TAX SUPPLEMENT TO PM REYES BAR REVIEWERS ON TAXATION I AND II

Notes of Baniqued and Dimaampao (rumored examiners) have already been integrated in the reviewers. These are stuff I forgot to put and some recent and relevant rulings and BIR issuances ERRATUM: In page 116 of PM Reyes Tax II on Protest of Assessment: File written protest with local treasurer within 60 days from receipt of notice of assessment. ---------------------------------------------------------GENERAL PRINCIPLES ---------------------------------------------------------Refer to page 13 of PM Reyes Tax I Q: How does a tax treaty eliminate double taxation? In order to eliminate double taxation, a tax treaty resorts to several methods. 1. First, It sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 2. The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief: a. Exemption method the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital. b. Credit method Although the income or capital which is taxed in the state of source is still taxable in the state of Q: What is the effect of RR 12-2013 [July 12, 2013] on deductibility of expenses during audit investigations? Prior to RR No. 12-2013, a taxpayer is allowed to claim a deductible expense where no withholding of tax was made if the taxpayer/withholding agent pays the tax including the interest and penalties incident to the failure to withhold the tax at the time of the audit investigation. RR No. 12-2013 now provides that no deduction will be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Sections 57 and 58 of the Code. RR 12-2013 [July 12, 2013] Refer to page 110 of PM Reyes Tax I Q: What is meant by theoretical interest? It is an interest "calculated" or computed (and not incurred or paid) for the purpose of determining the "opportunity cost" of investing funds in a given business. Such "theoretical" or imputed interest does not arise from a legally demandable interestbearing obligation incurred by the taxpayer who however wishes to find out, e.g., whether he would have been better off by lending out his funds and earning interest rather than investing such funds in his business. (Section 79, RR No.2) Note: It is not deductible as it does not represent a charge arising under an interest-bearing obligation. (Section 79, RR No.2) residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. (CIR v. S.C. Johnson and Sons, Inc. [309 SCRA 87]) ---------------------------------------------------------INCOME TAX ---------------------------------------------------------Refer to page 102 of PM Reyes Tax I

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Page 1 of 3 Last Updated: 23 September 2013

TAX SUPPLEMENT TO PM REYES BAR REVIEWERS ON TAXATION I AND II

Refer to page 149 of PM Reyes Tax I Q: What is the Bardahl Formula? The "Bardahl" formula was developed to measure corporate liquidity. The formula requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw materials, raw materials into inventory, and inventory into sales, including the time it takes to collect payment for the sales. As stressed by American authorities, although the "Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule. It is used only for administrative convenience Cynamid Philippines v. CA [322 SCRA 639] Refer to page 133 of PM Reyes Tax I (RMO 20-2013 [July 22, 2013]) Q: What is the effect of RMO 20-2013 [July 22, 2013] on tax exemption rulings issued to nonstock, non-profit organizations? RMO 20-2013 [July 22, 2013] provides that all tax exemption rulings issued to non-stock, non-profit organizations issued prior to June 30,2013 shall require revalidation. Existing tax exemption rulings shall be valid only until December 31, 2013. Q: What are the requirements that corporations or associations must meet to avail of a tax exemption ruling under Section 30(E) of the Tax Code? 1. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans. 2. It should meet the following tests: a. Organizational Test -- requires that the corporation or associations constitutive documents exclusively limit its purposes to one or more of those described in paragraph (E) of Section 30 of the NIRC, as amended. Q: What is the validity of a tax exemption ruling issued pursuant to RMO 20-2013 [July 22, 2013]? A Tax Exemption Ruling issued under RMO 20-2013 shall be valid for a period of three (3) years from the date of effectivity specified in the Ruling, unless sooner revoked or cancelled. (RMO 20-2013 [July 22, 2013]) Refer to page 148 of PM Reyes Tax I Q: Is there a need for an application for a tax treaty relief with the International Tax Affairs Division (ITAD) in order to avail of the benefit? No. In DEUTSCHE BANK V. CIR [AUGUST 19, 2013], the Supreme Court stated MIRANT V. CIR [CTA CASE NO. 7796, FEBRUARY 21, 2011] which provided that an application for tax treaty relief is needed is not a binding precedent as such was a minute resolution. The Court ruled that A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken.Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would b. Operational Test -- mandates that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in paragraph (E) of Section 30 of the NIRC, as amended. A corporation or association fails to meet this test if a substantial part of its operations may be considered activities conducted for profit. 3. All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person. Any profit must be plowed back and must be devoted or used altogether for the furtherance of the purpose for which the corporation or association was organized. 4. It must not be a branch of a foreign nonstock, non-profit corporation.

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

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TAX SUPPLEMENT TO PM REYES BAR REVIEWERS ON TAXATION I AND II

negate the availment of the reliefs provided for under international agreements. the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. ---------------------------------------------------------VALUE-ADDED TAX ---------------------------------------------------------Refer to page 48 of PM Reyes Tax II Q: May unapplied input taxes arising from purchases of goods and services after the expiration of the 2-year prescriptive period be treated as a deductible expense for income tax purposes? No. In BIR Ruling 123-2013 [March 25, 2013], the CIR stated that unutilized creditable input taxes attributable to zero-rated sales can only be recovered through the application for refund or tax credit. Nowhere in the Tax Code can we find a specific provision expressly providing for another mode of recovering unapplied input taxes, particularly your proposition that unapplied input taxes may be treated outright as deductible expense for income tax purposes. (RMC 57-2013 [August 23, 2013]) Refer to page 50 of PM Reyes Tax II Q: What are the rules laid out by the Supreme Court in Mindanao II Geothermal Partnership v. CIR [March 11, 2013] relative to the prescriptive period for filing a tax refund or credit of unutilized input VAT under Section 112 of the Tax Code? 1. An administrative claim must be filed with the CIR within two years after the close of the taxable quarter when the zero-rated or effectively zero-rated sales were made. 2. The CIR has 120 days from the date of submission of complete documents in support of the administrative claim within which to decide whether to grant a refund or issue a tax credit certificate. The 120-day period may extend beyond the two-year period from the filing of the administrative claim if the claim is filed in the later part of the two-year period. If the 120-day period expires without any decision from the CIR, then the administrative claim may be considered to be denied by inaction. 3. A judicial claim must be filed with the CTA within 30 days from the receipt of the CIRs decision denying the administrativeclaim or from the expiration of the 120-day period without any action from the CIR. 4. All taxpayers, however, can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. on 6 October 2010, as an exception to the mandatory and jurisdictional 120+30 day periods. (Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue/Mindanao I Geothermal Partnership v. Commissioner of Internal Revenue, G.R. No. 193301 & G.R. No. 194637 dated March 11, 2013.) Note: Strict compliance with the 120+30-day periods is necessary for such a claim to prosper, whether before, during, or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional (Commissioner of Internal Revenue vs. San Roque Power Corporation, G.R. No. 187485; Taganito Mining Corporation vs. Commissioner of Internal Revenue, G.R. No. 196113; Philex Mining Corporation vs. Commissioner of Internal Revenue, G.R. No. 197156, all dated February 12, 2013.)

Good luck to us all. AMDG.

PIERRE MARTIN DE LEON REYES Ateneo Law Batch 2013

Page 3 of 3 Last Updated: 23 September 2013