INSIGHTS is a monthly publication of BDB LAW to inform, update and provide perspectives to our clients and readers on significant tax-related court decisions and regulatory issuances (includes BIR, SEC, BSP, and various government agencies).

DISCLAIMER: The contents of this Insights are summaries of selected issuances from various government agencies, Court decisions, and articles written by our experts. They are intended for guidance only and as such should not be regarded as a substitute for professional advice.

Copyright © 2022 by Du-Baladad and Associates (BDB Law). All rights reserved. No part of this issue covered by this copyright may be produced and/or used in any form or by any means – graphic, electronic, and mechanical without the written permission of the publisher.

A tax liability may be compromised at any stage of taxation subject to certain rules and exceptions provided in the revenue regulations issued by the BIR.

The taxpayer was assessed for alleged deficiency DST. The CIR issued a Warrant of Garnishment against the taxpayer. The CTA in division and CTA En Banc both ruled that the assessment against the taxpayer is void. Aggrieved, the CIR elevated the case before the Supreme Court but the latter denied the former’s Petition. The CIR then filed a motion for reconsideration.

While the CIR’s motion for reconsideration is pending before the Supreme Court, the taxpayer filed a Manifestation with Motion to Render Judgment Based on Judicial Compromise Agreement requesting the High Court to approve the said agreement executed by both parties.

The Supreme Court found the Judicial Agreement executed by the parties in order. It ruled that a tax liability may be compromised at any stage of taxation subject to certain rules and exceptions provided in the revenue regulations issued by the BIR. The CIR is authorized to compromise, abate, refund or credit taxes. In the absence of any grave abuse of discretion, the authority of the CIR to compromise is purely discretionary and the courts cannot interfere with his exercise of discretionary functions. The Court thus denied the motion for reconsideration for being moot and academic and granted the parties’ Motion to Render Judgment Based on the Judicial Compromise Agreement. (Commissioner of Internal Revenue v. Oriental Assurance Corporation, G.R. No. 251677, July 28, 2021, date uploaded: August 26, 2022)

The 30-day period to elevate a claim for refund to the CTA commences after the receipt of the CIR’s decision or ruling or after the expiration of the 120-day (now 90-day) period, whichever is sooner.

In this case, the taxpayer failed to submit competent evidence that its clients are nonresident foreign corporations doing business outside the Philippines. The taxpayer presented “foreign business registration printouts.” However, in lieu of submitting duly authenticated proof of official foreign record, the taxpayer submitted mere printouts thereof, retrieved from AMINET database.

The Court partially denied the taxpayer’s claim for refund of unutilized input VAT for the first quarter of CY 2017. The Court held that for purposes of VAT zero-rating under Section 108(B)(2) of the Tax Code, the claimant must establish the two components of its client’s status as a non-resident foreign corporation, namely: (1) it is not a domestic corporation; and (2) it is not engaged in trade or business in the Philippines.

Thus, failure to present proof of the second element, i.e., that the affiliate is not doing business in the Philippines, is fatal to its claim for refund. Taxpayers are not precluded from adducing other competent evidence to prove an entity’s status as a non-resident foreign corporation. (Commissioner of Internal Revenue v Deutsche Knowledge Services, CTA EB No. 2423 (CTA Case No. 7921, July 01, 2022)
The taxpayer filed a claim for refund of its unutilized input VAT for the period from August 1, 2003 to December 31, 2004.

The Court En Banc affirmed the CTA third division’s decision denying the judicial claim for refund. It ruled that the judicial claim was filed out of time. An administrative claim for refund must be filed with the BIR within two (2) years after the close of the taxable quarter where the sales were made. In case of an adverse decision or ruling, or inaction of the CIR, the taxpayer is given a period of 30 days from receipt of the decision or ruling, or the expiration of 120-day (now 90-day) period fixed by law to file a Petition for Review. The Court En Banc emphasized that the 30-day period commences after the receipt of the CIR’s decision or ruling or after the expiration of the 120-day period, whichever is sooner.

In this case, the taxpayer filed its administrative claim for refund on August 30, 2005. Thus, the CIR has 120 days from August 30, 2005 or until December 28, 2005, to act on the taxpayer’s administrative claim for refund. Thereafter, the taxpayer had 30 days, or until January 27, 2006 to challenge CIR’s inaction. However, the taxpayer belatedly filed its Petition for Review on September 27, 2018 under the assumption that the 30-day period to appeal to the CTA should be reckoned from August 28, 2018, the receipt of the decision on its administrative claim for refund. (Pulp Specialties Philippines, Inc., CTA EB No. 2575 [CTA Case No. 9936], August 31, 2022)

There must be grant of authority, through a LOA before any revenue officer can conduct an examination or assessment.

The Court declared null and void assessment for deficiency taxes for taxable year 2010. The Court held that there must be grant of authority, through a LOA before any revenue officer can conduct an examination or assessment. In the absence of such authority, the assessment or examination is a nullity.

In the present case, the reassignment of the examination of taxpayer’s books to RO Cruz, RO Vega, and GS Zamora through revalidation violated RMO No. 43-90, which stated that any reassignment/transfer of cases shall require issuance of new LOA. Anent the MOA issued in favor of RO Gazzingan and GS Gorospe, it was held void as it is not proof of the existence of authority of the substitute or replacement revenue officer. Thus, the revalidation of LOA and the issuance of the MOAs are insufficient to clothe them with authority to conduct the examination of taxpayer. Accordingly, the subject assessments are void and bear no valid fruit. (Tricom Systems (Philippines), Inc. v Commissioner of Internal Revenue, CTA Case No. 9514, July 07, 2022)

The CTA Division has the authority to consider in its decision the question on the scope of authority of the revenue officers who were named in the LOA even though the parties had not raised the same in their pleadings or memoranda.

This resolves CIR’s Motion for Reconsideration, arguing that petitioner did not question the RO's authority to conduct the tax examination neither in its Petition for Review, Pre-Trial Brief, nor defined in the Pre-Trial Order. Thus, the Court erred when it ruled such issue that was never raised by the taxpayer.

The Court held that CTA Division has the authority to consider in its decision the question on the scope of authority of the revenue officers who were named in the LOA even though the parties had not raised the same in their pleadings or memoranda.

Here, holding that it may be true that the issue on the authority of the RO to conduct the tax examination was not raised by the taxpayer in its pleadings, however, this Court is not precluded from ruling on such issue under the rules and regulations, and jurisprudence. The determination of the RO's authority is necessary in the achievement of an orderly disposition of the instant case as the validity of the assessment emanates from the valid authority of said RO. Moreover, the LOA is a document that will satisfy the valid delegation of authority by the CIR to his representatives of his power to make assessment under the 1997 NIRC, as amended. (The Merry Cooks, Inc. v. CIR, CTA Case No. 10004, August 18, 2022)

The CTA is not precluded from accepting evidence that was not presented at the administrative level.

Attribution of the input VAT to the zero-rated sales need not always be direct

In a recent case of Commissioner of Internal Revenue v. McDonald's Philippines Realty Corp., the Supreme Court emphasized that due process requires the identification of tax agents authorized to continue the tax audit or investigation through an LOA. Taxpayer should be informed of the names of the tax agents who are duly authorized to conduct examination and assessment of the taxpayer's books and accounting records through an LOA. It is a jurisdictional requirement of a valid audit and therefore a valid assessment. There has to be a link between the LOA and the revenue officer who will conduct an examination of the taxpayers books of accounts and accounting records.

Moreover, the purpose of a Mission Order is different from an LOA. A Mission Order is issued to authorize the surveillance pursuant to Section 6(C) of the Tax Code, as amended, not the audit and assessment, of the taxpayer.

Here, the revenue officers involved in this case were not authorized by virtue of an LOA to conduct an examination and inspection of the taxpayer’s books of accounts, their authority having emanated from a Mission Order, the assessments resulting therefrom are inescapably void and must be slain at sight. Needless to say, void assessments bear no valid fruit. (CIR v. Autostrada Motore, Inc., CTA EB No. 2375 (CTA Case No 9624) July 21, 2022)

The Court of Tax Appeals can exercise jurisdiction over a criminal case under the Tariff and Customs Code referred by the Court of Appeals.

A case for Smuggling under Section 3601 of the Tariff and Customs Code of the Philippines was lodged before the CTA against an accused. Accused then questioned the jurisdiction of the CTA in taking cognizance of the Smuggling case filed before it.

CTA Division ruled that it has jurisdiction over the case. The CTA Division explained that when a court has no jurisdiction over the subject matter, the only power it has is to dismiss the action. Without jurisdiction to take cognizance of accused-appellant's appeal, the CA should have dismissed, as a matter of course, the appeal outright, and not transfer or refer the same to the appropriate court, which in this case is this Court.

However, the CA referred accused-appellant's appeal to the CTA by invoking the ruling of the Supreme Court in Rolando S. Sideno vs. People of the Philippines. (People of the Philippines vs. Ian Christopher Miguel Y Bayoneta, CTA Crim Case No. A-7, August 10, 2022)

The second sentence of Section 1117 of the CMTA is applicable only when the District Collector determines that there is no probable cause for the issuance of a warrant of seizure; hence, the issuance of an order of release of the imported goods.

On 3 March 2017, the District Collector (DC) rendered a Consolidated Decision ordering the quashal of the Warrants of Seizure and Detention (WSD) issued against the motor imported motor vehicles of the taxpayer and ordered the continuous processing of the import entries upon payment of additional duties and taxes. On 4 October 2017, the Commissioner of Customs (COC) rendered a Decision, reversing and setting aside the DC’s Consolidated Decision and ordering the forfeiture of the subject vehicles in favor of the government. In its Petition for Review, the taxpayer claimed that the COC's inaction within 48 hours from the issuance of the Consolidated Decision already rendered the shipments as "deemed released", pursuant to Section 1117 of RA No. 10863 or the Customs Modernization and Tariff Act (CMTA).

The Court ruled that the second sentence of Section 1117 of the CMTA is applicable only when the District Collector determines that there is no probable cause for the issuance of a warrant of seizure; hence, the issuance of an order of release of the imported goods. When the District Collector issues an order of release, the COC has a limited period to review the said order (i.e., 48 hours or 24 hours in case of perishable goods); otherwise, the imported goods shall be deemed released. A perusal of the Consolidated Decision reveals that the DC ordered the quashal of the WSDs, and the payment of additional duties, taxes and surcharges for the subject vehicles. It is not an order of release. (Monacat Trading v. Commissioner of Customs, Bureau of Customs, CTA Case No. 9851, August 4, 2022)

Mere entry of wrong information in tax returns due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return.

The CTA En Banc ruled that the mere entry of wrong information in tax returns due to mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return.

In this case, the stamping of "Tentative Exempt Organization" on Bethany Hospital's income tax return, even if Bethany Hospital is not a tax-exempt institution but is subject to 10% preferential tax rate, is not sufficient evidence to prove that Respondent intended to evade tax. Thus, it does not constitute a false return. (Commission of Internal Revenue vs. United Church of Christ in the Philippines, CTA EB No. 2346, 02 August 2022)

Revenue Memorandum Circular No. 120-2022 dated August 18, 2022

Additional Guidelines and Procedures on the Manner of Payment of Penalty Relative to Violations Incurred by Registered Business Enterprises (RBEs) in the Information Technology-Business Process Management (IT-BPM) Sector on the Conditions Prescribed Regarding Work-From-Home (WFH) Arrangement for the Period April 1, 2022 until September 12, 2022.

The Fiscal Incentives Regulatory Board (FIRB) issued FIRB Resolution No. 017-22 for RBEs in the IT-BPM sector allowing their respective Investment Promotion Agencies (IPAs) to continue implementing WFH arrangement without adversely affecting their fiscal incentives under the CREATE Act from April 1, 2022 until September 12, 2022 only. The number of employees under the WFH arrangement shall not exceed thirty percent (30%) of the total workforce of the RBE, while the remaining seventy percent (70%) of the total workforce shall render work or service within the geographical boundaries of the ecozone or freeport being administered by the IPA with which the project/activity is registered. The total workforce shall refer to the total employees directly or indirectly engaged in the registered project or activity of the RBE but excludes third-party contractors rendering janitorial or security services and other similar activities.

Relative thereto, non-compliance of the RBEs in the IT-BPM sector with the prescribed conditions under FIRB Resolution No. 017-22 for at least one day shall result in the suspension of its income tax incentives for the month when the violation took place. In such a case, the RBEs shall pay, as penalty, the regular income tax of either twenty-five percent (25%) or twenty percent (20%), whichever is applicable, for the aforesaid month. In addition, violations committed beyond September 13, 2022 onwards may subject the RBEs to applicable taxes.

Revenue Memorandum Circular No. 122-2022 dated August 18, 2022

Updating of Registration Information Record of Taxpayers Who Will Enroll in the Bureau's Online Registration and Update System.

One of the objectives of the Bureau's Digital Transformation Roadmap in 2022-2023 is to deliver a convenient, accessible and fast registration for taxpayers. In this regard, the Bureau will be launching an Online Registration and Update System (ORUS) that will allow taxpayers to register, update and transact registration-related transactions online.

All taxpayers who intend to transact online with the Bureau thru the ORUS, once available, and those who are currently transacting manually for their registration-related transactions, shall update their registration records, such as e-mail address and contact information using the S1905 — Registration Update Sheet (RUS). The RUS is available at the Client Support Section (CSS) of the Revenue District Office (RDO) and the Bureau's Official Website (www.bir.gov.ph) under the Advisory Section.

The designated e-mail address should be the taxpayer's official e-mail address. This shall be used in serving BIR orders, notices, letters and other processes/communications to the taxpayers.

Registered taxpayers shall update their Head Office registration first before updating their branches. In case of employees, employers shall inform their employees regarding this requirement. The RUS may be submitted via e-mail thru the list, to the concerned RDO where the taxpayer is registered.

SEC-OGC Opinion No. 22-10 dated August 15, 2022

Re: Real Estate Investment Trust (REIT).

Pryce is planning to put up a REIT company under the name "Pryce REIT" pursuant to Republic Act No. 9856 or the REIT Act. Once Pryce REIT is incorporated, Pryce is contemplating on leasing to the former some of its real properties used in the operation of its memorial gardens business. In the alternative, Pryce is also considering conveying to Pryce REIT, either through sale or assignment, their real properties.

The types of income that Pryce generates from the operation of the memorial parks are: a) the sale of the burial lots; b) the sale of double interment right; c) collection of periodic maintenance assessment charges; and d) rentals from the use of the memorial park facilities.

The sale of the burial lots and double interment rights, which are the primary sources of income of the memorial parks, are dispositions of real property assets, thus there would be no generation of recurring income for the REIT selling such real property assets. Upon the sale by the REIT of the burial lots and double interment rights to the buyers, the REIT divests itself of its ownership rights in favor of the buyer. Thus, these properties may not be considered as part of the income-generating real estate assets of a REIT.

Meanwhile, the collection of periodic maintenance assessment charges and rentals from the use of the memorial park facilities may fall under the definition of income-generating real estate as these may generate a regular stream of income, same as the nature of the rentals and user's fees mentioned in the definition of REIT under the REIT Act. 8 In this case, there is no deprivation of the REIT's ownership rights over the real property assets subject of these maintenance assessment charges and rentals on the use of the memorial park facilities.

Pryce may lease or convey, either by sale or assignment, its real property assets used in the operation of its memorial parks business to Pryce REIT, provided that Pryce REIT must ensure that at least seventy-five (75%) of its deposited property must be invested in, or consist of, income-generating real estate as discussed above.

SEC Memorandum Circular No. 7, s. 2022 dated August 11, 2022

Rules on Qualified and/or Eligible Personal Equity and Retirement Account (PERA) Investment Products.

The following securities that are registered pursuant to the requirements of the Securities Regulation Code and Investment Company Act are deemed to be eligible PERA investment products.

a. A newly formed mutual fund including any sub-fund of an umbrella fund and Exchange Traded Funds subject to the following requirements:

i. The Fund Manager should have a track record that for the past 5 years prior to its application it has been responsible for the operation and management of a registered mutual fund which has been offered to the general public; and
ii. The name shall contain the words "Personal Equity and Retirement Account" or "PERA."

In the case of a newly formed mutual fund including any sub-fund of an umbrella fund and Exchange Traded Funds, the existing approval process for investment companies shall be observed in the qualification or accreditation as PERA Investment Product subject to the requirements mentioned above.

b. REIT shares
c. Corporate Bonds with an investible rating issued by an accredited Credit Rating Agency
d. Equity Securities which form part of the PSE Dividend Yield Index

The following exempt securities are also considered as eligible PERA Investment Products:

a. Government Securities
b. Securities issued by Bangko Sentral ng Pilipinas
c. Corporate Bonds issued by Banks in compliance with the requirements of the Bangko Sentral ng Pilipinas

BSP Circular No. 1151, Series of 2022 Dated August 24, 2022
This amends the Minimum Capitalization of Rural Banks.

Section 121 of the Manual of Regulations for Banks (MORB), as amended by Circulars No. 1121 and 1142 dated 8 June 2021 and 29 March 2022, respectively, is hereby further amended, as follows:

DOF Opinion 013-2022 dated July 20, 2022

Request for Review of BIR Ruling No. OT-206-2021 Dated 16 June 2021.

Taxpayer is a duly constituted non-stock, non-profit homeowner’s association registered with the SEC. Thus, taxpayer’s income derived from association dues and rentals of its facilities is exempt from income tax, VAT or percentage tax, whichever is applicable. Provided, that such income and dues shall be used for the cleanliness, safety, security, and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages.

However, taxpayer shall be subject to the corresponding internal revenue taxes imposed under the NIRC, as amended, on its income not derived from association dues nor rentals of its facilities, which income should be returned for taxation. Likewise, interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangements, and royalties derived from sources within the Philippines are subject to the 20% final withholding tax; provided, however, that interest income derived by it from a depository bank under the expanded foreign currency deposit system shall be subject to 15% final withholding tax pursuant to Section 27 (D) (1) in relation to Section 57 (A), both of the NIRC, as amended. Taxpayer's gross receipts from operations not derived from rentals of its facilities, association dues, membership fees, other assessment and charges collected in purely reimbursement basis shall be subject to the 12% VAT imposed under Section 108 of the NIRC, as amended, or to the three percent (3%) tax imposed under Section 116 in relation to Section 109 (BB) of the NIRC if the gross sales or receipts from such sale of goods and services do not exceed Three Million Pesos (P3,000,000.00).

Circular Letter No. 2022-40 dated August 9, 2022

Guidelines on voluntary cessation and withdrawal of pre-need business in the Philippines.

A domestic pre-need company intending to voluntarily cease and cancel the registration of all its pre-need plans and run-off its business must submit a letter of intent to voluntarily cease the sales and the cancellation of the registration of its pre-need plans and withdraw its pre-need business before the Insurance Commission.