DOF OPINIONS
ONLY DOMESTIC DENATURED ALCOHOL IS EXEMPT FROM EXCISE TAX
DEPARTMENT OF FINANCE OPINION NO. 005.2024, JULY 16, 2024
Mr. D is requesting a review of the earlier denied ruling of the Bureau of Internal Revenue (BIR) that ruled that the importation of Ethyl Alcohol (Denatured Anhydrous Ethyl Alcohol) and SE-5 (Toluene 95%) pursuant to Section 141 in relation to Section 134 of the National Internal Revenue Code (NIRC) is subject to excise tax. In the earlier ruling, the BIR ruled that Section 134 of the NIRC only exempts domestic alcohol from excise tax. Likewise, importation should be taxed under Section 148 or Section 141 depending on whether it shall be used for motive power or subsequently rendered fit for oral intake through fermentation, dilution, purification, mixture, or any other similar process. However, Mr. D is of the position that imported denature alcohol should be treated similarly to domestic denatured alcohol following a ruling issued in the past. Likewise, Republic Act (R.A.) No. 10351 or the Sin Tax Reform Act of 2012 did not amend Section 134 of the NIRC and is still considered a good law. Further, the discriminatory distinction between imported and local distilled spirits has been resolved by the World Trade Organization (WTO) through the issuance of a ruling. In reply, the DOF agreed with the BIR forwarding that denatured alcohol, whether domestic or imported, falls within the definition of spirits as provided under Section 141 of the NIRC. In turn, Section 134 of the NIRC categorically pertains to domestic alcohol and nothing in the said provision mentioned about imported alcohol. Applying the principle that tax exemption must be couched in clear language and are strictly construed, exemption from excise tax under Section 134 of the NIRC, as amended, is strictly limited to “Domestic Denatured Alcohol.” Consequently, the importation of Ethyl Alcohol (Denatured Anhydrous Ethyl Alcohol) and SE-5 (Toluene 95%) does not qualify for exemption from excise tax.
DOF HAS NO JURISDICTION ON DISPUTED ASSESSMENT
DEPARTMENT OF FINANCE OPINION NO. 004.2024, JULY 8, 2024
Mr. A is requesting the Department of Finance (DOF) to review the earlier denied decision of the Commissioner of Internal Revenue (CIR) on the excise tax refund. In reply, the DOF dismissed the appeal on the ground of lack of jurisdiction over the subject matter. Citing Section 4 of the 1997 Tax Code, the first (1st) paragraph states that the Secretary of Finance has the authority to review the CIR's interpretation of the NIRC and other tax laws, while the second (2nd) paragraph clearly provides that refund of internal revenue taxes, fees, or other charges, among others, are subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA). Furthermore, Section 7 of Republic Act No. 9282 provides in part that the CTA shall exercise exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the Tax Code or other laws administered by the BIR. The DOF lacks the authority to consider the appeal because it concerns a final decision made by the CIR on a disputed assessment, consequently, it is unable to decide regarding the case's merits, as the CTA holds exclusive appellate jurisdiction over it.
DOF REVERSES THE BIR ON THE VAT IMPOSITION ON SSS PROPOSED AUCTION OF PROMISSORY NOTE
DEPARTMENT OF FINANCE OPINION NO. 002.2024, MAY 14, 2024
The Social Security System (SSS) is requesting a review of the earlier BIR ruling that the proposed auction of a Promissory Note (PN) issued to the Social Security System (SSS) is subject to Value-Added Tax (VAT). In reply, the DOJ cited Section 16 of the Republic Act (R.A) No. 11199, or the “Social Security Act of 2018, which repealed R.A. No. 8282 (old Social Security Law, as amended), which restored the exemption of SSS from VAT. Specifically, it provides that SSS and all its assets and properties, all contributions collected and all accruals thereto and income or investment earnings therefrom as well as all supplies, equipment, papers or documents shall be exempt from any tax, assessment, fee, charges or customs or import duty. In the earlier BIR ruling, the Bureau opined that the proposed auction of the PN is subject to VAT due to the explicit revocation of the VAT exemption of the SSS in R.A. No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law in reference to its repealing clause (i.e., Section 86). SSS is a government-owned and controlled corporation created by R.A. 1161 which was subsequently amended by R.A. No. 8282 and R.A. No. 11199. Both R.A. No. 1161 and R.A. No 8282 contains provisions exempting SSS from all kinds of taxes, fees, and charges. The VAT exemption of SSS was however, explicitly removed by the TRAIN law which took effect on 01 January 2018. Then more recently, its VAT exemption was restored with the enactment of R.A. No. 11199 which took effect on 05 March 2019. The DOF notes that Section 16 of R.A. No. 11199 is an exact restatement of Section 16 of R.A. No. 8282. Thus, the enactment of R.A. No. 11199, specifically the inclusion of Section 16 thereof. This demonstrates the clear legislative intent to restore the VAT exemption of SSS. Section 33 of R.A. No. 11199 is explicit that “Republic Act No. 1161, Republic Act No. 8282, and all other laws, proclamations, executive orders and regulations and parts thereof” inconsistent with R.A. No. 11199 are repealed, modified, or amended accordingly. In view of the above statement, the DOF resolved to REVERSE BIR Ruling No. M-046-2024 and held that the proposed auction of the PN issued to the SSS is not subject to VAT.
DOF HAS NO JURISDICTION ON DISPUTED ASSESSMENT
DEPARTMENT OF FINANCE OPINION NO. 001.2024, MAY 2, 2024
B Village Homeowners Association (“B” Homeowners) is requesting the Department of Finance to reverse and set aside the Decision of the Commissioner of Internal Revenue (CIR) and to recall the Warrant of Distraint and/or Levy (WDL) and Garnishment (WOG) issued to them. In reply, the DOF dismissed the request for lack of merit and jurisdiction over the subject matter. Citing Section 4 of the 1997 Tax Code, as amended, on the power of the Commissioner to interpret tax laws and to decide tax cases, the first (1st) paragraph of the law gives authority to the Secretary of Finance the power to review the CIR’s interpretation of the Tax Code and other tax laws, while the second (2nd) paragraph clearly provides that the disputed assessments, among others, are subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA). Since the subject Appeal involves a final decision of the CIR on a disputed assessment, the DOF lacks jurisdiction to take cognizance thereof and thus, cannot rule on the merits of the case as the same falls under the exclusive appellate jurisdiction of the CTA. Under Republic Act (R.A.) No. 9282, which expands the jurisdiction of the CTA, the CTA shall exercise exclusive appellate jurisdiction to review, on appeal, decisions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the Tax Code or other laws administered by the BIR. The reliance of B Homeowners on the DOF ruling in favor of the Dasmarinas Village Association Inc. (DVAI) was misplaced. The DOF took cognizance of DVAI’s appeal (BIR Ruling No. OT-206-2021) as it was within the power of review of the DOF under Section 4 of the Tax Code. Such authority is limited to the interpretation of the provisions of the Tax Code and other tax laws and does not extend to decisions of the CIR rendered in assessment disputes as in this case.
TOTAL ADMINISTRATIVE DISABILITY (TAD) PENSION BENEFITS OF THE SURVIVING SPOUSE PURSUANT TO THE “AFP TAX EXEMPTION FOR PAY & ALLOWANCES ACT OF 2001” ARE CONSIDERED EXEMPT FROM INCOME TAX BUT NOT TO ESTATE TAX
DEPARTMENT OF FINANCE OPINION NO. 002.2023.A, SEPTEMBER 21, 2023
Mr. A is requesting a review of the BIR Ruling subjecting the Total Administrative Disability (TAD) Pension Benefits received by a surviving spouse of a veteran/member of the Armed Forces of the Philippines (AFS), to estate tax. He argued that under Section 4 of the Republic Act (R.A.) No. 9040, otherwise known as “The AFP Tax Exemption for Pay and Allowances Act of 2001,” the TAD Pension Benefits remained exempt even from estate tax due to him as the sole heir of the deceased surviving spouse. In reply, the DOF agrees with the BIR that the release of TAD Pension Benefits to the surviving spouse, which partake the nature of an income, is expressly exempt by law. However, the case is different in terms of estate tax since what is being subject to tax is not the right of the person to receive such income, but the right of the person to transmit the property to their respective heirs at the time of death. The BIR’s position is more in accord with legislative intent to subject the right to transfer properties to heirs to tax in accordance with existing tax laws and finds no reason to reverse and set aside the earlier BIR Ruling.
THE PRICE OR VALUE OF THE ITEMS DOES NOT DICTATE WHETHER CERTAIN GOODS ARE NON-ESSENTIAL OR SEMI-ESSENTIAL, IT IS THE FUNCTION OF THE OBJECT THAT PRINCIPALLY DETERMINES IT
DEPARTMENT OF FINANCE OPINION NO. 012.2022.A, AUGUST 7, 2023
AAA Co. is requesting a review of the BIR’s ruling which ruled that the Rolex wristwatches are subject to excise tax. AAA Co. argued that the phrase “goods made of, ornamented, mounted or fitted with, precious metals or imitations thereof or ivory…” should not be considered as a separate taxable item apart from the matter that precedes it. Therefore, the said phrase is a mere extension of a phrase “All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones and imitations thereof.” Further, on the ground that there is doubt as to whether the provisions of Section 150 (a) of the 1997 Tax Code, as amended, apply to the same, the excise duty of 20% may not be imposed on the wristwatches they import. In reply, the Department of Finance (DOF) disagreed with the Commissioner’s ruling, stating that subparagraph (a) had in fact covered non-essential goods such as jewelry, automobiles, toilet preparations, and others. On the other hand, until the imposition of a percentage duty on watches and clocks was abolished by Presidential Decree (P.D.) No. 1994 in 1985, watches and clocks were classified and taxed separately from other non-essential articles or goods in earlier legislation. Furthermore, in Executive Order (E.O.) No. 36, the inclusion of wristwatches and clocks in the expanded coverage of non-essential goods subject to Percentage Tax was not stated. This is the same when Section 150 of E.O. No. 273 was carried forward as Section 150 of the 1997 Tax Code, as amended, for 20% excise tax imposition, whereas the inclusion of wristwatches and clocks was not enumerated. The DOF believes that it is the function of the object that principally determines whether it is non-essential or semi-essential and the price or value of the items do not necessarily dictate whether certain goods are non-essential or semi-essential. In this regard, the DOF reversed the BIR in subjecting wristwatches made of precious metals to a 20% excise tax.
TO AVAIL OF INCOME TAX EXEMPTION, A CORPORATION MUST BE NON-STOCK, NON-PROFIT CHARITABLE INSTITUTION ORGANIZED & OPERATED EXCLUSIVELY FOR CHARITABLE PURPOSES
DEPARTMENT OF FINANCE OPINION NO. 001.2023, JANUARY 10, 2023
R Charity (“R” Charity) is requesting a review of the earlier denied ruling of the Bureau of Internal Revenue (BIR) treating it as an ordinary corporation subject to Regular Corporate Income Tax (RCIT). R Charity’s submitted Amended Articles of Incorporation show that it is organized as a non-stock, non-profit association duly organized and existing under the laws of the Republic of the Philippines. Also, R Charity requesting from the BIR a confirmatory ruling of its tax-exempt status under Section 30(E) of the National Internal Revenue Code (NIRC), as amended. Earlier, the BIR denied R Charity’s claim for exemption premised on the findings that R Charity has distributed parts of its equity (including the net income) specifically on the following (a) by consistently using parts of its income in funding profit-making activities, like tournaments and concerts; and (b) by donating to other institutions engaged in activities not similar to the foundation’s purpose, organizing and financing tournaments, concerts, and activities of other private entities. On appeal, R Charity argued that its funds are used only for the furtherance of its charitable purposes, with its expenses consisting mainly of grants and donations to schools and communities, and that none of its funds are given to any private individual or entity for private purposes. In reply, there is no denying that R Charity is a non-stock, non-profit charitable institution organized and operated exclusively for charitable purposes. Its organizational documents reveal that R Charity is duly incorporated as a non-stock corporation primarily established for charitable, educational, and scientific purposes, making contributions and grants to entities organized and operated exclusively for charitable, scientific, or educational purposes. Nevertheless, even if R Charity may qualify as a non-stock, non-profit corporation, Section 30 imposes taxes on the income from any property of exempt organizations, as well as that arising from any activity it conducts for profit.
DOF REVERSES THE EARLIER BIR RULING ON CWT IMPOSITION ON THE NET DISTRIBUTIVE SHARE OF THE CO-VENTURERS IN A TAX-EXEMPT JV
DEPARTMENT OF FINANCE OPINION NO. 018.2022, OCTOBER 17, 2022
TC-DM Joint Venture (TC-DM JV) is requesting a review of BIR’s Ruling, which ordained that the respective net income of the co-venturers derived from the Joint Venture (JV) project is subject to the Creditable Withholding Tax (CWT). It argued that the BIR’s theory that distributive share of the co-venturers is subject to CWT is misplaced for the following reasons: (a) there is no basis for the imposition of the Expanded Withholding Tax (EWT) on the distribution of the net distributable shares of the co-venturers; and (b) the Department of Transportation (DOTr) shall assume any EWT, if any, on the distribution of the net income of TC, a Japanese Corporation co-venturer. In ruling, the DOF agreed that TC-DM JV is a valid JV or consortium fully compliant with the requirements under Revenue Regulations (RR) No. 10-2012, hence, not taxable as a corporation under Section 22 of the 1997 Tax Code, as amended. However, the Bureau made a reversible error when it further declared in the earlier BIR Ruling that the distributive share of the co-venturers in a tax-exempt JV is subject to CWT. As emphasized, the 1997 Tax Code, as amended, does not have an explicit provision imposing CWT on the net income distributed to each co-venturer in a non-taxable JV. Moreover, RR No. 2-98, as amended by RR No. 11-2018, provides a list of income payments subject to CWT and the rates prescribed thereon, which appears to contain an exclusive enumeration of transactions that are subject to withholding tax scheme.
ORGANIZATION AS A MUTUAL BENEFIT ASSOCIATION DOES NOT AUTOMATICALLY ENTITLE AN ENTITY TO INCOME TAX EXEMPTION
MANAGEMENT OF FUNDS ASSOCIATED WITH SAVINGS OR INVESTMENT PROGRAMS INCLUDES A DECLARATION OF DIVIDENDS TO THE MEMBERS
DEPARTMENT OF FINANCE OPINION NO. 017.2022, OCTOBER 17, 2022
K Co., a fraternal organization, is requesting a review of the BIR Ruling, which denied its request for tax exemption as a non-stock, non-profit corporation, or association under Section 30(C) of the 1997 Tax Code, as amended. In ruling, K Co.’s organization as a mutual benefit association and its concurrent license from the Insurance Commission does not automatically entitle the same to income tax exemption. K Co. must still comply with the requirements and the existing rules and regulations for its income to be exempt from tax, particularly for it to operate as a non-stock, non-profit association, assisting its members “through the provision of benefits through an established system of benefits payments to its members and their dependents.” As such, K Co.’s receipt and management of funds associated with savings or investment programs is not a violation of non-inurement provision. Moreover, mutual benefit associations are legally allowed to declare dividends from their surplus, specifically to give out additional benefits and the same shall not be construed as dividends for stock corporations. Verily, the mutual benefit association could remain to be a non-stock and non-profit entity, provided that it shall manage funds associated with savings and investment programs for the exclusive benefit of its members or their dependents
GOODWILL IS NECESSARILY ATTACHED TO THE TRADE-RELATED PROPERTY
TAXES IMPOSED ON THE SALE OF BUSINESS AS THE MAIN TRANSACTION IS ALSO IMPOSED ON THE TRANSFER OF THE ATTACHED GOODWILL
DEPARTMENT OF FINANCE OPINION NO. 014.2022, AUGUST 12, 2022
T Co. is requesting a review of BIR’s earlier ruling on the imposition of Value-Added Tax (VAT) on the amount representing the transfer of goodwill in the aggregate sale price on the transfer of trade-related properties. In reply, trade-related properties are defined as individual properties such as fuel stations, where these assets also include business components made up of intangible assets, including transferrable goodwill. T Co. claimed that its transfer of goodwill is a transfer of a capital asset not subject to VAT, citing cases where goodwill was properly classified as a capital asset subject to Capital Gains Tax (CGT) since the sale of the main business, was considered a sale of a capital asset subject to CGT, and the same was applied to the attached transfer of goodwill. However, T Co. contends that the transfer of goodwill is a separate transaction from the sale of service gas stations, to which it agreed that such sale is subject to VAT. In ruling, while goodwill was recognized and valued, the same cannot be sold or purchased independently, which implies that goodwill necessarily attaches to trade-related property. Consequently, whatever tax was imposed on the sale of the business as the main transaction, is also imposed on the transfer of the attached goodwill valued by the seller to be paid by the buyer. Hence, the DOF agreed that the assignment of goodwill, which was included in the aggregate sales price, is also subject to VAT as the main transaction of the sale of service gas stations is subjected to VAT.
MEMBERSHIP, ASSOCIATION DUES & OTHER FEES COLLECTED BY HOMEOWNERS’ ASSOCIATIONS INTENDED FOR BASIC SERVICES OF THE ASSOCIATION ARE EXEMPT FROM INCOME TAX & VAT/PERCENTAGE TAX
DEPARTMENT OF FINANCE OPINION NO. 013.2022, JULY 20, 2022
D Village Association Inc (D Association), a non-stock nonprofit corporation registered with the Housing and Land Use Regulatory Board (HLURB), is requesting a review of the BIR’s earlier ruling denying its request for a confirmatory ruling of tax exemption and subjecting to applicable internal revenue taxes its income from association or membership dues, rentals of facilities, trade business, and other activities. D Association believes that the association dues are not income but are instead capital, and not derived from real or personal property or activity conducted for profit. Likewise, association dues are merely held in trust, solely used for administrative expenses. Further, these are exempt from Value-Added Tax (VAT)/Percentage Tax under Section 18 of the Republic Act (R.A.) No. 9904, otherwise known as “Magna Carta for Homeowners and Homeowners’ Associations” (Homeowners’ Law) and the 1997 Tax Code, as amended by R.A. No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act. In rendering the opinion, the DOF reversed the BIR’s earlier ruling holding that D Association met the conditions for tax exemption of Homeowners’ Law, as clarified in Revenue Memorandum Circular (RMC) No. 9-2013, specifically the compliance with the submission of the Certification of Local Government Unit (LGU) attesting that it lacks resources to provide basic services being rendered by D Association. Likewise, financial documents submitted showed that rental income and dues collected were used for providing basic community services needed by the members, including the maintenance of the facilities of the village. Based on the foregoing, the DOF REVERSED the BIR’s earlier ruling.
WRISTWATCHES MADE OF PRECIOUS METALS ARE NOT SUBJECT TO 20% EXCISE TAXES
DEPARTMENT OF FINANCE OPINION NO. 012.2022, JUNE 29, 2022
R Co. is requesting the review of a BIR Ruling, which ruled that Rolex wristwatches are subject to excise tax. R Co. premised that the 20% excise tax may not be imposed on the wristwatches they imported on the basis that there appears a doubt on whether Section 150(a) of the 1997 Tax Code, as amended, covers the same. In ruling, the DOF ruled that wristwatches and clocks are not considered non-essential goods under Section 150(a) of the same code. A perusal of how the Tax Code defined non-essential goods was by providing an enumeration of goods deemed falling within its category or classification. It is clear that when Section 163 of Executive Order No. 273 was carried forward as Section 150 of the Tax Code for purposes of imposing excise tax at 20%, the enumeration therein did not contemplate the inclusion of wristwatches and clocks. Moreover, the mere fact that the tax on semi-essential goods such as watches was repealed does not automatically mean that those goods classified therein would change the characterization from semi-essential to non-essential. DOF believes that it is the function of the object that principally determines whether it is non-essential or semi-essential. A watch is a semi-essential device that allows the wearer to keep track of time. Jewelry, on the other hand, is solely for personal adornment and, thus, is classified as non-essential. Hence, the request for review was GRANTED.
THE GIVING OF REASONABLE PER DIEMS IS NOT AUTOMATICALLY AN INUREMENT
REVERSAL OF DENIED RULING ON INUREMENT PROHIBITION OF A BUSINESS LEAGUE
DEPARTMENT OF FINANCE OPINION NO. 011.2022, JUNE 29, 2022
C Co. is requesting a review of the earlier BIR Ruling denying C Co.’s application for issuance of a Certificate of Tax Exemption under Section 30(F) of the 1997 Tax Code, as amended. In ruling, Section 30(F) of the 1997 Tax Code, as amended, provides that a business league, chamber of commerce, or board of trade shall have no part of its net income inure to the benefit of any private individuals, to enjoy tax exemption. A perusal of records revealed that the Amended Articles of Incorporation (AOI) of C Co. provides that its Trustees do not receive compensation for the discharge of their duties but only reasonable per diems. Nevertheless, giving reasonable per diems is not automatically an inurement in violation of the prohibition provided for by law. The DOF opines that the exigencies of the operations of non-profit organizations also require them to incur reasonable expenses. However, such per diem to be granted must be a legitimate expense arising from the performance of duties that will lead to the Association achieving its purposes. Here, the DOF disagreed with the decision of the BIR that the provision of reasonable per diems in the AOI of C Co. is an outright violation of the “inurement” prohibition.
UNRESTRICTED RETAINED EARNINGS TRANSFERRED TO THE SURVIVING ENTITY, AS A RESULT OF A TAX-FREE MERGER, ARE EXEMPT FROM FINAL WITHHOLDING TAX ON DIVIDENDS
DEPARTMENT OF FINANCE OPINION NO. 009.2022, MAY 16, 2022
T Co. is requesting a review of the Bureau of Internal Revenue (BIR)'s earlier ruling that the statutory merger between TCI, as the absorbed corporation, and TMBC, as the surviving corporation, is subject to the final withholding tax on dividends constructively received by the shareholders to the extent of unrestricted earnings. In reply, the DOF opined that all the assets and liabilities of the absorbed corporation are transferred solely in exchange for shares of stock to the surviving corporation. Consequently, the transfer, pursuant to the statutory merger, necessarily includes all the accumulated earnings outstanding in the books of the absorbed corporation at the time of the merger. Hence, the retained earnings of TCI are considered in determining the number of shares to be issued by TMBC. Likewise, a tax-free merger merely defers the recognition of gain or loss such that the shareholders of the absorbed corporation keep the capital gains or losses on the transfer as unrealized upon receipt of the new shares from the surviving corporation. Only upon subsequent transfer of subject shares shall income tax be imposed on capital gains realized, if any. Therefore, the BIR made a reversible error when it declared that the unrestricted retained earnings of TCI were subject to final withholding tax on dividends.
PCSO RECEIPT OF PAYMENT FOR THE STL TICKETS PRICE IS NOT A SALE OF GOODS OR SERVICES SUBJECT TO VAT
DEPARTMENT OF FINANCE OPINION NO. 007.2022, MAY 11, 2022
The Philippine Charity Sweepstakes Office (PCSO) is requesting a review of the Bureau of Internal Revenue (BIR)'s earlier ruling, which ruled that the sale of Small Town Lottery (STL) tickets does not pertain to the conduct of horse races nor the sale of horse race sweepstakes, which are exempted from all taxes under Section 4 of Republic Act No. 1169, and is, thus, subject to the Value-Added Tax (VAT). In reply, STL includes activities such as the collection of bets, the issuance of tickets, the conduct and holding of draws, payments to winners and remittances, and other related activities. Receipt of payments for the price of the STL tickets by PCSO is neither a sale of goods nor a rendition of services under Section 105 of the 1997 Tax Code, as amended. Likewise, the STL ticket itself is not a good capable of pecuniary estimation because it does not have an innate value per se under Section 106 of the 1997 Tax Code, as amended. A bettor does not purchase a ticket because he/she desires to receive a PCSO ticket, but because he/she desires to place a bet in the lottery, and the ticket merely represents or otherwise evidences the bettor’s stake in the lottery. Further, when a bettor obtains an STL ticket, the PCSO does not perform a service in such a way that it calls for the exercise or use of the physical or mental faculties in exchange for a fee, remuneration, or consideration. The price paid by the bettor represents his bet in the lottery. The bettor merely receives, at most, an expectation or a potential claim to the prize. Thus, the very nature of the lottery, lottery tickets, and receipt of payments for the price of such lottery tickets is not a sale of goods or services that are subject to VAT.
TRANSFER OF SHARES AS A RESULT OF BONAFIDE CORPORATE RESTRUCTURING IS NOT SUBJECT TO DONOR'S TAX
DEPARTMENT OF FINANCE OPINION NO. 006.2022, APRIL 21, 2022
M Co., a foreign company, is seeking the review of the earlier BIR International Tax Affairs Division (ITAD) Ruling, which ruled that the transfer made by M Co. of its shares in MTSC to MHPS is subject to Donor’s Tax. In ruling, while the Donor’s Tax is imposed on the difference when the selling price of the shares is lower than the fair market value of the shares exchanged under Section 100 of the 1997 Tax Code, as amended, it should be borne in mind that the application of this provision is obtaining only in a situation where a tax is sought to be avoided by the parties to a sale. Here, as ruled by the BIR, the capital gain derived by M Co. is exempt from income tax under Article 13 of the RP-Japan Tax Treaty. In fine, M Co. could not have intended to avoid the income tax due on the transfer as any gain derived from the transfer is covered by the exemption. Furthermore, the transfer made by M Co. of shares it owned in 31 subsidiaries and affiliates worldwide for a 65% ownership in MHPS was made in the ordinary course of business under a bona fide business arrangement between two companies, therefore, not subject to Donor’s Tax. Hence, the Request for Review was GRANTED.
TAX ASSUMPTION IS DIFFERENT FROM TAX EXEMPTION
DEPARTMENT OF FINANCE OPINION NO. 004.2022, APRIL 4, 2022
GIZ is requesting the review of a BIR Ruling, which denied for lack of basis the request of GIZ for exemption from Value-Added Tax (VAT) and ad valorem on its local purchases of motor vehicles. GIZ alleged that the purchase by GIZ of motor vehicles for use in the implementation of the Philippine and German Government Projects are exempt from VAT. In reply, the Exchange of Notes (E/Ns) of the Projects provide for a tax assumption mechanism for the purchases of GIZ. The Philippine Government, through its implementing agencies, at the request of GIZ, commits to assume VAT or similar indirect taxes imposed by the Republic of the Philippines solely on goods and services procured in connection with the conclusion and fulfillment of the implementation and financing agreements. As a necessary consequence, GIZ is not exempt from VAT in its purchases of vehicles for the projects, as the liability to pay still exists. However, pursuant to the tax assumption clause in the relevant E/Ns, the Philippine Government shall shoulder the burden of such tax liability. The clear and unmistakable language of the E/Ns shows that the party’s intention was a tax assumption instead of an exemption. Thus, the BIR acted prudently when it ruled that the purchase by GIZ of the motor vehicles was not exempt from VAT.
WHEN ONLY COPYRIGHT RIGHTS ARE TRANSFERRED, PAYMENTS MADE IN CONSIDERATION THEREFORE ARE ROYALTIES
WHEN COPYRIGHT OWNERSHIP IS TRANSFERRED, PAYMENTS MADE IN CONSIDERATION THEREOF ARE BUSINESS INCOME
DEPARTMENT OF FINANCE OPINION NO. 001.2022, JANUARY 25, 2022
BPI is requesting the review of a BIR Ruling, which ruled that the license fees paid by BPI to W Co., a foreign company, are considered royalties subject to an income tax rate of 25% pursuant to the Philippines-Singapore Tax Treaty (PH-SG Tax Treaty). BPI maintained that license fees for the software are not royalties but business profits. BPI argued that it acquired only the copy of the copyrighted articles without acquiring any of the copyright rights, making the income payment of BPI to W Co. as business profits for income tax purposes. In ruling, the DOF, in accordance with Revenue Memorandum Circular (RMC) No. 44-2005, provides the twin requirements for the transaction to fall as a transfer of a copyrighted article, to wit: (1) the person does not acquire any of the copyright rights; and (2) the transaction does not involve the provision of services or know-how. A perusal of records showed that BPI complied with the twin requirements. When BPI was granted the right to the software on a license-to-use basis, it only acquired the end-product itself, and this does not include the ideas and principles underlying such software. When copyright ownership is transferred, payments made in consideration thereof are business income. Thus, the business profits of W Co. from license fees paid by BPI for the software use after the effectivity of the RMC are exempt from income tax pursuant to the PH-SG Tax Treaty, considering that W Co. is not deemed to have a permanent establishment in the Philippines, and, as such, the same is exempt from withholding taxes.
SALE OF AUSTRALIAN GOVERNMENT OF REAL PROPERTY USED AS DIPLOMATIC RESIDENCE IS NOT SUBJECT TO 6% CGT
THE PHILIPPINES, BEING A SIGNATORY & PARTY TO THE CONVENTION, IS BOUND TO PERFORM ITS TREATY OBLIGATIONS IN GOOD FAITH
DEPARTMENT OF FINANCE OPINION NO. 005.2021, AUGUST 24, 2021
The Australian Government is requesting a review of the earlier BIR Ruling, which ruled that the sale of the Australian Government’s real property is subject to the 6% Capital Gains Tax (CGT) based on the gross selling price or the current fair market value, whichever is higher. It argued that the sale of the subject property, which was used as a diplomatic residence of the Australian Embassy, is exempt from all national taxes, specifically, CGT, under Article 23 of the Vienna Convention on Diplomatic Relations (VCDR). In ruling, Article 23 of VCDR provides that the sending State and the head of the mission shall be exempt from all national, regional, or municipal dues and taxes in respect of the mission’s premises. Considering that the subject property was utilized as the residence of several heads of the Mission, the same qualifies as part of the Mission’s premises. Arguably, the heads of Mission and Diplomatic Agents both perform indispensable duties while posted in a foreign state. It can be said that providing the necessary board and lodging for them allows such a foreign state to pursue the functions of the Mission with more efficiency and efficacy. So long as there are no overt acts indicating the change in the purpose of the use of the property, it remains classified as a residence of its Head of Mission. Thus, when it was sold, it remained as a property intended for such a purpose. Therefore, the Australian Government’s sale of the subject property is not subject to 6% CGT.
THE CTA & NOT THE DOF HAS JURISDICTION ON BIR ASSESSMENT AGAINST THE CEBU CITY GOVERNMENT
DEPARTMENT OF FINANCE OPINION NO. 004.2021, JUNE 16, 2021
Cebu City Government (Cebu) is requesting a review of the Bureau of Internal Revenue (BIR) Final Decision on the Motion for Reconsideration of the Final Decision on Disputed Assessment (FDDA), which held that Cebu is liable to pay the BIR assessment in the aggregate amount of ₱1,278,349,609.52, covering the taxable year 2010. Cebu filed a Protest contending that it is not liable for the BIR assessment as it is engaged in governmental functions and not proprietary functions. Likewise, Cebu anchored its plea for the Department of Finance (DOF) to review the BIR decision under Section 4, paragraph 1 of the 1997 Tax Code, as amended, authorizing the DOF to review the interpretation of the Commissioner of Internal Revenue (CIR) on what is considered essential governmental functions and what are those corporate or proprietary function. In reply, the DOF opined that the matter is within the ambit of Section 4, paragraph 2 of the 1997 Tax Code, as amended, which is properly subject to the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA). Further, Section 7 of Republic Act (R.A.) 9282, otherwise known as “An Act Expanding the Jurisdiction of the CTA” provides that the CTA exercises exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments. Hence, the request for review was DENIED for lack of jurisdiction.
TO BE TAX EXEMPT, NO PART OF A NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTION’S NET INCOME OR ASSET SHALL INURE TO THE BENEFIT OF ANY INDIVIDUAL OR TRUSTEE UNLESS IT IS SUBJECTED TO PROPER LIQUIDATION OR REIMBURSEMENT PROCEDURES & IT IS REASONABLE & COMMENSURATE TO THE FUNCTIONS & SERVICES RENDERED
DEPARTMENT OF FINANCE OPINION NO. 001.2021, JANUARY 27, 2021
J Institute of Technology (J Co.) is requesting a review of the Bureau of Internal Revenue (BIR)’ earlier ruling denying its request for tax exemption as a non-stock, non-profit educational institution under Section 4(3), Article XIV of the 1987 Constitution and Section 30(H) of the 1997 Tax Code, as amended. The denial was premised on the non-compliance of J Co. on the requirements that no part of its net income or assets shall inure to the benefit of any individual or a specific person and that its net income was not used actually, directly, and exclusively for educational purposes. In reply, the DOF opined that J Co. failed to prove that it is a non-profit educational institution and that the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. A perusal of J Co. Treasurer’s Affidavit certified under oath that its Board of Trustees received per diem. As held in previously issued opinions, per diem, per se, is not prohibited, provided the same is subjected to proper liquidation or reimbursement procedures, commensurate to the functions and services rendered, and legitimate and reasonable expenses incurred in furtherance of the duties and responsibilities of the trustees or officers, which all redound to the accomplishment of the objectives of the organization. To determine the reasonableness of such per diem or compensation, the taxpayer’s application for tax exemption must be accompanied by the list of documentary requirements under Revenue Memorandum Order (RMO) No. 44-2016; however, J Co. was unable to demonstrate through its submitted documents that the per diem of its trustees and the compensation of its officers received were reasonable and commensurate to the performance of the tasks needed of them. As regards the applicability of the reduced rate of 10% for proprietary educational institutions, the DOF believes that this should be the subject of an audit by the BIR to determine whether the requisites under Section 27 (B) of the 1997 Tax Code, as amended, are met. Thus, the request for review was DENIED.
WAIVER OF TAXES UNDER FRIA ACT OF 2010
DEPARTMENT OF FINANCE OPINION NO. 012.2021, OCTOBER 21, 2020
M Co. is requesting a review of the BIR’s earlier ruling, which denied its request for waiver of Income Tax, Value-Added Tax (VAT), and Documentary Stamp Tax (DST) pertaining to the sale of M Co.’s properties in furtherance of its corporate rehabilitation pursuant to Section 19 of Republic Act (R.A.) No. 10142 or the “Financial Rehabilitation and Insolvency Act (FRIA) of 2010.” In ruling, the DOF did not agree with the BIR’s position that Section 19 of the law, when viewed in connection with Section 4(c) of the same Act, connotes that the waiver of taxes, tariffs, and customs duties refers to such claims already due to the government at the time of the issuance of the Commencement Order. Section 19 of the law does not touch upon nor has any relation to “Claims” as set out under the law. The DOF sees no point in connecting the definition of “Claim” with the waiver of taxes and fees provision of the same law. Waiver of taxes and fees under the law refers to those that are imposed upon the issuance of the Commencement Order by the court, and until the approval of the Rehabilitation plan or dismissal of the Petition. Thus, the taxes and fees imposed upon the issuance of the Commencement Order and until the approval of the Rehabilitation Plan or dismissal of the Petition, whichever is earlier, shall be considered waived, subject to the condition that it is made in furtherance of the objectives of rehabilitation.