TAX ALERT

February 28, 2005

WAIVER OF STATUTE OF LIMITATIONS NOT A WAIVER OF RIGHT TO

INVOKE DEFENSE OF PRESCRIPTION.
Facts: Under Revenue Memorandum Order No. 20-90, the Commissioner must sign
waivers for cases involving taxes amounting to more than One Million Pesos
(P1,000,000.00). In this case, only the Revenue District Officer signed the waiver.
Moreover, the BIR’s acceptance of the taxpayer’s waiver must be made before the
expiration of the three-year prescriptive period. Yet, in this case, it could not be
determined with certainty when the BIR accepted the taxpayer’s waiver. The date of the
taxpayer’s execution of the waiver could not have been the date when the BIR accepted
the waiver because the RDO who signed the waiver was not yet the RDO on the date of
the waiver’s execution. Finally, under RMO No. 20-90, the waiver must be executed in
three (3) copies with the second copy intended for the taxpayer. It is only when the
taxpayer receives his copy of the waiver accepted by the BIR that there is compliance
with the RMO. In this case, however, the taxpayer was not furnished a copy of the
waiver. Held: The waiver of the statute of limitations is an agreement between the
taxpayer and the BIR that the period to issue an assessment and collect the taxes due is
extended to a date certain. The waiver does not mean that the taxpayer relinquishes the
right to invoke prescription unequivocally particularly where the language of the
document is equivocal. The law on prescription, being a remedial measure, should be
liberally construed in order to afford protection for the taxpayer from any unreasonable
examination, investigation or assessment. As a corollary, the exceptions to the law on
prescription should be strictly construed. Philippine Journalists, Inc. vs. Commissioner
of Internal Revenue, G.R. No. 162852, December 16, 2004.

BIR ISSUES REGULATIONS REQUIRING MONTHLY SUBMISSION OF

SALES REPORT AND OTHER INFORMATION GENERATED BY CASH
REGISTER MACHINES AND MACHINE SALES GENERATING
RECEIPT/INVOICE REGISTERED WITH THE BIR.
All business establishments are now required to submit on or before the 10th day of the
month for each CRM/POS, the gross sales recorded at the end of the prior month.
Business establishments must report thru SMS, e-mail, or BIR portal. For meritorious
reasons, a taxpayer may be allowed to submit a manual report to the BIR Call Center in
order that the electronic submission can be effected thereat. The regulations require
business establishments covered by the regulations to enroll their machines on or before
March 10, 2005 thru SMS, e-mail, or BIR portal in order to obtain a Machine
Identification Number (MIN) for each machine. The regulations also provide that
establishments that fail to register the POS/CRM/Sales Receipt generating machine shall
update their corresponding registration records with the concerned RDOs. An update of
____________________________________________________________________________________________________________
8/F Jollibee Centre, San Miguel Avenue, Ortigas Center, Pasig City, 1605 Philippines
Telephone: (632) 633-9418 ‚ Facsimile: (632) 633-1911
E-mail: baniqued@info.com.ph
 2
registration shall also apply to an establishment that has not reported cancelled or
abandoned sales generating receipt machines. Moreover, January and February 2005
sales reports shall be submitted as distinct and separate reports on or before March 10,
2005. Revenue Regulations No. 5-2005, February 16, 2005.

DEPARTMENT OF FINANCE ISSUES REGULATIONS CONSOLIDATING

RELEVANT PROVISIONS OF THE BASES CONVERSION AND
DEVELOPMENT ACT OF 1992, THE SPECIAL ECONOMIC ZONE ACT OF
1995, ZAMBOANGA CITY SPECIAL ECONOMIC ZONE ACT OF 1995, AND
THE CAGAYAN SPECIAL ECONOMIC ZONE ACT OF 1995.
The salient features of the above regulations include the consolidation of the following:
(1) the national tax exemption and incentives available to all registered ECOZONE
enterprises, CAGAYAN-ZONE enterprises, ZAMBO-ZONE registered enterprises and
SUBIC-ECOZONE enterprises who are covered by the special tax regime of 5%; (2) the
tax and fiscal obligations under the Bases Conversion and Development Act, the Special
Economic Zone Act of 1995, the Zamboanga City Special Economic Zone Act of 1995
and the Cagayan Special Economic Zone Act of 1995; (3) Rules on the removal or
withdrawal of articles from the Zone to the customs territory; and (4) the Definition of
gross income earned. Revenue Regulations No. 2-2005, February 8, 2005.

BIR RULES ON TAX CONSEQUENCES OF SALE OF TRADEMARK BY A U.S.

COMPANY TO DOMESTIC CORPORATIONS; SALE OF HEALTH
REGISTRATION DATA, MARKETING AND MANUFACTURING KNOW-
HOW; AND SALE OF INVENTORY ON BEHALF OF THE BUYER PRIOR TO
ISSUANCE OF AUTHORITY TO SELL BY BFAD.
Facts: L-US, L-Phils., G Inc. and D Inc. propose to enter into a Memorandum of
Understanding (MOU) covering the sale of the portfolio of six branded drugs with D Inc.
acquiring one brand. To ensure the continuous supply of the drugs in the market pending
issuance of a BFAD authority to sell to G Inc. and D Inc., G Inc. and D Inc. shall also
purchase finished products and bulk materials from L-Phils. pursuant to a Supply
Strategy to be executed by the parties. In the event that such inventory of finished
products and bulk materials are not sufficient to cover the demand pending the issuance
of the BFAD authority, L-Phils., on the one hand, G Inc. or D Inc., on the other, shall, as
needed, enter into a Receivable Assignment Agreement whereby L-Phils. shall sell
additional inventory to Z Inc., the primary distributor of L-Phils., at current prices, and
thereafter assign the receivables from Z Inc. to G Inc. and/or D Inc. at cost. In view of G
Inc. and D Inc.’s lack of authority to sell, L-Phils. shall sell the branded drugs to Z Inc.
for and on behalf of G Inc. and/or D Inc. until such time that their respective authorities
to sell are issued. Ruling: (1) (a) The sale of trademarks contemplated in the MOU
involves not only the transfer of the use or right to use the trademark, but of the title or
ownership of the trademark in the Philippines. Hence, the transaction price for the sale of
trademark is not considered a royalty pursuant to Article 13(3) of the RP-US Tax treaty.
(b) Considering that L-US has no permanent establishment in the Philippines, the gain
derived from the sale of trademarks and related intellectual properties is not subject to
Philippine income tax and, consequently, not subject to withholding tax. (c) The sale is
not subject to VAT for the reason that such sale is not related to the regular commercial
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activity of L-US, nor is it incidental to the creation and delivery by L-US of innovative
pharmaceutical-based healthcare solutions. (d) The price paid by G Inc. and D Inc. to L-
US is in the nature of a capital expenditure, hence, deductible from taxable income in the
form of amortization pursuant to Section 34(F) of the Tax Code of 1997. (2) (a) The
proceeds of the sale of trademarks by L-US and payments received by L-Phils. for the
sale is not merely the use of or the right to use the health registration data, manufacturing
and marketing know-how, thus, should not be treated as royalties, but gains from the sale
of assets subject to the 32% regular corporate income tax. (b) The sale of health
registration data and manufacturing know-how is not subject to VAT since such sale is
not made in the ordinary course of trade or business of L-Phils. Similarly, the sale of
marketing know-how is an isolated transaction not subject to VAT. (c) The health
registration data, manufacturing and marketing know-how are expected to be of use to G
Inc. and D Inc. for the same period within which the respective trademarks are expected
to generate profits for G Inc. and D Inc. Hence, the price paid for their acquisition maybe
claimed as deductions from gross income as ordinary and necessary expenses directly
connected with the sale of medicines in the form of amortization expense over a period of
15 years pursuant to Section 34(F) of the Tax Code of 1997. (3) (a) The sale of existing
inventory and bulk materials by L-Phils. to G Inc. and D Inc. is subject to the 32%
regular corporate income tax or 2% minimum corporate income tax, if applicable. (b)
The sale of inventory is also subject to VAT. (4) (a) Income from the sales made by L-
Phils. to Z Inc. or other distributors for and on behalf of G Inc. or D Inc. during the
pendency of the application for an authority to sell with BFAD, shall constitute the
taxable income of G Inc. and D Inc. subject to the 32% regular corporate income tax. (b)
Since there is lack of authority on the part of G Inc. and D Inc. to sell pending issuance of
BFAD approval, L-Phils., as the licensed manufacturer, shall issue its own invoices and
receipts to evidence the sales. L-Phils. shall be liable for the 10% VAT due on the sales.
Consequently, L-Phils. shall likewise be entitled to credit the input VAT paid on the
importation, purchase or manufacture of the inventory sold. (c) Since the sale is made by
L-Phils. for and on behalf of G Inc. and D Inc., and the assignment is made at cost, the
assignment of receivables does not result in any income on the part of L-Phils. BIR
Ruling DA-641-2004, December 17, 2004.

BIR CONFIRMS TAX CONSEQUENCES OF TURN-KEY CONTRACT.

An engineering, procurement and construction contract was entered between M Corp
(domestic corporation) and J Corp (a foreign corporation with a Philippine branch)
consisting of an offshore portion (for the design, fabrication, manufacture, supply and
delivery of equipment, all of which shall be performed outside the Philippines by J Corp.)
and an onshore portion (for the construction and installation of certain facilities, and the
performance of related civil works for the project, to be performed in the Philippines by J
Corp.). Creditable Withholding Tax (“CWT”). The service fee paid by M Corp to J
Corp for services rendered under the onshore portion shall be considered income derived
from Philippine sources subject to income and consequently to the 2% CWT. The
service fee under the offshore portion is not subject to CWT. VAT. Payments arising
from the performance of services in the Philippines will be subject to the 10% VAT. The
importation into the Philippines from another country of the equipment contemplated by
the offshore portion will be subject to the 10% VAT. However, payments arising from
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services under the offshore portion will not be subject to the 10% VAT. RAMO 1-95.
The attribution formula prescribed under RAMO 1-95 will apply in determining the
taxable income of J Corp. on the payments arising from the offshore portion of the
contract. J Corp’s income from the offshore portion will form part of its reportable
“Sales to the Philippines” as an integral component of the same attribution formula
prescribed under RAMO 1-95. On the other hand, J Corp’s net onshore income from the
project shall be subject to 32% corporate income tax, net of 2% CWT that will be
withheld by M Corp. BIR Ruling No. DA-10-2005, January 17, 2005.

EXECUTION OF REAL ESTATE MORTGAGE NOT SUBJECT TO CAPITAL

GAINS TAX.
Facts: Bank C granted a loan to M. The loan was secured by a real mortgage over land
owned by D. When M defaulted on its loan, Bank C foreclosed on the property. Being
the highest bidder at the public sale, Bank C commenced the consolidation of its title over
the land by paying capital gains tax and DST after the lapse of the one-year redemption
period. The BIR assessed Bank C for the payment of another round of capital gains tax
for D’s mortgage over the property. Ruling: An execution of a real estate mortgage is
not tantamount to a sale, exchange or disposition of real property because the elements of
transfer of ownership, delivery and payment of money or its equivalent are wanting.
Since there was no sale, exchange or disposition of real property when D accommodated
M’s loan, no CGT shall be due on the mortgage. BIR Ruling No. DA-661-2004,
December 23, 2004.

DACION EN PAGO OF NON-PERFORMING LOAN BY BORROWER TO

FINANCIAL INSTITUTION EXEMPT FROM TAXES.
Under R.A. No. 9178, otherwise known as the Special Purpose Vehicle Act of 2002, the
dation in payment of an NPL in favor of a financial institution is exempt from DST,
capital gains tax, if the property transferred was held as a capital asset, creditable
withholding tax, if the property transferred was held as an ordinary asset, and VAT,
provided that the transaction must have occurred within the period from March 19, 2003
to March 19, 2005. BIR Ruling No. DA-002-2005, January 6, 2005; BIR Ruling No.
DA-021-2005, January 20, 2005.

PARTITION OF PROPERTIES NOT SUBJECT TO CAPITAL GAINS TAX, DST

AND VAT.
The BIR ruled that partition of properties among co-owners without any consideration is
not subject to capital gains tax, DST under Section 196 of the Tax Code of 1997 and
VAT considering that there is no sale, exchange or disposition of property. The
agreement is subject however to the P15.00 DST as prescribed in Sec. 188 of the Tax
Code of 1997. BIR Ruling DA-640-2004, December 17, 2004

RECONVEYANCE OF PROPERTY WITHOUT MONETARY

CONSIDERATION NOT SUBJECT TO CAPITAL GAINS TAX AND DST.
Facts: In 1964 a deed of sale was executed between Mrs. A and her eldest son over a
parcel of land for the purpose of securing a housing loan from the SSS. The said deed of
sale has been executed for convenience and without monetary consideration. To be fair
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among all of Mrs. A’s heirs and to put everything prospectively to avoid confusion and
problems in the future, a deed of sale was executed in 1975 to revert back the property to
Mrs. A, again for convenience and without monetary consideration. Ruling: The BIR
ruled that considering that the transfer of the subject property is without consideration
and was executed only as a requirement for the granting of the SSS loan, the
reconveyance of the same in Mrs. A’s favor is exempt from the payment of capital gains
tax and documentary stamp tax prescribed under Section 196 of the Tax Code of 1997.
However, the notarial acknowledgement is subject to the P15.00 documentary stamp tax
under Section 188 of the same Code. BIR Ruling DA-648-2004, December 21, 2004.

AGREEMENT BETWEEN TRUSTOR, TRUSTEE AND BENEFICIARY TO

ALLOW BENEFICIARY TO USE CERTAIN PROPERTIES OF TRUSTOR, AS
SECURITY FOR ITS LOAN WITH A BANK, NOT SUBJECT TO TAX.
On the instruction of the A (as Trustor), B (as Trustee) shall enter into an agreement with
C (as Beneficiary) to allow the latter to utilize certain real properties owned by Trustor to
secure the loan of the Beneficiary with a certain bank. A Declaration of Trust was
executed by the above parties whereby property shall be placed in the name of the
Trustee for the convenience of the Principal, the intent being that Trustee shall hold the
properties for the benefit of in trust for the Trustor which is the true and beneficial owner
thereof. The BIR ruled that the transfer of the real properties from Trustor to Trustee
through the Declaration of Trust is not subject to capital gains tax or to creditable
withholding tax, considering that the transfer is not for monetary consideration. The
transfer is also not subject to VAT, donor’s tax and DST under Section 196 of the Tax
Code of 1997. However, the notarial acknowledgement is subject to the P15.00
documentary stamp tax under Section 188 of the same Code. BIR Ruling DA-657-2004,
December 22, 2004; BIR Ruling DA-658-2004, December 22, 2004.

TRANSFER OF SHARES PURSUANT TO WORLDWIDE CORPORATE

REORGANIZATION NOT SUBJECT TO TAX.
The BIR ruled that the proposed transfer of all the outstanding P Corp. shares from D
Corp. (a foreign corporation) to C Corp. (a foreign corporation), in accordance with its
proposed corporate reorganization to be implemented by the T Group of Companies, is
not subject to any Philippine tax since the proposed transfer of shares from D Corp. to C
Corp. is pursuant to a legitimate worldwide corporate reorganization and considering that
D, C and P Corp. all belong to the T Group of Companies. The BIR also considered the
fact that the transferor and the transferee are all subsidiaries of the T Group of Companies
and the beneficial ownership of the P Corp. shares will remain within the T Group of
Companies. As there is no effective transfer of beneficial ownership, the BIR concluded
that no gain would be realized by D Corp. for income tax purposes. BIR Ruling DA-642-
2004 dated December 17, 2004.

TRANSFER OF SHARES IN DOMESTIC CORPORATION BY FOREIGN

CORPORATION TO ANOTHER FOREIGN CORPORATION THROUGH
PROPERTY DIVIDEND AND RETURN OF CAPITAL NOT PHILIPPINE
SOURCE INCOME, HENCE, NOT SUBJECT TO PHILIPPINE INCOME TAX.
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Forco A, a foreign corporation, holds shares in Forco B, another foreign corporation.
Forco B, in turn, owns shares in a Philippine company (Philco). Forco A, which has a
Philippine branch, invested in Forco B shares independently of its Philippine branch.
Forco B plans to transfer its Philco shares to Forco A via property dividend and/or return
of capital. On property dividend: BIR ruled that property dividends issued by Forco B to
Forco A, consisting of shares in a Philippine company, are not Philippine source income
of Forco A since less than 50% of Forco B’s worldwide income during the last three
years were derived from the Philippines. Also, Forco B does not derive taxable income
from the transfer of Philco shares because a dividend distribution is not considered a sale
or other disposition due to the absence of any consideration. The property dividend,
however, is subject to DST. On return of capital: BIR ruled that reduction in capital is
considered a partial liquidation. The transfer of shares by a stockholder to a corporation
under liquidation in exchange for assets of the liquidating corporation is considered a
sale. Gain, if any, derived by Forco A from the surrender of Forco B shares to Forco in
exchange for Philco shares is considered non-taxable foreign source income of Forco A.
The transfer, however, of Philco shares to Forco A as return of capital is subject to DST.
BIR Ruling No. DA-632-2004, December 14, 2004.

THE CAPITAL GAINS TAX ON SALE OF REAL PROPERTY IS THE

LIABILITY OF THE SELLER
Taxpayer X bought a parcel of land from seller Y on installment basis. Upon completion
of the payments, Y required the payment of capital gains tax by the buyer before
execution of the absolute deed of sale. X sought the opinion of the BIR on his liability to
pay capital gains tax. The BIR held that capital gains tax is the liability of the seller.
Moreover, the payment of capital gains tax is not a condition precedent for the execution
of a deed of sale. BIR Ruling No. 015-2005, January 15, 2005

DETERMINATION OF SUBSTANTIAL CHANGE IN OWNERSHIP AS A

RESULT OF MERGER INCLUDED IN NO-RULING AREA.
Corp. A requested for BIR confirmation that Corp. A’s Net Operating Loss Carry-Over
(NOLCO), as well as the aggregate NOLCO of Corp. B be carried over to Corp. A and
utilized as a deduction from its gross income, pursuant to a merger between Corp. A and
B. The BIR declared that it is “constrained not to rule on the applicability of NOLCO as
a deduction from gross income” inasmuch as it would entail a determination as to
whether there is substantial and effective change in ownership of Corp. A. The BIR
stated that the determination of whether there is/ there is no substantial change in the
ownership or enterprise (whether as a result of a merger or otherwise) for purposes of
applying the NOLCO provision under Section 34(D)(3) of the Tax Code of 1997, as
defined under Revenue Regulations No. 14-2001 is one of the instances identified as a
“No-Ruling Area” under Revenue Bulletin No. 1-2003. BIR Ruling DA-660-2004,
December 22, 2004

GAIN RESULTING FROM CONDONATION OF TAXPAYERS’S DEBT

THROUGH COURT APPROVED DEBT RESTRUCTURING PLAN NOT
SUBJECT TO INCOME TAX. FURTHERMORE, CONVERSION OF DEBT
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INTO EQUITY AS A RESULT OF A DEBT RESTRUCTURING PLAN ALSO
NOT SUBJECT TO TAX.
The BIR ruled that the debt rehabilitation plan was a result of judicial action and not
through the agreement of parties. Accordingly, the gain resulting from the condonation of
the taxpayer’s debt to various creditors shall not be subject to income tax or to donor’s
tax since there is no donative intent on the part of the creditors. Moreover, since the debt
to equity conversion is part of the debt restructuring plan, and will only be considered as
additional capital investment, the same is likewise not subject to donor’s tax. BIR Ruling
No. DA 028-2005, January 24, 2005.

TRANSFER OF PROFITS FROM BRANCH TO HEAD OFFICE WITHOUT

PHYSICAL REMITTANCE CONSIDERED CONSTRUCTIVE REMITTANCE
SUBJECT TO 15% BRANCH PROFIT REMITTANCE TAX.
The increase of the assigned capital by way of the transfer by a branch of its net profits
from operations and booking it thru the “Net Due to Head Office Account” and to
“Assigned Capital” account is subject to 15% BPRT based on the total profits applied or
earmarked for remittance without deduction for the tax component thereof. In effect the
aforesaid profits will be indirectly remitted by the branch to its head office abroad. It is
of course understood that the tax treatment on the transfer of net profits which are
credited directly to assigned capital is the same with that of transferring said profits due
to head office account. BIR Ruling No. DA-39-2005, January 28, 2005.

LIVING QUARTERS FURNISHED TO CERTAIN EMPLOYEES WHEREIN

THE HOUSING UNITS ARE 50 METERS FROM THE PLACE OF BUSINESS
OF THE EMPLOYER ARE NOT SUBJECT TO FRINGE BENEFITS TAX.
Taxpayer is engaged in tourism business. It maintains housing units which are within 50
meters from its business premises. Employees who will reside in the housing units are
required to be on-call due to the nature of the employer’s 24-hour business operations.
BIR ruled that the grant of the housing units is not taxable fringe benefits. BIR also ruled
that since the living quarters furnished to the employees are for the convenience of the
employer, the value thereof is also not taxable compensation income on the part of the
employees. BIR Ruling No. DA-635-2004, December 15, 2004.

PAYMENT OF LOAN BY SURETY NOT SUBJECT TO DONOR’S TAX.

The payment by the surety of the principal obligation through dacion en pago is not
considered a transfer of property by gift because the surety has the right to be
indemnified by the borrower. However, the payment of debt or loan obligation through
dacion en pago is subject to the capital gains tax presumed to have been realized from the
transfer of property, taking into consideration the outstanding balance of the loan as the
selling price. BIR Ruling No. DA-006-2005, January 11, 2005.

DEBIT NOTES MAY BE ALLOWED AS BASIS TO CLAIM INPUT TAXES.

Facts: Under a Distribution Agreement, J purchases products from K at a price which is
VAT inclusive. J then sells the products to customers at a certain profit margin, records
all sales, and issues its own VAT invoices to customers. As part of its advertising
campaign, K would, in certain cases, instruct J to give discounts to customers, with K
 8
agreeing to reimburse J for the discounts. In seeking reimbursement for the discounts, J
billed K the amount of the discount plus 10% VAT using Debit Notes, which indicated
on their face J’s VAT registration number and K’s name. J treated the billed amounts to
K as part of its sales and paid 10% VAT on the theory that since the discounts were
reimbursed, it was as if J did not give any discounts and, therefore, subject to VAT on the
full amount of the selling price. K, on the other hand, refused to pay the VAT component
of the bills on the ground that the reimbursement for the discounts billed by J is not
subject to VAT. Thus, K believes that it is not entitled to claim the VAT component of
the bills as its own input VAT credit. K paid only the amount of the basic discount and
did not claim any input VAT. Ruling: If K pays the VAT component of J’s bills, K will
be entitled to claim this as input VAT credit. Under the circumstances, the serially
numbered Debit Notes qualify as VAT sales invoices because on their face, the Debit
Notes reflect J’s VAT registration number and the amounts billed with an indication that
such amounts include VAT as required under Sections 113 and 237 of the 1997 Tax
Code. The Debit Notes may be allowed as basis to claim input taxes on K’s part as
prescribed in Section 110 of the said Code. K is entitled to claim as input VAT the 10%
VAT component of J’s past billings for the discounts upon payment to J. BIR Ruling
No. DA-614-2004, December 6, 2004.

PAYMENT OF LOAN THROUGH ASSIGNMENT OF REAL PROPERTY,

WHICH PREVIOUSLY HOUSED EQUIPMENT, MACHINERY AND PARTS
USED IN MANUFACTURING BUSINESS, NOT SUBJECT TO VAT.
Facts: U Inc. ceased operations in October 2001. On April 2, 2002, U Inc., by way of
absolute assignment of several parcels of land together with improvements thereon in the
amount of P42 Million paid its unpaid liabilities to R Bank amounting to P42 Million.
Ruling: The BIR confirmed that the assignment of the foregoing properties in payment of
U Inc.’s loan is not subject to the 10% VAT. The BIR noted that the real properties,
specifically the building, which were absolutely assigned by U Inc. to R Bank, used to
house the converting equipment, machinery and parts that were used in the U Inc.’s
manufacturing business. It is further noted that the assignment was not made in the
ordinary course of the regular trade or business of U Inc. The BIR further declared that
inasmuch as the said properties are not among the stock in trade of U Inc., and due to the
fact that U Inc. was neither engaged in buying and selling of real properties, nor engaged
in the leasing of properties, it follows that the assignment of said real properties is exempt
from VAT. BIR Ruling DA-669-2004, dated December 28, 2004.

TRANSFER OF BUILDINGS AND IMPROVEMENTS NOT PRIMARILY HELD

FOR SALE NOT SUBJECT TO VAT.
The transferor is engaged in the business of managing and operating the properties
comprising a hotel. Hence, since the properties transferred are not primarily held for sale
to customers or held for lease in the ordinary course of trade or business, the sale thereof
by dacion en pago is not subject to VAT. BIR Ruling No. DA-32-2005, January 27,
2005.
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HOTELS THAT RENT OUT CARS TO NON-HOTEL GUESTS SUBJECT TO
3% COMMON CARRIER’S TAX.
Facts: M Inc. is a domestic corporation operating a hotel in Makati City. In the course of
its business, M Inc. transports some hotel guests to and from the hotel and to any
destination of their choice during their stay in the hotel using hotel owned cars and
limousines. M Inc. however also transports non-hotel guests. It has been customary for
the hotel to earn revenues from the transportation services not only from its paying guest
but also from other customers. Ruling: The BIR ruled that the renting out of cars,
although incidental rather than a primary service of the hotel, falls within the definition of
a common carrier. Thus, M Inc.’s transportation services though merely incidental to its
hotel business shall be subject to 3% common carrier’s tax under Section 117 of the Tax
Code of 1997. BIR Ruling DA-643-2004, December 21, 2004.

ASSIGNMENT OF PROMISSORY NOTE WHERE THERE IS NO CHANGE IN

MATURITY OR REMAINING PERIOD FROM THAT OF THE ORIGINAL
INSTRUMENT IS NOT SUBJECT TO DST.
Mr. P executed a promissory note in favor of H bank. Before the due date, H bank
executed a deed of assignment over the promissory note in favor of Ms. J. The deed of
assignment transferring the promissory note is not subject to DST. BIR Ruling No. DA
019-2005, January 18, 2005.

IMPLEMENTATION OF DEBT RESTRUCTURING PLAN AND

REHABILITATION PLAN, WHICH DOES NOT INVOLVE NEW ISSUANCE OF
DEBT OR RENEWAL OR CONTINUANCE OF ANY LOAN AGREEMENT,
NOT SUBJECT TO DST.
B Corporation sought the restructuring of its debts and suspended payments of all its
principal amortizations. Later one of the creditors of B Corporation filed for corporate
rehabilitation and obtained court approval. The BIR ruled that under its legislative
franchise B Corporation was exempt from the payment of DST. Since B Corporation was
exempt then the creditors were liable to pay the DST. However, the BIR ruled that no
DST was due since the rehabilitation plan did not constitute a new issuance of debt or
renewal or continuance of any loan agreement between the creditors and the debtor but a
single document. BIR Ruling No. DA 026-2005, January 24, 2005.

PARTICIPATION OF SELLERS IN DEPARTMENT OF TRADE AND

INDUSTRY – CENTER FOR INTERNATIONAL TRADE EXPOSITIONS AND
MISSIONS TRADE FAIRS DOES NOT CONSTITUTE OPERATION OF A
“BRANCH” OR “FACILITY”.
The participation by exhibitors-sellers in short duration trade fairs organized by DTI-
CITEM at designated venues being leased merely for the purpose of showcasing
Philippine products without conducting sales transactions does not constitute an operation
of a “branch” or “facility”. The exhibitors-participants are not required to register their
trade fair booths as separate business establishments. Consequently, the payment of the
annual registration fee to the BIR will not apply. BIR Ruling No. DA-530-2004,
October 19, 2004.
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BIR ISSUES GUIDANCE ON USE OF FOREIGN CURRENCY IN BOOKS OF
ACCOUNTS AND FINANCIAL STATEMENTS.
The BIR authorized a taxpayer to use foreign currency in its books of accounts and
financial statements subject to the following conditions: (1) financial statements using
foreign currency shall contain a translation in Philippine pesos using the exchange rate
provided under RMC 26-85, (2) tax returns shall be prepared in Philippine pesos and
taxes due shall be paid in Philippine pesos using the exchange rate provided under RMC
26-85, and (3) any return, statement, or other document in which a conversion was made,
the rate of exchange shall be indicated thereon. BIR Ruling No. DA-622-2004,
December 8, 2004.

BIR ALLOWS CREDITING OF OVERPAID FINAL WITHHOLDING TAXES

AGAINST FUTURE REMITTANCES OF SAID TAX VIA AMENDMENT OF
WITHHOLDING TAX RETURNS AND ALLOWING EXCESS PAYMENTS TO
BE CREDITED AGAINST SUCCEEDING REMITTANCES OF FINAL
WITHHOLDING TAXES.
For the first six months of 2004, the withholding agent erroneously withheld a 15% final
withholding tax on income payments that should have been subjected only to a 10% final
withholding tax. BIR allowed the 5% overpaid final withholding tax paid for the period
from January to June 2004 to be directly credited against the final withholding taxes for
the succeeding months of 2004. This can be accomplished by amending the withholding
tax returns for January to June 2004 and crediting the excess payments against final
withholding taxes to be remitted during the succeeding months. BIR Ruling No. DA-
630-2004, December 14, 2004.

FOR PURPOSES OF COMPUTING THE 5% PREFERENTIAL TAX FOR PEZA-

REGISTERED ENTERPRISES, PAYMENTS FOR ROYALTIES CONSIDERED
PART OF COST OF FINISHED GOODS AND SHOULD BE DEDUCTIBLE FOR
PURPOSES OF COMPUTING GROSS INCOME.
A PEZA registered corporation subject to the 5% preferential tax rate has a licensing
agreement with a Japanese corporation. Under the agreement, the PEZA corporation will
pay a 3% royalty fee every quarter. The PEZA Corporation sought the opinion of the BIR
on the deductibility of the royalty fees for income tax purposes. The BIR ruled that the
treatment of royalties depends on the consideration for which such fees were paid. When
the royalties relate to a system or license, royalties are treated as general and
administrative expenses, which are not inventoriable costs. When, however, royalties are
connected with product design, logo, formula or process, then the payment is capitalized
as part of inventories. Therefore payments for royalties related to the transfer of technical
information and manufacturing know how should be considered part of the cost of
manufacturing the products. BIR Ruling No. DA 017-2005, January 19, 2005.

GAIN DERIVED FROM SALE BY A PEZA-REGISTERED CORPORATION OF

ITS BUILDING PREVIOUSLY USED IN ITS PEZA-REGISTERED ACIVITIES
ENTITLED TO THE 5% PREFERENTIAL TAX.
F Company, a PEZA-registered entity sought confirmation from the BIR that its sale of a
building previously used by in F Company’s PEZA-registered activity is entitled to 5%
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gross income tax in accordance with RA 7916. The BIR ruled that the sale of the building
is subject to 5% gross income tax since the sale of the building was made in the course of
winding up the business activities of F Company. BIR Ruling No. DA 027-2005,
Janaury 24, 2005.

NOTE:

The information provided herein is general and may not be applicable to all situations. It
should not be acted upon without specific legal advice based on particular situations. If
you have any questions, please feel free to contact any of the following at telephone
number (632) 633-9418, facsimile number (632) 633-1911, or at the indicated e-mail
address:

Atty. Carlos G. Baniqued cgbaniqued@baniquedlaw.com

Atty. Laura Victoria A.S. Yuson-Layug lvyusonlayug@baniquedlaw.com
Atty. Terence Conrad H. Bello thbello@baniquedlaw.com
Atty. Ma. Carlota Christina G. Laiño-Santiago cglaino@baniquedlaw.com
Atty. Suzette A. Celicious sacelicious@baniquedlaw.com
Atty. Madeline L. Zialcita-Villapando mlzvillapando@baniquedlaw.com
Atty. Kathleen L. Saga klsaga@baniquedlaw.com