1 February 2005

In this Issue
February 2005
taxbrief
Member of Grant Thornton International
BIR ISSUANCES
Revised VAT exemption thresholds (p 2)
Consolidated regulations for special economic
zones (p 2)
Composition of Committees on Real Property
Valuation (p 3)
Circularizing the Supreme Court decision on
the validity of a waiver (p 4)
Allocation of BIR collection goal for 2005
(p 4)
BIR RULINGS
Branch is a resident of the head office's home
country (p 4)
COURT OF APPEALS DECISIONS
Requirements for a valid waiver (p 5)
Dividends tax cannot be refunded if reversal
of dividend declaration is not valid (p 5)
COURT OF TAX APPEALS DECISIONS
Ordinary and necessary expenses of a
stockbroker (p 5)
Determining arm's length commissions (p 5)
VAT on sale of used motor vehicle by a dealer
in securities (p 6)
Determining arm's length export price (p 6)
SEC CIRCULARS
BSP CIRCULARS
Requirement for BIR-stamped ITR and FS
for securing bank loans (p 7)
Annual financial audit of Banks/NBFIs by
BSP-accredited external auditors (p 7)
2 February 2005
BIR ISSUANCES
Revised VAT exemption thresholds
The threshold amounts for the VAT exemption of certain
transactions have been revised pursuant to the provisions
of the Tax Code. The new thresholds are as follows:
1. Sale of real properties utilized for low-cost housing with
price per unit not exceeding PhP750,000 (previously
PhP375,000)
2. Sale of real properties utilized for socialized housing
with price per unit not exceeding PhP225,000
(previously PhP150,000)
3. Sale by real estate dealers and lessors of house and lot
and other residential dwellings valued at PhP1,500,000
and below (previously PhP1,000,000)
4. Lease of residential units with a monthly rental per unit
not exceeding PhP10,000 (previously PhP8,000)
5. Sellers of goods and services with gross annual sales/
receipts not exceeding PhP750,000 (previously
PhP550,000)
The deadline for the electronic submission of the summary
list of sales/purchases by large taxpayers and those enrolled
under the Electronic Filing and Payment System has also
been extended to the 30th of the month following the close
of the taxable quarter. The deadline was previously set on
the 25th.
(Revenue Regulations No. 1-2005, February 18, 2005)
Consolidated regulations for special economic zones
Revenue Regulations (RR) No. 2-2005 consolidates and
revises the regulations implementing the tax incentive
provisions under the Bases Conversion and Development
Act of 1992, Special Economic Zone Act of 1995,
Zamboanga City Special Economic Zones Act of 1995, and
the Cagayan Special Economic Zone Act of 1995.
The following incentives shall be available to all enterprises
registered with the Philippine Economic Zone Authority
(PEZA) and the Cagayan and Zamboanga ecozones that
are covered by the 5 percent gross income tax regime, and
shall also be available to enterprises registered with the
Subic ecozone:
1. Exemption from internal revenue taxes on
importations of raw materials, capital goods, and
equipment needed for their business operations within
the zone.
2. Exemption from internal revenue taxes on sale of
goods and services such as gross receipts tax, VAT,
percentage taxes, and excise taxes
3. Exemption from franchise, common carrier or VAT
and other percentage taxes on public and service
utilities and enterprises within the zone for services
rendered within the zone.
4. Preferential tax treatment on income earned from
business operation within the zone or from foreign
sources. For telecommunications services, the income
shall be net of the share of the foreign
telecommunications company. In the case of common
carriers by land, air, or water, only the portion of
income and expenses for the transport of cargo and
passengers within the zones shall be covered by the
preferential tax.
5. Purchases from enterprises in the customs territory of
raw materials forming part of finished goods exported
by the zone-registered enterprises shall be considered
effectively zero-rated or exempt for VAT purposes
depending on the incentives availed of by the
enterprise. A separate regulation will be issued to
implement this rule.
6. Zone-registered enterprises may generate income from
sources within the customs territory of up to 30
percent of its total income from all sources. Income
generated from the customs territory shall be subject to
internal revenue laws and regular internal revenue
taxes. In case a Subic ecozone-registered enterprise
generates income from the customs territory in excess
of 30 percent, all of its income shall be subject to the
regular internal revenue taxes and rates imposed on an
enterprise in the customs territory.
3 February 2005
7. Carriers who undertake to transship articles to and
from the zone to a customs-bonded warehouse within
the customs territory shall be bonded with no less than
PhP50,000. The laws and regulations on
transshipments shall govern transshipment of foreign
articles to and from the zone.
8. Articles that are manufactured in the zone and
exported to a foreign country shall be subject to the
laws on importation upon subsequent importation into
customs territory.
Enterprises operating within the zones but not accredited
or registered shall not be entitled to incentives.
All income derived by ecozone service establishment
rendering services within the PEZA ecozones, whether or
not registered with PEZA, shall be subject to internal
revenue taxes under the Tax Code. However, ecozone-
registered service enterprises that export their services or
render their services abroad through the use of
information technology, and whose services are paid for in
foreign currency inwardly remitted through the Bangko
Sentral ng Pilipinas (BSP) shall continue to enjoy the 5%
preferential tax rate on gross income.
All income derived by service establishments within the
Subic, Zamboanga, and Cagayan ecozones shall be
subject to withholding taxes under existing laws. The 5%
gross income tax rate shall be applicable to such service
establishments only if their services rendered within the
zones are paid in foreign currency inwardly remitted
through the BSP.
Gross income earned is defined as gross sales or
revenue derived from registered business activity within
the zone net of sales discounts, sales returns, and
allowances minus cost of sales or direct costs but before
any deductions for administrative, marketing, selling, and
operating expenses or incidental losses during a given
taxable year. For financial enterprises, gross income shall
include interest income, gains from sales, and other
income.
Cost of sales or direct cost shall consist only of costs or
expense items enumerated in RR 2-2005 for the
enterprises listed below. These costs of expense items shall
be computed in accordance with the generally accepted
accounting principles (GAAP).
For Subic, Zamboanga, and Cagayan ecozones:
1. Trading enterprises
2. Manufacturing enterprises
3. Service enterprises
For PEZA ecozones:
1. Ecozone export enterprises, free trade enterprises, and
domestic market enterprises
2. Ecozone developer/operator, facilities, utilities, and
tourism enterprises
RR 2-2005 took effect on March 5, 2005, 15 days after
publication.
(Revenue Regulations No. 2-2005, February 18, 2005)
Composition of Committees on Real Property
Valuation
Revenue Memorandum Circular (RMC) No. 3-2005
circularizes the new composition of the Committees on
Real Property Valuation provided for in Department of
Finance Order No. 35-04.
The Executive Committee on Real Property Valuations
(ECRPTV) shall be composed of the following:
Chairman: BIR Commissioner
Members: BIR Deputy Commissioner,
Operations Group
BIR Assistant Commissioner,
Assessment Service
Executive Director, Bureau of Local
Government Finance
Executive Director, National Tax
Research Center
Two licensed competent appraisers
from a reputable association/
organization of realty appraisers
4 February 2005
Consultants: Commissioner, Housing and Land Use
Regulatory Board Administrator,
National Mapping and Resource
Information Authority
Administrator, Land Registration
Authority
General Manager, National Housing
Authority
Secretariat: BIR Asset Valuation Division
The Executive Committee analyzes and approves the
proposed Schedule of Zonal Values of real properties as
prepared by a sub-technical committee and reviewed by a
technical committee composed of representatives from the
above offices.
Public hearings are conducted by the sub-technical
committees at the level of the Revenue District Offices
(RDOs).
(Revenue Memorandum Circular No. 3-2005,
January 18, 2005)
Circularizing the Supreme Court decision on the Circularizing the Supreme Court decision on the Circularizing the Supreme Court decision on the Circularizing the Supreme Court decision on the Circularizing the Supreme Court decision on the
validity of a waiver validity of a waiver validity of a waiver validity of a waiver validity of a waiver
RMC 5-2005 enjoins revenue officers to publicize the
decision of the Supreme Court (SC) relating to the validity
of a waiver of the statute of limitations, as follows:
1. The waiver must conform strictly with the provisions of
Revenue Memorandum Order (RMO) No. 20-90 in
order to be valid and binding.
a. It must specify a definite date agreed upon by the
Bureau of Internal Revenue (BIR) and the taxpayer
within which the BIR may assess and collect taxes.
b. It must be accepted by the Commissioner of Internal
Revenue or his duly authorized representative. The
date of acceptance must be indicated.
c. The taxpayer must be furnished a copy of the waiver
accepted by the BIR.
2. A waiver, to a certain extent, is a derogation of the
taxpayer's right to security against prolonged and
unscrupulous investigations and must therefore be
carefully and strictly construed.
3. A waiver of the statute of limitations is not a waiver of
the right to invoke the defense of prescription. It is an
agreement between the taxpayer and the BIR that the
period for the issuance of the assessment and the
collection of taxes due is extended to a certain date.
4. A waiver is not a unilateral act by the taxpayer or the
BIR.
(Revenue Memorandum Circular No. 6-2005,
February 14, 2005)
Allocation of BIR collection goal for 2005
RMO 2-2005 outlines the tentative allocation goal of the
BIR for 2005 broken down by revenue region and by
type of tax. The methodology, bases, and assumptions
used in the allocation are also described.
(Revenue Memorandum Order No. 2-2005,
January 18, 2005)
BIR RULINGS
Branch is a resident of the head office's home
country
Under the RP-US and RP-Canada tax treaties, branches
of companies that are residents of the U.S. or Canada shall
be deemed residents of the U.S. or Canada, respectively.
The RP-US tax treaty defines a U.S. resident as a U.S.
corporation. Hence, a Taiwan branch of a U.S. company
that is considered a U.S. corporation shall be covered by
the RP-US tax treaty with respect to income sourced
from the Philippines.
The RP-Canada tax treaty, on the other hand, defines a
resident of Canada to include any person who is liable to
tax in Canada by reason of his domicile, residence, place
of management, or any other criterion of a similar nature.
5 February 2005
A Korean branch of a Canadian company is liable to tax
in Canada and shall therefore be governed by the RP-
Canada tax treaty with respect to its Philippine-source
income.
(BIR Ruling No. DA-ITAD-157-04, December 29, 2004)
COURT OF APPEALS DECISIONS
Requirements for a valid waiver
A written waiver of statute of limitations must specify a
period within which the Commissioner of Internal
Revenue may assess the tax beyond the regular three-year
prescription period. Without a specified period, the
assessment could take forever, to the prejudice of the
taxpayer, a situation that the requirement specifically
intends to avoid. A waiver must not constitute a total
abdication of the statute of limitations but only for a
specified period stated in the waiver.
Likewise, a waiver is defective if it fails to indicate the
name or designation of the alleged authorized
representative of the Commissioner. It cannot be
ascertained whether or not the signatory is an
"authorized representative" of the Commissioner.
(Commissioner of Internal Revenue v. Enron Subic
Power Corp., CA-GR SP No. 82966, December 21,
2004)
Dividends tax cannot be refunded if reversal of
dividend declaration is not valid
If the tax was remitted on a valid declaration of cash
dividends by a domestic corporation, a tax refund may
not be granted if subsequent reversal of the declaration is
deemed unjustified.
The tax on dividends accrues upon the declaration of the
dividends even if the amounts are not yet actually received
by the shareholders. The tax paid on the cash dividend
properly and fairly declared by a solvent corporation that
possesses ample undivided profits and surplus cannot be
refunded if supporting documents cannot prove the
validity of the reversal of the declaration. The reversal
cannot be deemed valid if based only on a resolution
issued by the board or directors ten months after the
declaration on grounds of financial status of the group of
companies to which the company belongs. The company
could have presented books of accounts, balance sheets,
profit and loss statements, and other documents to prove
the absence of unrestricted retained earnings at the time of
declaration of the cash dividends.
(Engtek Philippines, Inc., v. Commissioner of Internal
Revenue, CTA Case No. 6644, January 26, 2005)
COURT OF TAX APPEALS DECISIONS
Ordinary and necessary expenses of a stockbroker
Expenses incurred by a stockbroker to purchase stock
certificates for delivery to its buying clients to cover an
inventory shortfall may be considered ordinary and
necessary business expenses that are deductible in
computing taxable income.
The company's records system was unable to keep track
of the increased level of activity during the stock market
boom. This led to an inventory shortfall. Certificates on
hand were less than the certificates on record. To avoid
possible lawsuit and loss of reputation, the company
purchased certain stocks for delivery to clients to cover
the inventory shortage. The Court of Tax Appeals (CTA)
deemed the submitted documents as adequate to
substantiate the necessity of the expense. The CTA
rejected the BIR's position that the expenses mentioned
above were losses related to the buyback of shares that
are still unrecovered. The BIR disallowed the expense for
failure of the company to substantiate the losses.
(ING Barings Securities Philippines, Inc. v. Commissioner
of Internal Revenue, CTA Case No. 6188 January 14,
2005)
Determining arm's length commissions
Lower commission payment charged by a Philippine
company to its Hong Kong affiliate may be considered an
"arm's length price" if, in exchange, said Hong Kong
affiliate performs certain services for the Philippine
company.
6 February 2005
The Philippine company doing business as a
stockbroker/dealer in securities generally charges 0.005
commission to its foreign clients. In the case of its Hong
Kong affiliate, a lower rate of 0.003 was charged because
all of the foreign transactions of the Philippine company
are coursed through the Hong Kong affiliate to simplify
the procedures.
Arm's length price is the price an unrelated party would
have paid under similar circumstances for the property
involved in a transaction between two or more
businesses owned directly or indirectly by the same
interests. There are many factors that can make
circumstances not similar and that can affect the price of
a property: the quality of the product, terms of sale,
intangible property associated with the sale, timing, level
of the market, and geographic factors. An affiliate
performing other services for the Philippine company
such as marketing, research, and execution of certain
transactions is not under similar circumstances as other
foreign companies not performing similar services.
Hence, a lower commission rate charge to said affiliate
does not necessarily deviate from arm's length price. The
BIR cannot validly impute additional income to the
Philippine company without examining the
circumstances surrounding the disparity of the
commission rate.
(ING Barings Securities Philippines, Inc. v.
Commissioner of Internal Revenue, CTA Case No.
6188 January 14, 2005)
VAT on sale of used motor vehicle by a dealer in
securities
The sale of a used motor vehicle by a company engaged
in stock brokering and in dealing in securities may be
deemed done in the course of trade or business and may
be subject to VAT if the articles of incorporation of said
company also vests incidental powers to acquire,
purchase, and sell personal property of every kind and
description.
The VAT is imposed on any person who, in the course
of trade or business, sells goods or properties. The
phrase "in the course of trade or business" means the
regular conduct or pursuit of a commercial or an
economic activity, including the transactions incidental to
this activity. If an activity is among the functions identified
in the company's articles of incorporation, the activity
shall be considered in the course of trade or business.
(ING Barings Securities Philippines, Inc. v. Commissioner
of Internal Revenue, CTA Case No. 6188 January 14,
2005)
Determining arm's length export price
Local selling price may not be an arm's length price for
export sales. Hence, the BIR cannot automatically assess
the company for additional export sales simply because a
lower price for export sales was charged compared to the
price for domestic sales. The CTA accepted the
justifications presented by the company for a lower
export price, as follows:
1. Domestic and export markets are two different
markets. Domestic price should not be the benchmark
for export price.
2. Export market is competitive and the company claims
that it needs to beat the competition. The company
needs to meet its export quota to retain Board of
Investments (BOI) incentives.
3. Exports are an important source of dollars needed to
fund the companys importations.
4. Export sales maximize productivity levels.
(Avon Products Mfg., Inc. v. Commissioner of Internal
Revenue, CTA Case No. 5908, January 20, 2005)
SEC CIRCULARS SEC CIRCULARS SEC CIRCULARS SEC CIRCULARS SEC CIRCULARS
The Securities and Exchange Commission (SEC) has
approved the adoption of the following Philippine
Standards on Auditing (PSA) and Philippine Auditing
Practice Statements (PAPS) effective for audit of financial
statements ending on or after December 31, 2004.
7 February 2005
PSA/PAPS
Number Title
100 Assurance Engagements
240 (revised) The Auditor's Responsibility to Consider Fraud and Error
in an Audit of Financial Statements
505 External Confirmations
545 Auditing Fair Value Measurements and Disclosures*
600 Using the Work of Another Auditor
1005 The Special Consideration in the Audit of Small Business*
1008 Risk Assessments and Internal Control - CIS Characteristics
and Considerations*
1009 Computer-Assisted Audit Techniques
1010 The Consideration of Environmental Matters in the Audit
of Financial Statements
1012 Auditing Derivative Financial Instruments
1000Ph Audit Evidence - Practical Problems in Audits of
Financial Statements**
315 Understanding the Entity and its Environment and
Assessing the Risks of Material Misstatement
330 The Auditor's Procedures in Response to Assessed Risks
500 (Revised) Audit Evidence
* Effective June 30, 2004
** Effective March 31, 2005
BSP CIRCULARS
Requirement for BIR-stamped ITR and FS for
securing bank loans
In order to ascertain that the borrower, co-maker,
endorser, or guarantor of a loan or credit accommodation
is financially capable of fulfilling his commitments, banks
should require from the applicant a statement of his assets
and liabilities and of his income and expenses together
with the following documents:
1. Latest Income Tax Return (ITR) of the borrower and
his co-maker, duly stamped as received by the BIR
2. A copy of the borrower's latest financial statements
submitted to the BIR, except as otherwise provided by
law
3. A waiver of confidentiality of client information and an
authority for the bank to verify with the BIR the
authenticity of the documents
The consistency of the data in the documents shall also be
checked.
Should the documents be spurious or incorrect, the bank
may terminate any loan or other credit accommodation
granted and shall have the right to demand immediate
repayment or liquidation of the obligation. Moreover,
the bank may seek redress from the court for any harm
done by the borrower's submission of spurious
documents.
Furthermore, the bank shall require that loans and other
credit accommodations be made under the signature of
the principal borrower and, in the case of unsecured
loans and other credit accommodations to an individual
borrower, at least one co-maker, except when the
principal borrower has the financial capacity and a good
track record of paying his obligations.
The new requirements shall cover new loans and other
credit accommodations granted after the effectivity of the
BSP circular, including their renewal, extension, and any
availment and/or re-availment, except consumer loans
that are supported by the required documents at the time
they were granted.
(BSP Circular No. 472, January 26, 2005)
Annual financial audit of banks/NBFIs by BSP-
accredited external auditors
Banks/quasi-banks/NSSLAs/NBFIs shall engage an
external independent auditor acceptable to the BSP to
conduct an annual financial audit not later than 30
calendar days after the close of the calendar year or the
fiscal year. The bank's report to the BSP shall be
accompanied by the following:
1. Certification on the following: (a) start and end dates
of the audit, (b) dates of submission of the financial
audit report and letter of comments (LOC) to the
board of directors/executive officer/country head, and
(c) absence of any direct or indirect financial interest
and other circumstances that may impair the
independence of the external auditor
8 February 2005
Tax Brief is a monthly 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, law and
business regulation require professional counsel.
We welcome your suggestions and feedback so
that the Tax Brief may be 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 of the materials in the Tax Brief.
Lina Figueroa
Senior Manager
Tax Advisory & Compliance
P&A
19th Floor, Tower I
The Enterprise Center
6766 Ayala Avenue
1200 Makati City
T +632 886-5511 local 507
F +632 886-5577
E Lina.P.Figueroa@pna.ph
W www.punongbayan-araullo.com
2. Reconciliation statement between the Audited Financial
Statements and the Consolidated Statement of Condition
(CSOC) and Consolidated Statement of Income and
Expenses (CSIE) submitted to the BSP
3. Other information that may be required
Government-owned or -controlled banks (including their
subsidiaries and affiliates), as well as other financial
institutions under BSP supervision that are under the
concurrent jurisdiction of the Commission on Audit
(COA), shall be exempt from the annual financial audit by
an acceptable external auditor. However, an independent
external auditor acceptable to BSP may still be required
under the following conditions:
a. If warranted by supervisory concerns such as material
weakness or a breach in internal control or risk
management systems
b. If required by circumstances such as loans from
multilateral financial institutions, privatization, or public
listing
(BSP Circular No. 474, February 3, 2005)