Tax Bulletin

February 2010

Highlights
BIR Rulings
After payment of all liabilities to employees or their beneficiaries, the employer may recover any excess trust funds under a retirement plan. However, the excess that is recovered must be declared by the employer for income tax purposes in the year of receipt. (Page 4) The sale to the original borrower of a non-performing loan (NPL) that is acquired by a special purpose vehicle (SPV) from a financial institution (FI) is exempt from documentary stamp tax (DST), capital gains tax (CGT), creditable withholding tax (CWT), and value-added tax (VAT) pursuant to the SPV Act of 2002, as amended. (Page 4) Condonation of indebtedness is not subject to corporate income, including Minimum Corporate Income Tax (MCIT), if the debtor remains in a capital deficiency position before and after the condonation. The condonation is likewise not subject to gift tax since there is no donative intent on the part of the creditors but is solely for business considerations. (Page 4) Services rendered to foreign principals by companies providing deployment of Filipino seafarers, the fees for which are paid in acceptable foreign currency accounted for in accordance with Bangko Sentral ng Pilipinas (BSP) rules and regulations, qualify as VAT zero-rated transactions. (Page 5) Sale of services by a domestic corporation to a non-resident foreign corporation is subject to 0% VAT, provided the non-resident foreign corporation is engaged in business conducted outside the Philippines and the consideration is paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations. (Page 6)
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BIR Issuances
Revenue Memorandum Order (RMO) No. 6-2010 prescribes the policies and guidelines on the stamping of income tax returns (ITRs) and attached audited financial statements (FS), and the number of copies of ITRs to be submitted and filed with the BIR. (Page 6) RMO No. 10-2010 prescribes the policies and guidelines on the monitoring, processing and maintenance of a database of estate tax cases. (Page 7) RMO No. 11-2010 prescribes the policies and guidelines for monitoring, reviewing and determining the tax consequences of Big-Ticket Items (BTI). (Page 9) RMO No. 13-2010 amends RMO No. 6-2010 on the stamping of ITRs and Audited FS. (Page 10) RMO No. 16-2010 prescribes the policies and guidelines in determining the VAT liabilities of motels and other similar establishments. (Page 10) RMO No. 40-2009 prescribes the guidelines and procedures in the observation of inventory-taking of goods for purposes of determining the 2009 ending inventory. (Page 11)

BOC Issuances
Customs Memorandum Order (CMO) No. 4-2010 implements the Fuel Marking Program of the Department of Finance (DOF) under Department Order No. 43-09 dated December 21, 2009. (Page 13) CMO No. 5-2010 prescribes a 3% duty rate on crude and refined petroleum products, pursuant to Executive Order (EO) No. 691 effective February 1, 2010. (Page 18) CMO No. 7-2010 re-schedules to March 23, 2010 the implementation of the Import Assessment System (IAS) of the electronic to mobile (e2m) Customs System at the NAIA Collection District, for Bill to Shipper (BTS)/Duty Delivery Paid (DDP) shipments of the Philippine Chamber of Air Express Operators (PCAEO). (Page 18)

PEZA Issuance
Memorandum Circular No. 2010-006 circularizes Revenue Regulations (RR) No. 1-2010 requiring all PEZA-registered enterprises to file their ITRs through the BIRs Electronic Filing and Payment System (EFPS). (Page 19)

BSP Issuances
Circular No. 679 amends Item a, Subsection X269.6 of the Manual of Regulations for Banks (MORB), covering the guidelines on the BSPs Rediscounting Facility. (Page 19)

Tax Bulletin

Circular No. 680 prescribes the rules and regulations for micro-agri loans. (Page 19) Circular No. 682 prescribes revised rules and regulations governing the organization, membership, establishment, administration, activities, supervision and regulation of Cooperative Banks, to implement the provisions of Chapter XII of Republic Act (RA) No. 9520, otherwise known as the Philippine Cooperative Code of 2008, which amended RA No. 6938 otherwise known as the Cooperative Code of the Philippines. (Page 20) Circular No. 683 prescribes the guidelines on the marketing, sale and servicing of micro-insurance products. (Page 22)

SEC Opinions
The articles of incorporation of a close corporation may provide for quorum and voting requirements in meetings of stockholders or directors, greater than those provided for in the Corporation Code, and may also provide for the classification of shares into common and founders shares, and grant founders shares a 1:10 voting rights ratio. (Page 24) The assignment of leasehold rights is not considered a sale of securities under the Securities Regulation Code (SRC). (Page 25) The business processing and collection center of a financing company will not itself be considered a financing company that is required to obtain a Certificate of Authority to Operate, provided it operates solely as a marketing and collecting agency and will not be releasing loans or extending credit to borrowers. (Page 26) If the 3-year liquidation period expires without a trustee or receiver being expressly designated by the corporation, the board of directors may be permitted to continue as trustees by legal implication, to complete the corporate liquidation. (Page 27) The revocation of a foreign corporations license to transact business in the Philippines shall not affect the validity of contracts entered into by said foreign corporation after the revocation. The only effect is that such foreign corporation cannot seek redress from the court to enforce such contracts. (Page 28) Under the control test, shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens, shall be considered of Philippine nationality. (Page 28) A Philippine corporation can elect foreign directors to the boards of its wholly-owned Philippine subsidiaries, provided the total number of such foreign nominee-directors in each board will not exceed 40% of the boards membership. (Page 29) To be exempt from income tax and VAT under Section 4(3), Article XIV of the 1987 Constitution, a non-stock, non-profit educational institution must prove with sufficient documents that the income for which exemption is sought is actually, directly and exclusively used for educational purposes. (Page 30)

BIR Rulings
BIR Ruling No. DA (C-236) 609-2009 dated October 16, 2009 After payment of all liabilities to employees or their beneficiaries, the employer may recover any excess trust funds under a retirement plan. However, the excess that is recovered must be declared by the employer for income tax purposes in the year of receipt. Facts: In line with its cost reduction program, P Co., a domestic corporation, terminated its Employees Retirement Plan and paid all its employees the benefits due them under the plan. Issue: After P Co. has paid off all charges and liabilities to its employees under the retirement plan, can it recover any excess funds? Ruling: Yes. Recovery by the employer of excess trust funds is permitted after the satisfaction of all liabilities to employees or their beneficiaries. Since P Co. has fully satisfied all liabilities to employees or their beneficiaries under the retirement plan, it may recover any excess funds under the plan. However, the excess that is recovered must be declared by the employer for income tax purposes in the year of receipt.

BIR Ruling No. DA (OSI-034) 617-2009 dated October 22, 2009 The sale to the original borrower of an NPL that is acquired by an SPV from an FI is exempt from DST, CGT, CWT and VAT pursuant to the SPV Act of 2002, as amended. Facts: O Co., a domestic corporation organized as an SPV under the SPV Act of 2002, purchased NPLs from an FI, which were covered by a Certificate of Eligibility (COE) issued by the BSP. O Co. is selling these NPLs to prospective buyers, one of which is M Co., a borrower in one of the NPLs being sold. Issue: Is the sale to M Co. of an NPL acquired by O Co. exempt from DST, CGT, CWT and VAT? Ruling: Yes. Under Section 15 of the SPV Act of 2002, as amended, and as implemented by Revenue Memorandum Circular (RMC) No. 44-2006, the transfer of an NPL covered by a COE from the SPV to a third party is exempt from DST, CGT, CWT and VAT.

BIR Ruling No. DA(C-244) 625-2009 dated October 27, 2009 Condonation of indebtedness is not subject to corporate income, including MCIT, if the debtor remains in a capital deficiency position before and after the condonation. The condonation is likewise not subject to gift tax since there is no donative intent on the part of the creditors but is solely for business considerations.
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Facts: B Co. is a domestic corporation listed on the Philippine Stock Exchange. B Co. incurred various debts consisting of notes, long-term commercial papers (LTCPs) and option shares under a put option with certain banks. B Co. defaulted on all its obligations. In order to settle its liabilities, B Co. offered to purchase the debt instruments from the holders of the notes, LTCPs and option shares, at 60% to 65% of the principal amount of the debt. In consideration of the negative
Tax Bulletin

financial condition of B Co., the creditors agreed to forego collecting the full amount of the loans and accepted B Co.s offer. The principal and interest condoned in favor of B Co. are reflected as gain on extinguishment and acquisition of debt. After the condonation, B Co. will still be in a capital deficit position. B Co. also guaranteed the obligations of its associate, Tel Co., to its shareholders. B Co. set up an allowance for impairment of losses on its investments and advances to Tel Co. By virtue of B Co.s guarantees and commitments to Tel Co., it recognized the indirect obligations as estimated liabilities from guarantees and commitments, for financial accounting purposes. B Co. did not derive any tax benefit arising from the estimated liabilities since it did not deduct the provision from its gross income for income tax purposes. The setup of the allowance for estimated liabilities was made exclusively for financial accounting purposes, not for tax purposes. Subsequently, B Co. purchased the shares of Tel Co. from the latters shareholders at a 35% discount on its redemption price. Thus, B Co. became both the creditor and debtor of the guarantee obligation, thereby extinguishing the obligation. Issues: 1. Is the condonation by the holders of the notes, LTCPs and option shares of at least 35% to 40% of the principal and interest due on the debt subject to corporate income, MCIT and donors tax? 2. Is the reversal of the estimated liabilities subject to income tax? Ruling: 1. No. The condonation by the holders of the notes, LTCPs and option shares of at least 35% to 40% of the principal and interest due on the debt is not subject to corporate income, including MCIT, if B Co. remains in a capital deficiency position before and after the condonation. The condonation is likewise not subject to gift tax since there is no donative intent on the part of the creditors but is prompted solely for business considerations. However, if after the condonation it is shown that B Co. derived income from the transaction, then the said amount shall be subject to corporate income tax. 2. No. The reversal of amounts booked and accrued as estimated liabilities on account of the guarantee commitments of B Co. will call for the application of the tax benefit doctrine. The tax benefit doctrine is a theory which requires the inclusion in gross income of amounts deducted in earlier taxable years but recovered in later years, but only to the extent that the earlier deductions resulted in an income tax benefit in the earlier year. Thus, the reversal by B Co. of the provision for estimated liabilities is not subject to income tax since B Co. did not deduct the estimated liabilities for income tax purposes, and said provision was made purely for financial accounting purposes and not for income tax purposes.

BIR Ruling No. DA (VAT-094) 629-2009 dated October 28, 2009 Services rendered to foreign principals by companies providing deployment of Filipino seafarers, the fees for which are paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations, qualify as VAT zerorated transactions. Facts: S Co. is a domestic corporation engaged in the enlistment, recruitment, placement and employment of Filipino professionals, skilled and unskilled workers for overseas work, as well as recruitment of seamen, for foreign clients/principals. The agency fees paid to S Co. are in foreign currency duly accounted for in accordance with BSP rules and regulations.
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Issue: Do the sales of services by S Co. to its foreign principals qualify as VAT zero-rated transactions? Ruling: Yes. The manning and crewing services that S Co. renders for its foreign clients may qualify as automatic VAT zero-rated transactions, if the said services are paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations. Failing that, the sale of said services will be subject to 12% VAT.

BIR Ruling No. DA (VAT-095) 634-2009 dated October 30, 2009 Sale of services by a domestic corporation to a non-resident foreign corporation is subject to 0% VAT, provided the non-resident foreign corporation is engaged in business conducted outside the Philippines and the consideration is paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations. Facts: P Co., a domestic corporation, is registered with the Board of Investments (BOI) as a new IT Export service firm on a pioneer basis, and was given an income tax holiday (ITH) incentive for 6 years from March 6, 2002 or actual start of its commercial operations, whichever is earlier. P Co.s sole client is E Co., a non-resident foreign company. Payments received by P Co. for services rendered to E Co. are accounted for in foreign currency pursuant to BSP rules and regulations. Issue: Are the payments received by P Co. from E Co. subject to 0% VAT? Ruling: Yes. Payments received by P Co. from E Co. are subject to 0% VAT, provided (a) E Co. is a non-resident entity engaged in business conducted outside the Philippines; and (b) the consideration is paid for in acceptable foreign currency and accounted for in accordance with BSP rules and regulations.

BIR Issuances
RMO No. 6-2010 prescribes the policies and guidelines on the stamping of ITRs and attached audited FS, and the number of copies of ITRs to be submitted and filed with the BIR. Revenue Memorandum Order No. 6-2010 dated January 19, 2010 RMO No. 6-2010 is issued to: 1. Facilitate the receipt of ITRs including their attached FS. 2. Avoid the time-consuming process of stamping all the pages of documents attached to the ITRs. 3. Maintain the number of copies of tax returns that shall be submitted at the number prescribed in the instructions in the tax returns, presently limited to 3 copies. 4. Improve taxpayer service. All concerned offices, including Authorized Agent Banks (AABs), shall receive the ITRs by stamping the official receiving seal or stamp of receipt of the internal revenue office where the returns are filed, on the space provided for on the 3 copies of the returns.

Tax Bulletin

Attachments to ITRs shall also be received in the same manner as above, except that the attached FS shall be stamped received only on the page of the Audit Certificate. Other pages of the FS and its attachments need not be stamped received. The taxpayer shall only accomplish and file 3 copies of tax returns with the AAB and/ or the BIR. Any tax return in excess of three shall not be received by the AAB and/or the BIR. RMO No. 6-2010 shall take effect immediately.

[Editors Note: See RMO No. 13-2010 below which amended RMO No. 6-2010.]

RMO No. 10-2010 prescribes the policies and guidelines on the monitoring, processing and maintenance of a database of estate tax cases.

Revenue Memorandum Order No. 10-2010 dated February 2, 2010 All RDOs shall conduct a proactive and close monitoring of potential estate tax cases by establishing linkages with, and/or accessing or securing records from the following: 1. 2. 3. 4. 5. 6. 7. 8. 9. Civil registers Hospitals Memorial parks Cemeteries Funeral parlors Crematoriums Judicial clerks of courts Obituaries Life insurance companies and other financial institutions

Information gathered shall be submitted to the Chief, Audit Information, Tax Exemption and Incentives Division (AITEID) for centralized data warehousing and other processing procedures. The Revenue District Officer shall send the Notification Letter to the following: 1. For decedents who have been ascertained as residents/registered taxpayers of the Revenue District Office (RDO) - Relative/contact person/residence of the decedent. 2. For decedents who are NOT residents or registered taxpayers of the RDO - The AITEID Chief will ascertain which RDO has jurisdiction over these cases, and transmit the same to these RDOs for compliance with the guidelines in RMO 112010. 3. The Notification Letter shall advise the decedents relative/administrator of the requirements and due dates for filing of the notice of death, estate tax return and payment of estate taxes. 4. If the relative/contact person fails to file the estate tax return and pay the estate tax on the due date, the Revenue District Officer shall undertake necessary actions to determine the estate tax obligation of the deceased/decedent and to protect the interest of the BIR, such as: Perform background investigation to determine the properties of the estate.
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Issue a Letter of Authority to investigate the case. Issue a subpoena duces tecum to compel the relative/contact person to submit information. Issue notices to entities that may be in possession of the properties of the decedent, ordering them not to allow the dissipation or withdrawal of the properties without prior BIR approval. Perform all other activities deemed warranted.

The National Investigation Division (NID) shall track the obituaries in newspapers of general circulation and shall: 1. Prepare a list of the names of the decedents listed in the obituaries and complete the information prescribed above. 2. Determine who among the decedents on the list are High potential cases, which are anticipated to have substantial properties and a potential for substantial estate tax payments. 3. Undertake procedures that are the same as those of the Revenue District Officers above. 4. Immediately notify the RDO where the decedent is a resident or is registered about the High potential cases, so that there will be no duplication of efforts. 5. Submit complete compiled lists of decedents (showing both High potential and other cases) to the Chief, AITEID every week. The Chief, AITEID shall ascertain which RDO has jurisdiction over the cases not considered High potential, and transmit the same to these RDOs within 5 days from receipt of the NID.

The BIR National Office shall designate responsibilities as follows: 1. The Deputy Commissioners for the Information Systems Group and the Operations Group - to coordinate in the establishment of the data warehouse for potential estate tax cases, and oversee access to this by concerned BIR offices for use in the issuance of CGT clearances and other tax monitoring and collection purposes. 2. The Deputy Commissioners for the Legal and Enforcement Group and the Operations Group - to coordinate the: Drafting of guidelines and policies for installment payment of estate tax cases and abatement of penalties of long-unsettled estate tax obligations; Formulation of a Revenue Audit Memorandum Order (RAMO) to prescribe the procedures for the audit of estate tax cases; Drafting of other issuances to: a. Prescribe the procedures for the issuance of the certificate authorizing the transfer of properties of the decedent. b. Ensure that properties of the decedent are not withdrawn without payment of the estate tax or approval from the BIR. c. Curb instances of taxpayers misrepresenting the sale of real properties of the decedents even after the death of said decedents. Drafting of a Memorandum of Agreement, which provides for enhancement in the administration of the estate tax system, that can be signed with such institutions as the Land Registration Authority, the Bankers Association of the Philippines, the Philippine Life Insurance Association, the Supreme Court and other organizations.

Tax Bulletin

3. The Assistant Commissioner for Taxpayer Assistance Service shall be responsible for conducting a Public Awareness Campaign for Project R.I.P. RMO No. 10-2010 shall take effect immediately.

RMO No. 11-2010 prescribes the policies and guidelines for monitoring, reviewing and determining the tax consequences of BTI.

Revenue Memorandum Order No. 11-2010 dated February 2, 2010 A transaction is considered a Big-Ticket Item (BTI) if the amount involved exceeds P200,000,000 on a single and unrelated event or transaction. This threshold amount shall not take into account the total amount of several unrelated and multiple events or transactions. A transaction is also a BTI if it involves a request for ruling filed with the BIR where the amount of the transaction is over P1,000,000. The following officers shall be responsible for the monitoring of BTI: 1. Large Taxpayers Service (LTS) Regular 2. LTS Excise 3. Enforcement Service Information on the occurrence of BTI can be sourced from media accounts (newspapers, television, etc.), websites of taxpayers, disclosure to and/or action from the SEC, BSP, BOI and other government agencies, and other sources. The responsible office must communicate with the taxpayer/s involved in the BTI within 5 working days from the date of the transaction, or from the date of discovery of the transaction. The responsible office shall be as follows: 1. If the transacting parties are a Large Taxpayer (LT) and a non-LT the LTS office (either Regular or Excise) having jurisdiction over the LT. 2. If the transacting parties are both non-LT the Enforcement Service. 3. If the transacting parties are both LT the Commissioner of Internal Revenue (CIR) will determine which LTS office will issue the communication. The Assistant Commissioner of the responsible office shall send an Access to Records letter to the taxpayer. The submission of the requested documents by the taxpayer within the prescribed deadline shall be strictly enforced. Failure of the taxpayer to comply will result in the institution of available sanctions, including the issuance of subpoena duces tecum. Upon receipt of the requested documents from the taxpayer, the responsible office shall evaluate the tax consequences of the transaction to ascertain whether the taxes, if any, on the BTI have been paid correctly, or whether there are issues on the BTI, including any aggressive tax planning or avoidance done in the structuring or documentation of the BTI. A report on the results of the evaluation of the transaction, together with the responsible officers recommendations, must be submitted to the CIR within 15 working days from receipt of the documents pertaining to the transaction. In the event the recommendation is for a more thorough verification in the form or an audit/ investigation, the appropriate Letter of Authority for a short audit shall be issued by the CIR.

For requests for ruling involving transactions exceeding P1,000,000, the BIR legal office receiving the copy of the request for ruling shall furnish a copy to the BIR office having jurisdiction over the taxpayer who filed the request. Said BIR office shall: 1. Request for information on the transaction through an Access to Records letter. 2. Submit a report on the results of the evaluation to the BIR legal office handling the request for ruling not later than 15 working days from receipt of the documents.

RMO No. 13-2010 amends RMO No. 6-2010 on the stamping of ITRs and Audited FS.

RMO No. 11-2010 shall take effect immediately.

Revenue Memorandum Order No. 13-2010 dated February 3, 2010 2. The attachments to the income tax returns shall also be received in the same manner as above, but for the attached financial statements the same shall only be stamped received on the page of the Audit Certificate, the Balance Sheet and the Income Statement. Accordingly, the other pages of the financial statements and its attachments need not anymore be stamped received. RMO No. 13-2010 shall take effect immediately. Item No. 2, Section III, of RMO No. 6-2010 is amended to require the stamping also on the balance sheet and income statement, as follows:

RMO No. 16-2010 prescribes the policies and guidelines in determining the VAT liabilities of motels and other similar establishments.

Revenue Memorandum Order No. 16-2010 dated February 5, 2010 RMO 16-2010 shall cover the following establishments: 1. Motels 2. Other similar establishments RMO 16-2010 shall not cover establishments such as hotels, resorts and other establishments which do not regularly allow short-time (less than 24 hours) stay in their establishments. Within 10 days from the issuance of this RMO, and on or before January 31 of each year thereafter, motels and other similar establishments shall submit to the RDO where they are registered a Sworn Declaration using the format provided in Annex A. The information to be indicated in the Sworn Declaration includes the room type, number of rooms and rate per room. The RDO concerned shall: 1. Evaluate the information provided in the Sworn Declaration and compute the prescribed revenues per month of an establishment. 2. Prepare an Occupancy Turnover Analysis Report (OTAR), containing a summary of the information gathered from the Sworn Declarations of all establishments in the District, and their prescribed revenue per month. This shall be completed no later than the last day of February each year.

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In accomplishing the OTAR, the following must be considered: 1. For peak periods covering the months of January to February, April to June, and December, the minimum turnover/day of a particular establishment shall be set at a constant factor of 2. 2. For lean periods covering the other remaining months of the year, the minimum turnover/day shall be 1.5.

Based on the OTAR for a motel, the concerned RDO shall notify the motel operator of the proposed additional output tax to be paid for each month. Upon receipt of the notification, the motel shall have the option of amending its VAT returns for the months in question, and pay the corresponding additional output tax within 10 days from receipt of the notice, in order to avoid the imposition of penalties and surcharges and the issuance of a Mission Order to conduct surveillance. The amended VAT return(s) shall take into account not only the additional gross sales from its room occupancy operations, but shall also cover gross sales/receipts from other operations (e.g., food, etc.).

The RDO, having jurisdiction over a motel that opts not to pursue the amendment of the VAT returns, shall recommend to the Regional Director the issuance of a Mission Order for the conduct of surveillance activities or other appropriate enforcement measures on the concerned motel, in order to determine its true and correct tax liabilities. Surveillance activities for a particular motel shall be conducted over a period of not less than 10 days.

Should the surveillance activity/enforcement measure disclose the understatement of taxable gross sales by 30% or more of the motels correct taxable sales for the taxable quarter, the motel shall be considered subject to Oplan Kandado procedures prescribed in RMO No. 3-2009. CIR is not precluded from ordering a more thorough investigation of any motel in order to determine its true and correct tax liabilities, should the evidence so warrant. The imposition of sanctions against a motel under the Oplan Kandado Program, shall not preclude the BIR from filing the appropriate tax evasion charges under the Run After Tax Evaders (RATE) Program against the concerned motel or the responsible officers of the establishment, if the evidence so requires. RMO 16-2010 shall take effect immediately.

RMO No. 40-2009 prescribes the guidelines and procedures in the observation of inventory-taking of goods for purposes of determining the 2009 ending inventory.

Revenue Memorandum Order No. 40-2009 dated December 14, 2009 Based on the FS and inventory lists for taxable year 2008 submitted to the RDO, the Revenue District Officer shall: 1. Prepare a list of taxpayers whose peso value of ending inventory is 50% or more of its declared sales for the same year, except dealers of automobiles,
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excise taxpayers and taxpayers maintaining fast-moving items/goods (e.g., drugstores, supermarkets and groceries). 2. Submit to the Regional Director for approval the list of taxpayers selected for inventory-taking observation. Upon receipt of the approved list from the Regional Director, the Revenue District Officer shall: 1. Immediately advise the concerned taxpayer that representatives from the RDO having jurisdiction over the place/premises where his inventory of goods for sale or for use in business are kept must be present to observe and witness the conduct of the annual inventory-taking; 2. Request from the taxpayer the scheduled date of inventory-taking for all the branches, warehouses, bodegas or facilities maintained, including the addresses. To ensure that all inventory-taking are witnessed by the BIR representative/s, the information provided by the taxpayer with regard to the place/premises where inventories are kept shall be cross-checked with the registration records available in the RDO. Any discrepancy that may be noted shall be immediately relayed to the concerned taxpayer and reconciled/resolved within 5 days from receipt of notification from the RDO. In case there are places/premises outside the RDO having jurisdiction over the head office (Home RDO), the Home RDO shall inform the RDO having jurisdiction over the place/premises where the inventories are kept of the scheduled inventory-taking, and request its participation. The Revenue District Officer shall prepare Mission Orders, for signature of the Regional Director, authorizing the Revenue Officers (ROs) to witness the inventorytaking, to be distributed as follows: 1. Original to the ROs assigned to witness the inventory-taking 2. Duplicate to be furnished to the taxpayer; this shall serve as the authority of the ROs to witness the inventory-taking 3. Triplicate to be duly acknowledged by the taxpayer or his authorized representative; this shall be attached to the report/docket to be prepared by the ROs after witnessing the inventory-taking 4. Quadruplicate file copy of the RDO Depending on the size of inventory kept by the taxpayer, the Revenue District Officer shall assign ROs from the Assessment Section to observe and witness the annual inventory-taking. If the existing Assessment ROs are not enough, the Revenue District Officer may assign ROs from other sections in the RDO to assist in the inventory-taking activity. The ROs must perform the following: 1. Obtain from the taxpayer a list of all accountable forms related to inventories. 2. Conduct an immediate physical count of all accountable forms and establish cutoffs, to preclude any alterations in the records of the taxpayer. 3. Verify the method of inventory valuation adopted, and ascertain if it conforms to the acceptable valuation methods prescribed by the Tax Code.
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4. Check if all books of inventories are registered with the BIR. 5. Obtain from the taxpayer a copy of the inventory lists to be used during the inventory-taking. The ROs shall observe and witness the actual inventory-taking during the dates scheduled by the taxpayer, with particular attention on inventories which are material in value. After completion of each inventory list, the ROs shall require the taxpayers representative to print his name or sign on every page together with the date and time. Likewise, the ROs shall print his name and sign the inventory list. The ROs shall prepare and submit a report on the conduct of inventory-taking, within 15 days after the conclusion of the inventory-taking activity, to the Revenue District Officer. The Revenue District Officer shall prepare and submit the List of Mission Orders, indicating therein the status on each taxpayer (e.g., completed, not done, etc.) to the Deputy Commissioner, Operations Group, copy furnished the Regional Director and Assistant Commissioner, Assessment Service. For purposes of this activity, the taxable year 2009 shall cover the 2009 calendar year and all fiscal years ending in the first 6 months of 2010, i.e., January 31, 2010, February 28, 2010, March 31, 2010, April 30, 2010, May 31, 2010 and June 30, 2010. This activity shall be concluded in July 2010. RMO No. 40-2009 shall take effect immediately upon approval.

BOC Issuances
CMO No. 4-2010 implements the Fuel Marking Program of the DOF under Department Order No. 43-09 dated December 21, 2009. Customs Memorandum Order No. 4-2010 dated January 29, 2010 CMO No. 4-2010 covers ports with importations of diesel and kerosene, whether or not taxes and duties have been paid, as well as ports covered by CMO No. 1608. The following shall be marked with the official marking agent designated by the DOF in accordance with existing rules: 1. All kerosene, including dual purpose kerosene, subject to zero excise tax 2. All diesel oil entered tax- and duty-free Responsibility for Marking Fuels 1. For kerosene not subject to excise tax, the owner, consignee or whoever brings the same into the country shall cause its marking with the official marking agent. He shall bear the cost of the marking. 2. For diesel oil not subject to tax and duty, the importer, manufacturer or refiner shall cause its marking with the official marking agent and shall bear the cost for the marking. 3. Failure or refusal of the responsible person or entity to cause the marking of covered kerosene or diesel oil within 15 days from notice shall subject
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such owner, consignee or importer and the articles to sanctions imposed in accordance with the TCCP, as amended, and other relevant existing laws and regulations. Presumption of Illegal Importation/Withdrawal 1. Should diesel oil marked as exempt be found in the domestic market, in the possession of anyone or under any situation where it should have been subject to duties and taxes, such fact shall constitute prima facie evidence of importation or withdrawal with intent to evade duties and taxes. It shall be enough to establish the existence of probable cause for the institution of seizure and forfeiture proceedings under the Tariff and Customs Code of the Philippines (TCCP) and other related laws and regulations. 2. The same presumption shall apply in the event kerosene marked as not subject to excise tax is used, transported, stored or otherwise labeled as aviation fuel in the domestic market, in the possession of anyone or under any situation where it should have been subject to tax. Implementation Roll-Out 1. The mandatory marking shall be implemented at the Subic Bay Free Port (SBF) and the Clark Special Economic Zone (CSEZ) for diesel oil and kerosene, and at the Port of Batangas for imported kerosene. 2. The District Collector of ports included in the implementation of the marking program shall submit a monthly list of kerosene shipments with the following particulars: Arrival/Admissions: a. b. c. d. e. f. g. Bill of lading (B/L) number Vessel and registry number Date of arrival Consignee Volume in liters per B/L Volume in liters per survey report at air (if available) Subic Bay Metropolitan Authority (SBMA) Permit to Bring Out and Clark Development Corporation (CDC) Permit to Bring In (for pipeline transfers to Port of Clark)

Duty/Tax Paid Deliveries a. b. c. d. e. f. g. Entry Number Date filed B/L number Vessel and registry number Volume in liters Amount paid Local buyer, if different from importer

Exempt and Free Deliveries a. Clearance document number b. Date filed

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c. d. e. f.

B/L number Vessel and registry number Volume in liters Local buyer, if different from importer

3. For pipeline transfers of diesel from the Port of Subic to the Port of Clark, the report must also include the volume of diesel obtained resulting from the interphase of diesel and aviation fuel in the pipeline. 4. The mandatory submission of the monthly report must be received by the Office of the Deputy Commissioner for Intelligence on or before the 10th of the following month, for consolidation and transmittal to the Program Implementation Office (PIO). 5. The District Collector of ports not yet included in the marking program, but with diesel oil and kerosene arrivals, must also submit the prescribed report. The initial report shall cover the entire year of 2009 and must be received by the Office of the Deputy Commissioner for Intelligence on or before February 15, 2010. Subsequent submissions must be on a monthly basis, but only when there is an arrival for the month. Duties of Program Implementation Office (PIO) Established under Department Order No. 23-07, the PIO shall have the following duties and responsibilities: 1. Commence the implementation of the marking program at the SBF, CSEZ, Port of Batangas and other ports with tax- and duty-free importations of diesel oil, or with importations of kerosene, upon effectivity of CMO No. 4-2010. This is whether or not taxes and duties have been paid. 2. Ensure that all operational and technical written instructions are in place and properly disseminated. 3. Identify and resolve operational and technical difficulties encountered during implementation, and propose measures to enhance the effectivity of the program. 4. Submit a monthly progress report to the Secretary of Finance on the pilot implementation. Notice of Arrival For kerosene shipments, the importer or their authorized agents shall submit a Notice of Arrival to the customs authorities, copy furnished the designated marking service provider, at least 3 days prior to the arrival of the carrying vessel. The Notice shall contain information as to the estimated time of arrival, vessel name, pier/port of destination, and quantity of product (in volume liters). Notification of Purchase 1. Buyers from suppliers in freeports and other similar sources of duty-/tax-free or exempt diesel (such as PEZA and other ecozone locators, bunkering entities, as well as gasoline stations operating in freeports/special ecozones) shall file a Notification of Purchase of Tax- and Duty-Free Diesel with the designated marking service provider, at least 7 working days from the expected date of marking.
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2. The notification shall be directed to the supplier, who shall coordinate with the marking service provider and the customs office in scheduling the date of the marking for the diesel purchased. 3. Prior to filing the Notification of Purchase with the designated service provider, copies thereof shall be given to the Customs Collector, the authorized representative of the Deputy Commissioner for Intelligence, and the SBMA office concerned, who shall acknowledge receipt on the original copy of the Notification that will be given to the service provider. Instructions to Mark and Required Coordination 1. Prior to processing the customs declaration filed for the clearance and release of the diesel, the concerned customs office shall verify if the Notice to Purchase has been appropriately provided. The Customs declaration (entry/ transit/shipment) shall then be marked/stamped with the words SUBJECT TO MARKING PURSUANT TO DEPARTMEMT ORDER 23-07, as amended. 2. The same customs office shall notify customs gatekeepers of any releases for which marking is required. Certificate of Marking 1. After completing the marking of the kerosene/diesel for withdrawal, the service provider shall issue the corresponding Certificate of Marking (COM) following the prescribed format. 2. The supplier shall demand presentation of the duly accomplished COM as basis for issuance of the corresponding Petroleum Gate Pass to authorize withdrawal of the kerosene/diesel, properly indicating the COM number issued. 3. The customs personnel assigned at the facility exit or customs guard/ inspector, in case of tankers or sea vessels, shall demand presentation of the COM and, if satisfied with its sufficiency and validity, shall authorize the exit/ departure of the carrying tankers from the facility. 4. Kerosene and diesel imported tax- and duty-free into the SBF and CSEZ for transfer to PEZA or other ecozones must be covered by an Import Permit issued by the receiving ecozone. 5. For transfer of such petroleum products to the Joint Oil Companies Aviation Storage Plant, prior approval from the government office with jurisdiction over the facility is required in addition to the transshipment application. 6. Transfer of said petroleum products from SBMA/CSEZ for bunkering or loading into foreign ships, vessels or aircraft, must be covered by a corresponding export declaration, together with a duly issued bunkering permit. Copies of the sub gate-pass shall be submitted to the customs office prior to the actual exit of the covered shipment. 7. The current practice of allowing petroleum product suppliers to file one customs declaration for its total distribution requirements covering a period of time, or for the requirements of many customers with each partial withdrawal covered by a sub-gate pass, shall be allowed only for tax- and/or duty-paid withdrawals.
16 Tax Bulletin

8. Every withdrawal of petroleum products subject to marking shall be covered by one customs declaration. 9. For diesel and kerosene initially stored in a bonded facility at the Port of Batangas, the payment of duties and taxes on which is suspended, and then transferred by pipeline or other means to the Pandacan Oil Terminal, marking shall be undertaken in the course of the withdrawal of such products from the Pandacan Oil Terminal. Port Reconciliation Team (PRT) 1. All gate passes covering releases without payment of duties and taxes must be subjected to post-audit by the PRT, chaired by the District Collector of Customs, with the marking service provider and the fuel suppliers as members. 2. On the basis of available data and information, the PRT must ascertain the following: Which releases, without duties and taxes paid, have not been marked pursuant to CMO No. 4-2010; Any diversions of free and exempt releases to the domestic market, or abuses in the availment of the privilege; In general, all arrivals of diesel and kerosene in the district have been disposed of in accordance with law and regulations.

Port Implementation Team (PIT) The District Collector shall establish a PIT chaired by the District Collector, with representatives from the Freeport/Ecozone Authority, all importers of petroleum products at the port, the port operator, the fuel storage facility owner/operator, all suppliers and concerned shipping lines as members.

Disposition of Seized Marked Fuel 1. Pending seizure and forfeiture proceedings against any marked fuel which has been seized for being sold in the domestic market, the District Collector shall dispose of the shipment pursuant to Section 2607 of the TCCP, taking into account the objectives of the Fuel Marking Program. The proceeds of the auction sale shall be held in trust until final termination of the case. 2. If the fuel shipment remains unsold after two failed biddings, the District Collector shall immediately report to the Committee on Negotiated Sale who shall dispose of the same pursuant to Customs Administrative Order (CAO) No. 10-2007. 3. In cases where the shipment remains unsold despite offers for negotiated sale by the BOC, the same shall be disposed of through the other modes of disposition authorized under the TCCP.

Penalty Clause Customs personnel, importers, brokers, and other individuals found violating any provision of CMO Nos. 4-2010 and 16-2008 shall be dealt with pursuant to existing laws and regulations.
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Transitory Provision Pending nationwide roll-out of the program, the services of the existing nominated service provider shall be retained during regular implementation in the ports covered by CMO No. 4-2010.

Effectivity 1. CMO No. 4-2010 shall take effect upon its publication. Upon its effectivity, no diesel oil entered free or exempt from duties and taxes, in whole or in part, shall be removed from their place of storage without the marking prescribed under CMO No. 4-2010. 2. No kerosene shipment arriving in any port for which fuel marking has been implemented, shall be cleared or released without the marking prescribed under CMO No. 4-2010.

[Editors Note: CMO No. 4-2010 was published in Manila Standard Today and Philippine Daily Inquirer on February 2, 2010.]

CMO No. 5-2010 prescribes a 3% duty rate on crude and refined petroleum products, pursuant to EO No. 691 effective February 1, 2010.

Customs Memorandum Order No. 5-2010 dated January 29, 2010 EO No. 691 provides that: The Most Favored Nation rates on crude and refined petroleum products shall be reduced based on certain triggers indexed to oil prices in the world market. In its Certification dated January 27, 2010, the Department of Energy certified that the trigger price levels in the implementation of EO No. 691 have not been reached for the period January 1-15, 2010. The average cost, insurance and freight price of Dubai crude and diesel in the international market was above US$81.422 and US$89.767 per barrel, respectively, during the period January 1-15, 2010. Pursuant to Section 4 of EO No. 691, all import entries corresponding to articles listed in Annex A thereof, filed and received by the BOC, shall be levied a 3% duty rate, effective February 1, 2010.

CMO No. 7-2010 re-schedules to March 23, 2010 the implementation of the Import Assessment System (IAS) of the e2m Customs System at the NAIA Collection District for Bill to Shipper (BTS)/Duty Delivery Paid (DDP) shipments of the Philippine Chamber of Air Express Operators (PCAEO).

Customs Memorandum Order No. 7-2010 dated February 22, 2010 In view of the ongoing development of the electronic system for the processing of the BTS, otherwise known as DDP for members of the PCAEO, the implementation of the e2m Customs System prescribed under CMO No. 27-2009 for BTS/DDP shipments of preapproved importers of PCAEO members at the NAIA Collection District, is rescheduled to March 23, 2010. Members of the PCAEO shall submit a list of their regular clients who import under the BTS/DDP scheme for approval of the Deputy Commissioner, Assessment and Operations Coordinating Group. Only those in the approved list are covered by CMO No. 7-2010.

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Tax Bulletin

PEZA Issuance
Memorandum Circular No. 2010-006 circularizes RR No. 1-2010 requiring all PEZA-registered enterprises to file their ITRs through the BIRs EFPS. Memorandum Circular No. 2010-006 dated February 5, 2010 Revenue Regulations (RR) No. 1-2010 requires all enterprises registered with Investment Promotions Agencies, including those registered with PEZA, to file their ITRs through the BIRs EFPS.

BSP Issuances
Circular No. 679 amends Item a, Subsection X269.6 of the MORB, covering the guidelines on the BSPs Rediscounting Facility. BSP Circular No. 679 dated February 1, 2010 Item a, Subsection X269.6 of the MORB now provides that for peso rediscounts, the rediscount rate shall be based on the applicable BSP overnight reverse repurchase rate. This Circular shall take effect on February 1, 2010.

Circular No. 680 prescribes the rules and regulations for micro-agri loans.

BSP Circular No. 680 dated February 3, 2010 Circular No. 680 prescribes the minimum criteria to determine a banks capacity to offer micro-agri loans. The micro-agri loan shall have the criteria/characteristics of a microfinance loan as provided in existing regulations, in addition to the following product characteristics: Subject Purpose/Term Particulars Short-term purposes only (up to 12 months) whether it is for farm activities, agri-business, agri-related fixed assets, among others Multiple income generation activities (farm and off-farm) Farm activities at least 2 years in operation Existing borrowers with good track record based on banks policies Up to P150,000 Loans to start small and increase incrementally based on banks policies Capacity to pay based on household cash flow analysis Frequent amortization (weekly, semi-monthly, monthly) Lump sum payment may be considered an option of up to 40% of loan amount Like microfinance loans, collateral substitutes may be required

Eligibility

Loan Amount

Loan Value Payment

Security

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Micro-agri loans shall be subject to the same risk management mechanisms required for microfinance loans including, but not limited to the following: 1. Clients ability to repay based on cash flow analysis and affordability, especially for new clients. The prospective client must have other sources of income sufficient for the periodic payment of the loan while the loan project is not yet generating income. 2. Adequate loan monitoring, collection and control, consistent with existing BSP regulations. 3. The loan product is included in the banks microfinance manual as one of the types of services or products offered to prospective clients. 4. The micro-agri loans must have a subcontrol ledger.

The approved micro-agri loan product will be considered a microfinance loan and will have the same regulatory treatment as provided by existing microfinance regulations. This Circular shall take effect 15 calendar days after its publication either in the Official Gazette or in a newspaper of general circulation.

[Editors Note: Circular No. 680 was published in Manila Bulletin on February 10, 2010.]

Circular No. 682 prescribes revised rules and regulations governing the organization, membership, establishment, administration, activities, supervision and regulation of Cooperative Banks, to implement the provisions of Chapter XII of RA No. 9520, otherwise known as the Philippine Cooperative Code of 2008, which amended RA No. 6938 otherwise known as the Cooperative Code of the Philippines.

BSP Circular No. 682 dated February 15, 2010 Definition, Registration and Pre-operating Requirements 1. A Cooperative Bank is one organized for the primary purpose of providing a wide range of financial services to cooperatives and their members. It shall be organized only by cooperative organizations that are duly established and registered under the Philippine Cooperative Code of 2008 (RA No. 9520). 2. A Cooperative Bank shall primarily provide financial, banking and credit services to cooperatives and their members, although it may provide the same services to non-members or the general public. 3. For purposes of these regulations, a Cooperative Bank shall likewise be considered a cooperative, which should be registered with the Cooperative Development Authority (CDA), subject to the requirements and requisite authorization of the BSP. 4. A prospective Cooperative Bank shall file its application for licensing as a bank with the BSP and, upon approval, shall be registered with the CDA. 5. Duly registered cooperatives applying for authority to establish a Cooperative Bank shall submit the documents enumerated in Section 4, Appendix 38, of the MORB, to the Central Applications and Licensing Group, SES. 6. A Cooperative Bank established under RA No. 9520 shall comply with the preoperating requirements specified in Section 11, Appendix 38, of the MORB. Capital Requirements 1. Cooperative Banks that will be established under RA No. 9520 shall have a minimum paid-in capital of P10,000,000.

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Tax Bulletin

2. No cooperative member shall own or control more than forty (40%) of the total capital contributions of a Cooperative Bank. This limitation shall also apply to cooperatives purchasing government-held preferred shares of Cooperative Banks, which are converted into common shares. 3. Cooperative Banks shall issue par value shares only. Establishment of Cooperative Banks 1. At least five cooperatives may form a Cooperative Bank, provided that a majority of the Cooperative Banks voting shares shall be held by member-cooperatives located in the province where the head office is located. This majority requirement shall be maintained on an on-going basis, except in meritorious cases as may be allowed by the Monetary Board. 2. Only one Cooperative Bank may be established in each province. However, an additional Cooperative Bank may be authorized to be established in the same province, depending on the economic conditions of the province as may be determined by the BSP, provided that the additional Cooperative Bank shall be located in a city or municipality other than the city or municipality where the first Cooperative Bank is located. 3. The Articles of Cooperation and By-Laws of any Cooperative Bank, or any amendment thereto, shall be registered with the CDA only when accompanied by a certificate of authority issued by the Monetary Board under its official seal. Establishment of Branches and Other Offices 1. The Cooperative Bank of the province may set up branches/extension offices/other banking offices (OBOs) anywhere within the province, subject to compliance with applicable branching rules and regulations in Section X151 of the MORB. 2. Cooperative Banks from other provinces may set up branches/extension offices/OBOs in cities or municipalities where there is no other Cooperative Bank head office/branch/extension office. 3. The establishment of branches/extension offices shall be subject to the following minimum combined capital requirement: At least P10,000,000 to establish branches/extension offices anywhere within the province where its head office is located. At least P50,000,000 to establish branches/extension offices in any island group (i.e., Luzon, Visayas, Mindanao) where the head office is located, except in Metro Manila. At least P100,000,000 to establish branches/extension offices anywhere in the country except in Metro Manila, unless the Cooperative Bank is qualified to establish a branch/extension office in Metro Manila and/or restricted areas as provided in Items d.1 and d.2 of Subsection X151.4 of the MORB on branching guidelines.
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Privileges, Incentives and Assistance for Cooperative Banks 1. Cooperative Banks shall be given the same privileges and incentives granted to rural banks, thrift banks, commercial banks and universal banks to rediscount notes with the BSP, the Land Bank of the Philippines and other government banks. 2. Foreclosure of mortgages covering loans granted by Cooperative Banks and execution of judgment involving real properties levied by a sheriff shall be exempt from publication in newspapers, as required by law, if the total amount of the loan, excluding interest due and unpaid, does not exceed P250,000. In such cases, it shall be sufficient publication if the notices of foreclosure and execution of judgment are posted in conspicuous areas in the banks premises, municipal hall, municipal public market, the barangay hall and the barangay public market, if any, where the property mortgaged is situated, during the 60-day period immediately preceding the public auction or execution of judgment.

Other provisions 1. The Circular also prescribes the qualifications, responsibilities and duties of the Members of the Board of Directors and Officers of Cooperative Banks. 2. With respect to the operations and governance of cooperative banks, the provisions of the banking laws, rules and regulations shall prevail, notwithstanding Section 71 of RA No. 8791, otherwise known as the General Banking Act of 2000.

This Circular shall take effect 15 calendar days after its publication either in the Official Gazette or in a newspaper of general circulation.

[Editors Note: Circular No. 682 was published in Philippine Daily Inquirer on February 19, 2010.] Circular No. 683 prescribes the guidelines on marketing, sale and servicing of micro-insurance products.

BSP Circular No. 683 dated February 23, 2010 A rural, cooperative or thrift bank, including its authorized branch/es, extension office/s and other banking offices, can present, market and sell micro-insurance products, as defined under the Insurance Commissions Memorandum Circular (IMC) No. 1-2010, provided the micro-insurance product is duly approved by the Insurance Commission. It can also service (i.e., collect premiums and pay claims) micro-insurance products as collection and payment agents, pursuant to Section 53.3 of the General banking Act. For this purpose, the Monetary Board has defined that, for rural, cooperative and thrift banks, micro-insurance products under IMC Nos. 9-2006 and 1-2010 shall serve as a financial product of an allied undertaking under Section 20 of the General Banking Act.

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Tax Bulletin

A rural, cooperative or thrift bank which intends to market or sell micro-insurance products shall ensure that the micro-insurance products presented and marketed are clearly distinguishable from bank products. For this purpose, all organic documents, informational and promotional materials used in the presentation and sale of these products shall prominently display both the name of the issuing insurance provider, and a clause stating that the insurance product/s of (name of the issuing insurance provider) is/are not insured by the Philippine Deposit Insurance Corporation and is/are not guaranteed by the (name of the bank). The bank shall also ensure compliance with pertinent laws and rules on the sale of micro-insurance products set by the Insurance Commission. As part of product due diligence, the bank should check whether the insurance provider issuing the microinsurance product has functioning customer care and claims-handling mechanisms to handle consumer protection issues. Prior to selling and/or marketing micro-insurance products, the bank shall submit certain documents to the BSP as bases for BSPs evaluation, such as: 1. Copy of the duly executed agreement between the bank and the insurance provider on the presentation, sale and servicing by the bank of the financial products of the latter, including the terms of compensation for the services. 2. Copy of the Insurance Commissions letter of approval covering each of the micro-insurance products to be marketed or sold by the bank. 3. Copy of the Certificate of Authority from the Insurance Commission of the insurance provider/s issuing the micro-insurance products to be marketed or sold. 4. Banks license from the Insurance Commission as a micro-insurance agent or broker, as applicable. 5. Certification from the bank president that he/she ascertained and will ensure continuing compliance with the following: That the product is authorized for cross-selling under existing BSP rules and regulations; The micro-insurance product is approved by the Insurance Commission and is issued by an entity duly licensed and held in good standing by the Insurance Commission; The bank conducted due diligence to ensure that the product is suitable to its customers; The organic, informational and promotional materials for the microinsurance products comply with BSP requirements; The bank personnel concerned has undertaken the necessary training and passed the qualifying examination for the presentation and sale of microinsurance products, in compliance with the requirements of the Insurance Commission on marketing personnel for insurance products.

This Circular shall take effect 15 calendar days after its publication either in the Official Gazette or in a newspaper of general circulation.

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SEC Opinions
SEC Opinion No. 10-02 dated January 15, 2010 The articles of incorporation of a close corporation may provide for quorum and voting requirements in meetings of stockholders or directors, greater than those provided in the Corporation Code, and may also provide for the classification of shares into common and founders shares, and grant founders shares a 1:10 voting rights ratio. Facts: The articles of incorporation of a proposed close holding (family) corporation will have the following provisions: Requiring a 6/7 quorum and vote in meetings of stockholders and directors, instead of the usual 2/3 provided by the Corporation Code; Prohibiting the transfer, conveyance, sale or assignment of shares to non-blood relatives, and with right of first refusal granted to the holding corporation in cases of valid transfers; Limiting the shareholdings of each of the children to a maximum of 20% either in personal capacity or in trust; Providing for a discounted purchase price of shares in case any of the children decides to leave the family business and sells his shares back to the holding corporation; Classifying stocks into common shares and founders shares, the latter to be issued only to the father and his spouse in recognition of their efforts in bringing the family business to where it is now. The common shares, on the other hand, shall be available to every member of the family. The founders and common shares will have the following features: 1. The founders shares shall comprise only 10% of the outstanding capital stock, and the remaining 90% shall be common shares. 2. In terms of voting rights, founders shares shall have a 1:10 ratio as opposed to the 1:1 ratio for common shares. In other words, one founders share shall be equivalent to ten votes. All shares, regardless of whether it is founders or common shares, shall be allowed to vote on all matters, including the right to vote and be voted for in the election of directors. 3. There shall be no other restrictions or privileges to be granted to the founders shares, nor shall there be any restriction imposed on the common shares in terms of voting rights. 4. The founders shares cease to be such and shall be converted to common shares once they are transferred to the children, or are sold back to the holding corporation, thereby cancelling the 1:10 voting right. Issue: Are the provisions valid? Is the proposed 1:10 voting rights ratio for founders shares subject to a limited period not to exceed five years under Section 7 of the Corporation Code?

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Tax Bulletin

Ruling: The provisions are valid, except for the one prohibiting the transfer of shares to nonblood relatives. The 1:10 voting rights ratio for founders shares is not subject to the limited period under Section 7 of the Corporation Code. Section 97 (3) of the Corporation Code allows the articles of incorporation of a close corporation to provide for a greater quorum or voting requirements, in meetings of stockholders or directors, than those provided in the Corporation Code. Section 98 also provides that the articles of incorporation of a close corporation may provide for restrictions on the transfer of shares, for as long as the restrictions are not more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period. If the existing stockholders or the corporation fails to exercise the option to purchase, the same Section 98 expressly provides that the transferring stockholder may sell his shares to any third person. Therefore, the provision prohibiting the transfer to non-blood relatives is not allowed, and the validity of the provision for a discounted purchase price, in case the corporation exercises the option to buy its own shares, will depend on the reasonableness of the discount. The articles of a close corporation may provide for the classification of shares into common and founders, and may provide that, in terms of voting rights, founders shares shall have a 1:10 ratio. The 1:10 voting rights ratio will not be subject to the 5-year limitation provided under Section 7 of the Corporation Code. The 5-year limitation applies only to the grant of an exclusive right to vote and be voted for in the election of directors.

SEC Opinion No. 10-03 dated January 27, 2010 The assignment of leasehold rights is not considered a sale of securities under the SRC. Facts: A Co. is the assignee of all the rights and obligations of D Co. under a lease agreement with the Bases Conversion and Development Authority (BCDA) and the Poro Point Management Corporation (PPMC), for the development, operation and management of a 65.5 hectare parcel of land located within the Poro Point Freeport Zone in La Union. Under the lease agreement, a portion of the leased property will be utilized for the development of a residential estate project consisting of subdivided and individual lots (Estate Lots) on which resort-style residences will be built (Estate Unit). A Co. intends to assign its leasehold rights over the Estate Lots to interested assignees. The assignee will possess and enjoy the subdivided lot for 44 years with the option to construct the Estate Unit within three years. After 44 years, the leased property and all the improvements on said property will revert to the BCDA and PPMC. Issue: Will the assignment of leasehold rights for valuable consideration be considered a sale of securities under the SRC?

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Ruling: No. Section 3.1 of the SRC defines the term securities in part as: shares, participation or interests in a corporation or in a commercial enterprise or profitmaking venture. This definition is suggestive of equity securities. The leasehold rights involved are not shares, participation or interest in a corporation and are not even investments in an enterprise. A Co. did not acquire shares, participation or interest in the BCDA by virtue of the lease agreement. In turn, the assignees of A Co. over the Estate Lots only acquire the corporations right to possess and enjoy the Estate Lots for a limited period with the option to construct residences on the lots within 3 years. Therefore, A Co. is merely assigning rights and not shares or interest in a corporation organized to develop the leased property. Neither is the assignment of leasehold rights by D Co. to A Co. an investment contract under the same Section 3.1 of the SRC. In the case of SEC vs. W.J. Howey Co. [328 U.S. 293 (1946)], the U.S. Supreme Court established the tripartite test to determine whether a particular financial instrument is an investment contract, as follows: (1) the investment of money, (2) in a common enterprise, and (3) with an expectation of profits to be derived solely from the efforts of the promoter or a third party. In this case, there is no investment of money. The consideration paid by A Co. to D Co. is not an investment of money to a common enterprise. Rather, it is a consideration for the transfer of rights acquired by D Co. under its lease agreement with BCDA.

SEC Opinion No. 10-05 dated January 15, 2010 The business processing and collection center of a financing company will not itself be considered a financing company that is required to obtain a Certificate of Authority to Operate, provided it operates solely as a marketing and collecting agency and will not be releasing loans or extending credit to borrowers. Facts: G Co., a finance company and its 67 branches, are holders of separate Certificates of Authority to Operate nationwide. In order to expand its marketing activities and strengthen its collection efforts, G Co. will establish a separate stock corporation that will operate as a business processing and collection center (business center). The business center will engage in the following activities: 1. Marketing and promoting G Co.s loan program and financial products through the distribution of marketing materials and other means; 2. Providing prospective borrowers application forms and other documentary requirements; 3. Receiving from prospective borrowers completed application forms and other documentary requirements; 4. Transmitting loan application forms submitted by prospective borrowers to the nearest G Co. branch; 5. Informing prospective borrowers of the approval or denial of their loan applications and, in case of approval, advising prospective borrowers to go to a particular G Co. branch office to sign other loan documents; 6. Collecting loan payments from borrowers whose loan applications originated from the business center and remitting all collections to G Co. Issue: Does the business center need to obtain a Certificate of Authority to Operate as a financing company?

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Tax Bulletin

Ruling: No, but the loan documents must be distributed to potential borrowers within the premises of G Co. or its branch offices, and not in the business center. RA No. 8556, or the Financing Company Act of 1998, defines a financing company, as follows: (a) Financing companies xxx, are corporations, except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property. For as long as G Co.s business center will operate solely as a marketing and collecting agency and will not be releasing loans or extending credit to borrowers, it will not be considered a finance company under RA No. 8556 and is not required to secure a Certificate of Authority to Operate as a financing company. However, the loan documents must be distributed to potential borrowers within the premises of G Co. or its branch offices, and not in the business center, since the Truth in Lending Act (RA No. 3765) requires that the borrower must be informed of the total amount to be financed, interest, and charges of his loan prior to the signing of the loan documents.

SEC Opinion No. 10-06 dated January 29, 2010 If the 3-year liquidation period expires without a trustee or receiver being expressly designated by the corporation, the board of directors may be permitted to continue as trustees by legal implication, to complete the corporate liquidation. Facts: Mr. X is the only surviving incorporator, stockholder, and director of A Co. whose 50year term of existence expired in October 1986. The 3-year period to liquidate A Co.s assets ended without the appointment of a trustee-in-liquidation, and its remaining asset, consisting of a parcel of land and building located in Ermita, Manila, has not yet been liquidated. Issue: Can Mr. X act as trustee-in-liquidation of A Co? Can Mr. X act as such trustee even beyond the 3-year liquidation period? Ruling: Yes, Mr. X may act as trustee-in-liquidation. In case of the death of one or more directors during or after the 3-year liquidation period, the surviving directors continue as trusteesin-liquidation, and may exercise the powers and duties of the deceased director-trustee/s. However, this is without prejudice to the right of a person-in-interest (e.g., a creditor or stockholder) to petition the courts for the appointment of a different trustee-in-liquidation on account of Mr. Xs refusal or inability to wind up the affairs of the dissolved corporation within a reasonable period.

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SEC Opinion No. 10-07 dated February 5, 2010 The revocation of a foreign corporations license to transact business in the Philippines shall not affect the validity of contracts entered into by said foreign corporation after the revocation. The only effect is that such foreign corporation cannot seek redress from the court to enforce such contracts. Facts: The license to transact business in the Philippines of B Co., a foreign corporation, was revoked by the SEC for failure to comply with reportorial requirements. Issues: 1. Are contracts entered into by B Co. after the revocation of its license valid? 2. Can B Co. sue and be sued before Philippine courts after the revocation of its license? Ruling: 1. Yes. The revocation of the license to transact business of a foreign corporation shall not affect the validity of contracts entered by it after the revocation. The only effect is that such foreign corporation cannot seek redress from the court to enforce such contracts. The language of Sections 133 and 134 of the Corporation Code imply that the failure of a foreign corporation to obtain a license to do business when one is required does not affect the validity of the transactions of such foreign corporation, but simply removes the legal standing of such foreign corporation to sue. 2. B Co. can no longer sue, but can be sued. Although the Corporation Code does not have a specific provision on the effects of the revocation of a foreign corporations license, it may be implied from Sections 123 and 133 that a foreign corporation whose license has been revoked can no longer transact business in the Philippines and cannot maintain any suit or action in any court or administrative agency in the Philippines, although it may be sued on any valid cause of action. In the case of contracts entered into by the foreign corporation prior to the revocation of its license, the foreign corporation may still bring or maintain an action based on such contracts. A contract cannot be considered void or even unenforceable when such contract was entered into by the foreign corporation while its license to transact business was subsisting.

SEC Opinion No. 10-08 dated February 8, 2010 Under the control test, shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens, shall be considered of Philippine nationality. Facts: F Co., a foreign corporation, intends to invest in 40% of the capital stock of P Co., a Philippine corporation. The other 60% of the capital stock of P Co. will be owned by Filipino investors. P Co. will in turn invest in 75% of the capital stock of Philippine Ship Manning Co. The other 25% of the capital stock of Philippine Ship Manning Co. will be owned by F Co. Effectively, F Co. will have 40% direct ownership in P Co. and 25% direct ownership in Philippine Ship Manning Co. Issue: Will F Co.s investment in P Co. and Philippine Ship Manning Co. violate the citizenship requirement for private recruitment firms (such as Philippine Ship Manning Co.) under the Labor Code?
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Ruling: No. Under Article 27 of the Labor Code, only Filipino citizens or corporations at least 75% of the authorized and voting capital stock of which is owned and controlled by Filipino citizens shall be permitted to participate in the recruitment and placement of workers, locally and overseas. For as long as P Co. maintains its 60% Filipino ownership, all its shares, including the 40% owned by F Co. shall likewise be considered Filipino-owned. This is based on the control test, which provides that shares belonging to corporations at least 60% of the capital of which is owned by Filipino citizens, shall be considered of Philippine nationality. Consequently, P Co.s ownership in Philippine Ship Manning Co. shall likewise be considered as wholly Filipino-owned, including the equity owned by F Co. considering that the controlling ownership in P Co. is the 60% Filipino-owned shares. However, the ownership structure as viewed using the control test will not necessarily reflect in the composition of Philippine Ship Manning Co.s board of directors. The AntiDummy Law provides that the election of aliens as members of the board of directors of corporations engaging in partly nationalized activities shall be allowed in proportion to their allowable participation or share in the capital of such entities. Therefore, Philippine Ship Manning Co. can only have a maximum of 25% foreign members on its board of directors.

SEC Opinion No. 10-09 dated January 20, 2010 A Philippine corporation can elect foreign directors to the boards of its wholly-owned Philippine subsidiaries, provided the total number of such foreign nominee-directors in each board will not exceed 40% of the boards membership. Facts: A Co. is a publicly-listed domestic corporation engaged in real estate activities. The capital stock of A Co. is owned 60% by Filipinos and 40% by foreigners. A Co. has several wholly-owned subsidiaries. The foreign shareholders of A Co. wish to be represented in the boards of A Co.s wholly-owned subsidiaries. Issues: 1. Are the foreign shareholders of A Co. entitled to be represented on the boards of A Co.s wholly-owned subsidiaries? 2. On the assumption that there are 5 directors, can 2 foreign directors (representing A Co.s foreign shareholders) be elected to the boards of A Co.s wholly-owned subsidiaries in proportion to the foreign shareholders 40% interest in A Co.? Ruling: 1. Since A Co. is the stockholder of the wholly-owned subsidiaries, it is A Co. itself, not its shareholders, which is entitled to elect directors to the boards of its wholly-owned subsidiaries, because a corporation has a juridical personality separate from that of its stockholders. The rule is that unless otherwise provided in the by-laws, it is the prerogative of the board of directors of a corporation to appoint nominees to the board of directors of other corporations of which it is a stockholder, whose acts shall be under the ultimate direction of the board of directors of the appointing corporation. In order to qualify a nominee, the appointing corporation must assign at least one qualifying share to the nominee, and the assignment must be properly recorded in the corporate books.

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2. Yes. Assuming that the law governing A Co.s subsidiaries does not ban foreigners from becoming corporate directors or provides more stringent restrictions, A Co., not its foreign shareholders, may elect two foreign nominee-directors to the boards of its wholly owned subsidiaries.

Court Decision
De La Salle University, Incorporated vs. Commissioner of Internal Revenue CTA (First Division) Case No. 7303 promulgated January 5, 2010 To be exempt from income tax and VAT under Section 4(3), Article XIV of the 1987 Constitution, a non-stock, nonprofit educational institution must prove with sufficient documents that the income for which exemption is sought is actually, directly and exclusively used for educational purposes. Facts: Petitioner De La Salle University, Incorporated is a non-stock, non-profit domestic corporation and educational institution, organized and existing under Philippine laws. Respondent CIR assessed Petitioner deficiency income tax and VAT on its income from the lease of its premises as bookstores and canteens, and deficiency DST on its lease and loan contracts for the fiscal years 2001, 2002 and 2003. Due to Respondent CIRs inaction on Petitioners protest, Petitioner appealed to the Court of Tax Appeals (CTA). Petitioner argued that pursuant to Section 4(3), Article XIV of the 1987 Constitution, its rent income is exempt from income tax and VAT because it was used for educational purposes, including the following: 1) to finance its loan payments to Philippine Trust Company, the original loan proceeds of which were used for the construction of a PE Sports Complex; and 2) to finance contributions to St. Yons Educational Services, Inc. (St. Yons), an institution that operates a dormitory for Petitioners visiting professors. Respondent, on the other hand, argued that the Constitutional exemption requires that both the revenues and the assets must be used actually, directly and exclusively for educational purposes. The lease of Petitioners premises was for a commercial or non-educational purpose and therefore falls outside the ambit of the Constitutional exemption. On the deficiency DST assessment on its lease contracts, Petitioner maintained that its lessees contractually assumed the obligation to pay the DST due. On the deficiency DST on the loan agreement, Petitioner proved actual DST remittance through the creditor-banks use of online electronic DST imprinting machine. Issues: 1. Is Petitioners rental income from its bookstores and canteens subject to income tax and VAT? 2. Is Petitioner liable for DST on its lease and loan contracts?

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Ruling: 1. Yes. Petitioners rental income is subject to income tax and VAT. The 1987 Constitution provides that all revenues and assets of non-stock, nonprofit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. In order to come within the ambit of the Constitutional exemption, the following conditions must be met: a. The institution must be a non-stock, non-profit educational institution; and b. The income must be used actually, directly and exclusively for educational purposes. While Petitioner clearly met the first requirement, it failed to sufficiently prove that the rent income it had earned was actually, directly and exclusively used for educational purposes. Thus, while Petitioner utilized its rent income to finance the loan payments to Philippine Trust Company, the proceeds of the loan were not accounted for, nor reported as an addition to the PE Sports Complex Fund. Thus, the claimed use of the loan proceeds for construction of the PE Sports Complex was not sufficiently proven. With respect to the contributions to St. Yons which also came from the rent income, while Petitioner submitted the Articles of Incorporation of St. Yons, it did not submit its contract with St. Yons for the operation of a dormitory for Petitioners visiting professors. Hence, the nature of Petitioners transactions and the basis of the amounts paid to St. Yons cannot be ascertained. With respect to Petitioners other disbursements, a discrepancy was noted between the amount of expenditures recorded in the subsidiary ledgers and the amount reflected in the disbursement vouchers. Petitioner explained that the discrepancy refers to disbursements made for renovations, although the supporting documents were inadvertently misplaced. In the absence of documents, Petitioner was not able to fully account for and substantiate all disbursements; hence, the court was unable to ascertain that the rent income was indeed used for educational purposes.

2. Petitioner is liable for deficiency DST on the lease contracts but not on the loan agreements. Petitioner is not liable for deficiency DST on the loan contracts. The loan documents it submitted bear the imprint of the DST imprinting machine used by the creditor-bank, and this proves remittance of the DST. Petitioner is, however, liable for deficiency DST on the lease contracts. Although the parties contractually agreed that the lessees shall pay the DST, the agreement does not bind the government. Petitioner, as lessor, should have assumed the role of a collecting agent with the duty of charging and collecting from the lessee the DST due on its lease contracts.

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SyCip Gorres Velayo & Co. 6760 Ayala Avenue, Makati City, Philippines Telephone: (632) 891-0307 Fax: (632) 819-0872 2010 SyCip Gorres Velayo & Co. All Rights Reserved. FEA no. 1000008 SGV & Co. maintains offices in Makati, Cebu, Davao, Bacolod, Cagayan de Oro, Baguio, General Santos and Cavite. For an electronic copy of the Tax Bulletin or for further information about Tax Services, please visit our website www.sgv.com.ph

We welcome your comments, ideas and questions. Please contact Ma. Fides A. Balili via e-mail at Ma.Fides.A.Balili@ph.ey.com or at telephone number 894-8113 and Mark Anthony P. Tamayo via e-mail at Mark.Anthony.P.Tamayo@ph.ey.com or at telephone number 894-8391.

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