Philippine Chamber of Commerce and Industry (PCCI) TAX SEMINAR

Tuesday, April 22, 2008, Dusit Hotel Nikko, Makati City

RECENT SIGNIFICANT DECISIONS ON TAXATION
JUANITO C. CASTAÑEDA, JR.
Associate Justice, Court of Tax Appeals

In Commissioner of Internal Revenue (CIR) vs. Michel J. Lhuiller, G.R. No. 150947, July 15, 2003, 406 SCRA 178, the Supreme Court (SC), held: “The Supreme Court by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts should take their bearings.”

A.

IRREVOCABLE CARRY-OVER OF EXCESS INCOME TAX; NO SECOND MOTION FOR RECONSIDERATION; DECISIONS OF COURT OF APPEALS (CA) ARE NOT BINDING ON CO-EQUAL CTA; SC HAS FINAL SAY

In its March 28, 2007 resolution, the Supreme Court denied taxpayer’s petition filed on March 9, 2007 assailing the January 18, 2007 decision of the CTA for: (a) failure of counsel to submit his IBP proof of payment for current year (2006 OR indicated); (b) submitting a verification of the petition,

certification of non-forum shopping and affidavit of service that failed to comply with the 2004 Rules on Notarial Practice with respect to competent evidence of affiants’ identities; and (c) failure to give an explanation why service was not done personally as required by Section 11, Rule 13 in relation to Section 3, Rule 45 and Section 5(d), Rule 56 of the Rules of Court. On July 5, 2007, petitioner’s motion for reconsideration was denied with finality. A second motion for reconsideration was filed claiming extraordinarily persuasive reasons. The high tribunal held that a second motion for reconsideration is prohibited and that there was no compelling reason to excuse non-compliance. CA decisions are not superior to CTA, the CA and the CTA being co-equal under RA 9282. Also, CA decision in an action in personam binds only the parties in the case. Most importantly, SC is not bound by the CA decisions & its rulings are binding on all courts.

On the merits, the Supreme Court held that under Section 76 of the 1997 NIRC, a taxable corporation with excess quarterly income tax payments may choose to claim for a refund or tax credit certificate or to automatically carry-over the excess tax for crediting against its income tax liabilities in the succeeding years. Once the carry-over option is taken, actually or constructively, it becomes irrevocable. “Since the petitioner elected to carry

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over its excess credits for the year 2000 in the amount of P4,627,976 as tax credits for the following year, it could no longer claim a refund. Again, at the risk of being repetitive, once the carry-over option was made, actually or constructively, it became forever irrevocable regardless of whether the excess tax credits were actually or fully utilized. Nevertheless, as held in Philam Asset Management, Inc., the amount will not be forfeited in favor of the government but will remain in the taxpayer’s account. Petitioner may claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully utilized.” Systra Philippines, Inc. vs. CIR, G.R No. 176290, September 21, 2007.

B.

ONLY FINAL ADJUSTMENT RETURN FOR PREVIOUS – NOT SUCCEEDING – TAXABLE YEAR IS REQUIRED TO CLAIM EXCESS INCOME TAX CREDIT

The taxpayer’s claim for refund of 1997 unutilized tax credit was allowed although it marked “x” indicating “to be carried as tax credit next year” on the box appearing on its 1998 income tax return. Under Section 69 of the pre-1997 NIRC, excess income tax credit may only be carried over to the succeeding taxable year. Hence, the explanation of the taxpayer that the marking was only meant to indicate that it meant to carry over its 1998 excess

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income tax to the succeeding year. The Tax Code merely requires the filing of the final adjustment return for the preceding – not the succeeding – taxable year. There is no legal requirement that the final adjustment return of the succeeding year be presented to the BIR in requesting a tax refund. At any rate, the taxpayer attached its 1999 and 2000 annual income tax returns. In 1999 the taxpayer incurred losses and had no tax liabilities against which the 1997 excess tax credits could be applied or utilized. State Land Investment Corporation vs. CIR, G.R. No. 171956, January 18, 2008.

C.

TAX MUST BE FOR PUBLIC PURPOSE

LOI 1464 issued on June 3, 1985 by President Ferdinand Marcos provided for a capital recovery component (CRC) on the domestic sale of fertilizers of not less than P10 per bag in favor of Planters Products, Inc. (PPI). Fertiphil Corporation sought a refund of the levy in a suit for collection and damages before the Makati Regional Trial Court (RTC), which granted the refund. The Court of Appeals (CA) affirmed the RTC decision. In sustaining the CA and RTC decisions, the Supreme Court ruled that Fertiphil has locus standi or right to appear in court since it suffered direct injury from the levy being required to pay it. It further held: The RTC has jurisdiction to consider the constitutionality of statutes, executive orders, presidential decrees
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and other issuances pursuant to Section 5, Article VIII of the 1987 Constitution. Judicial review of official acts on the ground of

unconstitutionality may be sought or availed of through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. The constitutionality of LOI 1465 is the very lis mota of the complaint for collection. The refund could not be granted without LOI 1465 being declared unconstitutional. The imposition of the levy was an exercise by the State of its taxation power. The primary purpose of the levy is revenue generation. “An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose.” The levy is not for a public purpose. “First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. x x x Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI becoming financially ‘viable.’ x x x Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by the FPA to Far East Bank and Trust Company, the depositary bank of PPI. x x x Fourth, the levy was used to pay the corporate debts of PPI.” The LOI is unconstitutional even if enacted under the police power as it did not promote public interest. Planters Products, Inc. vs. Fertiphil Corporation, G.R. No. 166006, March 14, 2008. D. TCCs USED AS PAYMENT FOR EXCISE TAXES BY A TRANSFEREE IN GOOD FAITH ARE VALID
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PAYMENTS; NEED FOR PUBLICATION OF RULES; ASSESSMENTS ARE VOID DUE TO LACK OF DUE PROCESS

BIR assessed Pilipinas Shell Petroleum Corporation (Shell) for deficiency excise taxes for the taxable years 1992 and 1994 to 1997. Shell had paid its excise tax liabilities through Tax Credit Certificates (TCCs) acquired through the Department of Finance (DOF) One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (Center) from other BOI-registered companies. The payments were duly approved by the Center through the issuance of Tax Debit Memoranda (TDM), and the BIR likewise accepted the TCCs by issuing its own TDM covering said TCCs, and corresponding Authorities to Accept Payment for Excise Taxes (ATAPETs). This was protested and appealed to the CTA, which sitting in Division ruled in favor of PSPC. [Incidentally, the contested payments here are also covered by a case pending appeal before the CA, where the CTA previously ruled in Shell’s favor.] However, upon appeal, the CTA En Banc upheld the assessments. On appeal, the Supreme Court reversed the CTA En Banc and reinstated the CTA Division decision, ruling as follows:

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1.

TCCs duly issued by the Center are immediately valid and effective and are not subject to post-audit as a suspensive condition. Post-audit contemplated in the TCCs does not pertain to their genuineness or validity, but on computational discrepancies that may have resulted from the transfer and utilization of the TCC. A tax credit is transferable in accordance with pertinent laws, rules and regulations.

2.

Shell, the transferee, is not required by law to be a capital equipment provider or a supplier of raw material and/or component supplier to the transferors. What the law requires is that the transferee be a BOI-registered company.

3.

Implementing Rules and Regulations (IRR) of EO 226, which incorporated the October 5, 1982 Memorandum of Agreement (MOA) between the MOF and BOI merely requires is that the transferee be a BOI-registered company.

4.

While October 5, 1982 MOA appears to have been amended by the August 29, 1989 MOA between the DOF and BOI, such may not operate to prejudice transferees, as it remains only an internal agreement.

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5.

Moreover, there is lack of publication with the National Administrative Register of the UP Law Center mandatorily required under Chapter 2, Book VII, EO 292, the Administrative Code of 1987. Shell cannot be compelled to submit sales documents for the purported post-audit.

6.

Liability clause at the dorsal portion of the TCCs (“Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE) provides only for solidary liability relative to the transfer of the TCCs from the original grantee to a transferee. There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned. The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center.

7.

Shell is a transferee in good faith and for value. No evidence reveals that Shell participated in any way in the issuance of the

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subject TCCs to the corporations who in turn conveyed the same to Shell. It was not involved in the processing for the approval of the transfers of the subject TCCs. 8. Pro-forma supply agreements allegedly executed by Shell and the transferors covering the sale of the Industrial Fuel Oil (IFO) were denied by Shell. BIR failed to present supply agreements to prove participation by Shell. 9. TCCs were already applied and cannot be canceled after acceptance as payment. 10. That there was fraud in the procurement of the TCCs is irrelevant and immaterial to this case. Real issue here is whether fraud or breach of law attended the transfer of said TCCs. The remedy is to run after fraud perpetrators. 11. Center has authority to cancel TCCs but may only do so before a transferred TCC has been fully utilized. 12. Center’s Excom Resolution No. 03-05-99 authorizing

cancellation of TCCs and TDMs granted without legal basis, covered by a penal provision therein, is invalid and unenforceable, not having been duly published.

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13.

There was non-compliance with statutory and procedural due process. Revenue Regulations No. 12-99 is applicable. There was no notice of informal conference and a preliminary assessment notice, as required. Shell’s November 4, 1999 motion for reconsideration of the purported Center’s findings and cancellation of the subject TCCs and TDM was not even acted upon. Shell was merely informed that it is liable for the amount of excise taxes it declared in its excise tax returns for 1992 and 1994 to 1997 covered by the subject TCCs via the formal letter of demand and assessment notice.

14.

For being formally defective, the November 15, 1999 formal letter of demand and assessment notice is void. Paragraph 3.1.4 of Sec. 3, RR 12-99 provides that the letter of demand “shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise the formal letter of demand and assessment notice shall be void.” the BIR merely relied on the findings of the Center which did not give Shell ample opportunity to air its side.

Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue, G.R. No. 172598, December 21, 2007.

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E.

BUREAU OF CUSTOMS COLLECTION SUIT ON CANCELLED TDMs/TCCs IS PROPER

On November 3, 1999, the DOF Secretary informed Shell that itsTDMs and corresponding TCCs assigned to it by various entities with the approval of the BOI and the One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (Center) were fraudulently issued and transferred, and had to be cancelled. Some of these TCCs were subsequently accepted as payment by the Bureau of Customs (BoC) for its taxes and import duties in 1997 and 1998. The Secretary asked Shell to immediately pay the BoC and the BIR the value of the cancelled TCCs as well as related penalties, surcharges and interest. Despite Shell’s objections, the Commissioner of Customs demanded from it the amount of P209,129,141. Shell filed a protest on December 23, 1999. However, the BoC did not act thereon. Consequently, Shell filed a petition for review questioning the legality of the cancellation of the TCCs in the CTA. On April 22, 2002, the respondent RP, as represented by the BoC, filed a complaint for collection before the Manila Regional Trial Court (RTC) for P10,088,912 in unpaid customs duties and taxes, alleging that its TCCs purchased from Filipino Way Industries and used to pay customs duties and taxes on its importations in 1997 were spurious.

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Shell questioned the RTC’s jurisdiction. Both the RTC and the Court of Appeals (CA) on petition for certiorari ruled that the RTC has jurisdiction. Upon review by certiorari, the Supreme Court held: 1. Assessments inform taxpayers of their tax liabilities. Under Section 1601 of the Tariff and Customs Code of the Philippines (TCCP), the assessment is in the form of a liquidation made on the face of the import entry return and approved by the Collector of Customs. 2. Under Section 1603 of the old TCCP, an assessment or liquidation of the BoC attains finality and conclusiveness one year from the date of final payment except when (a) there was fraud; (b) there is a pending protest or (c) the liquidation of import entry was merely tentative. There was no fraud as Shell claimed to be in good faith. No protest was made when Shell paid without protest using the TCCs. Liquidation was not a tentative one as the assessment had long become final and incontestable. Consequently, the respondent had the right to file a collection case. 3. Under Section 1204 of the TCC, import duties constitute a personal debt of the importer that must be paid in full. The

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importer’s liability constitutes a lien on the article which the government may choose to enforce while the imported articles are in its custody or control. 4. When respondent released the importer’s goods, its lien over the goods was extinguished. Consequently, respondent could only enforce the payment of duties by filing a collection case. 5. Under the old CTA Law, RA 1125, prior to RA 9282 amendment, CTA jurisdiction was limited to decisions of the Commissioner of Customs in instances enumerated under then Section 7(2). RTC has jurisdiction under Section 19(6) of the Judiciary Reform Act of 1980, which provides that RTCs shall exercise exclusive original jurisdiction in all cases not within the exclusive jurisdiction of any court, tribunal, person or body exercising judicial or quasi-judicial functions. 6. Respondent should collect Shell’s outstanding duties and taxes notwithstanding the pendency of the CTA case questioning the validity of the cancellation. Anyhow, Shell may seek a refund if it ultimately wins the CTA case. Pilipinas Shell Petroleum Corporation vs. Republic of the Philippines, represented by the Bureau of Customs, G.R. No. 161953, March 6, 2008.

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F.

PRESCRIPTIVE PERIOD

On April 14, 2000, the taxpayer filed its petition for review claiming refund based on its final adjusted return filed on April 14, 1998. Counting 365 days as a year pursuant to Article 13 of the Civil Code, the CTA found that the petition was filed beyond the two-year prescriptive period equivalent to 730 days for filing the claim under Section 229 of the NIRC, ruling that the petition was filed 731 days after the filing of the return. On appeal, the CA reversed the CTA and ruled that Article 13 of the Civil Code did not distinguish between a regular year and a leap year. The SC affirmed the CA’s reversal but ruled that the basis for the reversal is EO 292 of the Administrative Code of 1987, a more recent law, which provides that a year is composed of 12 calendar months. Using this, the petition was filed on the last day of the 24th calendar month from the day the taxpayer filed its final adjusted return. Commissioner of Internal Revenue vs. Primetown Property Group, Inc., G.R. No. 162155, August 28, 2007.

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G.

ONLY NOTICE REQUIRED IN PRIOR LAW; FAILURE TO PROTEST WITHIN 30 DAYS IS FATAL

In two notices dated October 28, 1988, the Commissioner of Internal Revenue validly assessed for 1986 deficiency percentage and documentary stamp taxes in the total amount of P129,488,656.63 by notifying the taxpayer of his findings. Section 228 of the 1997 NIRC requiring that the taxpayer should inform the taxpayer in writing of the law and facts on which the assessments for deficiency taxes were made is not applicable here. What applies is Section 270 (subsequently renumbered 229 prior to amendment as 228) of the old law prior to amendment by RA 8424, which merely required notice of findings. Due process was observed when a pre-assessment notice was issued and the taxpayer was given the opportunity to discuss the findings and even prepared worksheets in connection with the findings. The December 10, 1988 reply which stated “[a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the assessment” does not qualify as a protest. Hence, the assessments became final and unappealable. Commissioner of Internal Revenue vs. Bank of the Philippine Islands, G.R. No. 134062, April 17, 2007.

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H.

30-DAY PERIOD TO APPEAL IN CASE OF FAILURE TO ACT BY CIR WITHIN 180 DAYS FROM SUBMISSION OF DOCUMENTS IS JURISDICTIONAL; NEGLIGENCE OF COUNSEL IS NOT EXCUSABLE; ISSUES CANNOT BE RAISED FOR THE FIRST TIME ON APPEAL

The CIR failed to act on the disputed assessment within 180 days from date of submission of documents. Petitioner opted to file a petition for review before the CTA. Unfortunately, the petition for review was filed out of time; i.e., it was filed more than 30 days after the lapse of the 180-day period. Consequently, it was dismissed by the CTA for late filing. Petitioner did not file a motion for reconsideration or make an appeal; hence, the disputed assessment became final, demandable and executory. Negligence of counsel, i.e., alleged misfiling of Resolution by counsel’s secretary, is inexcusable. After availing the first option, i.e., filing a petition for review which was however filed out of time, petitioner cannot successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the CTA, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner’s inaction. Issue of prescription cannot be raised for the first time on appeal. Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue, G.R. No. 168498, April 24, 2007 Resolution.

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I.

REQUEST FOR RE-INVESTIGATION NOT GRANTED DOES NOT TOLL PRESCRIPTIVE PERIOD; INVALID AND LAPSED WAIVER OF PRESCRIPTION

Under Section 320 of the 1977 NIRC, the law then applicable, the period of prescription for assessment and collection is 3 years. The CIR had 3 years from the time he issued assessment notices to BPI on 7 April 1989 or until 6 April 1992 within which to collect the deficiency DST. However, it was only on 9 August 2002 that the CIR ordered BPI to pay the deficiency. For BPI’s protest letters dated 20 April and 8 May 1989 to toll the prescriptive period for collection, the request for reinvestigation should have been granted. There is nothing to show that such request was granted. Neither did the waiver of prescription effective until 31 December 1994 suspend the prescriptive period is invalid. The CIR himself contends that the waiver is void as it shows no date of acceptance in violation of RMO 20-90. At any rates, more than 8 years elapsed since expiry of the waiver before the BIR attempted to collect. Bank of the Philippine Islands (Formerly Far East Bank and Trust Company vs. CIR, G.R. No. 174942, March 7, 2008. See also BPI v. CIR, CTA Case No. 7397, April 9, 2008.

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J.

CTA HAS JURISDICTION ON RMC REVIEW

The CTA, not the Regional Trial Court (RTC), has the jurisdiction to review Revenue Memorandum Circulars (on the taxation of imported motor vehicles through the Subic Free Port in this case), which are considered administrative rulings issued from time to time by the CIR. Asia

International Auctioneers & Subic Bay Motors Corporation vs. Hon. Guillermo L. Parayno, G.R. No. 163445, Dec.18, 2007.

K.

1997 TAX REFORM ACT CANNOT BE APPLIED RETROACTIVELY; WRITTEN CLAIM IS CONDITION PRECEDENT TO FILING A PETITION FOR REVIEW PRIOR THERETO

Under Section 230 of the old Tax Code, an actual written claim for refund is required. Amended income tax return filed on June 17, 1997 cannot be considered as a written claim. Section 204(c) of the 1997 NIRC (RA 8424, the 1997 Tax Reform Act), provides in pertinent part: “That a return filed showing an overpayment shall be considered as a written claim for credit or refund”, can only operate prospectively. The new Tax Code became effective only on January 1, 1998. Tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally in favor of the government. CIR vs. BPI, G.R. No. 134062, April 17, 2007.
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L.

STATUTORY TAXPAYER IS PROPER PARTY TO CLAIM FOR REFUND OF INDIRECT TAXES; INDIRECT TAX EXEMPTION MUST BE CLEARLY GRANTED; 15-DAY APPEAL PERIOD TO CTA EN BANC IS JURISDICTIONAL; SERVICE TO COUNSEL OF RECORD BINDS PETITIONER

Petitioner Silkair, a Singapore-based international air carrier, sought a refund of excise tax paid by Petron Corporation as manufacturer, which shifted the burden of the tax to purchaser Silkair. The CTA Division denied against the claim since it was not the taxpayer. On September 12, 2005, a new counsel entered appearance without the withdrawal of the original counsel. Its original counsel of record received on October 3, 2005 a copy of the September 22, 2005 Resolution of the CTA Division denying its motion for reconsideration of the decision. On October 13, 2005, the original counsel withdrew its appearance with conformity of petitioner and the new counsel requested for an official copy of the Resolution. On October 14, 2005, the new counsel received a copy of the Resolution and requested on October 28, 2005 an extension of time to file petition. The Court En Banc gave it until November 14, 2005. Upon request, another extension until November 24, 2005 was granted and on November 17, 2005, Silkair filed its petition. By Resolution of May 19, 2006, the CTA En Banc dismissed the petition for being filed out of time notwithstanding the grant of extension.

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On petition for certiorari, the Supreme Court affirmed the dismissal, ruling that where no notice of withdrawal or substitution of counsel has been shown, notice to counsel of record is notice to the client citing Section 26, Rule 138 of the Rules of Court on the requirements for withdrawal of counsel. Ruling on the merits, the high tribunal held: The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even he shifts the burden thereof to another. Under Section 130(A)(2) of the NIRC, it is the manufacturer or producer who is subject to excise tax. Thus, Petron Corporation, not Silkair, is the statutory taxpayer entitled to claim a refund based on Section 135 of the NIRC, which exempts from excise tax petroleum products sold to exempt entities under international agreements and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the purchase price. There is no indirect tax exemption under the Air Transport Agreement in the absence of clear showing of legislative intent. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer. Silkair (Singapore) PTE, Ltd. vs. CIR, G.R. No. 173594, Feb. 6, 2008.

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M.

SAVINGS DEPOSIT WITH TIME DEPOSIT FEATURES SUBJECT TO DST; SUBSTANCE OVER FORM

Special savings deposit, which provide for a higher interest rate when the deposit is not withdrawn within the required fixed period but earn interest pertaining to a regular savings deposit when withdrawn prior to such period, are subject to DST on time deposits under Section 180 of the NIRC, as amended by RA 7660, even though evidenced by a passbook. Having a fixed term and the reduction of interest rates in case of pre-termination are essential features of a time deposit. While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. To claim that time deposits evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing of interest. The further amendment of Section 180 of the NIRC and its renumbering as Section 179 by RA 9243, approved on February 17, 2004, does not mean that time deposits for which passbooks were issued were exempt from payment of DST. If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks to
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“cloak” its time deposits as regular savings deposits, as reflected during the deliberations on Senate Bill No. 2518 which eventually became RA 9243. International Exchange Bank vs. CIR, G.R. No. 171266, April 4, 2007. See also Banco de Oro Universal Bank vs. CIR, G.R. No. 173602, January 15, 2007 Resolution.

N.

AVAILMENT OF TAX AMNESTY BY A QUALIFIED APPLICANT EXTINGUISHES TAX LIABILITY

A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. Being a qualified tax amnesty applicant, petitioner duly complied with the requisites enumerated in RA 9420, as implemented by RMC 19-2008. The law mandates that a tax amnesty compliant applicant shall be exempt from the payment of taxes, including the civil, criminal, or administrative penalties under the Tax Code. Metropolitan Bank and Trust Company vs. CIR, CTA EB No. 269, March 28, 2008 Resolution.

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O.

HEALTH MAINTENANCE ORGANIZATION (HMO) NOT ACTUALLY PROVIDING MEDICAL AND/OR HOSPITAL SERVICES IS SUBJECT TO VAT; NONRETROACTIVITY OF BIR RULINGS

An HMO (health maintenance organization), which does not actually provide medical and/or hospital services, but merely arranges for the same, is not VAT-exempt under Sec. 103, NIRC, but the taxpayer is not subject for years 1996 and 1997, relying on good faith on VAT Ruling No. 231-88, June 8, 1988, pursuant to Section 246 of the NIRC on non-retroactivity of rulings prejudicial to the taxpayer. There is no misrepresentation by the mere fact that the taxpayer failed to describe itself as an HMO. CIR vs. Philippine Health Care Providers, Inc., G.R. No. 168129, April 24, 2007.

P.

ZERO-RATE EXPORT SALES OF A VATREGISTERED TAXPAYER; ENTITLEMENT TO TAX CREDIT ON VAT CHARGED BY SUPPLIERS; AUTHORITY TO PRINT NEED NOT BE REFLECTED IN SALES INVOICES; RMC CANNOT HAVE RETROACTIVE EFFECT; LIBERAL INTERPRETATION IN CASE OF PEZAREGISTERED ENTERPRISES

A VAT-registered taxpayer is entitled to tax credit on input tax attributable to its zero-rated or effectively zero-rated sales. There is no law or

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BIR rule or regulation requiring that the BIR authority to print be reflected or indicated in the taxpayer’s sales invoices. Based on Secs. 113, 237 and 238 of the NIRC, only the following items are required to be indicated in receipts/invoices: (1) a statement that the seller is a VAT-registered entity followed by its TIN-V; (2) the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT; (3) date of the transaction; (4) quantity of merchandise; (5) unit cost; (6) business style, if any, and address of the purchases, customer or client in the case of sales, receipt or transfers in the amount of P100.00 or more, or regardless of the amount, where the sale or transfer is made by a person liable to VAT to another person also liable to VAT, or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees; and the TIN of the purchaser where the purchaser is a VAT-registered person. Items (7) and (8) do not apply to the taxpayer’s export sales since the purchasers of its goods are foreign entities, which are, logically, not VAT-registered or liable to pay tax in this jurisdiction. RMC 42-2003, issued on July 15, 2003 and providing for disallowance for failure to comply with invoicing requirements, does not apply. Principal ground for disallowance of the claim is the failure to reflect or indicate in the invoices the BIR authority to print, which is not required by law or

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regulations. Moreover, the claim was filed on May 18, 1999. Hence, the circular cannot be applied retroactively because to do so would be prejudicial to the taxpayer. As a PEZA-registered export enterprise, the taxpayer is entitled to leniency in the implementation of the VAT. Intel Technology Philippines, Inc. vs. CIR, G.R. No. 166732, April 27, 2007.

Q.

SUBSTANTIATION IS REQUIRED; CPA REPORT MUST BE SUPPORTED BY INVOICES/RECEIPTS; TRIAL DE NOVO; FORGOTTEN EVIDENCE MAY NOT BE INTRODUCED

The claim for refund/credit must comply with the substantiation requirements under CTA Circular No. 1-95. as amended by CTA Circular No. 10-97 (now Section 5, Rule 12 and Sections 1-5, Rule 13 of the Revised Rules of the Court of Tax Appeals). CPA summary report and certification are not sufficient. Proceedings before CTA constitute trial de novo. Forgotten

evidence may not be introduced. Documentary requirements under Revenue Regulations No. 3-88 must be followed as administrative issuances in the implementation of law have the force of law. Atlas Consolidated Mining and Development Corp. v. CIR, G.R. No. 145526, March 16, 2007; G.R. Nos. 141104 & 148763, June 8, 2007; G.R. No. 146221, September 25, 2007; G.R. No. 159490, February 18, 2008.
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R.

LOCAL BUSINESS TAX ON CONTRACTORS SHOULD BE BASED ON GROSS RECEIPTS, ACTUAL OR CONSTRUCTIVE

Taxpayer is a corporation with principal office in Pasig City and engaged in the design, engineering, and marketing of telecommunications facilities/system. It was assessed deficiency business taxes for the years 19982001 based on prior year’s gross revenues per its audited financial statements. The Supreme Court sustained the taxpayer’s position and ruled that as a contractor, it correctly paid its taxes based on gross receipt, actual or constructive, as opposed to gross earnings/revenue, which includes uncollected earnings. It cited Section 4. 108-4, BIR Revenue Regulations No. 16-2005, which defined gross receipts. “Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor. In contrast, gross revenue covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received. Ericsson Telecommunications, Inc. vs. City of Pasig, G.R. No. 176667, November 22, 2007.

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S.

“OVER-THE-COUNTER” SALE OF STOCK IS SUBJECT TO CAPITAL GAINS TAX, NOT STOCK TRANSACTION TAX; BASIS

Taxpayer was found to have bought for P98,000,000 and then sold “Over-The-Counter” for P6,175,000 shares of stock in Best World Resources Corporation (BW) in 1999 through his stock broker, Wise Securities Philippines, Inc. The CTA upheld the assessment against petitioner for deficiency capital gains tax (CGT) and documentary stamp tax (DST). “OverThe-Counter” (OTC) transactions refer to sale, transfer or other disposition of shares of stock listed with the Philippine Stock Exchange that are not effected on the trading floor, but only through the equity trading facility of the Philippine Central Depository, Inc. (PCDI). Taxpayer is subject to capital gains tax of 5% on the first P100,000 net capital gains realized and 10% on the excess of P100,000 net capital gains realized based on the highest closing price on the day when the shares are sold or transferred less cost determined on the basis of the first-in first-out (FIFO) method since the stock cannot properly identified pursuant to Sec. 6 (a) of Revenue Regulations No. 2-82, dated March 29, 1982.. Manuel Maranon, Jr. vs. Commissioner of Internal Revenue, CTA Case No. 6711, December 4, 2007.

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T.

NO CRIMINAL OR CIVIL LIABILITY DUE TO LACK OF VALID NOTICE OF ASSESSMENT

The BIR failed to prove receipt of the assessment notices, both the Preliminary Assessment Notice and the Final Assessment Notices. Without the alleged assessment notices, accused cannot be required to pay alleged deficiency income tax and value-added tax liabilities. Lack of due process exonerates the accused from both criminal and tax liabilities. Ernesto S. Mallari vs. People of the Philippines, CTA E.B. Crim. Case No. 002, January 8, 2008.

U.

SALE OF MEDICINE AND PHARMACEUTICAL ITEMS TO HOSPITAL IN-PATIENTS ARE VAT EXEMPT

Sale to hospital in-patients of medicines, drugs and pharmaceutical items are part of “hospital service” and thus, exempt from VAT under Section 109(l) of the 1997 NIRC. Professional Services, Inc. vs. CIR, CTA Case No. 7381, March 17, 2008

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V.

CINEMA TICKET SALES ARE VAT EXEMPT AND EXEMPT FROM AMUSEMENT TAX UNDER THE NIRC; FAILURE TO COMPLY WITH DUE NOTICE REQUIREMENT UNDER RMC

Legislative history shows that the gross receipts of proprietors or operators of cinemas/theaters from ticket sales have always been subject to amusement tax, not to VAT or any other business tax. Moreover, House Resolution No. 975 supports the finding that such sales are exempt from VAT. As to the amusement tax, the provision imposing amusement tax on the proprietor, lessee, or operator of theaters or cinematographs previously provided under C.A. No. 466 can no longer be found in the NIRC. While it is true that the Local Tax Code, which transferred to provincial government which included the phrase “to the exclusion of the national or municipal government” was replaced by the Local Government Code, which deleted such phrase, such removal does not empower the National Government or the municipal government to levy and collect taxes on the gross receipts from admission fees collected by operators/proprietors of theaters, cinemas and other amusement places, without an enabling statute.

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RMC 28-2001 entitled “Taxability of Movie/Cinema House Operators for VAT Purposes” failed to comply with notice, hearing and publication requirements embodied in RMC 20-86 and is thus inoperative. SM Prime Holdings, Inc. vs. CIR, CTA Case No. 7347, March 17, 2008. See Ayala Land, Inc. vs. CIR, CTA Case No. 7261, April 17, 2008; First Asia Realty Development Corporation and SM Prime Holdings, Inc. vs. CIR, CTA Case Nos. 7079, 7085, 7111 and 7272, September 22, 2006.

W.

NO TAX CREDIT ALLOWED FOR INPUT TAXES ON ZERO-RATED SALES BY SUPPLIERS TO PEZAREGISTERED ENTERPRISE

Under the Cross Border Doctrine, sales by suppliers of goods and services to a PEZA-registered Enterprise are considered as zero-rated VAT export sales. Hence, such PEZA-registered enterprise may not claim for VAT input taxes paid or incurred on its purchases of goods and services attributed to its zero-rated sales beginning the effectivity of RMC 74-99 dated October 15, 1999. Pursuant to RMC 42-03, its recourse is to seek reimbursement from its suppliers. Coral Bay Nickel Corporation vs. CIR, CTA Case No. 7022, March 10, 2008.
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X.

ASSESSMENT CANCELLED DUE TO FAILURE TO PRESENT THIRD PARTY INFORMATION

Both income tax and VAT assessments resulting from alleged undeclared purchases, sale of unaccounted prepaid cards, undeclared commission income and undeclared service and repairs income for the years 2001 and 2002 were cancelled due to failure to present third party information, which was the basis thereof. BIR, which was declared in default, presented no evidence notwithstanding its broad powers under Section 5 of the NIRC to obtain the best evidence. Assessment must be based on actual facts. Wintelecom, Inc. vs. CIR, CTA Case No. 7056, February 20, 2008

Y.

ALL EVENTS TEST

In CIR vs. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007, 3rd Div., reversing the decision of the CA affirming the CTA on this point, the high court disallowed the deduction of legal and auditing expenses billed in the year 1986 for work rendered by a law firm in 1984 and 1985 and for auditing services rendered by an auditing firm in the year 1985 pursuant to

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the “all events test” used for purposes of determining recognition of income and deductibility of expense. The Supreme Court held:

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the allevents test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation

remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with “reasonable accuracy.” Accordingly, the

term “reasonable accuracy” implies something less than an exact or completely accurate amount.

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The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed.

In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s. From the nature of the claimed

deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the
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retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have

reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firm’s

performance of its services in connection with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the amount of its liability, or whether it does or does not possess the information necessary to compute the amount of said liability with reasonable accuracy, are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services.
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In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so

because ICC failed to present evidence showing that even with only “reasonable accuracy,” as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986. Hence, per

Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR.

Z.

PROOF OF RECEIPT OF SEPARATION PAY BY EACH SEPARATED EMPLOYEE AND REMITTANCE IS REQUIRED; MERE CERTIFICATION BY INDEPENDENT CPA IS INSUFFICIENT; MOTION FOR NEW TRIAL MUST BE ADEQUATELY SUPPORTED BY ATTACHED DOCUMENTS

Claim for refund of withholding tax on separation pay to employees due to redundancy (cause beyond the control of employee) was denied by the BIR

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and the CTA for failure to show proof of payment of separation and remittance of such taxes. PLDT filed a motion for new trial/reconsideration, praying for an opportunity to prove receipt of separation pay on ground that receipts and quitclaims were only recently found and counsel relied on the audit of the independent CPA of voluminous cash salary vouchers unaware that cash salary vouchers of rank and file employees, unlike those of supervisory and executive employees, do not have acknowledgment receipts. CTA denied the motion. PLDT appealed to CA, which denied its petition and motion for reconsideration. Hence, PLDT filed a petition for review by certiorari. The Supreme Court ruled that it is incumbent on PLDT as a claimant for refund of each separated employee to show that each employee did reflect in his return the income upon which any creditable tax is required to be withhold. It must prove that the employees received the income payments as part of gross income and the fact of withholding. As held by the CTA, PLDT failed to prove receipt of payment as there were no payment acknowledgment receipts, the cash receipt vouchers being unsigned. Its submitted documents were insufficient to show that the tax withheld from the separated employees were actually remitted.

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While the independent auditor certified that it had been able to trace such remittance, there are no adequate supporting documents to show such remittance as required by CTA Circular No. 1-95. Newly discovered evidence as a basis of a motion for new trial should be supported by affidavits of the witnesses by whom such evidence is expected to be give, or by duly authenticated documents which are proposed to be introduced. And the grant or denial of a new trial is, generally speaking, addressed to the sound discretion of the court which cannot be interfered with unless a clear abuse thereof is shown. PLDT has not shown such abuse. No affidavits were attached to the motion for new trial. Also, the receipts, releases, and quitclaims were not authenticated. They were not notarized, despite being signed by employees, as early as December 28, 1995, or about two (2) years before the filing of the CTA petition. None of the responsible officers executed an affidavit explaining why the same (a) were not notarized on or about December 28, 1995; (b) whether the said deeds were turned over to its counsel when it filed the petition; and (c) why it failed to present the receipts to the independent auditor during the examination. As to liberal application of the rules, this is a dangerous proposition which must not be allowed as there would be no end to hearing. Simple negligence cannot be tolerated.

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Moreover, the alleged “newly discovered evidence” does not suffice, as PLDT would still have to prove that the redundant employees declared the separation pay as part of their gross income. Also, the fact of withholding must be established by a copy of the statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom. Philippine Long Distance Telephone Company vs. CIR, G.R. No. 157264, January 31, 2008.

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