bir ruling 2002

November 14, 2002

November 14, 2002

BIR NUMBERED RULING

EMPLOYMENT BENEFITS LDC:

SECTION 33(B); 33(C) REV. REGS. 3-98, 8-2000

027-2001

041-2002

Samahang Manggagawa ng University of Santo Tomas

Main Building, UST

Espaa, Manila

Attention: Mr. Edward O. Santos

President

Gentlemen:

This refers to your letter dated September 19, 2000 requesting for a ruling on the

following:

1 Whether the cost of educational benefits to employee and dependents of the employees and the hospitalization benefit given to employees is a fringe benefit tax or a withholding tax on compensation?

2. Who will determine whether or not your educational fringe benefit shall form part of the employee's gross compensation income?; and

3. What will qualify a rank and file to this taxation scheme?

In reply, please be informed that Section 2.78.1 of Revenue Regulations No. 2-98, as amended by RR 8-2000 and RR 10-2000 provides, viz:

"Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -

xxx

xxx

xxx

(3) Facilities and privileges of relatively small value. - Ordinarily, facilities and privileges (such as entertainment, medical services, or so-called "courtesy discounts" on purchases), otherwise known as "de minimis benefits" furnished or offered by an employer to his employees, are not considered as compensation subject to income tax and consequently to withholding tax, if such facilities are offered or furnished by the employer merely as means of promoting the health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "De Minimis" benefits not subject to income tax as well as withholding tax on compensation income of both managerial and rank and file employees:

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month."

Therefore the medical cash allowance to the extent of P750.00 per employee per semester or P125.00 per month given as a de minimis benefit is not subject to income tax and consequently, to withholding tax of both managerial and rank and file employees. RR 8-2000 provides that if the employer pays more than the ceiling prescribed, the excess shall be taxable to the employee, if such excess is beyond the P30,000.00 ceiling provided for 13th month pay and other benefits, otherwise, it is not.

On educational benefits, Section 2.33(B) of Revenue Regulations No. 3-98 defined fringe benefits as follows:

"Sec. 2.33. Special Treatment of Fringe Benefit

xxxxxxxxx

(B) Definition of Fringe Benefit - In general, except as otherwise provided under these regulations, for purposes of this Section, the term "Fringe Benefit" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee as defined in these regulations) such as, but not limited to the following:

xxx

xxx

xxx

(9) Educational assistance to the employee or his dependents" (emphasis supplied)

Pursuant to the said Revenue Regulations, the cost of the educational assistance to the employee which is borne by the employer shall, in general, be treated as taxable fringe benefit. However, a scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer's trade, business or profession, and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time that they have mutually agreed upon. In this case, the expenditure shall be treated as incurred for the convenience and furtherance of the employer's trade or business.

Furthermore, the cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the e employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.

To determine whether or not the educational fringe benefit shall form part of the employees' gross compensation income, it is necessary to determine whether or not said employee is a managerial or supervisory employee or a rank and file employed

Under Sec. 2.33(A) of Revenue Regulations No. 3-98, the term rank and file employees' means all employees who are holding neither managerial nor supervisory position. The Labor Code of the Philippines, as amended, defines "managerial employee" as one who is vested with powers or prerogatives to lay down and execute management policies and/or hire, transfer, suspend, lay-off, recall, discharge, assign, or discipline employees. "Supervisory employees" are those who in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not rarely routinary or clerical in nature but requires the use of independent judgment.

Section 2.78.1(A) of Revenue Regulations No. 2-98. as amended, includes fringe benefits as part of compensation income, "except those which are subject to fringe benefit tax under Section 33 of the Code," which means that if the recipient is a managerial or supervisory employee, then the provisions of Section 33 shall apply with respect to the imposition of a final tax on fringe benefits. But if the recipient is a rank and file employee, the fringe benefit will still be subject to withholding tax on compensation and consequently, to income tax, but not to final tax on fringe benefits. The benefits apply to both managerial/supervisory and rank and file employee but will be subject to different tax treatment (e.g. final FBT or income tax). Nonetheless, both types of employees shall be subject to the P30.00.00 threshold test pursuant to Section 32(B)(7)(e) of the Tax Code of 1997.

Therefore, the imposition of either a final tax on fringe benefit or withholding tax on compensation will depend on the employees' classification. Educational benefits received by managerial/supervisory employees shall be subject to the final tax on fringe benefits, while educational benefits of rank and file employees shall be subject to withholding tax on compensation, which shall be creditable to the taxpayers' income tax that shall become due and payable at the end of their taxable year.

Please be guided accordingly.

Very truly yours,

EDMUNDO P. GUEVARA

Deputy Commissioner

Legal and Inspection Group

Copyright 2 0 0 4 ACCESSLAW, Inc.

BIR Ruling No. 040-2002

November 14, 2002

BIR NUMBERED RULING

R.A. Nos. 7459, 7227;

Section 129

040-2002

Lan-Gas Manufacturing

315 Manuel L. Quezon St., Lower Bicutan

Taguig, Metro Manila

Attention: Mr. Rudy N. Lantano

Inventor

Gentlemen:

This refers to your letter dated August 31, 2002 which was filed with us on September 30, 2002 requesting for a confirmatory ruling to the effect that Mr. Rudy N. Lantano, an inventor duly certified by the Filipino Inventor's Society, is entitled to the incentives and tax exemptions granted under R.A. 7459, otherwise known as "The Inventors and Invention Incentives Act of the Philippines", wherever he may be located and doing business in the Philippines.

BACKGROUND OF THE CASE

The following are the facts of the case as represented by the taxpayer.

Mr. Rudy N. Lantano is an inventor duly certified by the Filipino Inventor's Society Screening Committee and a patent holder of various environment-friendly petroleum-based fuels, particularly, ALCO-DIESEL covered by Patent No. 28424; LAN-GAS covered by Patent No. 13594; and SUPERBUNKER FORMULA L covered by Patent No. 29089, all issued by the Philippine Patents Office. He has been issued various confirmatory rulings on the tax exemptions of the aforementioned invention products by the Bureau of Internal Revenue to wit:

1. Ruling No. DA-37-02-04-98;

2. DA-280-07-01-98;

3. DA-281-07-01-98:

4. DA-145-99; and

5. BIR Ruling No. 155-98.

Thereafter, Mr. Lantano started his operations as manufacturer seller of the above mentioned invention products. During his first two (2) years of operation, he was located inside the Incubation Site of the DOST Compound, Taguig. In year 2001, he left the Site and temporarily relocated his plant at a nearby place, also in Taguig. He was, however, forced to slow down his operation after his Supply, Process and Lease Agreement ("Agreement") with Pilipinas Shell Petroleum Corporation (PSPC) expired last June 2002. Since Mr. Lantano does not own a refinery plant where he can process the crude oil into other petroleum products and yields which are actually the main components of his invention products, he can no longer manufacture the invention products at the same cost as before, and the tax saving/exemption portion is eaten up by the manufacturing costs of the products, practically, yielding the tax incentives granted under R.A. 7459 to nothing. Likewise, since the Taguig plant is located in a very densely populated and limited area and taking into consideration the lack of refinery and storage facilities, as well as the manufacturing costs of the invention products and the location of his plant. Mr. Lantano relocated his plant at Subic Bay Economic and Freeport Zone (SBFZ), mainly, for purposes of producing the invention products at a lower cost, and thereby sustaining the production of the same.

The raw materials will be sourced within SBFZ from one of the petroleum companies located inside the Free-port Zone. Mr. Lantano will manufacture the invention products inside SBFZ, and thereafter, transfer the same to his storage tanks in Taguig where they will be stored until withdrawn for sale. In all cases, Mr. Lantano will either sell the finished invention products through wholesale or retail. In case of wholesale, the invention finished products will be available to petroleum new players or commercial buyers, and in case of retail selling, he will sell the invention products through his pumping outlets located in various places in Metro Manila and nearby provinces.

Mr. Lantano has been granted a Locational Clearance and Permit to Operate a Blending Facility by SBMA through Investment Processing Department. However, as a sole proprietor, Mr. Lantano is not qualified to register as a SBFZ enterprise.

POSITION OF MR. LANTANO

In connection with the foregoing, Mr. Lantano is now requesting confirmation of the following:

"1. The tax incentives availing under R.A. 7459 ("The Inventors and Invention Incentives Act of the Philippines") apply to a Filipino inventor wherever located in the Philippines e.g. Subic Bay Economic and Freeport Zone and other Ecozones.

"The applicability of the law is within the Philippine jurisdiction. While ecozones are deemed covered by special laws, specifically delineating the areas from customs territory, they are nonetheless within the Philippine territory. It is therefore, my humblest opinion that R.A. 7459 cannot be limited by the provisions of special laws creating these ecozones.

"2. The transfer of [inventor's] invention products manufactured inside the Special Economic and Freeport Zone (in the Philippines) to [his] storage tanks located within the Customs Territory is exempt from taxes and; duties on importation there being no consumption or sale between [the inventor] as consignor and consignee. While excise taxes is imposed on imported goods, in [inventor's] case, however, the invention products cannot be categorized as imported goods considering that [he] produced the products pursuant to the "Inventors and Inventions Incentives Act of the Philippines" which Act is applicable to all Filipino inventors wherever located in the Philippines. There is no sanction under the Act prohibiting Filipino inventors to relocate inside the economic zone. The purpose of the Act is to encourage commercialization of the inventions in the Philippines.

"Furthermore, the sale of said invention products either through wholesale or retail is also exempt from all taxes availing under R.A. 7459. As implemented by Section 3 of Revenue Regulations No. 19-93 dated July 27, 1993 implementing R.A. No. 7459, the inventor is exempt from the payment of the following taxes for which he shall be directly liable to pay, to wit:

"a) Income tax on the net income derived from the sale of invention products resulting from newly discovered/developed technologies by local researchers or new technology adopted from foreign sources whether it be patented machine, product, process including implements or tools and other related gadgets of invention, utility model and industrial design patents;

"b) Value-added tax (VAT) on the gross receipts/revenues derived from the sale of said invention products, provided, however, that you shall not be exempt from taxes for which he is not directly liable, e.g. VAT on the purchases of raw materials, supplies and equipment/machineries, which may be shifted as part of the cost of goods sold or for services rendered and

"c) Excise taxes directly payable in connection with the sale of invention products.

Further, in support of the above representation, the following documents were submitted:

1. Photocopy of Patent No. 28424 issued by the Philippine Patents Office on August 31, 1994 for ALCO DIESEL invention;

2. Photocopy of Patent No. 13594 issued by Philippine Patents Office for LAN-GAS invention;

3. Photocopy of Patent No. 29089 issued by the Philippine Patents office for SUPERBUNKER FORMULA L invention;

4. Copy of BIR Ruling No. DA-37-02-04-98;



7. Copy of BIR Ruling No. 155-98;

8. Copy of Locational Clearance, Permit to Operate and Certification to that effect duly issued by the SBMA;

9. BIR Registration;

10. Copies of Minutes of Meetings Bicameral Committee Conference, Deliberations of both Houses of Representatives and Senate

REQUESTED RULING

1. Section 2 of Republic Act No. 7459 (RA 7459), otherwise known as the inventors and Invention Incentives Act of the Philippines", to wit:

"SECTION 2. Declaration of National Policy and Program. ~ It is hereby declared to be the national policy to give priority to invention and its utilization on the country's productive system and national life; and to this end provide incentives to inventors and protect their exclusive right to their invention, particularly when the invention is beneficial to the people and contributes to national development and progress.

"Pursuant to the national policy, the Government shall provide a program to set up a climate conducive to invention and innovation, give encouragement and support to inventors who are creative and resourceful, as well as imbued with a deep sense of nationalism, and maximize the capability and productivity of inventors though incentives and other forms of assistance and support." (Italics supplied.)

Apparently the intention of the law is to promote invention and extend assistance and support to the Filipino inventors in the hope of maximizing their capability and productivity. 1 With respect to eligibility to the benefit and application of RA 7459, the Minutes of Proceedings on HB No. 240801 2 disclose that Filipino inventory residing in the Philippines can avail of the Bill's benefits. The Bill excludes Filipino inventors based abroad since it is assumed that they had already changed their citizenship and thus, their inventions are most probably presented to the foreign governments where they are now residing.3 Thus, benefits and incentives granted under RA 7459 is availing to a Filipino inventor for as long as he resides in the Philippines.

The fact that the blending facility is relocated at Subic Bay Special Economic and Free Port Zone (SBFZ) which is a delineated area from Customs Territory pursuant to the provisions of Republic Act No. 7227 (RA 7227), otherwise known as "Bases Conversion and Development Act of 1992", does not disqualify Mr. Lantano from availing of the tax exemption and incentive benefits under RA 7459.

II. The ultimate objective of RA 7227 is the conversion of military bases into alternative productive uses and the subsequent creation of Special Ecozones, among which is the SBFZ, and to develop such Ecozones into a self sustaining industrial, commercial, financial and investment centers to generate employment opportunities in and around the zone and to attract and promote productive foreign investment. Under Section 12 of Republic Act No. 7227 (RA 7227), the area covering the SBFZ is within the territorial jurisdiction of the Province of Bataan. The delineation of the area covering SBFZ as a separate customs territory is to ensure the free flow or movement of goods and capital within, into and exported out of Special Economic Zone.

In the process, incentives such as tax and duty free importations of raw materials, capital and equipment are made part of the package. But in all respect, however, SBFZ-registered enterprises are subject to five percent (5%) of the gross income earned in lieu of paying taxes which shall be distributed as follows: 3% to the National Government; 1% each to the local government units affected by the declaration of the zone; and, 1% to Special Development Fund. It can therefore, be readily ascertained that the five percent (5%) is actually a tax commuted into a single rate, and which amount is ultimately remitted to the National Government and local government units concerned in accordance with the above sharing ratio.

Further, as provided for in RA 7227, the exportation or removal of goods from the SBFZ to the customs territory is subject to customs duties and taxes under the Tariff and Customs Code and other relevant tax laws of the Philippines. 4 Such exportation by an SBF locator is deemed to be an importation by the buyer from customs territory.

In this connection, there are national internal revenue taxes that may be directly levied on imported petroleum goods, e.g., the VAT and the excise tax on imported petroleum goods or articles. Importation of petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax are exempt from VAT. 5 In the instant case, since the invention products, i.e., Lan-Gas, Alco-Diesel and Superbunker Formula L, are petroleum products, they are exempt from VAT.

As to whether the said invention petroleum products are exempt from excise taxes, Section 6 of RA 7459 provides as follows:

"SECTION 6. Tax Exemption. - To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of first sale, subject to the rules and regulations of the Department of Finance. Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon death of the inventor.

"The technologies, their manufacture and sale, shall also be exempt from payment of license; permit fees, customs duties and charges on imports." (Italics supplied)

The term "technology" means the application of knowledge or science which shall include all others, such as inventions, innovations and results of researches. 6

What is exempt under the above-mentioned provision is the income of the inventor. The excise tax on the movement of the inventions from SBFZ in the customs territory is an importation, for which the law subjects the importation/importer to the corresponding excise tax. The importer does not enjoy the exemption granted to the inventor under the abovementioned provision of R.A. No. 7459. If, on the other hand, the inventor himself is the importer, he is likewise not exempt from the excise tax, because as stated, what the law exempts is the income derived from the sale of the invention, and not the importation thereof.

Accordingly, the request for exemption from payment of excised taxes on the movement of the aforementioned invention products from the inventor's blending facility in SBFZ to his storage facility in Taguig which is located within the customs territory is hereby denied for lack of legal basis.

Very truly yours.

GUILLERMO L. PARAYNO, JR.

Commissioner of Internal Revenue.

____________________________

1 Sponsorship Remarks of Senator Mercado during the Bicameral Committee Conference dated February 7, 1992; Sponsorship Speech of Sen. Lina during the Senate Committee Meeting dated January 30, 1992; Remarks of Atty. Vicente Alvarez as Presiding Officer during the Committee Hearing of Joint Senate Committee on Science and Technology and Committee on Trade and Commerce held on February 11, 1999.

2 House Bill entitled "An Act Providing Incentives to Filipino Inventors in the Country and appropriating Funds Therefore" later consolidated with Senate Bill No. 1758 (Incentives for Inventions to come up with RA 7459.

3 Interpellation of Mr. Escudero on HB No. 24801 dated August 2, 1990

4 Section 12(b), RA 7227.

5 Section 109(c) of the Tax Code of 1997.

6 Sec. 3(c), R.A. 7459



November 11, 2002

BIR NUMBERED RULING

000-00

039-2002

PUYAT JACINTO & SANTOS

12/F Manilabank Building

6772 Ayala Avenue

Makati City

Attention: Atty. David B. Puyat

and

Atty. Virginia B. Viray

Gentlemen:

This refers to your letter dated July 24, 2001 on behalf of your clients, TA Bank of the Philippines, Inc. ("TA") and The Manila Banking Corporation ("TMBC"), the pertinent portion of which is quoted as follows:

"TA is a corporation organized and existing under Philippines laws, engaged primarily in commercial banking, and with principal address at the Grnd. Floor Octagon Bldg., Emerald Avenue, Ortigas Center, Pasig City.

"TA has a total authorized capital of Five Billion Pesos (PhP5,000,000,000.00) divided into Twenty Five Million (25,000,000) common shares and Twenty Five Million (25,000,000) preferred shares, each with a par value of PhP 100.00 per share.

"Its outstanding capital consists of One Billion Two Hundred Fifty Million Pesos (PhP1,250,000,000.00), divided into PhP625,000,000 in preferred shares 1 an PhP625,000,000 in common shares. 2

"All of the outstanding shares of TA are wholly owned by TMBC and its nominees.

"TMBC is likewise a corporation organized and existing under Philippine laws, engaged in business primarily as a thrift bank, and with principal address at the TMBC Building, 6772 Ayala Avenue, Makati City 1226, Metro Manila.

"TA is planning to decrease its authorized capital stock to 1,129,020 common shares, with a par value of PhP100.00 per share, and a total value of One Hundred Twelve Million Nine Hundred Two Thousand Pesos (PhP 112,902,000.00) ["Plan"].

"Under the Plan, all of TA's outstanding preferred shares, and 5,120,980 of its outstanding 6,250,000 common shares shall be surrendered by TMBC and cancelled immediately upon approval by the TA stockholders, the Securities and Exchange Commission ("SEC") and the Bangko Sentral ng Pilipinas ("BSP") of the said decrease.

"In exchange for the surrender of the abovesaid shares by TMBC, TA shall transfer to TMBC both real and personal, tangible and intangible properties listed hereunder, and referred to hereinafter as "Distributed

Assets."

LIST OF DISTRIBUTED ASSETS

A. LOAN PORTFOLIO 3

(Amounts in Thousand)

ACCOUNT NAMEBALANCE OF PRINCIPAL

AS OF MAY 31, 2001

ANDRES BORJA 5,000

ATLANTA GROUP 91,563

PHILIPPINE WIRELESS 47,231

MONDRAGON 31,667

MARICHRIS/MA. THERESA 65,000

GOTESCO 190,000

SUSAN LIM 5,000

E. UYTIEPO2,600

GEORGE GO44,531

FIL-ESTATE LAND 6,928

ASIAN GLOBE77,990

IPII44,536

ACTIVE REALTY13,251

METROPOLITAN1,613

FIL-ESTATE LAND200,000

J. RODRIGUEZ III30,000

REYNOLDS PHIL.6,576

LA. FIRMACION2,744

DJJ & SONS22,397

EL BUEN ASENSO17,100

LU FIRMACION6,800

JAIME CANCIO 300

C. QUIAMBAO2,954

R. RUBIO 906

A. DOMINGO300

AMA COMPUTER925

ATSUSHI HARADA1,094

CONCEPCION, PS186

DAVID DALISAY870

DE ROCA, DARL1TO925

DE ROCA, RIC650

MICLAT, ROMY & ANICETA186

CORTEZ, FELIX & MARISSA 840

TOTAL

922,663

B. ACQUIRED ASSETS

FORMER OWNER

DESCRIPTION/LOCATION

Active Realty Dev't Corp.146 lots located at Town & Country Southville,

Bian, Laguna with a total area of 23,604 sq.m. 9 lots located at Town & Country Southville, Bian, Laguna with a total area of 1,193 sq.m. 6 lots located at Town & Country North Marilao, Bulacan with a total area of 2,696 sq.m. 8 Mount Malarayat Golf & Country Club shares

Agusan River

Lot with residential building located at #57 12th

Street, New Manila, Quezon City with lot area of 1,001.5 sq.m.

DJJ and Sons

5 units located at the 14th Flr. World Trade

Exchange Center, Juan Luna St., Binondo

Fil Estate Land, Inc.

A parcel of land situated in dela Paz, Antipolo,

Rizal with a lot area of 473 sq.m. and covered by TCT-361115

12 lots situated in Parkridge Estate Phase V Antipolo, Rizal (5,757.50 sq.m.) 6 lots situated in Sherwood Hills, Trece Martires City, Cavite (4,254 sq.m.)

Ladislao Firmacion

A parcel of land along Francisco Road, Brgy.

Francisco with area of 1,173 sq.m.

Gotesco Properties

148 lots located at Calamba, Laguna

Gloria Lanuza

2 storey old residential building at no. 348

Nanirahan St., Villarica Subdivision, Mandaluyong City with lot area of 298 sq.m.

Gallardo Lopez

2 storey residential building located at #20-B Jose

Abad Santos St., Bayview Subd., Paraaque City with lot area of 553.45 sq.m.

Ma. Theresa CommercialState Theater Building (5 storey) located at Rizal

avenue, Sta. Cruz, Manila with lot area of 1,238.67

sq.m.

Metropolitan Land Corp.

4 CCTs located at the 11th Flr., Trafalgar Plaza HV

dela Costa St., Salcedo Village, Makati City with total area of 913.20 sq.m.

Meridien Dev't. Inc.

A parcel of land located at lot 2, Blk. 7, Fort

Bonifacio Global City, Taguig, Metro Manila with area of 1,600 sq.m.

C. REAL ESTATE PROPERTY DESCRIPTION/LOCATION

Upper Ground, Unit 2, World Trade

Exchange Building. No. 215 Juan Luna

St., Binondo, Manila with area of

294.72 sq.m.

with 2 parking slots

Based on the foregoing, you now request a confirmation of your opinion that:

"1. TA shall not be liable for income tax either for its receipt of the surrendered shares, or its transfer of the Distributed Assets to TMBC as liquidating dividends.

"2. No documentary stamp tax under Section 176 of the Tax Code is due on the surrender by TMBC of the TA shares and the subsequent cancellation thereof.

"3. The transfer by TA to TMBC of real property as liquidating dividend is not subject to documentary stamp tax on sale or transfer of real property under Section 196 of the Tax Code.

"4. Transfer by TA of its Loan Portfolio to TMBC is not subject to documentary stamp tax under Section 180 of the Tax Code.

"5. The transfer or assignment of any mortgage which stands as security for TA's Loan Portfolio shall be subject to documentary stamp tax under Section 195 of the Tax Code, based on the outstanding balance of the original loan.

"6. TMBC shall realize capital gain or loss when it surrenders its shares in TA in exchange for the assets distributed by TA as liquidating dividends, and such capital gain or loss shall be subject to final tax under Section 27(D)(2) of the Tax Code."

In reply, please be informed as follows;

1. TA shall not be liable for income tax either on its receipt of the surrendered shares, or its transfer of the Distributed Assets to TMBC as liquidating dividends.

In BIR Ruling No. 171-92 dated May 28, 1992, this Office ruled that the transfer by the liquidating corporation of its remaining assets to its stockholders is not considered a sale of these assets. Thus, a liquidating corporation does not realize gain or loss in partial or complete liquidation. (W.P. Fox & Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent, 15 BTA 115; Jordan Petroleum Company, 13 AFTR 2d 1692; 227 F. Supp. 174; J.T,S. Brown & Son Company v. Commissioner of Internal Revenue, 10 TC 840, cited in SIR Ruling No. 196-010-90-059-90 dated April 17, 1990).

Conversely, neither is a liquidating corporation subject to tax on its receipt of the shares surrendered by its shareholders pursuant to a complete or partial liquidation (BIR Ruling No. 171-92, supra).

Accordingly, TA Bank is not liable for income tax on either the transfer of its assets to its stockholders, or on its receipt of the shares surrendered by the shareholder, TMBC.

2.No documentary stamp tax ("DST") is due on the surrender and cancellation of the TA shares.

The Tax Code of 1997 imposes a DST on the sale, assignment or transfer of shares of stock under Section 176 thereof, which in part reads:

"Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of due-bills, certificates of obligations or shares or certificates of stock. - On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligations, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200.00), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock ...xxx." (emphasis supplied)

No DST under the above quoted provision shall be due on the surrender by TMBC of the shares of stock to TA. The surrender of the shares does not constitute a sale, assignment or transfer because TA is not taking title to the surrendered shares, and the shares are retired and not retained as treasury shares. In effect, TA does not realize any benefit, as owner or otherwise, from its receipt of the shares.

3.Transfer by TA to TMBC of real property is not subject to DST on sale or transfer of real property.

Section 189 of Revenue Regulation No. 26, otherwise know as the "Documentary Stamp Tax Regulations" provides, viz:

"SECTION 189. Conveyances by Corporation to Owner of All the Capital. - A conveyance of real estate by a corporation without valuable consideration to an owner of all its capital stock in consequence of its dissolution is not subject to tax." (Underscoring & italics supplied)

Under the above-quoted provision, a distribution in liquidation, without consideration, of the assets of a corporation consisting of real estate is not subject to DST imposed under Section 196 of the Tax Code of 1997. Accordingly, the distribution of the assets of TA, consisting of, among others, parcels of land, to its controlling and sole stockholder, TMBC, without monetary consideration, is not subject to DST as prescribed under Section 196 of the Tax Code of 1997. (BIR Ruling No. DA-214-96 dated June 26, 1996 and BIR Ruling No. 092-99 dated July 8, 1999 citing BIR Ruling No. 059-90.) In addition, Section 196 of the Tax Code speaks of "all conveyances, deeds, instruments, or writings, x x x, whereby any land, tenement or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other person designated by such purchaser or purchasers, x x x". Since it has been held that a corporation that distributes its assets to its shareholders as liquidating dividends is not deemed to be selling such assets to the latter, then Section 196 of the Tax Code of 1997 shall not apply. However, the notarial certification on this deed or deeds of assignment is subject to the documentary stamp tax of P15.00, pursuant to Section 188 of the Tax Code of 1997.

4. Transfer by TA of its Loan Portfolio to TMBC is not subject to DST.

The pertinent provisions in the Tax Code of 1997 as regards this issue are as follows:

"Sec. 180. Stamp tax on all bonds, loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the Government or any of its instrumentalities, deposits substitute debt instruments, certificates of deposits bearing interest and others not payable on sight or demand. - On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of P0.30 on each P200.00, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or note...xxx" (emphasis supplied)

SEC. 198. Stamp tax on assignments and renewals of certain instruments. - Upon each and every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same rate as that imposed on the original instrument, (emphasis supplied).

The above-quoted Sections clearly provide for the imposition of DST on the renewal or continuance of loan agreements and promissory notes. In the instant case, DST shall not be imposed on the assignment by TA of its Loan Portfolio (loan agreements and promissory notes) to TMBC, since the same is not for renewal or continuance (BIR Ruling No. 139-97 December 29, 1997). The term "assignment or transfer" in Section 198 of the Tax Code of 1997 applies only to "mortgage, lease or policy of insurance". Thus, in BIR Ruling No. 041-86 dated April 8, 1986, this Office defined the term "renew" within the context of Section 198 of the Tax Code of 1997 as follows:

" x x x. One of the definitions of the word "renew" found in Webster's New International Dictionary is: "To grant or obtain extension of; to continue in force for a fresh period; as to renew a note or a bond". As commonly used with reference to notes and bonds, the word "renewal" imports a postponement of the maturity of the obligation dealt with, an extension of the time in which that obligation may be discharged. (Emphasis supplied, Campbell River Timber Co. v. Vierhus, 198 American Law Reports, 763; 86 F. (2d) 673) In other words, the term "extension" has the same connotation as "renewal" which means the continuance of the old obligation."

5. Transfer or Assignment of any mortgage which stands as security for TA's Loan Portfolio shall be subject to DST.

Pursuant to Section 198, as above quoted, the assignment of any mortgage shall be subject to DST at the same rate as the original document.

Under Section 195 of the 1997 Tax Code, on every mortgage or pledge of lands, estate or property, real or personal, there shall be collected a DST at the following rates:

(a) When the amount secured does not exceed P5,000.00, P20.00;

(b) On each P5,000.00, or fractional part thereof in excess of P5,000.00, an additional tax of P10,00.

Since the DST on mortgage is based on the amount secured, the DST on the assignment of mortgage, if any, shall be based on the outstanding balance of the original loan at the time of the transfer or assignment. (BIR Ruling No. 139-97, id.)

6. TMBC shall realize capital gain or loss when TA distributes its assets as liquidating dividends.

The tax treatment of liquidating dividends depends on the characterization of the income in the form of such dividends received by shareholders as a result of the dissolution of the corporation in which they hold shares.

The second paragraph of Section 73(A) of the Tax Code of 1997 states:

"Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be."

In the case of Wise & Co., Inc., et al, vs. Bibiano L. Meer, Collector of Internal Revenue (78 Phil 655 [1947]), the Supreme Court, in interpreting a similarly worded provision as above cited as in Section 25(a) of Act No. 2833 ("Income Tax Law"), as amended by Section 4 of Act No. 3761 [which is partially lifted from section 201 (c) of the US Revenue Act of 1918], adopted the judicial construction of the US Supreme Court in the case of Hellmich vs. Hellman (276 US 233), where it was held that the amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The Supreme Court also stated that "(W)hen the corporation was dissolved and in the process of complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question to them in exchange, a transaction took place, which was no different in its essence from a sale of the same stock to a third party who paid therefor".

In BIR Ruling No. 190-84 dated December 21, 1984, the issue raised was precisely whether the liquidating gain (that is, the difference between the fair market value of the properties received and the cost basis of the shares to the stockholders) derived by an individual stockholder is subject to the then 10%/20% tax rates under Section 34(g) of the then Tax Code or to the graduated income tax rates under then Section 21(b). This Office ruled that such gain should be subject to the tax rates under then Section 21(b). The same conclusion was reached in other rulings of the BIR (BIR Ruling Nos. 322-87 dated October 19, 1987; 136-88 dated April 12, 1988; 021-89 dated February 13, 1989; 270-91 dated December 23, 1991; DA-223-98).

In effect, following the interpretation of these rulings, liquidating gain is to be treated as the gain from the sale or exchange of shares, consistent with the decision of the Supreme Court in Wise & Co., Inc., supra, subject, however, not to the 5%/10% final tax rate under Sections 24(C), 25(A)(3) or (B), 27(D)(2), 28(A)(7)(c) and (B)(5)(c) of the Tax Code of 1997, but to the ordinary income tax rates provided under Sections 24(A)(1), 25(A)(1) and (B) [that is, the 25% rate], 27(A) or (E), 28(A)(1) or (2) and (B)(l) of the Tax Code of 1997, depending on the status of the shareholder/stockholder (for instance, whether the shareholder is a corporation or an individual, resident or non-resident).

Finally, this Office also notes that a similar treatment has been given to corporate shareholders of a dissolving corporation, in that the liquidating gain realized is subject to the ordinary corporate income tax rate rather than to the then 10%/20%; or the current 5%/10% final tax rates. (see for instance BIR Ruling Nos. DA-214-96 dated June 26, 1996 and 171-92 dated May 28, 1992)

This Office also takes note of BIR Ruling No. DA-367-99 dated January 24, 1999 issued under designated authority, and similar rulings where the BIR departed from the above-mentioned rulings, and ruled that the liquidating gain is subject to the 5%/10% capital gains tax rate. The basis for this ruling was BIR Ruling No. 015-82 dated January 20, 1982, where the BIR held that the liquidating gain received by individual shareholders is subject to the then 10%/20% final tax, but, this ruling was effectively overturned in the subsequent BIR Ruling No. 190-84 and many other similar rulings mentioned above. Thus, BIR Ruling No. DA-529-99 and rulings similar to it have no basis, having been based on a ruling that had already been revoked.

Accordingly, this Office rules once and for all that:

1.Liquidating gain or loss is in the nature of capital gain or loss, as the case may be, and therefore treated in the manner stated in Section 39 of the Tax Code of 1997.

2.Liquidating gain, while characterized as gain from sale or exchange of shares, is subject to the ordinary income tax rates provided under Sections 24(A)(1)(c), 25(A)(1), 27(A) and (E), 28(A)(1) and (2) and (B)(l) of the Tax Code of 1997, depending on the status of the shareholder, and not to the 5%/10% final tax.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void.

Very truly yours,


Commissioner of Internal Revenue

____________________________

1 Divided into 6,250,000 shares, with par value of P100.00 per share;

2 Divided into 6,250,000 shares, with par value of P100.00 per share;

3 Transfer shall include interest accrued or to be accrued on the loan.



October 15, 2002

BIR NUMBERED RULING

R.A. # 7459 Sections 148 & 131, NIRC; RR 19-93

BIR Ruling # 155-98: DA 280-98, 281-98 & 037-98

037-2002

NILA N. MENDIOLA & ASSOCIATES

Unit 2106 21st Floor Cityland 10 Tower I

H.V. dela Costa Streets, Salcedo Village

Makati City

Attention: MS. NILA N. MENDIOLA

Certified Public Accountant

Gentlemen:

This refers to your letter dated March 18, 2002 requesting on behalf of your client. Mr. Rudy L. Lantano, for confirmation of your opinion that the importation of diesel. naphtha, gasoline and other yields, as direct and base raw materials in the manufacture, sale and commercialization of ALCO-DIESEL, LAN-GAS and SUPERBUNKER FORMULA-L, is exempt from excise tax imposed under Section 148 of the Tax Code of 1997.

It is represented that your client. Mr. Rudy Lantano, is an inventor duly certified by the Filipino Inventor's Society and confirmed by the Filipino Inventor's Screening Committee; that he is a patent holder of various environment friendly petroleum-based fuels, particularly ALCO-DIESEL covered by Patent No. 28424 dated August 31, 1994, LAN-GAS covered by Patent No. 13594 dated July 30, 1980 and SUPERBUNKER FORMULA-L covered by Patent No. 29089 dated September 7, 1995, all issued by the Philippine Patents Office; that he has been issued a tax exemption certificate by the Bureau of Internal Revenue under BIR Ruling No. DA-37-02-04-98; that in relation to the manufacture, sale and commercialization of the aforementioned invention products, your client intends to import diesel, naphtha, gasoline and other yields to be used as direct raw materials; that it is your position that the said importation is exempt from excise taxes imposed under Section 148 of the 1997 Tax Code, pursuant to Section 6 of Republic Act No. 7459, otherwise known as the "Inventions and Inventors Incentives Act of the Philippines", which provides, viz:

"Section 6. Tax Exemption. - To promote, encourage, develop and accelerate commercialization of technologies developed by local researchers or adapted locally from foreign sources including inventions, any income derived from these technologies shall be exempted from all kinds of taxes during the first ten (10) years from the date of the first sale, subject to the rules and regulations of the Department of Finance: Provided, that this tax exemption privilege pertaining to invention shall be extended to the legal heir or assignee upon the death of the inventor.

The technologies, their manufacture and sale, shall also be exempt from payment of license, permit fees, customs duties and charges on imports."

In reply, please be informed that your request cannot be granted by this Office for lack of legal basis. Section 3 of Revenue Regulations No. 19-93 which implemented the aforequoted provisions of RA No. 7459 provides that -

"3. The inventor shall be exempt from the following taxes for which otherwise he shall have been directly liable:

"xxxxxxxxx

(c) Excise taxes directly payable in connection with the sale of invention products."

The aforequoted provision itself will readily show that the exemption of Mr. Lantano from the excise tax imposed under Section 148 of the 1997 Tax Code covers only the sale of his invented ALCO-DIESEL, LAN-GAS and SUPERBUNKER FORMULA L. We cannot agree that Section 3 of RR 19-93 intends to grant excise tax exemption to Mr. Lantano on his importation of raw materials directly needed in the manufacture of his invented products. Tax exemption cannot be created by implication because exemptions from taxation are highly disfavored in law and one who claims exemption from tax must be able to justify his claim by clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist on vague implication. (Collector vs. Manila Jockey Club, Inc., L-875, March 23, 1956; Petroleum Co. vs. Llanes, 49 Phil. 466) To be exempted from payment of taxes, it is the taxpayer's duty to justify the exemption "by words too plain to be mistaken and too categorical to be misinterpreted. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. (Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, G.R 80041 Jan 22,1990)

Section 129 of the 1997 Tax Code provides that excise taxes apply to goods manufactured in the Philippines for domestic sale or consumption or for any other disposition and to things imported which shall be in addition to the value-added tax imposed under Title IV thereof. As importer of the raw materials needed in the manufacture and commercialization of his products, Mr. Lantano shall pay the excise taxes due on his imported articles prior to the release of the same from customshouse, pursuant to Section 131 (A) of the same Code.

This constitutes our final decision on the matter.

Very truly yours,

GUILLERMO PARAYNO, JR.




October 09, 2002

BIR NUMBERED RULING

Section 33, NIRC

Rev. Regs. 3-98

000-00

036-2002

TAX COUNSELING INTEGRATED

Unit 2204-C. PSE Centre Tower 1

Exchange Road, Ortigas Center

Pasig City

Attention: Atty. Reynoso B. Floreza

Gentlemen:

This refer to your letter dated May 18, 2000 requesting that your client, BECHTEL OVERSEAS CORPORATION (Bechtel), be allowed to pay their fringe benefit tax (FBT) through the use of its Tax Credit Certificate (TCC).

As borne out of the docket of the case, the following facts have been established.

On November 18, 1999, Bechtel, through counsel, filed a claim for tax credit of excess value added tax (VAT) in the amount of P52,508,690.20 (excess input of P54,489,808.05 plus overpaid VAT of P1,018,882.15). It was alleged that the said claim was being applied as tax credit because the construction project in Mauban, Quezon would be 100% completed by December 1999, and Bechtel does not have any other project when said excess input could be tax-credited against the company's VAT liabilities.

On January 5, 2000, TCC No. SN 000971 was issued in the amount of P52,508,690.20 in favor of Bechtel for excess input and overpayment of VAT covering the period from April 1997 to September 1999.

On April 14, 2000, Bechtel applied for a Tax Debit Memo amounting to P541,389.50 in payment of their FBT for the 1st quarter of 2000 utilizing the said TCC which, however, was denied by the Collection Service on the ground that "FBT is a final withholding tax which is an exception to the usage of TCCs under Section 204(c) of the NIRC".

In your supplemental letter dated April 9, 2002, you reiterated your position that FBT is the direct liability of employers and further stated that there could be no valid imposition of the civil penalties because Bechtel voluntarily filed the return and tendered payment of the tax within the statutory period. This ruling is based solely on the facts represented and covers only the legal issue of whether an employer's TCC however issued, may be used to pay the FBT on fringe benefits granted to the employer's managerial and supervisory employees.

In reply, please be informed of the following:

The second paragraph of Section 204(C) specifically prohibits the application of a Tax Credit Certificate (TCC for brevity) against withholding tax liabilities of a taxpayer. Thus.

"SECTION 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. The Commissioner may

xxx

A Tax Credit Certificate validly issued under the provisions of this Code may be applied against any internal revenue tax, excluding withholding taxes, for which the taxpayer is directly liable. Any request for conversion into refund of unutilized tax credits may be allowed, subject to the provisions of Section 230 of this Code: Provided, That the original copy of the Tax Credit Certificate showing a creditable balance is surrendered to the appropriate revenue officer for verification and cancellation: Provided, further. That in no case shall a tax refund be given resulting from availment of incentives granted pursuant to special laws for which no actual payment was made.

xxx"

(Emphasis supplied.)

The rationale for the above-stated prohibition is that the withholding tax is not considered a direct liability of the taxpayer. The tax withheld is actually payment made by the taxpayer other than the withholding agent who merely holds the tax withheld in trust for the government.

The issue is whether the FBT is a direct liability of the employer or whether the employer merely acts as withholding agent in paying the FBT.

Section 33 of the 1997 Tax Code specifically states that:

"SECTION 33.Special Treatment of Fringe Benefit.

(A) Imposition of Tax. A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for tinder Section 57(A) of this Code, xxx"

(Emphasis supplied)

The clear intention of Congress can be gathered from the minutes of the proceedings before the Committee On Ways And Means that deliberated on the said Section. Thus.

"Mr. Medalla (continuing)...." Now, another feature of the reform is fringe benefits taxation which is a feature of the tax system of Australia and many other countries. Since under the present system fringe benefits are already taxable but of course, many of them are not declared for tax purposes, this is really not new tax. This is on example of how the tax reform raises revenue, not by raising new taxes but by making the administration of existing taxes easier...

The loophole that the FBT seeks to plug is the fact that many executives are able to avoid taxation by being paid fringe benefits rather than straight salaries" (See pages 000026 and 20007, Minutes, Committee on Ways and Means, February 20, 1996/ELP/V-1)

Quite evidently, the purpose of the afore-quoted provision is to hold the employer directly liable for the FBT so as "to plug" the so-called loophole and to ensure that the same is paid. This to this Office's mind, is the reason for the special treatment of the FBT.

The second paragraph of Section 2.33(A) of Revenue Regulations No. 3-98 is instructive stating that:

"SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS

XXX

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the employee which shall be withheld and paid by the employer on a calendar quarterly basis as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58 A (Quarterly Returns and Payments of taxes Withheld) of the Code." (Emphasis supplied.)

Furthermore, Revenue Regulations No. 5-2000 defines a direct internal revenue tax liability as "...taxes for which the taxpayer is made statutorily liable. In essence, direct internal revenue tax liability pertains to the liability of a person mandated by law to file the tax return and pay the tax due thereon. "

From the foregoing discussion, it is quite clear that FBT is a withholding tax on the employee although payment thereof is made directly by the employer. It is a direct internal revenue tax liability of the employee, and not the employer. Such being the case, Bechtel cannot use its TCC to pay the FBT because of the prohibition under Section 204(C) of the 199 Tax Code.

As to your request for non-imposition of civil penalties on the ground that a voluntary tender of payment of the tax through the use of the TCC has been made, this Office finds no basis for the abatement of the civil penalties. Sec 204 of the 1997 Tax Code clearly provides that the TCC cannot be applied against withholding tax payment. Furthermore, Section 2.33 of RR 3-98 provides that FBT is a final withholding tax.

Hence, whatever interpretation the taxpayer has is of no moment considering that the provision of law, rules and regulations provide for its proper classification, i.e., final withholding tax.

Applying the aforementioned provisions, payment in the form of TCC is not valid and to be considered as no payment at all, Bechtel, having failed to pay the tax on time, the penalties thereon should attach.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void.

Very truly yours,





August 29, 2002

BIR NUMBERED RULING

035-2002

LAYA MANANGHAYA & CO.

22/F Philamlife Tower

8767 Paseo de Roxas

Makati City

Attention: ATTY. REMIGIO A. NOVAL

Partner, Tax & Corporate Services

and

ATTY. MA. GEORGINA J. SOBERANO

Director, Tax & Corporate Services

Gentlemen:

This refers to your letter dated February 19, 2002 stating that your client, Siemens Power Operations, Inc. (SPOI), is a duly organized domestic corporation which is 100% owned by Siemens A.G. (SAG), a corporation duly organized and existing under the laws of Germany; that SAG in turn, is a publicly-held international company whose stocks are held by approximately one million (1,000,000) shareholders; that of this multitude of shareholders, only one (1) entity, the Siemens Vermogensverwaltung GmbH, is known to hold more than five percent (5%) or to be exact, six and one-half percent (6.5%) of the capital, and that under German Law, any stock owner holding five percent (5%) or more of the capital of a company is required to report the same.

Based on the foregoing representations, you now request for a ruling that SPOI, being a publicly-held corporation, is not covered by the improperly accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997.

In reply thereto, please be informed that Section 29(A) and (B) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001, provides that in addition to other taxes imposed by Title II of the Tax Code of 1997, there shall be imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting tie earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders.

Thus, this kind of tax is being imposed in the nature of a penalty to the corporation for the improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation. However, the improperly accumulated earnings tax shall not apply to, among others, publicly-held corporations.

Under Section 4 of Revenue Regulations No. 2-2001, closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (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 twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations. For purposes of determining whether the corporation is a closely-held corporation, it is provided that stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.

In BIR Ruling No. 025-2002 dated June 25, 2002, this Office ruled that:

"Such being the case, since Abbott-Phils. is a wholly-owned subsidiary of Abbott-US, such shares will be considered as being owned proportionately by the 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. Thus, where at least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote in a corporation is owned directly or indirectly by at least 21 or more individuals, the corporation is considered publicly-held corporation as the term is defined under the Regulations."

"Further, Section 29 of the Tax Code of 1997 provides, viz:

"Sec. 29. Imposition of Improperly Accumulated Earnings Tax -

(A)xxx xxx xxx

(B)Corporations Subject to Improperly Accumulated Earnings Tax. -

(1) In General. - The improperly accumulated earnings tax imposed in the preceding section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

(2) Exceptions - The improperly accumulated earnings tax. as provided for under this Section shall not apply to:

(a)Publicly-held corporation;

(b)Banks and other non-bank financial intermediaries; and

(c)Insurance companies.

XXX

XXX

XXX

XXX

Accordingly, this Office confirms your opinion that Abbott-Phils. is considered a publicly-held corporation exempt from the Improperly Accumulated Earnings Tax (IAET), based on the representation that as of the year-end 2000, Abbott-US had 101,272 shareholders holding a combined 1,545,934,133 shares of common stock and the twenty largest shareholders of Abbott-US as of September 30, 2001 own an aggregate of 30.1 percent of Abbott-US issued and outstanding shares."

IN THE LIGHT OF ALL THE FOREGOING, this Office holds that since the parent company of SPOI is a corporation publicly listed in Germany, whose stocks are owned and held by more than 20 stockholders, SPOI is not subject to the 10% improperly accumulated earnings tax prescribed in Section 29 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-2001.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void.

Very truly yours,

EDUMUNDO P. GUEVARRA

Deputy Commissioner

Legal & Inspection Group



August 07, 2002

BIR NUMBERED RULING

030-2002

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT

Republic of the Philippines

IRC Building, #82 EDSA

Mandaluyong City

Attention: COMM. HAYDEE B. YORAC

Chairperson

Gentlemen:

This refers to your letter dated May 6, 2002 on your request for a ruling on the propriety of imposing capital gains tax and documentary stamp tax on the consolidation of title of the property surrendered as ill-gotten wealth in favor of the Republic of the Philippines.

The facts, as represented, are as follows:

In 1986, Jose Y. Campos surrendered, among others, the Independent Realty Corporation (IRC for brevity) and its properties to the Republic of the Philippines through the Presidential Commission on Good Government (PCGG for brevity) as part of the Marcos ill-gotten wealth. Since then, the corporation and its properties have been under the control of the Republic.

On April 2, 2002, the IRC and the PCGG consolidated the title of the Republic over a parcel of land and the building in such land covered by TCT No. 390163 and registered in the name of IRC.

Your good Office now requests whether capital gains tax and documentary stamp tax should be imposed on such transfer and consolidation.

In reply, please be informed that the Department of Justice, in DOJ OPINION NO. 108, s. 1987 dated October 16, 1987, has already rendered an opinion on the same matter, which this Office fully subscribes to and is hereby reproduced as follows:

This refers to your request for opinion on whether the Republic of the Philippines is exempt from payment of capital gains tax, transfer tax, real property tax and other fees in connection with the transfer in its favor of several real properties by Independent Realty Corporation (IRC). Said real properties were voluntarily surrendered to the Presidential Commission on Good Government (PCGG) by Jose Yao Campos being part of Marcos' ill-gotten wealth and which in turn were formally transferred to the Department of Agrarian of Agrarian Reform (DAR) by PCGG.

The accompanying documents disclose that Jose Y. Campos is the principal stockholder of Independent Realty Corporation (IRC); that he voluntarily surrendered in favor of the Philippine Government, the title and ownership of IRC and all its subsidiaries; that thereafter on April 1, 1986, the Philippine Government through the PCGG, formalized the sequestration of the said corporation and all its subsidiaries under the control of the PCGG; that in pursuance of the aforestated sequestration order, the Board of Directors of IRC passed a resolution authorizing the transfer of all properties in the name of IRC and its subsidiaries to the Republic of the Philippines, that the PCGG and DAR entered into a Memorandum of Agreement covering said surrendered properties; and that since IRC is deemed to be now owned by the Philippine Government, IRC executed a Deed of Transfer transferring, conveying, and assigning all its rights, interest and titles to all the properties listed in Annex "A" of said document in favor of the Republic of the Philippines.

You contend that since the Republic of the Philippines is the owner of the real properties in question, the; registration of the same should be exempt from the payment of capital gains tax, real property tax, transfer tax, and other fees being required by the Register of Deeds of Laguna and Cavite.

We find your contention tenable.

Taxes are financial burdens imposed for the purpose of raising revenues with which to defray the cost of the operation of the Government. The general rule is that, independently of constitution or statute, property belonging to the state or a political division thereof is not taxable on the theory that such taxation would merely have the effect of taking money out of one pocket and putting it in another (Cooley on Taxation, Sec. 621, 4th Edition). Taxing such property would not serve, in the final analysis, the main purpose of taxation. What is more, it would tend to defeat it, on account of the paper work, time and consequently, expenses it would entail (The Law on Local Taxation, by Justiniano V. Castillo). It is axiomatic that when public property in involved exemption is the rule and taxation, the exception (Social Security System vs. City of Bacolod, 115 SCRA 412; National Waterworks and Sewerage Authority vs. Quezon City, 23 SCRA 286; Board of Assessment Appeals vs. Court of Appeals, 8 SCRA 225). This implied exemption is generally reinforced by express provisions in the constitution or statutes exempting such property. (Cooley. Ibid.)

Accordingly, Section 40 of Presidential Decree No. 464, as amended (Real Property Tax Code), exempts from real property tax real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned corporation so exempt by its charter unless the beneficial use of which has been granted to a taxable person. Gifts or donations made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit or to any political subdivision of said government are exempt from the donors (gift) tax under Section 104(2) of the National Internal Revenue Code. Certificates placed upon documents, instruments and papers for the national, provincial, city or municipal government, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal government, are exempted from documentary stamp tax (see Section 212[2], NIRC). With regard to the capital gains tax, no such tax is due because there is no capital gain to be taxed, there being no sale or exchange of capital assets involved (see Section 34[2] of the National Internal Revenue Code) since the subject properties were voluntarily surrendered to the Republic of the Philippines which is the real owner of the same.

For all the foregoing, we reiterate the view that the transfer in favor of the Government of the subject properties may be effected without the payment of the taxes being required to be paid by the Registers of Deeds of Laguna and Cavite.

Incidentally, it may be mentioned that Executive Order No. 286 dated July 25, 1987, which created the Sequestered Assets Disposition Authority (SADA) to oversee the disposition of, among others, assets and properties voluntarily surrendered to the PCGG, provides for the exemption of SADA from the payment of taxes, fees and charges under Section 5 thereof, which reads as follows:

SEC. 5. Exemption from Taxes, Fees and other Charges. - The provisions of any law to the contrary notwithstanding, the Authority as well as the sequestered corporations and assets transferred to it, shall be exempt from all taxes, fees, charges, imposts, and assessments arising from or occasioned by the passing of title over such corporations or assets from the said corporations to the Authority and/or from the National Government to a private acquisition or buyer imposed by the National Government or any subdivision thereof; Provided, that in cases where government institutions acquired the said assets by foreclosure, the non-payment of similar taxes, fees, charges, imposts, and assessments shall not be a bar to the consolidation of title in the foreclosing institutions and the subsequent passing of title to the Authority.

The sale or transfer of such corporations of assets shall not be enjoined or hindered by the existence of any liens by way of taxes, charges or other assessments in favor of the government at the time of sale or transfer; Provided, that the proceeds from such sale or transfer shall be subject to the tax lien and shall first be applied to satisfy such obligations secured by such liens." (Emphasis supplied)

In view thereof, this Office is of the opinion and hereby holds that the consolidation of title of the property surrendered by IRC, as ill-gotten wealth, in favor of the Republic of the Philippines is exempt from capital gains tax and documentary stamp tax.

For your information and guidance.

Very truly yours,

RENE G. BAEZ




July 31, 2002

BIR NUMBERED RULING

RR 2-98; 79; RR 3-2002

000-00

029-2002

Atty. Maria Elena C. Ramiro

2423 Zarnora Street

Pasay City

Madam:

This refers to your letter dated November 8, 2001 requesting for a ruling in behalf of your clients, Loida P. Kahulugan, Rhodora M. Medel, Ma. Luisa N. Hibionada, Araceli S. Alegria and Jean D. Pena, on the following withholding tax issues. It is your contention that:

1.The nature of a withholding tax on compensation income of government employees is creditable since it can be allowed as credit against the income tax liability of the taxpayer for the taxable year pursuant to Section 79(C)(2) of the National Internal Revenue Code; and

2.Any deficiency or excess in the monthly withholding taxes on such compensation income duly remitted to the Bureau of Internal Revenue may be reconciled or adjusted at year-end, particularly during the last payroll period of the employee in accordance with Sec. 22(a) and (b) of Revenue Regulations No, 6-82, as amended by RR 12-86, otherwise known as the "Withholding Tax Regulations on Compensation."

In reply, please be informed that Section 2.57(B) of Revenue Regulations No. 2-98, implementing Republic Act No. 8424, "An Act Amending The National Internal Revenue Code, as amended" relative to the Withholding on Compensation, provides, viz:

"Sec. 2.57. Withholding of Tax at Source -

(A) xxx xxx xxx

(B) Creditable Withholding Tax Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in nature."

Thus, the withholding tax on compensation income of government employees is creditable in nature. Therefore, 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 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.

On the basis of the foregoing, the deficiency or excess in the withholding tax on compensation income of government employees, which is creditable in nature, may be reconciled or adjusted at year-end, more particularly during the last payroll period of the employee pursuant to Section 79(C)(2) of the Tax Code of 1997 as implemented by Revenue Regulations No. 2-98.

Moreover, Revenue Regulations No. 3-2002 dated March 22, 2002 provides that employees receiving compensation income from only one employer for one taxable year whose tax due is equal to tax withheld qualify for substituted filing of Income Tax Return (ITR).

In substituted filing of ITR, the employer's annual information return (BIR Form 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:

1.The employee receives purely compensation income (regardless of amount) during the taxable year;

2.The employee receives the income only from one employer during the taxable year;

3.The amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer; and

4.The employee's spouse also complies with all the three (3) conditions stated above.

Furthermore, RR 3-2002 shall cover taxable year 2002 and succeeding years although substituted filing is optional on the part of the employee for income earned for taxable year 2001.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then, this ruling shall be considered null and void.

Very truly yours,

RENE G. BAEZ




June 21, 2002

BIR NUMBERED RULING

22(DD); 28(A)(6)(a)

047-2001

024-2002

BOARD OF INVESTMENTS

Industry & Investments Building

385 Sen Gil J. Puyat Avenue,

Makati City

Attention: ADELINA E. BATALLONES

OIC Director One-Stop Action Center

Gentlemen:

This refers to your letter dated 27 February 2002 forwarding the request of Philippine Australia Business Council regarding the assistance sought by Indophil Resources Head Office (Melbourne).

It is represented that Indophil Resources Head Office (Melbourne) ("Indophil", for brevity) is an Australian Company licensed by the Securities and Exchange Commission in 1999 to establish a Regional Headquarters. Based on this, Indophil requests the issuance of a certifications/statement from the Bureau of Internal Revenue on the following:

1. Expats/alien executives occupying managerial and technical positions, employed by Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) are subject to withholding tax of 15% on compensation income.

2. Regional or Area Headquarters are exempt from payment of corporate income taxes.

In reply, please be informed that-

1. 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 upon their gross income received as salaries, wages, annuities, compensations, remuneration, and emoluments to a final tax equal to fifteen percentum (15%) of such gross income.

In relation thereto, Section 2.57.1(D) of Revenue Regulations No. 2-98, as amend by Revenue Regulations 6-2001, also provides that a final withholding tax equivalent to fifteen percent (15%) shall be withheld by the withholding agent from the gross income received by every alien individual occupying managerial and technical positions in regional. or area headquarters and Regional Operating Headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, except income which is subject to the fringe benefits tax, from such regional or area headquarters and regional operating headquarters.

Thus, expats/alien executives occupying managerial and technical positions employed by regional or area headquarters and regional operating headquarters are subject to withholding tax of 15% on compensation income.

2. 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.

Section 22(DD) of the Tax Code of 1997 defined the term "regional or area headquarters" as "a branch: established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as a supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific Regional and other foreign markets,"

Likewise, Article 63 of Executive Order No. 226, otherwise known as the Omnibus Investments Code as amended by R.A. 8756, provides that regional or area headquarters established in the Philippines by multinational companies and which headquarters do not earn or derive income from within the Philippines and do not participate in any manner in the management of any subsidiary or branch office it might have in the Philippines nor solicit or market goods and services whether on behalf of its mother company or its branches, affiliates, subsidiaries and any other company and which acts as supervisory, communications and coordinating centers for their affiliates, subsidiaries, or branches in the Asia Pacific Region and other foreign markets shall not be subject to income tax.

It must be noted that for tax purposes, a regional or area headquarters, in acting as a supervisory, communications and coordinating center for its affiliates in the region, shall not render any of the following qualifying services:

General administration and planning;

Business planning and coordination:

Sourcing/procurement of raw materials and components;

Corporate finance and advisory services;

Marketing control and sales promotion;

Training and personnel management;

Logistic services;

Research and development services, and product development;

Technical support and maintenance;

Data processing and communication; and Business development,

which functions are applicable to a Regional Operating Headquarters pursuant to Section 4(b) of the Rules and Regulations implementing R.A. No. 8756.

Accordingly, Indophil will not be subject to income tax as long as in performing its functions and in acting as a supervisory, communications and coordinating center for its affiliates in the region, it shall not render any of the foregoing qualifying services. Otherwise, it shall be taxed as a Regional Operating Headquarters.

It is understood that Indophil's books of accounts and other pertinent records shall be subject to periodic examination by revenue enforcement officers of this Bureau for the purposes of ascertaining whether Indophil is complying with the conditions under which it is granted tax exemption or tax incentives and its tax liability, if any, pursuant to Section 235 of the Tax Code of 1997.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered void.

Very truly yours,

RENE G. BANEZ




June 21, 2002

BIR NUMBERED RULING

Sections 32 & 33

023-2002

Joaquin Cunanan & Co.

29/F Philamlife Tower

8767 Paseo de Roxas

Makati City

Attention: Ms. Tomasa H. Lipana

Managing Partner

Tax Services

Madam:

This refers to your letter dated April 17, 2001 requesting on behalf of your client, Sodexho Pass International (Sodexho for brevity), for confirmation of the following opinions:

1. That meal and food benefits provided by client companies through Sodexho meal and food vouchers may be considered tax-exempt benefits;

2. That a meal and food allowance of no more than Php 100.00 per day is considered de minimis benefit; and,

3. That de minimis rice allowance of Php 1,000 per month given to the employees may be aggregated with the meal allowance through Sodexho meal and food vouchers and shall still be exempt from both withholding tax on compensation and fringe benefit tax.

It is represented that Sodexho, a foreign corporation organized and existing under the laws of France, is a service company engaged in operating innovative systems (the issuance of service vouchers) to manage employee benefits given by private companies, national government agencies, including universities and colleges, government-owned and/or controlled corporations, and more generally, any other organization to improve the health, goodwill, contentment or efficiency of their employees, members or beneficiaries or their dependents; that in the Philippines, Sodexho proposes to introduce administration of food and rice subsidy benefits given by Philippine employers to their employees through the following procedures:

1. Client company transfers to Sodexho the amount allotted for its employees' annual or monthly meal and food allowance and/or rice subsidy with instructions on the amount to be allotted per employee in conformity with a de minimis threshold that would be established;

2. Sodexho issues meal and food vouchers (intended for each employee with the value allotted for the respective employee's benefit per working day) and delivers the same to the client company. The face value of the vouchers shall be equivalent to the amount transferred by the client company to Sodexho;

3. Client company distributes the vouchers to its employees;

4. Employee uses these vouchers for meals and/or food at an accredited establishment (e.g., restaurant/food outlet) of his choice;

5. Accredited outlet sends back used vouchers to Sodexho for reimbursement;

6. Sodexho reimburses the store/outlet.

We reply as follows.

In general, the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code of 1997. The name and basis by which the remuneration for services is designated is immaterial in determining whether the remuneration constitutes compensation. Thus, fringe benefits, unless specifically excluded from gross income and unless subject to the fringe benefits tax under Section 33 of the Tax Code of 1997, would generally constitute compensation to the recipient. (Sec. 2.78.1(A), Revenue Regulations No. 2-98) Furthermore, any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee, except rank and file employees as defined, shall generally be understood as fringe benefits, and as such, shall be subject to the fringe benefits tax, unless specifically excluded under the Tax Code of 1997, as implemented according to rules and regulations as are necessary to carry out efficiently and fairly the provisions of the Code. (Section 33, Tax Code of 1997, as implemented by Revenue Regulations No. 3-98, as amended.)

De minimis benefits are facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees, and as such, they are subject to neither compensation income tax nor fringe benefits tax. They are, therefore, not subject to withholding tax as well. (Sec. 2.78.1(A)(3), Revenue Regulations No. 2-98, as amended by Revenue Regulations 8-2000; Sec. 2.33.(C), Revenue Regulations No. 3-98, implementing Section 33(C)(4) of the Tax Code of 1997.)

Accordingly, the amount of de minimis benefits conforming to the maximum values prescribed for each of the benefits enumerated in Revenue Regulations Nos. 3-98, as amended by Revenue Regulations Nos. 8-2000 and 10-2000 shall not be considered in determining the Php30,000 threshold of "Other Benefits" provided in Section 32(B)(7)(e) of the Tax Code of 1997. However, any amount of fringe benefits paid by the employer that is in excess of the maximum values set in the stated Regulations shall be considered, along with the "Other Benefits", in determining, whether or not the Php30,000 threshold has been exceeded, and the excess thereof shall become taxable to the employee receiving the benefits. (Sec. Sec. 2.78.1 (A)(3), Revenue Regulations No. 2-98, as amended by Revenue Regulations 8-2000).

On the basis of the foregoing, we proceed to respond to your specific concerns.

1. 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.

The meal and food benefits provided to their employees by client companies through Sodexho meal and food vouchers may be tax-exempt, subject to

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