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TAXATION I
QUIZZLER ON INCOME TAXATION
FOREWORD
This Reviewer covers the study of the law on Income Taxation which includes: 1. Title II of the National Internal Revenue Code (NIRC) 2. Statutes related or amending the NIRC 3. Related Revenue Regulations, BIR Rulings and other administrative issuances 4. Cases decided by the Supreme Court As a complement to this reviewer, I suggest you get any book containing the complete codal provisions of the NIRC (either the green codal from Rex Bookstore or the NIRC annotated codal by Casasola and Bernaldo. As for reference books, I would recommend Income Taxation by Mamalateo or Tax Law and Jurisprudence by Vitug and Acosta. As Albert Einstein puts it, the hardest thing in the world to understand is the income tax. May this reviewer serve its purpose in helping us in our efforts in overcoming this challenge and achieve excellence. Yours in Honor and Excellence, Pierre Martin DL Reyes business or professional income) or (b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or other income subject to final withholding tax) or (c) both global and schedular may be applied depending on the nature of the income realized by the taxpayer during the year.
Q: How do you distinguish schedular treatment from global treatment as used in income taxation?
A: Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable deductions, are subjected to tax at a graduated or fixed rate.
Q: To which system does the method of taxation under the NIRC belong?
A: The current method of taxation under the NIRC belongs to semischedular and semi-global tax system.
Q: What are the different income tax systems adopted by the Philippines?
A: The types of income tax systems adopted are as follows: 1. Global Tax System where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rates on these different items of income. 2. Schedular Tax System where there are different tax treatments of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. 3. Semi-Schedular or Semi-Global Tax System where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final withholding tax or business or professional income or mixed income compensation and
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foreign corporation is liable to pay Philippine income tax on income from sources within the Philippines.
Withholding agent
Shares of stock
Shareholder
and
Fiscal year
Paid or incurred and paid or accrued Trade or business Securities Dealer in securities
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 An individual whose residence is within the Philippines and who is not a citizen thereof An individual whose residence is not within the Philippines and who is not a citizen thereof A foreign corporation engaged in trade or business within the Philippines A foreign corporation not engaged in trade or business within the Philippines A guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person Any person required to deduct and withhold tax under the provisions of Section 57 (Withholding of Tax at source) Includes shares of stock of a corporation, warrants and/or options to purchase shares of stocks as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs and mutual fund certificates Includes any holder of shares of stock and others which are considered shares of stock under this code (refer to definition of Shares of Stock) Any person subject to tax When used in a definition, it shall not be deemed to exclude other things otherwise within the meaning of the term Means the calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed Means an accounting period of 12 months ending on the last day of any month other than December Shall be construed according to the method of accounting upon the basis of which net income is computed Includes the performance of the functions of a public office Means share of stock n a corporation and rights to subscribe for or to receive such shares A merchant of stocks or securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale
2.
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Bank
Non-bank institution
financial
Quasi-banking activities
Deposit substitutes
Ordinary Income
Mutual fund company Trade, business or profession Regional or area headquarters Long-term deposit or investment certificate
Minimum earner
Wage
thereof to customers Every banking institution as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) A financial intermediary as defined in RA 337 as amended by RA 8791 (General Banking Act of 2000) authorized by the BSP to perform quasibanking activities Means borrowing funds from 20 or more personal or corporate lenders at any one time, through the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrowers own account or through the issuance of certificates of assignments or similar instruments, with recourse, or of purchase agreements for purposes of re-lending or purchasing receivables and other similar obligations An alternative form of obtaining funds from the public (the term public means borrowing from 20 or more individual or corporate lenders at any one time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account for purposes of re-lending or purchasing receivables and other similar obligations, or financing their own needs or the needs of their agent or dealer Any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1) (which defines what capital assets are and those which are not) Includes any loss from the sale or exchange of property which is not a capital asset Mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code An open-end and close-end investment company as defined under the Investment Code Include performance of services by the taxpayer as an employee A branch established in the Philippines by multinational companies Certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with maturity period of not less than 5 years, the form of which shall be prescribed by the BSP and issued by Banks only to individuals in denominations of P10,000 and other denominations as may be prescribed by the BSP Refers to the rate fixed by the Regional Tripartite Wage and Productivity Boar, as defined by the Bureau of Labor and Employment Statistics (BLES) of DOLE A worker in the private sector paid the statutory minimum wage or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned
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books of account and records, Revenue examiners issued a report proposing that ANSCOR be assessed for deficiency withholding tax-atsource based on the transactions of exchange and redemption of stocks. ANSCOR filed a petition for review with the CTA assailing the tax assessments on the redemptions and exchange of stocks. The CTA ruled that ANSCORs redemption and exchange of the stocks of its foreign stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends" under Section 83(b) of the then 1939 Internal Revenue Act. ANSCOR avers that it has no duty to withhold any tax either from the Don Andres estate or from Doa Carmen based on the two transactions, because the same were done for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the event the company would declare cash dividends, and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly, envisioned by Don Andres. It likewise invoked the amnesty provisions of P.D. 67. ISSUES: (1) May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? (2) Whether ANSCOR's redemption of stocks from its stockholder and the exchange of stocks can be considered as "essentially equivalent to the distribution of taxable dividend" making the proceeds thereof taxable under the provisions of the above-quoted law? HELD: (1) NO. PD 67 condones the taxpayer. An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by petitioner for deficiency withholding tax/. As such, it is being held liable in its capacity as a withholding agent and not its personality as a taxpayer. In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer he is the person subject to tax impose by law; and the payee is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax. (2) The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the gain or profit is realized or received, actually or constructively, and (3) it is not exempted by law or treaty from income tax. The existence of legitimate business purposes in support of the redemption of stock dividends is immaterial in income taxation. The test of taxability under the exempting clause of Section 83(b) is whether income was realized through the redemption of stock dividends. The redemption converts into money the stock dividends which become a realized profit or gain and consequently, the stockholder's separate property. Profits derived from the capital invested cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence of any business purpose for the redemption. Hence, the proceeds are essentially considered equivalent to a distribution of taxable dividends. As "taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax under Section 22 ( tax on non-resident alien individual) in relation to Section 21 (rates of tax on citizens or residents) of the then 1939 Code. As income, it is subject to income tax which is required to be withheld at source.
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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 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 income principle). 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!)
B.
a. Revocable trust b. Irrevocable trust Corporations 1. Domestic Corporations (Section 27, NIRC) 2. Foreign Corporations (Section 28, NIRC) a. Resident foreign corporations b. Nonresident foreign corporations 3. Partnerships a. Taxable partnership (Section 73(D), NIRC) b. Exempt partnership i. General Professional Partnership (Section 26, NIRC) ii. Joint venture or consortium undertaking construction activity or engaged in petroleum operations with operating contract with the government
(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
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nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to them, the par value of the peso should be the guiding rate used for income tax purposes. The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter & Gamble. It was a definite amount of money which came to them within a specified period of time of two years as payment for their services. The law provides that a tax imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad or an alien residing in the Philippines, determined in accordance with the schedule. The earnings must be computed based on the uniform rate of exchange from US dollars to pesos for internal revenue tax purposes for the years 1970 and 1971. They are not exempted from this. Petitioners forget that they are citizens of the Philippines, and their income, within or without, and in these cases wholly without, are subject to income tax. Since petitioners already paid in accordance with the uniform rate, there is no reason for CIR to refund any taxes.
Q: What are the graduated income tax rates on taxable income of individuals?
A: In relation to Section 23 of the NIRC, the taxable income (i.e. the pertinent items of gross income less deductions and/or personal and additional exemptions authorized for such types of income by the Tax Code or other special laws) derived for each taxable year: 1. 2. From all sources within and without the Philippines by resident citizens; From all sources within the Philippines only by a non-resident citizen including overseas contract workers;
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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
a. b. c.
Shall be subject to the graduated income tax in accordance with the following schedule provided under Section 24: Not over P10,000 Over 10,000 but not over P30,000 Over P30,000 but not over P70,000 Over P70,000 but not over P140,000 Over P140,000 but not over P250,000 Over P250,000 but not over P500,000 Over P500,000 5% P500 + 10% of excess over P10,000 P2,500 + 15% of the excess over P30,000 P8,500 + 20% of the excess over P70,000 P22,500 + 25% of the excess over P140,000 P50,000 + 30% of the excess over P250,000 P125,000 + 32% of the excess over P500,000
Regional or area headquarters and regional operating headquarters of MNCs under Section 25(C) Offshore Banking Units under Section 25(D) Foreign petroleum service contractors and subcontractors 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 as other literary works and musical compositions which shall be subject to 10% BUT cinematographic films and similar works are subject to 25% tax as provided in Section 28, NIRC b. Interest income from long-term deposit or investment which is tax-exempt c. Prizes amounting to P10,000 or less which shall be subject to the graduated income tax rates d. Winnings from PCSO which are tax-exempt If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the rate is 25%. They shall be subject to the following rates: 6% beginning January 1, 1988 8% beginning January 1, 1999 10% beginning January 1, 2000 Applies to citizens and resident aliens If the shares of stock is listed but not traded in PSE, the rates are: a. Not over P100,000 5% b. In excess of P100,000 10% If the shares of stock is listed and traded in the PSE, it is subject to 1% of stock transaction tax.
2.
3.
Q: What are the incomes subject to preferential tax rates and what are the tax rates applicable to each? A: As a general rule, income, gain or profit derived by an individual
during the taxable year shall be subject to the graduated income tax rates. As exceptions, certain income subject to tax are not subject to the graduated tax rates stated previously and are subject to preferential tax rates. They are: 1. Tax on certain passive income under Section 24(B) a. Interests, royalties, prizes and other winnings under Section 24(B)(1) b. Cash and/or property dividends under Section 24(B)(2) Capital gains from sale of shares of stock not traded in the Stock exchange under Section 24(C) Capital gains from sale of real property under Section 24(D) Compensation income of alien and Filipino employees of Cash and Dividends Property
2. 3. 4.
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(Note that that this is one of the only two exceptions where the kind of taxpayer is immaterial. The rates is uniform whether the seller is an individual, citizen or alien or a corporation, domestic or foreign) Subject to final tax of 6% based on the gross selling price or current fair market value as determined by the Commissioner in accordance with Section 6(E), NIRC whichever is higher. However, if the buyer is the government or any of its political subdivisions or to GOCCs (buyer, not recipient of capital gains), the tax liability shall be either the graduated income tax rates under Section 24(A) or the 6% stated above whichever is higher. If the recipient of the capital gain from sale of real property is an alien whether engaged or not engaged in trade or business in the Philippines, he shall be subject to 6% based on the gross selling price or fair market value, whichever is higher.
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.
Compensation income of alien and Filipino employees of Regional or area headquarters and regional operating headquarters, Offshore Banking Units, Foreign petroleum service contractors and subcontractors.
The applicable tax rate is 15% on their gross income from sources within the Philippines.
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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.
prohibited from making donations to each other are prohibited from entering into universal partnerships. It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. The CIR failed to observe that William J. Suter "Morcoin" Co., Ltd. was not a universal partnership, but a particular one. A universal partnership requires either that the object of the association be all the present property of the partners, as contributed by them to the common fund, or else "all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of money. The subsequent marriage of the partners does not operate to dissolve it, as such marriage is not one of the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce. (2) NO. The capital contributions of partners Suter and Spirig were separately owned and contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their respective separate property. Thus, the individual interest of each consort in in the limited partnership did not become common property of both after their marriage in 1948. The partnership has a juridical personality of its own, distinct and separate from that of its partners. The limited partnership's separate individuality makes it impossible to equate its income with that of the component members. As the limited partnership under consideration is taxable on its income, to require that income to be included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict with the Code: for the Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compaia colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compaias colectivas that the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived from the duly registered general partnership. The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income. As to CIRs argument that the income of the limited partnership is constructively the income of the spouses and forms part of the conjugal partnership of gains, the conjugal partnership of gains is not a taxable unit. What is taxable is the "income of both spouses in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their contributions in the business partnership are not the same.
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expenses were not supported by receipts; that the names of the payees in the aforesaid entries were erased; and that the said payees did not report the sums in question in their income tax returns for 1948. Hence, the BIR assessed deficiency income tax against Tan Guan. Tan Guan appealed to the CTA which affirmed the assessment of the CIR. Tan Guans MR was denied by the CTA. Hence, this appeal. ISSUE: Whether the right of the CIR to assess the deficiency tax has prescribed? (2) Should the deduction claimed by Philippine Surplus Co. as a business expense be allowed? HELD: (1) NO. If the income tax return was false and fraudulent, the CIRs right has not prescribed. If not, the assessment issued is void because of prescription. Here, the ITR was false or fraudulent as Philippine Surplus Co. claimed deductions of fictitious expenses for the purpose of avoiding the declaration of profits which eventually would be taxable as income of Tan Guan and Sia Lin, and that the names of the payees in the corresponding entries of the expenses involved in the books of accounts were erased. The returns being false or fraudulent, the CIR has not lost his right to issue the assessment. With respect to Tan Guans contention that he should be given the same treatment as Sia Lin, who was absolved by the CIR, suffice it to say that the Government is not bound by the errors committed by its agents. (2) NO. The only reason why said deduction was disallowed is because 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
A foreign corporation is further classified into resident foreign corporation and nonresident foreign corporation.
Q: What is the difference between a resident foreign corporation and non-resident foreign corporation?
A: A Resident foreign corporation is foreign corporation engaged in trade or business within the Philippines. Resident here is used to describe a corporation organized under the laws of a foreign country which does business in the Philippines and it not being used in its ordinary sense that the foreign corporation acquires residence in the Philippines. A good example of a resident foreign corporation is the Philippine branch of a foreign corporation. For income tax purposes, only the income of the Philippine branch from sources within the Philippines is subject to income tax while the income of the Philippine branch and the foreign head office arising from foreign sources are exempt. On the other hand, a nonresident foreign corporation is a foreign corporation not engaged in trade or business within the Philippines. The term non-resident here means not engaged in trade or business in the Philippines. Except as provided in the NIRC, gross income from sources within the Philippines paid to a non-resident foreign corporation shall be subject to income tax that must be withheld by the Philippine payor of the income and remitted to the BIR.
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computed?
On the other hand, as provided in Section 28(B)(1), the rate of RCIT on the gross income from all sources within the Philippines for a nonresidence foreign corporation during the taxable year are as follows: 1. 35% effective November 1, 2005 2. 30% effective January 1, 2009.
imposition of the Minimum Corporate Income Tax (MCIT) on domestic corporations and resident foreign corporations. Specifically, an MCIT of 2% of the gross income as of the end of the taxable year is imposed upon any domestic corporations beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT will be imposed whenever such operation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income tax due from such operation. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT will apply on operations covered by the regular income tax system. The Regulations will apply to domestic and resident foreign corporations on their aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of the year 1998 will not be imposed with penalties for late payment of the tax. Note: Lets now go to the preferential tax rates
Q: May the President allow domestic and resident foreign corporations the option to be taxed on their gross income?
A: Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the President upon recommendation of the Secretary of Finance may allow domestic and resident foreign corporations the option to be taxed at 15% of gross income after the following conditions have been satisfied: 1. 2. 3. 4. a tax effort ratio of 20% of the GNP a ratio of 40% of income tax collection to total tax revenues a VAT tax effort of 4% of GNP a 0.9% ratio of Consolidated Public Sector Financial Position (CPSFP) to GNP
Q: What domestic corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all domestic corporations are subject to the RCIT or MCIT. As exceptions, certain domestic corporations enjoy preferential rates. They are: 1. 2. 3. 4. 5. Proprietary education institutions and hospitals Foreign currency deposit unit of a local universal or commercial bank Firms that are taxed under a special income tax regime Private educational institutions Hospitals
The preferential rates are as follows: 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 irrevocable for 3 consecutive taxable years during which the corporation is qualified. Proprietary institutions hospitals education and They shall pay a tax of 10% on their taxable income except those items covered by Section 27(D), namely: 1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements 2. Capital gains from the Sale of Shares of stock not traded in the Stock Exchange 3. Tax on Income derived under the Expanded Foreign Currency Deposit System 4. Intercorporate dividends 5. Capital gains realized from the sale, exchange or disposition of lands and/or buildings Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks,
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including branches of foreign banks that may be authorized by the BSP shall be taxexempt. (Note that Mamalateos book still states that its 10% as introduced by RA 8424. This is wrong because by virtue of RA 9294, the tax exemption of OBUs and FCDUs is now restored.) These are enterprises such as those registered with the PEZA Law (RA 7916) and the Bases Conversion and Development Act (RA 7227). They are subject to 5% final tax on gross income earned after the expiration of the income tax holiday if qualified. All revenue assets of a non-stock, non-profit private educational institution shall be taxexempt provided that they are used directly, exclusively and actually for educational purposes. (Note: This is in accordance with Section 4(3), Article 16 of the Constitution) Revenues derived from and assets used in the operation of hospitals shall be taxexempt from taxation, provided they are owned and operated by the educational institution as an indispensable requirement in the operation and maintenance of its medical school or college. International carriers by air or water
deposits or deposit substitutes in the Philippines is subject to the final withholding tax. They shall pay a tax of 2.5% on its gross Philippine billings. (For an International Air carrier, Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. For international shipping, Gross Philippine billings means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.) The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the BSP, from foreign currency transactions with nonresidents, other offshore banking units, local commercial banks that may be authorized by the BSP to transact business with offshore banking units shall be taxexempt except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board which shall be subject to the regular income tax payable to banks. However, any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units shall be subject only to a 10% final tax. (Note, however, that Mamalateos book still states 10% with no exemptions. This is wrong. RA 9294 has superseded RA 8424 and restored the tax exemptions of OBUs and FCDUs.) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with foreign currency deposit system units and other depository banks under the expanded foreign currency deposit system shall be tax-exempt, except from such transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board
Hospitals
Q: What resident foreign corporations are subject to preferential tax rates and what are the tax rates applicable to each?
A: As a general rule, all resident foreign corporations are subject to the RCIT or MCIT. As exceptions, certain resident foreign corporations enjoy preferential rates. They are: 1. Regional or area headquarters (RHQ) (a branch established in the Philippines by MNCs and which does not earn or derive income from the Philippines and whose role is supervisory) Representative office (a branch in the Philippines of a MNC whose activities are limited to information dissemination, product promotion) International carriers by air or water Offshore Banking Units Foreign Currency deposit Unit in the Philippines of a foreing bank Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office. Branch of foreign corporations registered with PEZA, SBMA, CDA, CDJHA. Qualified service contractor or subcontractor engaged in petroleum operations in the Philippines
2.
3. 4. 5. 6. 7. 8. 9.
The preferential rates are as follows: Regional or area headquarters Representative office RHQs and representative offices are taxexempt. Note, however, that income from passive investments like interest income on bank
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which shall be subject to the regular income tax payable to banks. However, any interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents other offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to 10% final tax. (This is as amended by RA 9294) ROHQ shall pay a 10% tax on their net taxable income from sources within the Philippines. Any profit remitted by a branch to its head office shall be subject to a 15% branch profit remittance tax. (Note that the purpose of a branch profit remittance tax is to equalize the tax burden on foreign corporations maintaining on one hand, local branch offices, and organizing, on the other hand, a subsidiary domestic corporation where at least majority of all the latters stocks are owned by such foreign corporation) After the income tax holiday of PEZAregistered firms, their gross income earned shall be subject to 5% final tax. However, enterprises registered under the BCDA law are not entitled to tax holiday and are immediately subject to 5% final tax on gross income earned. Aside from being subject to the regular tax on income from all other sources within the Philippines, a subcontractor is subject to the final tax equivalent to 8% of its gross income derived from its contract with the service contractors engaged in petroleum operations.
Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends
They are subject to 20% tax. Note, however, that interest income coming from a depository bank under the expanded foreign currency deposit system is subject to 7.5% tax.
Regional Operating Headquarters (ROHQ) Branch of foreign corporation with respect to profit remittances to head office.
Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10% They are tax-exempt (Note that they are exempt in order to reduce the extra or double taxation of distributed earnings) A final tax of 6% is imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets.
Capital gains realized from the sale, exchange or disposition of lands and/or buildings.
Note: Now, lets go to incomes of domestic, resident foreign and nonresident foreign corporations.
Q: What income of a domestic corporation or resident foreign corporation is subject to preferential tax rates?
A: As a general rule, all taxable income of a domestic corporation or resident foreign corporation is subject to the flat rate tax of 30%. As exceptions, the following are subject to preferential tax rates: 1. Certain passive incomes such as interests from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties Capital gains from the Sale of Shares of Stock not traded in the Stock Exchange Intercorporate dividends (dividends actually or constructively received by a domestic corporation or resident foreign corporation from another domestic corporation) Capital gains realized from the sale, exchange or disposition of lands and/or buildings.
The preferential rates are: Income of a non-resident cinematographic film owner, lessor or distributor Income of a non-resident owner or lessor of vessels chartered by Philippine nationals Income of a non-resident owner of aircraft, machineries and other equipment They shall pay a tax of 25% of its gross income from sources within the Philippines
2. 3.
They shall be subject to a tax of 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations as approved by the MARINA. They shall pay a tax of 7.5% of their gross rentals or fees.
4.
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Interest income on foreign loans contract on or after August 1, 1986. 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% tax on dividends. Note that beginning Jan. 1, 2009, the RCIT has been reduced to 30% from 35%. Net capital gains from the sale, exchange or other disposition of shares of stock shall be subject to the following rates: a. Not over P100,000 5% b. In excess of P100,000 10%
Capital gains from sale of shares of stock in a domestic corporation not traded in the Stock exchange
Petitioner reasons that since the Philippine branch and the Tokyo head office are one and the same entity, whoever made the investment in AG&P, Manila does not matter at all. This is wrong. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. In other words, the alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan which is a separate and distinct income taxpayer from the branch in the Philippines. It is thus clear that Marubeni cannot avail of the lower tax rate of 10%. (2) Yes. But while the CIR correctly concluded that the dividends in dispute were neither subject to the 15 % profit remittance tax nor to the 10 % intercorporate dividend tax, the recipient being a non-resident stockholder, they grossly erred in holding that no refund was forthcoming to the petitioner because the taxes thus withheld totalled the 25 % rate imposed by the Philippine-Japan Tax Convention. To simply add the two taxes to arrive at the 25 % tax rate is to disregard a basic rule in taxation that each tax has a different tax basis. While the tax on dividends is directly levied on the dividends received, "the tax base upon which the 15 % branch profit remittance tax is imposed is the profit actually remitted abroad." Marubeni, being a non-resident foreign corporation with respect to the transaction in question, the applicable provision of the Tax Code is Section 24 (b)(1)(iii) (Now Section 27(B)(5)(b)) in conjunction with the Philippine-Japan Treaty of 1980. In applying said section, Marubeni, being a non-resident foreign corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines. However, a discounted rate of 15% is given to petitioner on dividends received from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation. Consequently, petitioner is entitled to a refund.
Q: What is the income tax imposed on a corporation if its earnings and profits are accumulated (undistributed) instead of being divided and distributed to its stockholders?
A: Section 29(A) provides that, in addition to other taxes imposed under Title II, an improperly accumulated earnings tax (IAET) equal to 10% is imposed for each taxable year on the improperly accumulated taxable income of each corporation.
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As exceptions, the IAET shall not apply to: 1. Publicly-held corporations 2. Banks and other non-bank financial intermediaries; and 3. Insurance companies
6.
Q: How do you determine if a corporation is formed or availed for the purpose of avoiding the income tax with respect to shareholders?
A: Section 29(C)(1) provides that the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Moreover, Section 29(C)(2) provides that the fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence shall prove the contrary. Note that under Section 29(E), the term reasonable needs of the business includes the reasonably anticipated needs of the business.
Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual 7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare 8. A non-stock and non-profit educational institution 9. Government educational institution 10. Farmers or mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company or like organizstion of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and 11. Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. Note: Notwithstanding that they are exempt corporations, the income of whatever kind and character of the organizations mentioned above from any of their properties, real or personal, or form any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code. (Remember this!)
Q: What is meant by improperly accumulated taxable income in connection with the imposition of IAET?
A: Section 29(D) provides that the term improperly accumulated taxable income means taxable income adjusted by: 1. Income exempt from tax 2. Income excluded from gross income 3. Income subject to final tax; and 4. The amount of net operating loss carry-over deducted; And reduced by the sum of: 1. Dividends actually or constructively paid; and 2. Income tax paid for the taxable year
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Here, PAL, in its income tax return for FY 2000-2001, reported no net taxable income for the period, resulting in zero basic corporate income tax, which would necessarily be lower than any franchise tax due from PAL for the same period. The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the MCIT is income tax for which PAL is liable. The CIR reasons that Section 13(a) of PD 1590 provides that the corporate income tax of PAL shall be computed in accordance with the NIRC. And, since the NIRC of 1997 imposes MCIT, and PAL has not applied for relief from the said tax, then PAL is subject to the same. The CIRs contention must fail. Under the NIRC, a domestic corporation must pay whichever is higher of: (1) the income tax under Section 27(A) of the NIRC of 1997, computed by applying the tax rate therein to the taxable income of the corporation; or (2) the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the gross income of the corporation. Although this may be the general rule in determining the income tax due from a domestic corporation under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the provisions in the franchise of PAL specifically governing its taxation. After a conscientious study of PD 1590, in relation to Sections 27(A) and 27(E) of the NIRC of 1997, the Court, like the CTA en banc and Second Division, concludes that PAL cannot be subjected to MCIT for FY 2000-2001. First, PD 1590 refers to basic corporate income tax to be computed in accordance with the NIRC. It did not subject PAL to the entire Title II. Second, PD 1590 provides that the basic corporate income tax shall be based on its annual net taxable income. This is consistent with Section 27(A). In comparison, the 2% MCIT under Section 27(E) shall be based on the gross income of the domestic corporation. There is a distinction between taxable income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably. Hence, the basic corporate income tax, for which PAL is liable under PD 1590, cannot cover MCIT under Section 27(E) since the basis for the first is the annual net taxable income, while the basis for the second is gross income. Third, even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC of 1997, and one is paid in place of the other, the basic corporate income tax and the MCIT are distinct and separate taxes. Fourth, the evident intent of PD 1520 is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Neither can it be said that the NIRC of 1997 repealed or amended Presidential Decree No. 1590. It is true that when Presidential Decree No. 1590 was issued on 11 June 1978, PAL was then a governmentowned and controlled corporation; but when Republic Act No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a private corporation for six years. The repealing clause under Section 7(B) of Republic Act No. 8424 simply refers to charters of government-owned and controlled corporations, which would simply and plainly mean corporations under the ownership and control of the government at the time of effectivity of said statute. It is already a stretch for the Court to read into said provision charters, issued to what were then governmentowned and controlled corporations that are now private, but still operating under the same charters.
withholding and income taxes for the years 1989 and 1990. Alleging that the prescriptive period for refunds for 1989 would soon expire and that it was necessary to interrupt the prescriptive period, Paseo Realty filed with the CTA a petition for review praying for the refund. The CTA ordered the refund of the alleged excess creditable withholding taxes paid. CIR moved for reconsideration. CTA reversed and dismissed the petition for review. Paseo Realty then filed a petition for review with the CA. In resolving the twin issues of whether Paseo Realty is entitled to a refund representing creditable taxes withheld in 1989 and whether Paseo Realty applied such creditable taxes withheld to its 1990 income tax liability, the CA held that petitioner is not entitled to a refund because it had already elected to apply the total amount which includes the refund claimed, against its income tax liability for 1990. The CA denied Paseo Realtys MR. ISSUE: Whether the alleged excess taxes paid by Paseo Realty in 1989 should be refunded or credited against its tax liabilities for 1990? HELD: NO. Paseo Realtys failure to present sufficient evidence to prove its claim for refund is fatal to its cause. It is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. In this case, Paseo Realty combined its 1988 and 1989 tax credits and applied its 1990 tax due against the total, and not against its creditable taxes for 1989. The then Section 69 of the NIRC (now Section 76) provides that in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. The confusion as to Paseo Realtys entitlement to a refund could altogether have been avoided had it presented its tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax credit, which includes the creditable taxes withheld for 1989 subject of the claim for refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether petitioners tax credit of was applied to its approved refunds as it claims. The return would also have shown whether there remained an excess credit refundable to Paseo after deducting its tax liability for 1990. This omission is fatal to Paseos claim.
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the payment of tax "in respect to income received by them as such," the exemption does not apply to income derived ". . . from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income . . . ." as stated in the last paragraph of the then Section 27 (now Section 30) . Since the exemption claimed by the YMCA is expressly disallowed, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction. YMCAs contention that the Constitution exempts "charitable institutions" from the payment not only of property taxes but also of income tax from any source must likewise fail. The tax exemption covers property tax only. As to YMCAs claim that it is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income as stated in the Constitution. It is reiterated that YMCA is exempt from the payment of property tax, but not income tax on the rentals from its property. Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites.
that any profit remitted abroad by a branch of a foreign corporation to its head office shall be subject to 15% tax. The Bank of America argues that the 15% branch profit remittance tax should be assessed on the amount actually remitted or in other words, the 15% profit remittance tax should not form part of the tax base. The CTA upheld Bank of America in its claim for refund. The CA reversed. Hence, this appeal by Bank of America ISSUE: Whether the 15% branch profit remittance tax should be assessed on the amount actually remitted and not on the amount before profit remittance tax? HELD: There is absolutely nothing in Section 24(b)(2)(ii) (Now Section 28(A)(5)) which indicates that the 15% tax on branch profit remittance is on the total amount of profits of the branch (not all of which need be sent or would be ordered remitted abroad). The statute employs "Any profit remitted abroad by a branch to its head office shall be subject to a tax of fifteen per cent (15%)" without more. And to our mind, the term "any profit remitted abroad" can only mean such profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is commonly and popularly accepted and understood. To say therefore that the tax on branch profit remittance is imposed and collected at source and necessarily the tax base should be the amount actually applied for the branch with the Central Bank as profit to be remitted abroad is to ignore the unmistakable meaning of plain words. In the 15% remittance tax, the law specifies its own tax base to be on the "profit remitted abroad." There is absolutely nothing equivocal or uncertain 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.
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.
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territory cannot alter this fact. True, Section 37(a) (Now Section 32) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets of international transportation. However, that does not render it less an income from within the Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from sources within the Philippines. The 2.5% tax on gross Philippine billings imposed under Section 24(b)(2) (Now Section28(A)(3)) is an income tax levied on the presumed gain of the airline companies. It ensures that international airlines are taxed on the income they derive from Philippine sources. The revenues from the sale of tickets having been derived from Philippine sources, there is no cogency to the contention that said airlines are not subject to the aforestated tax. The inexorable conclusion, therefore, is that respondent American Airlines, Inc., being a resident foreign corporation engaged in business in the Philippines and deriving income from Philippine sources, the assessment of the deficiency tax against it was correct and valid. (NOTE: What is the taxable income here? It is the Gross Philippine Billings which include gross revenue realized from uplifts anywhere in the world by any international carrier doing business in the Philippines of passage documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail originates from the Philippines. See Section 28(A)(3)(a) of the NIRC))
were owned by Reese and the rest at 100 shares each by the Respondents. Reese entered into a trust agreement whereby it is stated that upon Reeses death, the company would purchase back all of its shares. Reese died. MANTRASCO repurchased the 24,700 shares. Thereafter, a resolution was passed authorizing that the 24,700 shares be declared as stock dividends to be distributed to the stockholders. The BIR ordered an examination of MANTRASCOs books and discovered that the 24,700 shares declared as dividends were not disclosed by respondents as part of their taxable income for the year 1958. Hence, the CIR issued notices of assessment for deficiency income taxes to respondents. Respondents protested but the CIR denied. Respondents appealed to the CTA. The CTA ruled in their favor. Hence, this petition by the CIR ISSUE: Whether the respondents are liable for deficiency income taxes on the stock dividends? HELD: Dividends means any distribution made by a corporation to its shareholders out of its earnings or profits. Stock dividends which represent transfer of surplus to capital account is not subject to income tax. But if a corporation redeems stock issued so as to make a distribution, this is essentially equivalent to the distribution of a taxable dividend the amount so distributed in the redemption considered as taxable income. The distinctions between a stock dividend which does not and one which does constitute taxable income to the shareholders is that a stock dividend constitutes income if its gives the shareholder an interest different from that which his former stockholdings represented. On the other hand, it does constitute income if the new shares confer no different rights or interests than did the old shares. Therefore, whenever the companies involved parted with a portion of their earnings to bnuy the corporate holdings of Reese, they were making a distribution of such earnings to respondents. These amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents are liable for deficiency income taxes.
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ISSUE: Whether the donation constitute a taxable gift? HELD: Yes. As provided in Article 619 of the Code of 1889 (identical with Article 726 of the present Civil Code of the Philippines), when a person gives to another thingon account of the latters merits or of the services rendered by him to the donor, provided they do not consisted a demandable debt,, there is also a donation There is nothing on record to show that when the late Pirovano rendered services as President and General Manager of the De la Rama Steamship Co. he was not fully compensated for such services. The fact that his services contributed in a large measure to the success of the company did not give rise to a recoverable debt, and the conveyances made by the company to his heirs remain a gift or donation. Also, whether remuneratory or simple, the conveyance remained a gift, taxable under the Code. But then appellants contend, the entire property or right donated should not be considered as a gift for taxation purposes; only that portion of the value of the property or right transferred, if any, which is in excess of the value of the services rendered should be considered as a taxable gift. But, as we have seen, Pirovano's successful activities as officer of the De la Rama Steamship Co. cannot be deemed such consideration for the gift to his heirs, since the services were rendered long before the Company ceded the value of the life policies to said heirs. What is more, the actual consideration for the cession of the policies, as previously shown, was the Company's gratitude to Pirovano; so that under the Code there is no 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.)
HELD: "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rents dividend, securities, or the transaction of any business carried on for gain or profit, or gains, profits, and income derived from any source whatever. The evidence substantially supports the findings of the Court of Tax Appeals. The quarters, therefore, exceeded their personal needs. But the exigencies of the husband-taxpayer's high executive position, not to mention social standing, demanded and compelled them to live in a more spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting up houseguests and guests of the husband-taxpayer's employer-corporation were not his predominant occupation as president, yet he and his wife had to entertain and put up houseguests in their apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in addition to his annual basic salary to take care of those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's employer-corporation is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Nevertheless, as correctly held by the Court of Tax Appeals, the taxpayers are entitled only to a ratable value of the allowances in question, and only the amount of P4,800 annually, the reasonable amount they would have spent for house rental and utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess considered as expenses of the corporation. Likewise, the findings of the CTA that the wife-taxpayer had to make the trip to New York at the behest of her husband's employer-corporation to help in drawing up the plans and specifications of a proposed building, is also supported by the evidence. No part of the allowance for travelling expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them. The fact that she had herself operated on for tumors while in New York was but incidental to her stay there and she must have merely taken advantage of her presence in that city to undergo the operation. Hence, the CIR is ordered to refund the taxpayers. (Note: What is the taxable income here? Gross income! The Court held basically upheld the CTA in (1) only the ratable value of the allowances for housing shall form part of the income as the apartment is used for his business functions as well and (2) the trip allowances does not form part of income as they are for business purposes.
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7. 8. 9. 10. 11.
Dividends Annuities Prizes and winnings Pensions; and Partners distributive share from the net income of the GPP
part of the banks gross receipts for purposes of the GRT on banks. In addition, Section 8 of RR No. 12-80 expressly states that interest income, even if subject to the FWT and excluded from gross income for income tax purposes, should still form part of the banks taxable gross receipts. Thus, interest earned by banks, even if subject to the final tax and excluded from taxable gross income, forms part of its gross receipts for GRT purposes. The interest earned refers to the gross interest without deduction since the regulations do not provide for any deduction. The gross interest, without deduction, is the amount the borrower pays, and the income the lender earns, for the use by the borrower of the lenders money. The amount of the final tax plainly comes from the interest earned and is consequently part of the banks taxable gross receipts. Hence, CBCs claim for refund must fail.
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(2) NO. Double taxation means taxing the same property twice when it should be taxed only once; that is, x x x taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding. Hence, there is no double taxation.
services rendered, terminal leave pay is actually part of gross income of the recipient. ISSUE: Whether terminal leave pay received by a government official or employee on the occasion of his compulsory retirement from the government service is subject to withholding (income tax)? HELD: NO. Terminal leave pay received by a government official or employee is not subject to withholding (income) tax. The rationale behind the employees entitlement to an exemption from withholding tax on his terminal leave is that commutation of leave credits, more commonly known as terminal leave, is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. In the exercise of sound personnel policy, the Government encourages unused leaves to be accumulated. The Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits. In fine, not being part of the gross salary or income of a government official or employee but a retirement benefit, terminal leave pay is not subject to income tax.
Q: What is non-compensation income? Q: What are the three categories of taxable income?
A: Taxable income may be grouped into: 1. Passive investment income (subject to final tax) 2. Compensation Income 3. Non-compensation income A: Non-compensation income is any other income that is not derived from personal services or not related to an employer-employee relationship and is generally subject to tax on net income basis. In other words, the rates are computed on taxable net income.
Q: How do you determine if an income should be considered as income from sources within the Philippines?
A: The following rules shall apply: 1. Interests If the obligor or debtor (corporate or otherwise) is a resident of the Philippines the interest income is treated as income from within the Philippines (Residence of the debtor) 2. Dividends Dividends received from a domestic corporation or from a foreign corporation are treated as income from sources within the Philippines (Residence of the corporation paying the dividend) 3. Services If the service is performed in the Philippines, the income shall be treated as from sources within the Philippines. (Performance of the service) 4. Rentals and Royalties If the property or interest is located or used in the Philippines, the gain or income is treated as income from sources within the Philippines (Location of the property or interest in such property) 5. Sale of Real Property If the real property sold is located within the Philippines, the gain is considered as income from the Philippines (Location of real property) 6. Sale of Personal property a. Personal property produced in whole or in part by the taxpayer within the Philippines and sold without the Philippines or produced in whole or in part by the taxpayer without and sold within the Philippines Any gain, profit or income shall be treated as derived partly from sources within and partly from sources without the Philippines. b. Purchase of personal property within and its sale without the Philippines, or purchase of personal property without and its sale within the Philippines
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Any gain, profit or income shall be treated as derived entirely from sources within the country in which sold. Note: This is basically Section 42 of the NIRC. I included this so that it will be easier to understand the assigned cases which discuss Section 32 in relation to Section 42. The rules under Section 42 will be discussed in greater detail in the succeeding pages.
sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. True, Section 37(a) (now Section 42(A)) of the Tax Code, which enumerates items of gross income from sources within the Philippines, namely: (1) interest, (2) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of personal property, does not mention income from the sale of tickets for international transportation. However, that does not render it less an income from sources within the Philippines.Section 37 (now Section 42), 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.
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source is the Philippines and is considered gross income generated within the Philippines
5. 6.
7.
health insurance or under the Workmens compensation Act, but not damages or compensation recovered for loss of profit in loss or damage to property which would be taxable Income exempt under treaty binding upon the Government of the Philippines. Certain retirement benefits, pensions, gratuities, more particularly: a. Retirement benefits received under RA 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer provided: i. provided that the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement ii. That the benefits granted shall be availed of by an official or employee only once. (Note: Reasonable private benefit plan means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.) b. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. c. The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. d. Payments of benefits due or to become due to any person (residing in the Philippines) under the laws of the United States administered by the United States Veterans Administration. e. Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. f. Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. Miscellaneous items, likewise exempt, including: a. Income of foreign governments or financing institutions owned, controlled or enjoying refinancing from such foreign governments and of international or regional financial institutions established by foreign governments from their passive investments in the Philippines b. Income of the Philippine government and its political subdivisions derived from public utilities or in the exercise of essential governmental functions c. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement but only if:
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i.
d.
e.
f. g.
h.
The recipient was selected without any action on his part to enter the contest or proceedings; and ii. The recipient is not required to render substantial future services as a condition to receiving the prize or award All prizes and wards granted to athletes in local and international sports competitions whether held in the Philippines or abroad. Gross benefits received by officials and employees of public and private entities provided, however, that the total exclusion shall not exceed P30,000 which shall cover: i. Benefits received by officials and employees of the national and local government pursuant to RA 6686 ii. Benefits received by employees pursuant to PD 851 iii. Benefits received by officials and employees not covered by PD 851 iv. Other benefits such as productivity incentives and Christmas bonus provided that the ceiling of P30,000 may be increased through the rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. GSIS, SSS, Medicare and Pag-ibig contributions and union dues of individuals Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years Gains from the redemption of shares of stock in a mutual fund company
sovereignty as auto-limitation. It is not precluded from allowing another power to participate in the exercise of jurisdictional right over certain portions of its territory. If it does so, it by no means follows that such areas become impressed with an alien character. They retain their status as native soil. They are still subject to its authority. Its jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease to the American armed forces by virtue of the military bases agreement of 1947. They are not and cannot be foreign territory. (2) YES. Having held that Clark Air Base has not become foreign soil or territory, the country's jurisdictional rights therein, certainly not excluding the power to tax, have been preserved. Reagan is liable for the income tax arising from a sale of his automobile in the Clark Field Air Base, which clearly is and cannot otherwise be other than, within our territorial jurisdiction to tax.
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should be applied to the case at bar where the law invoked (Section 9 of Republic Act No. 333) does not make any reference whatsoever to exemption of income derived from sale of expropriated property thereunder.
FRINGE BENEFITS TAX (SECTION 33, NIRC) Q: What are the special types of income taxes that are imposed on certain incomes of taxpayers?
A: The following are the special types of income taxes: 1. Improperly Accumulated Earnings Tax (IAET) under Section 29 (as discussed earlier) 2. Fringe Benefits Tax (FBT) under Section 33 3. Tax on enterprises registered with special economic and Freeport zones under Special Laws
employer shall assume the fringe benefits tax imposed on the taxable fringe benefits of the managerial or supervisory employees, but allows the employer to deduct such fringe benefit tax as a business expense from its gross income. However, the fringe benefits of rank-and-file employees are treated as part of his compensation income, which must be withheld and deducted by his employer from the compensation income of the employee. Note: Clearly, there is a difference in tax treatment between supervisory and managerial employees on one hand and rank-and-file employees on the other. It can be argued that such contravenes the fundamental principle that the income tax shall be imposed based on the taxpayers ability to pay.
Q: How do you define a (1) managerial employee; (2) supervisory employee and (3) rank-and-file employee?
A: RR 3-98 provides the following definitions: a. A managerial employee refers to one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees b. A supervisory employee is one who, in the interest of the employer, effectively recommends such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment. c. A rank-and-file employee means all employees who are holding neither managerial or supervisory position
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1.
Fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat. (Note: To review, Section 25(B) refers to non-resident aliens not engaged in trade or business in the Philippines whose income are taxed at 25% and Sections 25(C-E) refers to alien individuals and Filipinos employed in RHQs, ROHQs of MNCs, OBUs and petroleum subcontractors.)
2.
The grossed-up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.
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