TAX ALERT

August 31, 2008 WHILE THE CTA HAS THE JURISDICTION TO RESOLVE TAX DISPUTES IN GENERAL, WHERE WHAT IS ASSAILED IS THE VALIDITY OR CONSTITUTIONALITY OF A LAW, OR A RULE OR REGULATION ISSUED BY THE ADMINISTRATIVE AGENCY IN THE PERFORMANCE OF ITS QUASI-LEGISLATIVE FUNCTION, THE REGULAR COURTS AND NOT THE CTA HAVE JURISDICTION TO PASS UPON THE SAME. British American Tobacco v. Camacho, et al., G.R. No. 163583 dated August 20, 2008. THE CLASSIFICATION FREEZE PROVISION UNDER SECTION 145 OF RA 8240 AS AMENDED BY RA 9334 SATISFIED THE RATIONAL-BASIS TEST AS IT ADDRESSED CONGRESS ADMINISTRATIVE CONCERNS IN THE SIMPLIFICATION OF TAX ADMINISTRATION OF SIN PRODUCTS, ELIMINATION OF POTENTIAL AREAS FOR ABUSE AND CORRUPTION IN TAX COLLECTION, BUOYANT AND STABLE REVENUE GENERATION, AND EASE OF PROJECTION OF REVENUES. CONSEQUENTLY, THERE CAN BE NO DENIAL OF THE EQUAL PROTECTION OF THE LAWS. Ibid. SECTION 4(B)(E)(C), 2ND PARAGRAPH OF REVENUE REGULATIONS NO. 197, AS AMENDED BY SECTION 2 OF REVENUE REGULATIONS 9-2003, AND SECTIONS II(1)(B), II(4)(B), II(6), II(7), III (LARGE TAX PAYERS ASSISTANCE DIVISION II) II(B) OF REVENUE MEMORANDUM ORDER NO. 6-2003, AS PERTINENT TO CIGARETTES PACKED BY MACHINE, ARE INVALID INSOFAR AS THEY UNJUSTIFIABLY EMASCULATE THE OPERATION OF SECTION 145 OF THE NIRC AND AUTHORIZE THE COMMISSIONER OF INTERNAL REVENUE TO RECLASSIFY OR UPDATE THE CLASSIFICATION OF NEW BRANDS EVERY TWO YEARS OR EARLIER. Ibid. WHERE THE ENTIRE INSURANCE PROCEEDS ARE USED TO REHABILITATE AND REPLACE THE ASSETS DESTROYED BY FIRE, THE EXCESS OF THE INSURANCE PROCEEDS OVER THE NET BOOK VALUE OR COST BASIS OF THE ASSETS IS NOT RECOGNIZED AS REALIZED INCOME SUBJECT TO INCOME TAX. Under the doctrine of Involuntary Conversion of Property such as destruction, theft, seizure, condemnation, where a property is converted into a property similar or related in service or use or into money which is in good faith expended to acquire other property, no gain or loss shall be recognized. The excess of the total replacement cost over the net book value of the damaged asset will not be a deductible loss but may be capitalized
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2 subject to depreciation. Neither will the insurance proceeds form part of gross sales for VAT purposes since the indemnification is not an actual sale of goods by the insured to the insurer. BIR Ruling DA(VAT-004)050-2008 dated July 16, 2008. PROCEEDS FROM THE SALE OF PRINCIPAL RESIDENCE FULLY UTILIZED TO PAY OFF LOANS OBTAINED FOR THE PRIOR ACQUISITION OF A LAND AND THE CONSTRUCTION OF A NEW PRINCIPAL RESIDENCE SHALL BE EXEMPT FROM THE 6% CAPITAL GAINS TAX. BIR Ruling DA(I005)057-2008 dated July 18, 2008. THE TAX CONSEQUENCES OF A DEMERGER TAKING PLACE OUTSIDE THE PHILIPPINES OF TWO FOREIGN CORPORATIONS WITH PHILIPPINE BRANCHES ARE AKIN TO A MERGER UNDER SECTION 40(C)(2) OF THE NIRC INASMUCH AS THE TRANSFER OF ASSETS AND LIABILITIES OF THE ABSORBED FOREIGN CORPORATION, INCLUDING THAT OF ITS BRANCH, TO THE SURVIVING CORPORATION IS IN EXCHANGE OF SHARES OF STOCK IN THE LATTER. BIR Ruling DA(C003)017-2008 dated July 9, 2008. THE CONDITIONAL ASSIGNMENT OF RIGHTS OVER THE CERTIFICATE OF SALE COVERING FORECLOSED REAL PROPERTY EXECUTED PRIOR TO THE EXPIRATION OF THE REDEMPTION PERIOD, NOT BEING A CONVEYANCE OF REALTY SUCH AS LAND OR BUILDING, IS NOT SUBJECT TO CAPITAL GAINS TAX BUT ANY GAIN THEREFROM SHALL BE SUBJECT TO REGULAR INCOME TAX. BIR Ruling DA-387-2008 dated June 24, 2008. SINCE THE REDEEMABLE PREFERRED SHARES UPON REDEMPTION BECOME TREASURY SHARES WHICH ARE CONSIDERED RETIRED AND NO LONGER ISSUABLE, THE REDEMPTOR NOT TAKING TITLE NOR RECEIVING THEM FOR VALUE SHALL NOT BE LIABLE FOR INCOME TAX. BIR Ruling DA-390-2008 dated June 27, 2008. THE SHAREHOLDER OF THE REDEEMABLE PREFERRED SHARES SHALL REALIZE CAPITAL GAIN OR LOSS CONSISTING OF THE DIFFERENCE BETWEEN THE ADJUSTED BASIS OF THE SHARES AND THE REDEMPTION PRICES OF THE SHARES. Since the redeemable preferred shares will be redeemed at a price equal to its issue value, the shareholders will not realize a taxable gain or deductible loss upon redemption. BIR Ruling DA-390-2008 dated June 27, 2008. THE LESSEES ABANDONMENT IN FAVOR OF THE LESSOR OF LEASEHOLD IMPROVEMENTS AFTER PRE-TERMINATION OF THE LEASE AGREEMENT AND WRITING OFF FROM THE LESSEES BOOKS OF ACCOUNTS THE PRE-TERMINATION PENALTY EQUIVALENT TO THE BOOK VALUE OF THE IMPROVEMENTS SHALL NOT BE SUBJECT TO

3 DONORS TAX, THERE BEING NO DONATIVE INTENT. BIR Ruling DA-3902008 dated June 27, 2008. WHERE IT IS THE SUPPLIER-IMPORTER WHO PAID EXCISE TAX ON RAW ALCOHOL, THE MANUFACTURER-EXPORTER OF FINISHED ALCOHOL IS NOT THE PROPER PARTY TO CLAIM A REFUND UNDER SECTION 130(D) OF THE NIRC. Dissent, Acosta: The law categorically grants the manufacturer-exporter the privilege to claim a refund of excise taxes paid on raw materials used in its exported products as long as the following conditions are fulfilled: 1) excise taxes were actually paid on the locally-manufactured goods; (2) such locally manufactured goods were exported either in their original state or as ingredients or parts of any manufactured goods or products; and (3) there must be proof of actual exportation of the said goods and receipt of the corresponding foreign exchange payment. The excise tax paid attaches to the goods or products, irrespective of who paid it. Diageo Philippines, Inc. v. CIR, CTA EB No. 260 (CTA Case No. 7369) dated July 2, 2008. FAILURE TO INDICATE A CHOICE TO AVAIL OF EITHER THE TAX REFUND OR THE TAX CREDIT IN THE ANNUAL ITR IS NOT FATAL TO A CLAIM FOR REFUND AND SHOULD NOT BAR THE AVAILMENT OF SUCH REMEDY. CIR v. PERF Realty Corporation, G.R. No. 163345 dated July 4, 2008. FAILURE TO FORMALLY OFFER THE 1998 ITR IS NOT FATAL TO A CLAIM FOR REFUND WHERE THE SAID DOCUMENT IS ATTACHED TO A SUBSEQUENT MOTION FOR RECONSIDERATION AND HAS BECOME PART OF THE RECORDS OF THE CASE. Id. WHILE PPA-NCR MAY BE HELD LIABLE FOR PENALTIES, SURCHARGES AND INTEREST FOR THE DELAY IN THE REMITTANCE OF WITHHOLDING TAXES, ITS PROPERTIES CANNOT BE SUBJECT OF DISTRAINT AND/OR LEVY, PPA-NCR BEING A GOVERNMENT AGENCY PERFORMING AN ESSENTIAL PUBLIC SERVICE. Parole and Probation Administration - NCR v. CIR, CTA Case No. 7153 dated July 2, 2008. THE DEPOSIT REQUIRED BEFORE COURTS ENTERTAIN ANY ACTION ASSAILING THE PUBLIC AUCTION OF REAL PROPERTY UNDER SECTION 257 OF RA 7160 IS NOT APPLICABLE ON THE GOVERNMENT OR ITS AGENCIES SUCH AS NHA ESPECIALLY WHEN ITS TAX-EXEMPT STATUS IS THE BASIS OF THE SUIT. NHA v. Iloilo City, et al., G.R. No. 172267 dated August 20, 2008. DISMISSAL BY THE RTC OF A PETITION FOR DECLARATORY RELIEF INVOLVING THE LEGALITY OF ASSESSMENT FOR REAL PROPERTY TAXES IS NOT APPEALABLE TO THE CTA. Facts: NPC filed before the RTC a petition for declaratory relief, annulment of notice of delinquency, warrant of levy, notice of sale and public auction sale to question the legality of the assessment of real property taxes under R.A. 7160. On the ground that

4 NPC failed to exhaust its remedies before the LBAA and the CBAA, the RTC dismissed the petition for lack of jurisdiction. NPC filed a petition for review before the CTA. Held: The petition is dismissed for lack of jurisdiction considering that: (A) The petition does not fall under Section 7(a)(5) of R.A. 9282 wherein decisions of the CBAA involving assessment and taxation of real property are appealable; (B) The petition does not fall under Section 7(a)(3) of R.A. 9282 involving local taxes since real property taxes are governed by the more specific provision under Section 7(a)(5) thereof; (C) It is the CA, not the CTA which has jurisdiction over petitions for declaratory relief and appeals of such cases; (D) Though NPC raises the purely legal question of propriety of imposition of real property tax on its machineries and equipment, it should have exhausted its administrative remedies before the LBAA and the CBAA. Dissent, Palanca-Enriquez: (A) Where NPC questions the legality of the real property tax and not the correctness of the computation of the amount being assessed, the petition for declaratory relief and not the appeal to CBAA is the proper remedy; (B) Sections 7(a)(3) and 7(a)(5) of R.A. 9282 are not general and special provisions, respectively, but are two different jurisdictions of the CTA involving decisions of the RTC and the CBAA; (C) Cases involving pure questions of law are exempt from exhaustion of administrative remedies; (D) Real property tax is a local tax which is within the jurisdiction of the CTA under Section 7(a)(3) of R.A. 9282. NPC v. Municipal Government of Navotas, et al., CTA AC No. 37 (Civil Case No. 4658-MN) dated July 18, 2008. THE DENIAL BY THE CUSTOMS COMMISSIONER TO REVIEW THE DECISION OF THE CUSTOMS COLLECTOR WHICH HAS BECOME FINAL AND EXECUTORY IN VIEW OF THE ABSENCE OF A WRITTEN PROTEST DOES NOT CONSTITUTE A DECISION OF THE CUSTOMS COMMISSIONER APPEALABLE TO THE CTA. GST Philippines, Inc. v. Commissioner of Customs and Secretary of Finance, CTA Case No. 7133 dated July 17, 2008. CTA DISMISSED ON THE GROUND OF FORUM SHOPPING A PETITION FOR REVIEW OF THE CUSTOMS COMMISSIONERS DECISION ON THE PROPRIETY OF TARIFF CLASSIFICATION WHERE PETITIONER: (A) FAILED TO DISCLOSE A PENDING APPEAL BEFORE THE DEPARTMENT OF FINANCE INVOLVING THE SAME ISSUE BETWEEN PETITIONER AND ANOTHER PARTY; (B) SUBSEQUENTLY FILED A PETITION BEFORE THE COURT OF APPEALS INVOLVING SAME PARTIES, ISSUES AND RELIEFS THEREBY CREATING THE POSSIBILITY OF CONFLICTING DECISIONS BY THE DIFFERENT FORA. Kraft Foods (Philippines), Inc. v. Commissioner of Customs and Sugar Regulatory Administration, CTA EB No. 326 (CTA Case No. 7306) dated July 18, 2008. THE FACT THAT IMPORTED ARTICLES WERE WITHDRAWN FROM THE WAREHOUSE WITHOUT PAYMENT OF DUTIES AND TAXES, OR THAT THE SURETY WAS NOT NOTIFIED OF THE ACTS OF THE IMPORTER, DOES NOT RELIEVE THE SURETY OF ITS SOLIDARY OBLIGATION, THE NATURE OF SURETY AGREEMENT BEING TO HOLD THE SURETY JOINTLY AND SEVERALLY LIABLE FOR THE IMPORTERS OBLIGATION

5 TO PAY DUTIES, TAXES AND CHARGES DUE. Intra-Strata Assurance Corporation, et al. v. Republic of the Philippines, G.R. No. 156571 dated July 9, 2008. AN IMPORTED ARTICLE IS DEEMED ABANDONED WHEN THE OWNER, IMPORTER, CONSIGNEE OR INTERESTED PARTY FAILS TO FILE AN ENTRY WITHIN A NON-EXTENDIBLE PERIOD OF 30 DAYS FROM THE DATE OF DISCHARGE OF THE LAST PACKAGE FROM THE VESSEL OR AIRCRAFT AFTER DUE NOTICE. IT IS THE FILING AND ACCEPTANCE OF BOTH THE IMPORT ENTRY DECLARATION (IED) AND THE IMPORT ENTRY AND INTERNAL REVENUE DECLARATION (IEIRD) WHICH CONSTITUTES ENTRY UNDER SECTION 205 OF THE TARIFF AND CUSTOMS CODE OF THE PHILIPPINES AND WHICH BECOMES THE BASIS OF THE NON-EXTENDIBLE 30-DAY PERIOD. SUCH ABANDONED ARTICLES SHALL IPSO FACTO BE DEEMED THE PROPERTY OF THE GOVERNMENT. A DECLARATION AND NOTICE BY THE COLLECTOR OF CUSTOMS THAT THE GOODS HAVE BEEN ABANDONED BY THE IMPORTERS IS NOT REQUIRED BEFORE ANY ABANDONMENT CAN BECOME EFFECTIVE. Chevron Philippines, Inc. v. Commissioner of the Bureau of Customs, G.R. No. 178759 dated August 11, 2008. THE DELAY IN THE FILING OF THE IEIRD WHICH RESULTED IN THE PAYMENT OF LOWER DUTY FROM 10% TO 3% WAS DEEMED CALCULATED, PRECONCEIVED AND PURPOSELY DONE TO EVADE PAYMENT OF CORRECT DUTIES. IT WAS A CLEAR INDICATION OF THE INTENTION TO DEFRAUD THE GOVERNMENT WHICH RENDERED THE PRESCRIPTIVE PERIOD INAPPLICABLE. Ibid. A RESOLUTION BY THE CTA DIVISION DENYING A MOTION TO QUASH, BEING AN INTERLOCUTORY ORDER, IS NOT PROPER SUBJECT OF AN APPEAL BY PETITION FOR REVIEW BEFORE THE CTA EN BANC. Judy Anne L. Santos v. People and BIR, G.R. No. 173176 dated August 26, 2008. BIR ISSUES SUPPLEMENT TO REV. REGS. NO. 09-2004, AS AMENDED BY REV. REGS. NO. 10-2004, CLARIFYING THAT THE TRANSACTIONS OF BANGKO SENTRAL NG PILIPINAS ENTERED INTO IN THE EXERCISE OF ITS GOVERNMENTAL/REGULATORY AUTHORITY ARE OUTSIDE OF THE COVERAGE OF THE GROSS RECEIPTS TAX. Revenue Regulations No. No. 82008 dated August 29, 2008. BIR PUBLISHES THE FULL TEXT OF DEPARTMENT ORDER NO. 9-08, IMPLEMENTING RULES AND REGULATIONS ON THE ACCESSIBILITY OF INFORMATION ON TAXPAYERS BETWEEN THE BUREAU OF INTERNAL REVENUE AND THE LOCAL GOVERNMENT UNITS FOR TAX COLLECTION PURPOSES PURSUANT TO EXECUTIVE ORDER NO. 646. Revenue Memorandum Circular No. 44-2008 dated May 5, 2008.

6 CLARIFICATION THAT REV. REGS. NO. 30-2002 AS AMENDED BY REV. REGS. NO. 8-2004 ON THE EXERCISE OF COMPROMISE POWER OF THE BUREAU OF INTERNAL REVENUE SHALL, IN CASE OF CONFLICT, PREVAIL OVER THE PROVISIONS OF RMO NO. 20-2007. Revenue Memorandum Order No. 27-2008 dated June 16, 2008. BIR OUTLINES THE PROCEDURE ON THE HANDLING OF TAXPAYERS APPLICATION FOR CANCELLATION OF BUSINESS REGISTRATION, AND ISSUES WARNING ON THE USE OF OFFICIAL RECEIPTS/SALES INVOICES OF DISSOLVED BUSINESSES FOR PURPOSES OF CLAIMING INPUT TAXES. Revenue Memorandum Circular No. 56-2008 dated July 25, 2008. BIR ISSUES CLARIFICATION ON THE TIME WITHIN WHICH TO RECKON THE REDEMPTION PERIOD ON THE FORECLOSED ASSET AND THE PERIOD WITHIN WHICH TO PAY CAPITAL GAINS TAX OR CREDITABLE WITHHOLDING TAX AND DOCUMENTARY STAMP TAX ON THE FORECLOSURE OF REAL ESTATE MORTGAGE BY THOSE GOVERNED BY THE GENERAL BANKING LAW OF 2000, AS WELL AS THE VENUE FOR THE PAYMENT OF THESE TAXES. Revenue Memorandum Circular No. 58-2008 dated August 15, 2008. BIR ISSUES AMENDMENTS TO CERTAIN PORTIONS OF RMC NO. 30-2008 ON THE TAXABILITY OF INSURANCE COMPANIES FOR MINIMUM CORPORATE INCOME TAX, BUSINESS TAX AND DOCUMENTARY STAMP TAX PURPOSES. Revenue Memorandum Circular No. 59-2008 dated August 27, 2008. Note: The information provided herein is general and may not be applicable in 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 Atty. Laura Victoria A.S. Yuson-Layug Atty. Terence Conrad H. Bello Atty. Suzette A. Celicious-Sy Atty. Madeline L. Zialcita-Villapando Atty. Kathleen L. Saga Atty. Excelsis V. Antolin Atty. Cheryll Ann R. Trinidad Atty. Bernadette V. Quiroz cgbaniqued@baniquedlaw.com lvyusonlayug@baniquedlaw.com thbello@baniquedlaw.com sacelicious@baniquedlaw.com mlzvillapando@baniquedlaw.com klsaga@baniquedlaw.com evantolin@baniquedlaw.com crtrinidad@baniquedlaw.com bvquiroz@baniquedlaw.com

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