Client Advisory Letter

Lease on love

DST on financial leases

Citing the Financing Company Act (RA No. 5980), the CTA held that financial leasing is a mode of extending credit and falls within the same category of loans subject to the DST on debt instruments.

However, the DST should be computed on the principal amount of indebtedness which pertains to the cost of the leased property less the guaranty deposit representing the residual value of the property.

(CTA Case No. 8735, promulgated 12 February 2019)

Short-term relationship

Computing DST on advances with terms of less than one year

In computing deficiency DST on short-term advances, the CTA used the general ledger, promissory notes and official receipts to determine the specific number of days each advance was outstanding. However, for advances with no available records to determine the term, the CTA relied on the transaction movements in the GL, i.e., the dates the amount was credited and debited.

(CTA Case No. 8735, promulgated 12 February 2019)

Love knows no bounds

Implication of failure to revalidate the LOA

A revenue officer (RO) has one hundred twenty (120) days from the date of receipt of the LOA by the taxpayer to conduct a tax investigation and to submit the required report of investigation. If the investigation is not completed within the 120-day period, the RO may request the revalidation of the LOA.

The CTA ruled that the failure of the RO to request a revalidation does not nullify the LOA. It will only be a ground for the imposition of disciplinary action and demerit in the performance rating of said RO.

(CTA Case No. 9199, promulgated 8 February 2019)

Cold heart

When a preliminary collection letter constitutes a final decision

The BIR issued a preliminary collection letter (PCL) requesting the taxpayer to settle the tax assessments in the FAN within ten (10) days. The CTA treated said PCL as a final demand letter from the BIR tantamount to a denial of the taxpayer’s request for reconsideration of the FAN.

In other words, the PCL already constitutes the final decision of the BIR on the protest to the FAN. Therefore, the taxpayer had thirty (30) days from receipt of the PCL to appeal to the CTA.

(CTA Case No. 8730, promulgated 17 January 2019)

Love tips

Whether service charges should be subjected to VAT

Service charges collected by hotels, restaurants and other similar establishments that are earmarked and set aside for purposes of distributing the same to the employees should not be subject to VAT.

According to the CTA, gross receipts subject to VAT do not include monies or receipts which do not belong or redound to the benefit of the taxpayer.

(CTA Case No. 9349, promulgated 18 January 2019)

Imperfect match

Utilization of creditable withholding taxes corresponding to prior year’s income

In 2009, the taxpayer utilized creditable withholding taxes (CWT) that correspond to income recognized in 2008. The taxpayer explained that this was due to the fact that its customers-withholding agents only issued the related withholding tax certificates (BIR Form No. 2307) in 2009.

The CTA allowed the late utilization because the CWT was supported withholding tax certificates. It cited Section 2.58.3(B) of RR No. 2-1998 which allows claims for CWT refunds/credits if the income payments were declared as part of gross income and are supported by BIR Form No. 2307 duly issued by the withholding agent.

Note: Section 2.58.3(A) of RR No. 2-1998 provides that the amount of CWT shall be allowed as a tax credit against the income tax liability of the payee in the quarter of the taxable year in which the income was earned or received.

(CTA Case No. 9298, promulgated 21 January 2019)

On my own

Cancellation of unrefuted deficiency tax assessment

In its FDDA, the BIR disallowed excess tax credits carried over to the succeeding year.  However, the BIR did not indicate any reason for the disallowance.

Although the taxpayer failed to refute said disallowance, the CTA, on its own, cancelled the disallowance and the corresponding deficiency income tax assessment. The CTA held that the assessment was void because the BIR did not inform the taxpayer of the law and facts on which the assessment was based.

(CTA Case No. 9298, promulgated 21 January 2019)

Admission of feelings

When input VAT carry-over is allowed to be credited against the VAT assessment

In a deficiency VAT assessment, the BIR argued that the CTA Division erred when it deducted input VAT carried over to the succeeding taxable quarters from the deficiency VAT liability without requiring the taxpayer to substantiate such input VAT.

The CTA explained that substantiation was no longer necessary because the BIR already admitted its existence in the Details of Discrepancies attached to the FAN where the input VAT carry-over was disallowed on the assumption that it was credited against output VAT liabilities in the succeeding taxable years.

(CTA EB No. 1743, promulgated 21 January 2019)

A love misplaced

Serving the FAN to the new address

The BIR mailed the FAN to the old address of the taxpayer. The CTA cancelled the deficiency tax assessments in the FAN because there was no proper service thereof.

Although the taxpayer did not file a formal written notice of its change of address, it was found that the BIR was already aware of the taxpayer’s new address prior to the mailing of the FAN. This was evident in the following BIR-issued correspondences which already reflected the taxpayer’s new address:

• Letters of Authority
• Second and Final Request for Presentation of Books of Accounts and Other Relevant Records
• Notice of Informal Conference

In this light, the CTA ruled that the FAN should have been mailed to the new address.

(CTA Case No. 8782, promulgated 21 January 2019)

Proof of love

When proof of actual shipment is not required

The sales of goods by a VAT-registered supplier to a BOI-registered producer whose products are 100% exported are considered export sales subject to the VAT zero-rate. The CTA held that in a claim for refund/credit of input VAT attributable to such VAT zero-rated sales, the supplier-claimant is not required to prove that the BOI-registered producer actually exported or shipped the goods from the Philippines.

(CTA EB No. 1681, promulgated 28 January 2019)

Lucky in love

When prescribed deficiency tax assessments are nevertheless upheld

On 12 January 2015, the taxpayer received the FAN/FLD containing deficiency income tax, VAT, EWT, WTC and FWT assessments for taxable year 2011. The CTA found that the right of the BIR to assess the following taxes already prescribed:

• VAT for the first three (3) quarters
• EWT, WTC and FWT from January to November 2011

However, since the taxpayer was not able to point out which portions of the EWT and WTC assessments pertains to the months of January to November 2011, the entire taxable year’s assessments for EWT and WTC were considered by the CTA.

(CTA Case Nos. 9213 and 9214, promulgated 30 January 2019)

Withholding affection

Amendments to the withholding tax regulations

The BIR amended the following provisions of RR No. 2-1998 (as recently amended by RR No. 11-2018):

1. Section 2.57.2(P)(1) – 15% EWT on MERALCO refund arising from the SC decision in GR No 141314 to Phase IV customers as approved by the ERB;
2. Section 2.57.2(P)(2) – 10% or 15% EWT on interest paid by MERALCO directly to customers or applied against customer billings;
3. Section 2.57.2(Q) – 10% or 15% EWT on interest paid by other electric DUs directly to customers or applied against customer billings; and
4. Section 2.57.2(S) –15% EWT on interest income derived from any other debt instruments not within the coverage of deposit substitutes or RR No. 14-2012.

The above amendments are effective beginning 1 January 2019.

(Revenue Regulations No. 1-2019, published 11 February 2019)

Lessons from the heart

Amending the guidelines on the Continuing Professional Development Program

The BIR disseminated PRC Resolution No. 2016-990 which contains the Amendments to the Revised Guidelines on the Continuing Professional Development (CPD) Program. The following provisions were amended:

• Creation and composition of CPD Council
• Operational protocol
• Qualifications for accreditation of CPD providers
• CPD credit units
• Maximum creditable units for self-directed and/or lifelong learning
• Quality assurance review
• Matrix of CPD activities
• Prescribed forms and list of documentary requirements

(Revenue Memorandum Circular No. 20-2019, issued 31 January 2019)

Brand-new feeling

New ITR form for individuals earning purely business or professional income

The BIR issued a new ITR, BIR Form No. 1701A, for individuals earning income purely from business/profession who are subject either to the graduated income tax rates (with OSD as mode of deduction) or to the 8% final income tax.

The new ITR shall be used in filing the annual ITR for 2018 due on 15 April 2019. It may be filed manually by downloading and printing the PDF version from the BIR website, or electronically through the Offline eBIRForms Package v7.3.

It is not yet available in the eFPS. However, eFPS taxpayers are required to use the BIR Form No. 1701A in the Offline eBIRForms Package v7.3. If the 2018 ITR has already been filed using the old BIR Form No. 1701, the eFPS taxpayer should re-file using BIR Form No. 1701A marked as an amended return.

(Revenue Memorandum Circular No. 17-2019, issued 24 January 2019)

Courtship rituals

Work-around procedures for applications for PTUs of sales machines

In light of the temporary unavailability of the eAccReg System, the BIR issued standard work-around procedures to be followed by the RDOs, LTAD, ELTRD, LTDOs regarding the issuance of permit to use CRMs, POS machines, receipting system software and other sales machines (collectively, “sales machines”), and SPMs.

In light of these standard work-around procedures, the procedures under RMO No. 10-2005 are suspended.

(BIR Memorandum OPM-CSS-TSPMD No. 2019-01-13, dated 24 January 2019)