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1May 2007 May 2007

taxbrief

Member of Grant Thornton International

2 BIR Issuances• Sanctions on erring finance officers and tax

practitioners• New paradigm in meeting the BIR’s collection

target• Verification of 2005 tax returns

3 BIR Rulings• Non-withholding of VAT on foreign reinsurers• Book value computation for shares excludes

unrealized forex gains• ATP not required for pawn tickets• Sale of scraps by PEZA company• Sale of trademarks• VAT on money-transfer services•

Transportation and cell phone allowance

4 Supreme Court Decisions• FSD subject to DST• VAT on HMOs• Absence of ATP or TIN VAT on invoice not fatal to

claim for refund

7 Court of Appeals Decisions• Claim for refund proceeds separately from an

assessment

7 Court of Tax Appeals Decisions• Petroleum product purchased from a CBBE

not exempt from excise tax• Gross receipts of international airlines

ContentsContentsContentsContentsContents

Catherine Dela CruzSenior ManagerTax Advisory & Compliance

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must be resolved in favor of the government. The authoritydelegated to the Regional Directors and Assistant

Commissioners to sign rulings involving grant of exemptionshall be transferred to the Assistant Commissioner and theDeputy Commissioner, respectively. Claims for refund shall beresolved expeditiously. Reports granting claims of more thanP1 million shall be cleared with the Deputy Commissioner forOperations, while those amounting to at least P10 million shallpass through the Commissioner.

2. All periods in the audit and assessment process shall bescrupulously observed as prescribed in Revenue MemorandumOrder (RMO) No. 11-06 and brought to the PreliminaryAssessment Notice (PAN) / Final Assessment Notice (FAN) stage

without prolonged and unnecessary discussions with thetaxpayers.

3. All protests on PANs/FANs not containing substantial issuesshall be summarily denied without any prolonged discussionand brought to the payment stage, unless the taxpayer electsto go to court.

4. Taxpayers shall be enjoined to avail of the ImprovedVoluntary Assessment Program and the one-timeadministrative abatement.

Priority industries for audit 

Businesses that are earning more revenues this year (such as,but not limited to, the following) shall be prioritized for audit.

a. hotels and other tourism-related establishmentsb. stockbrokersc. lessors/lessees and sellers/dealers/buyers/brokers of

real propertiesd. mining companiese. TV stationsf. advertising companiesg. recruitment agencies

h. hospitals, clinics, medical and dental laboratoriesi. business agents and their clients reporting no

payment returns j. professionals like doctors, lawyers, accountants, etc.k. government contractorsl. duly identified top 10,000 private corporations under

RR 17-03

BIR ISSUANCES

Sanctions on erring finance officers and taxSanctions on erring finance officers and taxSanctions on erring finance officers and taxSanctions on erring finance officers and taxSanctions on erring finance officers and taxpractitionerspractitionerspractitionerspractitionerspractitioners

Revenue officials have been directed to initiate necessary actionsagainst any financial officer or tax practitioner who is found guiltyof violating the provisions of the tax laws. These actions mayinclude suspending or canceling his accreditation, or filingcriminal actions against him.

Under the Tax Code, a fine of P50,000 to P100,000 andimprisonment of two to six years shall be imposed, uponconviction, on financial officers and independent certified publicaccountants who willfully falsify audit reports, render reports notin accordance with sound auditing practices, or certify financialstatements with substantial misstatements or omissions. Thesame punishment applies to persons who certify financialstatements without audit, offer the use of accounting records notcompliant with tax rules, make false entries in the books, keeptwo or more sets of books, or commit other prohibited acts oromissions.

Revenue Regulations (RR) No. 11-06, on the other hand,enumerates the norms of conduct for tax practitioners, violations

of which shall result in the suspension or cancellation of his taxagent accreditation with the Bureau of Internal Revenue (BIR).

(Revenue Memorandum Circular No. 31-2007, April 25, 2007) 

New paradigm in meeting the BIR’s collectionNew paradigm in meeting the BIR’s collectionNew paradigm in meeting the BIR’s collectionNew paradigm in meeting the BIR’s collectionNew paradigm in meeting the BIR’s collectiontargettargettargettargettarget

The BIR has outlined guidelines and procedures that should bestrictly observed by revenue officers pursuant to the newparadigm mandated by the Secretary of Finance towards

meeting the annual collection target, as follows:

On the resolution of assessments and refund claims 

1. All claims for exemptions, cash refunds and issuance of taxcredit certificates (TCCs) shall be strictly evaluated. Any doubt

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(cont’d on page 4)

m. taxpayers reporting exempt/net loss/no operations intheir filed returns.

Intensified use of information as basis for development of assessment cases 

1. Tax mapping operations (e.g., Tax Compliance VerificationDrive or TCVD) and third-party information mining to addnew taxpayers to the rolls and enhance voluntarycompliance

2. Generation of discrepancy reports from the Summary Listsof Sales and Purchases (SLSP)

3. Accelerated database registration clean-up and build-up4. Strict monitoring of returns of stop/non-filer taxpayers

5. Stocktaking and surveillance activities on businessestablishments

6. Development of fraud cases as prescribed under RMO 40-06

Enforcement of penalties and collection of receivables 

1. Closing establishments that violate the provisions of theTax Code

2. Collecting Accounts Receivable through the issuance ofwarrants of distraint and/or levy

3. Initiating the audit of accounts that are closed in theIntegrated Tax Systems (ITS)

4. Initiating proceedings against erring financial officers/taxpractitioners pursuant to Revenue Memorandum Circular(RMC) No. 31-07

The performance of revenue officers in the implementation ofthese policies shall be strictly evaluated and shall be used,among others, as a basis to reshuffle officials and employees.Progress reports on actions taken and results shall besubmitted to the Commissioner every 15th of the month.

(Revenue Memorandum Circular No. 32-2007, May 2, 2007) 

Verification of 2005 tax returnsVerification of 2005 tax returnsVerification of 2005 tax returnsVerification of 2005 tax returnsVerification of 2005 tax returns

Tax Verification Notices (TVNs) shall be issued to cover theverification of all internal revenue taxes for 2005 of taxpayerswhose 2004 and 2005 income tax returns both fall under any ofthe following criteria:

a. “No Operation” tax returns

b. Exempt tax returnsc. Tax returns reflecting “Net Loss” and/or “No Taxable

Income”

Verification and report on all cases shall be completed andsubmitted to the Revenue District Officer (RDO) not later thanJune 15, 2007, and transmitted to the AssessmentDivision for review on or before June 29, 2007.

All applicable guidelines and procedures under existing revenueissuances not inconsistent with the provisions of the circularshall be strictly observed.

(Revenue Memorandum Order No. 05-2007, April 16, 2007) 

BIR RULINGS

Non-withholding of VAT on foreign reinsurersNon-withholding of VAT on foreign reinsurersNon-withholding of VAT on foreign reinsurersNon-withholding of VAT on foreign reinsurersNon-withholding of VAT on foreign reinsurers

An insurance company’s failure to withhold VAT on reinsurancepremiums paid to foreign reinsurers prior to 2002 is

understandable and appears to have a basis in the lawconsidering the difficulty in interpreting the BIR’s issuances onthe matter. It is a common principle in taxation that if the intentor meaning of the tax statute is not clear or is doubtful as towhether a taxpayer is covered by the tax obligation, the tax lawshall be construed against the Government because revenuelaws impose special burdens.

Section 4.102-1(d) of RR 07-95 dated December 9, 1995provides that the reinsurance business is subject to the 10%VAT, and that the VAT due on a foreign reinsurance companymust be withheld by the local insurance company. However, inRMC 11-96, it was clarified that reinsurance premiums shall notbe subject to VAT if received by a reinsurer from a companythat has paid the VAT on the insurance premium. In 2002,RR 08-02 dated June 13, 2002 amended portions of RR 07-95and reiterated that reinsurance premiums paid to nonresidentsare subject to withholding VAT.

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However, if the failure of the insurance company to withhold theVAT continued after 2002, the company shall be liable to interestimposable from the date the withholding VAT remittance return(BIR Form No. 1600) should have been filed (on the tenth day ofthe following month) up to the date when the relevant quarterly ormonthly VAT return was actually filed. The company shall not beliable to the VAT not withheld inasmuch as its failure to withholddid not result in any erosion in revenue. Non-withholding did notresult in a claim for input tax. A 25% surcharge is, however,imposable but without prejudice to the right of the company toapply for abatement.

(BIR Ruling No. 7-2007, March 27, 2007) 

Book value computation for shares excludesBook value computation for shares excludesBook value computation for shares excludesBook value computation for shares excludesBook value computation for shares excludesunrealized forex gainsunrealized forex gainsunrealized forex gainsunrealized forex gainsunrealized forex gains

In computing the book value of the shares of a company forpurposes of establishing the fair market value for taxpurposes, unrealized foreign exchange gains that have beenrecognized and reflected in the financial statements should beexcluded.

Unrealized foreign exchange gains, similar to the appreciationin value of property, do not yet constitute taxable incomeunless these are realized. Under the “realization” principle intaxation, income is recognized only when (a) the earningprocess is complete or virtually complete, and (b) an exchange

has taken place. Foreign exchange gains shall be realized

SUPREME COURTDECISIONS

FSD subject to DSTFSD subject to DSTFSD subject to DSTFSD subject to DSTFSD subject to DST

 A Fixed Savings Deposit (FSD) evidenced by a passbook but whose features are similar to a time deposit is subject to

documentary stamp tax (DST) on certificates of deposits

drawing interest under Section 180 of the Tax Code.

 The FSD, like a time deposit, provides for a higher

interest rate when the deposit is not withdrawn within

the required fixed period. Otherwise, it earns interest

pertaining to a regular savings deposit. Having a fixed

term and applying reduced interest rates in case of pre-

termination are essential features of a time deposit.

 To be deemed a certificate of deposit, a documentrequires no specific form as long as there is some

 written memorandum that the bank accepted a

deposit of a sum of money from

a depositor. The important and

controlling factor is the nature conveyed

by the passbook and not the particular label attached to it,

inasmuch as substance, not form, is paramount.

 The negotiable character of documents under Section 180 is

immaterial for purposes of imposing DST. A certificate of 

deposit may be payable to the depositor, to the order of the

depositor, or to some other person at his order.

(International Exchange Bank v. Commissioner of Internal Revenue, GR 171266, April 4, 2007)

VAT on HMOsVAT on HMOsVAT on HMOsVAT on HMOsVAT on HMOs

 A health maintenance

organization (HMO)

is not covered by the VAT

exemption granted to

medical, dental, hospital

and veterinary services

under the Tax Code. An

HMO does not actually 

render medical service,

but merely acts as a

conduit between the

(cont’d from page 4) 

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manufacturing activity of an enterprise registered with thePhilippine Economic Zone Authority (PEZA) shall be included incomputing the gross income earned from the registeredactivities. Consequently, such income shall be exempt fromincome tax during the period when the company is enjoying anincome tax holiday (ITH). After the expiration of the ITH, suchincome shall be subject to the 5% preferential income taxregime. The sale of reject and scrap items shall, however, besubject to 12% VAT during the ITH period.

(BIR Ruling No. DA-255-2007, April 25, 2007 )

Sale of trademarksSale of trademarksSale of trademarksSale of trademarksSale of trademarks

Sale of trademarks by a nonresident foreign corporation to alocal company is considered a sale of properties. However, suchsale is not made in the course of trade or business of the sellernor considered necessary or incidental in carrying out its businessof licensing its trademarks in the Philippines. Thus, applying therule of regularity, such sale of trademarks is not subject to VAT.

Trademarks are treated as intangible assets that may be subjectto depreciation if it can be shown that the period over which theycan be used in trade or business is definite. Hence, the local

company buyer may amortize the cost of the trademarksacquired over a period estimated based on the averageremaining lives of the trademarks pursuant to their registrationand the period required to build similar brands in the market.

(BIR Ruling No. DA-162-2007, March 20, 2007) 

VAT on money-transfer servicesVAT on money-transfer servicesVAT on money-transfer servicesVAT on money-transfer servicesVAT on money-transfer services

A local company engaged in money transfer services shall besubject to 0% VAT on service fees in foreign currency received

from a nonresident foreign corporation for money-transferservices where money shall be inwardly remitted to thePhilippines from abroad. The 12% VAT shall, however, apply if theservices are paid in the local currency.

(BIR Ruling No. DA-220-2007, April 12, 2007) 

Transportation and cell phone allowanceTransportation and cell phone allowanceTransportation and cell phone allowanceTransportation and cell phone allowanceTransportation and cell phone allowance

The following allowances given to call center employees,whether at supervisory levels or rank and file, shall not betaxable as compensation or fringe benefits of the employees:

1. Fixed monthly transportation allowance of P1,500 forrank and file employees and P3,000 for supervisoryemployees pre-computed on a daily basis. These areincurred by the employees in pursuit of the businessof the company. The allowance is provided to promotethe efficiency, well-being, and safety of theemployees. It is also necessary to enable them tocome to work safely and on time. There shall be no

requirement for substantiation because these are pre-computed on a daily basis.

2. Mobile phone allowance of P1,200 for supervisors,managers and directors who are expected to be oncall 24 hours a day. The accessibility of theseemployees is necessary to the business and redoundsto the convenience and benefit of the company. Thereis no need to substantiate this allowance.

(BIR Ruling No. DA-233-2007, April 17, 2007) 

(cont’d from page 6) 

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COURT OF APPEALSDECISIONS

Claim for refund proceeds separately fromClaim for refund proceeds separately fromClaim for refund proceeds separately fromClaim for refund proceeds separately fromClaim for refund proceeds separately froman assessmentan assessmentan assessmentan assessmentan assessment

Internal revenue taxes cannot be the subject of set-off or

compensation. A taxpayer’s entitlement to a refund of 

unutilized creditable withholding taxes cannot be forestalled

by alleged liability of the taxpayer to VAT and additional

income tax arising from alleged discrepancy in the

summaries of expanded withholding taxes attached to the

returns. The possible assessment that may result from a

BIR investigation is separate from the claim for refund.

Should an assessment be issued, it would have to be

threshed out in separate proceedings.

[Commissioner of Internal Revenue v. Starpack (Philippines)

Corporation, CA-GR SP No. 65210, March 22, 2007] 

COURT OF TAX APPEALSDECISIONS

Petroleum product purchased from a CBBEPetroleum product purchased from a CBBEPetroleum product purchased from a CBBEPetroleum product purchased from a CBBEPetroleum product purchased from a CBBEnot exempt from excise taxnot exempt from excise taxnot exempt from excise taxnot exempt from excise taxnot exempt from excise tax

Petroleum product purchased from a company 

registered as a Countryside Barangay Business Enterprise

(CBBE) is not exempt from excise tax. The buyer shall be

liable to the excise tax due on the petroleum product.

 The tax exemption granted to a CBBE under Republic Act

No. 6810 is personal and non-transferable. It is the CBBE,

not the transaction, that has been granted tax exemption.

Under the excise tax rules, should domestic products be

removed from the place of production without payment of 

the tax, the owner or person having possession thereof shall

be liable to the tax due on the product. Hence, a person

 who buys petroleum products from a CBBE shall be liable

to the excise tax due on the products.

(Lubwell Corporation v. Commissioner of Internal Revenue, CTA EB

 No. 143 re: CTA Case No. 6609, March 7, 2007)

Gross receipts of international airlinesGross receipts of international airlinesGross receipts of international airlinesGross receipts of international airlinesGross receipts of international airlines

 The definition of gross receipts subject to percentage taxunder RR 15-02 in the case of international airlines cannot

be applicable prior to October 26, 2002 when the

regulations became effective. Hence, prior to this date, the

percentage tax on international airlines shall be imposed on

gross receipts as defined under RR 06-66, which refers to

the cost of the single one-way fare as approved by the Civil

 Aeronautics Board on the continuous and uninterrupted

flight as reflected on the plane manifest. The tax cannot be

imposed on the amount actually received by the airline

based on discounts granted on the approved fare.

[Gulf Air Company, Philippine 

Branch (GF) v. Commissioner of 

Internal Revenue, CTA Case 

 No. 7030, March 31, 2007] 

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