SIGNIFICANT DECISIONS OF THE COURT OF TAX APPEALS

January 2014
VAT ASSESSMENT
Failure to imprint the words VAT-Exempt Sale or ZERO-Rated Sale in the Official
Receipt makes the transaction VAT-able.
When a PEZA-registered enterprise engages in activities which are not registered with PEZA, the
income or receipts derived from the unregistered activities shall be subject to the regular internal
revenue taxes, such as VAT. In such case, the PEZA-registered enterprise is obliged to register as a
VAT taxpayer and issue a VAT official receipt or invoice for every sale or transaction which is
subject to VAT. Should the PEZA-registered enterprise use its VAT official receipt or invoice to
evidence its VAT- exempt sale, Section 113 of the NIRC of 1997 requires it to prominently write or
print the term VAT-exempt sale on the VAT official receipt or invoice as failure to do so shall
make it liable to account for the VAT as if the sale is not VAT-exempt.
Thus, by reason of taxpayers failure to indicate the words VAT-exempt sale on the official
receipts that were issued, taxpayer is liable for the sale of services which are supported by official
receipts that do not bear the word VAT-exempt sale. (Commissioner of Internal Revenue vs.
First Sumiden Realty, Inc., CTA EB No. 975, January 04, 2014)
To be entitled to VAT zero-rating on sale of electricity generated from renewable source of
energy, taxpayer must prove that it is a generation company by showing its ERC registration
and Certificate of Compliance.
Taxpayer owns a hydro-electric power plant, which was duly certified by the Department of Energy
as consistent with the Power Development Plan of the government. Taxpayer sells its generated
power through hydro-electric power to Davao Light and Power Company, Inc. For its unutilized
input VAT attributable to its zero-rated sales of generated power covering the first quarter of 2008,
taxpayer filed a claim for refund. Due to inaction of the BIR, taxpayer filed a petition for review
before the CTA.
As ruled by the Court, one of the requisites in a claim for refund of input taxes related to zero-rated
sales is that there must be zero-rated of effectively zero-rated sales. In this regard, the sale of
generated power of fuel through renewable source of energy is VAT zero-rated under Section 108(B)
(7) of the NIRC of 1997. However, to be qualified for VAT zero-rating, taxpayer must be able to
prove that it is a generation company and that it is engaged in the sale of power or fuel generated
though renewable source of energy. To be considered a generation company, an entity should be
authorized by the Energy Regulatory Commission (ERC). Without a Certificate of Compliance
(COC) issued by the ERC, a person cannot be said to be a generation company. Hence, a taxpayer
must be able to prove that it is issued a COC by the ERC to be entitled to a refund. (Hedcor
Sibulan, Inc. vs. Comm. of Internal Revenue, CTA Case No. 8051, Jan 29, 2014)

7. The zero-rated sales that must be substantiated for purposes of VAT refund are the
sales reported in the same quarter as the input taxes subject of the refund were reported.
In this case involving a claim for refund of input taxes related to zero-rated sales for the 3rd and
4
th quarters of the year 2007, it was found by the Court that the 3rd quarter VAT return did not
indicate any VAT zero-rated sales. Also, the 4th quarter 2007 VAT return showed zero-rated
sales in the amount of P59,999,700. However, the taxpayer did not provide document to support
this sales of P59,999,700, as according to the taxpayer, this must have been sales prior to the
4
th quarter of 2007 but were reported only when collected in the 4th quarter of 2007. Instead, the
zero-rated sales that were substantiated for the 3rd and 4th quarters of 2007 are the amounts
with a total of P199,826,905.49, which were reported only upon collection in the VAT returns in
2009 and 2010.
The CTA denied the refund claim for failure of the taxpayer to show the existent of zero-rated
sales for the 3rd quarter of 2007 and to substantiate its reported zero-rated sales of P59,999,700
in the 4th quarter. According to the Court, the VAT accrues upon actual or constructive receipt of
payments or the consideration by the seller of services as evidenced by the official receipts,
regardless of whether or not the services have been rendered. The VAT should not be based on
the income that must have been received but on the income that was actually received. Although the
transaction is the past, present or future performance of service, the tax accrues
only upon actual or constructive receipt of consideration. Thus, the supporting official receipts
submitted by taxpayer which bear the dates 2009 and 2010, pertain to sales period other than
the 3rd and 4th quarters of 2007. The amount of P59,999,700, on the other hand, may be
considered as the taxpayers zero-rated sales as this is the amount reflected in the 4th quarter of
2007 upon which the claimed input VAT for the 3rd and 4th quarters of 2007 may be attributed.
For its failure to substantiate this amount, there is no zero-rated sales to speak of, and therefore
taxpayer is not entitled to refund. (Harte-Hanks Philippines, Inc. vs. Commissioner of
Internal Revenue, CTA EB Case No. 949, April 28, 2014)
IMPORTS
5. Import entry and internal revenue declarations are required to be machine validated
as proof of payment of tax.
Taxpayers claim for refund of input taxes were denied on the ground, among others, that the
import entry and internal revenue declarations (IEIRD) were not machine validated. On appeal
to the Court En Banc, taxpayer argued that Sections 110(A) and 113(A) of the NIRC and
Section 4.110-8 and 4.113-1 of Revenue Regulations No. 16-2005 do not require that IEIRDs
should be machine validated.
The Court agreed that Sections 110(A) and 113(A) of the NIRC and Section 4.110-8 and 4.113- 1 of
Revenue Regulations No. 16-2005 do not require IEIRDs to be machine validated.
However, paragraphs 2.3 and 2.3.1 of Customs Order No. 2-95, dated September 8, 1995,
require IEIRDs to be machine validated as proof of payment. Therefore, the IEIRDs must be
machine validated in order to be considered as proof. (Philex Mining Corporation vs.
Commissioner of Internal Revenue, CTA EB Case No. 939, February 12, 2014)

4. Absent any explanation regarding the factual basis of the results of the surveillance,

the taxpayer cannot be deemed to be informed about the basis of the assessment. Taxpayer received
from the BIR a 48-Hour Notice alleging that the BIR conducted a 10-day
surveillance, as a result of which, taxpayer was found liable for deficiency VAT. Taxpayer filed
its explanation arguing that it is not liable for the alleged deficiency VAT. Subsequently,
taxpayer received a 5-Day VAT Compliance Notice (VCN) reiterating demand for payment of
the alleged deficiency VAT. After the BIR denied the taxpayers plea and holding the latter liable
for the alleged deficiency VAT, taxpayer filed a petition for review before the CTA. The taxpayer
argued that the assessment is without basis.
The CTA agreed with the taxpayer. According to the CTA, the 5-Day VCN, on its face, shows
that it did not state the provisions violated by the taxpayer, in contravention of the requirements
in RMO 003-09. Also, the 48-Hour Notice and the 5-Day VCN did not provide details of the
findings of the investigating office. This failed to sufficiently inform the taxpayer of the
issues/violations that should be rectified. The Court also noted that it cannot determine the basis
of the BIRs findings regarding the sales amounts during the surveillance period. The BIR did
not describe how the surveillance was conducted nor did it explain the methods used in arriving
at the estimates. Without such information, the sales amounts used cannot be considered as
prima facie valid as they appear to have been arrived at without any basis. Absent any
explanation regarding the factual basis of the results of the surveillance, the taxpayer cannot be
deemed to be informed about the basis of the assessment. (Elric Auxiliary Services
Corporation/Sacred Heart Gas Station vs. Commissioner of Internal Revenue, CTA Case
No. 8315, February 17, 2014)
A representative office is not liable for income tax and value-added tax.
Taxpayer is a representative office of Shinko Electric Industries Co., Ltd., a company organized
and existing under the laws of Japan. It was assessed by the Bureau of Internal Revenue (BIR)
for deficiency income tax and VAT for the fiscal year ending March 31, 2007. The assessment
for deficiency income tax was due to disallowances of expenses as well as for alleged
unexplained source of funds resulting to undeclared income. The assessment for VAT is also
due to the alleged unexplained source of funds resulting to undeclared income.
Based on the definition of a representative office, it is fully subsidized by its head office. Its
subsidy is in the form of foreign inward remittances from its head office abroad which is utilized
to cover its expenses. In such case, the foreign inward remittance cannot be considered
income or flow of wealth, but a subsidy. This subsidy represents a capital or fund which is
distinct from income. It follows that unspent remittances, which must be considered a mere
subsidy, should not be considered income subject to tax. With more reason, duly substantiated
expenses paid out of the subsidy could not be considered part of taxable income. Hence,
inasmuch as a representative office is not allowed to derive income from sources within the
Philippines and is fully subsidized by its head office, it is not subject to Philippine income tax.
Likewise, inasmuch as representative offices do not derive income from the Philippines and are
fully subsidized by the head office, representative offices are exempt from VAT. (Shinko
Electric Industries Co., Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 8213, February
10, 2014)

ASSESSMENT FORMALITIES
2. Non-issuance of a preliminary assessment notice is a violation of due process, which
makes the assessment void.
Taxpayer was assessed by the BIR for deficiency taxes, for which Final Assessment Notices
(FAN) and Formal Letter of Demand (FLD) were issued. Later, a preliminary collection letter

(PCL) was issued by the Commissioner of Internal Revenue and later a Final Notice Before
Seizure. The taxpayer then filed a petition for review before the CTA. One of the arguments of
the taxpayer is that the FAN and the PCL are null and void since it never received a preliminary
assessment notice (PAN).
According to the Court, except in cases where a prior notice of assessment is not required, a
PAN is a vital component or an indispensable requirement before the BIR can issue a FAN/FLD.
The used of the word shall is imperative, operating to impose a duty which should be enforced.
Accordingly, in the absence of proof of receipt by the taxpayer of the PAN, it was not accorded
due process in the issuance of assessment. (SVI Information Services Corporation vs.
Commissioner of Internal Revenue, CTA Case No. 8496, February 10, 2014)
2. There is no need for the BIR to issue a letter of authority (LOA) if the alleged
erroneous payment of tax is manifest in the face of the tax return.
For the same case above, the assessment was issued without the prior issuance of the LOA.
Thus, the taxpayer argued that the assessment was void for failure to issue an LOA. The Court
ruled that there is no need for the BIR to issue an LOA considering that the alleged erroneous
payment of tax, assuming the same is correct, is already manifested on the face of the
taxpayers monthly remittance return. Thus, there is really no need for the BIR to examine and
scrutinize the books of account and other accounting records to determine correct tax liabilities.
(Masin-AES Pte. Ltd. Philippine Branch vs. Commissioner of Internal Revenue, CTA
Case No. 8543, April 10, 2014)

3. Falsity must be established by clear and sufficient evidence to warrant the application
of the 10-year prescriptive period for the assessment of taxes.
Taxpayer was assessed by the BIR for various deficiency taxes. Among the arguments raised
by the taxpayer against the assessment is that it had prescribed, having been issued beyond
the three-year prescriptive period for the issuance of an assessment. On the part of the BIR, it
argued that the declarations in the tax returns were deficient and did not disclose the truth
regarding the correct amount of income subject to tax, thus, it rendered the subject returns
false. As such, the taxpayer may be assessed within ten (10) years from the discovery of said
falsity.
Citing the case of Aznar vs. Court of Appeals1
, the Court ruled that mere falsity of a return does
not merit the application of the 10-year prescriptive period, unless it can be shown that the
return was made with a design to mislead or deceive on the part of the taxpayer, or at the very
least show culpable negligence. The BIR merely relied on the tax returns, as well as the
financial statements and trial balance to substantiate its claim that the returns submitted were
false. This is not enough to merit the application of the 10-year period. Such falsity must be
established by clear and sufficient evidence. (ESS Manufacturing Company, Inc. vs.
Commissioner of Internal Revenue, CTA Case No. 7958, February 14, 2014)

ASSESSMENT
2. No taxable income will result from the difference between the amount of income
payments reported per alpahlist and expenses per FS and ITR.
The BIR compared the expenses reported by the taxpayer in its FS and ITR with the same
nature of expenses reported in the alphalist. With the alphalist showing higher amount, the BIR
concluded that the taxpayer had unaccounted sources of cash or undeclared income.
According to the Court, this conclusion lacks merit because assuming that there is unaccounted
source of cash or undeclared income, there are also payments or expenses which were
unreported. If this is the case, the undeclared income would be effectively offset with the
consideration of the related expenses. Consequently, no taxable income will result from the
transactions. (East Asia Power Resources, Corp. vs. Commissioner of Internal Revenue,
CTA Case No. 8182, January 15, 2014)
ASSESSMENT NOTICE
3. The Court of Tax Appeals does not have jurisdiction over a petition for review filed
before it questioning the validity of an assessment that was not protested before the BIR.
On December 14, 2010, taxpayers were issued Preliminary Assessment Notice (PAN)
assessing them for alleged deficiency donors taxes. On January 18, 2011, taxpayers filed their
protest against the PAN. On March 9, 2011, taxpayers received a letter from the Regional
Director denying the protest to the PAN. And attached to said letter are the Formal Letter of
Demand and the Assessment Notice, reiterating the same assessment for the donors tax.
Without filing any formal protest letter against the Formal Letter of Demand and Assessment
Notice, the taxpayers filed a petition for review with the CTA on March 28, 2011. The BIR
argued that the CTA is bereft of jurisdiction to try the case on account of the prematurity of filing
of the petition for review.
According to the Court, given that the taxpayers did not file a protest against the final
assessment notice, there is no inaction or decision of the BIR Commissioner appealable before
the Court. Thus, the Court has not acquired jurisdiction over the subject matter of the case.
(Castalloy Technology Corp., Allied Industrial Corp. and Alinsu Steel Foundry Corp. vs.
Atty. Jose N. Tan, CTA Case No. 8244, January 30, 2014)
ASSESSMENT CARRY OVER
4. Error in the carry-over of prior years excess credits does not give rise to deficiency
income tax liability because it does not in any way pertain to an expense or income
account which could affect the income tax due.
In the 2006 annual income tax return of taxpayer, it erroneously carried over a prior years
excess tax credits of P12,785,038, instead of the correct amount of P11,278,461.95. The
taxpayer was then assessed by the BIR for deficiency income tax for the overstatement in the
amount of P1,506,576. The taxpayer explained in its protest that the discrepancy in the prior
years excess credit was adjusted in the ITR of the year 2008 and this had no effect in the
amount to be paid in 2006. In the Final Decision on Disputed Assessment, the BIR did not

consider the adjustment made in 2008 on the ground that the said adjustment allegedly
affected the succeeding year 2007, which is under investigation. Taxpayer then appealed to the
CTA. The BIR argued that taxpayer cannot escape liability by adjusting its 2008 ITR to offset the
erroneously carried-over excess tax credits in 2006 since an assessment was already issued.
Court ruled in favor of the taxpayer. The item involved in the assessment, i.e., discrepancy
on prior years excess tax credits claimed, does not pertain to either of the income or
cost/expense accounts in the 2006 ITR, which could affect taxpayers income tax due. Hence,
there could be no deficiency income tax so to speak. In fact, taxpayer would still have a tax
overpayment after adjustment of prior years excess credits. (Commissioner of Internal
Revenue vs. Waterfront Cebu City Hotel & Casino, Inc., CTA EB No. 991, January 29, 2014)
ASSESSMENT DOC STAMP SHARES
5. DST on sale of shares of stock is based on par value and not on the selling price of
the shares. A shareholder sold to another taxpayer its shares of stock held in another company with
par
value of P93,727,000 for a total consideration of P911,545,000. Taxpayer paid the DST in the
amount of P3,418,300 which was computed based on the selling price of P911,545,000.
Realizing that it should have paid DST based on the par value, taxpayer filed a claim for refund
for the excess tax payment. The BIR argued that the DST on sale of shares should be
computed based on the total purchase price and not on the par value. Thus, there was no error
in the payment made.
In ruling in favor of the taxpayer, the Court ruled that in accordance with Section 175 of the Tax
Code, in computing the DST due on the sale of shares of stock, the tax base is the total par
value of the shares and not on the purchase price. (Commissioner of Internal Revenue vs.
Eco Leisure and Hospitality Holding Company, Inc., CTA EB Case No. 1013, January 14,
2014)
DOC STAMPS
3. A Philippine branch of a foreign corporation is liable for DST on its advances due to
and from its head office.
Taxpayer is a Philippine branch of E.E. Black Ltd., a corporation organized and existing under
and by virtue of the State of Hawaii, USA. Taxpayer was assessed documentary stamp tax
(DST) on debt instruments pertaining to its due to and from its head office. Taxpayer argued
that it cannot be assessed DST on debt instruments since it cannot issue debt instrument to its
head office because being a branch office, it does not have a separate legal personality from its
head office. According to the Court, the general rule that a foreign corporation is the same
juridical entity as its branch office in the Philippines cannot apply here for purposes of imposing
the DST. The cash advances and intercompany trade payables and receivables which were
booked under due to/from accounts are well within the purview of debt instruments. (E.E.
Black Ltd. Philippine Branch vs. Commissioner of Internal Revenue, CTA Case No.
8526, April 10, 2014)
CTA JURISDICTION
6. The CTA has jurisdiction to entertain a petition seeking the annulment of a Forty
Eight Hour Notice and Five Day VAT Compliance Notice. Taxpayer received from the BIR a 48Hour Notice alleging that the BIR conducted a 10-day

surveillance, as a result of which, taxpayer was found liable for deficiency VAT. Taxpayer filed
its explanation arguing that it is not liable for the alleged deficiency VAT. Subsequently,
taxpayer received a 5-Day VAT Compliance Notice (VCN) reiterating demand for payment of
the alleged deficiency VAT. After the BIR denied the taxpayers plea and holding the latter liable
for the alleged deficiency VAT, taxpayer filed a petition for review before the CTA. The BIR
argued, among others, that the case is not within the jurisdiction of the CTA since the 48-Hour
Notice and the 5-Day VCN should not be treated as assessment notice.
According to the CTA, its jurisdiction is not limited to cases involving disputed assessment but
also decisions over other matters. The term other matters would refer to those cases which
do not necessarily involve disputed assessments or refunds but controversies arising under the
NIRC or other laws administered by the BIR. The subject matter of the case involves the
nullification of the 48-Hour Notice and 5-DAY VCN. They were issued pursuant to the power of
the Commissioner under the NIRC. The controversy falls within the meaning of other matters.
(Elric Auxiliary Services Corporation/Sacred Heart Gas Station vs. Commissioner of
Internal Revenue, CTA Case No. 8315, February 17, 2014)
TAX TREATY
1. Noncompliance with the 15-day period for prior application of tax treaty relief
should not operate to automatically divest entitlement to the tax treaty relief
especially in claims for refunds.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No.
1-2000. The BIR must not impose additional requirements that would negate the availment of
the reliefs provided for under international agreements. There is nothing in RMO No. 1-2000
which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with
the 15-day period. Bearing in mind the rationale of tax treaties, 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 the 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. The underlying principle of prior application with the BIR becomes
moot in refund cases, such as the present case, where the very basis of the claim is erroneous
or there is excessive payment arising from non-availment of the tax treaty relief at the first
instance. (Sal Oppenheim Jr. & Cie Kommanditgesellschaft Auk Aktien v. Commissioner
of Internal Revenue, CTA EB No. 906, March 3, 2014)

1. An application for tax treaty relief is not necessary before the terms of the tax treaty
can be made effective.
On September 21, 2011, the taxpayer applied for a Relief from Double Taxation on interest
income (TTRA) arising from a Subordinated Loan Agreement obtained from a foreign
corporation based in Singapore. The BIR issued a ruling (BIR ITAD Ruling No. 019-12) denying
relief on interests paid on or before September 21, 2011 (date of the application for TTRA) but
declaring the interests paid on September 22, 2011 and thereafter as entitled to the 15%
income tax rate pursuant to Article 11 of the Philippines Singapore Tax Treaty. On the basis of
the denial of relief for the interests paid on or before September 21, 2011, the BIR issued a
Formal Letter of Demand assessing the taxpayer for deficiency final withholding tax (FWT)
representing the difference of the 20% FWT that should have been applied and the 15% rate
based on the treaty that was used by the taxpayer.

The taxpayer contested the assessment on the ground that it correctly withheld the 15% FWT
based on the Philippines Singapore Tax Treaty. Citing the case of Deutsche Bank AG Manila
Branch vs. Commissioner of Internal Revenue1
, the Court ruled that the denial of the taxpayers
application of tax treaty relief for failure to comply with the 15-day period under 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 BIRs denial of the relief on interest
paid by taxpayer on or before September 21, 2011 has no legal basis. Thus, the taxpayer
cannot be held liable for the assessed final withholding taxes. (Masin-AES Pte. Ltd. Philippine
Branch vs. Commissioner of Internal Revenue, CTA Case No. 8543, April 10,
2014)

OTHERS
2. RA No. 9334 did not repeal Philippine Airlines franchise, PD. No. 1590, and therefore
remains exempt from excise taxes.
Taxpayer was assessed for excise taxes on the importation of alcohol and tobacco products by
the BIR and the Commissioner of Customs. Taxpayer argued that RA. No. 9334 did not amend
nor repeal its franchise, PD No. 1590. Therefore, it remains exempt from the payment of excise
taxes on all its importations of cigarettes, liquor and wine constituting its commissary and
catering supplies for international flight consumption.
The Court has consistently held that RA No. 9334 did not amend or repeal the exemption
granted to the taxpayer under its franchise. As such, PAL remains to be exempt from excise
taxes on all its importations of cigarettes, liquor and wine for its commissary and catering
supplies for international in-flight consumption. However, to be entitled to such exemption,
taxpayer must comply with the requirements provided under Section 13 of the same law i.e.
taxpayer is obliged to pay corporate income tax and VAT, in lieu of all other taxes, including
excise taxes on importation of commissary and catering supplies, provided that such articles,
supplies or materials are imported for its use in its transport and non-transport operations and
other activities incidental thereto and are not locally available in reasonable quantity, quality or
price. (Philippine Airlines, Inc. v. Commissioner of Internal Revenue and Commissioner of
Customs, CTA Case No. 8361, March 26, 2014)
LOCAL TAX
3. The gross receipts of a transmission company is deemed to have been realized in the
locality where the office of its customer, distribution company, is located regardless
of the location where the electricity is subsequently distributed.
Taxpayer was assessed for delinquency local franchise tax by the Province of Agusan del
Norte. Taxpayer argues that under Section 137 of R.A. 7160, the local franchise tax that may be
collected shall be limited to those realized within a local governments territorial jurisdiction. The
Court agreed. Since the taxpayers gross receipts were received from Agusan del Norte Electric
Cooperative (ANECO), the principal office of which is located in the City of Butuan, the one
authorized to impose the franchise tax on the taxpayers gross receipts from ANECO is the City
of Butuan. Consequently, the Province of Agusan del Norte cannot impose the franchise tax on
the taxpayers gross receipts from ANECO pursuant to Article 226 of the Implementing Rules
and Regulations of the Local Government Code which provides that the province shall not
impose the tax on business enjoying franchise operating within the territorial jurisdiction of any
city located within the province. It is of no moment that the electricity transmitted to ANECO is

subsequently distributed to end-users located in both the City of Butuan and the municipalities
of the Province of Agusan del Norte since the taxpayer derives its gross receipts from its
transmission of electricity to ANECO, a distribution utility, and not from the end-users. (National
Transmission Corporation vs. Province of Agusan del Norte, represented by its
Provincial Treasurer, Mr. Leopoldo V. Avila, CTA EB No. 950, March 17, 2014)

OTHERS
4. A consolidated rural is not entitled to a fresh five-year tax privilege.
Taxpayer, a rural bank, is a new bank resulting from the consolidation of two rural banks. After
paying its gross receipts tax for the year 2012, it applied for the refund of the same taxes paid. It
anchors its claim under Section 15 of RA No. 7353 or the Rural Bank Act of 1992 which
exempts newly formed rural banks from payment of pertinent taxes for a period of 5 years from
the date of commencement of operations. As a new juridical person separate from the
constituent corporations, it has the right to enjoy a new five-year tax privilege. In ruling against
the taxpayer, the Court ruled that although the law encourages consolidation and mergers of
rural banks, it does not go as far as giving a fresh tax exemption to consolidated rural banks for
another five years of operation. (One Network Bank, Inc. vs. Commissioner of Internal
Revenue, CTA Case No. 8460, April 11, 2014)
AMMENDMENTS
6. Revenue Regulations No. 2-2010 does not apply to the taxable year 2009, despite
RMC 16-2010.
For the first three quarters of 2009, taxpayer filed its income tax return using the itemized
deduction in computing its income taxes due. On February 18, 2010, the BIR issued RR No. 22010, amending Section 7 of RR No. 16-2008, requiring taxpayers to choose a method of
deduction during the first quarter, which will be applied during the next three quarters of the
taxable year. This significantly amended Section 7 which previously allowed the taxpayer to use
either the optional standard deduction (OSD) or the itemized deduction in the quarterly return
and another choice may be made for the annual ITR. Said amendment states that it applies to
the taxable year 2009. When the taxpayer filed its 2009 annual ITR, it used the OSD method of
deduction. Subsequently, it paid under protest additional income tax to account for the total
income tax due, should the BIR require the use of the itemized method as used in its 1st quarter
ITR. It then filed a refund for this additional taxes.
The CTA granted the refund by holding that the amendment made by RR 2-2010 should not
apply to 2009. According to the Court, the amendment covering the filing of the quarterly income
tax returns as well as the final adjustment return was radically changed. This is not merely a
clarification but a shift in policy. By definition, a clarification is an interpretation that removes
ambiguity. To apply the new amendment to 2009 will be in direct contravention to Section 246 of
the Tax Code, which protects taxpayers from the retroactive application of a regulation if it is
prejudicial to taxpayer. (COL Financial Group, Inc. vs. Commissioner of Internal Revenue,
CTA Case No. 8454, April 15, 2014)

NEXT: MAY 2014