Revenue Memorandum Order No.

63-99

The memorandum order 63-99 empowers the commissioner to rectify

abnormalities and distortions in income brought about by common control
through adoption of schemes considered as fair and reasonable. It adopts the
arms length bargaining standard as the ultimate test for determining the correct
gross income. Its application provides a method of re-distribution income and
expense of the taxpayer under common control. The purpose of sec 50 of the
NIRC according to sec 179 of rev regulation no.2 is to place a controlled tax
payer on a partly uncontrolled tax payer and through this determining the
standards of a uncontrolled tax payer. An uncontrolled taxpayer includes any
kind of control whether legally enforceable or not, and however exercisable or
exercised. The determining factor is the control and not only its form or mode of
exercise, the commissioners authority to determine extends to any case of
conduct of the tax payers affair or whether he has been conducting an
uncontrolled taxpayer through the arms length method.
It covers all forms of indebtedness, like loans, money advances, debts
arising in the ordinary course of business, but it does not include contributions
of capital with respect to shares. With respect to the determination of taxable
income of inter-company loans, the commissioner has the power to allocate an
arms length method for such loans, interest that will be charged at the time the
indebtedness arose from an independent transaction or between unrelated
parties, other relevant factors will be considered, like the amount, duration of
loan, and the kind of security given, in any case the commissioner may impute
interest on loans and other advances.
In reconciling the case of CIR vs Filinvest Development Corporation. And
revenue memorandum 63-99 the supreme court is correct in reversing the court

of appeals through the imputation of interest in those advance there is a ground

to resort to the interest-bearing fund borrowings due to the interest expense
deducted by FDC when such fund where never borrowed, thus the
commissioner is vested with the power to allocate, distribute or apportion
income, even in the absence of fraud, since the said power is intended to
prevent evasion of taxes or clearly to reflect the income of any such
organization. Such power given by sec. 43 is used correctly in order to prevent
evasion of taxes, in the said case where transactions between controlled
taxpayers will be specially scrutinized to avoid reducement of taxes.
In the said case upon the issuance of additional shares as a
consequence of the exchange and with only 42,217,000 shares thereof
accruing in favor of FDC and a total of 2,579,575,000 shares, the controlling
interest was supposedly reduced to 61%.03 the transaction did not qualify as a
tax-free exchange. Under sec 34 (c) of the NIRC, the CIR asseverates that
taxable gain in the sum of P 3,088,711,367,00 should be recognized as part of
FAI. The NIRC provides that gain or loss will not be recognized in the case the
exchange of property, for stock resulting in the control of transfers by the
transferor alone. The FDCs share 61% control of FLIs outstanding shares
should be appreciated in combination with the new shares 420,877,000 issued
to FAI which represents 9.96% control of the said transferee corporation. Since
the term control is defined as ownership of stock in a corporation possess at
least 51% of the total voting power of shares, entitled to one vote and under the
NIRC the stock between FDC FAI and FLI clearly amounts to a tax free
transaction.
There is sweet harmony between the application of revenue memo 6399 in the case of FILINVEST DEV.CORPORATION, because the CIR alongside
the principle that tax revenue regulations are not to be liberally construed, the
court of tax appeals is given great respect in their findings, thus upholding the
decision that there is no deficiency income in the value of FDC shareholdings in

FAC which the CIR failed to establish, the use of the arms length interest from
the aforesaid advances and the gain of FDC from the exchange with FAI and
FLI is correct. The adoption of the arms length bargaining standard as the
ultimate test for determining the correct gross income is only a proof that the
taxing authority is given much trust and respect when it comes to interpreting
tax laws, under the law such government agencies are given such power to
prescribe their own rules and procedures in order to maximize its inherent
power to interpret and rule. The application of the arms length provides a
method of re-distribution income and expense of the taxpayer under common
control, in order to harmonize the seemingly discrepancies between a revenue
regulation and the case , again The purpose of sec 50 of the NIRC according to
sec 179 of rev regulation no.2 is to place a controlled tax payer on a partly
uncontrolled tax payer and through this determining the standards of a
uncontrolled tax payer, being experts in the field of taxation the CIR has done
its job by using every necessary tool in interpreting tax laws. The CIR has
explained the process by defining such terms as uncontrolled taxpayer which
includes any kind of control whether legally enforceable or not, and however
exercisable or exercise, in order to improve the knowledge of the public
regarding how the agency computes their taxes. We must be reminded that in
terms of inter-company loans or advances the determining factor is the control
and not only its form or mode of exercise, the commissioners authority to
determine extends to any case of conduct of the tax payers affair or whether
he has been conducting an uncontrolled taxpayer through the arms length
method.