1.What tax relief can private schools look forward to?
On December 10, 2021, the President signed into law Republic Act (R.A.) No. 11635 amending Section 27(B) of the National Internal Revenue Code, as amended (Tax Code). R.A. No. 11635 provides that the taxable income of qualified proprietary educational institutions is subject to the 10% corporate income tax rate (or 1% from July 1, 2020 until June 30, 2023 as provided under R.A. No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act). If the gross income of a private or proprietary educational institution arising from trade, business or other activity that is not substantially related to the exercise or performance of its primary purposes or function exceeds 50% of the total gross income derived from all sources, the general regular income tax rate of 25% will be imposed on the entire taxable income. A 'proprietary educational institution' is defined as any private school maintained and administered by private individuals or groups with a permit to operate from the Department of Education, the Commission on Higher Education, or the Technical Education and Skills Development Authority.
R.A. No. 11635 is a welcome development to the private school sector after the issuance of Revenue Regulations (RR) No. 5-2021 on April 8, 2021 (implementing certain provisions of the CREATE Act) which defined 'proprietary educational institutions' as private schools which are non-profit. This meant that private schools should have been established as non-profit corporations in order to qualify for the lower corporate income tax rate of 10% (as well as the temporary tax rate of 1%). The definition of 'proprietary educational institutions' under RR No. 5-2021 could have been brought about by the language in Section 27(B) of the Tax Code which states that "[p]roprietary educational institutions and hospitals which are nonprofit shall pay a tax..." The implementation of RR No. 5-2021 with respect to the taxation of proprietary educational institutions was suspended under RR No. 14-2021 issued on July 28, 2021.
SyCipLaw TIP 1:
The promulgation of R.A. No. 11635 has hopefully cleared the confusion brought about by the issuance of RR No. 5-2021. The amendment to Section 27(B) of the Tax Code has made it clear that the "non-profit" qualification applies to hospitals only. Qualified private schools can avail of the lower tax rate of 10% provided that their gross income from unrelated trade, business or other activities does not exceed 50% of their total gross income.
2. When a taxpayer with a pending protest against a deficiency business tax assessment of a local government unit (LGU) has been denied renewal of its business permit, prompting it to file a Petition for Declaratory Relief with the trial court and ask for interim relief, will the Court of Tax Appeals (CTA) have jurisdiction over a petition for certiorari questioning interlocutory orders issued by the trial court?
Yes. In Mactel Corporation v. The City Government of Makati (G.R. No. 244602, July 14, 2021), the Supreme Court ruled that under R.A. No. 1125, as amended by R.A. No. 9282, the jurisdiction of the CTA includes jurisdiction over "decisions, resolutions, or orders of the Regional Trial Courts (RTC) in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction." However, it must be noted that before the case can be raised on appeal to the CTA, the action before the RTC must be in the nature of a tax case, or one which primarily involves a tax case.
In order for the CTA to take cognizance of a petition for certiorari, the interlocutory order must have been issued by the RTC on a local tax case. A local tax case is understood to mean as a dispute between the LGU and a taxpayer involving the imposition of the LGU's power to levy tax, fees, or charges against the property or business of the taxpayer concerned.
In this case, however, the taxpayer has in its favor a final and executory judgment establishing the proper basis for the assessment of its business taxes. The interlocutory orders being questioned did not rule on the validity of the assessments but merely ordered the LGU to refrain from proceeding further with the assessments until the computation of the taxpayer's business taxes has been determined in accordance with the previous final and executory decision.
In its petition for declaratory relief with the RTC, the taxpayer merely asked the trial court to define its rights and obligations under the final and executory judgment. Hence, while the case may be related to a tax case because the previous final and executory judgment sought to be enforced is a local tax case, the declaratory relief petition is already civil in nature. The assailed orders, therefore, do not fall under the appellate jurisdiction of the CTA.
SyCipLaw TIP 2:
Before elevating a case from the RTC to the CTA, the petitioner must ensure that the case is anchored on a tax issue, i.e., will it involve the application of tax laws?
Examples of local tax cases may involve: the legality or validity of the real property tax assessment, protests of assessments, disputed assessments, surcharges or penalties; the validity of a tax ordinance; claims for tax refund/ credit; claims for tax exemption; actions to collect the tax due; and even prescription of assessments. For these cases, they may be filed with the RTC and eventually, elevated or appealed to the CTA.
3. Are there exceptions to the mandatory nature of the 120-day period given to the Commissioner of Internal Revenue (CIR) to rule on an administrative claim for value-added tax (VAT) refund before a taxpayer can file a judicial claim?
Yes. In Hedcor Sibulan, Inc. v. CIR (G.R. No. 202093, September 15, 2021), the Supreme Court ruled that there are two recognized exceptions to the mandatory and jurisdictional nature of the 120-day period. First, if the CIR, through a specific ruling, misleads a particular taxpayer to prematurely file a judicial claim with the CTA. Second, if the CIR issued a general interpretative rule in accordance with Section 4 of the Tax Code which misleads all the taxpayers into prematurely filing judicial claims with the CTA. The CIR, in such cases, is not allowed to later on question the CTA's assumption of jurisdiction since equitable estoppel has set in.
Bureau of Internal Revenue (BIR) Ruling No. DA-489-03 falls under the second exception, i.e., a general interpretative rule. Issued on December 10, 2003, the ruling expressly provides that a taxpayer-claimant may seek judicial relief with the CTA by filing a petition for review without waiting for the 120-day period to lapse. It was not until October 6, 2010 that BIR Ruling No. DA-489-03 was reversed in CIR vs. Aichi Forging Co. of Asia, Inc., G.R. No. 184823 (Aichi). Hence, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its issuance on December 10, 2003 up to its reversal in Aichi on October 6, 2010.
In this case, the administrative claim was filed on June 25, 2010. Four days later, or on June 29, 2010, the taxpayer filed its judicial claim. The judicial claim was filed well within the issuance of BIR Ruling No. DA-489-03 before it was invalidated by Aichi. Thus, the taxpayer's immediate filing of the petition for review before the CTA without waiting for the prescribed period of 120 days to lapse is permissible.
SyCipLaw TIP 3:
Although the case is about exceptions, it is important for taxpayers to keep abreast of general rules – particularly those relating to prescriptive periods for filing refund claims. Such periods are not just mandatory, but also jurisdictional. Since the burden in claiming tax refunds rests upon the taxpayers, they should ensure compliance with all technical and substantive requirements so their refund claims will not be denied.
Notably, the previous 120-days given to the CIR to process and decide the VAT refund claims had now been reduced to 90 days under the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The TRAIN Law also deleted the remedy of the taxpayer in case of unacted VAT refund claims. However, despite the lack of clarificatory guidelines, it appears that the better rule is to allow a taxpayer the option to appeal to the CTA within 30 days from the lapse of the 90-day period. This would treat the inaction as "deemed a denial." After all, RA No. 1125, as amended by RA No. 9282, provides that the CTA has jurisdiction over inaction by the CIR in cases involving refunds where the Tax Code provides for a specific period of action, in which case the inaction shall be deemed a denial.
4. May a supervening event suspend the two-year reglementary period to file a claim for refund of internal revenue taxes?
No. In PMFTC, Inc. v. Commissioner of Internal Revenue (CTA Case No. 10110, November 25, 2021), the Second Division of the CTA ruled that "it is clear that the administrative and judicial claims for refund or credit of internal revenue taxes must be filed within the two (2)-year prescriptive period, which commences from the payment of the tax; that such period is mandatory and jurisdictional regardless of any supervening cause that may arise after payment".
In this case, the Philippine Tobacco Institute, Inc. (PTI), to which PMFTC, Inc. (PMFTC) is a member, filed a petition for declaratory relief with the Regional Trial Court (RTC) to question RR No. 17-2012 and Revenue Memorandum Circular (RMC) No. 90-2012 – which imposed excise tax on cigarette packs containing 5 and 10 sticks of cigarettes – for imposing taxes not authorized under R.A. No. 10351, or the Sin Tax Reform Law. The RTC granted PTI's petition for declaratory relief. The CIR appealed the RTC's decision to the Supreme Court, which issued a temporary restraining order (TRO), restraining the enforcement of the RTC's decision. During the effectivity of the TRO, PMFTC paid the excise taxes for its cigarette packs, containing less than 20 sticks of cigarettes, for taxable years 2014 to 2015. The Supreme Court eventually affirmed the RTC's decision in the PTI case in a decision rendered in 2017.
In 2019, PMFTC filed an administrative claim for refund and, thereafter, a judicial claim for refund for the excise taxes it paid under protest in taxable years 2014 to 2015. PMFTC argued that the Supreme Court's TRO in the PTI case is a "special circumstance" and that it was "legally and practically prevented from filing a claim for refund or credit on its alleged overpaid excise tax."
The CTA ruled that "[t]he second paragraph of the aforequoted Section 229 of the NIRC of 1997 is plain and clear: 'In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment' Thus, no supervening cause may interrupt the running of the said two (2)-year prescriptive period." The CTA further ruled that it "does not subscribe to [PMFTC's] reasoning to the effect that the filing of the refund claim concerning the subject excise taxes would be a futile exercise. While it may be true that considering [the CIR] would have the tendency to adhere to, and uphold, its issuances, he may deny outright [PMFTC's] administrative claim, upon the filing thereof, or not act on the same at all, the law allows [PMFTC] to lodge its appeal, within the time prescribed, on the denial or inaction of [the CIR], before [the CTA], which would act on it objectively and judiciously." Thus, "nothing prevented [PMFTC] from complying with the mandate of Section 229 of the NIRC of 1997, whether it be the filing of the administrative and judicial claims and/or in observing the two (2)-year prescriptive period."
SyCipLaw TIP 4:
Considering that the two-year prescriptive period in claims for tax refund is mandatory and jurisdictional, regardless of any supervening cause that may arise after payment, the taxpayer should be mindful of the date when it paid the tax and ensure that both its administrative claim and judicial claim are filed before the lapse of the two-year period.
A motion for reconsideration of the decision is currently pending.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
5. Are taxpayers required to show that services were performed in the Philippines in order to qualify for VAT zero rating?
Yes, Section 108(B) of the Tax Code, requires that, in order to qualify for VAT zero rating, the services must be performed in the Philippines by VAT-registered persons.
In Procter & Gamble Asia Pte. Ltd. v. Commissioner of Internal Revenue (CTA EB No. 2301 [CTA Case Nos. 7581 and 7639], November 24, 2021), the CTA En Banc held that "[i]t is indispensable that a claimant of tax refund must prove that the services it rendered to its foreign affiliates must have been performed or rendered in the Philippines and not abroad."
In this case, the petitioner, Procter & Gamble Asia Pte Ltd., filed a claim for refund of unutilized input taxes attributable to its zero-rated sales covering the taxable periods January to March 2005 and April to June 2005. However, the CTA En Banc upheld the decision of the CTA in Division, denying the refund claim on the ground, among others, that petitioner failed to provide adequate evidence that the subject services were performed in the Philippines.
Upholding the finding of the Court in Division, the CTA En Banc held that "there is no evidence on record that will fully convince this Court that the services rendered by petitioner to its client-affiliates abroad were performed in the Philippines. In petitioner's Formal Offer of Evidence filed on July 3, 2009, petitioner did not offer any specific evidence to establish that the subject services were performed in the Philippines." The CTA En Banc held that petitioner cannot rely on the independent certified public accountant's report considering that the report did not refer to any documents or evidence that would show that the services were rendered in the Philippines. Neither can petitioner rely on the Service Agreements which contain a provision allowing the services to be provided by various service providers including the petitioner's head office and regional branches. Thus, the CTA En Banc held that "[c]onsidering that the services may be rendered not only in the Philippines but also in Singapore and in Japan, or outside the normal place of business of the service provider, the Service Agreements submitted by petitioner are not sufficient to prove that the services were rendered in the Philippines."
Finally, as tax refunds are in the nature of tax exemptions, a claimant has the burden of proof to establish the factual basis of the claim for tax credit or refund. Unfortunately, petitioner failed to discharge this burden when it failed to present adequate evidence that the subject services were performed in the Philippines.
SyCipLaw TIP 5:
To the extent possible, service agreements and supporting documents (such as invoices and receipts) should indicate the location of the performance of services. Should parties intend that the subject services will be performed only in the Philippines and cannot be performed by the service provider outside the Philippines, it would be helpful to expressly state this in the service agreement, especially for purposes of showing that the services qualify for VAT zero rating.
A motion for reconsideration of the decision is currently pending.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
6. How should airline companies treat the collection and remittance of domestic/international passenger service charges, also known as terminal fees, that are integrated into the sale of airline tickets?
The BIR issued RMC No. 122-2021 clarifying the tax treatment of integrating the terminal fee at the point of sale of airline tickets. The RMC provides that domestic airline companies collecting the terminal fee from passengers should include the terminal fee in the official receipt that will be issued by the airline company to the passenger. The official receipt should reflect the 12% VAT and VAT exempt components of the terminal fee. The share of the Manila International Airport Authority (MIAA) in the terminal fee should be shown in the official receipt to be issued by the airline company as part of the receipts subject to VAT, while the airport aviation security fee and other fees under Presidential Decree (P.D.) No. 1957 should be reflected as VAT exempt. The VAT component of the terminal fee should be included in the total VAT.
In the case of international airline companies, the terminal fee should be reflected in the airlines' official receipt. The share of the MIAA in the terminal fee, the aviation security fee and other fees under P.D. No. 1957 will be reflected as VAT exempt.
RMC No. 122-2021 illustrates how domestic airline companies subject to VAT or international airline companies that are resident foreign corporations and, thus, subject to VAT on service fees should record in their books (i) the collection of the terminal fee (i.e., the share of the MIAA, the aviation security fee and other fees under P.D. No. 1957) and (ii) the remittance to the MIAA of the terminal fees they have collected.
When the MIAA pays the service fee to the airline companies for collecting the terminal fee, the payment shall be subject to creditable withholding VAT at the rate of 5% and creditable withholding tax of 2% of gross payments. The domestic airline companies shall issue a VAT official receipt for the service fees received from the MIAA. International airline companies, on the other hand, shall treat MIAA's payment of service fees as "other income" subject to the regular corporate income tax.
RMC No. 122-2021 further states that the terminal fee should be treated independently from the Gross Philippines Billings (GPB) tax imposed under Section 28(A)(3) of the Tax Code and the 3% common carrier's tax imposed under Section 118 of the Tax Code because the GPB refers to the amount of gross revenue derived from the carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight while the percentage tax on international carriers under Section 118 refers to gross receipts derived from the transport of cargo from the Philippines to another country. RMC No. 122-2021 clarifies that the terminal fee is a service charge for services performed within the Philippines, and thus, the terminal fee should be treated independently from taxes imposed on revenues derived from the carriage of persons, excess baggage, cargo and mail originating from the Philippines.
SyCipLaw TIP 6:
RMC No. 122-2021 clarifies the tax treatment and illustrates the invoicing requirement and proper recording of terminal fees that airline companies collect for, and remit to, the MIAA when the airline companies sell airline tickets to their customers, including the service fees that airline companies earn for collecting the terminal fees on behalf of the MIAA. Airline companies should thus be able to ensure compliance with the invoicing requirements and recording of the terminal fees as well as the service fees received from the MIAA. Airline companies may find it difficult to justify non-compliance given the guidance set out in RMC No. 122-2021.
7. Is Documentary Stamp Tax (DST) due on the transfer of shares of stock in a Philippine company from the decedent to the heirs?
It depends. In RMC No. 6-2022, the BIR observed that taxpayers appear unaware that certain transactions relating to the transfer of shares of stock are subject to DST. Accordingly, in the case of transfers via succession, the BIR clarified in RMC No. 6-2022 that the following are subject to DST under Section 175 of the Tax Code at the rate of Php1.50 on each Php200.00, or fractional part thereof, of the par value of the shares being transferred:
- Transfer of shares of stock from the decedent's estate to the heirs pursuant to a decedent's will approved by the probate court in a judicial settlement of estate; or
- Transfer by an heir who specifically waives or renounces his share over the inherited shares to another heir/s, regardless of whether the transfer occurs pursuant to a judicial settlement of estate approved by a probate court or through an extrajudicial settlement of estate.
The transfer of shares of stock from the decedent's estate to the heirs through intestate succession (i.e., transfer without a will), on the other hand, is not subject to DST under Section 175 of the Tax Code since ownership over the inherited shares is transferred to the heirs by operation of law.
SyCipLaw TIP 7:
The heirs should be aware that their acts (i.e., a specific waiver or renunciation of their inherited share to another heir) in a testate or intestate succession has tax consequences (e.g., donor's tax and DST). Failure to pay the taxes due as a result of the specific waiver or renunciation will not only make the heirs liable to pay a deficiency tax, but also to penalties such as the 25% surcharge and interest of 12% on the amount of tax that should have been paid. The BIR may likewise refuse to issue the Certificate Authorizing Registration for the transfer of the shares of stock if the taxes are not paid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
