Tax Bulletin

October 2018

Tax Bulletin | 1
 Highlights

BIR Rulings

• Liquidated damages for failure to deliver an obligation at a guaranteed date

represent indemnification for the unexpected loss of assets, and are not
subject to VAT. They are, however, subject to income tax, the same being
compensation for loss of anticipated profits. (Page 4)

• The sale, importation or lease of passenger or cargo vessel and aircraft,

including engine, equipment and spare parts thereof for domestic or
international transport operations shall be exempt from VAT. (Page 4)

BIR Issuances

• Revenue Regulation (RR) No. 22-2018 further amends Section 10 of RR No.

10-2010, as last amended by RR No. 10-2018, regarding the timetable when
a taxpayer shall be notified in writing of a request for exchange of information
from a foreign tax authority. (Page 5)

• Revenue Memorandum Order (RMO) No. 46-2018 prescribes the procedures

in the decentralized processing and issuance of tax clearance for bidding
purposes. (Page 5)

• Revenue Memorandum Circular (RMC) No. 85-2018 clarifies certain issues

relative to the issuance of electronic Certificates Authorizing Registration
(eCAR) for multiple transactions involving only one certificate of title of real
property. (Page 8)

• RMC No. 86-2018 circularizes the lists of withholding agents required to

deduct and remit 1% and 2% Creditable Withholding Tax (CWT) for the purchase
of goods and services. (Page 9)

Customs Updates

• Customs Memorandum Order (CMO) No. 15-2018 provides for the Electronic to
Mobile (E2M) User Access Policy. (Page 9)

• CMO No. 17-2018 provides for the Nationwide Implementation of the

1-Assessment System (formerly known as Enhanced Goods Declaration
Verification System or EGDVS). (Page 10)

• CMO No. 18-2018 provides for the Guidelines on the Implementation of

Customs Administrative Order (CAO) No. 1-2018 on the Amended Rules on
Consolidated Shipments of “Balikbayan Boxes.” (Page 11)

• Customs Special Order (CSO) No. 106-2018 provides for the Creation of the
Interim Internal Affairs Office (IIAO) under the Office of the Commissioner.
(Page 13)

• Commission Order (CO) No. 2018-01 provides for the Rules of Procedure on
Disputes involving Tariff Classification. (Page 13)

2 | Tax Bulletin
PEZA and BOI Updates

• PEZA Memorandum Circular No. 2018-021 circularizes the Department

of Health’s clarification on covered providers required to submit the Water
Safety Plan, and extension of the deadline for compliance. (Page 15)

• Memorandum Circular (MC) No. 2018-07 circularizes the new list of

Less Developed Areas entitled to additional incentives under the 2017
Investments Priorities Plan. (Page 16)

• MC No. 2018-08 circularizes additional registrable activities under the 2017

Investment Priorities Plan. (Page 16)

SEC Issuances

• SEC MC No. 13 adopts new accounting standards and interpretations as part

of the rules and regulations on financial reporting. (Page 17)

• SEC MC No. 14 provides relief to real estate companies in the implementation

of Philippine Financial Reporting Standard (PFRS) No. 15 and related
interpretations by the Philippine Interpretations Committee (PIC). (Page 17)

BSP Issuances

• Circular No. 1015 provides for the Implementing Guidelines of the Currency
Rate Risk Protection Program (CRPP Facility). (Page 18)

• Circular No. 1016 provides for the Compliance Framework for Non-Stock
Savings and Loan Associations (NSSLA). (Page 18)

• Circular No. 1017 provides for the Adoption of the Policy Framework on
the Grant of Regulatory Relief to Banks/Quasi-banks affected by Calamities.
(Page 19)

• Circular No. 1018 provides for the Amendments to the Qualification

Requirements of Unit Investment Trust Fund (UITF) Marketing Personnel.
(Page 20)

Court Decisions

• False or fraudulent returns must be proven for the extended 10-year

prescriptive period to apply. A waiver is considered valid despite its defects if
both parties are at equal fault.

The non-conversion of the Letter of Authority (LOA) to an Electronic LOA and

the extension of the audit and investigation to more than 120 days do not
invalidate the LOA. (Page 21)

• A corporation that declared dividends within the one-year period from the
end of the taxable year being assessed is no longer liable for Improperly
Accumulated Earnings Tax (IAET).

Additional Paid-In Capital (APIC) should be included in the paid-in capital for
purposes of computing the IAET. (Page 22)

Tax Bulletin | 3
 • While an accused wife may have been negligent in signing without reading,
documents presented by her husband, such negligence does not equate to
willful and deliberate intent not to supply correct information that is punishable
under Section 255 of the Tax Code. (Page 24)

• Declaration and distribution of property dividends to shareholders is not within

the ambit of the term “other disposition of shares of stock” in RRs 6-2008 and
6-2013 as it is a mere equity transaction. (Page 25)

 
BIR Rulings

BIR Ruling No. 1211-2018 dated 28 September 2018

Liquidated damages for failure to Facts:

deliver an obligation at a guaranteed
date represent indemnification for the A Co., B Co. and C Co. (collectively referred to as the “Contractors”) are engaged
unexpected loss of assets, and are not in the business of construction services. They entered into an agreement with
subject to VAT. They are, however, D Energy Co. for the construction of the latter’s coal-fired power plant under an
subject to income tax, the same being engineering and construction contract. Under the contract, should the Contractors
compensation for loss of anticipated fail to deliver the plant at a guaranteed completion date, they will be held liable for
profits. reasonable liquidated damages.

On the guaranteed completion date, the Contractors were delayed in the delivery of
the project. They were made to pay liquidated damages in favor of D Energy Co.

Issues:

1. Are liquidated damages subject to VAT?

2. Are liquidated damages subject to income tax?

Ruling:

1. No. Section 105 of the Tax Code, as amended, provides that any person who,
in the course of trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and any person who imports good shall be subject
to VAT. The phrase “in the course of trade or business” means the regular
conduct or pursuit of commercial or an economic activity, including transactions
incidental thereto, by any person. The liquidated damages for failure of the
Contractors to meet the guaranteed completion date are not considered
transactions subject to VAT since they represent the indemnification for
unexpected loss of assets.

2. Yes. Liquidated damages are subject to income tax, the same being
compensation for the loss of anticipated profits.

BIR Ruling No. 1212-2018 dated 28 September 2018

The sale, importation or lease of Facts:

passenger or cargo vessel and aircraft,
including engine, equipment and Q Co., a domestic corporation, is a common carrier for cargo and passengers in
spare parts thereof for domestic or coastwise trade, and is registered with the Maritime Industry Authority (MARINA). It
international transport operations shall imported one unit of cargo ship with an Authority to Import issued by MARINA.
be exempt from VAT.

4 | Tax Bulletin
 Issue:

Is the importation of the cargo ship exempt from VAT?

Ruling:

Yes. Section 109 (1) (T) of the Tax Code, as amended, provides that the sale,
importation or lease of passenger or cargo vessel and aircraft, including engine,
equipment and spare parts thereof, for domestic or international transport
operations shall be exempt from VAT.

BIR Issuances

RR No. 22-2018 further amends RR No. 22-2018 issued on 17 October 2018

Section 10 of RR No. 10-2010, as last
amended by RR No. 10-2018, regarding • Section 10 of RR No. 10-2010, as amended by RR No. 10-2018, is further
the timetable when a taxpayer shall amended as follows:
be notified in writing of a request for
exchange of information from a foreign 1. A taxpayer shall be notified in writing by the Commissioner that a foreign
tax authority. tax authority is requesting for an exchange of information held by financial
institutions pursuant to an international convention or agreement on tax
matters within the period prescribed as follows:

• Within 60 days from the Commissioner’s transmittal of all the

information requested from and provided for by the concerned
financial institution to the requesting treaty partner; OR

• After receipt of communication from the requesting foreign tax

authority that the investigation has reached its finality in cases where
an earlier notification will likely undermine the chance of success of
the investigation, and the requesting foreign tax authority has made a
substantiated request for the deferment of the notification.

• The regulations shall take effect after 15 days following complete publication in
a newspaper of general circulation.

(Editor’s Note: RR No. 22-2018 was published in Malaya on 19 October 2018)

RMO No. 46-2018 prescribes the RMO No. 46-2018 issued on 11 October 2018
procedures in the decentralized
processing and issuance of tax clearance • All prospective government bidders are required to secure a Tax Compliance
for bidding purposes. Verification Sheet (TCVS) from the Collection Section of the Revenue District
Office (RDO) where the individual or non-individual taxpayer is registered,
except for the following taxpayers,:

1. Non-Resident Foreign Corporations (NRFC);

2. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB); and

3. Large Taxpayers

Tax Bulletin | 5
 • A taxpayer-applicant for tax clearance for bidding purposes must satisfy the
following criteria:

1. No unpaid annual registration fee (ARF);

2. No open, valid “stop-filer” cases;

3. Taxpayers with previously issued tax clearance for bidding purposes must be
regular electronic Filing and Payment System (eFPS) users from enrollment up
to the filing of the application, but new applicants need not be regular eFPS
users and may submit their latest income tax and business tax returns not
filed and paid through the BIR’s eFPS;

4. Not tagged as a “Cannot Be Located (CBL)” taxpayer;

5. No Accounts Receivable/Delinquent Accounts (ARDA);

6. No pending criminal information filed in any court of competent jurisdiction

arising from any tax or tax-related cases.

• Applicants with delinquent accounts that are the subject of pending applications
for compromise settlement or abatement of penalties where the offered amounts
are fully paid upon the filing of the compromise or abatement application may still
be issued a TCVS and tax clearance for bidding purposes.

• ARDA refers to an outstanding tax liability of a taxpayer arising from a tax

assessment of any unpaid delinquent account, which is considered final, executory
and demandable under any of the following instances:

1. Failure to pay the tax due per return within the time prescribed for its
payment;

2. Tax payment made through a bank draft or check, but was denied by drawee-
bank due to insufficiency of funds, accounts closure or for other reasons of
dishonor under the Negotiable Instruments Law; and

3. A final, executory and demandable assessment on the following grounds:

►• Failure to file a valid protest or request for reinvestigation or

reconsideration within 30 days from receipt of the Formal Letter of
Demand and Final Assessment Notice (FLD/FAN);

• Failure to submit documents in support of the request for reinvestigation

within 60 days from filing of the request;

• Failure to appeal to the Court of Tax Appeals (CTA) within 30 days

from receipt of the decision denying the request for reinvestigation/
reconsideration, or in case of BIR inaction, after the lapse of 180 days
from submission of required documents;

►• Failure to appeal the decision of the CTA on the case with the higher
court as a result of which the decision became final and executory;

►• Failure to receive any assessment notice because it was served in the

address indicated in the BIR database, and the taxpayer transferred
to a new address or closed/ ceased operations without updating and
transferring or cancelling its BIR registration under the procedure
prescribed in the pertinent issuances; and

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 ►• Decision/Resolution by the CTA/Supreme Court in favor of the BIR,
which became final and executory.

►• All applications for the issuance of tax clearance for bidding purposes shall be
manually filed with the following BIR offices:

1. Collection Division of the Revenue Regional Office (RRO) where the

taxpayer is registered;

2. Concerned office of the Large Taxpayers Service (LTS) for large taxpayers;
and

3. Accounts Receivable Monitoring Division (ARMD) for NRA-NETB, NRFC and

other entities authorized by the Commissioner of Internal Revenue (CIR).

►• All applications for tax clearance for bidding purposes shall be processed and
released within 2 working days from receipt of the application with complete
documentary requirements.

►• Only duly accomplished application forms for tax clearance, with complete
documentary requirements, shall be accepted by the BIR.

►• Tax clearances for bidding purposes shall only be valid after they have been
posted in the BIR website.

►• Tax clearances, which have been revoked for valid reasons, shall likewise be
posted in the BIR website by indicating on the previously posted tax clearance,
the remark “Revoked effective (date).”

►• Tax clearance may be revoked based on any of the following grounds:

1. Disapproval of the application for compromise settlement and abatement

of penalties;

2. Submission of spurious documents as attachments to the application;

3. Non-compliance with the prescribed criteria; or

4. Misrepresentation to the government procuring agency or to the tax

clearance-issuing office.

►• A Preliminary Notice of Revocation (PNR) shall be issued to applicants who have

been issued a tax clearance and found to be non-compliant with the prescribed
criteria.

►• The PNR shall state the lacking criterion or criteria and a provision that the
same must be complied with within 30 days from its receipt.

►• A Notice of Revocation (NR) shall be issued to applicants who fail to comply

with the PNR, and those who submitted spurious documents and made
misrepresentations, without prejudice to the taxpayer’s filing of another
application for the issuance of a tax clearance for bidding purposes when the
circumstances that lead to the cancellation or revocation of the previously
issued tax clearance are no longer existing, or the taxpayer has already
been cleared of any criminal charges relative to the submission of spurious
documents.

Tax Bulletin | 7
 ►• Criminal charges shall be filed against taxpayers found to have submitted
spurious tax clearances and documentary requirements.

►• Issued tax clearance for bidding purposes may be renewed upon filing of
a subsequent application form for tax clearance for bidding purposes and
submission of the same requirements.

►• Tax clearances issued shall be deemed revoked or cancelled upon their

expiration.

►• The new tax clearance for bidding purposes shall be valid for another period
of 1 year from the date of its issuance, unless sooner revoked or cancelled.

►• All tax clearance certificates for bidding purposes issued by the ARMD prior to
the effectivity of this RMO shall remain valid until their expiry dates.

►• However, holders of said tax clearance for bidding purposes shall apply for
renewal with the corresponding Revenue Regional Offices or LTS at least 2
months prior to its expiry date.

►• Applications for tax clearance, which have been received by the ARMD but
have remained pending as of the effectivity date of RR 18-2018, shall still
be processed by the ARMD, but those with lacking requirements and failed
to meet the prescribed criteria shall be re-filed with the concerned offices
prescribed under this RMO.

►• This RMO shall take effect immediately.

RMC No. 85-2018 clarifies certain issues RMC No. 85-2018 issued on 1 October 2018
relative to the issuance of eCARs for
multiple transactions involving only one ►• For taxpayers submitting an Extra-Judicial Settlement with Sale or Extra-
certificate of title of real property. Judicial Settlement with Waiver of Rights, there are 2 transactions involved:
1) the settlement of the estate; and 2) transfer through sale or donation.

• In such a case, the Revenue Officer (RO) assigned in the One Time Transaction
(ONETT) shall issue 2 distinct eCARs, one of which will authorize the
settlement of the estate while another one will authorize the transfer through
sale or donation.

• Two electronic Certificate of Registion (eCARs) shall be presented

simultaneously to the Registry of Deeds (RD) since the presentation of only
one eCAR to the RD will invalidate the second eCAR transaction in the system,
resulting in the issuance of a Notice of Invalid eCAR by the RD.

• For taxpayers submitting 2 separate documents, such as an Extra-Judicial

Settlement and a Deed of Absolute Sale or Deed of Donation, the RO of the
ONETT shall first issue an eCAR for the estate settlement, and this will be
presented by the taxpayer to the RD for the issuance of a new certificate of
title.

• The new title number that will be issued for the first transaction on the
settlement of estate shall be the basis for the issuance of the eCAR for the
second transaction, whether sale or donation.

• The taxpayer may opt to pay for the applicable taxes at the same time to
avoid incurring penalties and interest.

8 | Tax Bulletin
RMC No. 86-2018 circularizes the RMC No. 86-2018 issued on 11 October 2018
lists of withholding agents required to
deduct and remit 1% and 2% CWT for the • The following lists of withholding agents were posted on the BIR website, www.
purchase of goods and services. bir.gov.ph, and were further classified as follows:

1. List of existing withholding agents;

2. List of additional withholding agents; and

3. List of withholding agents for deletion from existing list.

• The obligation to deduct and remit the withheld taxes to the BIR shall continue,
commence, or cease, as the case may be, starting 1 November 2018.

• All previously-published lists of withholding agents are repealed and superseded

by this circular.

• Any taxpayer not found in the published lists is deemed excluded, and therefore
not required to deduct the 1% and 2% CWT.

Customs Updates

CMO No. 15-2018 provides for the E2M CMO No. 15-2018 dated 28 September 2018
User Access Policy.
• This policy defines the Bureau of Customs’ (BOC) expectations of users who
have been granted access to Electronic to Mobile (E2M) systems and other
customs applications.

• This CMO covers all persons with access to the BOC’s E2M system, its related
applications and the data stored and processed in and through it.

• Administrative Provisions

1. The granting of user’s access shall be limited to specific, defined,

documented and approved applications, and levels of access rights shall be
based on the assigned role or function. The users shall only receive access
to the minimum applications and privileges required to perform their job-
related functions.

2. The Terms of Use to be signed by the persons granted E2M access shall
include provisions ensuring compliance with Republic Act (RA) No. 10173
or the Data Privacy Act of 2012 and its implementing guidelines.

• The Deputy Commissioner of BOC’s Management Information Systems and

Technology Group (MISTG) is the approving authority to grant user’s access to
the BOC’s E2M system and its related applications.

• User accounts may be restricted, deactivated or revoked at any time without

prior notice under certain instances enumerated in the CMO including
reasonable grounds to suspect misuse of access and violation of any terms of
use or any existing rules and policies affecting E2M access and usage.

Tax Bulletin | 9
 • Deactivation, revocation, restriction and/or re-activation of a user account shall
be with approval of the Deputy Commissioner of MISTG.

• The right and prerogative of the BOC to restrict, suspend, or revoke a user’s E2M
access shall be independent of and shall not be contingent on the pendency or
outcome of any administrative, civil or criminal proceeding.

• This CMO shall take effect immediately.

(Editor’s Note: CMO No. 15-2018 was received by the UP Law Center on 3 October
2018)

CMO No. 17-2018 provides for the CMO No. 17-2018 dated 11 October 2018
Nationwide Implementation of the
1-Assessment System (formerly • This CMO implements Section 109 and other relevant provisions of RA No.
known as Enhanced Goods Declaration 10863, otherwise known as the Customs Modernization and Tariff Act (CMTA),
Verification System or EGDVS). in relation to RA No. 11032, otherwise known as the Ease of Doing Business and
Service Delivery Act of 2018. This Order also supplements the provisions of CMO
No. 10-2018 and supersedes CMO No. 31-2017.

• The objective of this CMO is to prevent corruption by institutionalizing the “Zero

Contact Policy” (Section 7 of RA No. 11032) and suppress the “suki system” in
the cargo clearance process through the random assignment of examiners and
appraisers to a given goods declaration, among others.

• “1-Assessment System” refers to a web-based queue management software/

application that provides bias-free assessment by randomly assigning Appraisers
and Examiners to goods declaration filed. It shall apply only to import
consumption entries cleared under the formal entry process in all ports of entry,
subject to the exceptions provided in the CMO.

• Exceptions to the 1-Assessment System – goods declaration filed, even if cleared

under the formal entry process, as follows:

1. Shipments under the Super Green Lane (SGL)

2. Articles withdrawn from the Customs Bonded Warehouse (CBW) for local
consumption

3. Wastages under the Bonded Warehouse Regime and jet operation losses

4. Goods entered as temporary imports for subsequent re-exportation

5. Deferred Payment of Government (DPG)

• The Commissioner of Customs shall issue corresponding Memoranda to the

different District Collectors informing them of the schedule of the roll-out of the
1-Assessment System in their respective ports.

• This CMO shall take effect 15 calendar days after its complete publication in a
newspaper of general circulation.

(Editor’s Note: CMO No. 17-2018 was published in The Manila Times on 16 October
2018)

10 | Tax Bulletin
CMO No. 18-2018 provides for the CMO No. 18-2018 dated 11 October 2018
Guidelines on the Implementation of
CAO No. 1-2018 on the Amended • This CMO applies to consolidated shipments of Balikbayan Boxes entered
Rules on Consolidated Shipments of through any port of entry sent to families by “Qualified Filipinos While Abroad”
“Balikbayan Boxes.” (QFWA) which may be entitled to duty and tax exemption pursuant to Section
800 (g) of the CMTA.

• Balikbayan Boxes brought in through means other than Consolidated Shipments

shall be covered by a separate CMO.

• The objective of this CMO is to prescribe simplified customs clearance

procedures for consolidated shipment of Balikbayan Boxes sent by QFWA to
their families or relatives, especially the Overseas Filipino Worker (OFWs) in
recognition of their significant contribution to the Philippine Economy, among
others.

• The Deconsolidator shall apply for registration every 2 years with the Account
Management Office of the BOC upon submission of the required documents,
in addition to the registration requirements imposed by other government
agencies.

1. “Deconsolidator” refers to a consolidator’s agent situated at the country of

importation that provides services to ungroup or deconsolidate shipments,
orders, goods, etc. to facilitate distribution. It may also refer to a Breakbulk
Agent.

• Operational Provisions

1. Submission of Electronic – Inward Foreign Manifest (IFM), House Bill of

Lading (HBL) and House Airway Bill (HAWB) to the BOC shall be governed
by the provisions of existing rules and regulations by the BOC.

• To distinguish Consolidated Balikbayan Shipments from other

consolidated commercial importations, the words “CONSOLIDATED
BALIKBAYAN SHIPMENT” shall be indicated in the field for Description
of Goods in the Master Bill of Lading.

2. Preparation and Submission of Information Sheet – The sender may

request copies of the Information Sheet from the Consolidator, or may
download the same from the BOC website or from any Value-Added Service
Providers (VASPs). The information sheet must be signed and submitted
by the Sender in 3 copies to the Consolidator together with the listed
documentary requirements for Filipino citizens or for Dual Filipino citizens
without Philippine passport.

3. Lodgment of Goods Declaration – To expedite the cargo clearance process,

the Deconsolidator, upon filing of the goods declaration with the Informal
Entry Division or its equivalent unit, must submit a soft copy of the
Information Sheet together with the required documentary requirements.

Tax Bulletin | 11
 Based on the Information Sheet submitted in advance by the Consolidator,
the BOC shall make a determination whether a Sender is qualified to avail
of the tax and duty free exemption under the De Minimis scheme or of
the privilege under Section 800 (g) of the CMTA and for the expedited
clearance of Balikbayan Box/es.

4. Cargo Clearance Procedures – All Consolidated Balikbayan Shipments

processed under this CMO shall be subject to mandatory non-intrusive x-ray
inspection by, or under the supervision of, a BOC personnel, unless tagged
as “suspect” in which case it be subject to 100% physical examination.

5. Preparation of Order of Payment – Only 1 order of payment shall be

prepared regardless of the number of goods declaration lodged for a single
master bill of lading or master airway bill.

6. Shipments declared as consolidated Balikbayan Boxes but are found to be

otherwise shall be considered as misdeclared and shall be subjected to
seizure and forfeiture proceedings.

• The CMO provides for the following forms as Annexes:

1. Annex A: Information Sheet to be accomplished by the sender with regard

to information relating to the sender, the Philippine-based recipient
and itemized description of the goods; and to be accomplished by the
Consolidator and the Deconsolidator for information pertaining to shipment
and transport, arrival details, respectively.

2. Annex B: For consolidated shipments by sea, a sample Certificate of

Compliance to be secured from the Consolidator attesting to the electronic
submission of the pdf copies of the complete set of the Information Sheet
with the required attachments simultaneously to the Deconsolidator and
the BOC’s Advanced Manifest System (AMS);

3. Annex C: List of Information to be provided by the Deconsolidator in

soft copy together with the documents listed therein to expedite cargo
clearance process, upon filing of the goods declaration with the Informal
Entry Division (IED) or its equivalent unit.

4. Annex D: BOC Form for assessment of applicable duty and taxes.

5. Annex E: Format of Notice of Inspection stating that the box was randomly
selected for physical examination by the BOC pursuant to Section 420 of
the CMTA as well as the format of the security tamper evident tape with the
word “Inspected” by the BOC.

• This CMO shall take effect immediately.

(Editor’s Note: CMO No. 18-2018 was received by the UP Law Center on 16 October
2018)

12 | Tax Bulletin
CSO No. 106-2018 provides for the Customs Special Order (CSO) No. 106-2018 dated 4 October 2018
Creation of the IIAO under the Office of
the Commissioner. • Pursuant to the CMTA, it is the policy of the State to protect and enhance
government revenues and institute professionalism and meritocracy in Customs
Tax Administration. In the exigency of service as well as in compliance with
the marching order of the President to stop corruption in the BOC, and in view
of the aforementioned stated policy, IIAO was created under the Office of the
Commissioner.

• IIAO has the following functions:

1. Monitor the status of investigations by the Customs Intelligence and

Investigation Service (CIIS) – Investigation Division;

2. Monitor all administrative charges or cases against the BOC officials and
employees with the Legal Service (LS);

3. Submit a weekly report to the Office of the Commissioner of status and

update of all the administrative cases against BOC officials and employees
or as required by the Commissioner; and

4. Perform such other functions as directed by the Commissioner.

• This CSO shall take effect immediately.

CO No. 2018-01 provides for the Rules Commission Order (CO) No. 2018-01 dated 17 October 2018
of Procedure on Disputes involving Tariff
Classification. • This CMO covers the administrative remedies and procedures in the final
determination by the Tariff Commission (TC) of disputes involving tariff
classification under Chapter 1, Title XI of the CMTA.

• The objective of this CMO is to establish a Tariff Classification Dispute

Ruling system that is in line with the standards set out in the Revised Kyoto
Convention, the World Trade Organization Agreement on Trade Facilitation, the
ASEAN Trade in Goods Agreement (ATIGA), the World Customs Organization
(WCO) Harmonized System Convention, other relevant international trade
agreements, relevant Philippine laws, and international best customs practices,
among others.

• Definition of Terms

1. ASEAN Harmonized Tariff Nomenclature (AHTN) – an eight-digit

commodity nomenclature adopted by the ASEAN Member States to
harmonize their tariff nomenclatures at the eight-digit level. It adheres to
the six-digit commodity classification code of the Harmonized Commodity
Description and Coding System of the WCO but adds two digits, with
corresponding commodity description that represent ASEAN subheadings.

2. Advance Ruling on Tariff Classification – an official written decision issued

by the TC which provides the importer or exporter with the appropriate
tariff classification of goods under the AHTN prior to importation or
exportation.

Tax Bulletin | 13
 3. Tariff Classification – refers to the act or process of determining the
subheading in the AHTN to which goods appropriately belong in
accordance with Sections 1610 and 1611 of the CMTA.

4. Tariff Classification Dispute – refers to a situation or case when

a declared tariff classification of goods, not subject of a pending
application for advance ruling, is in dispute because the BOC has a
different classification or the tariff classification for the subject goods is
considered difficult or highly technical by the BOC.

5. Tariff Classification Dispute Ruling – an official written decision issued by

the TC on the disputed tariff classification which provides the importer,
exporter or the BOC with the appropriate classification of goods under
the AHTN during the importation or exportation.

• Operational Provisions

1. Tariff Classification Disputes are initiated through the following:

• Endorsement from the BOC in the case of difficult or highly technical

questions on tariff classification, as determined by BOC; or

• Filing of case by the importer or exporter when the BOC has a

different tariff classification.

2. Payment of Fees - Upon filing of the case, the importer or exporter shall
pay the prescribed fees. Failure to pay the fees shall cause the non-
acceptance of the case.

3. Evaluation of Cases Endorsed by the BOC:

• Within 7 working days from the receipt of the case, the TC shall
notify the importer or exporter and, if it deems appropriate, require
him/her to submit additional information and/or allow on-site
verification to determine the proper tariff classification of the subject
goods.

• Within 10 working days from receipt of notice, the importer or

exporter shall submit additional information and/or allow on-site
verification.

4. Evaluation of Cases filed by an Importer or Exporter

• After the conduct of the 2 steps mentioned above, within 5 working

days from receipt of the case, or receipt of additional information,
or conduct of on-site verification, the TC shall notify the BOC that a
tariff classification dispute is filed before it and request comments.

• Within 10 working days from receipt of the notice and the records
of the case, the BOC may file a comment or submit any additional
explanation or documents to justify its findings.

5. Conduct of Hearing – If necessary to clarify facts in resolving the pending

dispute on tariff classification, after due notice to the parties. The
hearing shall be summary and fact-finding in nature and shall be presided
by a hearing officer designated by the TC.

14 | Tax Bulletin
 6. Issuance of Tariff Classification Dispute Ruling

• Issued by the TC within 20 working days from receipt of all required

information or documents or the termination of the hearing. This
period may be extended for another 20 working days upon prior notice
to the importer/exporter and BOC.

• The ruling of the TC on commodity classification shall be binding upon

the BOC, unless the Secretary of Finance shall rule otherwise.

7. Publication – the TC shall publish its ruling on its website and deposit a
copy of the same in its Records Unit.

• This CO shall take effect 15 days after its complete publication in the Official
Gazette or in a newspaper of general circulation.

(Editor’s Note: CO No. 2018-01 was published on The Manila Times on 19 October
2018 and on The Manila Standard on 23 October 2018)

PEZA and BOI Updates

PEZA Memorandum Circular No. 2018- PEZA Memorandum Circular No. 2018-021 dated 1 October 2018
021 circularizes the DOH’s clarification
on covered providers required to submit • In a letter to PEZA dated 13 August 2018, the Department of Health (DOH) has
the WSP, and extension of the deadline extended the deadline for submission of the Water Safety Plan (WSP) from 31
for compliance. August 2018 to 28 February 2019.

• DOH has also clarified the following:

1. DOH Administrative Order (AO) No. 2014-0027 titled “National Policy on

Water Safety Plan for All Drinking-Water Service Providers” applies to all
drinking water service providers.

• Drinking water is defined as water intended for human consumption or

for use in food preparation and related processes.

2. Water service providers in economic zones are within the scope of DOH AO
No. 2014-0027.

• While water service providers in economic zones mainly distribute

their water for industrial use, the same industrial water is also used
for domestic purposes and such comes within the purview of drinking
water.

MC No. 2018-07 circularizes the new BOI Memorandum Circular No. 2018-07 dated 21 September 2018
list of Less Developed Areas entitled to
additional incentives under the 2017 • Executive Order (EO) No. 226 or the Omnibus Investments Act mandates that
Investments Priorities Plan. the BOI shall prepare a list of Less Developed Areas (LDA)

• On top of the incentives provided under EO No. 226, BOI-registered enterprises

located in an LDA are also entitled to the following:

Tax Bulletin | 15
 1. Pioneer incentives (whether new or expansion of an existing venture)

2. Additional deduction from taxable income equivalent to 100% of expenses

incurred in the development of necessary and major infrastructure facilities
and public utilities (with prior approval of the Board, and provided title over
the works will be transferred to the Philippine government upon completion)

• Through Board Resolution No. 21-02 series of 2018, the Board has approved the
new list of LDAs, which shall be made applicable to enterprises registered under
the 2017 IPP, and consisting of various municipalities/cities in several provinces/
regions in the country.

• MC No. 2018-07 shall take effect immediately upon complete publication.

(Editor’s Note: Published in The Philippine Star on 30 September 2018)

MC No. 2018-08 circularizes additional BOI Memorandum Circular No. 2018-08 dated October 10, 2018
registrable activities under the 2017 IPP.
• BOI Memorandum Circular (MC) No. 2017-004 provides for the general policies
and specific guidelines for the registration of projects and availment of incentives
under the 2017 Investment Priorities Plan (IPP).

• The Board conducted a review of MC No. 2017-004 to consider recent

developments in the industry vis-à-vis the reasonable and justifiable positions
of the private sector and related government agencies, and has deemed it
appropriate to include additional registrable activities under Infrastructure and
Logistics, specifically:

1. For air transport:

• Allows registration of sale and leaseback or leaseback option of a brand

new aircraft

• Allows registration of pure lease of new aircraft, which shall be eligible for
a two-year Income Tax Holiday

2. For water transport:

• Allows registration of pure lease and bareboat charter of new vessels

• MC 2018-08 shall take effect immediately upon complete publication

(Editor’s Note: Published in the Philippine Star on 14 October 2018)

SEC Issuances

SEC MC No. 13 adopts new accounting SEC Memorandum Circular No. 13 series of 2018 dated 15 October 2018
standards and interpretations as part
of the rules and regulations on financial The SEC approved the adoption of the following pronouncements to the Philippine
reporting. Financial Reporting Standards:

• Prepayment Features with Negative Compensation [amendments to Philippine

Financial Reporting Standard (PFRS) 9] – to be applied for annual periods
beginning on or after 1 January 2019;

16 | Tax Bulletin
 • Long-term Interest in Associates and Joint Ventures [amendments to Philippine
Accounting Standard (PAS) 28] – to be applied for annual periods beginning on
or after 1 January 2019;

• PFRS Practice Statement 2: Making Materiality Judgments – applicable to

financial statements prepared from 8 November 2017;

• Guidance on Financial Reporting – effective immediately; and

• PFRS 15, Implementation Issues Affecting the Real Estate Industries – the
consensus on the related interpretation or Q&A is effective on the same date of
PFRS 15.

(Editor’s Note: Published in the Manila Bulletin on 20 October 2018)

SEC MC No. 14 provides relief to SEC Memorandum Circular No. 14 series of 2018 dated October 29, 2018
the real estate companies in the
implementation of Philippine Financial To address the implementation issues affecting the real estate industry, the SEC
Reporting Standard (PFRS) No. 15 and provides for optional deferment of PFRS No. 15 and PIC Question and Answer (Q&A)
related interpretations by the Philippine No. 2018-12 with respect to the following items:
Interpretations Committee (PIC).
• Land - excluded in the computation of percentage of completion (POC). It may
be included in the POC calculation only at historical acquisition cost;

• Uninstalled materials - included in the POC calculation based on the

proportionate work accomplishment of significant building components
procured which are specifically and directly identifiable to the project, as long
as covered by contracts, purchase orders and partially paid for;

• Accounting for significant financing component on the transaction price- not

considered during the period of deferral.

The above deferral shall be for a period of 3 years and shall be complied with by real
estate companies starting 1 January 2021.

(Editor’s Note: This MC has not yet been published)

BSP Issuances

Circular No. 1015 provides for the BSP Circular No. 1015 dated 5 October 2018
Implementing Guidelines of the CRPP
Facility. • The following are the amendments to the revised implementing guidelines for
the Currency Rate Risk Protection Program Facility (CRRP Facility) issued under
Circular No. 1014 dated 24 September 2018.

• Subsection 1603.2 of the MORB on implementing guidelines was added to

provide that the implementing guidelines covering the mechanics, documentary
requirements, and detailed procedural rules of the Facility are provided in
Appendix 122.

Tax Bulletin | 17
 • Subsection 1603.5 of the MORB on supervisory enforcement actions was
amended to provide the enforcement actions and procedures which shall be
employed by the Bangko Sentral in the performance of post-verification of the
CRPP contracts through on-site examination or off-site verification to ascertain
the eligibility of the underlying foreign currency obligation with the CRPP
Facility.

• Appendix 122 of the MORB on implementing guidelines of the Currency Rate

Risk Protection Program (CRPP) Facility (Appendix to Section 1603 of the
MORB) is added to MORB by this Circular.

• Appendix 6 of the MORB was amended to include the reportorial requirements

of the CRPP Facility.

• The templates covering reportorial requirements of the CRPP Facility are

attached in this Circular.

• This Circular shall take effect 15 calendar days after its publication either in the
Official Gazette or in a newspaper of general circulation.

(Editor’s Note: BSP Circular No. 1015, s. 2018 was published in The Philippine Star
on 9 October 2018)

Circular No. 1016 provides for the BSP Circular No. 1016 dated 5 October 2018
Compliance Framework for NSSLA.
• The following amendments provide for the adoption of compliance framework
for Non-Stock Savings and Loan Associations (NSSLA).

• Section 4180S of the Manual of Regulations for Non-Bank Financial Institutions

(MORNBFI) on the selection, appointment, reporting requirements and delisting
of external auditors and/or auditing firms, and sanction is renumbered as the
new Section 4189S of the MORNBFI.

• The reference to Section 4180S in the title of Appendix S-8 of the MORNBFI
was changed to Section 4189S.

• Section 4180S of the MORNBFI was amended to provide for the compliance risk
management, which provides for the policy of the Bangko Sentral to promote
the safety and soundness of operations and activities of NSSLAs. Toward
this end, the trustees and officers of the NSSLA shall establish a compliance
risk management system. The compliance risk management system shall be
designed to specifically identify and mitigate risks that may erode the franchise
value of the NSSLA. As such, a compliance risk management system found
to be materially inadequate may be construed as an act, practice or omission
prejudicial to the interest of members.

• Subsection 4180S.1 of the MORNBFI was added to provide for compliance

function which shall have a formal status within the organization. The
compliance function shall have the right to obtain access to information
necessary to carry out its responsibilities, conduct investigations of possible
breaches of the compliance policy, and shall have direct access to the board of
trustees or appropriate board-level committee.

• Subsection 4180S.2 of the MORNBFI was added to provide for compliance

program that shall set out the planned activities of the compliance function,
which shall be updated on a regular basis or at least annually.

18 | Tax Bulletin
 • Subsection 4180S.3 of the MORNBFI was added to provide for a Chief
Compliance Officer (CCO) which should have the necessary qualifications,
experience, and professional background and should have a sound
understanding of relevant laws and regulations and their potential impact on
the NSSLAs operations.

• Subsection 4180S.4 of the MORNBFI was added to provide for the

responsibilities of the board of trustees and senior management.

• Subsection 4180S.5 of the MORNBFI is reserved.

• Subsection 4180S.6 of the MORNBFI was added allowing the outsourcing of

review, assessment, and testing of the compliance program to qualified third
parties.

• This Circular shall take effect 15 calendar days following its publication either
in the Official Gazette or in a newspaper of general circulation.

(Editor’s Note: BSP Circular No. 1016, s. 2018 was published in The Philippine Star
on 15 October 2018)

Circular No. 1017 provides for the BSP Circular No. 1017 dated 10 October 2018
Adoption of the Policy Framework on the
Grant of Regulatory Relief to Banks/QBs • The following amendments provide for the adoption of a policy framework on
affected by Calamities. the grant of regulatory relief to banks/quasi-banks (QBs) affected by calamities.

• Section X970/4970Q of the Manual of Regulations for Banks (MORB)/Manual

of Regulations for Non-Bank Financial Institutions (MORNBFI) was added to
provide for the regulatory relief policy which sets forth the guidelines on the
grant of regulatory relief measures to banks/QBs affected by calamities.

• Item a of Section X970/4790Q of the MORB/MORNBFI was added to provide

for the objectives, namely: 1) set a uniform and systematic approach in
granting regulatory relief to banks/QBs affected by calamities; and 2) provide
an adequate support to the recovery efforts of banks/QBs.

• Item b of Section X970/4790Q of the MORB/MORNBFI was added to provide

for definitions. For purposes on this Section, a state of calamity is a condition
involving mass casualty and/or major damages to property, disruption of means
of livelihoods, roads and normal way of life of people in the affected areas as a
result of the occurrence of natural or human induced hazard.

• Item c of Section X970/4790Q of the MORB/MORNBFI was added to provide

for a declaration of state of calamity. The National Disaster Risk Reduction
and Management Council (NDRRMC) shall recommend to the President of the
Philippines the declaration of a cluster of barangays, municipalities, cities,
provinces, and regions under a state of calamity, and the lifting thereof. The
declaration of and lifting of the state of calamity may also be issued by the local
sanggunian, upon the recommendation of the Regional / Local Disaster Risk
Reduction and Management Council.

• Item d of Section X970/4790Q of the MORB/MORNBFI was added to provide

for a regulatory relief package which may be availed of by all banks/QBs,
Thrift Banks (TB), Rural Banks (RBs), Cooperative Banks (Coop Banks), and
Rediscounting banks for a period of one (1) year from the date of declaration
state of calamity.

Tax Bulletin | 19
 • Item e of Section X970/470Q of the MORB/MORNBFI was added to provide for
the eligibility. It states that all banks/QBs with head offices and/or branches/
branch-lite units or with end-user borrowers located in areas under state of
calamity may avail of the relief package.

• Item f of Section X970/470Q of the MORB/MORNBFI was added to provide

reportorial requirements to avail of the regulatory relief.

• Item g of Section X970/470Q of the MORB/MORNBFI was added to provide for

supervisory enforcement action.

• This Circular shall take effect 15 calendar days after its publication either in the
Official Gazette or in a newspaper of general circulation.

[Editor’s Note: BSP Circular No. 1017, s. 2018 was published in The Philippine Star
on 17 October 2018].

Circular No. 1018 provides for the BSP Circular No. 1018 dated 26 October 2018
Amendments to the Qualification
Requirements of UITF Marketing • The following are the amendments to Subsection X410.7/4410Q.7/4152T.2 of
Personnel. the Manual of Regulations for Banks (MORB)/Manual of Regulations for Non-
Bank Financial Institutions (MORNBFI), respectively, on qualifications of Unit
Investment Trust Fund (UITF) Marketing Personnel.

• Item “d” of Subsection X410.7/4410Q.7 of the MORB/MORNBFI is hereby

renumbered to Subsection X410.15/4410Q.15 and amended to read, as
follows:

“Subsection X410.15/4410Q.15 UITF Marketing personnel. xxx.

xxx

To ensure the competence and integrity of all duly designated UITF Marketing
Personnel, all personnel involved in the sales of UITF must be certified as a UITF
Marketing Personnel through a UITF Certification Program (UCP) administered
by a reputable financial services industry association/organization acceptable
to the Bangko Sentral. The Certification Program, at a minimum, should
have a qualifying examination, a requirement for continuing education, and
a requirement for registration of the Certified UITF Marketing Personnel. The
Guidelines for the Administration of the UCP are provided in the Appendix-
123/Q-77.

It shall be the responsibility of the Trust Entity (TE) to ensure that its UITF
Marketing Personnel continuously comply with the qualification requirements
prescribed by the Bangko Sentral, and that they conduct themselves with
integrity, honesty and with proper representation to the clients of the TE.

• Subsection 415T.2 of the MORNBFI was amended to provide that the

regulations provided under Subsection 4410Q.15 of the MORNBFI shall apply in
the case of UITF Marketing Personnel.

• Transitory Provision. The following provision shall be incorporated as a footnote

to Subsection X410.15/4410Q.15 on “UITF Marketing Personnel” of the
MORB/MORNBFI.

20 | Tax Bulletin
 During the transitory period, UITF Marketing Personnel authorized to sell UITFs
under the existing requirements, who shall undergo and fail to pass the UCP, will
forfeit their existing qualification and will not be allowed to sell UITF until such
time that they obtain the required certification. The Certification requirement
shall be fully implemented beginning year 2022.

• This Circular shall take effect 15 calendar days following its publication either in
the Official Gazette or in a newspaper of general circulation.

Court Decisions

CIR vs. First Philippine Holdings Corporation; First Philippine Holdings

Corporation vs. CIR
CTA (En Banc) Case Nos. 1625 and 1626 promulgated 3 September 2018

A false or fraudulent return must Facts:

be proven for the extended 10-year
prescriptive period to apply. A waiver Petitioner CIR assessed Respondent First Philippine Holdings Corporation (FPHC) for
is considered valid despite its defects if various deficiency taxes for taxable year 2009.
both parties are in equal fault.
FPHC protested and sought the cancellation of the deficiency assessments on the
The non-conversion of the LOA to an ground of prescription. It also alleged the invalidity of the waivers executed as the
Electronic LOA and the extension of the Treasurer/Comptroller who signed them was not specifically authorized. FPHC
audit and investigation to more than 120 previously issued four Waivers of the Defense of Prescription under the Statute of
days do not invalidate the LOA. Limitations with the first Waiver issued on 17 August 2012.

The BIR, meanwhile, insisted that the extraordinary 10-year period to assess should
be applied in lieu of the 3 years provided under Sec. 203 of the Tax Code. The BIR
also posited that the 3-year prescriptive period does not apply to withholding taxes.

The CTA Second Division ruled in favor of FPHC, holding that the CIR’s right to
assess deficiency taxes for the period January to July 2009 has prescribed.

Issues:

1. Does the 10-year period to assess apply?

2. Should the waivers be considered valid despite their defects?

3. Does the non-conversion of the Letter of Authority to an Electronic LOA

(eLA) and the extension of the audit and investigation to more than 120 days
invalidate the LOA?

Rulings:

1. No, the 10-year period does not apply. In case of a false or fraudulent return
with intent to evade tax or of failure to file a return, a tax may be assessed and/
or collected at any time within 10 years after the discovery of the falsity, fraud
or omission, in lieu of the regular 3-year prescriptive period. However, a false or
fraudulent return must be proven for the extended prescriptive period to apply.

Tax Bulletin | 21
 In the instant case, the CIR raised the allegation on FPHC’s substantial
under-declaration of its sales exceeding 30% for the first time in its Motion
for Reconsideration and it did not submit any evidence to support its claim.
The CTA En Banc sustained the CTA Second Division’s finding that the CIR’s
computations showing alleged substantial under-declaration of sales without
any accompanying supporting evidence is insufficient to establish the fraud or
falsity that would warrant an extended prescriptive period.

The CTA En Banc confirmed the ruling of the CTA Second Division that the
deficiency taxes assessed for the period January to July 2009 have prescribed.

2. Yes, the waivers are valid despite the defects. Citing the Supreme Court’s
decision in CIR vs. Next Mobile, Inc., GR 212285 promulgated on 7 December
2015, the CTA En Banc sustained the CTA Second Division and held that both
parties are in pari delicto or in equal fault. FPHC was guilty of estoppel for not
raising any objection against the validity of the 4 waivers until it was assessed
taxes and penalties by the BIR.

3. No. Revenue Memorandum Order 69-2010 prescribes the guidelines on the

issuance of eLAs, among others. It does not state that the conduct of the
audit pursuant to the previously-issued manual LOA will be invalidated absent
immediate compliance with the retrieval and replacement of the eLAs. The
replacement of the eLAs in not a precondition for the continuance of the audit
investigation.

The CTA En Banc endorsed the case back to the CTA Second Division for the
determination of deficiency taxes for the un-prescribed period.

Cebu Air, Inc. vs. Commissioner of Internal Revenue

CTA (Special Second Division) Case No. 9106 promulgated 27 September 2018

A corporation that declared dividends Facts:

within the one-year period from the end
of the taxable year being assessed is no Respondent CIR assessed Petitioner Cebu Air, Inc. for, among others, Improperly
longer liable for IAET. Accumulated Earnings Tax (IAET) for taxable year 2010. In assessing Cebu Air for
IAET, the BIR argued that the corporation failed to prove that the accumulation of
APIC should be included in the paid-in earnings and profits is for the reasonable needs of the business pursuant to Section
capital for purposes of computing the 29 of the Tax Code. It averred that to consider the retained earnings reasonable for
IAET. the needs of business, the amount retained should only be up to 100% of the paid-
up capital or the amount contributed to the corporation, representing the par value
of the shares of stock. Any additional paid-in capital (APIC) is considered as excess
capital over and above the par and is excluded from Cebu Air’s paid-up capital.

On the other hand, Cebu Air insisted that it is a public corporation, and not a closely-
held corporation, and as such, it is not subject to IAET. It insisted that JG Summit
Holdings, Inc., Cebu Air’s ultimate parent company, is owned by more than 20
stockholders. Assuming that it is subject to IAET, Cebu Air posited that APIC should
be considered part of the paid-up capital and the BIR should have excluded income
earned in 2010 in computing the alleged improperly accumulated earnings because
a corporation is given 1 year following the close of the taxable year in which such
income was earned to declare dividends.

In its original decision promulgated on 11 January 2018, the CTA Second Division
ruled that Cebu Air is liable for IAET as it is a closely-held corporation. Even if the
shares of JG Summit were owned by more than 20 individuals, at least 50% in value
of the outstanding capital stock or at least 50% of the total combined voting power

22 | Tax Bulletin
 of all classes of stock entitled to vote was owned directly or indirectly by and for not
more than 20 individuals.

Cebu Air filed a Motion for Reconsideration on the adverse decision. The CIR
also appealed the decision, particularly the ruling that APIC is included in the
computation of the paid-in capital.

Issues:

1. Is Cebu Air liable for IAET?

2. Should APIC be included in the paid-in capital for purposes of computing the
IAET?

Rulings:

1. No. Cebu Air is not liable for IAET on its earnings in 2010 because it declared
regular and special cash dividends to all stockholders of record as of 14 April
2011, which it paid on 12 May 2011.

Section 6 of Revenue Regulations No. 2-2001 (IAET Regulations) prescribes

that “dividends must be declared and paid not later than one year following the
close of the taxable year, otherwise, the IAET, if any, should be paid within 15
days thereafter.” Thus, taking into consideration the cash dividends declared
and paid within the one-year period from the end of the taxable year being
assessed (i.e. calendar year 2010), Cebu Air will no longer have improperly
accumulated earnings for taxable year 2010.

2. Yes. The CTA cited the Guidelines on the Determination of Retained Earnings
Available for Dividend Declaration issued by the Securities and Exchange
Commission which defined ‘paid-in capital’ to include APIC or premium. APIC
is the amount of capital in excess of the par value of the company’s shares.
If the APIC is to be excluded from the amount that may be retained, it would
necessarily form part of the improperly accumulated earnings, which would
then be subjected to IAET. IAET is imposed as a penalty for the improper
accumulation of earnings and as a form of deterrent to the avoidance of tax
upon shareholders who are supposed to pay dividends tax.

APIC should not be considered earnings/profits of a corporation generated

from the normal and continuous operations of the business and as such, should
be included in the term ‘paid-up capital’ provided under Revenue Regulations
2-2001 for purposes of determining the amount of earnings that may be
accumulated for the reasonable needs of the business.

People of the Philippines vs. Leonila Tolentino Arceo

CTA (Second Division) Criminal Case No. O-271 promulgated 3 September 2018

While an accused wife may have been Facts:

negligent in signing without reading,
documents presented by her husband, Accused Leonila Tolentino Arceo, doing business under the name and style of L.T.
such negligence does not equate to Arceo Trading, was charged with filing false and fraudulent income tax returns for
willful and deliberate intent not to supply 2004 and 2005, in violation of Sec. 255 or the NIRC.
correct information that is punishable
under Section 255 of the Tax Code. The criminal case stemmed from the information that L.T. Arceo Trading, which
operates a junk shop that buys scrap materials, was declared the highest bidder

Tax Bulletin | 23
 for certain assets sold by the Privatization and Management Office (PMO). The BIR
alleged that these purchases were not correctly reported in the Income Tax Returns
and Audited Financial Statements (AFS) of the accused and that Arceo’s net worth
for the covered years was not sufficient to cover the purchases from PMO.

Arceo denied familiarity with and personal involvement in the transaction. She
insisted she learned only of the transaction when her husband informed her about
the cases filed by the BIR. She said she signed a Special Power of Attorney in favor
of her husband’s business partners and a loan agreement to finance the scrap
purchase upon instruction of her spouse, without reading the documents.

Issue:

Is the accused guilty of willful failure to supply correct and accurate information
under Sec. 255?

Ruling:

No. The elements of the offense of willful failure to supply correct and accurate
information are as follows, and not all were present in this case:

a. A person is required to supply correct and accurate information. Arceo has an

obligation to provide such information and is in fact aware of such duty;

b. Failure to supply correct and accurate information at the time required by law.
The prosecution proved that there was failure to supply the correct data when
the purchases from PMO were not reflected in the income statements of the
accused; and

c. Failure to supply correct and accurate information was done willfully. The
testimony of the accused and that of her husband showed lack of knowledge on
the transaction with the PMO. This lack of knowledge of the transaction points
to the lack of intent on the part of the accused to willfully fail to report the
purchases in the ITR and AFS of L.T. Arceo Trading. The husband also admitted
hiding the circumstances of the transaction from his wife.

The CTA held that as a dutiful wife obedient and subservient to the husband, the
accused dared not to ask the purpose of the documents she signed. Such behavior
stems from the underlying and prevalent culture that the husband is the head and
provider of the family. If there is one party that should be charged from violation
of the NIRC, it should be the husband. While the accused may have been negligent
in signing documents presented by her husband, without reading them, said
negligence does not equate to willful and deliberate intent to violate Section 255.

Trans-Asia Oil and Energy Development Corp. vs. CIR

CTA (Special Third Division) Case No. 9078 promulgated 28 September 2018

Declaration and distribution of property Facts:

dividends to shareholders is not within
the ambit of the term “other disposition Respondent CIR assessed Petitioner Trans-Asia Oil and Energy Development
of shares of stock” in RRs 6-2008 Corporation (TOEDC) for deficiency donor’s tax arising from its distribution of shares
and 6-2013 as it is a mere equity of stock in Trans-Asia Petroleum Corporation (TAPC), a wholly owned corporation,
transaction. as property dividends to its stockholders. TOEDC protested, arguing that it has paid

24 | Tax Bulletin
the final taxes due on the dividends. It also contended that TOEDC did not receive
any consideration from the distribution of income to shareholders. What was debited
in its books is retained earnings, which is accumulated income after tax or tax-paid
income, and not consideration or asset received.

The BIR treated the declaration of property dividend as “other disposition of stock
held as capital asset” under Revenue Regulations 6-2008 and 6-2013. Hence,
the difference between the total market value and the book value of the property
dividend was deemed a gift subject to donor’s tax under Section 100 of the Tax
Code. The BIR posited that RRs 6-2008 and 6-2013 cover not only sale of shares
of stock, which gives rise to realization of capital gains subject to capital gains tax,
but also all other disposition of shares of stock held as capital assets. It averred that
the final tax paid by TOEDC should not be offset against any donor’s tax assessed,
insisting that there is no double taxation.

Issue:

Is the transaction subject to donor’s tax?

Ruling:

No. TOEDC’s declaration and distribution of property dividends to its shareholders

in the form of TAPC shares of stock is not within the ambit of the term “other
disposition of shares of stock” in RRs 6-2008 and 6-2013. It is a mere equity
transaction since TOEDC did not recognize any gain or loss therefrom. Paragraph
23 of the International Financial Reporting Standards 10 provides that changes in a
parent’s ownership in a subsidiary that do not result in the parent losing control of
the subsidiary are equity transactions (i.e. transactions with owners in their capacity
as owners).

Dividends comprise any distribution whether in cash or other property in the

ordinary course of business by a domestic or resident corporation out of its earnings
or profits, even though extraordinary in amount. In recording the property dividends
at their carrying/book value, there was no profit or gain realized or recognized in
the transaction. Distribution of dividends is a non-reciprocal transfer. There was no
consideration given nor received during the transfer which would have triggered the
assessment of deficiency donor’s tax.

Tax Bulletin | 25
SGV | Assurance | Tax | Transactions | Advisory

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26 | Tax Bulletin