franchise to install telecommunications systems under a law which states that “The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise x x x.” As they were not being issued a Mayor’s permit, Petitioner paid the RPT under protest arguing that the phrase “exclusive of this franchise” means that only the real properties not used in furtherance of its franchise are subject to RPT while those real properties which are used in its telecommunications business are exempt from RPT.

??? Are Petitioner’s real properties used in its telecommunications business exempt from RPT?

REAL PROPERTY TAX

!!! NO. Petitioner’s real properties, whether or not used in its telecommunications business, are subject to RPT. The phrase “exclusive of this franchise” qualifies the term “personal property.” This means that Petitioner’s legislative franchise, which is an intangible personal property, shall not be subject to taxes. This is to put franchise grantees in parity with non-franchisees as the latter obviously do not have franchises which may potentially be subject to realty tax. There is nothing in the first sentence of Section 5 which expressly or even impliedly exempts Petitioner from RPT. Petitioner’s reliance on the BLGF’s opinion stating that real properties owned by telecommunications companies are exempt from RPT is without basis as the BLGF has no authority to rule on claims for exemption from RPT.

REAL PROPERTY TAX

• FELS ENERGY, INC. vs. PROVINCE OF BATANGAS

… FELS entered into a lease contract with NAPOCOR over two engine power barges at Batangas. The lease contract stipulated that NAPOCOR shall be responsible for all taxes (including RPT on the barges), fees and charges that FELS may be liable to except (i) income tax of FELS and its employees; and (ii) construction permit and environmental fees. FELS was assessed for RPT and the LBAA upheld the assessment by stating that while the barges “may be classified as movable/personal property, they are considered as real property for tax purposes because they are installed at a specific location with a character of permanency”.

??? Are the power barges considered as realty for RPT purposes?

!!! YES. The barges are real property subject to RPT. The remedy from the decision of the Provincial Assessor is an appeal to the LBAA and not a Motion for Reconsideration. Failure to file the appeal to the LBAA within the 60-day period provided by law makes the assessment final and unappealable.

REAL PROPERTY TAX

!!! The basis to consider power barges as real property is Article 415(9) of the Civil Code which provides that “docks and structures which, though floating, are intended by their nature and object to remain at a fixed place on a river, lake or coast”. As such they are categorized as immovable property by destination. Neither can FELS claim exemption under Section 234 of the LGC given that the requirement is that to be exempt the machineries and equipment must be actually, directly and exclusively used by GOCCs engaged in the generation of power. Since the agreement between FELS and NAPOCOR is that FELS will own and operate the barges and not NAPOCOR, the condition is not met. The mere undertaking to pay real estate taxes does not infect the transaction with NAPOCOR’s tax exemption since, at best, it will be considered only as an arrangement between the parties not binding 3rd parties.

REAL PROPERTY TAX

• PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs. C.A.

… Petitioner owned the Iloilo Fishing Port Complex which was on reclaimed land and consisted of a breakwater, landing quay, water and fuel oil supply system, refrigeration building, market hall and a municipal shed. Petitioner then leased portions of the IFPC to private firms engaged in the fishing business. Iloilo city then assessed the entire IFPC for RPT.

??? Is the entirety of the IFPC subject to the RPT?

!!! NO. The RPT liability of the IFPC is only on portions leased out to private entities. PFDA is not a GOCC but is actually an instrumentality of the national government exempt from RPT. Given this, it will only be subject to RPT on the portions of the IFPC which is leased to private entities. It is not a GOCC since a GOCC must satisfy two requirements: (i) capital stock divided into shares and (ii) authorized to distribute dividends/profits. PFDA does have capital stock but the same is not divided into shares and neither is it a non-stock corporation because it does not have members.

REAL PROPERTY TAX

!!! (Note: This was the same decision reached in MIAA vs. Paranaque (July 20, 2006) and again in MIAA vs. Pasay (April 2, 2009) where the property in question was the airport premises. In those cases, the Court additionally provided that other examples of government instrumentalities vested with corporate powers or what are know as “government corporate entities” are Philippine Ports Authority, BSP and University of the Philippines.)

CUSTOMS

• COMMISSIONER OF CUSTOMS vs. COURT OF TAX APPEALS AND LAS ISLAS FILIPINAS FOOD CORPORATION

… Respondent owned a customs bonded warehouse and among the conditions for its operations was for them to secure an import allocation from the Sugar Regulatory Administration (SRA) every time it imported sugar for its clients. PPOC, a Thai company, appointed Respondent as its exclusive offshore storage and transfer facility in the Philippines for its local and foreign transhipment operations. Upon arrival in Manila of some sugar importations in 2004, Respondent failed to present an import allocation from the SRA, as a result of which the shipment became the subject of an alert order. A decree of abandonment was issued upon failure of Respondent to file an import entry. The Collector of Customs then issued a warrant of seizure and detention of the goods in view of SRA’s advice that no import allocation was granted to Respondent for the shipment. Respondent asserted that the refined sugar was merely transhipped to the Philippines while Respondent PPOC was looking for a buyer in the international market; as such, the import allocation from SRA was unnecessary. While on appeal to the CTA, Respondent moved to release the shipment, which the court granted, subject to the filing by Respondent LIFFC of a surety bond. Commissioner of Customs argued that the seized shipment should not be released since there was prima facie evidence of fraud in the importation.

CUSTOMS

!!! NO. It was not proper for the CTA to order the release of the shipment even under bond, because there was prima facie evidence of fraud, which is the absence of an import allocation from the SRA. The TCCP provides that seized articles may not be released under bond if there is prima facie evidence of fraud in their importation. Under the TCCP, importation takes place when the merchandise is brought into the customs territory of the Philippines with the intention of unloading the same at port. An exception to this rule is transit cargo entered for immediate exportation which may be allowed, provided: (i) there is a clear intent to export the article as shown in the bill of lading, invoice, cargo manifest; (ii) the Collector must designate the vessel or aircraft wherein the articles are laden as a constructive warehouse to facilitate the direct transfer of the articles to the exporting vessel or aircraft; (iii) the imported articles are directly transferred from the vessel or aircraft designated as a constructive warehouse to the exporting vessel or aircraft; and (iv) an irrevocable domestic letter of credit, bank guaranty or bond in an amount equal to the ascertained duties, taxes and other charges is submitted to the Collector. None of the requisites above was present in this case. Importation therefore took place and the only logical conclusion is that the refined sugar was truly intended for domestic consumption.

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