SSS CAN’T ABSORB RATE HIKE DEFERMENT + PHILIPPINE CHAMBER CALLS ON CONGRESS TO FAST-TRACK CORPORATE TAX REFORM BILL
Other Relevant Tax Updates:
- Bureau of Internal Revenue (BIR) Rulings Digest
- Court of Tax Appeals (CTA) Cases Digest
- Tax and Business-Related News [January 16-22]
I. BIR RULINGS DIGEST
- Deductibility of royaltiesin computing gross income subject to 5% preferential tax rate
- Treatment of idle propertiesunder Revenue Regulations (RR) no. 7-2003; automatic conversion of property into capital asset is not necessary when the idle real property is considered capital asset from the moment it was acquired; sale of investment property not engaged in real estate business is not subject to vat
- Distribution or sale of agricultural productsin their original state for human consumption is exempt from vat
- Transfer of membership sharefrom one officer to another is exempt from Capital Gains Tax (CGT), donor’s tax, and Documentary Stamp Tax (DST)
- No registration of any document transferring real property shall be effected by the register of deeds unless the Capital Gains Tax (CGT) or Creditable Withholding Tax (CWT), if any, has been paid
DEDUCTIBILITY OF ROYALTIES IN COMPUTING GROSS INCOME SUBJECT TO 5% PREFERENTIAL TAX RATE
SATAC is seeking a ruling on its entitlement to the deductibility of royalties paid in computing gross income subject to the 5% preferential tax rate under Republic Act (R.A.) No. 9400 or The Bases Conversion and Development Act of 1992, as amended. This is in connection with the Intangibles Licensing Agreement entered into by SATAC and SWS, whereby the former shall use the intangible property of the latter. As consideration, SATAC shall pay royalties to SWS. As represented, royalty expense is only incurred as the service is rendered, thus, it is recorded as part of the Company’s cost of services. In reply, the BIR ruled that pursuant to Revenue Regulations (RR) No. 16-99, as amended, it allows enterprises registered in the Subic Special Economic and Freeport Zone to deduct royalty payments when calculating gross income subject to the 5% final tax provided that the agreement that gave rise to the royalty payment is actually and fully substantiated and the corresponding withholding taxes are duly paid. [BIR RULING NO. 701-2020, DECEMBER 29, 2020]
[TREATMENT OF IDLE PROPERTIES UNDER RR NO. 7-2003] [AUTOMATIC CONVERSION OF PROPERTY INTO CAPITAL ASSET IS NOT NECESSARY WHEN THE IDLE REAL PROPERTY IS CONSIDERED CAPITAL ASSET FROM THE MOMENT IT WAS ACQUIRED] [SALE OF INVESTMENT PROPERTY NOT ENGAGED IN REAL ESTATE BUSINESS IS NOT SUBJECT TO VAT]
Philippine Airlines Inc. is seeking confirmation on whether sale of real properties held for investment purposes is subject to CGT and DST but not to VAT. In reply, BIR states that an idle property may be classified as capital asset or ordinary asset. Under RR No. 7-2003, an idle property classified as ordinary asset is automatically converted into capital asset upon showing of proof that the same has not been used in business for more than two (2) years prior to the consummation of the taxable transaction involving said properties. The automatic conversion of property into capital asset is not necessary when the idle real property is considered capital asset from the moment it was acquired. Since PAL is not engaged in the real estate business and was organized as an airline company; and the subject properties have been idle for more than two (2) years as shown by the Certifications of the Provincial Assessor’s office of the Province of Aklan; and lastly, the subject properties have been treated in the books of accounts and are reflected in the Audited Financial Statements as investment properties and have not been used in the ordinary course of business, BIR opined that the subject properties are classified as capital assets and shall be subject only to CGT and DST and not to VAT. [BIR RULING NO. 698-2020, DECEMBER 29, 2020]
DISTRIBUTION OR SALE OF AGRICULTURAL PRODUCTS IN THEIR ORIGINAL STATE FOR HUMAN CONSUMPTION IS EXEMPT FROM VAT
H Distribution Co. is requesting for VAT exemption ruling on its importation and distribution of frozen fruit and vegetable. In reply, BIR opined that the importation and distribution/sale of agricultural products in their original state for human consumption is considered exempt from 12% VAT pursuant to Section 109 (1)(A) of the Tax Code. Agricultural products are considered remaining in their original state even if these have undergone the simple process of preparation or preservation for the market. Moreover, the VAT exemption is limited only to such products which are intended as food for human consumption. [BIR RULING 673-2020, DECEMBER 22, 2020]
[LGUS ARE TAXABLE ON INCOME FROM PROPRIETARY FUNCTIONS] [INCOME TAX EXEMPTION OF GOVERNMENT IN THE PERFORMANCE OF PROPRIETARY FUNCTION IS WITHDRAWN BY P.D. NO. 1931]
The Department of Finance-Bureau of Local Government Finance (DOF-BLGF) is requesting for clarification on the imposition of income tax on LGUs engaged in the operation of local economic enterprises, pursuant to Section 22(d) of Republic Act (R.A.) No. 7160 of the Local Government Code of 1991. The request is in relation to the letter of the Municipal Mayor of the Municipality of Baao, Camarines Sur addressed to the DOF-BLGF which informs that the BIR requested for the payment of income taxes from the market rental fees being paid to the LGU. In reply, BIR cited Section 27(C) of the 1997 Tax Code, which provides that government-owned and controlled corporations, agencies or instrumentalities of the government are no longer exempt from taxation and shall be liable to pay tax on their taxable income as are imposed upon corporations or associations engaged in similar business, industry or activity, except the GSIS, SSS, PHIC, and Local Water Districts. However, Section 32(B)(7)(b) of the same code excludes from the gross income and exempts from income tax, the income derived from the discharge of any essential governmental functions accruing to the Government of the Philippines or to any of its political subdivisions. As established in BIR Ruling No. 369-11, provincial, city and municipal governments are liable to income tax in the performance of their corporate or proprietary functions since the exemption privilege, including preferential tax treatment of all government units were withdrawn by P.D. No. 1931 Directing the Rationalization of Duty and Tax Exemption Privileges Granted to Government-Owned or Controlled-Corporations and All Other Units of Government. Thus, market rental fees received by the Municipality of Baao, Camarines Sur, being proprietary or private in character, are subject to income tax. [BIR RULING NO. 659-20, DECEMBER 9, 2020]
IMPORTATION OF DAIRY ANIMALS IS EXEMPT FROM VAT
National Dairy Authority is requesting for VAT exemption ruling on its importation of dairy animals. In reply, BIR referred to Section 109(1)(A) of the Tax Code which provides that sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption and breeding stock and genetic materials shall be exempt from VAT. Thus, importation is exempt from VAT subject to the conditions enshrined in Section 18 of the National Dairy Development Act of 1995. [BIR RULING NO. 654-2020, DECEMBER 2, 2020]
TRANSFER OF MEMBERSHIP SHARE FROM ONE OFFICER TO ANOTHER IS EXEMPT FROM CGT, DONOR’S TAX, AND DST
S Co., a beneficial owner of membership share from M Co., is seeking confirmation that the transfer of membership share from one of its officers to another shall not be subject to CGT, Donor’s Tax, and DST. In reply, Section 24(C) of the Tax Code provides that CGT is imposed on the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the Stock Exchange. In other words, CGT is imposed on the gain or profit from the sale of capital assets. Since the current trustee/officer only possessed legal title over the membership share, the transfer of the subject share in favor of the new trustee-appointee will be limited only to the transfer of the legal title. Also, since the beneficial ownership over the membership share remains with S Co., there is no actual transfer of ownership of the membership share between S Co. and its trustees and/or from such trustees to the next trustees, and, therefore, no gain or profit shall be recognized. Thus, the transfer of the legal title of the membership shares is not subject to CGT considering that the transfer involves neither monetary consideration nor change in beneficial ownership. Likewise, the transfer is not subject to DST since there is no transfer or conveyance of the beneficial ownership of or any right, claim or interest over the membership share or over the assets of M Co. Consequently, since there will be no transfer or conveyance of the membership share, the same shall not be subject to Donor’s Tax under Section 98 of the Tax Code. [BIR RULING NO. 653-2020, DECEMBER 2, 2020]
NO REGISTRATION OF ANY DOCUMENT TRANSFERRING REAL PROPERTY SHALL BE EFFECTED BY THE REGISTER OF DEEDS UNLESS THE CGT OR CWT, IF ANY, HAS BEEN PAID
Optical Media Board (OMB) is requesting for the issuance of Certificate Authorizing Registration (CAR) pending payment of the transfer tax liability. In reply, BIR referred to Section 58 (E) of the Tax Code which provides that no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly representative has certified that such transfer has been reported, and the CGT or CWT, if any, has been paid. It must be noted that the burden of paying the 6% CGT rest upon the seller. Since the buyer is a government agency, the seller may opt to be taxed under Section 24 (A) of the Tax Code. Until the seller pays the CGT, no registration of the Deed of Sale transferring the subject property to OMB can take effect notwithstanding the fact that OMB is an agency of the government. [BIR RULING 646-2020, DECEMBER 1, 2020]
II. CTA CASES DIGEST
- Taxpayer’s failure to file a petition for review to cta within 30 daysafter receipt of Commissioner of Internal Revenue (CIR) final decision resulting in lack of jurisdiction on the part of CTA
- Income from junket operations is classified under “other related services” subject to income tax and not to franchise tax
- Incorrect Tax Identification Number (TIN) of supplierin Summary List of Purchases (SLP) can result in undeclared receipts of actual owner of tin used; slp is not sufficient to substantiate input tax claimed; excess input tax carried forward to succeeding period is covered in the period benefited
TAXPAYER’S FAILURE TO FILE A PETITION FOR REVIEW TO CTA WITHIN 30 DAYS AFTER RECEIPT OF CIR FINAL DECISION RESULTING IN LACK OF JURISDICTION ON THE PART OF CTA
Petitioner Negros Sugar Farmers Multi-purpose Cooperative filed a Petition for Review seeking cancellation of the assessment issued by the Respondent CIR covering fiscal year ended August 31, 2005. In ruling, the Court held that it could not validly delve into the merits of the assessment as the same has already attained finality. Perusal of records showed that Petitioner failed to appeal within 30 days from receipt of the final decision dated February 13, 2013. Instead of elevating the matter before the CIR or the CTA, Petitioner opted to file a Petition to Set Aside/Recall Final Decision still with the Regional Director on March 22, 2013. In the meantime, the 30-day period to take the case to the CIR or the CTA has lapsed. Even then, after the Regional Director reiterated the final decision on June 21, 2013, Petitioner filed an administrative appeal before the CIR on July 19, 2013. Only after the CIR denied the appeal on March 8, 2018 did the Petitioner finally file a Petition before the CTA on April 12, 2018, or five (5) years late. It is noted that Petitioner’s repeated and successive filing of Motions for Reconsideration at the administrative level could not be a reason to extend the appeal period. The law has already clearly laid down the remedies and there could be no excuse to the non-observance. Since assessment has become final, executory and demandable, Petition was DENIED for lack of jurisdiction. [NEGROS SUGAR FARMERS MULTI-PURPOSE COOPERATIVE VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 9810, JANUARY 11, 2021]
INCOME FROM JUNKET OPERATIONS IS CLASSIFIED UNDER “OTHER RELATED SERVICES” SUBJECT TO INCOME TAX AND NOT TO FRANCHISE TAX
Petitioner Prime Investment Korea Inc. filed a Petition for Review seeking reversal of the Court’s earlier decision subjecting its junket gaming revenues to Income Tax. Petitioner invoked the Supreme Court’s ruling in Bloomberry case where the Court held that the contractees and licensees are likewise liable only to 5% Franchise Tax in lieu of all kinds of taxes, including Income Tax. On the other hand, Respondent CIR countered that contractees and licensees of PAGCOR shall likewise pay Income Tax for income derived from “other related services” including income from junket operations. In ruling, the Court held that under Presidential Decree (P.D.) No. 1869 or A Decree to Consolidate Previously Enacted PAGCOR Legislation, the income of PAGCOR is classified into two: (1) income from its operations under its franchise; (2) income from its operation of necessary and related services. The nature of taxes imposable is well defined for each kind of activity or operations. In Revenue Memorandum Circular (RMC) No. 13-2013, the income from junket operations is classified under “other related service”. Evidently, the income from junket operations is classified under “other related services” subject to Income Tax and not Franchise Tax. It was categorically held by the Supreme Court in Bloomberry case that payment of Income Tax on “other related services” extends to contractees and licensees. Thus, Petition was DENIED. [PRIME INVESTMENT KOREA INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA EN BANC CASE NO. 2129, JANUARY 8, 2021]
[INCORRECT TIN OF SUPPLIER IN SLP CAN RESULT IN UNDECLARED RECEIPTS OF ACTUAL OWNER OF TIN USED] [SLP IS NOT SUFFICIENT TO SUBSTANTIATE INPUT TAX CLAIMED] [EXCESS INPUT TAX CARRIED FORWARD TO SUCCEEDING PERIOD IS COVERED IN THE PERIOD BENEFITED]
Level Up, Inc. (LUI) and CIR both filed their respective Petitions for Review seeking the modification of the earlier decision and resolution of the Court Special 2nd Division partially upholding the deficiency VAT assessment against LUI. LUI argued that the deficiency assessment arising from undeclared receipts must be cancelled as the detailed summary of transactions of its affiliate with its clients sufficiently established that LUI lacked participation on the transactions and that the disallowed input tax should be cancelled as it is substantiated by its SLP. The undeclared receipts of LUI arose from the alleged incorrect use of LUI’s affiliate’s clients TIN in declaring their purchases instead of the TIN of LUI’s affiliate. Moreover, the total vatable sales of LUI’s affiliate are significantly lower than the purchases claimed by the clients. In ruling, the Court cannot subscribe to LUI’s claim that the undeclared receipts from its affiliate’s clients are actually sales of its affiliate in view of the significant discrepancies noted. This is in addition to the fact that the invoices and receipts attached by LUI to its Petition for Review to refute the finding are unreadable. As to the disallowed claimed input tax, there is no showing in Section 110 and 113 of the 1997 Tax Code that SLP is a sufficient proof to substantiate input tax or the existence of purchase of goods or service. On the separate Petition filed by CIR arguing that the Court in Division erred in the cancellation of the assessment with respect to the excess input tax to be carried over to the succeeding period, the Court upheld the assailed decision because it is beyond the scope of the present assessment. Thus, both Petitions were DENIED for lack of merit and the assailed decision and resolution were AFFIRMED. [LEVEL UP, INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA EN BANC CASE NOS. 2069 AND 2070, JANUARY 6, 2021]
III. TAX AND BUSINESS-RELATED NEWS [JANUARY 16-22]
- PEZA says investments to PH down 19 pct, hopes to bounce back to P100-B level
- Asian markets set for messy open after U.S. stocks peak following Biden inauguration
- SSS chief: Fund facing P14.9-B deficit amid halt in contribution hike
- SSS can’t absorb rate hike deferment
- Bangko Sentral sees inflation staying benign, to keep rates low
- Nissan to close PH car assembly, 133 workers to lose jobs
- Makati Shangri-La closing down ‘temporarily’ as pandemic batters hotel industry
- Philippine chamber calls on Congress to fast-track corporate tax reform bill
- Duterte keeps lower tariffs on some poultry products until 2022
- Congress urged to pass tax perks bill
PEZA says investments to PH down 19 pct, hopes to bounce back to P100-B level [ABS-CBN News, January 22, 2021]
The Philippine Economic Zone Authority (PEZA) saw a 19-percent drop in last year’s investments to P95 billion, equal to 326 projects, as investors shied away from commitments due to the impact of the COVID-19 pandemic.
Asian markets set for messy open after U.S. stocks peak following Biden inauguration [ABS-CBN News, January 22, 2020]
Asian investors were expecting a mixed day of trading after Wall Street peaked on Thursday, pushed upward by continued optimism about economic stimulus to counteract the COVID-19 pandemic promised by newly inaugurated U.S. President Joe Biden.
SSS chief: Fund facing P14.9-B deficit amid halt in contribution hike [Philippine Daily Inquirer, January 22, 2021]
Stopping the mandatory hike in private workers’ monthly contributions to the Social Security System (SSS) this year would result in P41.37 billion in foregone collections and could place the state-run pension fund’s bottom line in the red, its top official said on Thursday.
SSS can’t absorb rate hike deferment [Manila Bulletin, January 22, 2021]
State-run Social Security System (SSS) warned that the suspension of the scheduled increase in member-contribution will considerably strain the already dire financial position of the pension fund.
Bangko Sentral sees inflation staying benign, to keep rates low [ABS-CBN News, January 21, 2021]
The Bangko Sentral ng Pilipinas said Thursday it expects inflation to remain “benign” this year allowing it to keep interest rates low to help economic recovery.
Nissan to close PH car assembly, 133 workers to lose jobs [ABS-CBN News, January 21, 2021]
Japan’s Nissan Motor will stop its Philippine car assembly operations, the Department of Trade and Industry (DTI) confirmed on Thursday.
Makati Shangri-La closing down ‘temporarily’ as pandemic batters hotel industry [ABS-CBN News, January 20, 2021]
Shangri-La will be closing its hotel branch in Makati on February 1 as the hotel industry continues to reel from the disruptions caused by the COVID-19 pandemic, the hotel operator said in a statement on Wednesday.
Philippine chamber calls on Congress to fast-track corporate tax reform bill [ABS-CBN News, January 18, 2021]
The Philippines’ largest business organization on Monday called on Congress to pass a bill seeking to lower corporate taxes and rationalize fiscal incentives.
Duterte keeps lower tariffs on some poultry products until 2022 [ABS-CBN News, January 18, 2021]
President Rodrigo Duterte has signed an executive order keeping reduced tariff rates on certain imported poultry products until 2022, citing the COVID-19 pandemic.
Congress urged to pass tax perks bill [Philippine Daily Inquirer, January 16, 2021]
Fifty-one trade and industry groups urged lawmakers to pass a crucial tax reform bill that is being held up in a bicameral committee, keeping struggling businesses a step away from a policy that would cut taxes and make it easier to tide their workers through these difficult times.
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