transaction tax.

In the first place, the thirty-five percent (35%) transaction

PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES (PICOP) v. tax is an income tax, a tax on the interest income of the lenders or
CA, CIR and CTA, G.R. Nos. 106949-50 (1995) creditors as held by the Supreme Court in the case of Western Minolco
Corporation v. Commissioner of Internal Revenue. The 35% transaction tax
is an income tax on interest earnings to the lenders or placers. The latter
Facts: Paper Industries Corporation of the Philippines (PICOP) is a
are actually the taxpayers. Therefore, the tax cannot be a tax imposed
Philippine corporation registered with the Board of Investments (BOI) as a
upon the petitioner. In other words, the petitioner who borrowed funds
preferred pioneer enterprise with respect to its integrated pulp and paper
from several financial institutions by issuing commercial papers merely
mill, and as a preferred non-pioneer enterprise with respect to its
withheld the 35% transaction tax before paying to the financial institutions
integrated plywood and veneer mills. Petitioner received from the
the interest earned by them and later remitted the same to the respondent
Commissioner of Internal Revenue (CIR) two (2) letters of assessment and
CIR. The tax could have been collected by a different procedure but the
demand (a) one for deficiency transaction tax and for documentary and
statute chose this method. Whatever collecting procedure is adopted does
science stamp tax; and (b) the other for deficiency income tax for 1977, for
not change the nature of the tax. It is thus clear that the transaction tax is
an aggregate amount of PhP88,763,255.00.
an income tax and as such, in any event, falls outside the scope of the tax
exemption granted to registered pioneer enterprises by Section 8 of R.A.
PICOP protested the assessment of deficiency transaction tax , the
No. 5186, as amended. PICOP was the withholding agent, obliged to
documentary and science stamp taxes, and the deficiency income tax
withhold thirty-five percent (35%) of the interest payable to its lenders and
assessment. CIR did not formally act upon these protests, but issued a
to remit the amounts so withheld to the Bureau of Internal Revenue ("BIR").
warrant of distraint on personal property and a warrant of levy on real
As a withholding, agent, PICOP is made personally liable for the thirty-five
property against PICOP, to enforce collection of the contested assessments,
percent (35%) transaction tax 10 and if it did not actually withhold thirty-
thereby denying PICOP's protests. Thereupon, PICOP went before (CTA)
five percent (35%) of the interest monies it had paid to its lenders, PICOP
appealing the assessments.
had only itself to blame.
On 15 August 1989, CTA rendered a decision, modifying the CIR’s findings
and holding PICOP liable for the reduced aggregate amount of
2. NO. The CIR assessed documentary and science stamp taxes, amounting to
P20,133,762.33. Both parties went to the Supreme Court, which referred
PhP300,000.00, on the issuance of PICOP's debenture bonds. Tax
the case to the Court of Appeals (CA).
exemptions are, to be sure, to be "strictly construed," that is, they are not
CA denied the appeal of the CIR and modified the judgment against PICOP
to be extended beyond the ordinary and reasonable intendment of the
holding it liable for transaction tax and absolved it from payment of
language actually used by the legislative authority in granting the
documentary and science stamp tax and compromise penalty. It also held
exemption. The issuance of debenture bonds is certainly conceptually
PICOP liable for deficiency of income tax.
distinct from pulping and paper manufacturing operations. But no one
Issues:
contends that issuance of bonds was a principal or regular business activity
1. Whether PICOP is liable for transaction tax
of PICOP; only banks or other financial institutions are in the regular
2. Whether PICOP is liable for documentary and science stamp tax
business of raising money by issuing bonds or other instruments to the
3. Whether PICOP is liable for deficiency income tax
general public. The actual dedication of the proceeds of the bonds to the
Held:
carrying out of PICOP's registered operations constituted a sufficient nexus
1. YES. PICOP reiterates that it is exempt from the payment of the
with such registered operations so as to exempt PICOP from taxes
transaction tax by virtue of its tax exemption under R.A. No. 5186, as
ordinarily imposed upon or in connection with issuance of such bonds. The
amended, known as the Investment Incentives Act, which in the form it
Supreme Court agrees with the Court of Appeals on this matter that the
existed in 1977-1978, read in relevant part as follows: "SECTION 8.
CTA and the CIR had erred in rejecting PICOP's claim for exemption from
Incentives to a Pioneer Enterprise. — In addition to the incentives provided
stamp taxes.
in the preceding section, pioneer enterprises shall be granted the following
incentive benefits: (a) Tax Exemption. Exemption from all taxes under the
3. YES. PICOP did not deny the existence of discrepancy in their Income Tax
National Internal Revenue Code, except income tax, from the date of
Return and Books of Account owing to their procedure of recording its
investment is included in the Investment Priorities Plan x x x”. The
export sales (reckoned in U.S. dollars) on the basis of a fixed rate, day to
Supreme Court holds that that PICOP's tax exemption under R.A. No. 5186,
day and month to month, regardless of the actual exchange rate and
as amended, does not include exemption from the thirty-five percent (35%)
without waiting when the actual proceeds are received. In other words,
PICOP recorded its export sales at a pre-determined fixed exchange rate.
That pre-determined rate was decided upon at the beginning of the year
and continued to be used throughout the year. Because of this, the CIR has
made out at least a prima facie case that PICOP had understated its sales
and overstated its cost of sales as set out in its Income Tax Return. For the
CIR has a right to assume that PICOP's Books of Accounts speak the truth in
this case since, as already noted, they embody what must appear to be
admissions against PICOP's own interest.
Dispositive:
WHEREFORE, for all the foregoing, the Decision of the Court of Appeals is
hereby MODIFIED and Picop is hereby ORDERED to pay the CIR the
aggregate amount of P43,794,252.51 itemized as follows:
(1) Thirty-five percent (35%) transaction
tax P 3,578,543.51
(2) Total Deficiency Income Tax
Due P 40,215,709.00
Aggregate Amount Due and Payable P 43,794,252.51
ESSO V. CIR- TESTS OF DEDUCTABILITY
Category: Income Taxation
For an item to be deductible as a business expense, the expense must be ordinary
and necessary; it must be paid or incurred within the taxable year; and it must be
paid or incurred in carrying on a trade or business. In addition, the taxpayer must
substantially prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed.
FACTS: ESSO deducted from its gross income for 1959, as part of its ordinary
and necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. The Commissioner disallowed the
claim on the ground that the expenses should be capitalized and might be
written off as a loss only when a “dry hole” should result. Hence, ESSO filed an
amended return where it asked for the refund of P323,270 by reason of its
abandonment, as dry holes, of several of its oil wells. It also claimed as ordinary
and necessary expenses in the same return amount representing margin fees it
had paid to the Central Bank on its profit remittances to its New York Office.
ISSUE: Whether the margin fees may be considered ordinary and
necessary expenses when paid.
HELD:
For an item to be deductible as a business expense, the expense must be
ordinary and necessary; it must be paid or incurred within the taxable year; and
it must be paid or incurred in carrying on a trade or business. In addition, the
taxpayer must substantially prove by evidence or records the deductions
claimed under law, otherwise, the same will be disallowed. There has been no
attempt to define “ordinary and necessary” with precision. However, as guiding
principle in the proper adjudication of conflicting claims, an expenses is
considered necessary where the expenditure is appropriate and helpful in the
development of the taxpayer’s business. It is ordinary when it connotes a
payment which is normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayer’s business; the expenditure, to be an
allowable deduction as a business expense, must be determined from the nature
of the expenditure itself, and on the extent and permanency of the work
accomplished by the expenditure. Herein, ESSO has not shown that the
remittance to the head office of part of its profits was made in furtherance of its
own trade or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a showing that they
are illegal or ultra vires; which is erroneous. Claims for deductions are a matter
of legislative grace and do not turn on mere equitable considerations
CIR VS. CTA AND SMITH KLINE & FRENCH OVERSEAS CO. (PHILIPPINE
BRANCH)
FACTS: Smith Kline and French Overseas Company, a multinational firm domiciled
in Pennsylvania, is licensed to do business in the Phils. It is engaged in the
importation, manufacture, and sale of pharmaceutical drugs and chemicals.
In its original incomes tax return in 1971, Smith Kline declared a net
taxable income of P1,489,277 and paid P511,247 as tax due. Among the deductions
claimed from gross income was P501,040 as its share of the head office overhead
expenses.
However, in its amended return in 1973, there was an overpayment of
P324,255 “arising from underdeduction of home office overhead.” It made a formal
claim for refund of the alleged overpayment because it appears that sometime in
October 1972, Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in the unallocated
overhead expenses of the main office for the year ended December 1971 was
actually P1,427,484, and that the allocation was made on the basis of the
percentage of gross income in the Philippines to gross income of the corporation as
a whole. By reason of the new adjustment, Smith Kline’s tax liability was greatly
reduced from P511,247 to P186,992, resulting in an overpayment of P324,255.
The CTA rendered a decision in 1980 ordering the Commissioner to refund
the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed.

ISSUE: Is Smith Kline’s share of the head office overhead expenses incurred
outside the Philippines deductible?
HELD: YES. Smith Kline’s share of the head officer overhead expenses incurred
outside the Philippines is deductible.
Section 37 of the old NIRC. Net Income from sources in the Philippines.
“From the items of gross income specified in subsection (a) of this section,
there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expenses, losses, or
other deductions which cannot definitely be allocated to some item or class of gross
income. The remained, if any, shall be included in full as net income from sources
within the Philippines.”
Section 160. Apportionment of deductions.
“…The ratable part is based upon the ration of gross income from sources
within the Philippines to the total gross income.”
EXAMPLE: A non-resident alien individual whose taxable year is the
calendar year, derived gross income from all sources for 1939 of P180,000,
including therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Phils 12,000
Gain from sale of real property located in the Phils 11,000
TOTAL 36,000
That is, 1/5 of the total gross income was from sources within the Philippines. The
remainder of the gross income was from sources without the Philippines. The
expenses of the taxpayer for the year amount to P78,000. Of these expenses,
P8,000 is properly allocated to income from sources within the Phils and P40,000 is
from sources without the Phils. The remainder of the expense, P30,000, cannot be
definitely allocated to any class of income. A ratable part thereof, based upon the
relation of gross income from sources within the Phils to the total gross income
shall be deducted in computing net income from sources within the Phils. Thus,
these are deducted from the P36,000 of gross income from sources within the Phils
expenses amounting to P14,000 (representing P8,000 properly apportioned to the
income from sources within the Philippines and P6,000, a ratable part (1/5) of the
expenses which could not be allocated to any item or class of gross income). The
remainder of P22,000 is the net income from sources within the Phils.
From the foregoing provisions, it is manifest that where an expense is
clearly related to the production of Philippine-derived income or to Phil operations
(e.g., salaries of Phil personnel, rental of office building in the Phils), that expense
can be deducted from the gross income acquired in the Phils without resorting to
apportionment.
The overhead expenses incurred by the parent company in connection
with finance, administration, and research and development, all of which direct
benefit its branches all over the world, including the Phils, fall under a different
category however. There are items which cannot be definitely allocated or
identified with the operations of the Phil branch. For 1971, the parent company of
Smith Kline spent $1,077,739. Under Sec. 37, Smith Kline can claim as its deductible
share a ratable part of such expenses based upon the ration of the local branch’s
gross income to the total gross income, worldwide, of the multinational
corporation. Smith Kline also presented ample evidence to support its claim for
refund. We hold that Smith Kline’s amended 1971 return is in conformity with the
law and regulations. The Tax Court correctly held that the refund or credit of the
resulting overpayment is in order.
Optional Treatment of Interest Expense
PALANCA V CIR (GR L-16626)
While the distinction between "taxes" and "debts" was recognized in this
jurisdiction, the variance in their legal conception does not extend to the
interests paid on them, at least insofar as Section 30 (b) (1) of the National
Internal Revenue Code is concerned. Thus, under the law, for interest to be
deductible, it must be shown that there be an indebtedness, that there should
be interest upon it, and that what is claimed as an interest deduction should
have been paid or accrued within the year.
FACTS:
 July 1950, Don Carlos Palanca, Sr., donated to his son Carlos Jr.,
shares of stock in La Tondeña, Inc. amounting to 12,500 shares.
Carlos Jr. failed to file a return on the donation within the statutory
period so Carlos Jr. was assessed P97,691.23 (gift tax), P24,442.81
(25% surcharge), P47,868.70 (interest), which he paid on June 22,
1955.
 March 1,1956, Carlos Jr. filed with BIR his ITR for 1955 claiming a
deduction for interest of P9,706.45 and reporting a taxable income of
P65,982.12. He was assessed P21,052.01 as income tax.
  November 1956, Carlos Jr. filed an amended return for 1955,
claiming an additional deduction of P47,868.70 (allegedly the interest
paid on the donee’s gift tax based on Sec.30(b)(1) of the Tax Code)
so taxable income is P18,113.42 (not P65,982.12) and tax due
thereon in sum of P3,167.00. He claimed for a refund of P17,885.01
(P21,052.01 - P3,167.00)– BIR denied. Carlos Jr. reiterated claim for
refund, BIR denied
 BIR considered the donation by Carlos Sr. as a transfer in
contemplation of death so Carlos Jr. was assessed P191,591.62 as
estate and inheritance taxes. Carlos paid P17,002.74 on June 22,
1955 as gift tax (includes interest and surcharge) which was applied
to his estate and inheritance tax liability. Petitioner paid P60,581.80
as interest for delinquency.
 August 1958, Carlos Jr. filed again an amended ITR for 1955
claiming the following: As interest deductions: P9,706.45 (as in the
original ITR) + P60,581.80 (interest on the estate and inheritance
taxes); Net Taxable income: P5,400.32; Income tax due: P428.00;
claimed a refund of P20,624.01 (P21,052.01 – P428) Even before
BIR ruled on his claim, Carlos Jr. filed petition for review before CTA
 CTA: BIR should refund Carlos P20,624.01
ISSUE:
WON there is a difference between “indebtedness” and “taxes” to determine
the deductible interest
HELD:
NO. The CIR seeks the reversal of the Court of Tax Appeal's ruling on the
aforementioned petition for review. Specifically, he takes issue with the said
court's determination that the amount paid by respondent Palanca for interest
on his delinquent estate and inheritance tax is deductible from the gross
income for that year under Section 30 (b) (1) of the Revenue Code. CIR
urges that a tax is not an indebtedness. He adopts the view that "debts are
due to the government in its corporate capacity, while taxes are due to the
government in its sovereign capacity. A debt is a sum of money due upon
contract express or implied or one which is evidenced by a judgment. Taxes
are imposts levied by government for its support or some special purpose
which the government has recognized."
In view of the distinction, then, the Commissioner submits that the
deductibility of "interest on indebtedness" from a person's income tax under
Section 30(b) (1) cannot extend to "interest on taxes."
While "taxes" and "debts" are distinguishable legal concepts, in certain cases
as in the suit at bar, on account of their nature, the distinction becomes
inconsequential. The term "debt" is properly used in a comprehensive sense
as embracing not merely money due by contract, but whatever one is bound
to render to another, either for contract or the requirements of the law.
(Camden vs. Fink Coule and Coke Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax becomes at least
in a broad sense, a debt.
In our jurisdiction, the rule is settled that although taxes already due have
not, strictly speaking, the same concept as debts, they are, however
obligations that may be considered as such. (Sambrano vs. Court of Tax
Appeals, G.R. no. L-8652, March 30, 1957).
In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R.
No. L-13912, September 30, 1960, we explicitly announced that while the
distinction between "taxes" and "debts" was recognized in this jurisdiction,
the variance in their legal conception does not extend to the interests paid on
them, at least insofar as Section 30 (b) (1) of the National Internal Revenue
Code is concerned. Thus, under the law, for interest to be deductible, it must
be shown that there be an indebtedness, that there should be interest upon
it, and that what is claimed as an interest deduction should have been paid or
accrued within the year. It is here conceded that the interest paid by
respondent was in consequence of the late payment of her donor's tax, and
the same was paid within the year it is sought to be deducted.
In both this and the Prieto case, the taxpayer sought the allowance as
deductible items from the gross income of the amounts paid by them as
interests on delinquent tax liabilities. Of course, what was involved in the
cited case was the donor's tax while the present suit pertains to interest paid
on the estate and inheritance tax. This difference, however, submits no
appreciable consequence to the rationale of this Court's previous
determination that interests on taxes should be considered as interests on
indebtedness within the meaning of Section 30(b) (1) of the Tax Code. The
interpretation we have placed upon the said section was predicated on the
congressional intent, not on the nature of the tax for which the interest was
paid.
  Thus, shares of stock; like the other securities defined in Section
20(t)[4] of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
China Banking Corp. V. CA
active trader (for his own account) in, securities.
China Banking Corp. v. CA
 Section 20(u) of the NIRC defines a dealer in securities thus" (u)
G.R. No. 125508 July 19, 2000
The term 'dealer in securities' means a merchant of stocks or
VITUG, J.
securities, whether an individual, partnership or corporation, with
Lessons Applicable: Capital asset, capital loss, inventory depends on the nature of
an established place of business, regularly engaged in the
the business
purchase of securities and their resale to customers; that is, one
Laws Applicable:
who as a merchant buys securities and sells them to customers
FACTS:
with a view to the gains and profits that may be derived
 Petitioner China Bank made a 53% equity investment in First CBC Capital
therefrom."
(Asia) Ltd., a Hongkong Subsidiary of P 16,227, 851.80
 In the hands, however, of another who holds the shares of stock
 1906: with the approval of the Bangko Sentral, it wrote of as worthless
by way of an investment, the shares to him would be capital
investment for being insolvent in its 1987 Income Tax Return treated as
assets. When the shares held by such investor become worthless,
bad debts o ordinary loss deductible.
the loss is deemed to be a loss from the sale or exchange of
 CIR contends it should be capital loss.
capital assets.
 CTA and CA on Petition for Review on Certiorari: upheld CIR contention
 Loss sustained by the holder of the securities, which are capital
ISSUE: W/N Capital loss (NOT Ordinary Loss)
assets (to him), is to be treated as a capital loss as if incurred from
a sale or exchange transaction. A capital gain or a capital loss
HELD: Yes. Petition is DENIED
normally requires the concurrence of two conditions for it to
 Equity investment is a capital asset resulting in a capital gain or a capital
result: (1) There is a sale or exchange; and (2) the thing sold or
loss. A capital asset is defined negatively in Section 33(1) of the NIRC
exchanged is a capital asset. When securities become worthless,
 (1) Capital assets. - The term 'capital assets' means property held
there is strictly no sale or exchange but the law deems the loss
by the taxpayer (whether or not connected with his trade or
anyway to be "a loss from the sale or exchange of capital assets
business), but does not include:
 Capital losses are allowed to be deducted only to the extent of
 stock in trade of the taxpayer; or
capital gains, i.e., gains derived from the sale or exchange of
 other property of a kind which would properly be
capital assets, and not from any other income of the taxpayer.
included in the inventory of the taxpayer if on hand at
the close of the taxable year; or
 property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business;
or
 property used in the trade or business, of a character
which is subject to the allowance for depreciation
provided in subsection (f) of section twenty-nine; or
 real property used in the trade or business of the
taxpayer
PHIL. REFINING COMPANY V. CA (1996)
Phil. Refining Company v. CA
G.R. No. 118794 May 8, 1996
REGALADO, J.
Lessons Applicable: deductibility of bad debts, penalties of 25% surcharge,
interest of 20, civil penalties are compensatory (not penal), civil penalties
and interest are automatic
Laws Applicable:
FACTS: Petitioner Philippine Refining Company (PRC) was assessed by
respondent Commissioner of Internal Revenue (Commissioner) to pay a
deficiency tax for the year 1985 in the amount of P1,892,584
 PRC protested that the amounts are bad debts and interest expense
which are allowable and legl deductions. But, CIR ignored it and issued
a warrant of garnishment against PRC's deposits at City Trust Bank.
 PRC filed a Petition for Review with the CTA who reversed the
interest expense disallowance but maintained the 13 bad debts
disallowance.
 PRC elevated the case to CA who dismissed the case for failing to satisfy
the requirements of worthlessness of a debt:
 (1) there is a valid and subsisting debt
 (2) debt must be actually ascertained to be worthless and
uncollectible during the taxable year
 (3) debt must be charged off during the taxable year
 (4) debt must arise from the business or trade of the taxpayer
 (5) uncollectible even in the future
 (6) exerted diligent effort to collect
ISSUES:
1. W/N bad debts requirements are met to be deductible as
assessed by the CA
2. W/N PRC should be liable for penalties and interests
HELD: petition at bar is DENIED
1. NO.
 Furthermore, there are steps outlined to be undertaken by the taxpayer
to prove that he exerted diligent efforts to collect the debts, viz: (1)
sending of statement of accounts; (2) sending of collection letters; (3)
giving the account to a lawyer for collection; and (4) filing a collection
case in court.
 The only evidentiary support given by PRC for its aforesaid claimed
deductions was the explanation or justification posited by its financial
adviser or accountant. Not a single document was offered to show that
the Remoblas Store and CM Variety Store were burned, even just a
police report or an affidavit attesting to such loss by fire. The account
of Tomas Store in the amount of P16,842.79 is uncollectible, claims
petitioner PRC, since the owner thereof was murdered and left no
visible assets which could satisfy the debt. Withal, just like the accounts
of the two other stores just mentioned, petitioner again failed to
present proof of the efforts exerted to collect the debt, other than the
aforestated asseverations of its financial adviser. The accounts of
Aboitiz Shipping Corporation and J. Ruiz Trucking in the amounts of
P89,483.40 and P69,640.34, respectively, both of which allegedly arose
from the hijacking of their cargo and for which they were given 30%
rebates by PRC, are claimed to be uncollectible. Again, petitioner failed
to present an iota of proof, not even a copy of the supposed policy
regulation of PRC that it gives rebates to clients in case of loss arising
from fortuitous events or force majeure, which rebates it now passes
off as uncollectible debts.
 Findings of the CTA having recognized expertise will not ordinarily be
reviewed absent a showing of gross error or abuse on its part.
2. YES.
 Sec. 248 and 249 of the tax code clearly provides that civil penalty is
imposed in case of failure to pay the tax within the prescribed time for
its payment and deficiency tax or any surcharge or interest on the due
date appearing in the notice and demand of the commissioner. Thus,
penalties of 25% surcharge and interest of 20% shall accrue from April
11, 1989.
 Tax laws imposing penalties for delinquencies, so we have long held,
are intended to hasten tax payments by punishing evasions or neglect
of duty in respect thereof. If penalties could be condoned for flimsy
reasons, the law imposing penalties for delinquencies would be
rendered nugatory, and the maintenance of the Government and its
multifarious activities will be adversely affected
BASILAN ESTATES, INC. v. CIR
G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.
Doctrine:
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges, not
matters of right. They are not created by implication but upon clear expression in
the law.
Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets
on the basis of their acquisition cost. As of January 1, 1950 it changed the
depreciable value of said assets by increasing it to conform with the increase in
cost for their replacement. Accordingly, from 1950 to 1953 it deducted from
gross income the value of depreciation computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner, consequently assessing
the latter of deficiency income taxes.
Issue: Whether or not the depreciation shall be determined on the acquisition
cost rather than the reappraised value of the assets
Held: Yes. The following tax law provision allows a deduction from gross
income for depreciation but limits the recovery to the capital invested in the
asset being depreciated:
(1)In general. — A reasonable allowance for deterioration of property arising
out of its use or employment in the business or trade, or out of its not being
used: Provided, That when the allowance authorized under this subsection shall
equal the capital invested by the taxpayer . . . no further allowance shall be
made. . . .
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges,
not matters of right. They are not created by implication but upon clear
expression in the law [Gutierrez v. Collector of Internal Revenue, L-19537, May
20, 1965].
Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. It commences with the
acquisition of the property and its owner is not bound to see his property
gradually waste, without making provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the invested capital in
an asset will transgress the underlying purpose of a depreciation allowance. For
then what the taxpayer would recover will be, not only the acquisition cost, but
also some profit. Recovery in due time thru depreciation of investment made is
the philosophy behind depreciation allowance; the idea of profit on the
investment made has never been the underlying reason for the allowance of a
deduction for depreciation.
FERNANDEZ HERMANOS, INC. VS. CIR- ALLOWABLE TAX DEDUCTIONS
Category: Income Taxation
That the circumstances are such that the method does not reflect the taxpayer ’ s
income with reasonable accuracy and certainty and proper and just additions of
personal expenses and other non-deductible expenditures were made and correct ,
fair and equitable credit adjustments were given by way of eliminating non-
taxable items.
FACTS:
• Four cases involve two decisions of the Court of Tax Appeal s determining the
taxpayer ' s income tax liability for the years 1950 to 1954 and for the year
1957. Both the taxpayer and the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo respectively , appealed from the
Tax Court's decisions , insofar as their respective contentions on particular tax
items were therein resolved against them. Since the issues raised are inter
related, the Court resolves the four appeals in this joint decision.
• The taxpayer , Fernandez Hermanos, Inc. , is a domestic corporation organized
for the principal purpose of engaging in business as an " investment company "
wi th main office at Manila. Upon verification of the taxpayer's income tax
returns for the period in quest ion, the Commissioner of Internal Revenue
assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00,
P6,887.00 and P14,451.00 as alleged deficiency income taxes for the year s
1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the
result of alleged discrepancies found upon the examination and verification of
the taxpayer's income tax returns for the said years, summarized by the Tax
Court in its decision of June 10, 1963 in CTA Case No. 787, as follows:
ISSUE: The correctness of the Tax Court's rulings with respect to the
disputed items of disallowances enumerated in the Tax Court's summary
reproduced
HELD:
That the circumstances are such that the method does not reflect the taxpayer’s
income with reasonable accuracy and certainty and proper and just additions of JOSE GATCHALIAN ET AL. v. COLLECTOR OF INTERNAL REVENUE, GR No.
personal expenses and other non-deductible expenditures were made and 45425, 1939-04-29
correct , fair and equitable credit adjustments were given by way of eliminating
non-taxable items. Facts:
plaintiffs are all residents of the municipality of Pulilan, Bulacan, and that
Proper adjustments to conform to the income tax laws. Proper adjustments for defendant is the Collector of Internal Revenue of the Philippines;... plaintiffs, in
non-deductible items must be made. The following non-deductibles , as the case order to enable them to purchase one sweepstakes ticket valued at two pesos
may be, must be (P2), subscribed and paid therefor the amounts as follows:... immediately
added to the increase of decrease in the net worth: thereafter... plaintiffs purchased... from... ne of the duly authorized agents of the
National Charity Sweepstakes Office one ticket bearing No. 178637... and that
1. Personal living or family expenses the said ticket was registered in the name of Jose Gatchalian and Company... as a
2. Premiums paid on any life insurance policy result, the above-mentioned ticket bearing No. 178637 won one of the third
3. Losses from sales or exchanges of property between members of the family prizes in the amount of P50,000... and... which check was cashed... by Jose
4. Income taxes paid Gatchalian & Company
5. Other non-deductible taxes
6. Election expenses and other expense against public policy Gatchalian was required by income tax examiner Alfredo David to file the
7. Non-deductible contributions corresponding income tax return covering the prize won by Jose Gatchalian &
8. Gifts to others Company and that... the said return was signed by
9. Estate inheritance and gift taxes Gatchalian... efendant made an assessment against... requesting the payment of
10. Net Capital Loss the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan...
plaintiffs, through their attorney, sent to defendant a reply... requesting
On the other hand, non- taxable items should be deducted therefrom. These exemption from the payment of the income tax to which reply there were
items are necessary adjustments to avoid the inclusion of what otherwise are enclosed fifteen (15)... separate individual income tax returns filed separately
non-taxable receipts. They are: by each one of the plaintiffs... defendant... denied plaintiffs' request... for
1. inheritance gifts and bequests received exemption from the payment of tax... in view of the failure of the plaintiffs to pay
2. non- taxable gains the amount of tax demanded by the defendant, notwithstanding subsequent
3. compensation for injuries or sickness demand... issued a warrant of distraint and levy against the property of the
4. proceeds of life insurance policies plaintiffs... plaintiffs,... through Gregoria Cristobal, Maria C. Legaspi and Jesus
5. sweepstakes Legaspi,... paid under protest the sum of P601.51... as part of the tax... and
6. winnings requested defendant that plaintiffs be allowed to pay under protest the
7. interest on government securities and increase in net worth are not taxable if balance... plaintiffs demanded upon defendant the refund of the total sum of
they are shown not to be the result of unreported income but to be the result of P1,863.44... paid under protest by them but that defendant refused and still
the correction of errors in the taxpayer’s entries in the books relating to refuses to refund the said amount... notwithstanding the plaintiffs' demands.
indebtedness Issues:
Whether the plaintiffs formed a partnership, or merely a community of property
without a personality of its own
Ruling:
There is no doubt that if the plaintiffs merely formed a community of property
the latter is exempt from the payment of income tax under the law. But
according to the stipulated facts the plaintiffs organized a partnership of a civil
nature because each of them put up money... to buy a sweepstakes ticket for the
sole purpose of dividing equally the prize which they may win, as they did in
fact in the amount of P50,000 (article 1665, Civil Code). The partnership was
not only formed, but upon the organization thereof and the winning of... the
prize, Jose Gatchalian personally appeared in the office of the Philippine Charity
Sweepstakes, in his capacity as co-partner, as such collected the prize, the office
issued the check for P50,000 in favor of Jose Gatchalian and company, and the
said partner,... in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and formed a
community of property only.
Having organized and constituted a partnership of a civil nature, the said entity
is the one bound to pay the income tax which the defendant collecte
There is no merit in... plaintiffs' contention that the tax should be prorated
among them and paid individually, resulting in their exemption from the tax.
Principles:
G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and
REMEDIOS P. OBILLOS, brothers and sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents.
AQUINO, J.:
Facts:
On March 2, 1973 Jose Obillos, Sr. bought two lots with areas of 1,124 and 963
square meters of located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their
residences. The Torrens titles issued to them showed that they were co-owners of the
two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold
them to the Walled City Securities Corporation and Olga Cruz Canada for the total
sum of P313,050. They derived from the sale a total profit of P134, 341.88 or
P33,584 for each of them. They treated the profit as a capital gain and paid an
income tax on one-half thereof or of P16,792.
In April, 1980, the Commissioner of Internal Revenue required the four petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual
income tax on their shares thereof. The petitioners are being held liable for
deficiency income taxes and penalties totalling P127,781.76 on their profit of
P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture The petitioners contested the assessments.
Two Judges of the Tax Court sustained the same. Hence, the instant appeal.
Issue:
Whether or not the petitioners had indeed formed a partnership or joint venture and
thus liable for corporate tax.
Held:
The Supreme Court held that the petitioners should not be considered to have formed
a partnership just because they allegedly contributed P178,708.12 to buy the two
lots, resold the same and divided the profit among themselves. To regard so would
result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. 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.
*Article 1769(3) of the Civil Code provides that "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.*
Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the co-
ownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later.
They did not contribute or invest additional ' capital to increase or expand the
properties, nor was there an unmistakable intention to form partnership or joint
venture.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
assessments are cancelled. No costs.
All co-ownerships are not deemed unregistered partnership.—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.
As compared to other cases:
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where
after an extrajudicial settlement the co-heirs used the inheritance or the incomes
derived therefrom as a common fund to produce profits for themselves, it was held
that they were taxable as an unregistered partnership.
This case is different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA
198, where father and son purchased a lot and building, entrusted the administration
of the building to an administrator and divided equally the net income, and from
Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various
tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had
formed an unregistered partnership.
EVANGELISTA V. COLLECTOR
Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her
five children. A civil case was instituted for the settlement of her state, in which
Oña was appointed administrator and later on the guardian of the three heirs
who were still minors when the project for partition was approved. This shows
that the heirs have undivided ½ interest in 10 parcels of land, 6 houses and
money from the War Damage Commission.
Although the project of partition was approved by the Court, no attempt was
made to divide the properties and they remained under the management of Oña
who used said properties in business by leasing or selling them and investing
the income derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners’ properties and investments
gradually increased. Petitioners returned for income tax purposes their shares
in the net income but they did not actually receive their shares because this left
with Oña who invested them.
Based on these facts, CIR decided that petitioners formed an unregistered
partnership and therefore, subject to the corporate income tax, particularly for
years 1955 and 1956. Petitioners asked for reconsideration, which was denied
hence this petition for review from CTA’s decision.

Issue:
W/N there was a co-ownership or an unregistered partnership
W/N the petitioners are liable for the deficiency corporate income tax

Held:
Unregistered partnership. The Tax Court found that instead of actually
distributing the estate of the deceased among themselves pursuant to the
project of partition, the heirs allowed their properties to remain under the
management of Oña and let him use their shares as part of the common fund for
their ventures, even as they paid corresponding income taxes on their
respective shares.
Yes. For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason is simple. From the
moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable individually for all taxes in
LORENZO OÑA V CIR connection therewith. If after such partition, he allows his share to be held in
29JAN common with his co-heirs under a single management to be used with the intent
GR No. L -19342 | May 25, 1972 | J. Barredo of making profit thereby in proportion to his share, there can be no doubt that,
even if no document or instrument were executed, for the purpose, for tax
purposes, at least, an unregistered partnership is formed.
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships —
The term “partnership” includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business,
financial operation, or venture is carried on… (8 Merten’s Law of Federal Income
Taxation, p. 562 Note 63; emphasis ours.)
with the exception only of duly registered general copartnerships — within the
purview of the term “corporation.” It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned,
and are subject to the income tax for corporations. Judgment affirmed.
Reyes v CIR
REYES v CIR
GR No. 163581, 27 January 2006
Facts: By virtue of a sworn affidavit for reward by one Abad, an investigation
was conducted by BIR on the estate of the deceased Maria Tancinco who died in
1993 leaving a residential lot and old house in Dasma. Without submitting a
preliminary finding report, an LOA was issued and received by Reyes, one of the
heirs on 14 March 1997.
Then on 12 Feb 1998, a PAN was issued against the estate, and a FAN as well as
demand letter was issued on 22 April 1998. For the assessment of P14.9M for
estate tax of the estate of Maria Tancinco. On March 11, 1999, the heirs
proposed a compromise settlement of P1,000,000.00.
During those dates, RA 8424 Tax Reform Act was already in effect. RA 8424
stated that the taxpayer must be informed of both the law and facts on which
the assessment was based.The notice required under the old law was no longer
sufficient under the new law. First, RA 8424 has already amended the provision
of Section 229 on protesting an assessment. The old requirement of
merely notifying the taxpayer of the CIR’s findings was changed in 1998
to informing the taxpayer of not only the law, but also of the facts on which an
assessment would be made; otherwise, the assessment itself would be invalid.
Due to failure to pay tax on the deadline BIR notified on June 6, 2000 that the
subject property would be sold at public auction on August 8, 2000. Reyes filed
a protest with the BIR. Hence the petition for review filed by Reyes in CTA and a
TRO to desist and refrain from proceeding with the auction sale of the subject
property or from issuing a warrant pending determination of the case and/or
unless a contrary order is issued.
CIR filed a motion saying CTA has no jurisdiction since the assessment against
the estate is already final and executory; and (ii) that the petition was filed out
of time
CTA – Ruled in favour of CIR ordering Reyes to pay the estate tax amounting to
19M. CTA ratiocinated that there can only be a perfected and consummated
compromise of the estate’s tax liability[,] if the NEB has approved [Reyes’s]
application for compromise in accordance with RR No. 6-2000, as implemented
by RMO No. 42-2000.
CA – Partly granted petition. SC – Affirmed, petition w/o merit.
ISSUE: WON whether the assessment against the estate is valid; and, second,
whether the compromise entered into is also valid.
HELD: No. Under the present provisions of the Tax Code and pursuant to
elementary due process, taxpayers must be informed in writing of the law and
the facts upon which a tax assessment is based; otherwise, the assessment is
void. Being invalid, the assessment cannot in turn be used as a basis for the
perfection of a tax compromise. This was clear and mandatory under Section
228.
Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the
findings by the CIR, who had simply relied upon the provisions of former
Section 22913 prior to its amendment by Republic Act (RA) No. 8424, otherwise
known as the Tax Reform Act of 1997.
To be simply informed in writing of the investigation being conducted and of
the recommendation for the assessment of the estate taxes due is nothing but a
perfunctory discharge of the tax function of correctly assessing a taxpayer. The
act cannot be taken to mean that Reyes already knew the law and the facts on
which the assessment was based. It does not at all conform to the compulsory
requirement under Section 228. Moreover, the Letter of Authority received by
respondent on March 14, 1997 was for the sheer purpose of investigation and
was not even the requisite notice under the law.
Validity of Compromise. It would be premature for this Court to declare that the
compromise on the estate tax liability has been perfected and consummated,
considering the earlier determination that the assessment against the estate
was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax
Code, where the basic tax involved exceeds one million pesos or the settlement
offered is less than the prescribed minimum rates, the compromise shall be
subject to the approval of the NEB composed of the petitioner and four deputy
commissioners. Finally, as correctly held by the appellate court, this provision
applies to all compromises, whether government-initiated or not. Ubi lex non
distinguit, nec nos distinguere debemos. Where the law does not distinguish, we
should not distinguish.
MARUBENI CORPORATION V. COMMISSIONER OF INTERNAL REVENUE-
INCOME TAX
Category: Income Taxation
The dividends received by Marubeni Corporation from Atlantic Gulf and
Pacific Co. are not income arising from the business activity in which
Marubeni Corporation is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits subject to Branch Profit
Remittance Tax.
Facts:
Marubeni Corporation is a Japanese corporation licensed to engage in business
in the Philippines. When the profits on Marubeni’s investments in Atlantic Gulf
and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld
from it, and another 15% profit remittance tax based on the remittable amount
after the final 10% withholding tax were paid to the Bureau of Internal
Revenue. Marubeni Corp. now claims for a refund or tax credit for the amount
which it has allegedly overpaid the BIR.
Issues and Ruling:
1. Whether or not the dividends Marubeni Corporation received from Atlantic
Gulf and Pacific Co. are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to 15% profit remittance
tax imposed under Section 24(b)(2) of the National Internal Revenue Code.
NO. Pursuant to Section 24(b)(2) of the Tax Code, as amended, 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. The dividends received by Marubeni Corporation from
Atlantic Gulf and Pacific Co. are not income arising from the business activity in
which Marubeni Corporation is engaged. Accordingly, said dividends if remitted
abroad are not considered branch profits for purposes of the 15% profit
remittance tax imposed by Section 24(b)(2) of the Tax Code, as amended.
2. Whether Marubeni Corporation is a resident or non-resident foreign
corporation.
Marubeni Corporation is a non-resident foreign corporation, with respect to the
transaction. Marubeni Corporation’s head office in Japan is a separate and
distinct income taxpayer from the branch in the Philippines. The investment on
Atlantic Gulf and Pacific Co. was made for purposes peculiarly germane to the
conduct of the corporate affairs of Marubeni Corporation in Japan, but certainly
not of the branch in the Philippines.
3. At what rate should Marubeni be taxed?
15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in
conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is
taxed 35% of its gross income from all sources within the Philippines. However,
a discounted rate of 15% is given to Marubeni Corporation on dividends
received from Atlantic Gulf and Pacific Co. on the condition that Japan, its
domicile state, extends in favor of Marubeni Corporation a tax credit of not less
than 20% of the dividends received. This 15% tax rate imposed on the
dividends received under Section 24(b)(1)(iii) is easily within the maximum
ceiling of 25% of the gross amount of the dividends as decreed in Article
10(2)(b) of the Tax Treaty.

Note: Each tax has a different tax basis.
Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum
rate, as reflected in the phrase “shall not exceed.” This means that any tax
imposable by the contracting state concerned hould not exceed the 25%
limitation and said rate would apply only if the tax imposed by our laws exceeds
the same.
Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No.
105395 December 10, 1993
There would at least be three (3) parties: (a) the buyer, who procures the letter of
credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, which undertakes to
pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c) the seller,
who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.
Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank
of Ayudhya for the Account of General Chemicals Ltd., Inc. for the sale of plastic
ropes and agricultural files. Under the letter of credit, Bank of America acted as
an advising bank and Inter-Resin Industrial Corp. (IR) acted as the beneficiary.
Upon receipt of the letter advice, Inter- Resin told Bank of America to confirm
the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the letter
of credit. Inter-Resin made a partial availment of the Letter of Credit after
presentment of the required documents to Bank of America. After confirmation
of all the documents Bank of America issued a check in favor of IR. BA advised
Bank of Ayudhya of IR’s availment under the letter of credit and asked for the
corresponding reimbursement. IR presented documents for the second
availment under the same letter of credit. However, BA stopped the processing
of such after they received a telex from Bank of Ayudhya delaring that the LC
fraudulent. BA sued IR for the recovery of the first LC payment.
The IR contended that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under the
letter of credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of
credit when the corresponding draft
There would at least be three (3) parties: (a) the buyer, who procures the letter
of credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, which undertakes to
pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c) the seller,
who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.
The services of an advising (notifying) bank may be utilized to convey to the
seller the existence of the credit; or, of a confirming bank 16 which will lend
credence to the letter of credit issued by a lesser known issuing bank; or, of a
paying bank, which undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank to claim payment, the
buyer may approach another bank, termed the negotiating bank, 18 to have the
draft discounted.
Bank of America has acted independently as a negotiating bank, thus saving
Inter-Resin from the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. As a negotiating bank, Bank of America has a right
to recourse against the issuer bank and until reimbursement is obtained, Inter-
Resin, as the drawer of the draft, continues to assume a contingent liability
thereon.
Furthermore, bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of America
should have first checked the authenticity of the letter of credit with bank of
Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin finds no real support.
CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING
CORPORATION (204 SCRA 377)
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied
to dividend remittances to non-resident corporate stockholders of a
Philippine corporation. This rate goes down to 15% ONLY IF the country of
domicile of the foreign stockholder corporation “shall allow” such foreign
corporation a tax credit for “taxes deemed paid in the Philippines,” applicable
against the tax payable to the domiciliary country by the foreign stockholder
corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20
percentage points
FACTS:
Procter and Gamble Philippines declared dividends payable to its parent
company and sole stockholder, P&G USA. Such dividends amounted to Php
24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which
amounted to Php 8.3M It subsequently filed a claim with the Commissioner of
Internal Revenue for a refund or tax credit, claiming that pursuant to Section
24(b)(1) of the National Internal Revenue Code, as amended by Presidential
Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only 15%.
MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.
HELD:
YES. P&G Philippines is entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied
to dividend remittances to non-resident corporate stockholders of a
Philippine corporation. This rate goes down to 15% ONLY IF he country of
domicile of the foreign stockholder corporation “shall allow” such foreign
corporation a tax credit for “taxes deemed paid in the Philippines,” applicable
against the tax payable to the domiciliary country by the foreign stockholder
corporation. However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount equivalent to 20
percentage points which represents the difference between the regular 35%
dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall
allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines”
applicable against the US taxes of P&G USA, and such tax credit must reach at
least 20 percentage points. Requirements were met.
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic
corporation (owning 10% of remitting foreign corporation) shall be deemed
to have paid a proportionate extent of taxes paid by such foreign corporation
upon its remittance of dividends to domestic corporation.
b) 20 percentage points requirement: (computation is as follows)
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax
P 100.00
- 35.00
65. 00 -- available for remittance
P 65. 00
x 35% -- Regular Philippine dividend tax rate
P 22.75 -- regular dividend tax
P 65.0o
x 15% -- Reduced dividend tax rate
P 9.75 -- reduced dividend tax
P 65.00 -- dividends remittable
- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA
Dividends actually
remitted by P&G Phil = P 55.25
---------------------------------- ------------- x P35 = P29.75
Amount of accumulated P 65.00
profits earned
P35 is the income tax paid.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate
income tax ‘deemed paid’ by the parent company. Since P29.75 is much higher
than P13, Sec 902 US Tax Code complies with the requirements of sec 24
NIRC. (I did not understand why these were divided and multiplied. Point is,
requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double taxation of the same
income stream, it allows a tax credit of both (i) the Philippine dividend tax
actually withheld, and (ii) the tax credit for the Philippine corporate income
tax actually paid by P&G Philippines but “deemed paid” by P&G USA.
Moreover, under the Philippines-United States Convention “With Respect to
Taxes on Income,” the Philippines, by treaty commitment, reduced the regular
rate of dividend tax to a maximum of 20% of he gross amount of dividends
paid to US parent corporations, and established a treaty obligation on the part
of the United States that it “shall allow” to a US parent corporation receiving
dividends from its Philippine subsidiary “a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine
[subsidiary].
Note:
The NIRC does not require that the US tax law deem the parent corporation to
have paid the 20 percentage points of dividend tax waived by the Philippines.
It only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit
in an amount equivalent to the 20 percentage points waived by the
Philippines. Section 24(b)(1) does not create a tax exemption nor does it
provide a tax credit; it is a provision which specifies when a particular
(reduced) tax rate is legally applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity
investment in the Philippines by reducing the tax cost of earning profits here
and thereby increasing the net dividends remittable to the investor. The
foreign investor, however, would not benefit from the reduction of the
Philippine dividend tax rate unless its home country gives it some relief from
double taxation by allowing the investor additional tax credits which would be
applicable against the tax payable to such home country. Accordingly Section
24(b)(1) of the NIRC requires the home or domiciliary country to give the
 investor corporation a “deemed paid” tax credit at least equal in amount to the
20 percentage points of dividend tax foregone by the Philippines, in the
assumption that a positive incentive effect would thereby be felt by the
investor.
CIR V. WANDER PHILIPPINES INC.-DIVIDENDS, WITHHOLDING TAX
The dividends received from a domestic corporation is liable to a 15% withholding
tax, provided that the country in which the foreign corporation is domiciled shall
allow a tax credit (equivalent to 20% which is the difference between the 35% tax
due on regular corporations and the 15% tax due on dividends) against the taxes
due to have been paid in the Philippines.
Facts:
Wander is a domestic corporation which is a wholly-owned subsidiary of Glaro
S.A. Ltd.,a Swiss corporation not engaged in trade/business in the Philippines. In
two instances, Wander filed its withholding tax return and remitted to Glaro
(the parent company) dividends (P222,000 in the first instance and P355,200 in
the second), on which 35% tax was withheld and paid to the BIR.
Wander now files a claim for refund of the withheld tax contending that it is
liable only to 15% withholding tax pursuant to Section 24. B.1 of the Tax Code.
The BIR did not act upon the claim filed by Wander so the corporation filed a
petition to the Court of Tax Appeals (CTA). The CTA held that the corporation is
entitled to 15% withholding tax rate on dividends remitted to Glaro, a non-
resident foreign corporation.
Issue: Whether or not Wander is entitled to the 15% withholding tax rate.
Held:
Yes. According to Sec. 24.B.1 of the Tax Code, the dividends received from a
domestic corporation is liable to a 15% withholding tax, provided that the
country in which the foreign corporation is domiciled shall allow a tax credit
(equivalent to 20% which is the difference between the 35% tax due on regular
corporations and the 15% tax due on dividends) against the taxes due to have
been paid in the Philippines.
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law
involved in this case, reads:
sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended
is hreby further amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign
corporation not engaged in trade or business in the Philippines, including a
foreign life insurance company not engaged in life insurance business in the
Philippines, shall pay a tax equal to 35% of the gross income received during its
taxable year from all sources within the Philippines, as interest (except interest on
a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities,
compensation, remuneration for technical services or otherwise emolument, or
other fixed determinable annual, periodical ot casual gains, profits and income,
and capital gains: xxx Provided, still further that on dividends received from a
domestic corporation liable to tax under this chapter, the tax shall be 15% of the
dividends received, which shall be collected and paid as provided in sec 53 (d) of
this code, subject to the condition that the country in which the non-resident
foreign corporation is domiciled shall allow a credit against tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax (35%)
on corporation and the tax (15%) dividends as provided in this section: xxx."
While it may be true that claims for refund construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax on the
dividends received by Glaro from the Philippines should be considered as a full
satisfaction if the given condition. For, as aptly stated by respondent Court, to
deny private respondent the privilege to withhold only 15% tax provided for
under PD No. 369 amending section 24 (b) (1) of the Tax Code, would run
counter to the very spirit and intent of said law and definitely will adversely
affect foreign corporations interest here and discourage them for investing
capital in our country.
In the case, Switzerland did not impose any tax on the dividends received by
Glaro thus it should be considered as a full satisfaction of the given condition. To
deny respondent the privilege to withhold 15% would run counter to the spirit
and intent of the law and will adversely affect the foreign corporations’ interest
and discourage them from investing capital in our country.
*Petition dismissed for lack of merit.
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