May 2007

taxbrief
Contents
2 BIR Issuances
Sanctions on erring finance officers and tax
practitioners
New paradigm in meeting the BIRs collection
target
Verification of 2005 tax returns
3 BIR Rulings
Non-withholding of VAT on foreign reinsurers
Book value computation for shares excludes
unrealized forex gains
ATP not required for pawn tickets
Sale of scraps by PEZA company
Sale of trademarks
VAT on money-transfer services
Transportation and cell phone allowance
4 Supreme Court Decisions
FSD subject to DST
VAT on HMOs
Absence of ATP or TIN VAT on invoice not fatal to
claim for refund
7 Court of Appeals Decisions
Claim for refund proceeds separately from an
assessment
7 Court of Tax Appeals Decisions
Petroleum product purchased from a CBBE
not exempt from excise tax
Gross receipts of international airlines

Catherine Dela Cruz

Senior Manager
Tax Advisory & Compliance

Member of Grant Thornton International

May 2007

May 2007

BIR ISSUANCES
Sanctions on erring finance officers and tax
practitioners
Revenue officials have been directed to initiate necessary actions
against any financial officer or tax practitioner who is found guilty
of violating the provisions of the tax laws. These actions may
include suspending or canceling his accreditation, or filing
criminal actions against him.
Under the Tax Code, a fine of P50,000 to P100,000 and
imprisonment of two to six years shall be imposed, upon
conviction, on financial officers and independent certified public
accountants who willfully falsify audit reports, render reports not
in accordance with sound auditing practices, or certify financial
statements with substantial misstatements or omissions. The
same punishment applies to persons who certify financial
statements without audit, offer the use of accounting records not
compliant with tax rules, make false entries in the books, keep
two or more sets of books, or commit other prohibited acts or
omissions.
Revenue Regulations (RR) No. 11-06, on the other hand,
enumerates the norms of conduct for tax practitioners, violations
of which shall result in the suspension or cancellation of his tax
agent accreditation with the Bureau of Internal Revenue (BIR).

(Revenue Memorandum Circular No. 31-2007, April 25, 2007)

New paradigm in meeting the BIRs collection

target
The BIR has outlined guidelines and procedures that should be
strictly observed by revenue officers pursuant to the new
paradigm mandated by the Secretary of Finance towards
meeting the annual collection target, as follows:

On the resolution of assessments and refund claims

1. All claims for exemptions, cash refunds and issuance of tax
credit certificates (TCCs) shall be strictly evaluated. Any doubt

must be resolved in favor of the government. The authority

delegated to the Regional Directors and Assistant
Commissioners to sign rulings involving grant of exemption
shall be transferred to the Assistant Commissioner and the
Deputy Commissioner, respectively. Claims for refund shall be
resolved expeditiously. Reports granting claims of more than
P1 million shall be cleared with the Deputy Commissioner for
Operations, while those amounting to at least P10 million shall
pass through the Commissioner.
2. All periods in the audit and assessment process shall be
scrupulously observed as prescribed in Revenue Memorandum
Order (RMO) No. 11-06 and brought to the Preliminary
Assessment Notice (PAN) / Final Assessment Notice (FAN) stage
without prolonged and unnecessary discussions with the
taxpayers.
3. All protests on PANs/FANs not containing substantial issues
shall be summarily denied without any prolonged discussion
and brought to the payment stage, unless the taxpayer elects
to go to court.
4. Taxpayers shall be enjoined to avail of the Improved
Voluntary Assessment Program and the one-time
administrative abatement.

Priority industries for audit

Businesses that are earning more revenues this year (such as,
but not limited to, the following) shall be prioritized for audit.
a. hotels and other tourism-related establishments
b. stockbrokers
c. lessors/lessees and sellers/dealers/buyers/brokers of
real properties
d. mining companies
e. TV stations
f. advertising companies
g. recruitment agencies
h. hospitals, clinics, medical and dental laboratories
i. business agents and their clients reporting no
payment returns
j. professionals like doctors, lawyers, accountants, etc.
k. government contractors
l. duly identified top 10,000 private corporations under
RR 17-03

May 2007

m. taxpayers reporting exempt/net loss/no operations in

their filed returns.

Intensified use of information as basis for development of

assessment cases

a. No Operation tax returns

b. Exempt tax returns
c. Tax returns reflecting Net Loss and/or No Taxable
Income

1. Tax mapping operations (e.g., Tax Compliance Verification

Drive or TCVD) and third-party information mining to add
new taxpayers to the rolls and enhance voluntary
compliance
2. Generation of discrepancy reports from the Summary Lists
of Sales and Purchases (SLSP)
3. Accelerated database registration clean-up and build-up
4. Strict monitoring of returns of stop/non-filer taxpayers
5. Stocktaking and surveillance activities on business
establishments
6. Development of fraud cases as prescribed under RMO 4006

Verification and report on all cases shall be completed and

submitted to the Revenue District Officer (RDO) not later than
June 15, 2007, and transmitted to the Assessment
Division for review on or before June 29, 2007.

Enforcement of penalties and collection of receivables

BIR RULINGS

1. Closing establishments that violate the provisions of the

Tax Code
2. Collecting Accounts Receivable through the issuance of
warrants of distraint and/or levy
3. Initiating the audit of accounts that are closed in the
Integrated Tax Systems (ITS)
4. Initiating proceedings against erring financial officers/tax
practitioners pursuant to Revenue Memorandum Circular
(RMC) No. 31-07
The performance of revenue officers in the implementation of
these policies shall be strictly evaluated and shall be used,
among others, as a basis to reshuffle officials and employees.
Progress reports on actions taken and results shall be
submitted to the Commissioner every 15th of the month.

(Revenue Memorandum Circular No. 32-2007, May 2, 2007)

Verification of 2005 tax returns

Tax Verification Notices (TVNs) shall be issued to cover the
verification of all internal revenue taxes for 2005 of taxpayers
whose 2004 and 2005 income tax returns both fall under any of
the following criteria:

All applicable guidelines and procedures under existing revenue

issuances not inconsistent with the provisions of the circular
shall be strictly observed.

(Revenue Memorandum Order No. 05-2007, April 16, 2007)

Non-withholding of VAT on foreign reinsurers

An insurance companys failure to withhold VAT on reinsurance
premiums paid to foreign reinsurers prior to 2002 is
understandable and appears to have a basis in the law
considering the difficulty in interpreting the BIRs issuances on
the matter. It is a common principle in taxation that if the intent
or meaning of the tax statute is not clear or is doubtful as to
whether a taxpayer is covered by the tax obligation, the tax law
shall be construed against the Government because revenue
laws impose special burdens.
Section 4.102-1(d) of RR 07-95 dated December 9, 1995
provides that the reinsurance business is subject to the 10%
VAT, and that the VAT due on a foreign reinsurance company
must be withheld by the local insurance company. However, in
RMC 11-96, it was clarified that reinsurance premiums shall not
be subject to VAT if received by a reinsurer from a company
that has paid the VAT on the insurance premium. In 2002,
RR 08-02 dated June 13, 2002 amended portions of RR 07-95
and reiterated that reinsurance premiums paid to nonresidents
are subject to withholding VAT.

(contd on page 4)

May 2007

(contd from page 4)

However, if the failure of the insurance company to withhold the

VAT continued after 2002, the company shall be liable to interest
imposable from the date the withholding VAT remittance return
(BIR Form No. 1600) should have been filed (on the tenth day of
the following month) up to the date when the relevant quarterly or
monthly VAT return was actually filed. The company shall not be
liable to the VAT not withheld inasmuch as its failure to withhold
did not result in any erosion in revenue. Non-withholding did not
result in a claim for input tax. A 25% surcharge is, however,
imposable but without prejudice to the right of the company to
apply for abatement.

(BIR Ruling No. 7-2007, March 27, 2007)

SUPREME COURT
DECISIONS
FSD subject to DST
A Fixed Savings Deposit (FSD) evidenced by a passbook but
whose features are similar to a time deposit is subject to
documentary stamp tax (DST) on certificates of deposits
drawing interest under Section 180 of the Tax Code.
The FSD, like a time deposit, provides for a higher
interest rate when the deposit is not withdrawn within
the required fixed period. Otherwise, it earns interest
pertaining to a regular savings deposit. Having a fixed
term and applying reduced interest rates in case of pretermination are essential features of a time deposit.
To be deemed a certificate of deposit, a document
requires no specific form as long as there is some
written memorandum that the bank accepted a
deposit of a sum of money from
a depositor. The important and
controlling factor is the nature conveyed

Book value computation for shares excludes

unrealized forex gains
In computing the book value of the shares of a company for
purposes of establishing the fair market value for tax
purposes, unrealized foreign exchange gains that have been
recognized and reflected in the financial statements should be
excluded.
Unrealized foreign exchange gains, similar to the appreciation
in value of property, do not yet constitute taxable income
unless these are realized. Under the realization principle in
taxation, income is recognized only when (a) the earning
process is complete or virtually complete, and (b) an exchange
has taken place. Foreign exchange gains shall be realized

by the passbook and not the particular label attached to it,

inasmuch as substance, not form, is paramount.
The negotiable character of documents under Section 180 is
immaterial for purposes of imposing DST. A certificate of
deposit may be payable to the depositor, to the order of the
depositor, or to some other person at his order.
(International Exchange Bank v. Commissioner of
Internal Revenue, GR 171266, April 4, 2007)

VAT on HMOs
A health maintenance
organization (HMO)
is not covered by the VAT
exemption granted to
medical, dental, hospital
and veterinary services
under the Tax Code. An
HMO does not actually
render medical service,
but merely acts as a
conduit between the

May 2007

only upon actual conversion of one currency to another

currency. Recognition of unrealized foreign exchange gains in
the financial statements is merely for financial reporting
purposes, pursuant to Philippine Accounting Standards 21.

(BIR Ruling No. DA-187-2007, March 27, 2007)

ATP not required for pawn tickets

A pawn ticket cannot be considered a commercial invoice or
receipt although these are printed in booklet form and serially
numbered. Therefore, printing of pawn tickets shall not be
subject to the requirement to secure an Authority to Print (ATP)
pursuant to Section 238 of the Tax Code.

A pawn ticket is merely evidence that an individual has given

personal property to the pawnshop as security for the loan
granted. This is surrendered by the pawner when he pays his
obligation and secures the return of the pawned item.
Pawnbrokers issue official receipts to acknowledge the receipt
of the principal borrowed and the interest, which represents the
income of the pawnshop from its lending activity.

(BIR Ruling No. DA-210-2007, April 4, 2007)

Sale of scraps by PEZA company

Income derived from the sale of reject or scrap items that
inevitably arise at certain stages of the registered
(contd on page 6)

members and their accredited hospitals to arrange for the

provision of pre-need health care services to its enrolled
members for a fixed prepaid fee and a specified period of
time. HMOs are, therefore, subject to VAT.
In 1988, however, the BIR issued VAT Ruling No. 231-88
stating that as provider of medical services, an HMO is exempt
from VAT coverage. Hence, an HMO that did not pay VAT
in 1996 and 1997 on the basis of this 1988 ruling cannot be
made liable to the deficiency VAT if assessed in 1999.
Although the 1999 BIR assessment for VAT effectively
invalidated the 1988 ruling that the BIR itself issued, the HMO
is entitled to the benefit of non-retroactivity of rulings
guaranteed under Section 246 of the Tax Code, in the absence
of showing of bad faith on its part.
(Commissioner of Internal Revenue v. Philippine Health Care Providers,
Inc., GR No. 168129, April 24, 2007)

Absence of ATP or TIN VAT on invoice not

fatal to claim for refund
Invoices issued on export sales that do not indicate the BIR
authority to print or the taxpayer identification number (TIN)-

VAT shall not forfeit the taxpayers entitlement to claim a

refund or tax credit certificate for input VAT attributable to
said export sales.
While entities engaged in business are required to secure from
the BIR an authority to print receipts or invoices and to issue
duly registered receipts or invoices, there is no regulation that
requires the BIR authority to be printed or indicated therein.
In case of export sales, the purchasers are foreign entities, which
are, logically, not VAT-registered nor liable to pay VAT in the
Philippines. Thus, the name and TIN of the purchaser or the
TIN-VAT of the seller need not be reflected or indicated in the
invoices or receipts.
In any case, the provisions of the law and regulations do not
provide that failure to reflect or indicate in the invoices or
receipts the BIR authority to print or the TIN-V would result in
the invalidation of these invoices or receipts. Likewise, it is not
provided that such omission or failure would result in the
outright denial of a claim for tax credit or refund. Instead,
Section 264 of the Tax Code imposes the penalty of fine and
imprisonment for violations of the invoicing requirements.
(Intel Technology, Inc. v. Commissioner of Internal Revenue, GR 166732,
April 27, 2007)

May 2007

(contd from page 6)

manufacturing activity of an enterprise registered with the

Philippine Economic Zone Authority (PEZA) shall be included in
computing the gross income earned from the registered
activities. Consequently, such income shall be exempt from
income tax during the period when the company is enjoying an
income tax holiday (ITH). After the expiration of the ITH, such
income shall be subject to the 5% preferential income tax
regime. The sale of reject and scrap items shall, however, be
subject to 12% VAT during the ITH period.

(BIR Ruling No. DA-255-2007, April 25, 2007)

Sale of trademarks
Sale of trademarks by a nonresident foreign corporation to a
local company is considered a sale of properties. However, such
sale is not made in the course of trade or business of the seller
nor considered necessary or incidental in carrying out its business
of licensing its trademarks in the Philippines. Thus, applying the
rule of regularity, such sale of trademarks is not subject to VAT.
Trademarks are treated as intangible assets that may be subject
to depreciation if it can be shown that the period over which they
can be used in trade or business is definite. Hence, the local
company buyer may amortize the cost of the trademarks
acquired over a period estimated based on the average
remaining lives of the trademarks pursuant to their registration
and the period required to build similar brands in the market.

(BIR Ruling No. DA-162-2007, March 20, 2007)

VAT on money-transfer services

A local company engaged in money transfer services shall be
subject to 0% VAT on service fees in foreign currency received
from a nonresident foreign corporation for money-transfer
services where money shall be inwardly remitted to the
Philippines from abroad. The 12% VAT shall, however, apply if the
services are paid in the local currency.

(BIR Ruling No. DA-220-2007, April 12, 2007)

Transportation and cell phone allowance

The following allowances given to call center employees,
whether at supervisory levels or rank and file, shall not be
taxable as compensation or fringe benefits of the employees:
1. Fixed monthly transportation allowance of P1,500 for
rank and file employees and P3,000 for supervisory
employees pre-computed on a daily basis. These are
incurred by the employees in pursuit of the business
of the company. The allowance is provided to promote
the efficiency, well-being, and safety of the
employees. It is also necessary to enable them to
come to work safely and on time. There shall be no
requirement for substantiation because these are precomputed on a daily basis.
2. Mobile phone allowance of P1,200 for supervisors,
managers and directors who are expected to be on
call 24 hours a day. The accessibility of these
employees is necessary to the business and redounds
to the convenience and benefit of the company. There
is no need to substantiate this allowance.

(BIR Ruling No. DA-233-2007, April 17, 2007)

May 2007

COURT OF APPEALS
DECISIONS
Claim for refund proceeds separately from
an assessment
Internal revenue taxes cannot be the subject of set-off or
compensation. A taxpayers entitlement to a refund of
unutilized creditable withholding taxes cannot be forestalled
by alleged liability of the taxpayer to VAT and additional
income tax arising from alleged discrepancy in the
summaries of expanded withholding taxes attached to the
returns. The possible assessment that may result from a
BIR investigation is separate from the claim for refund.
Should an assessment be issued, it would have to be
threshed out in separate proceedings.
[Commissioner of Internal Revenue v. Starpack (Philippines)
Corporation, CA-GR SP No. 65210, March 22, 2007]

COURT OF TAX APPEALS

DECISIONS
Petroleum product purchased from a CBBE
not exempt from excise tax
Petroleum product purchased from a company
registered as a Countryside Barangay Business Enterprise
(CBBE) is not exempt from excise tax. The buyer shall be
liable to the excise tax due on the petroleum product.
The tax exemption granted to a CBBE under Republic Act
No. 6810 is personal and non-transferable. It is the CBBE,
not the transaction, that has been granted tax exemption.

Under the excise tax rules, should domestic products be

removed from the place of production without payment of
the tax, the owner or person having possession thereof shall
be liable to the tax due on the product. Hence, a person
who buys petroleum products from a CBBE shall be liable
to the excise tax due on the products.
(Lubwell Corporation v. Commissioner of Internal Revenue, CTA EB
No. 143 re: CTA Case No. 6609, March 7, 2007)

Gross receipts of international airlines

The definition of gross receipts subject to percentage tax
under RR 15-02 in the case of international airlines cannot
be applicable prior to October 26, 2002 when the
regulations became effective. Hence, prior to this date, the
percentage tax on international airlines shall be imposed on
gross receipts as defined under RR 06-66, which refers to
the cost of the single one-way fare as approved by the Civil
Aeronautics Board on the continuous and uninterrupted
flight as reflected on the plane manifest. The tax cannot be
imposed on the amount actually received by the airline
based on discounts granted on the approved fare.
[Gulf Air Company, Philippine
Branch (GF) v. Commissioner of
Internal Revenue, CTA Case
No. 7030, March 31, 2007]

May 2007

Tax Brief is a monthly publication of Punongbayan & Araullo

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