april 2010 tax brief

April 2010 11111

April 2010

Tax brief

ContentsContentsContentsContentsContents

02 New LawsNew LawsNew LawsNew LawsNew Laws

• Incentives to lawyers for free

legal services

• Exchange of information on

tax matters

• Income tax exemption of

LWDs

• Expanded Breastfeeding Act

03 SEC CircularSEC CircularSEC CircularSEC CircularSEC Circular

• Adoption of broker-dealer

chart of accounts

03 PPPPPresidential Issuanceresidential Issuanceresidential Issuanceresidential Issuanceresidential Issuance

• Review committee for

smuggling and tax evasion

cases

04 BIR IssuancesBIR IssuancesBIR IssuancesBIR IssuancesBIR Issuances

• OSD disclosure requirement

• Coverage of amusement

taxes

• Tax investigation of

cooperatives

• Employer withholding tax

obligations and penalties

• Taxpayers’ lifestyle check

system (TLCS)

• Replacement of expired CAR

• Further deferral of eDST

• BIR Industry Champion

Program

• Reinvigorated RATE program

• Audit of conglomerates

08 BIR RBIR RBIR RBIR RBIR Rulingsulingsulingsulingsulings

• Stipends of resident

physicians

• VAT on hotel services to

international airlines

• CWT on manpower services

• DST on credit facility

09 CourCourCourCourCourt Decisionst Decisionst Decisionst Decisionst Decisions

• Incidental transaction for

VAT purposes

• Contesting a real property

tax assessment

10 Highlight on P&A serHighlight on P&A serHighlight on P&A serHighlight on P&A serHighlight on P&A servicesvicesvicesvicesvices

• Customs compliance review

2 2 2 2 2 April 2010

New Laws

Incentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legalIncentives to lawyers for free legal

serserserserservicesvicesvicesvicesvices

This law grants to lawyers or professional

partnerships providing pro bono legal

services a tax deduction equivalent to

waived professional fee or 10% of their

gross income from legal services,

whichever is lower.

The actual free legal services shall be

exclusive of the 60-hour mandatory legal

aid services for indigent litigants required

under the Rule on Mandatory Legal Aid

Service for Practicing Lawyers.

The lawyer or professional partnership

should submit to the BIR and the

Department of Justice (DOJ)

certifications issued by the Public

Attorney’s Office (PAO), the DOJ or an

accredited association of the Supreme

Court (SC) indicating qualification of the

legal services provided, and the inability

of the DOJ and PAO to provide legal

services.

(Republic Act No. 9999, February 25, 2010)

Exchange of information on taxExchange of information on taxExchange of information on taxExchange of information on taxExchange of information on tax

mattersmattersmattersmattersmatters

The law authorizes the BIR to inquire into

bank deposits and other related

information held by financial institutions,

and supply such information to a

requesting foreign tax authority pursuant

to an international convention or

agreement on tax matters entered into by

the Philippines with its tax treaty partners.

The law also allows a foreign tax authority

to examine the income tax returns of

specific taxpayers in the Philippines that

are the subject of request for exchange of

tax information under the rules prescribed

by the Secretary of Finance as

recommended by the Commissioner of

Internal Revenue (CIR).

Taxpayers who are subject of the request

of a foreign tax authority for exchange of

information shall be notified by the CIR.

The requesting foreign tax authority is

mandated to maintain absolute

confidentiality of the information

received.

The law imposes sanctions on officers of

the bank who refuse to supply the

information, as well as BIR personnel

who unlawfully divulge information

obtained from banks to persons other

than the requesting foreign tax authority.

(Republic Act No. 10021, March 19, 2010)

Income tax exemption of LIncome tax exemption of LIncome tax exemption of LIncome tax exemption of LIncome tax exemption of LWDsWDsWDsWDsWDs

Local water districts (LWDs) have become

exempt from income tax with their

inclusion in the list of income tax-exempt

government-owned or -controlled

corporations, under Section 27(C) of the

Tax Code.

The law, however, mandates that any

amount of savings from the income tax

exemption should be used for capital

equipment expenditure to expand water

services coverage and provide safe and

clean water. To be tax-exempt, an LWD

should limit the increase in its

appropriation for personal services as well

as travel, transportation, or representation

expenses and purchase of motor vehicles

to not more than 20% a year, and adopt

internal control reforms to ensure its

economic and financial viability.

The law also condones all unpaid taxes of

LWDs from August 13, 1996 up to the

effectivity of the law subject to the

condition that the financial incapacity of

the LWD to meet its tax obligations is

established by the BIR, and the LWD

submits to Congress a program of

internal reforms as duly certified by the

Local Water Utilities Administration.


Expanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding ActExpanded Breastfeeding Act

To promote the practice of breastfeeding,

the law mandates all health and non-

health facilities, establishments and

institutions to establish lactation stations

and provide breaks for nursing employees

to breastfeed or extract milk for storage.

The law amends Republic Act No. (RA)

7600, or the Rooming in and

Breastfeeding Act of 1992, which requires

the setting up of rooming-in and

breast-feeding areas in all private and

government health institutions.

Under the law, the expenses incurred by

an establishment to set up lactation

stations shall be deductible for income tax

purposes in the year incurred up to twice

their actual amount. However, prior to

availing of the tax incentive, the law

requires that the establishments set up

lactation stations within six months after

the approval of the law and secure first a

“Working Mother- Baby-Friendly

Certificate” from the Department of

Health (DOH), which should be filed with

the BIR.

Establishments may be exempt from the

requirement if they can prove that this is

not feasible or not necessary based on the

peculiar circumstances of the workplace

and considering the number of women

employees or average number of women

who visit the establishment. Applications

for exemption may be filed with the

Department of Labor and Employment

(DOLE) or the Civil Service Commission,

in case of government agencies. The

exemption is valid for a renewable period

of two years.


April 2010 33333

Presidential Issuance

SEC Circular

RRRRReview committee for smuggling andeview committee for smuggling andeview committee for smuggling andeview committee for smuggling andeview committee for smuggling and

tax evasion casestax evasion casestax evasion casestax evasion casestax evasion cases

An independent committee has been

formed by the President to review all

smuggling and tax evasion cases handled

by the BIR and the Bureau of Customs

(BOC). The committee is composed of a

retired member of the judiciary and two

representatives each from the private

sector and the media.

Among the functions of the committee

are the following:

1. Review, evaluate and assess all

important smuggling and tax

evasion cases handled by the BIR

and the BOC that resulted in a

decision that is unfavorable to

the government;

2. Determine causes of the

unfavorable decision both at the

administrative and judicial levels;

3. Conduct an inventory of all

pending smuggling and tax

evasion cases and identify

priority cases for intensified

prosecution or for immediate

resolution; and

4. Formulate recommendations to

further improve the success rate

of the BIR and the BOC in the

prosecution of the cases.

The Committee shall submit its findings

and recommendations to the President

within 90 days from the appointment of

at least three of the committee members,

after which the Committee shall cease to

exist unless otherwise directed by the

President.

[Administrative Order Nos.277 (January 29,

2010) and 277-A, February 19, 2010]

Adoption of brokAdoption of brokAdoption of brokAdoption of brokAdoption of brokererererer-dealer char-dealer char-dealer char-dealer char-dealer chart oft oft oft oft of

accountsaccountsaccountsaccountsaccounts

The SEC has approved the adoption of

the broker-dealers chart of accounts

(BDCA) for implementation by all

registered brokers-dealers in securities,

including trading and non-trading

participants of the Philippine Stock

Exchange (PSE). The BDCA shall apply

to all financial statements of brokers-

dealers starting January 1, 2011.

Failure to comply with the BDCA shall

subject the erring party to the sanctions

under Securities and Exchange

Commission (SEC) Memorandum

Circular No. 8, series of 2009, or the scale

of fines imposed on non-compliance with

the SEC financial reporting requirements.

(SEC Memorandum Circular No. 1, Series of

2010, March 18, 2010)

4 4 4 4 4 April 2010

BIR Issuances

OSD disclosure requirementOSD disclosure requirementOSD disclosure requirementOSD disclosure requirementOSD disclosure requirement

This Circular was issued to remind

taxpayers of the requirement to disclose

their election to use the optional standard

deduction (OSD) starting taxable year

2009 by checking the appropriate box in

their income tax return (ITR) for the first

quarter of taxable year 2009, whether the

taxpayer adopts calendar or fiscal year. In

the case of newly-registered taxpayers, the

election to avail of the OSD should be

indicated in the initial quarterly ITR,

which is required for taxable year 2009.

Under the Circular, the type of deduction

availed of in the first quarter ITR should

be consistently applied for the succeeding

quarters and in the final return for taxable

year 2009.

For failure to do so, a taxpayer shall be

deemed as having availed of the itemized

deductions for the taxable year 2009. The

type of deduction availed of shall be

irrevocable for taxable year 2009,

notwithstanding any subsequent

amendment of such first quarter/initial

ITR filed.

(Revenue Memorandum Circular 16-10, March

1, 2010)

Coverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxesCoverage of amusement taxes

The BIR has clarified that the 18%

amusement tax imposed on proprietors,

lessees or operators of cabaret, night or

day clubs under Section 125 (b) of the

Tax Code covers similar amusement

places that offer the same entertainment

and function such as videoke bars,

karaoke bars, karaoke televisions, karaoke

boxes and music lounges. Hence, these

amusement places shall be subject to the

18% amusement tax, and not to the 12%

VAT.

(Revenue Memorandum Circular No. 18-10,

March 8, 2010)

TTTTTax investigation of cooperativesax investigation of cooperativesax investigation of cooperativesax investigation of cooperativesax investigation of cooperatives

Following the issuance of joint rules and

regulations implementing RA 9520,

otherwise known as the Philippine

Cooperative Code of 2008, the BIR has

authorized the continuation of all

pending tax investigations and the

issuance of tax assessments against

cooperatives in accordance with the

following guidelines:

a. Tax cases that existed prior to

the effectivity of RA 9520 shall

be governed by the old

Cooperative Code (RA 6938).

b. For 2008 tax returns and fiscal

period ended before March 22,

2009, notice of investigations

shall be issued based on the

existing audit program.

c. For periods beyond March 22,

2009, the BIR offices are

required to obtain prior

authorization from the

Cooperative Development

Authority (CDA) or its extension

office that has jurisdiction over

the cooperative, which should be

issued within 20 days from

receipt of request, copy

furnished the concerned

cooperative.


8, 2010)

Employer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligationsEmployer withholding tax obligations

and penaltiesand penaltiesand penaltiesand penaltiesand penalties

This Circular was issued to remind

employers of their obligation to withhold

and remit taxes on employees’

compensation income, to perform year-

end adjustments, and to refund excess tax

withheld. Non-compliance will result in

the following violations, for which there

are applicable penalties such as surcharge,

interest, and, in certain cases, compromise

penalty in lieu of criminal liability,

depending on the violation:

1. Non-withholding of tax -

when there is failure to withhold

any tax

2. Underwithholding - when

employer fails to withhold in full

the tax due

3. Non-remittance - when

employer fails to remit total

amount withheld

4. Late remittance - when

employer remits beyond the due

date

5. Failure or refusal to refund

excess taxes withheld


9, 2010)

April 2010 55555

BIR Issuances

TTTTTaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check systemaxpayers’ lifestyle check system

(TLCS)(TLCS)(TLCS)(TLCS)(TLCS)

This Order prescribes the policies and

guidelines in the conduct of investigations

on individual taxpayers with substantial

investments and assets or conspicuous

lifestyles, but who declared relatively small

income and tax payments.

When direct evidence is inadequate, not

available or inaccurate, the BIR will use

third party information. The National

Investigation Division (NID) shall verify

the existence of a taxpayer’s higher value

assets and/or conspicuous spending by

accessing the records of government

entities such as the Land Transportation

Office, Bureau of Immigration, Maritime

Industry Authority, Civil Aeronautics

Board, Land Registration Authority, and

registries of deeds.

The BIR shall also access the records of

private entities like airline and shipping

companies, resorts, membership clubs and

similar establishments; homeowners’

associations; real estate firms; credit card

companies; as well as statement of assets,

liabilities and net worth and/or amnesty

returns filed under RA 9480.

All the information gathered in the TLCS

shall be stored in an electronic data

warehouse and evaluated vis-à-vis the data

extracted from the BIR’s integrated tax

system (ITS). After verification, and if the

evidence warrants, the investigators shall

request the issuance of a Letter of

Authority (LA) from the Assistant

Commissioner of Internal Revenue

(ACIR) - Enforcement Service for

approval of the authorized officials. The

Special Investigation Division (SID) of

the Regional Offices and other BIR audit

offices shall implement the TLCS upon

approval of the CIR.

(Revenue Memorandum Order 19-10, March 9,

2010)

RRRRReplacement of expired Cereplacement of expired Cereplacement of expired Cereplacement of expired Cereplacement of expired Certificatestificatestificatestificatestificates

Authorizing RAuthorizing RAuthorizing RAuthorizing RAuthorizing Registration (CAR)egistration (CAR)egistration (CAR)egistration (CAR)egistration (CAR)

The Order provides the guidelines on the

issuance, replacement or revalidation of

Certificates Authorizing Registration

(CAR) pursuant to Revenue Regulations

No. (RR) 24-02.

Under RR 24-02, a CAR is valid for two

years from the original date of issuance.

The Order enumerates the documents

that should be submitted for the

replacement of an expired CAR:

1. Written request for the issuance

of a new CAR addressed to the

RDO or BIR office authorized

to issue the CAR

2. Original and duplicate copies of

the expired CAR

3. Original document of sale,

exchange or transfer (e.g., deed

of sale, deed of assignment,

deed of donation, deed of

extrajudicial settlement of estate,

etc.)

4. Photocopies of the proof of tax

payments previously made, or

certification issued by the

BIR’s revenue accounting

division indicating

taxes paid, date

of payment and

amount

The RDO/concerned BIR office shall

cancel the expired CAR, and issue a new

CAR containing the serial number and

original issue date of the expired CAR

with a statement that the CAR is a

replacement CAR. The replacement CAR

shall be valid for one year from issue date.

(Revenue Memorandum Order 23-10, March

15, 2010)

FFFFFurururururther deferral of eDSTther deferral of eDSTther deferral of eDSTther deferral of eDSTther deferral of eDST

The mandatory use of electronic

documentary stamp tax (eDST) system

was further suspended until June 30, 2010

in response to the numerous issues and

requests of users. The implementation

was earlier extended to February 28, 2010

under RMC 24-10.

Under RMC 31-10, the BIR clarified that

taxpayers/users who have implemented

the eDST in lieu of the Documentary

Stamp Electronic Imprinting Machine

(DSEIM) should have affixed the

rectangular black DST on all taxable

documents effective January 2010. For

taxpayers/users who still cannot comply

with the requirements of the eDST, the

constructive stamping/receipt system

(CS/RS), which involves attaching the

DST return (BIR Form 2000) and the

duly issued confirmation receipt/deposit

slip by the authorized agent bank (AAB)

to the taxable document, is still allowed

until the full implementation of eDST on

June 30, 2010.

[Revenue Memorandum Circular Nos. 24-10

(March 16, 2010) and 31-10 (March 30,

2010)]

6 6 6 6 6 April 2010

BIR Issuances

BIR IndustrBIR IndustrBIR IndustrBIR IndustrBIR Industry Champion Py Champion Py Champion Py Champion Py Champion Programrogramrogramrogramrogram

To develop in-depth expertise/

specialization in various industries, the

BIR shall implement the industry

champion program, which is aimed at

identifying tax issues to improve voluntary

compliance and enforcement in selected

industries.

BIR personnel shall be assigned as

industry champions for each specific

industry. They shall be responsible for,

among others, tapping experts to assist in

the identification and training of

personnel; coordinating with government

regulatory offices for tapping data

sources; conducting training for BIR

personnel; and organizing tax audit task

forces for selective industry audit.

The program will initially cover banking

and insurance, telecommunications,

power, petroleum, cement, shipping,

health maintenance organizations,

semiconductor, business process

outsourcing, mining, real estate, schools,

show business and entertainment,

tourism, foundations, enterprises enjoying

tax incentives, and professionals.


15, 2010)

RRRRReinvigorated RAeinvigorated RAeinvigorated RAeinvigorated RAeinvigorated RATE programTE programTE programTE programTE program

The following policies and guidelines have

been issued to reinvigorate the run after

tax evaders (RATE) program:

1. Development of RATE cases

This shall be the principal

responsibility of the NID and

the SIDs. The TLCS shall be

used in developing RATE cases.

BIR offices that fail to provide

the information required by the

NID or SIDs within 15 working

days from request may be

subjected to administrative

disciplinary action.

2. Issuance of Letters of

Authority (LA) for RATE

cases

The conduct of a preliminary

investigation is required to

establish prima facie evidence of

fraud or tax evasion in all RATE

cases. If prima facie evidence is

found, an LA shall be issued.

3. Reopening/reassignment of

investigations

If an LA has been issued

previously and investigation has

already commenced or been

concluded, the Deputy

Commissioner of Internal

Revenue Legal Inspection Group

(DCIR-LIG) shall include in the

request for issuance of LA to the

CIR a recommendation and

justification for the

re-assignment to, or re-opening

of, the investigation. All LAs

issued for RATE cases shall be

signed by the DCIR-LIG.

4. Conduct of investigation

Formal investigation of a RATE

case shall commence only after

prima facie evidence of fraud or

tax evasion has been established.

In case evidence is not sufficient

to prove the guilt of a taxpayer

beyond reasonable doubt, but

there exists clear and convincing

evidence that fraud has been

committed, a 50% surcharge

shall be imposed, together with

the deficiency tax assessment.

5. Evaluation of RATE cases

After conclusion of a formal

investigation, the NID or the

SIDs shall refer the RATE case

to the National Office (NO) -

RATE Team/Legal Division for

evaluation and appropriate

action.

If insufficient in form and

substance, the cases shall be

returned to the NID or the SIDs

for further investigation or

strengthening of the case.

However, in case the RATE case

is found to be sufficient, NO-

RATE Team/Legal Division

shall prepare the compliant

affidavit (CA) and referral letter

(RL), and submit it to the DCIR-

LIG for review and evaluation.

The NID must be able to report

at least two cases per month that

have been submitted by the NO-

RATE Team to the DCIR-LIG

for prosecution. On the other

hand, the SIDs must be able to

report at least three cases per

quarter that have been submitted

by Regional Legal Divisions to

the DCIR-LIG, for prosecution.

April 2010 77777

BIR Issuances

6. Prosecution of RATE cases/

civil remedies

RATE cases recommended for

criminal prosecution shall be

forwarded to the CIR for final

review and signature. The

prosecution of RATE cases that

were developed by the NID shall

be carried out by the NO-RATE

Team, while that of SIDs shall

be handled by the legal divisions.

The criminal prosecution

proceedings should be executed

in coordination with the DOJ.

To protect the interest of

government over the tax

liabilities of a taxpayer

undergoing RATE prosecution,

the CIR or any other authorized

officer shall issue the warrants

of distraint and/or levy/

warrants of garnishment.


17, 2010)

Audit of conglomeratesAudit of conglomeratesAudit of conglomeratesAudit of conglomeratesAudit of conglomerates

The Order provides the guidelines for the

conduct of investigation/audit of

conglomerates, their affiliates and

subsidiaries for taxable year 2009. The

term “conglomerate” means a group of

corporations that has diversified business

activities in varied industries controlled

and managed by a parent corporate entity.

It shall be the responsibility of the Large

Taxpayer Service (LTS) and the

Enforcement Service (ES) to identify the

conglomerates that will be subject to

audit. Special audit teams headed by the

ACIR-Large Taxpayers Service (LTS)-

Regular, LT-Excise and Enforcement

Service (ES) shall conduct the audit. The

revenue officers under each team shall

undertake a simultaneous, joint, and

coordinated examination of the books of

accounts of the related companies

assigned to them.

LAs shall be signed by the CIR under the

LA Monitoring System (LAMS). In case

an LA has already been issued by the

Regional Office (RO), this shall

automatically be considered invalidated

and the entire docket of the case should

be forwarded to the LTS or the ES.

Taxpayers that are subject to the audit but

are not under the LTS jurisdiction shall be

notified by the LTS and ES of the change

of jurisdiction for audit/investigation.

The audit should follow the procedures in

the BIR’s audit manual. The use of

Computer-Assisted Audit Tools and

Techniques (CAATS) for taxpayers with

computerized accounting systems (CAS)

is enjoined although limited to data

gathering, summarizing, and obtaining

discrepancy reports. Other special

procedures peculiar to related-party audit

that are necessary to reflect the true

taxable income of controlled entities may

also be undertaken. All preliminary

findings shall be reviewed by the ACIR or

by the respective Head Revenue Executive

Assistants (HREAs) before any Confer-

ence Letter is issued. Conference for

interrelated group of taxpayers shall be

conducted simultaneously, unless there are

justifiable reasons to conduct it separately.

All assessment notices (ANs) shall be

issued by the CIR upon approval of the

final reports of investigation. All ANs

should be conducted simultaneously,

unless there are justifiable reasons to

conduct them separately. ANs that remain

unpaid after the specified due date shall

be transmitted for collection to the

respective collection units having

jurisdiction over the taxpayers within 15

days from the date of delinquency.

Payment forms may be signed by the

ACIR or the respective HREAs.

All investigations should be completed

and the reports on such investigations

should be submitted to the CIR not later

than six months from the issuance of the

LA.


30, 2010)

8 8 8 8 8 April 2010

BIR Rulings

Stipends of resident physiciansStipends of resident physiciansStipends of resident physiciansStipends of resident physiciansStipends of resident physicians

The stipends received by resident

physicians during their intensive training

in the residency program of a hospital are

subject to creditable withholding tax

(CWT) imposed at the rate of 15% if the

gross income of the resident physicians

for the current year exceeds P720,000,

and 10% if otherwise pursuant to Section

2.57.2 (A)(1) of RR 2-98.

The BIR previously held (BIR Ruling No.

12-86) that stipend and allowances paid to

resident trainees are considered

compensation income subject to

withholding if these are received as a

result of an employer-employee

relationship. However, the BIR has

clarified that the taxability of stipends

received by resident physicians has

become apparent under RR 2-98.

Under Section 2.57.2 (A)(1) of RR 2-98,

income payments derived by individuals

engaged in the practice of profession or

calling like doctors of medicine are

subject to 10% or 15% CWT. The amount

subject to CWT shall include not only

fees, but also per diems, allowances, and

any other form of income payments not

subject to withholding tax on compensa-

tion.

Such stipends are considered income

subject to CWT even in the absence of an

employer-employee relationship since in

the present withholding tax regulations,

any other form of income payments not

subject to the withholding tax on

compensation are now subject to the

CWT prescribed under RR 02-98. In the

instant case, the applicable CWT rate shall

be 10% considering that the resident

physicians are receiving stipends in the

amount of P10,000 per month or a gross

annual income less than P720,000.

[BIR Ruling No. DA (C-004)024-2010,

February 4, 2010]

VVVVVAAAAAT on hotel serT on hotel serT on hotel serT on hotel serT on hotel services to internationalvices to internationalvices to internationalvices to internationalvices to international

airlinesairlinesairlinesairlinesairlines

The room accommodation and food and

beverage services rendered by a hotel for

clients engaged in international transport

operations are subject to VAT at 12%, not

at 0%. The BIR upheld its position under

BIR VAT ruling No. 02-01 that the VAT

zero-rated services contemplated in the

VAT Law refer to services rendered

directly in relation to the international

vessel itself. Since the hotel services are

rendered within the hotel’s premises and

have no direct connection with the

transport of goods or passengers, the BIR

held that the services cannot be deemed

as services directly attributable to the

transport of goods and passengers from a

Philippine port directly to a foreign port

entitled to VAT zero-rating under Section

108(B)(4) of the Tax Code.

[BIR Ruling No. DA(VAT-003)016-2010,

January 28, 2010]

CWT on manpower serCWT on manpower serCWT on manpower serCWT on manpower serCWT on manpower servicesvicesvicesvicesvices

Income payments to companies providing

personnel, manpower and general

maintenance services are subject to 2%

CWT imposed on business agencies

pursuant to Section 2.57.2(E)(4)(g) of RR

02-98 based on gross receipts, which

should include the agency commission

plus salaries and the contributions (SSS,

PhilHealth, and Pag-IBIG).

The rule under RMC 39-2007 that limits

the coverage of the 2% CWT to the

agency fee, excluding the salaries of

security guards, does not apply to

manpower service companies. Unlike in

the case of security agencies wherein the

primary obligation to pay the salaries of

the security guards rests on the clients, the

primary obligation to pay the salaries of

the workers of other service providers

rests on the service providers themselves.

The BIR explained that there is nothing in

the RMC indicating its applicability to

manpower agencies, i.e., janitorial and

clerical services, other than security

agencies. Thus, the RMC cannot apply to

agencies other than security agencies.

[BIR Ruling No. DA(C-003)020-2010,

January 29, 2010]

DST on credit facilityDST on credit facilityDST on credit facilityDST on credit facilityDST on credit facility

In order to finance its project, a coal

power plant company secured credit

facilities from various lenders. The facility

agreements are embodied in one master

agreement referred to as the omnibus

agreement, which sets forth the terms and

conditions upon which the various lenders

have agreed to provide loans to the

borrower.

The BIR held that while the omnibus

agreement, being a credit facility, is among

the agreements included in the definition

of a loan agreement under RR 09-94, a

credit facility per se is not considered a

loan agreement subject to DST under

Section 179 of the Tax Code, unless the

borrower makes actual drawings

considered as the operative act that gives

rise to DST liability.

There must be another document to

prove that such credit facility has indeed

been converted into a loan agreement,

either by the execution of a formal loan

agreement or a promissory note, or even

by a credit/debit memo, advice or

drawings. The DST shall be due on the

amount actually drawn.

[BIR Ruling No. DA(C-001)01-2010,

January 1, 2010]

April 2010 99999

Court Decisions

Incidental transaction for VIncidental transaction for VIncidental transaction for VIncidental transaction for VIncidental transaction for VAAAAATTTTT

purposespurposespurposespurposespurposes

Under Section 105 of the NIRC of 1997,

VAT is imposed on a sale or transaction

entered into by a person in the course of

any trade or business. A transaction is

characterized as having been entered into

by a person in the course of trade or

business if it is: (a) regularly conducted,

and (2) undertaken in pursuit of a

commercial or economic activity.

Transactions that are made incidental to

the pursuit of a commercial activity are

considered as entered into in the course

of trade or business, and are subject to

the 12% VAT.

In carrying out its business, a power

generating company acquired a motor

vehicle that formed part of its assets used

in its business operations. When the

motor vehicle was already fully

depreciated, the company sold the motor

vehicle, which is considered a one-time

sale transaction. The Court of Tax

Appeals (CTA) held that the sale of the

company’s fully depreciated motor vehicle

is considered an incidental transaction

since the vehicle was purchased and used

in the furtherance of the company’s

business. Hence, the sale should be

subject to the 12% VAT.

(Mindanao II Geothermal Partnership v.

Commissioner of Internal Revenue, CTA EB

No. 513 re CTA Case Nos. 7227, 7287, and

7317, March 10, 2010)

Contesting a real properContesting a real properContesting a real properContesting a real properContesting a real property taxty taxty taxty taxty tax

assessmentassessmentassessmentassessmentassessment

Payment of tax under protest pursuant to

Section 252 of the Local Government

Code (LGC) before appealing an

assessment with the Local Board of

Assessment Appeals (LBAA) and Central

Board of Assessment Appeals (CBAA) is

not required when what is being

questioned is the legality and not the

reasonableness of the real property tax

(RPT) assessment. Also, while a taxpayer

may be excused from exhausting

administrative remedies of lodging an

appeal before the LBAA and CBAA in

cases involving purely legal questions, he

cannot be excused if the resolution of the

case requires the presentation and

evaluation of evidence. Otherwise, the

appeal to the court will be considered

premature and not yet ripe for judicial

determination.

The CTA en banc dismissed the petition of

a power company that claimed exemption

from real property tax imposed on its

machineries and equipment, due to its

failure to exhaust the administrative

remedy of appealing the assessment to

the LBAA and CBAA pursuant to Section

226 and 229 of the LGC. The CTA en

banc held that although cases raising

purely legal questions may be excused

from exhausting administrative remedies

before going to the courts (Ty vs. Trampe,

GR N0. 117577, December 1, 1995), the

legal questions raised by the taxpayer

require proof of facts to prove its claim

for exemption (Figuerres vs. Court of

Appeals, et. Al., GR No. 119172, March 25,

1999). According to the CTA en banc the

taxpayer raises a question on the legality

of the RPT assessment based on its claim

that its machineries and equipment are

exempted from RPT. The Court noted

that this claim must be proven by the

taxpayer with sufficient and competent

evidence.

Under Section 206 of the LGC, every

person by or for whom real property is

declared, who shall claim tax exemption

for such property, should file with the

provincial, city or municipal assessor

sufficient documentary evidence in

support of its claim of exemption within

30 days from the date of declaration of

real property. Thus, a taxpayer claiming

exemption from RPT has to file a claim

before the provincial, city or municipal

assessor, and the latter officers have the

authority to determine the validity of the

claim through pieces of evidence

submitted by the taxpayer.

According to the CTA en banc, the

decision of the provincial, city or

municipal assessor on the taxability of

property can be appealed to the LBAA

and CBAA pursuant to Section 226 and

229 of the LGC. In the instant case, the

taxpayer sought judicial relief by filing a

petition with the Regional Trial Court

(RTC) after receiving the notice of

assessment by the municipal assessor

when what it should have done was to

first appeal the assessment to the LBAA

and then elevate the case to the CBAA

before going to the court.

On the requirement under Section 252 of

LGC that the tax due must be paid first

before initiating any protest to an

assessment, the CTA en banc held that

since the legality is at issue, and not the

excessiveness or reasonableness of the

real property tax assessment, there is no

need for the taxpayer to pay first the real

property tax assessment before initiating a

protest. Hence, the taxpayer is not

required to “first pay the tax” under

protest before initiating a protest or

appeal to the LBAA.

(National Power Corporation v. Municipal

Government of Navotas, et.al., CTA EB No.

461 re CTA AC No. 37, March 10, 2010)

10 10 10 10 10 April 2010

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