DIVERGENCE IN TAX RELIEF METHODS MEANT THE MFN CLAUSE COULD NOT BE INVOKED iAcademy, a Philippine domestic corporation, entered into a Licensing Agreement with DePaul University (a U.S. resident corporation) to offer a graduate business (MBA) program. Under the agreement, iAcademy pays DePaul royalties equivalent to 20% of the course fee per enrolled student. The royalties relate to the use of DePaul's intellectual property (marks) in connection with the MBA program. iAcademy sought confirmation that the 10% preferential rate under the Philippines-United Arab Emirates (PH-UAE) Tax Treaty should apply through the MFN clause of the PH-US Tax Treaty. In reply, under Section 28(B)(1) of the Tax Code of 1997, as amended, Non-Resident Foreign Corporations (NRFCs) are generally taxed at 25% on Philippine-sourced income, including royalties. The PH-US Tax Treaty allows a reduced rate on royalties — the lowest rate offered to any third state in a similar context may apply via the MFN clause. iAcademy claimed that Article 13(2)(b)(iii) of the PH-US Treaty and Article 12(2) of the PH-UAE Treaty would entitle DePaul to a reduced 10% rate. In reply, the BIR cited the Supreme Court ruling in Cargill Philippines Inc. v. CIR which requires two (2) conditions to invoke the MFN clause: (a) similarity in the subject matter (i.e., same type of royalties); and (b) similarity in the tax relief mechanism to avoid double taxation. While the nature of the royalties was similar under both treaties, the mechanism for double taxation relief differed: the PH-US Tax Treaty uses a limited tax credit method, and the PH-UAE Tax Treaty employs a full deduction method with no express limitation. The divergence in tax relief methods meant the MFN clause could not be invoked. Thus, the royalty payments are subject to a 25% income tax rate under Article 13(2)(b)(i) of the PH-US Treaty. In addition, the licensing of DePaul’s marks for use in the Philippines qualifies as a “sale or exchange of services.” Therefore, a 12% VAT applies under Sections 105 and 108 of the Tax Code of 1997, as amended. iAcademy must withhold and remit the VAT before making payments to DePaul. Due to differing tax relief mechanisms, the MFN clause under the PH-US Tax Treaty cannot be invoked. The royalty payments are taxable at 25% income tax and 12% VAT. [BIR ITAD RULING NO. 016-25, APRIL 14, 2025] ROYALTY PAYMENTS ARE SUBJECT TO A 25% TAX RATE PURSUANT TO PH-MALAYSIA TAX TREATY UNLESS THE ENTERPRISE IS A BOI-REGISTERED ENTITY ENGAGED IN PREFERRED ACTIVITIES S Philippines Inc. (S-PH) is seeking confirmation that the royalty payments made to S Malaysia Sdn Bhd (S-MY) are subject to a 15% income tax rate under the Philippines-Malaysia tax treaty. Both entities operate in the ink manufacturing industry and are affiliated members of the S Group. Under the License Agreement, S-MY granted S-PH a non-exclusive, temporary license to utilize its intellectual property and parts thereof for the production of packaging ink products and the provision of related services. In reply, Section 28(B)(1) of the National Internal Revenue Code of 1997 (Tax Code), as amended, generally imposes a 25% income tax on non-resident foreign corporations. On the other hand, Article 12 of the PH-Malaysia Tax Treaty provides that royalty payments may be taxed in the Philippines at a reduced rate of 15% if the royalties are paid by a registered enterprise engaged in preferred activities. In this case, the royalties were paid for the use of S-MY's intellectual property rights in producing packaging ink and related services. As S-PH failed to establish that it is a BOI-registered enterprise engaged in preferred activities, the reduced 15% rate does not apply. Consequently, the royalties are subject to the higher 25% tax rate under Article 12(2)(b)(ii) of the treaty. Furthermore, the gross receipts earned by S-MY for services rendered to S-PH, including the use of intellectual property rights, are subject to 12% Value-Added Tax (VAT) pursuant to Section 108(A) in relation to Section 105 of the Tax Code. S-PH is required to withhold a 12% VAT using BIR Form 1600 and remit it within ten (10) days after the end of the month in which the payment is made, pursuant to Revenue Regulations (RR) No. 16-2005. [BIR ITAD RULING NO. 15-25, APRIL 14, 2025] | | FAILURE OF THE RTC TO CONSIDER THE PETITIONER’S INACTION ON THE LOA’S VALIDITY CONSTITUTES AN ERROR OF JUDGMENT, NOT A JURISDICTIONAL ERROR, THUS, NOT RECTIFIABLE THROUGH A PETITION FOR CERTIORARI UNDER RULE 65 The Petitioner People of the Philippines filed a Petition for Certiorari challenging the joint Decision of the Respondent, Hon. Nyerson Quilala, Presiding Judge of Branch 28, RTC La Union. The Petitioner alleged that RTC La Union committed grave abuse of discretion, amounting to lack or excess of jurisdiction in acquitting the Private Respondent Lourdes Z. Korshak and LZK Holdings & Development Corporation of the criminal charges for willful failure to pay deficiency taxes, in violation of the Tax Code, and in absolving them of the corresponding civil liability. The Petitioner argued that the Private Respondent admitted the receipt of the Preliminary Assessment Notice (PAN) and Formal Letter of Demand (FLD)/Final Assessment Notice (FAN), filed the reply and administrative protest, but never questioned the validity of the Letter of Authority (LOA) pursuant thereto. Consequently, the FLD/FAN became final, executory and incontestable. On the other hand, the Respondent opposed the institution of the Petition for Certiorari, claiming that their acquittal can no longer be challenged, invoking their constitutional right against double jeopardy, and that the civil aspect of the case could have been appealed through the appropriate remedy. In ruling, the Court held that RTC La Union did not act with grave abuse of discretion, stating that RTC La Union’s failure to consider the Respondent’s inaction on the LOA’s validity constituted an error of judgment, not a jurisdictional error, thus, not rectifiable through a Petition for Certiorari under Rule 65. The Court further emphasized that overturning the acquittal of the Private Respondents would violate their right against double jeopardy, stating that a judgment of acquittal, whether rendered by the trial court or the appellate court, is final, unappealable and immediately executory. Moreover, the Court found that the FLD/FAN was a product of an illegal BIR examination since the person who recommended the deficiency tax was not named in the LOA. Therefore, the Private Respondents cannot be held liable for the deficiency tax liabilities arising from an invalid BIR examination. The Petition for Certiorari is DISMISSED. [PEOPLE OF THE PHILIPPINES VS. HON. NYERSON DEXTER TITO QUILALA TUALLA, IN HIS CAPACITY AS THE PRESIDING JUDGE OF BRANCH 28, REGIONAL TRIAL COURT, FIRST JUDICIAL REGION OF SAN FERNANDO CITY, LA UNION, LOURDES Z. KORSHAK AND LZK HOLDINGS & DEVELOPMENT CORPORATION, CTA SCA CASE NO. 0017, MAY 2, 2025] [THE INUREMENT PROHIBITION UNDER THE TAX CODE WAS INTENDED TO ASCERTAIN THAT NON-STOCK, NON-PROFIT ORGANIZATIONS ARE NOT USED AS TAX SHELTERS THROUGH TAX EXEMPTIONS GRANTED THERETO OR FOR THEIR OFFICERS OR ORGANIZERS TO GAIN OR BENEFIT FROM THE INCOME OR ASSETS OF SUCH ORGANIZATION] [THE COST OF ADMINISTERING & OPERATING THE WHOLESALE ELECTRICITY SPOT MARKET SHALL BE RECOVERED BY THE MARKET OPERATOR THROUGH A CHARGE IMPOSED TO ALL MARKET MEMBERS; PROVIDED, THAT SUCH CHARGE SHALL BE FILED WITH & APPROVED BY THE ERC] [FOR FAILURE TO MEET THE STATUTORY REQUIREMENTS & DEFINING CHARACTERISTICS OF A BUSINESS LEAGUE, A TAXPAYER CANNOT BE CONSIDERED AS SUCH & IS NOT ENTITLED TO INCOME TAX EXEMPTION UNDER SECTION 30(F) OF THE NIRC OF 1997, AS AMENDED] Petitioner Independent Electricity Market Operator of the Philippines, Inc. filed a Petition for Review seeking the reversal of Department of Finance Opinion No. 008 2022 (DOF Opinion), which denied its Request for Review of BIR Ruling No. OT-323-021, in which Respondent Commissioner of Internal Revenue (CIR) allegedly ruled that the Petitioner does not qualify for exemption from income taxation as a business league under Section 30 of the Tax Code of 1997. In the same ruling, the Respondent held that the market fees collected by the Petitioner from market participants and Net Settlement Surplus (NSS) calculated in the course of the settlements of transactions in the Wholesale Electricity Spot Market (WESM) shall be taxable as part of its gross income. The Petitioner argued that as the Market Operator of the WESM, it possesses the characteristics and passes the tests that would make it akin to a business league that is exempt from income taxation. Moreover, the Petitioner contended that it is composed of diverse electric power industry players such as generators, distributors, suppliers, bulk users, and service providers, all of which are mandated to transact in the WESM. Contrarily, the Respondent submitted that the market participants, although registered as WESM members, cannot be said to be of common business interest with the Petitioner as their membership is solely for trading purposes, not to support the Petitioner's objectives. In addition, with respect to the Market Fees and/or NSS, the Respondent asserted that these amounts received by the Petitioner are part of its operational income, benefit the corporation, and are used at its discretion, thus, should be included in its gross income and taxed accordingly. In ruling, Revenue Memorandum Order (RMO) No. 38-2019 enumerates the characteristics of a tax-exempt business league under Section 30(F) of the Tax code, as follows: (1) organized as a business league, chamber of commerce, or board of trade; (2) operated as an association of persons having some common business interest, which limits its activities to work for such common interest; (3) it does not engage in a regular business of a kind ordinarily carried on for profit; (4) it is non-profit; and (5) no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person. Applying these criteria, the Court held that the Petitioner fails to qualify as a "business league" under Section 30(F) of the Tax Code of 1997. Nonetheless, while the Petitioner may not qualify as a tax-exempt entity, the Market Fees it collects from WESM members are not subject to income tax and consequently to withholding tax. In the case at bar, the Market Fees imposed on WESM Members are intended only to recover the actual cost of administering and operating the WESM, in line with the objective of reducing electricity rates for end-users. Furthermore, as laid down in CIR v. The Court of Appeals, there are three elements in the imposition of income tax, to wit: (1) there must be gain or profit; (2) that the gain or profit is realized or received, actually or constructively; and (3) it is not exempted by law or treaty from income tax. Applying the foregoing, the Court finds that no gain or profit arises from NSS, hence, it cannot be subject to income tax. In view of this, the Petition was PARTIALLY GRANTED. The DOF Opinion, affirming the Respondent's ruling that the Petitioner is not an income tax exempt business league was AFFIRMED. However, the Respondent’s opinion that the Market Fees collected by Petitioner from WESM Members are subject to income tax and withholding tax, as well as, its opinion that the Net Settlement Surplus form part of petitioner's gross income, were REVERSED and SET ASIDE. [INDEPENDENT ELECTRICITY MARKET OPERATOR OF THE PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE AND SECRETARY OF FINANCE, CTA CASE NO. 10885, APRIL 30, 2025] | |
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