BIR Issuances venue Regulation Amendments to the Consolidated VAT Regulations; VAT-exempt transactions RR 15-2015 amends RR 16-2005 or the Consolidated VAT Regulations with respect to VAT-exempt transactions: The Regulations provide that the following transactions shall be exempt from VAT: 1. Transport of passengers or cargo by international carriers doing business in the Philippines, since these activities are subject to the common carrier's tax or the percentage tax on international carriers. Thus, international carriers that are so exempt shall not be allowed to register for VAT purposes. 2. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations. Provided that the exemption from VAT on the importation or local purchase of passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel importation and mandatory vessel retirement program of MARINA. Reyes TacanponG & Co. WHAT'S INSIDI ESI Rem Oana Clarifies the procedure in the processing of Estate Tax returns for agricultural properties covered by the Comprehensive Agrarian Reform Program (CARP) RMC 77-2015 was issued to address the problem of unclaimed land compensation due to unpaid and outstanding estate and other related taxes. The RMC clarifies the procedure, as follows: ‘The BIR shall assess the corresponding estate tax (with penalties and surcharge waived) on the CARP-covered landholding belonging to the deceased landowner's estate. The heirs/ successors-in-interest shall fle the Estate Tax return (BIR Form No. 1801), whether manually or electronically. Upon receipt of the heirs’ undertaking to pay the computed estate tax, the Land Bank of, the Philippines (LBP) shall deduct the same from the landowners’ compensation and remit said taxes immediately to the BIRTacannonc & Co. BIR - ITAD RULINGS = BIR - ITAD Ruling No. 399-15, December 7, 2015 Applicability of the “most favored nation clause” Closure Systems Intemational Inc. (CSI), a tax resident of the US entered into a Technology License Agreement with Closure Systems International (Philippines), Inc. (CSIPI). Under the Agreement, CSII granted CSIPI a non-transferable and non-exclusive right to use the Licensed Technology in the Philippines in connection with the manufacture and sale of plastic closures manufactured by either compression or injection molding. In consideration of the license to use the Licensed Technology, CSIP! agreed to pay CSII an amount equal to 4.0% of CSIPI's Net Sale Price of Licensed Products in each year of the Term of the Agreement. Payments are to be made in US Dollars by telegraphic transfer. Article 13 of the Philippines-US Tax Treaty provides that the tax imposed on royalties earned by a resident of the US from sources within the Philippines shall not exceed the least of: a. 25% of the gross amount of royalties; . 15% of the gross amount of royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments (BO!) and engaged in preferred areas of activities; and c. The lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State {ie., the “most favored nation clause’), The BIR, citing the Supreme Court (SC) case of CIR vs. SC Johnson ruled that there are two conditions for royalties to be subject to the “most favored Nation clause”, as follows: @. The royalties derived by a resident of the United States must be of the same kind as those derived by a resident of the third state/country. b. The mechanism employed by the United States in mitigating the effects of double taxation of foreign-sourced income derived by its residents must be the same with that employed by the third state/country. CSIPI invoked the Philippines-China Tax Treaty in relation to the “most-favored-nation” tax clause of the Philippines-US tax treaty. The BIR held that both the Philippines-US and the Philippines-China Tax Treaties. provide the same/identical definition of “royalties” subject to preferential tax rates. Hence, the first condition is satisfied, (On whether the second condition is satisfied, the BIR compared the respective articles in the Philippines-US tax treaty and the Philippines-China tax treaty with respect to the “Methods for Elimination of Double Taxation’/"Relief from Double Taxation”. The BIR concluded that both the Philippines-US tax treaty and the Philippines-China tax treaty employ the ordinary credit method in mitigating the effects of double taxation. Hence, the second condition is satisfied. The BIR ruled that since all conditions for the most-favored-nation tax treatment of royaties laid down by the Supreme Court in the SC Johnson case are satisfied, royalty fees to be paid by CSIP! to CSIl for the use of the licenses granted, is subject to 10 percent income tax based on the gross amount of the royalty fees in accordance with the Philippines-China tax treaty. BIR - ITAD Ruling No. 340-15, December 7, 2015 Treaty relief on royalties under the Philippines-Japan tax treaty Nagano Seiko Co., Ltd. (Nagano-Japan), a tax resident of Japan, entered into a Royalty Agreement with Cavite Nagano Seiko, Inc. (Cavite Nagano-Philippines). Under the Agreement, Nagano-Japan agreed to furnish Cavite Nagano-Reyes Tacanpone & Co. BIR - ITAD Rulings (cont. from p.2) ——— Philippines an indivisible, non-transferable and non-exclusive right and license to use certain intellectual property and know-how. Cavite Nagano-Philippines will pay royalty fees to Nagano-Japan at the rate of 0.3% of the entire sales amount of Cavite Nagano-Philippines. The representative office of Nagano-Japan in the Philippines (ie, Nagano Seiko Co, Lid-Representative Office or ~~ "Nagano Representative-Philippines") did not participate in the Royalty Agreement nor in the realization of the royally fees based on the notarized Swom Statement issued by Nagano Representative- Philippines. Article 12 of the Philippines-Japan tax treaty provides that the tax that can be imposed on royalties earned by a resident of Japan from sources within the Philippines shall not exceed: a, 15% of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b. 10% of the gross amount of the royalties in all other cases Since the royalties paid by Cavite Nagano-Philippines to Nagano Japan is not for the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting but for use of trademarks or trade names owned by Nagano-Japan, such royalty payments are subject to the preferential rate of 10% of the gross amount of royalties pursuant to Article 12 of the Philippines-Japan tax treaty. BIR-ITAD Ruling No. 335-15, December 7, 2015 Services rendered by a foreign corporation for a Philippine domestic corporation outside of the Philippines is not subject to tax KAWA Engineering LTD. (KAWA), a tax resident of Canada, entered into a Service Agreement with CalEnergy International Services, Inc. (CalEnergy).. Under the Agreement, KAWA agreed to provide services in identifying potential projects for investment in South East Asia, Asia and elsewhere. Specifically, KAWA performed due diligence and consulting services for the review of a potential investment in a hydroelectric power project located in Myanmar, The services were rendered by personnel of KAWA in Canada and Switzerland and there were no actual services performed in the Philippines based. ‘on the certification issued by the Vice President of CalEnergy. Under the Agreement, CalEnergy obligated itself to pay KAWA service fees based on hourly rates, as well as other fees and expenses Article 7 (1) of the Philippines-Canada tax treaty provides that the profits of an enterprise of a Contracting State (ie., Canada) shall be taxable only in that State unless the enterprise carries on business in the other Contracting State (.6., Philippines) through a permanent establishment situated therein. If the enterprise carries on or has carried on business, as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of the profit that is attributable to: a. that permanent establishment; or b. sale of goods or merchandise of the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected, through that permanent establishment The BIR ruled that since KAWA is not engaged in trade or business in the Philippines to which an office or a branch is necessary, then KAWA is considered to have no permanent establishment in the Philippines. This being the case, the consultancy fees paid by CalEnergy to KAWA shall be exempt from income tax pursuant to the Philippines-Canada tax treaty.@rv ES TacanponG & Co. Bureau of Local Government Finance (BLGF) Opinion BLGF Opinion dated October 19, 2015 Business tax exemption of newly started businesses This Opinion clarifies that since the local business tax (LBT) is computed based on gross sales or receipts for the preceding calendar year, newly started businesses with no gross sales or receipts on its initial year of operation cannot be made liable for the LBT. However, the Bureau mentioned that if the local government unit (LGU) has a specific ordinance imposing a tax on newly created businesses, then said ordinance shall prevail. Supreme Court (SC) Decisions SS PILIPINAS TOTAL GAS, INC. vs. COMMISSIONER OF INTERNAL REVENUE EB-GR No. 207112, December 8, 2015 Running of the 120-day period in a claim for refund of unutilized input VAT On May 15, 2008, Pilipinas Total Gas, Inc. (Total Gas) filed an administrative claim for refund of unutiized input VAT for the first two quarters of taxable year 2007. On August 28, 2008, Total Gas submitted additional supporting documents to the BIR. Due to the BIR's inaction on the claim, Total Gas elevated the matter to the Court of Tax Appeals (CTA) on January 23, 2009. In its January 13, 2011 Decision, the CTA Division dismissed the petition for being prematurely filed. The CTA Division ruled that Total Gas failed to complete the necessary documents to substantiate a claim for refund of unutiized input VAT on purchases of goods and services enumerated under RMO No. 53-1998. Consequently, the 120-day Period allowed by the rules for the BIR to act on the claim under Section 112 (C) of the National Internal Revenue Code of 1997 (NIRC), had not even started to run Total Gas appealed to the CTA En Banc but the appeal was denied. The applicable rule Section 112 (C) of the NIRC provides that the ‘Commissioner of Internal Revenue (CIR) shall grant a refund or issue the tax credit certificate within 120 days from the date of submission of complete documents in support of the application for refund, From the above, it is apparent that the CIR has 120 days from the date of submission of complete documents to decide a claim for tax credit or refund of creditable input taxes. The taxpayer may, within 30 days from receipt of the denial of the claim or after the expiration of the 120-day period, which is considered a "denial due to inaction," appeal the decision or unacted claim to the CTA. The SC’s decision The SC ruled that the judicial claim in this case was not prematurely fled, The SC ruled that the alleged failure of Total Gas to submit the complete documents at the administrative (continued on. p.5)Reyes Tacanpone & Co. SC Decisions (cont. from p.4) SS level did not render its petition for review with the CTA dismissible for lack of jurisdiction. First, the 120-day period had commenced to run and the 120+30 day period was, in fact, complied with. Also, it is the taxpayer who determines when complete documents have been submitted for the purpose of the running of the 120-day period. The SC noted that the CIR sent no written notice informing Total Gas that the documents were incomplete or required it to submit additional documents. Neither was there any decision made denying the administrative claim of Total Gas on the ground that it had failed to submit all the required documents. It was precisely the inaction of the BIR which prompted Total Gas to file the judicial claim, Thus, by failing to inform Total Gas of the need to ‘submit any additional document, the BIR cannot now argue that the judicial claim should be dismissed because the taxpayer failed to submit complete documents. COMMISSIONER OF INTERNAL REVENUE (CIR) vs. NEXT MOBILE, INC. G.R. No. 212825, December 7, 2015 Application of the principle of estoppel with respect to invalid waivers The general rule is that a waiver that does not comply with the requirements for a valid waiver under RMO. No. 20-90 and RDAO-01-05 is invalid and ineffective and does not extend the prescriptive period to assess taxes. However, due to peculiar circumstances present in this case (which are discussed below) the Supreme Court ruled that the waivers in issue are valid. The Coutt’s decision was based on the following findings: « First, the parties in this case are in pari deiicto or “in ‘equal fault". In pari delicto connotes that the two parties to a controversy are equally culpable or guilty and they shall have no action against each other. The SC ruled that to uphold the validity of @6e0 of the waivers in this case would be consistent with the principle that taxes are the lifeblood of the government and that their prompt and certain availabilty is an imperious need. As between the parties, it would be more equitable if the BIR's lapses were allowed to pass and consequently uphold the waivers in order to support this principle and public policy. * Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Parties who do not come to court with clean hands cannot be allowed to benefit from their own wrongdoing. Following the foregoing principles, the taxpayer should not be allowed to benefit from the flaws in its own waivers and successfully insist on their invalidity in order to evade its responsibility 1o pay taxes. © Third, the taxpayer is estopped from questioning the validity of its waivers. While itis true that the Court has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is justified in this case. The taxpayer executed five (6) waivers and delivered them to the BIR, one after the other. The taxpayer allowed the BIR to rely on them and did not raise any objection against their validity (Cont. on 2.6)Reyes Tacanpone & Co. SC Decisions (cont. from p.5) SS © Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules. The BIR's negligence in the performance of its duties was so gross that it amounted to malice and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the waivers. Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities.