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LN must be replaced with a LOA to produce a valid assessment

(Medicard Philippines,, Inc., v Commissioner of Internal Revenue, GR No.. 222743, April 5, 2017))

A FAN, arising from an LN, issued without prior issuance of an LOA is not valid. A Letter Notice (LN) is
issued to a taxpayer to inform him of discrepancies uncovered between his declarations and information
sourced from other taxpayers or government agencies. The taxpayer is given an opportunity to explain
and reconcile the differences cited in the LN. If the issues in the LN are not resolved, the BIR shall issue
an LOA before a PAN or FAN can be issued on the unreconciled discrepancies. Failure to convert
previously issued LN to an LOAs is a clear and unequivocal violation of a taxpayer’s right to due process.

Hence, the resulting assessment issued against taxpayer shall be deemed void.

Termination letter necessary to prove completion of tax abatement process

(Asiatrust Development Bank, Inc., v Commissioner of Internal Revenue, GR No. 201530, April 19, 2017))

Application for tax abatement is considered approved only upon the issuance of a termination letter.
Section 4 of RR No. 15-2006 provides that any person/taxpayer, natural or juridical, may settle through
this abatement program any delinquent account or assessment which has been released as of June 30,
2006, by paying an amount equal to 100% of the Basic Tax Assessed with the AAB of the RDO that has
jurisdiction over the taxpayer.

The last step in the aforementioned tax abatement process is the issuance of the termination letter.
Presentation of the termination letter is essential as it proves that the taxpayer’s application for tax
abatement has been approved. Without a termination letter, a tax assessment cannot be considered
closed and terminated.
(Note: Under current rules, a Certificate of Approval/Denial is issued in lieu of a termination letter.)

Coverage of the tax exemption of minimum wage earners

(Soriano v. Secretary of Finance, G.R. Nos. 184450, 184508, 184538 & 185234, January 24, 2017)

Pursuant to RA 9504, minimum wage earners (MWEs) are exempt from payment of income tax on their
minimum wage, holiday pay, overtime pay, night shift differential pay and hazard pay.

Sections 1 and 3 of Revenue Regulations (RR) No. 10-2008 implementing the law, however, provides that
MWEs, who receive other benefits in excess of the P30,000 tax exempt limit, shall be taxable on the
excess, as well as on its salaries, wages and allowances. In effect, MWEs who receive non-exempt
income shall be disqualified for the exemption. RR10-2008 further limited the availability of the
exemption for only six months in 2008, beginning in July.

The Supreme Court held that BIR committed grave abuse of discretion when it promulgated said
implementing regulation. The additional requirements for exemption are not found in the law which it
seeks to implement and these are, therefore, not valid impositions.

R.A. 9504 explicitly defines the coverage of the exemption to include wages that are not in excess of the
minimum wage. RA 9504 is a social legislation which grants to the lowest paid employees an additional
income by no longer demanding from them a contribution for the operations of government. Workers
who received statutory minimum wage remain as MWEs and receipt of other taxable income during the
year does not disqualify them as MWEs. MWEs are entitled to on the statutory minimum wage, any
excess is still subject to appropriate taxes. The SC also ruled that the MWEs are exempt for the entire
taxable year 2008 since taxable income is only determined on a yearly basis.
Increased personal exemption under RA 9504 available in full in 2008
(Soriano v. Secretary of Finance, G.R. Nos. 184450, 184508, 184538 & 185234, January 24, 2017)

RR No. 10-2008, in implementing RA 9504, mandates that the increased personal and additional
exemptions under R.A. No. 9504 shall be available only for the half year in 2008.

The SC declared that this interpretation is against the legislative intent of the law which is to give the
taxpayer the maximum exemptions that can be availed of as declared in the sponsorship speech and
President’s certification for the approval of the bill. In addition, the Tax Code does not require the
prorating of the exemptions even in case of a status change during the taxable year.

Exemption of cooperatives from RPT

(Provincial Assessor of Agusan del Sur v. Filipinas Palm Oil Plantation, Inc., G.R. 183416, October 5,

Section 234 of the LGC exempts all real property owned by cooperatives, without distinction, from real
property tax (RPT). Nothing in the law suggests that the real property tax exemption only applies when
the property is used by the cooperative itself. The clear absence of any restriction or limitation in the
provision could only mean that the exemption applies to wherever the properties are situated and to
whoever uses them. Similarly, the instance that the real property is leased to either an individual or
corporation is not a ground for withdrawal of tax exemption.

The exemption from real property taxes given to cooperatives applies regardless of whether or not the
land owned by the cooperatives is leased to and used by another entity which does not enjoy exemption
from real property tax.

Characterization of “machinery” as a real property/immovable is governed by the LGC and not

the Civil Code
(Provincial Assessor of Agusan del Sur v. Filipinas Palm Oil Plantation, Inc., G.R. 183416, October 5,

Section 199(o) of the LGC defines “machinery” as real property subject to RPT. On the other hand, Article
415(5) of the Civil Code defines “machinery” as that which constitutes an immovable property.

In a previous SC decision, it was settled that harmonizing the two laws “would necessarily mean
imposing additional requirements for classifying machinery as real property for real property tax purposes
not provided for, or even in direct conflict with, the provisions of the Local Government Code.”

Therefore, in determining whether machinery is real property subject to RPT, the definition and
requirements under the LGC are controlling.

Tax exemption of redemption gains under the RP-US tax treaty

(CIR v Goodyear Philippines Inc. GR 216130, August 3, 2016)

In this case, the company redeemed preferred shares at a redemption price equal to the aggregate par
value plus a premium representing accrued and unpaid dividends. The company filed an application with
the Bureau of Internal Revenue (BIR) to confirm the applicability of the treaty provision on the tax
exemption of the redemption gains. At the same time, the company took the conservative approach and
withheld and remitted a final withholding tax (FWT) at 15% on the difference between the par value and
the redemption price treated as taxable dividend.

Before the expiration of the two-year period to refund, the company opted to file an administrative claim
for refund of the final withholding tax on grounds that the gain is exempt under the tax treaty and that
the FWT was erroneously paid. Subsequently, a petition for review with the Court of Tax Appeals (CTA)
was filed.

At the CTA, the BIR took the position that the refund cannot be granted because the premium was
correctly treated as dividend subject to the 15% FWT. The CTA in division and en Banc upheld the
propriety of the refund so the BIR appealed the decision at the Supreme Court (SC).

Upholding the CTA, the SC reiterated that treaties have the force and effect of law. Hence, the RP-US Tax
Treaty should govern the tax implications of company’s transaction with its shareholder which is a US
resident. Under the treaty, the term “dividends” should be understood according to the taxation law of the
State in which the corporation making the distribution is a resident. Accordingly, under the Philippine Tax
Code, dividend is defined as “any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders, whether in money or in other property.” The Board of
Directors has to declare and pay the dividends to all of its shareholders. The company’s financial
statements, however, does not disclose unrestricted earnings. Absent the availability of unrestricted
retained earnings, the BOD had no power to issue dividends.

Furthermore, an ordinary distribution of dividend should be in the nature of a recurring return on stock.
This was not the case with the company’s redemption. The premium received by the shareholder did not
represent a periodic distribution of dividend, but rather a one-time payment for the redemption of the
preferred shares. The distinction between a distribution in liquidation and an ordinary dividend depends
on the particular circumstances of the case and the intent of the parties. If the distribution is in the
nature of a recurring return on stock it is an ordinary dividend. However, if the corporation is
recapitalizing and narrowing its activities, the distribution may properly be treated as in partial liquidation
and as payment by the corporation to the stockholder for his stock, not as dividend distribution.

The SC upheld the CTA and ruled that the redemption gains can qualify for exemption under the treaty
provisions and cannot be treated as taxable dividends.

Tax privileges of PAGCOR contractees and licensees

(Bloomberry Hotels and Resorts Inc. v CIR. GR 212530, August 10, 2016)

This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court seeking: (a) to annul
the issuance by the Commissioner of Internal. Revenue (CIR) of an alleged unlawful governmental
regulation, specifically the provision of RMC No. 33-2013 1 dated April 17, 2013 subjecting contractees
and licensees of the Philippine Amusement and Gaming Corporation (PAGCOR) to regular corporate
income tax; and (b) to enjoin the CIR from implementing the assailed provision of RMC No. 33-2013.

The SC noted that it has already issued a decision on the tax treatment of PAGCOR. That is, PAGCOR is
subject to a 5% franchise tax on its income realized from the operation of casinos. This is in lieu of all
other taxes, including corporate income tax. Income from other related services are not entitled to the
same privilege and are subject to the regular corporate income tax and all other applicable taxes.

The PAGCOR Charter states that exemptions granted for earnings derived from the operations conducted
under the franchise shall inure to the benefit of and extend to corporations, associations, agencies, or
individuals with whom the PAGCOR or operator has any contractual relationship in connection with the
operations of the casinos authorized to be conducted under the Franchise. Hence, all contractees and
licensees of PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from all other
taxes, including corporate income tax realized from the operation of casinos. In the same manner,
contractees and licensees shall likewise pay corporate income tax for income derived from other services.

The SC ordered the CIR to cease and desist from implementing RMC 33-2013 insofar as it imposes
corporate income tax on petitioner Bloomberry Resorts and Hotels, Inc.’s income derived from its gaming

SUMMARY OF CTA Decisions (JUL 2016 – FEB 2017)

Protesting a local tax ordinance or assessment

(Davao Agricultural Ventures Corporation (DAVCO) v. City of Davao, CTC AC No. 135, February 20, 2017)
As a rule, the remedy within the administrative machinery must first be resorted to and pursued to its
appropriate conclusion before the court’s judicial power can be sought.

In cases of disputed local tax assessments, Section 195 of the Local Government Code provides that the
taxpayer has 30 days from receipt of the denial of the local treasurer, or from the lapse of the 60-day
period granted to the treasurer to decide on the protest, within which to appeal the assessment with the
court of competent jurisdiction, which is the Regional Trial Court. An appeal filed directly with the CTA
cannot be given due course.

On the other hand, a petition to declare a local ordinance as null and void should be raised in appeal
within 30 days from effectivity of the ordinance, to the Secretary of Justice who has 60 days to act on it.
Hence, failure of the taxpayer to appeal to the Secretary of the Department of Justice within the
mandatory period of 30 days from the effectivity of the ordinance is fatal to its cause.

The Court of Tax Appeals, being a court of special jurisdiction, can only take cognizance of matters that
are clearly within its jurisdiction specifically defined under Section 7 of R.A. 1125, as amended by R.A.

A Preliminary Collection Notice may constitute a final decision

(Organizational Change Consultants International Center for Learning, Inc. v. CIR, CTA Case No. 8625,
February 10, 2017]
A Preliminary Collection Notice may constitute a final decision on disputed assesment, provided that, the
notice reiterated the taxpayer’s tax liabilities and requested for the payment of the same to avoid
accumulation of interest and surcharges, and it is indicated that if taxpayer failed to pay the same, the
BIR would be constrained to serve and execute the administrative summary remedies to enforce the
collection of said tax liabilities.

In this case, the taxpayer disputed the Formal Letter of Demand (FLD) together with the Assessment
Notices (FAN), however, instead of a Final Decision on Disputed Assessment, the taxpayer received a
Preliminary Collection Notice.
The CTA ruled that the Preliminary Collection Notice can be considered as the final decision of the BIR. It
was ruled by the Supreme Court, in the case of Allied Banking Corporation v. CIR , that CIR must indicate
clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a
disputed assessment. The CTA held that since the notice reiterated the petitioner’s tax liabilities and
requested for the payment of the same to avoid accumulation of interest and surcharges and also
indicated that if petitioner failed to pay the same, respondent would be constrained to serve and execute
the Administrative Summary Remedies to enforce the collection of petitioner’s tax liabilities, this notice
can be considered as the final decision.

Determination of output VAT and carried over input VAT is indispensable in a claim for
(Total (Philippines) Corporation v. Commissioner of Internal Revenue, CTA Case 7855, February 9, 2017)

Section 110 (A) and (B) in relation to Section 112 (A) of the National Internal Revenue Code (NIRC) of
1997, as amended, allows that input VAT from zero-rated transactions can be claimed for refund or
issuance of tax credit certificate (TCC) provided that input VAT is greater than output VAT.
If taxpayer is applying for excess input VAT in 2007, the validation of the carried over excess input VAT
from the last quarter of 2006 is necessary in the determination of petitioner’s entitlement to refund. This
is to verify that the carried over input VAT is sufficient to cover the output VAT so that the input VAT
being refunded in 2007 remains undiminished by any output VAT. Refund claimant should present VAT
invoices and official receipts to prove the existence of the carried over input VAT from prior year.

Without the substantiation, the carried-over input VAT cannot be validly applied against the output VAT in
the year applied for refund. The alleged excess input VAT being claimed for refund must first be applied
against the output VAT. If there is no excess, there is no input VAT that can be considered for refund.

Difference between judicial appeal of a disputed assessment and claim for VAT refund
(Allegro Microsystems Philippines, Inc. v. Undersecretary of the Department of Finance, C.T.A. EB Case
No. 1327 Re:C.T.A. Case No. 8882, January 30, 2017)

The CTA emphasized the difference between the judicial appeal of a disputed assessment and the judicial
appeal with respect to a claim for refund of unutilized input VAT.

The Supreme Court, in the case of Lascona Land Co., Inc. v. CIR, has interpreted the application o
Section 228 of the NIRC in protesting disputed assessment. The Supreme Court held that, pursuant to
Section 228, the taxpayer may await the final decision of the CIR on its protest and appeal the same (if
unfavorable) within 30 days after receipt of the copy of the decision. The unfavorable decision can still
be appealed even if issued after the expiration of the 180-day period given to the Commissioner to act on
the protest.

In contrast, in Section 112 governing VAT refunds, the taxpayer should file its judicial appeal within 30
days from the lapse of the 120-day period given to the BIR to act on the taxpayer’s claim. After the lapse
of the 30-day period, the CTA Division loses its jurisdiction to entertain the appeal. A decision issued after
the lapse of the 120 + 30 day period cannot anymore be appealed at the CTA.

Prescriptive period in VAT refunds

(Carmen Copper Corporation v Commissioner of Internal Revenue, CTA Case No. 8873, December 16,

Section 112(A) and (C) of the Tax Code provides the basis for administrative and judicial claims for
refund or tax credit of unutilized input tax attributable to zero-rated or effectively zero-rated sales.

The CTA held that an administrative claim for refund of unutilized input VAT must be filed with the
Commissioner of Internal Revenue (CIR) within two years after the close of the taxable quarter when the
zero-rated or effectively zero-rated sales were made. From the date of submission of complete
documents in support of the administrative claim for refund, the CIR has a period of 120 days within
which to act on
a claim for refund or application for issuance of tax credit certificate. Upon denial of the claim or
expiration of the 120-day period, the taxpayer has a 30-day period within which to appeal the
unfavorable decision or unacted claim before the division of the Court of Tax Appeals (CTA).

In the words of the Supreme Court in the case of Silicon Philippines: “the taxpayer can file an appeal in
one of two ways: (1) file the judicial claim within thirty days after the Commissioner denies the claim
within the 120-day period, or (2) file the judicial claim within thirty days from the expiration of the 120-
day period if the Commissioner does not act within the 120-day period.”

PAN is a requisite to a FAN

(Bloat and Ogle, Inc. v Commissioner of Internal Revenue, CTA Case No. 8682, December 16, 2016)
It is a requirement of due process that a taxpayer be fully apprised of the facts and the law on which a
final assessment was issued, that the final assessment, demand letter and details of discrepancies were
all sent to him. Section 228 of the Tax Code is instructive of the procedure in complying with due

The law clearly state that the taxpayer should be given the Preliminary Assessment Notice (PAN) before a
final assessment is issued. Tax laws are civil in nature. Under the Civil Code, acts executed against
mandatory laws are generally void.

The CTA ruled that an undated PAN addressed to a taxpayer’s old address does not provide proof to
support that the taxpayer was apprised. In cases where the taxpayer denies receiving the PAN,
the burden is shifted to the BIR to prove otherwise. The BIR should prove that the taxpayer received the
PAN in the due course of the mail. Citing a case law, the CTA further ruled that failure to strictly comply
with Section 228 and RR No. 12-99, is a denial of due process and does not only render the assessment
void, but also finds no validation in any provision of law.

Customs has jurisdiction on export of currencies

(Ronavie Renon Kamata v Commissioner of Customs, CTA Case No. 8845, September 26, 2016)

If a person is caught at the airport attempting to bring out currencies in excess of the amount allowed
under the laws, the officials of the Bureau of Customs have authority to confiscate the excess in favor of
government. Under the rules of the Bangko Sentral ng Pilipinas (BSP), there is a prohibition on
unauthorized bringing of currencies outside the Philippines in excess of the amounts allowed. Under BSP
regulations, the limit for is USD10,000 or the equivalent in other currencies. The threshold for the
Philippine peso is P10,000.

The Philippine Tariff and Customs Code authorizes the forfeiture of any article of prohibited exportation
or importation. The Supreme Court has previously ruled that Philippine peso bills come within the concept
of “merchandise” and, therefore, fall within the jurisdiction of the Bureau of Customs.

Deficiency interest imposable only income, estate and donor’s tax

(Composite Materials, Inc. v Commissioner of Internal Revenue, CTA Case No. 8365, October 3, 2016)

Section 249 of the Tax Code provides that deficiency in the tax due as defined the Code shall be subject
to interest at 20% per annum which shall be assessed and collected from the date prescribed for its
payment until the its full payment.
An analysis of the Tax Code shows that there are only three instances where the term “deficiency” is
defined, and this relates only and respectively to three types of internal revenue taxes, namely, income
tax, estate tax, and donor’s tax, pursuant to Sections 56(B), 93 and 104 of the Tax Code.

Hence, the deficiency interest under Section 249 should be applied only whenever there is a deficiency
income tax, a deficiency estate tax, and a deficiency donor’s tax. No deficiency interest under Section
249(8) should be imposed on deficiency VAT because there is no definition of deficiency tax in the Tax
Code pertaining to VAT.

Passive income of holding companies not subject to local business tax

(City of Makati and City Treasurer v Metro Pacific Investments Corporation (MPIC), CTA AC No. 143, July
20, 2016)

A holding company was assessed local business tax on its dividend and interest income and gains from
sale of assets. The company paid the tax and subsequently applied for cash refund. The refund claim was
appealed at the Regional Trial Court (RTC) which ruled in favor of the company. The local government
appealed the decision of the RTC at the CTA. The CTA approved the refund.

The local business tax on holding companies under the Makati Revenue Code (MRC) is imposed under
Section 3A.02(p) which provides that a Holding Company shall be taxed at the rate prescribed either
under subsection (g) or (h), of the gross sales and/ or receipts during the preceding calendar year.

Subsection (h) imposes a rate of 20% of 1% on banks and other financial institutions while Subsection
(g) imposes graduated rates on establishment rendering various services including business management

The RTC ruled and the CTA confirmed that the nature of the activities of the holding company are in the
same nature as the activities enumerated in Subsection (g) specifically business management services. It
cannot be considered as or similar to financial institutions. The courts acknowledged that the MRC is clear
on the definition of gross receipts as the amount or fee for the services rendered. A holding company is
subject to local business tax only on its gross receipts. Nowhere does the provision state that it includes
dividend income, interest income, rental income or gain from the sale of fixed assets.

The CTA likewise noted that this levying of a tax on the income of a holding company is a deliberate
attempt to bypass the prohibition laid down by Section 133(a) that LGUs shall not levy income tax, except
on banks and other financial institutions.