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Summary of significant CTA cases promulgated in November 2008

By Atty. Maria Noeli V. Francisco 1. LINDBERG PHILIPPINES, INC., vs. CITY OF MAKATI and NELIA A. BARLIS, in her capacity as the TREASURER OF THE CITY OF MAKATI (CTA E.B. No. 349, November 11, 2008) Under Build-Operate-Transfer (BOT) arrangements, does the act of advancing the necessary capital by employing and paying for the services of a contractor who builds the power plant, be considered as an activity of doing business, necessarily taxable in the principal office of a company? Can a company involved in BOT arrangements, be appropriately classified as a contractor selling its services for a fee? In this case, the CTA resolved the issue on the jurisdiction of the City of Makati in taxing the principal office of the petitioner and its classification as a contractor for local business tax purposes.

business transactions in its office in Makati City, and its alleged payments of its business taxes to the municipalities where it has branch offices were also not proven. CTA En Banc emphasized that petitioner cannot merely deny the fact that it is covered by the taxing jurisdiction of Makati City without adducing evidence to prove otherwise. Under the BOT arrangement, petitioner advances the necessary capital by employing and paying for the services of a contractor which will build the power plant. These transactions, prior to the completion of the power plants and branch offices of the petitioner, are considered activities of doing business, which are necessarily taxable in its principal office, considering that all the documents and deals are arranged in its principal office. In rebutting petitioners argument on the basis of Section 50 of the Local Government Code, the CTA En Banc reiterated that in the ordinary course of business, particularly in the nature of a BOT business, prior to the building and construction of any power plant at any locality, the usual negotiations thereon, until the full completion of the contract of BOT, is usually done in the principal office. Naturally, the transaction is taxable as an exercise of a business. Although the power plants, subject of petitioners contract of BOT, are situated at different localities, still the act of financing the construction and operation thereof, are considered doing business which appears to be have been performed at petitioners principal office in Makati City. It is therefore clear that the City of Makati has jurisdiction to tax the petitioner. In ruling that the petitioner is a contractor and not merely a financing or holding company, the CTA En Banc cited Section 139 of the Local Government Code and Section 3A.01(t)

Noting the pronouncement of the Court in Division, the CTA stressed that the City of Makati, where petitioners principal office is found, has the power to tax its business, but as much as only thirty percent (30%) of petitioners gross sales/receipts. Apart from petitioners admission that its principal office is in Makati City, it was also found that the principal office is in charge of reviewing and approving the correctness of the invoices issued by the branch offices. Such activities done in the principal office are evident of business transactions which should necessarily be recorded. Petitioner failed to refute that there are no recorded sales or

of the Revised Makati Revenue Code1 defining the term contractor which in essence includes any person whether natural or juridical as long as the activity of such person consists essentially of the sale of services for a fee. On the basis of petitioners Articles of Incorporation and nature of its operations as described in its financial statements, it can be appropriately classified as a contractor. As cited by petitioner in Tatad vs. Garcia2, it was expressly mentioned therein that under the BOT arrangement, there is not only the financing of the project that is involved, but also the construction, maintenance and operation thereof. Thus, petitioner is undeniably not only engaged in financing or investment activities, but also the sale of services which readily classifies it as a contractor. 2. ACCENTURE, INC., vs. COMMISIONER OF INTERNAL REVENUE (CTA Case No. 7046, November 13, 2008) In claiming for refund or issuance of tax credit certificate in relation to unitilized input VAT on domestic purchases of goods and services, does the allegation that the taxpayers clients are foreign clientssufficiently meet the requirement of the law that the recipient of its service is doing business outside the Philippines? No. The phrase foreign clients is couched in general terms that the Court cannot just simply assume that they are doing business outside the Philippines. A foreign client may also be engaged in doing business in the Philippines and

in that case, when the petitioner and the recipient of its services are both doing business in the Philippines, their transaction falls squarely under Section 108(A) of NIRC of 1997, as amended; governing domestic sale or exchange of services subject to 12% VAT. Even if there is an allegation that these foreign clients are doing business outside the Philippines, still the Court cannot give weight to such allegation. Mere allegations are not sufficient but must be accompanied by supporting evidence.3 Thus, petitioner failed to prove that its sale of services to foreign clients qualifies for zero percent VAT. 3. COMMISSIONER OF INTERNAL REVENUE vs. INTEL TECHNOLOGY PHILIPPINES, INC. (CTA E.B. No. 379, November 18, 2008) Is the failure to indicate the date of acceptance of the waiver by the BIR sufficient to render such waiver void? Yes. As aptly quoted by the Second Division, the Supreme Court has enumerated the requirements for a valid waiver to be: A valid waiver of the statute of limitations, under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, must be (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum
Accenture In.c vs. Commissioner of Internal Revenue, CTA Case Nos. 7158, 7285 & 7313, August 7, 2008.

City Ordinance No. 2004-A-025, otherwise known as An Ordinance Adopting the Revises Makati Revenue Code [formerly under Section 3A.01(q) of Municipal Ordinance No. 072-92, otherwise known as the Makati Revenue Code]. 2 243 SCRA 436.

Order (RMO) No. 20-90 on 4 April 1990 to lay down an even more detailed procedure for the proper execution of such waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with. Following the above, the Second Division correctly found the waivers in question defective on the following grounds: 1) the waivers were not signed by the Commissioner of Internal Revenue considering that the assessed amount exceeds P1,000,000.00; 2) as regards the waivers executed on June 9, 2003 and November 28, 2003, respondent failed to indicate the date of its acceptance of the waiver; and 3) petitioner was not furnished copies of the waivers executed on January 13, 2003, June 9, 2003, November 28, 2003 and March 8, 2004 by the respondent. Petitioner cannot correctly argue that as all the essential elements of a contract exists, the waiver should be declared valid. A waiver of the statute of limitations under the NIRC, is not an ordinary agreement, according to the Supreme Court, it is to a certain extent, is a derogation f the taxpayers right to security against prolonged and unscrupulous investigations and must therefore be carefully and strictly construed. 4 It is governed not by the general provisions of the New Civil Code but by the National Internal Revenue Code following the basic

principle in statutory construction that a special law prevails over a general law. The Supreme Court in the landmark case Philippine Journalists, Inc. vs. Commissioner of Internal Revenue5, laid to rest the issue on the necessity of full compliance with the requisites provided by law on waivers. Affirming this Court, the Supreme Court categorically declared that waiver is not valid and binding when it does not conform to the provisions of RMO No. 20-90. As to the requirement of the correct revenue official who signs on behalf of the government, it was said that: The waiver is also defective from the government side because it was signed only by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The waiver is not a lateral act by the taxpayer or the BIR, but is a bilateral agreement between two parties to extend the period to a date certain. The conformity of the BIR must be made by either the Commissioner or the Revenue District Officer. This case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and executed almost seven months before the expiration of the three-year prescriptive period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the BIR. Considering that the taxes involved amount to more than P1,000,000.00, the waivers should have been signed by the Commissioner of Internal Revenue and not by any other officer of the BIR. In the same case of Philippine Journalists6, the Supreme Court, applying the same RMO No. 20-90, ruled: Finally, the records show that
Philippine Journalists, Inc. vs. Commissioner of Internal Revenue (G.R. No. 167765, June 30, 2008). 6 Ibid.

Ounano vs. Court of Appeals, G.R. No. 129279, 4 March 2003, 398 SCRA 525, citing People vs. Donato, G.R. No. 72969, 5 June 1991, 198 SCRA 130, cited in Philippine Journalists, Inc. vs. Commissioner of Internal Revenue (G.R. No. 167765, June 30, 2008.

petitioner was not furnished a copy of the waiver. Under RMO No. 20-90, the waiver must be executed in three copies with the second copy for the taxpayer. The Court of Appeals did not think this was important because the petitioner need not have a copy of the document it knowingly executed. It stated that the reason copies are furnished is for a party to be notified of the existence of a document, event or proceeding. The flaw in the appellate courts reasoning stems from its assumption that the waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement between the taxpayer and the BIR. When the petitioners comptroller signed the waiver on September 22, 1997, it was not yet complete and final because the BIR had not assented. There is compliance with the provision of RMO No. 20-90 only after the taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but of the acceptance by the BIR and the perfection of the agreement. The waiver document is incomplete and defective and thus the three-year prescriptive period was not tolled or extended and continued to run until April 17, 1998. Consequently, the Assessment/Demand No. 33-1-00075794 issued on December 9, 1998 was invalid because it was issued beyond the three (3) year period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-046 which petitioner received on March 28, 2000 is also null and void for having been issued pursuant to an invalid assessment.

4. CE LUZON GEOTHERMAL POWER COMPANY, INC. vs. COMMISSIONER OF INTERNAL REVENUE (CTA Case No. 6792, November 25, 2008) To be entitled to a tax refund or issuance of a tax credit certificate on account of unutilized excess input VAT paid on its domestic purchases of goods and services which attributable to zerorated sales under the EPIRA LAW and NIRC, what are the requisites? Pursuant to the provisions of Sections 110(B) and 112(A) of the NIRC of 1997, as amended, the requisites are as follows: 1) there must be zero-rated or effectively zero-rated sales; 2) that input taxes were incurred or paid; 3) that such input taxes are attributable to zero-rated sales or effectively zerorated sales; 4) that the input were not applied against any output VAT liability; and 5) that the claim for refund was filed within the two-year prescriptive period. 1st requisite: Petitioners claim for zero-rating of its sales of electricity as a power generation company stems from the provisions of Par. 5, Section 6 of RA 9136. Based on said law, to qualify for VAT zero-rating it must be established that the claimant: 1) is a generation company; and 2) it derived its sales from power generation. In the case at bar, petitioner proved that it is engaged in the business of power generation and the subsequent sale of generated power to the Philippine National Oil CompanyEnergy Development Corporation. However, report of the independent CPA showed a discrepancy between the gross receipts from sales of generated power, as reflected in the VAT returns and as shown in the official receipts. 2nd and 3rd requisites:

Only a portion of the amount claims was found to have met the substantiation requirements prescribed under Section 110(A) and 113(A) of the NIRC of 1997, as implemented by Section 4.104-1, 4.104-5 & 4.108-1 of Revenue Regulations No. 7-95, hence only a certain portion of the claim was considered valid. 4th requisite: After applying the creditable VAT withheld of P21,920,865.53 and monthly VAT payment of P13,015,106.29 totalling to P34,935,971.82 against petitioners output tax liability of P36,534,775.90, there still remains an output tax due of P1,598,804.08, which shall be offset against the substantiated input VAT of P15,550,088.76. Thus, only the net input VAT amount of P13,951,284.68 is unutilized or unapplied, as of the fourth quarter of 2002. Although the petitioner carried-over the subject claim to the succeeding taxable quarters until the fourth quarter of 2003, the same remained unapplied as petitioner had no output VAT liability during those quarters. Moreover, in its VAT return for the third and fourth quarters of 2003, petitioner deducted the said input VAT as Any VAT Refund/TCC Claimed from the Total Available Input Tax. This means that the substantiated claim of P13, 951,284.68 can no longer be used as credit against petitioners future output VAT liability. 5th requisite: The petitioners claim was timely filed. The reckoning of the two-year prescriptive period for the filing of a claim for input VAT refund commences from the date of filing the corresponding Quarterly VAT Return (Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, 524 SCRA 733).

Counting from the date when petitioner filed its Quarterly VAT Return for the third quarter of 2001 on October 25, 2001, both the administrative claim filed on September 26, 2003 and the Petition for Review filed on September 30, 2003, fell within the two-year prescriptive period. Likewise, counting from the dates when petitioner filed its Quarterly VAT returns for the 4th quarter of 2001 and the four quarters of 2002 on January 10, 2002, April 10, 2002, July 24, 2002, October 25, 2002 and January 27, 2003, respectively, both the administrative claim filed on December 18, 2003 and the Petition for Review filed on December 19, 2003 fell within the two-year prescriptive period. The CTA partially granted petitioners Petition for Review entitling it to a refund or issuance of a tax credit certificate, representing unutilized input VAT attributable to zero-rated sales for the third and fourth quarters of 2001 and all four quarters of 2002 in the reduced amount as found by the Court. 5. STENIEL MINDANAO PACKAGING CORPORATION vs. CITY TREASURER OF DAVAO CITY (CTA AC No. 39, November 27, 2008) Is the petitioners sale of its packaging materials to both export-oriented and non-export oriented clientele considered as export sales in accordance with Article 143(c) of R.A. 7160 (Local Government Code of 1991)? In relation to Subsection (c) of aforequoted Section 143, an exporter for purposes of imposing local business tax, shall refer to those principally engaged in the business of exporting goods and merchandise, as well as manufacturers and producers whose goods or products are both sold domestically and abroad as provided under Article 232, of the Implementing

Rules and Regulations of RA 7160, or the Local Government Code. Thus, to be considered an exporter under the said Code, it is necessary that the business entity is engaged, either in the exportation of its goods and merchandise; or in the manufacture or production of goods or products that are both sold domestically and abroad. Indubitably, petitioner is a manufacturer and a seller of packaging materials such as corrugated fiber board containers, cartons and boxes, which are sold to different clients both for local consumption and export. In other words, petitioner does not export its packaging materials but sells them instead to export-oriented enterprises, which in turn utilize the same to package their products for export. Notably, the Implementing Rules and Regulations of Executive Order No. 226 (Omnibus Investments Code) considers packaging materials constituting supplies as forming part of the export product. Based on Article 39(k), packaging materials form part of the export products. In spite of this provision however, it does not necessarily make petitioner an exporter as contemplated under the Local Government Code. The provision merely confirms that the packaging materials used by export oriented enterprises form part of the export product for purposes of granting incentives to Board of Investment (BOI)registered enterprises. Furthermore, the tax credit mentioned therein pertains to National Internal Revenue taxes and Customs duties. There is no mention of local taxes thereby making said provision not applicable in the case. The business tax is imposed upon petitioner for its privilege of engaging in business in the City of Davao, specifically, its business of manufacturing corrugated fiber

containers, cartons and boxes. This imposition of business tax is provided for under Section 143 of the Local Government Code of 1991. The said Code does not make the manufacturer who sells its manufactured product to an exporter who utilizes the same to produce its export product, an exporter, petitioner cannot be considered as an exporter, but rather, by its own admission, as a manufacturer of any article of commerce of whatever kind and nature. A company that does not export it products, but sells it to local companies, which in turn utilize said products, as inputs in the manufacture of other products that are exported abroad, is locally taxable as manufacturer under Section 143(a), and not under Section 143(c) of RA No. 7160.7 Additionally, petitioners sales of manufactured corrugated containers, cartons, and boxes cannot fall under the term export sales because Section 143(c) of RA No. 7160 only applies to sales of essential commodities, limited to those enumerated in said Subsection. As the manufactured corrugated boxes of petitioner are neither considered exports nor one of the essential commodities enumerated in Section 143(c) of RA No. 7160, petitioners sales during taxable year 2004 are all considered local sales subject to the tax rate provided under Section 143(a) of the sam Code. Hence, petitioner is taxable as a manufacturer under Section 143(a), and not under Section 143(c), of RA No. 7160. Petitioner was denied its claim for refund or issuance of tax credit certificate.

Letter of the Minister of Finance to Revenue Officer Marzan of Makati dated February 22, 1986 as quoted in the Decision of the lower court, Annex A, Appeal, Docket, pp. 16-20.