BIR Ruling 2002

November 14, 2002
BIR NUMBERED RULING
EMPLOYMENT BENEFITS LDC:

SECTION 33(B); 33(C) REV. REGS. 3-98, 8-2000
027-2001
041-2002
Samahang Manggagawa ng University of Santo Tomas
Main Building, UST
Espaa, Manila
Attention: Mr. Edward O. Santos
President
Gentlemen:
This refers to your letter dated September 19, 2000 requesting for a ruling on the
following:
1 Whether the cost of educational benefits to employee and dependents of the employees
and the hospitalization benefit given to employees is a fringe benefit tax or a withholding
tax on compensation?
2. Who will determine whether or not your educational fringe benefit shall form part of
the employee's gross compensation income?; and
3. What will qualify a rank and file to this taxation scheme?
In reply, please be informed that Section 2.78.1 of Revenue Regulations No. 2-98, as
amended by RR 8-2000 and RR 10-2000 provides, viz:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. xxx
xxx
xxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities and privileges
(such as entertainment, medical services, or so-called "courtesy discounts" on purchases),
otherwise known as "de minimis benefits" furnished or offered by an employer to his
employees, are not considered as compensation subject to income tax and consequently
to withholding tax, if such facilities are offered or furnished by the employer merely as
means of promoting the health, goodwill, contentment, or efficiency of his employees.
The following shall be considered as "De Minimis" benefits not subject to income tax as
well as withholding tax on compensation income of both managerial and rank and file
employees:
(b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month."
Therefore the medical cash allowance to the extent of P750.00 per employee per semester
or P125.00 per month given as a de minimis benefit is not subject to income tax and
consequently, to withholding tax of both managerial and rank and file employees. RR 82000 provides that if the employer pays more than the ceiling prescribed, the excess shall
be taxable to the employee, if such excess is beyond the P30,000.00 ceiling provided for
13th month pay and other benefits, otherwise, it is not.
On educational benefits, Section 2.33(B) of Revenue Regulations No. 3-98 defined fringe
benefits as follows:
"Sec. 2.33. Special Treatment of Fringe Benefit
xxx
xxx
xxx
(B) Definition of Fringe Benefit - In general, except as otherwise provided under these
regulations, for purposes of this Section, the term "Fringe Benefit" means any good,
service, or other benefit furnished or granted by an employer in cash or in kind, in
addition to basic salaries, to an individual employee (except rank and file employee as
defined in these regulations) such as, but not limited to the following:
xxx
xxx
xxx
(9) Educational assistance to the employee or his dependents" (emphasis supplied)
Pursuant to the said Revenue Regulations, the cost of the educational assistance to the
employee which is borne by the employer shall, in general, be treated as taxable fringe
benefit. However, a scholarship grant to the employee by the employer shall not be
treated as taxable fringe benefit if the education or study involved is directly connected
with the employer's trade, business or profession, and there is a written contract between
them that the employee is under obligation to remain in the employ of the employer for a
period of time that they have mutually agreed upon. In this case, the expenditure shall be
treated as incurred for the convenience and furtherance of the employer's trade or
business.
Furthermore, the cost of educational assistance extended by an employer to the
dependents of an employee shall be treated as taxable fringe benefits of the e employee
unless the assistance was provided through a competitive scheme under the scholarship
program of the company.
To determine whether or not the educational fringe benefit shall form part of the
employees' gross compensation income, it is necessary to determine whether or not said
employee is a managerial or supervisory employee or a rank and file employed
Under Sec. 2.33(A) of Revenue Regulations No. 3-98, the term rank and file employees'
means all employees who are holding neither managerial nor supervisory position. The
Labor Code of the Philippines, as amended, defines "managerial employee" as one who is
vested with powers or prerogatives to lay down and execute management policies and/or
hire, transfer, suspend, lay-off, recall, discharge, assign, or discipline employees.
"Supervisory employees" are those who in the interest of the employer, effectively
recommend such managerial actions if the exercise of such authority is not rarely
routinary or clerical in nature but requires the use of independent judgment.
Section 2.78.1(A) of Revenue Regulations No. 2-98. as amended, includes fringe benefits
as part of compensation income, "except those which are subject to fringe benefit tax
under Section 33 of the Code," which means that if the recipient is a managerial or
supervisory employee, then the provisions of Section 33 shall apply with respect to the
imposition of a final tax on fringe benefits. But if the recipient is a rank and file
employee, the fringe benefit will still be subject to withholding tax on compensation and
consequently, to income tax, but not to final tax on fringe benefits. The benefits apply to
both managerial/supervisory and rank and file employee but will be subject to different
tax treatment (e.g. final FBT or income tax). Nonetheless, both types of employees shall
be subject to the P30.00.00 threshold test pursuant to Section 32(B)(7)(e) of the Tax Code
of 1997.
Therefore, the imposition of either a final tax on fringe benefit or withholding tax on
compensation will depend on the employees' classification. Educational benefits received
by managerial/supervisory employees shall be subject to the final tax on fringe benefits,
while educational benefits of rank and file employees shall be subject to withholding tax
on compensation, which shall be creditable to the taxpayers' income tax that shall become
due and payable at the end of their taxable year.
Please be guided accordingly.
Very truly yours,
EDMUNDO P. GUEVARA
Deputy Commissioner
Legal and Inspection Group
Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR Ruling No. 040-2002
November 14, 2002
BIR NUMBERED RULING
R.A. Nos. 7459, 7227;

Section 129
040-2002
Lan-Gas Manufacturing
315 Manuel L. Quezon St., Lower Bicutan
Taguig, Metro Manila
Attention: Mr. Rudy N. Lantano

Inventor
Gentlemen:
This refers to your letter dated August 31, 2002 which was filed with us on September 30,
2002 requesting for a confirmatory ruling to the effect that Mr. Rudy N. Lantano, an
inventor duly certified by the Filipino Inventor's Society, is entitled to the incentives and
tax exemptions granted under R.A. 7459, otherwise known as "The Inventors and
Invention Incentives Act of the Philippines", wherever he may be located and doing
business in the Philippines.
BACKGROUND OF THE CASE
The following are the facts of the case as represented by the taxpayer.
Mr. Rudy N. Lantano is an inventor duly certified by the Filipino Inventor's Society
Screening Committee and a patent holder of various environment-friendly petroleumbased fuels, particularly, ALCO-DIESEL covered by Patent No. 28424; LAN-GAS
covered by Patent No. 13594; and SUPERBUNKER FORMULA L covered by Patent
No. 29089, all issued by the Philippine Patents Office. He has been issued various
confirmatory rulings on the tax exemptions of the aforementioned invention products by
the Bureau of Internal Revenue to wit:
1. Ruling No. DA-37-02-04-98;
2. DA-280-07-01-98;
3. DA-281-07-01-98:
4. DA-145-99; and
5. BIR Ruling No. 155-98.
Thereafter, Mr. Lantano started his operations as manufacturer seller of the above
mentioned invention products. During his first two (2) years of operation, he was located
inside the Incubation Site of the DOST Compound, Taguig. In year 2001, he left the Site
and temporarily relocated his plant at a nearby place, also in Taguig. He was, however,
forced to slow down his operation after his Supply, Process and Lease Agreement
("Agreement") with Pilipinas Shell Petroleum Corporation (PSPC) expired last June
2002. Since Mr. Lantano does not own a refinery plant where he can process the crude oil
into other petroleum products and yields which are actually the main components of his
invention products, he can no longer manufacture the invention products at the same cost
as before, and the tax saving/exemption portion is eaten up by the manufacturing costs of
the products, practically, yielding the tax incentives granted under R.A. 7459 to nothing.
Likewise, since the Taguig plant is located in a very densely populated and limited area
and taking into consideration the lack of refinery and storage facilities, as well as the
manufacturing costs of the invention products and the location of his plant. Mr. Lantano
relocated his plant at Subic Bay Economic and Freeport Zone (SBFZ), mainly, for
purposes of producing the invention products at a lower cost, and thereby sustaining the
production of the same.
The raw materials will be sourced within SBFZ from one of the petroleum companies
located inside the Free-port Zone. Mr. Lantano will manufacture the invention products
inside SBFZ, and thereafter, transfer the same to his storage tanks in Taguig where they
will be stored until withdrawn for sale. In all cases, Mr. Lantano will either sell the
finished invention products through wholesale or retail. In case of wholesale, the

invention finished products will be available to petroleum new players or commercial
buyers, and in case of retail selling, he will sell the invention products through his
pumping outlets located in various places in Metro Manila and nearby provinces.
Mr. Lantano has been granted a Locational Clearance and Permit to Operate a Blending
Facility by SBMA through Investment Processing Department. However, as a sole
proprietor, Mr. Lantano is not qualified to register as a SBFZ enterprise.
POSITION OF MR. LANTANO
In connection with the foregoing, Mr. Lantano is now requesting confirmation of the
following:
"1. The tax incentives availing under R.A. 7459 ("The Inventors and Invention Incentives
Act of the Philippines") apply to a Filipino inventor wherever located in the Philippines
e.g. Subic Bay Economic and Freeport Zone and other Ecozones.
"The applicability of the law is within the Philippine jurisdiction. While ecozones are
deemed covered by special laws, specifically delineating the areas from customs territory,
they are nonetheless within the Philippine territory. It is therefore, my humblest opinion
that R.A. 7459 cannot be limited by the provisions of special laws creating these
ecozones.
"2. The transfer of [inventor's] invention products manufactured inside the Special
Economic and Freeport Zone (in the Philippines) to [his] storage tanks located within the
Customs Territory is exempt from taxes and; duties on importation there being no
consumption or sale between [the inventor] as consignor and consignee. While excise
taxes is imposed on imported goods, in [inventor's] case, however, the invention products
cannot be categorized as imported goods considering that [he] produced the products
pursuant to the "Inventors and Inventions Incentives Act of the Philippines" which Act is
applicable to all Filipino inventors wherever located in the Philippines. There is no
sanction under the Act prohibiting Filipino inventors to relocate inside the economic
zone. The purpose of the Act is to encourage commercialization of the inventions in the
Philippines.
"Furthermore, the sale of said invention products either through wholesale or retail is also
exempt from all taxes availing under R.A. 7459. As implemented by Section 3 of
Revenue Regulations No. 19-93 dated July 27, 1993 implementing R.A. No. 7459, the
inventor is exempt from the payment of the following taxes for which he shall be directly
liable to pay, to wit:
"a)
Income tax on the net income derived from the sale of invention products
resulting from newly discovered/developed technologies by local researchers or new
technology adopted from foreign sources whether it be patented machine, product,
process including implements or tools and other related gadgets of invention, utility
model and industrial design patents;
"b)
Value-added tax (VAT) on the gross receipts/revenues derived from the sale of
said invention products, provided, however, that you shall not be exempt from taxes for
which he is not directly liable, e.g. VAT on the purchases of raw materials, supplies and
equipment/machineries, which may be shifted as part of the cost of goods sold or for
services rendered and
"c)
Excise taxes directly payable in connection with the sale of invention products.
Further, in support of the above representation, the following documents were

submitted:
1.
Photocopy of Patent No. 28424 issued by the Philippine Patents Office on August
31, 1994 for ALCO DIESEL invention;
2.
Photocopy of Patent No. 13594 issued by Philippine Patents Office for LAN-GAS
invention;
3.
Photocopy of Patent No. 29089 issued by the Philippine Patents office for
SUPERBUNKER FORMULA L invention;
4.
Copy of BIR Ruling No. DA-37-02-04-98;
5.
6.
7.
Copy of BIR Ruling No. 155-98;
8.
Copy of Locational Clearance, Permit to Operate and Certification to that effect
duly issued by the SBMA;
9.
BIR Registration;
10.
Copies of Minutes of Meetings Bicameral Committee Conference, Deliberations
of both Houses of Representatives and Senate
REQUESTED RULING
1. Section 2 of Republic Act No. 7459 (RA 7459), otherwise known as the inventors
and Invention Incentives Act of the Philippines", to wit:
"SECTION 2. Declaration of National Policy and Program. ~ It is hereby declared to be
the national policy to give priority to invention and its utilization on the country's
productive system and national life; and to this end provide incentives to inventors and
protect their exclusive right to their invention, particularly when the invention is
beneficial to the people and contributes to national development and progress.
"Pursuant to the national policy, the Government shall provide a program to set up a
climate conducive to invention and innovation, give encouragement and support to
inventors who are creative and resourceful, as well as imbued with a deep sense of
nationalism, and maximize the capability and productivity of inventors though incentives
and other forms of assistance and support." (Italics supplied.)
Apparently the intention of the law is to promote invention and extend assistance and
support to the Filipino inventors in the hope of maximizing their capability and
productivity. 1 With respect to eligibility to the benefit and application of RA 7459, the
Minutes of Proceedings on HB No. 240801 2 disclose that Filipino inventory residing in
the Philippines can avail of the Bill's benefits. The Bill excludes Filipino inventors based
abroad since it is assumed that they had already changed their citizenship and thus, their
inventions are most probably presented to the foreign governments where they are now
residing.3 Thus, benefits and incentives granted under RA 7459 is availing to a Filipino
inventor for as long as he resides in the Philippines.
The fact that the blending facility is relocated at Subic Bay Special Economic and Free
Port Zone (SBFZ) which is a delineated area from Customs Territory pursuant to the
provisions of Republic Act No. 7227 (RA 7227), otherwise known as "Bases Conversion
and Development Act of 1992", does not disqualify Mr. Lantano from availing of the tax
exemption and incentive benefits under RA 7459.
II. The ultimate objective of RA 7227 is the conversion of military bases into alternative
productive uses and the subsequent creation of Special Ecozones, among which is the
SBFZ, and to develop such Ecozones into a self sustaining industrial, commercial,
financial and investment centers to generate employment opportunities in and around the
zone and to attract and promote productive foreign investment. Under Section 12 of
Republic Act No. 7227 (RA 7227), the area covering the SBFZ is within the territorial
jurisdiction of the Province of Bataan. The delineation of the area covering SBFZ as a
separate customs territory is to ensure the free flow or movement of goods and capital
within, into and exported out of Special Economic Zone.
In the process, incentives such as tax and duty free importations of raw materials, capital
and equipment are made part of the package. But in all respect, however, SBFZregistered enterprises are subject to five percent (5%) of the gross income earned in lieu
of paying taxes which shall be distributed as follows: 3% to the National Government;
1% each to the local government units affected by the declaration of the zone; and, 1% to
Special Development Fund. It can therefore, be readily ascertained that the five percent
(5%) is actually a tax commuted into a single rate, and which amount is ultimately
remitted to the National Government and local government units concerned in
accordance with the above sharing ratio.
Further, as provided for in RA 7227, the exportation or removal of goods from the SBFZ
to the customs territory is subject to customs duties and taxes under the Tariff and
Customs Code and other relevant tax laws of the Philippines. 4 Such exportation by an
SBF locator is deemed to be an importation by the buyer from customs territory.
In this connection, there are national internal revenue taxes that may be directly levied on
imported petroleum goods, e.g., the VAT and the excise tax on imported petroleum goods
or articles. Importation of petroleum products (except lubricating oil, processed gas,
grease, wax and petrolatum) subject to excise tax are exempt from VAT. 5 In the instant
case, since the invention products, i.e., Lan-Gas, Alco-Diesel and Superbunker Formula
L, are petroleum products, they are exempt from VAT.
As to whether the said invention petroleum products are exempt from excise taxes,
Section 6 of RA 7459 provides as follows:
"SECTION 6. Tax Exemption. - To promote, encourage, develop and accelerate
commercialization of technologies developed by local researchers or adapted locally from
foreign sources including inventions, any income derived from these technologies shall
be exempted from all kinds of taxes during the first ten (10) years from the date of first
sale, subject to the rules and regulations of the Department of Finance. Provided, that
this tax exemption privilege pertaining to invention shall be extended to the legal heir or
assignee upon death of the inventor.
"The technologies, their manufacture and sale, shall also be exempt from payment of
license; permit fees, customs duties and charges on imports." (Italics supplied)
The term "technology" means the application of knowledge or science which shall
include all others, such as inventions, innovations and results of researches. 6
What is exempt under the above-mentioned provision is the income of the inventor. The
excise tax on the movement of the inventions from SBFZ in the customs territory is an
importation, for which the law subjects the importation/importer to the corresponding
excise tax. The importer does not enjoy the exemption granted to the inventor under the
abovementioned provision of R.A. No. 7459. If, on the other hand, the inventor himself is
the importer, he is likewise not exempt from the excise tax, because as stated, what the
law exempts is the income derived from the sale of the invention, and not the importation
thereof.
Accordingly, the request for exemption from payment of excised taxes on the movement
of the aforementioned invention products from the inventor's blending facility in SBFZ
to his storage facility in Taguig which is located within the customs territory is hereby
denied for lack of legal basis.
Very truly yours.
GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue.
____________________________
1 Sponsorship Remarks of Senator Mercado during the Bicameral Committee Conference
dated February 7, 1992; Sponsorship Speech of Sen. Lina during the Senate Committee
Meeting dated January 30, 1992; Remarks of Atty. Vicente Alvarez as Presiding Officer
during the Committee Hearing of Joint Senate Committee on Science and Technology
and Committee on Trade and Commerce held on February 11, 1999.
2 House Bill entitled "An Act Providing Incentives to Filipino Inventors in the Country
and appropriating Funds Therefore" later consolidated with Senate Bill No. 1758
(Incentives for Inventions to come up with RA 7459.
3 Interpellation of Mr. Escudero on HB No. 24801 dated August 2, 1990
4 Section 12(b), RA 7227.
5 Section 109(c) of the Tax Code of 1997.
6 Sec. 3(c), R.A. 7459
November 11, 2002

BIR NUMBERED RULING
000-00
039-2002
PUYAT JACINTO & SANTOS
12/F Manilabank Building
6772 Ayala Avenue
Makati City
Attention: Atty. David B. Puyat
and
Atty. Virginia B. Viray
Gentlemen:
This refers to your letter dated July 24, 2001 on behalf of your clients, TA Bank of the
Philippines, Inc. ("TA") and The Manila Banking Corporation ("TMBC"), the pertinent
portion of which is quoted as follows:
"TA is a corporation organized and existing under Philippines laws, engaged primarily in
commercial banking, and with principal address at the Grnd. Floor Octagon Bldg.,
Emerald Avenue, Ortigas Center, Pasig City.
"TA has a total authorized capital of Five Billion Pesos (PhP5,000,000,000.00) divided
into Twenty Five Million (25,000,000) common shares and Twenty Five Million
(25,000,000) preferred shares, each with a par value of PhP 100.00 per share.
"Its outstanding capital consists of One Billion Two Hundred Fifty Million Pesos
(PhP1,250,000,000.00), divided into PhP625,000,000 in preferred shares 1 an
PhP625,000,000 in common shares. 2
"All of the outstanding shares of TA are wholly owned by TMBC and its nominees.
"TMBC is likewise a corporation organized and existing under Philippine laws, engaged
in business primarily as a thrift bank, and with principal address at the TMBC Building,
6772 Ayala Avenue, Makati City 1226, Metro Manila.
"TA is planning to decrease its authorized capital stock to 1,129,020 common shares, with
a par value of PhP100.00 per share, and a total value of One Hundred Twelve Million
Nine Hundred Two Thousand Pesos (PhP 112,902,000.00) ["Plan"].
"Under the Plan, all of TA's outstanding preferred shares, and 5,120,980 of its
outstanding 6,250,000 common shares shall be surrendered by TMBC and cancelled
immediately upon approval by the TA stockholders, the Securities and Exchange
Commission ("SEC") and the Bangko Sentral ng Pilipinas ("BSP") of the said decrease.
"In exchange for the surrender of the abovesaid shares by TMBC, TA shall transfer to
TMBC both real and personal, tangible and intangible properties listed hereunder, and
referred to hereinafter as "Distributed
Assets."
LIST OF DISTRIBUTED ASSETS
A. LOAN PORTFOLIO 3
(Amounts in Thousand)
ACCOUNT NAME BALANCE OF PRINCIPAL
AS OF MAY 31, 2001
ANDRES BORJA
ATLANTA GROUP
PHILIPPINE WIRELESS
MONDRAGON
MARICHRIS/MA. THERESA
GOTESCO
SUSAN LIM
E. UYTIEPO 2,600
GEORGE GO 44,531
FIL-ESTATE LAND
ASIAN GLOBE
77,990
IPII 44,536
ACTIVE REALTY 13,251
METROPOLITAN 1,613
FIL-ESTATE LAND 200,000
J. RODRIGUEZ III 30,000
REYNOLDS PHIL. 6,576
LA. FIRMACION
2,744
DJJ & SONS 22,397
EL BUEN ASENSO 17,100
LU FIRMACION
6,800
JAIME CANCIO
5,000
91,563
47,231
31,667
65,000
190,000
5,000
6,928
300
C. QUIAMBAO
2,954
R. RUBIO
906
A. DOMINGO
300
AMA COMPUTER 925
ATSUSHI HARADA 1,094
CONCEPCION, PS 186
DAVID DALISAY 870
DE ROCA, DARL1TO
925
DE ROCA, RIC
650
MICLAT, ROMY & ANICETA
CORTEZ, FELIX & MARISSA
TOTAL
922,663
186
840
B. ACQUIRED ASSETS
FORMER OWNER
DESCRIPTION/LOCATION
Active Realty Dev't Corp.

146 lots located at Town & Country Southville,
Bian, Laguna with a total area of 23,604 sq.m. 9 lots located at Town & Country
Southville, Bian, Laguna with a total area of 1,193 sq.m. 6 lots located at Town &
Country North Marilao, Bulacan with a total area of 2,696 sq.m. 8 Mount Malarayat Golf
& Country Club shares
Agusan River
Lot with residential building located at #57 12th
Street, New Manila, Quezon City with lot area of 1,001.5 sq.m.
DJJ and Sons
5 units located at the 14th Flr. World Trade
Exchange Center, Juan Luna St., Binondo
Fil Estate Land, Inc.
A parcel of land situated in dela Paz, Antipolo,
Rizal with a lot area of 473 sq.m. and covered by TCT-361115
12 lots situated in Parkridge Estate Phase V Antipolo, Rizal (5,757.50 sq.m.) 6 lots
situated in Sherwood Hills, Trece Martires City, Cavite (4,254 sq.m.)
Ladislao Firmacion
A parcel of land along Francisco Road, Brgy.
Francisco with area of 1,173 sq.m.
Gotesco Properties
148 lots located at Calamba, Laguna
Gloria Lanuza
2 storey old residential building at no. 348
Nanirahan St., Villarica Subdivision, Mandaluyong City with lot area of 298 sq.m.
Gallardo Lopez
2 storey residential building located at #20-B Jose
Abad Santos St., Bayview Subd., Paraaque City with lot area of 553.45 sq.m.
Ma. Theresa Commercial

State Theater Building (5 storey) located at Rizal
avenue, Sta. Cruz, Manila with lot area of 1,238.67
sq.m.
Metropolitan Land Corp.
4 CCTs located at the 11th Flr., Trafalgar Plaza HV
dela Costa St., Salcedo Village, Makati City with total area of 913.20 sq.m.
Meridien Dev't. Inc.
A parcel of land located at lot 2, Blk. 7, Fort
Bonifacio Global City, Taguig, Metro Manila with area of 1,600 sq.m.
C. REAL ESTATE PROPERTY DESCRIPTION/LOCATION
Upper Ground, Unit 2, World Trade
Exchange Building. No. 215 Juan Luna
St., Binondo, Manila with area of
294.72 sq.m.
with 2 parking slots
Based on the foregoing, you now request a confirmation of your opinion that:
"1.
TA shall not be liable for income tax either for its receipt of the surrendered
shares, or its transfer of the Distributed Assets to TMBC as liquidating dividends.
"2.
No documentary stamp tax under Section 176 of the Tax Code is due on the
surrender by TMBC of the TA shares and the subsequent cancellation thereof.
"3.
The transfer by TA to TMBC of real property as liquidating dividend is not
subject to documentary stamp tax on sale or transfer of real property under Section 196 of
the Tax Code.
"4.
Transfer by TA of its Loan Portfolio to TMBC is not subject to documentary
stamp tax under Section 180 of the Tax Code.
"5.
The transfer or assignment of any mortgage which stands as security for TA's
Loan Portfolio shall be subject to documentary stamp tax under Section 195 of the Tax
Code, based on the outstanding balance of the original loan.
"6.
TMBC shall realize capital gain or loss when it surrenders its shares in TA in
exchange for the assets distributed by TA as liquidating dividends, and such capital gain
or loss shall be subject to final tax under Section 27(D)(2) of the Tax Code."
In reply, please be informed as follows;
1. TA shall not be liable for income tax either on its receipt of the surrendered shares, or
its transfer of the Distributed Assets to TMBC as liquidating dividends.
In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the
liquidating corporation of its remaining assets to its stockholders is not considered a sale
of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or
complete liquidation. (W.P. Fox & Sons, Inc., Petitioner, v. Commissioner of Internal
Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692; 227
F. Supp. 174; J.T,S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC
840, cited in SIR Ruling No. 196-010-90-059-90 dated April 17, 1990).
Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares
surrendered by its shareholders pursuant to a complete or partial liquidation (BIR Ruling
No. 171-92, supra).
Accordingly, TA Bank is not liable for income tax on either the transfer of its assets to its
stockholders, or on its receipt of the shares surrendered by the shareholder, TMBC.
2.
No documentary stamp tax ("DST") is due on the surrender and cancellation of
the TA shares.
The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of
stock under Section 176 thereof, which in part reads:
"Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of duebills, certificates of obligations or shares or certificates of stock. - On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills,
certificates of obligations, or shares or certificates of stock in any association, company
or corporation, or transfer of such securities by assignment in blank, or by delivery, or by
any paper or agreement, or memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future transfer of
any due-bill, certificate of obligation or stock, there shall be collected a documentary
stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200.00),
or fractional part thereof, of the par value of such due-bill, certificate of obligation or
stock ...xxx." (emphasis supplied)
No DST under the above quoted provision shall be due on the surrender by TMBC of the
shares of stock to TA. The surrender of the shares does not constitute a sale, assignment
or transfer because TA is not taking title to the surrendered shares, and the shares are
retired and not retained as treasury shares. In effect, TA does not realize any benefit, as
owner or otherwise, from its receipt of the shares.
3.
Transfer by TA to TMBC of real property is not subject to DST on sale or transfer
of real property.
Section 189 of Revenue Regulation No. 26, otherwise know as the "Documentary Stamp
Tax Regulations" provides, viz:
"SECTION 189. Conveyances by Corporation to Owner of All the Capital. - A

conveyance of real estate by a corporation without valuable consideration to an owner of
all its capital stock in consequence of its dissolution is not subject to tax." (Underscoring
& italics supplied)
Under the above-quoted provision, a distribution in liquidation, without consideration, of
the assets of a corporation consisting of real estate is not subject to DST imposed under
Section 196 of the Tax Code of 1997. Accordingly, the distribution of the assets of TA,
consisting of, among others, parcels of land, to its controlling and sole stockholder,
TMBC, without monetary consideration, is not subject to DST as prescribed under
Section 196 of the Tax Code of 1997. (BIR Ruling No. DA-214-96 dated June 26, 1996
and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90.) In
addition, Section 196 of the Tax Code speaks of "all conveyances, deeds, instruments, or
writings, x x x, whereby any land, tenement or other realty sold shall be granted,
assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any
other person designated by such purchaser or purchasers, x x x". Since it has been held
that a corporation that distributes its assets to its shareholders as liquidating dividends is
not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of
1997 shall not apply. However, the notarial certification on this deed or deeds of
assignment is subject to the documentary stamp tax of P15.00, pursuant to Section 188 of
the Tax Code of 1997.
4.
Transfer by TA of its Loan Portfolio to TMBC is not subject to DST.
The pertinent provisions in the Tax Code of 1997 as regards this issue are as follows:
"Sec. 180. Stamp tax on all bonds, loan agreements, promissory notes, bills of exchange,
drafts, instruments and securities issued by the Government or any of its
instrumentalities, deposits substitute debt instruments, certificates of deposits bearing
interest and others not payable on sight or demand. - On all bonds, loan agreements,
including those signed abroad, wherein the object of the contract is located or used in the
Philippines, bills of exchange (between points within the Philippines), drafts, instruments
and securities issued by the Government or any of its instrumentalities, deposit substitute
debt instruments, certificates of deposits drawing interest, orders for the payment of any
sum of money otherwise than at sight or on demand, on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and on each
renewal of any such note, there shall be collected a documentary stamp tax of P0.30 on
each P200.00, or fractional part thereof, of the face value of any such agreement, bill of
exchange, draft, certificate of deposit or note...xxx" (emphasis supplied)
SEC. 198. Stamp tax on assignments and renewals of certain instruments. - Upon each
and every assignment or transfer of any mortgage, lease or policy of insurance, or the
renewal or continuance of any agreement, contract, charter, or any evidence of obligation
or indebtedness by altering or otherwise, there shall be levied, collected and paid a
documentary stamp tax, at the same rate as that imposed on the original instrument,
(emphasis supplied).
The above-quoted Sections clearly provide for the imposition of DST on the renewal or
continuance of loan agreements and promissory notes. In the instant case, DST shall not
be imposed on the assignment by TA of its Loan Portfolio (loan agreements and
promissory notes) to TMBC, since the same is not for renewal or continuance (BIR
Ruling No. 139-97 December 29, 1997). The term "assignment or transfer" in Section
198 of the Tax Code of 1997 applies only to "mortgage, lease or policy of insurance".
Thus, in BIR Ruling No. 041-86 dated April 8, 1986, this Office defined the term "renew"
within the context of Section 198 of the Tax Code of 1997 as follows:
" x x x. One of the definitions of the word "renew" found in Webster's New International
Dictionary is: "To grant or obtain extension of; to continue in force for a fresh period; as
to renew a note or a bond". As commonly used with reference to notes and bonds, the
word "renewal" imports a postponement of the maturity of the obligation dealt with, an
extension of the time in which that obligation may be discharged. (Emphasis supplied,
Campbell River Timber Co. v. Vierhus, 198 American Law Reports, 763; 86 F. (2d) 673)
In other words, the term "extension" has the same connotation as "renewal" which means
the continuance of the old obligation."
5. Transfer or Assignment of any mortgage which stands as security for TA's Loan
Portfolio shall be subject to DST.
Pursuant to Section 198, as above quoted, the assignment of any mortgage shall be
subject to DST at the same rate as the original document.
Under Section 195 of the 1997 Tax Code, on every mortgage or pledge of lands, estate or
property, real or personal, there shall be collected a DST at the following rates:
(a)
When the amount secured does not exceed P5,000.00, P20.00;
(b)
On each P5,000.00, or fractional part thereof in excess of P5,000.00, an
additional tax of P10,00.
Since the DST on mortgage is based on the amount secured, the DST on the assignment
of mortgage, if any, shall be based on the outstanding balance of the original loan at the
time of the transfer or assignment. (BIR Ruling No. 139-97, id.)
6. TMBC shall realize capital gain or loss when TA distributes its assets as liquidating
dividends.
The tax treatment of liquidating dividends depends on the characterization of the income
in the form of such dividends received by shareholders as a result of the dissolution of the
corporation in which they hold shares.
The second paragraph of Section 73(A) of the Tax Code of 1997 states:
"Where a corporation distributes all of its assets in complete liquidation or dissolution,

the gain realized or loss sustained by the stockholder, whether individual or corporate, is
a taxable income or a deductible loss, as the case may be."
In the case of Wise & Co., Inc., et al, vs. Bibiano L. Meer, Collector of Internal Revenue
(78 Phil 655 [1947]), the Supreme Court, in interpreting a similarly worded provision as
above cited as in Section 25(a) of Act No. 2833 ("Income Tax Law"), as amended by
Section 4 of Act No. 3761 [which is partially lifted from section 201 (c) of the US
Revenue Act of 1918], adopted the judicial construction of the US Supreme Court in the
case of Hellmich vs. Hellman (276 US 233), where it was held that the amounts
distributed in the liquidation of a corporation shall be treated as payments in exchange for
stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as
other gains or profits. The Supreme Court also stated that "(W)hen the corporation was
dissolved and in the process of complete liquidation and its shareholders surrendered
their stock to it and it paid the sums in question to them in exchange, a transaction took
place, which was no different in its essence from a sale of the same stock to a third party
who paid therefor".
In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was precisely
whether the liquidating gain (that is, the difference between the fair market value of the
properties received and the cost basis of the shares to the stockholders) derived by an
individual stockholder is subject to the then 10%/20% tax rates under Section 34(g) of the
then Tax Code or to the graduated income tax rates under then Section 21(b). This Office
ruled that such gain should be subject to the tax rates under then Section 21(b). The same
conclusion was reached in other rulings of the BIR (BIR Ruling Nos. 322-87 dated
October 19, 1987; 136-88 dated April 12, 1988; 021-89 dated February 13, 1989; 270-91
dated December 23, 1991; DA-223-98).
In effect, following the interpretation of these rulings, liquidating gain is to be treated as
the gain from the sale or exchange of shares, consistent with the decision of the Supreme
Court in Wise & Co., Inc., supra, subject, however, not to the 5%/10% final tax rate under
Sections 24(C), 25(A)(3) or (B), 27(D)(2), 28(A)(7)(c) and (B)(5)(c) of the Tax Code of
1997, but to the ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1)
and (B) [that is, the 25% rate], 27(A) or (E), 28(A)(1) or (2) and (B)(l) of the Tax Code of
1997, depending on the status of the shareholder/stockholder (for instance, whether the
shareholder is a corporation or an individual, resident or non-resident).
Finally, this Office also notes that a similar treatment has been given to corporate
shareholders of a dissolving corporation, in that the liquidating gain realized is subject to
the ordinary corporate income tax rate rather than to the then 10%/20%; or the current
5%/10% final tax rates. (see for instance BIR Ruling Nos. DA-214-96 dated June 26,
1996 and 171-92 dated May 28, 1992)
This Office also takes note of BIR Ruling No. DA-367-99 dated January 24, 1999 issued
under designated authority, and similar rulings where the BIR departed from the abovementioned rulings, and ruled that the liquidating gain is subject to the 5%/10% capital
gains tax rate. The basis for this ruling was BIR Ruling No. 015-82 dated January 20,
1982, where the BIR held that the liquidating gain received by individual shareholders is
subject to the then 10%/20% final tax, but, this ruling was effectively overturned in the
subsequent BIR Ruling No. 190-84 and many other similar rulings mentioned above.
Thus, BIR Ruling No. DA-529-99 and rulings similar to it have no basis, having been
based on a ruling that had already been revoked.
Accordingly, this Office rules once and for all that:
1.
Liquidating gain or loss is in the nature of capital gain or loss, as the case may be,
and therefore treated in the manner stated in Section 39 of the Tax Code of 1997.
2.
Liquidating gain, while characterized as gain from sale or exchange of shares, is
subject to the ordinary income tax rates provided under Sections 24(A)(1)(c), 25(A)
(1), 27(A) and (E), 28(A)(1) and (2) and (B)(l) of the Tax Code of 1997, depending on
the status of the shareholder, and not to the 5%/10% final tax.
This ruling is being issued on the basis of the foregoing facts as represented. However, if
upon investigation, it will be disclosed that the facts are different, then this ruling shall be
considered null and void.
Very truly yours,
Commissioner of Internal Revenue
____________________________
1 Divided into 6,250,000 shares, with par value of P100.00 per share;
2 Divided into 6,250,000 shares, with par value of P100.00 per share;
3 Transfer shall include interest accrued or to be accrued on the loan.
October 15, 2002
BIR NUMBERED RULING
R.A. # 7459 Sections 148 & 131, NIRC; RR 19-93

BIR Ruling # 155-98: DA 280-98, 281-98 & 037-98
037-2002
NILA N. MENDIOLA & ASSOCIATES
Unit 2106 21st Floor Cityland 10 Tower I
H.V. dela Costa Streets, Salcedo Village
Makati City
Attention: MS. NILA N. MENDIOLA
Certified Public Accountant
Gentlemen:
This refers to your letter dated March 18, 2002 requesting on behalf of your client. Mr.
Rudy L. Lantano, for confirmation of your opinion that the importation of diesel.
naphtha, gasoline and other yields, as direct and base raw materials in the manufacture,
sale and commercialization of ALCO-DIESEL, LAN-GAS and SUPERBUNKER
FORMULA-L, is exempt from excise tax imposed under Section 148 of the Tax Code of
1997.
It is represented that your client. Mr. Rudy Lantano, is an inventor duly certified by the
Filipino Inventor's Society and confirmed by the Filipino Inventor's Screening
Committee; that he is a patent holder of various environment friendly petroleum-based
fuels, particularly ALCO-DIESEL covered by Patent No. 28424 dated August 31, 1994,
LAN-GAS covered by Patent No. 13594 dated July 30, 1980 and SUPERBUNKER
FORMULA-L covered by Patent No. 29089 dated September 7, 1995, all issued by the
Philippine Patents Office; that he has been issued a tax exemption certificate by the
Bureau of Internal Revenue under BIR Ruling No. DA-37-02-04-98; that in relation to
the manufacture, sale and commercialization of the aforementioned invention products,
your client intends to import diesel, naphtha, gasoline and other yields to be used as
direct raw materials; that it is your position that the said importation is exempt from
excise taxes imposed under Section 148 of the 1997 Tax Code, pursuant to Section 6 of
Republic Act No. 7459, otherwise known as the "Inventions and Inventors Incentives Act
of the Philippines", which provides, viz:
"Section 6. Tax Exemption. - To promote, encourage, develop and accelerate
commercialization of technologies developed by local researchers or adapted locally from
foreign sources including inventions, any income derived from these technologies shall
be exempted from all kinds of taxes during the first ten (10) years from the date of the
first sale, subject to the rules and regulations of the Department of Finance: Provided, that
this tax exemption privilege pertaining to invention shall be extended to the legal heir or
assignee upon the death of the inventor.
The technologies, their manufacture and sale, shall also be exempt from payment of
license, permit fees, customs duties and charges on imports."
In reply, please be informed that your request cannot be granted by this Office for lack of
legal basis. Section 3 of Revenue Regulations No. 19-93 which implemented the
aforequoted provisions of RA No. 7459 provides that -
"3. The inventor shall be exempt from the following taxes for which otherwise he shall
have been directly liable:
"xxx xxx
xxx
(c) Excise taxes directly payable in connection with the sale of invention products."
The aforequoted provision itself will readily show that the exemption of Mr. Lantano
from the excise tax imposed under Section 148 of the 1997 Tax Code covers only the sale
of his invented ALCO-DIESEL, LAN-GAS and SUPERBUNKER FORMULA L. We
cannot agree that Section 3 of RR 19-93 intends to grant excise tax exemption to Mr.
Lantano on his importation of raw materials directly needed in the manufacture of his
invented products. Tax exemption cannot be created by implication because exemptions
from taxation are highly disfavored in law and one who claims exemption from tax must
be able to justify his claim by clearest grant of organic or statute law. An exemption from
the common burden cannot be permitted to exist on vague implication. (Collector vs.
Manila Jockey Club, Inc., L-875, March 23, 1956; Petroleum Co. vs. Llanes, 49 Phil.
466) To be exempted from payment of taxes, it is the taxpayer's duty to justify the
exemption "by words too plain to be mistaken and too categorical to be misinterpreted.
Laws granting exemption from tax are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming exemption to prove that it is
in fact covered by the exemption so claimed. (Commissioner of Internal Revenue vs.
Mitsubishi Metal Corporation, G.R 80041 Jan 22,1990)
Section 129 of the 1997 Tax Code provides that excise taxes apply to goods
manufactured in the Philippines for domestic sale or consumption or for any other
disposition and to things imported which shall be in addition to the value-added tax
imposed under Title IV thereof. As importer of the raw materials needed in the
manufacture and commercialization of his products, Mr. Lantano shall pay the excise
taxes due on his imported articles prior to the release of the same from customshouse,
pursuant to Section 131 (A) of the same Code.
This constitutes our final decision on the matter.
Very truly yours,
GUILLERMO PARAYNO, JR.
October 09, 2002
BIR NUMBERED RULING
Section 33, NIRC

Rev. Regs. 3-98
000-00
036-2002
TAX COUNSELING INTEGRATED
Unit 2204-C. PSE Centre Tower 1
Exchange Road, Ortigas Center
Pasig City
Attention:
Atty. Reynoso B. Floreza
Gentlemen:
This refer to your letter dated May 18, 2000 requesting that your client, BECHTEL
OVERSEAS CORPORATION (Bechtel), be allowed to pay their fringe benefit tax (FBT)
through the use of its Tax Credit Certificate (TCC).
As borne out of the docket of the case, the following facts have been established.
On November 18, 1999, Bechtel, through counsel, filed a claim for tax credit of excess
value added tax (VAT) in the amount of P52,508,690.20 (excess input of P54,489,808.05
plus overpaid VAT of P1,018,882.15). It was alleged that the said claim was being applied
as tax credit because the construction project in Mauban, Quezon would be 100%
completed by December 1999, and Bechtel does not have any other project when said
excess input could be tax-credited against the company's VAT liabilities.
On January 5, 2000, TCC No. SN 000971 was issued in the amount of P52,508,690.20 in
favor of Bechtel for excess input and overpayment of VAT covering the period from April
1997 to September 1999.
On April 14, 2000, Bechtel applied for a Tax Debit Memo amounting to P541,389.50 in
payment of their FBT for the 1st quarter of 2000 utilizing the said TCC which, however,
was denied by the Collection Service on the ground that "FBT is a final withholding tax
which is an exception to the usage of TCCs under Section 204(c) of the NIRC".
In your supplemental letter dated April 9, 2002, you reiterated your position that FBT is
the direct liability of employers and further stated that there could be no valid imposition
of the civil penalties because Bechtel voluntarily filed the return and tendered payment of
the tax within the statutory period. This ruling is based solely on the facts represented and
covers only the legal issue of whether an employer's TCC however issued, may be used
to pay the FBT on fringe benefits granted to the employer's managerial and supervisory
employees.
In reply, please be informed of the following:
The second paragraph of Section 204(C) specifically prohibits the application of a Tax
Credit Certificate (TCC for brevity) against withholding tax liabilities of a taxpayer.
Thus.
"SECTION 204. Authority of the Commissioner to Compromise, Abate and Refund or
Credit Taxes. The Commissioner may
xxx
A Tax Credit Certificate validly issued under the provisions of this Code may be applied
against any internal revenue tax, excluding withholding taxes, for which the taxpayer is
directly liable. Any request for conversion into refund of unutilized tax credits may be
allowed, subject to the provisions of Section 230 of this Code: Provided, That the original
copy of the Tax Credit Certificate showing a creditable balance is surrendered to the
appropriate revenue officer for verification and cancellation: Provided, further. That in no
case shall a tax refund be given resulting from availment of incentives granted pursuant
to special laws for which no actual payment was made.
xxx"
(Emphasis supplied.)
The rationale for the above-stated prohibition is that the withholding tax is not considered
a direct liability of the taxpayer. The tax withheld is actually payment made by the
taxpayer other than the withholding agent who merely holds the tax withheld in trust for
the government.
The issue is whether the FBT is a direct liability of the employer or whether the employer
merely acts as withholding agent in paying the FBT.
Section 33 of the 1997 Tax Code specifically states that:
"SECTION 33.
Special Treatment of Fringe Benefit.
(A) Imposition of Tax. A final tax of thirty-four percent (34%) effective January 1,
1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%)
effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary
value of fringe benefit furnished or granted to the employee (except rank and file
employees as defined herein) by the employer, whether an individual or a corporation
(unless the fringe benefit is required by the nature of, or necessary to the trade business or
profession of the employer, or when the fringe benefit is for the convenience or
advantage of the employer). The tax herein imposed is payable by the employer which
tax shall be paid in the same manner as provided for tinder Section 57(A) of this Code,
xxx"
(Emphasis supplied)
The clear intention of Congress can be gathered from the minutes of the proceedings
before the Committee On Ways And Means that deliberated on the said Section. Thus.
"Mr. Medalla (continuing)...." Now, another feature of the reform is fringe benefits
taxation which is a feature of the tax system of Australia and many other countries. Since
under the present system fringe benefits are already taxable but of course, many of them
are not declared for tax purposes, this is really not new tax. This is on example of how the
tax reform raises revenue, not by raising new taxes but by making the administration of
existing taxes easier...
The loophole that the FBT seeks to plug is the fact that many executives are able to avoid
taxation by being paid fringe benefits rather than straight salaries" (See pages 000026 and
20007, Minutes, Committee on Ways and Means, February 20, 1996/ELP/V-1)
Quite evidently, the purpose of the afore-quoted provision is to hold the employer directly
liable for the FBT so as "to plug" the so-called loophole and to ensure that the same is
paid. This to this Office's mind, is the reason for the special treatment of the FBT.
The second paragraph of Section 2.33(A) of Revenue Regulations No. 3-98 is instructive
stating that:
"SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS
XXX
The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar quarterly basis
as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58
A (Quarterly Returns and Payments of taxes Withheld) of the Code." (Emphasis
supplied.)
Furthermore, Revenue Regulations No. 5-2000 defines a direct internal revenue tax
liability as "...taxes for which the taxpayer is made statutorily liable. In essence, direct
internal revenue tax liability pertains to the liability of a person mandated by law to file
the tax return and pay the tax due thereon. "
From the foregoing discussion, it is quite clear that FBT is a withholding tax on the
employee although payment thereof is made directly by the employer. It is a direct
internal revenue tax liability of the employee, and not the employer. Such being the case,
Bechtel cannot use its TCC to pay the FBT because of the prohibition under Section
204(C) of the 199 Tax Code.
As to your request for non-imposition of civil penalties on the ground that a voluntary
tender of payment of the tax through the use of the TCC has been made, this Office finds
no basis for the abatement of the civil penalties. Sec 204 of the 1997 Tax Code clearly
provides that the TCC cannot be applied against withholding tax payment. Furthermore,
Section 2.33 of RR 3-98 provides that FBT is a final withholding tax.
Hence, whatever interpretation the taxpayer has is of no moment considering that the
provision of law, rules and regulations provide for its proper classification, i.e., final
withholding tax.
Applying the aforementioned provisions, payment in the form of TCC is not valid and to
be considered as no payment at all, Bechtel, having failed to pay the tax on time, the
penalties thereon should attach.
upon investigation, it will be ascertained that the facts are different, then this ruling shall
be considered void.
Very truly yours,

August 29, 2002
BIR NUMBERED RULING
035-2002
LAYA MANANGHAYA & CO.
22/F Philamlife Tower
8767 Paseo de Roxas
Makati City
Attention: ATTY. REMIGIO A. NOVAL
Partner, Tax & Corporate Services
and
ATTY. MA. GEORGINA J. SOBERANO
Director, Tax & Corporate Services
Gentlemen:
This refers to your letter dated February 19, 2002 stating that your client, Siemens Power
Operations, Inc. (SPOI), is a duly organized domestic corporation which is 100% owned
by Siemens A.G. (SAG), a corporation duly organized and existing under the laws of
Germany; that SAG in turn, is a publicly-held international company whose stocks are
held by approximately one million (1,000,000) shareholders; that of this multitude of
shareholders, only one (1) entity, the Siemens Vermogensverwaltung GmbH, is known to
hold more than five percent (5%) or to be exact, six and one-half percent (6.5%) of the
capital, and that under German Law, any stock owner holding five percent (5%) or more
of the capital of a company is required to report the same.
Based on the foregoing representations, you now request for a ruling that SPOI, being a
publicly-held corporation, is not covered by the improperly accumulated earnings tax
prescribed in Section 29 of the Tax Code of 1997.
In reply thereto, please be informed that Section 29(A) and (B) of the Tax Code of 1997,
as implemented by Revenue Regulations No. 2-2001, provides that in addition to other
taxes imposed by Title II of the Tax Code of 1997, there shall be imposed for each
taxable year a tax equal to 10% of the improperly accumulated taxable income of
corporations formed or availed of for the purpose of avoiding the income tax with respect
to its shareholders or the shareholders of any other corporation, by permitting tie earnings
and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders.
Thus, this kind of tax is being imposed in the nature of a penalty to the corporation for
the improper accumulation of its earnings, and as a form of deterrent to the avoidance of
tax upon shareholders who are supposed to pay dividends tax on the earnings distributed
to them by the corporation. However, the improperly accumulated earnings tax shall not
apply to, among others, publicly-held corporations.
Under Section 4 of Revenue Regulations No. 2-2001, closely-held corporations are those
corporations at least fifty percent (50%) in value of the outstanding capital stock or at
least fifty percent (50%) of the total combined voting power of all classes of stock
entitled to vote is owned directly or indirectly by or for not more than twenty (20)
individuals. Domestic corporations not falling under the aforesaid definition are,
therefore, publicly-held corporations. For purposes of determining whether the
corporation is a closely-held corporation, it is provided that stock owned directly or
indirectly by or for a corporation, partnership, estate or trust shall be considered as being
owned proportionately by its shareholders, partners or beneficiaries.
In BIR Ruling No. 025-2002 dated June 25, 2002, this Office ruled that:
"Such being the case, since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US,
such shares will be considered as being owned proportionately by the Abbott-US
shareholders. The ownership of a domestic corporation for purposes of determining
whether it is a closely held corporation or a publicly held corporation is ultimately traced
to the individual shareholders of the parent company. Thus, where at least 50% of the
outstanding capital stock or at least 50% of the total combined voting power of all classes
of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or
more individuals, the corporation is considered publicly-held corporation as the term is
defined under the Regulations."
"Further, Section 29 of the Tax Code of 1997 provides, viz:
"Sec. 29. Imposition of Improperly Accumulated Earnings Tax (A)
xxx
xxx
xxx
(B)
Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding
section shall apply to every corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of any other corporation,
by permitting earnings and profits to accumulate instead of being divided or distributed.
(2) Exceptions - The improperly accumulated earnings tax. as provided for under
this Section shall not apply to:
(a)
Publicly-held corporation;
(b)
Banks and other non-bank financial intermediaries; and
(c)
Insurance companies.
XXX
XXX
XXX
XXX
Accordingly, this Office confirms your opinion that Abbott-Phils. is considered a
publicly-held corporation exempt from the Improperly Accumulated Earnings Tax
(IAET), based on the representation that as of the year-end 2000, Abbott-US had 101,272
shareholders holding a combined 1,545,934,133 shares of common stock and the twenty
largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1
percent of Abbott-US issued and outstanding shares."
IN THE LIGHT OF ALL THE FOREGOING, this Office holds that since the parent
company of SPOI is a corporation publicly listed in Germany, whose stocks are owned
and held by more than 20 stockholders, SPOI is not subject to the 10% improperly
accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997, as
implemented by Revenue Regulations No. 2-2001.
Very truly yours,
EDUMUNDO P. GUEVARRA
Deputy Commissioner
Legal & Inspection Group

August 07, 2002
BIR NUMBERED RULING
030-2002
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
Republic of the Philippines
IRC Building, #82 EDSA
Mandaluyong City
Attention: COMM. HAYDEE B. YORAC
Chairperson
Gentlemen:
This refers to your letter dated May 6, 2002 on your request for a ruling on the propriety
of imposing capital gains tax and documentary stamp tax on the consolidation of title of
the property surrendered as ill-gotten wealth in favor of the Republic of the Philippines.
The facts, as represented, are as follows:
In 1986, Jose Y. Campos surrendered, among others, the Independent Realty Corporation
(IRC for brevity) and its properties to the Republic of the Philippines through the
Presidential Commission on Good Government (PCGG for brevity) as part of the Marcos
ill-gotten wealth. Since then, the corporation and its properties have been under the
control of the Republic.
On April 2, 2002, the IRC and the PCGG consolidated the title of the Republic over a
parcel of land and the building in such land covered by TCT No. 390163 and registered in
the name of IRC.
Your good Office now requests whether capital gains tax and documentary stamp tax
should be imposed on such transfer and consolidation.
In reply, please be informed that the Department of Justice, in DOJ OPINION NO. 108, s.
1987 dated October 16, 1987, has already rendered an opinion on the same matter, which
this Office fully subscribes to and is hereby reproduced as follows:
This refers to your request for opinion on whether the Republic of the Philippines is
exempt from payment of capital gains tax, transfer tax, real property tax and other fees in
connection with the transfer in its favor of several real properties by Independent Realty
Corporation (IRC). Said real properties were voluntarily surrendered to the Presidential
Commission on Good Government (PCGG) by Jose Yao Campos being part of Marcos'
ill-gotten wealth and which in turn were formally transferred to the Department of
Agrarian of Agrarian Reform (DAR) by PCGG.
The accompanying documents disclose that Jose Y. Campos is the principal stockholder
of Independent Realty Corporation (IRC); that he voluntarily surrendered in favor of the
Philippine Government, the title and ownership of IRC and all its subsidiaries; that
thereafter on April 1, 1986, the Philippine Government through the PCGG, formalized
the sequestration of the said corporation and all its subsidiaries under the control of the
PCGG; that in pursuance of the aforestated sequestration order, the Board of Directors of
IRC passed a resolution authorizing the transfer of all properties in the name of IRC and
its subsidiaries to the Republic of the Philippines, that the PCGG and DAR entered into a
Memorandum of Agreement covering said surrendered properties; and that since IRC is
deemed to be now owned by the Philippine Government, IRC executed a Deed of
Transfer transferring, conveying, and assigning all its rights, interest and titles to all the
properties listed in Annex "A" of said document in favor of the Republic of the
Philippines.
You contend that since the Republic of the Philippines is the owner of the real properties
in question, the; registration of the same should be exempt from the payment of capital
gains tax, real property tax, transfer tax, and other fees being required by the Register of
Deeds of Laguna and Cavite.
We find your contention tenable.
Taxes are financial burdens imposed for the purpose of raising revenues with which to
defray the cost of the operation of the Government. The general rule is that,
independently of constitution or statute, property belonging to the state or a political
division thereof is not taxable on the theory that such taxation would merely have the
effect of taking money out of one pocket and putting it in another (Cooley on Taxation,
Sec. 621, 4th Edition). Taxing such property would not serve, in the final analysis, the
main purpose of taxation. What is more, it would tend to defeat it, on account of the
paper work, time and consequently, expenses it would entail (The Law on Local Taxation,
by Justiniano V. Castillo). It is axiomatic that when public property in involved
exemption is the rule and taxation, the exception (Social Security System vs. City of
Bacolod, 115 SCRA 412; National Waterworks and Sewerage Authority vs. Quezon City,
23 SCRA 286; Board of Assessment Appeals vs. Court of Appeals, 8 SCRA 225). This
implied exemption is generally reinforced by express provisions in the constitution or

statutes exempting such property. (Cooley. Ibid.)
Accordingly, Section 40 of Presidential Decree No. 464, as amended (Real Property Tax
Code), exempts from real property tax real property owned by the Republic of the
Philippines or any of its political subdivisions and any government-owned corporation so
exempt by its charter unless the beneficial use of which has been granted to a taxable
person. Gifts or donations made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for profit or to any political
subdivision of said government are exempt from the donors (gift) tax under Section
104(2) of the National Internal Revenue Code. Certificates placed upon documents,
instruments and papers for the national, provincial, city or municipal government, made
at the instance and for the sole use of some other branch of the national, provincial, city
or municipal government, are exempted from documentary stamp tax (see Section
212[2], NIRC). With regard to the capital gains tax, no such tax is due because there is no
capital gain to be taxed, there being no sale or exchange of capital assets involved (see
Section 34[2] of the National Internal Revenue Code) since the subject properties were
voluntarily surrendered to the Republic of the Philippines which is the real owner of the
same.
For all the foregoing, we reiterate the view that the transfer in favor of the Government of
the subject properties may be effected without the payment of the taxes being required to
be paid by the Registers of Deeds of Laguna and Cavite.
Incidentally, it may be mentioned that Executive Order No. 286 dated July 25, 1987,
which created the Sequestered Assets Disposition Authority (SADA) to oversee the
disposition of, among others, assets and properties voluntarily surrendered to the PCGG,
provides for the exemption of SADA from the payment of taxes, fees and charges under
Section 5 thereof, which reads as follows:
SEC. 5. Exemption from Taxes, Fees and other Charges. - The provisions of any law to
the contrary notwithstanding, the Authority as well as the sequestered corporations and
assets transferred to it, shall be exempt from all taxes, fees, charges, imposts, and
assessments arising from or occasioned by the passing of title over such corporations or
assets from the said corporations to the Authority and/or from the National Government
to a private acquisition or buyer imposed by the National Government or any subdivision
thereof; Provided, that in cases where government institutions acquired the said assets by
foreclosure, the non-payment of similar taxes, fees, charges, imposts, and assessments
shall not be a bar to the consolidation of title in the foreclosing institutions and the
subsequent passing of title to the Authority.
The sale or transfer of such corporations of assets shall not be enjoined or hindered by the
existence of any liens by way of taxes, charges or other assessments in favor of the
government at the time of sale or transfer; Provided, that the proceeds from such sale or
transfer shall be subject to the tax lien and shall first be applied to satisfy such obligations
secured by such liens." (Emphasis supplied)
In view thereof, this Office is of the opinion and hereby holds that the consolidation of
title of the property surrendered by IRC, as ill-gotten wealth, in favor of the Republic of
the Philippines is exempt from capital gains tax and documentary stamp tax.
For your information and guidance.
Very truly yours,
RENE G. BAEZ
July 31, 2002
BIR NUMBERED RULING
RR 2-98; 79; RR 3-2002

000-00
029-2002
Atty. Maria Elena C. Ramiro
2423 Zarnora Street
Pasay City
Madam:
This refers to your letter dated November 8, 2001 requesting for a ruling in behalf of your
clients, Loida P. Kahulugan, Rhodora M. Medel, Ma. Luisa N. Hibionada, Araceli S.
Alegria and Jean D. Pena, on the following withholding tax issues. It is your contention
that:
1.
The nature of a withholding tax on compensation income of government
employees is creditable since it can be allowed as credit against the income tax liability
of the taxpayer for the taxable year pursuant to Section 79(C)(2) of the National Internal
Revenue Code; and
2.
Any deficiency or excess in the monthly withholding taxes on such compensation
income duly remitted to the Bureau of Internal Revenue may be reconciled or adjusted at
year-end, particularly during the last payroll period of the employee in accordance with
Sec. 22(a) and (b) of Revenue Regulations No, 6-82, as amended by RR 12-86, otherwise
known as the "Withholding Tax Regulations on Compensation."
In reply, please be informed that Section 2.57(B) of Revenue Regulations No. 2-98,
implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue
Code, as amended" relative to the Withholding on Compensation, provides, viz:
"Sec. 2.57. Withholding of Tax at Source (A) xxx
xxx
xxx
(B) Creditable Withholding Tax Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the tax
due of the payee on said income. The income recipient is still required to file an income
tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the
income and/or pay the difference between the tax withheld and the tax due on the income.
Taxes withheld on income payments covered by the expanded withholding tax (referred
to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78
also of these regulations) are creditable in nature."
Thus, the withholding tax on compensation income of government employees is
creditable in nature. Therefore, pursuant to Section 79(C)(2) of the Tax Code of 1997, the
amount deducted and withheld during any calendar year shall be allowed as a credit to
the recipient of such income against the tax imposed under Section 24(A).
As regards any deficiency or excess in the monthly withholding, Step 6 of Section
2.79(B)(5)(b) of Revenue Regulations No. 2-98 provides that the deficiency tax (when
the amount of tax computed in Step 5 is greater than the amount of cumulative tax
already deducted and withheld or when no tax has been withheld from the beginning of
the calendar year) shall be deducted from the last payment of compensation for the
calendar year. If the deficiency tax is more than the amount of last compensation to be
paid to an employee, the employer shall be liable to pay the amount of tax which cannot
be collected from the employee. The obligation of the employee to the employer arising
from the payment by the latter of the amount of tax which cannot be collected from the
compensation of the employee must be settled between the employee and employer.
The excess tax (when the amount of cumulative tax already deducted and withheld is
greater than the tax computed in Step 5) shall be credited or refunded to the employee not
later than January 25 of the following year. However, in case of termination of
employment before December, the refund shall be given to the employee at the payment
of the last compensation during the year. In return, the employer is entitled to deduct the
amount refunded from the remittable amount of taxes withheld from compensation
income in the current month in which the refund was made, and in the succeeding months
thereafter until the amount refunded by the employer is fully repaid.
On the basis of the foregoing, the deficiency or excess in the withholding tax on
compensation income of government employees, which is creditable in nature, may be
reconciled or adjusted at year-end, more particularly during the last payroll period of the
employee pursuant to Section 79(C)(2) of the Tax Code of 1997 as implemented by

Revenue Regulations No. 2-98.
Moreover, Revenue Regulations No. 3-2002 dated March 22, 2002 provides that
employees receiving compensation income from only one employer for one taxable year
whose tax due is equal to tax withheld qualify for substituted filing of Income Tax Return
(ITR).
In substituted filing of ITR, the employer's annual information return (BIR Form No.
1604-CF) may be considered the "substituted" ITR of the employee inasmuch as the
information he would have provided the BIR in his own ITR (BIR Form No. 1700) would
have been exactly the same information contained in the employer's annual information
return. This being the case, the taxpayer has the option not to file his ITR for the taxable
year involved.
In addition, substituted filing applies only if all the following circumstances are present:
1.
The employee receives purely compensation income (regardless of amount)
during the taxable year;
2.
year;
The employee receives the income only from one employer during the taxable
3.
The amount of tax due from the employee at the end of the year equals the
amount of tax withheld by the employer; and
4.
The employee's spouse also complies with all the three (3) conditions stated
above.
Furthermore, RR 3-2002 shall cover taxable year 2002 and succeeding years although
substituted filing is optional on the part of the employee for income earned for taxable
year 2001.
upon investigation, it will be disclosed that the facts are different, then, this ruling shall
be considered null and void.
Very truly yours,
RENE G. BAEZ

June 21, 2002
BIR NUMBERED RULING
22(DD); 28(A)(6)(a)
047-2001
024-2002
BOARD OF INVESTMENTS
Industry & Investments Building
385 Sen Gil J. Puyat Avenue,
Makati City
Attention: ADELINA E. BATALLONES
OIC Director One-Stop Action Center
Gentlemen:
This refers to your letter dated 27 February 2002 forwarding the request of Philippine
Australia Business Council regarding the assistance sought by Indophil Resources Head
Office (Melbourne).
It is represented that Indophil Resources Head Office (Melbourne) ("Indophil", for
brevity) is an Australian Company licensed by the Securities and Exchange Commission
in 1999 to establish a Regional Headquarters. Based on this, Indophil requests the
issuance of a certifications/statement from the Bureau of Internal Revenue on the
following:
1. Expats/alien executives occupying managerial and technical positions, employed by
Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ)
are subject to withholding tax of 15% on compensation income.
2. Regional or Area Headquarters are exempt from payment of corporate income taxes.
In reply, please be informed that1. Section 10 of the Rules and Regulations Implementing Article 61 of R.A. 8756
provides that alien executives occupying managerial and technical positions employed by
the regional or area headquarters and regional operating headquarters of multinational
companies shall be subject for each taxable year upon their gross income received as
salaries, wages, annuities, compensations, remuneration, and emoluments to a final tax
equal to fifteen percentum (15%) of such gross income.
In relation thereto, Section 2.57.1(D) of Revenue Regulations No. 2-98, as amend by
Revenue Regulations 6-2001, also provides that a final withholding tax equivalent to
fifteen percent (15%) shall be withheld by the withholding agent from the gross income
received by every alien individual occupying managerial and technical positions in
regional. or area headquarters and Regional Operating Headquarters established in the
Philippines by multinational companies as salaries, wages, annuities, compensation,
remuneration, and other emoluments, such as honoraria and allowances, except income
which is subject to the fringe benefits tax, from such regional or area headquarters and
regional operating headquarters.
Thus, expats/alien executives occupying managerial and technical positions employed by
regional or area headquarters and regional operating headquarters are subject to
withholding tax of 15% on compensation income.
2. Section 28(A)(6)(a) of the Tax Code of 1997 provides that regional or area
headquarters as defined in Section 22(DD) of the said Code shall not be subject to
income tax.
Section 22(DD) of the Tax Code of 1997 defined the term "regional or area headquarters"
as "a branch: established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and which act as a
supervisory, communications and coordinating center for their affiliates, subsidiaries or
branches in the Asia-Pacific Regional and other foreign markets,"
Likewise, Article 63 of Executive Order No. 226, otherwise known as the Omnibus
Investments Code as amended by R.A. 8756, provides that regional or area headquarters
established in the Philippines by multinational companies and which headquarters do not
earn or derive income from within the Philippines and do not participate in any manner in
the management of any subsidiary or branch office it might have in the Philippines nor
solicit or market goods and services whether on behalf of its mother company or its
branches, affiliates, subsidiaries and any other company and which acts as supervisory,
communications and coordinating centers for their affiliates, subsidiaries, or branches in
the Asia Pacific Region and other foreign markets shall not be subject to income tax.
It must be noted that for tax purposes, a regional or area headquarters, in acting as a
supervisory, communications and coordinating center for its affiliates in the region, shall
not render any of the following qualifying services:
General administration and planning;
Business planning and coordination:
Sourcing/procurement of raw materials and components;
Corporate finance and advisory services;
Marketing control and sales promotion;
Training and personnel management;
Logistic services;
Research and development services, and product development;
Technical support and maintenance;
Data processing and communication; and Business development,

which functions are applicable to a Regional Operating Headquarters pursuant to Section
4(b) of the Rules and Regulations implementing R.A. No. 8756.
Accordingly, Indophil will not be subject to income tax as long as in performing its
functions and in acting as a supervisory, communications and coordinating center for its
affiliates in the region, it shall not render any of the foregoing qualifying services.
Otherwise, it shall be taxed as a Regional Operating Headquarters.
It is understood that Indophil's books of accounts and other pertinent records shall be
subject to periodic examination by revenue enforcement officers of this Bureau for the
purposes of ascertaining whether Indophil is complying with the conditions under which
it is granted tax exemption or tax incentives and its tax liability, if any, pursuant to
Section 235 of the Tax Code of 1997.
be considered void.
Very truly yours,
RENE G. BANEZ
June 21, 2002
BIR NUMBERED RULING
Sections 32 & 33
023-2002
Joaquin Cunanan & Co.
29/F Philamlife Tower
8767 Paseo de Roxas
Makati City
Attention: Ms. Tomasa H. Lipana
Managing Partner
Tax Services
Madam:
This refers to your letter dated April 17, 2001 requesting on behalf of your client,
Sodexho Pass International (Sodexho for brevity), for confirmation of the following
opinions:
1. That meal and food benefits provided by client companies through Sodexho meal and
food vouchers may be considered tax-exempt benefits;
2. That a meal and food allowance of no more than Php 100.00 per day is considered de
minimis benefit; and,
3. That de minimis rice allowance of Php 1,000 per month given to the employees may
be aggregated with the meal allowance through Sodexho meal and food vouchers and
shall still be exempt from both withholding tax on compensation and fringe benefit tax.
It is represented that Sodexho, a foreign corporation organized and existing under the
laws of France, is a service company engaged in operating innovative systems (the
issuance of service vouchers) to manage employee benefits given by private companies,
national government agencies, including universities and colleges, government-owned
and/or controlled corporations, and more generally, any other organization to improve the
health, goodwill, contentment or efficiency of their employees, members or beneficiaries
or their dependents; that in the Philippines, Sodexho proposes to introduce administration
of food and rice subsidy benefits given by Philippine employers to their employees
through the following procedures:
1. Client company transfers to Sodexho the amount allotted for its employees' annual or
monthly meal and food allowance and/or rice subsidy with instructions on the amount to
be allotted per employee in conformity with a de minimis threshold that would be
established;
2. Sodexho issues meal and food vouchers (intended for each employee with the value
allotted for the respective employee's benefit per working day) and delivers the same to
the client company. The face value of the vouchers shall be equivalent to the amount
transferred by the client company to Sodexho;
3. Client company distributes the vouchers to its employees;
4. Employee uses these vouchers for meals and/or food at an accredited establishment
(e.g., restaurant/food outlet) of his choice;
5. Accredited outlet sends back used vouchers to Sodexho for reimbursement;
6. Sodexho reimburses the store/outlet.
We reply as follows.
In general, the term "compensation" means all remuneration for services performed by an
employee for his employer under an employer-employee relationship, unless specifically
excluded by the Tax Code of 1997. The name and basis by which the remuneration for
services is designated is immaterial in determining whether the remuneration constitutes
compensation. Thus, fringe benefits, unless specifically excluded from gross income and
unless subject to the fringe benefits tax under Section 33 of the Tax Code of 1997, would
generally constitute compensation to the recipient. (Sec. 2.78.1(A), Revenue Regulations
No. 2-98) Furthermore, any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee, except rank and file employees as
defined, shall generally be understood as fringe benefits, and as such, shall be subject to
the fringe benefits tax, unless specifically excluded under the Tax Code of 1997, as
implemented according to rules and regulations as are necessary to carry out efficiently
and fairly the provisions of the Code. (Section 33, Tax Code of 1997, as implemented by
Revenue Regulations No. 3-98, as amended.)
De minimis benefits are facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of his

employees, and as such, they are subject to neither compensation income tax nor fringe
benefits tax. They are, therefore, not subject to withholding tax as well. (Sec. 2.78.1(A)
(3), Revenue Regulations No. 2-98, as amended by Revenue Regulations 8-2000; Sec.
2.33.(C), Revenue Regulations No. 3-98, implementing Section 33(C)(4) of the Tax Code
of 1997.)
Accordingly, the amount of de minimis benefits conforming to the maximum values
prescribed for each of the benefits enumerated in Revenue Regulations Nos. 3-98, as
amended by Revenue Regulations Nos. 8-2000 and 10-2000 shall not be considered in
determining the Php30,000 threshold of "Other Benefits" provided in Section 32(B)(7)(e)
of the Tax Code of 1997. However, any amount of fringe benefits paid by the employer
that is in excess of the maximum values set in the stated Regulations shall be considered,
along with the "Other Benefits", in determining, whether or not the Php30,000 threshold
has been exceeded, and the excess thereof shall become taxable to the employee
receiving the benefits. (Sec. Sec. 2.78.1 (A)(3), Revenue Regulations No. 2-98, as
amended by Revenue Regulations 8-2000).
On the basis of the foregoing, we proceed to respond to your specific concerns.
1. The meal and food benefits provided by the client-companies to their employees
through Sodexho meal and food vouchers may be considered tax-exempt benefits.
The meal and food benefits provided to their employees by client companies through
Sodexho meal and food vouchers may be tax-exempt, subject to the standards set for de
minimis thresholds for fringe benefits under Revenue Regulations No. 3-98, as amended
by Revenue Regulations No. 8-2000 and 10-2000, and further, to the conditions set for
the benefits to be exempt pursuant to the tests of convenience of the employer and the
promotion of health, goodwill, contentment, or efficiency of the employees under Sec.
2.78.1(A)(2) and (3) of Revenue Regulations No. 2-98, as amended by Revenue
Regulations No. 8-2000 and 10-2000. The name and basis upon which the benefits are to
be given are immaterial in determining whether such would constitute taxable income.
Thus, whether or not the benefits are administered by the company itself or through
Sodexho, as the conduit, would not be the determining factor; rather, the determination
must be made according to the standards laid down in the implementing Regulations.
Accordingly, the value of the meals provided to an employee in addition to his
remuneration for services rendered, if furnished to such employee for the convenience of
the employer, shall not be added to the remuneration paid for the purpose of determining
the amount of compensation subject to income and withholding tax. Neither shall
facilities or privileges that are of relatively small value constitute compensation income if
these are offered or furnished by the employer merely as a means of promoting the
health, goodwill, contentment, or efficiency of his employees. (Sec. 2.78.1 (A)(2) and (3),
Revenue Regulations No. 2-98, as amended)
In the same token, the de minimis benefits which are not subject to fringe benefits tax
refer to those same facilities and privileges furnished or offered by an employer to his
employees that are of relatively small value and are being offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or
efficiency of his employer such as the following:
1.
Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year and the monetized value of leave credits paid to government
officials and employees, (as amended by Revenue Regulations Nos. 8-2000 and 10-2000)
2.
Medical cash allowance to dependents of employees not exceeding Php750.00 per
employee per semester or Php125 per month;
3.
Rice subsidy of Php 1,000 or one (1) sack of 50-kg rice per month amounting to
not more than Php 1,000;
4.
Uniform and clothing allowance not exceeding Php3,000 per annum;
5.
Actual yearly medical benefits not exceeding Php 10,000 per annum;
6.
Laundry allowance not exceeding Php300 per month;
7.
Employees' achievement awards, e.g., length of service or safety
achievement, which must be in the form of tangible personal property other than cash or
gift certificate, with an annual monetary value not exceeding Php 10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;
8.
Gifts given during Christmas and major anniversary celebrations not exceeding
Php5,000 per employee per annum;
9.
Flowers, fruits, books or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and,
10.
Daily meal allowance for overtime work not exceeding twenty-five percent (25%)
of the basic minimum wage.
2.
The meal and food allowance, although not for overtime work, is considered
de minimis if it does not exceed 25% of the basic minimum wage.
Revenue Regulations 3-98, as amended by Revenue Regulations 8-2000 and 10-2000 are
illustrative and non-exclusive in the enumeration of what constitutes de minimis fringe
benefits. Accordingly, we rule that the meal and food benefits granted through Sodexho
meal and food vouchers, although not intended to be used for overtime work, may still be
added in the above enumeration. However, in terms of de minimis threshold for regular
meal and food benefit, the ceiling for benefits of similar nature under Revenue
Regulations No. 8-2000 should be used as guidelines. Such being the case, meal and food
benefits not exceeding 25% of the daily minimum wage may be considered de minimis
meal benefit and therefore, tax exempt. The excess over this amount shall be considered
other benefits as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997.
The excess of the meal and food allowance given over the de minimis ceiling shall still be
exempt provided that it, together with the total amount of other benefits, shall not exceed
Php30,000.
3.
The rules and regulations on de minimis benefits do not allow aggregation of the
amounts set for each type of benefit.
In keeping with the spirit of the rules and regulations on de minimis benefits, we rule that
there can be no aggregation of the values set for each item of benefit stated in Revenue
Regulations Nos. 2-98 and 3-98, as amended by Revenue Regulations Nos. 8-2000 and
10-2000. The intent of the Regulations is to treat each item of de minimis benefit
independently of each other, and we have to give life to that intent. Thus, the Regulations
separately provide maximum values for rice allowance and for meal allowance.
Accordingly, there can be no aggregation of de minimis values for rice and meal and food
benefits through Sodexho meal and food vouchers. In order to clearly conform with
prescribed de minimis standards, therefore, separate vouchers should be used for the rice
allowance and the meal and food benefit.
considered as null and void.
Very truly yours,
RENE G. BAEZ
June 10, 2002
BIR NUMBERED RULING
175
022-2002
SYCIP GORRES VELAYO & CO.
6760 Ayala Avenue
Makati City
Attention: Atty. Ma. Victoria A. Villaluz
Gentlemen:
This refers to your letter dated October 10, 2001 requesting on behalf of your client,
Philips Semiconductors Philippines, Inc. (PSPI), for a ruling confirming your opinion that
no interest may be imputed on the "Quasi-Equity Investment Agreement" between
Koninklijke Philips Electronics N.V. (Philips-Netherlands) and PSPI.
It is represented that PSPI is a Philippine domestic corporation; that for purposes of
capital expansion and improvement of its overall financial condition, PSPI entered into
an agreement called the "Quasi-Equity Investment Agreement" dated April 6, 2001 with
US shareholder, Philips-Netherlands, a corporation duty established and existing under
the laws of the Netherlands; that pursuant to said agreement Philips-Netherlands shall
deposit US$200,000,000 in PSPI as deposit for future subscription to PSPI shares; that
said deposit is not subject to repayment or redemption by PSPI; that in the event of
dissolution, liquidation and winding up of PSPI, no amount shall be repayable to PhilipsNetherlands in respect to such deposit under the aforesaid agreement, but rather, PhilipsNetherlands shall participate in any residual profits of PSPI as other shareholders would;
and that said amount will be credited in the company books as capital. In this regard,
paragraphs 1 to 5 of the Quasi-Equity Investment Agreement state:
"1. DEPOSIT FOR FUTURE SUBSCRIPTION
The proceeds of the Quasi-Equity investment, as, defined hereinbelow, shall constitute a
deposit for future subscriptions of new shares in the Receiver.
2. DEPOSIT OF THE QUASI-EQUITY
(a) The Payer will deposit the amount of the United States Dollars Two Hundred Million
Only (US$200 Million), hereinafter called the "Quasi-Equity" to the Receiver and the
Receiver shall accept the Quasi-Equity in one amount, before 30 June 2001. Said
"deposit for Quasi-Equity shall alternately refer to the "deposit for future subscription.
(b) The Payer shall pay the proceeds of the proceeds of the Quasi-Equity to the bank
account designated by the Receiver in writing at least 2 days prior to the requested for the
Quasi-Equity, such payment to constitute the drawdown by the Receiver of the QuasiEquity in accordance with the terms of this Agreement.
3. INTEREST
The Quasi-Equity shall be free of interest.
4. REDEMPTION or REPAYMENT
No redemption or repayment of the Quasi-Equity is foreseen.
5. SUBORDINATION
(a) The Payer hereby agrees that on the liquidation or winding up of the Receiver,
whether or not such winding up occurs before shares are issued against the deposit for
future subscription, no amount shall be payable to the Payer in such winding up of the
Receiver in respect of the Quasi-Equity until the claims of all other creditors of the
Receiver shall have been paid or provided for in full and the Payer accordingly agrees
and undertakes not to claim in said liquidation or winding up of the Receiver in respect of
the Quasi-Equity until all such other creditors have been satisfied as aforesaid.
(b) Upon said satisfaction of all creditors, the Payer shall be entitled to claim against the
Receiver, either in part or in full, and to participate in any residual profits of the Receiver.
The Payer shall in this respect rank pari passu with the shareholders, if there are other
shareholders at the the time of winding up, of the Receiver with respect to the residual
profits of the Receiver.
In reply thereto, please be informed that the foregoing given by the Philips-Netherlands
under the said agreement is not covered by RMO No. 63-99. Section 2.3 of the RMO
states that it does not apply to indebtedness which was in fact a contribution of capital.
This section states:
"2. Coverage:
This paper applies to all forms of bonafide indebtedness and includes:
"2.1 Loans or advances of money or other consideration (whether or not evidenced by a
written instrument);
"2.2 Indebtedness arising in the ordinary course of business out of sales, leases, or the
rendition of services by or between members of the group, or any other similar extension;
"2.3 But does not apply to alleged indebtedness which was in fact a contribution of
Capital or a distribution by a corporation with respect to its shares." (Emphasis supplied)
The "Quasi-Equity Investment Agreement" sufficiently discloses that the amount thus
given thereunder to PSPI by Philips-Netherlands may not be considered as "bona fide
indebtedness" within the ambit of RMO No. 63-99. Rather, the amount to be deposited is
analogous to a capital contribution considering that the same is not subject to any
repayment or redemption by PSPI. Furthermore, the said amount is subordinated to the
claims of creditors as provided in. paragraph 5 of the agreement quoted above. In
addition, the parties agree that the said amount represents deposit for future subscription
of shares of PSPI, thereby, constituting it as a capital contribution rather than as an
indebtedness. Accordingly, the amount given is not considered a loan or indebtedness
covered by Section 4.1 of RMO No. 63-99 which would authorize the Commissioner of
Internal Revenue to allocate interest income under Section 50 of the Tax Code of 1997.
The nature of a "loan" is defined in Articles 1933 and 1953 of the New Civil Code of the
Philippines as follows:
"Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower."
"Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the
same kind and quality."
On the basis of the foregoing provisions, it is clear that the amount given by PhilipsNetherlands to PSPI does not qualify or may not be considered as a loan. Unlike a loan
where the person who receives the money has an obligation to repay the amount received,
the agreement expressly provides that no redemption or repayment of the Quasi-Equity
by PSPI is foreseen (paragraph 4 of the agreement). Without the obligation on the part of
PSPI to repay the amount so deposited and the corrollary right on the part of PhilipsNetherlands to demand payment thereof, no bona fide indebtedness is present under these
circumstances.
The intent of the parties is clearly (manifested in the agreement which provides that the
amount received shall constitute a deposit for future subscriptions of new shares
(paragraph 1 of the agreement). Philips-Netherlands takes part in the business risk and
limits its recovery of the amount given on any residual profits on the liquidation or
finding up of PSPI. It is placed in equal fooling with any shareholder in PSPI whose
return of the contribution given depends upon the existence of residual profits, if any,
after all the other creditors shall have been paid.
Accordingly, not being considered as "bona fide indebtedness" within the purview of
RMO No. 63-99, no interest may be imputed on the Quasi-Equity Investment Agreement
between Philips-Netherlands and PSPI.
Very truly yours,

RENE G. BAEZ
May 31, 2002
BIR NUMBERED RULING
021-2002
ATTY. DANILO L. CONCEPCION
Liquidator, EYCO Group of Companies
c/o TAN CONCEPCION & BAWAGAN Law Offices
Suites 2104-2106, Medical Plaza Ortigas Bldg.
San Miguel Avenue, Ortigas Center
1605 Pasig City
Gentlemen:
This refers to your letter dated 30 April 2002, as the SEC appointed Liquidator for the
EYCO Group of Companies, requesting confirmation of your opinion on the tax incidents
of the transactions as described below.
It is represented that on September 16, 1997, a petition for Suspension of Payments,
Formation and Appointment of Rehabilitation Receiver/Committee, Approval of
Rehabilitation Plan with Alternative Prayer for Liquidation and Dissolution of
Corporations (the "Petition") was filed by the eleven (11) companies comprising the
EYCO Group of Companies (EYCO) and the individuals Eulogio Yutingco, Caroline
Yutingco-Yao and Teresa Lao, before the Securities and Exchange Commission (SEC);
that the case is now pending and docketed as SEC Case No. 09-97-5764; that EYCO is
comprised of the following companies:
1.
Nikon Industrial Companies
2.
Nikolite Industrial Corporation
3.
2000 Industries Corporation
4.
Trade Mope Industrial Corporation
5.
First Unibrands Food Corporation
6.
Integral Steel Corporation
7.
Clarion Printing Mouse, Inc.
8.
Nikon Plaza, Inc.
9.
Nikon Land, Inc.
10.
EYCO Properties, Inc.
11.
Thames, Philippines
that on September 14, 1999, after the lapse of two years from the filing of the Petition,
the SEC En Banc issued an Order declaring EYCO insolvent and ordering its liquidation
and dissolution; that on May 31, 2001, the SEC appointed you, Atty. Concepcion, as
Liquidator for EYCO,
It is also represented that on March 11, 2002, in compliance with your assigned task, you
submitted for approval by the SEC a Liquidation Plan for EYCO (the "Plan''); that in its
Order dated April 11, 2002, the SEC approved the Plan; that pursuant to the Plan, EYCO
and the Spouses Eulogio Yutingco and Wong Bee Kuan (hereafter "Yutingcos"), being the
majority stockholders therein, have agreed, among others, to surrender to the Liquidator
the property located in Valenzuela City and known as "Ramitex Property" for the benefit
of EYCO's unsecured creditors; that the proposed Deed of Transfer provides that the
Liquidator shall hold legal title to the Ramitex property in trust and for the benefit of the
unsecured creditors; that the Ramitex Property consists of the following parcels of land,
together with existing improvements thereon:
TCT No.
Reference in Plan
Area Registered Owner/s
V-48193
Ramitex Lot 1 10,506 EYCO Properties, Inc.
V-48192
Ramitex Lot 2 51,588 Nikon Plaza, Inc.
V-39089
Ramitex Lot 3 139,537
San Miguel Corporation*
V-49678
Ramitex Lot 4 16,958 Eulogio Yutingco & Ten Leng Valencia**
*Covered by a Deed of Sale in the name of the Yutingcos who acquired the property as
trustee for EYCO.
** Covered by an Assignment of Rights by the Spouses Valencia in favor of the
Yutingcos.
It is further represented that Ramitex Lot 1 is now the subject of a case initiated by the
Liquidator in order to recover the same from a third party who succeeded in foreclosing
the same; that a similar case for recovery of Ramitex Lot 4 will shortly be filed by the
Liquidator also against the same party who foreclosed Ramitex Lot 1; that in the event of
recovery, the aforesaid two Ramitex Lots will be brought within the operation of the Plan
and disposed of in the manner described below and subject to the tax incidents that are
the subject of the instant request for ruling.
It is finally represented that in accordance with the terms of the Plan, the following steps
shall be taken:
1.
The Yutingcos shall execute a Declaration of Trust confirming that Ramitex Lot 3
is a corporate asset and was acquired by them, for and on behalf of and as mere trustees
for EYCO.
2.
Ramitex Lots 2 and 3 shall, thereafter, be conveyed by the Yutingcos and EYCO
to the Liquidator through the execution of a corresponding Deed of Transfer/Conveyance
(hereinafter, "Deed of Transfer"). The Liquidator shall, in turn, execute a Declaration of
Trust acknowledging that he shall cause registration of the properties in his name and
hold legal title thereto as trustee for EYCO.
In connection with the foregoing, you request confirmation of your opinion as follows:
1.
Since there will be no consideration for the transfer/conveyance of the Ramitex
Lots 2 & 3 from the Yutingcos and EYCO to the undersigned Liquidator, no corporate
income tax shall accrue and become collectible under the Tax Code and pertinent
Regulations, either by way of capital gains tax or creditable withholding tax.
2.
The transfer/conveyance of the Ramitex Lots 2 & 3 to the Liquidator will not be
subject to the 10% value-added-tax (VAT). Under Section 4.100-1 of Revenue
Regulations No. 7-95, the transmission of property to a trustee shall not be subject to VAT
if the property is to be merely held in trust for the trustor and/or beneficiary.
3.
There being no donative intent on the part of the Yutingcos and EYCO, the
transfer/conveyance will not be subject to the donor's tax.
4.
The Deed of Transfer/Conveyance to be executed by the Yutingcos and EYCO
will not be subject to the documentary stamp tax (DST) imposed under Section 196 of the
Tax Code there being no monetary consideration involved. The same will be subject only
to the P15.00 DST under Section 188 of the Tax Code.
In this regard, we note that in the Order dated January 13, 1998, issued by Judge Salvador
S. Tensuan of Branch 146, Regional Trial Court of Makati, Ramitex Lot 3 which is
covered by TCT No. 3909 of the Registry of Deeds of Valenzuela, Metro Manila, is still
in the name of San Miguel Corporation but has been proven to be already owned by the
Yutingcos pursuant to a Deed of Absolute Sale.
It should be noted that prior to the transfer/conveyance of Ramitex Lot No. 3 to the
Liquidator, the applicable taxes on the transfer of property from San Miguel Corporation
to the Yutingcos should have been paid.
In reply, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that
a final tax of six percent (6%) is hereby imposed on the gains presumed to have been
realized on the sale, exchange or disposition of lands and/or buildings which are not
actually used in the business of a corporation and are treated as capital assets, based on
the gross selling price or fair market value as determined in accordance with Section 6(E)
of the said Code, whichever is higher, of such lands and/or buildings.
On the other hand. Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended,
provides that a creditable withholding Tax based on the gross selling price total amount
of consideration or the fair market value determined in accordance with Section 6(E) of
the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall be imposed upon the withholding
agent/buyer, in accordance with the following schedule:
A.
Where the seller/transferor is exempt from
creditable withholding tax in accordance with
Sec. 2.57.5 of these regulations
- Exempt
B.
Upon the following values of real property, where the seller/ transferor is
habitually engaged in the real estate business:
With a selling price of Five Hundred Thousand Pesos
(P500,000.00) or less
- 1.5%
With a selling price of more than Five Hundred Thousand Pesos
(500,000.00) but not more than Two Million Pesos
(P2,000,000.00)
-3%
With a selling price of more than Two Million Pesos
(P2.000,000.00)
-5%
C.
Where the seller/transferor is not habitually engaged
in the real estate business
- 6%
In the instant case, considering that there is no transfer of ownership, but rather a trust is
to be created by virtue of the execution of Deed of Transfer on Ramitex Lots 2 and 3 by
the Yutingcos and EYCO in favor of the Liquidator, with no monetary consideration
involved for such transfer, this Office is of the opinion as it hereby holds that the transfer
of the aforesaid properties in favor of the Liquidator will not be subject to capital gains
tax imposed under Section 27(D)(5) of the Tax Code of 1997 nor to the expanded
withholding tax prescribed in Revenue Regulations No. 2-98, as amended.
Moreover, Section 181 of Regulation No. 26 provides that a deed executed by a debtor
covering an assignment of property to a trustee to be held for the benefit of a creditor is
not subject to tax. However, it also provides that when the trustee sells or conveys such
property either to the creditor or any person, the deed executed by him is taxable. Thus,
Section 181 of Regulations No. 26 states that "SEC. 181. Deed to trustee for benefit of creditor. - A deed executed by a debtor covering
an assignment of property to a trustee to be held for the benefit of a creditor is not subject
to tax. When, however, the trustee sells or conveys such property either to the creditor or
any other person, the deed executed by him is taxable."
Accordingly, the Deed of Transfer to be executed by and between the Yutingcos and
EYCO, as Trustors, and the Liquidator, as Trustee, for the benefit of the creditors, is not
subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997
but the acknowledgment thereof is subject to the P15.00 documentary stamp tax
prescribed in Section 188 of the said Code.
Further, in accordance with Section 4.100-1 of Revenue Regulations No. 7-95 which
provides that transmission of property to a trustee shall not be subject to VAT if the
property is to be merely held in trust for the trustor and/or beneficiary, the conveyance
between the Yutingcos and EYCO on the one hand, and the Liquidator on the other, is not
subject to the 10% VAT. The said Section states "Section 4.100-1. Value-added tax on sale on goods or properties. "XXX XXX
XXX"
"Transmission of property to a trustee shall not be subject to VAT if the property is to be
merely held in trust for the trustor and/or the beneficiary".
Moreover, the above transaction is not subject to donor's tax imposed under Section 99 of
the Tax Code of 1997 as there is no intention to donate on the part of the Yutingcos and
EYCO.
However, should the Liquidator, as trustee, sell or convey by dacion en pago such
property either to any creditor or any person in the future, the deed of transfer to be
executed by the Liquidator will be subject to the capital gains tax or withholding tax as
the case may be, to the VAT, if applicable, as well as to the documentary stamp tax under
Very truly yours,

EDMUNDO P. GUEVARA
Officer-in-Charge
May 13, 2002
BIR NUMBERED RULING
RA 9136; RA 6395
32(B)(7)(b); 196; 198
000-00
020-2002
Power Sector Assets & Liabilities Management Corporation
Energy Center, Merrit Road
Fort Bonifacio, Taguig
Metro Manila
Attention: Edgardo M. Del Fonso
President
Gentlemen:
This refers to your letters dated November 12 and 20, 2001 and February 8, 2002
requesting for confirmation of your understanding of the tax consequences arising from
or Incidental to the privatization of the National Power Corporation (NPC) and taxable of
the entities created pursuant to Republic Act (R.A.) No. 9136, also known as the "Electric
Power Industry Reform Act of 2001".
I.
MATTERS ON WHICH RULING IS REQUESTED
A. On the transfer of assets and liabilities of the NPC:
1)
NPC, as a public utility, is not liable to income tax on the transfer of its assets and
liabilities to PSALM and TRANSCO;
2)
The transfer of NPC's assets to PSALM and TRANSCO is not subject to franchise
tax or VAT pursuant to the NPC Charter;
3)
The transfer of NPC's real properties is not subject to documentary stamp tax
(DST);
4)
Since the transfer of NPC liabilities to PSALM does not involve renewal or
continuance of NPC's debts, the same is not subject to DST imposed under Section 198 of
the Tax Code of 1997;
B. On the operation of the transferred assets during the transition period
1)
The income of PSALM arises from the exercise of essential governmental
function, and is, thus exempt from income tax pursuant to Section 32(B)(7)(b) of the Tax
Code of 1997;
2)
The sale of generated power by PSALM is subject to zero percent (0%) VAT;
3)
The transfer of NPC's franchise necessarily entails the transfer of the privileges
that. NPC enjoys in relation to the operation of the transmission system; hence, since
TRANSCO is the transferee of the transmission and sub-transmission facilities of NPC,
including all other assets related thereto, it should be taxed in the same manner as NPC;
accordingly, the income of TRANSCO is excluded from gross income for purposes of
computing its income tax pursuant to Section 32(B)(7)(b) of the Tax Code and just like
NPC, TRANSCO will be exempt from all forms of taxes, including franchise tax, in
accordance with P.D. No. 938, as amended;
4)
NPC is not liable to income tax on its income arising from the service agreement
with PSALM and TRANSCO, as well as to VAT;
C.
On the privatization of NPC assets:
1)
Gain from the sale by PSALM of the generation facilities to qualified buyers is
not subject to income tax;
2)
The privatization of assets by PSALM is not subject to VAT;
3)
The sale, however, of said real property by PSALM is subject to DSI:
4)
The consideration received by TRANSCO from the sale of the transmission
facilities or gram of concession contract is not subject to income tax;
5)
Likewise, the concession fee and rental to be received by TRANSCO or proceeds
from the sale of the transmission facilities are not subject to vat;
D. The Universal Charge collected by the distribution utilities is not part of their
respective taxable revenues nor will it form part of their gross receipts for purposes of
determining their franchise tax liability; likewise, the collection of said Universal Charge
by PSALM will not be considered as taxable income nor will it form part of its gross
receipts for VAT purposes; and
E.
The interest arising from NPC losses transferred to PSALM remains exempt from
income tax.
II. LEGAL REFERENCES
In this ruling, the following terms shall be used in reference to the relevant legislations:
EPIRA - Republic Act No. 9136, otherwise known as the "Electric Power Industry
Reform Act of 2001."
IRR - Rules and Regulations to Implement Republic Act No.9136.
Tax Code of 1997 - Section 3 of Republic Act No. 8424, otherwise known as the
"National Internal Revenue Code of 1997."
NPC Charter - Republic Act No. 6395, as amended, otherwise known as "An Act
Revising the Charter of the National Power Corporation."
III.
BACKGROUND
The facts as represented by you are as follows:
In pursuance of the constitutional mandate, particularly Section 1, Article XII in the 1987
Constitution, the EPIRA came into law June 26, 2001. The EPIRA aims to provide a
framework for the restructuring of the electric power industry, including the privatization
of the assets of NPC, the transition to the desired competitive structure, and the definition
of the responsibilities of the various government agencies and private entities.
To lend substance to the stated Declaration of Policy of the EPIRA, the EPIRA provides
for the creation of two government owned corporations, namely: the Power Sector Assets
and Liabilities Management Corporation ("PSALM") and the National Transmission
Corporation ("TRANSCO").
PSALM shall primarily manage the orderly sale, disposition, and privatization of NPC
generation assets, real estate and other disposable assets, and Independent Power
Producer (IPP) contracts with the objective of liquidating all NPC financial obligations,
stranded contract costs stranded debts in an optimal manner. On the other hand.
TRANSCO, which is to be wholly-owned by PSALM, is mandated to assume the
electrical transmission function of the NPC, among others. It shall assume the authority
and responsibility of NPC for the planning, construction and centralized operation and
maintenance of its high voltage transmission facilities, including grid interconnections
and ancillary services. It will likewise be responsible for the operation of the transmission
and sub-transmission assets until their disposal to distribution utility qualified to take
over the responsibility for operating, maintaining, upgrading and expanding said assets.
The EPIRA has also highlighted the importance of ensuring the reliability, security and
affordability of the supply of electric power to end-users. In several provisions of the law,
specifically Sections 47(a) 1 and 51(m), 2 it is repeatedly provided that the sale
privatization or disposition of NPC assets must be undertaken in a manner that would
optimize the value and sale prices of said assets. You state that this objective must be
achieved since the proceeds from the privatization of NPC assets will be utilized by
PSALM to liquidate debts of NPC, as any stranded debt will form part of the basis of the
Energy and Regulatory Commission ("ERC") in the determination of the Universal
Charge that will be imposed on all electricity sold to end-users (Sections 4(vv) 3 ; 34(a) 4
; 51(d) 5 , EPIRA). In short, the value of the proceeds from the NPC privatization
will determine the amount of Universal Charge that consumers will have to bear.
The process of privatizing the assets of NPC will involve three phases, to wit:
a.
Phase I will entail the transfer of all existing NPC generation assets, real estate
and other assets, liabilities and IPP contracts to PSALM within 180 days from the
effectivity of the EPIRA 6 . Within the same period of time, the transmission and subtransmission facilities of NPC and all other assets related to transmission operations,
including the nationwide franchise of NPC for the operation of the transmission system
and the grid, shall be transferred to TRANSCO. The transmission and sub-transmission
related liabilities of NPC are to be transferred to and assumed by PSALM. 7
b.
Phase II will cover the administration and operation of the transferee assets by
PSALM and TRANSCO prior to the privatization thereof. Until these assets are
privatized, PSALM will be selling power from the transferred generation assets and thus,
under the IRR of the EPIRA, PSALM will be considered a generation company with
respect to its sale of generated power. 8 Considering that the EPIRA provides that
PSALM can only hire its own personnel only when absolutely necessary and should avail
of itself of the service of personnel from other government agencies 9 , PSALM will be
entering into a Operations and Management Agreement (herein referred to for brevity as
"O&M Agreement") 10 with NPC for the latter to operate and maintain the generation
facilities prior to their sale to the qualified buyers. Specifically, the O&M will cover the
comprehensive operation and maintenance services to PSALM in respect of PSALM's
generation assets, including thermal, diesel, geothermal and hydroelectric power plants;
fuel procurement for independent power project, marketing activities relating to the sale
of the generation companies, including renegotiating transition supply contracts, and
selected legal services, among others. TRANSCO, on the other hand, will act as the
system operator of the nationwide electrical transmission and sub-transmission system to
be transferred by NPC. For this reason, the EPIRA provides for the transfer of the
nationwide franchise of NPC for the operation of the transmission system and the grid. 11
To operate the system, TRANSCO will likewise be entering into an Operations &
Management Agreement (herein referred also as O&M Agreement) with NPC for the
latter to assign to TRANSCO its employees presently involved in the operation and
management of the facilities
c.
Phase III involves the total privatization of the transmission and generation
assets, real estate, and other disposable assets as well as existing IPP contracts of NPC,
except for the assets of Small Power Utilities Group ("SPUG"). PSALM will structure
the sale, privatization or disposition of Net assets and IPP contracts and/or their energy
output based on such terms and conditions to optimize the value and sale prices of said
assets. 12 On the other hand, the transmission facilities, including grid interconnections
and ancillary services, may be awarded to the winning qualified bidder through an
outright sale or a concession contract ("Concession Contract"). The award should result
in maximum present value of proceeds to the National Government. In case a Concession
Contract is awarded, the Concessionaire shall have a contract period of twenty-five (25)
years, subject to review and renewal for a maximum period of another twenty-five (25)
years. 13 TRANSCO will negotiate with and transfer the sub-transmission facilities and
associated liabilities to the qualified distribution utility or utilities connected to such subtransmission facilities not later than two (2) years from the effectivity of the EPIRA or the
start of open access, whichever comes earlier. 14 The plans for the privatization of NPC
assets are contained in the Privatization Plan that PSALM submitted to the Joint
Congressional Power Commission ("JCPC") for endorsement of approval to the
President of the Philippines. Upon approval of the privatization plan, PSALM will
implement the same.
It is further explained that within a year from the effectivity of the EPIRA, a Universal
Charge to be determined, fixed and approved by the ERC will be imposed on electricity
end-users for the following purposes:
1.
Payment for the stranded debts in excess of the amount assumed by the National
Government and stranded contract cost of NPC as well as qualified stranded contract cost
of distribution utilities resulting from the restructuring of the industry:
2.
Missionary electrification;
3.
The equalization of the taxes and royalties applied to indigenous or renewable
sources of energy vis-a-vis imported energy fuels;
4.
An environmental charge equivalent to one-fourth of one centavo per kilowatthour (P.0025/kwh), which accrues to an environmental fund to be used solely for
watershed rehabilitation and management, and
5.
A charge to account for all forms of cross-subsidies for a period not exceeding ,
three (3) years.
that the EPIRA provides that the Universal Charge is a non-bypassable charge, which
shall be passed on and collected from the end-users on a monthly basis by the distribution
utilities; that collections of the Universal Charge by the distribution utilities and the
TRANSCO in any given month shall be remitted to PSALM on or before the fifteenth
(15th) of the succeeding month, net of any amount due to the distribution utility; that
PSALM will create a Special Trust Fund to be disbursed only for the purposes specified
in Section 34 15 of the EPIRA, in an open and transparent manner; and that all amounts
collected for the Universal Charge shall be distributed to the respective beneficiaries
within a reasonable period to be provided by the ERC.
Furthermore, it is also represented that the EPIRA mandates the transfer to PSALM of all
outstanding obligations of NPC arising from loans, issuances of bonds, securities and
other instruments of indebtedness; 16 and that under Section 51(j) 17 of the EPIRA,
PSALM was granted power to borrow money and incur such liabilities, including the
issuance of bonds, securities or other indebtedness utilizing its assets as collateral and or
through the guarantees of the National Government, provided, however, all such debts or
borrowings should be paid off or settled before the end of its corporate life. In the
meantime, you also represented that NPC's foreign obligations that will be transferred to
PSALM may be grouped into three categories, namely:
"(a) Loans extended by foreign governments, financing institutions owned or
controlled or enjoying financing from foreign governments, or international or regional
financial institutions established by foreign governments;
"(b) Commercial loans; and "
"(c) Bonds.
Finally, you represented that with respect to the mode by which PSALM may privatize
the transmission facilities, including grid interconnections and ancillary services of NPC,
the then on-going discussions of the Joint Congress Power Commission (JCPC) that was
constituted under the law to review and approve the IRR implementing the EPIRA
indicate that there is a growing consensus that a concession arrangement is the preferred
approach; that PSALM is inclined to privatize the transmission facilities through a
concession arrangement; that while the concession approach is still subject to approval of
the President of the Philippines, together with other issues contained in the Privatization
Plan, you believe that the discussions of the JCPC will be given due consideration; that in
the meantime, you need a BIR ruling on the tax implication of the award by the
TRANSCO to a qualified party of a Concession Contract for the operation and
management of the transmission facilities; and that in the event, however, that the
President decides to pursue the outright sale option, you shall request an opinion on the
tax implication thereof.
IV. DISCUSSION
A. Transfer of assets and liabilities of NPC - Phase I

1)
To PSALM
Section 51 18 in relation to Section 49 19 of the EPIRA mandates trial PSALM a wholly
government-owned and-controlled corporation shall take title to and possession of,
administer and conserve all the existing NPC generation assets, liabilities. IPP contracts,
real estate and all other disposable assets transferred to it. Likewise, all outstanding
obligations of the NPC arising from losses issuances of bonds, securities and other
Instruments of indebtedness shall be transferred to and assumed by PSALM within one
hundred eighty (180) days from the approval of that EPIRA.
Furthermore, Paragraph 3 of Section 8 20 of the EPIRA provides that all transmission and
subtransmission related liabilities of NPC shall be transferred to and assumed by the
PSALM.
2)
To TRANSCO
With respect, however, to the electrical transmission activities of the NPC, the same
Section 8 of the EPIRA created the TRANSCO to assume such functions, to wit.
xxx
xxx
xxx
"Within six months from the effectivity of this Act, the transmission and sub-transmission
facilities of NPC and all other assets related to transmission operations, including the
nationwide franchise of NPC for the operation of the transmission system and grid, shall
be transferred to the TRANSCO. The TRANSCO shall be wholly owned by the Power
Sector Assets and Liabilities Management Corporation (PSALM Corp.)
xxx
xxx
xxx
Section 2 of Rule 22 of the IRR enumerates "all other assets" related to transmission and
subtransmission facilities, to include, but not limited to the following:
1.
System operations facilities such as telecommunications and Supervisory Control
and Data Acquisition (SCADA) systems including offices and laboratory buildings
housing these equipment; and
2.
TRANSCO offices and real estate properties, vehicles, laboratory and test
equipment, spare parts and other physical structures.
B.
Operation of the transferred assets during the transition period (after transfer of
assets but prior to privatization) - Phase II
Pursuant to Section 47(j) 21 in relation to the assets transferred to PSALM, NPC may
generate and sell electricity only from the undisposed generating assets and IPP contracts
of PSALM Corp, and shall not incur any new obligations to purchase power through
bilateral contracts with generation companies or other suppliers during the transition
period.
In respect of the subtransmission functions and assets, pursuant to Paragraph 3 also of the
same Section 8 of the EPIRA, the same shall be segregated from the transmission
functions, assets and liabilities for transparency and disposal: Provided, that the
subtransmission assets shall be operated and maintained by TRANSCO until their
disposal to qualified distribution utilities which are in a position to take over the
responsibility for operating, maintaining, upgrading, and expanding said assets.
Moreover, under Section 18 22 of the EPIRA, the net profit, if any, of TRANSCO shall
be remitted to the PSALM not later than ninety (90) days after the immediately preceding
quarter.
C.
On the privatization of NPC's assets - Phase III
1. Generation assets, real estate and other disposable assets as well as IPP contracts.
Pursuant to Section 47 of the EPIRA, except for the assets of Small Power Utilities
Group (SPUG), the generation assets, real estate and other disposable assets, as well as
the IPP contracts of NPC, shall be privatized; within six (6) months from the effectivity
of the EPIRA, PSALM shall submit a plan for the endorsement by the Joint
Congressional Power Commission (JCPC) and the approval of the President of the
Philippines, on the total privatization of the generation assets, real estate, other disposable
assets, as well as existing IPP contracts of NPC and thereafter, implement the same, in
accordance, with the following guidelines among others to wit:
a)
The privatization value to the National Government of the generation assets, real
estate, other disposable assets as well as IPP contracts shall be optimized [Sec. 47(a),
EPIRA];
b)
The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related
assets and assigned liabilities, if any, shall be grouped in a manner which shall promote
the viability of the resulting Generation Companies, ensure economic efficiency,
encourage competition, foster reasonable electricity rates, and create market appeal to
optimize returns to the government from the sale and disposition of such assets in a
manner consistent with the objectives of this Act. x x x [Sec. 47(c), Ibid];
c)
All assets of NPC shall be sold in an open and transparent manner through public
bidding, and the same shall apply to the disposition of IPP contracts [Sec. 47(d), Ibid];
d)
The Agus and the Pulangui complexes in Mindanao shall be excluded from
among the generation companies that will be initially privatized. The ownership shall be
transferred to PSALM and both shall continue to be operated by the NPC. Said
complexes may be privatized not earlier than ten (10) years from the effectivity of this
Act, and except for Agus III, shall not be subject to Build-Operate-Transfer (B-O-T),
Build-Rehabilitate-Operate-Transfer (B-R-O-T) and other variations thereof pursuant to
Republic Act No. 6957 (BOT Law) as amended by Republic Act No. 7718. The
privatization of Agus and Pulangui complexes shall be left to the discretion PSALM in
consultation with Congress, [Sec. 47(f), Ibid];
e)
The steamfield assets and generating plants of each geothermal complex shall not
be sold separately. They shall be combined and each geothermal complex shall be sold
as one package through public bidding. The geothermal complexes covered by this
requirement include, but are not limited to, Tiwi-Makbun, Leyte A and B, Tongonan,
Palinpinon, and Mt. Apo. [Sec. 47(g), Ibid]; and
f)
The ownership of the Caliraya-Botohan-Kalayaan (CBK) pump storage shall be
transferred to PSALM. [Sec. 47(h), Ibid].
2. TRANSCO Privatization
Section 21 23 of the EPIRA provides that within six (6) months from its effectivity, the
PSALM Corp. shall submit a plan for the endorsement by the Joint Power Commission
and the approval of the President of the Philippines who shall thereafter direct PSALM
Corp. to award, in open competitive bidding, the transmission facilities including grid
interconnections and ancillary services to a qualified party either through an outright sale
or a concession contract. The buyer/concessionaire shall be responsible For the
improvement, expansion, operation, and/or maintenance of its transmission asset and the
operation of any related business."
Under Section 11(a) 24 of Rule of the IRR, PSALM and TRANSCO that secure a
nationwide franchise to the Buyer/Concessionare for the operation of the transmission
system and grid. The award is expected to result in maximum present value of proceeds
to the National Government. In case a Concession Contract is awarded, the
concessionaire shall have a contract period of twenty-five (25) years subject to review
and renewal for a maximum period of another 25 years. Upon the expiration of
termination of the Concession Contract, the transmission facilities and assets, including
the nationwide franchise for the operation of the transmission system and grid shall revert
to TRANSCO.
Paragraph 4 of Section 8 of EPIRA defines the manner and terms under which the
aforementioned transmission systems and facilities shall be transferred, to wit:
"TRANSCO shall negotiate with and thereafter transfer such functions, assets, and
associated liabilities to the qualified distribution utility or utilities connected to such
subtransmission facilities not later than two (2) years from the effectivity of the Act of the
start of the open access, whichever comes earlier: Provided, That in the case of electric
cooperatives, the TRANSCO shall grant concessional financing over a period of twenty
(20) years: Provided, however, That the installment payments to TRANSCO for the
acquisition of subtransmission facilities shall be given first priority by the electric
cooperatives out of the net income derived from such facilities. The TRANSCO shall
determine the disposal value of the subtransmission assets based on the revenue potential
of such assets."
Consistent therewith, paragraphs 8 and 9 of Section 8 of the EPIRA respectively provide
that:
"Aside from PSALM Corp., TRANSCO and connected distribution utilities, the third
party shall be allowed ownership or management participation, in whole or in part, in
such subtransmission entity.
"The TRANSCO may exercise the power of eminent domain subject to the requirements
of the Constitution and existing laws. Except as provided herein, no person, company or
entity other than TRANSCO shall own any transmission facilities."
Thus, considering the restriction imported with respect to the ownership of management
participation, in whole or in part over the subtransmission entity, it has been discussed
and agreed, as represented, that TRANSCO will enter into a concession contract to
implement the mandated privatization of NPC's assets.
V. REQUESTED RULING
In reply, please be informed that the transactions arising from or relating to the
privatization of NPC will be taxed in the manner described below. In this connection, it is
to be noted that this ruling shall apply only to the facts as represented, in connection with
the applicable provisions of the EPIRA, the IRR, the Tax Code of 1997 and related laws
existing as of the date of this ruling.
A.
Transfer of assets and liabilities of NPC.
1. NPC is not liable to income tax on the transfer of its assets to PSALM and
TRANSCO.
Under the NPC Charter, NPC enjoys exemption from all forms of taxes, direct or indirect.
However, such tax exemption privileges of NPC were repealed by PD 1177, Section 23
of said PD 1177 allows organizations otherwise exempted by law from payment of
internal revenue taxes to ask for subsidy from the General Fund in the exact amount of
taxes/duties due, which shall be automatically considered as both revenue and

expenditure in the General Fund. As cited by the Supreme Court in Maceda vs
Macaraig, Jr. (233 SCRA 217), there was reason to believe that NPC availed of the
subsidy granted to tax exempt GOCCs. Thereafter, E.O. 93, series of 1987, was
promulgated specifically to correct the presidential restoration of the grant of tax
exemption to some government and private entities pursuant to PD 1931, without the
benefit of review by the FIRB, thus, all tax and duty incentives granted to the government
and private entities were withdrawn except, among others, those covered by the nonimpairment clause of the Constitution.
As a rule, contractual exemptions which are granted pursuant to a contract entered into by
the taxing authority under an enabling few falls within the purview of the nonimpairment clause of the Constitution. They should not, however, be confused with
exemptions granted under franchises. (Cagayan Electric Co. vs, CIR, G.R. L-601026, 25
September 1985). A franchise is a special privilege conferred by governmental authority,
acting as such on an undertaking that is within the scope of governmental functions.
Maintaining the tax-exempt status of NPC pursuant to its charter and its availment of the
tax subsidy under PD 1177, the FIRB issued on Jane 24, 1987, Resolution No. 17-87,
which clarified the coverage of the exemption under Sec. 8(b), CA No. 120 (later, Section
13 of RA 6395) and restored the tax and duty exemption privileges of the NPC, but
excluded certain transactions from the coverage, to wit:
1.
Importation of fuel (crude equivalent to coal);
2.
Commercially-funded importations (i.e., importations which include but are
limited to those financed by the NPC's own internal funds domestic borrowings from any
source whatsoever; borrowings from foreign based financial institutions, etc.); and
3.
Interest income derived from any source.
Thereafter, the income tax exemption of NPC was repealed with the amendments
introduced by RA 8424. Consistent with Section 7(B) of RA 8424, Section 27(C) of the
Tax Code of 1997 provides that"(C) Government-Owned or Controlled Corporations, Agencies or Instrumentalities. The provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government,
except the Government Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes (PCSO) and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in a similar business, industry, or
activity."
Considering that NPC is not among the government corporations enumerated, its
exemption from income tax was deemed repealed. However, in BIR Ruling No. 18-00
dated January 20, 2000, the BIR clarified that the income of NPC from the operation of a
public utility is excluded from gross income pursuant to Section 32(B)(7)(b) of the Tax
Code of 1997, which reads:
"(B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this Title:
"7)
xxx
xxx
xxx
"(b) Income derived by the Government or its Political Subdivisions. - Income derived
from any public utility or from the exercise of any essential governmental function
accruing to the Government of the Philippines or to any political subdivision thereof.
On the basis of said ruling, NPC is not paying income taxes on its income arising from its
operation as a public utility.
The exemption of NPC is act limited only to the sale and transmission of generated
power, but includes transactions incidental to and necessarily connected with the
operations of the public utility, such as a sale or transfer on an isolated basis of us its
assets, which transaction is not conducted as a separate business. (Radio Communications
vs. Court of Tax Appeals, G.R. No. 60547, July 11, 1985; Phil. Power Development Co.
vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965). "Where something is done as a
mere incident to, or as a necessary consequence of, the principal business, it is not
ordinarily taxed as an independent business in itself. What is usually taken as essential is
the main activity in which the taxpayer is engaged. All the various transactions tending
to better accomplish the principal end in view must be treated as merely incidental." (De
la Rama Steamship Co. vs. Comm. of Internal Revenue, CTA Case No. 1499, March 5,
1967). Thus, the income, if any, from the sale or transfer of NPC's assets is not income
from other business activities conducted by NPC but rather earnings and profits realized
in connection with the business conducted in accordance with the franchise, and thus
covered by the exemptions provided for in Section 32(B)(7)(b) of the Tax Code of 1997.
2. NPC is not liable to franchise tax or VAT on the transfer of its assets to PSALM and
TRANSCO.
Section 27(c) of the Tax Code of 1997 repealed only the income tax exemptions of NPC.
Hence, the NPC Charter is controlling as regards franchise tax. As above stated, the
use of the phrase "all forms of taxes" in PD 938, which is an amendment of the NPC
Charter, evinces a clear legislative intention to exempt NPC from any kind of tax.
(Maceda vs. Macaraig, Jr., 223 SCRA 217). Accordingly, the transfer of assets by NPC
to PSALM and TRANSCO is not subject to franchise tax.
Moreover, since NPC is not a VAT-taxable entity and the transfer of its assets is not
necessary to carry out its primary function as utility and neither is it done in the course
of its trade or business, such transfer shall not be subject to VAT. (BIR Ruling No.113-98
dated July 23, 1998).
3. The transfer of real properties from NPC to PSALM and TRANSCO is not subject to
Documentary Stamp Taxes (DST) under Section 196 of the Tax Code of 1997.
Section 196 of the Tax Code provides that DST shall be imposed on all conveyances,
deeds, instruments, or writings other than grants, patents or original certificates of
adjudication issued by the Government, whereby any land, tenement, or other realty sold
shall be granted, assigned, transferred or otherwise conveyed to the purchaser or
purchasers, or to any other person or persons designated by such purchaser or
purchasers. The DST will be computed at the rate of P15.00 for every P1,000, based on
the consideration contracted to be paid the such realty or its fair market value determined
in accordance with Section 6(E) of this Code, whichever is higher. When one of the
contracting parties is the Government, the tax herein imposed shall be based on the actual
consideration, xxx xxx xxx.
Based on the foregoing, DST under Section 196 of the Tax Code of 1997 is imposed on
all conveyances, deeds, instruments, or writings involving the sale of land, tenement or
other realty, computed based on the consideration contracted to be paid for such realty or
its fair market value determined in accordance with Section 6(E) of the Tax Code, or
when one of the contracting parties is the government, on the actual consideration.
As to whether or not the transfer of NPC's assets to PSALM or TRANSCO, as the case
may be, will fall squarely within the very concept of "sale", reference to the provision of
Article 1458 of the Civil Code must be made. This law provides for the following
essential requisites to a contract of a sale, viz:
1.
Consent of the contracting parties by virtue of which the vendor obligates himself
to transfer the ownership of and to deliver a determinate thing, and the vendee obligates
himself to pay therefor a price certain in money or its equivalent.
2.
Object certain which is the subject matter of the contract.
3.
Cause of the obligation which is established. The cause as far as the vendor is
concerned is the acquisition of the price certain in money or its equivalent, while the
cause as far as the vendee is concerned is the acquisition of the thing which is the object
of the contract.
Thus, the contract of sale is characterized consensual, bilateral and reciprocal principal,
onerous, commutative, and nominate.
In this case, the transfer of NPC's generation assets and liabilities to PSALM, as well as
of the transmission and subtransmission assets and systems to TRANSCO, all of which
are government-owned and -controlled corporations is mandated by law. There is no
positive offer to sell and buy the aforesaid NPC properties. Moreover, consideration,
which should be the prime reason for the transfer of abovementioned assets, is not
availing to the parties in the transfer of the aforementioned NPC assets. Although it has
been stated earlier, it should bear stressing that this is a transaction between and among
government-owned and -controlled corporations pursuant to a law calling for the
reorganization of NPC's assets.
Consideration is defined as the inducement to a contract. It is the reason or material cause
of a contract It is some right, interest, profit or benefit accruing to the party. (Black's Law
Dictionary, 6th Edition)
In the case of PSALM, its assumption of NPC's liabilities is mandated by law. Normally,
the transfer of property by a person (transferor) to another person (transferee) in
exchange for the assumption by said person of the transferor's liability will be considered
a sale, where the assumption of liability constitutes a consideration for the assets. The
gain, if any, from the transfer is the difference between the higher of the consideration
received or zonal value, if applicable, and the value of the assets given up. The amount
of the liabilities transferred is treated as part of the consideration.
Likewise, the taking of title over the assets of NPC by PSALM for the purpose of selling
or disposing them, is consistent with the guidelines set under the EPIRA. Unlike in an
ordinary business transaction, PSALM, as the entity assuming the obligation, does not
exercise any discretion whether to accept the assets and liabilities to be transferred nor
does it play any role in the determination of the amount of the liabilities that it will
assume.
Accordingly, the transfer of ownership over NPC properties to PSALM is not a
transaction contemplated within Section 196 of the Tax Code, and therefore neither NPC,
PSALM nor TRANSCO is subject to DST under the said section. The notarial
certification, is however, subject to the DST of fifteen pesos (P15.00) imposed under
4. The transfer of liabilities of NPC to PSALM is not subject to DST imposed under
Pursuant to Section 198 of the Tax Code, DST is imposed on every renewal or
continuance of any agreement, contract or any evidence of obligation or indebtedness at
the same rate as that imposed on the original instrument.
Pursuant to Article 1291 of the Civil Code, obligations may be modified by, among
others, substituting the person of the debtor. Novation is a juridical act with a dual
function; it extinguishes an obligation and creates a new one. Manresa says that
novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first either by
changing the object or principal conditions, or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor (4 Tolentino, Civil Code 352;
Joven de Cortes v. Venturanza, 79 SCRA 709, 722; Peterson v. Azada, 8 Phil. 432).
The four essential requisites of novation are: (1) previous valid obligations;(2) the
agreement of all parties to the new contract. (3) the extinguishment of the old contract
and (4) the validity of the new one. (Tiu Siuco v. Habana, 45 Phil. 707, 712).
In the instant case, there is an existing valid obligation entered into by NPC. As mandated
by the EPIRA, PSALM shall take over the liabilities of NPC, thereby subrogating the
latter as debtor with respect to such obligations. Both NPC and PSALM are wholly
owned by the National Government, which acts as guarantor of the loans, regardless of
whether NPC or PSALM is the debtor. Also, to comply with the provisions of EPIRA,
NPC is discussing with its various creditors the possible assumption by PSALM of these
obligations. The process would, by novation, completely create a new obligation between
the original NPC creditors and PSALM, thereby falling within the purview of Article
1291 of the Civil Code.
It should, however, be noted that the transfer of NPC's obligations is by operation of law,
with the intent of preserving the NPC loans for the benefit of the NPC creditors The
intention of the law is to allow for the restructuring of the electric power industry, which
includes the privatization of the assets of the NPC 25 and the transfer of its liabilities to
PSALM, 26 which PSALM is mandated to restructure and liquidate: 27 In this particular
instance, the transfer of the loans is actually a transfer of such loans from one government
vehicle (that is, NPC) to another (that is, PSALM) both of which share the same
objective and governmental purpose of ensuring supply of electricity to the country. It is
also to be noted, that in the case of foreign loans. Section 8(b) of the NPC Charter
provides that the National Government guarantees the same absolutely and
unconditionally as a primary obligor and not merely as a surety. Considering that both
entities serve similar purposes, and that they are both vehicles used by the National
Government to achieve the identical objective of providing electrification to the country,
the transfer of the NPC loans does not give rise in this case to a new obligation, as the
National Government remains the guarantor for the original loans even after they are
transferred to PSALM. Accordingly, no DST under Section 180 of the Tax Code of 1997
should be imposed on the transfer of the NPC loans to PSALM.
It has also been ascertained with the Department of Finance, Corporate Affair Division,
that NPC's real assets were never subjected to any mortgage. Thus, neither shall DST
under Section 198 in relation to Section 195 of the Tax Code of 1997 is imposed.
B.
Operation of the transferred assets during the transition period (after transfer of
assets but prior to privatization)
1. Income of PSALM arises from the exercise of essential government funds and, thus,
exempt from tax.
The mandate of PSALM under Section 50 28 of the EPIRA is to manage the orderly sale,
disposition, and privatization of NPC generation assets, real estate and other disposable
assets, and IPP contracts; and, to liquidate the NPC stranded debts and stranded costs by
utilizing the proceeds from the privatization and other property contributed to it,
including the proceeds from the Universal Charge. Although the operation by PSALM of
the NPC assets transferred to it, is not its principal purposes nonetheless, because of the
provisions of EPIRA mandating the transfer of the assets of NPC, PSALM is required to
continue to operate the generation assets of NPC until the same are eventually
sold/privatized. 29 Otherwise, there would be massive interruption in the supply of
electricity, which is contrary to the goal of the EPIRA of ensuring to quality, reliability,
security and affordability of the supply of electric power.
The foregoing defined activities PSALM are essentially governmental functions. Under
Section 32(B)(7)(b) of the Tax Code of 1997, income derived from the exercise of any
essential government function accruing to the Government of the Philippines is excluded
from gross income.
On what constitutes "essential government function," the Supreme Court, in the case of
People's Homesite and Housing Corporation vs. Court of Industrial Relations (G.R. No.
L-31890 dated May 29, 1987) expressed this view:
"It has not always been easy determining which functions are governmental in nature and
which are proprietary. The characterization of functions performed by the government
has evolved from the traditional "constituent-ministrant" classification [as enumerated in
the case of Bacani vs. National Coconut Corporation, (l10, Phil 468[19560] to its
disavowal in the case of ACCFA v. CUGGO, et. al. (GR No. L-221484, November 29,
1969, 30 SCRA 649), where, considering the social justice provision of the 1936
Constitution, we said that the "constituent-ministrant" classification has become
unrealistic, if not obsolete. There, we gave our assent to a socio-political philosophy
espousing a great socialization of economic forces found nothing objectionable in
government undertaking in its sovereign capacity activities which by the constituentministrant test would have been considered as merely optional.
"We, thus, ruled in said case that the Agricultural Credit Administration, tasked as it was
with the implementation of the land reform program of the government was an agency
performing government functions.
Considering the foregoing, this Office opines defines that the activities undertaken by
PSALM pursuant to the provision of the EPIRA are essential government functions and
as such, any income received by it arising from, or relating to, such activities is deemed,
income from the exercise of essential governmental function and therefore, excluded
from gross income pursuant to Section 32(B)(7)(b) of the tax Code of 1997.
Furthermore, the operation by PSALM of NPC's generation assets, the same being
consequential to its mandate of holding/administering NPC's assets until the same are
disposed or privatized, is deemed included in is governmental function. Hence, income

derived from the operation af such generation assets is exempt from income tax and
minimum corporation income tax imposed in Section 27(A) and Section 27(E)
respectively, of the Tax Code of 1997.
2. Sale of generated power by, PSALM is subject to zero percent (0%) VAT
Section 102 of the Tax Code of 1997 imposes VAT equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange or services in the course of trade or
business in the Philippine, provided the annual gross receipts exceed P550,000.
Section 6(b), Rule 5 30 of the IRR in relation to Section 4(x) of the EPIRA, 31 however,
expressly provides that the sale of generated power by generation companies shall, upon
the effectivity of the Act, be subject to zero percent (0%) VAT. Since PSALM, once
registered with the ERC will fall within the definition of a Generation company under
Rule 5 of the aforesaid IRR with respect to its sale of generated power, we confirm your
opinion that its sale of generated power will be subject to VAT at the rate of zero percent
(0%).
3. TRANSCO shall be taxed in the same manner as NPC.
Section 8 of the EPIRA provides that the transmission and sub-transmission facilities of
NPC and all other assets related to transmission operation, including the nationwide
franchise of NPC for the operation of the transmission system and the grid shall be
transferred to TRANSCO. The transfer of the franchise of NPC necessarily entails also
the transfer of the privileges that NPC enjoys under its charter in relation to the operation
of the transmission system in order for it to perform the electrical transmission functions
of the NPC. As previously ruled, the income of NPC from the operation of a public utility
is excluded from gross income. In this regard, Sections 18 and 55(f) of the EPIRA state
that "the net profit, if any, of TRANSCO shall be remitted to the PSALM Corp. not later
than ninety (90) days after the immediately preceding quarter" and "the following
following funds, assets, contributions and other property shall constitute the property of
the PSALM Corp. xxx net profit of TRANSCO". As stated earlier, PSALM will be
wholly-owned by the National Government.
Thus, we confirm your opinion that TRANSCO should be taxed in the same manner as
NPC, to wit:
i)
With respect to income tax, the income of TRANSCO is excluded from gross
income for purposes of computing its income tax pursuant to Section 32(B)(7)(b) of the
Tax Code of 1997.
ii)
On franchise tax, just like NPC, TRANSCO will be exempt from all forms of
taxes, including franchise tax, because the NPC franchise, including privileges related
thereto, have been transferred by operation of law to TRANSCO.
4. NPC's tax liability on its on its income arising from the service agreements with
PSALM and TRANSCO.
After the assets will have been transferred to PSALM, NPC will enter into an, O&M
Agreement with PSALM so it can continue to operate the generation facilities and sell
power, for and on behalf of PSALM. In respect to the operations of the transmission
system, TRANSCO will enter into an O&M Agreement with NPC providing for the
assignment of the latter's employees to TRANSCO to render the services required to be
performed pursuant to the provisions of the EPIRA.
As discussed earlier, Section 8 32 of the EPIRA mandates, among others, the transfer of
NPC's nationwide franchise to TRANSCO. The tax exemption privileges being enjoyed
by NPC were granted under its franchise. When such franchise was accordingly
transferred to TRANSCO, NPC was automatically divested of the privileges accruing to
the franchise. It would nave been different if what had been transferred to TRANSCO
were merely the NPC properties or facilities used in its operation without the
corresponding transfer of franchise, In such a case, NPC would continue to enjoy the
privileges granted under the franchise.
A legislative franchise is in the nature of a contract between the the taxing authority and
the grantee, thus, subject to the non-impairment clause the Constitution. Normality tax
exemptions and privileges are granted to grantee/holder as an incentive to the
performance of its franchise. Such tax exemption privileges are exclusive to the grantee
once the grantee is divested of such function and the franchise is removed, it can no
longer enjoy the privileges emanating therefrom. Furthermore, unless the law expressly
states, being exclusive in nature, such franchise can never be shared by two entities much
more, by the original franchisee which has been stripped of such franchise.
Under the foregoing circumstances, essential governmental functions have been,
transferred and assumed by PSALM. In the case of TRANSCO, as a public utility, it now
enjoys the franchise of its predecessor, the NPC, pursuant to Section 8 of the EPIRA.
Following the foregoing, the categorical transfer of such functions and franchise will
necessary entail the transfer of tax exemption privileges granted thereunder, unless the
EPIRA declares otherwise. However, there is no provision in the EPIRA that
categorically allows simultaneous enjoyment of the franchise by both TRANSCO and
NPC.
There is no tax by silence but, where the law levies a tax, so also must the tax exemption
be explicit in the law. Thus, as held in the case Floro Cement vs. Gorospe (200 SCRA
480), tax exemptions are not presumed. Applying this in the case of NPC, it can no longer
invoke continuous enjoyment of tax exemption privileges granted under the franchise
without a clear and specific provision under the EPIRA. On the other hand, while the
EPIRA does provide for the withdrawal of NPC tax exemption privileges in view of the
transfer of its franchise to TRANSCO, it has been repeatedly held though that there is,
however, no prohibition against the government taxing itself. (Bisaya Transportation Co.,
Inc. vs. Collector of Internal Revenue. L-11812, 29 May 1959)
Presently, the general rule on income taxation of government-owned and/or controlled
corporations is embodied in Section 27(C) of the Tax Code of 1997: except for five (5)
government corporations specifically mentioned therein, all other government and
government-owned and controlled corporation are now subject to income tax.
Since the service to be rendered by NPC to PSALM and TRANSCO under the O&M
Agreements will not be an activity essentially governmental in nature, any income
derived therefrom by NPC will not be covered by said provision and thus subject
income tax and minimum corporate income tat imposed under Section 27(A) and (E),
respectively, of the Tax Code of 1997.
Moreover, services rendered by NPC under the O&M Agreement are deemed rendered in
the course of its business, hence, subject to VAT or the appropriate percentage tax, as the
case may be.
In the meantime, tinder Section 70 33 of the EPIRA, as implemented by Section 2 of

Rule 3 of the IRR, NPC shall be responsible for providing power generation and its
associated power delivery systems in area that are no connected to the transmission
system through SPUG. SPUG 34 refers to the functional unit of NPC created to pursue
missionary electrification function to some areas in the country where there is electricity
and as provided.
Thus, while power generation shall no longer be considered a public utility operation,
hence, not required to secure a national franchise pursuant to Paragraph 3, Section 6 of
the EPIRA, it may however toe considered an essential governmental, function insofar as
the operation by NPC of the assets of SPUG is concerned. Such being the case, income
derived therefrom will be excluded from gross income pursuant to Section 32(B)(7)(b) of
the Tax Code of 1997. Moreover, sale of generated power by NPC through SPUG shall
be subject to the zero percent (0%) VAT pursuant to Section 6 of the EPIRA, as
implemented by Section 6(b), Rule 5 of the IRR.
Accordingly, NPC will be subject to income tax and VAT and/or percentage tax on its
O&M income; and 0% VAT on its income from generating electricity through SPUG.
C.
Privatization of Assets.
As stated earlier, the following ruling is based on the law existing as of the date this
ruling.
1. Gain from the sale by PSALM of the generation facilities to qualified buyer not subject
to income tax.
The eventual sale, disposition or privatization of the generation assets, real estate and
other disposable assets, and IPP contracts, will be a mere incident to, or a necessary
consequence of, the generation activity that PSALM will undertake as discussed in B.1.,
above, which should therefore not be taxed as an independent business in itself. (De la
Rama Steamship Co. vs. Comm. of Internal Revenue, Ibid). Accordingly, any income that
PSALM may derive from such sale will also not be subject to income tax.
2. Privatization of assets by PSALM is not subject to VAT.
Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a valueadded tax equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods, is collected from any person who, in the course of trade or business,
sells, barters, exchanges, leases goods or properties, which tax shall be paid by the seller
of transferor,
The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial activity, including transactions incidental thereto.
Since the disposition or sale of the assets is a consequence of PSALM's mandate to
ensure the orderly sale or disposition of the property and thereafter to liquidate the
outstanding loans and obligations of NPC, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the Universal Charge, and not
conducted in pursuit of any commercial or profitable activity, including transactions
incidental thereto, the same will be considered an isolated transaction, which will
therefore not be subject to VAT. (BIR Ruling No. 113-98 dated July 23, 1998)
3. The sale of real property by PSALM is subject to DST.
Pursuant to Section 196 of the Tax Code of 1997, the sale of real properties by PSALM
will be subject to DST at the rate of P15.00 for every P1,000 based on the consideration
contracted to be paid for such realty or its fair market value determined in accordance
with Section 6(E) thereof, whichever is higher. When one of the contracting parties is
the government, the tax to be imposed shall be based on the actual consideration subject
to the proviso that, where one party to the transaction is exempt, the other party shall pay
the tax. (Section 173 of the Tax Code of 1997)
Accordingly, the sale of real property by PSALM. pursuant to the privatization of the
generation assets will be subject to DST based on the actual consideration that PSALM
will receive from the qualified buyers.
This tax consequence is in contrast to the Phase I transfer of NPC assets to PSALM and
TRANSCO, which is not subject to DST on the premise that the transaction does not
constitutes a "sale" for reasons discussed in relevant sections of this ruling.
4 & 5. Tax Consequence of concession fee and rental to be received by TRANSCO or
proceeds from the award of concession to qualified concessionaire/s or sale of the
transmission facilities.
As represented, the sale of the transmission facilities or the award of concession
agreement and lease arrangement that TRANSCO with enter into with the qualified
concessionaires are activities undertaken to implement the privatization of transmission
system of NPC as mandated by Section 21 35 of the EPIRA. The award is expected to
result in the maximum present value of the proceed to the National Government, the
reason being that said proceeds will be remitted by TRANSCO to PSALM. which the
latter will utilize to liquidate the stranded debt of NFC.
While this office is being apprised of the foregoing plan to grant concession right to
private persons, for failure however, on your part to submit a copy of the Concession
Contract, the requested ruling is hereby deferred as the tax treatment of the concession
would depend on the specific terms and conditions of said Concession Contract.
It should also be noted that TRANSCO's franchise is not transferred to concessionaire
since the concessionaire will have to secure its own franchise through efforts of PSALM
and TRANSCO. 36
With respect however, to the sale arrangement, considering that TRANSCO will retain
its franchise, TRANSCO's income from the sale will be excluded from gross income for
purposes of computing its income tax pursuant to the provision of Section 32(B)(7)(b) of
the Tax Code of 1997. Moreover, TRANSCO will be exempt from all taxes, except
income tax, in accordance with the NPC Charter, on such sale. However, for the same
reasons stated in the immediately preceding section, the transfer of real property assets by
sale will be subject to DST under Section 196 of the Tax Code of 1997. Since
TRANSCO is exempt from all taxes, including the DST under the said Section 196. the
qualified winning bidder shall be the one directly liable for the DST pursuant to Section
173 of the Tax Code of 1997.
D. Collection of Universal Charge by distribution utilities is not part of their taxable
revenues nor will it be part of their gross receipts for purposes of determining their
franchise taxes. Likewise the collect of Universal Charge by PSALM will not be
considered as taxable income not will it form part of its gross receipts for VAT purposes.
The Universal Charge will be collected from all end-users by the distribution These
charges will be remitted to PSALM and will be used exclusively for the liquidation of the
stranded debts and stranded costs of NPC as well as qualified stranded contracts costs of
distribution utilities resulting from the restructuring of the industry. The EPIRA provides
that the Universal Charge is a non-bypassable charge. 37
Accordingly, since the Universal changes to be collected by the do not belong to them
and therefore, would not redound to their benefit, the same will not be considered in the
nature of income. Neither will the same form part of the gross receipts of the distribution
utilities for purposes of determining their franchise tax liability. Gross receipts of a
taxpayer do not include monies or receipts entrusted to the taxpayer which do not belong
to them and do not redound to the taxpayer's benefit; and it is nor necessary that there
roust be a law or regulation which would exempt such monies and receipts within the
meaning of gross receipt under the Tax Code. 38 In another case, the Supreme Court
ruled that the gross receipts of a taxpayer should not included any money which although
delivered to it has been especially earmarked by law or regulation for some person other
than the taxpayer. 39 However, we required that the Universe Charge appear as a
separate item in the bill.
On the other hand, the Universal Charge received by PSALM will not be subject to
income tax since it wilt not be in "the nature of income as defined in Sec. 32(A) of the
Tax Code of 1997, which includes gains, profits, and income derived from salaries,
wages or compensation for personal services of whatever kind and in whatever form paid,
or from profession vocations, trades, business, commerce, sales, or dealings property,
whether real or personal, growing out of the ownership or use of or interest in such
property; also from interests, rents, dividends, securities, or transactions or any business
carried on for gain or profits, and income derived from any source whatever. Income, in
a broad sense, means all wealth that flows into the taxpayer other than as a mere return of
capital. (Section 36, Revenue Regulations No. 2, otherwise known as the Income Tax
Regulations). The Universal Charge is not a flow of wealth to PSALM as it would not
accrue to its benefit but wold be remitted to the Special Trust Fund, as provided under the
EPIRA. PSALM is just the administrator of the fund, which shall be disbursed/distributed
to its respective beneficiaries only for the following purposes: 1) payment for the
stranded debts in excess of the amounts assumed by the National Government and
stranded contract costs of NPC as well as qualified stranded contract cost of distribution
utilities resulting from the restructuring of the industry; 2) missionary electrification; 3)
the equalization of the taxes royalties applied to indigenous or renewable sources of
energy vis-a-vis imported energy fuels; 4) an environmental charge equivalent to one
fourth of one centavo per kilowatt-hour (P0.0025/kWh), which shall accrue to an
environmental fund to be used solely for watershed rehabilitation and management (this
environmental fund will be managed by NPC under existing arrangement); 5)a charged
to account for all forms of cross-subsidies for a period not exceeding three (3) years. 40
Neither can the Universal Charge be deemed part of the gross receipts of PSALM for
VAT purposes. The term "gross receipts" means the total amount of money or its
equivalent representing the contact price, compensation or service fee, including the
amount charged for materials supplied with the services and deposits or advance
payments actually or constructively received during the taxable quarter for the services
performed or to be performed for another person. The Universal Charge is not
compensation for services performed by PSALM. While it is authorized under the
EPIRA to receive said charges, it is earmarked to be utilized for purposes mentioned in
the immediately preceding paragraph.
E.
Interest arising from NPC loans transferred to PSALM is exempt from income
tax.
You represented that NPC's foreign obligations that will be transferred to PSALM may be
grouped into three categories, namely;
1.
Loans extended by foreign government, financing institutions owned or controlled
or enjoying financing from foreign governments, or international or regional financial
institutions established by foreign governments;
2
Commercial loans; and
3.
Bonds;
and that NPC does not withhold tax on interest payment in connection with these
obligations.
Section 8 of NPC's Charter, as amended by P.D. 1360, provides:
"Sec. 8. Authority to Incur Indebtedness and Issue Bonds; Their Conditions, Privileges
and Exemptions; Sinking Funds; Guarantee. "(a) Domestic Indebtedness. - Whatever the Board deems it necessary for the Corporation
to incur indebtedness by contracting loans with domestic financial institutions or to issue
bonds to carry on the purpose for which the Corporation has been organized, it shall, be
resolution approved by at least four members of the Board, so declare and state the
proposed debt is to be incurred and conditions as it shall deem appropriate for the
accomplishment of the said purpose; Provided, that in the case of bond issues, the same
shall be subject to the approval of the President of the Philippines upon recommendation
of the Secretary of Finance
"The bonds issued under the authority of this subsection be exempt from the payment of
all taxes by the Republic of the Philippines or by any authority, branch, division or
political subdivision thereof, which facts shall be stated upon the face of the said bonds.
Said bonds shall be receivables as security in any transaction with the Government in
which such security is required.
"The Republic of the Philippines hereby guarantees the payment by the Corporation of
both the principal ad interest of the bonds issued by said Corporation by virtue of this
Act, and shall pay such principal and interest in case the Corporations fails to do so, and
there are hereby appropriated, out of the general funds in the National Treasury not
otherwise appropriated, the sums necessary to make the payments guaranteed by this Act;
Provided, That the sum so paid by the Republic of the Philippines shall be refunded by
the Corporation; Provided, further, That the Corporation shall set aside five per centum of
its annual net operating revenues before interests as a reserve or sinking fund to answer
for amounts advanced to it by the National Government for any loans, credit and
indebtedness contracted by the former for which the latter shall be answerable as primary
obligor or guarantor under the provisions of this Act; Provided furthermore, That the
setting aside of the amounts mentioned herein shall automatically cease the moment the
accumulated sinking fund or reserve exceeds the amounts advance to the Corporation by
the National Government under this Act; And, Provided, finally, That the Corporation
may periodically make payment to the National Government out of the said reserves.
"(b) Foreign Loans. - The Corporation is hereby authorized to contract loans, credits, in
any convertible foreign currency, or capital goods, and indebtedness from time to time
from foreign governments, or any international financial institution or fund source, or to
issue bonds, in such amount and in any foreign currency on such terms and conditions as
it shall deem appropriate the accomplishment of its purposes and to enter into and
execute agreements and other documents specifying such terms and conditions.
"The President of the Philippines, by himself, or through his duly authorized

representative, is hereby authorized to guarantee, absolutely and unconditionally as
primary obligor and not as surety merely, in the name and on behalf of the Republic of
the Philippines, the payment of the loans, credit, indebtedness and bonds issued up to the
amount herein authorized, which shall be over and above the amount which the President
of the Philippines is authorized to guarantee under Republic Act Numbered Sixty-One
Hundred Forty-Two, as amended, as well as the performance of all or any of the
obligations undertaken by the Corporation in the territory of the Republic of the
Philippines pursuant to the loan entered into with foreign governments or any
international financial institutions or fund sources.
"In the contracting of any loan credit or indebtedness under this Act, the President of the
Philippines may, when necessary agree to waive or modify the application of any law
granting any preferences or imposing restrictions on international competitive bidding,
including among others, Act Numbered Four Thousand Two Hundred Thirty-Nine,
Commonwealth Act Numbered One Hundred Thirty -Eight, the provisions of
Commonwealth Act Numbered Five Hundred Forty-One, Republic Act Numbered Five
Thousand One Hundred Eighty-Three, insofar as such provisions do not pertain to
constructions primarily for defense or security purposes; Provided, however, That as far
as practicable, utilization of the services of qualified domestic firms in the prosecution of
projects financed under this Act shall be encouraged; Provided, further, That in case
where international competitive bidding shall be conducted reference of least fifteen per
centum shall be granted in favor of articles, materials or supplies of the growth
production of manufacture of the Philippines, Provided, finally, That the method and
procedure and the comparison of bids shall be the subject of agreement between the
Philippine Government and the lending institution.
"The loans, credits and indebtedness contracted under this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid from the proceeds of any
loan, credit or indebtedness incurred under this Act, shall, also be exempt fro all taxes,
fees, imposts, other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political subdivisions." (Emphasis
supplied)
Pursuant to the foregoing provision, interest on bonds under Section 8(a) and foreign
loans incurred under Section 8(b) of the NPC Charter are exempt from income tax. In the
following discussion, the term "NPC loans" refers to the bonds issued under Section 8(a)
and the foreign loans incurred under Section 8(b) of the NPC Charter, which are exempt
pursuant to the said provisions of the charter.
While the EPIRA does not provide for the same treatment of the NPC loans once they are
transferred to PSALM, the interest arising from these loans shall continue to be exempt
from income tax because the exemption in the NPC Charter is granted not to NPC, which
is a borrower, but rather on the loans, credits and indebtedness as well as on the payment
of the principal, interest and other charges. In effect, the exemption is granted to the
lender, which is the entity earning the interest income. Such being the case, interest
payments on the aforementioned foreign loans originally incurred by NPC under its
charter, as amended by PD No. 1360, and which will be transferred to and assumed by
PSALM, shall remain exempt from tax.
On the other hand, foreign loans that PSALM may incur in the future in connection with
the performance of its functions and for the attainment of its objective 41 no longer be
covered by the foregoing tax exemption provision of the NPC Charter. They may,
however, still be exempt from income tax pursuant to Section 32(B)(7)(a) of the Tax
Code of 1997 pertinent portion of which provides as follows:
"(B) Exclusions from Gross Income. The following items shall not be included in the
gross income and shall be exempt from Taxation under this Title:
"(7) Miscellaneous Items."(a) Income Derived by Foreign Government. - Income derived from investment in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by foreign governments."
Also, the interest arising from such loans may also be exempt from income tax or be
subject to a preferential tax rate if the creditor is a resident of a country with which the
Philippines has an existing treaty, subject to the conditions stated in such treaty.
This ruling is being issued on the basis of the foregoing facts represent. However, if
upon investigation, it be disclosed that the facts are different, then this ruling shall be
Very truly yours,
RENE G. BAEZ
____________________________
1 "SEC. 47. NPC Privatization. - Except for the assets of SPUG, the generation assets,
real estate and other disposable assets as well as IPP contracts of NPC shall be privatized
in accordance with this Act. Within six (6) months from the effectivity of this Act the
PSALM Corp. shall submit a plan for the endorsement by the Joint Congressional Power
Commission and the approval of the President of the Philippines, on the total
privatization of the generation assets, real estate, other disposable assets as well as
existing IPP contracts of NPC and thereafter, implement the same, in accordance with the
following guidelines, except as provided for in Paragraph (f) herein:
(a) The privatization value to the National Government of the NPC generation assets, real
estate, other disposable assets as well as IPP contracts shall be optimized;"
2 "SEC. 51. Powers. - The PSALM Corp. shall, in the performance of its functions and
for the attainment of its objective have the following powers:
xxx
xxx
xxx
(m) To structure the sale, privatization or disposition of NPC assets and IPP contracts
and/or their energy output based on such terms and conditions which shall optimize the
value and sale prices of said assets."
3 "(vv) Stranded Debts of NPC" refer to any unpaid financial obligations of NPC which
have not been liquidated by the proceeds from the sales and privatization of NPC assets;"
4 "SEC. 34. Universal Charge. - Within one (1) year from the effectivity of this Act, a
universal charge to be determined, fixed and approved by the ERC, shall be imposed on
all electricity end-users for the following purposes:
(a) Payment for the stranded debt in excess of the amount assumed by the National
Government and stranded contract costs of NPC and as well as qualified stranded
contract costs of distribution utilities resulting from the restructuring of the industry;"
5 "SEC 51. Powers. - The .PSALM Corp. shall, in the performance of its functions and
for the attainment of its objective, have the following powers:
xxx
xxx
xxx
(d) To calculate the amount of the stranded debts and stranded costs of NPC which shall
form the basis for ERC in the determination of the universal charge;"
6 "SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation.
-There is hereby created a government-owned and -controlled corporation to be known as
the "Power Sector Assets and Liabilities and Management Corporation", hereinafter
referred to as the "PSALM Corp.", which shall take ownership of all existing NPC
generation assets, liabilities, IPP contracts, real estate and all other disposable assets. All
outstanding obligations of the NPC arising from loans, issuances of bonds, securities and
other instruments of indebtedness shall be transferred to and assumed by the PSALM
Corp. within one hundred eighty (180) days from the approval of this Act."
7 "SEC. 8. Creation of the National Transmission Company. - There is hereby created a
National Transmission Corporation, hereinafter referred to as TRANSCO, which shall
assume the electrical transmission function of the National Power Corporate (NPC), and
have the powers and functions hereinafter granted. The TRANSCO shall assume the
authority and responsibility of NPC for the planning, construction and centralized
operation and maintenance of its high voltage transmission facilities, including grid
interconnections and ancillary services.
Within six (6) months from the effectivity of this Act, the transmission and
subtransmission facilities of NPC and all other assets related to transmission operations,
including the nationwide franchise of NPC for the operation of the transmission system
and the grid, shall be transferred to the TRANSCO. The TRANSCO shall be wholly
owned by the Power Sector Assets and Liabilities Management Corporation (PSALM
Corp.)
The subtransmission functions and assets shall be segregated from the transmission
functions, assets and liabilities for transparency and disposal; Provided, That the
subtransmission assets shall be operated and maintained by TRANSCO until their
disposal to qualified distribution utilities which are in a position to take over the
responsibility for operating, maintaining, upgrading, and expanding said assets. All
transmission and subtransmission related liabilities of NPC shall be transferred to and
assumed by the PSALM Corp.
TRANSCO shall negotiate with and thereafter transfer such functions, assets, and
associated liabilities to the qualified distribution utility or utilities connected to such
subtransmission facilities not later than two (2) years from the effectivity of this Act of
the start of open access, whichever comes earlier: Provided, That in the case of electric
cooperatives, the TRANSCO shall grant concession financing over a period of twenty
(20) years: Provided, however, That the installment payments to TRANSCO for the
acquisition of subtransmission facilities shall be given first priority by the electric
cooperatives out of the net income derived from such facilities. The TRANSCO shall
determine the disposal value of the subtransmission assets based on the revenue potential
of such assets;
xxx
xxx
xxx
8 "Sec. 5. Powers. - PSALM Corp. shall, in the performance of its functions and for the
attainment of its objectives, have the following powers:
xxx
xxx
xxx
(q) To operate the generation assets, directly or through NPC, prior to Privatization of
such assets. Towards this end, while PSALM operates the generation assets, it shall be
considered a Generation Company;
xxx
xxx
xxx" (Rule 21, IRR)
9 "SEC 51. Powers. - The PSALM Corp. shall, in the performance of its functions and
xxx
xxx
xxx
(h) To appoint or hire, transfer, remove and fix the compensation of its personnel and
advisors or other Persons as may be necessary in the sale, Privatization and disposition
of NPC assets and IPP contracts; Provided, however, That the PSALM shall hire its own
personnel only if absolutely necessary, and as far as practicable, shall avail itself of the
services of personnel detailed from other government agencies;"
10 "Sec. 5. Powers. - The PSALM Corp. shall, in the performance of its functions and
for the attainment of its objectives, have the following powers: xxx
xxx
xxx
(b) To take title to possession of, administer and conserve the assets transferred to it,
including the execution of bilateral contracts to sell power from undisposed assets and
contracts transferred by NPC:
xxx
xxx
xxx
(q) To operate the generation assets, directly or through NPC, prior to Privatization of
such assets. Towards this end, while PSALM operates the generation assets, it shall be
considered a Generation Company." (Rule 21, IRR)
11 See Footnote No. 7.
for the attainment of its objectives, have the following powers:
xxx
xxx
xxx
(o) To structure the sale, Privatization or disposition of NPC assets and IPP contracts and
or their energy output based on such terms and conditions which shall optimize the value
and sale prices of said assets."(Rule 21, IRR)
13 "SEC. 21. TRANSCO Privatization. - Within six (6) months from the effectivity of
this Act, the PSALM Corp. shall submit a plan for the endorsement by the Joint Power
Commission and the approval of the President of the Philippines. The President of the
Philippines thereafter shall direct PSALM Corp to award, in open competitive bidding,
the transmission facilities, including grid interconnections and ancillary services to a
qualified party either through an outright sale or a concession contract. The
buyer/concessionaire shall be responsible for the improvement, expansion, operation,
and/or maintenance of its transmission assets and the operation of any related business.
The award shall result in maximum present value of proceeds to the national
government. In case a concession contract is awarded, concessionaire shall have a
contract period of twenty-five (25) years, subject to review and renewal for a maximum
period of another twenty-five (25) years.
xxx
xxx
xxx" (EPIRA)
(a)
Payment for stranded debts in excess of the amount assumed by the National
contract costs of distribution utilities consulting the restructuring of the industry;
(b)
Missionary electrification;
(c)
The equalization of taxes and royalties applied to indigenous or renewable
(d)
An environmental charge equivalent to one-fourth of one centavo per kilowatthour (P0.0025/kWh), which shall accrue to as environmental fund to be used solely for
watershed rehabilitation and management. Said fund shall be managed by NPC under
existing arrangements; and
(e)
A charge to account for all forms of cross-subsidies for a period not exceeding
three (3) years.
The universal charge shall be a non-bypassable charge which shall be passed on and
collected from all end-users on a monthly basis by the distribution utilities. Collections
by the distribution utilities and the TRANSCO in any given month shall be remitted to
the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any
amount due to the distribution utility. Any end-user or self-generating entity not
connected to a distribution utility shall remit its corresponding universal charge directly
to the TRANSCO.
The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which
shall disbursed only for the purposes specified herein in an open and transparent manner.
All amounts collected for the universal charge shall be distributed to the respective
beneficiaries within a reasonable period to be provided by the ERC."
16 See footnote No. 6.
for the environment of its objective, have the following powers:
xxx
xxx
xxx
(j) To borrow money and incur such liabilities, as may be required to service all
obligations transferred from NPC and loans from ECs assumed from NEA in accordance
with the relevant sections of these Rules, including the issuance of bonds, securities or
other evidences of indebtedness utilizing its assets as collateral and/or through the
guarantees of the National Government: Provided, That all such debts or borrowings shall
have been paid off before the end of its corporate life;"
xxx
xxx
xxx
(b) To take title to and possession of, administer and conserve the assets transferred to it;
to sell or dispose of the same at such price and under such terms and conditions as it may
deem necessary or proper, subject to applicable laws, rules and regulations;
(c) To take title to and possession of the NPC IPP contracts and to appoint, after public
bidding in transparent and open manner, qualified independent entities who shall act as
the IPP Administrators in accordance with this Act;
xxx
xxx
xxx
(k) To restructure existing loans of NPC;
xxx
xxx
xxx"
21 "SEC. 47. NPC Privatization. - Except for the assets of SPUG, the generation assets,
real estate, and other disposable assets as well as IPP contracts of NPC shall be privatized
in accordance with this Act. Within six (6) months from the effectivity of this Act, the
PSALM Corp shall submit a plan for the endorsement by the Joint Congressional Power
Commission and the approval of the President of the Philippines, on the total
privatization of the generation assets, real estate, and other disposable assets as well as
existing UPP contracts of NPC and thereafter, implement in the same, in accordance with
the following guidelines, except as provided for in Paragraph (f) herein;
xxx
xxx
xxx
(j) NPC may generate and sell electricity only from the undisposed generation assets and
IPP contracts of PSALM Corp. and shall not incur any new obligations to purchase power
through bilateral contracts with generation companies or others suppliers."
22 "SEC. 18. Profits. - The net profit, if any, of TRANSCO shall be remitted to the
PSALM Corp. not later than ninety (90) days after the immediately preceding quarter;"
24 "Sec. 11. TRANSCO Privatization.
(a)
Within six (6) months from the effectivity of the Act, the PSALM shall submit a
Privatization Plan for endorsement by the Power Commission and the approval of the
President of the Philippines. The President of the Philippines thereafter shall direct
PSALM to award, in open competitive bidding, the transmission facilities, including grid
interconnections and Ancillary Services to a qualified party either through an outright
sale, a Concession Contract or any other means not inconsistent with the objectives of the
Act. The Buyer or Concessionaire or any other successor-in-interest to TRANSCO shall
be responsible for the improvement, expansion, operation or maintenance of the
transmission assets and the operations of any related businesses. PSALM and TRANSCO
shall secure a nationwide franchise for and in behalf of the Buyer or Concessionaire. The
award shall result in maximum present value of proceeds to the National Government. In
case a Concession Contract is awarded, the Concessionaire shall have a contract period of
twenty-five (25) years, subject to review and renewal for a maximum period of another
twenty-five (25) years. Upon the expiration or termination of the Concession Contract,
the transmission facilities and assets, including the nationwide franchise for the operation
of the transmission system and Grid shall revert to TRANSCO."
25 "SEC. 3. Scope. - This Act shall provide a framework for the restructuring of the
electric power industry, including the privatization of the assets of NPC, the transition to
the desired competitive structure, and the definition of the responsibilities of the various
government agencies and private entities."
26 Section 49, EPIRA. See Footnote No. 6.
27 "SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal
purpose of the PSALM Corp. is to manage the orderly sale, disposition, and privatization
of NPC generation assets, real estate and other disposable assets, and IPP contracts with
the objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.
The PSALM Corp. shall have its principal office and place of business within Metro
Manila.
The PSALM Corp. shall exist for a period of twenty five (25) years from the effectivity
of this Act, unless otherwise provided by law, and all assets held by it, all moneys and
properties belonging to it, and all its liabilities outstanding upon the expiration of its term
of existence shall revert to and be assumed by the National Government."
"SEC. 51. Powers. - The PSALM Corp. shall, in the performance of its functions
and for the attainment of its objective, have the following powers:
xxx
xxx
xxx
(k) To restructure existing loans of fee NPC;
xxx
xxx
xxx" (EPIRA)
28 "SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal
purpose of the PSALM Corp. is to manage the orderly sale, disposition, and privatization
of NPC generation assets, real estate and other disposable assets, and IPP contracts with
the objective of liquidating all NPC financial obligations and stranded contract costs in
an optimal manner.
xxx
xxx
xxx
30 "Section. 6. Generation Charges and VAT.
xxx
xxx
xxx
(b) Pursuant to the policy of reducing electricity to End-users, sales of generated power
by a Generation Company shall, from the effectivity of the Act, be zero-rated for the
purpose of imposition of value-added tax. Towards this end, the imposition of zero
percent (0%) VAT shall apply to the sale of generated power by a Generation Company
through all stages of the sale until it reaches the End-user. The DOF, through the BIR,
shall issue the necessary revenue regulation within sixty (60) calendar days from
effectivity of these Rules."
31 "(x) "Generation Company " refers to any person or entity authorized by the ERC to
operate facilities used in the generation of electricity." (Sec. 4 EPIRA)
33 "SEC. 70. Missionary Electrification. - Notwithstanding the divestment or
privatization of NPC assets, IPP contracts and spun-off corporation, NPC shall remain as
a National Government-owned and controlled corporation to perform the missionary
electrification function through the Small Power Group (SPUG) and shall be responsible
for providing power generation and its associated power delivery systems in areas that
are not connected to the transmission system. The missionary electrification shall be
funded from the revenues from sales in missionary areas and from the universal charge to
be collected from all electricity end-users as determined by the ERC."
34 "SEC. 4. Definition of Terms. xxx
xxx
xxx
(tt) "Small Power Utilities Group" or "SPUG" refers to the functional unit NPC created to
pursue missionary electrification function;" (EPIRA)
35 Footnote No. 12.
36 Footnote No. 24.
(a)
Payment for the stranded debts in excess of the amount assumed by the National
contract costs of distribution utilities resulting from the restructuring of the industry;
(b)
Missionary electrification
(c)
The equalization of taxes and royalties applied to indigenous or renewable
(d)
An environmental charge equivalent to one-fourth of one centavo per kilowatthour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely for
watershed rehabilitation and .management. Said fund shall be managed by NPC under
existing arrangements; and
(e)
A charge to account for all forms of cross-subsidies for a period not exceeding
three (3) years.
The universal charge shall be a non-bypassable change which shall be passed on and
collected from all end-users on a monthly basis by the distribution utilities. Collections
by the distribution utilities and the TRANSCO in any given month shall be remitted to
the PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any
amount due to the distribution utility. Any end-user or self-generating entity not
connected to a distribution utility shall remit its corresponding universal charge to the
TRANSCO.
The PSALM Corp., as administrator of the fund create a Special Trust Fund which shall
be disbursed only for the purposes specified herein in an open and transparent manner.
All amounts collected for the universal charge shall be distributed to the respective
beneficiaries within a reasonable period to be provided by the ERC."
38 Commissioner of Internal Revenue vs. Tours Specialists, Inc. and the Court of Tax
Appeals, G.R. No. 66416, March21, 1990.
39 Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. (108 Phil. 821
[1960]).
40 Section 34, EPIRA.
41 "Section 5. Powers. - xxx
"(k) To borrow money and incur such liabilities, as may be required to service all
obligations transferred from NPC and loans from ECs assumed from NEA in accordance
with the relevant sections of these Rules, including the issuance of bonds, securities or
other evidence of indebtedness utilizing its assets as collateral and/or through the
guarantees of the National Government: Provided, That all such debts or borrowings shall
have been paid or settled before the end of its corporate life;" (Rule 21, IRR)

May 09, 2002
BIR NUMBERED RULING
RR 10-2000
019-2002
FERNANDEZ, SANTOS & LOPEZ
Certified Public Accountants 8th Floor, Philbank Building
6778 Ayala Avenue, Makati City
Attention: Eliseo A. Fernandez
Chairman/Senior Managing Partner
Gentlemen:
This refers to your letter dated February 14, 2000 requesting on behalf of your client,
Maersk Filipinas, Inc., for a confirmation of your opinion that the medical allowance to
be given to all its employees, irrespective of position, as well as to the employees of its
affiliates, (Maersk-Filipinas Crewing, Inc., Mercantile-Filipinas, Inc. and Mercantile
Ocean Maritime Co. (Fil.), Inc.), in the amount of Seven Thousand Pesos (P7,000.00),
shall be considered as: (1) a de minimis benefit and therefore not subject to the fringe
benefits tax and/or that the same is for the benefit of the employer, as well as for the
welfare of the employee; and (2) not taxable as additional compensation on the part of the
employee.
It is represented that Maersk Filipinas, Inc. is a corporation duly organized and existing
under and by virtue of the laws of the Republic of the Philippines; that it plans to give
each of its employees, irrespective of position, an annual medical allowance of Seven
Thousand Pesos (P7,000.00); that the annual medical allowance is pegged at P7,000.00,
to be given, at the option of the taxpayer, at the beginning of each year in lump sum, or
quarterly at P 1,750.00, or monthly at P 583.33 and the employee will not be required to
reimburse the company for the unspent amount, and should such medical expenses
exceed P7,000.00, the company will not be liable for the excess; that present practice
calls for the employees to request for reimbursement of these medical expenses by
submitting receipts for medical expenses (medicines and consultations) not exceeding
P7,000.00 a year; and that Maersk Filipinas, Inc. feels that the cost/expenses in the
administration of the reimbursement type of program will be minimized, if not totally
eliminated, by converting the manner of disbursement of the medical allowance to an
annual, quarterly or monthly payment.
In reply, please be informed that under Section 1(A)(3)(e) of Revenue Regulations No.
10-2000, which provides to wit:
Section 1. Section 2.78.1(A)(3), (6)(b)(ii) and (7) of Revenue Regulations No. 2-98, as
last amended by Revenue Regulations No. 8-2000, is hereby further amended to read as
follows:
"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. "(A) xxx
xxx
xxx
xxx
"(1) Compensation paid in kind. - xxx
xxx
"
xxx
xxx
xxx
xxx
"(3) Facilities and privileges of relatively small value. "
xxx
xxx
xxx
xxx
" The following shall be considered as "de minimis" benefits not subject to INCOME
TAX AS WELL AS withholding tax on compensation income of both managerial and
rank and file employees:
"(a) xxx
xxx
xxx
"(b) xxx
xxx
xxx
"(c) xxx
xxx
xxx
"(d) xxx
xxx
xxx
"(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;
xxx
xxx
xxx
in order that the yearly medical benefits of both managerial and rank & file employees be
considered as "de minimis" benefits which are exempt from the fringe benefits tax and
income tax, as well as withholding tax on compensation, medical allowances and benefits
furnished or offered by an employer to his employees must not exceed P10,000.00 per
annum and it must be ACTUALLY USED OR UTILIZED for medical reasons. The term
"actual" connotes something that exists in fact or existing in reality as distinct or
contrasted with something that is potential, possible or a mere expectancy.
Your client, Maersk Filipinas, Inc. will provide its employees, irrespective of position, an
annual medical allowance of Seven Thousand Pesos (P7,000.00) and the employees will
neither be required to reimburse the company for the unspent amount nor will the
company be liable for the excess. Such an arrangement is not in harmony with the
mandate of Revenue Regulations No. 10-2000 because the aforesaid medical allowance
may or may not be utilized actually for medical purposes.
To be considered as "de minimis" medical allowance that will neither be subject to fringe
benefits tax in the case of managerial employees, or to income tax and consequently,
withholding tax on compensation, in the case of rank-and-file employees, in accordance
with Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 10-2000,
the following conditions must concur:
1.
The amount given to the employee shall be for his own medical expenses for a
given taxable year;
2.
The amount actually given and actually spent shall not exceed P 10,000.00 in any
given calendar year; and
3.
The employee must fully substantiate with official receipts in his name the
medical allowance so granted, on or before the annualization of withholding taxes in any
given calendar year.
On the basis of the above, this Office is of the opinion as it hereby holds that the annual
medical allowance to be furnished by Maersk Filipinas, Inc. to its employees can not be
considered as "de minimis" benefits in the absence of actual substantiation made to
completely establish that the amount shall be exclusively utilized by the employee for his
medical needs. Such being the case, the amount granted to the employees, without
differentiation, are considered as compensation subject to income tax and consequently,
to withholding tax.
Very truly yours,
RENE G. BAEZ
May 03, 2002
BIR NUMBERED RULING
RR 2-98
000-00
018-2002
Department of Social Welfare and Development Batasan Pambansa
Complex, Constitution Hills
Quezon City
Attn.: Belinda C. Manahan
Undersecretary for Management
Gentlemen:
This refers to your letter dated November 13, 2000 requesting for authority to refund to
your employees the taxes you withheld from their monetized leave credits in excess of
ten (10) days in the aggregate amount of P653,962.79 for the calendar year 1999.
It is represented that in the calendar year 1999, you withheld from your employees'
monetized leave credits in excess of ten (10) days the income tax due thereon in the
aggregate amount of P653,962.79 pursuant to Section 2.78(A)(7) of Revenue Regulations

2-98 dated April 17, 1998; and that said Section 2.78.1 (A) (7) of RR 2-98 was
subsequently abrogated by Executive Order 291 (MONETIZATION OF LEAVE
CREDITS OF GOVERNMENT OFFICIALS AND EMPLOYEES) dated September 27,
2000, viz.:
"SEC. 2. ABROGATION OF BIR RULING ON MONETIZED LEAVE CREDITS.
Hence, pursuant to Section 17, Article VII of the Constitution, I hereby abrogate all
previous rulings, including Section 2.78.1 (A) (7), p. 27 of Revenue Regulation No. 2-98
dated April 17, 1998 issued by the Bureau of Internal Revenue which subjected the
monetization of leave credits to income tax, which I have noticed to be inconsistent with
the provision of Republic Act (R.A.) No. 8424, the "Tax Reform Act of 1997", as well as
the intention on the grant of such benefits."
It is your position that the abrogation of Section 2.78(A)(7) of Revenue Regulations 2-98
by Section 2 of Executive Order 291 renders erroneous the withholding of the income tax
on your employees' monetized leave credits in excess of ten (10) days entitling said
employees to the refund thereof under Section 229 of the NIRC of 1997.
In reply, please be informed that after consideration of the facts and the applicable law
thereto, we cannot grant you the authority to refund to your employees the income tax
withheld from their monetized leave credits in excess of ten days.
Section 229 of the NIRC of 1997 allows the refund of erroneously or illegally collected
taxes. The withholding tax in the amount of P653,962.79 was not erroneously nor
illegally collected. Section 2.78 (A) (7) of Revenue Regulations 2-98 specifically
provided that the monetized leave credits in excess of ten days is subject to income tax, to
wit:
"Sec. 2.78. WITHHOLDING TAX ON COMPENSATION. XXX
(7) Vacation and sick leave allowances. Amounts of "vacation allowances or sick leave
credits" which are paid to an employee constitute compensation. Thus, the salary of an
employee on vacation or sick leave, which are paid notwithstanding his absence from
work, constitutes compensation. However, the monetized value of the unutilized vacation
leave credits of ten (10) days or less which were paid to the employee during the year are
not subject to income tax and to the withholding tax."
There is no dispute that at the time said amount was collected, Section 2.78 (A)(7) of
Revenue Regulations 2-98 was a valid regulation implementing an existing law. It was
promulgated by the Secretary of Finance, upon the recommendation of the Commissioner
of Internal Revenue, by virtue of the power vested in him under Section 244 of the NIRC
of 1997. It is a well-settled rule in administrative law that administrative regulations and
policies enacted by administrative bodies to interpret the law which they are entrusted to
enforce have the force and effect of law (Sierra Madre Trust vs. Secretary of Agriculture
and Natural Resources, 121 SCRA 384 [1983]; Asturias Sugar Central Inc. vs.
Commissioner of Customs, 29 SCRA 617 [1969]; Antique Sawmill Inc. vs. Zayco, et-al.,
17 SCRA 316 [1966].
The fact that Section 2.78 (A) (7) of Revenue Regulations 2-98 was subsequently
abrogated by his Excellency President Joseph E. Estrada under Executive Order No. 291
does not render erroneous the withholding of income tax on your employees' monetized
leave credits in excess of ten days as, at the time it was collected, a valid regulation
implementing an existing law mandated its collection.
Accordingly, we regret to deny your aforesaid request for lack of legal basis.
Very truly yours,
RENE G. BAEZ
April 29, 2002
BIR NUMBERED RULING
Sections 24(B)(1), 27(D)(1), 28(A)(7) 22(Y), 180

BIR Ruling Nos. 020-2001; 035-2001, 050-2001
017-2002
BASES CONVERSION DEVELOPMENT AUTHORITY
BCDA Corporate Center
Gozar corner Lucas Streets Villamor Airbase, Pasay City
Attn: Mr. Isaac S. Puno
Executive Vice President
Gentlemen:
This refers to your letters dated January 21, 2002, February 4, 2002 and March 4, 2002
requesting confirmation of your opinions on the taxation of BCDA Bonds '07.
It is represented that the Bases Conversion Development Authority ("BCDA") is a
government-owned-and-controlled corporation created by virtue of Republic Act No.
7227, as amended; that it is mandated to undertake the accelerated, sound and balanced
conversion into alternative uses of the former US Military baselands, including Subic,
Clark and their extensions, like John Hay, Poro Point and Morong, Bataan; that in the
conversion program. BCDA is also mandated to promote the economic and social
development of Central Luzon, in particular, and the country, in general; that under
Section 5(d) of its Charter, BCDA is expressly granted the power to issue bonds; that
BCDA's plans and programs for the next five (5) years are driven by, among others, the
thrust to develop special economic zones (SEZs), namely: Clark, John Hay, Poro Point
and the Bataan Technology Park, to create more jobs and generate investments in these
zones; that in line with this thrust, a major BCDA project is the Subic-Clark-Tarlac
Expressway Project, which is one of the five flagship projects of the Arroyo
Administration; that the project aims to synergize the efforts of the two zones in
developing a world-class, multi-modal logistics hub and industrial corridor in the region;
that the project will also enable both the Clark and Subic Special Economic Zones to
share resources, infrastructure and facilities- in particular the Diosdado Macapagal
International Airport; that BCDA intends to issue P2.0 billion worth of bonds due 2007
(BCDA Bonds '07) the proceeds which will be used to partially finance this project, the
development of SEZs, and other infrastructure projects, as well as the retirement of the
P1.0 billion bridge loan used to initially finance such infrastructure projects; that the
salient features of BCDA Bonds '07 are as follows:
Issuer
:
Base Conversion Development Authority BCDA Corporate
Center, Gozar Street Villamor Air Base, Pasay City
Bond Amount
:
P2.0 billion
Issue Price
:
At par
Maturity
:
5 years and 1 day from Issue Date
Base Rate
:
[Market determined]
Coupon Rate
:
200 basis points over the Base Rate, fixed over the term of
the BCDA Bonds, payable quarterly in arrears
Redemption
:
In one lump sum at maturity date
Security
:
Mortgage over real properties with minimum bond to
collateral ratio of 60:100
Lead Underwriter
:
Development Bank of the Philippines Sen. Gil Puyat
Avenue cor. Makati Avenue Makati City
Participating Underwriters: (to be determined at a later stage)
Bond Counsel for the Issuer: Office of the Government Corporate Counsel 3rd Floor
MWSS Bldg. Old Balara, Quezon City
Corporate Counsels, Phils Law offices 1905 Security Bank Center
6775 Ayala Avenue. Makati City
Bond Counsel for the
Underwriting Syndicate :
Picazo Buyco Tan Fider & Santos Law Offices 8th Floor,
Singapore Airlines Bldg. 13 S H.V. dela Costa St., Salcedo Village Makati City
MT1 Trustee
:
Development Bank of the Philippines - Trust Services
Makati City
Bond Agent
:
Metropolitan Bank and Trust Company- Trust Banking
Group Metrobank Plaza, Sen. Gil Puyat
Global Financial Advisors : Corporate ACCESS Holdings, Inc. West Ave. cor. Ligaya
St. West Triangle, Quezon City
ATR-Kim Eng Capital Partners, Inc. 17th Floor Tower One & Exchange Plaza
that the BCDA Bonds '07 will be offered through an Underwriting Syndicate with the
Development Bank of the Philippines (DBP) as Lead Underwriter; that the required
participation of the participating underwriter is a minimum of PI00 million, with
multiples of P50 million above the minimum, while that of a direct investor is a minimum
of P50 million, with multiples of P10 million above the minimum; that with DBP firmly
underwriting P1.0 billion, it is expected that at the time of origination there will be less
than twenty (20) subscribers to the BCDA Bonds '07; that the BCDA Bonds '07 will be
evidenced by a Global Bonds Certificate to be held in trust by the Metropolitan Bank and
Trust Company-Trust Banking Group, as bonds agent; that only one bond certificate will
be issued, and as far as BCDA is concerned, only MBTC-Trust is the holder of the bonds;
that to evidence investor's participation in the Global Bond Certificate, including
secondary sales/transfers of participation, the bond agent shall issue confirmations of
participation or confirmations of sale; that no new bonds will be issued in the name of the
transferees; that per April 25, 2002 letter of Development Bank of the Philippines, the
Offering Period for the BCDA Bond '07 ended on April 24, 2002, with the following
being the only applicants:
Name, and Address of Applicant
Amount of Bonds to be Purchased
1. Development Bank of the Philippines (for its account)
Sen. Gil Puyat J. Avenue
Makati City
P 1,000,000,000
2. UCPB-Trust Banking Division
(for its own account)
5th Flr., UCPB Building, 7907, Makati Ave.,
Makati City
100,000,000
3. DBP-Trust Services
[for the account of (i) DBP Gratuity Plan Fund and (ii) Blue Chi: Fund] Sen. Gil
J. Puyat Avenue
Makati City
50,000,000
4. Corporate Guarantee & Insurance Co., Inc. (for its own account)
Angeles, Pampanga
50,000,000
that pending compliance with the documentary requirements for application to purchase
the BCDA Bonds '07, Heritage Park Management Corporation is also applying to
purchase P50,000,000 worth of BCDA Bonds '07; that consequently, there will be less
than twenty (20) holders of the BCDA Bonds '07 at the time of origination; and that you
now request confirmation of the following:
"1. Assuming that there will be less than twenty (20) subscribers at the time of the
origination of the BCDA Bonds, the coupon or interest on the bonds is not subject to the
20% final withholding tax on deposit substitutes (BIR Ruling No. 020-2001 dated May
31, 2001; BIR Ruling No. 035-2001 dated August 16, 2001);
"2. It is only the number of subscribers at the time of origination of the BCDA Bonds that
is critical in determining whether or not the BCDA Bonds will be considered as deposit
substitutes, because it is from these subscribers that BCDA will borrow. In other words,
the number of transferees in the secondary market for the BCDA Bonds will not affect the
taxation of the coupon on the BCDA Bonds (because the purchase price that will be paid
by the transferee will flow to the transferors, and not to BCDA;
"3. Gains from sale, exchange or retirement of the BCDA Bonds '07 are excluded from
gross income and, therefore, exempt from income tax pursuant to Section 32(B)(7)(g) of
the Tax Code of 1997 (BIR Ruling No. 020-2001 dated May 31, 2001; BIR Ruling No.
035-2001 dated August 16, 2001);
"4. The original issuance of the BCDA Bonds '07 is subject to documentary stamp tax at
the rate of Thirty Centavos (P0.30) on each Two Hundred Pesos (P200) or fractional part
thereof, of the face value of the bonds (Section 180, Tax Code of the 1997); and
"5. Considering that new bonds will NOT be issued in the name of the transferees,
transfers of the BCDA Bonds '07 will not be subject to documentary stamp tax pursuant
to Section 6 of Revenue Regulations No. 26, the DST Regulations, which provides:
"Section 6. Transfer of bonds, debentures, etc. - No documentary stamp tax accrues on
mere transfers of bonds, debentures, or certificates of indebtedness issued by any
association, company or corporation, but where the transfer of the bonds carries with it
the issuance of new bonds in the name of the transferee to replace the old ones, the tax
imposed on the issuance of the bonds should be paid."
(See also BIR Ruling No. 119-91 dated June 25, 1991 and BIR Ruling No. 050-2001
dated October 29, 2001)
In reply, please be informed that your opinions are hereby confirmed as follows:
1. Under Sections 24(B)(1), 27(D)(1), 28(A)(7) in relation with Section 22(Y), all of the
Tax Code of 1997 (Tax Code), a final tax at the rate of twenty percent (20%) is imposed
on "interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements".
While Section 2(h)(iii)(b) of Revenue Regulations No. 17-84 considers all borrowings of
the national and local government and its instrumentalities including the Central Bank of
the Philippines (now Bangko Sentral ng Pilipinas), evidenced by debt instruments
denoted as treasury bonds, bills, notes, certificate of indebtedness and similar instruments
as "deposit substitutes", Section 22(Y) of the Tax Code defines the term as follows:
"The term "deposit substitutes" refers to alternative form of obtaining funds from the
public (the term public means borrowing from 20 or more individuals or corporate
lenders at any one time other than deposits, through the issuance, endorsement, or
acceptance of debt instants for the borrower's own account for the purpose of relending or
purchasing of receivables and other obligations, or financing their own needs or the needs
of their agent or debtor, x x x"
In the light of the aforecited Section 22(Y) of the Tax Code, this Office has consistently
opined that to be considered as "deposit substitutes" subject to twenty percent (20%) final
withholding tax, the borrowing of funds must be obtained from twenty (20) or more
individuals or corporate lenders at any one time. (BIR Ruling No. 020-2001 dated May
31, 2001)
In line with your representation that since BCDA Bonds '07 were offered through an
Underwriting Syndicate with the Development Bank of the Philippines (DBP) as Lead
Underwriter, with a required participation of the participating underwriter in the
minimum amount of P100 million, with multiples of P50 million above the minimum,
and P50 million, with multiples of P10 million above the minimum from a direct investor
and with DBP firmly underwriting P1.0 billion, as well as the fact that, at the time of
close of the Offering Period on April 24, 2002, which is the time of origination, there
were in fact less than twenty (20) subscribers, BCDA Bonds '07 may not be classified as
"deposit substitutes" Accordingly, interest income derived therefrom shall be subject to
the following:
a)
ordinary income tax at the schedular rate imposed under Section 24 (A)(l)(c) of
the Tax Code, if the bondholder is an individual citizen or a resident alien;
b)
20% tax of the bondholder is a nonresident alien engaged in trade or business
within the Philippines under Section 25(A)(2) of the Tax Code;
c)
25% tax imposed under Section 25 (B) of the Tax Code, if the bondholder is a
non-resident alien individual not engaged in trade or business within the Philippines;
d)
corporate income tax of 32% or 2% minimum corporate income tax imposed
under Section 27 (A) and 27 (E), and 28(A)(1) and (2), respectively, of the Tax Code, or
domestic and resident foreign corporations;
e) 32% final withholding tax, for nonresident foreign corporation; and,
f) Such other rate that may be imposed under the appropriate tax treaty to which the
Philippines is a signatory.
2. For purposes of determining whether the borrowing is from the "public", the number
of investors shall be counted as of the time of origination or original issuance regardless
of whether the bonds are thereafter traded or sold in the secondary market.
However, a representation or warranty should be made to the effect that the bonds are
acquired upon their original issuance by the original purchaser thereof, for and on its own
behalf, or on behalf of a single purchaser only, and in the latter case, that the purchaser is
acquiring such bonds for its own account and not for the account of other entities. (BIR
Ruling No. 035-2001 dated August 16, 2001).
3. As consistently ruled by this Office, gains from the sale, exchange, or retirement of
bonds with maturity of more than five (5) years, shall be exempt from income tax
provided for under Section 32(B)(7)(g) of the Tax Code, the pertinent portion of which
reads as follows:
"(g) Gains from the sale of bonds, debentures or other certificates of indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years" shall not be
included in gross income and shall be exempt from taxation.
Since BCDA Bonds '07 have a tenor of 5 years and 1 day, any gain realized from its sale
or exchange or retirement is excluded from the gross income; hence, exempt from income
tax pursuant to the above-cited Section 32(B)(7)(g) of the Tax Code.
The term "gain" shall refer to the gain, if any, from secondary trading which is the
difference between the selling price of the bonds in the secondary market and the price at
which the bonds were purchased by the seller. The term "gain" shall also include the gain
(that is, the difference between the proceeds from the retirement of the bonds and the
price at which such last holder acquired the bonds) realized by the last holder of the
bonds when such bonds are surrendered for retirement upon their maturity. (BIR Ruling
No.035-2001 dated August 16, 2001) The term "gain" however, does not include
"interest" (Nippon Life Insurance Company of the Philippines, Inc. vs. Commissioner of
Internal Revenue, CTA Case No. 6142. promulgated February 4, 2002), which, as stated,
is subject to income tax as described above.
4. The original issuance of the BCDA Bonds '07 shall be subject to DST at the rate of
P0.30 for every Two hundred Pesos (P200.00) or fractional part thereof of their face
value pursuant to Section 180 of the Tax Code.
5. Finally, the transfer of BCDA Bonds '07 in bearer form in the secondary market by
way of simple delivery to the buyer is not subject to the DST unless the transfer of the
instruments carries with it a renewal or issuance of new instruments in the name of the
transferee to replace the old ones. (BIR Ruling No. 050-2001 dated October 29, 2001)
upon investigation, it shall be disclosed that the facts are different, the this ruling shall be
Very truly yours,
RENE G. BAEZ
April 24, 2002
BIR NUMBERED RULING
131(A)
000-00
016-2002
HON. NOEL ELI B. KINTANAR
Undersecretary/Executive Director Coordinating Council For Private
Sector Participation Malacaang Palace
Sir:
This refers to your letter dated October 22, 2001, requesting exemption from the payment
of ad valorem tax for the six (6) units of Cherokee Jeeps which you intend to sell to nontax exempt individual/entity.
In support of your request, you stated that the said vehicles, which were donated in 1990
and 1991 by the United States Agency for International development (USAID) to the
Coordinating Council For Private Sector Participation (CCPSP) pursuant to the provision
of the Philippine Assistance Program Support Project, are now beyond the useful life of
ten (10) years, as indicated in US Treasury Bulletin F; that on September 21, 2000, the
Commission on Audit (COA) conducted a Value for Money Audit and found out that the
said vehicles are beyond economical repair; that since a year had already elapsed since
the audit was conducted, the vehicles deteriorated further and most, if not all, are now
junks; that the Department of Finance gave you a written notice to vacate the parking
slots where the vehicles are parked but your Office has no parking area where those
vehicles could be transferred; that due to those compelling reasons, the CCPSP
Management decided to sell said unserviceable vehicles in a public auction; that at its
present condition, the vehicles may not carry a price enough to pay the taxes due thereon;
and that CCPSP is planning to utilize the proceeds of the sale to purchase a brand new
vehicle as the replacement of the six (6) units to be sold.
In reply, please be informed that the power to grant tax exemptions, like the power to tax,
is exclusively lodged in Congress. This Office only enforces the tax laws and grants the
exemptions provided for in said laws. We regret to inform you that there is no provision
in the Tax Code of 1997 and revenue regulations promulgated by this Office granting
exemption from taxes the subsequent sale or transfer of vehicles by the taxexempt person/entity to a non tax-exempt person or entity. At any rate, it is not your
Office which shall be liable for the duty and internal revenue tax due on the sale of the
said six (6) units Cherokee Jeeps but the purchaser/s thereof, pursuant to the second
paragraph of Section 131 (A) of the Tax Code of 1997, reading:
"Sec. 131. Payment of Excise Taxes on Imported Articles. "(A) Persons Liable. - xxx xxx
xxx
XXX XXX XXX XXX
"In the case of tax-free articles brought or imported into the Philippines by persons,
entities, or agencies exempt from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entities, the purchasers or
recipients shall be considered the importers thereof, and shall be liable for the duty and
internal revenue tax due on such importation.
xxx
xxx
xxx
We regret, therefore, to deny your aforesaid request for lack of legal basis.
Very truly yours,
RENE G. BAEZ
April 16, 2002
BIR NUMBERED RULING
000-00
015-2002
Baniqued & Baniqued
Suite 803, S F Jollibee Centre,
San Miguel Ave., Ortigas Center, Pasig City
Attn.: Atty. Carlos G. Baniqued & Terence Conrad H. Bello

Gentlemen:
This refers to your letter dated August 2, 2002, in behalf of British American Tobacco
("BAT") that:
(a)
"Lucky Strike Soft Pack"; a new brand of cigarette that BAT intends introduce
and sell in the domestic market shall be considered as a "New Brand", not as a "Variant
of an Existing Brand", for excise tax purchases;
(b)
"Lucky Strike Soft Pack" which BAT proposes to sell at a net retail price of P9.90
per pack of twenties, shall be subject to specific tax at the rate of P8.96 per pack.
It is represented that BAT is a resident foreign corporation organized and existing under
the laws of the United Kingdom. It maintains a branch office in the Philippines located at
25c Citybank Tower, 8741 Paseo de Roxas, Makati City. It is engaged in the business of
importing and selling cigars and cigarettes and other goods related thereto. BAT intends
to import into the Philippines or manufacture locally "Lucky Strike" brand of cigarettes
in soft pack ("Lucky Strike Sort Pack") and proposes to sell the same at a net retail price
(exclusive of VAT and the applicable excise tax) of P9.90 per pack of twenties. It
currently imports and sells in the domestic market "Lucky Strike" cigarette brand in hard
pack, (''Lucky Strike Hard Pack") at net retail price of P22.92. BAT, which introduced
Lucky Strike Hard Pack in the domestic market in January 1998, pays an excise tax of
P13.44 per pack of Lucky Strike Hard Pack prior to the removal thereof from customs
custody.
Based on the foregoing facts, you now request for confirmation of your opinion that a
Lucky Strike Soft Pack shall be considered a "New Brand", not a "Variant of an Existing
Brand", for excise tax purposes; and (b) Lucky Strike Soft Pack, which BAT proposes to
sell at a retail price of P9.90 per pack of twenties shall be subject to a specific tax at the
rate of 8.96 per pack.
In reply, please be informed that for excise tax purposes, cigarette brands are grouped
into three (3) categories: existing brands, new brands, and variants of existing brands:
"Duly registered or existing brands of cigarettes" include duly registered, existing, or
active brands of cigarettes prior to January 1, 1997, [Section 2(3), Revenue Regulations
("Rev Regs.") No. 1-97, January 1, 1997]. The classification of existing brands of
cigarettes, as well as their specific tax per pack, is already fixed by law. It is based on
their average net retail price as of October 1, 1990. This classification shall remain in
force until revised by Congress. [See Section 145 and Annex "D" of the National
Internal Revenue Code 1997 (" 1997 NIRC "), and Annex "D" Republic Act No. 8240].
"New brands" of cigarettes refer to brands duly registered after January 1, 1997, which
include duly registered but inactive brands of cigarettes not sold in commercial
quantity prior to January 1, 1997, [Section 2(6), Rev. Regs. No.1-97 New brands are
classified according to their current net retail price. In the meantime that the current net
retail price has not yet been established, the suggested net retail price shall be used to
determine the specific tax classification. Thereafter, a survey shall be conducted in 20
major supermarkets or retail outlets in Metro Manila (for brands marketed nationally) or
in 5 major supermarkets or retail outlets in the region (for brands marketed only outside
of Metro Manila). 3 months after the initial removal of the new brand to determine the
actual net retail price excluding the excise tax and the value-added tax which shall then
be the basis in determining the specific tax classification, [Section 4(B), Rev. Regs. No.
1-97.]
"Variant of a brand" refers to a brand on which a modifier is prefixed and/or suffixed to
the root name of the brand and/or a different brand watch carrier the same logo or design
of the existing brand. Variants of the existing brands of cigarettes which are introduced in
the domestic market after January 1, 1997 shall be taxed under the highest classification
of any variant of the brand: [Section 145, 1997 NIRC; see also Section 2(8), Rev. Regs.
No. 1-97.]
Section 145 of the 1997 NIRC, which prescribes the specific tax applicable to each class
provides that " Sec. 145. Cigars and cigarettes. xxx
xxx
xxx
"(C) Cigarettes packed by machine. - There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
"(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten
pesos (P10.00) per pack, the tax shall be Twelve pesos (P 12.00) per pack;
"(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six
pesos and fifty centavos (P6.50) but does not exceed Ten pesos (P10.00} per pack, the tax
shall be Eight pesos (P8.00) per pack;
"(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos
(P5.00) but does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall
be Five pesos (P5.00) per park;
"(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five
pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced the domestic market after
the effectivity of Republic Act No. 8240 shall be taxed under the highest classification of
any variant of that brand..
"x
x
x
"The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4)
hereof shall be increased by twelve percent (12%) on January 1, 2000.
"New brands shall be classified according to their current net retail price.
"For the above purpose, 'net retail price' shall mean the price at which the cigarette is sold
on retail in twenty (20) major supermarkets in Metro Manila (for brand of cigarettes
marketed nationally), excluding the amount intended to cover the applicable excise tax
and the value-added, tax. For brands that are marketed only outside Metro Manila, the
'net retail price' shall mean the price at which the cigarette is sold in five (5) major
supermarkets in the region excluding the amount intended to cover the applicable excise
tax and the value-added tax.
"The classification of each brand of cigarettes based on its average net retail price as of
October 1, 1996, as set forth in Annex 'D', shall remain in force until revised by
Congress."
As can be gleaned from the aforequoted provision, the tax classification relating to
variant (i.e. taxed under the highest classification of any variant of the brand) applies only
to variants of existing brands. In other words, such tax classification has no application
variants of new brands. Instead, if the cigarette brand concerned is a variant of a new
brand, it should be classified as a "new brand" for excise tax purposes in which case it
shall be classified according to its current net retail price, and not taxed as a "variant of a
brand".
While the law defines the term "variant of a brand", this term should be understood in the
context of the earlier paragraph in Section 145 of the 1997 NIRC, which makes reference
to Variants of existing brands of cigarettes that are introduced in the domestic market
after the effectivity of the Act (which) shall be taxed under the highest classification of
any variant of that brand". Besides, the term "variant of a brand" is defined as "a Brand
on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a
different brand which carries the same logo or design of the existing brand". In fact,
Section 2(8) of RR 1-97 confirms this view when it cites the following examples:
"a. Modifier is prefixed - Example. A registered existing "ABC" brand manufactured as
"Kings ABC", "Large ABC"
b. Modifier is suffixed Example, A registered existing "ABC" brand
manufactured as "ABC Kings", ABC Large", ABC Lights", "ABC Menthol", "ABC
Filter", etc.
c. A different brand which carries the same logo or design of the existing brand
Example, A registered existing "ABC" brand carrying the logo, badge, emblem or mark
in the shape of a horseshoe is manufactured as a new '"DEF" brand carrying the same
horseshoe logo, badge, emblem or mark; or a registered existing "ABC" brand carrying
two (2) horizontal stripes with red and white colors is manufactured as a new "DEF"
brand carrying the same stripes and colors." (Underscoring supplied.)
Then again. Section 4.A of RR 1-97 explicitly enumerates the brands that are considered
"existing brands" under R.A. 8240, which enumeration does not include Lucky Strike,
logically so, since such brand does not exist prior to January 1, 1997.
While BAT currently sells Lucky Strike Hard Pack in the domestic market, the excise tax
classification applicable to it should not be made to apply to Lucky Strike Soft Pack,
Lucky Strike Hard Pack is a new brand of cigarette having been introduced by BAT in the
domestic market only after the effectivity of R.A. 8240, i.e., after January 1, 1997. Not
being an existing brand as the term is understood within the context of R.A. 8240, the
specific tax applicable Lucky Strike Hard Pack as the rate of P13.44 should not be
applied to Lucky Strike Soft Pack, which should be classified instead according to the
current net retail price. On the other hand, Lucky Strike Soft Pack, which BAT proposes
to sell at a net retail price of P9.90 per pack of twenties, shall be subject to specific tax at
the rate of P8.96 per pack. Since BAT's suggested net retail price for Lucky Strike Soft
Pack is P9.90, the specific tax applicable is P8.96.
Accordingly, we confirm your opinion that (a) Lucky Strike Soft Pack shall be
considered a "New Brand", not a "Variant of a Brand", for excise tax purposes; and (b)
Lucky Strike Soft Pack, which BAT proposes to sell at a net retail price of P9.90 per pack
of twenties, shall be subject to specific tax rate of P8.96 per pack.
be considered void.
Very truly yours,
RENE G. BAEZ

April 10, 2002
BIR NUMBERED RULING
Section 43
RR 2
000-00
014-2002
Joaquin Cunanan & Co.
Pricewaterhouse Coopers
29th Floor Philamlife Towers
Paseo de Roxas
1226 Makati City
Attn: Mrs. Tomasa H. Lipana
Managing Partner
Tax Services
Gentlemen:
This refers to your letter dated March 28, 2001 stating that your client, First Malayan
Leasing and Financing Corporation (FMLFC), is a corporation organized and existing
under the laws of the Philippines and is engaged primarily in the general financing and
investments business including, but not limited to, extending credit facilities for
construction of housing projects and commercial and industrial development projects and
discounting of notes, drafts and similar evidence of indebtedness. It has adopted the Rule
of 78 Method in determining the interest income which you described as follows :
"Under the Rule of 78 Method, the proceeds of a loan granted to a borrower on an agreed
term (12 to 60 months) shall be net of interest since the interest due thereon shall be
deducted in advance. Hence, the granting of a loan will be recorded in the books of our
client as follows :
Finance Receivable
XXX
Cash XXX
Unearned Interest & Discounts (UID)
XXX
UID represents the unearned portion of interest collected in advance on discount notes or
loans. The earned UID is recognized as income on a monthly basis using the Rule of 78
Method (otherwise known as the sum of the months method) based on the computed
factor for each month. For example, to compute for the factor of a loan with a term of 24
months :
Factor =
Term (Term + 1)
2
=
24 (24 + 1)
2
=
300
Interest
Income
=
24/300 X Balance of UID
(First Amortization)
Interest
Income
=
23/300 X Balance of UID
Under this method, the interest earned is higher during the first few years and would
eventually decline as the loan nears its maturity. This method was adopted by FMLFC
since it is commonly used in the industry. However, the Rule of 78 Method is not in
accordance with the Statement of Financial Accounting Standards (SFAS) No. 19,
Summary of Generally Accepted
Accounting Principles for Banks and Financial Intermediaries issued by the Accounting
Standards Council. Under the said SFAS No. 19, unearned interests and discounts and
interest on discounted loans should be amortized using the interest method or annuity
method. Interest income is to be recognized based on the outstanding principal balance of
a loan."
Your client is now requesting permission to change from Rule of 78 Method to Annuity
Method because the Rule of 78 Method is not in accordance with the Statement of
Financial Accounting Standards (SFAS) No. 19, Summary of Generally Accepted
Accounting Principles for Banks and Financial Intermediaries issued by the Accounting
Standards Council.
In reply, please be informed that on the basis of the above representations, FMLFC is
hereby granted permission to change its accounting method of determining interest
income from Rule of 78 Method to Annuity Method provided that it truly reflects your
income for the period. The change of accounting method from one system to another is
allowed under the provision of Section 43 of the Tax Code of 1997, in relation to Section
167 of Revenue Regulations No. 2, the pertinent portion of which provides as follows:
"Sec. 43. General Rule.- The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case maybe) in
accordance with the method of accounting regularly employed in keeping with the books
of such taxpayer; but if no such method of accounting has been employed or if the
method employed does not clearly reflect the income, the computation shall be made in
accordance with such method as in the opinion of the Commissioner clearly reflects the
income, x x x x
Section 167 of Revenue Regulations No. 2
" x x x It is recognized that no uniform method of accounting can be prescribed for all
taxpayers and the law contemplates that each taxpayer shall adopt such forms and
systems of accounting as are in his judgment best suited for his purpose, x x x Any
approved standard method of accounting which reflects taxpayer's income may be
adopted, x x x "
With regard to your request that the authority granted retroact to January 1, 2001, since
the request for change of accounting method was filed with this Office on March 29,
2001, or within the 90-day period required by Section 168 of Revenue Regulations No. 2,
please be advised that the same is granted. Section 168 of Revenue Regulations No. 2
states :
"Section 168. Change in Accounting Methods.XXX XXX XXX
Application for permission to change the method of accounting employed and the basis
upon which the return is made shall be filed within 90 days after the beginning of the
taxable year to be covered by the return, xxx
xxx
xxx. "
upon investigation it will be disclosed that the facts are different, then this ruling shall be
Very truly yours,
RENE G. BAEZ
April 05, 2002
BIR NUMBERED RULING
000-00
013-2002
PUNONGBAYAN & ARAULLO
20th Floor, Tower I, The Enterprise Center
6766 Ayala Avenue, Makati City
Attention:
MS. MARIVIC C. ESPAO
Tax Partner
Gentlemen:
This refers to your letter dated May 3, 2001 requesting for a confirmatory opinion that the
Outstation Allowance given by your client, PHILIPPINE GAMING MANAGEMENT
CORPORATION (PGMC for brevity), to its managerial/supervisory employees shall be
considered as non-taxable fringe benefits and therefore, not subject to the fringe benefit
tax or withholding tax on compensation.
You represent that PGMC is a domestic corporation organized to act as manager or
managing agent of persons, firms, associations, corporations, partnerships and other
entities, to provide management, investment and technical advice for commercial,
industrial, manufacturing and other kinds of enterprises; and to undertake, carry on, assist
or participate in the promotion, organization, management, liquidation or reorganization
of corporations, partnerships and other entities, except the management of funds,
securities, portfolio or similar assets of the managed entities or corporation.
On January 25, 1995, PGMC entered into an Equipment Lease Agreement with the
Philippine Charity Sweepstakes Office (PCSO for brevity) covering lease of PGMC's online lottery equipment. Some of these equipment are leased by PCSO to lotto franchise
holders.
On December 1, 1995, PGMC subsequently agreed to provide maintenance and repair
services for the leased equipment. PGMC sends its employees to regularly visit lottery
franchise holders in different parts of the Philippines to check whether the equipment
they are leasing from PCSO are in top condition. They likewise attend to requests of
franchise holders for repairs of equipment.
As a company policy, PGMC pays for the actual hotel/lodging accommodations and
transportation expenses of the employees assigned to inspect the equipment. In addition,
it gives a fixed amount of Outstation Allowance as support to its employees who are sent
to locations beyond Metro Manila, with the rates differentiated as follows:
i)
Full allowance - given when the employee assigned is away from the head office
for at least 16 to 24 hours.
Vice President
P770/day
Supervisors/Managers
P700/day
ii)
Day allowance - given when the employee is away from the office for more than 8
hours but less than 16 hours.
Vice President
P400/day
Supervisors/Managers
P330/day
In reply, please be informed that as a general rule, Section 33(A) of the Tax Code of 1997
imposes a final withholding tax of 32% on the grossed-up monetary value of fringe
benefit furnished or granted to the employee (except rank and file employees) by the
employer, whether an individual or a corporation.
This general rule is not, however, without exception. The aforequoted section sets forth
two scenarios wherein no fringe benefit tax will be imposed, i.e., (1) when the fringe
benefit is required by the nature of or necessary to the trade, business or profession of the
employer; or (2) when the fringe benefit is for the convenience or advantage of the
employer.
The Outstation Allowance, as you claimed, is given by PGMC to its managerial and
supervisory employees who will be away from the office site for at least 8 hours to visit
lotto franchise holders for repairs and/or inspection of equipment leased by the latter
from the PCSO. The same is intended to cover meals and trip-related expenses in
connection with their off-site visit to franchise holders including, but not limited to
baggage services, laundry expenses, parking fees, toll fees, telephone fees and other
incidental expenses.
The Outstation Allowance, therefore, is clearly required by the nature of or necessary to

the trade or business of PGMC. Accordingly, this Office opines and so holds that the
grant of the Outstation Allowance by PGMC to its managerial and supervisory employees
are not subject to the fringe benefits tax prescribed in Section 33(A) of the said Code.
Consequently, the Outstation Allowance, not being part of the compensation income of
the employee, is not subject to income tax and consequently to withholding tax.
By the same token, the Outstation Allowance which may be incurred or expected to be
incurred by the aforesaid employee in the performance of his duties cannot be considered
as part of compensation subject to withholding tax even if the employee fails to
account/liquidate the same considering that said expense is pre-computed on a daily basis
and is paid to an employee while he is on an assignment or duty.
Section 2(6)(b)(ii) of Revenue Regulations No. 8-2000 specifically states that:
"(ii) The employee is required to account/liquidate for the foregoing expenses in
accordance with the specific requirements of substantiation for each category of expenses
pursuant to Sec. 34 of the Code. The excess of actual expenses over advances made shall
constitute taxable income if such amount is not returned to the employer. Reasonable
amounts of reimbursements/advances for traveling and entertainment expense which are
pre-computed on a daily basis and are paid to an employee while he is on an assignment
or duty need not be subject to the requirements of substantiation and to withholding."
be considered void.
Very truly yours,
RENE G. BAEZ
April 03, 2002
BIR NUMBERED RULING
000-00
012-2002
ATTY. JUANITO L. SANTOS

No. 77 San Rafael St., Bo. Capitolyo
Pasig City
Dear Atty. Santos:
This refers to your letter dated July 9, 2001 requesting for a clarification on the
entitlement of the Estate of SOFRONIO AMPER, SR. (SOFRONIO for brevity) to the a)
Deduction of the Family Home and b) Standard deduction as provided in Section 86(A)
(4) and (5), respectively, of the 1997 Tax Code.
The facts, as you represent, are the following:
SOFRONIO is a natural-born Filipino citizen, born on March 11, 1925 in Surigao,
Philippines. He joined the U.S. Merchant Marine sometime in 1946 to improve his life
and future family and became an American citizen. At that time, joining the U.S.
Merchant Marine was a very lucrative and propitious venture.
He got married sometime in 1950 to LEONILA MENDOZA-AMPER and begot eight (8)
children, now all of legal age and residents of the different parts of California, U.S.A. In.
1960, they acquired as husband and wife a 314.08 sq.m, real estate property located at
Merville Park, Paraaque City and in 1966 built thereon a residential house after full
payment was made. Title over the property was issued by the Registry of Deeds of Rizal
on October 16, 1969 and this place became their residence from 1966 up to the time of
his death. A certification issued by the Barangay Chairman of Barangay Merville, Alicia
R. Benzon, was attached to the request to prove that SOFRONIO and LEONILA are bona
fide residents and owners of the said home.
As a Merchant Marine, he was assigned to different places, came home to the Philippines
to his wife whenever he had the opportunity. They acquired the subject property with all
the intention of residing thereat, and to retire in his home country.
From the time he retired at the age of 65 years old, he went home to the Philippines to
reside therein. In 1998, due to his kidney problems, other ailments, and old age, the
family agreed to bring him to California, U.S.A. for treatment and hospitalization. All
expenses for medicine and hospitalization were free, being a retired U. S. Merchant
Marine. Those were the privileges, among others, granted by the U.S. government to its
retired personnel, aside from the fact that all his children were there. On January 11,
2001, Jose finally succumbed and died, leaving the subject property as his only estate.
In support of the above, the heirs have submitted an affidavit attesting, among others, to
the fact that the subject property is the conjugal property of the Spouses SOFRONIO; that
the said property was never leased to anybody; and, the said VENILDA Y. LAUD is their
relative who has been staying and living with them, and at the same time the caretaker of
the property. You have also submitted a certification issued Barangay Chairman dated
July 25, 2001 that his Philippine house is his family residence.
In reply, please be informed that Section 86(A)(4) and (5) of the 1997 Tax Code
specifically provide that:
"SECTION 86. Computation of Net Estate. For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of a Citizen or a Resident. In the case of a
citizen or resident of the Philippines, by deducting from the value of the gross estate
xxx
(4) The Family Home. An amount equivalent to the current fair market value of the
decedent's family home: Provided, however, That if the said current fair market value
exceeds One million pesos (P1,000.000), the excess shall be subject to estate tax. As a
sine qua non condition for the exemption or deduction, said family home must have been
the decedent's family home as certified by the barangay captain of the locality.
(5) Standard Deduction. An amount equivalent to One million pesos (P1,000,000).
xxx"
Based on the documents submitted, it is shown that at the time of death of SOFRONIO,
he was still considered a resident alien of the Philippines. There was an intention on the
part of SOFRONIO to reside in the Philippines. The only reason he left the Philippines
was to avail of free medical treatment in the United States, and there was no intention to
reside in the United States permanently.
Although Section 86(A) speaks of a "resident of the Philippines", the same should be
construed as to necessarily include resident aliens. Basic and axiomatic is the rule on
statutory construction that the Courts, or in this case this Office, must give effect to the
general legislative intent that can be discovered from or is unraveled by the four comers
of the statute, and in order to discover said intent, the whole statute, and not only a
particular provision thereof, should be considered. It is noteworthy to state that, the law
precisely distinguishes a citizen or resident (Section 86(A), 1997 Tax Code) from a
nonresident not a citizen of the Philippines (Section 86 (B) thereof) in terms of allowable
deductions for an estate.
Accordingly, SOFRONIO, being a bona fide resident of the Philippines as certified by the
Barangay Chairman of Barangay Merville, and coupled by the circumstances stated
above, is considered a resident alien within the definition of Section 86(A) of the 1997
Tax Code. As such, the value of the gross estate of SOFRONIO shall be determined by
including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated in accordance with Section 85 of the 1997 Tax Code.
Accordingly, the estate of SOFRONIO can avail of the deductions afforded to it under
Section 86(A)(1) to (7) of the 1997 Tax Code, as implemented by Revenue Regulations
No. 17-93 dated August 30, 1993, including the deduction of the Family Home and the
Standard Deduction of P1,000,000.00 each.
In BIR Ruling No. 009-99 dated January 22, 1999, "the above enumerated items are
properly authorized by law to be deducted as independent, separate and distinct items of
deduction, which may properly be deducted from the gross estate of a resident decedent,
subject to the limitations or conditions that are provided for under each said item above ".
be considered void.
Very truly yours,
RENE G. BAEZ

March 27, 2002
BIR NUMBERED RULING
NOLCO S34(D)(3)
RR No. 14-2001
000-00
011-2002
SGV & CO.
6760 Ayala Avenue
1226 Makati City
Attention: Atty. Emmanuel C. Alcantara
Tax Division
Gentlemen:
This refers to your letter dated December 1, 2000 requesting for confirmation of your
opinion that the net operating losses of Grand Cement Manufacturing Corporation
("Grand") is preserved even after the purchase from the existing stockholders of eightyeight percent (88%) of its outstanding and issued shares by Taiheiyo Cement Corporation
("Taiheiyo") and may still be carried over and claimed as a deduction from its gross
income, pursuant to Section 34(D)(3) of the Tax Code of 1997, as implemented by
Revenue Regulations No. 14-2001.
It is represented that Grand is a domestic corporation duly organized and existing under
the laws of the Philippines and is engaged in the production and trading of cement
products of all kinds, with principal office address at San Fernando, Cebu City; that it is a
BOI registered enterprise with a non-pioneer status, enjoying certain tax benefits,
including an income tax holiday for four (4) years from January 1, 1993; that its income
tax holiday, including the one (1) year extension granted by the BOI on February 14,
1997, ended on January 1, 1998; that Taiheiyo is a non-resident foreign corporation duly
organized and existing under the laws of Japan; that Taiheiyo invested in Grand's existing
cement business in the Philippines on October 25, 2000 by acquiring approximately
eighty-eight percent (88%) of the outstanding and issued capital stock of the latter; that
Grand adopts a calendar year accounting period; that for the taxable years ending
December 31, 1998 and December 31, 1999, Grand incurred NOLCO; and that in
support of your request, you submitted the following documents: 1) Articles of
Incorporation of Grand Cement Manufacturing Corporation; 2) SEC Certificate of
Registration of Grand Cement Manufacturing Corporation; 3) Certification by the
corporate secretary of Grand Cement Manufacturing Corporation of its authorized

capitalization, the par value of the shares of stock and the list of stockholders of record of
Grand Cement Manufacturing Corporation; and 4) Audited financial statements of Grand
Cement Manufacturing Corporation for the years 1999 and 1998.
In reply, please be informed that Section 34(D)(3) of the Tax Code provides:
"Sec. 34
Deductions from gross income. xxx
(D)
Losses. (3) Net operating loss carry-over. - The net operating loss of the business or any
enterprise for any taxable year immediately preceding the taxable year, which had not
been previously offset as deduction from gross income, shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years immediately
following the year of such loss; Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt from income tax shall not be allowed
as a deduction under this subsection; provided, further. that a net operating loss carryover shall be allowed only if there has been no substantial change in the ownership of the
business in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is held by or on behalf of the same
persons; or
(ii) Not less than seventy-five percent (75%) of the paid-up capital of the corporation, if
the business is in the name of a corporation, is held by or on behalf of the same persons.
For purposes of this subsection, the term "net operating loss" shall mean the excess of
allowable deduction over gross income of the business in a taxable year; xxx"
The above provision is clarified by Revenue Regulations No. 14-2001, pertinent portions
of which provide:
"SEC. 2. General Principles and Policies. 2.1
For purposes of these Regulations, the allowance for deduction of
NOLCO shall be limited only to net operating losses accumulated beginning
January 1, 1998.
2.2
In general, NOLCO shall be allowed as a deduction from the gross income of the
same taxpayer who sustained and accumulated the net operating losses regardless of the
change in its ownership. This rule shall also apply in the case of a merger where the
taxpayer is the surviving entity.
xxx
xxx
xxx
2.4 NOLCO shall also be allowed if there has been no substantial change in the
ownership of the business or enterprise in that not less than 75% in nominal value of
outstanding issued shares or not less than 75% of the paid up capital of the corporation, if
the business is in the name of a corporation, is held by or on behalf of the same persons.
The 75% equity, ownership or interest rule prescribed in these Regulations shall only
apply to a transfer or assignment of the taxpayer's net operating losses as a result of or
arising from the said taxpayer's merger or consolidation or business combination with
another person, xxx.
xxx
xxx
xxx
SEC. 3. Definition of Terms. - For purposes of these Regulations, the words and phrases
herein provided shall mean as follows:
xxx
xxx
xxx
3.8 Substantial Change in the Ownership of the Business or Enterprise. - The term
"Substantial Change in the Ownership of the Business or Enterprise" shall refer to a
change in ownership of the business or enterprise as a result of or arising from its merger
or consolidation or combination with another person in the manner as provided in
subsection 2.4 of these Regulations. Any change in ownership as a result of or arising
thereunder shall not be treated as a substantial change for as long as the stockholders of
the party thereto, to whom the net operating loss is attributable, gains or retains 75% or
more interest after such merger or consolidation or combination.
xxx
xxx
xxx
SEC. 5. Determination of Substantial Change in Ownership of the Business.
xxx
xxx
xxx
5.2 When Change Occurs. - A change in the ownership of the business occurs when the
person who sustained net operating losses enters into a merger, or consolidation or
combination with another person, thereby resulting to the transfer or conveyance of the
said net operating losses, to another person, in the course of the said merger or
consolidation or combination.
xxx
xxx
xxx."
[Underscoring supplied]
In this case, the NOLCO, which Grand seeks to preserve, have not been previously offset
as a deduction from gross income, and they were incurred in the taxable years during
which it was no longer exempt from income tax, particularly the taxable years 1998 and
1999. The transfer of shares by the previous stockholders of Grand were through straight
purchase and sale and not through merger, consolidation or business combination. As
such, the transfer of shares did not cause a substantial change in ownership as a result of
or arising from merger, consolidation or combination with another person as defined in
subsection 3.8 of Revenue Regulations No. 14-2001. Accordingly, we hereby confirm
your opinion that the NOLCO of Grand is preserved even after the purchase from the
existing stockholders of eighty-eight percent (88%) of its outstanding and issued shares
by Taiheiyo, and may still be carried over and claimed as a deduction from its gross
income for the next three (3) consecutive taxable years immediately following the year of
such loss.
upon investigation it shall be disclosed that the facts are different, then this ruling shall be
Very truly yours,
RENE G. BAEZ
February 19, 2002
BIR NUMBERED RULING
000-00
010-2002
SYCIP GORRES VELAYO & CO.
6760 Ayala Avenue
Makati City
Attention: Atty. J. A. Osana
Gentlemen:
This refers to your letter dated October 24, 2001, on behalf of your client, Allstate Life
Insurance Company of the Philippines (Allstate), appealing from the ruling issued by the
Director of Revenue Region No. 6, Dr. Ruperto P. Somera, dated October 15, 2001
relative to the filing of the Short Period Return of Allstate.
It is represented that on August. 31, 2001, the respective Board of Directors and
stockholders of Pru Life Insurance Corporation of UK (Pru Life UK) and Allstate
approved the Plan of Merger and the Articles of Merger between Pru Life UK and
Allstate: that Pru Life UK is a Large Taxpayer registered with the Large Taxpayers
Service; that Allstate was originally registered with Revenue District Office No. 47 but
now falls under the jurisdiction of RDO 34; that under the Plan of Merger, Pru Life UK
shall be the surviving corporation and Allstate shall be the absorbed corporation; that all
the assets and liabilities of Allstate, as shown in its Audited Financial Statements as of
May 31, 2001, shall be conveyed, assigned, and transferred to Pru Life UK in
consideration for shares of stock of Pru Life UK; that Allstate shall confirm the
conveyance of all its assets to Pru Life UK as of the date of the Securities and Exchange
Commission's approval of the merger; that the Effective Date of Merger indicated in the
Plan of Merger is September 1, 2001, but this is subject to the SEC's approval of the
Articles of Merger and issuance of the Certificate of Filing of the Articles of Merger, and
to the Bureau of Internal Revenue's issuance of a ruling that the merger complies with
Section 40(C)(2) of the Tax Code; that on September 26, 2001, the merger documents
were filed with the SEC on behalf of Pru Life UK and Allstate; that on the same date, a
request for ruling was also filed with the Law Division of the BIR National Office that
the merger of Pru Life UK and Allstate qualifies as a tax-free merger under Section
40(C)(2) of the National Internal Revenue Code of 1997 (NIRC); that on September 27,
2001, a request was filed with RDO 34 that Allstate be required to file a short period
return only after the SEC has finally approved the merger and within a period of at least
90 days from the date of the SEC's approval of the merger; that the request was made
because Allstate was at that time still in the process of engaging its external auditor to
conduct an audit and prepare the Audited Financial Statements that would be the basis for
the Short Period Return and Allstate was still compiling the records and documents that
would be required by its external auditor; that RDO 34 referred the request to the
Regional Director for resolution and the latter denied the request for lack of legal basis,
holding that:
"xxx under Section 52(C) of the Tax Code of 1997, the dissolving or reorganizing
corporation shall, prior to the issuance by the Securities and Exchange Commission of the
Certificate of Dissolution or Reorganization, secure a certificate of Tax Clearance from
this office, which certificate shall be submitted to the Securities and Exchange
Commission. Hence it is imperative that a preliminary short period return be
filed/submitted to this office within thirty (30) days after the approval of the plan of
merger to enable us to issue a certificate of tax clearance which will be the basis of SEC's
approval of the subject merger."
that on October 22, 2001, the SEC finally approved the merger of Pru Life UK and
Allstate.
In connection therewith, you now appeal from the ruling of the Regional Director and
request a confirmatory opinion that the 30-day period for the filing of the Short Period
Return of Allstate, as the absorbed corporation in the merger, should be reckoned from
the SEC's approval of the merger, not from the approval by the Board of Directors and
stockholders of the Plan of Merger. You further request that Allstate be allowed an
extension of 60 days from the lapse of the initial 30 days from SEC's approval of the
merger within which to file the short period return.
In reply, please be informed that Section 52(C) of the Tax Code provides:
Return of Corporation Contemplating Dissolution or Reorganization. Every
corporation shall, within thirty (30) days after the adoption by the corporation of a
resolution or plan for its dissolution, or for the liquidation of the whole or any part of its
capital stock, including a corporation which has been notified of possible involuntary
dissolution by the Securities and Exchange Commission, or for its reorganization, render
a correct return to the Commissioner, verified under oath, setting forth the terms of such
resolution or plan and such other information as the Secretary of Finance, upon
recommendation of the Commissioner, shall, by rules and regulations, prescribe.
The dissolving or reorganizing corporation shall, prior to the issuance by the Securities
and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be
defined by rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, secure a certificate of tax clearance from the
Bureau of Internal Revenue which certificate shall be submitted to the Securities and
Exchange Commission.
Prior to the amendment of the Tax Code by Republic Act No. 8424 (Tax Reform Act of
1997), the filing of short period return was expressly required for corporations
contemplating dissolution but not for corporations contemplating reorganization such as
merger. Nevertheless, the requirement for the filing of the short period return has been
applied to absorbed corporations in cases of merger. Thus, the Supreme Court decided
that the short period return of an absorbed corporation should be filed within 30 days
after the cessation of its business or thirty days after the approval of the Articles or
Merger. [Bank of the Philippine Islands vs Commissioner of Internal Revenue, G.R. No.
144653, August 28, 200.] The Supreme Court affirmed the decision of the Court of tax
Appeals that based its pronouncement on Sec 78 of the then Tax Code and Sec. 244 of
Revenue Regulations No. 2, viz:
Sec. 78.
Return of corporation contemplating dissolution. Every corporation
shall, within thirty days after the adoption by the corporation of a resolution or plan for
the dissolution of the corporation or for the liquidation of the whole or any part of its
capital stock, render a correct return to the Commissioner of Internal Revenue, verified
under oath, setting forth the terms of such resolution or plan and such other information
as the Minister of Finance shall by regulations, prescribe.
Sec. 244.
Return of corporation contemplating dissolution or retiring from business.
All corporations, partnership, joint accounts and associations, contemplating
dissolution, shall within 30 days after the approval of such resolution authorizing their
dissolution, and within the same period after their retirement from business, file their
income tax return covering the profit earned or business done by them from the beginning
of the year up to the date of such dissolution or retirement and pay the corresponding
income tax due thereon upon demand by the Commissioner of Internal Revenue.
Although under the foregoing provisions, and reckoning point for the 30-day period is the
"adoption by the corporation of a resolution or plan" for the dissolution, the SupremeCourt still reckoned the 30-day period from the SEC's approval of the merger. This is
because the SEC's approval of the merger is the operative act that gives legal effect to the
merger and results to the cessation of the separate juridical personality of absorbed
corporation.
Therefore, this Office hereby rules that in a merger or consolidation, the phrase "within
thirty (30) days after the adoption by the corporation of a resolution or plan for its
dissolution" in Section 52(C) of the Tax Code of 1997 refers to the 30-day period from
the SEC's approval of the merger, this being the interpretation of the provision by the
Supreme Court in the above-mentioned case.
As regards the request for an additional time for Allstate to file the Short Period Return,
that is, within 60 days from the date of the SEC's approval of the merger, having found
your reasons to be meritorious, your request is hereby granted.
upon, investigation, it will be disclosed that the facts are different, then this ruling shall
Very truly yours,
RENE G. BAEZ
February 18, 2002
BIR NUMBERED RULING
000-00
009-2002
ABS-CBN BROADCASTING CORPORATION
ABS-CBN Broadcast Center, Sgt. E. A. Esguerra Avenue
Cor. Mother Ignacia St.,
Quezon City
Attention: KAI V. RODRIGUEZ
Assistant Vice-President
Gentlemen:
This refers to your letter dated December 19, 2001 requesting for clarification on the
proper implementation of the BIR regulations on Creditable Withholding Tax on Talent
Fees beginning January 1, 2002, and a confirmation of the following assumptions:
1.
On Default Withholding Tax Rate
The default rate to apply on January 1, 2002 is 10%. This default rate assumes
that the 20% withholding tax on talent fees will only be applied when the talent's gross
income has reached the threshold of P720,000 anytime during the year.
2.
On the filing of the Affidavit-Declaration of current year's gross income
It is clear in Revenue Regulations No. 12-2001 (RR 12-2001 for brevity) that the
mid-year deadline for filing of the affidavit-declaration is June 30. However, if the talent
reaches the P720,000 talent fee threshold anytime before June 30, the rate of 20% is
automatically applicable, with or without the filing of an affidavit-declaration.
3.
On Talents under Contracts with Talent Fees beyond P720,000 per year
For talents who are under contract with our Company and are expected to earn at
least P720,000 per year, should ABS-CBN Broadcasting Corporation (ABS-CBN for
brevity) automatically apply the 20% tax rate?
In the case of contract cancellation and the total talent fee of an individual for the
year does not reach P720,000, can ABS-CBN recompute talent fees and refund its
overpaid withholding taxes and adjust the last talent fee pay-out?
4.
Retroactive Adjustments of Taxes
When the individual's talent fee reaches P720,000, we understand that there will
be no retroactive adjustments to correct the total tax withheld. This means that the
application of 20% will be prospective, applicable only to succeeding talent fees to be
paid.
In reply, please be informed of the following opinions:
1. On Default Withholding Tax Rate
Section 2.57.2(A) of Revenue Regulations No. 2-98, as amended by RR 12-2001, is quite
clear in providing that:
"Section 2.57.2.
xxx
(A) Professional fees, talent fees, etc. for services rendered by individuals. - On the gross
professional, promotional and talent fees or any other form of remuneration for the
services of the following individuals xxx
(2) Professional entertainers, such as, but not limited to, actors and actresses, singers and
emcees - Twenty percent (20%), if professional entertainer's gross income for the current
year exceeds P720,000; and Ten percent (10%), if otherwise.
xxx
(4) All directors involved in movies, stage, radio, television and musical productions Twenty percent (20%), if the director's gross income for the current year exceeds
P720,000; and Ten percent (10%), if otherwise.
xxx
(8) Other recipients of talent fees-Twenty percent (20%), if the recipient's gross income
for the current year exceeds P720,000; and Ten percent (10%), if otherwise.
xxx"
Thus, this Office hereby confirms your assumption that the default rate to apply on
January 1, 2002 is 10%. This default rate assumes that the 20% withholding tax on talent
fees will only be applied when the talent's gross income has reached the threshold of
P720,000 anytime during the year. However, the said taxpayer should file the required
annual Affidavit-Declaration within the period discussed in no. 2, below. Failure to do so
within the required period discussed in no. 2, below would automatically subject him to
the twenty percent (20%) creditable withholding tax.
2. On the filing of the Affidavit-Declaration of current year's gross income
The penultimate paragraph of Section 2.57.2(A) of RR 2-98, as amended by RR 12-2001,
specifically states that:
"Furthermore, in order to determine the applicable tax rate (10% and 20%) to be
applied/withheld by the withholding agent, every professional entertainer, professional
athlete, director involved in movies, stage, radio, television and musical productions and
other recipients of talent fees shall annually disclose his gross income for the current year
to the Bureau of Internal Revenue (BIR), by submitting a notarized sworn declaration
duly stamped received by the BIR (Withholding Tax Division of the National Office).
The disclosure should be filed on June 30 of each year or within fifteen (15) days after
the end of the month the talent's income reaches P720,000, whichever comes earlier. In
case his total gross income is less than P720,000 as of June 30, he/she shall submit a
second disclosure within fifteen (15) days after the end of the month that his/her gross
income for the current year to date reaches P720,000. The initial disclosure after the
effectivity of these Regulations shall be filed on or before September 30, 2001 or within
fifteen (15) days after the effectivity of these Regulations, whichever comes later. In case
of failure to submit the annual declaration/disclosure to the BIR, the payor shall withhold
the tax at the rate of 20%.
xxx"
Thus, should the talent fees for the current year reach P720,000 before the June 30
deadline, the taxpayer should file within fifteen (15) days after the end of the month
his/her income reaches P720,000 or June 30, whichever comes earlier, the affidavitdeclaration. In other cases, the taxpayer is required to file the annual affidavit-declaration
on June 30. Should the talent fees or gross income for the current year reach P720,000
only after June 30, thus after the taxpayer has filed his/her June 30 affidavit-declaration,
the taxpayer should file another (second) affidavit-declaration within fifteen (15) days
after the end of the month that his/her gross income for the current year reaches
P720,000. To illustrate:
a.
If taxpayer A earns P720,000 by March 5, he/she should file the affidavitdeclaration on or before the 15th of April.
b.
If taxpayer B earns P720,000 by June 14, he/she should file the affidavitdeclaration on June 30.
c.
If taxpayer C earns less than P720,000 by June 30, he/she should file the affidavitdeclaration on June 30.
d.
If taxpayer D earns less than P720,000 as of June 30 as reflected in his/her June
30 affidavit-declaration, but thereafter and within the current year, reaches the threshold
of P720,000 on September 5, he/she should file a second affidavit-declaration on or
before the 15th of October.
It should be emphasized, further, that should the taxpayer fail to file the required
affidavit-declaration within the prescribed deadlines, and the payor knows as a fact that
the taxpayer has already received P720,000 or more as of that date (e.g., the payor has
itself paid said amount to the taxpayer), the taxpayer would automatically be subjected to
the twenty percent (20%) creditable withholding tax.
3.
On Talents under Contracts with Talent Fees beyond P720,000 per year
For talents who are under contract with you and who are expected to earn at least
P720,000, the 20% creditable withholding tax rate should not be automatically applied. It
is only when the talents actually earned/reached the P720,000 threshold that you should
apply the 20% creditable withholding tax rate.
Thus, the situation you presented regarding contract cancellation and refund of overpaid
withholding tax is not relevant since it is only when the talent's income has reached
P720,000 that you should apply the 20% creditable withholding tax rate.
4.
On the Retroactive Adjustments of Taxes
The application of the 20% creditable withholding tax rate on the individual's talent fee is
prospective. Under Section 2.57.4 of RR 2-98, as amended by RR 12-2001, the time of
withholding arises at the time an income payment is paid or payable, or the income
payment is accrued or recorded as an expense or asset, whichever is applicable, in the
payor's books, whichever comes first. Thus, since the liability of the individual for
payment of the 20% creditable withholding tax rate arises only when his income reaches
P720,000, it is only on the succeeding talent fees that the withholding agent should
withhold the 20% tax. There is, thus, no retroactive adjustment of the application of the
20% creditable withholding tax rate.
Please note that creditable withholding taxes are taxes withheld on certain income
payment intended to approximate the actual amount of tax to be paid on the income of the
payee. The payee is still required to file an income tax return, as prescribed in Sections 51
and 52 of the Tax Code of 1997, in order to report the income and make the necessary
adjustments. (Section 2.57 (B), RR 2-98).
We hope that the foregoing has been helpful.
Very truly yours,
RENE G. BAEZ

February 14, 2002
BIR NUMBERED RULING
Section 204 (A)(2)

000-00
007-2002
Ms. Teresita Santos, et al.
c/o Ms. Potenciana Jabson
30 R. Jabson St., Brgy. Malinao
Pasig City
Gentlemen:
This refers to your letter dated July 15, 1997 requesting for the waiver of the surcharge,
interest and compromise penalty due to non-payment of Documentary Stamp Tax (DST)
and Capital Gains Tax (CGT) assessed and issued by BIR - Quezon City Office, by
reason of financial incapacity.
It is represented that you and other buyers, namely:
Name of Buyer
Assessment # DST (Basic) CGT (Basic) TCT# Area
Teresita Santos
11-176-96
P 1,240.62
P 5,334.34
PT-91591
45
Azucena Sunga
11-178-96
1,225.00
5,238.03
PT-91591
44
Alicia Basilio 11-143-96
1,121.87
4,753.99
PT-91591
39
Francisco Dizon
11-177-96
1,300.00
5,623.30
PT-91591
48
Josenido Ondevilla 11-469-96
681.25
3,504.29
PT-91591
26
Virginia Tiemsin
11-170-96
2,350.00
9,476.05
PT-91591
88
Milagros de Villa Octera
11-145-96
1,256.25
5,427.79
PT-91591
46
Brenda Petras 11-172-96
1,256.25
5,430.66
PT-91591
46
Rogelia Felipe 11-173-96
1,240.62
5,334.34
PT-91591
45
Reynaldo Bernate
11-107-96
1,150.00
4,849.00
PT-91591
40
Erlinda Robles11-175-96
1,262.50
5,430.66
PT-91591
46
Jesus Briones 11-168-96

1,300.00
5,623.30
PT-91591
48
Ignacio Tabenas
11-171-96
1,450.00
6,393.85
PT-91591
56
were proven to be urban peasants and originally possessors in bad faith of various parcels
of land owned by Potenciana Jabson as per actual investigation and ocular inspection
made by our Regional Office, Quezon City; that in exchange for the easy terms afforded
to you by the landowner, you agreed to shoulder all transfer taxes required by law; and
that in keeping with the said agreement between you and the landowner, you are
requesting this Office to allow you to settle your liabilities by way of paying only the
basic tax due (DST and CGT), taking into consideration your financial status.
In reply, please be informed that Section 2 of Revenue Regulations No. 13-85
implementing then Section 21(b) (now Section 24(D)(1) of the Tax Code of 1997)
provides that the person liable to pay the capital gains tax is the seller or the person who
is presumed to have realized an income or gain from the transaction. This Office
recognizes the validity of the agreement between the seller and the buyers whereby the
latter assumed the payment of all transfer taxes as having the force of law between the
parties. However, Section 204(A)(2) of the Tax Code of 1997 is for the benefit of the
person liable under the law to pay the tax. Under the law, it is the seller who is liable to
pay the capital gains tax. It appears that the financial position of the seller does not
demonstrate a clear inability to pay the assessed tax. Accordingly, there is no basis for
compromise insofar as the seller is concerned. To rule otherwise would provide an
opportunity for circumventing the law.
In view of the foregoing, we regret to inform you that your request is hereby denied for
lack of legal basis.
Very truly yours,
RENE G. BAEZ
January 29, 2002
BIR NUMBERED RULING
RA 7227
RA 6395
BR #098A-98;
8-99; DA-090-01
006-2002
National Power Corporation
Agham Road, Diliman Quezon City
Attention: Mr. Nonito R. Bernardo, Jr.
Vice President for Finance
Gentlemen:
This refers to your letter dated January 8, 2001 requesting for a ruling on the proposed
buy-out by the National Power Corporation (NPC) of a power station of Enron Power
Development Corp. ("Enron").
It is represented that the NPC was established in 1936 under Commonwealth Act (CA)
No. 120 to primarily be responsible for the development of power grids and the
construction of generating facilities for the whole country; that in the early 1990s, in
response to the severe power shortage that threatened to cripple the Philippine economy
during that time and financial constraints facing NPC from directly constructing
additional power plants, NPC entered into various project agreements with private sector
companies for the construction and/or operation of power plants in the country; that
among the project agreements that NPC entered into in this regard is a Fast-Track Build,
Operate and Transfer Project ("BOT") Agreement with Enron dated January 7, 1993,
which provided for the construction by the latter of a bunker fuel-fired diesel engine
generator power station (Facility) in Subic, Zambales and the purchase of electricity
generated therefrom by NPC; that for the ownership and management of this power plant,
Enron established the Subic Power Corporation (SPC) arid registered it on May 4, 1993
with Subic Bay Metropolitan Authority ("SBMA") as a Subic Bay Freeport Enterprise;
that as SBMA-registered entity, SPC was granted all benefits under Republic Act (RA)
No. 7227 otherwise known as the "Bases Conversion and Development Act of 1992" and
its implementing rules and regulations; that in accordance thereto, It is subject to the 5%
special tax on gross income in lieu of all taxes (BIR Ruling No. 098A-98 dated June 29,
1998); that under Republic Act No. 9136, otherwise known as the "Electric Power
Industry Reform Act of 2001", the legislature authorized, among others, the privatization
of the assets and liabilities of" NPC and established Power Sector Assets and Liabilities
Management (PSALM) to manage such privatization on behalf of the Government of the
Philippines; that in this regard, NPC and Enron have been negotiating the possible buy
out of NPC of the Subic plant with the end view of : (a) substantially reducing the
Capacity Fees and O&M Fees paid by NPC to Enron; (b) enabling NPC to immediately
privatize, and derive material value from the Power Station; and (c) allowing Enron and
its affiliates to liquefy the value of its assets and consolidate their interests ("Buy-out
Transactions"); and that under the proposed agreements, Enron agrees to transfer to NPC
and/or PSALM the power plant in exchange for a lump sum cash payment.
This ruling makes reference purely to the tax consequences of the transaction, and
assumes that all approvals required for the validity of the transaction have or will be
secured at the time of transfer.
In reply, please be informed that pursuant to Section 12(c) of R.A. No. 7227, SBF
registered enterprises shall be exempt from all national and local taxes in lieu of paying
the preferential tax of five percent (5%) of the gross income earned. Section 3(o) of
Revenue Regulations No. 1-95, as amended by Revenue Regulations No. 12-97 provides
that "gross income" refers to gross sales or gross revenues derived from the registered
business activity within the ECOZONE, net of sales discounts, sales returns and
allowances and minus cost of sales, cost of production or direct costs of services but
before any deduction for selling and administrative expenses or incidental losses during a
given taxable period.
Such being the case, the gross income earned on the sale by SPC of its power plant
located within the Subic Freeport Zone is subject to the 5% preferential tax rate based on
the gross selling price or fair market value of the property as determined under Sec. 6(E)
of the Tax Code of 1997, whichever is higher, minus the depreciated cost of the SPC
power plants as of the date of sale.
Furthermore, as a duly registered SBF enterprise, SPC is exempt from the value added
tax on the sale of its power plant located within the Freeport Zone. (Section 109(q) of the
Tax Code)
Moreover, since SPC is subject to the 5% preferential tax in lieu of all taxes, it is also
exempt from payment of the documentary stamp tax (DST) on the transfer of its power
plant to NPC, subject to the proviso of Section 173 of the Tax Code of 1977 that when
one party to the transaction enjoys exemption from DST, the other party thereto who is
not exempt shall be the one directly liable for the tax. Considering, however, that NPC
enjoys exemption from all direct taxes, including DST, under Section 13 of R.A. No.
6395, as amended by P.D. No. 938, no DST maybe collected from it. Accordingly, as both
parties to the buy-out transactions enjoy exemptions from DST, no DST is payable on the
transfer of SPC power plants to NPC.
upon investigation, it shall be disclosed that the facts are different, then this ruling shall
Very truly yours,
RENE G. BANEZ
January 11, 2002
BIR NUMBERED RULING
121
000-00
005-2002
Centennial Bank
G/F Prestige Tower, Emerald Avenue Ortigas Center, Pasig City
Attention: Mr. Eduardo C. Visperas
President and CEO
Gentlemen:
This refers to your letters dated March 1, 2000 and March 9, 2000 requesting in effect for
a ruling on the applicability of gross receipts tax (GRT) to your bank under Section 121
of the Tax Code of 1997 in relation to Section 17 of Republic Act (R.A.) No. 7906.
It is represented that Centennial Bank is a savings bank; that it started banking operations
on February 18, 1998; that it was organized under Republic Act No. 7906, otherwise
known as the Thrift Bank Act of 1995; and that it is owned by the three big financial
institutions of the Armed Forces of the Philippines, namely: the Armed Forces and Police
Mutual Benefit Association, Inc. (AFPMBAI), the Aimed Forces and Police Savings and
Loan Association, Inc. (AFPSLAI), and the Armed Forces and Police Retirements and
Separation Benefit System (AFPRSBS).
In reply, please be informed that Section 7 of R.A. No. 8424 provides that the provision
of Section 17 of R.A. No. 7906 shall continue to be in force and effect only until
December 31, 1999. Accordingly, effective January 1, 2000, all thrift banks, whether in
operation as of that date or thereafter, shall no longer enjoy tax exemption as provided
under Section 17 of R.A. No. 7906, thereby subjecting all thrift banks to taxes, fees and
charges in the same manner and at the same rate as banks and other financial
intermediaries.
In view of the foregoing, this Office is of the opinion and so holds that Centennial Bank
is subject to the gross receipts tax imposed under Section 121 of the Tax Code of 1997
effective January 1, 2000.
Very truly yours,
RENE G. BAEZ
January 11, 2002

BIR NUMBERED RULING
39
000-00
004-2002
PANGASIWAAN SA PATALAAN NG LUPAIN
(Land Registration Authority)
East Avenue cor. NIA Road
Quezon City
Attention: Mr. Rhandolfo B. Amansec
Chief
Inspection & Investigation Division
Gentlemen:
This refers to your letter dated February 16, 1999 relative to the investigation being
conducted by your Office on the alleged anomalous/fraudulent issuance of Certificate
Authorizing Registration (CAR) No. 1073134 dated April 28, 1997 issued in the name of
Eugenio C. Delica by the Las Pias Muntinlupa Revenue District Office which was
presented to the Register of Deeds of Makati City; that as per certification of said office,
the said CAR was based on the Contract to Sell dated April 16, 1985 presented to the
Examiner and not on the Zonal/Assessed Value nor the Fair Market Value of the
properties at the time the taxes due were paid.
Based on the foregoing, you now request for any circular/memorandum issued by this
Office or any law that governs the issuance of a CAR and if it was proper and legal for
the Examiner to base the CAR on the amount stated in the Contract to Sell which is much
lower than the prevailing market value of the properties or the assessed/zonal value of the
properties involved.
In reply, please be informed that pursuant to then Section 34(h) of the National Internal
Revenue Code as amended by Batas Pambansa Blg. 47, net capital gains from the sale, or
other disposition of real property by citizens of the Philippines or resident alien
individual shall be subject to the final income tax rates prescribed as follows:
NET CAPITAL GAINS
Rates
On the first 100,000 or less
10%
On any amount over P100,000
20%
such tax shall be in lieu of the tax imposed under Section 21 of the same Code Pursuant
to Section 4 of Revenue Regulations No. 8-79 implementing Section 34(h) of the
National Internal Revenue Code as amended by Batas Pambansa Blg. 47, the basis for
determining net capital gains tax are:
"(i)
The schedular final capital gains tax prescribed in Section 34(h) of the Tax Code
shall be based on net capital gains. For purposes of these Regulations the term "net
capital gains" means the capital-gain from the sale or other disposition of real property
which is equal to the excess of the amount realized over the adjusted basis of the
property, undiminished by any capital loss sustained from other capital asset transaction.
"(ii) The amount realized from the sale or other disposition of real property shall be
any money received plus the fair market value of the property (other than money)
received, reduced by commissions and other selling expenses. Interest included in
installment payments shall not form part of the amount realized but shall be treated as
ordinary income under Section 29 and taxable under Section 21 of the Tax Code.
"(iii) The basis for determining the gain shall be the basis as determined in accordance
with Section 35 of the National Internal Revenue Code and adjusted for additional capital
investment, depreciation, amortization, depletion and other recovery of capital by the
taxpayer.
"(iv) The entire amount of the capital gain shall be subject to the final schedular tax
without taking into account the period or duration during which the real property was
held by the seller from the date it was acquired up to the date of its sale or disposition."
On the other hand, installment sales of real property is governed by the following:
"(i) Election to pay the capital gains tax in installment. - An individual who sells real
property under deferred payment sale and is otherwise qualified to report the gains on
installment basis may elect to pay the capital gains tax in accordance with the formula
prescribed in subparagraph (b)(2) of this Section. For purposes of these Regulations an
individual is otherwise qualified to account for his gain on installment basis if the initial
payment does not exceed 25% of the selling price. The term "initial payment" means the
payment which the seller receives before or upon execution of the instrument of sale and
payments which he expects or is scheduled to receive in cash or property (other than
evidence of indebtedness of the purchaser) during the taxable year of sale or disposition."
Furthermore, Revenue Regulations No. 9-84 amending Sections 5(c) and 7(a) of
Revenue Regulations No. 8-79 then prevailing at the time of the transaction provides that
the seller or buyer or both may apply for issuance of a certification by the Commissioner
or by the Revenue District Officer (hereinafter referred to as the "Authorized revenue
officer") having jurisdiction over the place where the real property sold or disposed of is
located, for the following reasons:
"(1) The capital gains tax as declared in the return is fully paid.
"(2) Portions of the capital gains tax due or payable up to the time of certification are
actually paid in cases where the taxpayer elected to pay the tax in installment.
"(3) The capital gains tax is exempt under Section 35 of the National Internal Revenue
Code or under any other law.
"(4) The capital gains tax is not required to be paid because the (i)
the real property sold is used in the seller's trade or business
(ii)
the real property was held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business (e.g., the seller is engaged in the business of
buying and selling real property)
(iii)
the real property was offered for rent
"(5) The seller elects to report the capital gain under Section 21, in relation to
paragraph (a), (b), (c) and (d) of Section 34 of the Tax Code, where the property was sold
to the government or any of its political subdivisions or agencies or to a governmentowned or controlled corporation.
"(6) The capital asset transaction resulted in a loss.''
Please note of the absence of the word zonal value. Such is the case then since
zonal value was not one of the factors in the determination of capital gains tax. The
Technical Committee which was created to study and prepare the zonal schedules of fair
market values of real properties to be used as basis for the computations of any internal
revenue tax was created only under Ministry Order No. 20-86 dated September 5, 1986
after the execution of the Contract to Sell on April 16, 1985.
Very truly yours,
RENE G. BAEZ
January 11, 2002
BIR NUMBERED RULING
RR 2-98
000-00
003-2002
Pambansang Korporasyon Sa Elektrisidad (National Power Corporation)
Visayas Regional Center
Cebu City
Attention: Ricarte M. Polloso
Finance Manager
Gentlemen:
This refers to your letter dated November 28, 2000 requesting for authority to offset the
withholding taxes deducted from the monetization of leave credits of your employees for
the years 1999 and 2000 against future tax remittances.
It is represented that under Executive Order No. 291 dated September 27, 2000, President
Joseph Estrada confirmed that the monetization of leave credits shall continue to be
exempted from income tax and that the off-setting of the withholding taxes deducted
from the monetization of leave credits for the years 1999 and 2000 against future tax
remittances is the fastest and most convenient way to relieve the BIR of the
administrative costs involved in the computation and issuance of tax credits to the
countless government employees who have availed of the benefit of leave monetization.
It can be gleaned from your letter that it is your position that the abrogation of Section
2.78.1(A)(7) of Revenue Regulations 2-98 by Section 2 of Executive Order 291 renders
erroneous the withholding of the income tax on your employees' monetized leave credits
entitling said employees to the refund thereof under Section 229 of the NIRC of 1997.
Thus, you are asking for authority to offset the withholding taxes deducted from the
monetization of leave credits of your employees for the calendar years 1999 to 2000
against future tax remittances.
In reply, please be informed that after consideration of the facts and the applicable law
thereto, we cannot grant you the authority to off-set the withholding taxes deducted from
the monetization of leave credits of your employees for the calendar years 1999 to 2000
against future tax remittances.
Granting arguendo that the collection of taxes under Section 2.78.1(A)(7) of Revenue
Regulations 2-98 was erroneous, still the authority sought cannot be granted. It is wellsettled that a taxpayer may not offset taxes due from the claims that he may have against
the government. This was the ruling of the Supreme Court in the case of PHILEX
MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents
[G.R. No. 125704. August 28, 1998.], viz.:
"In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. We find no
cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we
categorically held that taxes cannot be subject to set-off or compensation, thus:
"We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a tax
on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the
government."
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc.
v. Commission on Audit, 20 which reiterated that:
"... a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as allowed to be set-off."
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines. Inc., wherein we ruled that a pending refund may be set off against an
existing tax liability even though the refund has not yet been approved by the
Commissioner, is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which the
Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex."
Accordingly, we regret to inform you that your aforesaid request is denied for lack of
legal basis.
Very truly yours,
RENE G. BAEZ

January 12, 2002
BIR NUMBERED RULING
000-00
002-2002
Development Bank of the Philippines
Senator Gil Puyat Avenue corner Makati Avenue
Makati City
Attention:
Remedios L. Macalincag
President and Chief Executive Officer

Gentlemen:
This refers to your letter to Her Excellency Gloria Macapagal-Arroyo, dated August 10,
2001, reiterating your request for the issuance of an appropriate directive clarifying the
retroactivity of the non-taxability of monetized leave credits of government officials and
employees under Executive Order No. 291 dated September 27, 2000.
In reply, please be informed that it is the position of this Office that Executive Order No.
291 dated September 27, 2000 shall not be given retroactive application.
In the case of Commissioner of Internal Revenue vs. Republic Cement Corporation, et.
al., G.R. No. 35668 August 10, 1983, the Supreme Court, citing the case of Cebu
Portland Cement Co. vs. Collector of Internal Revenue G.R. No. L-35668-72, October
29, 1968, L-35683, ruled:
"Indeed, like other statutes, tax laws operate prospectively, whether they enact, amend or
repeal, unless, as aforesaid, the purpose of the Legislature to give retrospective effect is
expressly declared or may clearly be implied from the language used. x x x
x x x It was enough for the Court to say in effect that even assuming Republic Act 1299
had re-classified cement as a mineral product, the reclassification could not be given
retrospective application (so as to justify the refund of sales taxes paid before Republic
Act 1299 was adopted) because laws operate prospectively only, unless the legislative
intent to the contrary is manifest, which was not so in the case of Republic Act 1266.
[The situation would have been different if the. Court instead had ruled in favor of
refund, in which case it would have been absolutely necessary (1) to make an
unconditional ruling that Republic Act 1299 re-classified cement as a mineral product
(not subject to sales tax), and (2) to declare the law retroactive, as a basis for granting
refund of sales taxes paid before Republic Act 1299.]"
Section 2 of Executive Order 291 does not provide that it be given retroactive
application, to wit:
"SEC. 2. ABROGATION OF BIR RULING ON MONETIZED LEAVE CREDITS.
Hence, pursuant to Section 17, Article VII of the Constitution, I hereby abrogate all
previous rulings, including Section 2.78.1 (A) (7), p. 27 of Revenue Regulation No. 2-98
dated April 17, 1998 issued by the Bureau of Internal Revenue which subjected the
monetization of leave credits to income tax, which I have noted to be inconsistent with
the provision of Republic Act (R.A.) No. 8424, the "Tax Reform Act of 1997" as well as
the intention on the grant of such benefits."
Accordingly, we regret to inform you that your request is denied.
Very truly yours,

RENE G. BAEZ
January 09, 2002
BIR NUMBERED RULING
RR 6-2001
000-00
001-2002
Social Security System
East Avenue, Diliman
Quezon City
Attention: Ms. Amelita C. Dela Torre
Asst. Vice President
General Accounting Department
Gentlemen:
This refers to your letter dated September 4, 2001, requesting that the due date for filing
various tax returns and payment of taxes due thereon every twenty five (25) days after the
end of each month be retained instead of ten (10) days as provided for under Revenue
Regulations No. 6-2001 due to the following reasons:
1. SSS, as a government withholding agent, has voluminous transactions which will
have to be encoded in the computer in order so generate remittance lists.
2. SSS remits various types of taxes (compensation, VAT, expanded, percentage and
final) and it entails time to prepare several tax returns.
3. We have 10 hub branches nationwide and considerable time is needed for the
branches to prepare and transmit their remittance lists thru mails and for Main Office to
consolidate the data and prepare a consolidated tax return
4. In the branches, only one employee is responsible for activities #2 and 3. He is also in
charge of the preparation of reports to support various remittances to government and
private agencies which all fall due 10 days after the end of the month.
In reply, please be informed that except for those who availed of the electronic filing and
payment (EFPS), Revenue Regulations No. 6-2001 does not provide for any other
exception to the required period of ten (10) days for filing of various tax returns and
payment of taxes due thereon. Accordingly, your request that the due date for the filing of
various tax returns and payment of taxes due thereon every twenty five (25) days after the
end of each month be retained cannot be granted for lack of legal basis.
Very truly yours,
By:
EDMUNDO P. GUEVARA
Deputy Commissioner
Legal & Inspection Group

BIR Ruling 2002

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November 14, 2002

BIR NUMBERED RULING

EMPLOYMENT BENEFITS LDC:

Copyright 2 0 0 4 ACCESSLAW, Inc.

R.A. Nos. 7459, 7227;

Attention: Mr. Rudy N. Lantano

finished invention products through wholesale or retail. In case of wholesale, the

Further, in support of the above representation, the following documents were

November 11, 2002

Active Realty Dev't Corp.

148 lots located at Calamba, Laguna

Ma. Theresa Commercial

"SECTION 189. Conveyances by Corporation to Owner of All the Capital. - A

Transfer by TA of its Loan Portfolio to TMBC is not subject to DST.

When the amount secured does not exceed P5,000.00, P20.00;

"Where a corporation distributes all of its assets in complete liquidation or dissolution,

R.A. # 7459 Sections 148 & 131, NIRC; RR 19-93

Section 33, NIRC

Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR NUMBERED RULING

Copyright 2 0 0 4 ACCESSLAW, Inc.

implied exemption is generally reinforced by express provisions in the constitution or

RR 2-98; 79; RR 3-2002

employee pursuant to Section 79(C)(2) of the Tax Code of 1997 as implemented by

BIR Ruling No. 024-2002

General administration and planning;

Business planning and coordination:

Sourcing/procurement of raw materials and components;

Corporate finance and advisory services;

Marketing control and sales promotion;

Training and personnel management;

Research and development services, and product development;

Technical support and maintenance;

Data processing and communication; and Business development,

merely as a means of promoting the health, goodwill, contentment, or efficiency of his

Very truly yours,

Very truly yours,

32(B)(7)(b); 196; 198

A. Transfer of assets and liabilities of NPC - Phase I

taxes/duties due, which shall be automatically considered as both revenue and

disposed or privatized, is deemed included in is governmental function. Hence, income

In the meantime, tinder Section 70 33 of the EPIRA, as implemented by Section 2 of

"The President of the Philippines, by himself, or through his duly authorized

Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR Ruling No. 019-2002

aggregate amount of P653,962.79 pursuant to Section 2.78(A)(7) of Revenue Regulations

Sections 24(B)(1), 27(D)(1), 28(A)(7) 22(Y), 180

Attn.: Atty. Carlos G. Baniqued & Terence Conrad H. Bello

Copyright 2 0 0 4 ACCESSLAW, Inc.

The Outstation Allowance, therefore, is clearly required by the nature of or necessary to

ATTY. JUANITO L. SANTOS

BIR Ruling No. 011-2002

corporate secretary of Grand Cement Manufacturing Corporation of its authorized

BIR NUMBERED RULING

Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR Ruling No. 007-2002

Section 204 (A)(2)

Jesus Briones 11-168-96

January 11, 2002

Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR Ruling No. 002-2002

President and Chief Executive Officer

Very truly yours,

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