You are on page 1of 19

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

TAXATION I
QUIZZLER ON INCOME TAXATION
FOREWORD
This Reviewer covers the study of the law on Income Taxation which includes: 1. Title II of the National Internal Revenue Code (NIRC) 2. Statutes related or amending the NIRC 3. Related Revenue Regulations, BIR Rulings and other administrative issuances 4. Cases decided by the Supreme Court As a complement to this reviewer, I suggest you get any book containing the complete codal provisions of the NIRC (either the green codal from Rex Bookstore or the NIRC annotated codal by Casasola and Bernaldo. As for reference books, I would recommend Income Taxation by Mamalateo or Tax Law and Jurisprudence by Vitug and Acosta. As Albert Einstein puts it, the hardest thing in the world to understand is the income tax. May this reviewer serve its purpose in helping us in our efforts in overcoming this challenge and achieve excellence. Yours in Honor and Excellence, Pierre Martin DL Reyes

Q: How do you distinguish schedular treatment from global treatment as used in income taxation?
A: Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified accordingly and are accorded different tax treatments , in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. On the other hand, under the global tax system , all income received by the taxpayer are grouped together, without any distinction as to type or nature of the income , and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate.

Q: To which system does the method of taxation under the NIRC belong?
A: The current method of taxation under the NIRC belongs to semischedular and semi-global tax system.

Q: What are the features of the Philippine Income Tax Law? OVERVIEW OF INCOME TAXATION Q: What is an Income Tax?
A: Income Tax has been defined as a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, emoluments, profits and the like. A: The features are as follows: 1. Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed. 2. Income tax is a progressive tax since the tax base increases as the tax rate increases. 3. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, resident principle and the source principle. 4. The Philippines follows the semi-schedular or semi-global system of income taxation.

Q: Where is the Philippine Income Tax Law embodied?


A: It is embodied in Title II (Tax on Income) of the National Internal Revenue Code (NIRC) as well as in numerous (a) revenue regulations and (b) BIR rulings and other administrative issuances (e.g. Revenue Memorandum Circulars or RMCs).

Q: What are the criteria in imposing Income Tax in the Philippines?


A: The criteria are: 1. Citizenship or nationality principle A citizen of the Philippines is subject to Philippine income tax (a) on his worldwide income, if he resides in the Philippines (b) only on his Philippine source income, if he qualifies as a non-resident citizen where his foreign-source income shall be tax-exempt. 2. Residence or domicile principle An alien is subject to Philippine income tax because of his residence in the Philippines. A resident alien is liable to pay Philippine income tax only from his income from Philippine sources but is taxexempt from foreign-source income 3. Source of income principle An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a non-resident alien or non-resident foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines.

Q: What are the different income tax systems adopted by the Philippines?
A: The types of income tax systems adopted are as follows: 1. Global Tax System where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income. 2. Schedular Tax System where there are different tax treatments of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. 3. Semi-Schedular or Semi-Global Tax System where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or professional income or mixed income compensation and business or professional income) or (b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or other income subject to final withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized by the taxpayer during the year.

Q: What are the types of Philippine Income Tax?


A: The types of Income tax under Title II of the NIRC are: 1. Graduated income tax on individuals 2. Normal corporate income tax on corporations

1|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

3. 4.

Minimum corporate income tax on corporations Special income tax on certain corporations (e.g. private educational institutions, FCDUs, and international carriers) 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset 6. Capital gains tax on sale or exchange of real property located in the Philippines and classified as a capital asset 7. Final withholding tax on certain passive investment incomes 8. Fringe benefit tax 9. Branch profit remittance tax; and 10. Tax on improperly accumulated earnings.

Resident alien Nonresident alien Resident foreign corporation Nonresident foreign corporation Fiduciary

Q: When is income taxable?


A: Income, gain or profit is subject to income tax when the following conditions are present: 1. There is income, gain or profit 2. The income, gain or profit is received or realized during the taxable year; and 3. The income, gain or profit is not exempt from income tax.

Withholding agent

DEFINITION OF TERMS (SECTION 22, NIRC)


NOTE: It is advisable that you memorize or at the very least familiarize yourself with the following terms as you will encounter these terms in the succeeding provisions. Understanding tax requires knowing the definitions of the technical terms.

Shares of stock

Shareholder Person Corporation An individual, a trust, estate or corporation Includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum and other energy operations pursuant to an operating agreement under a service contract with the Government Partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business When applied to a corporation, means created or organized in the Philippines or under its laws When applied to a corporation, means a corporation which is not domestic The term means a citizen of the Philippines: 1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein 2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment on a permanent basis 3. who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. who has been previously considered a non-resident citizen and who

Taxpayer Including includes Taxable year

and

Fiscal year

General Professional Partnerships

Domestic Foreign Nonresident citizen

Paid or incurred and paid or accrued Trade or business Securities Dealer in securities

Bank

Non-bank institution

financial

Quasi-banking activities

arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines with respect to his income derived from sources abroad until date of his arrival in the Philippines An individual whose residence is within the Philippines and who is not a citizen thereof An individual whose residence is not within the Philippines and who is not a citizen thereof A foreign corporation engaged in trade or business within the Philippines A foreign corporation not engaged in trade or business within the Philippines A guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person Any person required to deduct and withhold tax under the provisions of Section 57 (Withholding of Tax at source) Includes shares of stock of a corporation, warrants and/or options to purchase shares of stocks as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs and mutual fund certificates Includes any holder of shares of stock and others which are considered shares of stock under this code (refer to definition of Shares of Stock) Any person subject to tax When used in a definition, it shall not be deemed to exclude other things otherwise within the meaning of the term Means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed Means an accounting period of 12 months ending on the last day of any month other than December Shall be construed according to the method of accounting upon the basis of which net income is computed Includes the performance of the functions of a public office Means share of stock n a corporation and rights to subscribe for or to receive such shares A merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers Every banking institution as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) A financial intermediary as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) authorized by the BSP to perform quasibanking activities Means borrowing funds from 20 or more personal or corporate lenders at any one time, through the issuance, endorsement, or

2|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Deposit substitutes

Ordinary Income

Ordinary loss Rank and employees file

Mutual fund company Trade, business or profession Regional or area headquarters Long-term deposit or investment certificate

Statutory Minimum Wage

Minimum earner

Wage

acceptance of debt instruments of any kind other than deposits for the borrowers own account or through the issuance of certificates of assignments or similar instruments, with recourse, or of purchase agreements for purposes of re-lending or purchasing receivables and other similar obligations An alternative form of obtaining funds from the public (the term public means borrowing from 20 or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account for purposes of re-lending or purchasing receivables and other similar obligations, or financing their own needs or the needs of their agent or dealer Any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1) (which defines what capital assets are and those which are not) Includes any loss from the sale or exchange of property which is not a capital asset Mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code An open-end and close-end investment company as defined under the Investment Code Include performance of services by the taxpayer as an employee A branch established in the Philippines by multinational companies Certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with maturity period of not less than 5 years, the form of which shall be prescribed by the BSP and issued by Banks only to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP Refers to the rate fixed by the Regional Tripartite Wage and Productivity Boar, as defined by the Bureau of Labor and Employment Statistics (BLES) of DOLE A worker in the private sector paid the statutory minimum wage or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned

Commission on Audit (COA) conducted an examination of the books of accounts and records of MERALCO and thereafter recommended, among others, that: (1) income taxes paid by MERALCO should not be included as part of MERALCO's operating expenses and (2) the "net average investment method" or the "number of months use method" should be applied in determining the proportionate value of the properties used by MERALCO during the test year. The ERB adopted the recommendations of the COA and held that income tax should not be treated as operating expense as this should be "borne by the stockholders who are recipients of the income or profits realized from the operation of their business" hence, should not be passed on to the consumers. The decision directed the reduction of the MERALCO rates by an average of P0.167 per kwh and the refund of such amount to MERALCO's customers beginning February 1994 and until its billing cycle beginning February 1998. ISSUE: Whether income tax should be included in the computation of operating expenses of a public utility? HELD: NO. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general, Operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or income. They are items of expenses which contribute or are attributable to the production of income or revenue. On the other hand, Income tax is imposed on an individual or entity as a form of excise tax or a tax on the privilege of earning income. In exchange for the protection extended by the State to the taxpayer, the government collects taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the taxpayer from the State. To charge consumers for expenses incurred by a public utility which are not related to the service or benefit derived by the customers from the public utility is unjustified and inequitable. Accordingly, the burden of paying income tax should be Meralco's alone and should not be shifted to the consumers by including the same in the computation of its operating expenses.

COMMISSIONER OF INTERNAL REVENUE VS. COURT OF APPEALS


GR NO. 108576, JANUARY 20, 1999 FACTS: Don Andres Soriano, a citizen and resident of the United States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR. ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens. Don Andres died, but his estate continued to receive stock dividends as well as his wife Doa Carmen Soriano. Pursuant to a board resolution, ANSCOR redeemed a considerable number of com mon shares from Don Andres estate. As stated in the Board Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the company's foreign exchange remittances in case cash dividends are declared. ANSCOR also reclassified some of Doa Carmens common shares to preferred shares. After examining ANSCOR's books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-atsource based on the transactions of exchange and redemption of stocks. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The CTA ruled that ANSCORs redemption and exchange of the stocks of its foreign stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under Section 83(b) of the then 1939 Internal Revenue Act. ANSCOR avers that it has no duty to withhold any tax either from the Don Andres estate or from Doa Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange

Relevant Cases assigned: REPUBLIC OF THE PHILIPPINES VS. MANILA ELECTRIC COMPANY
GR NO. 141314, NOVEMBER 15, 2002 FACTS: MERALCO filed with the ERB an application for revised rates, with an average increase of P0.21 per kwh in its distribution charge. The ERB granted a provisional increase of P0.184 per kwh subject to the condition that in the event the ERB determines that MERALCO is entitled to a lesser increase in rates, all excess amounts collected by MERALCO shall be refunded to its customers or credited in their favor. The

3|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67. ISSUES: (1) May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? (2) Whether ANSCOR's redemption of stocks from its stockholder and the exchange of stocks can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law? HELD: (1) NO. PD 67 condones the taxpayer. An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax/. As such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax. (2) The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause of Section 83(b) is whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 ( tax on non-resident alien individual) in relation to Section 21 (rates of tax on citizens or residents) of the then 1939 Code. As income, it is subject to income tax which is required to be withheld at source.

revenue officers unsatisfied sought the opinion of the US Treasury Department. The US CIR reversed the opinion of the Attorney-General and decided against the claim of Madrigal. Madrigal paid under protest and brought the action before the Trial Court which ruled in defendants favor. On appeal, petitioner argues that the income should be divided into two equal parts, because of the conjugal partnership existing between him and his wife. The respondents, on the other hand, contend that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage. ISSUE: Whether the income should be divided into two equal parts because of the conjugal partnership existing between Madrigal and his wife? HELD: NO. Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." In this case, Paterno, wife of Madrigal, has an inchoate right, a mere expectancy, in the property of her husband Vicente Madrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property acquired as income after such income has become capital. Paterno has no absolute right to one-half the income of the conjugal partnership. Not being seized of a separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in the Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect. GENERAL PRINCIPLES OF INCOME TAXATION (SECTION 23, NIRC)

MADRIGAL VS. RAFFERTY


GR NO. 12287, AUGUST 7, 1918 FACTS: Vicente Madrigal and Susana Paterno were legally married prior to Jan 1, 1914. The marriage was contracted under the provisions of law concerning conjugal. On Feb 25, 1915, Vicente Madrigal filed sworn declaration with the Collector of Internal Revenue, showing, as his total net income for the year 1914. Subsequently Madrigal submitted the claim that the said amount did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife, and that in computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Madrigal should be divided into two equal parts, one-half to be considered the income of Madrigal and the other half of Paterno. The Attorney-General agreed with Madrigal. The

Q: What are the general principles of income taxation in the Philippines?


A: Except as otherwise provided in this Code, the general principles are: 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and outside the Philippines (Citizenship principle) 2. A non-resident citizen (of the Philippines) is taxable only on income derived from sources within the Philippines (Citizenship principle) 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines (Citizenship principle) 4. An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources

4|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

5.

6.

within the Philippines (Residence and source of income principle) A domestic corporation is taxable on all income derived from sources within and outside the Philippines (Citizenship principle) A foreign corporation, whether engaged or not in trade or business in the Philippines is taxable only on income derived from sources within the Philippines (source of income principle).

TAX ON INDIVIDUALS (EXCEPT ESTATES AND TRUSTS) (SECTIONS 24-26, NIRC) Q: Who are the individual taxpayers?
A: They are: 1. Citizens a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens b. Nonresident Aliens i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines

In other words, under Title II, only resident citizens and domestic corporations are taxable on their worldwide income while the other types of individual and corporate taxpayers are taxable only on income derived from sources within the Philippines . (Remember this!)

KINDS OF INCOME TAXPAYERS


NOTE: Before we proceed to income taxation proper, it is important to know the different kinds of taxpayers first. This is because in analyzing any problem involving income taxation, the first thing to do is to determine who the taxpayer is . The only two exceptions where knowing the taxpayer is immaterial are (1) where the transaction involves sales of shares of stock of a domestic corporation because it is subject to 1% of stock transaction tax or 5%/10% capital gains tax on net capital gain whether the seller is an individual, citizen or alien or a corporation, domestic or foreign and (2) where the real property sold is a capital asset located in the Philippines which is subject to 6% capital gains tax.

Q: Who are citizens of the Philippines?


A: The following are considered Citizens of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the Constitution 2. Those whose fathers or mothers are citizens of the Philippines 3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law

Q: What is meant by residence?


A: Residence refers to an individuals habitual place of abode to which whenever absent, he has the intention of returning.

Q: What are the kinds of income taxpayers?


A: The kinds of income taxpayers under Title II of the NIRC are: A. Individuals 1. Citizens (Section 24, NIRC) a. Resident Citizens b. Nonresident Citizens 2. Aliens a. Resident Aliens (Section 24, NIRC) b. Nonresident Aliens (Section 25, NIRC) i. Engaged in trade or business in the Philippines ii. Not engaged in trade or business in the Philippines 3. Estates and Trusts (Section 60, NIRC) a. Revocable trust b. Irrevocable trust B. Corporations 1. Domestic Corporations (Section 27, NIRC) 2. Foreign Corporations (Section 28, NIRC) a. Resident foreign corporations b. Nonresident foreign corporations 3. Partnerships a. Taxable partnership (Section 73(D), NIRC) b. Exempt partnership i. General Professional Partnership (Section 26, NIRC) ii. Joint venture or consortium undertaking construction activity or engaged in petroleum operations with operating contract with the government

Q: Why is it important to determine whether a citizen is a resident or non-resident?


A: It is important because a person will be taxable on his worldwide income if he is a resident citizen and he shall also be taxable on his income from sources within the Philippines. If he is a non-resident, he shall be exempted on his income from sources outside the Philippines.

Q: Why is there a distinction?


A: A resident citizen is taxed on his worldwide income because he receives protection from the Philippine government even outside the country. As to a non-resident, the Philippines retains personal jurisdiction over the person of the citizen no matter how long he lives in a foreign country for as long as he remains a citizen.

Q: Who is a non-resident citizen?


A: The term means a citizen of the Philippines: 1. who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein 2. who leaves the Philippines during the taxable year to reside abroad either as an immigrant or for employment on a permanent basis 3. who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. who has been previously considered a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines with

(Note that the definitions of all the kinds of taxpayers mentioned above
can be found in Section 22, NIRC. This is why it is important to memorize them!)

5|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

respect to his income derived from sources abroad until date of his arrival in the Philippines

REVENUE REGULATION NO. 9-99


Issued May 24, 1999 amends RMO No. 30-99 by prescribing non-resident citizens, overseas contract workers and seamen to file information returns (BIR Form 1701C or the new computerized Form 1703). Said form, together with other relevant supporting papers, shall be filed to the Foreign Post or the Revenue District Office which has jurisdiction over the place of residence of the taxpayer not later than April 15 following the taxable year. The 1998 returns filed after April 15 but not later than July 15, 1999 will not be subject to penalty charges.

Relevant cases assigned: CONWI VS. COURT OF TAX APPEALS


G.R. L-48532, AUGUST 31, 1992 FACTS: Petitioners are Filipino citizens and employees of Procter and Gamble Philippines. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based in the US. During the years 1970 and 1971 petitioners were assigned, for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines, during which petitioners were paid U.S. dollars as compensation for services in their foreign assignments. When petitioners filed their income tax returns for the year 1970, they computed the tax due by applying the dollar-to-peso conversion on the basis of the floating rate. However, in 1973, petitioners filed with the CIR, amended income tax returns for the above-mentioned years, this time using the par value of the peso pursuant to CB Circular No. 289 as the basis for converting their respective dollar income into Philippine pesos for purposes of computing and paying the corresponding income tax due from them. The aforesaid computation as shown in the amended income tax returns resulted in the alleged overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-payments were filed with respondent Commissioner. CTA agreed with CIRs contention that the proper rate of conversion of petitioners' dollar earnings for tax purposes is the prevailing free market rate of exchange and not the par value of the peso. Petitioners contend that since their dollar earnings do not fall within the classification of foreign exchange transactions and thus, not included in the coverage of CB Circular No. 289 which provides for specific instances when the par value of the peso shall not be the conversion rate used, their earnings should be converted for income tax purposes using the par value. ISSUE: Whether petitioners dollar earnings should be computed using the par value? HELD: NO. CB Circular No. 289 shows that the subject matters involved therein are export products, invisibles, receipts of foreign exchange, foreign exchange payments, new foreign borrowing and investments nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. The law provides that a tax imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance with the schedule. The earnings must be computed based on the uniform rate of exchange from US dollars to pesos for internal revenue tax purposes for the years 1970 and 1971. They are not exempted from this. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Since petitioners already paid in accordance with the uniform rate, there is no reason for CIR to refund any taxes.

Q: Who is a resident alien?


A: A Resident alien is an individual whose residence is within the Philippines and who is not a citizen thereof. He is taxed in the same manner as a resident citizen, except that only his income from Philippine sources is taxable. His income from foreign sources is not liable to Philippine income tax.

Q: Who is a non-resident alien?


A: A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof. A non-resident alien is further classified into (a) engaged in trade or business in the Philippines or (b) not engaged in trade or business in the Philippines. As provided in Section 25(A)(1), if the aggregate period of his stay is 180 days during any calendar year, he shall be deemed a non -resident alien doing business in the Philippines (180-day Rule).

Q: What are the graduated income tax rates on taxable income of individuals?
A: In relation to Section 23 of the NIRC, the taxable income (i.e. the pertinent items of gross income less deductions and/or personal and additional exemptions authorized for such types of income by the Tax Code or other special laws) derived for each taxable year: 1. 2. 3. From all sources within and without the Philippines by resident citizens; From all sources within the Philippines only by a non-resident citizen including overseas contract workers; From all sources within the Philippines only, by a resident alien or a non-resident alien engaged in trade or business in the Philippines

Shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24: Not over P10,000 Over 10,000 but not over P30,000 Over P30,000 but not over P70,000 Over P70,000 but not over P140,000 Over P140,000 but not over P250,000 Over P250,000 but not over P500,000 5% P500 + 10% of excess over P10,000 P2,500 + 15% of the excess over P30,000 P8,500 + 20% of the excess over P70,000 P22,500 + 25% of the excess over P140,000 P50,000 + 30% of the excess over P250,000 P125,000 + 32% of the excess over P500,000

Relevant revenue regulations:

Over P500,000

6|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Note the following:


1. The taxable income here does not include a. Tax on certain passive income under Section 24(B) b. Capital gains from sale of shares of stock not traded in the Stock exchange under Section 24(C) c. Capital gains from sale of real property under Section 24(D) (These are subject to preferential tax rates. See next question) For married individuals, the husband and wife shall compute separately their individual income tax based on their respective total taxable income provided that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income (see also MADRIGAL VS. RAFFERTY above and COMMISSIONER V. SUTER below) Under RA 9504, minimum wage earners shall be exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay and hazard pay shall likewise be exempt from tax.

e.

Winnings from PCSO which are tax-exempt

2.

3.

If the recipient of the above passive income is a non-resident alien engaged in trade or business in the Philippines, the rate is 20% except: a. Royalties on books as well as other literary works and musical compositions which shall be subject to 10% BUT cinematographic films and similar works are subject to 25% tax as provided in Section 28, NIRC b. Interest income from long-term deposit or investment which is tax-exempt c. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates d. Winnings from PCSO which are tax-exempt If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the rate is 25%. They shall be subject to the following rates: 6% beginning January 1, 1988 8% beginning January 1, 1999 10% beginning January 1, 2000 Applies to citizens and resident aliens If the shares of stock is listed but not traded in PSE, the rates are: a. Not over P100,000 5% b. In excess of P100,000 10% If the shares of stock is listed and traded in the PSE, it is subject to 1% of stock transaction tax. (Note that that this is one of the only two exceptions where the kind of taxpayer is immaterial. The rates is uniform whether the seller is an individual, citizen or alien or a corporation, domestic or foreign) Subject to final tax of 6% based on the gross selling price or current fair market value as determined by the Commissioner in accordance with Section 6(E), NIRC whichever is higher. However, if the buyer is the government or any of its political subdivisions or to GOCCs (buyer, not recipient of capital gains), the tax liability shall be either the graduated income tax rates under Section 24(A) or the 6% stated above whichever is higher. If the recipient of the capital gain from sale of real property is an alien whether engaged or not engaged in trade or business in the Philippines , he shall be subject to 6% based on the gross selling

Q: What are the incomes subject to preferential tax rates and what are the tax rates applicable to each? A: As a general rule, income, gain or profit derived by an individual
during the taxable year shall be subject to the graduated income tax rates. As exceptions, certain income subject to tax are not subject to the graduated tax rates stated previously and are subject to preferential tax rates. They are: 1. Tax on certain passive income under Section 24(B) a. Interests, royalties, prizes and other winnings under Section 24(B)(1) b. Cash and/or property dividends under Section 24(B)(2) Capital gains from sale of shares of stock not traded in the Stock exchange under Section 24(C) Capital gains from sale of real property under Section 24(D) Compensation income of alien and Filipino employees of a. Regional or area headquarters and regional operating headquarters of MNCs under Section 25(C) b. Offshore Banking Units under Section 25(D) c. Foreign petroleum service contractors and subcontractors under Section 25(E) Cash and Dividends Property

Capital Gains from sale of shares of stock of a domestic corporation

2. 3. 4.

The preferential rates are as follows: Interests, royalties, prizes and other winnings Citizens and Resident aliens are subject to 20% except: a. Interest income from a depository bank which is subject to 7.5% b. Interest income from long-term deposit or investment which is tax-exempt c. Royalty on books as well as other literary works and musical compositions which are subject to 10% d. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates

Capital gains from sale of real property

7|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

price or fair market value, whichever is higher. Compensation income of alien and Filipino employees of Regional or area headquarters and regional operating headquarters, Offshore Banking Units, Foreign petroleum service contractors and subcontractors. The applicable tax rate is 15% on their gross income from sources within the Philippines.

Relevant cases: OBILLOS VS. COMMISSIONER


G.R. NO. L-68118, OCTOBER 29, 1985 FACTS: Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots located at Greenhills. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The Torrens titles issued to them would show that they were co-owners of the two lots. After holding the two lots for more than a year, the petitioners resold them. They derived from the sale a total profit. They treated the profit as a capital gain and paid an income tax. One before the expiration of the five-year prescriptive period, the CIR required the four petitioners to pay corporate income tax in addition to individual income tax on their shares thereof. The CIR considered the share of the profits of each petitioner as a " taxable in full (not a mere capital gain of which is taxable) and required them to pay deficiency income taxes. Thus, the petitioners are being held liable for deficiency income taxes and penalties in addition to the tax on capital gains already paid by them. The theory of the CIR is that the four petitioners had formed an unregistered partnership or joint venture. The petitioners protested. The CTA sustained the CIRs assessment. Hence, this appeal. ISSUE: Whether the petitioners should be considered to have formed an unregistered partnership? HELD: No. It is an error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed to buy the two lots, resold the same and divided the profit among themselves. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. A Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation.

Relevant revenue regulations: REVENUE REGULATION NO. 8-98


This amended pertinent portions of RRs Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property. Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days following each sale or disposition of real property. Payment of the CGT will be made to an Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having jurisdiction over the place where the property being transferred is located. Creditable withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer on the sale, transfer or exchange or real property classified as ordinary asset will be paid by the withholding agent/buyer upon filing of the return with the AAB located within the RDO having jurisdiction over the place where the property being transferred is located. Payment will have to be done within 10 days following the end of the month in which the transaction occurred , provided, however, that taxes withheld in December will be filed on or before January 25 of the following year.

REVENUE REGULATION NO. 10-98


This prescribes the regulations to implement RA No. 8424 relative to the imposition of income taxes on income derived under the Foreign Currency Deposit and Offshore Banking Systems. Specifically , interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable.

Q: Is a co-ownership a taxable entity for the purpose income tax?


A: No. A co-ownership is not considered a separate taxable entity or a corporation as defined under Section 22(B). The co-owners in a coownership report their share of the income from the property owned in common by them in their individual tax returns for the year. The co-ownership is not converted into a partnership where the transactions of the co-owners intended to liquidate the co-ownership are few or isolated and the element of habituality is not present.

Q: What is a general professional partnership?


A General professional partnership (GPP) are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

8|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Q: Is a GPP liable for income tax?


A: No. A GPP is not considered a taxable entity for income tax purposes. Section 26 of the NIRC provides that persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacities computed on their respective distributive shares of the partnership profit.

Relevant cases: COMMISSIONER V. SUTER


G.R. NO. G.R. NO. L-25532, FEBRUARY 28, 1969 FACTS: A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The limited partnership was registered with the SEC. The firm engaged, among other activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and amusement machines, their parts and accessories. In 1948, Suter and limited partner Spirig got married and thereafter, limited partner Carlson sold his share in the partnership to Suter and his wife. The limited partnership had been filing its income tax returns as a corporation, without objection by the CIR until in 1959 when the CIR, in an assessment, consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency income tax against Suter. Suter protested but was denied by the CIR. He appealed to the CTA reversed the CIRs assessment. Hence, this appeal by the CIR. ISSUE: (1) Whether or not the partnership was dissolved after the marriage of Suter and Spirig and the subsequent sale to them by the remaining partner, Carlson, of his participation in the partnership? (2) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for income tax purposes, considering that respondent Suter and his wife actually formed a single taxable unit? HELD: (1) NO. A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations to each other are prohibited from entering into universal partnerships. It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. The CIR failed to observe that William J. Suter "Morcoin" Co., Ltd. was not a universal partnership, but a particular one . A universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else " all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of money. The subsequent marriage of the partners does not operate to dissolve it, as such marriage is not one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce. (2) NO. The capital contributions of partners Suter and Spirig were separately owned and contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their respective separate property. Thus, the individual interest of each consort in in the limited partnership did not become common property of both after their marriage in 1948. The partnership has a juridical personality of its own, distinct and separate from that of its partners. The limited partnership's separate individuality makes it impossible to equate its income with that of the component members. As the limited

partnership under consideration is taxable on its income, to require that income to be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with the Code: for the Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compaias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the duly registered general partnership. The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income. As to CIRs argument that the income of the limited partnership is constructively the income of the spouses and forms part of the conjugal partnership of gains, the conjugal partnership of gains is not a taxable unit. What is taxable is the "income of both spouses in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions in the business partnership are not the same.

TAN GUAN V. CTA


G.R. NO. 76573, SEPTEMBER 14, 1989 FACTS: Tan Guan and Sia Lin, Chinese nationals, organized and registered the Philippine Surplus Company, a general partnership. For the same year the partners and the partnership filed separate income tax returns. The partnership paid no income tax. A registered general partnership is exempt from income tax although it is required to file income tax returns. Profits, whether or not distributed, are considered income of the partners. Acting upon a confidential report that the Philippine Surplus Company posted in its book fictitious expenses for the purpose of avoiding taxes, the Bureau of Internal Revenue investigated in 1954 the books and papers of said partnership disallowed certain expense deduction for being fictitious. The BIR investigators discovered that the expenses were not supported by receipts; that the names of the payees in the aforesaid entries were erased; and that the said payees did not report the sums in question in their income tax returns for 1948. Hence, the BIR assessed deficiency income tax against Tan Guan. Tan Guan appealed to the CTA which affirmed the assessment of the CIR. Tan Guans MR was denied by the CTA. Hence, this appeal. ISSUE: Whether the right of the CIR to assess the deficiency tax has prescribed? (2) Should the deduction claimed by Philippine Surplus Co. as a business expense be allowed? HELD: (1) YES. If the income tax return was false and fraudulent, the CIRs right has not prescribed. If not, the assessment issued is void because of prescription. Here, the ITR was false or fraudulent as Philippine Surplus Co. claimed deductions of fictitious expenses for the purpose of avoiding the declaration of profits which eventually would be taxable as income of Tan Guan and Sia Lin, and that the names of the payees in the corresponding entries of the expenses involved in the books of accounts were erased. The returns being false or fraudulent, the CIR has not lost his right to issue the assessment. With respect to Tan Guans contention that he should be given the same treatment as Sia Lin, who was absolved by the CIR, suffice it to say that the Government is not bound by the errors committed by its agents. (2) NO. The only reason why said deduction was disallowed is because

9|P I E R R E M AR TI N D L R E YE S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

the expenses were fictitious or non-existent. Said conclusion was prompted by the absence of supporting receipts in the voucher covering the expenses and by the failure of the recipients thereof to declare them in their income tax returns

Q: What are two types of resident foreign corporations?


A: The two types are: 1. those exempt from income tax because they are not engaged in trade or business in the Philippines (e.g. regional or area headquarters) 2. those subject to income tax at a. 10% preferential tax rate b. 30% regular corporate income tax or 2% minimum corporate income tax whichever is higher (e.g. Philippine branches of foreign corporations engaged in trade and business in the Philippines; regional operating headquarters of MNCs) Note: Now, let us go to the tax rates and computations on income taxes on corporations. First, let us start with the flat rate rates.

TAX ON CORPORATIONS (SECTIONS 27-30, NIRC)


Note: The corresponding changes introduced by RA 9337 (Amending the NIRC of 1997) have already been integrated in the discussions below on corporate income tax. All provisions and rates mentioned here are updated as of March 1, 2009.

Q: What is a corporation under the NIRC?


A: A corporation includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies but does not include: a. b. general professional partnerships joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum and other energy operations pursuant to an operating agreement under a service contract with the Government.

Q: What is the regular corporate income tax (RCIT)?


A: Section 27(A)(1) and Section 28(A)(1) of the NIRC provide that, except as otherwise provided for in the Code, the rates of RCIT on taxable income from worldwide sources of a domestic corporation or from sources within the Philippines of a foreign corporation during the taxable year are as follows: 1. 35% effective November 1, 2005 2. 30% effective January 1, 2009 . In case of corporations adopting the fiscal year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases, and other transactions occur. Their income and expenses for the fiscal year shall be deemed earned and spent equally for each month of the period. The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period divided by twelve. To illustrate: If a corporation is under the fiscal accounting period (April 2008 to March 2009, how shall the Income tax due for fiscal year 2008 be computed?

It classified into domestic and foreign.

Q: How do you distinguish a domestic corporation from a foreign corporation?


A: The Philippines adopts the law of incorporation test under which a corporation is considered as a domestic corporation if it is organized or created in accordance with or under the laws of the Philippines and it is foreign if it is organized or created under the laws of a foreign country. A domestic corporation is taxable on all income derived from sources within and without the Philippines while a foreign corporation is taxable only on income derived from sources within the Philippines. A foreign corporation is further classified into resident foreign corporation and nonresident foreign corporation .

Q: What is the difference between a resident foreign corporation and non-resident foreign corporation?
A: A Resident foreign corporation is foreign corporation engaged in trade or business within the Philippines . Resident here is used to describe a corporation organized under the laws of a foreign country which does business in the Philippines and it not being used in its ordinary sense that the foreign corporation acquires residence in the Philippines. A good example of a resident foreign corporation is the Philippine branch of a foreign corporation. For income tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to income tax while the income of the Philippine branch and the foreign head office arising from foreign sources are exempt. On the other hand, a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines. The term non-resident here means not engaged in trade or business in the Philippines. Except as provided in the NIRC, gross income from sources within the Philippines paid to a non-resident foreign corporation shall be subject to income tax that must be withheld by the Philippine payor of the income and remitted to the BIR.

On the other hand, as provided in Section 28(B)(1), the rate of RCIT on the gross income from all sources within the Philippines for a nonresidence foreign corporation during the taxable year are as follows: 1. 35% effective November 1, 2005 2. 30% effective January 1, 2009 .

Q: What is meant by taxable income which is subject to RCIT?


A: As defined in Section 31, taxable income means the pertinent items of gross income specified in the Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by the Code or other special laws. For corporations, taxable income would mean net income. Net income and taxable income is used interchangeably when it comes to corporations.

10 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Q: May the President allow domestic and resident foreign corporations the option to be taxed on their gross income?
A: Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the President upon recommendation of the Secretary of Finance may allow domestic and resident foreign corporations the option to be taxed at 15% of gross income after the following conditions have been satisfied: 1. 2. 3. 4. a tax effort ratio of 20% of the GNP a ratio of 40% of income tax collection to total tax revenues a VAT tax effort of 4% of GNP a 0.9% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP

Q: What domestic corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all domestic corporations are subject to the RCIT or MCIT. As exceptions, certain domestic corporations enjoy preferential rates. They are: 1. 2. 3. 4. 5. Proprietary education institutions and hospitals Foreign currency deposit unit of a local universal or commercial bank Firms that are taxed under a special income tax regime Private educational institutions Hospitals

This option is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%. Upon election of the gross income tax option, it shall be revocable for 3 consecutive taxable years during which the corporation is qualified.

The preferential rates are as follows: Proprietary institutions hospitals education and They shall pay a tax of 10% on their taxable income except those items covered by Section 27(D), namely: 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements 2. Capital gains from the Sale of Shares of stock not traded in the Stock Exchange 3. Tax on Income derived under the Expanded Foreign Currency Deposit System 4. Intercorporate dividends 5. Capital gains realized from the sale, exchange or disposition of lands and/or buildings Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the BSP shall be taxexempt. (Note that Mamalateos book still states that its 10% as introduced by RA 8424. This is wrong because by virtue of RA 9294, the tax exemption of OBUs and FCDUs is now restored.) These are enterprises such as those registered with the PEZA Law (RA 7916) and the Bases Conversion and Development Act (RA 7227). They are subject to 5% final tax on gross income earned after the expiration of the income tax holiday if qualified. All revenue assets of a non-stock, non-profit private educational institution shall be taxexempt provided that they are used directly, exclusively and actually for educational purposes. (Note: This is in accordance with Section 4(3), Article 16 of the Constitution) Revenues derived from and assets used in the operation of hospitals shall be taxexempt from taxation, provided they are

Q: What is the minimum corporate income tax?


A: As provided in Section 27(E) and Section 28(A)(2) , a minimum corporate income tax of 2% of gross income shall be imposed on a domestic corporation and resident foreign corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations when the MCIT is greater than the RCIT for the taxable year.

Q: What is gross income for purposes of applying the MCIT?


A: Gross income shall mean gross sales less sales returns, discounts, allowances and cost of goods sold. Relevant revenue regulations:

REVENUE REGULATION NO. 9-98


This prescribes the regulations to implement RA No. 8424 relative to the imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign corporations. Specifically, an MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any domestic corporations beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT will be imposed whenever such operation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income tax due from such operation. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT will apply on operations covered by the regular income tax system. The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of the year 1998 will not be imposed with penalties for late payment of the tax. Note: Lets now go to the preferential tax rates

Foreign currency deposit unit of a local universal or commercial bank

Firms that are taxed under a special income tax regime

Private educational institutions

Hospitals

11 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

owned and operated by the educational institution as an indispensable requirement in the operation and maintenance of its medical school or college.

Q: What resident foreign corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all resident foreign corporations are subject to the RCIT or MCIT. As exceptions, certain resident foreign corporations enjoy preferential rates. They are: 1. Regional or area headquarters (RHQ) (a branch established in the Philippines by MNCs and which does not earn or derive income from the Philippines and whose role is supervisory) Representative office (a branch in the Philippines of a MNC whose activities are limited to information dissemination, product promotion) International carriers by air or water Offshore Banking Units Foreign Currency deposit Unit in the Philippines of a foreing bank Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office. Branch of foreign corporations registered with PEZA, SBMA, CDA, CDJHA. Qualified service contractor or subcontractor engaged in petroleum operations in the Philippines

local commercial banks that may be authorized by the BSP to transact business with offshore banking units shall be taxexempt except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable to banks. However, any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be subject only to a 10% final tax. (Note, however, that Mamalateos book still states 10% with no exemptions. This is wrong. RA 9294 has superseded RA 8424 and restored the tax exemptions of OBUs and FCDUs.) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be tax-exempt, except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable to banks. However, any interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents other offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to 10% final tax. (This is as amended by RA 9294) ROHQ shall pay a 10% tax on their net taxable income from sources within the Philippines. Any profit remitted by a branch to its head office shall be subject to a 15% branch profit remittance tax. (Note that the purpose of a branch profit remittance tax is to equalize the tax burden on foreign corporations maintaining on one hand, local branch offices, and organizing, on the other hand, a subsidiary domestic corporation where at least majority of all the latters stocks are owned by such foreign corporation) After the income tax holiday of PEZAregistered firms, their gross income earned

2.

3. 4. 5. 6. 7. 8. 9.

Foreign Currency deposit Unit in the Philippines of a foreign bank

The preferential rates are as follows: Regional or area headquarters Representative office RHQs and representative offices are taxexempt. Note, however, that income from passive investments like interest income on bank deposits or deposit substitutes in the Philippines is subject to the final withholding tax. They shall pay a tax of 2.5% on its gross Philippine billings. (For an International Air carrier, Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. For international shipping , Gross Philippine billings means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.) The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units,

International carriers by air or water

Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office.

Offshore Banking Units

Branch of foreign corporations registered

12 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

with PEZA, SBMA, CDA, CDJHA.

Qualified service contractor or subcontractor engaged in petroleum operations in the Philippines

shall be subject to 5% final tax. However, enterprises registered under the BCDA law are not entitled to tax holiday and are immediately subject to 5% final tax on gross income earned. Aside from being subject to the regular tax on income from all other sources within the Philippines, a subcontractor is subject to the final tax equivalent to 8% of its gross income derived from its contract with the service contractors engaged in petroleum operations.

Q: What income of a non-resident foreign corporation is subject to preferential tax rates?


A: As a general rule, the gross income of a non-resident foreign corporation is subject to the flat rate tax of 30%. As exceptions, the following are subject to preferential tax rates and final withholding taxes: 1. 2. 3. 4. 5. Income of a non-resident cinematographic film owner, lessor or distributor Income of a non-resident owner or lessor of vessels chartered by Philippine nationals Income of a non-resident owner of aircraft, machineries and other equipment Interest income on foreign loans contract on or after August 1, 1986. Intercorporate dividends received from a domestic corporation Capital gains from sale of shares of stock in a domestic corporation not traded in the Stock exchange

Note: Now, lets go to incomes of domestic, resident foreign and non resident foreign corporations.

Q: What income of a domestic corporation or resident foreign corporation is subject to preferential tax rates?
A: As a general rule, all taxable income of a domestic corporation or resident foreign corporation is subject to the flat rate tax of 30%. As exceptions, the following are subject to preferential tax rates: 1. Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends (dividends actually or constructively received by a domestic corporation or resident foreign corporation from another domestic corporation) Capital gains realized from the sale, exchange or disposition of lands and/or buildings.

6.

The preferential rates are: Income of a non-resident cinematographic film owner, lessor or distributor Income of a non-resident owner or lessor of vessels chartered by Philippine nationals Income of a non-resident owner of aircraft, machineries and other equipment Interest income on foreign loans contract on or after August 1, 1986. Intercorporate dividends received from a domestic corporation They shall pay a tax of 25% of its gross income from sources within the Philippines

2. 3.

They shall be subject to a tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the MARINA. They shall pay a tax of 7.5% of their gross rentals or fees.

4.

The preferential rates are: Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends They are subject to 20% tax. Note, however, that interest income coming from a depository bank under the expanded foreign currency deposit system is subject to 7.5% tax.

They shall be subject to 20% withholding tax.

Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10% They are tax-exempt (Note that they are exempt in order to reduce the extra or double taxation of distributed earnings) A final tax of 6% is imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets.

They shall be subject to a final withholding tax of 15% subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against tax due from the nonresident foreign corporation deemed to have been paid in the Philippines equivalent to 15% which represents the difference between the regular income tax of 30% and the 15% tax on dividends. Note that beginning Jan. 1, 2009, the RCIT has been reduced to 30% from 35%. Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10%

Capital gains realized from the sale, exchange or disposition of lands and/or buildings.

Capital gains from sale of shares of stock in a domestic corporation not traded in the Stock exchange

13 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Relevant cases: MARUBENI CORP. VS. CIR


G.R. NO. 76573, SEPTEMBER 14, 1989 FACTS: Marubeni Corporation of Japan, a foreign corporation duly organized and existing under the laws of Japan and duly licensed to engage in business under Philippine laws, has equity investments in Atlantic Gulf and Pacific Co. of Manila (AG&P). AG&P declared and paid cash dividends to Marubeni and withheld the corresponding final dividend tax thereon. AG&P directly remitted the cash dividends to Marubenis head office in Tokyo, Japan net not only of the 10% final dividend tax but also of the withheld 15% profit remittance tax based on the remittable amount after deducting the final withholding tax of 10%. Marubeni Corporation sought a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered branch profits subject to 15% profit remittance tax. Then Acting Commissioner Ancheta ruled that only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. Consequently, Marubeni claimed for a refund or issuance of a tax credit representing profit tax remittance erroneously paid on the dividends remitted by AG&P to head office in Tokyo . CIR denied Marubeni Corporationss claim for refund/credit. Petitioner appealed to the CTA which affirmed the denial of the refund by the CIR. On appeal to the SC, it is the argument of Marubeni that following the principal-agent relationship theory, Marubeni Japan is a resident foreign corporation subject only to the 10 % intercorporate final tax on dividends received from a domestic corporation. ISSUE: (1) Whether Marubeni is a resident foreign corporation or a nonresident foreign corporation? (2) Whether Marubeni is entitled to refund or tax credit for the alleged overpayment of branch profit remittance tax withheld from dividends by AG&P? HELD: (1) A resident foreign corporation is one that is "engaged in trade or business" within the Philippines. Marubeni contends that precisely because it is engaged in business in the Philippines through its Philippine branch that it must be considered as a resident foreign corporation. Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. This is wrong. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. It is thus clear that Marubeni cannot avail of the lower tax rate of 10%. (2) Yes. But while the CIR correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled

the 25 % rate imposed by the Philippine-Japan Tax Convention. To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." Marubeni, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b)(1)(iii) ( Now Section 27(B)(5)(b)) in conjunction with the Philippine-Japan Treaty of 1980. In applying said section, Marubeni, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. Consequently, petitioner is entitled to a refund.

Q: What is the income tax imposed on a corporation if its earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders?
A: Section 29(A) provides that, in addition to other taxes imposed under Title II, an improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the improperly accumulated taxable income of each corporation.

Q: What corporations are subject to IAET?


A: As a general rule, the IAET shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits accumulate instead of being divided or distributed. As exceptions , the IAET shall not apply to: 1. Publicly-held corporations 2. Banks and other non-bank financial intermediaries; and 3. Insurance companies

Q: How do you determine if a corporation is formed or availed for the purpose of avoiding the income tax with respect to shareholders?
A: Section 29(C)(1) provides that the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Moreover, Section 29(C)(2) provides that the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence shall prove the contrary. Note that under Section 29(E) , the term reasonable needs of the business includes the reasonably anticipated needs of the business .

14 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Q: What is meant by improperly accumulated taxable income in connection with the imposition of IAET?
A: Section 29(D) provides that the term improperly accumulated taxable income means taxable income adjusted by: 1. Income exempt from tax 2. Income excluded from gross income 3. Income subject to final tax; and 4. The amount of net operating loss carry-over deducted; And reduced by the sum of: 1. Dividends actually or constructively paid; and 2. Income tax paid for the taxable year

Relevant cases: COMMISSIONER OF INTERNAL REVENUE VS PAL


G.R. NO. 180066, JULY 7, 2009 FACTS: PAL is a domestic corporation organized under the corporate laws of the Philippines. For FY 2000-2001, PAL allegedly incurred zero taxable income which left it with unapplied creditable withholding tax. PAL did not pay any MCIT for the period. In a letter in 2002 to the CIR, PAL requested for the refund of its unapplied creditable withholding tax for FY 2000-2001. In an informal conference, BIR officers relayed to PAL representatives that the BIR was denying the claim for refund of PAL and, instead, was assessing PAL for deficiency MCIT for FY 2000-2001. BIR issued PAL an assessment representing deficiency MCIT for FY 20002001, plus interest and compromise penalty. PAL protested. A formal demand letter for deficiency MCIT was sent to PAL. PAL sent a written protest. The BIR denied with finality the protest of PAL and reiterated the request that PAL immediately pay its deficiency MCIT for FY 20002001, inclusive of penalties incident to delinquency. PAL filed a Petition for Review with the CTA. The CTA Second division ruled in favor of PAL. CIR filed a petition for review with the CTA en banc. The CTA en banc found that PAL was exempted and denied the CIRs petition. ISSUE: Whether PAL is liable for deficiency MCIT for FY 2000-2001? HELD: NO. PD 1590, the franchise of PAL, provides that, during the lifetime of its franchise, PAL shall be governed by two fundamental rules, particularly: (1) PAL shall pay the Government either basic corporate income tax or franchise tax, whichever is lower; and (2) the tax paid by PAL, under either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax. The basic corporate income tax of PAL shall be based on its annual net taxable income, computed in accordance with the NIRC. Franchise tax, on the other hand, shall be two per cent (2%) of the gross revenues derived by PAL from all sources, whether transport or nontransport operations. However, with respect to international airtransport service, the franchise tax shall only be imposed on the gross passenger, mail, and freight revenues of PAL from its outgoing flights. Here, PAL, in its income tax return for FY 2000-2001, reported no net taxable income for the period, resulting in zero basic corporate income tax, which would necessarily be lower than any franchise tax due from PAL for the same period. The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the MCIT is income tax for which PAL is liable. The CIR reasons that Section 13(a) of PD 1590 provides that the corporate income tax of PAL shall be computed in accordance with the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL has not applied for relief from the said tax, then PAL is subject to the same. The CIRs contention must fail. Under the NIRC, a domestic corporation must pay whichever is higher of: (1) the income tax under Section 27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the gross income of the corporation. Although this may be the general rule in determining the income tax due from a domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the provisions in the franchise of PAL specifically governing its taxation. After a conscientious study of PD 1590, in relation to Sections 27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en banc and Second Division, concludes that PAL cannot be subjected to MCIT for FY 2000-2001. First, PD 1590 refers to basic corporate income tax to be computed in accordance with the NIRC. It did not subject PAL to the entire Title II. Second, PD 1590 provides that the basic corporate income tax shall be based on its annual net taxable income. This is

Q: What are the corporations exempt from tax?


A: Section 30 of the NIRC provides that the following organizations shall be exempt from tax: 1. Labor, agricultural or horticultural organization not organized principally for profit 2. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit 3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents 4. Cemetery company owned and operated exclusively for the benefit of its members 5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person 6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual 7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare 8. A non-stock and non-profit educational institution 9. Government educational institution 10. Farmers or mutual typhoon or fire insurance company , mutual ditch or irrigation company, mutual or cooperative telephone company or like organizstion of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and 11. Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. Note: Notwithstanding that they are exempt corporations, the income of whatever kind and character of the organizations mentioned above from any of their properties, real or personal, or form any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code.

15 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

consistent with Section 27(A). In comparison, the 2% MCIT under Section 27(E) shall be based on the gross income of the domestic corporation. There is a distinction between taxable income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably. Hence, the basic corporate income tax, for which PAL is liable under PD 1590, cannot cover MCIT under Section 27(E) since the basis for the first is the annual net taxable income, while the basis for the second is gross income. Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other, the basic corporate income tax and the MCIT are distinct and separate taxes. Fourth , the evident intent of PD 1520 is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590. It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a governmentowned and controlled corporation; but when Republic Act No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a private corporation for six years. The repealing clause under Section 7(B) of Republic Act No. 8424 simply refers to charters of government-owned and controlled corporations, which would simply and plainly mean corporations under the ownership and control of the government at the time of effectivity of said statute. It is already a stretch for the Court to read into said provision charters, issued to what were then governmentowned and controlled corporations that are now private, but still operating under the same charters.

refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. The confusion as to Paseo Realtys entitlement to a refund could altogether have been avoided had it presented its tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax credit, which includes the creditable taxes withheld for 1989 subject of the claim for refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether petitioners tax credit of was applied to its approved refunds as it claims. The return would also have shown whether there remained an excess credit refundable to Paseo after deducting its tax liability for 1990. This omission is fatal to Paseos claim.

COMMISSIONER OF INTERNAL REVENUE V. COURT OF APPEALS


G.R. NO. 124043, OCTOBER 14, 1998 FACTS: Young Men's Christian Association of the Philippines, Inc. (YMCA) was established as a welfare, educational and charitable non-profit corporation." YMCA earned, among others, income from leasing out a portion of its premises to small shop owners and parking fees. The CIR issued an assessment to YMCA , for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA protested. However, CIR denied the claims of YMCA. YMCA then filed a petition for review at the CTA. CTA ruled in favor of the YMCA and stated that the leasing of the facilities to small shop owners and operation of the parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of the YMCA. CIR elevated the case to the CA. The CA initially decided in favour but thereafter reversed itself. ISSUE: Is income derived from rentals of real property owned by the YMCA subject to income tax? HELD: While the income received by the organizations enumerated in Section 27 (now Section 30) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income received by them as such," the exemption does not apply to income derived ". . . from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income . . . ." as stated in the last paragraph of the then Section 27 (now Section 30) . Since the exemption claimed by the YMCA is expressly disallowed, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. YMCAs contention that the Constitution exempts "charitable institutions" from the payment not only of property taxes but also of income tax from any source must likewise fail. The tax exemption covers property tax only. As to YMCAs claim that it is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income as stated in the Constitution. It is reiterated that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property. Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites.

PASEO REALTY V. COURT OF APPEALS


G.R. NO. 119286, OCTOBER 13, 2004 FACTS: Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2) parcels of land at Paseo de Roxas in Makati City, filed its ITR for the calendar year 1989. Thereafter, Paseo Realty filed with CIR a claim for the refund of excess creditable withholding and income taxes for the years 1989 and 1990. Alleging that the prescriptive period for refunds for 1989 would soon expire and that it was necessary to interrupt the prescriptive period, Paseo Realty filed with the CTA a petition for review praying for the refund. The CTA ordered the refund of the alleged excess creditable withholding taxes paid. CIR moved for reconsideration. CTA reversed and dismissed the petition for review. Paseo Realty then filed a petition for review with the CA. In resolving the twin issues of whether Paseo Realty is entitled to a refund representing creditable taxes withheld in 1989 and whether Paseo Realty applied such creditable taxes withheld to its 1990 income tax liability, the CA held that petitioner is not entitled to a refund because it had already elected to apply the total amount which includes the refund claimed, against its income tax liability for 1990. The CA denied Paseo Realtys MR. ISSUE: Whether the alleged excess taxes paid by Paseo Realty in 1989 should be refunded or credited against its tax liabilities for 1990? HELD: NO. Paseo Realtys failure to present sufficient evidence to prove its claim for refund is fatal to its cause. It is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. In this case, Paseo Realty combined its 1988 and 1989 tax credits and applied its 1990 tax due against the total, and not against its creditable taxes for 1989. The then Section 69 of the NIRC (now Section 76) provides that in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the

16 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

TAXABLE INCOME DEFINED (SECTION 31, NIRC) Q: What is taxable income?


A: As defined in Section 31, the term taxable income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. EO 37 changed all net income phrases appearing in Title II of the Tax Code of 1997 to taxable income. Taxable income is the income subject to tax less deductions, if any, authorized by such type of income. In short, the term refers to the tax base . For individuals engaged in trade or business or in the practice of their profession , it is the income after deducting exemptions and certain allowable deductions . For corporations and other juridical entities , taxable income would mean net income. Relevant Cases: Note: In the following cases, remember this: the term taxable income refers to the tax base. In cases involving the branch profit remittance tax, for example, the tax base or taxable income is the profit remitted abroad.

about the language of the provision. The tax is imposed on the amount sent abroad, and the law (then in force) calls for nothing further. Hence, the Bank of America is entitled to the refund.

COMMISSIONER OF INTERNAL REVENUE VS. AMERICAN AIRLINES


GR NO. 67938, DECEMBER 19, 1989 FACTS: American Airlines, is a corporation duly organized under the laws of the US. It is an off-line international carrier without any flight originating from the Philippines. However, by virtue of BOI Certificate of Authority No. 267 and a license issued by the SEC, a liaison office was established by it in this country for passenger and flight information and reservation and to render ticketing services. In 1979, CIR assessed American Airlines for deficiency income tax, interest and compromise penalty for the year 1974. American Airlines received from the CIR a letter of demand with an assessment which was computed on American Airlines gross Philippine billings. American Airlines protested. CIR denied the request. American Airlines filed a petition for review with the CTA contending that it was not doing business in the Philippines and that selling tickets is not an activity subject to the assessed tax on gross Philippine billings. CTA reversed the decision of CIR, and held that the acts of an international air carrier in maintain an office in the Philippines for promotion and information purposes; and the receipt of payments for passage tickets sold in the Philippines from passengers from the Philippines do not make such international air carrier engaged in business in the Philippines. Hence, this appeal by the CIR to the SC. ISSUE: Whether an off-line international carrier without flight operations in the Philippines but rendering ticketing services is liable to pay the 2.5% tax on its gross Philippine billings pursuant to Section 24(b)(2) (Now Section 28(A)(3))? HELD: YES. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activities within this country. The sale of tickets in the Philippines is an activity that produces income. The absence of flight operations within Philippine territory cannot alter this fact. True, Section 37(a) (Now Section 32) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets of international transportation. However, that does not render it less an income from within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. The 2.5% tax on gross Philippine billings imposed under Section 24(b)(2) (Now Section28(A)(3)) is an income tax levied on the presumed gain of the airline companies. It ensures that international airlines are taxed on the income they derive from Philippine sources. The revenues from the sale of tickets having been derived from Philippine sources, there is no cogency to the contention that said airlines are not subject to the aforestated tax. The inexorable conclusion, therefore, is that respondent American Airlines, Inc., being a resident foreign corporation engaged in business in the Philippines and deriving income from Philippine sources, the assessment of the deficiency tax against it was correct and valid. (NOTE: What is the taxable income here? It is the Gross Philippine Billings which include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. See

BANK OF AMERICA VS. COURT OF APPEALS


GR NO. 103092, JULY 21, 1994 FACTS: Bank of America is a foreign corporation duly licensed to engage in business in the Philippines. It paid the 15% branch profit remittance tax on profit from its foreign currency deposit unit operations. The tax was based on net profits after income tax without deducting the amount corresponding to the 15% tax. Thereafter, Bank of America filed a claim for refund with the BIR. Of that portion of its payment which corresponds to the 15% branch profit remittance tax. It based its claim on Section 24(B)(2)(ii) (Now Section 28(A)(5)) of the NIRC which provides that any profit remitted abroad by a branch of a foreign corporation to its head office shall be subject to 15% tax. The Bank of America argues that the 15% branch profit remittance tax should be assessed on the amount actually remitted or in other words, the 15% profit remittance tax should not form part of the tax base. The CTA upheld Bank of America in its claim for refund. The CA reversed. Hence, this appeal by Bank of America ISSUE: Whether the 15% branch profit remittance tax should be assessed on the amount actually remitted and not on the amount before profit remittance tax? HELD: There is absolutely nothing in Section 24(b)(2)(ii) (Now Section 28(A)(5)) which indicates that the 15% tax on branch profit remittance is on the total amount of profits of the branch (not all of which need be sent or would be ordered remitted abroad). The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. And to our mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain

17 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

Section 28(A)(3)(a) of the NIRC))

COMMISSIONER VS. BURROUGH, LTD.


GR NO. L-66653, JUNE 19, 1986 FACTS: Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a branch office located at Makati. Sometime in 1979, said branch office applied with the Central Bank for authority to remit to its parent company abroad, branch profit. It paid the 15% branch profit remittance tax. Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted and not on the amount before profit remittance tax, Burroughs filed a written claim for the refund or tax credit representing alleged overpaid branch profit remittance tax. Thereafter Burroughs filed with the CTA a petition for review for the recovery of the amount. CTA ordered the CIR to grant a tax credit in favour of Burroughs Limited. ISSUE: Whether the tax base upon which the 15% branch profit remittance tax shall be imposed is the amount applied for remittance on the profit actually remitted and not the amount before profit remittance tax? HELD: Yes. Section 24(b)(2)(ii) (Now Section 28(A)(5) states that Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15 %). In a BIR Ruling dated 1980, the CIR held that the provision should mean that "the tax base upon which the 15% branch profit remittance tax ... shall be imposed...(is) the profit actually remitted abroad and not on the total branch profits out of which the remittance is to be made. " Applying therefore, the aforequoted ruling, the claim of Burrough that it made an overpayment is valid.

does constitute taxable income to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest different from that which his former stockholdings represented. On the other hand, it does constitute income if the new shares confer no different rights or interests than did the old shares. Therefore, whenever the companies involved parted with a portion of their earnings to bnuy the corporate holdings of Reese, they were making a distribution of such earnings to respondents. These amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents are liable for deficiency income taxes.

PIROVANO VS. COMMISSIONER


GR NO. L-19865, JULY 31, 1965 FACTS: Enrico Pirovano is the father of herein petitioners. In early 1941, De la Rama Steamship Co. insured the life of Enrico, its President and General Manager. During the Japanese Occupation, Enrico died. De la Rama issued a Resolution granting P400,000 to the hiers of Pirovano converted into 4,000 shares of stock. This was modified thereafter. Instead, the company would renounce its title to the proceeds of the insurance in favor of the heirs. Mrs. Estefania Pirovano, in behalf of heir children executed a public document formally accepting the donation and the Board of Directors took official notice of this acceptance. Two years thereafter, the majority stockholders revoked said donation. De La Rama was ordered by the SC in a case (remember Pirovano vs. De La Rama Steamship!) to pay. The CIR assessed the amount as donees gift tax inclusive of surcharges, interests and other penalties. The heirs contested the assessment and imposition of the donees gift taxes and donors gift tax and also made a claim for refund of the said collected taxes. The claims were denied by the CIR. CTA affirmed. Hence, this petition. Petitioners contend that that the proceeds of the insurance was made not for an insufficient or inadequate consideration but rather it a was made for a full and adequate compensation for the valuable services rendered by the late Enrico Pirovano to the De la Rama Steamship Co.; hence, the donation does not constitute a taxable gift under the provisions of the then Section 108 of the National Internal Revenue Code. ISSUE: Whether the donation constitute a taxable gift? HELD: Yes. As provided in Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines) , when a person gives to another thingon account of the latters merits or of the services rendered by him to the donor, provided they do not consisted a demandable debt,, there is also a donation There is nothing on record to show that when the late Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. Also, whether remuneratory or simple, the conveyance remained a gift, taxable under the Code. But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of the services rendered should be considered as a taxable gift. But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the value of the life policies to said heirs. What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude to Pirovano; so that under the Code there is no

COMMISSIONER VS. MANNING


GR NO. L-28398, AUGUST 6, 1975 FACTS: Manila Trading and Supply Co. (MANTRASCO) had an authorized capital stock of P2.5 million divided into 25,000 common shares: 24,700 were owned by Reese and the rest at 100 shares each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reeses death, the company would purchase back all of its shares. Reese died. MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an examination of MANTRASCOs books and discovered that the 24,700 shares declared as dividends were not disclosed by respondents as part of their taxable income for the year 1958. Hence, the CIR issued notices of assessment for deficiency income taxes to respondents. Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR ISSUE: Whether the respondents are liable for deficiency income taxes on the stock dividends? HELD: Dividends means any distribution made by a corporation to its shareholders out of its earnings or profits. Stock dividends which represent transfer of surplus to capital account is not subject to income tax. But if a corporation redeems stock issued so as to make a distribution, this is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. The distinctions between a stock dividend which does not and one which

18 | P I E R R E M A R T I N D L R E Y E S

COURSE: TAXATION I PROFESSOR: GRUBA st 1 Semester AY 2010-2011

consideration the value of which can be deducted from that of the property transferred as a gift. Like "love and affection," gratitude has no economic value and is not "consideration" in the sense that the word is used in this section of the Tax Code. (Note: In other words, the whole proceed of the insurance is taxable income given that gratitude cannot be deducted for taxation purposes.)

COLLECTOR VS. HENDERSON


GR NO. L-12954 AND L-13049, FEBRUARY 28, 1961 FACTS: The spouses Arthur Henderson and Marie B. Henderson filed with the BIR returns of annual net income for the years 1948 to 1952. In due time the Henderson received from the BIR assessment notices and paid the amounts assessed. In 1953, after investigation and verification, the BIR reassessed the taxpayers' income for the years 1948 to 1952 and demanded payment of the deficiency taxes. In the foregoing assessments, the BIR considered as part of their taxable income the taxpayer-husband's allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to the Marikinagun and Country Bluc paid by his employer for his account; and travelling allowance of his wife. Henderson asked for reconsideration of the assessment. BIR denied and hence, taxpayers filed in the CTA a petition to review the decision of the CIR. The CTA held that the ratable value to him of the quarters furnished constitutes part of taxable income, that since the taxpayers did not receive any benefit from the travelling expense allowance as the trip was a business one, the same could not be considered income, and even if it was considered as such, it is not subject to tax as it was deductible as travel expense. The CTA ordered the CIR to refund the taxpayers. Hence, this petition. ISSUE: Whether the allowances for rental of the apartment furnished by the husband-taxpayer's employer-corporation, including utilities such as light, water, telephone, etc. and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of taxable income? HELD: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. The evidence substantially supports the findings of the Court of Tax Appeals. The quarters, therefore, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable value of the

allowances in question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation. Likewise, the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. Hence, the CIR is ordered to refund the taxpayers. (Note: What is the taxable income here? Gross income! The Court held basically upheld the CTA in (1) only the ratable value of the allowances for housing shall form part of the income as the apartment is used for his business functions as well and (2) the trip allowances does not form part of income as they are for business purposes.

19 | P I E R R E M A R T I N D L R E Y E S