TAX ALERT

September 30, 2004

THE SUPREME COURT DECLARES THAT THE TAX EXEMPTION UNDER

SECTION 28(3), ARTICLE VI OF THE 1987 PHILIPPINE CONSTITUTION COVERS
PROPERTY TAXES ONLY.
Lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes are exempt from real estate taxes. What is meant by actual,
direct and exclusive use of the property for a religious, charitable or educational purpose is the
direct and immediate and actual application of the property itself to the purposes for which the
religious, charitable or educational institution is organized. It is not the use of the income from
the real property that is determinative of whether the property is used for tax-exempt purposes.
Lung Center of the Philippines vs. Quezon City, et al., G.R. No. 144104, dated June 29, 2004.

THE BUREAU OF INTERNAL REVENUE (“BIR”) REVOKES ITS RULINGS NOS. 076-
88, DATED MARCH 4, 1988, 004-89, DATED JANUARY 19, 1989, AND 191-89, DATED
SEPTEMBER 4, 1989, PURSUANT TO COURT OF TAX APPEALS (“CTA”) CASE NO.
5233.
In the aforementioned case, the CTA held that the separation from a company by an employee
due to his acceptance of a position in the Government could not be considered as something
beyond his control. Hence, any and all benefits received by a retiring employee/officer from the
private sector to join the government service are subject to tax and, consequently, to the
withholding tax. Revenue Memorandum Circular No. 48-2004, dated July 19, 2004.

REVENUE MEMORANDUM CIRCULAR NO. 51-2004 ENUMERATES THE BIR

OFFICES AUTHORIZED TO ISSUE TAX DEBIT MEMOS (“TDMs”).
Only the following BIR Offices are authorized to issue TDMs: a) the Revenue District Offices
(“RDO”) of Revenue Region No. 8 – Makati for their respective taxpayers; b) the Large
Taxpayers’ District Offices of Makati and Cebu for their respective taxpayers; c) the Large
Taxpayers Collection and Enforcement Division for LTAAIDI and LTDAIDII; and d) the
Collection Programs Division for all other RDOs and Regional Offices outside of those
mentioned. Dated April 12, 2004.

AN ADDITIONAL CAPITAL INVESTMENT IS NOT SUBJECT TO INCOME TAX AND

DONOR’S TAX.
The conversion of a stockholder’s loan into equity, including interest and royalty fees, without the
necessity of issuing an additional number of shares of stock shall not give rise to a taxable
income. It shall only be considered as an additional capital investment on the part of the
stockholder. Moreover, such additional capital investment shall not be subject to donor’s tax
since the stockholder has no intention to donate to the corporation. Bureau of Internal Revenue
Ruling No. DA-419-2004, dated August 8, 2004.

A TRANSACTION WHERE NOTHING OF EXCHANGEABLE VALUE COMES TO OR

IS RECEIVED BY A TAXPAYER DOES NOT CREATE TAXABLE INCOME.
The condonation of Corporation A’s debt by a creditor shall not be subject to income tax
considering that Corporation A is in a capital deficiency position and will remain insolvent before
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and after the said condonation. It is likewise not subject to gift tax because the creditor has no
intent to donate. The creditor condoned the debt solely for business considerations. Ibid.

THE TRANSFER BY A LIQUIDATING CORPORATION OF ITS REMAINING ASSETS

TO ITS STOCKHOLDERS IS NOT A SALE.
The liquidating corporation does not realize gain or loss in partial or complete liquidation. The
assignment of shares held by the liquidating corporation to its stockholder, as liquidating
dividend, is not subject to tax since there is no sale, barter or exchange of the said shares. The
receipt by the stockholder of the shares is a consequence of the dissolution of the liquidating
corporation. The transfer of the shares is, however, subject to documentary stamp tax (“DST”).
Upon presentation of the proof of payment of the DST, the corporate secretary of the corporation,
whose shares were subject of the assignment, can register the transfer of the shares in its stock
and transfer book, cancel the old stock certificates and issue new stock certificates in the name of
the transferee. Bureau of Internal Revenue Ruling No. DA-409, dated July 28, 2004.

TAXABLE GAIN AS A RESULT OF A NON-RECOGNITION TRANSACTION UNDER

SECTION 40(C)(2) OF THE TAX CODE SUBJECT TO 32% CORPORATE INCOME
TAX.
This relates to a request for clarification regarding BIR Ruling No. S-40-018-2004, dated July 21,
2004, that the BIR issued in response to A’s request for confirmation that the transfer of assets
and liabilities of P Inc. to L Inc. qualify under Section 40(C)(2) of the 1997 Tax Code. The BIR
confirmed that the taxable gain resulting from the excess of the liabilities over the original basis
of the assets shall be subject to 32% corporate income tax and shall be entitled to the deductible
corporate costs and expenses as provided under Section 34 of the 1997 Tax Code. Bureau of
Internal Revenue Ruling DA-425-2004, dated August 6, 2004.

THE LEASE OF PROPERTY BY REGIONAL HEADQUARTERS ARE SUBJECT TO

THE ZERO PERCENT (0%) VALUE-ADDED TAX (“VAT”) RATE.
Under Executive Order No. 226, as amended, regional headquarters are exempt from VAT. Their
lease of property is subject to 0% VAT. Nonetheless, lessors of property to regional headquarters
are required to obtain approved applications for effective zero-rating, pursuant to Section
4.107.1(d) of Rev. Regs. No. 7-95, as amended, to avail of the 0% rate. VAT Review Committee
Ruling NO. 013-2004, dated May 14, 2004.

THE SALE OF PETROLEUM THROUGH A BROKER IN FAVOR OF

INTERNATIONAL MARINE VESSELS IS EXEMPT FROM EXCISE TAX.
A scrutiny of Section 135 (a) – (c) of the 1997 Tax Code discloses that, to be entitled to
exemption from excise tax, (1) the petroleum products must be sold to an international carrier for
its use and consumption outside the Philippines; and (2) the country of the carrier exempts from
tax petroleum products sold to a Philippine carrier. There is nothing in the aforesaid provision
that requires that the sale, to be exempt from excise tax, be made directly by the petroleum
products manufacturers/producers to the international carrier. The sale of petroleum products by
a manufacturer, through its broker, in favor of international marine vessels is exempt from excise
tax pursuant to Section 135(a) of the 1997 Tax Code, as implemented by Revenue Regulations
(“Rev. Regs.”) No. 13-77, as amended by Rev. Regs. No. 5-78. Bureau of Internal Revenue
Ruling No. DA-427-2004, dated August 10, 2004.

THE JOINT VENTURE BETWEEN A REAL ESTATE DEVELOPER AND AN OWNER

OF LAND IS NOT SUBJECT TO REGULAR COPORATE INCOME TAX.
The joint venture entered into and between A Inc. and Mr. X is not subject to the regular
corporate income tax under Section 27(A) of the 1997 Tax Code. The allocation of saleable lots
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of the project between Mr. X and A Inc. in consideration of their respective contributions is not a
taxable event. It is not subject to income tax or any withholding tax because the allocation is a
mere return of capital that each has contributed. The transfer is also not subject to VAT because
the owner neither sells, barters, exchanges property nor renders services to be subject to VAT.
The Partition Agreement and Deed of Allocation is not subject to DST on the sale of real
property, income tax and any withholding tax because the allocation is made without monetary
consideration and is not in connection with a sale. However, upon subsequent disposition by the
co-venturers of the areas allocated to them, the gain that may be realized by them from such sale
will be subject to the creditable withholding tax or capital gains tax (“CGT”), as the case may be.
Such sale shall also be subject to the DST imposed on sale of real property and VAT. Bureau of
Internal Revenue Ruling DA-431-2004, dated August 11, 2004.

THE TRANSFER OF TITLE FROM TRUSTEE TO TRUSTOR IS NOT TAXABLE.

The transfer of the condominium certificates of title from ABC Realty Corp., as trustee, to the
trustors/beneficiaries is not subject to income tax and the expanded withholding tax, as well as
DST on sale of real property. The transfer is also not subject to VAT. Bureau of Internal
Revenue Ruling DA-411-2004, dated July 29, 2004.

INCOME PAYMENTS MADE TO A BOARD OF INVESTMENTS (“BOI”) -

REGISTERED COMPANY ENJOYING AN INCOME TAX HOLIDAY (“ITH”) ARE
NOT SUBJECT TO CREDITABLE WITHHOLDING TAX.
Income payments made to BOI-registered companies enjoying the ITH incentive are not subject
to creditable withholding tax in accordance with Rev. Regs. No.2-98, as amended. However,
salaries paid to employees are subject to withholding tax pursuant to Section 57 of the 1997 Tax
Code. Bureau of Internal Revenue Ruling No. DA 418-2004, dated August 4, 2004.

IN CASE OF AN EXTRA-JUDICIAL SALE, THE TIME TO PAY CGT AND DST IS

RECKONED FROM THE ISSUANCE OF THE FINAL DEED OF SALE BY THE
SHERIFF AFTER THE EXPIRATION OF THE 1-YEAR REDEMPTION PERIOD
WHEN OWNERSHIP OVER THE MORTGAGED PROPERTY IS TRANSFERRED TO
THE BUYER.
In the case of Yap vs. Intermediate Appellate Court, G.R. No. 68464, dated March 22, 1993, the
Supreme Court held that the mere issuance of a certificate of sale would not confer the buyer full
ownership over the mortgaged property. It was only upon the issuance of the final deed of sale
after the expiration of the 1-year redemption period that ownership over the property would be
transferred to the buyer. Moreover, a domestic corporation or an individual, as mortgagee, would
also be entitled to the same privileges as banks, insurance and finance companies since the
principle in extra-judicial foreclosure sale is the same whether initiated by banks or by a domestic
corporation – the mortgagee in all cases is entitled to redeem the property within a period of one
year reckoned from the date the certificate of sale is inscribed at the back of the title of the
mortgaged property. Bureau of Internal Revenue Ruling No. DA 423-2004, dated August 4,
2004.

IN CASE OF A FORECLOSURE SALE, THE TRANSFER TAXES SHOULD BE BASED

ON THE BID PRICE INSTEAD OF THE ZONAL VALUATION FOR PURPOSES OF
CONSOLIDATING THE TITLE IN THE BUYER’S NAME.
The BIR held that the local government was incorrect in using the zonal valuation as tax base for
purposes of computing the transfer tax. Revenue Memorandum Order No. 41-91 provides that the
determination of the tax base of sales, exchange or any disposition of real property for DST
purposes shall be the same as the tax base used in the computation of the CGT, which is gross
selling price, fair market value or zonal value of the real property whichever is higher, except in
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specific cases which include the sale of real property effected through public bidding where both
the CGT and DST are computed based on the highest winning bid price. Bureau of Internal
Revenue Ruling No. 433-2004, dated August 12, 2004.

NOTE:

The information provided herein is general and may not be applicable in all situations. It should
not be acted upon without specific legal advice based on particular situations. If you have any
questions, please feel free to contact any of the following at telephone number (632) 633-9418,
facsimile number (632) 633-1911, or at the indicated e-mail address:

Atty. Carlos G. Baniqued cgbaniqued@baniquedlaw.com

Atty. Laura Victoria A.S. Yuson-Layug
Atty. Terence Conrad H. Bello
Atty. Ma. Carlota Christina G. Laiño-Santiago
Atty. Suzette A. Celicious
Atty. Madeline L. Zialcita-Villapando
Atty. Kathleen L. Saga
lvyusonlayug@baniquedlaw.com
thbello@baniquedlaw.com
cglaino@baniquedlaw.com
sacelicious@baniquedlaw.com
mlzvillapando@baniquedlaw.com
klsaga@baniquedlaw.com