Bureau of Internal Revenue
Republic of the Philippines

Index of 2002 BIR RULINGS

Capital Gains Tax Documentary Stamp Tax Donor's Tax Estate Tax Excise Tax

Income Tax Value Added Tax Withholding Tax Percentage Tax Others

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Capital Gains Tax [return to top]

Documentary Stamp Tax [return to top]

Donor's Tax [return to top]

Estate Tax [return to top]

Excise Tax [return to top]

Income Tax [return to top]

Percentage Tax [return to top]

Number	Subject	Date	Addressee

 

Value Added Tax [return to top]

Withholding Tax [return to top]

Others [return to top]

DIGEST OF BIR RULINGS 2002

Period for filing returns and payment of taxes - Except for those who availed of the Electronic Filing and Payment System (EFPS), Revenue Regulations No. 6-2001 does not provide for any other exception to the required period of ten (10) days for filing of various tax returns and payment of taxes due thereon. The request of Social Security System (SSS) that due date for the filing of various tax returns and payment of taxes due thereon every twenty five (25) days after the end of each month be retained cannot be granted for lack of legal basis. (BIR Ruling No. 001-2002 dated January 9, 2002)

Non-taxability of monetized leave credits - Executive Order No. 291 dated September 27, 2000, which provides for the non-taxability of monetized leave credits of government officials and employees, cannot be given retroactive application. (BIR Ruling No. 002-2002 dated January 12, 2002)

WITHHOLDING TAXES; non-offsetting of taxes against future remittance - The request of the Pambansang Korporasyon sa Elektrisidad (NPC) for authority to offset the withholding taxes deducted from the monetization of leave credits of its employees for the calendar years 1999 to 2000 against future tax remittance cannot be granted, even assuming that the collection of taxes under Section 2.78.1(A)(7) of the Revenue Regulations 2-98 was erroneous. It is well-settled that a taxpayer may not offset taxes due from the claims that he may have against the government, as held by the Supreme Court in the case of Philex Mining Corporation, vs. Commissioner of Internal Revenue, Court of Appeals, G.R. No. 125704, August 28, 1998. (BIR Ruling No. 003-2002 dated January 11, 2002)

CAPITAL GAINS TAX; basis of CAR - An issue was raised whether it was proper and legal for the BIR examiner to base the CAR on the amount stated in the Contract to Sell dated April 16, 1985, which is much lower than the prevailing market value of the properties or the assessed/zonal value of the properties involved.

Pursuant to then Section 34(h) of the National Internal Revenue Code (NIRC), as amended by Batas Pambansa Blg. 47, net capital gains from the sale, or other disposition of real property by citizens of the Philippines or resident alien individual shall be subject to the final income tax rates prescribed therein, such tax being in lieu of the tax imposed under Section 21 of the same Code. Section 4 of Revenue Regulations No. 8-79 implementing Section 34(h) of the NIRC, as amended by Batas Pambansa Blg. 47, provides the basis for determining net Capital Gains Tax. Zonal value was not one of the factors in the determination of Capital Gains Tax. The Technical Committee, which was created to study and prepare the zonal schedules of fair market values of real properties to be used as basis for the computation of any internal revenue tax, was created only under Ministry Order No. 20-86 dated September 5, 1986 after the execution of the Contract to Sell on April 16, 1985. (BIR Ruling No. 004-2002 dated January 11, 2002)

GROSS RECEIPTS TAX; liability of thrift banks - Section 7 of R.A. No. 8424 provides that the provision of Section 17 of R.A. 7906 shall continue to be in force and effect only until December 31, 1999. Effective January 1, 2000, all thrift banks, whether in operation as of that date or thereafter, shall no longer enjoy tax exemption as provided under Section 17 of R.A. 7906, thereby subjecting all thrift banks to taxes, fees and charges in the same manner and at the same rate as banks and other financial intermediaries. Centennial Bank is, therefore, subject to the gross receipts tax imposed under Section 121 of the Tax Code of 1997 effective January 1, 2000. (BIR Ruling No. 005-2002 dated January 11, 2002)

VALUE-ADDED TAX; taxability of SBF-registered enterprises - Pursuant to Section 12(c) of R.A. No. 7227, Subic Bay Freeport Enterprise (SBF) registered enterprises shall be exempt from all national and local taxes in lieu of paying the preferential tax of five percent (5%) of the gross income earned. Section 3(o) of Revenue Regulations No. 1-95, as amended by Revenue Regulations No. 12-97, provides that "gross income" refers to gross sales or gross revenues derived from the registered business activity within the ECOZONE, net of sales discounts, sales returns and allowances and minus cost of sales, cost of production or direct costs of services but before any deduction for selling and administrative expenses or incidental losses during a given taxable period. The gross income earned on the sale by Subic Power Corporation (SPC) of its power plant located within the Subic Freeport Zone is subject to the 5% preferential tax rate based on the gross selling price or fair market value of the property as determined under Sec. 6(E) of the Tax Code of 1997, whichever is higher, minus the depreciated cost of the SPC power plants as of the date of sale. Furthermore, as a duly registered SBF enterprise, SPC is exempt from the Value-Added Tax on the sale of its power plant located within Freeport Zone, pursuant to Section 109(q) of the Tax Code of 1997. (BIR Ruling No. 006-2002 dated January 29, 2002)

CAPITAL GAINS TAX; DOCUMENTARY STAMP TAX; authority to compromise - Denies the request of Ms. Teresita Santos et. al., urban poor peasants possessors in bad faith of various parcel of land owned by Potenciana Jobson, to pay only the basic tax due (Documentary Stamp Tax and Capital Gains Tax) without surcharge, interest and compromise penalty. The Bureau recognizes the validity of the agreement between the seller and the buyers whereby the latter assumed the payment of all transfer taxes as having the force of law between the parties. However, Section 204(A)(2) of the Tax Code of 1997 is for the benefit of the person liable under the law to pay the assessed tax. There is no basis for compromise insofar as the seller is concerned. To rule otherwise would provide an opportunity for circumventing the law. (BIR Ruling No. 007-2002 dated February 14, 2002)

BIR RULING NO. 008-2002 WAS RECALLED.

CREDITABLE WITHHOLDING TAX on talent fees -

1. On Default Withholding Tax Rate - The default withholding tax rate to apply on talent fees will only be applied when the talent's gross income has reached the threshold of P 720,000 anytime during the year.

2. On the Filing of the Affidavit-Declaration of Current Year's Gross Income - Should the talent fees for the current year reach P 720,000 before the June 30 deadline, the taxpayer should file within fifteen (15) days after the end of the month that his/her income reaches P 720,000 or June 30, whichever comes earlier, the affidavit-declaration. In other cases, the taxpayer is required to file the annual affidavit-declaration on June 30. Should the talent fees or gross income for the current year reach P 720,000 only after June 30, thus after the taxpayer has filed his/her June 30 affidavit-declaration, the taxpayer should file another (second) affidavit-declaration within fifteen (15) days after the end of the month that his/her gross income for the current year reaches P 720,000. Should the taxpayer fail to file the required affidavit-declaration within the prescribed deadlines, and the payor knows as a fact that the taxpayer has already received P 720,000 or more as of that date, the taxpayer would automatically be subjected to twenty percent (20%) Creditable Withholding Tax.

3. On Talents Under Contract With Talent Fees Beyond P 720,000 Per Year - For talents who are under contract and who are expected to earn at least P 720,000, the 20% creditable withholding tax rate should not be automatically applied. It is only when the talents actually earned/reached the P 720,000 threshold that the 20% Creditable Withholding Tax rate should be applied.

4. On the Retroactive Adjustment of Taxes - The application of the 20% Creditable Withholding Tax rate on the individual's talent fee is prospective. Since the liability of the individual for payment of the 20% Creditable Withholding Tax rate arises only when his income reaches P 720,000, it is only on the succeeding talent fees that the withholding agent should withhold the 20% tax. Hence, no retroactive adjustment of the application of the 20% Creditable Withholding Tax rate should be made. (BIR Ruling No. 009-2002 dated February 18, 2002)

INCOME TAX; filing of Short Period Return - Prior to the amendment of the Tax Code by Republic Act No. 8424, the filing of Short Period Return was expressly required for corporations contemplating dissolution but not for corporations contemplating reorganization such as merger. Nevertheless, the requirement for the filing of the Short Period Return has been applied to absorbed corporations in cases of merger. The Supreme Court decided that the Short Period Return of an absorbed corporation should be filed within thirty (30) days after the cessation of its business or thirty (30) days after approval of the Articles of Merger (Bank of the Philippine Islands vs. Commissioner of Internal Revenue, G.R. No. 144653, August 28, 2001). Although under Sec. 78 of the then Tax Code and Sec. 244 of Revenue Regulations No. 2-1940 it is provided that the reckoning point for the 30-day period is the "adoption by the corporation of a resolution or plan" for the dissolution, the Supreme Court still reckoned the 30-day period from the SEC's approval of the merger. This is because the SEC's approval of the merger is the operative act that gives legal effect to the merger and results to the cessation of the separate juridical personality of the absorbed corporation. Thus, the 30-day period for the filing of the Short Period Return of Allstate Life Insurance Company of the Philippines, the absorbed corporation in the merger, should be reckoned from the SEC's approval of the merger, not from the approval by the Board of Directors of the Plan of the Merger. (BIR Ruling No. 010-2002 dated February 19, 2002)

INCOME TAX; net operating loss - The net operating losses (NOLCO) of Grand Cement Manufacturing Corporation ("Grand") may still be carried over and claimed as a deduction from its gross income, pursuant to Section 34(D)(3) of the Tax Code of 1997, as implemented by Revenue Regulations No. 14-2001. The NOLCO, which Grand seeks to preserve, have not been previously offset as a deduction from gross income, and they were incurred in the taxable years during which it was no longer exempt from Income Tax, particularly the taxable years 1998 and 1999. The transfer of shares by the previous stockholders of Grand were through straight purchase and sale and not through merger, consolidation or business combination. As such, the transfer of shares did not cause a substantial change in ownership as a result of or arising from merger, consolidation or combination with another person, as defined in subsection 3.8 of Revenue Regulations No. 14-2002. Accordingly, the NOLCO of Grand is preserved even after the purchase from the existing stockholders of eighty-eight percent (88%) of its outstanding and issued shares by Taiheiyo Cement Corporation, and will still be carried over and claimed as a deduction from its gross income for the next three (3) consecutive taxable years immediately following the year of such loss. (BIR Ruling No. 011-2002 dated March 27, 2002)

ESTATE TAX; deductions from gross estate – Accordingly, being a bonafide resident of the Philippines as certified by the Barangay Chairman of Barangay Merville, and coupled by the circumstances stated, SOFRONIO is considered a resident alien within the definition of Section 86(A) of the 1997 Tax Code. As such, the value of the gross estate of SOFRONIO shall be determined by including the value at the time of death of all property, real or personal, tangible or intangible, wherever situated in accordance with Section 85 of the 1997 Tax Code.  Accordingly, the estate of SOFRONIO can avail of the deductions afforded to it under Section 86(A)(1) to (7) of the 1997 Tax Code, as implemented by Revenue Regulations No. 17-93 dated August 30, 1993, including the deduction of the Family Home and the Standard Deduction of P1,000,000.00 each. (BIR Ruling No. 012-2002 dated April 03, 2002)

FRINGE BENEFITS TAX; taxability of outstation allowance - The Outstation Allowance granted to the managerial and supervisory employees of Philippine Gaming Management Corporation (PGMC) who will be away from the office site for at least 8 hours to visit lotto franchise holders for repairs and/or inspection of equipment leased by PGMC from Philippine Charity Sweepstakes Office (PCSO, which covers meals and trip-related expenses, is required by the nature of or necessary to the trade or business of PGMC. Accordingly, the aforesaid allowance is not subject to the fringe benefits tax prescribed in Section 33(A) of the Tax Code of 1997. Hence, the outstation allowance being part of the compensation income of the employee, is not subject to Income Tax and consequently to withholding tax. By the same token, the aforestated allowance which may be incurred or expected to be incurred by the managerial and supervisory employees in the performance of his duties cannot be considered as part of compensation subject to withholding tax even if the employee fails to account/liquidate the same considering that said expense is pre-computed on a daily basis and is paid to an employee while he is on an assignment or duty. (BIR Ruling No. 013-2002 dated April 5, 2002)

Change of accounting method - First Malayan Leasing and Financing Corporation (FMLFC) is granted permission to change its accounting method of determining interest income from Rule of 78 Method to Annuity Method provided that it truly reflects its income for the period. The change of accounting method from one system to another is allowed under the provision of Section 43 of the Tax Code of 1997, in relation to Section 167 of Revenue Regulations No. 2. The authority granted retroact to January 1, 2001 since the request for change of accounting method was filed with the Law Division on March 29, 2001 or within the 90-day period required by Section 168 of Revenue Regulations No. 2. (BIR Ruling No. 014-2002 dated April 10, 2002)

EXCISE TAX; variant of a new brand of cigarette - If a cigarette brand sought to be introduced in the market is a variant of a new brand, it should be classified as a “new brand” for excise tax purposes. In which case, it shall be classified according to its current net retail price and not taxed as a “variant of a brand,” which refers to a variant of an existing brand. Thus, the Lucky Strike Soft Pack introduced by the British American Tobacco (BAT) being a variant of a new brand of cigarette should be classified as a “new brand” for excise tax purposes. (BIR Ruling No. 015-2002 dated April 16, 2002)

EXCISE TAX; subsequent sale of imported vehicles to non-tax exempt entity - There is no provision in the Tax Code of 1997 granting exemption from taxes of the subsequent sale or transfer of vehicles by tax exempt person/entity to a non-tax-exempt person or entity. The Coordinating Council for Private Sector Participation, which is the grantee of six (6) Cherokee Jeeps from United States Agency for International Development (USAID), is not liable to pay the duties and internal revenue taxes due on its subsequent sale of the aforesaid units but the purchasers thereof pursuant to second paragraph, Section 131(A) of the 1997 Tax Code. (BIR Ruling No. 016-2002 dated April 24, 2002)

Taxability of BCDA Bonds - The BCDA Bonds ’07 issued by the Bases Conversion Development Authority (BCDA) are not “deposit substitutes” because at the time of its original issuance, there were only less than 20 subscribers of said bonds. To be considered as “deposit substitutes” subject to 20% final withholding tax, the borrowing of funds must be obtained from 20 or more individuals or corporate lenders at any one time. Accordingly, the interest income derived from the BCDA Bonds ’07 shall be subject to the following:

a) ordinary income tax at the schedular rate imposed under Section 24 (A)(1)(c) of the Tax Code of 1997, if the bondholder is an individual citizen or a resident alien;

b) 20% tax if the bondholder is a non-resident alien engaged in trade or business within the Philippines under Section 25(A)(2) of the Tax Code;

c) 25% tax imposed under Section 25(B) of the Tax Code, if the bondholder is a non-resident alien individual not engaged in trade or business within the Philippines;

d) corporate income tax of 32% or 2% minimum corporate income tax imposed under Section 27(A) and 27(E), and 28(A)(1) and (2), respectively, of the Tax Code, for domestic and resident foreign corporations;

e) 32% final withholding tax, for nonresident foreign corporation; and

f) such other rate that maybe imposed under the appropriate tax treaty to which the Philippines is a signatory.

For purposes of determining whether the borrowing is from the “public,” the number of investors shall be counted as of the time of origination or original issuance regardless of whether the bonds are thereafter traded or sold in the secondary market.  However, a representation or warranty should be made to the effect that the bonds are acquired upon their original issuance by the original purchaser thereof, for and on its own behalf, or on behalf of a single purchaser only, and in the latter case, that the purchaser is acquiring such bonds for its own account and not for the account of other entities. (BIR Ruling No. 035-2001 dated August 16, 2001)

Since BCDA Bonds ’07 have a tenor of 5 years and 1 day, any gain realized from its sale or exchange or retirement is excluded from the gross income, hence, exempt from Income Tax pursuant to the above-cited Section 32(B)(7)(g) of the Tax Code of 1997.

The term “gain” shall refer to the gain, if any, from secondary trading, which is the difference between the selling price of the bonds in the secondary market and the price at which the bonds were purchased by the seller. The term “gain” shall also include the gain (that is, the difference between the proceeds from the retirement of the bonds and the price at which such last holder acquired the bonds) realized by the last holder of the bonds when such bonds are surrendered for retirement upon their maturity (BIR Ruling No. 035-2001 dated August 16, 2001). The term “gain” however, does not include “interest” (Nippon Life Insurance Company of the Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6142, promulgated February 4, 2002), which, as stated, is subject to Income Tax as described above.

The original issuance of the BCDA Bonds ’07 shall be subject to Documentary Stamp Tax (DST) at the rate of P 0.30 for every Two Hundred Pesos (P 200.00) or fractional part thereof of their face value pursuant to Section 180 of the Tax Code of 1997.

Finally, the transfer of BCDA Bonds ’07 in bearer form in the secondary market by way of simple delivery to the buyer is not subject to the DST unless the transfer of the instruments carries with it a renewal or issuance of new instruments in the name of the transferee to replace the old ones. (BIR Ruling No. 017-2002 dated April 29, 2002)

Taxability of monetized leave credits – Executive Order No. 291, which took effect on September 27, 2000, did not render the withholding of taxes on monetized leave credits in excess of 10 days erroneous or illegal considering that Sec. 2.78.1(A)(7) of RR 2-98 was, at the time said taxes were collected, a valid regulation implementing an existing law. (BIR Ruling No. 018-2002 dated May 3, 2002)

De minimis medical allowance - To be considered de minimis medical allowance that will neither be subject to Fringe Benefits Tax (FBT) nor to withholding tax on compensation, the following conditions must concur: 1) the amount given to the employee shall be for his own medical expenses for a given taxable year; 2) the amount actually given and actually spent shall not exceed P 10,000 in any given year; and 3) the employee must fully substantiate with official receipts in his name the medical allowance so granted, on or before the annualization of withholding taxes in any given year. (BIR Ruling No. 019-2002 dated May 9, 2002)

Tax consequences of Electric Power Industry Reform Act of 2001 - The tax consequences of R.A. 9136, otherwise known as the Electric Power Industry Reform Act of 2001 (EPIRA), which came into law on June 26, 2001 and provided for the privatization of the assets of National Power Corporation (NPC) and the creation of two (2) government-owned corporations (the Power Sector Assets and Liabilities Management Corp. (PSALM) and the National Transmission Corp. (TRANSCO)) are the following:

A. On the Transfer of Assets and Liabilities of NPC (Phase I)

1. NPC Not Liable to Income Tax on the Transfer of its Assets to PSALM and TRANSCO.

The Income Tax exemption of NPC was deemed repealed by Sec. 27(C) of the 1997 Tax Code wherein NPC was not included among the entities exempt from Income Tax.  However, the income of NPC from the operation of a public utility is still considered excluded from gross income pursuant to Section 32(B)(7)(b), as clarified in BIR Ruling No. 18-00.

The exemption of NPC is not limited to the sale and transmission of generated power, but includes transactions incidental to and necessarily connected with the operations of the public utility, such as a sale or transfer on an isolated basis of its assets, which transaction is not conducted as a separate business (Radio Communications vs. CTA, G.R. No. 60547, July 11, 1985; Phil. Power Development co. vs. Commissioner, CTA Case No. 1152, Oct. 13, 1965).  Thus, the income, if any, from the sale or transfer of NPC's assets is not income from other business activities conducted by NPC but rather earnings and profits realized in connection with the business conducted in accordance with the franchise, and thus covered by the exemptions provided for in Sec. 32(B)(7)(b) of the 1997 Tax Code.

2. Transfer of Assets by NPC to PSALM and TRANSCO Not Subject to Franchise and Value-Added Taxes.

Sec. 27(C) of the 1997 Tax Code repealed only the income tax exemptions of NPC.  Hence, P.D. 938, NPC's Charter, is controlling as regards franchise tax.  The phrase "all forms of taxes" in P.D. 938 evinces a clear legislative intention to exempt NPC from any kind of tax (Maceda vs. Macaraig, Jr., 223 SCRA 217).

Moreover, since NPC is not a VAT-taxable entity and the transfer of its assets is not necessary to carry out its primary function as a utility and neither is it done in the course of trade or business, such transfer shall not be subject to VAT (BIR Ruling No. 113-98 dated July 23, 1998).

3. Transfer of Real Properties from NPC to PSALM and TRANSCO Subject to DST under Sec. 196 of the 1997 Tax Code.

Documentary Stamp Tax (DST) under Sec. 196 of the 1997 Tax Code is imposed on the deeds, instruments or writings involving the "sale" of land, tenement or other realty.  In the instant case, the transfer of NPC's generation assets and liabilities to PSALM, as well as of the transmission and sub-transmission assets and systems to TRANSCO, all of which are government-owned and controlled corporations, is mandated by law.  The taking of title over the assets of NPC by PSALM for the purpose of selling or disposing them is likewise consistent with the guidelines set under the EPIRA. Unlike in an ordinary business transaction, PSALM, as the entity assuming the obligation, does not exercise any discretion whether to accept the assets and liabilities to be transferred nor does it play any role in the determination of the amount of the liabilities that it will assume.

4. Transfer of Liabilities by NPC to PSALM is Not Subject to DST under Sec. 180 and 198 of the 1997 Tax Code.

The transfer of liabilities by NPC to PSALM would, by novation, completely create a new obligation between the original NPC creditors and PSALM.  However, it should be noted that the transfer of obligation is by operation of law, with the intent of preserving the NPC loans for the benefit of the NPC creditors.  Said transfer of loans is actually a transfer of such loans from one government vehicle (NPC) to another (PSALM).  Further, considering that both entities serve similar purposes and that they are both vehicles used by the National Government to achieve the identical objective, the transfer of loan does not give rise to a new obligation since the National Government remains the guarantor for the original loans even after the loans are transferred to PSALM.  Accordingly, no DST under Section 180 of the Tax Code should be imposed.

NPC's real assets were never subjected to any mortgage, hence, no DST under Sec. 198 in relation to Sec. 195 of the Tax Code shall be imposed.

B. Operation of the Transferred Assets (Phase II)

1. Income of PSALM from Exercise of Essential Government Function Exempt from Tax.

Activities undertaken by PSALM, pursuant to the provisions of EPIRA, are essential governmental functions, and as such, any income derived therefrom, including income from the operation of NPC's generation assets, is excluded from gross income and the MCIT imposed in Sec. 27(A) and Sec. 27(E), respectively.

2)      Sale of Generated Power by PSALM Subject to Zero Percent (0%) VAT.

Sec. 6(b), Rule 5 of the Implementing Rules and Regulations (IRR) in relation to Sec. 4(x) of the EPIRA provides that the sale of generated power by generation companies shall be subject to 0% VAT. PSALM's registration with the Energy Regulatory Commission (ERC) will make it a Generation Company and as such, its sale of generated power will be subject to 0% VAT.

3)      TRANSCO Taxed in Same Manner as NPC.

The transfer by NPC of its assets related to transmission operation includes the transfer of its nationwide franchise to TRANSCO. The transfer of the franchise transfers the privilege that NPC enjoys under its charter in relation to the operation of the transmission system.  Since TRANSCO should be taxed in the same manner as NPC, as provided in the latter's charter, the income of TRANSCO is excluded from gross income for purposes of computing its Income Tax pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code.  Moreover, TRANSCO will be exempt from all forms of taxes including franchise tax because the NPC franchise, including the privileges related thereto, have been transferred by operation of law to TRANSCO.

4)      NPC Subject to Income Tax and VAT and/or Percentage Tax on its O&M Income; and 0% VAT on its Income from Generating Electricity through SPUG.

NPC will enter into Operations and Management (O&M) Agreements with both PSALM and TRANSCO for the operation of the assets transferred to the latter.  Since EPIRA mandates the transfer of NPC's nationwide franchise to TRANSCO, NPC was automatically divested of its privileges accruing to it under the said franchise, including, among others, tax exemption privileges.  Moreover, essential government functions have been transferred and assumed by PSALM.

Accordingly, since the service to be rendered by NPC to PSALM and TRANSCO under the O&M Agreements will not be an activity essentially governmental in nature, any income derived therefrom by NPC will be subject to Income Tax and MCIT, as provided under the 1997 Tax Code.  Moreover, since the same services are deemed rendered in the course of NPC's business, such services shall be subject to VAT or the appropriate Percentage Tax, as the case may be.

However, under Sec. 70 of the EPIRA, as implemented by Sec. 2 of Rule 3 of the IRR, NPC shall be responsible for providing power generation and its associated power delivery systems in areas that are not connected to the transmission system through Small Power Utilities Group (SPUG), a functional unit of NPC created to pursue missionary electrification function to some areas in the country where there are no electricity.

While under the EPIRA, power generation shall no longer be considered a public utility operation, it may still be considered as essential governmental function insofar as the operation by NPC of the assets of SPUG is concerned.  Hence, income derived therefrom shall be excluded from gross income pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code.  Moreover, sale of generated power by NPC through SPUG shall be subject to 0% VAT  pursuant to Sec. 6 of EPIRA, as implemented by Sec. 6(b), Rule 5 of the IRR.

C. Privatization of NPC's Assets (Phase III)

1)      Gain From the Sale by PSALM of the Generation Facilities to Qualified Buyers  Not Subject to Income Tax.

The eventual sale, disposition or privatization of the generation assets, real estate and other disposable assets, and IPP contracts, will be a mere incident to, or a necessary consequence of, the generation activity that PSALM will undertake and should therefore not be taxed as an independent business in itself.  Hence, any income that PSALM may derive from such sale will also not be subject to Income Tax.

2)      Disposition/Sale of Assets by PSALM Not Subject to VAT.

The disposition or sale of the said assets are made pursuant to PSALM's mandate to sell the same and to liquidate the outstanding loans and obligations of NPC. Since the same is not conducted in pursuit of any commercial or profitable activity, it will be considered an isolated transaction which will not be subject to VAT (BIR Ruling No. 113-98 dated July 23, 1998).

3)      Sale of Real Properties by PSALM Subject to DST.

The sale of real properties by PSALM will be subject to Documentary Stamp Tax (DST) under Sec. 196 of the 1997 Tax Code.  Since one of the contracting parties is the government, the tax to be imposed shall be based on the actual consideration that PSALM will receive from the qualified buyers.

4)      TRANSCO's Income From the Sale Arrangement Between TRANSCO and  Concessionaires Will Be Excluded From Gross Income But Winning Bidder Liable to DST on the Transfer of Real Property by Sale.

Sale of the transmission facilities or the award of concession agreement and lease arrangement that TRANSCO will enter into with the qualified concessionaires are activities undertaken to implement the privatization of the transmission system of NPC as mandated by Sec. 21 of EPIRA. The tax treatment of the Concession Contract will depend on the specific terms of the contract. Because of failure to submit a copy of the Concession Contract, the requested ruling is deferred.

TRANSCO's franchise shall not be transferred to the concessionaire since the latter will have to secure its own franchise through the efforts of PSALM and TRANSCO.  In this connection, in the sale arrangement between TRANSCO and the concessionaires, TRANSCO's income from the sale will be excluded from gross income pursuant to Sec. 32(B)(7)(b) of the 1997 Tax Code.  Moreover, TRANSCO will be exempt from all taxes, except Income Tax, in accordance with the NPC Charter on such sale.  However, the transfer of real property by sale is subject to DST under Sec. 196 of the 1997 Tax Code, but since TRANSCO is exempt from all taxes, the qualified winning bidder shall be the one directly liable for DST pursuant to Sec. 173 of the 1997 Tax Code.

D.  Collection of Universal Charge

Since the Universal Charges collected by distribution utilities do not belong to them and would not redound to their benefit, the same will not constitute part of their taxable revenues nor will it be part of their gross receipts for purposes of determining their franchise taxes.  Gross receipts of a taxpayer do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit.  However, it is required that the Universal Charge appear as a separate item in the bill.

Likewise, the collection of Universal Charge by PSALM will not be considered as taxable income nor will it form part of its gross receipts for VAT purposes. The Universal Charge is not a flow of wealth to PSALM as it would not accrue to its benefit but would be remitted to the Special Trust Fund, as provided under the EPIRA. PSALM is just the administrator of the fund which shall be disbursed/distributed to its respective beneficiaries in accordance with the EPIRA.  Nor will the Universal Charge be part of gross receipts since the same does not represent compensation for services performed by PSALM.

E. Interest Arising From NPC Loans Transferred to PSALM Exempt From Income Tax.

Interest from NPC loans transferred to PSALM is exempt from Income Tax. While EPIRA does not provide for the same treatment of the NPC loans once the same are transferred to PSALM, the interest arising therefrom shall remain exempt because the exemption in the NPC Charter is not granted to NPC, which is the borrower, but ration on the loans, credits and indebtedness as well as on the payment of principal, interest and other charges.  In this connection, Section 8 of NPC's Charter provides that domestic indebtedness and foreign loans contracted by NPC shall be exempt from all taxes, fees, etc. In effect, the exemption is granted to the lender, the entity earning the interest income.

However, foreign loans that PSALM may incur in the future in connection with the performance of its functions shall no longer be covered by the foregoing tax exemption.  Nonetheless, the same may still be exempt from Income Tax pursuant to Section 32(B)(7)(a) of the 1997 Tax Code, if the interest from the said loans are derived by foreign government, financing institutions owned, controlled or enjoying refinancing from foreign governments, and international or regional financial institutions established by foreign governments.

Also, the interest arising from such loans may also be exempt from Income Tax or be subject to a preferential tax rate if the creditor is a resident of a country with which the Philippines has an existing treaty, subject to the conditions stated in such treaty.  (BIR Ruling No. 020-2002 dated May 13, 2002)

WITHHOLDING TAX; CAPITAL GAINS TAX; DOCUMENTARY STAMP TAX; VALUE-ADDED TAX; DONOR’S TAX; transfer of properties to the liquidator as trustee - Section 27 (D)(5) of the Tax Code of 1997 provides for a final tax of 6% on the gains presumed to have been realized on the sale, exchange, disposition of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets based on the gross selling price or fair market value, whichever is higher, of such lands or buildings.  On the other hand, a creditable withholding tax is imposed in  the gross selling price/total amount of consideration or the fair market value determined in accordance of Section 6(E) of the Code, whichever is higher.

In the instant case, there was no transfer of ownership, but rather a trust created by virtue of a Deed of Transfer  by the Yutingcos and EYCO to the  Liquidator, with no monetary consideration involved in the transfer. Such transaction is not subject to the Capital Gains Tax imposed under Section 27(D)(5) of the Tax Code of 1997 nor to the expanded withholding prescribed in Revenue Regulations No. 2-98, as amended.

The Deed of Transfer is not subject to the Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code of 1997 but the acknowledgement thereof is subject to the P15.00 DST prescribed under Section 188 of the said Code.

The transmission of the property to a trustee shall not be subject to  Value-Added Tax (VAT) if the property is to be held merely in trust, in accordance with Section 44.100-1 of Revenue Regulations No. 7-95.

Moreover, the above transaction is not subject to the Donor’s Tax imposed under Section 99 of the Tax Code of 1997 as there is no intention to donate on the part of the Yutingcos and EYCO.

The investment agreement by the parties should not be considered as a loan, pursuant to the definition provided for in Articles 1933 and 1953 of the New Civil Code, or a bonafide indebtedness within the ambit of RMO No. 63-99. Rather, it is analogous to a capital contribution considering the said amount is not subject to any repayment or redemption by PSPI. The intent of the parties is clearly manifested in the agreement which provides that the amount received shall constitute a deposit for future subscriptions of new shares.  Accordingly, no interest may be imputed on the Investment Agreement between the parties. (BIR Ruling No. 022-2002 dated June 10, 2002)

FRINGE BENEFITS TAX; de minimis meal and food allowance - The meal and food benefits provided by the client companies to their employees through Sodexho meal and food vouchers may be considered tax exempt benefits, subject to the standards set for de minimis thresholds for fringe benefits under Revenue Regulations (RR) No. 3-98, as amended by RR Nos. 8-2000 and 10-2000. The meal and food allowance, although not for overtime work, is considered de minimis, if it does not exceed 25% of the basic minimum wage. The excess over this amount shall be considered as other benefits as contemplated under Section 32(B)(7)(e)(iv) of the Tax Code of 1997. The rules and regulations on de minimis benefits do not allow aggregation of the amounts set forth for each type of benefit. In order to clearly conform with the prescribed de minimis standards, therefore, separate vouchers should be used for the rice allowance and the meal and food benefit.  (BIR Ruling No. 023-2002 dated June  21, 2002)

FINAL WITHHOLDING TAX for alien employees - Section 10 of the Rules and Regulations Implementing Article 61 of R.A. 8756  provides that alien executives occupying managerial and technical positions employed by the regional or area headquarters and regional operating headquarters of multinational companies shall be subject for each taxable year to a final tax equal to 15% of their gross income received as salaries, wages, annuities, compensations, remunerations and emoluments. Section 28(A)(6)(a) of the Tax Code of 1997 provides that regional or area headquarters, as defined in Section 22(DD) of the said Code, shall not be subject to Income Tax. 

Accordingly, Indophil, will not be subject to Income Tax as long as it is performing its functions and in acting capacity as supervisory, communications and coordinating center for its affiliates in the region, and it shall not render any of the qualifying services mentioned in the Code, otherwise, it shall be taxed as a Regional Operating Headquarter.  (BIR Ruling No. 024-2002 dated June 21, 2002)

IMPROPERLY ACCUMULATED EARNINGS TAX; publicly-held corporation - Abbot-Phils., as a  wholly-owned subsidiary of Abbot-US, will be considered as being owned proportionately by Abbott-US shareholders. The ownership of a domestic corporation, for purposes of determining whether it is a closely-held corporation or a publicly-held corporation, is ultimately traced to the individual shareholders of the parent company. Accordingly, Abbot-Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax. This is based on the representation that as of the year end 2000, Abbot-US had 101 to 272 shareholders holding a combined 1,545,937,133 shares of common stock, and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1% of Abbot-US issued as outstanding shares. Based on Section 4 of Revenue Regulations No. 2-2001, closely-held corporations are those corporations at least 50% in value if the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Abbot-Phils. does not fall under the definition of a closely-held corporation. (BIR Ruling No. 025-2002 dated June 25, 2002)

Tax consequence of issuance of zero coupon bonds  - The interest or income earned from the HGC Bonds (i.e. the discount to face value) up to the extent of the weighted average interest rate of 10.15% is exempt from Income Tax pursuant to Section 19 of the HGC Charter, as implemented by Article 44 of the Implementing Rules and Regulations of the HGC. 

Interest or income earned from the HGC Bonds in excess of the weighted average interest rate of 10.15% is exempt from the 20% final withholding tax imposed by Section 27 (D)(1) of the Tax Code of 1997 but subject to the ordinary Income Tax.

Gains arising from the sale or transfer of the HGC Zeroes in the secondary market are exempt from Income Tax pursuant to Section 32(B)(7)(g) of the Tax Code since HGC Zeroes have a tenor of 5 years and 1 day.

Section 32(B)(7)(g) of the Tax Code exempts from Income Tax the gain realized from the redemption or retirement of bonds, as well as their sale or exchange in trade.  The original issue discount notes does not fall within the purview of the term “gain” under said Section.

The original issuance of the HGC Zeroes shall be subject to Documentary Stamp Tax (DST) while the sale or transfer thereof in the secondary market in bearer form by simple delivery to the buyer is not subject to DST.  (BIR Ruling No. 026-2002 dated June 27, 2002)

WITHHOLDING TAX on sale of real property - The nature of the real property being sold should be determined first. If the real property is a land or building not actually used in the business of the seller-corporation and is treated as a capital asset, then a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on whichever is higher of the gross selling price or fair market value (FMV) of such land or building. This rule applies whether or not the seller-corporation is engaged in real estate business.

On the other hand, if the real property being sold is an ordinary asset, then the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations (RR) No. 2-98 shall apply. The rate of withholding tax will depend on, first, whether the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, the gross selling price, as defined in the said RR, if the seller is habitually engaged in real estate business.

Based on the foregoing, and on the assumption that the seller in each case is taxable and not exempt, the tax implication of the following sales transactions are as follows:

1.         Where the seller is a corporation duly registered with the HLURB as habitually engaged in the real estate business, a creditable withholding tax based on the gross selling price/total amount of consideration or FMV, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be deducted by the withholding agent/buyer, in accordance with the following schedule:  

a.  Seller or transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of RR No. 2-98

Exempt

b.   Seller or transferor is habitually engaged in the real estate business and the selling price is:

        i.     P500,000 or less 1.5%

        ii.    More than P500,000 but not more than P2,000,000 3%

        iii.   More than P2,000,000 5%

2.         The above tax treatment shall likewise apply in cases where the seller-corporation is habitually engaged in the real estate business, even if the buying corporation is not engaged in the real estate business.

3.         If the property is an ordinary asset and the seller is not habitually engaged in the real estate business, the rate of creditable withholding tax is 6% of the gross selling price as provided in Section 3(J) of RR No. 6-2001. On the other hand, if the property is not actually used in the business of the seller-corporation, and is treated as a capital asset, a final tax of 6% shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building pursuant to Section 27(D)(5) of the Tax Code.

4.         Where the seller-corporation habitually engaged in the real estate business sells real property held as ordinary asset to an individual not engaged in trade or business, the following rules shall apply:

If the sale is on installment plan (i.e., payments in the year of sale do not exceed 25% of the selling price), no withholding tax is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or FMV of the property, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller until the tax is fully paid.

b.   If, on the other hand, the sale is on a “cash basis” or is a “deferred payment sale not on the installment plan” (i.e. payments in the year of sale exceed 25% of the selling price or FMV of the property, whichever is higher), the applicable withholding tax rate shall be withheld on the first installment.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the following rules shall apply:

a.   If the sale is on installment plan, the tax shall be deducted and withheld by the buyer on every installment.

b.   If, on the other hand, the sale is on a “cash basis” or is a “deferred payment sale not on the installment plan,” the buyer shall withhold the tax based on the gross selling price or FMV of the property, whichever is higher, on the first installment.

For purposes of applying the foregoing rules, “gross selling price” shall mean the consideration stated in the sales document or the FMV determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher.

Registration with HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in real estate business. If the seller/transferor is not registered with the HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (e.g. consummation during the preceding year at least 6 taxable real estate transactions regardless of amount). (BIR Ruling No. 027-2002 dated July 3, 2002)

Tax consequences of a conveyance of land by a dissolving corporation - If R Corp has no other creditors, the receipt by the trustee of the 3 parcels of land is in effect a distribution of liquidating dividends to the shareholders of R Corp subject to the following:

a.            Stockholders receiving liquidating dividends will thereby realize capital gain or loss.  The gain, if any shall be subject to Income Tax at the rates prescribed under then Section 21 (a) of the Tax Code.  Moreover, pursuant to then Section 33 (B) of the Tax Code, as amended, only 50% of the aforementioned capital gain is reportable for Income Tax purposes if the shares were held by the individual stockholders for more than 12 months, and 100% of the capital gains if the shares were held for less than 12 months. Finally, the conveyance of real properties in the form of liquidating dividends to the stockholders is not subject to Documentary Stamp Tax (DST) under Section 196 of the Tax Code. 

b.         If the stockholders sell the aforementioned land and building received by them as liquidating dividends immediately after title thereto is transferred to their names and after the lease thereon shall have been terminated, the stockholders shall be subject to the 5% Capital Gains Tax (CGT) based on the gross selling price thereof or the FMV prevailing at the time of sale, whichever is higher, pursuant to then Section 21 (c) of the Tax Code, as amended. If the sale is effected on or after January 1, 1998, however, the CGT rate is 6% (Section 24 (D) (1), Tax Code of 1997).  The sale shall also be subject to DST under Section 196 of the Tax Code of 1997. 

On the other hand, if there are still creditors, such creditors have preference over the corporate assets of R Corp. vis-à-vis its shareholders, and therefore, the shareholders who are individuals are not yet deemed to be in receipt of their respective share in the net assets of the corporation.  In which case, the transfer of the 3 parcels of land pursuant to the Deed of Conveyance is indeed a mere transfer to a trust, which would not be subject to the Income Tax, withholding tax nor to the DST on conveyances of real property.

The notarial certification, however, would be subject to the DST of Ten Pesos (P10) pursuant to then Section 188 of the Tax Code, as amended. The shareholders themselves become subject to Income Tax on the liquidating gains, if any, once the liabilities of the trust are settled and there is no impediment to the distribution of the net assets of the trust, whether or not there is in fact an actual distribution of assets. 

In addition, the transfer of real property as liquidating dividends to the shareholders of a corporation is not subject to the DST on conveyance of real property. (BIR Ruling No. 028-2002 dated July 22, 2002)

WITHHOLDING TAX; compensation income of government employees; substituted filing of ITR - The withholding tax on compensation income of government employees is creditable in nature.  Thus, pursuant to Section 79(C)(2) of the Tax Code of 1997, the amount deducted and withheld during any calendar year shall be allowed as a credit to the recipient of such income against the tax imposed under Section 24 (A).

As regards any deficiency or excess in the monthly withholding, Step 6 of Section 2.79 (B)(5)(b) of Revenue Regulations (RR) No. 2-98 provides that the deficiency tax (when the amount of tax computed in Step 5 is greater than the amount of cumulative tax already deducted and withheld or when no tax has been withheld from the beginning of the calendar year) shall be deducted from the last payment of compensation for the calendar year. If the deficiency tax is more than the amount of last compensation to be paid to an employee, the employer shall be liable to pay the amount of tax which cannot be collected from the employee. The obligation of the employee to the employer arising from the payment by the latter of the amount of tax which cannot be collected from the compensation of the employee must be settled between the employee and employer.

The excess tax (when the amount of cumulative tax already deducted and withheld is greater than the tax computed in Step 5) shall be credited or refunded to the employee not later than January 25 of the following year. However, in case of termination of employment before December, the refund shall be given to the employee at the payment of the last compensation during the year.  In return, the employer is entitled to deduct the amount refunded from the remittable amount of taxes withheld from compensation income in the current month in which the refund was made, and in the succeeding months thereafter until the amount refunded by the employer is fully repaid.

Moreover, RR No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one taxable year whose tax due is equal to tax withheld qualify for substituted filing of ITR.

In substituted filing of ITR, the employer’s annual information return (BIR From No. 1604-CF) may be considered the “substituted” ITR of the employee inasmuch as the information he would have provided the BIR in his own ITR (BIR Form No. 1700) would have been exactly the same information contained in the employer’s annual information return.  This being the case, the taxpayer has the option not to file his ITR for the taxable year involved.

In addition, substituted filing applies only if all the following  circumstances are present: