February 2013 11111

February 2013

Tax briefContentsContentsContentsContentsContents

0202020202 BIR IssuancesBIR IssuancesBIR IssuancesBIR IssuancesBIR Issuances Transfer pricing regulations Expansion of eFPS coverage Clarification on deductibility

of depreciation and otherexpenses on motor vehicles

Revalidation of rulings of non-stock, non-profit hospitals

Income tax and VAT onmembership fees ofhomeowners associations

0404040404 BIR RulingsBIR RulingsBIR RulingsBIR RulingsBIR Rulings VAT on sale and/or lease of

cinematographic films VAT on regional or area

headquarters 15% tax sparing credit rate

for dividends

0505050505 CourCourCourCourCourt Decisionst Decisionst Decisionst Decisionst Decisions Scope of CTAs appellate

jurisdiction Application of doctrine

piercing the corporate veil Sale of sugar by a

cooperative to non-members

0707070707 SEC IssuanceSEC IssuanceSEC IssuanceSEC IssuanceSEC Issuance Revised date of submission

of the ISAFS of financing andlending companies

1010101010 Highlight on P&A servicesHighlight on P&A servicesHighlight on P&A servicesHighlight on P&A servicesHighlight on P&A services Tax return preparation and

review

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BIR Issuances

Transfer pricing regulationsThe Bureau of Internal Revenue (BIR)has issued the following guidelines inapplying the arms length principle forcross-border and domestic transactionsbetween associated enterprises.

Definition of associated enter-prisesFor transfer pricing (TP) purposes, two ormore enterprises are associated if oneparticipates directly or indirectly in themanagement, control, or capital of theother, or if the same persons participatedirectly or indirectly in the management,control, or capital of the enterprises. Theterm control is defined as any kind ofcontrol, direct or indirect, whether or notlegally enforceable, and however exercis-able or exercised. Moreover, control shallbe deemed present if income or deduc-tions have been arbitrarily shiftedbetween two or more enterprises.

Determination of arms length priceThe BIR adopts the use of arms lengthprinciple as the most appropriatestandard in determining the transferprices of associated enterprises or relatedparties. The arms length principlerequires that the transaction with a relatedparty be made under comparableconditions and circumstances as atransaction with an independent party.

In the application of the arms lengthprinciple, the following three-stepapproach shall be observed:

1. Conduct of comparabilityanalysis

2. Identification of tested partyand the appropriate transferpricing method

3. Determination of the armslength results

Arms length pricing methodologiesThe TP guidelines prescribed fivemethods in determining the arms lengthprice of a transaction. These are compa-rable uncontrolled price (CUP), resaleprice method, cost plus method (CPM),profit split method (PSM) and transactionnet margin method (TNMM). There is nosingle method that is applicable to allcases, and choice of appropriate transferpricing method must be made dependingon the evaluation of the transaction.

Details of the TP methodologies areexplained in the regulations.

Advance Pricing Arrangement (APA)The advance pricing arrangement (APA)is a facility available to taxpayers to enterinto an agreement with the BIR todetermine in advance the criteria (e.g.,method, comparables and appropriateadjustments) to ascertain the transferprices of controlled transactions over afixed period of time. An APA mayinvolve an agreement between thetaxpayer and the BIR (unilateral APA) oran agreement involving the Philippinesand one or more of its treaty partners(multilateral APA).

Transfer Pricing DocumentationTP document is not required at the timeof the filing of the tax return. However,the taxpayer has the obligation to ensurethat TP documents are available forsubmission when required or requestedby the BIR. The TP documents must beretained or preserved within the retentionperiod provided under the Tax Code.

Taxpayers are required to preparecontemporaneous TP documentation.Documentation is contemporaneous if itexists or is brought into existence at thetime the associated enterprises develop orimplement any arrangement that mightraise transfer pricing issues or review thearrangements when preparing returns.

(Revenue Regulations No. 2-2013, January 23,2013)

Expansion of eFPS coverageThe BIR has expanded the coverage ofelectronic filing and payment system(eFPS) to include all national governmentagencies (NGAs) whose main fund/budget comes from the Department ofBudget (DBM) based on the yearlybudget allotment under the GeneralAppropriations Act.

A notification letter shall be sent by theBIR to all NGAs, including theirbranches and extension offices locatednationwide, mandating them to enroll anduse the eFPS in the filing of tax returnsand payment of their tax dues. The taxreturns that NGAs are required to file viathe eFPS shall include BIR Forms1601(C), 1601(E), 1601(F), 1603, 1600,1702, 1702Q, 2000, 2500M, 2500Q, and2551 M. The staggered filing of returnsallowed for withholding agents/taxpayersenrolled in the eFPS facility shall notapply in the case of NGAs.

All NGAs notified through the notifica-tion letter shall enroll in the electronic taxremittance advice (eTRA) system byenrolling first with the BIRs eFPS facility.For NGA tax liabilities arising from theuse of funds coming from the DBM,concerned NGAs shall use the eTRA.NGAs tax liabilities arising from the useof funds other than those coming fromthe DBM must be paid using cashthrough the bank debit system of theAuthorized Agent Bank (AAB) where theNGA shall enroll for this purpose.

(Revenue Regulations No. 1-2013, January 23,2013)

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BIR Issuances

Clarification on deductibility ofdepreciation and other expenseson motor vehiclesThe BIR issued the following clarificationon the limit imposed under RevenueRegulations No. (RR) 14-2012 on thedeductibility of depreciation allowance,maintenance expenses and input VAT onmotor vehicles:

1. The limit on deductibility ofdepreciation allowance, mainte-nance expenses and input VATon motor vehicles shall apply toland vehicles purchased prior toOctober 17, 2012 (i.e., effectivityof RR 14-2012) where thepurchased amount exceeded thethreshold of P2.4 million.

2. Non-deductible expenses fornon-depreciable vehicles shallalso cover all related expensesand input tax including, but notlimited to, repairs and mainte-nance, oil and lubricants,gasoline, spare parts, tires andaccessories, premiums paid forinsurance, and registration fees.

3. In case the non-depreciablevehicles will be sold at a loss,any loss shall likewise not beallowed as a deduction fromgross income.

Note: Under RR 14-2012, a taxpayer mayclaim for depreciation allowance, maintenanceexpense and input VAT only for one land vehiclefor use of an official or employee with value notexceeding P2.4 million. No depreciation shall beallowed for yachts, helicopters, airplanes, andland vehicles over P2.4 million, unless thetaxpayers main line of business is transportoperations or lease of transport equipment.

(Revenue Memorandum Circular No. 02-2013,January 7, 2013)

Revalidation of rulings of non-stock, non-profit hospitalsAll hospitals that were issued tax-exemptrulings by the BIR are required to requesta revalidation of their tax-exempt statusby submitting the following documents tothe Revenue District Office (RDO) wherethe organization is registered:

a. Letter of application, whichmust state the specific paragraphunder Section 30 of theNational Internal Revenue Code(NIRC) under which it seeksexemption

b. Copies of the corporationslatest Article of Incorporationand By-Laws duly certified bythe Securities and ExchangeCommission (SEC)

c. Certification of Registrationwith the BIR

d. Tax clearance issued by theRDO where the corporation isregistered

e. Copies of the income taxreturns or annual informationreturns and financial statementsfor the last three years

f. A statement of its modusoperandi stating its sources ofrevenue

g. Other documents the BIR mayrequire

The application shall be evaluated by theRDO to determine whether the organiza-tion qualifies as a tax-exempt corporationunder Section 30 of the Tax Code. If the

application is found insufficient, theorganization shall be notified of thefindings, and the application shall bereturned to it.

If the application is found valid, a reportshall be prepared by the RDO stating whythe organization is qualified to be tax-exempt under Section 30 of the TaxCode. The docket of the case shall beforwarded to the Office of the RegionalDirector for review. If the RegionalDirector agrees with the recommendationof the RDO, the same shall be forwardedto the Office of the Assistant Commis-sioner, Legal Service. The Law Divisionshall review and evaluate the documents,and if everything is in order, it shallprepare the appropriate certificate of taxexemption for signature of theCommissioner or her duly authorizedrepresentative.

All rulings issued prior to November 1,2012 that grant tax exemption to propri-etary non-profit hospitals or to non-stock,non-profit entities operating as hospitalsunder Section 30 of the Tax Code shallno longer be valid.

(Revenue Memorandum Circular No. 4-2013,January 14, 2013)

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BIR Issuances

Income tax and VAT on member-ship fees of homeowners associa-tionsThe association dues, membership fees,and other assessments/charges collectedby homeowners associations from itshomeowner-members and other entitiesform part of their gross income, which issubject to income tax and Value-AddedTax (VAT). The amounts paid in dues orfees by homeowner-members constituteincome payments or compensation forbeneficial services homeowners associa-tions provide to their members andtenants, which are subject to income taxand VAT. Moreover, since homeownersassociations are subject to income tax,they are subject to applicable withholdingtaxes under existing regulations.

This notwithstanding, the associationdues and income of the homeownersassociations may be exempted fromincome tax, VAT and percentage tax if itsatisfies the following conditions:

1. It must be a duly constitutedAssociation as defined underSec. 3(b) of Republic Act No.(RA) 9904.

2. The local government unit(LGU) must issue a certificationidentifying the basic communityservices and facilities beingrendered by the homeownersassociation and therein statingits lack of resources to rendersuch services.

3. The homeowners associationmust present proof (i.e.,financial statements) that theincome and dues are used forthe cleanliness, safety, securityand other basic services neededby the members, including themaintenance of the facilities oftheir respective subdivisions orvillages.

(Revenue Memorandum Circular No. 9-2013,January 30, 2013)

VAT on sale and/or lease ofcinematographic filmsCinematographic film owners/producersand lessors are subject to the 12% VATon their share in the gross sales orreceipts representing the rental incomefor the use or lease of cinematographicfilms. Being lessees of services, such VATcan be passed on to cinema/theateroperators or proprietors.

Pursuant to Section 105 of the Tax Code,the VAT is an indirect tax in which theamount of the tax may be shifted to orpassed on to the buyer, transferee orlessee of goods, properties, or services.Since VAT is the direct liability of thelessor, once shifted, it is no longer a taxon the part of the lessee but an additionalcost, which the lessee must pay to obtainthe service.

The BIR held that cinema/theateroperators may not refuse to shoulder theVAT component from their lease ofcinematographic films. As explained bythe BIR, the exemption from VAT ofcinema/theater operators or proprietors,which was upheld by Supreme Court(Commissioner of Internal Revenue v.SM Prime Holdings), is only limited onthe gross receipts derived by cinema/theater operators or proprietors fromadmission tickets and does not extend tothe purchase or lease of cinematographicfilms. Hence, owners, producers, andlessors of cinematographic films maypass on the VAT component to cinema/theater operators or proprietors on thesale or lease of cinematographic films.

(BIR Ruling No. 047-2013, January 24,2013)

VAT on regional or area headquar-tersUnder Section 109(1)(J) of the Tax Code,services rendered by regional or areaheadquarters established in the Philip-pines by multinational corporations thatact as supervisory, communications andcoordinating centers for their affiliatesubsidiaries or branches in the AsiaPacific Region and do not earn or deriveincome from the Philippines are exemptfrom VAT. On the other hand, Section108(B)(3) of the Tax Code likewiseprovides that services rendered by VAT-registered persons to persons or entitiesexempt under special laws shall beeffectively subject to 0% VAT.

BIR Rulings

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BIR Rulings

Under Article 65 of Executive Order No.(EO) 226, regional or area headquartersare exempt from VAT, while the sale orlease of goods or properties to them issubject to the 0% VAT. Considering thatEO 226 is a special law, the sale of goodsand services rendered to the regional orarea headquarters shall be effectivelysubject to 0% VAT under Section108(B)(3) of the Tax Code.

(BIR Ruling No. 035-2013, January 29,2013)

15% tax sparing credit rate fordividendsUnder Section 28(B)(5)(b) of the TaxCode, a nonresident foreign corporationmay avail of the 15% preferential tax rateon dividends received by it from adomestic corporation without need forapplying for a tax relief from theInternational Tax Affairs Division(ITAD) if it meets the tax sparing creditrequirement, i.e., the country of domicileof the nonresident foreign corporationallows a credit against the tax imposableby it at an amount equivalent to 20%(now 15%) of the dividends remittedfrom the Philippine domestic corporationto corporations domiciled therein.

The BIR held that the exemption fromtaxes of the dividends received by thecountry of domicile of the non-residentcorporate stockholder is sufficient for theapplicability of the 15% tax rate underSection 25(b)(5)(B) of the Tax Code.Hence, dividends received by a non-resident foreign corporation domiciled ina country that imposes no tax on divi-dends from foreign sources are subject tothe 15% preferential withholding tax rateunder said tax sparing credit provision ofthe Tax Code.

(BIR Ruling Nos. 012-2013 and 014-2013,January 3, 2013)

Scope of CTAs appellate jurisdic-tionWhile the Court of Tax Appeals (CTA) isconferred under RA 1125, as amended byRA 9282, the authority to resolve taxdisputes in general, this does not includecases where the constitutionality of a lawor rule is challenged. Moreover, whileunder its Revised Rules, the CTA hasjurisdiction over other matters arisingunder the National Internal RevenueCode. The other matters contem-plated therein must also be directlyrelated to the disputed assessment andcannot be taken in isolation to invoke thespecialized jurisdiction of the CTA.

In the instant case, the taxpayer filed for atax treaty relief application (TTRA) withthe Commissioner of Internal Revenue torequest confirmation that the dividends it

Court Decisions

received from a domestic corporation issubject to preferential tax rate. The BIRissued a ruling denying the taxpayersapplication. The ruling was appealed tothe Secretary of Finance who denied thetaxpayers appeal.

In its appeal to the CTA, the taxpayerassailed the constitutionality of RevenueMemorandum Order Nos. (RMOs) 1-2000 and 72-2010, which require thefiling of a tax treaty relief application inavailing of preferential tax rate under taxtreaties. The taxpayer argued that bothRMO 1-2000 and 72-2010 are unconstitu-tional since they were issued beyond therule making power of the Commissionerof Internal Revenue. Hence, it sought thereversal of the BIR and Department ofFinance (DOF) ruling denying itsapplication for preferential tax treaty rate.

The CTA held that its jurisdiction toresolve tax disputes in general does notinclude cases where the validity orconstitutionality of a law, or a rule orregulation issued by the administrativeagency in the performance of its quasi-legislative function is challenged. Citingthe case of British American Tobacco v.Camacho (GR No. 163583, August 20,2008), the CTA ruled that the determina-tion of whether a specific rule or set ofrules issued by an administrative agencycontravenes the law or the constitution iswithin the jurisdiction of the regularcourts. Hence, the taxpayer should haveelevated the case before the regularcourts, after the denial of its appeal bythe Secretary of Finance.

(Egis Projects S.A. v. The Secretary of Financeand Commissioner of Internal Revenue, CTACase No. 8413, January 29, 2013)

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Court Decisions

Application of doctrine piercingthe corporate veilThe stockholders and/or officers of acorporation cannot be held directly liablefor corporate tax liabilities, except forcertain circumstances when the doctrinepiercing the corporate veil may beapplied; hence, the stockholders and/orthe officers of the corporation may bedirectly liable for the tax liabilities of thecorporation.

After having affirmed the deficiency taxassessment against the company, the CTAordered the companys president (whowas likewise found guilty for failure to filereturn and supply information underSection 255 of the Tax Code) to pay forthe civil liability of the company arisingfrom its tax assessment. The companypresident appealed the ruling with theCTA and argued that the civil liability ofthe corporation should not be collectedfrom him since he himself is not thecorporation, but merely a responsibleofficer.

In its amended decision, the CTA heldthat the taxpayer is correct in pointing outthat the corporation is a separate anddistinct entity. Thus, while the accused isthe president of the corporation, hehimself is not the corporation, but merelya responsible officer. As ruled by theCTA, only in circumstances such as whenthe corporation was used merely as anadjunct, business conduit or alter ego ofanother corporation or by its officers orstockholders, or the corporation was usedto perpetuate fraud in violation of the taxlaws can the doctrine of piercing thecorporate veil be applied.

Considering that no allegation was madethat the corporation was used by itspresident in the aforementioned circum-stances, the fiction that the stockholdersand/or officers are separate and distinct

entities from the corporation cannot bedisregarded. Hence, the CTA held thatthe company president cannot be made topay the civil liability of the corporationarising from the deficiency assessmentissued to it by the BIR.

(People of the Philippines v. Wong Yan Tak,Geralyn Bobier and Pic N Pac Mart, Inc.,CTA Criminal Case No. 0-090, January 8,2013)

Sale of sugar by a cooperative tonon-membersUnder Section 3 of RR 13-08, an advanceVAT on the sale of refined sugar shall bepaid by the owner/seller before therefined sugar is withdrawn from anysugar refinery/mill. The withdrawal is notsubject to advance VAT in case therefined sugar is owned and withdrawnfrom the sugar refinery/mill by anagricultural cooperative of good standingduly accredited and registered with theCooperative Development Authority(CDA), which cooperative is the agricul-tural producer of the sugar cane that wasconverted into refined sugar.

Under Section 4 (a) of RR 13-08, in orderfor a cooperative to be considered anagricultural producer, it should be ofgood standing duly accredited andregistered with the CDA and it should be

(a) the tiller of the land it owns or leases;(b) the one incurring cost of agriculturalproduction of the sugar; and (c) the oneproducing the sugar cane to be refined.

In the case at hand, the BIR, beforeissuing the Authorization AllowingRelease of Refined Sugar (AARS),required the agricultural cooperative topay the advance VAT on the grounds thatthe cooperative was unable to meet therequirements to qualify as an agriculturalproducer exempt from payment ofadvance VAT.

The CTA held that the subject agricul-tural cooperative is considered the actualproducer of the sugarcane that wasconverted into refined sugar since it isduly registered with the CDA, is in goodstanding, and it provided the variousproduction inputs (fertilizers), capital,technology transfer and farm manage-ment. Hence, the agricultural cooperativeshould be VAT-exempt on its sale ofrefined sugar to non-members.

(Negros Del Norte Planters Association Multi-Purpose Cooperative v. Commissioner ofInternal Revenue and BIR Regional Director,Region 12, Bacolod City, CTA Case No. 8287,January 30, 2013)

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SEC Issuance

Revised date of submission of theISAFS of financing and lendingcompaniesThe Securities and Exchange Commission(SEC) moved the deadline for submissionof the interim semi-annual financialstatements (ISAFS), otherwise known asFinancing Companies Interim FinancialStatements (FCIF) and Lending Compa-nies Financial Statements (LCIF), whichare required to be submitted by financingand lending companies pursuant to Rule8(a) of the Implementing Rules andRegulations of RA 9474, otherwiseknown as the Lending Company Regula-tion Act of 2007.

Under SEC Memorandum Circular No. 3,Series of 2007, the SEC requires lendingand financial companies to submit theirISAFS or FCIF within 15 calendar daysfrom the end of semester. Due to theclamor to have later dates of submission,the SEC has adopted a new deadline forsubmission of financing and lendingcompanies of their ISAFS: from 15calendar days to 45 calendar days fromthe end of the semi-annual periodcovered by the report.

(SEC Memorandum Circular No. 3, January15, 2013)

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