BIR Revenue Regulations No. 13-97

January 14, 1998 PSE CIRCULAR FOR BROKERS NO. 006-98 SUBJECT : BIR Revenue Regulations No. 13-97 Amending Further Revenue Regulations No. 7-95 as Last Amended by Revenue Regulations No. 6-97 The Exchange is circularizing the attached BIR Revenue Regulation for the guidance and information of all member-brokers. The most relevant provision of which is quoted hereunder: "'SECTION 4.110-4. Submission of the Names of All Buyers of Goods and Services Subject to Value-Added Tax (VAT) to be Contained in Summary Lists of Sales and the Names of Sellers/Suppliers to be Contained in Summary List of Purchases. cdasaia All persons liable for the value-added tax (VAT) such as manufacturers and wholesalers, among others, shall submit to the Revenue District Offices having jurisdiction over them, on or before the last day of the month immediately following the close of each calendar quarter, EACH AND EVERY NAME, of all buyers and sellers/suppliers of goods services subject to VAT, to be contained in the quarterly Summary Lists of their Sales and Purchases of goods and services . . ." (SGD.) JOSE LUIS U. YULO, JR. President & CEO 5 May 1997 BUREAU OF INTERNAL REVENUE Revenue Region No. 8 5/F Atrium Building, Makati Ave., Makati City Attention : MS. VIRGINIA P. TOMAS Chief, Assessment Division GENTLEMEN/MESDAMES: We write on behalf of our client, MABUHAY VINYL CORPORATION (MVC), with office address at 4/F Gammon Centre, 126 Alfaro Street, Legaspi Village, Makati City. MVC has endorsed to us for reply your Pre-Assessment Notices dated 16 April 1997, which was received last 23 April 1997, regarding alleged income and withholding tax deficiencies for the years 1988 and 1989. Our Atty. Juris B. M. Tomboc has written to you last 22 April 1997, which was received by your good office last 22 April 1997, to express our intention to file our Reply/Protest over said Pres-Assessment Notices within fifteen (15) days from date of receipt or until 06 May 1997. We hereby submit our reply on said Pre-Assessment Notices. I. REGARDING THE ALLEGED DEFICIENCY INCOME TAXES FOR 1988 AND 1989 The assessment for deficient income taxes for the years 1988 and 1989 has prescribed. Note that Section 203 of the National Internal Revenue Code, as amended by Batas Pambansa Blg. 700 provides: "Section 203. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period; Provided, That in a case where a return is filed beyond the period prescribed by law, the three year period shall be counted from the day the return was filed. For the purposes of this section a return filed before the last day prescribed by law for the filing thereof shall be considered filed on such last day." Note that the taxable years under consideration are 1988 and 1989. For the year 1989, the income tax return was filed on 15 April 1990. The BIR, therefore had until 15 April 1993 to issue an assessment. Note, too, that a waiver was issued last 20 July 1995 which was good until 30 September 1995. This, in effect, tolled the running of the prescriptive period. However, from 1 October 1995 to the present, no formal assessment has yet been issued. This amounts to a period of more than three (3) years even with the exclusion of the period of waiver. Hence, pursuant to the aforementioned provision of the NIRC, the Commissioner of Internal Revenue has lost her power to assess and collect alleged deficiency income taxes for the year 1989, more so, for the year 1988. II. REGARDING THE ALLEGED DEFICIENCY WITHHOLDING TAXES FOR 1988 AND 1989 We refer you a summary of the facts that led to this alleged deficiency withholding tax assessment. MVC had foreign currency denominated loans from different foreign banks and foreign corporations which were guaranteed by the Development Bank of the Philippines (DBP). MVC defaulted in the payment of said loans, thus compelling DBP to pay for said loans to the foreign creditors. Thus, for the aforementioned taxable years, the loans were no longer payable to the foreign creditors, but were already payable to DBP by virtue of DBP's subrogation to the rights of the foreign creditors. Note that said loans to DBP were subsequently transferred by the National Government to the Asset Privatization Trust (APT). Note that this transfer by the National Government of the DBP loans to the APT shows that said loans are not anymore payable to any foreign creditor. The change in creditors from foreign creditors to the DBP is material for withholding tax purposes. Note that for non-resident foreign corporations, "interest from foreign loans" is subject to the withholding tax system. For domestic corporations, withholding is only required when interest pertains to "interests on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements." This is provided in Section 24(e)(1) of the NIRC, as amended by Executive Order no. 37, effective 1 August 1986. The interests on the DBP loans are not "interests on Philippine currency bank deposits" for MVC is not a bank, does not perform quasi-banking functions, and does not accept money deposits. Neither are said interests in the nature of "yield or any other monetary benefit from trust funds and similar arrangements" because MVC is a corporation engaged in the manufacturing of polyvinyl chloride. MVC is not engaged in the business of a trust fund. Neither may said interests be considered as interests from deposit substitutes since said loans came from traditional lending activities of DBP. Note that yield or monetary benefits derived by banks from traditional lending activities are not subject to the 15% withholding tax, but are treated as income and subject to the 35% corporate income tax. Therefore, MVC is not liable for any withholding taxes on interest. Hence, MVC is not liable for the deficiency income taxes and deficiency withholding taxes so computed in the Pre-Assessment Notice. cdasaia We shall make ourselves available for a conference regarding the aforementioned matter after the filing of this Reply upon due notice from your office. We shall likewise examine the records of this case which are in your possession on a date that we will later agree upon. Very truly yours, (SGD.) EDUARDO B. CUDALA (SGD.) LORENZO G. LAO