Since BCDA Bonds ’07 have a tenor of 5 years and 1 day, any gain realized from its sale or exchange or retirement is excluded from the gross income, hence, exempt from Income Tax pursuant to the above-cited Section 32(B)(7)(g) of the Tax Code of 1997.
The term "gain" shall refer to the gain, if any, from secondary trading, which is the difference between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller. The term "gain" shall also include the gain (that is, the difference between the proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds) realized by the last holder of the bonds when such bonds are surrendered for retirement upon their maturity (BIR Ruling No. 035-2001 dated August 16, 2001). The term "gain" however, does not include "interest" (Nippon Life Insurance Company of the Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6142, promulgated February 4, 2002), which, as stated, is subject to Income Tax as described above.
The original issuance of the BCDA Bonds ’07 shall be subject to Documentary Stamp Tax (DST) at the rate of P 0.30 for every Two Hundred Pesos (P 200.00) or fractional part thereof of their face value pursuant to Section 180 of the Tax Code of 1997.
Finally, the transfer of BCDA Bonds ’07 in bearer form in the secondary market by way of simple delivery to the buyer is not subject to the DST unless the transfer of the instruments carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones. (BIR Ruling No. 017-2002 dated April 29, 2002)
Taxability of monetized leave credits – Executive Order No. 291, which took effect on September 27, 2000, did not render the withholding of taxes on monetized leave credits in excess of 10 days erroneous or illegal considering that Sec. 2.78.1(A)(7) of RR 2-98 was, at the time said taxes were collected, a valid regulation implementing an existing law. (BIR Ruling No. 018-2002 dated May 3, 2002)
De minimis medical allowance - To be considered de minimis medical allowance that will neither be subject to Fringe Benefits Tax (FBT) nor to withholding tax on compensation, the following conditions must concur: 1) the amount given to the employee shall be for his own medical expenses for a given taxable year; 2) the amount actually given and actually spent shall not exceed P 10,000 in any given year; and 3) the employee must fully substantiate with official receipts in his name the medical allowance so granted, on or before the annualization of withholding taxes in any given year. (BIR Ruling No. 019-2002 dated May 9, 2002)
Tax consequences of Electric Power Industry Reform Act of 2001 - The tax consequences of R.A. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), which came into law on June 26, 2001 and provided for the privatization of the assets of National Power Corporation (NPC) and the creation of two (2) government-owned corporations (the Power Sector Assets and Liabilities Management Corp. (PSALM) and the National Transmission Corp. (TRANSCO)) are the following:
A. On the Transfer of Assets and Liabilities of NPC (Phase I
1. NPC Not Liable to Income Tax on the Transfer of its Assets to PSALM and TRANSCO.
The Income Tax exemption of NPC was deemed repealed by Sec. 27(C) of the 1997 Tax Code wherein NPC was not included among the entities exempt from Income Tax. However, the income of NPC from the operation of a public utility is still considered excluded from gross income pursuant to Section 32(B)(7)(b), as clarified in BIR Ruling No. 18-00.
The exemption of NPC is not limited to the sale and transmission of generated power, but includes transactions incidental to and necessarily connected with the operations of the public utility, such as a sale or transfer on an isolated basis of its assets, which transaction is not conducted as a separate business (Radio Communications vs. CTA, G.R. No. 60547, July 11, 1985; Phil. Power Development co. vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965). Thus, the income, if any, from the sale or transfer of NPC's assets is not income from other business activities conducted by NPC but rather earnings and profits realized in connection with the business conducted in accordance with the franchise, and thus covered by the exemptions provided for in Sec. 32(B)(7)(b) of the 1997 Tax Code.
2. Transfer of Assets by NPC to PSALM and TRANSCO Not Subject to Franchise and Value-Added Taxes.
Sec. 27(C) of the 1997 Tax Code repealed only the income tax exemptions of NPC. Hence, P.D. 938, NPC's Charter, is controlling as regards franchise tax. The phrase "all forms of taxes" in P.D. 938 evinces a clear legislative intention to exempt NPC from any kind of tax (Maceda vs. Macaraig, Jr., 223 SCRA 217).
Moreover, since NPC is not a VAT-taxable entity and the transfer of its assets is not necessary to carry out its primary function as a utility and neither is it done in the course of trade or business, such transfer shall not be subject to VAT (BIR Ruling No. 113-98 dated July 23, 1998).
3. Transfer of Real Properties from NPC to PSALM and TRANSCO Subject to DST under Sec. 196 of the 1997 Tax Code.
Documentary Stamp Tax (DST) under Sec. 196 of the 1997 Tax Code is imposed on the deeds, instruments or writings involving the "sale" of land, tenement or other realty. In the instant case, the transfer of NPC's generation assets and liabilities to PSALM, as well as of the transmission and sub-transmission assets and systems to TRANSCO, all of which are government-owned and controlled corporations, is mandated by law. The taking of title over the assets of NPC by PSALM for the purpose of selling or disposing them is likewise consistent with the guidelines set under the EPIRA. Unlike in an ordinary business transaction, PSALM, as the entity assuming the obligation, does not exercise any discretion whether to accept the assets and liabilities to be transferred nor does it play any role in the determination of the amount of the liabilities that it will assume.
4. Transfer of Liabilities by NPC to PSALM is Not Subject to DST under Sec. 180 and 198 of the 1997 Tax Code.
The transfer of liabilities by NPC to PSALM would, by novation, completely create a new obligation between the original NPC creditors and PSALM. However, it should be noted that the transfer of obligation is by operation of law, with the intent of preserving the NPC loans for the benefit of the NPC creditors. Said transfer of loans is actually a transfer of such loans from one government vehicle (NPC) to another (PSALM). Further, considering that both entities serve similar purposes and that they are both vehicles used by the National Government to achieve the identical objective, the transfer of loan does not give rise to a new obligation since the National Government remains the guarantor for the original loans even after the loans are transferred to PSALM. Accordingly, no DST under Section 180 of the Tax Code should be imposed.
NPC's real assets were never subjected to any mortgage, hence, no DST under Sec. 198 in relation to Sec. 195 of the Tax Code shall be imposed.
B. Operation of the Transferred Assets (Phase II
1. Income of PSALM from Exercise of Essential Government Function Exempt from Tax.
Activities undertaken by PSALM, pursuant to the provisions of EPIRA, are essential governmental functions, and as such, any income derived therefrom, including income from the operation of NPC's generation assets, is excluded from gross income and the MCIT imposed in Sec. 27(A) and Sec. 27(E), respectively.
2) Sale of Generated Power by PSALM Subject to Zero Percent (0%) VAT.
Sec. 6(b), Rule 5 of the Implementing Rules and Regulations (IRR) in relation to Sec. 4(x) of the EPIRA provides that the sale of generated power by generation companies shall be subject to 0% VAT. PSALM's registration with the Energy Regulatory Commission (ERC) will make it a Generation Company and as such, its sale of generated power will be subject to 0% VAT.
3) TRANSCO Taxed in Same Manner as NPC.
The transfer by NPC of its assets related to transmission operation includes the transfer of its nationwide franchise to TRANSCO. The transfer of the franchise transfers the privilege that NPC enjoys under its charter in relation to the operation of the transmission system. Since TRANSCO should be taxed in the same manner as NPC, as provided in the latter's charter, the income of TRANSCO is excluded from gross income for purposes of computing its Income Tax pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code. Moreover, TRANSCO will be exempt from all forms of taxes including franchise tax because the NPC franchise, including the privileges related thereto, have been transferred by operation of law to TRANSCO.
4) NPC Subject to Income Tax and VAT and/or Percentage Tax on its O&M Income; and 0% VAT on its Income from Generating Electricity through SPUG.
NPC will enter into Operations and Management (O&M) Agreements with both PSALM and TRANSCO for the operation of the assets transferred to the latter. Since EPIRA mandates the transfer of NPC's nationwide franchise to TRANSCO, NPC was automatically divested of its privileges accruing to it under the said franchise, including, among others, tax exemption privileges. Moreover, essential government functions have been transferred and assumed by PSALM.
Accordingly, since the service to be rendered by NPC to PSALM and TRANSCO under the O&M Agreements will not be an activity essentially governmental in nature, any income derived therefrom by NPC will be subject to Income Tax and MCIT, as provided under the 1997 Tax Code. Moreover, since the same services are deemed rendered in the course of NPC's business, such services shall be subject to VAT or the appropriate Percentage Tax, as the case may be.
However, under Sec. 70 of the EPIRA, as implemented by Sec. 2 of Rule 3 of the IRR, NPC shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system through Small Power Utilities Group (SPUG), a functional unit of NPC created to pursue missionary electrification function to some areas in the country where there are no electricity.
While under the EPIRA, power generation shall no longer be considered a public utility operation, it may still be considered as essential governmental function insofar as the operation by NPC of the assets of SPUG is concerned. Hence, income derived therefrom shall be excluded from gross income pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code. Moreover, sale of generated power by NPC through SPUG shall be subject to 0% VAT pursuant to Sec. 6 of EPIRA, as implemented by Sec. 6(b), Rule 5 of the IRR.
C. Privatization of NPC's Assets (Phase III
1) Gain From the Sale by PSALM of the Generation Facilities to Qualified Buyers Not Subject to Income Tax.
The eventual sale, disposition or privatization of the generation assets, real estate and other disposable assets, and IPP contracts, will be a mere incident to, or a necessary consequence of, the generation activity that PSALM will undertake and should therefore not be taxed as an independent business in itself. Hence, any income that PSALM may derive from such sale will also not be subject to Income Tax.
2) Disposition/Sale of Assets by PSALM Not Subject to VAT.
The disposition or sale of the said assets are made pursuant to PSALM's mandate to sell the same and to liquidate the outstanding loans and obligations of NPC. Since the same is not conducted in pursuit of any commercial or profitable activity, it will be considered an isolated transaction which will not be subject to VAT (BIR Ruling No. 113-98 dated July 23, 1998).
3) Sale of Real Properties by PSALM Subject to DST.
The sale of real properties by PSALM will be subject to Documentary Stamp Tax (DST) under Sec. 196 of the 1997 Tax Code. Since one of the contracting parties is the government, the tax to be imposed shall be based on the actual consideration that PSALM will receive from the qualified buyers.
4) TRANSCO's Income From the Sale Arrangement Between TRANSCO and Concessionaires Will Be Excluded From Gross Income But Winning Bidder Liable to DST on the Transfer of Real Property by Sale.
Sale of the transmission facilities or the award of concession agreement and lease arrangement that TRANSCO will enter into with the qualified concessionaires are activities undertaken to implement the privatization of the transmission system of NPC as mandated by Sec. 21 of EPIRA. The tax treatment of the Concession Contract will depend on the specific terms of the contract. Because of failure to submit a copy of the Concession Contract, the requested ruling is deferred.
TRANSCO's franchise shall not be transferred to the concessionaire since the latter will have to secure its own franchise through the efforts of PSALM and TRANSCO. In this connection, in the sale arrangement between TRANSCO and the concessionaires, TRANSCO's income from the sale will be excluded from gross income pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code. Moreover, TRANSCO will be exempt from all taxes, except Income Tax, in accordance with the NPC Charter on such sale. However, the transfer of real property by sale is subject to DST under Sec. 196 of the 1997 Tax Code, but since TRANSCO is exempt from all taxes, the qualified winning bidder shall be the one directly liable for DST pursuant to Sec. 173 of the 1997 Tax Code.
D. Collection of Universal Charge
Since the Universal Charges collected by distribution utilities do not belong to them and would not redound to their benefit, the same will not constitute part of their taxable revenues nor will it be part of their gross receipts for purposes of determining their franchise taxes. Gross receipts of a taxpayer do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit. However, it is required that the Universal Charge appear as a separate item in the bill.
Likewise, the collection of Universal Charge by PSALM will not be considered as taxable income nor will it form part of its gross receipts for VAT purposes. The Universal Charge is not a flow of wealth to PSALM as it would not accrue to its benefit but would be remitted to the Special Trust Fund, as provided under the EPIRA. PSALM is just the administrator of the fund which shall be disbursed/distributed to its respective beneficiaries in accordance with the EPIRA. Nor will the Universal Charge be part of gross receipts since the same does not represent compensation for services performed by PSALM.
E. Interest Arising From NPC Loans Transferred to PSALM Exempt From Income Tax.
Interest from NPC loans transferred to PSALM is exempt from Income Tax. While EPIRA does not provide for the same treatment of the NPC loans once the same are transferred to PSALM, the interest arising therefrom shall remain exempt because the exemption in the NPC Charter is not granted to NPC, which is the borrower, but ration on the loans, credits and indebtedness as well as on the payment of principal, interest and other charges. In this connection, Section 8 of NPC's Charter provides that domestic indebtedness and foreign loans contracted by NPC shall be exempt from all taxes, fees, etc. In effect, the exemption is granted to the lender, the entity earning the interest income.
However, foreign loans that PSALM may incur in the future in connection with the performance of its functions shall no longer be covered by the foregoing tax exemption. Nonetheless, the same may still be exempt from Income Tax pursuant to Section 32(B)(7)(a) of the 1997 Tax Code, if the interest from the said loans are derived by foreign government, financing institutions owned, controlled or enjoying refinancing from foreign governments, and international or regional financial institutions established by foreign governments.
Also, the interest arising from such loans may also be exempt from Income Tax or be subject to a preferential tax rate if the creditor is a resident of a country with which the Philippines has an existing treaty, subject to the conditions stated in such treaty. (BIR Ruling No. 020-2002 dated May 13, 2002)
WITHHOLDING TAX; CAPITAL GAINS TAX; DOCUMENTARY STAMP TAX; VALUE-ADDED TAX; DONOR’S TAX; transfer of properties to the liquidator as trustee - Section 27 (D)(5) of the Tax Code of 1997 provides for a final tax of 6% on the gains presumed to have been realized on the sale, exchange, disposition of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets based on the gross selling price or fair market value, whichever is higher, of such lands or buildings. On the other hand, a creditable withholding tax is imposed in the gross selling price/total amount of consideration or the fair market value determined in accordance of Section 6(E) of the Code, whichever is higher.
In the instant case, there was no transfer of ownership, but rather a trust created by virtue of a Deed of Transfer by the Yutingcos and EYCO to the Liquidator, with no monetary consideration involved in the transfer. Such transaction is not subject to the Capital Gains Tax imposed under Section 27(D)(5) of the Tax Code of 1997 nor to the expanded withholding prescribed in Revenue Regulations No. 2-98, as amended.
The Deed of Transfer is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code of 1997 but the acknowledgement thereof is subject to the P15.00 DST prescribed under Section 188 of the said Code.
The transmission of the property to a trustee shall not be subject to Value-Added Tax (VAT) if the property is to be held merely in trust, in accordance with Section 44.100-1 of Revenue Regulations No. 7-95.
Moreover, the above transaction is not subject to the Donor’s Tax imposed under Section 99 of the Tax Code of 1997 as there is no intention to donate on the part of the Yutingcos and EYCO.
The investment agreement by the parties should not be considered as a loan, pursuant to the definition provided for in Articles 1933 and 1953 of the New Civil Code, or a bonafide indebtedness within the ambit of RMO No. 63-99. Rather, it is analogous to a capital contribution considering the said amount is not subject to any repayment or redemption by PSPI. The intent of the parties is clearly manifested in the agreement which provides that the amount received shall constitute a deposit for future subscriptions of new shares. Accordingly, no interest may be imputed on the Investment Agreement between the parties. (BIR Ruling No. 022-2002 dated June 10, 2002)
FRINGE BENEFITS TAX; de minimis meal and food allowance - The meal and food benefits provided by the client companies to their employees through Sodexho meal and food vouchers may be considered tax exempt benefits, subject to the standards set for de minimis thresholds for fringe benefits under Revenue Regulations (RR) No. 3-98, as amended by RR Nos. 8-2000 and 10-2000. The meal and food allowance, although not for overtime work, is considered de minimis, if it does not exceed 25% of the basic minimum wage. The excess over this amount shall be considered as other benefits as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997. The rules and regulations on de minimis benefits do not allow aggregation of the amounts set forth for each type of benefit. In order to clearly conform with the prescribed de minimis standards, therefore, separate vouchers should be used for the rice allowance and the meal and food benefit. (BIR Ruling No. 023-2002 dated June 21, 2002)
FINAL WITHHOLDING TAX for alien employees - Section 10 of the Rules and Regulations Implementing Article 61 of R.A. 8756 provides that alien executives occupying managerial and technical positions employed by the regional or area headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year to a final tax equal to 15% of their gross income received as salaries, wages, annuities, compensations, remunerations and emoluments. Section 28(A)(6)(a) of the Tax Code of 1997 provides that regional or area headquarters, as defined in Section 22(DD) of the said Code, shall not be subject to Income Tax.
Accordingly, Indophil, will not be subject to Income Tax as long as it is performing its functions and in acting capacity as supervisory, communications and coordinating center for its affiliates in the region, and it shall not render any of the qualifying services mentioned in the Code, otherwise, it shall be taxed as a Regional Operating Headquarter. (BIR Ruling No. 024-2002 dated June 21, 2002
IMPROPERLY ACCUMULATED EARNINGS TAX; publicly-held corporation - Abbot-Phils., as a wholly-owned subsidiary of Abbot-US, will be considered as being owned proportionately by Abbott-US shareholders. The ownership of a domestic corporation, for purposes of determining whether it is a closely-held corporation or a publicly-held corporation, is ultimately traced to the individual shareholders of the parent company. Accordingly, Abbot-Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax. This is based on the representation that as of the year end 2000, Abbot-US had 101 to 272 shareholders holding a combined 1,545,937,133 shares of common stock, and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1% of Abbot-US issued as outstanding shares. Based on Section 4 of Revenue Regulations No. 2-2001, closely-held corporations are those corporations at least 50% in value if the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Abbot-Phils. does not fall under the definition of a closely-held corporation. (BIR Ruling No. 025-2002 dated June 25, 2002)
Tax consequence of issuance of zero coupon bonds - The interest or income earned from the HGC Bonds (i.e. the discount to face value) up to the extent of the weighted average interest rate of 10.15% is exempt from Income Tax pursuant to Section 19 of the HGC Charter, as implemented by Article 44 of the Implementing Rules and Regulations of the HGC.
Interest or income earned from the HGC Bonds in excess of the weighted average interest rate of 10.15% is exempt from the 20% final withholding tax imposed by Section 27 (D)(1) of the Tax Code of 1997 but subject to the ordinary Income Tax.
Gains arising from the sale or transfer of the HGC Zeroes in the secondary market are exempt from Income Tax pursuant to Section 32(B)(7)(g) of the Tax Code since HGC Zeroes have a tenor of 5 years and 1 day.
Section 32(B)(7)(g) of the Tax Code exempts from Income Tax the gain realized from the redemption or retirement of bonds, as well as their sale or exchange in trade. The original issue discount notes does not fall within the purview of the term "gain" under said Section.
The original issuance of the HGC Zeroes shall be subject to Documentary Stamp Tax (DST) while the sale or transfer thereof in the secondary market in bearer form by simple delivery to the buyer is not subject to DST. (BIR Ruling No. 026-2002 dated June 27, 2002)
WITHHOLDING TAX on sale of real property
- The nature of the real property being sold should be determined first. If the real property is a land or building not actually used in the business of the seller-corporation and is treated as a capital asset, then a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on whichever is higher of the gross selling price or fair market value (FMV) of such land or building. This rule applies whether or not the seller-corporation is engaged in real estate business.
On the other hand, if the real property being sold is an ordinary asset, then the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations (RR) No. 2-98 shall apply. The rate of withholding tax will depend on, first, whether the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, the gross selling price, as defined in the said RR, if the seller is habitually engaged in real estate business.
Based on the foregoing, and on the assumption that the seller in each case is taxable and not exempt, the tax implication of the following sales transactions are as follows:
1. Where the seller is a corporation duly registered with the HLURB as habitually engaged in the real estate business, a creditable withholding tax based on the gross selling price/total amount of consideration or FMV, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be deducted by the withholding agent/buyer, in accordance with the following schedule:
a. Seller or transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of RR No. 2-98
Exempt
b. Seller or transferor is habitually engaged in the real estate business and the selling price is:
i. P500,000 or less 1.5%
ii. More than P500,000 but not more than P2,000,000 3%
iii. More than P2,000,000 5%
2. The above tax treatment shall likewise apply in cases where the seller-corporation is habitually engaged in the real estate business, even if the buying corporation is not engaged in the real estate business.
3. If the property is an ordinary asset and the seller is not habitually engaged in the real estate business, the rate of creditable withholding tax is 6% of the gross selling price as provided in Section 3(J) of RR No. 6-2001. On the other hand, if the property is not actually used in the business of the seller-corporation, and is treated as a capital asset, a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building pursuant to Section 27(D)(5) of the Tax Code.
4. Where the seller-corporation habitually engaged in the real estate business sells real property held as ordinary asset to an individual not engaged in trade or business, the following rules shall apply:
If the sale is on installment plan (i.e., payments in the year of sale do not exceed 25% of the selling price), no withholding tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or FMV of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid.
b. If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan" (i.e. payments in the year of sale exceed 25% of the selling price or FMV of the property, whichever is higher), the applicable withholding tax rate shall be withheld on the first installment.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the following rules shall apply:
a. If the sale is on installment plan, the tax shall be deducted and withheld by the buyer on every installment.
b. If, on the other hand, the sale is on a "cash basis" or is a "deferred payment sale not on the installment plan," the buyer shall withhold the tax based on the gross selling price or FMV of the property, whichever is higher, on the first installment.
For purposes of applying the foregoing rules, "gross selling price" shall mean the consideration stated in the sales document or the FMV determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher.
Registration with HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in real estate business. If the seller/transferor is not registered with the HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (e.g. consummation during the preceding year at least 6 taxable real estate transactions regardless of amount). (BIR Ruling No. 027-2002 dated July 3, 2002)
Tax consequences of a conveyance of land by a dissolving corporation - If R Corp has no other creditors, the receipt by the trustee of the 3 parcels of land is in effect a distribution of liquidating dividends to the shareholders of R Corp subject to the following:
a. Stockholders receiving liquidating dividends will thereby realize capital gain or loss. The gain, if any shall be subject to Income Tax at the rates prescribed under then Section 21 (a) of the Tax Code. Moreover, pursuant to then Section 33 (B) of the Tax Code, as amended, only 50% of the aforementioned capital gain is reportable for Income Tax purposes if the shares were held by the individual stockholders for more than 12 months, and 100% of the capital gains if the shares were held for less than 12 months. Finally, the conveyance of real properties in the form of liquidating dividends to the stockholders is not subject to Documentary Stamp Tax (DST) under Section 196 of the Tax Code.
b. If the stockholders sell the aforementioned land and building received by them as liquidating dividends immediately after title thereto is transferred to their names and after the lease thereon shall have been terminated, the stockholders shall be subject to the 5% Capital Gains Tax (CGT) based on the gross selling price thereof or the FMV prevailing at the time of sale, whichever is higher, pursuant to then Section 21 (c) of the Tax Code, as amended. If the sale is effected on or after January 1, 1998, however, the CGT rate is 6% (Section 24 (D) (1), Tax Code of 1997). The sale shall also be subject to DST under Section 196 of the Tax Code of 1997.
On the other hand, if there are still creditors, such creditors have preference over the corporate assets of R Corp. vis-à-vis its shareholders, and therefore, the shareholders who are individuals are not yet deemed to be in receipt of their respective share in the net assets of the corporation. In which case, the transfer of the 3 parcels of land pursuant to the Deed of Conveyance is indeed a mere transfer to a trust, which would not be subject to the Income Tax, withholding tax nor to the DST on conveyances of real property.
The notarial certification, however, would be subject to the DST of Ten Pesos (P10) pursuant to then Section 188 of the Tax Code, as amended. The shareholders themselves become subject to Income Tax on the liquidating gains, if any, once the liabilities of the trust are settled and there is no impediment to the distribution of the net assets of the trust, whether or not there is in fact an actual distribution of assets.
In addition, the transfer of real property as liquidating dividends to the shareholders of a corporation is not subject to the DST on conveyance of real property. (BIR Ruling No. 028-2002 dated July 22, 2002)
WITHHOLDING TAX; compensation income of government employees; substituted filing of ITR - The withholding tax on compensation income of government employees is creditable in nature. Thus, pursuant to Section 79(C)(2) of the Tax Code of 1997, the amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24 (A).
As regards any deficiency or excess in the monthly withholding, Step 6 of Section 2.79 (B)(5)(b) of Revenue Regulations (RR) No. 2-98 provides that the deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee must be settled between the employee and employer.
The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5) shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year. In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid.
Moreover, RR No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one taxable year whose tax due is equal to tax withheld qualify for substituted filing of ITR.
In substituted filing of ITR, the employer’s annual information return (BIR From No. 1604-CF) may be considered the "substituted" ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer’s annual information return. This being the case, the taxpayer has the option not to file his ITR for the taxable year involved.
In addition, substituted filing applies only if all the following circumstances are present:
1. The employee receives purely compensation income (regardless of amount) during the taxable year;
2. The employee receives the income only from one employer during the taxable year;
3. The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and
4. The employee’s spouse also complies with all the three (3) conditions stated above.
Furthermore, RR 3-3002 shall cover taxable year 2002 and succeeding years although substituted filing is optional on the part of the employee for income earned for taxable year 2001. (BIR Ruling No. 029-2002 dated July 31, 2002)
Taxability of properties surrendered as ill-gotten wealth in favor of the Philippine Government - Certificates placed upon documents, instruments and papers for the national, provincial, city or municipal government, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal government, are exempted from Documentary Stamp Tax [see Section 212 (2), 1997 Tax Code]. With regard to the Capital Gains Tax, no such tax is due because there is no capital gain to be taxed, there being no sale or exchange of capital assets involved [see Section 34(2), 1997 Tax Code] since the subject properties were voluntarily surrendered to the Republic of the Philippines which is the real owner of the same. (BIR Ruling No. 030-2002 dated August 7, 2002)
VALUE-ADDED TAX – Even for the sake of argument, FWP’s gross receipts do not exceed P 550,000.00 for any 12 - month period, this does not mean that it is given the option to register as a VAT taxpayer. The option applies only where a taxpayer is otherwise subject to VAT if not for the fact that it does not meet the P 550,000.00 threshold under Section 109 (z) of the Tax Code of 1997, in which case, it becomes subject to the 3% Percentage Tax under Section 116 of the Tax Code of 1997. This is not the case of FWP where VAT exemption is based on a special law under Section 109(q) of the Tax Code of 1997. In view of the foregoing, FWP does not have the option to register either as VAT or non-VAT taxpayer with respect to its gross receipts as subcontractor. It however, has the option to register as VAT or non-VAT taxpayer with respect to its other activities, provided they fall under the above mentioned instances in the regulation where such option is indeed given. (BIR Ruling No. 031-2002 dated August 12, 2002)
Effective date of merger - For purposes of compliance with BIR reportorial requirements on merger, the general rule is that the effective date of merger shall be the date of approval by the SEC of the Articles and Plan of Merger pursuant to Sec. 79 of the Corporation Code. In this case, the SEC approved the merger on April 30, 2002.
However, when the parties to the merger provided for a date when their merger shall take effect, in which case, the effective date of merger shall be the date agreed upon by the constituent corporations (as stated in their Plan of Merger), which in this case is June 30, 2002. Thus, for purposes of complying with the requirements of the post merger notice and filing of the short period return under Section 52 (c) of the Tax Code of 1997, the 30 day period shall be reckoned from the effective date of merger, June 30, 2002. (BIR Ruling No. 032-2002 dated August 12, 2002)
DONOR’S TAX; sale of realty less than the adequate value
- York Philippines is not subject to Donor’s Tax when it sold its building and improvements on rented land to the new lessee for less than the market value of the properties, as stated in their previous tax declarations.
The sale resulted from the global restructuring of York Group which prompted York Philippines to cease operations and consequently dispose its assets and risk losing the value of its building and the improvements upon pre-termination of its lease.
As a rule, under Sec. 100 of the Tax Code of 1997, transfers for less than an adequate and full consideration in money or money’s worth of property is deemed a gift, thus subject to Donor’s Tax. However, this rule is not absolute. In the case of Commissioner of Internal Revenue vs. BF Goodrich Phils., Inc. G. R. No. 104171, February 24, 1999, the Supreme Court ruled that: "it is possible that real property may be sold for less than the adequate consideration for a bona fide business purposes; in such an event, the sale remains an arm’s length transaction. In the present case, the private respondent was compelled to sell the property even at a price less than its market value, because it would have lost all ownership rights over it upon expiration of the parity amendment."
In the case at bar, there is no showing of donative intent on the part of York. Though Sec. 100 does not require donative intent since its purpose is to close any avenue for tax avoidance by encompassing all transactions where there is a disparity in consideration, it is, however, indicative of a strong proof that a gratuity is intended. However, jurisprudence recognizes those instances where there is no gratuity intended – these are dealings done in the ordinary course of business. Although it is true that these dealings per se are not sufficient to rule out the existence of donative intent, it is equally true that donative intent is not synonymous with a disparity in consideration.
Since York’s transaction is an arm’s length transaction and a bona fide business arrangements, the same negates the fiction which treats the effect as a donation. Accordingly, it is not subject to Donor’s Tax ordinarily imposed on gift or donation under Sec. 98 in relation to Sec. 100 of the Tax Code of 1997. (BIR Ruling No. 033-2002 dated August 16, 2002)
Taxation of Additional Compensation Allowance (ACA) - The ACA given to government employees pursuant to EO 219 shall not be subject to withholding tax deductions but shall be subject to Income Tax as "taxable compensation income."
However starting January 1, 2000, it shall be treated as part of the "other benefits" under Section 32(b)(7)(e) of the Tax Code of 1997, which are excluded from gross compensation income, provided, that the total amount of such benefits does not exceed P30,000.00.
This ruling modifies BIR Ruling No. 179-99 dated November 22, 1999 stating that ACA is exempt from taxes provided for under AO No. 53 on the condition that such allowance was not integrated in the basic pay. (BIR Ruling No. 034-2002 dated August 16, 2002)
IMPROPERLY ACCUMULATED EARNINGS TAX; publicly-held corporations - Improperly accumulated earnings tax is a penalty imposed on the corporation for the improper accumulation of its earnings to deter the avoidance of tax by the shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations.
The ownership of a domestic corporation for purposes of determining whether it is a closely-held corporation or a publicly-held corporation is ultimately traced to the individual shareholders of the parent company. Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by more than 20 individuals, the corporation is considered publicly-held corporation. (BIR Ruling No. 025-2002 dated June 25, 2002
Considering that the parent company of Siemens Power Operations, Inc. is a corporation publicly listed in Germany, whose stocks are owned and held by more than 20 stockholders, Siemens Power Operations, Inc. is not subject to the 10% improperly accumulated earnings tax. (BIR Ruling No. 035-2002 dated August 29, 2002)
FRINGE BENEFIT TAX; WITHHOLDING TAX; application of Tax Credit Certificate (TCC) - The second paragraph of Section 204(C) of the Tax Code of 1997 specifically prohibits the application of a TCC against the withholding tax liabilities of a taxpayer. The rationale for this prohibition is that the withholding tax is not considered a direct liability of the taxpayer. The tax withheld is actually payment made by the taxpayer other than the withholding agent who merely holds the tax withheld in trust for the government.
Fringe benefit tax is a withholding tax on the employee although payment thereof is made directly by the employer. It is a direct internal revenue tax liability of the employee, and not of the employer. Hence, Bechtel Overseas Corporation cannot use its TCC to pay the fringe benefit tax because of the prohibition under Section 204(C) of the Tax Code of 1997.
Bechtel Overseas Corporation’s request for non-imposition of civil penalties on the ground that it made a voluntary tender of payment of the fringe benefit tax through the use of its TCC was denied for lack of basis for abatement of civil penalties. Payment in the form of a TCC is not valid and is considered as no payment at all. Bechtel Overseas Corporation, having failed to pay the tax on time, the penalties thereon should attach. (BIR Ruling No. 036-2002 dated October 9, 2002)
EXCISE TAX; imported articles of an inventor
- The exemption of an inventor from the Excise Tax pursuant to Section 3 of Revenue Regulations (RR) No. 19-93, which implemented the provisions of RA 7459 (Inventions and Inventors Incentives Act of the Philippines), covers only the sale of his invented products. Section 129 of the Tax Code provides that Excise Taxes apply to goods manufactured in the Philippines for domestic sale or consumption or for any other disposition, and to things imported which shall be in addition to the VAT. As importer of the raw materials needed in the manufacture and commercialization of his products, the inventor has to pay the Excise Taxes due on his imported articles prior to the release of the same from customhouse, pursuant to Section 131(A) of the Tax Code of 1997. (BIR Ruling No. 037-2002 dated October 15, 2002)
INCOME TAX; VALUE-ADDED TAX; withdrawal of tax incentives to government agencies and instrumentalities - Philippine Tourism Authority (PTA), to which Duty Free Philippines (DFP) is attached, is a government instrumentality, which is one of the entities referred to in Section 27(C) of the Tax Code of 1997. An "instrumentality" refers to any agency of the National Government, not integrated within the department framework, vested with some, if not all, corporate powers, administering specific funds, and enjoying operational autonomy, usually through a charter.
The withdrawal of the exemption privileges granted to government agencies and instrumentalities such as PTA/DFP under Section 27(C) of the Tax Code of 1997 covers only Income Tax. With respect to the imposition of VAT on DFP’s importation of goods and its local purchases of goods, the nature of business of duty free shops require its exemption from taxes to enable said shops to be much more competitive by reducing its cost of operation. If PTA and, consequently, DFP were to pay VAT, which is an indirect tax, it will be passed on to its tax-free merchandise, rendering the same not tax-free at all. (BIR Ruling No. 038-2002 dated November 5, 2002)
DOCUMENTARY STAMP TAX; gain or loss in partial or complete liquidation of a corporation - The transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation.
No Documentary Stamp Tax (DST) is due on the surrender and cancellation of shares since the surrender does not constitute a sale, assignment or transfer because the liquidating corporation is not taking title to the surrendered shares and the shares are retired and not retained as treasury shares.
A distribution in liquidation, without consideration, of the assets of a corporation consisting of real estate is not subject to DST under Section 196 of the Tax Code of 1997. A corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter. However, the notarial certification on the deeds of assignment is subject to DST of P15.00 under Section 188 of the Tax Code of 1997. (BIR Ruling No. 039-2002 dated November 11, 2002)
EXCISE TAX; VALUE-ADDED TAX; importation of petroleum products - Importation of petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to Excise Tax is exempt from VAT. Moreover, the exemption from Excise Tax under Section 6 of RA 7459 does not apply to the movement of the inventions from the SBFZ to customs territory, which is importation subject to Excise Tax. (BIR Ruling No. 040-2002 dated November 14, 2002)
TAXABILITY OF FRINGE BENEFIT TAX – Medical cash allowance of P 750 per employee per semester given as de minimis benefit to both managerial and rank and file employees is not subject to Income Tax and withholding tax. However, the excess shall be taxable to the employee if such excess is beyond the P 30,000 ceiling for 13th month and other benefits.
Generally, the cost of educational assistance or scholarship grant to the employee shall be treated as taxable fringe benefit. However, said scholarship grant shall not be treated as taxable fringe benefit if: (a) the education or study involved is directly connected with the employer’s trade, business or profession and (b) there is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time that they have mutually agreed upon.
Educational assistance to dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.
The provisions of Section 33 of the Tax Code of 1997 shall apply with respect to the imposition of a final tax on educational fringe benefits extended to managerial or supervisory employees. If the recipient is a rank and file employee, the fringe benefit will be subject to withholding tax on compensation and to Income Tax but not on final tax on fringe benefits. Both managerial or supervisory or rank and file employee shall be subject to the P 30,000 threshold pursuant to Section 32(B)(7)(e) of the Tax Code of 1997. (BIR Ruling No. 041-2002 dated November 14, 2002)
