Tax Case Anabelle

16 October 2013

Lopez Group 1

Whats upPICPA National Convention Tax Update16 November 2013

www.pwc.com/ph

Isla Lipana & Co.

Isla Lipana & Co., PwC member firm

PICPA

Slide 2

16 November 2013

Supreme Court Decisions

1 Revenue Regulations2

Revenue Memorandum Circulars

3 Other Issuances4 5 BIR Rulings

Line up

16 October 2013

Lopez Group 2

Supreme Court Decisions

1

Supreme court decisions


16 November 2013

G.R. No. 188550, 19 August 2013Deutsche Bank

Slide 4

Prior application for tax treaty relief not a prerequisite

PICPA

16 October 2013

Lopez Group 3


16 November 2013

Slide 5

PICPA

Facts: Petitioner paid 15% branch profit remittance tax (BPRT) amounting to PhP67,688,553.51 for 2002 and prior taxable years

Filed an application for tax treaty relief with ITAD seeking confirmation of entitlement to 10% tax under the RP-Germany Tax Treaty.

Filed an administrative claim for refund in the total amount of PhP22,562,851.17.

CTA denied the claim for failure to file treaty relief prior to remittance of branch profits.

G.R. No. 188550, 19 August 2013


16 November 2013

Slide 6

G.R. No. 188550, 19 August 2013

PICPA

Ruling:

Those who are entitled to the benefit of a treaty cannot be totally deprived of such benefit for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.

Filing a tax treaty relief application prior to the transaction is not a prerequisite for treaty protection.

16 October 2013

Lopez Group 4


G.R. Nos. 187485, 196113, 197156, 12 February 2013 San Roque Power Corporation

16 November 2013PICPA

Slide 7

The 2-year prescriptive period refers to administrative claim for refund and not judicial claim

Failure to comply with the 120+30 day period violates the doctrine of exhaustion of administrative remedies subject to exception.


G.R. Nos. 187485, 196113, 197156 dated 12 February 2013

Facts:

On 28 March, 2003, Company A filed with the BIR a claim for refund of Php560 million representing 2001 unutilized input VAT attributable to zero-rated sales

13 days after or on 10 April 2003, Company A appealed the claim to the CTA (prior to the lapse of 2 years from first quarter of 2001)


Slide 8

16 October 2013

Lopez Group 5


Ruling:

The filing of a claim for tax refund of excess input VAT is governed by Section 112(A) and (C), not Section 229 of the Tax Code, which applies to refund of erroneously paid or illegally collected taxes

Claim may be filed with the BIR anytime within the two-year prescriptive period.

BIR has 120 days from submission of complete documents to decide on the claim.


Slide 9



Ruling:

Claimant has 30 days from the decision or inaction to elevate case to the CTA. The 30-day period to appeal need not fall within the 2-year prescriptive period.

Failure to comply with the 120+30 day period violates the doctrine of exhaustion of administrative remedies.

If the CIR fails to decide within 120 days, such inaction shall be deemed a denial of the application for tax refund


Slide 10


16 October 2013

Lopez Group 6


Ruling: Exception to the 120+30 day rule:

BIR Ruling DA-489-03: taxpayer need not wait for the lapse of the 120-day period before it could seek judicial relief

- Exception will apply to claims filed within 10 December 2003 to 6 October 2010, when Aichi ruling was promulgated.

- Taxpayers who acted in good faith and relied on the ruling should not be prejudiced by an erroneous interpretation by the CIR, particularly on a difficult question of law. Aichi ruling cannot be given retroactive effect.

Note: SC dismissed the motion for reconsideration on 8 October 2013


Slide 11



GR Nos. 193301 and 194637 dated 11 March 2013Mindanao II Geothermal

Incidental transactions, though isolated, is subject to 12% VAT.


Slide 12

16 October 2013

Lopez Group 7


GR Nos. 193301 and 194637 dated 11 March 2013

Facts:

Company is a VAT-registered taxpayer engaged in the production and sale of electricity.

Sold a fully depreciated motor vehicle which formed part of property, plant and equipment.


Slide 13


GR Nos. 193301 and 194637 dated 11 March 2013

Ruling:

Sale of the motor vehicle is an isolated transaction.

However, it is still considered incidental to the principal activity as said vehicle was previously used in the conduct thereof. The same also formed part of the companys PPE.

An incidental transaction made in the course of the companys principal business which is subject to VAT


Slide 14

16 October 2013

Lopez Group 8


Comparison of selected court cases

Mindanao II(GR No. 193301) 11 March 2013

Magsaysay (GR No. 146984)28 July 2006

CS Garments CTA EB Case No. 287 (CTA Case No. 6520) 14 January 2008

Transaction Sale of NissanPatrol

Sale of vessels by the National Development Company (NDC)

Sale of company vehicle to its General Manager

Subject to VAT?

Yes.The sale was made in the course of business.

No.The sale was not in the course of business of NDC as it was involuntary, and made in compliance with the Governments policy for privatization.Hence, the sale could no longer be repeated or carried on with regularity.

Yes.The sale of vehicle was made in the course of business because the same had been purchased and used in furtherance of the business of CS Garments.

16 November 2013

Slide 15

PICPA

Revenue Regulations2

Revenue Regulations

16 October 2013

Lopez Group 9


16 November 2013

Revenue Regulations No. 2-2013 dated 23 January 2013

Transfer Pricing Guidelines

Slide 17

PICPA


Revenue Regulations No. 2-2013Transfer Pricing Guidelines

16 November 2013

Salient features

1. The Guidelines shall apply to

a. cross-border transactionsb. domestic transactions

2. The arms length principle shall follow a 3-step approach: Step 1: Conduct a comparability analysis of the similarities and

differences.Step 2: Identify the tested party and the appropriate transfer

pricing method.Step 3: Determine the arms length results.

Slide 18

PICPA

16 October 2013

Lopez Group 10



16 November 2013

4. Taxpayers must keep adequate documentation of their transfer prices. The transfer pricing documents must be contemporaneous.

5. Transactions entered into prior to the effectivity of these regulations shall be governed by the laws and other administrative issuances prevailing at the time the controlled transactions were entered into.

Slide 19

PICPA



16 November 2013

Purposes of maintaining TP documentation: Defend taxpayers transfer pricing analysis; Prevent transfer pricing adjustments arising from tax examinations; and

Documentation Details:

1. Organizational Structure2. Nature of the business/industry and market conditions3. Controlled transactions4. Assumptions, strategies, policies5. Cost contribution arrangements (CCA)6. Comparability, functional and risk analysis7. Selection of transfer pricing method8. Application of the transfer pricing method9. Background documents10. Index to documents

Slide 20

PICPA

16 October 2013

Lopez Group 11



16 November 2013

Slide 21

PICPA

Categories of Intercompany Transfer:

1. Sales of Tangible property2. Sales of Intangibles3. Provision of Services4. Cost Sharing5. Loans6. Lease

Other concerns:

TP Adjustments

Covered Transactions

Materiality Threshold

Updates when needed

Penalty


Revenue Regulations No. 12-2013 dated 12 July 2013

Amendment to Revenue Regulations No. 02-98 relative to the deductibility of certain income payments

16 November 2013

Slide 22

PICPA

16 October 2013

Lopez Group 12


Revenue Regulations No. 12-2013 dated 12 July 2013Amendment to Revenue Regulations No. 2-98 relative to the deductibility of certain income payments

Previously, the BIR allowed deduction of income payments even if withholding tax due thereon was paid during tax audit/ investigation.

The new RR no longer allows deduction of expense unless the withholding tax is paid prior to tax audit or investigation

The provision of RR No. 12-2013 shall apply to audit investigations for taxable year 2013 (RMC 63-2013, 26 September 2013).

16 November 2013

Slide 23

PICPA


16 November 2013

Revenue Regulations No. 6-2013 dated 11 April 2013

Fair market value of shares (held as capital asset) sold outside the stock exchange

Slide 24

PICPA

16 October 2013

Lopez Group 13


Revenue Regulations No. 6-2013 Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets

RR 6-08: Fair market value in the case of shares of stock not listed and traded in the local stock exchanges means the book value of the shares of stock as shown in the financial statements nearest the date of sale.

RR 6-13: In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values.

16 November 2013

Slide 25

PICPA


Revenue Regulations No. 6-2013 Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets

The value of equity shall be adjusted by the FMV of underlying assets. The value of real property at the time of sale shall be the higher of

1. FMV as determined by the Commissioner (BIR Zonal value), or

2. FMV as shown in the schedule of values fixed by the Provincial and City Assessors, or

3. FMV as determined by an Independent Appraiser.

16 November 2013

Slide 26

PICPA

16 October 2013

Lopez Group 14

Revenue Memorandum Circulars

RMCs3


Revenue Memorandum Circular No. 57-2013 dated 23 August 2013

Circularization of BIR Ruling No. 123-2013 input VAT are not deductible for income tax purposes

16 November 2013

Slide 28

PICPA

16 October 2013

Lopez Group 15


Revenue Memorandum Circular No. 57-2013 dated 23 August 2013Circularization of BIR Ruling No. 123-2013

Input VAT attributable to zero-rated sales can only be recovered through tax refund or tax credit.

The method of treating unapplied input taxes as outright deductible expense for income tax purposes lacks legal basis. Hence, such deductions claimed for income tax purposes should be disallowed.

16 November 2013

Slide 29

PICPA


Revenue Memorandum Circular No. 9-2013Taxability of dues and membership fees collected by homeowners association

Abandoned tax exemption of association dues and other assessment charges

Now subject to:

1. Income Tax / Expanded Withholding Tax (EWT)

2. 12% Value Added Tax or 3% Percentage Tax(whichever is applicable depending on whether the association is registered as a VAT/Non-VAT taxpayer)

16 November 2013

Slide 30

PICPA

16 October 2013

Lopez Group 16


RTC Decision - Declaratory Relief on the Validity of BIR Revenue Memorandum Circular No. 65-2012 First e-Bank Tower Condominium Corporation 5 September 2013

Association dues and other fees and charges collected by a condominium corporation from its members are tax exempt.

16 November 2013

Slide 31

PICPA


Declaratory Relief on the Validity of BIR Revenue Memorandum Circular No. 65-2012

Facts:

Petitioner assailed the validity of the RMC No. 65-2012 contending that the same was issued without due process of law.

32


16 October 2013

Lopez Group 17



Ruling of the RTC:

The Circular introduced a new legislation under the mantle of quasi-legislative authority.

The BIR Commissioner, under the guise of clarifying income tax on association dues, made the Circular effective immediately. In so doing, the passage contravenes the constitutional mandate of due process of law.

33




The RMC created a new tax burden.

In so doing, it abruptly charges the taxpayer an imposition which was then not existing, and worse, made it immediately effective which is prejudicial to the rights of the petitioner.

34


16 October 2013

Lopez Group 18

Other Issuances

Other Issunces4


SEC Memorandum Circular No. 820 May 2013

Guidelines on Filipino-foreign ownership requirements for corporations engaged in nationalized and partly nationalized activities


Slide 36

16 October 2013

Lopez Group 19


SEC Memorandum Circular No. 820 May 2013

All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH

a. the total number of outstanding shares of stock entitled to vote in the election of directors; AND

b. the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

37



CTA Case No. 8024 dated 24 April 2013Waterfront Philippines

Extending loans and cash advances with interest to affiliates is deemed performance of service for a fee, subject to VAT.


Slide 38

16 October 2013

Lopez Group 20


Facts:

Company is not habitually engaged in lending transactions

It does not extend cash advances to affiliates with a view to profit or livelihood. The reason for imputing interest is to make the transaction at arms length

Cash advances are exclusively granted to its affiliates.

16 November 2013

Slide 39

CTA Case No. 8024 dated 24 April 2013

PICPA


Ruling:

It is immaterial that the company is not a lending investor since VAT is levied on all kinds of services rendered in the Philippines for a fee or consideration.

The broad interpretation of services under Section 108 of the Tax Code includes the act of extending loans and cash advances to the companys affiliates which is rendered for a fee in the form of interest generated thereon.

16 November 2013

Slide 40

PICPA

CTA Case No. 8024 dated 24 April 2013

16 October 2013

Lopez Group 21

BIR Rulings

BIR Rulings5


BIR Ruling No. 614-2012 dated 09 November 2012 | BIR Ruling No. 508-2012 dated 3 August 2012

Upstream merger between a parent company and its subsidiaries is in the nature of a donation and not a tax-free merger

Slide 42


16 October 2013

Lopez Group 22


First Scenario:

ABC has two wholly-owned domestic subsidiaries, namely, XYZ and ZNT corporations.

The three companies merged pursuant to a Plan of Merger which was approved by the SEC..

BIR Ruling Nos. 614-2012 and 508-2012 Upstream merger is in the nature of a donation and not a tax-free merger

ABC

ZNTXYZ

Facts illustrated:

Slide 43



BIR Ruling Nos. 614-2012 and 508-2012Upstream merger is in the nature of a donation and not a tax-free merger

Second Scenario:

Company A is a domestic corporation. It has a wholly-owned subsidiary, Company B, also a domestic corporation

The respective boards of directors of Companies A and B have effected a merger with Company A as the surviving corporation.

Subsidiary

ParentA

B

Facts illustrated: (contd)

Slide 44


16 October 2013

Lopez Group 23


Facts Under the Plan of Merger, the subsidiary/ieswill convey, assign, and transfer to the parent all its assets and liabilities, and since the parent already owns 100% of the absorbed corporation/s prior to the merger, no new shares will be issued by the parent as a consequence of the merger

The intended re-organization/merger where the parent as the surviving corporation is an upstream merger, whereby the former will not be issuing shares in exchange for all the assets to be transferred by its subsidiary/iesas a result of the merger.

BIR Ruling Nos. 614-2012 and 508-2012 Upstream merger is in the nature of a donation and not a tax-free merger

Slide 45



Ruling Effectively, said transfer of assets is in the nature of a donation and not a statutory and tax-free merger contemplated under Section 40(C)(2) and (6)(b) of the Tax Code.

Hence, the transaction shall be subject to donors tax.

The BIR also emphasized that the intended merger has also the effect of dissolving and liquidating the subsidiary/ies without payment of the corresponding taxes.

BIR Ruling Nos. 614-2012 and 508-2012Upstream merger is in the nature of a donation and not a tax-free merger

Slide 46


16 October 2013

Lopez Group 24


Section 40(C)(2)

SECTION 40. Determination of Amount and Recognition of Gain or Loss.

(C) Exchange of Property. xxx

(2) Exception. No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation (a) A corporation, which is a party to a merger or consolidation, exchanges

property solely for stock in a corporation, which is a party to the merger or consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solelyfor stock or securities in another corporation, a party to the merger or consolidation.

Slide 47



Section 40(C)(6)(b)

(6) Definitions. xxx

(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean:

(i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the

properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transactions shall be treated as a single unit: Provided, finally, That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor.

Slide 48


16 October 2013

Lopez Group 25


Thank you!

16 November 2013

Slide 49

2013 Isla Lipana & Co. All rights reserved. Isla Lipana & Co. is a Philippine

member firm of the PricewaterhouseCoopers global network. In this document,

PwC refers to the network of member firms of PricewaterhouseCoopers

International Limited, each of which is a separate and independent legal entity.

PICPA

Tax Case Anabelle

Documents

Transcript of Tax Case Anabelle