August 2010

Tax brief

Contents 02 SEC Issuance Accreditation of appraisal companies 03 Court Decisions Court Presentation of quarterly ITRs in refund claims Proof of doing business outside the Philippines Prescriptive period for judicial claims of unutilized input VAT 04 BIR Issuances Implementing the tax subsidy to PDIC Implementing the Expanded Senior Citizens Act (RA 9994) Suspension of electronic letters of authority (eLA) VAT on tollways 07 BIR Rulings Rulings Taxability of outstation allowance VAT on sale of receivables VAT on purchases of nonstock and non-profit corporations 08 BLGF Opinions Local tax exemption of local water districts LBT on tollway contractors 09 Highlight on P&A services services Tax planning 10 Invitation to a P&A seminar CPE-accredited seminar for August 2010 BIR tax agent accreditation

SEC Issuance
Accreditation of appraisal companies The Securities and Exchange Commission (SEC) has issued the following revised guidelines on the accreditation of new and existing accredited appraisal companies whose accreditation are due for renewal. I.
Accreditation criteria

professional risk or professional liability insurance for errors and omissions in the amount of at least P500,000. d. The appraisal company should have rendered professional services to at least two banks or two public companies or secondary licensees. The appraisal company and/or any of its directors/officers or partners, as the case may be, and its property valuer shall have no adverse judgment against them on any administrative, civil or criminal case involving its appraisal business.

g.

Certifications from at least two banks, or two public companies or secondary licensees that have engaged the companys appraisal services Notarized certification of the applicant signed by its president or managing partner that: (a) it meets all the qualification requirements; (b) it has not been declared liable by the SEC or any competent court for violation of the Corporation Code, Securities Regulation Code, Real Estate Investment Trust Act; (c) the applicant and/or any of its directors/officers or partners, or property valuers have no adverse judgment against them on any administrative, civil or criminal case involving its appraisal business.

h.

The following are the criteria for accreditation, that should be met by appraisal companies upon application, and maintained during the effectivity of their accreditation. a. The appraisal company should be registered with the SEC either as a corporation or as a general professional partnership engaged in appraisal work. The certifying property valuer employed or engaged by the appraisal company shall be a professional appraiser licensed by the Department of Trade and Industry (DTI) or the Professional Regulation Commission (PRC) of Real Estate Service, pursuant to Republic Act No. (RA) 9646 and its implementing rules and regulations, and an officer/ member in good standing of any registered association of property valuers and/or appraisal companies. At the time of application, the appraisal company shall have a minimum of five years experience in the appraisal business, during which it: (a) provides property valuation services on a regular basis; (b) possesses the requisite licenses; (c) has sufficient financial resources to enable it to conduct its business effectively and meet its liabilities; (d) has effective internal control and checks and balances; and (e) has adequate insurance to cover its usual

e.

b.

II. Documentary requirements The following documents should be presented upon submission of application for accreditation of appraisal company: a. Notarized application for accreditation Proof of payment of processing fee Profile showing the history, scope of services, list of employees and their corresponding profession, and bio-data of the directors/ executive officers or partners, and certifying property valuer Copy of the license of the applicants property valuer Certificate of good standing issued by a professional association of real estate service providers accredited by the PRC of Real Estate Service List of past and present clientele

b.

c.

III. Valuation standards All accredited appraisal companies and their property valuers should adopt the Philippine Valuation Standards as embodied in the Department of Finance (DOF) Order No. 37-09. For valuations of real properties on transactions of real estate investment trusts (REITs), the property valuer should use the income capitalization under 5.12.2 to 5.12.6 of GN1- Real Property Valuations of the Property Valuation Standards. (SEC Memorandum Circular No. 4, Series of 2010, July 27, 2010)

c.

d.

e.

f.

August 2010

Court Decisions
Presentation of quarterly ITRs in quarterly refund claims It is not enough that a taxpayer claiming refund of its excess or unutilized creditable withholding taxes (CWT) presents its annual income tax return. In order to be entitled to refund of its excess or unutilized CWT, the CTA requires that such taxpayer should also present its succeeding quarterly income tax returns (ITRs) to prove that it did not apply such excess or unutilized CWT against its income tax due for the first three quarters, and effectively, to its succeeding taxable year. According to the CTA, it is possible that a taxpayer may have carried over its unutilized or excess CWT to its quarterly income tax returns, and subsequently, amended its return. Thus, the amended return will no longer reflect any unutilized CWT while the taxpayers annual ITR will not show any amount of the prior years excess credit. To avoid doubt, the presentation of quarterly ITR is important. Hence, for failure to present its quarterly ITRs, the taxpayers claim for excess/unutilized CWT was denied by the Court of Tax Appeals (CTA). [Mirant (Navotas II) Corporation v. Commissioner of Internal Revenue, CTA Case No. 7618, July 12, 2010] Proof of doing business outside the Philippines For the sale of services to qualify as zerorated for purposes of refund/tax credit of unutilized input VAT, Sec. 108(B)(2) of the Tax Code requires that: (a) the services be other than processing, manufacturing or repacking of goods; (b) the payment for such services be in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); and (c) the recipient of the service is doing business outside the Philippines. To establish that its clients are nonresident foreign corporations or foreign corporations not engaged in business in the Philippines, the taxpayer-refund claimant presented the following documents: (a) service contracts or agreements entered by it with its nonresident foreign clients indicating their place of business outside the Philippines; (b) official receipts/invoices issued to its foreign clients with office addresses or place of business outside the Philippines; (c) bank certificate of inward remittance; (d) SEC certifications on the nonregistration as partnership or corporation of its foreign clients; and (e) uncontroverted testimonies of witnesses. The CTA held that the documentary evidence presented by the taxpayer such as VAT services invoices and billing statements, VAT official receipts, bank account passbooks, and certificate of inward remittances merely established: (a) the existence of the sale; (b) that payments of services were in acceptable foreign currency; and (c) that proceeds of sales transactions were inwardly remitted to the Philippines and accounted for in accordance with BSP rules. On the other hand, the service contracts or agreements indicating the foreign clients place of business outside the Philippines do not prove that the foreign clients are already doing business outside the Philippines, while the testimonial evidence of witnesses establish only that the clients are foreign clients or non-resident clients. In the absence of proof that the nonresident foreign clients are doing business outside the Philippines, the taxpayers sale of service does not qualify for zero-rating. Hence, its claim for refund was denied by the CTA. (Sitel Philippines Corporation v. Commissioner of Internal Revenue, CTA EB No. 496 re: CTA Case No. 7186, July 2, 2010)

August 2010

Court Decisions
Prescriptive period for judicial claims VA of unutilized input VAT Under Section 112(A) of the Tax Code, a VAT-registered taxpayer must file a claim for refund or issuance of tax credit of its input VAT attributable to zero-rated, or effectively zero-rated, sales within two years reckoned from the close of taxable quarter when the said sales were made. As provided under Section 112(D) of the Tax Code, the Commissioner of Internal Revenue (CIR) is given a specific period for action, i.e., a period of 120 days from the date of submission of complete documents to grant, in proper cases, a refund or to issue a tax credit certificate for creditable input taxes due or paid attributable to zero-rated or effectively zero-rated sales. In case of full or partial denial of the claim for tax refund or tax credit, or failure to act on the application within the 120-day period, the affected taxpayer may, within 30 days from the receipt of the decision denying the claim or after the expiration of the 120-day period, appeal the decision or the unacted claim with the CTA. For the CTA to have jurisdiction over a case for refund of creditable input taxes due to zero-rated sales, the VATregistered taxpayer, who filed its administrative claim in a timely manner, must await the decision or ruling of denial of such claim, whether full or partial, or the expiration of the 120-day period from the submission of complete documents in support of such claim, and then file before the CTA a petition for review within 30 days from receipt of the decision or ruling, or from the expiration of the 120-day period, as the case may be. In the instant case, the taxpayer filed its administrative claim for issuance of tax credit for its unutilized input taxes for the four quarters of taxable year 2005 on June 26, 2006, which is within the twoyear prescriptive period under Section 112(A) of the Tax Code. The CTA deemed that the taxpayer, upon filing its administrative claim, simultaneously submitted the complete documents in support of its claim. Thus, under Section 112(D) of the Tax Code, the taxpayer has 120 days, or up to October 24, 2006, to wait for the decision or ruling of the CIR denying its claim for issuance of tax credit. Since there was no action on the part of the CIR, the taxpayer had 30-days, or until November 23, 2006, to file a petition for review with the CTA. However, the taxpayer filed its petition on March 28, 2007. Hence, when the taxpayer filed its judicial appeal, the CTA had no more jurisdiction to entertain the case, as the 30-day period to appeal the presumed denial of the taxpayers refund claim through the inaction of the CIR had already lapsed. (Third Millenium Oil Mill, Inc. v. Commissioner of Internal Revenue, CTA Case No. 7583, July 7, 2010)

BIR Issuances
Implementing the tax subsidy to PDIC The BIR has issued the following guidelines and procedures on the grant of tax expenditure subsidy for payment of the tax liabilities and implementation of tax exemption privileges of the Philippine Deposit Insurance Corporation (PDIC) under its charter (RA 3591, as amended by RA 9576):
1. Payment of tax obligations of PDIC from June 1, 2009 to May 31, 2014

which it is directly liable on or before their due dates. To pay for its tax obligations, PDIC shall request the Fiscal Incentives Review Board (FIRB) to issue a certificate of entitlement to subsidy (CES). Specific guidelines are provided on the payment of income tax, VAT, capital gains tax, documentary stamp tax (DST) and withholding tax liabilities of PDIC, which shall be paid through the issuance of Tax

Expenditure Fund (TEF) or CES. As regards the withholding tax obligation of payors on income payments to PDIC, the regulations provide that the Bureau of Treasury (BTr) shall not withhold on income payments to PDIC for treasury notes, treasury bonds, treasury bills and other discounted instruments of PDIC, with the BTr subject to certain condition on the release of income payments to PDIC.

For the period June 1, 2009 to May 31, 2014, PDIC shall pay all taxes to
4 August 2010

BIR Issuances
However, withholding agents (other than the BTr such as BSP, the Land Bank of the Philippines, the Development Bank of the Philippines (DBP) or private banks are mandated to withhold and remit the corresponding final withholding tax (FWT) and CWT to the BIR for all income payments due to the PDIC. The withholding agents shall furnish PDIC with a certified photocopy of BIR Form 1601-F and the corresponding Monthly Alphalist of Payees (MAP), which shall serve as basis for determining the CES to be issued by the FIRB.
2. Tax exemption status starting June 1, 2014

Implementing the Expanded Senior Citizens Act (RA 9994) The BIR has issued the regulations implementing the tax provisions of RA 9994, or the Expanded Senior Citizens Act of 2010. The salient features of the regulations are as follows:
1. On the income tax exemption of senior citizens - The income tax

b. On or before January 31 of every year, the senior citizen must file a sworn statement that his annual taxable income for the previous year does not exceed the National and Economic Development Authority (NEDA) poverty level. A senior citizen deriving compensation income from one employer and whose annual taxable income exceeds the poverty level shall not be exempt from income tax, but the same may qualify for substituted filing of tax return if the correct amount of withholding tax on compensation has been collected for the taxable year.
2. On the tax benefit to benefactor of senior citizens

exemption applies to senior citizens who derive income in the nature of compensation income, and qualify as a minimum wage earner. They shall also be exempt from income tax if their aggregate gross income during the taxable year does not exceed their personal and additional exemption allowances. To avail of the income tax exemption, the following requirements must be satisfied: a. The senior citizen must first be qualified by the BIR by submitting a certified true copy of his Office of Senior Citizens Association (OSCA) ID card to the revenue district office (RDO) that has jurisdiction over his place of residence. If qualified, the senior citizens name shall be recorded by the RDO in the master list of taxexempt senior citizens for the particular taxable year.

Beginning June 1, 2014, the PDIC shall be exempt from income tax, FWT on income, and VAT on assessments collected from member banks. Thus, income payments made by the BTr, other government corporations and institutions and private entities, including banks that have financial dealings with PDIC shall no longer be subject to creditable/expanded withholding tax pursuant to Section 2.57.5(B) of Revenue Regulations No. (RR) 2-98. (Revenue Regulations No. 06-2010, July 12, 2010)

-A senior citizen who is not gainfully employed and who is living with and dependent upon his benefactor for chief support will not entitle the benefactor to claim an additional personal exemption of P25,000. The benefactor of a senior citizen shall be entitled only to P50,000 personal exemption allowance.

3. On the VAT exemption of senior citizens - The establishments

supplying the goods and services that are covered by the VAT exemption must treat the sale as an exempt sale. As such, the sale to senior citizens as exempt sale must be properly segregated from taxable sales in the official receipt/invoice to be issued by the establishment. Any input tax attributable to the exempt sale shall not be allowed as an input tax credit and must be closed to cost or expense account by the seller.

August 2010

BIR Issuances
4. On the tax treatment of discount granted by establishments - The discount

granted by sellers of qualified goods and services to senior citizens may be claimed by the establishments as a tax deduction based on the cost of goods sold and services rendered to the senior citizens, subject to the following conditions: a. Only the portion of the gross sales exclusively used, consumed or enjoyed by the senior citizens shall be eligible for the deductible sales discount. b. The gross selling price and sales discount must be separately indicated in the official receipt or sales invoice. c. Only the actual amount of the discount granted or sales discount not less than the applicable statutory rate (20%, 5% or 50% of gross selling price), net of VAT, whichever is higher, can be deducted from gross income for income tax purposes, and from gross sales or gross receipts of the business enterprise for VAT or other percentage tax purposes. d. The sales recorded must be inclusive of the discount granted. e. The discount can only be deducted from gross income for the same taxable year the discount is granted. f. A separate and accurate record of sales, including the name of senior citizens, OSCA ID card, gross sales/receipts, sales discount granted, date of transactions and invoice numbers for every transaction to senior citizens must be maintained.
6 August 2010

g. Only business establishments selling any of qualified goods and services to senior citizens where actual discount was granted may claim the deduction. h. The seller must not claim the optional standard deduction during the taxable year.
5. On the tax privileges granted to private entities employing senior citizens - Private

of tax verification notice (TVN) shall only be allowed for one-time transactions, donors tax, estate tax and request for reinvestigation. All offices/task forces are required to continue encoding updates on their eLAs that were issued prior to July 1, 2010. On the other hand, concerned examiners or revenue officers with manual LAs issued prior to July 1, 2010 should continue the conduct of their investigation. (Revenue Memorandum Circular No. 61-2010, July 14, 2010) VAT on tollways After a series of deferment, the BIR has set August 16, 2010 as the starting date for collecting the 12% VAT on gross receipts of tollway operators across the country. As required by the BIR, all tollway operators shall issue the standard receipt for the tollway industry prescribed under RMC 40-05, which must show, among others, the VAT as a separate item. For tollway operators who have been assessed for VAT liabilities for prior periods, they can apply for abatement of the tax liability, surcharge and interest under Section 204 of the National Internal Revenue Code (NIRC) and RR 13-2001. On the other hand, the accumulated input VAT account of toll companies shall have zero balance on August 16, 2010. Any input tax that will be reflected in their books of accounts and other accounting records will have to be purchases for goods and services delivered/rendered and invoiced/receipted on or after August 16, 2010. (Revenue Memorandum Circular No. 63-2010, July 20, 2010)

establishments employing senior citizens shall be entitled to additional deduction from gross income equivalent to 15% of the total amount paid as salaries and wages to senior citizens, subject to the following conditions: a. The senior citizen should be employed continuously for a period of six months. b. The annual taxable income of the senior citizen should not exceed the poverty level as determined by NEDA through the National Statistical Coordination Board (NSCB). RR 07-2010 was published on July 21, 2010 and took effect on August 5, 2010. (Revenue Regulations No. 07-2010, July 20, 2010) Suspension of electronic letters of (eLA) authority (eLA) The BIR has temporarily suspended the generation of electronic Letters of Authority (eLA) by revoking Revenue Memorandum Circular (RMC) 56-2010, which discontinued the use of manuallyissued LAs and mandated their replacement with eLAs starting July 1, 2010. With the suspension of issuance of eLAs, manually-issued LAs may be used for the conduct of investigation. However, effective July 1, 2010, only the CIR can manually issue and sign LAs. Also, effective July 12, 2010, manual issuance

BIR Rulings
Taxability of outstation allowance Outstation or out-of-town allowance granted to certain employees are not subject to fringe benefits tax (FBT) and not considered compensation subject to income tax. The employer granting the allowance is a resident foreign corporation engaged in the business of installation and commissioning of telecommunications equipment and network as well as providing technical assistance and other services related to telecommunications. The outstation allowance is granted by the company to its technical support specialists, project managers and senior managers who are sent to various remote areas all over the Philippines to maintain the equipment and infrastructure of their clients in the telecommunications industry. The outstation allowance is pre-computed on a daily basis and is intended to cover the meals and other trip-related expenses incurred by the employees during their off-site assignments such as baggage services, laundry expenses, parking fees, toll fees, telephone fees and other incidental expenses. Considering that the expenses covered by the outstation allowance are required by the nature of the trade or business of the company, the BIR held that such allowance is not subject to the FBT. Moreover, since the outstation allowance is pre-computed on a daily basis and is paid to the employees while they are on assignment or duty, the BIR further held that the same is not considered compensation subject to income tax and consequently to withholding tax. The employees are not required to account/ liquidate the allowance. [BIR Ruling No. DA(ECB-001)110-2010, June 25, 2010] VAT on sale of receivables While sale of goods and services are subject to VAT under Sections 106 and 108 of the Tax Code, sale of accounts receivables by a local financing company to a thrift bank are not subject to VAT. The BIR held that the sale of account receivables, even on a without recourse basis, is considered to be in the nature of a financing arrangement and a mere collection alternative. Being part of the traditional banking or financial service, it is not subject to VAT. However, where the seller and purchaser of the receivables are either a bank or a financial intermediary performing quasibanking activity, the BIR held that the earnings derived from the sale of receivables constitute net trading gains, which should be subject to gross receipts tax (GRT) and not to VAT. Hence, the net trading gain derived by the thrift bank from the subsequent trading of the receivables shall be subject to GRT, instead of the VAT. [BIR Ruling No. DA(VAT-016)109-2010, June 25, 2010] VAT on purchases of non-stock and non-profit corporations A non-stock and non-profit corporation engaged in the promotion of physical fitness/health is exempt from the payment of income tax on income received by it as a non-stock corporation under Section 30 of the Tax Code. However, its exemption covers only income taxes for which it is directly liable. The BIR held that such exemption does not cover the VAT passed on by VATregistered companies on purchases made by the non-stock, non-profit corporation. The BIR explained that although the seller is the one primarily liable to the payment of VAT, it can pass on to the buyer the amount of tax as part of the latters purchases. According to the BIR, shifting the VAT to a tax-exempt organization does not make that organization directly liable to VAT and, therefore, the organization cannot invoke its tax exemption privilege under Section 30 of the Tax Code to avoid passing on or shifting the VAT. [BIR Ruling No. DA(VAT-014)099-2010, June 16, 2010]

August 2010

BLGF Opinions
Local tax exemption of local water districts Although local water districts (LWDs) enjoy local tax exemption, which include the local business tax (LBT) under Section 46 of Presidential Decree (PD) 198 and 193 of the Local Government Code (LGC), their local tax exemption privilege no longer includes payment of business permits/licenses. The BLGF opined that Section 46 of PD 198, which exempts LWDs from paying license or permit fees, was modified or repealed by Section 534 or the repealing clause of the LGC. The clause provides, among others, that all general or special laws that are inconsistent with any provisions of the LGC are considered repealed or modified. Moreover, Section 193 of the LGC which exempted LWDs from the blanket withdrawal of the tax exemption privileges of all persons covers only exemptions from taxes and does not include exemption from the payment of business permits and licenses. It likewise pointed out that Section 147 of the LGC is clear that it is mandatory for the operation of any business or calling to secure a mayors permit in the local government unit (LGU) where they are engaged. (BLGF Opinion dated May 17, 2010) LBT on tollway contractors A tollway management company, as a subcontractor of a tollways corporation that was granted the concession to finance, design, operate and maintain one of the expressways in the country, qualifies as a contractor as defined under Section 131(h) of the LGC. As a contractor, it is subject to LBT at the rate of 50% of 1% of its total gross sales or receipts realized for the preceding calendar pursuant to Section 143(e) of the LGC. Its total gross receipts shall include service fees and other fees or amounts it receives for services rendered in the operation of the expressway. The tollway subcontractor maintains a head office and support facilities that are located in other LGUs. However, since the tollway subcontractor does not own any structure within the stretch of the tollway, including the toll booths, then the tollway subcontractor shall only be liable to LBT where its principal office is located to the exclusion of other jurisdictions traversed by the expressway. (BLGF Opinion dated April 16, 2010)

August 2010

Highlight on P&A services

Tax planning We help clients identify opportunities for tax efficiency in their business operations and in the way they structure their business or transactions to maximize potential tax benefits.

Tax Brief is a regular publication of Punongbayan & Araullo (P&A) that aims to keep its clientele, as well as the general public, informed of various developments in taxation and other related matters. This publication is not intended to be a substitute for competent professional advice. Even though careful effort has been exercised to ensure the accuracy of the contents of this publication, it should not be used as the basis for formulating business decisions. Government pronouncements, laws, especially on taxation, and official interpretations are all subject to change. Matters relating to taxation, law and business regulation require professional counsel. We welcome your suggestions and feedback so that the Tax Brief may be made even more useful to you. Please get in touch with us if you have any comments and if it would help you to have the full text of the materials in the Tax Brief. Figueroa Lina Figueroa Tax Advisory Principal, Tax Advisory & Compliance Division T +632 886-5511 Ext. 507 F +632 886-5506 Ext 606 E Lina.Figueroa@ph.gt.com

If you would like to know more about our tax planning services, please contact: Edward L. Roguel Partner, Tax Advisory & Compliance T + 632 886 5511 ext. 553 F + 632 886 5511 ext. 606 E Wowie.Roguel@ph.gt.com

P&A is a member firm within Grant Thornton International Ltd. Grant Thornton International is one of the worlds leading organizations of independently owned and managed accounting and consulting firms.

August 2010

Invitation to a P&A seminar

CPE-accredited seminar for BIR tax agent accreditation Pursuant to Revenue Memorandum Order (RMO) No. 39, tax practitioners and agents applying for accreditation in 2010, or are presently accredited, are required to submit proof of completion of 18 hours of continuing professional education (CPE) not later than September 30, 2010. As a BIR-accredited CPE provider, Punongbayan & Araullo is offering this three-day seminar, which is designed to satisfy the CPE requirements for BIR tax practitioners. This tax seminar is also a must for tax preparers, compliance officers or tax accountants seeking tax compliance guidance and up-to-date knowledge on the latest rules, regulations and jurisprudence on most pressing tax issues confronting them. The tax seminar shall cover the following topics: Date September 13 September 14 Topics Corporate income tax Creditable withholding taxes Taxation and withholding on compensation income and fringe benefits Value-added tax Handling tax assessments Update on recent tax developments Time 9 AM - 5 PM 9 AM - 5 PM
To register Please download the registration form from the Events and Seminars section of our website at http://www.punongbayanaraullo.com. Registration fee: P15,000 (exclusive of 12% VAT) for the three-day seminar includes handouts, snacks, lunch and BIR CPE accreditation and PICPA CPE credits P5,500 per day exclusive of 12% VAT 5% discount if payment is made on or before September 7, 2010 When? September 13-15, 2010 9:00 AM - 5:00 PM Where? P&A Training Center 4th Floor, 111 Paseo de Roxas St. cor. Legaspi St., Makati City

September 15

9 AM - 5 PM

speakers Resource speakers P&A Tax Partners/Managers

10

August 2010

Who should attend? The target participants who will benefit greatly from this seminar are company owners, HR officers, accounting managers, comptrollers, CFOs, internal auditors, and CPA practitioners.