You are on page 1of 39

Taxation Law Reviewer (Income Tax)

Laws, cases and notes.

INCOME TAX I
by Olive Cachapero

INCOME TAXATION
I. General Principles

Features of Philippine Income Taxation


1) Income tax is a direct tax because the tax burden is borne by the income recipient upon whom
the tax is imposed.
2) Income tax is a progressive tax since the tax base increases as the tax rate increases. (ability
to pay principle)
3) The Philippines has adopted the most comprehensive system of imposing income tax by
adopting the citizenship principle, resident principle and the source principle.
renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized
income taxable base (that can subject non-resident aliens and foreign corporations to income tax
on their income from Philippine sources.
4) The Philippines follows the semi-schedular or semi-global system of income taxation. Under
which,all compensation and other income not subject to final tax are added together to arrive at
the gross income, and after deducting the sum of allowable deductions from business or
professional income, capital gain and passive income, and other income not subject to final tax,
in the case of corporation, as well as personal and additional exemptions, in the case of
individual taxpayers, the taxable income(gross income less allowable deductions and
exemptions) is subjected to one set of graduated tax rates (if an individual) or normal corporate
income tax rate (if a corporation).
5) The Philippine income tax law is a law of American origin. Hence the decisions of the US
courts have force and persuasive effect in the Philippines.

Tax Situs - literally means the place of taxation, or the country that has jurisdiction to levy a
particular tax on persons, property, rights or business.

Basis: Symbiotic relationship. The jurisdiction, state or political unit that gives protection has the
right to demand support.

The situs of taxation is determined by a number of factors


a) Subject matter- or what is being taxed. He may be a person or it may be a property, an act or
activity;
b) Nature of tax- or which tax to impose. It may be an income tax, an import duty or a real
property tax;
c) Citizenship of the taxpayer
d) Residence of the taxpayer.
Only resident citizens and domestic corporations are taxable on their worldwide income (both
income inside and outside the Philippines) while the other types of individual and corporate
taxpayers (i.e. non-resident citizen, non-resident alien, foreign corporation) are taxable only on
income derived from sources within the Philippines.

Situs of taxation literally means place of taxation.

GR: The taxing power cannot go beyond the territorial limits of the taxing authority. Basically,
the state where the subject to be taxed has a situs may rightfully levy and collect the tax; and the
situs is necessarily in the state which has jurisdiction or which exercises dominion over the
subject in question.

Resident citizens and domestic corporation are taxable on all income derived from
sources within or withoutthe Philippines.
A non-resident citizen is taxable on all income derived from sources within the Philippines.
An alien whether a resident or not of the Philippines and a foreign corporation, whether
engaged or not in trade or business in the Philippines are also taxable only from
sources within the Philippines.

The taxable situs will depend upon the nature of income as follows:
1) Interests- Interest income is treated as income from within the Philippines if the debtor or
lender whether an individual or corporation is a resident of the Philippines.
2) Dividends
Dividends received from a domestic corporation are treated as income from sources within the
Philippines.
Dividends received from a foreign corporation are treated as income from sources within the
Philippines, unless 50% of the gross income of the foreign corporation for the three-year period
preceding the declaration of such dividends was derived from sources within the Philippines; but
only in an amount which bears the same ratio to such dividends as the gross income of the
corporation for such period derived from sources within the Philippines bears to its gross income
from all sources.
3) Services- Services performed in the Philippines shall be treated as income from sources
within the Philippines
4) Rentals and Royalties- Gain or income from property or interest located or used in the
Philippines is treated as income from sources within the Philippines.
5) Sale of Real Property- Gain from sale of real property located within the Philippines is
considered as income within the Philippines.
6) Sale of Personal Property- Gain, profit or income from sale of shares of stocks of a
domestic corporation is treated as derived entirely from sources within the Philippines,
regardless of where the said shares are sold Gains from sale of other personal property can be
considered income from within or without or partly within or partly without depending on the
rules provided in Sec. 42 E of the Tax Code.

The source of an income is the property, activity or service that produced the income. It is the
physical source where the income came from.
1. Progressive vs. Regressive System of Taxation (pg 44 PM Rev)

Progressive System of taxation Regressive System of taxation


tax laws shall place emphasis on exists when there are more
direct taxes rather than on indirect indirect taxes imposed than direct
taxes taxes

Note: Progressive and Regressive Systems of Taxation are different from Progressive and
Regressive Rates.
Progressive Rate Regressive rate
Tax the rate of which increases as Tax the rate of which decreases as
the tax base or bracket increases. the tax base or bracket increases.

2. Global vs. Schedular System of Taxation (pg 45 PM Rev)

Global tax System Schedular Tax System


Where the taxpayer is required to Where there are different tax
lump all items of income earned treatments of different types of
during a taxable period and pay income so that a separate tax
under a single set of income tax return is required to be filed for
rates on these different items of each type of income and the tax is
income computed on a per return or per
schedule basis
One rate for all types of gross Varying taxes are imposed on
income passive income
All income receive by the The various types of income
taxpayer are grouped together, (compensation;
without any distinction as to type business/professional income) are
or nature of the income, and classified accordingly and are
accorded different tax treatments,
in accordance with schedules
characterized by graduated tax
rates.
after deducting therefrom Since these types f income are
expenses and other allowable treated separately, the allowable
deductions, are subject to tax at a deductions shall likewise vary for
graduated or fixed rate. each type of income
Can be found in the income Found in the income taxation of
taxation of corporations individuals where the tax rates are
progressive in character

TAX ON INCOME
CHAPTER I - DEFINITIONS
Section 22. Definitions
Person' means an individual, a trust, estate or corporation.

Corporation' shall include partnerships, no matter how created or


organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government.
'General professional partnerships' are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.

Domestic,' when applied to a corporation, means created or organized in


the Philippines or under its laws.

Foreign,' when applied to a corporation, means a corporation which is not


domestic.

The term 'non-resident citizen' means:


1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of hisphysical presence abroad with a definite
intention to reside therein.
2) A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for employment on a
permanent basis.
3) A citizen of the Philippines 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) A citizen who has been previously considered as non-resident citizen and
who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect
to his income derived from sources abroad until the date of his arrival in the
Philippines.
5) The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be for purpose of this
Section.

Resident alien' means an individual whose residence is within the


Philippines and who is not a citizen thereof.

Non-resident alien' means an individual whose residence is not within the


Philippines and who is not a citizen thereof.

Resident foreign corporation' applies to a foreign corporation engaged in


trade or business within the Philippines.

Non-resident foreign corporation' applies to a foreign corporation not


engaged in trade or business within the Philippines.

Fiduciary' means a guardian, trustee, executor, administrator, receiver,


conservator or any person acting in any fiduciary capacity for any person.

Withholding agent' means any person required to deduct and withhold any
tax under the provisions of Section 57.

Shares of stock' shall include shares of stock of a corporation, warrants


and/or options to purchase shares of stock, 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 (such as golf, polo or similar
clubs), and mutual fund certificates.

Shareholder' shall include holders of a share/s of stock, warrant/s and/or


option/s to purchase shares of stock of a corporation, as well as a holder of a
unit of participation in a partnership (except general professional
partnerships) in a joint stock company, a joint account, a taxable joint
venture, a member of an association, recreation or amusement club (such as
golf, polo or similar clubs) and a holder of a mutual fund certificate, a
member in an association, joint-stock company, or insurance company.

Taxpayer' means any person subject to tax imposed by this Title.

Taxable year' means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed
under this Title. 'Taxable year' includes, in the case of a return made for a
fractional part of a year under the provisions of this Title or under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of
the commissioner, the period for which such return is made.
Fiscal year' means an accounting period of twelve (12) months ending on
the last day of any month other than December.

Ordinary income' includes any gain from the sale or exchange of property
which is not a capital asset or property described in Section 39(A)(1). Any
gain from the sale or exchange of property which is treated or considered,
under other provisions of this Title, as 'ordinary income' shall be treated as
gain from the sale or exchange of property which is not a capital asset as
defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from
the sale or exchange of property which is not a capital asset. Any loss from
the sale or exchange of property which is treated or considered, under other
provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale
or exchange of property which is not a capital asset.

B. General Principles of Income Taxation (pg 55 PM Rev)


Section 23, National Internal Revenue Code

Sec. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise
provided in this Code:
a) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
b) A nonresident citizen is taxable only on income derived from sources within the Philippines;
c) An individual citizen of the Philippines who is working and deriving income from abroad as
an overseascontract worker is taxable only on income from sources within the Philippines:
Provided, That a seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
d) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
e) A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and
f) 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.

C. Scope of Income Taxation

II. Income

Income means the gain derived from capital, from labor, or from both combined, including
profits gained from dealings in property or as well as any asset clearly realized whether earned or
not.

Income may be defined as the amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest or profit from investment.
1. Difference between Capital & Income
a) Madrigal v. Rafferty 38 Phil 14
Capital Income
A fund A flow
A fund of property existing at an A flow of services rendered by
instant of time that capital by the payment of
money from it or any other
benefit rendered by a fund of
capital in relation to such fund
through a period of time
A wealth The service of wealth
All the wealth which flows into
the taxpayer other than a mere
return on capital
Is a fund or property existing at A flow of wealth during a definite
one distinct point in time period of time

Gain derived and severed from


capital

"The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a
tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be
defined as "profits or gains." (Madrigal v. Rafferty)

A "stock dividend" shows that the company's accumulated profits have been
capitalized, instead of distributed to the stockholders or retained as surplus
available for distribution in money or in kind should opportunity offer. Far
from being a realization of profits of the stockholder, it tends rather to
postpone such realization, in that the fund represented by the new stock has
been transferred from surplus to capital, and no longer is available for actual
distribution.

The essential and controlling fact is that the stockholder has received
nothing out of the company's assets for his separate use and benefit; on the
contrary, every dollar of his original investment, together with whatever
accretions and accumulations have resulted from employment of his money
and that of the other stockholders in the business of the company, still
remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very
truth of the matter, to substance and not to form, he has received nothing
that answers the definition of income.

Yet, without selling, the shareholder, unless possessed of other resources,


has not the wherewithal to pay an income tax upon the dividend stock.
Nothing could more clearly show that to tax a stock dividend is to tax a
capital increase, and not income, than this demonstration that, in the nature
of things, it requires conversion of capital in order to pay the tax.

Tax is imposed not upon the stock dividend, but rather upon the
stockholder's share of the undivided profits previously accumulated by the
corporation, the tax being levied as a matter of convenience at the time such
profits become manifest through the stock dividend.

A stockholder has no individual share in accumulated profits, nor in any


particular part of the assets of the corporation, prior to dividend declared.

Thus, neither under the Sixteenth Amendment nor otherwise has Congress
power to tax without apportionment a true stock dividend made lawfully and
in good faith, or the accumulated profits behind it, as income of the
stockholder. The Revenue Act of 1916, insofar as it imposes a tax upon the
stockholder because of such dividend, contravenes the provisions of Article I,
2, cl. 3, and Article I, 9, cl. 4, of the Constitution, and to this extent is
invalid notwithstanding the Sixteenth Amendment.

i. Raytheon Production Corp vs. CIR 144 F2d 110

But, to say that the recovery represents a return of capital in that it takes the
place of the business good will is not to conclude that it may not contain a
taxable benefit. Although the injured party may not be deriving a profit as a
result of the damage suit itself, the conversion thereby of his property into
cash is a realization of any gain made over the cost or other basis of the
good will prior to the illegal interference. Thus A buys Blackacre for $5,000. It
appreciates in value to $50,000. B tortiously destroys it by fire. A sues and
recovers $50,000 tort damages from B. Although no gain was derived by A
from the suit, his prior gain due to the appreciation in value of Blackacre is
realized when it is turned into cash by the money damages.

Compensation for the loss of Raytheon's good will in excess of its cost is
gross income.

Where the cost basis that may be assigned to property has been wholly
speculative, the gain has been held to be entirely conjectural and not
taxable. A trespasser had taken coal and then destroyed the entries so that
the amount of coal taken could not be determined. Since there was no way
of knowing whether the recovery was greater than the basis for the coal
taken, the gain was purely conjectural and not taxed. Magill explains the
result as follows: "as the amount of coal removed could not be determined
until a final disposition of the property, the computation of gain or loss on the
damages must await that disposition." Taxable Income, pp. 339-340. The
same explanation may be applied to Farmers' & Merchants' Bank v.
Commissioner, supra, which relied on the Strother case in finding no gain.
The recovery in that case had been to compensate for the injury to good will
and business reputation of the plaintiff bank inflicted by defendant reserve
banks' wrongful conduct in collecting checks drawn on the plaintiff bank by
employing "agents who would appear daily at the bank with checks and
demand payment thereof in cash in such a manner as to attract unfavorable
public comment". Since the plaintiff bank's business was not destroyed but
only injured and since it continued in business, it would have been difficult to
require the taxpayer to prove what part of the basis of its good will should be
attributed to the recovery. In the case at bar, on the contrary, the entire
business and good will were destroyed so that to require the taxpayer to
prove the cost of the good will is no more impractical than if the business
had been sold. We conclude that the portion of the $410,000 attributable to
the suit is taxable income.

b) Income from whatever source

Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC
and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical
interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,
[42]
after all, the term gross income is understood to mean all income from whatever
source derived, including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from business; gains
derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and partners distributive share of the gross income of general professional
partnership.[43] While it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to mean
"cash received or its equivalent", "the amount of money coming to a person within a specific
time" or "something distinct from principal or capital."[44] Otherwise stated, there must be proof
of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the
item of gross income sought to be distributed, apportioned or allocated by the CIR.

i. Sec 50 Regulations No. 2

SECTION 50. Forgiveness of indebtedness. The cancellation and forgiveness of indebtedness


may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the
circumstances. If, for example, an individual performs services for a creditor, who, in
consideration thereof cancels the debt, income to that amount is realized by the debtor as
compensation for his services. If, however, a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt, the amount of the debt is a gift from the
creditor to the debtor and need not be included in the latter's gross income. If a corporation to
which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of
a dividend.
CIR vs. PROCTER & GAMBLE
The term "taxpayer" is defined in our NIRC as referring to "any person
subject to tax imposed by the Title [on Tax on Income]." It thus becomes
important to note that under Section 53 (c) of the NIRC, the withholding
agent who is "required to deduct and withhold any tax" is made " personally
liable for such tax" and indeed is indemnified against any claims and
demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with
the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is, moreover,
subject to and liable for deficiency assessments, surcharges and penalties
should the amount of the tax withheld be finally found to be less than the
amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." The terms liable for tax" and "subject to
tax" both connote legal obligation or duty to pay a tax. It is very difficult,
indeed conceptually impossible, to consider a person who is statutorily made
"liable for tax" as not "subject to tax." By any reasonable standard, such a
person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were
illegally collected from him.

CHAPTER X - ESTATES AND TRUSTS


Section 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust,
including:
1) Income accumulated in trust for the benefit of unborn or unascertained
person or persons with contingent interests, and income accumulated or held
for future distribution under the terms of the will or trust;
2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to be
held or distributed as the court may direct;
3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
4) Income which, in the discretion of the fiduciary, may be either distributed
to the beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees (1) if contributions
are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of
all liabilities with respect to employees under the trust, for any part of the
corpus or income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his employees:
Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the
extent that it exceeds the amount contributed by such employee or
distributee.

(C) Computation and Payment. -


(1) In General. - The tax shall be computed upon the taxable income of the
estate or trust and shall be paid by the fiduciary, except as provided in
Section 63 (relating to revocable trusts) and Section 64 (relating to income
for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two
or more trusts, the creator of the trust in each instance is the same person,
and the beneficiary in each instance is the same, the taxable income of all
the trusts shall be consolidated and the tax provided in this Section
computed on such consolidated income, and such proportion of said tax shall
be assessed and collected from each trustee which the taxable income of the
trust administered by him bears to the consolidated income of the several
trusts.

III. Classification of Income Taxpayers

The Tax Code classifies taxpayers into four main groups, namely:
1) Individuals,
2) Corporations,
3) Estates under Judicial Settlement and
4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

A. Individuals
1. Citizens
Sections 1 and 2, Article IV, 1987 Constitution

Section 1. The following are citizens of the Philippines:


1. Those who are citizens of the Philippines at the time of the adoption of
this Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect
Philippine Citizenship upon reaching the age of majority; and
4. Those who are naturalized in the accordance with law.
Section 2. Natural-born citizens are those who are citizens of the Philippines
from birth without having to perform any act to acquire or perfect their
Philippine citizenship. Those who elect Philippine citizenship in accordance
with paragraph (3), Section 1 hereof shall be deemed natural-born citizens.

a) Resident Citizens

Sec 5 last par, Revenue Regulations No. 2


An alien actually present in the Philippines who is not a mere transient or sojourner is a resident
of the Philippines for purposes of the income tax. Whether he is a transient or not is determined
by his intentions with regard to the length and nature of his stay. A mere floating intention
indefinite as to time, to return to another country is not sufficient to constitute him a transient. If
he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who
comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient. But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been consummated or abandoned.

b) Non-resident Alien

3. General Professional Partnership Section 22(B), NIRC


B (B) The term 'corporation' shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not include
general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships formed by
persons for the sole purpose of exercising their common profession, no part
of the income of which is derived from engaging in any trade or business.

ALIENS
1. Resident Aliens
2. Non-resident Aliens
a) Engaged in trade or business (NRAE)
b) Not engaged in trade or business (NRANE)

RA NRAE NRANE
Tax rates Subject to Subject to 25% on income
graduated graduated within the
income tax income tax Philippines (flat
rates rates tax)
Deductions Can avail of Cannot avail
deductions
Exemptions Allowed Entitled to
personal and personal
additional exemptions
exemptions only by way of
reciprocity and
not to
additional
exemptions

RC NRC RA NRA
Without Immigrant Stay in the Stays for a
intention resides abroad Philippines is definite
of an immigrant either: short
transferrin for which 1. definite and period of
g his a foreign extended time
physical visa has been
presence secured 2. indefinite
abroad
whether to
stay
permanent
ly or
temporaril
y as an
overseas
contract
worker
Permanent Lives in the Transient
employee Philippines comes to
employment on and has no the
a more or less definite Philippines
permanent intention as to for a
basis his stay definite
purpose,
Overseas which in its
contract nature may
worker - time be
spent abroad is promptly
immaterial as accomplish
long as the ed
workers
employment Note: A
contract passed mere
through and floating
registered with intention
the POEA indefinite
as to time
to return to
another
country is
NOT
sufficient to
constitute
him as a
transient.
Contract Purpose is of
worker: such a nature
a. leaves the that an
country on extended stay
account of a may be
contract for necessary for
employment its
which is accomplishme
renewed from nt, and to that
time to time end the alien
under such makes the
circumstance as Philippines his
to require him temporary
to be physically home,
present although he
abroad most of intends to
the time (not return to his
less than 183 domicile
days) abroad.

GENERAL PROFESSIONAL PARTNERSHIP


TAN vs. CIR
GPP Ordinary business partnership
The income tax is imposed not on the treated as a corporation for income
professional partnership, which is tax tax purposes and so subject to
exempt, but on the partners the corporate income tax
themselves in their individual
capacity computed on their
distributive shares of partnership
profits
not itself an income taxpayer; Itself a taxpayer for corporate income
income tax-exempt tax

Section 23 of the Tax Code


Sec. 23. Tax liability of members of general professional partnerships. (a)
Persons exercising a common profession in general partnership shall be
liable for income tax only in their individual capacity, and the share in the
net profits of the general professional partnership to which any taxable
partner would be entitled whether distributed or otherwise, shall be returned
for taxation and the tax paid in accordance with the provisions of this Title.
X x x x x

There is, then and now, no distinction in income tax liability between a
person who practices his profession alone or individually and one who does it
through partnership (whether registered or not) with others in the exercise of
a common profession. Indeed, outside of the gross compensation income tax
and the final tax on passive investment income, under the present income
tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of
rules.

We can well appreciate the concern taken by petitioners if perhaps we were


to consider Republic Act No. 7496 as an entirely independent, not merely as
an amendatory, piece of legislation. The view can easily become myopic,
however, when the law is understood, as it should be, as only forming part
of, and subject to, the whole income tax concept and precepts long obtaining
under the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying
the tax, adopts the most comprehensive tax situs of nationality and
residence of the taxpayer (that renders citizens, regardless of residence,
and resident aliens subject to income tax liability on their income from all
sources) and of the generally accepted and internationally recognized
income taxable base (that can subject non-resident aliens and foreign
corporations to income tax on their income from Philippine sources).

Partnerships are, under the Code, either


1. "taxable partnerships" or
Ordinarily, partnerships, no matter how created or organized, are subject to
income tax (and thus alluded to as "taxable partnerships") which, for
purposes of the above categorization, are by law assimilated to be within the
context of, and so legally contemplated as, corporations. Except for few
variances, such as in the application of the "constructive receipt rule" in the
derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly
pointed out in the discussions in Congress during its deliberations on
Republic Act 7496, aforequoted, to cover corporations and partnerships
which are independently subject to the payment of income tax.

2. "exempt partnerships."
"Exempt partnerships," upon the other hand, are not similarly identified as
corporations nor even considered as independent taxable entities for income
tax purposes. A GPP is such an example. Here, the partners themselves, not
the partnership (although it is still obligated to file an income tax return
[mainly for administration and data]), are liable for the payment of income
tax in their individual capacity computed on their respective and distributive
shares of profits. In the determination of the tax liability, a partner does so as
an individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed to
be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely
confirmed, the above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable
to all individual income taxpayers on their non-compensation income. There
is no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general professional
partnership.
ESTATES and TRUST

CIR vs.VISAYAN ELECTRIC COMPANY and CTA, 1968

And, for tax purposes, the employees' reserve fund is a separate taxable
entity.8 Respondent company then, while retaining legal title and
custody9 over the property, holds it in trust for the beneficiaries mentioned in
the resolution creating the trust, in the absence of any condition therein
which would, in effect, destroy the intention to create a trust.

Given the fact that the dividends are returns of the trust estate and not of
the grantor company, we must say that petitioner misconceived the import
of the law when he assessed said dividends as part of the income of the
company. Similarly, the tax court should not have considered them at all as
the company's "receipts, revenues and profits" which are exempt from
income tax.

2. As we look back at the resolution creating the employees' reserve fund


and having in mind the company's admission that it is "solely for the benefit
of the employees" and that the company is holding said fund "merely as
trustee of its employees,"11 we reach the conclusion that the fund may not
be diverted for other purposes, and that the trust so created is irrevocable.
For, really nothing in respondent company's acts suggests that it reserved
the power to revoke that fund or for that matter appropriate it for itself. The
trust binds the company to its employees. The trust created is not therefore
a revocable trust a provided in Section 59 of the Tax Code. 12 Nor is it a trust
contemplated in Section 60, the income from which is for the benefit of the
grantor.

The assessment made by petitioner and the ruling of the CTA on lack of
income tax liability were on a mistaken premise, but that the trust
established by respondent should pay the taxes imposed upon individuals.

CIR vs. CA, CTA, GCL RETIREMENT PLAN, 1992


In so far as employees' trusts are concerned, the foregoing provision
should be taken in relation to then Section 56(b) (now 53[b]) of the Tax Code,
as amended RA 1983. This provision specifically exempted employee's trusts
from income tax and is repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by
this Title upon individuals shall apply to the income of estates or of any kind
of property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's
trust which forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees . . .

The tax-exemption privilege of employees' trusts, as distinguished from


any other kind of property held in trust, springs from the foregoing provision.
It is unambiguous. Manifest therefrom is that the tax law has singled out
employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of
employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or disability.
It provides security against certain hazards to which members of the Plan
may be exposed. It is an independent and additional source of protection for
the working group. What is more, it is established for their exclusive benefit
and for no other purpose.

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in
order to encourage the formation and establishment of such private Plans for
the benefit of laborers and employees outside of the Social Security Act.
Enlightening is a portion of the explanatory note to H.B. No. 6503, now R.A.
1983, reading:
Considering that under Section 17 of the social Security Act, all contributions
collected and payments of sickness, unemployment, retirement, disability
and death benefits made thereunder together with the income of the
pension trust are exempt from any tax, assessment, fee, or charge, it is
proposed that a similar system providing for retirement, etc. benefits for
employees outside the Social Security Act be exempted from income taxes.
(Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p.
1859, May 3, 1957; cited in Commissioner of Internal Revenue v. Visayan
Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA 715); emphasis
supplied.

It is evident that tax-exemption is likewise to be enjoyed by the income of


the pension trust. Otherwise, taxation of those earnings would result in a
diminution accumulated income and reduce whatever the trust beneficiaries
would receive out of the trust fund. This would run afoul of the very
intendment of the law.

There can be no denying either that the final withholding tax is collected
from income in respect of which employees' trusts are
declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the
withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection
of income taxes by requiring its payment at the source. If an employees'
trust like the GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not supposed to
pay in the first place.

CORPORATIONS

PASCUAL vs. CIR

DOCTRINE: The sharing of returns does not in itself establish a partnership


whether or not the persons sharing therein have a joint or common right or
interest in the property. There must be a clear intent to form a partnership,
the existence of a juridical personality different from the individual partners,
and the freedom of each party to transfer or assign the whole property.

FACTS: Petitioners Mariano Pascual and Renato Dragon bought 2 parcels of


land from Santiago Bernardino, and they bought another 3 parcels of land
from Juan Roque. The first two parcels of land were sold by petitioners in
1968 to Marenir Development Corporation, while the three parcels of land
were sold by petitioners to Erlinda Reyes and Maria Samson on 1970.
Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made
in 1970. The corresponding capital gains taxes were paid by petitioners in
1973 and 1974 by availing of the tax amnesties granted in the said years.

However petitioners were assessed and required to pay a total amount of


P107,101.70 as alleged deficiency corporate income taxes for the years 1968
and 1970. Petitioners protested the said assessment asserting that they had
availed of tax amnesties way back in 1974.

In a reply, respondent Commissioner informed petitioners that in the years


1968 and 1970, petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes prescribed
under Section 24, both of the NIRC that the unregistered partnership was
subject to corporate income tax as distinguished from profits derived from
the partnership by them which is subject to individual income tax; and that
the availment of tax amnesty under P.D. No. 23, as amended, by petitioners
relieved petitioners of their individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent CTA which affirmed
the decision of the respondent commissioner. It ruled that an unregistered
partnership was in fact formed by petitioners which like a corporation was
subject to corporate income tax distinct from that imposed on the partners.
In a separate dissenting opinion, Associate Judge Roaquin stated that
considering the circumstances of this case, although there might in fact be a
co-ownership between the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered partnership which
made "them liable for corporate income tax under the Tax Code.

ISSUE:
WON petitioners formed an unregistered partnership subject to corporate
income tax.

HELD:
NO. In the present case, there is clear evidence of co-ownership between
the petitioners. There is no adequate basis to support the proposition that
they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They shared in the
gross profits as co- owners and paid their capital gains taxes on their net
profits and availed of the tax amnesty thereby. Under the circumstances,
they cannot be considered to have formed an unregistered partnership which
is thereby liable for corporate income tax, as the respondent commissioner
proposes.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can
be held liable for said deficiency corporate income tax, then petitioners can
be held individually liable as partners for this unpaid obligation of the
partnership. However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.

LORENZO T. OA vs. CIR, 1972


It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited by
them. Indeed, it is admitted that during the material years herein involved,
some of the said properties were sold at considerable profit, and that with
said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase and
sale of corporate securities. It is likewise admitted that all the profits from
these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the moment petitioners
allowed not only the incomes from their respective shares of the inheritance
but even the inherited properties themselves to be used by Lorenzo T. Oa
as a common fund in undertaking several transactions or in business, with
the intention of deriving profit to be shared by them proportionally, such act
was tantamonut to actually contributing such incomes to a common fund
and, in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when


the heirs can be considered as co-owners rather than unregistered co-
partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the
income thereof does belong commonly to all the heirs, obviously, without
them becoming thereby unregistered co-partners, but it does not necessarily
follow that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common
management of the administrator or executor or of anyone chosen by them
and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and
render meaningless Sections 24 and 84(b) of the National Internal Revenue
Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among
the reasons for holding the appellants therein to be unregistered co-partners
for tax purposes, that their common fund "was not something they found
already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are
doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated,
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 for this 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 connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single
management to be used with the intent 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. This is exactly what happened to
petitioners in this case.
ISSUE: As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question, of their
inherited properties from those acquired by them subsequently, We consider
as justified the following ratiocination of the Tax Court in denying their
motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an
unregistered partnership, the holding should be limited to the business
engaged in apart from the properties inherited by petitioners. In other words,
the taxable income of the partnership should be limited to the income
derived from the acquisition and sale of real properties and corporate
securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income
derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income
must include not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited


properties may be considered as individual income of the respective heirs
only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part
of the common assets of the heirs to be used in making profits, it is but
proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the clear
intent of the law.

Likewise, the third question of petitioners appears to have been adequately


resolved by the Tax Court in the aforementioned resolution denying
petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective
shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support
of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each
petitioner on his share of partnership profits. This is not correct; rather, it
should be the other way around. The partnership profits distributable to the
partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners
in his individual capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been correctly assessed.
Since the individual income tax liabilities of petitioners are not in issue in this
proceeding, it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever
excess they might have paid as individual income tax cannot be credited as
part payment of the taxes herein in question. It is argued that to sanction the
view of the Tax Court is to oblige petitioners to pay double income tax on the
same income, and, worse, considering the time that has lapsed since they
paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming
that the failure to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has
erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period
for the recovery of the excess income taxes in the case of herein petitioners
has already lapsed, it would not seem right to virtually disregard prescription
merely upon the ground that the reason for the delay is precisely because
the taxpayers failed to make the proper return and payment of the corporate
taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above
suspicion in their conduct vis-a-vis their tax obligation to the State.

EVANGELISTA vs. COLLECTOR OF INTERNAL REVENUE, 1957

ISSUE: Whether petitioners are subject to the tax on corporations provided


for in section 24 of Commonwealth Act. No. 466, otherwise known as the
National Internal Revenue Code, as well as to the residence tax for
corporations and the real estate dealers fixed tax. With respect to the tax on
corporations, the issue hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code, the pertinent parts
of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed,


collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships
(compaias colectivas), a tax upon such income equal to the sum of the
following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations or insurance companies, but does not include
duly registered general copartnerships. (compaias colectivas).

Article 1767 of the Civil Code of the Philippines provides:


By the contract of partnership two or more persons bind themselves to
contribute money, properly, or industry to a common fund, with the intention
of dividing the profits among themselves.

Essential elements of a partnership are two, namely:


(a) an agreement to contribute money, property or industry to a common
fund; and
(b) intent to divide the profits among the contracting parties. The first
element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a
common fund. Hence, the issue narrows down to their intent in acting as
they did. Upon consideration of all the facts and circumstances surrounding
the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among
themselves, because:
1) Said common fund was not something they found already in existence. It
was not property inherited by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial portion thereof in order to
establish said common fund.
2) They invested the same, not merely not merely in one transaction, but in
a series of transactions. On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This
was soon followed on April 23, 1944, by the acquisition of another real estate
for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24) acquired and transactions undertaken,
as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired by the petitioners in February, 1943. In
other words, one cannot but perceive a character of habitually peculiar to
business transactions engaged in the purpose of gain.
3) The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the
utilization thereof.
4) Since August, 1945, the properties have been under the management of
one person, namely Simeon Evangelista, with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and contracts, and to
indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or
business and enterprise operated for profit.
5) The foregoing conditions have existed for more than ten (10) years, or, to
be exact, over fifteen (15) years, since the first property was acquired, and
over twelve (12) years, since Simeon Evangelista became the manager.
6) Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of said
intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not co-partners,
for, in consequence of the acts performed by them, a legal entity, with a
personality independent of that of its members, did not come into existence,
and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When our
Internal Revenue Code includes "partnerships" among the entities subject to
the tax on "corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of the term.
Thus, for instance, section 24 of said Code exempts from the aforementioned
tax "duly registered general partnerships which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in
any of the standard forms, or in conformity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporations. Again, pursuant to said section 84(b),
the term "corporation" includes, among other, joint accounts, (cuentas en
participation)" and "associations," none of which has a legal personality of its
own, independent of that of its members. Accordingly, the lawmaker could
not have regarded that personality as a condition essential to the existence
of the partnerships therein referred to. In fact, as above stated, "duly
registered general copartnerships" which are possessed of the
aforementioned personality have been expressly excluded by law
(sections 24 and 84 [b] from the connotation of the term "corporation" It may
not be amiss to add that petitioners' allegation to the effect that their liability
in connection with the leasing of the lots above referred to, under the
management of one person even if true, on which we express no opinion
tends to increase the similarity between the nature of their venture and
that corporations, and is, therefore, an additional argument in favor of the
imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are
taxed differently from "partnerships". By specific provisions of said laws, such
"corporations" include "associations, joint-stock companies and insurance
companies." However, the term "association" is not used in the
aforementioned laws.

For purposes of the tax on corporations, our National Internal Revenue Code,
includes these partnerships with the exception only of duly registered
general co-partnerships 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.

As regards the residence of tax for corporations, section 2 of


Commonwealth Act No. 465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or
organized, whether domestic or resident foreign, engaged in or doing
business in the Philippines shall pay an annual residence tax of five pesos
and an annual additional tax which in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock


company, partnership, joint account (cuentas en participacion), association
or insurance company, no matter how created or organized.

Considering that the pertinent part of this provision is analogous to that of


section 24 and 84 (b) of our National Internal Revenue Code (commonwealth
Act No. 466), and that the latter was approved on June 15, 1939, the day
immediately after the approval of said Commonwealth Act No. 465 (June 14,
1939), it is apparent that the terms "corporation" and "partnership" are used
in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.

AFISCO INSURANCE CORP vs. CIR, 1999


Pool Taxable as a Corporation

ISSUE: WON pool or clearing house was an informal partnership, which was
taxable as a corporation under the NIRC. They point out that the reinsurance
policies were written by them individually and separately, and that their
liability was limited to the extent of their allocated share in the original risks
thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its
role was limited to its principal function of allocating and distributing the
risk(s) arising from the original insurance among the signatories to the treaty
or the members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc.

Petitioners belie the existence of a partnership in this case, because (1)


they, the reinsurers, did not share the same risk or solidary liability;
[14]
(2) there was no common fund;[15] (3) the executive board of the pool
did not exercise control and management of its funds, unlike the board of
directors of a corporation;[16] and (4) the pool or clearing house was not
and could not possibly have engaged in the business of reinsurance from
which it could have derived income for itself.

The Court is not persuaded. This Court rules that the Court of Appeals, in
affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as
worded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic


corporations. -- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how
created or organized, but not including:
1. duly registered general co-partnership (compaias colectivas),
2. general professional partnerships,
3. private educational institutions, and
4. building and loan associations xxx.

Ineludibly, the Philippine legislature included in the concept of


corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NLRCs inclusion of such
entities in the tax on corporations was made even clearer by the Tax
Reform Act of 1997, which amended the Tax Code. Pertinent provisions of
the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax
of thirty-five percent (35%) is hereby imposed upon the taxable income
derived during each taxable year from all sources within and without the
Philippines by every corporation, as defined in Section 22 (B) of this Code,
and taxable under this Title as a corporation xxx.

SEC. 22. -- Definition. -- When used in this Title:


xxx xxx xxx
(B) The term corporation shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. General professional partnerships are partnerships
formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any
trade or business.
xxx xxx xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue [22] held


that Section 24 covered theseunregistered partnerships and
even associations or joint accounts, which had no legal personalities apart
from their individual members. The Court of Appeals astutely
applied Evangelista:
xxx Accordingly, a pool of individual real property owners dealing in real
estate business was considered acorporation for purposes of the tax in
sec. 24 of the Tax Code in Evangelista v. Collector of Internal Revenue,
supra. The Supreme Court said:

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.

Article 1767 of the Civil Code recognizes the creation of a contract of


partnership when two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.[25] Its requisites are: (1) mutual
contribution to a common stock, and (2) a joint interest in the profits.[26] In
other words, a partnership is formed when persons contract to devote to a
common purpose either money, property, or labor with the intention of
dividing the profits between themselves.[27] Meanwhile, an association
implies associates who enter into a joint enterprise x x x for the transaction
of business.

In the case before us, the ceding companies entered into a Pool
Agreement[29] or an association[30] that would handle all the insurance
businesses covered under their quota-share reinsurance treaty [31]and surplus
reinsurance treaty[32]with Munich. The following unmistakably indicates a
partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. This common fund pays for
the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of the
ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share in
the business ceded to the pool and in the expenses according to a Rules
of Distribution annexed to the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pools formation. As aptly found by
the CTA:
xxx The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction
of business for profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the transaction of the
business. x x x If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it
implies that profit actually resulted.

The petitioners reliance on Pascual v. Commissioner is misplaced,


because the facts obtaining therein are not on all fours with the present
case. In Pascual, there was no unregistered partnership, but merely a co-
ownership which took up only two isolated transactions. The Court of
Appeals did not err in applying Evangelista, which involved a partnership that
engaged in a series of transactions spanning more than ten years, as in the
case before us.

c) Co-ownership Art. 484 Civil Code


Art. 484. There is co-ownership whenever the ownership of an undivided thing or right
belongs to different persons.

IV. Tax Base & Tax Rates

A. Individuals

1. Resident Citizens & Resident Aliens Section 24, NIRC


Not over 5%
P10,000 TAX
ON
Over P10,000 but not over P500+10% of the excess over P10,000
P30,000
Over P30,000 but not over P2,500+15% of the excess over P30,000
P70,000
Over P70,000 but not over P140,000 P8,500+20% of the excess over P70,000
Over P140,000 but not over P22,500+25% of the excess over P140,000
P250,000
Over P250,000 but not over P50,000+30% of the excess over P250,000
P500,000
Over P500,000 P125,000+34% of the excess over P500,000 in
1998.
INDIVIDUALS
Section 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:


a) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources
within and without the Philippines be every individual citizen of the Philippines residing therein;
b) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual citizen of the Philippines who is residing outside of the
Philippines including overseas contract workers referred to in Subsection(C) of Section 23
hereof; and
c) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following
schedule:

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent
(33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof,
shall compute separately their individual income tax based on their respective total taxable
income: Provided, That if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.
(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other literary works and musical
compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes
amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and
Lotto winnings), derived from sources within the Philippines: Provided, however, That interest
income received by an individual taxpayer (except a nonresident individual) from a depository
bank under the expanded foreign currency deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That
should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th)
year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the
cash and/or property dividends actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or mutual fund companies and
regional operating headquarters of multinational companies, or on the share of an individual in
the distributable net income after tax of a partnership (except a general professional partnership)
of which he is a partner, or on the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium taxable as a corporation of which he
is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after
January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not,
even if declared or distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The
provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.
Not over 5%
P100,000
On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -


(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%)
based on the gross selling price or current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to
have been realized from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of
conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if
any, on gains from sales or other dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or controlled corporations shall be
determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection:
Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date
of sale or disposition through a prescribed return of his intention to avail of the tax exemption
herein mentioned: Provided, still further, That the said tax exemption can only be availed of once
every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or disposition
shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value
at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized
amount bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon.

Revenue Regulation No. 10-98


Issued September 2, 1998 prescribes the regulations to implement RA No.
8424 relative to the imposition of income taxes on income derived under the
Foreign Currency Deposit and Offshore Banking Systems. Specifically,
interest income which is actually or constructively received by a resident
citizen of the Philippines or by a resident alien individual from a foreign
currency bank deposit will be subject to a final withholding tax of 7.5%. The
depository bank will withhold and remit the tax. If a bank account is jointly in
the name of a non-resident citizen, 50% of the interest income from such
bank deposit will be treated as exempt while the other 50% will be subject to
a final withholding tax of 7.5%. The Regulations will apply on taxable income
derived beginning January 1, 1998 pursuant to the provisions of Section 8 of
RA 8424. In case of deposits which were made in 1997, only that portion of
interest which was actually or constructively received by a depositor starting
January 1, 1998 is taxable.

Revenue Regulation No. 8-98


Issued September 2, 1998 amends pertinent portions of Revenue Regulations
Nos. 11-96 and 2-98 relative to the tax treatment of the sale, transfer or
exchange of real property. Specifically, the Capital Gains Tax (CGT) Return
will be filed by the seller within 30 days following each sale or disposition of
real property. Payment of the CGT will be made to an Authorized Agent Bank
(AAB) located within the Revenue District Office (RDO) having jurisdiction
over the place where the property being transferred is located. Creditable
withholding taxes, on the other hand, deducted and withheld by the
withholding agent/buyer on the sale, transfer or exchange or real property
classified as ordinary asset will be paid by the withholding agent/buyer upon
filing of the return with the AAB located within the RDO having jurisdiction
over the place where the property being transferred is located. Payment will
have to be done within 10 days following the end of the month in which the
transaction occurred, provided, however, that taxes withheld in December
will be filed on or before January 25 of the following year.

Revenue Regulation No. 13-99


Issued September 14, 1999 prescribes the regulations for the exemption of
a citizen or a resident alien individual from the payment of the 6% Capital
Gains Tax on the sale, exchange or disposition of his principal residence. In
order for a person to be exempted from the payment of the tax, he should
submit, together with the required documents, a Sworn Declaration of his
intent to avail of the tax exemption to the Revenue District Office having
jurisdiction over the location of his principal residence within (30) days from
the date of the sale, exchange or disposition of the principal residence. The
proceeds from the sale, exchange or disposition of the principal residence
must be fully utilized in acquiring or constructing the new principal residence
within eighteen (18) calendar months from the date of the sale, exchange or
disposition. In case the entire proceeds of the sale is not utilized for the
purchase or construction of a new principal residence, the Capital Gains Tax
will be computed based on the formula specified in the Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part
within the 18-month reglementary period, his right of exemption from the
Capital Gains Tax did not arise on the extent of the unutilized amount, in
which event, the tax due thereon will immediately become due and
demandable on the 31st day after the date of the sale, exchange or
disposition of the principal residence.
If the individual taxpayer's principal residence is disposed in exchange for a
condominium unit, the disposition of the taxpayer's principal residence will
not be subjected to the Capital Gains Tax herein prescribed, provided that
the said condominium unit received in the exchange will be used by the
taxpayer-transferor as his new principal residence.

Revenue Regulation No. 14-2000


Issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No. 13-99
relative to the sale, exchange or disposition by a natural person of his
"principal residence".

The residential address shown in the latest income tax return filed by the
vendor/transferor immediately preceding the date of sale of said real
property shall be treated, for purposes of these Regulations, as a conclusive
presumption about his true residential address, the certification of the
Barangay Chairman, or Building Administrator (in case of condominium unit),
to the contrary notwithstanding, in accordance with the doctrine of
admission against interest or the principle of estoppel.

The seller/transferor's compliance with the preliminary conditions for


exemption from the 6% capital gains tax under Sec. 3(1) and (2) of the
Regulations will be sufficient basis for the RDO to approve and issue the
Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC)
of the principal residence sold, exchanged or disposed by the aforesaid
taxpayer. Said CAR or TCC shall state that the said sale, exchange or
disposition of the taxpayer's principal residence is exempt from capital gains
tax pursuant to Sec. 24 (D)(2) of the Tax Code, but subject to compliance
with the post-reporting requirements imposed under Sec. 3(3) of the
Regulations.

REVENUE REGULATIONS NO. 9-2012 issued on June 1, 2012 implements


Sections 24(D)(1), 27(D)(5), 57, 106 and 196 of the National Internal
Revenue Code (NIRC) of 1997 relative to the non-redemption of properties
sold during involuntary sales. In case of non-redemption of properties sold
during involuntary sales, regardless of the type of proceedings and
personality of mortgagees/selling persons or entities, the Capital Gains Tax
(CGT), if the property is a capital asset; or the Creditable Withholding Tax
(CWT), if the property is an ordinary asset; the Value-Added Tax (VAT) and the
Documentary Stamp Tax (DST) shall become due.

The buyer of the subject property, who is deemed to have withheld the CGT
or CWT due from the sale, shall then file the CGT return and remit the said
tax to the BIR within 30 days from expiration of the applicable statutory
redemption period, or file the CWT return and remit the said tax to the BIR
within 10 days following the end of the month after expiration of the
applicable statutory redemption period, provided that, for taxes withheld in
December, the CWT return shall be filed and the taxes remitted to the BIR on
or before January 15 of the following year. If the property sold through
involuntary sale is under the circumstances which warrant the imposition of
VAT, the said tax must be paid to the BIR by the VAT-registered
owner/mortgagor on or before the 20th day or 25th day, whichever is
applicable, of the month following the month when the right of redemption
prescribes.

The DST return shall be filed and the said tax paid to the BIR within 5 days
after the close of the month after the lapse of the applicable statutory
redemption period. The CGT/CWT/VAT and DST shall be based on whichever
is higher of the consideration (bid price of the higher bidder) or the fair
market value or the zonal value as determined in accordance with Section
6(E) of the Tax Code.

Non-resident Aliens
Sec. 25, NIRC

Section 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -


1) In General. - A nonresident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code
notwithstanding.

2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or
Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational
Company, or Share in the Distributable Net Income of a Partnership (Except a General
Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or
Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends
from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund
company or from a regional operating headquarter of multinational company, or the share of a
nonresident alien individual in the distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or the share of a nonresident alien
individual in the net income after tax of an association, a joint account, or a joint venture taxable
as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and
prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject
to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on
the total amount thereof: Provided, however, that royalties on books as well as other literary
works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%)
on the total amount thereof: Provided, further, That cinematographic films and similar works
shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That
interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should
the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or investment certificate based on the
remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;


Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in
domestic corporations not traded through the local stock exchange, and real properties shall be
subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. -
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax
equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien
individual not engaged in trade or business in the Philippines from the sale of shares of stock in
any domestic corporation and real property shall be subject to the income tax prescribed under
Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. - There shall be levied, collected and paid for each
taxable year upon the gross income received by every alien individual employed by regional or
area headquarters and regional operating headquarters established in the Philippines by
multinational companies as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such regional or area headquarters and
regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying
the same position as those of aliens employed by these multinational companies. For purposes of
this Chapter, the term 'multinational company' means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and
other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and
paid for each taxable year upon the gross income received by every alien individual employed by
offshore banking units established in the Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and allowances, from such off-shore
banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however,
That the same tax treatment shall apply to Filipinos employed and occupying the same positions
as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien
individual who is a permanent resident of a foreign country but who is employed and assigned in
the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the
salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, received from such contractor or subcontractor: Provided, however, That the
same tax treatment shall apply to a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred
to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the
case may be, imposed under this Code.

a) Not engaged in trade or business


Republic Act No. 10378
AN ACT RECOGNIZING THE PRINCIPLE OF RECIPROCITY AS BASIS FOR
THE GRANT OF INCOME TAX EXEMPTIONS TO INTERNATIONAL
CARRIERS AND RATIONALIZING OTHER TAXES IMPOSED THEREON BY
AMENDING SECTIONS 28(A)(3)(a), 109, 118 AND 236 OF THE
NATIONAL INTERNAL REVENUE CODE (NIRC), AS AMENDED, AND FOR
OTHER PURPOSES

Section 1. Section 28(A)(3)(a) of Republic Act No. 8424, otherwise known as


the National Internal Revenue Code of 1997, as amended, is hereby further
amended to read as follows:
"SEC. 28. Rates of Income Tax on Foreign Corporations.
"(A) Tax on Resident Foreign Corporations.
"(1) xxx
"(2) xxx
"(3). International Carrier. An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (21/2 %) on its Gross
Philippine Billings as defined hereunder:

a) 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: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any part outside
the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings.

b) 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.

"Provided, That international carriers doing business in the Philippines may


avail of a preferential rate or exemption from the tax herein imposed on their
gross revenue derived from the carriage of persons and their excess
baggage on the basis of an applicable tax treaty or international agreement
to which the Philippines is a signatory or on the basis of reciprocity such that
an international carrier, whose home country grants income tax exemption
to Philippine carriers, shall likewise be exempt from the tax imposed under
this provision.
"x x x."

Section 2. Section 109 of the National Internal Revenue Code of 1997, as


amended, is hereby further amended to read as follows:
"SEC. 109. Exempt Transactions. - The following shall be exempt from the
value-added tax:
"(A) xxx;
"xxx
"(S) Transport of passengers by international carriers;
"(T) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
"(U) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations;
"(V) Services of bank, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries; and
"(W) Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs, the
gross annual sales and/or receipts do not exceed the amount of One million
five hundred thousand pesos (P1,500,000): Provided, That not later than
January 31, 2009 and every three (3) years thereafter, the amount herein
stated shall be adjusted to its present value using the Consumer Price Index,
as published by. the National Statistics-Office (NSO);
"x x x."

Section 3. Section 118 of the National Internal Revenue Code of 1997, as


amended, is hereby further amended to read as follows:
"SEC. 118. Percentage Tax on International Carriers.
"(A) International air carriers doing; business in the Philippines on their gross
receipts derived from transport of cargo from the Philippines to another
country shall pay a tax of three percent (3%) of their quarterly gross
receipts.

"(B) International shipping carriers doing business in the Philippines on their


gross receipts derived from transport of cargo from the Philippines to another
country shall pay a tax equivalent to three percent (3%) of their quarterly
gross receipts."

Section 4. Section 236 of the National Internal Revenue Code of 1997, as


amended, is hereby further amended to read as follows:
"SEC. 236. Registration Requirements. 1wphi1
"(A) Requirements. x x x
"xxx
"(G) Persons Required to Register for Value-Added Tax.

"(1) Any person who, in the course of trade or business, sells, barters or
exchanges goods or properties, or engages in the sale or exchange of
services, shall be liable to register for value-added tax if:

"(a) His gross sales or receipts for the past twelve (12) months, other than
those that are exempt under Section 109(A) to (V), have exceeded One
million five hundred thousand pesos (P1,500,000); or

"(b) There are reasonable grounds to believe that his gross sales or receipts
for the next twelve (12) months, other than those that are exempt under
Section 109(A) to (V), will exceed One million five hundred thousand pesos
(P1,500,000).