This update is taken from a newspaper article entitled “Tax court rules on St. Luke’s dues” published in Business World on December 16, 2008. Hence, the information contained herein is based solely on the article. The case could not be found in the CTA website as of this date.
* St. Luke’s remains to be a non–stock and non–profit corporation, as such it is entitled to tax benefits

 

Facts:

In 2003, the BIR assessed St. Luke’s Medical Center ( “St. Luke’s ) that it owed      Php 218 million citing the Tax Code which imposes a 10% income tax on non-profit schools and hospitals. BIR alleged Section 27 of the Tax Code and it argued that all of St. Luke’s profit were subject to the 10% tax, as the provision states that profits from unrelated or business activities should account for no more than half the total to get a tax exemption. St. Luke’s on the other hand raised Section 30 of the Tax Code which states that non–stock and charitable entities are entirely tax exempt. The dispute reached the Court of Tax Appeals.

 

Issue:

Whether or not St. Luke’s remains to be a non–stock and not–profit corporation?

 

Ruling:

Yes, St. Luke’s remains to be a non–stock and non–profit corporation. However, it is not entirely tax exempt. Non-operating activities such as interest earnings and foreign exchange gains are subject to the corporate income tax.

The Court of Tax Appeals held that Section 30 of the Tax Code applies to the case. It covers non-stock corporations that are at the same time charities. Section 27 does not apply as it covers only non-profit schools and hospitals. St. Luke’s submitted documents to show that no shares of stock had been distributed and that members of the hospital’s board of trustees were all volunteers, with no salaries or allowances. St. Luke’s also showed a certificate from the Social Welfare department recognizing it as a charitable institution, and explained that its Medical Social Department gives free medical services to “underprivileged individuals.”

Court of Tax Appeals also cited a 1965 Supreme Court decision that stated St. Luke’s remained a charitable institution even patients paid fees, as long as funds were “devoted exclusively to the maintenance of the institution.” But the hospital’s “non-operating and other income” must be taxed 32%, the prevailing corporate tax rate for the years 2000 to 2002. The tax court said that St. Luke’s tax liabilities amount to Php 43 million.

 

 

 

To further strengthen their economic ties, Philippines and Japan entered into a Protocol, which amended some of the provisions of the existing Convention for the Avoidance Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

The Protocol, which enhanced the preferential income tax treatments under the 1980 RP-Japan Tax Treaty has the following features:

1. Amendment of the period within which to count the six-month threshold in determining the existence of a permanent establishment in a contracting state in the case of services rendered in said state from “ a period or periods aggregating more than six months within any taxable year “ to “ a period or periods aggregating more than six months within any twelve – month period”;

2. Reduction of the general withholding tax rate on dividends from 25% to 15%;

3. Decrease in the shareholding requirement from 25% to 10% in order to qualify for the 10% preferential dividend tax rate;

4. Reduction of the general withholding tax rate on royalties (except those paid for the use or the right to use cinematographic films and films or tapes for radio or television broadcasting which remains to be taxed at a maximum rate of 15% ranging from 10% to 25%;

5. Imposition of a fixed 10% withholding tax rate on interest arising in a contracting state and paid to a resident of the other contracting state without qualification as to the nature of the transaction from which the interest is paid or the status of the payor;

6. Tax exempt interest includes interest on debts claims guaranteed, insured or indirectly financed by the governments of Japan and the Philippines, including their respective political subdivisions and local subdivisions and local authorities; central bank or wholly owned financial institutions

The Protocol took effect last December 5, 2008. The new tax treaty shall take effect on January 1, 2009.

 

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Veronica Joy C. Catajoy, Revisions to RP-Tax Treaty, Tax or Otherwise, Business World, November 20,2008, Page 2/S1.

 

 

 

The following discusses some important points as regards annualization of withholding taxes of employees:

1.December withholding tax return ( BIR Form 1601 C ). This form is due on January 12-15 next year for filers under the Electronic Filing and Payment System ( EFPS ), depending on their industry grouping, and on January 15 for manual filers.

This is the last withholding return for the year, hence, in addition to the December withholding taxes, this should also cover any adjustments on taxes previously withheld. For this year, the company must also consider the guidelines set by the BIR in Revenue Regulations ( RR ) 010-08 implementing the transition rules for the increases in the personal exemptions that apply for calendar year 2008 as follows:

• Php 35,000 for single taxpayers
• Php 37,500 for heads of family
• Php 41,000 for each married individual and
• Php 16,500 for each qualified dependent child, not exceeding four children.

The surcharges of 25% and 20% interest per annum will be imposed for late filing. If the company runs out of time, it may consider filing based on the tentative amounts calculated and file an amended return later, subject to payment of interest on any additional withholding taxes payable.

2. Annual Information Return of Income Taxes Withheld on Compensation ( BIR Form 1604-CF). This is due on February 2,2009. In this return, the company must provide information on the amount of withholding taxes on compensation that had been remitted to the BIR from January to December 2008. Thus, it is important for the person preparing the return to ensure that the information reported in BIR Form 1604- CF tallies with the amounts indicated in the monthly withholding tax returns ( BIR Form 1601 C ) filed in 2008.

For 2008, the company should consider the revised format of the alphalist under RR 10-2008. If the company is enrolled in the EFPS, this alphalist should be submitted as an attachment through the EFPS pursuant to Revenue Memorandum Circular 71-2004.

3. Information on Hazard Pay

The employer is required to attach to the December return ( BIR Form 1601 C ) a copy of the list submitted to the nearest DOLE Regional/ Provincial Offices – Operations Unit showing the names of minimum wage earners ( MWEs ) who received the hazard pay, their period of employment, amount of hazard pay per month and justification for the hazard pay as certified by the DOLE or allied agency.

4. Employees’ Withholding Statements ( BIR Form 2316 )

The company is required to provide its employees with the Certificateof Compensation Payment/ Tax Withheld ( BIR Form 2316 ) on or before January 31,2009. Failure shall be grounds for the mandatory audit of the payor’s income tax liabilities ( including withholding tax ) upon verified of the payee.

Companies are also required to issue this form to MWES whose income are exempt fro m income tax and consequently from withholding tax, under RA 9504.

BIR Form 2316 also contains a certification to the effect that the employer’s filing of BIR Form 1604- CF shall be considered a substituted filing of the employee’s income tax return to the extent that the amount of compensationand tax withheld appearing in BIR Form 1604-CF is consistent with the amounts indicated in BIR Form 2316.

If the employee is qualified, this portion must be signed by both the employee and employer, attesting that the information has been verified and is true and correct to the best of their knowledge.

 

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Marivic Espano,Let’s Talk Tax, Business World, November 25,2008,page 2/S1.