Income Taxation Mamalateo Notes

8/13/2019 Income Taxation Mamalateo Notes

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

COURSE: TAXATION I

PROFESSOR: GRUBA

1st

Semester AY 2010-2011

3. Minimum corporate income tax on corporations

4. 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 incomes8. Fringe benefit tax

9. Branch profit remittance tax; and

10. Tax on improperly accumulated earnings.

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.

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.

Person An individual, a trust, estate or corporation

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

General Professional

Partnerships

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

Domestic When applied to a corporation, means created

or organized in the Philippines or under its laws

Foreign When applied to a corporation, means a

corporation which is not domestic

Nonresident citizen 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

respect to his income derived from

sources abroad until date of his

arrival in the Philippines

Resident alien An individual whose residence is within the

Philippines and who is not a citizen thereofNonresident alien An individual whose residence is not within the

Philippines and who is not a citizen thereof

Resident foreign

corporation

A foreign corporation engaged in trade or

business within the Philippines

Nonresident foreign

corporation

A foreign corporation not engaged in trade or

business within the Philippines

Fiduciary A guardian, trustee, executor, administrator,

receiver, conservator or any person acting in

any fiduciary capacity for any person

Withholding agent Any person required to deduct and withhold tax

under the provisions of Section 57 (Withholding

of Tax at source)

Shares of stock 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

Shareholder 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)

Taxpayer Any person subject to tax

“Including” and

“includes”

When used in a definition, it shall not be

deemed to exclude other things otherwise

within the meaning of the term

Taxable year Means the calendar year or the fiscal year

ending during such calendar year, upon the

basis of which the net income is computedFiscal year Means an accounting period of 12 months

ending on the last day of any month other than

December

“Paid or incurred”

and “paid or

accrued”

Shall be construed according to the method of

accounting upon the basis of which net income

is computed

Trade or business Includes the performance of the functions of a

public office

Securities Means share of stock n a corporation and rights

to subscribe for or to receive such shares

Dealer in securities 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 customersBank Every banking institution as defined in RA 337

as amended by RA 8791 (General Banking Act of

2000)

Non-bank financial

institution

A financial intermediary as defined in RA 337 as

amended by RA 8791 (General Banking Act of

2000) authorized by the BSP to perform quasi-

banking activities

Quasi-banking

activities

Means borrowing funds from 20 or more

personal or corporate lenders at any one time,

through the issuance, endorsement, or




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


acceptance of debt instruments of any kind

other than deposits for the borrower’s 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

Deposit substitutes An alternative form of obtaining funds from thepublic (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 borrower’s 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

Ordinary Income 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)

Ordinary loss Includes any loss from the sale or exchange of

property which is not a capital asset

Rank and file

employees

Mean all employees who are holding neither

managerial nor supervisory position as defined

under existing provisions of the Labor Code

Mutual fund

company

An open-end and close-end investment

company as defined under the Investment Code

Trade, business or

profession

Include performance of services by the taxpayer

as an employee

Regional or area

headquarters

A branch established in the Philippines by

multinational companies

Long-term deposit or

investment

certificate

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 theBSP and issued by Banks only to individuals in

denominations of P10,000 and other

denominations as may be prescribed by the BSP

Statutory Minimum

Wage

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

Minimum Wage

earner

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

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

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 operatingexpense 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 Doña Carmen

Soriano. Pursuant to a board resolution, ANSCOR redeemed a

considerable number of common 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 Doña

Carmen’s 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-at-source 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 ANSCOR’s 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 Doña Carmen based on

the two transactions, because the same were done for legitimate

business purposes which are (a) to reduce its foreign exchange




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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 stockscan 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 thetaxpayer, 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.

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 lawconcerning 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

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 defendant’s

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 impliestaxes 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)

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




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


within the Philippines (Residence and source of income

principle)

5. A domestic corporation is taxable on all income derived from

sources within and outside the Philippines (Citizenship

principle)

6. 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 incomeprinciple).

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: 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 partnershipi. 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

(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!)

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

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, whoelect 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 individual’s habitual place of abode to which

whenever absent, he has the intention of returning.

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, heshall 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 l ong 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




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


respect to his income derived from sources abroad until date

of his arrival in the Philippines

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 CIR’s 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 petitioner’s dollar earnings should be computed using

the par value?

HELD: NO. CB Circular No. 289 shows that the subject matters involvedtherein 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 arecitizens 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.

Relevant revenue regulations:

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 15following the taxable year. The 1998 returns filed after April 15 but not

later than July 15, 1999 will not be subject to penalty charges.

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 thePhilippines 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. From all sources within and without the Philippines by

resident citizens;

2. From all sources within the Philippines only by a non-resident

citizen including overseas contract workers;

3. 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 5%

Over 10,000 but not over P30,000 P500 + 10% of excess over

P10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the excess

over P30,000Over P70,000 but not over P140,000 P8,500 + 20% of the excess

over P70,000


over P140,000


over P250,000

Over P500,000 P125,000 + 32% of the

excess over P500,000




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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)

2. 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)

3. 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.

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)

2. Capital gains from sale of shares of stock not traded in the

Stock exchange under Section 24(C)

3. Capital gains from sale of real property under Section 24(D)

4. 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 sub-

contractors under Section 25(E)

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

e. Winnings from PCSO which are

tax-exempt

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 asother 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%.

Cash and Property

Dividends

They shall be subject to the following rates:

6% beginning January 1, 1988



Applies to citizens and resident aliens

Capital Gains from sale

of shares of stock of a

domestic corporation

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 inthe 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)

Capital gains from sale of

real property

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




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price or fair market value, whichever is

higher.

Compensation income of

alien and Filipino

employees of Regional or

area headquarters and

regional operatingheadquarters, Offshore

Banking Units, Foreign

petroleum service

contractors and sub-

contractors.

The applicable tax rate is 15% on their gross

income from sources within the Philippines.



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.


This prescribes the regulations to implement RA No. 8424 relative to theimposition 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 incometax?

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 co-

ownership 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.

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 hisfour 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 ½ 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 CIR’s 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 theyfound 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.

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.




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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 CIR’s

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 contractof 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 (compañia

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 compañiascolectivas 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 CIR’s 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, astheir contributions in the business partnership are not the same.

TAN GUAN V. CTAG.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 expensededuction 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

Guan’s 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

CIR’s 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 Guan’s 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 ag ents.

(2) NO. The only reason why said deduction was disallowed is because




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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

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. general professional partnerships

b. joint venture or consortium formed for the purpose of

undertaking construction projects or engaging in petroleum

and other energy operations pursuant to an operatingagreement under a service contract with the Government.

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 andthe 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.

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 rateb. 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.

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 thetaxable 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 becomputed?

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 non-

residence 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.




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PROFESSOR: GRUBA

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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. a tax effort ratio of 20% of the GNP

2. a ratio of 40% of income tax collection to total tax revenues

3. a VAT tax effort of 4% of GNP

4. a 0.9% ratio of Consolidated Public Sector Financial Position

(CPSFP) to GNP

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.

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.



This prescribes the regulations to implement RA No. 8424 relative to the

imposition of the Minimum Corporate Income Tax (MCIT) on domesticcorporations 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 sy stem.

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 ta x.

Note: Let’s now go to the preferential tax rates

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. Proprietary education institutions and hospitals 2. Foreign currency deposit unit of a local universal or

commercial bank

3. Firms that are taxed under a special income tax regime

4. Private educational institutions

5. Hospitals


Proprietary education

institutions and

hospitals

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

Foreign currency

deposit unit of a local

universal or commercial

bank

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 tax-

exempt.

(Note that Mamalateo’s 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.)

Firms that are taxed

under a special income

tax regime

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.

Private educational

institutions

All revenue assets of a non-stock, non-profit

private educational institution shall be tax-

exempt 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)

Hospitals Revenues derived from and assets used in

the operation of hospitals shall be tax-

exempt from taxation, provided they are




COURSE: TAXATION I

PROFESSOR: GRUBA

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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)

2. Representative office (a branch in the Philippines of a MNC

whose activities are limited to information dissemination,

product promotion)

3. International carriers by air or water

4. Offshore Banking Units

5. Foreign Currency deposit Unit in the Philippines of a foreing

bank6. Regional Operating Headquarters (ROHQ)

7. Branch of foreign corporation with respect to profit

remittances to head office.

8. Branch of foreign corporations registered with PEZA, SBMA,

CDA, CDJHA.

9. Qualified service contractor or subcontractor engaged in

petroleum operations in the Philippines


Regional or area

headquarters

RHQs and representative offices are tax-

exempt.

Note, however, that income from passive

investments like interest income on bank

deposits or deposit substitutes in thePhilippines is subject to the final withholding

tax.

Representative office

International carriers

by air or water

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.)

Offshore Banking Units 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,

local commercial banks that may be

authorized by the BSP to transact business

with offshore banking units 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 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 Mamalateo’s 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.)

Foreign Currency

deposit Unit in the

Philippines of a foreign

bank

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)

Regional Operating

Headquarters (ROHQ)

ROHQ shall pay a 10% tax on their net

taxable income from sources within the

Philippines.

Branch of foreign

corporation with

respect to profit

remittances to headoffice.

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

latter’s stocks are owned by such foreign

corporation)

Branch of foreign

corporations registered

After the income tax holiday of PEZA-

registered firms, their gross income earned




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


with PEZA, SBMA, CDA,

CDJHA.

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.

Qualified service

contractor or

subcontractor engagedin petroleum

operations in the

Philippines

Aside from being subject to the regular tax

on income from all other sources within the

Philippines, a subcontractor is subject to thefinal tax equivalent to 8% of its gross income

derived from its contract with the service

contractors engaged in petroleum

operations.

Note: Now, let’s 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

2. Capital gains from the Sale of Shares of Stock not traded in

the Stock Exchange

3. Intercorporate dividends (dividends actually or constructively

received by a domestic corporation or resident foreign

corporation from another domestic corporation)

4. Capital gains realized from the sale, exchange or disposition

of lands and/or buildings.

The preferential rates are:

Certain passive incomes

such as interests from

deposits and yield or anyother monetary benefit

from deposit substitutes

and from trust funds and

similar arrangements and

royalties

They are subject to 20% tax.

Note, however, that interest incomecoming from a depository bank under the

expanded foreign currency deposit system

is subject to 7.5% tax.

Capital gains from the Sale

of Shares of Stock not

traded in the Stock

Exchange

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%


Intercorporate dividends They are tax-exempt

(Note that they are exempt in order to

reduce the extra or double taxation of

distributed earnings)

Capital gains realized from

the sale, exchange or

disposition of lands and/or

buildings.

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.

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 a nd final withholding taxes:

1. Income of a non-resident cinematographic film owner, lessoror distributor

2. Income of a non-resident owner or lessor of vessels chartered

by Philippine nationals

3. Income of a non-resident owner of aircraft, machineries and

other equipment

4. Interest income on foreign loans contract on or after August

1, 1986.

5. Intercorporate dividends received from a domestic

corporation

6. Capital gains from sale of shares of stock in a domestic

corporation not traded in the Stock exchange

The preferential rates are:

Income of a non-resident

cinematographic film

owner, lessor or

distributor

They shall pay a tax of 25% of its gross

income from sources within the

Philippines


owner or lessor of vessels

chartered by Philippine

nationals

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.


owner of aircraft,

machineries and other

equipment

They shall pay a tax of 7.5% of their gross

rentals or fees.

Interest income on foreign

loans contract on or afterAugust 1, 1986.

They shall be subject to 20% withholding

tax.

Intercorporate dividends

received from a domestic

corporation

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% ta x on dividends.

Note that beginning Jan. 1, 2009, the RCIT

has been reduced to 30% from 35%.

Capital gains from sale of

shares of stock in a

domestic corporation not

traded in the Stock

exchange

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%





COURSE: TAXATION I

PROFESSOR: GRUBA

1st


Relevant cases:

MARUBENI CORP. VS. CIRG.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 inAtlantic 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

Marubeni’s 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 Corporations’s 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 non-

resident 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 Philippinebranch 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 Section27(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 ta x 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 thecorporation, 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 .




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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; and4. 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

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 anyspecific 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 andoperated 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.

Relevant cases:

COMMISSIONER OF INTERNAL REVENUE VS PALG.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 zerotaxable 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 2000-

2001, 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 2000-

2001, 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 CIR’s 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 air-

transport 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 CIR’s 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




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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 firstis 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 government-

owned 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 meancorporations 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 government-

owned and controlled corporations that are now private, but still

operating under the same charters.

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 thatthe 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 Realty’s 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 Realty’s 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

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 Realty’s 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 taxeswithheld 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

petitioner’s 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 Paseo’s 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 theirproperties, 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.

YMCA’s 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 YMCA’s 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.




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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.”

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 toits 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

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 t he 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 ass essed

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 sourceswithin 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 thatrespondent 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




COURSE: TAXATION I

PROFESSOR: GRUBA

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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 CentralBank 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.

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: 24,700were 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 Reese’s 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 MANTRASCO’s 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

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 toincome 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

donor’s 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 thing…on account of the latter’s 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




COURSE: TAXATION I

PROFESSOR: GRUBA

1st


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 predominantoccupation 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 travellingexpenses 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.

Documents

Income Taxation Mamalateo Notes