TAX UPDATE (02/03/2022)

BIR RULINGS

• • To be classified as capital assets for taxation purposes the property must be not actually used in trade or business of the taxpayer, whether or not connected with his trade or business, or not held for lease or sale of customers. Also, if the property is merely held for capital appreciation and investment purposes and remains vacant and idle, it is deemed a capital asset.
    • Real properties owned by taxpayers not engaged in the real estate business or referring to those persons other than real estate dealers, real estate developers and/or real estate lessors, shall, upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving the said real properties, and though classified as ordinary assets, be automatically converted into capital asset. (BIR Ruling No. VAT-334-2021, September 23, 2021).
  • The transfer of the legal title of the shares from the former trustee-appointee to the new trustee-appointee, is not subject to capital gains tax (CGT) considering that the transfer involves neither monetary consideration nor change in beneficial ownership.
    • Furthermore, if there is no transfer or conveyance to the new trustee of the beneficial ownership of or any right, claim or interest over the share or over the assets, transfers cannot be subject to documentary stamp tax and shall not be subject to donor’s tax. (BIR Ruling No. OT-467-2021, December 14, 2021).
  • A foreign corporation, whether or not engaged in trade or business in the Philippines, is subject to income tax only with respect to income derived from sources in the Philippines. With respect to value-added tax (VAT), payments for the sale or exchange of services, including the use or lease of properties are subject to VAT only if the services are performed in the Philippines.
    • Thus, where if a foreign corporation enters a maintenance agreement with the Philippine entity where despite the computer system is located in Manila, the maintenance and repair of the system are to be performed abroad using internet-based remote computer repair technology and no services will be performed in the Philippines and no personnel will be sent herein, the service fees are exempt from income tax and VAT. (BIR Ruling No. OT-340-2021, September 28, 2021).
  • The value of the gross estate of the decedent shall be determined by including the value at the time of his death all properties to the extent of any interest therein.
    • If the decedent prior to his death relinquished his right over ownership over his inheritance, the property shall no longer be included in the gross estate.
  • In order to support the claim that the decedent died without an heir, an affidavit to this effect must also be submitted.
  • A Certificate Authorizing Registration is not a proof of ownership that only a proof that taxes have been paid. (BIR Ruling No. OT-034-2021, September 30, 2021)
  • A non-stock and non-profit residential homeowner association duly registered with the Housing and Land Use Regulatory Board and performs the delivery of basic community services, the income derived from association dues, membership fees, other assessments and charges collected in a purely reimbursement basis and rentals of 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, it shall be subject to the applicable internal revenue taxes on its other income from trade, business or other activities. (BIR Ruling No. OT-344-2021, October 04, 2021).
  •  The retirement benefits to be received by a qualified employee-member of the Plan shall continue to be exempt from income tax provided:
    • Employee has been in the service of the same employer for at least 10 years; and
    • 50 years old at the time of retirement.
    • Income of the Plan’s fund from its investments shall continue to be exempt from income tax and withholding tax, provided:
      • Contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan;
      • If under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of employees;
    • Provided further: any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that exceeds the amount contributed by such employee.
    • The contributions of Participating Companies to the retirement fund are deductible from the Participating Companies’ gross income, and shall continue to qualify through all the years that it shall be in operation, provided that any modification or amendment in the Retirement Plan Rules and Regulations should be submitted to the BIR for certification that such modification or amendment does not affect the qualification of the Plan.
    • However, portions of the fund of the Plan in excess of the amount actuarially determined to cover the benefits of the covered employees may be reverted to the company without terminating the Plan but the same shall be declared as income and applicable taxes thereon shall be paid (BIR Ruling No. OT-450-2021, December 9, 2021; OT-480-2021, December 24, 2021).
  • A tax assumption mechanism expressed through an Exchange of Notes between the Republic of the Philippines and the Government of Japan, is binding through executive action without need of a vote by the Senate or Congress.
    • Marubeni Corporation, a non-resident foreign corporation that is licensed to do business in the Philippines entered into a Consortium Agreement (“UC”) with D.M. Consunji, Inc. (“DMCI”) for the limited purpose of submitting a tender to the Department of Transportation (“DOTr”), to perform the contract relating to the Exchange of Notes between the Philippines and Japan for the improvement of “Mass Transit Systems in Metro Manila”.
    • UC, after having been awarded the Project, sought confirmation from the BIR of its tax liabilities in view of the tax assumption mechanism expressed under the Exchange of Notes. Accordingly, the BIR ruled:
    • UC, having been formed solely for the purpose of bidding and implementing the Project, is subject to corporate income tax, through the UC members, provided that the lead partner is Marubeni and that its share of work is more than 50% of the contract amount. However, pursuant to the Exchange of Notes, the said income tax on the Japanese company shall be assumed by DOTr;
    • By reason of such tax assumption scheme, the UC, through its members, is still required to file quarterly and annual income tax returns with the BIR;
    • On the VAT aspect of the project, pursuant to the case of Mitsubishi Corporation – Manila Branch v. Commissioner of Internal Revenue, and Revenue Memorandum Circular No. 8-2017, the VAT-registered suppliers and sub-contractors of the UC shall bill and pass on 12% VAT to the UC, which in turn, will include in its billing and pass on to DOTr. The Japanese contractors shall file the prescribed VAT returns on gross receipts derived from the project, claim its input taxes from its purchases of goods, properties, and services, and shall pay the output tax thereon, after offsetting the creditable or allowable input taxes, considering that the amount intended for the payment of the VAT has already been collected and received by UC from DOTr.
    • As the importer, the DOTr shall be liable for the 12% VAT on the importation of materials and equipment under Section 107(A) of the Tax Code, as amended.
    • The Japanese personnel employed by the UC and its Japanese contractors performing work in the Philippines are required to file income tax returns but the DOTr shall assume payment of the taxes due thereunder. Accordingly, the said Japanese personnel are not subject to withholding tax on compensation under Section 57 of the Tax Code, as amended, pursuant to the tax assumption provisions under the Exchange of Notes and the Mitsubishi case.
    • In connection with the tax assumption scheme and pursuant to the Exchange of Notes, the Government of the Philippines or its executing agency (i.e. DOTr) shall be responsible for the liquidation or settlement of such fiscal levies, duties, taxes, and other similar charges. (BIR Ruling No. OT-471-2021, December 21, 2021)
  • Merger of Wawona Holdings, Inc. (“WHI”) as the absorbed corporation, and Abaya Investments Corporation (“AIC”) as the surviving corporation, qualifies as a tax-free merger under Section 40(C)(2) of the National Internal Revenue Code of 1997 (“NIRC”), as amended.
    • Because the acquisition and assumption by AIC of all the assets and liabilities of WHI will result in specific benefits to both corporations, such as but not limited to increased financial strength through pooling of resources, a more diversified and stable capital base, increased operating economies and efficiencies, and reduction of overall business expenses, the merger is being undertaken for a bona fide business purpose.
    • The transaction is also not subject to donor’s tax as there is no intention on the part of any of the parties to donate since the transaction is purely for a legitimate business purpose.
    • Also, the transfer of properties as a consequence of the merger shall not be subject to any output tax, pursuant to Section 4.106-8(b)(3) of Revenue Regulations (“RR”) No. 16-2005, as amended by RR No. 4-2007, and as further amended by RR No. 10-2011, since the conveyance of the property to effectuate the merger is not made in the course of business but by operation of law.
    • The excess and unexpired Minimum Corporate Income Tax (“MCIT”) of the absorbed corporation shall be carried forward and credited against the normal income tax due of the surviving corporation for the three (3) years immediately succeeding taxable years pursuant to Section 27(E)(2) of the NIRC, as amended. Also, any excess and unutilized creditable withholding taxes (“CWT”), if any, which form part of the assets to be transferred may be utilized by the surviving corporation against its income tax liabilities for the succeeding years or may be the subject of claim for refund or issuance of a tax credit certificate.
    • However, net operating loss carry-over (“NOLCO”) is not one of the assets that can be transferred and absorbed.
    • Lastly, in order for the above transaction to be considered as a merger under Section 40 (C)(2) and (6)(b) of the NIRC, as amended, the parties to the merger should, among others, comply with the requirements set forth under RR No. 18-2001 (BIR Ruling No. OT-474-2021, December 22, 2021)
  • Transfer or conveyance of real properties representing the common areas of the condominium corporation, without consideration, does not generate taxable income, and therefore, not subject to Capital Gains Tax or creditable withholding tax.
    • The purpose of the conveyance is for the management of the project for the common benefit of the unit owners.
    • It is also exempt from imposition of documentary stamp tax based on Sec. 185 of Regulation No. 26, otherwise known as the Revised Documentary Stamp Tax Regulations, which provides that “conveyances of realty not in connection with a sale, to trustees or other persons without consideration are not taxable.” (BIR Ruling No. OT-483-2021, December 23, 2021)
  • The transfer of subdivided lots in favor of the qualifies socialized housing member-beneficiaries is not subject to either the capital gains tax imposed under Section 27(D)(5) of the National Internal Revenue Code (Tax Code) of 1997, as amended, or the creditable withholding tax (“CWT”) imposed under Revenue Regulations (“RR”) No. 2-98, as amended, considering that the transfer is only a formality to finally effect the transfer of the subject property to its member-beneficiaries who actually bought the same from the form owner through the association. In other words, the association is merely transferring the ownership of the property to its member-beneficiaries who actually own the same.
    • Moreover, the said transfer is not subject to the donor’s tax imposed under Section 99 of the Tax Code of 1997, as amended, since there is no donative intent on the part of the association to donate the property to its member-beneficiaries, considering that it could not donate property the ownership of which already belongs to the members-beneficiaries themselves.
    • Also, the deeds or documents covering the transfer of the subdivided lots in favor of the beneficiaries is not subject to documentary stamp tax under Section 196 of the Tax Code of 1997, as amended. (BIR Ruling Nos. OT-381-2021 and OT-484-2021, December 24, 2021)
  • The tax exemption under Republic Act No. 7459, otherwise known as the “Inventors and Inventions Incentives Act of the Philippines” is only for the exclusive benefit of the inventor and not for any other entity that commercially produces and distributes the invented product.
    • Any income received by the company from such production/distribution/marketing is subject to the payment of appropriate taxes.
    • Moreover, the inventor is still subject to the following taxes:
    • 20% final withholding taxes on interest from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and 15% percent final withholding tax on interest from foreign currency deposit;
    • Capital gains tax on sale of shares of stock prescribed under Section 24(c) of the National Internal Revenue Code of 1997, as amended;
    • Capital gains tax on sale of property prescribed under Section 24(D) of the National Internal Revenue Code of 1997, as amended;
    • Income tax on income not arising from the inventor’s productive activity such as interest, royalties, prizes, winnings and dividends;
    • Value-Added Tax (“VAT”) on the gross receipts/revenues derived from the sale of the said invention products, and also VAT for which the inventor is not directly liable, e.g. VAT on his purchases of raw materials, supplies, and equipment/machinery, which may be shifted to him as part of the cost of goods sold or for services rendered; and
    • Other percentage taxes under Title V of the National Internal Revenue Code of 1997, as amended;
    • Excise taxes directly payable in connection with the sale of invention products; and
    • Documentary Stamp Tax on documents, instruments and papers. (BIR Ruling No. OT-485-2021, December 24, 2021, OT-486-2021, December 21, 2021)