Banks win round 1 vs BIR policy on income, expenses allocations

THE Makati City Regional Trial Court stopped the Bureau of Internal Revenue (BIR) from implementing Revenue Regulations No. 4-2011 which prescribes the rules on the proper allocation of cost and expenses among the income earnings of banks and other financial institutions for income tax reporting purposes.

Makati RTC Judge Honorio Gualao Jr. issued the ruling after the Bankers Association of the Philippines (BAP) composed of several local and branches of foreign banks filed a petition for declaratory relief with application for a temporary restraining order and/or writ of preliminary injunction.

The restraining order is for 20 days and the court has set a hearing on April 20 for the application for a writ of preliminary injunction.

The objective of RR 4-2011 is to set the rules on income and expenses allocations of banks among their various operations, which are governed by different income tax rules

RR 4-2011 provides that a bank may deduct only those costs and expenses attributable to the operation of the Regular Banking Unit (RBU) to arrive at its taxable income. Any cost or expense related to or incurred in the operation of the foreign currency deposit unit (FCDU)/expanded FCDU (EFCDU) or offshore banking unit (OBU) is not allowed as deduction from the RBU’s taxable income.

Failure to comply with the RR will subject officers of the banks and other financial institutions to criminal liability.

The banks filed a petition before the court to nullify RR 4-2011 after the BIR started issuing preliminary assessment notices (PANs) on several banks.

A PAN shows the deficiency tax assessment as well as the detailed facts and the law, rules and regulations or jurisprudence on which the proposed assessment is based.

Petitioner banks feared that issuance of PAN could lead to a distraint and levy of their properties.

“Should there be distraint and levy, the banks will be deprived possession of their properties, effectively crippling their business operations,” the petition stated.

In their petition, the banks said issuing the RR is not among the instances that the National Internal Revenue Code (NIRC) allowed the delegation of power to issue financial related policies to the Department of Finance (DOF) and the BIR.

“RR 4-2011 is therefore an illegal exercise of quasi-legislative or legislative power. By issuing RR 4-2011, the DOF usurped power that properly belongs to the Legislature. Section 50 of the NIRC, which empowers the BIR Commissioner to allocate expenses in non-arm’s length transactions, does not authorize the DOF to issue rules prescribing a uniform method of allocation, especially within one organization, trade or business,” petitioners said.

Petitioners added that it also violated a provision of the NIRC which gives the taxpayers the freedom to choose the accounting method in computing taxable income and the same RR limits the rights of petitioners to claim deductions which is otherwise allowed under the law.

They further pointed out that it violated their right to due process because it was issued without public consultation.

A hearing was conducted last April 8 that led to the issuance of the TRO.

In its Order, RTC Makati noted that RR 4-2011 fails to indicate any legal basis. The applicants were able to establish their clear legal right to, and the urgency of, the grant of the TRO. The court also found basis to protect the applicants from irreparable injury if RR 4-2011 will be implemented. If not restrained, tax deficiency assessments based on RR 4-2011 will damage the reputation of the banks and erode the public’s trust and confidence.

“We are glad that the court agreed with our position that there is something grievously wrong with Revenue Regulation 4-2011. This is not the first time that our courts of law have come to the rescue of the citizens who feel aggrieved by revenue regulations issued by our tax authorities. We recently got a favorable decision on the PEACe bonds case from the Supreme Court, which invalidated a revenue regulation for taking away tax incentives promised to the investing public at the time government bonds were issued,” lawyer Francis Lim said.

Petitioner banks include Asia United Bank; BDO Unibank, Inc.; Bank of America; Bank of Commerce; BDO Private Bank, Inc.; Citibank, N.A., Philippine Branch; China Banking Corporation; Chinatrust (Phils.) Commercial Bank Corporation; Deutsche Bank AG, Manila Branch; East West Banking Corporation; ING Bank N.V., Manila Branch; Philippine Bank of Communications; Philippine National Bank; Philippine Veterans Bank; PNB Savings Bank; Rizal Commercial Banking Corporation; Security Bank Corporation; Standard Chartered Bank, Philippine Branch; and United Coconut Planters Bank.