July 7 2025 Tax Updates

COURT OF TAX APPEALS DECISIONS

A non-stock, non-profit mutual benefit association is not subject to Local Business Tax (LBT) as it is neither engaged in business nor classified as a financial institution or insurance company. Under Sections 131(d) and 143(f) of the Local Government Code (LGC), LBT may only be imposed on entities engaged in business or profit-driven financial activities, while Sections 190 and 403 of the Insurance Code expressly exclude mutual benefit associations (MBAs) from the definitions of “insurance companies” and “financial institutions”; applying these provisions, the Supreme Court held that a non-stock, non-profit MBA operating solely for the benefit of its members by providing financial assistance such as sickness, death, and unemployment benefits is not engaged in business or profit-seeking activity and therefore cannot be subjected to LBT, rendering the assessment and issuance of a tax order of payment void for lack of legal basis. (Public Safety Mutual Benefits Fund., Inc. v. Laquian, CTA Case No. 289, February 12, 2025)

A Tax Order Payment (TOP) is considered an assessment if it states the nature and amount of the tax and penalties even without citing the exact ordinance provision as long as it sufficiently informs the taxpayer (tax type, base, implied rate, and surcharges). Section 195 of the Local Government Code requires that a local tax assessment must include the nature of the tax, the amount of deficiency, and the applicable surcharges, interest, and penalties for it to be valid; applying this, the TOP issued was deemed sufficient as it clearly indicated the tax type (“FINANCIAL INSTITUTION – INSURANCE COMPANIES”), the tax base, rate (implied at 60% of 1%), and total amount due including penalties, which aligns with the rate prescribed under Section 21.02(1) of the City of San Juan Revenue Code of 2013, thereby upholding its validity and showing no due process violation despite the taxpayer’s failure to recognize the ordinance provision cited. (Public Safety Mutual Benefits Fund., Inc. v. Laquian, CTA Case No. 289, February 12, 2025)

Accused is acquitted for alleged willful failure to pay tax, ruling that the assessment was void due to improper service of the LOA and FAN/FLD, which violated her right to due process. Under Section 255 of the National Internal Revenue Code (NIRC) of 1997, as amended, a taxpayer who willfully fails to pay any tax, file a return, or supply accurate information may be held criminally liable. Here, the CTA acquitted the accused, Lanila Madayag Diaz-Salayog, for failure of the prosecution to prove her guilt beyond reasonable doubt. The Court held that the Bureau of Internal Revenue (BIR) failed to properly serve the Letter of Authority (LOA) and Final Assessment Notice/Formal Letter of Demand (FAN/FLD), both of which are essential to establish a valid tax assessment and a willful failure to pay taxes. The LOA was improperly delivered to an unauthorized person at an address different from the taxpayer’s registered address, and there was no competent justification or proof for the substituted service. Similarly, the FAN/FLD lacked proper evidence of mailing and receipt, such as registry receipts or an affidavit of service. Due to these procedural lapses, the assessment was rendered void, and without a valid assessment, neither criminal liability nor civil liability for the alleged ₱10.67 million deficiency income tax for 2014 could arise (People of the Philippines v. Lanila Madayag Diaz, CTA Crim Case No. O-999, January 15, 2025)

Accused was acquitted as the cigarettes found in his van were inadmissible evidence, seized through an invalid warrantless search lacking probable cause despite his admitted possession.  A mere unexplained possession of imported articles subject to excise tax, for which no tax has been paid, is punishable regardless of ownership. In this case, Victor Gaw Sy was apprehended driving a van containing 5,000 reams of imported “Two Moon” and “Blue Moon” cigarettes with unpaid excise taxes amounting to ₱1.75 million. Although Sy claimed he was unaware of the contents and was merely hired to transport the van, the Court found he had animus possidendi (intent to possess) due to his conscious physical control of the goods. However, the Court ruled that the warrantless search and seizure of the vehicle and cigarettes was unconstitutional due to the absence of probable cause and irregularities in the checkpoint procedure, rendering the seized evidence inadmissible and ultimately acquitting the accused. (People of the Philippines v. Victor Gaw Sy, CTA Case No. O-1050, January 15, 2025)

The tax assessment against Smart Communications was cancelled because it was partly prescribed, issued without jurisdiction over receipts recorded in Tuguegarao City, and based on arbitrary estimates unsupported by an audit of its records. Provinces may impose a franchise tax on businesses operating within their territorial jurisdiction based on gross receipts. Moreover, the law limits the assessment of local taxes to within five years from the date they become due. In this case, Smart Communications Inc. was assessed by the Province of Cagayan for local franchise taxes amounting to ₱48.59 million covering the years 2011 to 2015. Smart argued that it was exempt under its legislative franchise (R.A. No. 7294) which included a “tax in lieu of all taxes” clause, and also invoked the Public Telecommunications Policy Act’s equality clause. The Court rejected these defenses, affirming prior Supreme Court rulings that the “in lieu of all taxes” clause covers only national taxes, not local ones, and that Section 23 of the PTPA does not grant a tax exemption. However, the Court held that the 2011 assessment had prescribed, the Province had no authority to tax gross receipts recorded in Tuguegarao City, and that the assessments were invalid for being based on arbitrary, uniform estimates without examining Smart’s books. Thus, the Court cancelled the entire tax assessment and enjoined its collection (Smart Communications Inc. v. Province of Cagayan, CTA AC No. 291, Civil Case No. 8456, February 17, 2025)

The Regional Trial Court (RTC) correctly dismissed the petition, ruling that appeals from a local treasurer’s denial of tax protest under Section 195 of the LGC are original actions, as it involves judicial review of a non-judicial entity’s ruling. Under Section 195 of the Local Government Code (LGC) of 1991, a taxpayer may file an appeal with a court of competent jurisdiction within 30 days from receipt of the denial of a protest issued by the local treasurer against a local tax assessment. The Supreme Court clarified that such appeal is an exercise of original jurisdiction by the RTC because the local treasurer, as a non-judicial entity, does not render judicial decisions subject to appellate review. Applying this to the case, the RTC of Taguig City correctly dismissed the petition on the ground that appeals under Section 195 of the LGC are original actions, not appellate in nature, thus affirming its authority to exercise original jurisdiction over the taxpayer’s challenge to the local treasurer’s denial of protest (Lucio Tan Group, Inc. v J. Voltaire R. Enriquez, in his capacity as City Treasurer of Taguig City, CTA AC No. 300, February 12, 2025)

Under Section 196 of the Local Government Code (LGC), a refund claim applies in the absence of a valid assessment, which must state the nature, amount, and legal basis of the tax; otherwise, any court action without prior refund claim is premature. Under Section 196 of the LGC of 1991, a taxpayer may claim a refund of erroneously or illegally collected taxes by first filing a written claim with the local treasurer, and only after doing so may initiate a judicial action, provided both actions are filed within two years from the date of payment. In this case, petitioner paid local taxes on March 27, 2023 to the City Treasurer of Taguig as alleged deficiency business tax on dividend income, and subsequently filed a Petition for Review before the RTC without first submitting a written claim for refund. The document titled “Tax Deficiency Assessment for the Year 2022” lacked the necessary elements of a valid assessment under Section 195, such as the nature of the tax, factual and legal bases, and clear reference to applicable laws or ordinances. As such, Section 195 was inapplicable, and the proper remedy was under Section 196. However, petitioner’s letters to the City Treasurer only protested the assessment but did not specifically request a refund, thus failing to comply with the administrative prerequisite. Because no valid administrative claim for refund was filed prior to seeking judicial relief, the Petition for Review was dismissed for prematurity and failure to exhaust administrative remedies, despite the payment having been made within the allowable two-year period (Lucio Tan Group, Inc. v J. Voltaire R. Enriquez, in his capacity as City Treasurer of Taguig City, CTA AC No. 300, February 12, 2025)

BIR RULINGS

Prior service in a merged entity may be counted toward the ten-year requirement for tax-exempt retirement benefits, provided the merger was beyond the employee’s control and no separation pay was received. Pursuant to Section 32(B)(6)(a) of the National Internal Revenue Code (Tax Code), retirement benefits received by employees are exempt from income tax if the employee has rendered at least ten (10) years of service in the same employer and is at least fifty (50) years old at retirement. Under the Certificate of Qualification granted by the Bureau of Internal Revenue (BIR) to the BPI Group of Companies, and guided by relevant rules and jurisprudence, the ten-year service requirement may include aggregate years of service rendered by BFSBI employees prior to their absorption into BPI, provided the transfer was due to a valid merger beyond the employees’ control and no separation benefits were received. Accordingly, in the context of the approved merger between BPI and BFSBI effective January 1, 2022, the BIR confirms that: (1) the BFSBI employees’ prior service may be credited toward the tenure requirement under the Retirement Plan; and (2) the tax-exempt status of retirement benefits, the tax exemption of Retirement Fund investment income, and the deductibility of employer contributions to the Retirement Fund remain unaffected, so long as the conditions under the law and Certificate of Qualification continue to be met. (BIR Ruling No. OT-068-2024, December 26, 2024)

Sale and printing of educational books not principally for advertisements and compliant with NBDB rules are VAT-exempt, and thus not subject to 5% creditable withholding VAT by government purchasers. Pursuant to Section 109(1)(R) of the National Internal Revenue Code of 1997, as amended, in relation to Republic Act No. 8047 and Revenue Regulations No. 16-2005, the sale, importation, printing, or publication of books and educational materials—including digital formats—is exempt from Value-Added Tax (VAT), provided such materials are not principally for paid advertisements and comply with National Book Development Board (NBDB) requirements. Applying this provision, the Bureau of Internal Revenue confirmed that Mexico Printing Company, Inc. (MPCI), as an NBDB-registered book publisher and printer engaged in contracts with the government, is exempt from the 12% VAT on qualified transactions. Consequently, government entities purchasing such VAT-exempt materials from MPCI are not required to withhold the 5% creditable VAT under RMO No. 23-2014. However, MPCI’s non-exempt printing activities remain subject to VAT, and its purchases from suppliers are still subject to 12% VAT, as VAT exemptions apply only to its sales of qualified educational materials and not to its inputs. (BIR Ruling No. VAT-067-2024, December 18, 2024)

Coconut sap sugar processed through simple boiling with polarization below 99.5° and color above 800 ICU is considered in its original state and thus exempt from VAT. Pursuant to Section 109(1)(A) of the National Internal Revenue Code of 1997, as amended, and in relation to Revenue Regulations No. 8-2015, agricultural food products in their original state, including those that undergo simple processes such as boiling, may be exempt from VAT. Applying this provision, coconut sap sugar, produced through basic farm-level processes like boiling and drying, and meeting the specified thresholds of polarization (below 99.5°) and color (above 800 ICU), is deemed to be in its original state and thus qualifies as a VAT-exempt agricultural product. (BIR Ruling No. VAT-066-2024, November 15, 2024)

Leases and local purchases directly used in the development and installation of a certified renewable energy project are subject to 0% VAT. Pursuant to Section 15(g) of Republic Act No. 9513 (Renewable Energy Act) and Section 108(B)(3) of the Tax Code, as amended, purchases and leases of goods, properties, and services by a Department of Energy-certified renewable energy developer are subject to zero percent (0%) VAT, provided they are directly used in the development, construction, and installation of renewable energy facilities. Applying this, transactions such as the lease of land and procurement of local supplies and services for a certified solar power project are VAT zero-rated, subject to post-audit by the BIR to ensure the inputs were indeed utilized for the qualified activities. (BIR Ruling No. OT-065-2024, November 13, 2024)

Property transfers pursuant to a court-approved Declaration of Nullity of Marriage and adjudication to common children as presumptive legitimes are not subject to CGT, donor’s tax, or DST. Under Sections 24(D)(1), 98(A), and 188 of the Tax Code, as amended, and relevant BIR rulings, transfers of real properties arising from a court-approved Declaration of Nullity of Marriage are not subject to capital gains tax, donor’s tax, or documentary stamp tax (DST), as these are not considered sales, donations, or dispositions with monetary consideration but rather judicial partitions or distributions in compliance with property settlement. Additionally, the adjudication of property to common children as presumptive legitimes is also exempt from CGT and DST but must be annotated on the titles and will form part of the gross estate for estate tax purposes upon the death of either parent. (BIR Ruling No. OT-062-2024, October 18, 2024)

Tax exemption was denied due to private inurement arising from excessive fringe benefits comprising 40% of operating expenses, violating the non-profit requirement. Under Par. 3, Sec. 4, Art. XIV of the 1987 Constitution and Section 30(H) of the NIRC of 1997, non-stock, non-profit educational institutions are exempt from income tax only if their revenues are actually, directly, and exclusively used for educational purposes; however, due to substantial fringe benefits and incentives comprising 40% of operating expenses, which constitute private inurement, the institution failed to meet the non-profit requirement and was thus denied income tax exemption and reclassified as a proprietary educational institution subject to the 10% preferential tax under Section 27(B). (BIR Ruling No. SH30-063-2024, October 18, 2024)

The transfer of real properties via deeds of assignment by a liquidating government entity to the National Government, though akin to dacion en pago, is exempt from CGT, donor’s tax, and DST as it is a non-profit governmental function pursuant to its statutory mandate. Pursuant to Sections 24(D)(1), 98, 99, 101, 173, 188, 196, and 199 of the NIRC of 1997, as amended, Section 132(e) of R.A. No. 7653 (New Central Bank Act), and Section 66 of R.A. No. 6657 (CARL), the deeds of assignment executed by the CB-Board of Liquidators (CB-BOL) in favor of the Republic of the Philippines (ROP), although containing provisions similar to a dacion en pago and ordinarily taxable as a sale or disposition, are not subject to capital gains tax (CGT), donor’s tax, or documentary stamp tax (DST), as the transfers were made in performance of CB-BOL’s statutory duty to liquidate residual assets not transferred to the BSP, and such disposition by a government entity to the National Government is considered a governmental act not undertaken for profit, and therefore entitled to tax exemptions. (BIR Ruling No. OT-061-2024, October 8, 2024)

BIR DEADLINES FROM JULY 8, TO MAY 13 2025. A gentle reminder on the following deadlines, as may be applicable: