Most banks, if not all, welcomed the issuance of a temporary restraining order (TRO) on April 8, 2015 and a writ of preliminary injunction on April 27, 2015 issued by the Makati Regional Trial Court (RTC) Branch 57 on the Bureau of Internal Revenue (BIR) enjoining the implementation of Revenue Regulations (RR) No. 04-2011.
According to the Makati RTC, the revenue regulation appeared to have violated fundamental principles of taxation and express provisions in the 1997 Tax Code, as amended, and that the banks’ interests or rights would be irreversibly damaged or prejudiced if the injunctive relief is not issued.
Under the Rules of Court, the RTC upon application may issue a TRO to be effective only for a period of 20 days from service on the party or person sought to be enjoined, except as may otherwise be provided. Within this period, the court must order the party enjoined (the BIR) to show cause why the injunction should not be granted. Also, the court must determine within the same period whether or not the preliminary injunction shall be granted, and accordingly issue the corresponding order. In the instant case, the RTC issued the preliminary injunction on April 27, 2015 before the lapse of the 20-day period of effectivity of the TRO.
A preliminary injunction is an order granted at any stage of an action or proceeding prior to the judgment or final order, requiring a party or a court, agency or a person to refrain from a particular act or acts issued to preserve and protect certain rights and interest during the pendency of an action. By virtue of the injunction, the BIR is thus precluded in the meantime from enforcing the provisions of RR No. 04-2011 on banks and other financial institutions until the RTC issues a decision withdrawing the injunction.
RR No. 04-2011 was issued by the BIR on March 15, 2011. It deals with the proper allocation of costs and expenses amongst income earnings of banks and other financial institutions for income tax reporting purposes.
In general, an RBU of a bank pertains to its unit dealing in the local currency whereas the FCDU (or EFCDU) are separate units within the same bank dealing with and operating in foreign currencies. Each of these units earn income from various sources, which may be classified as tax-paid income (income already subjected to final tax), tax-exempt income, or taxable income. These units are components of the same bank, but have separate computation and reporting for income tax purposes.
RR No. 04-2011 prescribes the rules on the allocation of costs and expenses between the RBU and the FCDU: by specific identification; and by allocation. Specific identification, by its name, prohibits claiming of expenses which are not directly attributable to a unit. Under the allocation method, common expenses or expenses that cannot be specifically identified to a particular unit shall be allocated based on percentage share of gross income earnings of a unit to the total gross income earnings subject to regular income tax and final tax, including those exempt from income tax.
Prior to the issuance of the injunction, the BIR had issued letter notices and assessments to various banks pursuant to RR 04-2011. In sum, the assessments resulted from the disallowance of expenses which, according to the BIR, should have been allocated by the banks to its exempt or tax-paid income. According to the BIR, the banks should have allocated part of its common costs and expenses to tax-paid or tax-exempt income, pursuant to RR No. 04-2011.
In response, the banks challenged the validity of RR 04-2011 and filed an action for declaratory relief with application for TRO/preliminary injunction before the RTC-Makati.
It must be emphasized that the issuance of the TRO and preliminary injunction does not mean that RR No. 04-2011 has been struck down by the judiciary as null and void. Until final resolution of Civil Case No. 15-287, the issue is still in limbo. At this point, the banks and the BIR must stand at status quo until the decision of the court is laid down.
To date, the BIR has filed a Motion for Reconsideration before the Makati RTC Branch 57 challenging the grounds relied upon by the court in issuing the preliminary injunction. In an interview, BIR commissioner Kim Jacinto-Henares said the policy of the Bureau is to bring the case all the way to the higher courts. The banks are also expected to protect their interest as some banks have received final assessment notices pursuant to RR 04-2011. Thus, we can expect an appeal from either party as to any decision stemming from this dispute until the Supreme Court stamps it with finality. This precipitates there will be a fight to the end. For now, the banks may have to wait longer until this issue gets legally resolved.
Philip Marion A. Ortal is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.
This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.
source: PH Star
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