Pre-audit of annual income tax returns

The BIR issued the following guidelines in the pre-audit of income tax returns (ITRs) of individuals engaged in business or practice of profession and corporate taxpayers that are registered in the Revenue District Offices (RDOs).

Guidelines and procedures

The pre-audit of annual ITRs shall be conducted without field investigation.  Also, the pre-audit shall not be covered by an electronic Letter of Authority (eLA) or Tax Verification Notice (TVN).  The Revenue District Officer shall be responsible for assigning the annual ITRs in batch for pre-audit by the revenue officers.

The pre-audit process shall involve the verification of the following:

(a)    mathematical computation of income tax due and payment;

(b)   correctness of claimed personal and additional exemptions;

(c)    correctness and validity of claimed deductions/expenses subject to ceiling/limitations;

(d)   validity of claims for income tax holiday, tax exemption or other tax incentives;

(e)    correctness of application of minimum corporate income tax;

(f)     claimed CWTs;

(g)    correct utilization of tax credit certificates;

(h)   corrections of claimed optional standard deduction;

(i)     accuracy and applicability of net operating loss carryover; and

(j)     completeness of required attachments to the annual ITRs.

In case the pre-audit results in a deficiency tax, a registered mail shall be sent to the concerned taxpayer requiring the settlement of the deficiency tax within 15 days from receipt of the letter from the BIR. If the taxpayer fails to respond or does not pay the deficiency tax, the issuance of a preliminary assessment notice (PAN) or final assessment notice (FAN) shall be recommended.

A pre-audited annual ITR may still be selected for regular audit if it qualifies under the selection criteria prescribed in the annual BIR audit program. All preaudited annual ITRs with “no discrepancy” and ITRs where the taxpayer has settled the deficiency tax shall no longer be transmitted to the assessment division. However, the said return shall be retained in the RDO for possible audit/investigation based on the BIR’s annual audit program.

(Revenue Memorandum Order No. 25-2012, November 19, 2012

Tax Brief – December 2012

Punongbayan and Araullo

Local Business Tax on “other income”

A company that is licensed to engage in the construction or operation of power plants is not subject to local business tax (LBT) on its other income comprising of dividend income, foreign exchange gain and interest income from bank deposits.

In the instant case, the company never conducted any business or engaged in commercial operation as evidenced by the affidavit of non-operation, which it submitted to the local government unit (LGU) with its application for business permit. However, in the notice of assessment issued by the LGU, it classified the company as a “Holding Company-Management Service,” and correspondingly, assessed it on its dividend income (from its shareholdings), foreign exchange gains and interest income (from its bank deposit of the remainder of its branch capital).

The Regional Trial Court (RTC) sustained the findings of the LGU when it held that the primary purpose indicated in the company’s certification reveals that services embodied under the definition of contractor includes persons whose activity consists essentially of the sale of all kinds of services for a fee. The Court of Tax Appeals (CTA) reversed the decision of the RTC and held that the LGU erred in classifying the company as a “Holding Company-Management Service.”

According to the CTA, in determining whether the company is a “holding company-management service,” the actual operations must be determined on the basis of evidence relating to its operations, rather than inferring from a reading of the primary purpose clause stated in the company’s Articles of Incorporation. An enterprise’s Articles of Incorporation only show what a corporation is empowered or authorized to do, but do not prove what the business of a corporation actually is.

The CTA further held that Section 143 in relation to Section 131(n) of the Local Government Code (LGC) is clear that the company is only subject to LBT on its gross sales or receipts. Under Section 131(n) of the LGC, the term “gross sales or receipts” is defined as the total amount of money or its equivalent, representing the contract price, compensation or service fee, including the amount charged for material supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person. Hence, only income arising from the company’s services performed or to be performed to its customers should be subject to LBT.

Since the company had no income arising from services performed or to be performed for its customers, the CTA held that the foreign exchange gain, dividend income and interest income should not form part of the company’s gross receipts that should be subject to LBT.

(Orleyte Company v. City of Makati, CTA AC No. 80 November 14, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Due process requirement in tax assessments

The issuance of a PAN is part of the due process requirement in the assessment of taxes. Full compliance with the requirement is mandatory to ensure the validity of an assessment.

The requirement that a taxpayer must first be notified of its deficiency taxes through the issuance of a PAN is provided under Section 228 of the National Internal Revenue Code (NIRC).

This is confirmed under Section 3 of RR 12-99, which provides that if after review and evaluation, it is determined that there exists sufficient basis to assess a taxpayer for deficiency tax or taxes, a PAN showing in detail the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based should be issued to the taxpayer.

In the instant case, since the taxpayer denied having received the PAN, it was thus incumbent upon the BIR to prove that the taxpayer received the PAN. However, for failure on the part of the BIR to prove that the taxpayer was served a copy of the PAN, the CTA held that the assessment made by the BIR was invalid, and thus, ordered its cancellation.

(Commissioner of Internal Revenue v. Unioil Corporation, CTA EB Case No. 857 re CTA Case No. 8000, November 13, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Clarification on reporting of VAT on power generation

The Circular was issued to clarify the various issues in the implementation of Revenue Memorandum Circular No. 62-2012 on the revised rule on the reporting of gross receipts and remittance of VAT on power generation and other related charges.

Following are some of the issues clarified in the Circular:

1. On the liability of generation companies and electricity suppliers to interest and penalties for non-remittance of outstanding deferred VAT from distribution utilities (DUs) and electric cooperatives (ECs) prior to August 25, 2012

Generation companies (GenCos), aggregators, market operators, retail electricity suppliers and other suppliers of electricity shall be required to remit only the amount of outstanding deferred VAT prior to August 25, 2012 that they collected from the DUs/ ECs, which the latter had collected from the end-users/customers.

DUs /ECs shall reconcile with GenCos, aggregators, market operators, retail electricity suppliers and other suppliers of electricity the unremitted portion of the deferred VAT prior to August 25, 2012, which shall be subject to audit by the BIR.

However, the outstanding deferred VAT prior to August 25, 2012 that has already been remitted by the DUs/ECs to the GenCos, aggregators, market operators, retail electricity suppliers and other suppliers of electricity, but not paid by the latter to the BIR within the deadline prescribed herein, shall be subject to surcharge, interest and penalties.

2. On the determination of amount of generation fee and VAT to be paid per GenCo

The VAT collected from the end-users by the DUs/ECs must immediately be remitted to the GenCos, aggregators, market operators, retail electricity suppliers and other suppliers of electricity not later than the 10th day of the following month, to enable the GenCos to remit the VAT on or before the 20th or 25th of the same month, whichever is applicable, net of GenCos’ own input tax, if any.

Moreover, DUs/ECs are required to furnish the GenCOs with a summary list of VAT collections from end-users/customers to enable the GenCos to file the VAT returns, and attach the list as a supplemental schedule to the GenCos’ Summary List of Sales submitted to the BIR.

In case the DU/EC has special arrangements with the GenCo for discounts for prompt payments, and such is availed of by the DU/EC, the payment shall be deemed collected from the end-user/client.  Accordingly, the same shall be reported as part of the GenCo’s vatable gross receipts, and shall be subjected to VAT.

3. On manner of allocating zero-rated sales and other reconciling items to the GenCos

The zero-rated sales and other reconciling items shall be proportionately allocated by the DUs/ECs based on kilowatt purchased.

(Revenue Memorandum Circular No. 71-2012, November 15, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

a letter from George Esperacion

Dear Atty.  Onia,

Hello.  How are you? By the way, Happy New Year.  It’s been awhile since we see each other in Dagupan City. The reason I contacted you is because I need some advice regarding this.

A friend who lives in Los Angeles contacted me and expresses her intention of selling her land “riceland” to me which is located in Binmaley.  The only paper she had is the Declaration of Real Property (Tax Declaration). She pay’s her property tax each year. The property has no certificate of title yet. Here are my questions.

1.What information or document  do I need from her before doing a Deed of Sale?

2.How do you determine the selling or buying  price of this property?

3. On my part, what sort of verification that I need to do?

Please advise whenever you get a chance and also how much do I owe you for this consultation?

Regards,

George Esperacion

Dear George,

Nice to hear from you. It is like few years ago that you had your vacation in Dagupan and I was able to join our classmates welcoming you.

For your first question.  Considering that the parcel of land is not yet titled and is just covered by Tax Declaration, you have to inquire from the seller who is in actual possession of the said agricultural land.  You may also inquire from your seller how did she acquire the said parcel of land and inquire if she was able to keep the document of transfer to her.

For your second question.  One way of determining the selling price of the parcel of land is to inquire the selling or buying price of similar properties in the barangay where the property is located.

For your third question. Since you are abroad, you can assign somebody to verify some information such as (a) the cadastral claimant by requesting DENR Form No. V-37 from the Community Environment and Natural Resources Office (DENR) having jurisdiction over the prospect parcel of land.  You will also know the area metes and bounds of the property through the Form V-37; (b) the Zonal value of the prospect parcel of land with the Bureau of Internal Revenue to determine the capital gains tax which the seller is obliged under the law to pay (c) hire a geodetic engineer to determine the exact metes and bounds of the property and to determine its exact area and to determine if there are illegal occupants therein. (d) verify the Tax Declaration and the document of previous owner given by the seller with the Municipal Assessor of the town where the property is located.  By verifying the Tax Declaration of the property and previous owners you can also determine whether or not the spouse of the seller should be required to sign his conformity the sale.

I have to thank you for this legal inquiry because I have something to post in by Alaminos Law Blog of answers to common legal problems.  I can give free legal advice to the public why not free of charge from a friend and classmate.  It is nice to be of service.

May God bless and your family.

Regards,

Henry

Rising to business challenges: Is your internal auditor ready?

As businesses prepare to capitalize on a booming economy, internal audit is expected to help light the way with better insight and smarter risk management.

Challenge and opportunity

The Asian Development Bank recently reported that the Philippine economy grew by 7.1% in the third quarter of 2012, versus 3.2% in the same period last year. This makes the Philippines the strongest performing economy in the Southeast Asian region, nearly matching China in growth pace.

For business leaders, this bullish performance spells opportunity. But it also opens the door to bigger risks.

In this environment, internal audit’s (IA) responsibilities in capturing emerging risks, ensuring appropriate corporate governance, and incorporating technology into internal audit processes becomes even more important.

In its 2012 Chief Audit Executive Survey, Grant Thornton summarized the following challenges and opportunities faced by internal audit (IA) organizations:

• Internal auditors are facing increasing technology risks attendant to cloud computing and cybersecurity threats. The ability to achieve growth goals is at risk without protected data and secure processes.

• Trends point to the need for a more global IA presence. Outsourced, offshore and standardized processes across countries may require increased cross-border and multi-cultural IA orientation.

• Chief Audit Executives (CAEs) or their equivalent recognize that their organizations can better harness the power of technology, e.g., data analytics, continuous auditing technologies, in promoting internal audit efficiencies.

• As stakeholders call for internal auditors to have a broader understanding of the business, CAEs are challenged to balance these with developing experiences leading to an executive management career.

The Institute of Internal Auditors (IIA) stressed that internal auditing should be performed by professionals with a deep appreciation of the importance of strong governance, an in-depth understanding of business systems and processes, and a fundamental drive to help organizations more effectively manage risk. IA adds organizational value when it proactively provides objective assurance and insight into the effectiveness and efficiency of governance, risk management, and internal control processes.

Internal auditors are expected to level-up their competencies in light of these changes in business and stakeholder expectations.

Competencies for today’s internal auditor

Results from an IIA Research Foundation survey showed that the following are ‘very important’ competencies internal auditors should demonstrate:

• Communication skills (including oral, written, report writing and presentation)

• Problem identification and solution skills (including core, conceptual, and analytical thinking)

• Ability to promote the value of internal audit

• Keeping up to date with industry, regulatory and standard changes

• Organizational skills

• Conflict resolution and negotiation skills

By level, CAEs should have the ability to promote the value of internal audit; managers are expected to exhibit organizational skills, while IA staff should demonstrate excellent communication skills.

Internal auditors regard ethical conduct, i.e., managing one’s actions toward others based on commonly accepted standards, as the most important behavioural skill. Ethical conduct can be demonstrated through the following ‘very important’ components:

• Confidentiality

• Objectivity

• Communication (sending clear messages)

• Judgement

• Governance and ethics sensitivity

By rank, the top skills CAEs should demonstrate include leadership, governance and ethics sensitivity, and influence (ability to persuade).

Managers should demonstrate effective staff management skills, while IA staff should be team players (must be able to inspire collaboration/cooperation among team members).

The common technical skills, i.e., applying subject matter or terminology in a particular field, are expected of internal auditors, which include understanding business, and risk analysis and control self-assessment techniques.

CAEs and managers should additionally focus on skills related to managing people while IA staff should focus on skills needed for analysing processes and controls.

Summary

Internal auditors should continually improve their competencies, knowledge, and audit tools and techniques to adequately address the risks facing their organizations.

A respondent to the IIA Research Foundation survey highlighted the growing expectations concerning internal auditors by stating that, “Internal audit is becoming a place where leaders are made.” Furthermore, the survey revealed that in light of increased stakeholder expectations, internal auditors remain receptive to taking on newer and broader responsibilities.

The challenge lies in the transformation process – in developing a competency framework and individual development plans that support internal auditors as they move up the organizational ladder.

And the bigger question is: Is your internal auditor ready?

Mhycke C. Gallego CPA, CIA, CCSA, CRISC, MPM is a Partner with the Advisory Services Division of Punongbayan & Araullo.

Executive Brief – December 2012

Punongbayan and Araullo

Clarification on business taxes on professionals

The Bureau of Internal Revenue (BIR) issued the following clarifications on the applicable business taxes on the services performed by persons engaged in the practice of profession or calling.

a. Value-added tax (VAT) – A professional shall be liable to VAT at the rate of 12% if his gross receipts/professional fees for the past 12 months amount to more than P1,919,500. He is likewise liable to register as a VAT-taxpayer if there are reasonable grounds to believe that his gross receipts/ professional fees for the next 12 months will exceed P1,919,500.

For purposes of the P1,919,500 VAT threshold, a husband and wife shall be considered separate taxpayers. If the professional fails to register as a VAT-taxpayer, he shall be liable to pay the 12% output tax as if he were a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered.

b. Percentage tax – A professional is liable to the 3% percentage tax if his gross receipts  /professional fees for the past 12 months do not exceed P1,919,500 and he is not a VAT-registered person.

If the professional registers as a VAT-person, he shall be liable to VAT upon registration as a VAT taxpayer, and not to percentage tax, regardless of the amount of his gross receipts/professional fees. A person who is not required to register for VAT may elect to be VAT-registered but he shall not be allowed to cancel such registration for the next three years from the quarter the election was made.

(Revenue Memorandum Circular No. 64-2012, October 31, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Change in useful life of property used in business

The estimated useful life of the fixed assets used by an enterprise registered with the Philippine Economic Zone Authority (PEZA) for its manufacturing activities may be changed for purposes of claiming depreciation deduction, both for tax and financial accounting purposes, if the estimated useful life of the asset previously adopted is no longer reasonable.

Under Section 34(F)(3) of the Tax Code, the taxpayer and Commissioner of Internal Revenue may enter into an agreement in writing on the estimated useful life and rate of depreciation of any  property. The rate so agreed upon shall be binding on both the taxpayer and the BIR.

However, if it develops that the useful life of the property originally estimated under previous factual conditions is no longer reasonable, the law allows the taxpayer to lengthen or shorten the useful life of the property in light of prevailing factual considerations.

(BIR Ruling No. 598-2012, October 25, 2012)

 Tax Brief – December 2012

Punongbayan and Araullo

Tax refund based on “solutio indebiti”

A claim for refund of erroneously, illegally, excessively or wrongfully collected taxes or penalty must be filed within two years from date of payment of the tax or penalty regardless of any supervening cause that may arise after the payment of tax or penalty pursuant to Section 229 of the Tax Code.

In the instant case, the taxpayer-refund claimant — an electric distribution company — filed an application for provisional increase of its electric rate schedules in 1994 with the Energy Regulatory Board (ERB). Acting on its petition, the ERB issued an order granting the company a provisional increase subject to the condition that after hearing and evaluation, should the company be entitled to a lesser increase, all excess amount should be refunded to its customers or credited to their future consumption.

When it imposed the provisional increase upon its consumers, the company declared the provisional increase in its income tax returns and paid the corresponding income tax. However, after consultation and hearing, the ERB rendered a decision in 1998 granting a lesser increase in rates, and thus, it ordered the company to refund or credit to its customers the overcharged amount.

The company appealed the ERB decision to the Court of Appeals (CA), which ruled in 1999 in its favor by reversing the ERB decision. The CA decision was reversed in 2002 by the Supreme Court (SC), and became final and executory on May 5, 2003.

As a result of the mandated refund or credit, the company’s gross electric revenue, taxable income and income tax liability during the taxable years 1994-1998 and 2000-2001 were reduced, resulting in excess income tax payments.  To recover its erroneously paid tax, the company filed with the BIR its administrative claim for refund in 2003 while its judicial claim with the CTA was filed in 2005.

The second division of the CTA entitled the company to claim for tax refund due to the special circumstances prevailing in the instant case. An appeal was made to the CTA en banc, which held that the rule of solutio indebiti does not apply to the claim for refund since the elements of solutio indebiti are lacking in the case. The CTA en banc also held that the two-year prescriptive period for the company to claim refund had lapsed reckoned from the dates the income taxes had been paid without consideration to any supervening cause that arose after the payment of the tax.

In response to the motion for reconsideration of the decision of the CTA en banc, the CTA en banc held that the twoyear prescriptive period under Section 229 of the Tax Code may be suspended for reasons of equity and other special circumstances. It held that considering the SC decision ordering the company to refund or credit to future consumption the overcharged amount became final and executory only on May 5, 2003, it will be iniquitous to rule that the two-year prescriptive period was not interrupted, but instead commenced to run from the date of payment of the taxes sought to be refunded.

In its amended decision, the CTA en banc further held that the principle of solution indebiti is applicable to refund or illegally collected or assessed tax. Based on jurisprudential pronouncements cited by the CTA en banc, it held that the rule on solutio indebiti may be applied to the refund claim of the taxpayer.

(Commissioner of Internal Revenue v. Manila Electric Company, Inc, CTA EB No. 773, November 13, 2012)

Tax Brief – December 2012

Punongbayan and Araullo

Expiration of invoices/receipts

Following the BIR’s adoption of the online system for authority to print (ATP), all unused or unissued receipts and invoices which were printed prior to January 18, 2013 (date of effectivity of RR 18-2012) shall be deemed valid only until June 30, 2013.

By implication, which we will further clarify with the BIR,  all taxpayers whose ATPs were issued prior to January 18, 2013 may be liable to apply for new ATP under the new system on or before May 1, 2013 or 60 days before the expiry date.
Under the regulations, application for ATPs and submission of required documents shall be done through the on-line ATP system.

This shall cover all principal and supplementary receipts/invoices.  Under RR 18-2012, the term “principal receipts/invoices” refers to written accounts evidencing the sale of goods and/or services issued to customers in the ordinary course of business which include VAT sales invoice/receipts and Non-VAT sales invoice/receipts.

On the other hand, supplementary receipts/invoices, also known as commercial invoices, are written accounts evidencing that a transaction has been made between the seller and buyer of goods forming part of the books of accounts of a business taxpayer for recording, monitoring and control purposes. These include, among others, delivery receipts, order slips, debit and/or credit memo, purchase order, job order, provisional/temporary receipt, acknowledgment receipt, collection receipt, cash receipt, bill of lading, billing statement, and statement of account.

The application for ATP should be filed not later than 60 days prior to the actual expiry date.

The unused /unissued receipts/invoices shall be surrendered to the taxpayer’s RDO on or before the 10th day after the expiration of the receipts/invoices for destruction.  An inventory listing of these unused/unissued receipts and invoices shall also be submitted to the BIR.

The approved ATP shall be valid only until full usage of the approved serial numbers or five (5) years from its issuance, whichever comes first.

Revenue Regulations No. 18-2012

Punongbayan and Araullo

 

Donation by foreigner

Si Richard ay isang foreigner na naging kaibigan ni Rene dahil magka relihiyon sila. Dahil sa nakikita ng foreigner na si Rene ay nag aalaga ng baka at bina buy and sell dahil dito nagka interes din ang foreigner na bumili ng baka at ipinagkatiwala sa ilalim na pangangalaga ni Rene at napagkasunduan na maghahati sa kikitain sa  bawat na ibebentang baka.

Para magkaroon ng malawak na pastulan at kural ng mga baka bumili sa sariling pera ang foreigner ng 5,200 sq. mtr. Agri lot at ipinangalan ang TCT sa kanilang dalawa ni Rene. 

Lumipas ang mga taon ang napagkasunduan hatian sa tutubuin ay hindi na natutupad ni Rene dahil dito napagkasunduan na ibenta na lamang ang nabili lupa.

Una inialok ng foreigner na ibenta ang lupa pangsakahan kay Rene subalit walang kapasidad na bilhin dahil sa kakulangan ng pera pambili. Ilang taon ang lumipas hindi naibenta ang lupain dahil walang nagka interes na bumibili. 

Dahil walang bumili sa lupa nagpasya ang foreigner na donate na lamang ang nasabing lupain sa matagal niyang kaibigan at trustee na si Ruben pumayag naman si Rene.

Si Ruben ay matagal nanilbihan sa foreigner noong nanirahan ang huli sa bansa subali’t si Ruben ay nagkasakit at ipinakiusap sa foreigner na idonate na lamang ang lupain sa anak niyang  bunso lalake na may edad na 19 yrs old, pumayag naman ang foreigner at Rene.

Tanong:

1.    Ano ang unang hakbang na gagawin nina Rene, anak ni Ruben at foreigner para mailipat sa pangalan ang titulo pabor sa anak ni Ruben?

2.    Sa kasalukuyan ang foreigner ay nasa ibang bansa pero may SPA na ginawa noong huling bumalik ng bansa para kay Ruben kabilang na nakasaad sa SPA na puwede ibenta ni Rene ang lupain sa ngalan ng principal pero hindi nakasaad ang donasyon.

3.    Pabalik sa bansa ang foreigner ano mang araw at buwan sa susunod na taon pa, hihintayin na lamang bumalik para pumirma sa dokumento para sa paglilipat sa pangalan ng anak ni Ruben?

Mga sagot:

1. Kailangan pumirma sina Richard and Ruben ng Deed of Donation para sa anak ni Ruben.  Ang Deed of Donation ay dapat notaryado.  Dapat dalhin ang nasabing Deed of Donation sa Bureau of Internal Revenue para mabayaran ang Donor’s Tax at para mabigyan ang anak ni Ruben ng Certificate of Authority to Register.
2. Ang Special Power of Attorney para magbenta ng lupain ay hindi sakop ang pagdonate ng nasabing lupain.  Sa pagbebenta merong perang tatanggapin ang may-ari na halaga ng napagbentahan subalit sa pagdonate walang perang matatanggap ang may-ari.
3. Kahit hindi hintayin ang pagdating ni Richard sa bansa para i-donate nila ni Ruben sa anak ni Rene.  Dahil sa makabagong paraan ng pakipag-ugnayan, maaaring ipadala sa pamamagitan ng email ang Deed of Donation para pirmahan ni Richard at doon ipanotaryo sa kanyang bansa. Para kilalanin ang dokumento sa Pilipinas, kailangang ipa-authenticate ito sa Embahada ng Pilipinas doon sa bansa niya.  Ang pirmado, notaryado at authenticated Deed of Donation ay maaari ng i-registro sa Register of Deeds pagkatapos mabayaran ang donors tax sa Bureau of Internal Revenue.

Lotto tickets subject to DST

The sale of lotto tickets is subject to documentary stamp tax (DST) based on the cost of the ticket, pursuant to Section 190 of the Tax Code, as amended. They are not covered by the tax exemption granted to horse races and sale of tickets in the horse race sweepstakes under the Philippine Charity Sweepstakes Office (PCSO) charter (Republic Act No. 1169).

Under Section 4 of RA 1169, i.e., PCSO Charter, horse races and sale of tickets in the said sweepstakes are exempt from all taxes, except that each ticket shall bear a 12-centavo internal revenue stamp. According to the Court of Tax Appeals (CTA), since the statute expressly limits the exemption to horse races and sale of horse race sweepstakes, it may not, by interpretation or construction, be extended to others, i.e., lotto tickets.

On the contention that Section 4 of RA 1169, which grants tax exemption to “horse races tickets and sale of sweepstakes,” is inconsistent with Section 190 of the Tax Code, which imposes tax on lotto, the CTA held that there is no inconsistency between Section 190 of the Tax Code and Section 4 of RA 1169 since the latter expressly exempts only horse races and sale of sweepstakes tickets, and does not include lotto tickets.

The CTA further held that Section 190 of the Tax Code is clear that the cost of the ticket should be the basis for the computation of the DST. According to the CTA, the cost of the ticket is equivalent to the gross sales without deducting the commission and rent due the third parties, and not the net receipts.

(PCSO v. CIR and Assistant Commissioner of Internal Revenue, Large Taxpayers Service, CTA EB Case No. 807 re Case No. 8036, October 1, 2012)

Tax Brief - November 2012

Punongbayan and Araullo

Proof of service of assessment notice

Under Section 228 of the Tax Code, when the Commissioner of Internal Revenue (CIR) or his duly authorized representative finds that the proper taxes should be assessed, the taxpayer must be notified of his liability for deficiency taxes through the sending of a Preliminary Assessment Notice (PAN).

In CIR vs. Metro Star Superama, Inc., cited by the CTA, the Supreme Court (SC) held that the sending of a PAN to a taxpayer to inform him of the assessment made is part of the due process requirement in the issuance of a deficiency tax assessment, the absence of which renders nugatory any assessment made by tax authorities.

In its argument against the assessment issued by the BIR, the taxpayer claimed that the BIR’s assessment did not become final, demandable and executory since the taxpayer did not receive the PAN. To prove receipt of PAN by the taxpayer, the BIR submitted the judicial affidavit and presented as witness the BIR personnel who was in charge of checking the mailing, among others, of assessment notices.

To prove service by registered mail, the CTA held that Sections 7 and 13 of 1997 Rules of Civil Procedure require that the following evidence be presented: (a) an affidavit from the BIR personnel stating, among others, that the notice was in a sealed envelope, the postage was fully prepaid, and there were instructions to the postmaster to return the mail to the sender after 10 days if the mail is delivered in compliance with Section 7 of 1997 Rules of Civil Procedure; (b) the registry receipt issued by the mailing office.

The CTA held that the judicial affidavit and testimony of the BIR personnel do not show compliance with the provisions of Section 7, Rule 13 of the 1997 Rules of Civil Procedure. According to the CTA, the judicial affidavit of the BIR personnel failed to state that the PAN was in a sealed envelope, the postage was fully prepaid, and there were instructions to the postmaster to return the mail to the sender after 10 days if the mail is undelivered. Moreover, there was no indication that the BIR presented the registry receipt issued by the mailing office for the PAN.

For failure to establish that the taxpayer received the PAN in accordance with the provisions of Section 13 in relation to Section 7, both of Rule 13 of the Rules of Court, the assessment made by the CIR is void.

(People of the Philippines v. Katherine M. Lim and Edelyn Coronacion, CTA EB Criminal Case No. 019, re CTA Criminal Case No. 0- 113, October 1, 2012

Tax Brief – November 2012

Punongbayan and Araullo