Tax treatment of share in taxable JV

In order to be a tax-exempt joint venture (JV) under Section 22(B) of the Tax Code, a JV or consortium formed for the purpose of undertaking a construction project must meet the following conditions:

a. the JV should be for the undertaking of a construction project

b. the parties in the JV must be licensed as general contractors by the Philippine Contractors Accreditation Board (PCAB)

c. local contractors are engaged in construction business

d. the JV itself must be duly licensed by the PCAB.

The BIR held that a JV project for the construction of a condominium where one of the parties contributes the land and the other party provides construction funding and/or development is not covered by Section 3 of Revenue Regulations No. 10-2012, and, as such, is taxable as a corporation.

As regards the share in the JV of the co-venturers, the BIR held that the transfer of condominium units from the JV to the co-venturers shall be subject to ordinary income tax based on the current fair market value of the condominium units less the fair market value of the property contributed to the JV in case of the co-venturer contributing the land, and costs actually, directly and exclusively incurred for the construction of the project on the part of the developer as co-venturer.

The subsequent sale by the coventurers - directly or indirectly (by trust or agency) - of the condominium units received shall be subject to ordinary income tax, creditable withholding tax, VAT, and documentary stamp tax.

(BIR Ruling No. 263-2013, July 12, 2013)

Tax Brief – August 2013

Punongbayan and Araullo

One ATRIG, one automobile

To ensure that the importation of automobiles is fully accounted for and revenue collections of the government are protected, the BIR has adopted the policy wherein one authority to release imported goods (ATRIG) shall be issued for each unit of imported automobile with a net importer’s price of over P2.1 million, excluding the VAT and excise taxes.

In cases of importation having a single bill of lading but consisting of several automobiles regardless of importer’s selling price, excluding value-added tax (VAT) and excise taxes, one ATRIG shall still be issued for every unit of automobile.

Pending the enhancement of the Philippine National Single Window System on ATRIG, a separate notarized application for ATRIG shall be filed and signed by the importer or his duly authorized representative, with the prescribed documentary stamp affixed thereon, for each and every unit of automobile.

(Revenue Memorandum Order No.21-2013, July 23, 2013)

Tax Brief – August 2013

Punongbayan and Araullo

Revalidation of tax exemption of non-stock, non-profit organizations

Corporations and associations under Section 30 of the National Internal Revenue Code (NIRC), as amended, including those that received tax exemption rulings/certificates prior to June 30, 2012, must file their respective Applications for Tax Exemption/Revalidation with the Revenue District Office (RDO) where they are registered.

General documentary requirements

A corporation or association applying for tax exemption or revalidation of its tax exemption must submit the following documents:

1. Original copy of application letter for issuance of Tax Exemption Ruling - The letter shall cite the particular paragraph of Section 30 of the NIRC, as amended, on which the application for exemption/revalidation is being based.

2. Certified true copy of the latest Articles of Incorporation and By-Laws issued by the Securities and Exchange Commission

3. Original copy of certification under oath by an executive officer of the corporation or association as to: (a) all previous amendments/changes in the Articles of Incorporation and By- Laws, (b) manner of activities, and (c) the sources and disposition of income, if any, of the subject corporation or association. If there are no amendments/changes, the certification shall state this fact.

4. Certified true copy of the Certificate of Registration with the Bureau of Internal Revenue (BIR)

5. Original copy of the certification under oath by the treasurer of the corporation or association as to the amount of income, compensation, salaries or any emoluments paid by the corporation or association to its trustees, officers and other executive officers, provided that a corporation sole, which, by its nature, does not have trustees, corporate officers or executive officers, need not submit the certification required under this subparagraph

6. Original copy of the certification issued by the RDO where the corporation or association is registered that the corporation or association is not the subject of any pending investigation, ongoing audit, pending tax assessment, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal; or if there be any, the original copy of the certification issued by the RDO on the status thereof

7. Certified true copies of the Income Tax Returns or Annual Information Returns and Financial Statements of the corporation or association for the last three years

8. Original copy of a statement under oath by an executive officer of the corporation or association as to its modus operandi, which shall include:

a) A full description of the past, present, and proposed activities of the corporation or association

b) A narrative description of anticipated receipts and contemplated expenditures

c) A detailed description of all revenues that it seeks to be exempted from income tax. All other revenues that are not included in the statement/ application shall be subject to income tax.

In the course of review of the application for tax exemption/revalidation, the BIR may require additional information or documents as the circumstances warrant. There is also a separate listing of the additional requirements for non-stock, nonprofit educational institutions.

Guidelines for the evaluation of application

Corporations or associations that apply for tax exemption ruling under Section 30(E) of the NIRC, as amended, must meet all of the following requirements:

1. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans.

2. It should meet the following tests:

a. Organizational test – requires that the corporation or association’s constitutive documents exclusively limit its purposes to one or more of those described in paragraph (E) of Section 30 of the NIRC, as amended

b. Operational test – mandates that the regular activities of the corporation or association be exclusively devoted to the accomplishment of the purposes specified in paragraph (E) of Section 30 of the NIRC, as amended.

A corporation or association fails to meet this test if a substantial part of its operations may be considered “activities conducted for profit”.

c. All the net income or assets of the corporation or association must be devoted to its purpose/s and no part of its net income or asset accrues to or benefits any member or specific person. Any profit must be plowed back and must be devoted or used altogether for the furtherance of the purpose for which the corporation or association was organized.

d. It must not be a branch of a foreign non-stock, non-profit corporation.

Validity of tax exemption ruling

The tax exemption ruling shall be valid for a period of three years from the date of effectivity of the ruling, unless sooner revoked or cancelled.

The tax exemption ruling shall be deemed revoked if there are material changes in the character, purpose, or method of operation of the corporation or association that are inconsistent with the basis for its income tax exemption. The revocation takes effect as of the date of the material change.

Renewal of tax exemption rulings

The tax exemption ruling may be renewed upon filing of a subsequent Application for Tax Exemption /Revalidation, under the same requirements and procedures provided herein. Otherwise, the exemption shall be deemed revoked upon the expiration of the tax exemption ruling. The new tax exemption ruling shall be valid for another period of three years, unless sooner revoked or cancelled.

(Revenue Memorandum Order No. 20-2013, July 22, 2013)

Tax Brief – August 2013

Punongbayan and Araullo

Presentation of quarterly ITRs in refund claims

In the case of claims for refund of excess or unutilized CWT, the presentation of succeeding quarterly income tax returns (ITRs) is required to prove that the taxpayer did not carry over and/or apply its excess withholding taxes to the succeeding taxable quarters.

According to the CTA, the presentation of quarterly ITRs is necessary to establish that the taxpayer claiming the refund did not exercise its option to carry over its excess unutilized withholding tax against its tax liabilities for the succeeding taxable quarters.

The CTA pointed out that the option to carry over excess withholding tax under Section 76 of the Tax Code is exercised against the quarterly income taxes to the taxable quarters of the succeeding taxable years. Since it is against the quarterly income taxes in the quarterly ITRs that the option to carry over is exercised, the CTA maintained that the best evidence to prove that there was really no carry over is not the final adjustment return or annual ITR, which may be amended at the end of the taxable year, but the quarterly ITR where the exercise to carry over actually takes place.

Hence, in case of failure to present succeeding quarterly ITRs, the CTA cannot determine with reasonable certainty whether the taxpayer claiming the refund opted to carry-over its excess and unutilized CWT. In such an instance, since the taxpayer is unable to prove its entitlement to refund, its claim for refund of its excess unutilized CWT shall be denied by the CTA.

(Jardine Lloyd Thomson Insurance Brokers, Inc. v. Commissioner of Internal Revenue, CTA EB Case No. 861 re: CTA Case No. 7916, June 5, 2013.

Tax Brief – July 2013

Punongbayan and Araullo

Proof establishing VAT zero-rated direct export sales

Under Section 112(A) of the Tax Code, a VAT-registered taxpayer with input taxes attributable to zero-rated or effectively zero-rated sales is entitled to claim for refund of its unutilized input VAT within the two-year period from the close of the taxable quarter when such sales were made.

As one of the transactions subject to zero-percent rate, direct export sales qualify as VAT zero-rated sale pursuant to Section 106(A)(2)(a)(1) of the Tax Code if the following conditions are present: (1) there was a sale and actual shipment of goods from the Philippines to a foreign country; (2) the sale was made by a VAT-registered person; (3) the sale was paid for in acceptable foreign currency or its equivalent in goods or services; and (4) the payment was accounted for in accordance with the Bangko Sentral ng Pilipinas (BSP) rules and regulations.

On the other hand, the documents that should be presented by the taxpayer to prove that there is direct export sales are: (1) sales invoice as proof of sale of goods; (2) export declaration and bill of lading or airway bill as proof of actual shipment of goods from the Philippines to a foreign country; and (3) the bank credit advice, certificate of bank remittance or any other document proving payment for the goods in acceptable foreign currency or its equivalent in goods and services.

While the taxpayer-refund claimant was able to prove that it was a VAT-registered taxpayer, the CTA held that the documents such as official receipts, and bank certificates/cash statements submitted by the taxpayer cannot be linked to its export sales due to its failure to submit its VAT zero-rated sales invoices and export documents, such as export declarations and bills of lading, or airway bills. Hence, for failure to submit the aforesaid documents, the CTA held that its sales cannot qualify for VAT zero-rating and its input VAT cannot be refunded.

(Philippine Gold Processing & Refining Corporation v. Commissioner of Internal Revenue, CTA Case No. 8270, June 11, 2013)

Tax Brief – July 2013

Punongbayan and Araullo

Tax treatment of separation pay due to retrenchment

Separation or termination from the service as part of the company’s retrenchment program are considered separation that is beyond the control of the separated official or employee.

As such, any amount received by such officials or employees as a consequence of their separation shall not be included in gross income and shall be exempt from taxation pursuant to Section 32 (B) (6) (b) of the Tax Code, as amended.

However, the tax exemption does not cover the payment of the separated employee’s salaries and the payment of 13th month pay and other benefits in excess of the P30,000 threshold under Section 2.78.1(A)(3)(a) and (A)(7) of RR 2-98, as amended.

As regards monetization of sick and vacation leave credits, only the cash equivalent of vacation leaves not exceeding 10 days shall be exempt from tax, while the monetized value of all sick leave credits of separated employees shall be subject to income tax.

(BIR Ruling No. 227-2013, June 20, 2013)

Tax Brief – July 2013

Punongbayan and Araullo

Refund of input VAT prior to VAT registration

A VAT-registered taxpayer that incurred input VAT on its VAT-zero rated sales prior to its VAT registration is not entitled to claim refund for such unutilized input VAT.

Under Section 112(A) of the Tax Code, in order to be entitled to refund/tax credit of unutilized input VAT, the following requisites must be satisfied: (1) the taxpayer must be

VAT-registered; (2) the taxpayer must be engaged in sales that are zero-rated or effectively zero-rated; (3) the claim must be filed within the two years after the close of the taxable quarter when such sales were made; and (4) the input taxes were not applied against any output VAT liability during and in the succeeding quarters.

In the instant case, the input VAT that was the subject of refund refers to the VAT paid by the taxpayer on its purchase of land, while its alleged zero-rated sale of service occurred when it entered into a lease agreement with its affiliate PEZA-registered IT enterprise. The taxpayer incurred the VAT and the alleged zero-rated transaction took place when the taxpayer was not yet VAT-registered.

Considering that the unutilized input VAT on the purchase of land was incurred by the taxpayer at a time when it was not yet registered as a VAT taxpayer, there is no input VAT that can be a subject of refund.

Moreover, the Court of Tax Appeals (CTA) held that since the land lease agreement was executed before the taxpayer’s VAT registration, its sale of service is not yet considered a VAT zero-rated sale. Hence, for failure to establish that it incurred input taxes and rendered zero-rated sale of service, the taxpayer’s claim for refund was denied by the CTA.

(Crescent Park 14-678 Property Holdings, Inc. v. Commissioner of Internal Revenue, CTA Case No. 8326, June 13, 2013)

Tax Brief – July 2013

Punongbayan and Araullo