Tax Case Anabelle

16 October 2013
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PICPA National Convention Tax
Update
16 November 2013
Isla Lipana & Co.
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Supreme
Court
Decisions
Revenue
Regulations
Revenue
Memorandum
Circulars
Other
Issuances
PICPA
Isla Lipana & Co., PwC member firm
Lopez Group
BIR Rulings
16 November 2013
Slide 2
16 October 2013
Supreme court decisions
Supreme
Court
Decisions
G.R. No. 188550, 19 August 2013

Deutsche Bank
Prior application for tax treaty relief not a

prerequisite
PICPA
Lopez Group
16 November 2013
Slide 4
16 October 2013
G.R. No. 188550, 19 August 2013
Facts:
Petitioner paid 15% branch profit remittance tax (BPRT)

amounting to PhP67,688,553.51 for 2002 and prior
taxable years
Filed an application for tax treaty relief with ITAD seeking
confirmation of entitlement to 10% tax under the RPGermany Tax Treaty.
Filed an administrative claim for refund in the total
amount of PhP22,562,851.17.
CTA denied the claim for failure to file treaty relief prior to
remittance of branch profits.
PICPA
16 November 2013
Slide 5
G.R. No. 188550, 19 August 2013

Ruling:
Those who are entitled to the benefit of a treaty cannot

be totally deprived of such benefit for failure to strictly
comply with an administrative issuance requiring prior
application for tax treaty relief.
Filing a tax treaty relief application prior to the
transaction is not a prerequisite for treaty protection.
PICPA
Lopez Group
16 November 2013
Slide 6
16 October 2013
G.R. Nos. 187485, 196113, 197156, 12

February 2013
San Roque Power Corporation
The 2-year prescriptive period refers to administrative

claim for refund and not judicial claim
Failure to comply with the 120+30 day period violates the
doctrine of exhaustion of administrative remedies subject to
exception.
PICPA
16 November 2013
Slide 7
G.R. Nos. 187485, 196113, 197156

dated 12 February 2013
Facts:
On 28 March, 2003, Company A filed with the BIR a

claim for refund of Php560 million representing 2001
unutilized input VAT attributable to zero-rated sales
13 days after or on 10 April 2003, Company A appealed
the claim to the CTA (prior to the lapse of 2 years from
first quarter of 2001)
PICPA
Lopez Group
16 November 2013
Slide 8
16 October 2013
G.R. Nos. 187485, 196113, 197156

Ruling:
The filing of a claim for tax refund of excess input VAT is

governed by Section 112(A) and (C), not Section 229 of
the Tax Code, which applies to refund of erroneously paid
or illegally collected taxes
Claim may be filed with the BIR anytime within the twoyear prescriptive period.
BIR has 120 days from submission of complete
documents to decide on the claim.
PICPA
16 November 2013
Slide 9
G.R. Nos. 187485, 196113, 197156

Ruling:
Claimant has 30 days from the decision or inaction to

elevate case to the CTA. The 30-day period to appeal need
not fall within the 2-year prescriptive period.
Failure to comply with the 120+30 day period violates the
doctrine of exhaustion of administrative remedies.
If the CIR fails to decide within 120 days, such inaction
shall be deemed a denial of the application for tax refund
PICPA
Lopez Group
16 November 2013
Slide 10
16 October 2013
G.R. Nos. 187485, 196113, 197156

Ruling: Exception to the 120+30 day rule:
BIR Ruling DA-489-03: taxpayer need not wait for the lapse of the
120-day period before it could seek judicial relief
- Exception will apply to claims filed within 10 December 2003 to 6
October 2010, when Aichi ruling was promulgated.
- Taxpayers who acted in good faith and relied on the ruling should
not be prejudiced by an erroneous interpretation by the CIR,
particularly on a difficult question of law. Aichi ruling cannot be
given retroactive effect.
Note: SC dismissed the motion for reconsideration on 8 October 2013
PICPA
16 November 2013
Slide 11
GR Nos. 193301 and 194637 dated 11

March 2013
Mindanao II Geothermal
Incidental transactions, though isolated, is

subject to 12% VAT.
PICPA
Lopez Group
16 November 2013
Slide 12
16 October 2013
GR Nos. 193301 and 194637 dated 11

March 2013
Facts:
Company is a VAT-registered taxpayer engaged in the

production and sale of electricity.
Sold a fully depreciated motor vehicle which formed part
of property, plant and equipment.
PICPA
16 November 2013
Slide 13
GR Nos. 193301 and 194637 dated 11

March 2013
Ruling:
Sale of the motor vehicle is an isolated transaction.

However, it is still considered incidental to the principal
activity as said vehicle was previously used in the conduct
thereof. The same also formed part of the companys
PPE.
An incidental transaction made in the course of the
companys principal business which is subject to VAT
PICPA
Lopez Group
16 November 2013
Slide 14
16 October 2013
Comparison of selected court cases

Mindanao II
(GR No. 193301)
11 March 2013
Magsaysay
(GR No. 146984)
28 July 2006
CS Garments
CTA EB Case No. 287
(CTA Case No. 6520)
14 January 2008
Transaction Sale of Nissan

Patrol
Sale of vessels by the

National Development
Company (NDC)
Sale of company vehicle

to its General Manager
Subject to
VAT?
No.
The sale was not in the
course of business of
NDC as it was
involuntary, and made
in compliance with the
Governments policy
for privatization.
Hence, the sale could
no longer be repeated
or carried on with
regularity.
Yes.
The sale of vehicle was
made in the course of
business because the
same had been
purchased and used in
furtherance of the
business of CS
Garments.
Yes.
The sale was made
in the course of
business.
PICPA
16 November 2013
Slide 15
Revenue Regulations
Lopez Group
Revenue
Regulations
16 October 2013
Revenue Regulations No. 2-2013

dated 23 January 2013
Transfer Pricing Guidelines
PICPA
16 November 2013
Slide 17

Salient features
1.
2.
The Guidelines shall apply to

a. cross-border transactions
b. domestic transactions
The arms length principle shall follow a 3-step approach:
Step 1: Conduct a comparability analysis of the similarities and
differences.
Step 2: Identify the tested party and the appropriate transfer
pricing method.
Step 3: Determine the arms length results.
PICPA
Lopez Group
16 November 2013
Slide 18
16 October 2013

4. Taxpayers must keep adequate documentation of their
transfer prices. The transfer pricing documents must be
contemporaneous.
5. Transactions entered into prior to the effectivity of these
regulations shall be governed by the laws and other
administrative issuances prevailing at the time the controlled
transactions were entered into.
PICPA
16 November 2013
Slide 19

Purposes of maintaining TP documentation:
Defend taxpayers transfer pricing analysis;
Prevent transfer pricing adjustments arising from tax examinations; and
Documentation Details:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Organizational Structure
Nature of the business/industry and market conditions
Controlled transactions
Assumptions, strategies, policies
Cost contribution arrangements (CCA)
Comparability, functional and risk analysis
Selection of transfer pricing method
Application of the transfer pricing method
Background documents
Index to documents
PICPA
Lopez Group
16 November 2013
Slide 20
10
16 October 2013

Categories of Intercompany Transfer:
1.
2.
3.
4.
5.
6.
Sales of Tangible property

Sales of Intangibles
Provision of Services
Cost Sharing
Loans
Lease
Other concerns:
TP Adjustments
Covered Transactions
Materiality Threshold
Updates when needed
Penalty
PICPA
16 November 2013
Slide 21

dated 12 July 2013
Amendment to Revenue Regulations No. 0298 relative to the deductibility of certain
income payments
PICPA
Lopez Group
16 November 2013
Slide 22
11
16 October 2013

dated 12 July 2013
Amendment to Revenue Regulations No. 2-98 relative to the
deductibility of certain income payments
Previously, the BIR allowed deduction of income

payments even if withholding tax due thereon was paid
during tax audit/ investigation.
The new RR no longer allows deduction of expense unless
the withholding tax is paid prior to tax audit or
investigation
The provision of RR No. 12-2013 shall apply to audit
investigations for taxable year 2013 (RMC 63-2013, 26
September 2013).
PICPA
16 November 2013
Slide 23

dated 11 April 2013
Fair market value of shares (held as capital
asset) sold outside the stock exchange
PICPA
Lopez Group
16 November 2013
Slide 24
12
16 October 2013

Taxation of Sale, Barter, Exchange or Other Disposition of Shares of
Stock Held as Capital Assets
RR 6-08: Fair market value in the case of shares of

stock not listed and traded in the local stock exchanges
means the book value of the shares of stock as shown in
the financial statements nearest the date of sale.
RR 6-13: In determining the value of the shares, the
Adjusted Net Asset Method shall be used whereby all
assets and liabilities are adjusted to fair market values.
PICPA
16 November 2013
Slide 25

Taxation of Sale, Barter, Exchange or Other Disposition of Shares of
Stock Held as Capital Assets
The value of equity shall be adjusted by the FMV of

underlying assets. The value of real property at the time of
sale shall be the higher of
1. FMV as determined by the Commissioner (BIR Zonal
value), or
2.
FMV as shown in the schedule of values fixed by the

Provincial and City Assessors, or
3.
FMV as determined by an Independent Appraiser.
PICPA
Lopez Group
16 November 2013
Slide 26
13
16 October 2013
Revenue Memorandum
Circulars
RMCs
Revenue Memorandum Circular

No. 57-2013 dated 23 August 2013
Circularization of BIR Ruling No. 123-2013
input VAT are not deductible for income
tax purposes
PICPA
Lopez Group
16 November 2013
Slide 28
14
16 October 2013
Revenue Memorandum Circular No.

57-2013 dated 23 August 2013
Circularization of BIR Ruling No. 123-2013
Input VAT attributable to zero-rated sales can only be

recovered through tax refund or tax credit.
The method of treating unapplied input taxes as outright
deductible expense for income tax purposes lacks legal
basis. Hence, such deductions claimed for income tax
purposes should be disallowed.
PICPA
16 November 2013
Slide 29
Revenue Memorandum Circular No.

9-2013
Taxability of dues and membership fees collected by homeowners
association
Abandoned tax exemption of association dues and other

assessment charges
Now subject to:
1. Income Tax / Expanded Withholding Tax (EWT)
2. 12% Value Added Tax or 3% Percentage Tax
(whichever is applicable depending on whether the
association is registered as a VAT/Non-VAT
taxpayer)
PICPA
Lopez Group
16 November 2013
Slide 30
15
16 October 2013
RTC Decision - Declaratory Relief on

the Validity of BIR Revenue
Memorandum Circular No. 65-2012
First e-Bank Tower Condominium Corporation 5 September 2013
Association dues and other fees and charges

collected by a condominium corporation
from its members are tax exempt.
PICPA
16 November 2013
Slide 31
Declaratory Relief on the Validity of

BIR Revenue Memorandum Circular
No. 65-2012
Facts:
Petitioner assailed the validity of the RMC No. 65-2012
contending that the same was issued without due process
of law.
PICPA
Lopez Group
16 November 2013
32
16
16 October 2013

No. 65-2012
Ruling of the RTC:
The Circular introduced a new legislation under the
mantle of quasi-legislative authority.
The BIR Commissioner, under the guise of clarifying
income tax on association dues, made the Circular
effective immediately. In so doing, the passage
contravenes the constitutional mandate of due process of
law.
PICPA
16 November 2013
33

No. 65-2012
The RMC created a new tax burden.
In so doing, it abruptly charges the taxpayer an
imposition which was then not existing, and worse, made
it immediately effective which is prejudicial to the rights
of the petitioner.
PICPA
Lopez Group
16 November 2013
34
17
16 October 2013
Other Issuances
Other
Issunces
SEC Memorandum Circular No. 8

20 May 2013
Guidelines on Filipino-foreign ownership

requirements for corporations engaged in
nationalized and partly nationalized
activities
PICPA
Lopez Group
16 November 2013
Slide 36
18
16 October 2013
SEC Memorandum Circular No. 8

20 May 2013
All covered corporations shall, at all times, observe the constitutional

or statutory ownership requirement. For purposes of determining
compliance therewith, the required percentage of Filipino ownership
shall be applied to BOTH
a.
the total number of outstanding shares of stock entitled to vote

in the election of directors; AND
b. the total number of outstanding shares of stock, whether or not

entitled to vote in the election of directors.
PICPA
16 November 2013
37
CTA Case No. 8024 dated 24 April

2013
Waterfront Philippines
Extending loans and cash advances with

interest to affiliates is deemed performance
of service for a fee, subject to VAT.
PICPA
Lopez Group
16 November 2013
Slide 38
19
16 October 2013
CTA Case No. 8024 dated 24 April 2013
Facts:
Company is not habitually engaged in lending

transactions
It does not extend cash advances to affiliates with a view
to profit or livelihood. The reason for imputing interest is
to make the transaction at arms length
Cash advances are exclusively granted to its affiliates.
PICPA
16 November 2013
Slide 39
CTA Case No. 8024 dated 24 April

2013
Ruling:
It is immaterial that the company is not a lending

investor since VAT is levied on all kinds of services
rendered in the Philippines for a fee or consideration.
The broad interpretation of services under Section 108
of the Tax Code includes the act of extending loans and
cash advances to the companys affiliates which is
rendered for a fee in the form of interest generated
thereon.
PICPA
Lopez Group
16 November 2013
Slide 40
20
16 October 2013
BIR Rulings
BIR Rulings
BIR Ruling No. 614-2012 dated 09

November 2012 |
BIR Ruling No. 508-2012 dated 3
August 2012
Upstream merger between a parent company and its
subsidiaries is in the nature of a donation and not a tax-free
merger
PICPA
Lopez Group
16 November 2013
Slide 42
21
16 October 2013
BIR Ruling Nos. 614-2012 and 508-2012

Upstream merger is in the nature of a donation and not a tax-free merger
Facts illustrated:
First Scenario:
ABC
XYZ
ABC has two wholly-owned

domestic subsidiaries,
namely, XYZ and ZNT
corporations.
ZNT
The three companies

merged pursuant to a Plan
of Merger which was
approved by the SEC..
PICPA
16 November 2013
Slide 43
BIR Ruling Nos. 614-2012 and 5082012

Facts illustrated: (contd)
Second Scenario:
Parent
Subsidiary
PICPA
Lopez Group
Company A is a domestic
corporation. It has a wholly-owned
subsidiary, Company B, also a
domestic corporation
The respective boards of directors of
Companies A and B have effected a
merger with Company A as the
surviving corporation.
16 November 2013
Slide 44
22
16 October 2013

Facts
Under the Plan of Merger, the subsidiary/ies

will convey, assign, and transfer to the parent
all its assets and liabilities, and since the
parent already owns 100% of the absorbed
corporation/s prior to the merger, no new
shares will be issued by the parent as a
consequence of the merger
The intended re-organization/merger where
the parent as the surviving corporation is an
upstream merger, whereby the former will
not be issuing shares in exchange for all the
assets to be transferred by its subsidiary/ies
as a result of the merger.
PICPA
16 November 2013
Slide 45

Ruling
Effectively, said transfer of assets is in the

nature of a donation and not a statutory and
tax-free merger contemplated under Section
40(C)(2) and (6)(b) of the Tax Code.
Hence, the transaction shall be subject to
donors tax.
The BIR also emphasized that the intended
merger has also the effect of dissolving and
liquidating the subsidiary/ies without
payment of the corresponding taxes.
PICPA
Lopez Group
16 November 2013
Slide 46
23
16 October 2013
Section 40(C)(2)
SECTION 40. Determination of Amount and Recognition of Gain or
Loss.
(C) Exchange of Property.
xxx
(2) Exception. No gain or loss shall be recognized if in pursuance of a plan of
merger or consolidation
(a) A corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the
merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party to
the merger or consolidation, solely for the stock of another
corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or
consolidation, exchanges his securities in such corporation, solely
for stock or securities in another corporation, a party to the merger or
consolidation.
PICPA
16 November 2013
Slide 47
Section 40(C)(6)(b)
(6) Definitions.
xxx
(b) The term 'merger' or 'consolidation', when used in this Section, shall be
understood to mean:
(i) the ordinary merger or consolidation, or
(ii) the acquisition by one corporation of all or substantially all the
properties of another corporation solely for stock: Provided, That
for a transaction to be regarded as a merger or consolidation within
the purview of this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of escaping the
burden of taxation: Provided, further, That in determining whether a
bona fide business purpose exists, each and every step of the
transaction shall be considered and the whole transaction or series of
transactions shall be treated as a single unit: Provided, finally, That in
determining whether the property transferred constitutes a substantial
portion of the property of the transferor, the term 'property' shall be
taken to include the cash assets of the transferor.
16 November 2013
PICPA
Lopez Group
Slide 48
24
16 October 2013
Thank you!
2013 Isla Lipana & Co. All rights reserved. Isla Lipana & Co. is a Philippine
member firm of the PricewaterhouseCoopers global network. In this document,
PwC refers to the network of member firms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
PICPA
Lopez Group
16 November 2013
Slide 49
25

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16 October 2013

Isla Lipana & Co.

Supreme court decisions

G.R. No. 188550, 19 August 2013

Prior application for tax treaty relief not a

G.R. No. 188550, 19 August 2013

Petitioner paid 15% branch profit remittance tax (BPRT)

G.R. No. 188550, 19 August 2013

Those who are entitled to the benefit of a treaty cannot

G.R. Nos. 187485, 196113, 197156, 12

The 2-year prescriptive period refers to administrative

G.R. Nos. 187485, 196113, 197156

On 28 March, 2003, Company A filed with the BIR a

G.R. Nos. 187485, 196113, 197156

The filing of a claim for tax refund of excess input VAT is

G.R. Nos. 187485, 196113, 197156

Claimant has 30 days from the decision or inaction to

G.R. Nos. 187485, 196113, 197156

GR Nos. 193301 and 194637 dated 11

Incidental transactions, though isolated, is

GR Nos. 193301 and 194637 dated 11

Company is a VAT-registered taxpayer engaged in the

GR Nos. 193301 and 194637 dated 11

Sale of the motor vehicle is an isolated transaction.

Comparison of selected court cases

Transaction Sale of Nissan

Sale of vessels by the

Sale of company vehicle

Revenue Regulations No. 2-2013

Revenue Regulations No. 2-2013

The Guidelines shall apply to

Revenue Regulations No. 2-2013

Revenue Regulations No. 2-2013

Revenue Regulations No. 2-2013

Sales of Tangible property

Revenue Regulations No. 12-2013

Revenue Regulations No. 12-2013

Previously, the BIR allowed deduction of income

Revenue Regulations No. 6-2013

Revenue Regulations No. 6-2013

RR 6-08: Fair market value in the case of shares of

Revenue Regulations No. 6-2013

The value of equity shall be adjusted by the FMV of

FMV as shown in the schedule of values fixed by the

FMV as determined by an Independent Appraiser.

Revenue Memorandum Circular

Revenue Memorandum Circular No.

Input VAT attributable to zero-rated sales can only be

Revenue Memorandum Circular No.

Abandoned tax exemption of association dues and other

RTC Decision - Declaratory Relief on

Association dues and other fees and charges

Declaratory Relief on the Validity of

Declaratory Relief on the Validity of

Declaratory Relief on the Validity of

SEC Memorandum Circular No. 8

Guidelines on Filipino-foreign ownership

SEC Memorandum Circular No. 8

All covered corporations shall, at all times, observe the constitutional

the total number of outstanding shares of stock entitled to vote

b. the total number of outstanding shares of stock, whether or not

CTA Case No. 8024 dated 24 April

Extending loans and cash advances with

CTA Case No. 8024 dated 24 April 2013