TAX ALERTS. visit us on January Penalty for Failure to Separately Indicate VAT in OR s or Invoices

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1 P a g e 1 TAX ALERTS visit us on January 2012 Penalty for Failure to Separately Indicate VAT in OR s or Invoices Right to be Informed of the Facts and the Law on Which Assessment is Based New VAT Exemption Thresholds Tax Rule on VAT on Sale of Goods to Freeport Enterprise Tax Rule on VAT on Electronic Books Transaction on Unregistered Activities of PEZA Subject to CWT VAT on Royalty Payments by PEZA Companies Rule on Commutation of Leave Credits DST on Inter-company Advances Imputation of Theoretical Interests on Loan Advances Fringe Benefits Granted Must be Required or Necessary to Business MAIN OFFICE: 7 th & 8 th Floors, Don Jacinto Bldg., Dela Rosa cor. Salcedo Streets, Legaspi Village, Makati City Tel no. +63 (2) REGIONAL OFFICES: Batangas Branch Office: Unit 4-YCP Business Center J.P. Laurel Highway, Lipa City, Batangas Phone: +63(043) Cebu Branch Office: Unit 504 Cebu Holdings Center Cebu Business Park, Mabolo, Cebu City Phone: +63(32) ; ; Fax: +63(32) Davao Branch Office: 3 rd Floor Bldg. B. Plaza Luisa Ramon Magsaysay Avenue, Davao City Phone +63(82)

2 P a g e 2 Penalty for Failure to Separately Indicate VAT in OR s or Invoices Bureau of Internal Revenue (BIR) is now pushing its program to ensure issuance of receipts by businessmen to determine whether they are paying the correct tax. Consumers are encouraged by BIR to ask for receipts whenever they purchase goods or properties. On the part of consumers, they must know that receipts issued to them are proper, that is, they must know the difference between Official Receipts (ORs) or Invoices. ORs are issued for lease of goods or properties, and for every sale, barter or exchange of services and invoices are issued for sale, barter or exchange of goods or properties. If the seller is engaged in both sale of goods and services, the customer must determine the primary business to know the correct receipts to be issued. Said receipts must be duly registered with Bureau of Internal Revenue (BIR). In order to determine whether receipts are duly authorized and registered, it must contain the Authority to Print number. Receipts duly issued must be properly filled up. Under section 113 (B) of National Internal Revenue Code (NIRC) as amended, the following information shall be indicated in the VAT OR or VAT Invoice: 1. A statement that the seller is a VAT-registered person, followed by his Tax Identification Number (TIN); 2. The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value added tax: Provided, that: a. The amount of the tax shall be shown as a separate item in the invoice or receipt; b. If the sale is exempt from value-added tax, the term VAT-exempt sale shall be written or printed prominently on the invoice or receipt; c. If the sale is subject to zero percent (0%) valueadded tax, the term zero-rated sale shall be written or printed prominently on the invoice or receipt; d. If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VATexempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zerorated components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt: Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale. 3. The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and

3 P a g e 3 4. In the case of sales in the amount of one thousand (Php 1,000) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and Taxpayer Identification Number (TIN) of the purchaser, customer or client. Thus, in case of VAT ORs or invoices on transactions, VATregistered taxpayers must show separately the amount of VAT. Taxpayers found to have violated the said mandate may, upon conviction for each act or omission be fined an amount not less than Php 1,000 but not more than Php 50,000 and suffer imprisonment of not less than 2 years but not more than 4 years. (Revenue Regulation No , November 21, 2011) Right to be Informed of the Facts and the Law on Which Assessment is Based Thru the RELIEF program of the BIR whereby a simple procedure like the computerized matching of Bureau of Customs (BOC) records and taxpayer s importation in its tax return, BIR purportedly discovered non declaration of importation by a chemical company. Accordingly, BIR issued Preliminary Assessment Notice (PAN) and Formal Letter of Demand with assessment notice (FAN) to the company for VAT deficiency and Income tax deficiency. However, in both the PAN and FAN, the list of importations from the BOC used by the BIR for its comparison was not provided to the taxpayer. The list only became available after the taxpayer, having received the PAN, wrote, and requested for a copy of the list. CTA held that the PAN and the FAN are not valid because they violate Section 228 of the Tax Code, which provides that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment against him, otherwise, the assessment shall be void. In the case, BIR failed to provide the taxpayer with the list of its alleged undeclared importations that gave rise to the deficiency assessments issued against it. It also discovered an alarming discrepancy in the amounts specified in the PAN vis-à-vis the amounts appearing in the computation sheet attached to the PAN. As pointed out by the CTA, the BIR failed to provide the taxpayer with the list of its alleged undeclared importations that gave rise to the deficiency assessments issued against it. The CTA also discovered an alarming discrepancy in the amounts specified in the PAN visà-vis the amounts appearing in the computation sheet attached to the PAN. These details are not sufficient to afford the taxpayer the opportunity to intelligently answer the assessment as well as prepare documentary evidence for its protest. (BASF Philippines, Inc. v. Commissioner of Internal Revenue, November 22, 2011)

4 P a g e 4 New VAT Exemption Thresholds On October 28, 2011, BIR issued Revenue Regulation No increasing the threshold amounts for the VAT exemption of the following transactions pursuant to Section 109 (P), (Q) and (V) of the National Internal Revenue Code (NIRC) (P) Sale of real property not primarily held for sale to customers or held for lease in the ordinary course of trade or business; or Real property utilized for low-cost housing and socialized housing; or Residential lot House and lot and other residential dwelling (Q) Lease of residential unit with a monthly rental: ** Regardless of the amount of aggregate rentals received by the lessor during the year. (V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned above Old VAT Exemption Threshold Php 1,500,000 and below Php 2, 500, 000 and below Not exceeding Php 10, 000 gross annual sales and/or receipts do not exceed Php 1,500,000 New VAT Exemption Threshold Php 1,919, 500 and below Php 3, 199, 200 and below Not exceeding Php 12, 800 Not exceeding Php 1, 919, 500 The new thresholds shall take effect starting January 1, (Revenue Regulations No , October 28, 2011) In understanding the difference between (Q) and (V), the former presupposes that regardless of whether the gross annual rentals received by the lessor exceeds Php 1, 919, 5000 as long as the subject of lease is a residential unit, the lessor is not subject to VAT, while the latter presupposes that if the taxpayer s gross annual sales and/or receipts exceeds Php 1, 919, 500 and the transactions involve are sale or lease of goods or properties or the performance of services other than leasing of residential unit then said taxpayer will be subject to VAT. Tax Rule on VAT on Sale of Goods to Freeport Enterprise In this case, a VAT-registered IT company sells its electronic gaming machines to a Freeport zone registered enterprise. The BIR ruled that A VATregistered IT company is subject to 0% VAT on its sale of electronic gaming machines to a freeport zone-registered enterprise. The BIR anchored its ruling in Section 3 of RMC 50-07, which provides that sale, barter, exchange, or lease of all goods, properties, and/or services to a freeport zone-registered enterprise shall be subject to 0% VAT in case the seller is a VAT seller/contractor from the customs territory.

5 P a g e 5 The sale of an electronic gaming machine qualifies for VAT zerorating under RMC considering that the equipment was purchased by a freeport zone-registered enterprise from a VAT-registered enterprise from the customs territory. Moreover, the input tax paid attributable to the zero-rated sale may be refunded to the IT company. Accordingly, the seller, in order to claim for VAT refund, must show proof of payment of VAT on the equipment it purchased and subsequently sold to the freeport zone-registered enterprise. (BIR Ruling No , September 28, 2011). Tax Rule on VAT on Sale of Electronic Books Under section 109 (R) of NIRC, the sale, importation, printing, or publication of books and any newspaper, magazine, review, or bulletin are exempt from VAT, provided the following requisites are present: 1. If these appear at regular intervals; 2. With fixed prices for subscription and sale ; and 3. Sale is not devoted principally to the publication of paid advertisement. When BIR issued BIR Ruling on September 7, 2011, it ruled that the sale of an electronic copy of any publication does not come within the purview of the terms books, newspapers, periodicals, magazine, review or bulletin, which are exempt from VAT under Section 109 (R) of NIRC. BIR emphasized that the said terms, for purposes of the VAT law only applies to printed matters in hard copy. Books or publications that are converted to electronic or digital format in CD-ROM and DVD-ROM, for example, are not embraced by the VAT exemption under the NIRC. (BIR Ruling issued on September 7, 2011) In exempting books under section 109 (R) of NIRC, the government had in mind the objective of information dissemination. But when information s of such books are converted into an electronic copy, the objective now is for profit which should be taxed. Transactions on Unregistered Activities of PEZA Subject to CWT A call center company which is an information technology enterprise registered with the PEZA, currently enjoying Income tax holiday, leases its transmission facilities to another call center company. They both entered a master service agreement. Its registered activity with PEZA indicates only

6 P a g e 6 customer care and business processing outsourcing services. Apparently, the lease of its transmission facilities does not form part of its registered activity with PEZA. Since the lessee withhold the supposed tax on the lessor company s rental income, the latter argued that there was erroneous withholding, hence, it sought refund for the tax withheld. derived by PEZA-registered enterprises from their unregistered activities is not covered by ITH and other tax incentives granted to them under RA As such, their income from unregistered activity should be taxed at the rate of regular internal revenue taxes and should be subjected to withholding tax pursuant to RR (JP Morgan Chase Bank, N.A. Philippine Customer Care Center v. Commissioner of Internal Revenue and Revenue District Officer of RDO 50, Makati City, CTA Case No. 7962, September 23, 2011) part of the cost of goods destined for consumption outside the territorial border of the taxing authority. On the other hand, it cannot indirectly made to bear the VAT since it is an entity exempt from internal revenue laws under RA 7916, citing also the case of CIR vs. Seagate Technology (G.R , February 11, 2005). The CTA held that the income payment was correctly subjected to withholding tax and, therefore, no erroneous withholding and remittance was made that would have given rise to a claim for refund by the company. CTA explained that although PEZA-registered enterprises are exempt from CWT under Section of RR 2-98, their exemption from withholding tax does not cover their income from unregistered activities. Income VAT on Royalty Payments by PEZA Companies Considering that the resident withholding agent is a PEZAregistered enterprise operating within an economic zone, it can neither be directly charged with VAT nor indirectly made to bear, as added cost, the VAT. It cannot be directly charged with VAT because, by operations of law, economic zones are deemed separate customs territory. Thus, under the cross-border principle of VAT system, no VAT shall form Accordingly, its royalty fees to the nonresident foreign corporation shall be exempt from VAT. (BIR Ruling No , June 29, 2011)

7 P a g e 7 Rule on Commutation of Leave Credits In commutation and payment of monetized unused sick leave and vacation leave credits as a result of involuntary separation of employees from the service, different tax rule applies if it involves private employees and government employees. Monetized unused sick leave credits of private employees are always taxable while their monetized vacation leave credits are exempt only up to 10 days. Exceeding that, it is already taxable. Monetized unused sick leave and vacation leave credits of government employees are always tax exempt. The above rule is discussed thoroughly by the BIR when it issued BIR Ruling No on June 29, BIR has ruled that commutation and payment of monetized unused sick and VL credits as a result of involuntary separation of employees from the service shall only be exempt to the extent of 10 days for VL. Thus, the cash equivalent of VL credits exceeding 10 days is subject to tax. In the case of the monetized unused SL credits, its cash equivalent, regardless of number of monetized SL credits, is subject to income tax and consequently to withholding tax. BIR held that the principle in exempting monetized VL cannot be applied to SL credits since an employee must actually go on SL to avail of the leave credits. (BIR Ruling No , June 29, 2011) Filinvest DST on Inter-company Advances Development Corporation (FDC) extended cash advances on its affiliates FAI, FLI, DSCC and FCI. Such affiliates intercompany advances are covered by mere instructional letters and/or cash and journal vouchers. The BIR subject such intercompany advances for documentary stamp tax (DST) under Section 180 of the Tax Code. SC held that the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates qualified as loan agreements upon which documentary stamp taxes may be imposed. Section 180 of 1997 NIRC, when read in conjunction with Section 173 of the 1993 NIRC, the same applies to all loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No provide as follows: Section 3. Definition of Terms. For purposes of these Regulations, the following term shall mean:

8 P a g e 8 (b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings. In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code. (Filinvest Development Corporation v. Commissioner of Internal Revenue, GR and , July 19, 2011) Imputation of Theoretical Interests on Loan Advances The BIR imputed theoretical interests and assessed for deficiency income taxes Filinvest Development Corporation (FDC) on cash advances it made on its affiliates FAI, FLI, DSCC and FCI. The CIR argues that theoretical interests can be imputed on the advances FDC extended to its affiliates considering that, for said purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between or among controlled organizations, trades or businesses even in the absence of fraud, since said power is intended "to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses." The SC held that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2, does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to definition of gross income in Section 28 of the 1993 NIRC, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. On the perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC

9 P a g e 9 had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. (Filinvest Development Corporation v. Commissioner of Internal Revenue, GR and , July 19, 2011) officers under which sixty percent (60%) of the car plan availment is shouldered by petitioner and the remaining forty percent (40%) for the account of the officer, payable in five (5) years. The BIR assessed PAGCOR for deficiency fringe benefit tax. the CTA upheld the deficiency FBT. (PAGCOR vs CIR, ibid). Fringe Benefits Granted Must Be Required or Necessary to Business Section 33 (B) of NIRC defines Fringe benefit as any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank-and-file employees) such as but not limited to the following: xxxx (3) Vehicle of any kind xxx. In the case of PAGCOR vs CIR (CTA Case No. 7880, July 6, 2011), CTA explains that benefits granted by employer to its supervisory and managerial employees, to be considered as fringe benefits, the same must inure to the benefit of the employer. In the said case PAGCOR provides a car plan program to its qualified CTA held that PAGCOR failed to substantiate its claim that the car plan was required by the nature of or was necessary to its business operation. It was unable to present sufficient and convincing evidence that the subject fringe benefit was required or necessary in the conduct of its business or without such fringe benefit its operation would be hampered or adversely affected. Neither was petitioner able to prove that the car plan extended to its employees inured to its benefit. For the company s failure to substantiate its claim,

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