TAX ALERT

July 29, 2005 THERE IS NO PROHIBITION ON THE USE OF FOREIGN CURRENCY IN THE FINANCIAL STATEMENTS OF PHILIPPINE TAXPAYERS. Facts: J Company asked the BIR’s permission to use the US Dollar as its functional currency in the preparation of its financial statement. Held: The Philippine Generally Accepted Accounting Principles allow the use of foreign currency in financial statements. The use of foreign currency for companies whose functional currency is a foreign currency will more clearly reflect income considering that the use of Philippine Pesos results in artificial foreign exchange losses that distort the real financial condition of these companies. The use of foreign currency is also revenue neutral. The use of foreign currency in financial statements is subject to the following conditions: 1) the foreign currency to be used in the books shall be limited to the US Dollar; 2) the financial statements shall also be prepared and maintained in US Dollar with a translation in Philippine pesos using the exchange rate provided under Revenue Memorandum Circular (“RMC”) No. 26-85; 3) tax returns shall be prepared in Philippine Pesos and taxes due shall be paid in Philippine Pesos using the exchange rate provided in RMC No. 26-85; and 4) in any return, statement or other documents in which a conversion is made, the rate of exchange used shall be indicated. BIR Ruling No. DA-251-2005 dated June 9, 2005. IMPLEMENTATION OF REVENUE REGULATIONS (“REV. REGS”) NO. 142005 SUSPENDED. In compliance with the Temporary Restraining Order (TRO) issued by the Supreme Court on July 1, 2005, the implementation of Rev. Regs. No. 14-2005 is deferred until such time that the TRO is lifted. However, VAT already collected and for which VAT invoices/receipts were issued should be remitted to the BIR within the prescribed deadline for filing the Monthly VAT Declaration. The Bureau shall revert the VAT status of concerned taxpayers to their registration status prior to July 1, 2005. Revenue Memorandum Circular No. 30-2005 dated July 2, 2005. BIR ISSUES POLICIES AND GUIDELINES FOR THE ABATEMENT OF SURCHARGES IN RELATION TO THE FILING OF AMENDED TAX RETURNS FILED UNDER CERTAIN CONDITIONS. Rev. Regs. No. 15-2005 dated June 9, 2005 provide that taxpayers who desire to rectify their returns to reflect their correct income and/or pay the correct taxes due may file an amended return and pay the deficiency taxes due thereon inclusive of interest, either in full or in installments, but shall pay surcharge thereon in accordance with the schedule and various conditions stated therein.

gains derived by AD Company shall be taxable only in Japan. resident or non-resident). and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The FBT is payable upon the exercise of the option. Collector of Internal revenue (78 Phil 655 [1947]). BIR Ruling No. 2005. Therefore.. The employee-grantee of the option benefits from a lower exercise price. ceased operations and started winding down its business. considering that AA Inc. is exempt from income tax under Article 13 of the Philippines-Japan tax treaty. 2005. the Supreme Court held that the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for shares.999. LIQUIDATING GAIN IS SUBJECT TO THE ORDINARY INCOME TAX RATES. Ruling: The tax treatment of liquidating dividends depends on the characterization of the income in the form of such dividends received by shareholders as a result of the dissolution of the corporation in which they hold shares. this benefit qualifies as a fringe benefit. and the (ii) the 32% fringe benefit tax paid. sought confirmation from the BIR that any gain to be derived from liquidating dividends to be declared in favor of AD Company as an offshoot of the dissolution of AA Inc. DA-255-2005 dated June 16. he realizes a benefit equivalent to the difference between the exercise price and the market value of the shares at the time of the exercise. as defined under Section 33(B) of the Tax Code of 1997. which is the time that any benefit from the option is actually realized. Accordingly. By exercising his option..’s real property assets in the Philippines is less that 50% of its total assets. In view however of Article 13 of the Philippines-Japan tax treaty. Bibiano L. vs. B Germany. In the case of Wise & Co. THE TRANSFER BY A FOREIGN CORPORATION OF SHARES OF STOCK IN A DOMESTIC CORPORATION TO ANOTHER FOREIGN CORPORATION IN EXCHANGE FOR ONE (1) SHARE OF STOCK IN THE LATTER CORPORATION PURSUANT TO A GLOBAL CORPORATE RESTRUCTURING IS NOT SUBJECT TO CAPITAL GAINS TAX. a foreign corporation. over B Germany’s . which is subject to fringe benefit tax (“FBT”). depending on the status of the shareholder (corporation or individual. AD Company is a Japanese corporation with a wholly owned subsidiary in the Philippines known as AA Inc. Meer.. a domestic corporation. liquidating gain is to be treated as a gain from the sale or exchange of shares. is the owner of 6. although granted pursuant to an employer-employee relationship. is not given to the senior employees for free. intends to distribute its net assets by declaring liquidating dividends in favor of AD Company.000. A stock option.2 A STOCK OPTION IS A FRINGE BENEFIT SUBJECT TO FRINGE BENEFIT TAX. Effective March 31. consistent with the Wise & Co. BIR Ruling No. another foreign corporation. decision and as such is subject to the ordinary income tax rates. et al. DA-ITAD 65-05 dated June 29.996 Class B shares of B Philippines. 2004 AA Inc. AA Inc.000 Class A shares and 5. The corporation can claim as a deduction from gross income the grossed-up monetary value of the benefit that it furnished to its senior employees under the stock option plan. Inc. AA Inc. B Germany entered into a Deed of Exchange with J Germany. or an amount equivalent to the sum of (i) the difference between the exercise price and market value of the shares at the time of exercise.

. the transfer of said property rights is not being made “in the course of trade or business” and is thus not subject to VAT. 270-2005 dated June 21. NETTING MANAGEMENT SERVICES PERFORMED OUTSIDE THE PHILIPPINES IS NOT SUBJECT TO INCOME TAX AND VAT. DST. The transfer by B Germany of its 6. the assignment of shares is subject to DST under Section 176 of the Tax Code. The service fee is also not subject to VAT because the services will be done entirely outside the Philippines. hence. Moreover. to S UK is not an income derived from sources within the Philippines. No gain is realized from the transaction. THE ASSIGNMENT BY A PARENT COMPANY TO ITS WHOLLY OWNED SUBSIDIARY OF A GEOTHERMAL RESOURCES SALES CONTRACT BY WAY OF ADDITIONAL CAPITAL CONTRIBUTION BUT WITHOUT THE ISSUANCE OF ADDITIONAL SHARES IS NOT SUBJECT TO INCOME TAX.000. within S UK’s premises in the United Kingdom through the Citibank website. 2 provides that “[w]here a corporation requires additional funds for conducting business and obtains such needed money through voluntary process payments by its shareholders. S UK and S Phils. since the rights and interests of the parent company in the GRSC are not primarily held for sale or for lease in the ordinary course of business. would not result in the recognition of taxable income both on the part of the parent company or the wholly-owned subsidiary. in exchange for one (1) share of the unissued capital stock of J Germany. 2005. However. DONOR’S TAX OR VAT.996 Class B shares in B Philippines. Section 56 of Rev. DA-278-2005 dated June 23. 2005.” Consequently. Finally. S UK will not send any personnel in the Philippines to perform these services. is not subject to capital gains tax inasmuch as the transfer is merely a re-alignment of stock holdings. DA-ITAD 6605 dated June 29. entered into a Netting Services Agreement. Regs. The transaction is not subject to donor’s tax as there is no donative intent on the part of the parent company. without the issuance of additional shares. BIR Ruling No. BIR Ruling No. the assignment by a parent company of its rights and interested in a Geothermal Resources Sales Contract in favor of its wholly-owned subsidiary in the form of additional paid-in capital. will not be considered income. 2005. The BIR ruled that the service fee to be paid by S Phils. the amounts so received being credited to its surplus account or to a special capital account. The Deed of Exchange was conducted as a preliminary step towards the eventual merger of B Philippines and S Philippines into SB Philippines as part of the global corporate merger of B Group and S Group.000 Class A shares and 5. whereby S UK will provide netting management services to S Phils.999. exempt from Philippine income tax. the transaction is without consideration.3 shares in B Philippines. No. BIR Ruling No. Neither is the transaction subject to DST as the transfer of rights in a contract is not among the transactions subject to DST. although there is no increase in the outstanding shares of stock of the corporation.

13-2005 ON THE IMPLEMENTATION OF THE TAX INCENTIVE PROVISION OF R. REGS. explicitly provides that the expanded withholding tax shall not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law. Republic Act No. Incentives granted under the Bases Conversion and Development Act of 1992 and Philippine Economic Zone Act of 1995 shall apply only to the registered operations of ECOZONE enterprises. No.A. or are related to the transfer of technical information and manufacturing know-how. thus. 13-2005 dated April 25. 13-2005.A. Rev. 2-2005. No. 2005. 32-2005 dated June 17.4 REV. Regs. and 6 of Rev. the provisions of Rev. 2-2005 in so far as these applied to enterprises registered under paragraph (c) of Section 12 of R. Thus. such royalties should be considered as part of the cost of manufacturing the products and. formula or process. in so far as its provisions are not in conflict with Rev. 2005. It further suspended the effectivity of Sections 3. No. 1-95. shall be subject to income tax at the regular rates. No. as . 7227. No. REV. 2-2005 is also suspended insofar as they apply to enterprises registered under R. AN ECOZONE ENTERPRISE ENJOYING THE 5% PREFERENTIAL TAX RATE IS EXEMPT FROM WITHHOLDING TAXES. 7903 (otherwise known as Zamboanga City Special Economic Zone Act of 1995). 7227). Regs. Rev. 13-2005 were promulgated to define “gross income earned” to implement the tax incentive provision under paragraph (c) of Section 12 of the Bases Conversion Development Act of 1992 (R. 2-2005. 2-98. Regs. 2005. INTEREST ON BANK DEPOSITS EARNED BY AN ECOZONE ENTERPRISE SHALL BE SUBJECT TO REGULAR INCOME TAXES. 12-2005 redefines gross income to implement the tax incentive provision under par. Republic Act No. revoking Section 7 of Rev. Pending the issuance of new regulations. BIR Ruling No.A. (c) of Section 4. shall apply. No. No. general or special. and 6 of Rev. NO. Rev. When royalties are connected with a product design. Regs. The effectivity of Sections 3. Regs. logo. 4. as amended. Revenue Regulations No. No. 7922 (otherwise known as Cagayan Special Economic Zone Act of 1995) and paragraph (f) of Section 4. Regs. 7922 and 7903. 12-2005 AMEND CERTAIN PROVISIONS OF REV. No. Revenue Memorandum Circular No. Regs. Regs. 2-2005 AFFECTING CAGAYAN SPECIAL ECONOMIC ZONE AND ZAMBOANGA CITY SPECIAL ECONOMIC ZONE. ROYALTY PAYMENTS ARE DEDUCTIBLE FROM GROSS REVENUES FOR PURPOSES OF COMPUTING TAXABLE INCOME OF ECOZONE ENTERPRISES SUBJECT TO 5% PREFERENTIAL TAX. 2005. No. No. 7227. 4. Regs. No. REGS. 12-2005 dated April 25. income earned from unregistered activities by ECOZONE enterprises.A. No. 13-2005 revoked Section 7 of Rev. NO. No. This is because ECOZONE enterprises enjoy preferential tax treatment and Rev. DA-281-2005 dated June 23. REGS NO. Regs. NO. Revenue Regulations. such as income from Philippine currency or foreign currency bank deposits.

Regs. DA-280-2005 dated June 23. No. which is an incentive to enterprises registered with the Board of Investments (BOI). 11 of the Philippines-Japan tax treaty. as a PEZA-registered enterprise. executed a Loan Agreement with a domestic corporation. CIR (G.5 such. 001-2005 dated June 16. 2005. No. 2005. is a non-resident foreign corporation organized and existing under the laws of Japan and has a representative office in the Philippines. Section 3 of Rev. if an entity enters into a transaction subject to DST during the period for which it is enjoying the ITH. 202002. The representative office is not privy and does not have any participation whatsoever in the negotiation and implementation of the Loan Agreement. Thus. These SBMA privileges are also extended to PEZA firms by virtue of R. BIR Ruling No. BIR Ruling No. if an entity is still enjoying the ITH. S Corp. then. requested confirmation from the BIR that interest payments to D Ltd. with incentives granted to enterprises registered with the Philippine Economic Zone Authority (PEZA). An entity may not simultaneously enjoy an income tax holiday (ITH). are subject to the preferential withholding tax rate of 15% pursuant to Art. 16-99 provides that SBMA trading and manufacturing enterprises are allowed to deduct royalty payments when calculating gross income subject to 5% final tax. D Ltd. royalties relating to know-how in the manufacturing of products are rightfully part of cost of goods sold and should be deductible when calculating gross income subject to 5% final tax. it shall be subject to DST on such transaction. 7916. it is subject to internal revenue taxes other than income tax. Moreover. 1989) which .R. such as DST. Ruling: Any income derived by D Ltd. 2005. Consequently. BIR CLARIFIES THAT AN ENTITY MAY NOT SIMULTANEOUSLY ENJOY INCENTIVES AS A BOI-REGISTERED ENTERPRISE AND AS A PEZAREGISTERED ENTERPRISE. if it is no longer enjoying the ITH. D Ltd. On the other hand. such as interest income from foreign currency deposits shall be subject to final income tax at the rate of 7. including DST.A. whereby D Ltd agreed to lend S Corp. it may claim exemption from DST on its registered activity since the 5% income tax on gross income applicable to PEZA-registered enterprises is in lieu of all national and local taxes. income earned from unregistered activities by enterprises registered under the Bases Conversion and Development Act of 1992 and the Philippine Economic Zone Act of 1995. the amount of Twenty Million Japanese Yen. independently of its representative office shall be considered income of D Ltd.5% of such interest income. BIR Ruling No. capitalized as part of inventories. The Commissioner of Internal Revenue ruled that based on Revenue Regulations No. 76573 September 14. S Corp. Thus. alone applying the rule enunciated in the case of Marubeni vs. INCOME OF JAPANESE CORPORATION ACTING INDEPENDENTLY OF ITS PHILIPPINE REPRESENTATIVE OFFICE IS SUBJECT TO THE PREFERENTIAL TAX RATE UNDER THE RP-JAPAN TAX TREATY. DA-279-05 dated June 23. INTEREST ON FOREIGN CURRENCY DEPOSITS MAINTAINED IN A SUBIC BANK BY PEZA-REGISTERED/SBMA LOCATOR IS SUBJECT TO WITHHOLDING TAX.

042. completely lost its business from the said property because the tenants immediately relocated and the demolition rendered the property unfit for occupancy. since there was no donative intent on the part of Bank A. is a domestic corporation engaged in selling and marketing electronic products while H Co. G Corp. is the registered owner of real property with improvements with a total area of 2. the Loan Agreement is subject to DST under Section 180 of the Tax Code of 1997. and importing. On the part of Resort Company. Sometime in 2001. the cancellation of the accrued interest by Bank A does not give rise to a taxable income considering that the deduction of the interest as expense in the prior years in its books did not result to a tax benefit in its favor. retailing. the income derived from the expropriation sale of the specified property is not subject to withholding tax but only to the 6% capital gains tax. the Light Rail Transit Authority (LRTA) filed a complaint for eminent domain with the Regional Trial Court of Manila over a portion measuring 804. the BIR confirmed that the interest payments are subject to the 15% preferential tax rate. THE CANCELLATION OF INTEREST INCOME ON A NON-PERFORMING LOAN IS NOT SUBJECT TO INCOME TAX AND DONOR’S TAX. Furthermore. However. and was subsequently demolished to give way to the Line 2-LRTA Project. DA-277-2005 dated June 23. S Co. BIR Ruling No.50 square meters.90 square meters. 202 restricted Bank A from recognizing interest income on such loan. could no longer be used in trade or business of G Corp. therefore. selling. Thus. DA-257-2005 dated June 16. Inasmuch as the particular portion measuring 804. DA-ITAD 67-05 dated June 29. the cancellation of the portion of the accrued interest is not subject to donor’s tax. general merchandise. 2005. BIR Ruling No. 2005. intends to sell mobile phone units . BIR Ruling No. When LRTA entered the property in 2001 to demolish part of the structure therein. is another domestic corporation engaged in buying. the said sale being involuntary and forced upon only on the seller by virtue of the exercise of the government’s power of eminent domain and.6 states that when a foreign corporation transacts business in the Philippines independently of its branch. The receipts from the sale is not subject to VAT. the cancellation of the balance of the interest on the indebtedness of Resort Company by Bank A is not subject to income tax. BIR RULES ON TAX CONSEQUENCES OF EXPROPRIATION OF REAL PROPERTY. the principal agent relationship is set aside. G Corp. It is likewise subject to DST under Section 196 of the Tax Code based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code.90 square meters of the aforementioned property of G Corp. 2005. marketing. had become idle from the time the LRTA entered the property. cannot be said to have been conducted in the course of trade or business. Hence. had already been abandoned by tenants. Section 4 of Bangko Sentral ng Pilipinas Circular No. Bank A cancelled a portion of the accrued interest on a loan it granted to Resort Company due to the fact that the loan had become a non-performing loan. SALE OF GOODS CONSUMMATED OUTSIDE THE PHILIPPINES IS NOT SUBJECT TO VAT. S Co.

Any unutilized input VAT of the joint venture cannot be treated as cost by the co-venturers for income tax purposes but may be the subject of a claim for refund or tax credit. The invoice and/or official receipt must. for as long as the properties which are the object of insurance are situated in the Philippines. transfer or amendment of such debt instruments by A Inc. S Co. will sell the phones to H Co. To enable the joint venture to credit against its output VAT the input VAT derived from the separate domestic purchases of goods and services by the joint venture members. the property insurance policies issued by the said Hong Kong branch will be subject to DST imposed under Section 14 of the Tax Code. the VAT registered invoices and/or receipts must comply with the invoicing requirements provided under Section 113 of the Tax Code. SUBSEQUENT TRANSFER OF DEBT INSTRUMENT ISSUED PURSUANT TO A TAX FREE EXCHANGE IS NOT SUBJECT TO DST PROVIDED THERE IS NO INCREASE IN THE AMOUNT OR CHANGE IN THE MATURITY DATE OF THE DEBT INSTRUMENT. to S Co. as the consignee of the phones. even if such policies are signed or issued abroad. shall not be subject to DST provided that there is no increase in the amount or change in the maturity date from that of the . indicate the purchaser of the goods and/or services as follows: “Sold to (name of co-venturer) as member of the __________ Joint Venture. among others.00 for every P200. A Inc. However. while in transit is exempt from VAT. BIR Ruling No. 2005. DA-264-2005 dated June 17. the sale having been consummated outside the Philippines. INSURANCE CONTRACTS ISSUED BY A BRANCH IN FOREIGN COUNTRY. 2005. in exchange for shares and debt instruments issued by B Inc. In the case of the Philippine corporation’s branch in Hong Kong. The BIR ruled that the DST due on the issuance of the debt instruments shall be subject to P1. The BIR held that the sale of phone units by H Co. as owner of the phones but H Co.. BIR Ruling No. will acquire title over the phones prior to their entry in the Philippines. DA-174-2005 dated June 21. DA-288-2005 dated June 27. ARE NOT SUBJECT TO DST. Conversely. entered into a tax-deferred exchange transaction under Section 40(C)(2) and (C)(6) of the Tax Code of 1997. H Co. 2005. The shipping documents will indicate S Co. the DST imposed on property insurance under Section 184 will not apply. transferred Receivables to B Inc. of the issue value. as the consignee. while in transit or outside the Philippines so H Co. and B Inc. BIR Ruling No.” In addition. to support the joint venture’s input tax credits. or a fractional part thereof. where the property is situated outside the Philippines. will be liable for the VAT on importation. the invoices and/or receipts issued by the third parties or subcontractors must be issued to the consortium. However. the subsequent assignment. BEING IN THE NATURE OF PROPERTY INSURANCE COVERING PROPERTIES OUTSIDE THE PHILIPPINES. BIR DISCUSSES REQUIREMENTS FOR AN UNINCORPORATED JOINT VENTURE TO BE ABLE TO CLAIM THE INPUT VAT PAID BY JOINT VENTURE MEMBERS.7 and in order to make their phones competitive. whereby A Inc.

Calamba Steel Center. After filing an administrative claim for refund with the BIR. Due to Taxpayer C’s tax loss position for the three quarters of 1996. Madeline L. No. 2005.8 original instrument pursuant to Section 199(F) of the Tax Code of 1997. it was unable to use the excess taxes paid for and in its behalf by the withholding agents. facsimile number (632) 633-1911. Facts: For the year 1995. or at the indicated e-mail address: Atty. 9243.com . Laiño-Santiago Atty.com mlzvillapando@baniquedlaw. please feel free to contact any of the following at telephone number (632) 633-9418. Yuson-Layug Atty. BIR Ruling No. several persons withheld taxes from their income payments to Taxpayer C and remitted these taxes to the BIR. Carlos G. it filed its judicial claim for refund with the Court of Tax Appeals on April 18. Saga cgbaniqued@baniquedlaw. It should not be acted upon without specific legal advice based on particular situations.com lvyusonlayug@baniquedlaw. DA-244-2005 dated June 7. Inc. Taxpayer C attached its 1996 final adjustment return to its Reply to Comment when it appealed the CTA decision on the case to the Court of Appeals.S. 151857. 2005. 1997.com sacelicious@baniquedlaw. Hence. NOTE: The information provided herein is general and may not be applicable in all situations. Baniqued Atty. excess income taxes paid in 1995 that have not been applied to or used in 1996 may still be the subject of a tax refund in 1997 provided that the claim for such refund is filed with the internal revenue commissioner within two years after payment of said taxes.R. (formerly JS Steel Corporation) vs. Carlota Christina G. Ma. as amended by Republic Act No. Commissioner of Internal Revenue. If you have any questions. The amount of the claim must still be proven in the normal course. From the inception of the case to the formal offer of its evidence. Kathleen L. dated April 28. Bello Atty. Terence Conrad H. Taxpayer C did not present its 1996 income tax return to disclose its total income tax liability. the Supreme Court stressed that the recognition of the entitlement to a tax refund does not necessarily mean the automatic payment of the sum claimed in the final adjustment return of the taxpayer. Laura Victoria A. G. As a caveat. Celicious Atty.com thbello@baniquedlaw.com cglaino@baniquedlaw. THE RECOGNITION OF AN ENTITLEMENT TO A TAX REFUND DOES NOT MEAN AUTOMATIC PAYMENT OF THE CLAIM. This made it difficult to determine whether such excess tax payments were utilized in 1996.com klsaga@baniquedlaw. Zialcita-Villapando Atty. Held: A tax refund may be claimed even beyond the taxable year following that in which the tax credit arises. Suzette A.

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