WEEKLY TAX UPDATES [JUNE 18-22, 2018]

SECURITIES & EXCHANGE COMMISSION (SEC) LEGAL OPINION FOR THIS WEEK

 

EFFECT OF MERGER ON THE EXISTING LICENSE AS REGIONAL OPERATING HEADQUARTER (ROHQ)

Langdon & Seah Asia Company Limited (LSACL), a Company organized in Hong Kong (HK) and licensed by the SEC to do business in the Philippine as an ROHQ, is contemplating a merger with its affiliate, Arcadis Asia Limited (AAL), a company also organized in HK. Under the proposed merger, AAL will be the surviving corporation while LSACL will be the absorbed corporation. In rendering legal opinion, the SEC provides for the effects of the proposed merger. Accordingly, LSACL shall file with the SEC within 60 days after the merger becomes effective, a copy of the Articles of Merger duly authenticated in HK. Likewise, LSACL being a dissolving company shall file a Petition for Withdrawal of License in accordance with Section 136 of the Corporation Code. Further, it is required to submit documents to SEC to legally effect the withdrawal of a foreign corporation’s License to Transact Business in the Philippines. If AAL will continue the business of LSACL in the Philippines, it must file its own Application for a License To Do Business in the Philippines in compliance with Sections 123, 124, 126 and 128 of the Corporation Code. It must also comply with all the requirements prescribed by the Company Registration and Monitoring Department (CRMD) of SEC [SEC-OFFICE OF THE GENERAL COUNSEL OPINION NO. 18-11, JUNE 5, 2018]

 

CONTROL TEST VS. INCORPORATION TEST IN THE DETERMINATION OF NATIONALITY OF CORPORATION

Medtronic United States (US) formed a domestic corporation in the Philippines namely Medtronic-PH with a total capitalization of Php 8,940,000.00, owning at least 99.99% of the outstanding capital stock of the said corporation. It sells its products to end-users or thru retailing. The issue brought for SEC opinion is the corporate classification of Medtronic-PH and whether or not it can directly sell products to end-users and customers. In addressing the request, the SEC opined that under the Incorporation Test, a corporation is considered a national of the country under whose laws it was incorporated. Accordingly, Medtronic-PH is considered a domestic corporation having been registered and incorporated under Philippine Laws. However, while Incorporation Test serves as the primary test under Philippine jurisdiction, other tests such as Control Test must be used to determine compliance with the provision of the Constitution and of other laws on nationality requirements. Certain areas of investments and business activities are reserved to Filipinos. Under these cases, Control Test is used to determine the eligibility of a corporation, which has foreign equity participation in its ownership structure, to engage in nationalized or partly nationalized activities. Under the Control Test, the nationality of the corporation depends on the nationality of the controlling stockholders. Thus, under Foreign Investment Act, Medtronic-PH is not a Philippine National, but a foreign owned corporation. In sum, while Medtronic-PH is a domestic corporation (having been incorporated in the Philippines), it is a foreign-owned corporation based on its ownership structure. With regard to the issue on whether or not Medtronic-PH is allowed to engage in direct selling of its product to end-users, the SEC referred to Section 2 of RA 8762 “Retail Trade Liberation Act of 2000” which states that sales to industrial and commercial users who use the products bought by them to render services to the general public and/or manufacture of goods which are in turn sold by them shall not be considered as retail. Based on the facts stated, it appears that products being sold by Medtronic-PH will be used to render services or to produce goods to the general public, hence, falls under the definition “Sales Not Considered as Retail”. [SEC-OFFICE OF THE GENERAL COUNSEL OPINION NO. 18-10, JUNE 04, 2018]

 

A DISSOLVING COMPANY HAS LEGAL CAPACITY TO SUE BEYOND THE 3-YEAR PERIOD IF A TRUSTEE HAS BEEN DESIGNATED

H & E Realty Corporation Inc. is seeking for an opinion on the legal capacity of a dissolved corporation to institute and file actions in court for the recovery and disposition of its properties during liquidation. In rendering opinion, the SEC referred to Section 122 of the Corporation Code of the Philippines citing that as a general rule a corporation has no juridical personality after dissolution. However, it may continue as a corporate body within three (3) years but only for purposes of winding up its affairs which consists of prosecuting and defending suits by or against it and enabling the dissolved corporation to settle and close its affairs, to dispose and convey its properties, and to distribute its corporate assets. However, there are court cases wherein an action in court may be brought for the benefit of a dissolved corporation even beyond the 3-year period. Clarifying SEC-OGC Opinion No. 03-33, if there are trustees, assignees or receivers designated within the 3-year period, there is no time limit by which the trustees/assignees/receivers must finish liquidation, and he may sue or be sued even beyond the 3-year period. Nevertheless, if the 3-year period has expired without a trustee/receiver having been designated, the Board of Directors may be permitted to continue as trustees by legal implication to complete corporate liquidation. Still in the absence of a Board of Directors, those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation, might make proper representations with the SEC for working out a final settlement of the corporate concerns. [SEC-OFFICE OF THE GENERAL COUNSEL OPINION NO. 18-09, JUNE 4, 2018]

 

COURT OF TAX APPEALS (CTA) DIGEST FOR THIS WEEK

 

BANK OVERDRAFT OR NEGATIVE CASH IN BANK AS SOURCE OF FINDINGS OF FICTITIOUS EXPENSES  + REQUISITES OF DEDUCTIBILITY OF INTEREST EXPENSE

Petitioner Commissioner of Internal Revenue (CIR) filed a Petition for Review seeking for reconsideration and modification of the Court in Division’s Decision and Resolution relative to the deficiency tax assessment against the Respondent LuDo & Luym Corporation.  On the issue of prescription, the Petitioner asserts that the right to assess Respondent has not yet prescribed because Respondent filed false or fraudulent return, thus, the tax may be assessed within ten (10) years after the discovery of the falsity. However, there is no showing that Respondent has substantially under declared its sales, receipt or income and that the presumption of falsity of returns cannot arise by mere assertion. On the findings of fictitious expenses, it was noted that the Petitioner added to taxable income per investigation various bank accounts with negative balances which are accordingly attributable to fictitious expenses.  Respondent, on the other hand, argues that the assessment is based on mere analysis, allegation and assumptions; and that the negative balances resulted from non-posting or erroneous posting of deposits and fund transfers in its books.  In resolving the Petition, the Court in Division sustained the disallowance of fictitious expenses pertaining to the bank overdrafts for the reason that the accounts to which the bank statements and certifications pertain cannot be ascertained since Respondent failed to provide details of each account. The documents submitted by Respondent and used by the ICPA were not pre-marked or offered as evidence, hence, were not admitted as forming part of the records of the case. Furthermore, based on Section 3 of Revenue Regulations No. 13-2000, Respondent failed to comply with the 4th requisite for the deductibility of interest expense (i.e. failure to prove that the indebtedness is connected with its trade or business). Considering the foregoing, the said interest expense, even if disallowed would still have an overall effect that is in favour of Respondent, as it may either result to a net loss or tax overpayment. The Petition for Review is DENIED and the earlier decision of the Court in Division is AFFIRMED. [COMMISSIONER OF INTERNAL REVENUE VS. LUDO & LUYM CORPORATION, CTA EB NO. 1559, JUNE 8, 2018]

 

REASSIGNMENT OF TAX AUDIT NEEDS ISSUANCE OF NEW LETTER OF AUTHORITY

The Petitioner, Nikken Philippines, Inc. filed a Petition for Review seeking reversal of the decision and resolution of the Court in Division ordering the Petitioner to pay the modified tax assessment issued by the Respondent Commissioner of Internal Revenue. Several issues have been raised focused on the absence of factual and legal bases of the assessment as well as the set-in of prescription which barred the Respondent from continuing the assessment. However, the Court instead resolved to grant the Petition holding that the assessment should be cancelled for want of authority on the part of the BIR examiners conducting the audit. As noted during the presentation of evidence, there was a reassignment of the case yet no Letter of Authority (LOA) was issued and instead the Petitioner was only notified through the issuance of Memorandum of Assignment. The Court ruled that there shall be issuance of new LOA for any reassignment or transfer of cases made to give authority to the new Revenue Officer (RO) who will continue to perform the assessment functions, as this is required under Revenue Memorandum Order 43-1990. There must be a grant of authority before any RO can conduct an examination or assessment. Thus, in the absence of a new LOA authorizing the new RO to conduct the reinvestigation of the Petitioners books, he acted without authority, making the assessment null and void. Consequently, the assessment is CANCELLED. [NIKKEN PHILIPPINES, INC.VS. COMMISSIONER OF INTERNAL REVENUE, CTA EB CASE NO. 1569, JUNE 7, 2018]

 

AFTER A LETTER NOTICE SERVED ITS PURPOSE, THE REVENUE OFFICER SHOULD SECURE LOA BEFORE PROCEEDING WITH FURTHER EXAMINATION & ASSESSMENT + LN IS DIFFERENT FROM LOA

The Petitioner Philippine International Air Terminals Company Inc. (PIATCO) filed a Petition for Review seeking the cancellation of the assessment issued by the Respondent Commissioner of Internal Revenue pursuant to a Letter Notice (LN) issued arising from discrepancy findings as a result of third-party matching. In resolving the Petition, it was noted that the assessment issued was only made on the basis of or pursuant to a mere LN and without the subsequent and requisite Letter of Authority (LOA). Consequently, the Petition for Review was GRANTED resulting to the cancellation and withdrawal of the assessment. [PHILIPPINE INTERNATIONAL AIR TERMINALS COMPANY, INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 9181, JUNE 06, 2018]

 

CREW NOT THE PRINCIPAL PARTY IN A CREW TRAINING SERVICE AGREEMENT

The Petitioner Commissioner of Internal Revenue (CIR) filed a Petition for Review seeking the reversal of the decision of the Court in Division partially granting the claim of Respondent Döhle Ship Management Philippines Corporation for refund of unapplied excess input VAT attributable to zero-rated sales. The Petitioner argued that under the Service Agreement, the Respondent does not directly render services to its non-resident foreign clients, but directly to the crew being trained by it. Consequently, the Respondent's services cannot qualify for zero-rating as it failed to show that the direct recipients of its services are non-resident foreign clients which are doing business outside the Philippines. The Respondent, on the other hand, argued that the crew training services does not make the crew as the party to whom the services were rendered (i.e. principals abroad). In resolving the Petition, the Court ruled that the Respondent was able to substantiate, at least partially, its zero rated sales and correctly argued that the crew is not the principal party to the service agreement but rather its foreign principal abroad. The Petition for Review is DENIED. [COMMISSIONER OF INTERNAL REVENUE VS. DÖHLE SHIPMANAGEMENT PHILS. CORP., CTA CASE NO. 8721, JUNE 01, 2018]

 

TRAIN LAW IS NOT CURATIVE LAW, IT CANNOT BE GIVEN RETROACTIVE APPLICATION ON THE IMPOSITION OF DEFICIENCY & DELINQUENCY INTERESTS

Both the Petitioner Batangas Electric Cooperative 1 and the Respondent Commissioner of Internal Revenue filed a Motion for Partial Reconsideration on the earlier decision of the Court En Banc holding the Petitioner liable to deficiency assessment with imposable 20% deficiency and delinquency interests per annum and cancelling the compromise penalty. The Petitioner argued that there is no basis in the imposition of deficiency and delinquency interests. In addition, it sought clarifications on the interest due citing Section 75 of the recently enacted Tax Acceleration and Inclusion (TRAIN) Law which provides that in no case shall the deficiency and delinquency interests be imposed simultaneously. Further, the Petitioner argued that the TRAIN Law can be considered a curative law remedying unconscionable and confiscatory interests effectively amounting to 40% per annum, hence, should be applied retroactively. Respondent, on the other hand, claimed asserting that TRAIN Law being a substantive law has no retroactive application citing Article 4 of the New Civil Code of the Philippines which provides that law shall have no retroactive effect unless the contrary is provided. Likewise, the Respondent posits that it is not a curative law since curative statutes are intended to supply defects, abridge superfluities in existing laws and curb certain evils, making valid that which before enactment of statute was invalid which is not present under the 1997 Tax Code. In resolving the Motion, the Court ruled that the imposition of compromise penalty without the conformity of the taxpayer is illegal and unauthorized. On the arguments that TRAIN Law is a curative law, the Court is not convinced citing that the provisions of the 1997 Tax Code on the imposition of delinquency and delinquency interests have not been declared by the Supreme Court as invalid, thus, there was nothing to cure with the passage of TRAIN Law. The TRAIN Law, which took effect on January 1, 2018, should be applied prospectively. [BATANGAS ELECTRIC COOPERATIVE 1 (BATELEC 1) VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 8423, JUNE 1, 2018]

 

TAXPAYER MUST STRICTLY OBSERVE THE 30-DAY PERIOD TO FILE ITS APPEAL BEFORE THE CTA, OTHERWISE THE ASSESSMENT SHALL BECOME FINAL, EXECUTORY & DEMANDABLE

The Petitioner Solid-One Mills Philippines, Inc. filed a Petition for Review seeking the cancellation of the Respondent Commissioner of Internal Revenue deficiency tax assessment covering the year 2007. The Petitioner argued that the subject assessment had already lapsed and that the assessment is void for violation of due process. Records reveal that on March 16, 2012, the Petitioner received a letter issued by the Respondent wherein the said letter categorically declared that Petitioner's failure to submit supporting documents in connection with its request for reinvestigation rendered the assessment final and executory. Accordingly, the taxpayer had been given thirty (30) days within which to file its Petition for Review. However, the Petitioner filed its Petition only on October 18, 2012, rendering the Petition as belatedly filed resulting to non-acquisition of jurisdiction of the Court. Thus, in view of the foregoing, the case was forwarded to the Collection Division making it final. Therefore, the instant Petition for Review is DISMISSED for lack of jurisdiction. [SOLID-ONE MILLS PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 1562, JUNE 1, 2018] 

 

BIR HAS NO VALID JUSTIFICATION TO GARNISH A TAXPAYER’S BANK ACCOUNT WITHOUT THE PRIOR ISSUANCE OF BOTH PAN & FAN

The Petitioner Stradcom Corporation filed a Petition for Review seeking refund of erroneously and illegally collected tax which was garnished by the Respondent Commissioner of Internal Revenue in relation to its deficiency tax assessment. The Petitioner argued that the issuance of Warrant of Garnishment was precipitous and incomplete derogation of the Petitioner’s right to due process as Respondent never issued a Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN). In resolving the Petition, the Court ruled in favour of the Petitioner citing that there was no valid justification for the Respondent to garnish the Petitioner’s bank account without the prior issuance of both PAN and FAN. In fine, considering the utter disregard of the due process requirements by the Respondent, Petitioner is entitled to its refund claim. Consequently, the Petition for Review is GRANTED and the Respondent is ordered to refund or issue a Tax Credit Certificate in favour of the Petitioner. [STRADCOM CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 9125, MAY 29, 2018]

 

TAX NEWS

 

Electronics industry fears 40% add’l operating costs under tax package 2 [Manila Bulletin, June 13, 2018]

The electronics industry yesterday warned that the proposed 15 percent corporate income tax (CIT) under the package 2 of the government’s comprehensive tax reform program would jack up their operational costs by an average of 40 percent further adversely impacting on their competitiveness.
Source: https://business.mb.com.ph/2018/06/13/electronics-industry-fears-40-addl-operating-costs-under-tax-package-2/

 

Lopez calls for drastic change in mindset for doing business [Manila Bulletin, June 13, 2018]

Trade and Industry Secretary Ramon M. Lopez yesterday raised his worry about the country’s competitiveness and has called for a drastic change of mindset where all stakeholders, government agencies especially, to overhaul the entire all business processes to start from “zero base” for the country to really leapfrog into the top 20 percentile by 2020 of the Ease of Doing Business (EODB) global ranking where the Philippines ranked second lowest among ten ASEAN countries.

Source: https://business.mb.com.ph/2018/06/13/lopez-calls-for-drastic-change-in-mindset-for-doing-business/

 

Tax credits with ‘sunset provision’ urged for e-vehicles [Manila Bulletin, June 13, 2018]

For the Duterte administration which has aversion extending subsidies, a “tax credit policy with sunset provision” is seen as the likely pathway that could gain traction on the rollout of plug-in hybrids or electric vehicles (EVs) in the country.

Source: https://business.mb.com.ph/2018/06/13/tax-credits-with-sunset-provision-urged-for-e-vehicles/

 

BSP sets deadline for reporting project finance exposures of banks [Manila Bulletin, June 12, 2018]

The Bangko Sentral ng Pilipinas (BSP) is directing banks to submit the enhanced reportorial requirements for project finance and real estate exposures by July 31 and October 19 this year as a pilot run.

Source: https://business.mb.com.ph/2018/06/12/bsp-sets-deadline-for-reporting-project-finance-exposures-of-banks/


DOF reviewing international common carriers’ tax [Manila Bulletin, June 11, 2018]
The Department of Finance (DOF) is reviewing the common carriers tax imposed on international air and sea cargo vessels operating in the country to ensure a level playing field and improve the nation’s competitiveness in the global shipping and air cargo sectors.

Source: https://business.mb.com.ph/2018/06/11/dof-reviewing-international-common-carriers-tax/


DBM rejects proposed reduction in VAT rate [Manila Bulletin, June 11, 2018]
The Department of Budget and Management (DBM) has rejected the proposal to reduce the country’s consumption levy, citing the lawmakers should instead let the Duterte administration finish its tax reform measures before cutting down the value-added tax (VAT) rate.

Source: https://business.mb.com.ph/2018/06/11/dbm-rejects-proposed-reduction-in-vat-rate/


Policy changes proposed in DA to improve ease of doing business in agri sector [Manila Bulletin, June 15, 2018]
The Department of Agriculture (DA) was told to change certain policies as the unnecessary regulatory burden, just like in other sectors, affects the ease of doing business in the agriculture and fishery sector.

Source: https://business.mb.com.ph/2018/06/15/policy-changes-proposed-in-da-to-improve-ease-of-doing-business-in-agri-sector/

 

Gov’t incurs budget deficit in May despite higher revenue [Manila Bulletin, June 15, 2018]
The national government registered a budget deficit in May despite the higher than expected revenue collections of the Bureau of the Internal Revenue (BIR) and Bureau of Customs, the Department of Finance (DOF) said.

Source: https://business.mb.com.ph/2018/06/15/govt-incurs-budget-deficit-in-may-despite-higher-revenue/

 

DOF expects tax amnesty law in place next April [Manila Bulletin, June 14, 2018]
The Department of Finance (DOF) expects the proposed tax amnesty would be passed into law by September this year to pave the way for its implementation in April next year.
Source: https://business.mb.com.ph/2018/06/14/dof-expects-tax-amnesty-law-in-place-next-april/

 

Drilon bats for public hearings on suspension of excise tax on fuel [Business Mirror, June 15, 2018]
Senate Minority Leader Franklin M. Drilon pushed Friday for the holding of a public hearing on proposals for the Duterte administration to suspend the collection of excise tax on fuels based on the controversial Tax Reform for Acceleration and Inclusion (TRAIN) law.
Source: https://news.mb.com.ph/2018/06/15/drilon-bats-for-public-hearings-on-suspension-of-excise-tax-on-fuel/

 

DOJ set to conclude prelim probe on Rappler tax raps next week [Manila Bulletin, June 14, 2018]
The Department of Justice (DOJ) is expected to conclude next week its preliminary investigation on the P133 million tax evasion complaint against the popular online news site Rappler.

Source: https://news.mb.com.ph/2018/06/14/doj-set-to-conclude-prelim-probe-on-rappler-tax-raps-next-week/


‘All aspect of our governance would depend on taxes’ — Duterte [Manila Bulletin, June 13, 2018]
Filipinos must pay taxes so government could implement programs such as free college tuition program that aim to improve their lives, President Duterte said Wednesday.

Source: https://news.mb.com.ph/2018/06/13/all-aspect-of-our-governance-would-depend-on-taxes-duterte/

 

BIR says no more updating of additional tax exemption [Manila Bulletin, June 10, 2018]
The Bureau of Internal Revenue (BIR) said individual taxpayers are no longer required to update their additional exemptions in their annual income tax returns (ITRs).

Source: https://news.mb.com.ph/2018/06/10/bir-says-no-more-updating-of-additional-tax-exemption/

 

Firm faces tax raps at DOJ [Philippine Daily Inquirer, June 09, 2018]
A freight firm faces a criminal complaint before the Department of Justice (DOJ) for having owed the government over P27 million in taxes.

Source: https://news.mb.com.ph/2018/06/09/firm-faces-tax-raps-at-doj/

 

Sotto cool to TRAIN suspension, eyes VAT reduction [Philippine Star, June 11, 2018]
MANILA, Philippines — Senate President Vicente Sotto III is not keen on supporting calls to suspend the Tax Reform for Acceleration and Inclusion (TRAIN) law but is eyeing the possible reduction of the value-added tax (VAT) and other measures to stem the rising prices of commodities while protecting the government’s revenue stream.

Source: https://www.philstar.com/headlines/2018/06/11/1823553/sotto-cool-train-suspension-eyes-vat-reduction