Month: June 2022

BIR RULINGS

• Taxpayer is exempt from income tax and creditable withholding tax on its income received directly in connection with its economic and low-cost housing project, consisting of house and lot units solely for family home or dwelling purposes, a project duly registered with the Board of Investments (BOI).
  • Moreover, the sale by the Company of residential lot valued at P1,919,500.00 and below, or house and lot and other residential dwellings valued at P3,199,200.00 and below, is VAT-exempt under Section 109 (1)(P) of the Tax Code. Provided, however, that beginning January 01, 2021, the VAT exemption shall only apply to sale of house and lot and other residential dwellings with selling price of not more than P3,199,200.00.
  • However, the sale of house and lot units in excess of the house and lot units registered with the BOI, if any, including those units used for commercial purposes such as leasing, retails stores, offices, etc. shall be subject to the payment of appropriate taxes under the Tax Code. (BIR Ruling No. 011-2022, BIR Ruling No. 012-2022, BIR Ruling No. 018-2022, BIR Ruling No. 020-2022, BIR Ruling No. 023-2022, BIR Ruling No. 026-2022, BIR Ruling No. 027-2022, BIR Ruling No. 028-2022, BIR Ruling No. 029-2022, BIR Ruling No. 030-2022, BIR Ruling No. 037-2022)

• A non-stock corporation or association organized and operated exclusively for religious purposes, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person is exempt from income taxation. However, income of whatever kind and character of religious institutions from any of their properties, real or personal, regardless of the disposition made of such income, shall be subject to tax.
  • Hence, any income derived from the sale of real property, regardless of how income is used, whether for profit or non-profit purposes, is subject to the corresponding internal revenue taxes imposed under the Tax Code.
  • Therefore, the sale of the property by a religious institution is subject to capital gains tax based on the gross selling price or current fair market value, whichever is higher, of such land. Moreover, the Deed of Absolute Sale of said real property shall be subject to DST. (BIR Ruling No. 013-2022)

• Cancellation of shares and re-issuance thereof to the Republic of the Philippines pursuant to several Supreme Court decisions, is exempt from capital gains tax, donor’s tax and documentary stamp tax.
  • Capital Gains Tax - The transfer of shares in favor of the Republic of the Philippines without any monetary consideration, and made in order to give effect to the mentioned laws, is not subject to capital gains tax.
  • Donor’s Tax - There is no intention to donate as the transfer was made in compliance with the above-mentioned laws. The transfer of the legal title to the Republic of the Philippines is only a confirmation of its ownership over the said shares, and there is no donative intent or act of liberality involved.
  • Documentary Stamp Tax - There is no sale, agreement to sell, or memorandum of sale, or deliver or transfer contemplated under Sec. 175 of the Tax Code. However, the notarial acknowledgment on the Deed of Compliance is subject to the documentary stamp tax. (BIR Ruling No. 016-2022; (BIR Ruling No. 039-2022)

•  Merger of two companies, whereby the assets and liabilities are transferred in exchange of shares of stock is considered as tax-free merger, where no gain or loss shall be recognized from the transfer all assets and liabilities.
  • Moreover, no gain or loss shall be recognized by the transferee on its receipt of assets and liabilities of the transferor.
  • One of the requisites of a valid donation is the intent to do an act of liberality. Where the purpose of donation is purely for legitimate business purposes – there is no intention to donate and the transaction is bona fide effected solely for business reasons -  the merger will not be subject to gift tax. (BIR Ruling No. 017-2022; (BIR Ruling No. 019-2022)

• An entity engaged by National Housing Authority is exempt from project-related income taxes and creditable withholding taxes on it income received directly in connection with the construction/development of socialized housing units.
  • Moreover, the delivery of socialized housing units are exempt from VAT provided that selling price does not exceed the VAT threshold.
  • However, the purchases of goods/articles shall be subject to VAT, even if the said purchases are to be used for the socialized housing project, since VAT is an indirect tax which can be passed on by the seller of the goods/services. The seller must issue VAT exempt official receipts on its gross receipts from the said socialized housing project. (BIR Ruling No. 023-2022)

• Retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer are exempt from income tax, provided, that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement  shall not be included in gross income and shall be exempt from taxation.
  • Where the Company has an approved reasonable retirement benefit plan, the retirement benefits that will be received by its retiring employee shall be exempt from income tax, provided that the employees meet two (2) conditions: (1) the employee had been in the service of the same private firm for at least ten (10) years; and (2) he is at least fifty (50) years old at the time of retirement.
  • Hence, if the retiring employee is at least sixty (60) years old but has not been in the service of the for at least ten (10) years at the time of his retirement, the retirement benefits that he will receive shall not be exempt from income tax.
  • Moreover, pursuant to Section 2.78.1 of Revenue Regulations (R) No. 2-98, as amended, the terminal pay, i.e., commutation and payment of monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. Conversely, the cash equivalent of vacation leave exceeding ten (10) days is subject to tax. However, this same principle cannot apply to sick leave credits since an employee must actually go on sick leave to be able to avail of said leave credits.
  • It is, however, understood that this exemption does not include the payment of the retiring employees' salaries, except if minimum wage earners, and the payment of the 13th month pay and other benefits in excess of the Php90,000.002 threshold which shall be subject to income tax, and consequently to withholding tax, under Section 2.78.1 (A)(3)(a) and (A)(7) of RR No. 2-98, as amended. (BIR Ruling No. 024-2022)

• An invention is exempt from all kinds of taxes for the first 10 years from the date of first sale provided that tax exemption privilege pertaining to invention shall be extended to the legal heirs or assignee upon the death of the investor. The technologies, their manufacture or sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports.
  • The invention must be new and original and the technology is newly developed by local researchers or adopted locally from foreign sources.
  • In other words, the tax exemption for the inventor only and not for any other entity that commercially produces and distributes the invented product.BIR Ruling No. 025-2022)

• A non-stock, no-profit educational institution is  exempt from income tax only on the following revenues or receipts:
  • Tuition and Miscellaneous Fees; and
  • Income derived from the operations of cafeterias/canteens, dormitories and bookstores located within its premises, owned and operated by institutions to be actually, directly and exclusively used for educational purposes.
• It is also exempt from VAT on educational services (BIR Ruling No. 031-2022, BIR Ruling No. 034-2022)

• The Deed of Absolute Donation being a gift in favor of a political subdivision of the Government, is exempt from the payment of the donor’s tax pursuant to Section 101 (A) (1) of the Tax Code.
  • The Deed of Donation is likewise not subject to the Documentary Stamp Tax (DST) under Sec. 196 but only to the DST of P15.00 imposed under Sec. 188.  (BIR Ruling No. 035-2022)

• That the Deed of Absolute Donation being a gift in favor of a religious corporation is exempt from the payment of the donor’s tax pursuant to Section 101 (A) (1) of the Tax Code, subject to the condition that not more than thirty percent (30%) of said gift shall be used by the done for administration purposes.
  • The Deed of Donation is likewise not subject to the Documentary Stamp Tax (DST) under Sec. 196 but only to the DST of P15.00 imposed under Sec. 188.  (BIR Ruling No. 036-2022, BIR Ruling No. 038-2022)

• The transfer of the legal title of the company shares from its former trustees to new sets of officers over the company shares, is exempt from the following taxes:
  • Capital gains tax  considering that the transfer involves neither monetary consideration nor change in beneficial ownership as the transfer for the new set of officers will be limited only to the transfer of the legal title.
  • Donors tax considering that there is no intention on the part of any of the parties to donate the shares since the transaction is purely for a legitimate business purpose
  • Documentary stamp tax as the transfer is without change in beneficial ownership (BIR Ruling No. 042-2022)

CLARIFICATION ON THE INCOME TAX TREATMENT OF DIFFERENT CLASSIFICATIONS OF EDUCATIONAL INSTITUTIONS (Revenue Memorandum Circular No. 78-2022, June 8, 2022)

• Proprietary Educational Institution refers to any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
• Income from proprietary educational institutions which are domestic corporations is subject to ten percent (10%) preferential income tax. Provided that beginning July 1, 2020 until June 30, 2023, the tax rate shall be one percent (1%)
• Moreover, the same tax rate shall be applicable to a domestic educational institution which is also a non-stock, non-profit (NSNP) whose net income or assets accrue/inure to or benefit any member or specific person.
• If the revenue or income not used actually, directly and exclusively for education purposes exceeds fifty percent (50%) of the total gross income derived from all sources, the regular corporate income tax shall be imposed on the entire taxable income of the institution.
• Applicable tax on other proprietary educational institutions:
  • Individual - income of an individual, trust, or estate that owns the proprietary educational institution as a sole proprietor, is taxable under Sections 24 and 25 of the Tax Code, and the applicable tax rates shall depend on the citizenship and residence of such individual, trust, or estate.
  • Other Corporations - The income of a corporation, as defined under Section 22(B) of the Tax Code, that is not organized as domestic corporation but is classified as resident foreign corporation, is taxable under Section 28(A) of the Tax Code.
• Contributions or Gifts/Donations to Educational Institutions
  • Individuals – an amount not in excess of 5% of their taxable income.
  • Corporation – an amount not in excess of 10% of their taxable income
  • Contributions or gifts actually paid or made within the taxable year to domestic corporations organized and operated exclusively for educational purposes may be allowed as deduction from the gross income in an amount provided that no part of the net income or asset of the done corporations inures to the benefit of any individual or private stockholder.
  • The amount may be deductible in full if the conditions under Section 34(H)(2)(c) of the Tax Code are complied with.
  • Certain gifts or donations in favor of an NSNP educational institution may be exempt from donor's tax, subject to the condition that not more than thirty percent (30%) of said gifts shall be used by the donee institution for administration purposes
• Withholding Tax:
  • An educational institution shall be constituted as withholding agent if he acts as an employer or makes payments to individual or corporations subject to withholding tax pursuant to Section 57 of the Tax Code.
  •  NSNP educational institutions are not subject to creditable final withholding taxes on their revenues and assets used actually, directly and exclusively for educational purposes.
  • Income payments to proprietary educational institutions, including NSNP education institutions, which are subject to preferential income tax are subject to creditable and final withholding tax.
  • Educational institutions organized as sole proprietorships under Sec. 24 (A)(2) (a or b) are also subject to creditable and final withholding taxes.
• NSNP educational institutions are required to secure a one-time certificate of income tax exemption or exemption ruling from the BIR. Otherwise, the income of the NSNP educational institution shall be subject to applicable taxes under the Tax Code.

ALL FIELD AUDITS ARE SUSPENDED UNTIL FURTHER NOTICE; NO NEW LETTER OF AUTHORITY/MISSION ORDER WILL BE ISSUED (Revenue Memorandum Circular No. 77-2022, May 30, 2022)

• All field audits and other field operations of the Bureau of Internal Revenue covered by Letters of Authority/Mission Orders relative to examinations and verifications of taxpayers’ books of accounts, records, and other transactions are suspended until further notice.
• No new Letters of Authority/Mission Orders will be further issued.
• No written orders to audit and/or investigate taxpayers’ internal revenue tax liabilities shall be issued and/or served, except in the following cases:
  • Investigation of cases prescribing on or before October 31,2022;
  • Processing and verification of estate tax returns, donor's tax returns, capital gains tax returns and withholding tax returns on the sale of real properties or shares of stocks together with the documentary stamp tax returns related thereto;
  • Examination and/or verification of internal revenue tax liabilities of taxpayers retiring from business; or Audit of National Government Agencies (NGAs), Local Government Units (LGUs) and Government Owned and Controlled Corporations (GOCCs) including subsidiaries and affiliates; and
  • Other matters/concerns where deadlines have been imposed or under the orders of the Commissioner of Internal Revenue.
• Service of Assessment Notices, Warrants, and Seizures Notices should still be effected.
• Taxpayers may voluntarily pay their known deficiency taxes without the need to secure authority  from concerned Revenue Officials.