February 2013

Tax brief
Contents
02 BIR Issuances
Transfer pricing regulations
Expansion of eFPS coverage
Clarification on deductibility
of depreciation and other
expenses on motor vehicles
Revalidation of rulings of nonstock, non-profit hospitals
Income tax and VAT on
membership fees of
homeowners associations
04 BIR Rulings
VAT on sale and/or lease of
cinematographic films
VAT on regional or area
headquarters
15% tax sparing credit rate
for dividends
05 Cour
Courtt Decisions
Scope of CTAs appellate
jurisdiction
Application of doctrine
piercing the corporate veil
Sale of sugar by a
cooperative to non-members
07 SEC Issuance
Revised date of submission
of the ISAFS of financing and
lending companies
10 Highlight on P&A services
Tax return preparation and
review
February 2013

BIR Issuances
Transfer pricing regulations
The Bureau of Internal Revenue (BIR)
has issued the following guidelines in
applying the arms length principle for
cross-border and domestic transactions
between associated enterprises.
Definition of associated enterprises

For transfer pricing (TP) purposes, two or

more enterprises are associated if one
participates directly or indirectly in the
management, control, or capital of the
other, or if the same persons participate
directly or indirectly in the management,
control, or capital of the enterprises. The
term control is defined as any kind of
control, direct or indirect, whether or not
legally enforceable, and however exercisable or exercised. Moreover, control shall
be deemed present if income or deductions have been arbitrarily shifted
between two or more enterprises.
Determination of arms length price

The BIR adopts the use of arms length

principle as the most appropriate
standard in determining the transfer
prices of associated enterprises or related
parties. The arms length principle
requires that the transaction with a related
party be made under comparable
conditions and circumstances as a
transaction with an independent party.
In the application of the arms length
principle, the following three-step
approach shall be observed:
1.
2.
3.

Conduct of comparability
analysis
Identification of tested party
and the appropriate transfer
pricing method
Determination of the arms
length results

Arms length pricing methodologies

The TP guidelines prescribed five

methods in determining the arms length
price of a transaction. These are comparable uncontrolled price (CUP), resale
price method, cost plus method (CPM),
profit split method (PSM) and transaction
net margin method (TNMM). There is no
single method that is applicable to all
cases, and choice of appropriate transfer
pricing method must be made depending
on the evaluation of the transaction.
Details of the TP methodologies are
explained in the regulations.
Advance Pricing Arrangement (APA)

The advance pricing arrangement (APA)

is a facility available to taxpayers to enter
into an agreement with the BIR to
determine in advance the criteria (e.g.,
method, comparables and appropriate
adjustments) to ascertain the transfer
prices of controlled transactions over a
fixed period of time. An APA may
involve an agreement between the
taxpayer and the BIR (unilateral APA) or
an agreement involving the Philippines
and one or more of its treaty partners
(multilateral APA).
Transfer Pricing Documentation

TP document is not required at the time

of the filing of the tax return. However,
the taxpayer has the obligation to ensure
that TP documents are available for
submission when required or requested
by the BIR. The TP documents must be
retained or preserved within the retention
period provided under the Tax Code.
Taxpayers are required to prepare
contemporaneous TP documentation.
Documentation is contemporaneous if it
exists or is brought into existence at the
time the associated enterprises develop or
implement any arrangement that might
raise transfer pricing issues or review the
arrangements when preparing returns.
(Revenue Regulations No. 2-2013, January 23,
2013)

2 February 2013

Expansion of eFPS coverage

The BIR has expanded the coverage of
electronic filing and payment system
(eFPS) to include all national government
agencies (NGAs) whose main fund/
budget comes from the Department of
Budget (DBM) based on the yearly
budget allotment under the General
Appropriations Act.
A notification letter shall be sent by the
BIR to all NGAs, including their
branches and extension offices located
nationwide, mandating them to enroll and
use the eFPS in the filing of tax returns
and payment of their tax dues. The tax
returns that NGAs are required to file via
the eFPS shall include BIR Forms
1601(C), 1601(E), 1601(F), 1603, 1600,
1702, 1702Q, 2000, 2500M, 2500Q, and
2551 M. The staggered filing of returns
allowed for withholding agents/taxpayers
enrolled in the eFPS facility shall not
apply in the case of NGAs.
All NGAs notified through the notification letter shall enroll in the electronic tax
remittance advice (eTRA) system by
enrolling first with the BIRs eFPS facility.
For NGA tax liabilities arising from the
use of funds coming from the DBM,
concerned NGAs shall use the eTRA.
NGAs tax liabilities arising from the use
of funds other than those coming from
the DBM must be paid using cash
through the bank debit system of the
Authorized Agent Bank (AAB) where the
NGA shall enroll for this purpose.
(Revenue Regulations No. 1-2013, January 23,
2013)

BIR Issuances
Clarification on deductibility of
depreciation and other expenses
on motor vehicles
The BIR issued the following clarification
on the limit imposed under Revenue
Regulations No. (RR) 14-2012 on the
deductibility of depreciation allowance,
maintenance expenses and input VAT on
motor vehicles:
1.

2.

3.

The limit on deductibility of

depreciation allowance, maintenance expenses and input VAT
on motor vehicles shall apply to
land vehicles purchased prior to
October 17, 2012 (i.e., effectivity
of RR 14-2012) where the
purchased amount exceeded the
threshold of P2.4 million.
Non-deductible expenses for
non-depreciable vehicles shall
also cover all related expenses
and input tax including, but not
limited to, repairs and maintenance, oil and lubricants,
gasoline, spare parts, tires and
accessories, premiums paid for
insurance, and registration fees.
In case the non-depreciable
vehicles will be sold at a loss,
any loss shall likewise not be
allowed as a deduction from
gross income.

Note: Under RR 14-2012, a taxpayer may

claim for depreciation allowance, maintenance
expense and input VAT only for one land vehicle
for use of an official or employee with value not
exceeding P2.4 million. No depreciation shall be
allowed for yachts, helicopters, airplanes, and
land vehicles over P2.4 million, unless the
taxpayers main line of business is transport
operations or lease of transport equipment.

Revalidation of rulings of nonstock, non-profit hospitals

All hospitals that were issued tax-exempt
rulings by the BIR are required to request
a revalidation of their tax-exempt status
by submitting the following documents to
the Revenue District Office (RDO) where
the organization is registered:
a.

Letter of application, which

must state the specific paragraph
under Section 30 of the
National Internal Revenue Code
(NIRC) under which it seeks
exemption

b.

Copies of the corporations

latest Article of Incorporation
and By-Laws duly certified by
the Securities and Exchange
Commission (SEC)

c.

Certification of Registration
with the BIR

d.

Tax clearance issued by the

RDO where the corporation is
registered

e.

Copies of the income tax

returns or annual information
returns and financial statements
for the last three years

f.

A statement of its modus

operandi stating its sources of
revenue

g.

Other documents the BIR may

require

application is found insufficient, the

organization shall be notified of the
findings, and the application shall be
returned to it.
If the application is found valid, a report
shall be prepared by the RDO stating why
the organization is qualified to be taxexempt under Section 30 of the Tax
Code. The docket of the case shall be
forwarded to the Office of the Regional
Director for review. If the Regional
Director agrees with the recommendation
of the RDO, the same shall be forwarded
to the Office of the Assistant Commissioner, Legal Service. The Law Division
shall review and evaluate the documents,
and if everything is in order, it shall
prepare the appropriate certificate of tax
exemption for signature of the
Commissioner or her duly authorized
representative.
All rulings issued prior to November 1,
2012 that grant tax exemption to proprietary non-profit hospitals or to non-stock,
non-profit entities operating as hospitals
under Section 30 of the Tax Code shall
no longer be valid.
(Revenue Memorandum Circular No. 4-2013,
January 14, 2013)

The application shall be evaluated by the

RDO to determine whether the organization qualifies as a tax-exempt corporation
under Section 30 of the Tax Code. If the

(Revenue Memorandum Circular No. 02-2013,

January 7, 2013)

February 2013

BIR Issuances
Income tax and VAT on membership fees of homeowners associations
The association dues, membership fees,
and other assessments/charges collected
by homeowners associations from its
homeowner-members and other entities
form part of their gross income, which is
subject to income tax and Value-Added
Tax (VAT). The amounts paid in dues or
fees by homeowner-members constitute
income payments or compensation for
beneficial services homeowners associations provide to their members and
tenants, which are subject to income tax
and VAT. Moreover, since homeowners
associations are subject to income tax,
they are subject to applicable withholding
taxes under existing regulations.

This notwithstanding, the association

dues and income of the homeowners
associations may be exempted from
income tax, VAT and percentage tax if it
satisfies the following conditions:
1.

It must be a duly constituted

Association as defined under
Sec. 3(b) of Republic Act No.
(RA) 9904.

2.

The local government unit

(LGU) must issue a certification
identifying the basic community
services and facilities being
rendered by the homeowners
association and therein stating
its lack of resources to render
such services.

3.

The homeowners association

must present proof (i.e.,
financial statements) that the
income and dues are used for
the cleanliness, safety, security
and other basic services needed
by the members, including the
maintenance of the facilities of
their respective subdivisions or
villages.

(Revenue Memorandum Circular No. 9-2013,

January 30, 2013)

BIR Rulings
VAT on sale and/or lease of
cinematographic films
Cinematographic film owners/producers
and lessors are subject to the 12% VAT
on their share in the gross sales or
receipts representing the rental income
for the use or lease of cinematographic
films. Being lessees of services, such VAT
can be passed on to cinema/theater
operators or proprietors.
Pursuant to Section 105 of the Tax Code,
the VAT is an indirect tax in which the
amount of the tax may be shifted to or
passed on to the buyer, transferee or
lessee of goods, properties, or services.
Since VAT is the direct liability of the
lessor, once shifted, it is no longer a tax
on the part of the lessee but an additional
cost, which the lessee must pay to obtain
the service.

4 February 2013

The BIR held that cinema/theater

operators may not refuse to shoulder the
VAT component from their lease of
cinematographic films. As explained by
the BIR, the exemption from VAT of
cinema/theater operators or proprietors,
which was upheld by Supreme Court
(Commissioner of Internal Revenue v.
SM Prime Holdings), is only limited on
the gross receipts derived by cinema/
theater operators or proprietors from
admission tickets and does not extend to
the purchase or lease of cinematographic
films. Hence, owners, producers, and
lessors of cinematographic films may
pass on the VAT component to cinema/
theater operators or proprietors on the
sale or lease of cinematographic films.
(BIR Ruling No. 047-2013, January 24,
2013)

VAT on regional or area headquarters

Under Section 109(1)(J) of the Tax Code,
services rendered by regional or area
headquarters established in the Philippines by multinational corporations that
act as supervisory, communications and
coordinating centers for their affiliate
subsidiaries or branches in the Asia
Pacific Region and do not earn or derive
income from the Philippines are exempt
from VAT. On the other hand, Section
108(B)(3) of the Tax Code likewise
provides that services rendered by VATregistered persons to persons or entities
exempt under special laws shall be
effectively subject to 0% VAT.

BIR Rulings
Under Article 65 of Executive Order No.
(EO) 226, regional or area headquarters
are exempt from VAT, while the sale or
lease of goods or properties to them is
subject to the 0% VAT. Considering that
EO 226 is a special law, the sale of goods
and services rendered to the regional or
area headquarters shall be effectively
subject to 0% VAT under Section
108(B)(3) of the Tax Code.
(BIR Ruling No. 035-2013, January 29,
2013)

15% tax sparing credit rate for

dividends
Under Section 28(B)(5)(b) of the Tax
Code, a nonresident foreign corporation
may avail of the 15% preferential tax rate
on dividends received by it from a
domestic corporation without need for
applying for a tax relief from the
International Tax Affairs Division
(ITAD) if it meets the tax sparing credit
requirement, i.e., the country of domicile
of the nonresident foreign corporation
allows a credit against the tax imposable
by it at an amount equivalent to 20%
(now 15%) of the dividends remitted
from the Philippine domestic corporation
to corporations domiciled therein.

The BIR held that the exemption from

taxes of the dividends received by the
country of domicile of the non-resident
corporate stockholder is sufficient for the
applicability of the 15% tax rate under
Section 25(b)(5)(B) of the Tax Code.
Hence, dividends received by a nonresident foreign corporation domiciled in
a country that imposes no tax on dividends from foreign sources are subject to
the 15% preferential withholding tax rate
under said tax sparing credit provision of
the Tax Code.
(BIR Ruling Nos. 012-2013 and 014-2013,
January 3, 2013)

Court Decisions
Scope of CTAs appellate jurisdiction
While the Court of Tax Appeals (CTA) is
conferred under RA 1125, as amended by
RA 9282, the authority to resolve tax
disputes in general, this does not include
cases where the constitutionality of a law
or rule is challenged. Moreover, while
under its Revised Rules, the CTA has
jurisdiction over other matters arising
under the National Internal Revenue
Code. The other matters contemplated therein must also be directly
related to the disputed assessment and
cannot be taken in isolation to invoke the
specialized jurisdiction of the CTA.
In the instant case, the taxpayer filed for a
tax treaty relief application (TTRA) with
the Commissioner of Internal Revenue to
request confirmation that the dividends it

received from a domestic corporation is

subject to preferential tax rate. The BIR
issued a ruling denying the taxpayers
application. The ruling was appealed to
the Secretary of Finance who denied the
taxpayers appeal.
In its appeal to the CTA, the taxpayer
assailed the constitutionality of Revenue
Memorandum Order Nos. (RMOs) 12000 and 72-2010, which require the
filing of a tax treaty relief application in
availing of preferential tax rate under tax
treaties. The taxpayer argued that both
RMO 1-2000 and 72-2010 are unconstitutional since they were issued beyond the
rule making power of the Commissioner
of Internal Revenue. Hence, it sought the
reversal of the BIR and Department of
Finance (DOF) ruling denying its
application for preferential tax treaty rate.

The CTA held that its jurisdiction to

resolve tax disputes in general does not
include cases where the validity or
constitutionality of a law, or a rule or
regulation issued by the administrative
agency in the performance of its quasilegislative function is challenged. Citing
the case of British American Tobacco v.
Camacho (GR No. 163583, August 20,
2008), the CTA ruled that the determination of whether a specific rule or set of
rules issued by an administrative agency
contravenes the law or the constitution is
within the jurisdiction of the regular
courts. Hence, the taxpayer should have
elevated the case before the regular
courts, after the denial of its appeal by
the Secretary of Finance.
(Egis Projects S.A. v. The Secretary of Finance
and Commissioner of Internal Revenue, CTA
Case No. 8413, January 29, 2013)
February 2013

Court Decisions
Application of doctrine piercing
the corporate veil
The stockholders and/or officers of a
corporation cannot be held directly liable
for corporate tax liabilities, except for
certain circumstances when the doctrine
piercing the corporate veil may be
applied; hence, the stockholders and/or
the officers of the corporation may be
directly liable for the tax liabilities of the
corporation.

entities from the corporation cannot be

disregarded. Hence, the CTA held that
the company president cannot be made to
pay the civil liability of the corporation
arising from the deficiency assessment
issued to it by the BIR.

After having affirmed the deficiency tax

assessment against the company, the CTA
ordered the companys president (who
was likewise found guilty for failure to file
return and supply information under
Section 255 of the Tax Code) to pay for
the civil liability of the company arising
from its tax assessment. The company
president appealed the ruling with the
CTA and argued that the civil liability of
the corporation should not be collected
from him since he himself is not the
corporation, but merely a responsible
officer.

Sale of sugar by a cooperative to

non-members
Under Section 3 of RR 13-08, an advance
VAT on the sale of refined sugar shall be
paid by the owner/seller before the
refined sugar is withdrawn from any
sugar refinery/mill. The withdrawal is not
subject to advance VAT in case the
refined sugar is owned and withdrawn
from the sugar refinery/mill by an
agricultural cooperative of good standing
duly accredited and registered with the
Cooperative Development Authority
(CDA), which cooperative is the agricultural producer of the sugar cane that was
converted into refined sugar.

In its amended decision, the CTA held

that the taxpayer is correct in pointing out
that the corporation is a separate and
distinct entity. Thus, while the accused is
the president of the corporation, he
himself is not the corporation, but merely
a responsible officer. As ruled by the
CTA, only in circumstances such as when
the corporation was used merely as an
adjunct, business conduit or alter ego of
another corporation or by its officers or
stockholders, or the corporation was used
to perpetuate fraud in violation of the tax
laws can the doctrine of piercing the
corporate veil be applied.
Considering that no allegation was made
that the corporation was used by its
president in the aforementioned circumstances, the fiction that the stockholders
and/or officers are separate and distinct

6 February 2013

(People of the Philippines v. Wong Yan Tak,

Geralyn Bobier and Pic N Pac Mart, Inc.,
CTA Criminal Case No. 0-090, January 8,
2013)

Under Section 4 (a) of RR 13-08, in order

for a cooperative to be considered an
agricultural producer, it should be of
good standing duly accredited and
registered with the CDA and it should be

(a) the tiller of the land it owns or leases;

(b) the one incurring cost of agricultural
production of the sugar; and (c) the one
producing the sugar cane to be refined.
In the case at hand, the BIR, before
issuing the Authorization Allowing
Release of Refined Sugar (AARS),
required the agricultural cooperative to
pay the advance VAT on the grounds that
the cooperative was unable to meet the
requirements to qualify as an agricultural
producer exempt from payment of
advance VAT.
The CTA held that the subject agricultural cooperative is considered the actual
producer of the sugarcane that was
converted into refined sugar since it is
duly registered with the CDA, is in good
standing, and it provided the various
production inputs (fertilizers), capital,
technology transfer and farm management. Hence, the agricultural cooperative
should be VAT-exempt on its sale of
refined sugar to non-members.
(Negros Del Norte Planters Association MultiPurpose Cooperative v. Commissioner of
Internal Revenue and BIR Regional Director,
Region 12, Bacolod City, CTA Case No. 8287,
January 30, 2013)

SEC Issuance
Revised date of submission of the
ISAFS of financing and lending
companies
The Securities and Exchange Commission
(SEC) moved the deadline for submission
of the interim semi-annual financial
statements (ISAFS), otherwise known as
Financing Companies Interim Financial
Statements (FCIF) and Lending Companies Financial Statements (LCIF), which
are required to be submitted by financing
and lending companies pursuant to Rule
8(a) of the Implementing Rules and
Regulations of RA 9474, otherwise
known as the Lending Company Regulation Act of 2007.

Under SEC Memorandum Circular No. 3,

Series of 2007, the SEC requires lending
and financial companies to submit their
ISAFS or FCIF within 15 calendar days
from the end of semester. Due to the
clamor to have later dates of submission,
the SEC has adopted a new deadline for
submission of financing and lending
companies of their ISAFS: from 15
calendar days to 45 calendar days from
the end of the semi-annual period
covered by the report.
(SEC Memorandum Circular No. 3, January
15, 2013)

February 2013

Highlight on P&A services

Tax rreturn
eturn pr
eparation and rreview
eview
preparation
We prepare clients tax returns covering
monthly, quarterly and annual income taxes,
value-added tax and other percentage taxes,
fringe benefit tax, withholding taxes, and
documentary stamp tax. Based on the
information provided to us, we ensure that the
computation of clients tax liabilities is made
in accordance with existing tax laws and
regulations. On their behalf, we file tax returns
with the appropriate tax office and pay the
corresponding taxes on or before the due date.

Tax Brief is a regular publication of Punongbayan & Araullo (P&A) that aims to keep its clientele, as well
as the general public, informed of various developments in taxation and other related matters.
This publication is not intended to be a substitute for competent professional advice. Even though
careful effort has been exercised to ensure the accuracy of the contents of this publication, it should
not be used as the basis for formulating business decisions. Government pronouncements, laws,
especially on taxation, and official interpretations are all subject to change. Matters relating to taxation,
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We welcome your suggestions and feedback so that the Tax Brief may be made even more useful to
you. Please get in touch with us if you have any comments and if it would help you to have the full text
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Lina Figuer
oa
Figueroa
Principal, T
ax Advisory & Compliance Division
Tax
T +632 886-5511 ext. 507
F +632 886-5506 ext. 606
E Lina.Figueroa@ph.gt.com

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8 February 2013

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review services, please contact:
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