Regional Director BIR RR No.2, Baguio City (CAR) TAX UPDATES Atty. EDUARDO T. BAJADOR Regional Director BIR RR No.2, Baguio City (CAR)

TAX JURISPRUDENCE CIR v. St. Luke’s Medical Center, Inc. GR Nos. 195909 and 195960 (26 September 2012) A proprietary non-profit hospital is subject to 10% tax under Section 27(B) of the 1997 Tax Code. St. Luke’s fails to meet the requirements under section 30 (e) and (g) of the National Internal Revenue Code to be completely tax exempt from all its income. St. Luke’s is therefore liable for deficiency income tax in 1998 at the preferential rate of 10 percent under Section 27 (b) being a proprietary hospital institution of the Tax Code. Records showed that the BIR assessed St. Luke’s in 2002 with deficiency taxes worth P76.06 million – an amount that was reduced to P63.93 million – for 1998 when the hospital posted income of P1.73 billion from patient services. This deficiency included income tax, value-added tax, withholding tax on compensation and expanded withholding tax. St. Luke’s filed an administrative protest, but the BIR failed to act on it within the 180-day period required, thus prompting the hospital to seek an appeal before the Court of Tax Appeals. When the tax appeals court ruled in favor of the hospital, the BIR elevated the case to the Supreme Court for review. In a landmark decision, the Supreme Court has declared that private, non-profit hospitals are subject to income tax. In a decision written by Associate Justice Antonio Carpio, the Court’s Second Division upheld the Bureau of Internal Revenue’s bid to collect some P64 million in income taxes from the St. Luke’s Medical Center. The decision partly reversed an earlier ruling of Court of Tax Appeals that exempted St. Luke’s from paying income tax because it is a non-stock, non-profit corporation. The Supreme Court agreed with the BIR’s assertion that proprietary hospitals like St. Luke’s are still liable for income tax under National Internal Revenue Code, but under preferential rate of 10 percent – much lower than the 32 percent corporate income tax imposed on ordinary corporations. In arriving at the conclusion, the SC reconciled the provisions of Sections 27(B) and 30 of the 1997 Tax Code. A charitable institution, while “organized and operated” exclusively” for charitable purposes, is nevertheless allowed to engage in “activities conducted for profit“ without loosing its tax exempt status. The only consequence is that the “income of whatever kind and character from any of the activities conducted for profit, regardless of the disposition of such income”, shall be subject to tax. St. Luke’s is a non-stock non-profit corporation. Nonetheless, services to paying patients are activities conducted for profit. Such income is subject to income tax, but not to the 30% income tax but to 10% under Section 27(B) of the 1997 Tax Code. With this ruling, the Court junked the claim of the hospital that it should be tax-exempt.

TAX JURISPRUDENCE B. Kintanar v. Ppl Ppl. v. B. Kintanar CTA EB Crim No. 012 (7 May 2012) Ppl. v. B. Kintanar CTA Crim. Case No. 030 (11 Aug 2010) The TP was convicted by the Court under Sec. 255 of the NIRC, which provides the following elements: The accused is a person required by law to make or file a return; The accused failed to make or file the return at the time required by law; and Failure to make or file the return was willful. This is a criminal case filed by the RATE Team which was headed before by DCIR King and DCIR Sales. A little background of the case: The case stemmed from his failure to file his ITRs for TY 2000 & 2001. Together with his wife, Gloria Kintanar, he was charged for tax Evasion under Sec. 255 of the NIRC in June 2005 after it was discovered that he was actually receiving huge amounts of commissions for distributing or selling Forever Living Products Phils, Inc. health products. but failed to report the same income. Kintanar contention was that the tax evasion was not willful since he assigned the company’s accountants to accomplish her tax returns. The CTA convicted the TP based on the doctrine of “willfull blindness”. This case is now widely regarded as a landmark case as the CTA decided that Ms. Kintanar was guilty of "willful blindness," setting a precedent for future tax evasion cases.

TAX JURISPRUDENCE B. Kintanar v. Ppl Ppl. v. B. Kintanar CTA EB Crim No. 012 (7 May 2012) Ppl. v. B. Kintanar CTA Crim. Case No. 030 (11 Aug 2010) A TP’s reliance on his supposed accountant to file his required ITR is considered as an act delegating the performance of his legal duty to the said accountant, and is tantamount to “deliberate ignorance” or “conscious avoidance” on the part of the TP. The CTA held that the TP’s “deliberate refusal or avoidance to verify the contents of these documents and inquire on the authenticity thereof under the circumstances obtaining in this case constitutes ‘willful blindness’ on his part.” “Willful Blindness” is defined as the “[d]eliberate avoidance of knowledge of a crime, esp. by failing to make a reasonable inquiry about suspected wrongdoing despite being aware that it is highly probable. It creates an inference of knowledge of the crime in question

BIR RULINGS BIR Ruling No. 458-2012 (10 July 2012) Payments to a foreign corporation for services performed entirely outside the Philippines are exempt from income tax and VAT. Facts: B Co., a non-resident Singaporean corporation, rendered services for F Co., a domestic corporation. These services were performed by B Co. entirely in Indonesia. F Co. paid service fees to B Co. Issue: Are the service fees paid by F Co. to B Co. subject to Philippine income tax and VAT? Ruling: 1. No. Under Section 23(F) of the Tax Code, a non-resident foreign corporation is taxable only on income derived from sources within the Philippines, and under Section 42(A)(3), income from services is considered derived from sources within the Philippines only if the services are performed in the Philippines. Hence, income from services performed by a non-resident foreign corporation entirely outside the Philippines is exempt from Philippine income tax. 2. No. Under Section 108(A) of the Tax Code, payments for services are subject to VAT only if the services are performed in the Philippines.

BIR RULINGS BIR Ruling No. 495-2012 (31 Jul 2012) Income derived from investments in the Philippines by foreign governments is exempt from income tax and, consequently, from withholding tax. Facts: K Co., an autonomous government body responsible for the management and administration of some of Kuwait’s funds, derives income from its investments in the Philippines such as government bonds, corporate bonds and bank deposits. Issue: Is the income derived by K Co. from investments in the Philippines exempt from Philippine income tax? Ruling: Yes. Under Section 32(B)(7)(a)(i) of the Tax Code, income derived by foreign governments from investments in the Philippines is exempt from income tax and, consequently, from withholding tax.

REVENUE ISSUANCE RMC No. 32-2012 (16 Jul 2012) Clarifies the grant of tax exemption to private contractors for socialized housing projects under the "Urban Development and Housing Act of 1992“ Section 3(r) of R.A. 7279 defines “socialized housing” as follows: “(r) “Socialized housing” refers to housing programs and projects covering houses and lots or homelots only undertaken by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberalized terms on interest payments, and such other benefits in accordance with the provisions of this Act;”

REVENUE ISSUANCE RMC No. 32-2012 (16 Jul 2012) The tax incentive provision, granting exemption from project-related taxes and VAT to project contractors/ developers, is limited to the construction and development of houses and lots or homelots only with a view to reduce the cost of housing units for the benefit of the underprivileged and homeless and to encourage greater private sector participation in socialized housing. The development and/or construction of classrooms, school buildings, multi-purpose halls/covered courts, and livelihood centers falls outside the definition of the term “socialized housing” and cannot qualify for the tax incentives granted under Sec. 20 of RA 7279.

Regional Director BIR RR No.2, Baguio City (CAR) Thank you !!! Atty. EDUARDOT. BAJADOR Regional Director BIR RR No.2, Baguio City (CAR)