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TAX ALERT December 31, 2008

. BIR EXTENDS 15% PREFERENTIAL INCOME TAX RATE APPLICABLE TO ALIEN EMPLOYEES OF REGIONAL HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS UNDER SECTION 25(D) OF THE 1997 NIRC TO ALIEN EMPLOYEES OF A REPRESENTATIVE OFFICE AND FILIPINOS OCCUPYING THE SAME POSITIONS AS THESE ALIEN EMPLOYEES. BIR Ruling No. DA(ECB-007)370-2008 dated October 30, 2008. BIR REITERATES THE RULE FOR DETERMINING WHETHER AN INDIVIDUAL IS A RESIDENT OR NOT. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. BIR Ruling No. DA [I-034]376-2008 dated October 31, 2008. THERE IS NO REQUIREMENT THAT A JOINT VENTURE FORMED FOR CONSTRUCTION PROJECTS HAVE A SERVICE CONTRACT WITH THE GOVERNMENT BEFORE IT CAN BE EXCLUDED FROM THE DEFINITION OF A TAXABLE CORPORATION. Takenaka Corporation Philippine Branch vs. CIR, CTA Case No. 7385 dated November 18, 2008. TO FALL WITHIN THE AMBIT OF SECTION 27(B) OF THE 1997 NIRC, AS AMENDED, SUBJECTING A HOSPITAL TO A TAX OF 10%, IT MUST BE: (1) NON-PROFIT; AND (2) ITS GROSS INCOME FROM UNRELATED TRADE, BUSINESS OR OTHER ACTIVITY MUST NOT EXCEED 50% OF THEIR TOTAL GROSS INCOME FROM ALL SOURCES. ON THE OTHER HAND, TO FALL WITHIN THE AMBIT OF SECTION 30(E) OF THE SAID CODE, WHICH RENDERS THE HOSPITAL A TAX-EXEMPT CORPORATION, IT MUST BE A: (1) NON-STOCK CORPORATION; (2) OPERATED EXCLUSIVELY FOR CHARITABLE PURPOSE; AND (3) NO PART OF ITS NET INCOME OR ASSET SHALL BELONG TO OR INURE TO THE BENEFIT OF ANY MEMBER,

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ORGANIZER, OFFICER OR ANY SPECIFIC PERSON. BEING A MERE NON-PROFIT CORPORATION OR ASSOCIATION ENTITLES THE HOSPITAL TO A 10% TAX RATE, BUT IF IT IS ALSO A NON-STOCK CORPORATION, IT BECOMES TAX-EXEMPT. St. Luke’s Medical Center, Inc. vs. CIR, CTA Case No. 6993 dated November 21, 2008. ADMISSION OF PAY PATIENTS DOES NOT DETRACT FROM THE CHARITABLE CHARACTER OF A HOSPITAL IF ITS FUNDS ARE NONETHELESS DEVOTED EXCLUSIVELY TO THE MAINTENANCE OF THE INSTITUTION. Ibid. IF THE SALE OF PROPERTIES IS SUBJECT TO SUSPENSIVE CONDITIONS (e.g. JUDICIAL TITLING, EXEMPTION FROM CARP BY THE DAR), THE CAPITAL GAINS TAX AND THE DOCUMENTARY STAMP TAX DUE THEREON SHALL ONLY ACCRUE UPON THE FULFILLMENT OF SAID CONDITIONS. BIR Ruling No. DA (C-113) 368-2008 dated October 29, 2008. COURT OF TAX APPEALS (CTA) RULES THAT IN A CLAIM FOR REFUND OF UNUTILIZED INPUT VAT ATTRIBUTABLE TO THE ZERO-RATED SALE OF SERVICES, IT IS ESSENTIAL TO PROVE THAT THE RECIPIENT OF THE SERVICE IS DOING BUSINESS OUTSIDE THE PHILIPPINES. The CTA considered insufficient the petitioner-taxpayer’s presentation of official receipts, billing statements, memo invoices-receivable, memo invoices-payable and bank statements. The CTA added that even in petitioner-taxpayer’s testimonial evidence, there is nothing to establish that the services were rendered to foreign clients doing business outside the Philippines. That the clients are “foreign clients” is not sufficient as the said foreign clients may also be engaged in business in the Philippines, in which case the sale of services are subject to 12% VAT. Accenture, Inc. vs. CIR, CTA Case No. 7046 dated November 13, 2008. CTA REITERATES THAT, FOR VAT PURPOSES, SALES INVOICES MUST SUPPORT THE SALE OF GOODS OR PROPERTIES WHEREAS OFFICIAL RECEIPTS MUST SUPPORT THE SALE OF SERVICES. (Takenaka Corporation – Philippine Branch vs. CIR, CTA Case No. 6886 dated November 4, 2008. NOTE: Includes the usual dissent of Justice Acosta on the matter.) IN A CLAIM FOR REFUND OF UNUTILIZED INPUT VAT, THE APPROPRIATE DOCUMENT TO SUBSTANTIATE INPUT VAT CREDITS ON PAYMENTS MADE TO NON-RESIDENTS IS BIR FORM NO. 1600, THE MONTHLY REMITTANCE RETURN OF VALUE-ADDED TAX AND OTHER PERCENTAGE TAXES WITHHELD. BANK REMITTANCES ARE INSUFFICIENT BECAUSE THEY DO NOT SHOW THE AMOUNT OF VAT PAID AND THE COURT CANNOT VERIFY THEREFROM THE REMITTANCE OF WITHHOLDING VAT. GST Philippines, Inc. vs. CIR, CTA Case No. 6489 dated November 13, 2008.

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PURSUANT TO RA 9136 (THE EPIRA LAW), POWER GENERATION COMPANIES BECAME SUBJECT TO 0%VAT. IT MUST BE ESTABLISHED, HOWEVER, THAT THE ENTITY: (1) IS A GENERATION COMPANY AND (2) DERIVES SALES FROM POWER GENERATION. CE Luzon Geothermal Power Company, Inc. vs. CIR, CTA Case No. 6792 dated November 25, 2008. UNUTILIZED EXCESS CREDITABLE VAT WITHHELD FROM SALES OF GOODS OR SERVICES TO THE GOVERNMENT IS REFUNDABLE. Schneider Electric Industries, S.A. vs. CIR, CTA Case No. 6786 dated November 27, 2008. SUPREME COURT RULES THAT IN A CLAIM FOR REFUND OF INDIRECT TAXES, SUCH AS EXCISE TAX, THE STATUTORY TAXPAYER OR THE PARTY DIRECTLY LIABLE TO PAY THE TAX IS THE PROPER PARTY TO CLAIM THE REFUND. Excise tax on petroleum is an indirect tax. Although the burden to pay an indirect tax can be passed on to the purchaser of the goods, the liability to pay the indirect tax remains with the petroleum manufacturer or seller. When the manufacturer or seller decides to shift the burden of the excise tax to the tax-exempt purchaser, the tax becomes a part of the price of the commodity. In a claim for refund of excise taxes, the petroleum manufacturer who is the statutory taxpayer is the proper party to claim the refund. The exempt entity’s remedy is to invoke its tax exemption before buying the petroleum so that the petroleum manufacturer would not pass on the excise taxes as part of the purchase price. Silkair (Singapore) Pte. Ltd. vs. CIR, GR Nos. 171383 & 172379 dated November 14, 2008. HOWEVER, CTA ALLOWS A PEZA-REGISTERED ENTERPRISE TO CLAIM A REFUND OF EXCISE TAXES PASSED ON TO IT BY THE STATUTORY TAXPAYER. However, in another case, the CTA allowed an EPZA registered enterprise to claim a refund of excise taxes passed on to it by the petroleum manufacturer. The CTA ruled that the fact that it was not the EPZA registered enterprise which paid the taxes directly to the BIR does not have an adverse effect on the claim for refund as the law granting the exemption makes no distinction as to the circumstance when the law shall apply. Philippine Associated Smelting and Refining Corporation vs. CIR, CTA EB Case No. 351 dated November 12, 2008. CTA REITERATES REQUIREMENTS OF A VALID WAIVER OF THE STATURE OF LIMITATIONS AS ENUMERATED IN REVENUE MEMORANDUM ORDER (RMO) NO. 20-90. A waiver of the statute of limitations is not an ordinary agreement but a derogation of the taxpayers’ right to security against prolonged and unscrupulous investigations. It must be carefully and strictly construed. It is governed not by the general provisions of the New Civil Code but by the NIRC. It cannot, therefore, be argued that only the essential elements of a contract (i.e., consent, object certain and cause) are necessary for its validity. CIR v. Intel Technologies Philippines, Inc., CTA EB No. 379 dated November 18, 2008.

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UNDER THE RP-SINGAPORE TAX TREATY, THE RECKONING OF DAYS SERVICES ARE RENDERED CREATING A PERMANENT ESTABLISHMENT IS NOT INTERRUPTED BY THE END OF THE TAXABLE YEAR BUT CONTINUES UNTIL COMPLETION OF THE SAME OR A CONNECTED PROJECT. A corporation which is a resident of Singapore may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation (including consultancy services), through its employees or other personnel, in the same or connected project, continues within the Philippines for a period or periods aggregating more than 183 days. The 183-day period shall be counted based on the total number of days the service is rendered in the Philippines for the entire duration of the same or a connected project. The period shall be reckoned from the start of the project until completion and may span two or more taxable years including all periods resulting from its automatic renewal or extension thereof. BIR Ruling No. DA-ITAD 93-08 dated November 7, 2008. A FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES BUT RENDERING SERVICES THEREIN THROUGH ITS PERSONNEL IS NOT DEEMED TO HAVE A PERMANENT ESTABLISHMENT UNTIL SUCH TIME AS THE PROVISION OF SERVICES BY SUCH PERSONNEL EXCEEDS 183 DAYS. Under the RP-US Tax Treaty, the furnishing of services, including consultancy services, through employees or personnel continuing for a period or periods aggregating more than 183 days for the same or a connected project creates a permanent establishment. For the fiscal years 2002 to 2007, a foreign corporation not engaged in trade or business in the Philippines rendered services in the Philippines through its personnel for an aggregate of 129 days. Consequently, for 2002 to 2007, such foreign corporation is not considered to have a permanent establishment in the Philippines and the compensation it receives for services furnished shall not be subject to income tax. However, for the succeeding years after 2007, the foreign corporation shall be considered to have a permanent establishment as soon as the performance of services in the Philippines by its personnel exceeds 183 days. BIR Ruling No. DA-ITAD 70-08 dated October 29, 2008. AN ROHQ DOES NOT CONSTITUTE A PERMANENT ESTABLISHMENT UNDER THE RP-SINGAPORE TAX TREATY. Under the treaty, a “permanent establishment” is defined as a “fixed place of business in which the business of the enterprise is wholly or partly carried on”. A Regional Operating Headquarter (ROHQ) situated in the Philippines, which, although in the nature of an office, does not carry on the business of the enterprise, whether wholly or partly, cannot be considered a permanent establishment. (BIR Ruling No. DA-ITAD 71-08 dated October 29, 2008) THE STATUS OF A FOREIGN CORPORATION WITH THE SECURITIES AND EXCHANGE COMMISSION THAT STATES THAT THE LATTER IS NOT REGISTERED AS A CORPORATION IN THE PHILIPPINES CAN BE

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CONSIDERED AN INDICATION OF THE UNLIKELIHOOD THAT THE CORPORATION HAS A PERMANENT ESTABLISHMENT IN THE PHILIPPINES. BIR Ruling No. DA-ITAD 70-08 dated October 29, 2008. THE ASSIGNMENT OF OVERSEAS DISTRIBUTION RIGHTS BY A NON-RESIDENT FOREIGN JAPANESE CORPORATION TO A PHILIPPINE CORPORATION IS NOT SUBJECT INCOME TAX UNDER THE RP-JAPAN TAX TREATY. The consideration received by M Japan, a Japanese corporation engaged in the manufacture, sale, supply and distribution of marine propellers and stern equipment and not registered as a corporation/partnership in the Philippines, from M Phils, a domestic corporation, for the assignment by M Japan to M Phils of the right to sell, supply and distribute to overseas customers payable in 60 equal monthly installments is not subject to Philippine income tax under the RP-Japan Tax Treaty. The payments are not in the nature of business profits as the right to sell, supply or distribute to overseas customers is not the type of gods or merchandise sold by M Japan. The payments are also not in the nature of royalties which can include payments for the letting or leasing of intangible or tangible (industrial, commercial or scientific equipment) property since the person who lets or leases property does not extinguish or diminish his ownership and interest over the property when the same is let or leased to another person. The payments are actually in the nature of capital gains but Article 13 of the RP-Japan Tax Treaty applies only if the property is situated in the State concerned (i.e., the Philippines). Since the intangible assigned constituting the right to sell, supply and distribute to overseas customers is not situated in the Philippines, Article 13 dealing with capital gains does not apply. The payments are in the nature of other income covered by Article 22 of the RP-Japan Tax Treaty, which makes such payments taxable only in Japan where the alienator is a resident. BIR Ruling No. DA-ITAD 72-08 dated October 29, 2008. CTA RULES THAT UNDER THE REVISED MAKATI REVENUE CODE, A CORPORATION INVOLVED IN FINANCING THE CONSTRUCTION AND OPERATION OF PRIVATE POWER PLANTS THROUGH BUILD-OPERATE-TRANSFER (BOT) ARRANGEMENTS WITH CUSTOMERS IS CONSIDERED A CONTRACTOR AND IS SUBJECT TO LOCAL TAXES AS SUCH BY THE LOCAL GOVERNMENT WHERE ITS PRINCIPAL OFFICE IS LOCATED. The Local Government Code of 1991 defines a “contractor” as essentially including any person, whether natural or juridical, engaged in the sale of service for a fee. A BOT arrangement involves not only the financing of a project but also the construction, maintenance and operation thereof. Thus, a corporation which finances a BOT arrangement by advancing capital to employ and pay for the services of a contractor which will build power plants is taxable by the local government unit where the principal office is located considering that all the documents and deals are arranged therein even if the power plants are in different localities. In addition, while uncollected sales are deductible from the tax base, it is incumbent upon the taxpayer to present proof as regards which part of the sales are uncollected. Linberg Philippines, Inc. vs. City of Makati, CTA EB Case No. 349 dated November 11, 2008.

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SURCHARGE AND PENALTIES ON LOCAL TAXES MAY BE IMPOSED BY THE LOCAL GOVERNMENT IF THE TAXPAYER MISREPRESENTED ITSELF AND CAUSED A DIFFERENT CLASSIFICATION AND TAX RATE TO BE APPLIED TO IT. Ibid. UNLIKE FOR VAT PURPOSES, AN “EXPORTER” FOR PURPOSES OF IMPOSING LOCAL BUSINESS TAX SHALL REFER TO “THOSE PRINCIPALLY ENGAGED IN THE BUSINESS OF EXPORTING GOODS AND MERCHANDISE, AS WELL AS, MANUFACTURERS AND PRODUCERS WHOSE GOODS OR PRODUCTS ARE BOTH SOLD DOMESTICALLY AND ABROAD” AS PROVIDED UNDER ARTICLE 232 OF THE IMPLEMENTING RULES AND REGULATIONS OF THE LOCAL GOVERNMENT CODE OF 1991. The classification does not depend on the transaction but on the person. Hence, a company that does not export its products but sells it to local companies, which in turn utilize said products as inputs in the manufacture of other products that are exported abroad, is taxable as a manufacturer and not an exporter under The Local Government Code. Steniel Mindanao Packaging Corporation vs. City Treasurer of Davao City, CTA AC No. 39 dated November 27, 2008. Note: The information provided herein is general and may not be applicable in all situations. It should not be acted upon without specific legal advice based on particular situations. If you have any questions, please feel free to contact any of the following at telephone number (632) 633-9418, facsimile number (632) 633-1911, or at the indicated e-mail address: Atty. Carlos G. Baniqued cgbaniqued@baniquedlaw.com Atty. Laura Victoria A.S. Yuson-Layug lvyusonlayug@baniquedlaw.com Atty. Terence Conrad H. Bello thbello@baniquedlaw.com Atty. Suzette A. Celicious sacelicious@baniquedlaw.com Atty. Madeline L. Zialcita-Villapando mlzvillapando@baniquedlaw.com Atty. Kathleen L. Saga klsaga@baniquedlaw.com Atty. Excelsis V. Antolin evantolin@baniquedlaw.com Atty. Cheryll Ann R. Trinidad crtrinidad@baniquedlaw.com Atty. Bernadette V. Quiroz bvquiroz@baniquedlaw.com Past issues of the Tax Alert are available at our website www.baniquedlaw.com.