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D FEBRUARY 2006

In this Issue:

· BIR Issuances · SEC Opinion:

JUNE 2006 In this issue of the Tax bits, we extensively examined current tax and corporate jurisprudence to provide our clients and colleagues with a brief but comprehensive set of information intended to keep them abreast of the latest guidelines that affect the corporate world.

BIR REGULATIONS, ORDERS AND CIRCULARS

VAT and EWT Treatment of Freight and Other Incidental Charges Billed by Freight Forwarders. Revenue Memorandum Circular 35-2006 issued by the Bureau of Internal Revenue (BIR) on June 21, 2006, clarifies the tax treatment of charges billed by freight forwarders.

Member of Deloitte

The business of Freight Forwarders is to ensure the delivery of goods or cargoes from a certain pick-up point to their final destination. Their service may be characterized as either Cross-Border Movement of Cargoes or Local Movement of Cargoes. 1. Cross-Border Movement of Cargoes (from Philippines to Foreign Port or vice-versa) · The forwarders act only as integrator of various services. · For VAT purposes, the gross receipts of the forwarder, is limited to the commissions and/or service fees charged to client. · Payment received by the forwarders which are intended for third-party service providers are not considered as part of their gross receipts. · The output tax shall be computed based on the actual gross receipts of the forwarders but in no case below 5% of freight cost per billing statement, which was made the basis of the VAT shifted (input tax) to the Shipper. · For Income Tax purposes, the income tax liability shall always be based on actual gross receipts. 2. Local Movement of Cargoes (within the Philippines) · The forwarders take full responsibility and control in bringing the cargoes to their final destination. · For VAT purposes, once the forwarders issue VAT official receipt for the entire services, it is presumed that the entire payment made is intended to indemnify the forwarders for their services. · Payments to third-party service providers, is the forwarder's cost of doing business (inputs). · Forwarder's gross receipts, depends on how the entire amount received from shipper is treated by the forwarder which is normally reflected on the invoicing procedures adopted.

The Tax Bits Staff Atty. Domingo A. Lagundi, Jr. Tax & Corporate Senior Manager Menchie M. Marzan Tax & Corporate Senior

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Definition of Terms Accessorial Charges ­ refer to standard charges billed by international carries to the forwarders and in turn billed by the forwarders to their clients at cost. Ex: 1. For air carriers · Fuel surcharge · Security surcharge · Air Way Bill Fee 2. For see carriers · Bunker's Adjustment Factor (BAF) · Yen appreciation Surcharge (YAS) · Peak Season Surcharge (PSS) · Advance Manifest Surcharge (AMS) · Terminal Handling Charges (THC) · Documentation/Bill of Lading Fee · Alameda Corridor Surcharge (ACS) · Carriers Security Charge (CSC) Currency Adjustment Factor (CAF) ­ refers to a fee charged by the forwarders covering losses incurred due to fluctuation in the exchange rates between peso and foreign currencies. Freight ­ refers to basic charges of international air or sea carrier in the movement of cargoes billed to forwarders which are in turn passed on by the forwarders to their clients. Inbound Movement ­ refers to the movement of cargoes from foreign port to the Philippines Local Destination Charges ­ refers to fees charged by the forwarders to their clients for their services rendered in the Philippines involving inbound movement. Ex: · · · · · Collect Fee Turn-over/breakbulk fee Trucking, processing Documentation charges Other related charges

Local Origin Charges ­ refers to fees charged by the forwarders to their clients for their services rendered in the Philippines involving outbound movement. Ex: · · · · Trucking, processing Documentation charges Disbursement fee Other related charges

Offshore Destination Charges ­ refers to charges of foreign forwarders/agents billed to the forwarders for the services rendered abroad involving outbound movement which are, in turn, billed by the forwarders to the clients at cost. Offshore Origin Charges ­ refers to charges of foreign forwarders/agents billed to the forwarders for services rendered abroad involving inbound movement which are, in turn, billed by the forwarders to their clients at cost. Outbound Movement ­ refers to the movement of cargoes from the Philippines to a foreign port. Value-Added Tax (VAT) Treatment 1. Outbound Movement · The freight (exclusive of commissions), accessorial charges and offshore destination charges shall not be considered as forming part of gross receipts. · For VAT purposes, below are charges considered as part of gross receipts: Local origin charges; and Actual commission income on the freight. 2. Inbound Movement · The freight (exclusive of commissions), accessorial charges and offshore origin charges shall not be considered as forming part of gross receipts. · For VAT purposes, below are charges considered as part of gross receipts: Local destination charges; CAF; and Actual commission income on the freight. 3. Local Movement · If the forwarder issues a VAT Official Receipt, the entire amount received shall be considered as gross receipt.

Local Movement ­ refers to the movement of cargoes from one place in the Philippines to another place in the Philippines.

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The above mentioned rule shall apply even if the forwarder engaged the service of independent contractor to perform some of the services but the said contractor issue its VAT official receipt to the forwarder (and not to the shipper). If the freight forwarder engaged the services of third-party service provider, the amounts payable to them are treated as reimbursable expenses and/or advance payments and the same are covered by a Non-VAT Acknowledgement Receipt. The amount must not form part of the forwarders' gross receipts.

deduction for income tax purposes, provided that the proper withholding tax has been made by the clients. In the hands of the forwarders, any payments claimed to have been made by the forwarders to the third-party service providers (which are included in the payments of the clients to the forwarders) but which are not covered by the acceptable proofs and relevant documents, shall be treated as part of gross receipts subject to VAT and not allowed as deduction for income tax purposes. Expanded Withholding Tax (EWT) Treatment For EWT purposes, forwarders shall be treated as other contractors (Operator of forwarding establishment) pursuant to Section 2.57.2(E) (4) (d) of RR No. 2-98, as amended, hence, subject to 2% withholding tax. 1. Cross-Borders Transactions · EWT shall be based on gross commissions received, plus local origin/destination charges and CAF computed as follows: 1. For services subject to regular VAT rate: EWT = VAT amount x 2% Rate of VAT 2. For services subject to zero-rate: EWT = Total compensation x 2% · Forwarders are responsible to withhold and remit the 2% EWT on payments to third-party service providers.

Conditions/Procedures for Reimbursable Expenses NOT to be subject to VAT 1. Reimbursable expenses and/or advance payments should be receipted separately using Non-VAT Official Acknowledgement Receipts to be issued by the forwarders to the shippers upon collection. 2. The third-party service providers issued their official receipts in favor of the shippers and not of the forwarders; 3. The forwarder shall record the reimbursable expenses under the account "RECEIVABLE FOR CASH ADVANCES ON BEHALF OF SHIPPERS"; and 4. The forwarders shall attach the original copy of all official receipts issued by the third-party service providers in the name of the shippers to the NONVAT Official Acknowledgment Receipts. Invoicing Requirements · For every sale of service, a VAT registered forwarder shall issue a VAT official receipt in accordance with Revenue Regulations (RR) No. 16-2005. However, for outbound and inbound movements, the forwarders shall be allowed to show reimbursable expenses and the charges subject to VAT under one billing statement. The amount of commission shall be computed at 5% of total freight charges.

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2. Local Transactions · · Forwarders are responsible to instruct the thirdparty to issue the official receipts in the name of the Shippers. Upon payment to third-party, forwarders shall compute and deduct the EWT due and should issue certificate of creditable tax withheld (BIR Form 2307) accordingly. Shippers are responsible to remit to the BIR the EWT on reimbursable expenses upon payment to forwarders.

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Substantiation Requirements The Billing Statement and Official Receipt issued by the forwarders in the name of the client shall, in the hands of the client, be a sufficient proof for claiming a ·

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· · ·

Bioethanol

Official receipts issued by third-party service provider should be attached to the NON-VAT Official Acknowledgement Receipts. The withholding of taxes due shall arise from the time the reimbursement is claimed from the Shippers by the Forwarders. Reimbursable expenses and/or advance payments redounding to the benefit of the forwarder, and all other expenses covered by Forwarder's VAT official receipts shall be subject to EWT.

w/ Bitrex

Fuel

1. Prior to each importation an application for Permit to Import shall be filed with the BIR together with the applicable supporting documents. 2. No subsequent importation may be allowed unless the liquidation reports required by these regulations are fully complied with. 3. Upon arrival of shipment, the same shall be unloaded and transported directly and stored in customs bonded storage tank designated for the purpose; 4. Samples from the respective storage tanks shall be tested to ascertain if it is in accordance with the prescribed standard specification. 5. In case the bioethanol/bioethanol with bitrex & fuel bioethanol does not conform with the standard specification, the applicable excise tax rates imposed under Section 141 of the Tax Code shall be assessed and collected before the removal thereof from the customs bonded storage tank. 6. If the bioethanol with bitres/fuel bioethanol who fails to meet the standard has been released from BOC without payment of excise tax the importer or processor shall be liable without the benefit of deduction to an excise tax at the rate of P0.05 per liter inclusive of penalties 7. The denaturing of bioethanol/bioethanol with bitrex shall be conducted in the presence of representative from Oil IndustryParticipant, DOE, BIR and BOC within 48 hours after the completion of unloading from foreign vessel and transfer thereof to the customs bonded storage tank. 8. Before the release from the customs bonded storage tank, an application for Authority to Release Imported Goods (ATRIG) shall be filed with the BIR, together with copies of other documents necessary for the said release.

Revenue Regulations No. 8-2006 issued on May 9, 2006 provides the Implementing Guidelines on the Taxation and Monitoring of the Raw Materials Used and the Bioetanol-Blended Gasoline (E-Gasoline) Produced under the Fuel Bioethanol Program of the Department of Energy (DOE). The following conditions must be met before a person may be allowed to import and/or purchase locally manufactured fuel bioethanol intended for the manufacture of E-Gasoline: 1. Must be a holder of accreditation certificate as "Oil Industry-Participant" (OIP) in the Fuel Bioethanol Program duly issued by the DOE; and 2. A valid holder of Permit to Operate duly issued by the BIR. For purposes of the Fuel Bioethanol Program, only pure anhydrous bioethanol containing an alcoholic strength of more than 99% bioethanol shall be used, as a blending component, in the production of E-gasoline. A P0.05 per liter excise tax rate under Section 148 (d) of the Tax Code shall be imposed on denatured bioethanol product. Provided, that if it fails to satisfy the aforementioned requirements, the same shall be subject to the applicable excise tax rates prescribed under Section 141 of the Tax Code. Importation of Bioethanol/Bioethanol containing Bitrex & Fuel Bioethanol Generally, in case of importation of Bioethanol/Bioethanol containing Bitrex and Fuel Bioethanol, the following rules and procedures shall be observed:

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9. The Fuel Bioethanol shall at all times contain the markings/marker dye as herein prescribed. 10. In case the customs bonded storage tank is located within the blending premises, an official delivery invoice (ODI) or any other prescribed BIR form shall be issued to cover the tax-paid removal of fuel bioethanol. 11. Total volume of shipment shall be directly transported from carrying vessel and unloaded to the BIR approved storage tanks upon release thereof from customs custody. 12. Prior to blending of fuel bioethanol with unleaded gasoline in order to produce E-gasoline, a sample thereof should be tested. In case it does not conform with the standard specifications, the blending shall not be allowed and the applicable tax rates imposed under Section 141 of Tax Code shall be assessed without the benefit of deduction of the excise tax rate of P0.50 per liter previously paid to the BOC.

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If not yet registered as an excise taxpayer 1. Accreditation Certificate issued by the DOE; 2. Certificate of Registration from the Department of Trade and Industry, in case of individuals; 3. Certificate of Registration from SEC together with Articles of Incorporation and By-Laws, in case of partnership or corporation; 4. Certificate of Registration issued by the BIR; 5. Plat and plan of the production/blending plant (Plat is a map of a specific land area such as a town, section, or subdivision showing the location and boundaries of individual parcels of land subdivided into lots, with streets, alleys, easements, etc., usually drawn to a scale); 6. Bond prescribed under Sec.160 of the Tax Code.

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If already a duly-registered excise taxpayer 1. Accreditation Certificate duly issued by the DOE; 2. Amended Certificate of Registration from DTI or SEC, as the case may be, together with Articles of Incorporation and By-Laws; 3. Amended plat and plan, in case of changes in or additional manufacturing and storage facilities shall be installed dedicated for the production of E-gasoline; and 4. Application for the conversion of the content of existing storage tanks, as the case may be.

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Importation of Bioethanol/Fuel Bioethanol through economic and Freeport zones shall be covered by separate implementing regulations. Sale or transfer of fuel bioethanol by OIP to another OIP shall require a prior written permit issued by the BIR and the DOE. On the other hand, all transfer of fuel bioethanol from one storage facility to another storage facility which are both owned and operated by the same OIP shall, likewise, be covered by a prior permit from the BIR. With respect to gains realized on the E-gasoline resulting from the storage and in transit delivery thereof to the retailers/dealers, the same shall be subject to the corresponding excise tax rate of P4.35 per liter. Deficiency excise tax shall be paid to the BIR by the OIP within 5 days immediately succeeding the month of operation. Any person, who intends to engage in business as producer of E-gasoline shall file an application for Permit to Operate with the BIR. The application shall be accompanied by the following:

The OIP shall submit the following reports on a regular basis: 1. Liquidation Statement ­ monthly liquidation statement shall be prepared and submitted to the BIR within 8 days immediately succeeding the month of operation. 2. Monthly Transcript of ORB ­ shall be submitted to the BIR on or before the 8th day immediately succeeding the month of operation and every month thereafter. 3. DOE Monthly Reports ­ copies of the following monthly reports submitted to the DOE shall be furnished to the Chief, LTFOD, within 5 days from the date of receipt thereof by the DOE: a. Schedule II ­ Imports b. Schedule IV C ­ Report/Receiving Reports

Local

Purchases

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c. Schedule IV D ­ Sales Reports/Removal Reports d. Schedule V ­ Inventory Summary Reports

SEC Opinion No. 06-04 ­ Memorandum Circular No. 3 s. 2006: dated March 30, 2006. Change in Principal Office Address applies only to corporations and partnerships applying for registration with the Commission from February 2006 onwards. There is no need to amend articles of incorporation of a corporation when it changes its principal office address, for as long as the address is in the same municipality or city as the one indicated in the articles of incorporation on file with the Commission. The corporation only has to reflect this change of address in the General Information Sheet submitted to the SEC. To legally effect the change of principal office from one municipality or city to another, it is necessary that the articles of incorporation, not only the By-laws shall be amended in accordance with law. To facilitate the monitoring over corporations the Commission requires corporations and partnerships applying for registration to state the following in the Articles of Incorporation, namely: (1) specific address of the corporation's principal office. (ii) specific residence address of each stockholder, officer, director or trustee. "Metro Manila" shall no longer be allowed as address of the principal office.

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