TAX ALERT

February 28, 2005 WAIVER OF STATUTE OF LIMITATIONS NOT A WAIVER OF RIGHT TO INVOKE DEFENSE OF PRESCRIPTION. Facts: Under Revenue Memorandum Order No. 20-90, the Commissioner must sign waivers for cases involving taxes amounting to more than One Million Pesos (P1,000,000.00). In this case, only the Revenue District Officer signed the waiver. Moreover, the BIRs acceptance of the taxpayers waiver must be made before the expiration of the three-year prescriptive period. Yet, in this case, it could not be determined with certainty when the BIR accepted the taxpayers waiver. The date of the taxpayers execution of the waiver could not have been the date when the BIR accepted the waiver because the RDO who signed the waiver was not yet the RDO on the date of the waivers execution. Finally, under RMO No. 20-90, the waiver must be executed in three (3) copies with the second copy intended for the taxpayer. It is only when the taxpayer receives his copy of the waiver accepted by the BIR that there is compliance with the RMO. In this case, however, the taxpayer was not furnished a copy of the waiver. Held: The waiver of the statute of limitations is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. The law on prescription, being a remedial measure, should be liberally construed in order to afford protection for the taxpayer from any unreasonable examination, investigation or assessment. As a corollary, the exceptions to the law on prescription should be strictly construed. Philippine Journalists, Inc. vs. Commissioner of Internal Revenue, G.R. No. 162852, December 16, 2004. BIR ISSUES REGULATIONS REQUIRING MONTHLY SUBMISSION OF SALES REPORT AND OTHER INFORMATION GENERATED BY CASH REGISTER MACHINES AND MACHINE SALES GENERATING RECEIPT/INVOICE REGISTERED WITH THE BIR. All business establishments are now required to submit on or before the 10th day of the month for each CRM/POS, the gross sales recorded at the end of the prior month. Business establishments must report thru SMS, e-mail, or BIR portal. For meritorious reasons, a taxpayer may be allowed to submit a manual report to the BIR Call Center in order that the electronic submission can be effected thereat. The regulations require business establishments covered by the regulations to enroll their machines on or before March 10, 2005 thru SMS, e-mail, or BIR portal in order to obtain a Machine Identification Number (MIN) for each machine. The regulations also provide that establishments that fail to register the POS/CRM/Sales Receipt generating machine shall update their corresponding registration records with the concerned RDOs. An update of
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2 registration shall also apply to an establishment that has not reported cancelled or abandoned sales generating receipt machines. Moreover, January and February 2005 sales reports shall be submitted as distinct and separate reports on or before March 10, 2005. Revenue Regulations No. 5-2005, February 16, 2005. DEPARTMENT OF FINANCE ISSUES REGULATIONS CONSOLIDATING RELEVANT PROVISIONS OF THE BASES CONVERSION AND DEVELOPMENT ACT OF 1992, THE SPECIAL ECONOMIC ZONE ACT OF 1995, ZAMBOANGA CITY SPECIAL ECONOMIC ZONE ACT OF 1995, AND THE CAGAYAN SPECIAL ECONOMIC ZONE ACT OF 1995. The salient features of the above regulations include the consolidation of the following: (1) the national tax exemption and incentives available to all registered ECOZONE enterprises, CAGAYAN-ZONE enterprises, ZAMBO-ZONE registered enterprises and SUBIC-ECOZONE enterprises who are covered by the special tax regime of 5%; (2) the tax and fiscal obligations under the Bases Conversion and Development Act, the Special Economic Zone Act of 1995, the Zamboanga City Special Economic Zone Act of 1995 and the Cagayan Special Economic Zone Act of 1995; (3) Rules on the removal or withdrawal of articles from the Zone to the customs territory; and (4) the Definition of gross income earned. Revenue Regulations No. 2-2005, February 8, 2005. BIR RULES ON TAX CONSEQUENCES OF SALE OF TRADEMARK BY A U.S. COMPANY TO DOMESTIC CORPORATIONS; SALE OF HEALTH REGISTRATION DATA, MARKETING AND MANUFACTURING KNOWHOW; AND SALE OF INVENTORY ON BEHALF OF THE BUYER PRIOR TO ISSUANCE OF AUTHORITY TO SELL BY BFAD. Facts: L-US, L-Phils., G Inc. and D Inc. propose to enter into a Memorandum of Understanding (MOU) covering the sale of the portfolio of six branded drugs with D Inc. acquiring one brand. To ensure the continuous supply of the drugs in the market pending issuance of a BFAD authority to sell to G Inc. and D Inc., G Inc. and D Inc. shall also purchase finished products and bulk materials from L-Phils. pursuant to a Supply Strategy to be executed by the parties. In the event that such inventory of finished products and bulk materials are not sufficient to cover the demand pending the issuance of the BFAD authority, L-Phils., on the one hand, G Inc. or D Inc., on the other, shall, as needed, enter into a Receivable Assignment Agreement whereby L-Phils. shall sell additional inventory to Z Inc., the primary distributor of L-Phils., at current prices, and thereafter assign the receivables from Z Inc. to G Inc. and/or D Inc. at cost. In view of G Inc. and D Inc.s lack of authority to sell, L-Phils. shall sell the branded drugs to Z Inc. for and on behalf of G Inc. and/or D Inc. until such time that their respective authorities to sell are issued. Ruling: (1) (a) The sale of trademarks contemplated in the MOU involves not only the transfer of the use or right to use the trademark, but of the title or ownership of the trademark in the Philippines. Hence, the transaction price for the sale of trademark is not considered a royalty pursuant to Article 13(3) of the RP-US Tax treaty. (b) Considering that L-US has no permanent establishment in the Philippines, the gain derived from the sale of trademarks and related intellectual properties is not subject to Philippine income tax and, consequently, not subject to withholding tax. (c) The sale is not subject to VAT for the reason that such sale is not related to the regular commercial

3 activity of L-US, nor is it incidental to the creation and delivery by L-US of innovative pharmaceutical-based healthcare solutions. (d) The price paid by G Inc. and D Inc. to LUS is in the nature of a capital expenditure, hence, deductible from taxable income in the form of amortization pursuant to Section 34(F) of the Tax Code of 1997. (2) (a) The proceeds of the sale of trademarks by L-US and payments received by L-Phils. for the sale is not merely the use of or the right to use the health registration data, manufacturing and marketing know-how, thus, should not be treated as royalties, but gains from the sale of assets subject to the 32% regular corporate income tax. (b) The sale of health registration data and manufacturing know-how is not subject to VAT since such sale is not made in the ordinary course of trade or business of L-Phils. Similarly, the sale of marketing know-how is an isolated transaction not subject to VAT. (c) The health registration data, manufacturing and marketing know-how are expected to be of use to G Inc. and D Inc. for the same period within which the respective trademarks are expected to generate profits for G Inc. and D Inc. Hence, the price paid for their acquisition maybe claimed as deductions from gross income as ordinary and necessary expenses directly connected with the sale of medicines in the form of amortization expense over a period of 15 years pursuant to Section 34(F) of the Tax Code of 1997. (3) (a) The sale of existing inventory and bulk materials by L-Phils. to G Inc. and D Inc. is subject to the 32% regular corporate income tax or 2% minimum corporate income tax, if applicable. (b) The sale of inventory is also subject to VAT. (4) (a) Income from the sales made by LPhils. to Z Inc. or other distributors for and on behalf of G Inc. or D Inc. during the pendency of the application for an authority to sell with BFAD, shall constitute the taxable income of G Inc. and D Inc. subject to the 32% regular corporate income tax. (b) Since there is lack of authority on the part of G Inc. and D Inc. to sell pending issuance of BFAD approval, L-Phils., as the licensed manufacturer, shall issue its own invoices and receipts to evidence the sales. L-Phils. shall be liable for the 10% VAT due on the sales. Consequently, L-Phils. shall likewise be entitled to credit the input VAT paid on the importation, purchase or manufacture of the inventory sold. (c) Since the sale is made by L-Phils. for and on behalf of G Inc. and D Inc., and the assignment is made at cost, the assignment of receivables does not result in any income on the part of L-Phils. BIR Ruling DA-641-2004, December 17, 2004. BIR CONFIRMS TAX CONSEQUENCES OF TURN-KEY CONTRACT. An engineering, procurement and construction contract was entered between M Corp (domestic corporation) and J Corp (a foreign corporation with a Philippine branch) consisting of an offshore portion (for the design, fabrication, manufacture, supply and delivery of equipment, all of which shall be performed outside the Philippines by J Corp.) and an onshore portion (for the construction and installation of certain facilities, and the performance of related civil works for the project, to be performed in the Philippines by J Corp.). Creditable Withholding Tax (CWT). The service fee paid by M Corp to J Corp for services rendered under the onshore portion shall be considered income derived from Philippine sources subject to income and consequently to the 2% CWT. The service fee under the offshore portion is not subject to CWT. VAT. Payments arising from the performance of services in the Philippines will be subject to the 10% VAT. The importation into the Philippines from another country of the equipment contemplated by the offshore portion will be subject to the 10% VAT. However, payments arising from

4 services under the offshore portion will not be subject to the 10% VAT. RAMO 1-95. The attribution formula prescribed under RAMO 1-95 will apply in determining the taxable income of J Corp. on the payments arising from the offshore portion of the contract. J Corps income from the offshore portion will form part of its reportable Sales to the Philippines as an integral component of the same attribution formula prescribed under RAMO 1-95. On the other hand, J Corps net onshore income from the project shall be subject to 32% corporate income tax, net of 2% CWT that will be withheld by M Corp. BIR Ruling No. DA-10-2005, January 17, 2005. EXECUTION OF REAL ESTATE MORTGAGE NOT SUBJECT TO CAPITAL GAINS TAX. Facts: Bank C granted a loan to M. The loan was secured by a real mortgage over land owned by D. When M defaulted on its loan, Bank C foreclosed on the property. Being the highest bidder at the public sale, Bank C commenced the consolidation of its title over the land by paying capital gains tax and DST after the lapse of the one-year redemption period. The BIR assessed Bank C for the payment of another round of capital gains tax for Ds mortgage over the property. Ruling: An execution of a real estate mortgage is not tantamount to a sale, exchange or disposition of real property because the elements of transfer of ownership, delivery and payment of money or its equivalent are wanting. Since there was no sale, exchange or disposition of real property when D accommodated Ms loan, no CGT shall be due on the mortgage. BIR Ruling No. DA-661-2004, December 23, 2004. DACION EN PAGO OF NON-PERFORMING LOAN BY BORROWER TO FINANCIAL INSTITUTION EXEMPT FROM TAXES. Under R.A. No. 9178, otherwise known as the Special Purpose Vehicle Act of 2002, the dation in payment of an NPL in favor of a financial institution is exempt from DST, capital gains tax, if the property transferred was held as a capital asset, creditable withholding tax, if the property transferred was held as an ordinary asset, and VAT, provided that the transaction must have occurred within the period from March 19, 2003 to March 19, 2005. BIR Ruling No. DA-002-2005, January 6, 2005; BIR Ruling No. DA-021-2005, January 20, 2005. PARTITION OF PROPERTIES NOT SUBJECT TO CAPITAL GAINS TAX, DST AND VAT. The BIR ruled that partition of properties among co-owners without any consideration is not subject to capital gains tax, DST under Section 196 of the Tax Code of 1997 and VAT considering that there is no sale, exchange or disposition of property. The agreement is subject however to the P15.00 DST as prescribed in Sec. 188 of the Tax Code of 1997. BIR Ruling DA-640-2004, December 17, 2004 RECONVEYANCE OF PROPERTY WITHOUT MONETARY CONSIDERATION NOT SUBJECT TO CAPITAL GAINS TAX AND DST. Facts: In 1964 a deed of sale was executed between Mrs. A and her eldest son over a parcel of land for the purpose of securing a housing loan from the SSS. The said deed of sale has been executed for convenience and without monetary consideration. To be fair

5 among all of Mrs. As heirs and to put everything prospectively to avoid confusion and problems in the future, a deed of sale was executed in 1975 to revert back the property to Mrs. A, again for convenience and without monetary consideration. Ruling: The BIR ruled that considering that the transfer of the subject property is without consideration and was executed only as a requirement for the granting of the SSS loan, the reconveyance of the same in Mrs. As favor is exempt from the payment of capital gains tax and documentary stamp tax prescribed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgement is subject to the P15.00 documentary stamp tax under Section 188 of the same Code. BIR Ruling DA-648-2004, December 21, 2004. AGREEMENT BETWEEN TRUSTOR, TRUSTEE AND BENEFICIARY TO ALLOW BENEFICIARY TO USE CERTAIN PROPERTIES OF TRUSTOR, AS SECURITY FOR ITS LOAN WITH A BANK, NOT SUBJECT TO TAX. On the instruction of the A (as Trustor), B (as Trustee) shall enter into an agreement with C (as Beneficiary) to allow the latter to utilize certain real properties owned by Trustor to secure the loan of the Beneficiary with a certain bank. A Declaration of Trust was executed by the above parties whereby property shall be placed in the name of the Trustee for the convenience of the Principal, the intent being that Trustee shall hold the properties for the benefit of in trust for the Trustor which is the true and beneficial owner thereof. The BIR ruled that the transfer of the real properties from Trustor to Trustee through the Declaration of Trust is not subject to capital gains tax or to creditable withholding tax, considering that the transfer is not for monetary consideration. The transfer is also not subject to VAT, donors tax and DST under Section 196 of the Tax Code of 1997. However, the notarial acknowledgement is subject to the P15.00 documentary stamp tax under Section 188 of the same Code. BIR Ruling DA-657-2004, December 22, 2004; BIR Ruling DA-658-2004, December 22, 2004. TRANSFER OF SHARES PURSUANT TO WORLDWIDE CORPORATE REORGANIZATION NOT SUBJECT TO TAX. The BIR ruled that the proposed transfer of all the outstanding P Corp. shares from D Corp. (a foreign corporation) to C Corp. (a foreign corporation), in accordance with its proposed corporate reorganization to be implemented by the T Group of Companies, is not subject to any Philippine tax since the proposed transfer of shares from D Corp. to C Corp. is pursuant to a legitimate worldwide corporate reorganization and considering that D, C and P Corp. all belong to the T Group of Companies. The BIR also considered the fact that the transferor and the transferee are all subsidiaries of the T Group of Companies and the beneficial ownership of the P Corp. shares will remain within the T Group of Companies. As there is no effective transfer of beneficial ownership, the BIR concluded that no gain would be realized by D Corp. for income tax purposes. BIR Ruling DA-6422004 dated December 17, 2004. TRANSFER OF SHARES IN DOMESTIC CORPORATION BY FOREIGN CORPORATION TO ANOTHER FOREIGN CORPORATION THROUGH PROPERTY DIVIDEND AND RETURN OF CAPITAL NOT PHILIPPINE SOURCE INCOME, HENCE, NOT SUBJECT TO PHILIPPINE INCOME TAX.

6 Forco A, a foreign corporation, holds shares in Forco B, another foreign corporation. Forco B, in turn, owns shares in a Philippine company (Philco). Forco A, which has a Philippine branch, invested in Forco B shares independently of its Philippine branch. Forco B plans to transfer its Philco shares to Forco A via property dividend and/or return of capital. On property dividend: BIR ruled that property dividends issued by Forco B to Forco A, consisting of shares in a Philippine company, are not Philippine source income of Forco A since less than 50% of Forco Bs worldwide income during the last three years were derived from the Philippines. Also, Forco B does not derive taxable income from the transfer of Philco shares because a dividend distribution is not considered a sale or other disposition due to the absence of any consideration. The property dividend, however, is subject to DST. On return of capital: BIR ruled that reduction in capital is considered a partial liquidation. The transfer of shares by a stockholder to a corporation under liquidation in exchange for assets of the liquidating corporation is considered a sale. Gain, if any, derived by Forco A from the surrender of Forco B shares to Forco in exchange for Philco shares is considered non-taxable foreign source income of Forco A. The transfer, however, of Philco shares to Forco A as return of capital is subject to DST. BIR Ruling No. DA-632-2004, December 14, 2004. THE CAPITAL GAINS TAX ON SALE OF REAL PROPERTY IS THE LIABILITY OF THE SELLER Taxpayer X bought a parcel of land from seller Y on installment basis. Upon completion of the payments, Y required the payment of capital gains tax by the buyer before execution of the absolute deed of sale. X sought the opinion of the BIR on his liability to pay capital gains tax. The BIR held that capital gains tax is the liability of the seller. Moreover, the payment of capital gains tax is not a condition precedent for the execution of a deed of sale. BIR Ruling No. 015-2005, January 15, 2005 DETERMINATION OF SUBSTANTIAL CHANGE IN OWNERSHIP AS A RESULT OF MERGER INCLUDED IN NO-RULING AREA. Corp. A requested for BIR confirmation that Corp. As Net Operating Loss Carry-Over (NOLCO), as well as the aggregate NOLCO of Corp. B be carried over to Corp. A and utilized as a deduction from its gross income, pursuant to a merger between Corp. A and B. The BIR declared that it is constrained not to rule on the applicability of NOLCO as a deduction from gross income inasmuch as it would entail a determination as to whether there is substantial and effective change in ownership of Corp. A. The BIR stated that the determination of whether there is/ there is no substantial change in the ownership or enterprise (whether as a result of a merger or otherwise) for purposes of applying the NOLCO provision under Section 34(D)(3) of the Tax Code of 1997, as defined under Revenue Regulations No. 14-2001 is one of the instances identified as a No-Ruling Area under Revenue Bulletin No. 1-2003. BIR Ruling DA-660-2004, December 22, 2004 GAIN RESULTING FROM CONDONATION OF TAXPAYERSS DEBT THROUGH COURT APPROVED DEBT RESTRUCTURING PLAN NOT SUBJECT TO INCOME TAX. FURTHERMORE, CONVERSION OF DEBT

7 INTO EQUITY AS A RESULT OF A DEBT RESTRUCTURING PLAN ALSO NOT SUBJECT TO TAX. The BIR ruled that the debt rehabilitation plan was a result of judicial action and not through the agreement of parties. Accordingly, the gain resulting from the condonation of the taxpayers debt to various creditors shall not be subject to income tax or to donors tax since there is no donative intent on the part of the creditors. Moreover, since the debt to equity conversion is part of the debt restructuring plan, and will only be considered as additional capital investment, the same is likewise not subject to donors tax. BIR Ruling No. DA 028-2005, January 24, 2005. TRANSFER OF PROFITS FROM BRANCH TO HEAD OFFICE WITHOUT PHYSICAL REMITTANCE CONSIDERED CONSTRUCTIVE REMITTANCE SUBJECT TO 15% BRANCH PROFIT REMITTANCE TAX. The increase of the assigned capital by way of the transfer by a branch of its net profits from operations and booking it thru the Net Due to Head Office Account and to Assigned Capital account is subject to 15% BPRT based on the total profits applied or earmarked for remittance without deduction for the tax component thereof. In effect the aforesaid profits will be indirectly remitted by the branch to its head office abroad. It is of course understood that the tax treatment on the transfer of net profits which are credited directly to assigned capital is the same with that of transferring said profits due to head office account. BIR Ruling No. DA-39-2005, January 28, 2005. LIVING QUARTERS FURNISHED TO CERTAIN EMPLOYEES WHEREIN THE HOUSING UNITS ARE 50 METERS FROM THE PLACE OF BUSINESS OF THE EMPLOYER ARE NOT SUBJECT TO FRINGE BENEFITS TAX. Taxpayer is engaged in tourism business. It maintains housing units which are within 50 meters from its business premises. Employees who will reside in the housing units are required to be on-call due to the nature of the employers 24-hour business operations. BIR ruled that the grant of the housing units is not taxable fringe benefits. BIR also ruled that since the living quarters furnished to the employees are for the convenience of the employer, the value thereof is also not taxable compensation income on the part of the employees. BIR Ruling No. DA-635-2004, December 15, 2004. PAYMENT OF LOAN BY SURETY NOT SUBJECT TO DONORS TAX. The payment by the surety of the principal obligation through dacion en pago is not considered a transfer of property by gift because the surety has the right to be indemnified by the borrower. However, the payment of debt or loan obligation through dacion en pago is subject to the capital gains tax presumed to have been realized from the transfer of property, taking into consideration the outstanding balance of the loan as the selling price. BIR Ruling No. DA-006-2005, January 11, 2005. DEBIT NOTES MAY BE ALLOWED AS BASIS TO CLAIM INPUT TAXES. Facts: Under a Distribution Agreement, J purchases products from K at a price which is VAT inclusive. J then sells the products to customers at a certain profit margin, records all sales, and issues its own VAT invoices to customers. As part of its advertising campaign, K would, in certain cases, instruct J to give discounts to customers, with K

8 agreeing to reimburse J for the discounts. In seeking reimbursement for the discounts, J billed K the amount of the discount plus 10% VAT using Debit Notes, which indicated on their face Js VAT registration number and Ks name. J treated the billed amounts to K as part of its sales and paid 10% VAT on the theory that since the discounts were reimbursed, it was as if J did not give any discounts and, therefore, subject to VAT on the full amount of the selling price. K, on the other hand, refused to pay the VAT component of the bills on the ground that the reimbursement for the discounts billed by J is not subject to VAT. Thus, K believes that it is not entitled to claim the VAT component of the bills as its own input VAT credit. K paid only the amount of the basic discount and did not claim any input VAT. Ruling: If K pays the VAT component of Js bills, K will be entitled to claim this as input VAT credit. Under the circumstances, the serially numbered Debit Notes qualify as VAT sales invoices because on their face, the Debit Notes reflect Js VAT registration number and the amounts billed with an indication that such amounts include VAT as required under Sections 113 and 237 of the 1997 Tax Code. The Debit Notes may be allowed as basis to claim input taxes on Ks part as prescribed in Section 110 of the said Code. K is entitled to claim as input VAT the 10% VAT component of Js past billings for the discounts upon payment to J. BIR Ruling No. DA-614-2004, December 6, 2004. PAYMENT OF LOAN THROUGH ASSIGNMENT OF REAL PROPERTY, WHICH PREVIOUSLY HOUSED EQUIPMENT, MACHINERY AND PARTS USED IN MANUFACTURING BUSINESS, NOT SUBJECT TO VAT. Facts: U Inc. ceased operations in October 2001. On April 2, 2002, U Inc., by way of absolute assignment of several parcels of land together with improvements thereon in the amount of P42 Million paid its unpaid liabilities to R Bank amounting to P42 Million. Ruling: The BIR confirmed that the assignment of the foregoing properties in payment of U Inc.s loan is not subject to the 10% VAT. The BIR noted that the real properties, specifically the building, which were absolutely assigned by U Inc. to R Bank, used to house the converting equipment, machinery and parts that were used in the U Inc.s manufacturing business. It is further noted that the assignment was not made in the ordinary course of the regular trade or business of U Inc. The BIR further declared that inasmuch as the said properties are not among the stock in trade of U Inc., and due to the fact that U Inc. was neither engaged in buying and selling of real properties, nor engaged in the leasing of properties, it follows that the assignment of said real properties is exempt from VAT. BIR Ruling DA-669-2004, dated December 28, 2004. TRANSFER OF BUILDINGS AND IMPROVEMENTS NOT PRIMARILY HELD FOR SALE NOT SUBJECT TO VAT. The transferor is engaged in the business of managing and operating the properties comprising a hotel. Hence, since the properties transferred are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, the sale thereof by dacion en pago is not subject to VAT. BIR Ruling No. DA-32-2005, January 27, 2005.

9 HOTELS THAT RENT OUT CARS TO NON-HOTEL GUESTS SUBJECT TO 3% COMMON CARRIERS TAX. Facts: M Inc. is a domestic corporation operating a hotel in Makati City. In the course of its business, M Inc. transports some hotel guests to and from the hotel and to any destination of their choice during their stay in the hotel using hotel owned cars and limousines. M Inc. however also transports non-hotel guests. It has been customary for the hotel to earn revenues from the transportation services not only from its paying guest but also from other customers. Ruling: The BIR ruled that the renting out of cars, although incidental rather than a primary service of the hotel, falls within the definition of a common carrier. Thus, M Inc.s transportation services though merely incidental to its hotel business shall be subject to 3% common carriers tax under Section 117 of the Tax Code of 1997. BIR Ruling DA-643-2004, December 21, 2004. ASSIGNMENT OF PROMISSORY NOTE WHERE THERE IS NO CHANGE IN MATURITY OR REMAINING PERIOD FROM THAT OF THE ORIGINAL INSTRUMENT IS NOT SUBJECT TO DST. Mr. P executed a promissory note in favor of H bank. Before the due date, H bank executed a deed of assignment over the promissory note in favor of Ms. J. The deed of assignment transferring the promissory note is not subject to DST. BIR Ruling No. DA 019-2005, January 18, 2005. IMPLEMENTATION OF DEBT RESTRUCTURING PLAN AND REHABILITATION PLAN, WHICH DOES NOT INVOLVE NEW ISSUANCE OF DEBT OR RENEWAL OR CONTINUANCE OF ANY LOAN AGREEMENT, NOT SUBJECT TO DST. B Corporation sought the restructuring of its debts and suspended payments of all its principal amortizations. Later one of the creditors of B Corporation filed for corporate rehabilitation and obtained court approval. The BIR ruled that under its legislative franchise B Corporation was exempt from the payment of DST. Since B Corporation was exempt then the creditors were liable to pay the DST. However, the BIR ruled that no DST was due since the rehabilitation plan did not constitute a new issuance of debt or renewal or continuance of any loan agreement between the creditors and the debtor but a single document. BIR Ruling No. DA 026-2005, January 24, 2005. PARTICIPATION OF SELLERS IN DEPARTMENT OF TRADE AND INDUSTRY CENTER FOR INTERNATIONAL TRADE EXPOSITIONS AND MISSIONS TRADE FAIRS DOES NOT CONSTITUTE OPERATION OF A BRANCH OR FACILITY. The participation by exhibitors-sellers in short duration trade fairs organized by DTICITEM at designated venues being leased merely for the purpose of showcasing Philippine products without conducting sales transactions does not constitute an operation of a branch or facility. The exhibitors-participants are not required to register their trade fair booths as separate business establishments. Consequently, the payment of the annual registration fee to the BIR will not apply. BIR Ruling No. DA-530-2004, October 19, 2004.

10 BIR ISSUES GUIDANCE ON USE OF FOREIGN CURRENCY IN BOOKS OF ACCOUNTS AND FINANCIAL STATEMENTS. The BIR authorized a taxpayer to use foreign currency in its books of accounts and financial statements subject to the following conditions: (1) financial statements using foreign currency shall contain a translation in Philippine pesos using the exchange rate provided under RMC 26-85, (2) tax returns shall be prepared in Philippine pesos and taxes due shall be paid in Philippine pesos using the exchange rate provided under RMC 26-85, and (3) any return, statement, or other document in which a conversion was made, the rate of exchange shall be indicated thereon. BIR Ruling No. DA-622-2004, December 8, 2004. BIR ALLOWS CREDITING OF OVERPAID FINAL WITHHOLDING TAXES AGAINST FUTURE REMITTANCES OF SAID TAX VIA AMENDMENT OF WITHHOLDING TAX RETURNS AND ALLOWING EXCESS PAYMENTS TO BE CREDITED AGAINST SUCCEEDING REMITTANCES OF FINAL WITHHOLDING TAXES. For the first six months of 2004, the withholding agent erroneously withheld a 15% final withholding tax on income payments that should have been subjected only to a 10% final withholding tax. BIR allowed the 5% overpaid final withholding tax paid for the period from January to June 2004 to be directly credited against the final withholding taxes for the succeeding months of 2004. This can be accomplished by amending the withholding tax returns for January to June 2004 and crediting the excess payments against final withholding taxes to be remitted during the succeeding months. BIR Ruling No. DA630-2004, December 14, 2004. FOR PURPOSES OF COMPUTING THE 5% PREFERENTIAL TAX FOR PEZAREGISTERED ENTERPRISES, PAYMENTS FOR ROYALTIES CONSIDERED PART OF COST OF FINISHED GOODS AND SHOULD BE DEDUCTIBLE FOR PURPOSES OF COMPUTING GROSS INCOME. A PEZA registered corporation subject to the 5% preferential tax rate has a licensing agreement with a Japanese corporation. Under the agreement, the PEZA corporation will pay a 3% royalty fee every quarter. The PEZA Corporation sought the opinion of the BIR on the deductibility of the royalty fees for income tax purposes. The BIR ruled that the treatment of royalties depends on the consideration for which such fees were paid. When the royalties relate to a system or license, royalties are treated as general and administrative expenses, which are not inventoriable costs. When, however, royalties are connected with product design, logo, formula or process, then the payment is capitalized as part of inventories. Therefore payments for royalties related to the transfer of technical information and manufacturing know how should be considered part of the cost of manufacturing the products. BIR Ruling No. DA 017-2005, January 19, 2005. GAIN DERIVED FROM SALE BY A PEZA-REGISTERED CORPORATION OF ITS BUILDING PREVIOUSLY USED IN ITS PEZA-REGISTERED ACIVITIES ENTITLED TO THE 5% PREFERENTIAL TAX. F Company, a PEZA-registered entity sought confirmation from the BIR that its sale of a building previously used by in F Companys PEZA-registered activity is entitled to 5%

11 gross income tax in accordance with RA 7916. The BIR ruled that the sale of the building is subject to 5% gross income tax since the sale of the building was made in the course of winding up the business activities of F Company. BIR Ruling No. DA 027-2005, Janaury 24, 2005.

NOTE: The information provided herein is general and may not be applicable to 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 Atty. Laura Victoria A.S. Yuson-Layug Atty. Terence Conrad H. Bello Atty. Ma. Carlota Christina G. Laio-Santiago Atty. Suzette A. Celicious Atty. Madeline L. Zialcita-Villapando Atty. Kathleen L. Saga cgbaniqued@baniquedlaw.com lvyusonlayug@baniquedlaw.com thbello@baniquedlaw.com cglaino@baniquedlaw.com sacelicious@baniquedlaw.com mlzvillapando@baniquedlaw.com klsaga@baniquedlaw.com