TAX AND BUSINESS-RELATED NEWS [OCTOBER 7-13] BUREAU OF INTERNAL REVENUE-INTERNATIONAL TAX AFFAIRS DIVISION (ITAD) RULINGS SUPREME COURT CASE DIGEST COURT OF TAX APPEALS CASE DIGEST
| | | 1. TAX AND BUSINESS-RELATED NEWS | NTC tells Facebook, Lazada PH, Shopee PH: Stop selling text blast machines Ex-banker to face raps for role in P14-B Legacy scam exposed by Inquirer Greenergy gets SEC approval for big authorized capital stock increase Facebook will try to 'nudge' teens away from harmful content 13th month pay 'mandatory' amid COVID-19, says DOLE Lyka should register as payment operator, says BSP Officials seeking more 'attractive' rates to entice small miners, sellers to transact with BSP Lyka closure order affirmed after BSP denies its registration bid via proxy firm BSP bats for 'fair and inclusive' digital transaction value-added tax
| NTC tells Facebook, Lazada PH, Shopee PH: Stop selling text blast machines [Philippine Daily Inquirer, October 12, 2021] The National Telecommunications Commission (NTC) has ordered US tech giant Facebook and e-commerce companies Lazada and Shopee to immediately stop selling text blast machines, saying this violated the law. Ex-banker to face raps for role in P14-B Legacy scam exposed by Inquirer [Philippine Daily Inquirer, October 12, 2021] A former bank manager from Bacolod City will face charges related to the 2008 banking scandal that defrauded the government of millions of pesos in deposit insurance payments as part of a multi-billion peso scam. Greenergy gets SEC approval for big authorized capital stock increase [ABS-CBN News, October 12, 2021] The SEC approved the application by Greenergy [GREEN 2.24] to raise its authorized capital stock (ACS) from P2 billion (divided into P1.9 billion in common shares and P0.1 billion in prefs) to P5 billion (divided into P4.9 billion in common shares and P0.1 billion in prefs). Facebook will try to 'nudge' teens away from harmful content [ABS-CBN News, October 11, 2021] A Facebook Inc executive said Sunday that the company would introduce new measures on its apps to prompt teens away from harmful content, as US lawmakers scrutinize how Facebook and subsidiaries like Instagram affect young people's mental health. | 13th month pay 'mandatory' amid COVID-19, says DOLE [ABS-CBN News, October 11, 2021] The Department of Labor and Employment on Monday reiterated that payment of an employee’s 13th-month pay is mandatory. Lyka should register as payment operator, says BSP [ABS-CBN News, October 10, 2021] Social media platform Lyka must register as a payments operator instead of its marketing arm Digital Spring Marketing and Advertising Inc before it can resume operations, the Bangko Sentral ng Pilipinas said Friday. Officials seeking more 'attractive' rates to entice small miners, sellers to transact with BSP [ABS-CBN News, October 8, 2021] The Bangko Sentral ng Pilipinas is exploring ways to encourage small scale miners to transact with the central bank and to formalize their entry into the banking system, an official said Friday. Lyka closure order affirmed after BSP denies its registration bid via proxy firm [Philippine Daily Inquirer, October 8, 2021] Social media-based payments platform Lyka — which became popular on the back of celebrity endorsements — will remain shuttered after the central bank affirmed its closure order and denied its bid to be registered with the regulator through another company. BSP bats for 'fair and inclusive' digital transaction value-added tax [ABS-CBN News, October 8, 2021] Transactions below P500 should be exempted from the proposed 12 percent value-added tax on digital transactions in the spirit of fairness, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said Friday. | | A. TAX TREATY DOES NOT APPLY TO A PERSON WHO IS NEITHER A RESIDENT OF ONE OR BOTH OF THE CONTRACTING STATES; PROFITS ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING STATE ARE SUBJECT TO TAXES SITUATED THEREIN; FURNISHING SERVICES WITHIN THE PHILIPPINES FOR MORE THAN 183 DAYS CREATE A PERMANENT ESTABLISHMENT; A FIXED PLACE OF BUSINESS, THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON IS CONSIDERED A PERMANENT ESTABLISHMENT | B. INCOME OF NON-RESIDENT FOREIGN CORPORATION (NRFC) IS TAXABLE IF IT HAS PERMANENT ESTABLISHMENT IN THE PHILIPPINES; INCOME PAYMENT TO NRFC MAY BE SUBJECT TO 12% FINAL WITHHOLDING VAT (FVAT) PURSUANT TO PHILIPPINE-JAPAN TAX TREATY; EMPLOYMENT, IF EXERCISED IN THE PHILIPPINES FOR MORE THAN 183 DAYS, IS A TAXABLE TRANSACTION IN THE PHILIPPINES | C. SERVICE FEES PAID BY DOMESTIC CORPORATION TO NON-RESIDENT FOREIGN CORPORATION (NRFC) ARE EXEMPT FROM FINAL WITHHOLDING TAX (FWT) AND FINAL WITHHOLDING VAT (FVAT) UNDER TAX TREATY AGREEMENT | D. SUBSTITUTION FEES FROM LOANS EXTENDED IN THE PHILIPPINES ARE NOT SUBJECT TO INCOME TAX DUE TO ABSENCE OF PERMANENT ESTABLISHMENT BUT SUBJECT TO VALUE ADDED TAX (VAT) UNDER SEC. 108 OF THE TAX CODE | E. BRANCH PROFIT MAY BE SUBJECT TO LOWER 10% INCOME TAX PURSUANT TO PHILIPPINES-NETHERLANDS TAX TREATY | F. SERVICE FEES PAID TO A CORPORATION WITHOUT PERMANENT ESTABLISHMENT IN THE CONTRACTING STATE ARE EXEMPT FROM INCOME TAX PURSUANT TO A TAX TREATY; SERVICE FEES ARE VAT-EXEMPT IF THE SERVICES ARE PERFORMED OUTSIDE THE PHILIPPINES | [TAX TREATY DOES NOT APPLY TO A PERSON WHO IS NEITHER A RESIDENT OF ONE OR BOTH OF THE CONTRACTING STATES] [PROFITS ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT IN THE OTHER CONTRACTING STATE ARE SUBJECT TO TAXES SITUATED THEREIN] [FURNISHING SERVICES WITHIN THE PHILIPPINES FOR MORE THAN 183 DAYS CREATE A PERMANENT ESTABLISHMENT] [A FIXED PLACE OF BUSINESS, THROUGH WHICH THE BUSINESS OF AN ENTERPRISE IS WHOLLY OR PARTLY CARRIED ON IS CONSIDERED A PERMANENT ESTABLISHMENT] L Co. is requesting confirmation that its service fee payment to A Co. is exempt from income tax pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Singapore Tax Treaty). In reply, Article 1 (Personal Scope) of the Philippines-Singapore Tax Treaty provides that the Convention shall apply to persons who are residents of one or both Contracting States. In this case, A Co. cannot claim any of the benefits provided under the Tax Treaty for taxable years 2014 to 2016 since it did not present a Tax Residency Certificate (TRC) duly issued by the taxing authority of Singapore. Even if A Co. was a resident of Singapore in such taxable years, still its claim for service fees to be income tax exempt under Article 7 of the Tax Treaty cannot stand due to the creation of a permanent establishment. A perusal of the documents submitted reveal that although A Co. may not have a fixed place of business in the Philippines, it, nonetheless, created a permanent establishment when it furnished services in the Philippines through its employee. The employee rendered the said services in the premises of L Co., where he occupies as the President or Managing Director. Certainly, the office of L Co. may likewise be said to be at his disposal where he could freely carry on the business of A Co. In addition, records reveal that A Co. furnished services in the Philippines through its employee for a period or periods aggregating more than 183 days. Hence, A Co. is not entitled to the benefits under the Tax Treaty. Consequently, the payment of service fees to A Co. is subject to income tax rate of 30% under Section 28(B)(1) of the 1997 Tax Code; and L Co. shall withhold 12% VAT pursuant to Section 4.114-2 of Revenue Regulations No. 16-2005, in relation to Section 105 of the 1997 Tax Code. [BIR ITAD RULING NO. 043-21, SEPTEMBER 29, 2021] | [INCOME OF NRFC IS TAXABLE IF IT HAS PERMANENT ESTABLISHMENT IN THE PHILIPPINES] [INCOME PAYMENT TO NRFC MAY BE SUBJECT TO 12% FVAT PURSUANT TO PHILIPPINE-JAPAN TAX TREATY] [EMPLOYMENT, IF EXERCISED IN THE PHILIPPINES FOR MORE THAN 183 DAYS, IS A TAXABLE TRANSACTION IN THE PHILIPPINES] S Co. is seeking confirmation that payment of service fees to K Co. is exempt from income tax pursuant to Philippine-Japan Tax Treaty. In reply, paragraph 1, Article 7 and paragraphs 1, 2, and 6, Article 5 of the Philippines-Japan Tax Treaty provide that the profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein and the profits are attributable to the permanent establishment. Upon perusal of the documents, K Co. is deemed to have permanent establishment in the Philippines since 2012. All service fees paid by S Co. to K Co. beginning 2012 to present for the provision of consultancy services in the Philippines in relation to the operation and maintenance of the Multipurpose Power Facility are subject to income tax. The remuneration derived by a resident of Japan in respect of an employment is generally taxable in Japan; however, if such employment was exercised in the Philippines for more than 183 days, the remuneration derived therefrom may be taxed in the Philippines. Thus, nonresident aliens not engaged in trade or business in the Philippines are subject to 25% income tax on gross income. Moreover, K Co., being a nonresident foreign corporation, is subject to 30% income tax under Section 28 (B)(1) of the 1997 Tax Code. Finally, since the services are performed by K Co. in the Philippines, the service fees paid to it are also subject to 12% VAT under Section 108(A) of the 1997 Tax Code. S Co. shall use BIR Form No. 1600 which shall serve as documentary substantiation for its claim of input tax on the fees. VAT withheld shall be remitted within ten (10) days following the end of the month the withholding was made. [BIR ITAD RULING NO. 036-21, JULY 9, 2021] | SERVICE FEES PAID BY DOMESTIC CORPORATION TO NRFC ARE EXEMPT FROM FWT AND FVAT UNDER TAX TREATY AGREEMENT MCS Co. and MCCS Co. are requesting confirmation that their service fees payment to G Co. is exempt from income tax pursuant to the Philippines-Singapore Tax Treaty. In ruling, Paragraph 1, Article 7 of the Philippines-Singapore Tax Treaty provides that profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment. Relative thereto, Paragraph 1 and 2, Article 5, defines that a permanent establishment is a fixed place in which the business of an enterprise is wholly or partly carried on, and includes especially, a seat of management, a branch, an office, a store or other sales outlet, a factory, and a workshop. A review of records reveal that G Co. is not engaged in trade or business in the Philippines, does not have a branch, an office, or other fixed place of business in that country, and did not render such services for more than 183 days. Therefore, the service fees paid by MCS Co. and MCCS Co. to G Co. are exempt from income tax pursuant to Paragraph 1, Article 7 of the tax treaty. Furthermore, in accordance with the cross-border doctrine or destination principle of the VAT system in Section 108(A), the sale of services by G Co. is also exempt from VAT since the services are performed outside of the Philippines. [BIR ITAD RULING NO. 035-21, JULY 7, 2021] | SUBSTITUTION FEES FROM LOANS EXTENDED IN THE PHILIPPINES ARE NOT SUBJECT TO INCOME TAX DUE TO ABSENCE OF PERMANENT ESTABLISHMENT BUT SUBJECT TO VAT UNDER SEC. 108 OF THE TAX CODE S Co., a foreign corporation engaged in mining, metal processing, manufacturing electronic materials, and financing business is seeking confirmation that substitution fees paid by N Co., a domestic corporation engaged in mining, and renewable energy development are exempt from income tax pursuant to the Philippines-Japan Tax Treaty. The parties entered into a Stockholders Agreement (SA) whereby they agreed to reorganize and operate T Co. and to make loans to or guarantee the repayment by T Co. of the loans obtained in proportion to their shareholding ratio in the said company. The stockholders entered two (2) Substitution Agreements under the earlier SA whereby S Co. – with 62.50% ownership, shall substitute for N Co. – with 22.50% ownership, to make loans to, or guarantee the repayment by T Co. pursuant to the SA so long as the shareholding ratio of S Co. exceeds 50%. In consideration of the loans or guarantee made by S Co., N Co. shall pay the former a substitution fee of 1% per annum based on average unpaid principal balance of the loans. In reply, Articles 7 and 5 of the Philippines-Japan Tax Treaty state that profits of an enterprise may be taxed in the other Contracting State but only those attributable to the permanent establishment or fixed place of business. S Co. currently does not have a permanent establishment in the Philippines. Further, profits earned from services done in the Philippines is subject to value-added tax (VAT) under Section 108(A) of the Tax Code. It is to be recalled that S Co. is allowed to engage in financing business; thus, any income derived from related activities is considered as business profit. Based on the facts mentioned, substitution fees paid by N Co. to S Co. are exempt from income tax, but are subject to VAT. [BIR RULING NO. ITAD 034-21, JULY 7, 2021] | BRANCH PROFIT MAY BE SUBJECT TO LOWER 10% INCOME TAX PURSUANT TO PHILIPPINES-NETHERLANDS TAX TREATY S Co. is seeking confirmation that branch profits remitted to its head office, N Co. is subject to income tax of 10% pursuant to the Philippines-Netherlands Tax Treaty. N. Co. is a corporation organized and existing under the laws of the Netherlands and is a resident thereof based on its Articles of Association and Certificate of Residence issued by the Tax Administration Office of Rivierenland in the Netherlands. S Co. was granted a license to establish a branch to undertake exploration and production of hydrocarbons northwest offshore of Palawan. In reply, Section 28(A)(5) of the 1997 Tax Code provides that profits remitted by a branch office of a foreign corporation in the Philippines to its head office abroad are subject to income tax of 15%. However, such profits are subject to relief, which may either be in the form of tax exemption or reduction of tax, to the extent required by any treaty obligation binding upon the Philippine government. For this purpose, Paragraph 7, Article 10 of the Philippines-Netherlands Tax Treaty provides that profits remitted by a permanent establishment situated in a Contracting State to its head office in the other Contracting State are subject to tax of 10%. Thus, profits remitted by S Co. to N Co. is subject to income tax of 10%. [BIR ITAD RULING NO. 032-21, JUNE 18, 2021] | [SERVICE FEES PAID TO A CORPORATION WITHOUT PERMANENT ESTABLISHMENT IN THE CONTRACTING STATE ARE EXEMPT FROM INCOME TAX PURSUANT TO A TAX TREATY] [SERVICE FEES ARE VAT-EXEMPT IF THE SERVICES ARE PERFORMED OUTSIDE THE PHILIPPINES] U Co. is seeking confirmation if service fees paid to N Co. are exempt from income tax pursuant to Philippines-Netherlands Tax Treaty. N Co. is a corporation organized and existing under the laws of the Netherlands. On the other hand, U Co. is a wholly-owned subsidiary of N. Co. and a domestic corporation engaged primarily in manufacturing janitorial and other household products. U Co. and N Co. entered into a Central Services Agreement to provide intercompany services to all members of the U Group of Companies worldwide. It is agreed that U Co. will pay a service fee to N Co. which shall not exceed 4% of the former's annual turnover or total net receivables from its customers. Based on a sworn statement and certification issued by U Co., all services under the Agreement are and will be performed by N. Co. outside the Philippines. In reply, Section 28 (B)(1) of the 1997 Tax Code provides that income derived by a nonresident foreign corporation is subject to income tax at the rate of 30%. However, in reference to Section 32(B)(5) of the 1997 Tax Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government. Moreover, Paragraph 1, Article 7 and Paragraphs 1 and 2, Article 5 of the Philippines-Netherlands Tax Treaty provide that the profits of a corporation of a Contracting State received from another Contracting State may be subject to tax in the other State if the profits are attributable to a permanent establishment which a corporation has in that State. In line with this, a permanent establishment means a fixed place of business through which a resident of one of the Contracting States engages or transacts in a business and furnishing of services must continue for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Since N Co. is not engaged in trade or business in the Philippines and is not deemed to have a permanent establishment, the service fees paid by U Co. to N Co. are exempt from income tax pursuant to Paragraph 1, Article 7 of the Treaty. Moreover, the service fees are also exempt from value-added tax ("VAT") under Section 108(4) of the 1997 Tax Code since these are not performed by N Co. in the Philippines. [BIR ITAD RULING NO. 031-21, JUNE 16, 2021] | 3. SUPREME COURT CASE DIGEST | [SBMA CAN IMPOSE COMMON UTILITY SERVICE AREA (CUSA) FEES] [CUSA FEES ARE NOT IN THE NATURE OF TAX] Petitioner Philip Morris Philippines Manufacturing, Inc. filed an appeal by certiorari from the Decision and Resolution of the Court of Appeals (CA). The CA affirmed the Decision of the Regional Trial Court dismissing the Complaint for Injunction with Application for Issuance of a Writ of Preliminary Injunction filed by Petitioner against Respondent Subic Bay Metropolitan Authority. Petitioner insisted that Respondent’s imposition of the Common Utility Service Area (CUSA) Fee is unilateral, forced, and has the effect of amending, varying, or modifying the terms of the Assignment of Leasehold Rights (ALR) and the Subic Technopark Corporation Master Lease Agreement (STEP MLA). Likewise, CUSA Fee is not a mere regulatory fee but a tax, as it is being collected for public purpose, i.e., to fund municipal services within the common areas of the Subic Bay Freeport Zone (SBFZ) which are for the direct benefit of the general public. In his Comment, Respondent reiterated the contractual obligations of Petitioner under the ALR and STEP MLA as well as the implementing rules and regulations. Likewise, Petitioner should have submitted the matter for arbitration pursuant to the Arbitration Clause of the ALR and STEP MLA. Further, CUSA Fee is merely a cost recovery or reimbursement mechanism, and as such does not constitute revenue and is not intended to raise revenue. In ruling, both Republic Act No. 7227 or the “Bases Conversion and Development Act of 1992” and its Implementing Rules and Regulations expressly grant the Respondent with authority to fix reasonable service and utility fees necessary for the establishment, operation, maintenance of utilities, other services, and infrastructure of the SBFZ . Necessarily, these fees would include the charges collected by SBMA from its tenants to cover expenses for security services or law enforcement, fire protection and prevention, street cleaning, and street lighting, which comprise the CUSA Fee. Administrative Order No. 31 directed government-owned and controlled corporations, such as Respondent, not only to rationalize existing fees but also to impose additional charges "to enable the government to effectively provide services without straining the National Government's sources." The Respondent not previously collecting charges or fees for the subject services from business establishments or locators in the SBFZ is not a bar to the subsequent implementation of the CUSA Fee. The law clearly granted it authority to impose reasonable fees and charges for the provision of the municipal services covered by CUSA Fee. On the theory that the CUSA Fee is in reality a tax, the Court held that it is not a tax measure since the revenue generated therefrom did not exceed the cost of regulation. The penalty for non-payment of the CUSA Fee was also sustained. Thus, the Petition was DENIED, and the earlier Decision and Resolution were AFFIRMED. [PHILIP MORRIS PHILIPPINES MANUFACTURING, INC. VS. SUBIC BAY METROPOLITAN AUTHORITY, G.R. NO. 232797, JUNE 14, 2021, UPLOADED AUGUST 10, 2021] | 4. COURT OF TAX APPEALS CASE DIGEST | [CLAIM FOR INPUT VAT REFUND MUST BE FULLY SUBSTANTIATED] [TAX REFUNDS OR TAX CREDITS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER] [EXCEPTION TO MANDATORY 120+30 PERIOD IS BIR RULING NO. DA-489-03 DATED 10 DECEMBER 2003 UP TO REVERSAL ON 6 OCTOBER 2010] Petitioner Kurimoto (Philippines) Corporation filed a Petition for Review seeking refund of unutilized input VAT attributable to zero-rated sales for the 3rd and 4th quarters of taxable year 2015 in the amount of Php 11,666,047.12. However, Respondent Commissioner of Internal Revenue countered that the refund should be denied due to premature filing. Likewise, Petitioner’s claim was not fully substantiated with proper documents such as sales invoices and official receipts relative to its sale and offsetting arrangement to Kurimoto, Ltd. pursuant to Revenue Memorandum Circular (RMC) No. 54-2014. In ruling, the Court held that based on the Independent Certified Public Accountants (ICPA) report, Petitioner failed to substantiate the foreign currency remittances it received from Kurimoto, Ltd., thus, not qualified for valid zero-rated sales. Likewise, only Php 5,408,569.64 represents the substantiated unutilized input VAT attributable to zero-rated sales and only Php 4,820,117.26 is attributable to valid zero-rated sales. Thus, Petition was PARTIALLY GRANTED. Consequently, Respondent was ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor of the Petitioner in the reduced amount of Php 4,820,117.26. [KURIMOTO (PHILIPPINES) CORPORATION VS. HON. CAESAR R. DULAY, IN HIS CAPACITY AS THE COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 9740, SEPTEMBER 17, 2021] | Thank you and best regards, WILLIE B. SANTIAGO Lawyer & Certified Public Accountant Tax & Corporate Services Division TL : (+632) 8 894-5892 Loc. 703 Website: www.dmdcpa.com.ph Don Jacinto Building De la Rosa corner Salcedo Streets Legaspi Village, Makati City 1229 Philippines | |
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