ADAMSON CENTRAL BAR OPERATIONS

TAXATION LAW
Section 28 (5)(b), NIRC:
A final withholding tax at the rate of 15% is hereby imposed on the amount of cash and/or property
dividends received from a domestic corporation, which shall be collected and paid provided in Section 57
(a) of this Code, subject to the condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit the tax due from the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% for 1997, 19% for 1998, 18% for 1999, 17% thereafter,
which represents the difference between the regular income tax of 35% in 1997, 34% in 1998, 33%
in 1999, and 32% thereafter on corporations and the 15% tax on dividends as provided in this
subparagraph.
TAX SPARING RULE
Involves inter-corporate dividends received by a non-resident foreign corporation from a
domestic corporation

Only 15% final withholding tax on cash and/or property dividends is imposed

Provided the country in which the non-resident foreign corporation is domiciled shall allow a credit
against the tax due form the non-resident foreign corporation taxes deemed to have been paid in
the Philippines, which is 32% by 2000 [Sec. 28, (B) (5) (b)]

TAX SPARING CREDIT RULE

Situation: NRFC received dividend, cash or property dividend from DC. That dividend received
from DC is subject to 15% FINAL WITHHOLDING TAX.
This 15% may be imposed on this dividend received from DC if the foreign government of the
NRFC allows a tax credit at least 19% (1998), 18% (1999), 17% (2000). It should be credited form the
taxed deemed paid by this NRFC in the Phils.
If so, the foreign government does not allow a tax credit of at least 19%, the tax there is not 15%
but 34%. Thus the tax spared or saved is 19% because normally the tax is 34%. So, 34% less 15%
equals 19%, that is the tax saved and that represents the tax credit allowed by the foreign government.
Question: Must the foreign government actually grant a tax credit or is it enough that the foreign
government allow such tax credit?
Answer: There is no statutory provision that requires actual grant. Neither is there a Revenue
Regulation requiring actual grant. It is clear that the provision of the law says allows. SO, it is enough
to prove that the foreign corporation allows a tax credit. It is not incumbent upon the foreign corporation
to prove the amount actually granted.
Question: Does a withholding agent or a subsidiary corp. have the personality to fila a written
claim or refund?
Answer: The withholding agent has the personality to file a written claim for refund. A
withholding agent is technically a taxpayer because it is required to deduct and withhold the tax, and it
has the obligation to remit the same to the govt. So, withholding agent is liable for tax. It has therefore
the personality to file a written claim for refund.
Withholding agent is not only an agent of the taxpayer but also an agent of the government.
Since it is an agent of the taxpayer, it is ipso facto authorized to file a written claim for refund.
-

To justify an accumulation of earnings and profits for the reasonable anticipated

future needs, such accumulations must have been used within a reasonable time after the close of a
taxable period.

- Immediacy Test If the corporation did not prove an immediate need for accumulation of earnings, the
accumulation was not for reasonable needs of the business, and the surtax would apply.
Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec. 28 (A) (4) as
amended by RA 9294 (2004)]
Tax Rate: Exempt from all taxes, except net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary Board to be subject to the regular income
tax payable by banks.

ADAMSON CENTRAL BAR OPERATIONS

EXCEPTION: 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 final tax
at the rate of 10%.
Tax Coverage: ONLY income derived by offshore banking units from foreign currency transactions with:
1. Nonresidents
2. Other offshore banking units
3. Local commercial banks including branches of foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with offshore banking units
CONCEPT OF DOUBLE TAXATION
Kinds of Double Taxation
A. DIRECT DUPLICATE
taxing same person, property or right twice
for the same purpose
by the same taxing authority
within the same jurisdiction or taxing district
within the same taxable period
and they must be of the same kind or character of tax
B. INDIRECT DUPLICATE
Exists if any of the elements for Direct taxation is not present
No constitutional prohibition on double taxation. However, where there is direct duplicate taxation then
there may be violation of the constitutional precepts of equal protection and uniformity in taxation.
TAX TREATY AS A MODE OF ELIMINATING
DOUBLE TAXATION:
1) EXEMPTION METHOD the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may taken into account in determining
the rate of tax applicable to the tax payers remaining income or capital (ex. Tax Sparing Credit scheme)
2) CREDIT METHOD the tax paid in the state of source is credited against the tax levied in the state of
residence