Professional Documents
Culture Documents
(Based on the 2013 Bar Syllabus and Updated with Recent BIR Issuances and the
Latest Supreme Court and CTA Jurisprudence as of January 31, 2013)
Yes. The power to tax can be exercised by the Q: Differentiate the power of taxation from
government even if the Constitution is entirely silent police power and the power of eminent
on the subject. There is no need for a constitutional domain.
grant for the State to exercise this power. The power
to tax is inherent in the State, being an attribute of
See table below.
sovereignty. This is so because the State can
neither exist nor endure without taxes.
TAXATION EMINENT POLICE
It must be noted that Constitutional provisions
DOMAIN POWER
relating to the power of taxation do not operate as
grants of power to the Government, but instead
Authorit Only by the May be Only by
merely constitute as limitations upon a power which
y who government exercised by government
would otherwise be practically without limit
exercise or its (1) or its political
s the political government subdivisions
Q: Why is the power to tax considered inherent
power subdivisions or political
in sovereignty?
subdivisions
OR (2)
It is considered inherent in a sovereign State
granted to
because it is a necessary attribute of sovereignty.
public utilities
Without this power, no sovereign State can exist nor
endure. The power to tax proceeds upon the theory
that the existence of a government is a necessity. Purpose The property The property The use of
No sovereign State can continue to exist without the is taken for is taken for the property
means to pay its expenses, and, for those means, it the support public use is regulated
has the right to compel all citizens and properly of the and must be for promoting
within its limits to contribute; hence, the emergence government compensated the general
of the power to tax. welfare and
is not
compensable
---------------------------------------------------------------
C. Characteristics of Taxation Persons Operates on Operates on Operates on
--------------------------------------------------------------- affected a community an individual a community
or class of as owner of a or class of
Note: This should properly refer to Characteristics or individuals particular individuals
Elements of a Tax, not Characteristics of Taxation. In the
property
event the question is asked, answer as if the question
refers to characteristics of a tax. See Chapter 1, K.
Characteristic of Tax. With reservations, however, as to Effect The money There is a There is no
the source, the 2013 Beda tax reviewer enumerates as contributed transfer of transfer of
characteristic of taxation the following: (1) Comprehensive becomes the right to title. At most,
(2) Unlimited (3) Plenary and (4) Supreme. It is submitted part of the property there is
that the proper answer would make reference to the public funds restraint on
inherent limitations to the power of taxation. Atty. the injurious
Domondon states that the inherent limitations on the use of
power of taxation is also known as the elements, tenets or
property
characteristics of taxation.
for a lawful economic activity have a right to maintain The distinction made by the Supreme Court in
a legitimate business. Hence, HMOs should not be PROGRESSIVE DEVELOPMENT CORPORATION V.
arbitrarily and unjustly included in the DST QUEZON CITY [172 SCRA 629] is particularly
coverage. instructive. The Court stated that: If the generating of
revenue is the primary purpose and regulation is
In TIO VS. VIDEOGRAM REGULATORY BOARD [151 merely incidental, the imposition is a tax; but if the
SCRA 208], the Supreme Court held that the levy of regulation is the primary purpose, the fact that
30% tax on videogram operators was imposed incidentally revenue is also obtained does not make
primarily to answer the need for regulating the video the imposition a tax
industry, particularly rampant film piracy and flagrant
violation of intellectual property rights. Thus, a (regulatory) fee is imposed for purposes of
regulation (in exercise of police power) while a tax is
Q: May a tax be validly imposed in the imposed for revenue generation purpose (the power
exercise of police power and not of the of taxation).
power to tax?
Q: When an exaction is imposed to
Yes. The power of taxation may be used as an discourage certain businesses, is the
implement of police power of the State with the end exaction a tax?
in view of regulating a particular activity.
No, it is a regulatory fee. In COMPANIA GENERAL DE
Note: Some authors and jurisprudence still refer to the TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA
imposition levied for the purpose of regulation as a tax. 367], the Supreme Court held that the municipal
This is inaccurate and adds to confusion. The proper term, license fees for the privilege to engage in the
as used by the Supreme Court in numerous decisions business of selling liquor or alcoholic beverages
should be regulatory fee or fee. In earlier cases, they were imposed for regulatory purposes as such
were referred to as license fees. It is submitted that the
use of the term tax should only be used to refer to an
products are potentially harmful to public health and
imposition for the purposes of revenue while the term fee morals.
is used for an imposition for purposes of regulation. As
you will see later, the distinction between a tax and a Q: When an exaction is imposed to provide
fee is relevant as certain inherent and constitutional means for the rehabilitation and stabilization
limitations apply only to one and no to the other. It is also of a threatened industry, is the exaction a
important for purposes of tax exemptions.
tax?
Q: How do you determine if an imposition is No. Jurisprudence provides that such exactions are
a tax or a (regulatory) fee? considered regulatory fees in light of their purpose.
an exercise of the power of taxation but an exercise Q: Should universal charges (for electricity
of the police power to aid and support the sugar end-users) be considered a tax or a fee?
industry.
Universal charges are regulatory fees. In GEROCHI V.
Q: When the exaction is imposed to make a DOE [G.R. NO. 159796, JULY 17, 2007], in
private company viable, is it a fee or a tax? determining whether the Universal Charge imposed
on electricity end-users by distributors is a tax, the
The exaction should be considered a tax. In Supreme Court held in the negative and stated that
PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 the universal charge is a regulatory fee levied to
SCRA 485], an Letter of Instruction was issue ensure the viability of the countrys electric power
imposing a capital recovery component on the industry
domestic sales of all fertilizer grades and such
exaction shall be collected until adequate capital The amount of the exaction
was raised to make Planters Product, a private
company, viable. The Supreme Court held that the Q: How do you distinguish a tax from a
levy was invalid for not serving a public purpose as regulatory fee in terms of the amount of the
the ultimate beneficiary was a private company. exaction?
Hence, the primary purpose was for revenue
generation. If the amount levied is too high and/or if the amount
levied is not related to costs of regulation, the
Q: Are royalty fees (on a per liter basis) exaction should be considered a tax as it is levied
imposed on the movement of petroleum fuel for revenue purposes.
to and from special economic zones a tax or Some cases:
a fee?
In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA
The royalty fees imposed on the movement of 270], in determining whether the exaction of P50.00
petroleum fuel are regulatory fees. As held in from aliens securing an employment permit (from the
CHEVRON PHILIPPINES V. BCDA [SEPTEMBER 15, Mayor of Manila) is a fee or a tax, the Supreme
2010], the royalty fees were exacted on a per liter Court held that the amount was too excessive and
basis because the higher the volume of fuel entering that there was no logic or justification in the exaction
the special economic zone, the greater the extent from aliens who have been cleared for employment.
and frequency of supervision and inspection The Court opined that it was obvious that the
required to ensure safety, security and order within purpose of the exaction is to raise money under the
the zone. guise of regulation.
exercise of the power of eminent domain. It noted asserted that the substantiation requirements for
that the tax credit granted to private establishments claiming the input VAT were impractical and
giving senior citizen discounts can be deemed as incapable of implementation as in order to claim
their just compensation for private property taken by input VAT, the name, address and TIN of the toll
the State for public use. way user must be indicated in the VAT receipt or
invoice. In addition, the rounding off of the toll rate
--------------------------------------------------------------- and putting the excess collection in an escrow is
F. Principles of a sound tax system illegal while the giving of the change to meet the
1. Fiscal Adequacy exact toll rate would be a logistical nightmare. The
2. Administrative Feasibility Supreme Court held that while administrative
3. Theoretical Justice feasibility is a canon of a sound tax system, the
non-observance thereof will not render a tax
---------------------------------------------------------------
imposition invalid except to the extent that
specific constitutional or statutory limitations
Q: What the basic principles of a sound tax are impaired.
system?
Note: J. Dimaampao is of the view that if the tax law runs
The basic principles are the following: contrary to the principle of theoretical justice, such
violation will render the law unconstitutional considering
1. Fiscal Adequacy The source of government that under the Constitution, the rule of taxation should be
revenue must be sufficient to meet uniform and equitable. It is submitted that this should be
qualified. As to a violation of the principle of theoretical
governmental expenditures and other public justice on the basis of uniformity, I submit that it would
needs amount to a violation of the Constitution, specifically the
2. Theoretical Justice a good tax system must equal protection clause. However, as to a violation of the
be based on the taxpayers ability to pay principle of theoretical justice on the basis of equity, it is
3. Administrative feasibility taxes should be submitted that such would not be constitutionally infirm.
capable of being effectively enforced. The basis of this view can be found in the case of
TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628]
In CHAVEZ V. ONGPIN [186 SCRA 331] , at issue was which held that the system of taxation need not be always
the validity of the increase, via an Executive Order, progressive.
of the property values for purposes of real property
taxes. The Supreme Court held that such was valid. ---------------------------------------------------------------
One of the justifications was based on fiscal G. Theory and Basis of Taxation
adequacy. The Court stated that fiscal adequacy 1. Lifeblood Theory
requires that the sources of revenue must be 2. Necessity Theory
adequate to meet government expenditures. To 3. Benefits-Protection Theory (Symbiotic
continue collecting at valuations arrived at several relationship)
years ago is not in consonance with a sound tax 4. Jurisdiction over subject and objects
system. ---------------------------------------------------------------
Note: The basic principles of a sound tax system are also
known as the Canons of Taxation.
Note: As explained by Atty. Domondon, the theory of
taxation and the basis or rationale for taxation are two
different concepts. The theory of taxation explains why
there is a need to impose taxes while the basis or
Q: Will a violation of the abovementioned rationale for taxation explains the reason why a State may
principles render a tax law unconstitutional? impose taxes. The theory of taxation refers to the lifeblood
theory (and the necessity theory which is but an extension
of the lifeblood theory). The basis or rationale of taxation
It depends. This was settled in the case of DIAZ V. refers to (1) the symbiotic relationship and (2) jurisdiction
SEC. OF FINANCE [JULY 19, 2011]. One of the by the state over persons and property within its territory.
grounds raised in assailing the validity of the
imposition of VAT on the collection of toll way
operators was that it violated the principle of
administrative feasibility. Particularly, the petitioner
Taxes are the lifeblood of the government and so In CIR v. CTA [234 SCRA 348], the Supreme Court
should be collected without unnecessary hindrance. held that government cannot and must not be
On the other hand, such collection should be made stopped in matters involving taxes as they are the
in accordance with law as any arbitrariness will lifeblood of the nation through which the government
negate the very reason for government itself. It is agencies continue to operate and with which the
therefore necessary to reconcile the apparently State effects its functions for the welfare of its
conflicting interests of the authorities and the constituents.
taxpayers so that the real purpose of taxation, which
is the promotion of the common good, may be In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457
achieved. CIR vs. Algue [158 SCRA 9] SCRA 32], the Supreme Court held that the
Government cannot be estopped from collecting
The lifeblood theory states that an assessment of a taxes by the mistake, negligence, or omission of its
tax is enforceable despite it being contested agents. Upon taxation depends the Governments
because of the urgency to collect taxes, this being ability to serve the people for whose benefit the
the governments primary source of revenue. CIR v. taxes are collected. Neglect or omission of
Cebu Portland [156 SCRA 535] government officials entrusted to collect taxes
should not be allowed to bring harm or detriment to
the people.
The lifeblood theory can be manifested in
the following cases: In SEC. OF FINANCE VS. ORO M AURA SHIPPING LINES
[593 SCRA 14], the Supreme Court opined that
1. The prohibition against set-off of taxes [see assuming further that MARINA merely committed a
Section 204(C), NIRC] mistake in approving the vessels proposed cost and
2. The prohibition against the issuance of an that the Collector of the Port of Manila similarly
injunction to restrain the collection of taxes erred, we reiterate the legal principle that estoppel
3. Presumption of correctness of assessments generally finds no application against the State when
it acts to rectify mistakes, errors, irregularities, or
Illustrative cases: illegal acts of its officials and agents irrespective of
rank. The rule holds true even if the rectification
In CIR v. Cebu Portland [156 SCRA 535], the prejudices parties who had meanwhile received
taxpayer argued that that the deficiency assessment benefits.
cannot be enforced because it is still being
contested. The Supreme Court held that this
argument loses sight of the urgency of the need to Q: What is the exception to the prohibition
collect taxes as the lifeblood of the government. If on the issuance of an injunction to restrain
the payment of taxes could be postponed by simply the collection of taxes?
questioning heir validity, the machinery of the state
would grind to a halt and all government functions An injunction may be issued to restrain the collection
would be paralyzed. of taxes when in the opinion of the Court the
collection may jeopardize the interest of the
Government and/or the taxpayer, the Court at any support between the State and its inhabitants. In
stage of the proceeding may suspend the said return for his contribution, the taxpayer receives the
collection and require the taxpayer either to deposit general advantages and protection which the
the amount claimed or to file a surety bond for not government affords the taxpayer and his property.
more than double the amount with the Court. (See In CIR VS. ALGUE [158 SCRA 9], the Supreme Court
Section 11, RA 1125, as amended by RA 9282). stated that taxes are what we pay for civilized
society. Hence, despite the natural reluctance to
Note: It must be noted, however, that the CTA cannot surrender part of ones hard-earned income, every
issue a writ of injunction to restrain the collection of taxes person who is able must contribute his share in the
in the exercise of its original jurisdiction. It can only issue running of the government and the latter, for its part,
such a writ of injunction in its appellate jurisdiction. The is expected to respond in the form of tangible and
Supreme Court held in CIR vs. J.C. Yuseco [G.R. No. L-
12518, October 28, 1961] that nowhere does the law vest
intangible benefits intended to improve the lives of
in the CTA original jurisdiction to issue writs of prohibition the people and enhance their moral and material
or injunction independently of, and apart from, an values. This symbiotic relationship is the rationale of
appealed case. The writ of prohibition or injunction that it taxation and should dispel the erroneous notion that
may issue to suspend the collection of taxes, is merely it is an arbitrary method of exaction by those in the
ancillary to and in furtherance of its appellate jurisdiction. seat of power
Taxes being the chief source of revenue for the ---------------------------------------------------------------
government to keep it running, must be paid immediately
and without delay. A taxpayer who feels aggrieved by a
4. Jurisdiction over subjects and objects
decision of a revenue officer and appeals to the CTA must ---------------------------------------------------------------
pay the tax assessed, except if the CTA opines that
collection would jeopardize the interest of the Government Q: Explain the jurisdiction of the State over
and/or taxpayer, it could suspend the collection and persons and property within its territory as a
require the taxpayer to deposit the amount claimed or to
file a bond. basis or rationale of taxation.
the Government this power must be used justly and be imposed retroactively if the law expressly
not treacherously. ROXAS VS. CTA [23 SCRA 276]; provides and if it will not amount to a denial of due
REYES V. ALMANZOR [196 SCRA 322]; CIR V. TOKYO process.
SHIPPING [244 SCRA 332]
Hence, in resolving the issue of whether a statute
Q: Justice Marshall said that the power to favorable to a taxpayer-heir can be given retroactive
tax involves the power to destroy. On the effect, the Supreme Court held in LORENZO VS.
other hand, Justice Holmes stated later that POSADAS [64 PHIL. 353] that inheritance taxation is
the power to tax is not the power to destroy governed by the statute in force at the time of the
death of the decedent, unless the language of the
while the court sits. Reconcile the
statute clearly demands or expresses that it shall
apparently inconsistent statements. have a retroactive effect which is not the case. And
such Revenue laws are not to be classed penal
The two statements can be reconciled on three laws, so even if favorable, should not be given
levels. First, the imposition of a valid tax could not retroactive effect.
be judicially restrained merely because it would
prejudice the taxpayers property. Second, an illegal ---------------------------------------------------------------
tax could be judicially declared invalid and should
2. Imprescriptibility
not work to prejudice a taxpayers property. Third, J.
Marshalls view refers to a valid tax while J. Holmes ---------------------------------------------------------------
view refers to an invalid tax.
Q: Are taxes imprescriptible?
---------------------------------------------------------------
As a general rule, taxes are imprescriptible.
H. Doctrines in Taxation
However, as an exception, the tax law may provide
1. Prospectivity of tax laws otherwise. In particular, the NIRC and LGC provides
2. Imprescriptibility for prescriptive periods for assessment and
3. Double Taxation collection of taxes.
4. Escape from Taxation
5. Exemption from Taxation Q: What is the rationale behind providing for
6. Compensation and Set-off a statute of limitations in the collection of
7. Compromise taxes?
8. Tax Amnesty
9. Construction and Interpretation As held in the case of REPUBLIC VS. ABLAZA [108
--------------------------------------------------------------- PHIL 1105, the law prescribing a limitation of actions
for the collection of the income tax is beneficial both
--------------------------------------------------------------- to the Government and to its citizens; to the
1. Prospectivity of tax laws Government because tax officers would be obliged
to act promptly in the making of assessment, and to
---------------------------------------------------------------
citizens because after the lapse of the period of
prescription citizens would have a feeling of security
Q: Are tax statutes prospective in its against unscrupulous tax agents who will always find
application? an excuse to inspect the books of taxpayers, not to
determine the latter's real liability, but to take
Yes. As held in CEBU PORTLAND V. COLLECTOR [G.R. advantage of every opportunity to molest peaceful,
NO. 18649, FEBRUARY 27, 1965], the general rule law-abiding citizens.
under the Civil Code that laws shall have
prospective application applies to tax laws. In CIR V. B.F. GOODRICH PHILS [FEBRUARY 24, 1999],
the Supreme Court noted that our tax laws provides
Q: Can tax statutes be applied retroactively? for a statute of limitations in the collection of taxes
for the purpose of safeguarding taxpayers from any
Yes. While, as a general rule, taxes must only be unreasonable examination, investigation or
imposed prospectively, taxes, as an exception, may assessment.
impositions are of a different character. The first is a SCRA 442], the Supreme Court stated that the NIRC
license fee for the privilege of engaging in the sale of levies a tax on all quarry resources whether
liquor in the exercise of police power while the other extracted from public or private land. Thus, the local
is imposed for revenue purposes based on the sales government unit cannot impose taxes on quarry
made. resources as they are already taxed under the
NIRC. However, by express provision in the Local
Q: Company A, engaged in the manufacture Government Code, the LGU may levy on quarry
of tobacco, is subject to the payment of resources extracted from public land.
tobacco inspection fees aside from other
taxes it pays to the national government. Is Q: What are the modes of elimination double
there double taxation? taxation?
No. Tobacco Inspection fees are undoubtedly The usual methods of avoiding the occurrence of
National Internal Revenue taxes, they being one of double taxation are:
the miscellaneous taxes provided for under the Tax
Code. The Code specifically provides for the 1. Allowing reciprocal exemption either by law
collection and manner of payment of the said or by treaty
inspection fees. Tobacco inspection fees are levied 2. Allowance of tax credit for foreign taxes paid
and collected for purposes of regulation and control. 3. Allowance of deduction for foreign taxes
Tobacco inspection fees are of a different kind and paid; and
character from other taxes imposed. (LA SUERTE VS. 4. Reduction of the Philippine tax rate
CTA [134 SCRA 36])
---------------------------------------------------------------
Q: A city ordinance imposed a license fee 4. Escape from Taxation
on any person, firm, entity or corporation a) Shifting of tax burden
doing business in the City. A contends that b) Tax Avoidance
the ordinance constitutes double taxation as c) Tax Evasion
he already pays taxes imposed by the ---------------------------------------------------------------
national government. Is A correct?
---------------------------------------------------------------
No. It has been expressly affirmed by the Supreme a) Shifting of tax burden
Court that such an argument against double taxation ---------------------------------------------------------------
may not be invoked where one tax is imposed by the
state and the other is imposed by the city, it being Q: What is meant by shifting the tax
widely recognized that there is nothing inherently burden?
obnoxious in the requirement that license fees or
taxes be exacted with respect to the same Shifting of tax burden is the process by which the
occupation, calling or activity by both the state and burden of a tax is transferred from the statutory
the political subdivisions thereof. (CITY OF BAGUIO taxpayer or the one whom the tax was assessed or
VS. DE LEON [25 SCRA 938]) imposed to another without violating the law.
Q: A local government unit wishes to levy Q: What is the meaning of impact and
excise taxes on quarry resources found incidence of taxation?
within its jurisdiction. The national
government argues that it may not do so as Impact of taxation and incidence of taxation are two
such articles are already taxed by the NIRC. different concepts.
Decide.
Impact of taxation (liability) is the point on which a
The local government unit may levy a tax on quarry tax is originally imposed while incidence of taxation
resources extracted from public lands but not from (burden) is that point on which the tax burden finally
private lands. In PROVINCE OF BULACAN V. CA [299 rests or settles down.
1. Forward shifting - When the burden of the As held in the case of EXXONMOBIL V. CIR [G.R. NO.
tax is transferred from a factor of production 180909, JANUARY 19, 2011], in the case of indirect
through the factors of distribution until it taxes, it is the manufacturer of the goods who is
finally settles on the ultimate purchaser or entitled to claim any refund thereof. Indirect taxes
consumer. paid by the manufacturers or producers of the goods
2. Backward shifting When the burden of cannot be refunded to the purchasers of the goods
the tax is transferred from the consumer or because the purchasers are not the taxpayers.
purchaser through the factors of distribution CONTEX CORPORATION VS. CIR [433 SCRA 577]
2
to the factors of production.
3. Onward shifting When the tax is shifted The liability for the payment of the indirect tax lies
two or more times either forward only with the seller of the goods or services, not in
3 the buyer thereof. In indirect taxes, when the seller
or backward.
passes on the tax to his buyer, he, in effect, shifts
Q: What taxes can be shifted? the burden, not the liability to pay it, to the purchaser
as part of the price of goods sold or rendered. CIR v.
Only indirect taxes may be shifted. PLDT [478 SCRA 61]
1. The end to be achieved (which is payment of Q: ABC Corporation owns the ABC building.
less taxes than that known by the taxpayer to be It sold the said building to A, a close
legally due or non-payment of a tax when it is business associate of ABC Corporation, on
shown that a tax is due); 30 August 1989. After a week, A sold the
2. An evil or deliberate state of mind; and same to XYZ Corporation. Is the scheme
3. A course of action which is unlawful. designed to avoid taxes or evade taxes?
Q: Husband and wife own a lot of real This is a case of tax evasion. The scheme sought to
estate. Upon advice of their lawyer, they make it appear that there were two sales of the
decided to organize a corporation to take
control of their properties. The husband and _________________________________________
wife were issued 2,500 original unissued no 4
If the properties were to be held by the spouses in the case, it
par value shares of stock in exchange for would be tied to the succession proceedings and the
their properties. Is the scheme designed to consequential payment of estate taxes when the owner dies. On
the other hand, a corporation does not die and can hold the
avoid taxes or evade taxes? property for a period of at least 50 years.
subject properties. It is obvious that the objective of 1. Where the President exercises his power
the sale to Z was to reduce the amount of tax to be under the flexible tariff clause to remove
paid especially that the transfer from Z to XYZ would existing protective tariff rates (see Section
then be subject to only 6% capital gains tax, and not 28(2), Article VI, 1987 Constitution)
the 30% corporate income tax. The intermediary 2. The local government may grant exemptions
transaction which was prompted more on the from the payment of local taxes without
mitigation of tax liabilities than for legitimate congressional approval consequent to its
business purpose constitutes one of tax evasion power to levy taxes, fees and other charges.
(CIR v. CA [327 Phil. 1]). (see Section 5, Article X, 1987
Constitution)
--------------------------------------------------------------- 3. Where the President enters into and ratify a
5. Exemption from taxation tax treaty granting certain exemptions
a) Meaning of exemption from taxation subject only to Senate occurrence.
b) Nature of tax exemption
Q: May tax exemptions exist by implication?
c) Kinds of tax exemption
d) Rationale/grounds for exemption No. In NDC v. CIR [151 SCRA 472], at issue was
e) Revocation of tax exemption whether the undertaking signed by the Secretary of
--------------------------------------------------------------- Finance in the promissory note can be considered
an exemption on taxes on the interest remitted. The
Note: Tax exemption of special entities under the Supreme Court ruled in the negative and opined that
Constitution shall be discussed under Chapter 1.I.2.a.(iv) tax exemptions cannot be merely implied but must
Prohibition against Taxation of religious, charitable entities
and educational entities, (v) Prohibition against taxation of
be categorically and unmistakably expressed.
non-stock, non-profit institutions, (xii) exemption from real
property taxes. ---------------------------------------------------------------
b) Nature of tax exemption
--------------------------------------------------------------- ---------------------------------------------------------------
a) Meaning of exemption from taxation
--------------------------------------------------------------- Q: What is the nature of tax exemptions?
A tax exemption is defined as a grant of immunity, 1. Mere personal privileges to the grantees;
express or implied, to particular persons or 2. Generally revocable by the government unless
corporations from the obligation to pay taxes. founded on contract which is protected by the
non-impairment clause;
Q: Who has the power to grant tax 3. Implies a waiver on the part of the Government
exemptions? of its right to collect what otherwise would be
due; and
Both the power to tax and to exempt certain persons 4. Not necessarily discriminatory so long as the
are vested in the legislature. In particular, ARTICLE exemption has a rational basis.
VI, SECTION 28 OF THE CONSTITUTION provides that
No law granting any tax exemption shall be passed ---------------------------------------------------------------
without the concurrence of a majority of all the c) Kinds of tax exemptions
Members of the Congress. ---------------------------------------------------------------
Q: Enumerate the instances where tax Q: What are the kinds of tax exemptions?
exemptions may be granted other than by
act of Congress: See table.
the abolition of franchise tax on telecommunications amount equal or greater than the tax being collected
companies in accordance with the VAT law. (PHILEX MINING V. CIR [294 SCRA 687]).
in REPUBLIC V. CAGUIOA [536 SCRA 194] held that Taxes cannot be the subject of set-off because they
there is no vested right in a tax exemption and more are not in the nature of contracts between parties
so when the latest expression of legislative intent but grow out of a duty to, and, are positive acts, of
renders it continuance doubtful. In the said case, RA the Government, to the making and enforcing of
7227 granted private domestic corporations doing which, the personal consent of the taxpayer is not
business in the Subic SEZ tax exemptions on required (REPUBLIC V. M AMBULAO LUMBER [4 SCRA
importations of general merchandise. However, RA 622])
9334 withdrew the tax exemption on the
importations of cigars, cigarettes, distilled spirits, The erroneous payment of final withholding tax
fermented liquors and wines. cannot be used to offset or be treated as advance
tax payment, and cannot be used against the
In NITAFAN V. CIR [152 SCRA 284], the Supreme succeeding final withholding tax. COMMISSIONER OF
Court held that the salaries of members of the INTERNAL REVENUE VS. GOULDS PUMPS (PHILS.)
judiciary are subject to income tax as applied to all INCORPORATED, AUGUST 22, 2012
taxpayers. The payment of income tax by Justices
and Judges do not fall within the constitutional Note: In one case, DOMINGO V. GARLITOS [8 SCRA 443],
protection against decrease of their salaries during the Supreme Court allowed the set-off between taxes and
their continuance in office. debts. It opined that if the obligation to pay taxes and the
taxpayers claim against the government are both
overdue, demandable, as well as fully liquidated,
Q: Is there an exception to the above compensation takes place by operation of law and both
doctrine? obligations are extinguished to their concurrent amounts.
In the said case, the taxpayer who has been assessed
Yes. The exemption cannot be withdrawn if the municipal taxes was allowed to assign in favor of the
exception was granted to private parties based on municipality a final judgment obtained by him against the
material consideration of a mutual nature, which said municipality to cover the assessment. Atty.
then becomes contractual and thus covered by the Domondon reconciled the rulings of the Supreme Court in
non-impairment clause of the Constitution (MCIAA DOMINGO V. GARLITOS [8 SCRA 443] and FRANCIA V. IAC
[162 SCRA 753] by stating that in the former case, both
V. M ARCOS [261 SCRA 667]).
claims being overdue, demandable, and fully liquidated
while in the latter case, the claim against the government
--------------------------------------------------------------- was not overdue and demandable as it was already
6. Compensation and set-off settled. Atty. Domondon submits that when confronted
--------------------------------------------------------------- with a bar problem, we follow the doctrine laid down in
FRANCIA V. IAC [162 SCRA 753] unless the facts would
involve the (1) the application of the principle of solutio
Q: Can taxes be the subject of indebiti or (2) it involves local government taxes.
compensation between the government and
the taxpayer? Q: Is the civil concept of solutio indebiti
applicable to taxation?
No. As held in CALTEX VS. COA [208 SCRA 727],
taxes cannot be the subject of compensation Yes. In the case of FILINVEST DEVELOPMENT
because the government and taxpayer are not CORPORATION VS. CIR [529 SCRA 605], the Court
mutually creditors and debtors of each other. A claim held that in the field of taxation where the State
for taxes is not such a debt, demand, contract or exacts strict compliance upon its citizens, the State
judgment as is allowed to be set-off. (see FRANCIA V. must likewise deal with taxpayers with fairness and
IAC [162 SCRA 753]) honesty. Hence, under the principle of solutio
indebiti, the Government has to restore to petitioner
There can be no off-setting of taxes against the the sums representing erroneous payments of taxes.
claims that the taxpayer may have against the
government. A person cannot refuse to pay taxes on
the ground that the government owes him an
The doctrine provides that where the refund of a tax The condonation of a tax liability is equivalent and
illegally or erroneously collected or overpaid by a is in the nature of a tax exemption. Hence, it is a
taxpayer is barred by prescription, a tax presently grant of immunity, express or implied, to particular
being assessed against a taxpayer may be persons or corporations from the obligation to pay
recouped or set-off against the tax whose refund is taxes.
now barred by prescription. This doctrine is
inapplicable in the Philippines in light of the lifeblood ---------------------------------------------------------------
theory. (UST V. COLLECTOR [104 PHIL. 1062] 9. Construction and interpretation of:
a) Tax Laws
--------------------------------------------------------------- b) Tax Exemption and exclusion
7. Compromise c) Tax Rules and Regulations
--------------------------------------------------------------- d) Penal Provisions of Tax Laws
e) Non-retroactive application to taxpayers
Q: Can taxes be the subject of a ---------------------------------------------------------------
compromise?
Yes. Compromises are allowed and enforceable Q: What are the sources of tax laws?
when the subject matter thereof is not prohibited
from being compromised and the person entering The sources of tax laws are:
into it is duly authorized to do so. In fact, under
SECTION 204 OF THE TAX CODE, payment of internal 1. Constitution;
revenue taxes may be compromised on the grounds 2. NIRC as amended RA 9648;
of (1) doubtful validity of the assessment or (2) 3. Tariff and Custom Code as amended RA
financial incapacity. 8181;
4. Local Government Code;
--------------------------------------------------------------- 5. Local Tax Ordinance/City/Municipal Tax Code;
6. Tax Treaties/International Agreements;
8. Tax Amnesty
7. Presidential Decree/ Executive Order;
--------------------------------------------------------------- 8. Decisions of SC/CTA/CA; and
9. Revenue Rules and Regulations, Rulings
Q: What is a tax amnesty? implemented by the BIR
A tax amnesty is a general pardon or intentional
Q: What is the nature of tax laws?
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of evasion or
1. Not political in character
violation of a revenue or tax. REPUBLIC V. IAC [196
2. Civil in nature, not subject to ex post facto
SCRA 335]
law prohibition
3. Not penal in character
Q: Distinguish a tax amnesty from a tax 4. Not retroactive in its application
exemption.
Q: Do tax laws continue in force even during
Tax Amnesty Tax Exemption
a period of enemy occupation?
immunity from all immunity from civil
criminal, civil and liability only Yes. In HILADO V. CIR [100 SCRA 288], the Supreme
administrative liabilities Court held that internal revenue laws are not
arising from nonpayment political in nature and as such were continued in
of taxes force during the period of enemy occupation and in
applies only to past tax has prospective effect actually enforced by the occupation
periods application. government. Income tax returns filed during such
period and income tax payments effected are and determine the classification of the imported article
considered valid and legal. before tariff may be imposed. Unfortunately, CMO 23-
2007 has already classified the article even before the
customs officer had the chance to examine it. In effect,
Q: Do rules and regulations issued by petitioner Commissioner of Customs diminished the
administrative or executive officers powers granted by the Tariff and Customs Code with
(implementing tax laws) have the force and regard to wheat importation when it no longer required the
effect of law customs officers prior examination and assessment of the
proper classification of the wheat. It is well-settled that
rules and regulations, which are the product of a
Yes. Rules and regulations issued by administrative
delegated power to create new and additional legal
or executive officers pursuant to the procedure or provisions that have the effect of law, should be within the
authority granted by law upon the administrative scope of the statutory authority granted by the legislature
agency have the force and effect, or partake of the to the administrative agency. It is required that the
nature of a statute and are just as binding as if they regulation be germane to the objects and purposes of the
have been written in the statute itself. As such, they law; and that it be not in contradiction to, but in conformity
have the force and effect of law and enjoy the with, the standards prescribed by law.
presumption of constitutionality and legality until they
are set aside with finality in an appropriate case by a
competent court (ABAKADA GURO PARTY LIST VS. ---------------------------------------------------------------
PURISIMA [562 SCRA 251]) a) Tax laws
---------------------------------------------------------------
COMMISSIONER OF CUSTOMS V. HYPERMIX FEEDS Q: State the rule on construction or
[G.R. NO. 179579, FEBRUARY 1, 2012] interpretation of tax laws?
DOCTRINE: Rule and regulations, which are the product
of a delegated power to create new and additional legal As a general rule, there is no need for statutory
provisions that have effect of law, should be within the construction if the tax law is clear. Where the law is
scope of the statutory authority granted by the legislature clear and unambiguous, the law must be taken as it
to the administrative agency. is devoid of judicial addition or subtraction.
becomes satisfied that a different construction only an exemption from property taxes on the poles,
should be given. wires, and transformers.
---------------------------------------------------------------
b) Tax Exemption and exclusion Q: What is the legislative grace concept?
---------------------------------------------------------------
The legislative grace concept provides that any tax
Q: How are tax exemptions construed and relief provided is the result of specific acts of
interpreted? Congress that must be applied and interpreted
strictly. In NDC V. CIR [151 SCRA 472], the
Tax exemptions should be strictly construed against Supreme Court ruled that the fact that the Secretary
the taxpayer. of Finance guaranteed the loans of the NDC cannot
be taken to mean that the payments of NDC to the
As held in the case of QUEZON CITY V. ABS-CBN Japanese creditors are exempt from withholding
[567 SCRA 495], statutes granting tax exemptions since the undertaking was not tantamount to a
are construed stricissimi juris against the taxpayer waiver of collection to taxes which must be express
and liberally in favor of the taxing authority. He who
claims an exemption from his share of common Q: Should the doctrine of strict
burden must justify his claim that the legislature interpretation of tax exemptions be applied
intended to exempt him by unmistakable terms. For first as a precondition to the application of
exemptions from taxation are not favored in law, nor the principle of tax exemption?
are they presumed.
Yes. Before applying the principles of tax exemption,
A tax exemption must be strictly construed against doctrine of strict interpretation must first be applied.
the one claiming the exemption because it is There must first be a determination who are covered
contrary to the lifeblood theory which is the by the tax statute before a determination of who are
underlying basis for taxes. exempted. In CIR V. CA & ADMU [271 SCRA 605],
the Supreme Court, before resolving the issue on
Taxation is the rule and exemption is the exception. whether the Institute of Philippine Culture (IPC) of
The burden of proof rests upon the party claiming the Ateneo De Manila University was an
the exemption to prove that it is in fact covered by independent contractor (and as such liable for
the exemption so claimed (CIR V. MITSUBISHI METAL contractors tax), noted that it is an error to apply the
[181 SCRA 215]). principle of tax exemption without first applying the
well-settled doctrine of strict interpretation in the
In LUZON STEVEDORING V. CTA [163 SCRA 647], in imposition of taxes. The Supreme Court found that
resolving the issue on whether tugboats are the IPC never sold its services for a fee to anyone or
embraced and included in the term cargo vessel, was ever engaged in a business apart from or
the Supreme Court ruled in the negative. Any claim independently from the academic purposes of the
for exemption from the tax statute should be strictly Ateneo. Thus, it is not an independent contractor.
construed against the taxpayer. Thus, tugboats
cannot be considered cargo vessels as they are not Q: What are the reasons for strictissimi juris
meant to carry and transport persons or goods by interpretation of tax laws?
themselves but are mainly for towing.
1. Lifeblood theory
In MERALCO V. VERA [67 SCRA 352], the issue to be 2. To minimize differential treatment and foster
resolved was whether MERALCO was exempt from impartiality, fairness and equality of
excise tax on its poles, wires, and transformers. The treatment among taxpayers
Supreme Court held that the in lieu of all taxes 3. Taxation is a high prerogative of sovereignty
provision is limited in scope to taxes upon the whose relinquishment is never presumed
privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee.
Construing this provision strictly against MERALCO,
the Supreme Court held that the provision covers
Q: What the exceptions to the strictissimi Q: How are tax condonations construed?
juris interpretation of tax laws?
As held in SURIGAO CONSOLIDATED MINING VS. CIR [9
1. When the statute granting exemption SCRA 728], being in the nature of tax exemptions, it
provides for liberal construction thereof should be sustained only when expressed in explicit
2. In case of special taxes relating to special terms, and it cannot be extended beyond the plain
cases and affecting only special classes of meaning of those terms. Hence, it must construed
persons strictly against the grantee and liberally in favor of
3. If exemption refer to the public property the taxing authority.
4. In cases of exemptions granted to charitable
and educational institutions or their property ---------------------------------------------------------------
5. In cases of exemptions in favor of a c) Tax rules and regulations
government political subdivision or ---------------------------------------------------------------
instrumentality
Q: How are tax rules and regulations
Q: Is the rule of strict construction to tax construed?
exemptions applicable to government
political subdivisions and instrumentalities? As they have the force and effect of law, tax rules
and regulations are construed strictly against the
No. As held in the case of M ACEDA V. M ACARAIG [197 government and liberally in favor of the taxpayer.
SCRA 771], it is a recognized principle that the rule ---------------------------------------------------------------
on strict interpretation does not apply in the case of d) Penal provisions of tax laws
exemptions in favor of a government political ---------------------------------------------------------------
subdivision or instrumentality.
Q: How are penal provisions of tax laws
Q: Why is the rule of strict construction to
construed?
tax exemptions inapplicable to government
political subdivisions and instrumentalities? Penal provisions of tax laws are strictly construed
against the State and liberally in favor of the
The reason for the rule does not apply in the case of taxpayer.
exemptions running to the benefit of the government
itself or its agencies. In such case the practical effect
---------------------------------------------------------------
of an exemption is merely to reduce the amount of
money that has to be handled by government in the e) Non-retroactive application to taxpayers
course of its operations. For these reasons, ---------------------------------------------------------------
provisions granting exemptions to government
agencies may be construed liberally, in favor of non Q: Can BIR issuances be applied
tax liability of such agencies. (M ACEDA V. M ACARAIG retroactively?
[197 SCRA 771])
Yes. BIR issuances may be applied retroactively if
Q: How are tax amnesties construed? its application will not be prejudicial to the taxpayer.
(see Section 246, NIRC)
As held in the case of CIR V. M ARUBENI
CORPORATION [204 SCRA 377], a tax amnesty, Q: When will BIR issuances be not given
much like a tax exemption, is never favored nor retroactive application?
presumed in law. If granted, the terms of the
amnesty, like that of a tax exemption, must be As provided in SECTION 246 OF THE NIRC, rulings
construed strictly against the taxpayer and liberally and circulars, rules and regulations promulgated by
in favor of the taxing authority. the CIR would have no retroactive application if to
so apply them would be prejudicial to the
taxpayers
In CIR V. CA [267 SCRA 557], the taxpayer relied Q: Is the failure of a taxpayer to consult the
and implemented a computation by virtue of a BIR BIR before relying on a BIR Ruling imply
Ruling. The said issuance was later reversed in a bad faith on the part of the former?
subsequent BIR Ruling. The Supreme Court held
that the later BIR ruling cannot be given retroactive No. In CIR V. CA [267 SCRA 557], the Supreme
application as such would be prejudicial to the Court in resolving the argument that failure to
taxpayer. The same doctrine was applied in the case consult with the BIR amounted to bad faith opined
of ABS-CBN V. CTA [108 SCRA 143] with regard to that such failure does not imply bad faith especially
its reliance on a Memorandum Circular on the when the BIR Ruling relied upon was clear and
withholding of taxes on film rentals which was categorical leaving no room for interpretation.
revoked by a subsequent memorandum circular.
---------------------------------------------------------------
Q: When can BIR issuances be given I. Scope and Limitation of Taxation
retroactive application even if such would 1. Inherent Limitations
be prejudicial to taxpayers? 2. Constitutional Limitations
SECTION 246 OF THE NIRC provides for the following ---------------------------------------------------------------
exceptions:
Q: What is the scope of the legislatures
1. Where the taxpayer deliberately misstates or taxing power?
omits material facts from his return or any
document required of him by the BIR; The legislative taxing power or discretion extends to
2. Where the facts subsequently gathered by the the following:
BIR are materially different from the facts on
which the ruling is based; or 1. nature (kind of tax to be collected);
3. Where the taxpayer acted in bad faith. 2. object (purpose for which the tax shall be
levied);
Jurisprudence also provides for another exception. 3. extent (amount or rate of tax to be collected);
In PBCOM V. CIR [302 SCRA 241], The Supreme 4. coverage (the persons, property or occupation to
Court opined that the non-retroactivity of rulings by be taxed);
the CIR is inapplicable where the nullity of the 5. apportionment of the tax (general or limited to a
issuance was declared by the Courts and not by the particular locality or partly general or partly
CIR. local);
6. method of collection; and
In BIR RULING NO. 370-2011 [OCTOBER 7, 2011] the 7. situs (place) of taxation.
issue was whether RCBC is liable to pay the final
withholding tax on interest income realized from the ---------------------------------------------------------------
5
purchase of PEAce Bonds. Relying upon previous 1. Inherent Limitations
BIR Rulings in 2001, RCBC paid no final tax upon a) Public purpose
the issuance of the bonds. However, the rulings b) Inherently legislative
were all reversed by a BIR Ruling in 2004. RCBC c) Territorial
invoked the non-retroactivity principle of BIR d) International comity
Rulings. The Supreme Court in resolving this matter e) Exemption of government entities,
stated that the non-retroactivity principle does not
agencies, and instrumentalities
apply when the ruling involved is null and void for
being contrary to the law, such as the previous ---------------------------------------------------------------
rulings on the PEACe bonds.
What are the inherent limitations on the
power to tax?
_________________________________________
5 The inherent limitations are those limitations which
Poverty Eradication and Alleviation Certificate (PEAce) Bond
exist despite the absence of an express
constitutional provision thereon.
The right of taxation can only be used in aid of a c. Delegation of emergency powers to the
public purpose. In PASCUAL V. SECRETARY OF PUBLIC President (see Section 23(2), Article VI, 1987
WORKS [110 SCRA 331], the Supreme Court Constitution)
explained that the right of the legislature to
appropriate public funds is correlative with its right to d. Delegation to the President to enter into
tax and as such the power of taxation may only be executive agreements and to ratify tax treaties
exercised for public purposes. In that case, the subject to the concurrence by the Senate
appropriation of public funds for the construction of
feeder roads on land owned by a private person is e. Delegation to the people at large
invalid for being made for other than a public
purpose. Q: Do local governments have the power to
tax?
The rule can also be seen in PEPSI COLA V.
MUNICIPALITY OF TANUAN [69 SCRA 460] where the Yes. The power to tax is no longer vested
Supreme Court held that one of the requisites for the exclusively on Congress. The local governments are
valid exercise of the power of tax is that the tax must now given direct authority to levy taxes, fees and
be for a public purpose. other charges pursuant to Section 5, Article X, of the
construction and installation work were completed in Due to the variance in the concept of domicile for
the Philippines, some pieces of equipment and tax purposes and considering the multiple
supplies were completely designed and engineered relationships that may arise with respect to
in Japan. These services made and completed in intangible property and the use to which the property
Japan are not subject to contractors tax as they are may have been devoted, all of which may receive
rendered outside the taxing jurisdiction of the the protection of the laws of jurisdiction other than
Philippines. the domicile of the owner thereto, the same income
or intangible property may be subject to taxation in
In REAGAN V. CIR [30 SCRA 968], the Supreme several taxing jurisdictions.
Court held that bases under lease to the US under
the Military Bases Agreement remain part of Q: How do we address multiplicity of situs
Philippine territory. It is not foreign territory for of taxation?
purposes of income tax legislation. The power to tax
has been preserved except for those matters where
an appropriate exemption was provided for. The taxing jurisdiction may:
Note: Instead of Situs of Excise taxes, this should have The situs of VAT is the place where the transaction
been properly referred to as Situs of transfer taxes. is made. It is either where the property is sold and
While transfer taxes are considered excise taxes, note consumed or where the service is to be performed.
that VAT was placed under Situs of Business taxes when
in fact it is also an excise tax.
---------------------------------------------------------------
Q: What is the situs of excise taxes? d) International Comity
---------------------------------------------------------------
The situs of excise taxes is where the transaction
was performed. It is the place where the business or Q: Explain the principle of comity as a
_________________________________________ limitation on the power of taxation.
8
As an example, the tax imposed on gains from sale of shares of The property or income of a foreign state or
stock of a domestic corporation are treated as derived entirely government may not be the subject of taxation by
from sources within the Philippines regardless of where the said another.
shares are sold.
2. The Congress may, by law, authorize the 6. All lands, buildings, and improvements, actually,
President to fix within specified limits, and subject directly and exclusively used for religious,
to such limitations and restrictions as it may charitable or educational purposes.
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
The exemption provided for under Article VI, Section
imposts within the framework of the national
development program of the Government. 28 pertains only to real property taxes (LLADOC V.
CIR [14 SCRA 292]).
---------------------------------------------------------------
Under Article XIV, Section 4(3), all revenues and
(iv) Prohibition against taxation or religious,
assets of non-stock, non-profit educational
charitable entities, and educational entities institutions used actually, directly, and exclusively for
(x) Exemption from real property taxes educational purposes shall be exempt from taxes
--------------------------------------------------------------- and duties.
shall only cover property actually charged parking fees on the lots beside its
indispensable to the institution? building. Can the CIR tax YMCA for such
income?
No. As held in HERRERA V. QCBAA [3 SCRA 186],
the exemption in favor of property used exclusively Yes. In CIR V. CA [298 SCRA 83], the Supreme
for charitable or educational purposes is not limited Court ruled that the income from the lease and
to property actually indispensable but extends to parking fees were not exempt. The last paragraph of
facilities which are incidental to or reasonably Section 27 of the NIRC clearly provides that profits
necessary for the accomplishment of its purposes. realized by exempt organizations (non-profit clubs)
from real property from whatever source and
Q: A hospital has a school for training wherever used are taxable. The Court noted that
nurses and midwifes. Substantial profit is while YMCA is exempt from real property taxes, it is
derived from the operation of the said not exempt from income tax on the rentals from its
school. Is the school exempt from taxes? property. Further, YMCA failed to prove that it was a
non-stock, non-profit educational institution under
As to the lands, buildings, and improvements, such Article XIV, Section 4(3) of the Constitution.
is beyond the taxing power of the State irrespective
of the substantial profits as all lands, buildings and Q: The Philippine Lung Center leased
improvements used exclusively for religious, portions of its real property out for
charitable or educational purposes are exempt from commercial purposes. Are these exempt
real property taxes. The school is a facility incidental from real property taxes?
or reasonably necessary for the accomplishment of
the purposes of the hospital as the students practice No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON
therein. (see HERRERA V. QCBAA [3 SCRA 186]) CITY [433 SCRA 119], the Supreme Court held that
the hospital was not exempt from real property tax
As to the profits, it will be exempt from taxes if it on the portions of its property not actually, directly,
proves that it is within the coverage of Article XIV, and exclusively used for charitable purposes. Thus,
Section 4(3) which exempts all revenues and assets those leased out for commercial purposes are
of non-stock, non-profit educational institutions used subject to real property tax. Those used by the
actually, directly, and exclusively for educational hospital even if used for paying patients remain
purposes exempt from real property taxes.
Yes. As held in BISHOP OF SEGOVIA V. PROV. BOARD DOCTRINE: A proprietary non-profit hospital is subject
OF ILOCOS NORTE [51 SCRA 352], the exemption to 10% tax under Section 27(B) of the Tax Code.
from the payment of the land tax in favor of the
FACTS: St. Lukes Medical Center is a hospital organized as
convent includes not only the land actually occupied a non-stock and non-profit corporation. It admits both
by the building, but also the adjacent ground or paying and non-paying patients. The CIR claimed that St.
vegetable garden destined to the incidental use of Lukes was liable for income tax at 10% as provided under
10
the parish priest in his ordinary life. The unused Section 27(B) of the NIRC. St. Lukes argues that it is a
cemetery is also exempt as it is not used for non-stock, non-profit institution for charitable and social
commercial purposes and instead is used as a place
for those who participate in the religious festivities.
_________________________________________
Q: YMCA is a non-stock, non-profit 10
Section 27(B) provides that proprietary educational institutions
institution with religious, charitable and and hospitals which are non-profit shall pay a tax of ten percent
educational objectives. YMCA leased part of (10%) on their taxable income
its premises to small canteen owners and
welfare purposes exempt from income tax under Section charitable. This is affirmed in the constitutional provision
11
30(E) and (G) of the NIRC. with regard to non-stock, non-profit educational
institutions. For their income to be exempt, their revenues
HELD: St. Lukes cannot claim full tax exemption under and assets must be used actually, directly, and exclusively
Section 30 because it has paying patients and this is for educational purposes. The rule now can be laid down
notwithstanding the fact that it is a non-profit hospital. For as follows: For the income of a non-stock, non-profit
Section 27(B) to apply, the hospital must be non-profit corporation to be totally exempt, it must be organized and
which means that no net income or asset accrues to or operated exclusively for educational or charitable
benefits any member or specific person and all the purposes. In such case, it will fall within the coverage of
activities of the hospital are non-profit. On the other hand, Section 30(E) and (G) of the Tax Code. However, if it
Section 30(E) and (G), while providing for an exemption is conducts for-profit activities, like the admission of paying
qualified by the last paragraph which, in turn, provides that patients, it will not be exempt with regard to that particular
activities conducted for profit shall be taxable. Section income. Section 27(B) will apply and the income will be
30(E) and (G) requires that an institution be operated taxed at the preferential rate of 10%.
exclusively for charitable purposes to be completely
exempt from income tax. In this case, however, St. Lukes RMC 67-2012 [October 31, 2012] was issued by the BIR
is not operated exclusively for charitable purposes insofar to implement this decision of the Supreme Court on all
as its revenues from paying patients are concerned. Such private non-profit hospitals and educational institutions
revenue is subject to income tax at 10% under Section starting from January 1, 1998.
27(B).
Q: Is the existence of paying patients
material to the real property tax exemption
Note: This case is very important because it reconciles the
following constitutional and statutory provisions: Section of the building, land and improvements of
28, Article VI (tax exemption of real property actually, St. Lukes?
directly, and exclusively used for religious, charitable or
educational purposes); Section 4(3) Article XIV (tax No. The lands, buildings, and improvements of St.
exemption of income of non-stock, non-profit educational Lukes remain exempt from real property taxes even
institutions used actually, directly, and exclusively for if it admits paying patients. This is consistent with
educational purposes); Section 27(B), Tax Code (10% the ruling in LUNG CENTER OF THE PHILIPPINES V.
preferential tax rate to income of proprietary educational
institutions); Section 30(E) and (G) (tax exemption of the
QUEZON CITY [433 SCRA 119] where the Supreme
income of non-stock non-profit corporations organized and Court held that a charitable institution does not lose
operated exclusively for charitable purposes.). its character as such and its exemption from real
property taxes simply because it derives income
With regard to taxation of real property, the doctrine laid from paying patients
down in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
[433 SCRA 119] still holds. The lands, buildings, and Q: If St. Lukes were to lease to private
improvements actually, directly and exclusively used for
religious, charitable and educational purposes shall
persons portions of its property for profit, is
remain exempt from real property taxes even if there is, in the property and the profits exempt from
the case of a hospital, admission of paying patients. If the taxes?
hospital were to lease to private persons portions of its
property for profit, the real property will not be exempt The property will not be exempt from real property
from real property taxes. Thats for real property taxes. taxes and also the profits will not be exempt from
Income taxation is another thing. income tax. Pursuant to the ruling in LUNG CENTER
OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119],
With regard to income taxation, the statement of the Court
must be noted: Non-profit does not necessarily mean those portions of real property not actually used for
_________________________________________ charitable purposes shall not be exempt from real
property taxes. Consistent with the ruling in CIR V.
11
Section 30(E), NIRC provides that a non-stock corporation or CA [298 SCRA 83], profits realized from real
association organized and operated exclusively for charitable property by exempt institutions from whatever
purposes is exempt from income tax while Section 30(G) provides source or wherever used are taxable.
that a civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare is likewise
exempt. ---------------------------------------------------------------
preacher, minister, or dignitary is assigned to the Q: How does the principle of uniformity
armed forces, or to any penal institution, or relate to the equal protection clause?
government orphanage or leprosarium.
The test of uniformity is based on the requisites for a
valid classification under the equal protection clause.
--------------------------------------------------------------- As held in SISON V. ANCHETA [130 SCRA 654],
2. Constitutional Limitations uniformity of taxation is quite similar to the standard
a) Provisions indirectly affecting taxation of equal protection.
---------------------------------------------------------------
Under the equal protection clause, for a
Q: What are the general (indirect) classification to be valid, it must:
constitutional limitations on the taxing
1. Rest on substantial distinctions;
power? 2. Be germane to the purpose of the law;
3. Not be limited to existing conditions only; and
The general constitutional limitations are: 4. Apply equally to all members of the same class.
1. Due process (Article III, Section 1)
Q: Is there a violation of the uniformity of
2. Equal protection (Article III, Section 1)
3. Religious Freedom (Article III, Section 5) taxation or equal protection when the State
4. Non-Impairment of Contracts (Article gives preferential tax treatment to locators
(Article III, Section 10) inside special economic zones?
Q: Does the Attrition Law (RA 9335), which Q: Does RR 17-99 (implementing RA 8240
gives incentives to BOR/BOC employees, but applying the higher tax rule on the
violate the equal protection clause? January 1, 2000 increase)13 violate the equal
protection clause?
No. In ABAKADA GURO PARTY-LIST V. PURISIMA [562
SCRA 251], the Supreme Court held that there was Yes. In CIR V. FORTUNE TOBACCO [SEPTEMBER 28,
no violation of the equal protection clause. The 2011], the Supreme Court ruled that the higher tax
equal protection clause recognizes a valid rule only applies on the transition period. To
classification, that is, a classification that has a implement the higher tax rule on the January 1,
reasonable foundation or rational basis and not 2000 increase would violate the rule of uniformity
arbitrary. The subject of the Attrition Law was since brands belonging to the same category would
revenue generation and collection of the BIR and be imposed with different tax rates.
BOC, thus, the incentives and sanctions should
logically pertain to them and not to other government Q: Does the adoption of a gross system of
agencies. This has been reiterated in the recent income taxation to compensation income
case of BOCEA V. TEVES [G.R. 181704, DEC. 6,
and a system of net income taxation as
2011].
regards professional and business income
Q: Does the classification freeze scheme12 violate the rule on uniformity?
under RA 9334 violate the equal protection
No. In SISON V. ANCHETA [130 SCRA 654], the
clause?
Supreme Court noted that taxpayers who are
No. In British American Tobacco v. Camacho
recipients of compensation income have practically
[562 SCRA 511], the Supreme Court held that the
no overhead expenses and thus, they should not be
classification freeze does not violate the equal
entitled to make deductions for income tax
protection clause as it passes the rational basis test
purposes. On the other hand, professionals and
and is meant to improve the efficiency and effectivity
businessmen have no uniformity in terms of costs or
of the tax administration over sin products while
expenses necessary to produce their income. Thus,
trying to balance the same with state interests. It
it would be unjust to disregard such disparities and
addresses the concerns in the simplification of tax
giving them all zero deductions and impose on all
administration of sin products, elimination of
the same tax rates.
potential areas for abuse and corruption in tax
collection, buoyant and stable revenue generation,
and ease of projection of revenues. Q: Does the rule on uniformity require
territorial uniformity?
Court ruled in the negative as the rule on uniformity thereof. The free exercise and enjoyment of religious
does not require taxes for the same purpose should profession and worship, without discrimination or
be imposed in different territorial subdivisions at the preference, shall forever be allowed. No religious test shall
same time. It is enough that the tax falls equally and be required for the exercise of civil or political rights.
impartially on all owners or operations of tenement
houses similarly classified or situated.
Q: A municipality passed an ordinance
The statement made by the Court in CIR V. which imposes a tax on the sale of bibles. Is
LINGAYEN GULF [164 SCRA 27] to the effect that a the ordinance valid?
tax is uniform when it operates with the same force
and effect in every place where the subject of it is No. As held in AMERICAN BIBLE SOCIETY VS. CITY OF
found should not be taken to mean that territorial M ANILA [101 SCRA 386], the municipal ordinances
uniformity is required. imposing a tax on the sale of bibles were declared
unconstitutional as it would impair the free exercise
Q: A municipal ordinance was passed and enjoyment of its religious profession and
worship, as well as its rights of dissemination of
imposing a tax on the sale of soft drinks or
religious beliefs.
carbonated beverages by
agents/consignees of dealers doing ---------------------------------------------------------------
business outside the municipality. Is there a (iv) Non-impairment of obligations of
violation of the equal protection clause? contracts
---------------------------------------------------------------
Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24
SCRA 789], under the said municipal ordinance,
sales of local dealers not acting for or on behalf of Article III.
merchants established outside the municipality Section 10. No law impairing the obligation of contracts
would be exempt from the tax while those acting as shall be passed.
agents and consignees of dealers outside the
municipality would have to pay the tax. The
Q: When can the non-impairment clause be
Supreme Court ruled that this was a violation of the rightly invoked against the withdrawal of a
uniformity required by the Constitution. tax exemption?
exemption (such that it impairs the Q: What are the characteristics or elements
obligations of contracts when revoked)? of a tax? (essential elements of a tax)
Q: Enumerate the three (3) stages or However, they may be held liable for the unpaid
aspects of taxation. Explain each. taxes:
a. If it appears that the corporate assets have
The three stages or aspects of taxation are: passed into their hands
b. When the stockholders have unpaid
1. Levy This refers to the enactment of a law by subscriptions to the capital of the
Congress imposing a tax corporation (liable only to the extent of their
2. Assessment and collection This is the act of unpaid subscriptions).
administration and implementation of the tax law ---------------------------------------------------------------
by the executive department through the L. Requisites of a Valid Tax
administrative agencies ---------------------------------------------------------------
3. Payment This is the act of compliance by the
taxpayer including whatever remedies are
Q: What are the requisites of a valid tax?
available to him under the law
TABACOS DE FILIPINAS V. CITY OF M ANILA [8 SCRA be of sufficient amount to include the cost of
367]. ) licensing, regulating and surveillance.
Q: What is the importance of determining Q: Does the above rule apply to all types of
whether a particular imposition is a tax or a license fees?
license fee?
No. In the case of license fees for non-useful
It is necessary because some limitations apply only occupations, wider discretion in fixing the amount is
to one and not to the other, and for the reason that given to municipal corporations and the exaction
exemption from taxes may not include exemption may be very large without necessarily being a tax.
from license fees. This is so because municipal corporations are
Q: What are the three types of license fees? authorized to enact ordinances to provide for the
health and safety and promote the morality, peace
The three types of license fees are: and general welfare of its inhabitants. Thus, in the
case of PHYSICAL THERAPY ORGANIZATION OF THE
1. License for the regulation of useful occupation or PHILIPPINES V. MUNICIPAL BOARD OF THE CITY OF
enterprises M ANILA [101 PHIL. 1142], the Supreme Court found
2. License for the regulation or restriction of non- the imposed license fee as reasonable as the
useful occupation or enterprises practice of hygienic and aesthetic massage not as a
14
3. License for revenue only useful and beneficial occupation which will promote
and is conducive to public morals.
(See VICTORIAS MILLING CO. VS. CIR [22 SCRA 13])
---------------------------------------------------------------
Q: What is a license tax and how do you 4. Special Assessment
distinguish it from a license fee? ---------------------------------------------------------------
As explained by the Supreme Court in the case of
VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the Q: Distinguish a tax from a special
term "license tax" has not acquired a fixed meaning. assessment.
It is often "used indiscriminately to designate
impositions exacted for the exercise of various See table below.
privileges." It does not refer solely to a license for
regulation. In many instances, it refers to "revenue- TAX SPECIAL
raising exactions on privileges or activities." On the ASSESSMENT
other hand, license fees are commonly called taxes. Definition Enforced An enforced
But, legally speaking, license taxes are "for the proportional proportional
purpose of raising revenues," in contrast to license contribution from contribution from
fees which are imposed "in the exercise of police persons and owners of lands
power for purposes of regulation." property especially or
peculiarly benefited
Q: What should be the extent of the exaction by public
for it to be considered a license fee? improvements
As held in the case of G.A. CUUNJIENG V. PATSTONE Basis Based on Based wholly on
[42 PHIL 818], the amount of the exaction must only necessity benefits
Revenue is a broad term that includes not only Excise or Taxes laid upon the
taxes but income from other sources as well. privilege tax manufacture, sale or
consumption of commodities
--------------------------------------------------------------- within the country; upon
N. Kinds of taxes licenses to pursue certain
1. As to object occupations and upon
a) Personal, capitation, or poll tax corporate privileges (e.g.
b) Property tax value-added tax)
c) Privilege tax
2. As to burden or incidence Q: What are the classes or kinds of tax
a) Direct according to who bears the burden?
b) Indirect
3. As to tax rates See table below.
a) Specific
b) Ad valorem Direct Taxes wherein both the tax
c) Mixed liability as well as the impact
4. As to purposes or burden of the tax falls on
a) General or fiscal the same person (e.g.
b) Special, regulatory, or sumptuary corporate and individual
5. As to scope or authority to impose income tax)
a) National internal revenue taxes
Indirect Taxes wherein the tax liability
b) Local real property tax, municipal falls on one person but the
tax burden thereof may be
6. As to graduation shifted or passed to another.
a) Progressive (e.g. value-added tax,
b) Regressive percentage taxes)
c) Proportionate
---------------------------------------------------------------
Q: Classify the taxes imposed under the Tax
Q: What are the classes or kinds of tax Code into direct and indirect taxes.
according to subject or object?
Income tax, estate tax and donors tax are
See table below. considered as direct taxes. On the other hand,
value-added tax, excise tax, other percentage tax
Personal, Taxes of a fixed amount upon and documentary stamp tax are indirect taxes.
capitation, or all persons of a certain class
poll tax within the jurisdiction of the
taxing power without regard Q: What are the classes or kinds of tax
to the amount of their according to the determination of amount or
property or the occupations of tax rates?
businesses in which they may
be engaged (e.g. community See table below.
tax)
Specific Tax which imposes a specific
Property Tax Taxes assessed on all sum by the head or number
property or all property of a or by some standard of
certain class within the weight or measurement and
jurisdiction of the taxing which requires no
Q: What are the kinds of income tax On the other hand, under the global tax system, all
systems? income received by the taxpayer are grouped
together, without any distinction as to type or nature
The types of income tax systems are as follows: of the income, and after deducting therefrom
expenses and other allowable deductions, are
1. Global Tax System where the taxpayer is subjected to tax at a graduated or fixed rate (see
required to lump up all items of income earned TAN VS. DEL ROSARIO [OCTOBER 3, 1994]).
during a taxable period and pay under a single
set of income tax rates on these different items Note: The Philippines had adopted both the global system
of income. and the schedular system of taxation. The global system
can be found in the income taxation of corporations. The
Tax Code subjects them to either the regular corporate
Note: Simply put, one rate for all types of gross
income tax or minimum corporate income tax irrespective
income.
of the tax base. On the other hand, the schedular system
can be found in the income taxation of individuals where
2. Schedular Tax System where there are the tax rates are progressive in character.
different tax treatments of different types of
income so that a separate tax return is required ---------------------------------------------------------------
to be filed for each type of income and the tax is 2. Features of the Philippine Income Tax
computed on a per return or per schedule basis.
Law
Note: Simply put, varying taxes are imposed on a) Direct tax
passive income. b) Progressive
c) Comprehensive
3. Semi-Schedular or Semi-Global Tax System d) Semi-schedular or semi-global tax
where the tax system is either (a) global (e.g. system
taxpayer with compensation income not subject ---------------------------------------------------------------
to final withholding tax or business or
professional income or mixed income
compensation and business or professional
income) or (b) schedular (e.g. taxpayer with
Q: What are the features of the Philippine 4. Types of Philippine Income Tax
Income Tax system? ---------------------------------------------------------------
The Philippine tax system is: Q: What are the types of Philippine Income
Tax (under Title II of the NIRC)?
1. Income tax is a direct tax because the tax
burden is borne by the income recipient The types of Income tax under Title II of the NIRC
upon whom the tax is imposed. are:
2. Income tax is a progressive tax since the 1. Graduated income tax on individuals
tax base increases as the tax rate increases. 2. Normal corporate income tax on corporations
3. The Philippines has adopted the most 3. Minimum corporate income tax on corporations
comprehensive system of imposing 4. Special income tax on certain corporations (e.g.
income tax by adopting the citizenship private educational institutions, FCDUs, and
principle, resident principle and the source international carriers)
principle. 5. Capital gains tax on sale or exchange of unlisted
4. The Philippines follows the semi-schedular shares of stock of a domestic corporation
or semi-global system of income taxation. classified as a capital asset
6. Capital gains tax on sale or exchange of real
--------------------------------------------------------------- property located in the Philippines and classified
3. Criteria in imposing Philippine income tax as a capital asset
a) Citizenship principle 7. Final withholding tax on certain passive
b) Residence principle investment incomes
c) Source principle 8. Fringe benefit tax
9. Branch profit remittance tax; and
---------------------------------------------------------------
10. Tax on improperly accumulated earnings.
Q: What are the criteria in imposing
---------------------------------------------------------------
Philippine income tax?
5. Taxable Period
1. Citizenship or nationality principle A ---------------------------------------------------------------
citizen of the Philippines is subject to
Philippine income tax (a) on his worldwide Note: This is apparently misplaced in the Syllabus. For
better understanding of the concepts, I moved this to the
income, if he resides in the Philippines (b) discussion on Income right before Methods of Accounting.
only on his Philippine source income, if he
qualifies as a non-resident citizen where his
foreign-source income shall be tax-exempt. ---------------------------------------------------------------
2. Residence or domicile principle An alien 6. Kinds of Taxpayers
is subject to Philippine income tax because ---------------------------------------------------------------
of his residence in the Philippines. A
resident alien is liable to pay Philippine Note: It is important to know the different kinds of
income tax only from his income from taxpayers in order to determine the following: (1) gross
income for tax purposes (2) exclusions from gross income;
Philippine sources but is tax-exempt from (3) exemptions; (4) deductions and (5) income tax rates.
foreign-source income
3. Source of income principle An alien is The only two exceptions where knowing the taxpayer is
subject to Philippine income tax because he immaterial are where the transaction involves (1) sales of
derives income from sources within the shares of stock of a domestic corporation because it is
Philippines. Thus, a non-resident alien or subject to of 1% of stock transaction tax or 5%/10%
non-resident foreign corporation is liable to capital gains tax on net capital gain whether the seller is
pay Philippine income tax on income from an individual, citizen or alien or a corporation, domestic or
sources within the Philippines foreign and (2) where the real property sold is a capital
asset located in the Philippines which is subject to 6%
capital gains tax.
---------------------------------------------------------------
4. who has been previously considered a non- Ruling 33-00 [September 5, 2000], however, the CIR
resident citizen and who arrives in the held that for overseas contract workers, the time spent
Philippines at any time during the taxable abroad is not material as all that is required is for the
year to reside permanently in the Philippines workers employment contract to pass through and be
registered with the POEA.
with respect to his income derived from
sources abroad
Q: If a natural-born Philippine citizen who
[See Section 22(E), NIRC] became a citizen of the United States is later
on granted Philippine dual citizenship under
Note that Section 2, RR No. 01-79 [January 8, RA 9225, is he required to pay taxes for
1979] enumerates who are deemed non-resident income earned in the United States?
citizens:
No. In BIR Ruling DA-095-05 [March 29, 2005], the
1. Immigrant one who leaves the Philippines CIR held that such a person would be a non-resident
to reside abroad as an immigrant for which a citizen, and hence, will not be required to pay
foreign visa has been secured Philippine tax for income earned in the United
2. Permanent employee one who leaves the States.
Philippines to reside abroad for employment
on a more or less permanent basis ---------------------------------------------------------------
3. Contract worker one who leaves the (ii) Aliens
Philippines on account of a contract of (a) Resident Aliens
employment which is renew from time to (b) Non-resident Aliens
time under such circumstance as to require
(1) Engaged in trade or business
him to be physically present abroad most of
the time (not less than 183 days) (2) Not engaged in trade or business
---------------------------------------------------------------
Q: Should a non-resident citizen file an
Note: It is important to know the classification of alien
income tax return or information return taxpayers to know (1) the tax rates to be imposed on their
covering his income earned abroad? income derived from sources within the Philippines and (2)
allowable exemptions and deductions.
No. Previously, under RR No. 01-79, non-resident
citizens were required to do so. In RR No. 9-99, non- As to (1): Tax rates A non-resident alien not engaged in
resident citizens were required to file an information trade or business within the Philippines is subject to a flat
return. However, under RR 05-01 [July 31, 2001], tax of 25% on income within the Philippines. (see Section
25(B), Tax Code). A resident alien is or non-resident alien
non-resident citizens are no longer required to file engaged in trade or business is subject to the graduated
the same on their income derived from sources income tax rates (see Section 23, Tax Code)
outside the Philippines.
As to (2): Deductions Resident aliens can avail of
Q: What is meant by the phrase most of the deductions while non-resident aliens not engaged in trade
time as used in determining whether a or business cannot avail of deductions.
citizen who derives income from abroad and Exemptions Resident aliens are allowed personal and
is physically present abroad is a non- additional exemptions while non-resident aliens engaged
resident? in trade or business in the Philippines are entitled to
personal exemptions only by way of reciprocity and not to
RR No. 01-79 states that to be physically present additional exemptions.
abroad most of the time during the taxable year, a
contract worker must have been outside the Read Section 22(F) and (G), Tax Code
Philippines for not less than 183 days during such
taxable year. Q: Who is a resident alien?
Note: As can be seen from the wording of RR No. 01-79, A resident alien is an individual whose residence is
most of the time applies to a contract worker. In BIR within the Philippines and who is not a citizen
An alien will be considered a resident if the stay here Q: Who is a non-resident alien?
is either:
A non-resident alien is an individual:
1. definite and extended;
2. indefinite 1. whose residence is not within the Philippines; and
2. who is not a citizen thereof
An alien actually present in the Philippines who is
not a mere transient or sojourner is a resident of the Note: Determination is by his intention with regard to the
Philippines for purposes of the income tax. length and nature of his stay (see Section 5, RR 2).
Again, remember, that an alien is considered a non-
resident if he stays here for a definite short period of
In GARRISON V. CA [JULY 19, 1990], in resolving the time.
contention of US nationals that they cannot be
considered resident aliens as they intend to go back
Q: What are two kinds of non-resident
to the US on termination of their employment in the
Philippines, the Supreme Court held that what the aliens?
law requires is merely physical or bodily presence in
a given place for a period of time, not the intention to 1. Engaged in trade, business, or the practice
make it a permanent place of abode. of a profession in the Philippines
2. Not engaged in trade business, trade or
The Supreme Court further held that, as laid clearly exercise of a profession within the
in RR No. 2, whether an alien is a transient or not is Philippines
determined by his intentions with regard to the
length and nature of his stay. A mere floating Read Section 25(A)(1), Tax Code
intention indefinite as to time, to return to another
country is not sufficient to constitute him as a Q: How do you determine if a non-resident
transient. If he lives in the Philippines and has no alien is engaged in trade or business?
15
definite intention as to his stay, he is a resident.
One who comes to the Philippines for a definite Once a taxpayer is determined to be a non-resident
purpose, which in its nature may be promptly alien, the test to determine whether the alien is a
16
accomplished, is a transient. But if his purpose is non-resident alien engaged in trade or business is
of such a nature that an extended stay may be whether his total aggregate stay for a taxable year
necessary for its accomplishment, and to that end exceeds 180 days.
the alien makes the Philippines his temporary home,
he becomes a resident, although he intends to ---------------------------------------------------------------
17
return to his domicile abroad. (iii) Special class of individual employees
(a) Minimum wage earner
Q: When is the residence of an alien ---------------------------------------------------------------
considered lost?
Section 22(GG) and (HH), Tax Code
_________________________________________
Note: This is not a kind of taxpayer. A minimum wage
15
In other words, stay is indefinite. worker is actually a resident citizen only that it is exempt
16
In other words, the stay is for a definite short period of time. from income tax.
17
In other words, the stay is definite but extended.
Q: Is the income of minimum wage earners Read Section 61, Tax Code
subject to the graduated income tax rates?
Q: To whom shall the income of a trust be
No. Minimum wage earners shall be exempt from taxable to?
the payment of income tax on their taxable income.
Further, their holiday pay, overtime pay, night shift If the trust instrument is irrevocable, the income
differential pay, and hazard pay received by them shall be taxable to the fiduciary. If the trust
shall likewise be exempt from income tax (see 21
instrument is revocable, the income shall be
Section 24, Tax Code as amended by RA 9504) taxable to the grantor.
taxed on its income from sources within and without the tax of 10%. ABC argues that following the
Philippines, but a foreign corporation is taxed only on its principal-agent relationship theory, ABC is a
income from sources within the Philippines.
resident foreign corporation subject only to
It is important to know the kinds of foreign corporations for the 10 % intercorporate final tax on
income taxation purposes to determine the allowable dividends received from a domestic
deductions. While a resident foreign corporation is taxable corporation. Is ABC correct?
on income solely from sources within the Philippines, it is
permitted to deductions from gross income but only to the
extent connected with income earned in the Philippines.
No. The general rule that a foreign corporation is the
On the other hand, non-resident foreign corporations same juridical entity as its branch office in the
cannot avail of deductions. (see N.V. REEDERIJ Philippines cannot apply here. This rule is based on
AMSTERDAM VS. CIR [JUNE 23, 1988]) the premise that the business of the foreign
corporation is conducted through its branch office,
Q: Enumerate the kinds of corporate following the principal agent relationship theory. It is
taxpayers and define each. understood that the branch becomes its agent here.
So that when the foreign corporation transacts
A corporation is itself a taxpaying entity and business in the Philippines independently of its
speaking generally, for purposes of income tax, branch, the principal-agent relationship is set aside.
corporations are classified into (a) domestic The transaction becomes one of the foreign
corporations and (b) foreign corporations. corporation, not of the branch. Consequently, the
Foreign corporations are further classified into (1) taxpayer is the foreign corporation, not the branch or
resident foreign corporations and (2) non- the resident foreign corporation. Corollarily, if the
resident foreign corporations. business transaction is conducted through the
branch office, the latter becomes the taxpayer, and
For definitions, see table below. not the foreign corporation. (see M ARUBENI
CORPORATION VS. CIR [SEPTEMBER 14, 1989]).
Domestic one created or organized in the
corporation Philippines or under its laws. Q: XYZ is a foreign shipping company. It
Foreign one created or organized under does not have a branch office in the
Corporation the laws of a foreign country. Philippines and it made only two calls in
Resident foreign a foreign corporation engaged in
Corporation trade or business within the
Philippine ports. What kind of foreign
Philippines or having an office or corporation is XYZ?
place of business therein.
Non-resident a foreign corporation not XYZ is a foreign corporation not authorized or
foreign engaged in trade or business licensed to do business in the Philippines. In order
corporation within the Philippines and not that a foreign corporation may be considered
having any office or place of engaged in trade or business, its business
business therein. transactions must be continuous. A casual
business activity in the Philippines by a foreign
Q: ABC Corporation, a foreign corporation corporation does not amount to engaging in
in Japan and licensed to do engage in trade or business in the Philippines for income
business in the Philippines (hence, a tax purposes. Accordingly, its taxable income for
resident foreign corporation) has equity purposes of our income tax law consists of its gross
investments in XYZ Company, a domestic income from all sources within the Philippines. (see
corporation. XYZ declared and paid cash N.V. REEDERIJ AMSTERDAM VS. CIR [JUNE 23,
dividends to ABC. XYZ directly remitted the 1988])
cash dividends to ABCs head office in
Japan (hence, a non-resident foreign
corporation) net not only of the 10% final
dividend tax but also of the withheld 15%
profit remittance tax based on the remittable
amount after deducting the final withholding
_________________________________________
_________________________________________
23
It is also important to note in this BIR Ruling that the CIR held
22
The requisites of a joint venture are as follows: that the allocation of saleable units does not constitute as a
1. Contribution by each party taxable event as no income is actually realized by Avida or
2. Profits are shared among the parties Aurora.
24
3. There is joint right of mutual control over the subject By the contract of partnership, two or more persons bind
matter themselves to contribute money, property or industry to a
4. There is a single business transaction rather than a common fund with the intention of dividing the profits among
general or continuous transaction. themselves (see Article 1767, Civil Code)
Yes. The term corporations includes partnerships, No. A co-ownership who own properties which
no matter how created or organized. produce income should not automatically be
considered partners of an unregistered partnership,
Q: What are the kinds of partnerships under or a corporation, within the purview of the income
the Tax Code? tax law. The essential elements of a partnership are
two, namely: (a) an agreement to contribute money,
1. Taxable partnerships these are business property or industry to a common fund; and (b) intent
partnerships or partnerships which are to divide the profits among the contracting
organized for the purpose of engaging in parties. Here, there is no evidence that petitioners
trade or business. They are subject to entered into an agreement to contribute money,
income tax as if they were corporations property or industry to a common fund, and that they
whether or not registered with the SEC as a intended to divide the profits among themselves.
partnership The sharing of returns does not in itself establish a
2. Exempt partnerships these are partnership whether or not the persons sharing
partnerships not considered as taxable therein have a joint or common right or interest in
entities for income tax purposes i.e. General the property. There must be a clear intent to form a
Professional Partnerships). partnership, the existence of a juridical personality
different from the individual partners, and the
Q: How do you determine if a partnership is freedom of each party to transfer or assign the
taxable? (elements of a taxable partnership) whole property. (see OBILLOS v. CIR [OCTOBER 29,
1985] and PASCUAL V. CIR [OCTOBER 18, 1988]).
1. An intent to form the same
2. Generally participating in both profits and Q: A group of insurance companies in the
losses Philippines decided to form a pool and
3. Such a community of interest, as far as third entered into a reinsurance treaty with a non-
persons are concerned as enables each resident reinsurance company. Is such a
party to make contract, manage he business pool subject to corporate taxes and
and dispose of the whole property. withholding taxes on dividends paid to the
non-resident reinsurance company?
Q: Is a co-ownership taxable as a
corporation? Yes. Where several local insurance ceding
companies enter into a Pool Agreement or an
No. The common ownership of property does not by association that would handle all the insurance
itself create a partnership between the owners, businesses covered under their quota-share
though they may use it for purposes of making reinsurance treaty and surplus reinsurance
gains. Article 1769(3) of the Civil Code provides treaty with a non-resident foreign reinsurance
that the sharing of gross returns does not by itself company, the resulting pool having a common fund,
establish a partnership whether or not the persons and functions through an executive board and its
sharing them have a joint or common right or interest work is indispensable, beneficial and economically
in any property from which the returns are derived. useful to the business of the ceding companies and
the foreign firm, such circumstances indicate a
Q: A and B, co-owners, bought 3 parcels of partnership or an association taxable as a
land in one transaction and bought 2 more corporation (see AFISCO INSURANCE CORPORATION
parcels of land in another. They decided to VS. CIR [JANUARY 25, 1999])
sell the 3 parcels to C and the 2 parcels to D.
They realized a net profit gain and paid CGT. Q: A and B inherited properties. They did
CIR assessed them for deficiency corporate not partition the same and instead invested
them to a common fund and divide the
profits therefrom. Should they be classified income of which is derived from engaging in any
as an unregistered partnership subject to trade or business.
corporate income tax?
Q: Is a GPP liable for income tax?
Yes. The income from inherited properties may be
considered as individual income of the respective No. A GPP is not considered a taxable entity for
heirs only as long as the inheritance or estate is not income tax purposes. Section 26 of the NIRC
distributed, or, at least, partitioned. But the moment provides that persons engaging in business as
their respective known shares are used as part of partners in a GPP shall be liable for income tax only
the common assets of heirs to be used in making in their separate and individual capacities computed
profits, it is but proper that the income from such on their respective distributive shares of the
shares should be considered as part of the taxable partnership profit.
income of an unregistered partnership. (see ONA V.
CIR [M AY 25, 1972]). Q: Distinguish between a GPP and an
ordinary business partnership.
Note: Thus, we make a distinction. Before the partition of
property, the income of the co-ownership arising from the A general professional partnership, unlike an
death of a decedent is not subject to income tax, if the ordinary business partnership (which is treated as a
activities of the co-owners are limited to the preservation corporation for income tax purposes and so subject
of the property and the collection of the income therefrom.
However, after partition, should the co-owners invest the
to the corporate income tax), is not itself an income
income of the co-ownership in any income-producing taxpayer. The income tax is imposed not on the
properties, they would be constituting themselves into an professional partnership, which is tax exempt, but on
unregistered partnership which is consequently subject to the partners themselves in their individual capacity
income tax as a corporation. computed on their distributive shares of partnership
profits (see CARAG, CABALLES, JAMORA AND SOMERA
Q: A and B bought 3 parcels of land in 1976 LAW OFFICES VS. DEL ROSARIO [OCTOBER 3, 1994])
and 2 parcels of land in 1977. In 1988 they
sold the first three to Z and the other two ---------------------------------------------------------------
were sold to Y in 1989. A and B realized a 7. Income Taxation
net profit from the sale and they individually a) Definition
paid he corresponding capital gains tax. The b) Nature
CIR assessed them for deficiency income c) General Principles
tax arguing that they formed an ---------------------------------------------------------------
unregistered partnership. Is the contention
of the CIR correct? Q: Define Income tax.
No. Isolated transactions by two or more persons do Income tax is a tax on all yearly profits arising from
not warrant their being considered as an property, professions, trades and offices.
unregistered partnership. They will instead be
considered as mere co-owners; no corporate income In CONWI V. CTA [AUGUST 31, 1992], the Supreme
tax is due on mere co-ownerships. Court defined income tax as an amount of money
coming to a person or corporation within a specified
--------------------------------------------------------------- time, whether as payment for services, interest, or
profit from investment.
d) General Professional Partnerships (GPP)
---------------------------------------------------------------
Q: What is the nature of income tax?
Q: What is a GPP? An income tax is an excise tax and not a tax on
property. It is levied upon the privilege of receiving
General professional partnership (GPP) are income or profit.
partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the
fruit of capital or labor severed from the tree. (see However, stock dividends constitute as income if a
M ADRIGAL VS. RAFFERTY [AUGUST 7, 1918]). corporation redeems stock issued so as to make a
25
distribution. This is essentially equivalent to the
Q: What is the difference between income distribution of a taxable dividend the amount so
and capital? distributed in the redemption considered as taxable
income. (see COMMISSIONER VS. M ANNING [AUGUST
Income is distinct from capital. Income means all the 7, 1975])
wealth which flows into the taxpayer other than a
mere return on capital while capital is a fund or Q: Is money received as exemplary
property existing at one distinct point in time while damages (punitive damages) income?
income denotes a flow of wealth during a definite
period of time. Income is gain derived and severed Yes. In COMMISSIONER V. GLENSHAW GLASS CO. [348
from capital. (see CHAMBER OF REAL ESTATE AND U.S. 426], Glenshaw Co was engaged in a
BUILDERS ASSOCIATION, INC. V. ROMULO [M ARCH 9, protracted litigation with Hartford-Empire Co where
2010]). the former demanded exemplary damages for fraud
and treble damages for injury to its business by
Income as contrasted with capital or property is to reason of the latters violation of federal antitrust
be the test. The essential difference between capital laws. The parties settled. Glenshaw did not report
and income is that capital is a fund; income is a flow. the money received as damages from the settlement
A fund of property existing at an instant of time is in its income tax return. The Commissioner
called capital. A flow of services rendered by that assessed Glenshaw for the deficiency. Glenshaw
capital by the payment of money from it or any other contended that punitive damages, as windfalls
benefit rendered by a fund of capital in relation to flowing from culpable conduct of third parties are not
such fund through a period of time is called an taxable income. The US Supreme Court held that
income. Capital is wealth, while income is the money received as damages must be reported as
service of wealth. A tax on income is not a tax on they constitute income. The mere fact that such
property. "Income," as here used, can be defined as payments were extracted from wrongdoers cannot
"profits or gains." (see M ADRIGAL VS. RAFFERTY detract from their character as taxable income. The
[AUGUST 7, 1918]). Court also stated that punitive damages cannot be
classified as gifts.
Q: Are stock dividends income or capital?
Q: Is money received as compensatory
Generally, stock dividends represent capital and do damages income?
not constitute as income to its recipient. Mere
issuance thereof is not yet subject to income tax as Yes. In MURPHY V. IRS [493 F.3d 170], the US Court
they are nothing but an enrichment through increase of Appeals (District of Columbia), held that the
in value of capital investment. Such are considered amount received as compensatory damages on for
unrealized gain and cannot be subjected to income emotional distress and loss of reputation constitutes
tax until that gain has been realized. taxable income.
As explained by the Supreme Court in FISHER V. Note: It must be noted, however, that in the Murphy case,
TRINIDAD [OCTOBER 30, 1922], when a corporation what was involved was physical injuries. Note under our
issues stock dividends, it shows that the Tax Code, amounts received as compensation for
corporations accumulated profits have been personal injuries are excluded from gross income and
capitalized, instead of distributed to the stockholders hence, not taxable. Thus, we must make a distinction. If
its non-physical injuries like mental anguish, the damages
or retained as surplus available for distribution. The are included in gross income and hence taxable but if its
stockholder receives nothing out of the corporate _________________________________________
assets for his separate use and benefit but a
representation of his increased interest in the capital 25
The exception to the rule that stock dividends do not constitute
of the corporation. The capital still belongs to the income shall be discussed more extensively later. Knowing that
corporation as there is no separation of interest. there is an exception will suffice for now.
Income, gain or profit is subject to income tax when Q: What is the constructive receipt
the following conditions are present: doctrine?
1. There is income, gain or profit (existence of The constructive receipt doctrine provides than an
26 item is treated as income when it is credited to the
income)
2. The income, gain or profit is not exempt from account of the taxpayer, or made unconditionally
27 available to the taxpayer; no physical possession is
income tax.
3. The income, gain or profit is received or realized required. (see Section 52, RR No. 2-40)
28
during the taxable year; (realization of
income) Income is received not only when it is actually
handed to a taxpayer but also when it is merely
Note: As to (1) for tax purposes, income does not only constructively received by him. In LIMPAN
refer to the money a taxpayer receives but includes INVESTMENT V. CIR [JULY 26, 1966], the lessees
anything of value. opted to deposit their payments when the lessor
refused to accept the same in 1957. The lessor did
As to (2) An income may have other elements but the not report these payments in his 1957 income tax
law may specifically exclude the same from income for tax return. The Supreme Court held that the failure to
purposes i.e. certain passive incomes excluded from
income as they are already subject to final taxes.
report the said rental income is unjustified as, when
the payments were deposited, the lessor was
As to (3) Even if there is material gain, not excluded by deemed to have constructive received such rentals.
law, if the material gain is not yet realized by the taxpayer,
then there is no income to speak of. Q: When is income recognized?
(see M ANDARIN HOTELS V. CIR, CTA CASE NO, 5046, services they are plainly
M ARCH 24, 1997] compensation which is taxable
income COMMISSIONER V. LABUE
[351 US 243]
---------------------------------------------------------------
d) Tests in determining whether income is All Events Test Income is reportable when all
earned for tax purposes the events have occurred that
(i) Realization test fix the taxpayers right to
(ii) Claim of right doctrine or doctrine of receive the income and the
amount can be determined with
ownership, command or control reasonable accuracy. CIR V.
(iii) Economic benefit test, doctrine of ISABELA CULTURAL
proprietary interest CORPORATION, G.R. NO. 172231,
(iv) Severance test FEBRUARY 12, 2007
(v) All events test
Flow of Wealth Test The test of taxability is the
--------------------------------------------------------------- source (the property, activity or
service that produced the
Note: The enumeration is inaccurate in that realization income determins whether any
test and severance test is one and the same. Also it does gain was derviced from the
not include the Flow of Wealth Test. transaction COLLECTOR V.
ADMINISTRATRIX OF THE ESTATE
Q: Enumerate the different tests for income OF ECHARRI, G.R. NO. 45544,
determination and define each. APRIL 25, 1939.
Income is not deemed realized Q: What are the different taxable periods
until the fruit has been plucked provided for in the Tax Code?
from the tree EISNER V.
MACOMBER [252 US 426]
1. Calendar period or calendar year is an
Claim of Right The power to dispose of income
accounting period which starts from January
Doctrine/Doctrine of is the equivalent of ownership 1 and ends on December 31
Ownership, of it. The exercise of that power 2. Fiscal period or fiscal year - is an
Command or Control to procure the payment of accounting period of 12 months ending on
income to another is the the last day of any month other than
enjoyment and hence the December 31.
realization of the income by him 3. Short period is an accounting period
who exercises it. The dominant wherein income shall be computed on the
purpose of the revenue laws is
basis of a period less than 12 months.
the taxation of income to those
who earn or otherwise create
the right to receive it and enjoy Read Section 43, Tax Code
the benefit of it when paid
HELVERING V. HORST [311 U.S. Q: What is the general rule for computing
112]
the taxpayers taxable income?
Economic Benefits Where stock, options, shares of
Test/Doctrine of stock or other assets are The taxable income shall be computed upon the
Proprietary Interest transferred by an employer to basis of the taxpayers annual accounting period
an employee to secure better fiscal year or calendar year as the case may be.
Q: In what instances shall taxable income be Q: What are two main accounting methods
computed on the basis of calendar year? that may be used by taxpayers?
Q: In what instances shall taxable income be 2. Accrual Method method of accounting for
computed on the basis of a short period? income in the period it is earned, regardless
of whether it has been received or not.
The general rule is that the taxable period is always Expenses are accounted for in the period
12 months. The exceptions (where a taxpayer may they are incurred and not in the period they
have a taxable period of less than 12 months) are: are paid.
1. Taxpayer, other than an individual, changes Note: Other methods would include (1) Installment
method; (2) Percentage of Completion Method and (3)
his accounting period from fiscal to calendar Crop year basis.
30
year or from calendar year to fiscal year or
from one fiscal year to another (Section 46,
Q: Distinguish cash method from accrual
Tax Code)
2. Taxpayer dies method of accounting.
3. Corporation is newly organized _________________________________________
4. Corporation is dissolved 30
Crop Year Basis is a method of accounting applicable only for
5. Tax period is terminated by the CIR by
farmers engaged in the production of crops which take more than
authority of law (Section 6(D), Tax Code) a year from the time of planting to the process of gathering and
disposal of the harvest. Expenses paid or incurred are deductible
Read Section 46, Tax Code in the year the gross income from the sale of the crops is realized.
be inferred from most cases on income taxation. Its either b) Concept of income from whatever source
the taxpayer overpaid and hence, he wants a refund or the derived
taxpayer underpaid and hence, the government assesses
him for deficiency taxes. This is why it is important to ---------------------------------------------------------------
understand the inclusions in gross income, deductions,
exclusions and exemptions because the controversy Q: Is the enumeration provided in Section
between the taxpayer and the government in most cases 32(A) exclusive?
would be in one of these areas.
No. Section 32(A) does not intend the enumeration
--------------------------------------------------------------- to be exclusive. It merely directs that the types of
9. Gross Income income listed therein be treated as income from
a) Definition sources within the Philippines (see CIR VS.
b) Concept of income from whatever source AMERICAN AIRLINES [DECEMBER 19, 1989]).
derived
c) Classification of income as to source Note: Note that the statutory definition contains the phrase
all income derived from whatever source. This indicates
--------------------------------------------------------------- that non-exclusive nature of the enumeration in Section
32(A).
Read Section 32(A), Tax Code
Q: What is meant by the phrase all income
--------------------------------------------------------------- derived from whatever source"
a) Definition
--------------------------------------------------------------- The phrase all income derived from whatever
source encompasses all accessions to wealth,
clearly realized, and over which the taxpayers have
Q: Define gross income. (statutory
complete dominion. A gain constitutes taxable
inclusions of gross income) income when its recipient has such control over it
that as a practical matter, he derives readily
Except when otherwise provided, all income derived realizable economic value from it.
from whatever source, including, but not limited to,
the following items: Income from whatever sources refers to all income
not expressly excluded or exempted from the class
1. Compensation for services in whatever form of taxable income, irrespective of the voluntary or
paid, including, but not limited to fees, involuntary action of the taxpayer in producing the
salaries, wages, commissions and similar income GUTIERREZ V. CIR, CTA CASE NO. 65,
items; AUGUST 31, 1965]
2. Gross income derived from the conduct of
trade or business or the exercise of a Gains, money or otherwise derived from all other
profession; illegal source fall within the ambit of income derived
3. Gains derived from dealings in property from whatever source and is subject to income tax.
4. Interests
5. Rents Note: Income derived from whatever source will be
6. Royalties discussed in greater detail later.
7. Dividends
8. Annuities ---------------------------------------------------------------
9. Prizes and winnings c) Gross income vis--vis net income vis--
10. Pensions; and
vis taxable income
11. Partners distributive share from the net
income of the GPP ---------------------------------------------------------------
---------------------------------------------------------------
In all cases, other than when a final tax is imposed I hope that placed things into perspective and highlights
or when the gross compensation income tax system the importance and relationship of the concepts of gross
applies, the income tax is imposed on the net income, deductions, exclusions and exemptions.
taxable income computed as follows:
---------------------------------------------------------------
(1) All income minus exclusions equals gross d) Classification of income as to source
income; ---------------------------------------------------------------
(2) Gross income less allowable deductions
equals net income (in case of corporations, Q: What are the classifications of income as
this is already the taxable net income) to source?
(3) Net income less personal and additional
exemptions (when applicable) equals 1. Gross income and taxable income from
taxable net income sources within the Philippines
(4) Taxable net income times income tax rates 2. Gross income and taxable income from
(on the graduated basis or corporate tax rate sources without the Philippines
as the case may be) equals net income tax 3. Income partly within or partly without the
due Philippines
(5) Income tax less creditable withholding tax
and/or tax credit equals net income tax Note: Ill discuss this in greater detail under (x)(e) Source
payable. Rules in determining income from within and without and
(f) Situs of Taxation of this Item in the Syllabus. Lets know
To simplify: first the different incomes that would be considered part of
gross income and then we determine whether it is within
Individual Corporation or without. Its pointless to determine the source of the
income if you dont know if its actually income in the first
place. Again, the 2013 Bar Syllabus was not well thought
All Income All income of.
Less: Exclusions Less: Exclusions
2. Salaries
--------------------------------------------------------------- 3. Wages
(e) Sources of income subject to tax 4. Commissions; and
(i) Compensation Income 5. Similar items
(ii) Fringe benefits
(see Section 32(A)(1))
(iii) Professional Income
(iv) Income from business
Q: What are the items not included in
(v) Income from dealings in property
compensation income?
(vi) Passive investment income
(vii) Annuities, proceeds from life insurance 1. For agricultural labor paid entirely in
or other types of insurance products of the farm where the labor is
(viii) Prizes and Awards performed
(ix) Pensions, retirement benefit or 2. For domestic service in a private home
31
separation pay 3. For casual labor not in the course of the
32
(x) Income from any source whatever employers trade or business
--------------------------------------------------------------- 4. For services by a citizen or resident of the
Philippines for a foreign government or an
--------------------------------------------------------------- international organization.
(i) Compensation Income
(see Section 78, NIRC)
---------------------------------------------------------------
Note: As to (2) (a) A private home is the fixed place of
Read Section 78, Tax Code aboard of an individual or family. If the home is utilized
primarily for the purpose of supplying board or lodging to
Note: There are two components to compensation the public as a business enterprise, it ceases to be a
income: (1) the basic compensation income (which we will private home and remuneration paid for services
discuss here) and (2) fringe benefits which is specially performed therein is not exempted and should be included
treated by the Tax Code. in compensation income.
Q: Define compensation for income tax (b) The services of a household personnel furnished to an
employee (except rank and file employee) by an employer
purposes. shall be subject to fringe benefit tax.
Compensation means all remuneration for services As to (3) (a) Any remuneration paid for casual labor
performed by an employee for his employer under and does not promote or advance the employers trade or
an employer-employee relationship unless business is not considered compensation income.
specifically excluded by the Tax Code. This includes However, any remuneration paid for casual labor but in the
the cash value of all remuneration paid in any course of the employers trade or business is considered
as compensation.
medium other than cash. (see Section 78, NIRC,
Section 2.78.3, RR No. 2-98). Compensation may
be paid in money, or in some medium other than Q: What is the test to determine whether an
money as for example, stocks, bonds, or other forms income is compensation or not?
of property.
The test is whether such income is received by
33
Q: What constitutes compensation for virtue of an employer-employee relationship.
services? _________________________________________
31
Compensation for services, under an employer- Casual labor means occasional, incidental or irregular.
32
This means that the labor does not promote or advance the
employee relationship, includes payments in trade or business of the employer.
whatever form paid including but not limied to: 33
To determine the existence of an employer-employee
relationship, follow the four-fold test:
1. Fees
No. Section 34 expressly provides that no Q: If an employer pays the income taxes
deductions shall be allowed for taxpayers earning assessable against an employee, is the
compensation income arising from personal services payment by the employer taxable income on
rendered under an employer-employee relationship. the part of the employee?
The deductions are not necessary for the taxpayer
to earn the pure compensation income which arose Yes. In OLD COLONY TRUST CO. V. COMMISSIONER
out of an employer-employee relationship. [279 U.S. 716], the US Supreme Court held that the
payment of the tax by the employer was in
Q: Are living allowances treated as consideration of services rendered by the employee.
compensation income? The payment constituted income to the employee.
The Court also added that it cannot be argued that
A: Generally, living allowances should be treated as the payment was a gift. The payment for services,
income of the recipient. However, if any amount even though voluntary, was nevertheless
thereof is paid directly by the employer and paid for compensation for services rendered.
the convenience of the latter, the excess of what the
recipient employee would have ordinarily incurred Q: Are association dues, membership fees
for his own subsistence is not taxable income but a and other assessment charges collected by
business expense of the employer. This exemplifies a condominium corporation from its
the employers convenience rule (see COLLECTOR members and tenants subject to income
VS. HENDERSON [1 SCRA 649])
tax?
Q: Are 13th month pay and other benefits Yes. Such amounts form part of the gross income of
included in compensation income? the corporation. This is because the condominium
corporation furnishes its members and tenants with
benefits, advantages and privileges in return for
_________________________________________
34
"Personal Equity and Retirement Account (PERA)" refers to the
1. The employer has the power to control the employee voluntary retirement account established by and for the exclusive
with respect to the means and methods by which the use and benefit of the Contributor for the purpose of being
work is to be accomplished invested solely in PERA investment products in the Philippines.
2. Selection and management of the employee The Contributor shall retain the ownership, whether legal or
3. Power of dismissal beneficial, of funds placed therein, including all earnings of such
4. Payment of wages funds.
such payments. They constitute as income 10. Life or health insurance and other non-life
payments or compensation for beneficial services insurance premiums or similar amounts
provided to members and tenants. [RMC 65-2012] in excess of what the law allows.
Note: Pursuant to Section 18 of RA 9904 (Magna Carta Q: What is the rationale behind the
for Homeowners and Homeowners Association), the
association dues and income derived from rentals of the
Fringe Benefits Tax?
homeowners associations may be exempted from tax
subject to the following conditions: (a) The homeowners As a general rule, the income recipient is the person
association must be a duly constituted Association as liable to pay the income tax. In order to improve
defined under Section 3(b) of RA 9904; (b) The LGU collection of income on the compensation income of
having jurisdiction over the homeowners association must employees, the State requires the employer to
issue a certification identifying the basic services being withhold the tax upon payment of the compensation
rendered by the association and its lack of resources to income. However, it has been observed that many of
render such services; and (c) the association must present the fringe benefits paid by the employer to his
proof that the income and dues are used for the
cleanliness, security and other basic services need by
employees are not subjected to income tax and
members, including maintenance of the facilities in their withholding tax on compensation. To plug this
respective subdivisions and villages. (RMC 9-2013 loophole, RA 8424 was passed. It imposed a fringe
[January 29, 2013] benefits tax on the fringe benefits received by
--------------------------------------------------------------- supervisory and managerial employees. The law
(ii) Fringe benefits mandates that the employer shall assume the fringe
(a) Special treatment of fringe benefits benefits tax imposed on the taxable fringe benefits
35 36
of the managerial or supervisory employees, but
(b) Definition
allows the employer to deduct such fringe benefit tax
(c) Taxable and non-taxable fringe benefits as a business expense from its gross income.
--------------------------------------------------------------- However, the fringe benefits of rank-and-file
37
employees are treated as part of his compensation
Read Section 33, Tax Code income, which must be withheld and deducted by his
employer from the compensation income of the
Q: What is a fringe benefit? employee.
As defined by Section 33(B), the term fringe What is a fringe benefit tax?
benefit means any good, service or other benefit
furnished or granted in cash or in kind by an A fringe benefit tax is a final withholding tax (at
employer to an individual employee (except rank 32%) imposed on the grossed-up monetary value of
and file employees as defined herein) such as, but fringe benefit furnished or granted to the employee
not limited to, the following: except rank and file employees by the employer.
(2) On the taxation of fringe benefits There is a Q: What housing privileges are not subject
difference in tax treatment between supervisory and
managerial employees on one hand and rank-and-file
to fringe benefit tax?
employees on the other. It can be argued that such
contravenes the fundamental principle that the income tax 1. Housing privilege of military officials of the
38
shall be imposed based on the taxpayers ability to pay. AFP
2. Housing unit which is situated inside or
Q: What is meant by grossed-up monetary adjacent to the premises of a business or
value of the fringe benefit? factory (it is considered adjacent if its
located within the maximum of 50 meters
As defined in RR 3-98 [JANUARY 1, 1998], the from the perimeter of the business
grossed-up monetary value of the fringe benefit premises)
represents the whole amount of income received by 3. Temporary housing for an employee who
the employee which includes the net amount of stays in a housing unit for three months or
money or net monetary value of property which has less
been received plus the amount of the fringe benefit
tax thereon otherwise due from the employee, but (see Section 2.33(D)(1), RR 3-98]
paid by the employer for and in behalf of his
employee. Q: Are expense accounts taxable fringe
benefits?
In essence, the purpose of getting the grossed-up
monetary value is to preserve the benefit to the General Rule: Expenses incurred by the employee
employer as a whole. but which are paid by his employer shall be treated
as taxable fringe benefits
Q: How is the grossed-up monetary value of
the fringe benefit determined? Exception: They are not taxable fringe benefits if
incurred or reasonably expected to be incurred by
It is determined by dividing the actual monetary
value of the fringe benefit by 68% (effective January _________________________________________
1, 2000.)
38
Why? Pursuant to the employers convenience rule, by
Note: The above determination is not absolute. In the providing the quarters, the government can avail of the services of
case of non-resident aliens not engaged in trade or soldiers anytime their services are desired.
business and alien and Filipino individuals employed in
RHQs, ROHQs of MNCs, OBUs and petroleum
the employee in the performance of his duties be taxable as fringe benefits (see Section 2.33(D),
subject to the following conditions RR No. 3-98)
1. Expenditures are duly receipted for and in Q: Are interest on loans obtained by the
the name of the employer employee from the employer subject to
2. Expenditures do not partake of the nature of fringe benefit tax?
a personal expense attributable to the
employee Yes. If the employer lends money to his employee
free of interest or a rate lower than 12%, such
(see Section 2.33(D)(2)(a), RR 3-98) interest foregone by the employer or the difference
of the interest assumed by the employee and the
Note: Personal expenses of the employee paid or rate of 12% shall be treated as a taxable fringe
reimbursed by the employer to the employee shall be
treated as a taxable fringe benefit whether or not the same
benefit (see Section 2.33(D)(5)(a), RR No. 3-98)
are duly receipted for in the name of the employer
Q: Are membership fees, dues and other
Q: When is a motor vehicle privilege expenses in social and athletic clubs
considered a taxable fringe benefit? subject to fringe benefit tax?
1. Employer purchases vehicle in employees Yes. Membership fees, dues, and other expenses
name borne by the employer for his employee in social
2. Employer provides employee cash for and athletic clubs or other smiliar organizations shall
vehicle purchase be treated as taxable fringe benefits of the employee
3. Employer purchases car on installment in in full (see Section 2.33(D)(6), RR No. 3-98)
name of employee
4. Employer shoulders a portion of purchase Q: Are expenses for foreign travel by the
price employee subject to fringe benefits tax?
5. Employer owns and maintains a fleet of
motor vehicles for use of business and General Rule: Reasonable business expenses
employees which are paid for by the employer for the foreign
6. Employer leases and maintains a fleet of travel of his employee for the purpose of attending
motor vehicles for the use of the business business meetings or conventions shall not be
and employees. treated as taxable fringe benefits.
(see Section 2.33(D)(3), RR No. 3-98) Exception: In the absence of documentary evidence
showing that the travel abroad was in connection
Note: The use of an aircraft is not subject to fringe with business meetings or conventions, the expense
benefits tax but the use of yacht is subject to fringe benefit shall be treated as a taxable fringe benefit.
39
tax. (see Section 2.33(D)(3)(g) and (h), RR No. 3-98).
(see Section 2.33(D)(7), RR No. 3-98)
Q: Are household expenses of employees
subject to fringe benefits tax? Note: (1) Travelling expenses of family members of the
employee borne by the employer shall be subject to fringe
Yes. Expenses of the employee which are borne by benefits tax (see Section 2.33(D)(7)(c), RR No. 3-98)
the employer for household personnel such as
salaries of household help, personal driver of the (2) Holiday and vacation expenses treated of the
employee, or other similar personnel expenses shall employee borne by the employer shall be treated as
taxable fringe benefits. (see Section 2.33(D)(8), RR No.
_________________________________________ 3-98)
39
Dont ask me why theres a distinction. I cant fathom why.
Thats what the law says!
Q: Is the cost of educational assistance to 4. Benefits given to the rank and file employees,
the employee or his dependents subject to whether granted under a collective bargaining
fringe benefit tax? agreement; and
5. De minimis benefits
General rule: Yes. The cost of educational
assistance to the employee and his dependents Note: Exemption from fringe benefit tax is not an
exemption from other income taxes unless such benefit is
borne by the employer shall be subject to fringe also stated expressly to be exempt from other income
benefits tax (see Section 2.33(D)(9)(a) and (b), RR taxes (refer to the exclusions). Section 2.23(C), RR No. 3-
No. 3-98) 98 provides that fringe benefits exempted from the
payment of the fringe benefits tax may however still form
Exceptions: part of the employees basic compensation income which
is subject to income tax.
1. Education of the employee is directly
connected with employers trade or business Q: What are de minimis benefits?
2. With a written contract that employee shall
remain employed with the employer for a As defined by RR 3-98 [MAY 21, 1998], de minimis
period of time mutually agreed upon by the benefits are benefits of relatively small value
parties offered or furnished by the employer to his/her
3. In case of dependents, the assistance was employees as a means of promoting the health,
provided through a competitive scheme goodwill, contentment, efficiency of his/her
under the scholarship program of the employees. These benefits are exempt from the
company employer. withholding tax on compensation income, and
consequently from income tax, regardless of
Q: Is the cost of life or health insurance paid whether or not the recipients of the benefits are
for by the employer subject to fringe benefit managerial or rank-and-file employees.
tax?
Q: What are deemed de minimis benefits?
The cost of life or health insurance and other non-life
insurance premiums borne by the employer for his As provided in RR No. 005-11 [March 16, 2011], as
employees shall be treated as taxable fringe benefits amended recently by RR No. 008-12 [M AY 11,
except: 2012], the following shall be considered de minimis
benefits not subject to income tax as well as
1. Contributions of the employer for the benefit withholding tax on compensation income of both
of the employee to the SSS, GSIS and other managerial and rank and file employees:
similar contributions
2. The cost of premiums borne by the 1. Monetized unused vacation leave credits of
employer for the group insurance of his private employees not exceeding ten (10) days
40
employees during the year;
2. Monetized value of vacation and sick leave
(see Section 2.33(D)(10), RRR No. 3-98) credits paid to government officials and
41
employees;
3. Medical cash allowance to dependents of
Q: Enumerate the non-taxable fringe employees, not exceeding P750 per employee
benefits. per semester or P125 per month;
42
Yes. In this case, the properties should be regarded If the real property being sold is an ordinary asset,
as ordinary assets. When Y obtained by inheritance withholding tax rates shall apply. The rate of
the parcels in question, transferred to him was not withholding tax will depend on whether, first, the
merely the duty to respect the terms of any contract seller is exempt or taxable; second, whether the
thereon, but as well the correlative right to receive seller is habitually engaged in real estate business
and enjoy the fruits of the business and property or not; and third, if the seller is habitually engaged in
which the decedent had established and real estate business, the gross selling price.
maintained. Under the circumstances, Ys sales of
the several lots forming part of his rental business Q: Is an equity investment a capital asset?
cannot be characterized as other than sales of
ordinary assets. The sales concluded on installment Yes. As ruled by the Supreme Court in CHINABANK V.
basis of the subdivided lots comprising the last lot do CA [JULY 19, 2000], an equity investment is
not deserve a different characterization for tax a capital, not ordinary, asset of the investor the sale
purposes. The following circumstances in or exchange of which results in either a capital gain
combination show unequivocally that the petitioner or a capital loss.
was, at the time material to this case, engaged in the
real estate business (see TUASON VS. LINGAD [JULY Q: Can an ordinary asset be converted to a
31, 1974]) capital asset?
Q: What is the tax consequence if the General Rule: No, the property is still an ordinary
property is sold by a seller-corporation asset (see Section 3(e), RR No. 7-2003)
engaged in real estate business?
Exceptions: Properties classified as ordinary assets
It depends. In BIR RULING 27-02 [JULY 15, 2002],
50 for being used in business by a taxpayer engaged in
the CIR was asked to rule on the tax consequences business other than real estate business are
of certain transactions involving a seller that is automatically converted into capital assets upon
showing of proof that the same have not been used
_________________________________________ in business for more than 2 years prior to the
consummation of the taxable transactions involving
50
This ruling also stated that registration with the HLURB or the properties. (BIR RULING NO. 142-2011; Sec.
HUDCC shall be sufficient for a seller/transferor to be considered 3(e), RR No. 7-2003)
as habitually engaged in the real estate business. If the
seller/transferor is not registered with HLURB or HUDCC, he/it
may prove that he/it is engaged in the real estate business by Note: The conversion from ordinary assets to capital
offering other satisfactory evidence assets is only allowed if the taxpayer is not engaged in the
real estate business.
Read Section 22(Z), Section 39(A)(2), Tax Actual gain Presumed gain
Code
There is actual gain There is presumed gain
Q: Distinguish ordinary gain from capital whenever an individual whenever an individual
gain. or corporation sold sold real property treated
shares of stock treated as a capital asset
Ordinary Gain Capital Gain as a capital asset located in the Philippines
or a corporation sold
land/building treated as
any gain from the sale or The gains realized from
a capital asset located in
exchange of property the sale, exchange, or
the Philippines
which is not a capital other disposition of the
asset or property. properties of a taxpayer
classified as capital Actual gain arrived at by Presumed gain does not
assets. deducting the cost or consider the cost of the
adjusted basis of the property sold
property sold from the
Derived from property Derived from property
amount realized
used in trade or not used in trade or
business business whether or not
connected thereto Q: Distinguish long-term capital gain v.
short-term capital gain.
Ordinary gains are not Some types of capital
adjusted by the holding gains are adjusted by Short-term capital gain Long-term capital gain
period in Section 39(B) the holding period in
Section 39(B) If the capital asset has If the capital asset has
been held for not more been held for more than
Only ordinary losses Ordinary losses may be than 12 months 12 months
may be deduced from deducted from certain
ordinary gains types of capital gains
Q: Distinguish net capital gain and net Q: What is the allowable extent of losses
capital loss from sales or exchanges of capitals assets?
(capital loss limitation rule)
Net capital gain Net capital loss
Losses from sales of exchanges of capital assets
means the excess of the means the excess of the shall be allowed to be deducted only to the extent of
gains from sales or losses from sales or the gains from such sales or exchanges.
exchanges of capital exchanges of capital
assets over the losses assets over the gains In CHINABANK V. CA [JULY 19, 2000], Chinabank
from such sales or from such sales or made a 53% equity investment in the First CBC
exchanges exchanges. Capital (Asia) Ltd, a Hong Kong subsidiary. First
CBC became insolvent. With BSP approval,
--------------------------------------------------------------- Chinabank wrote-off the investment in its ITR as a
(5) Computation of the amount of gain or bad debt or as an ordinary loss deductible from its
loss gross income. The BIR disallowed the deduction on
the basis that the debt was not worthless. The
---------------------------------------------------------------
Supreme Court ruled that the equity investment is
not indebtedness in the first place but rather capital,
Note: This involves Section 40 of the Tax Code
not an ordinary, asset. Shares of stock would
(Determination of Amount and Recognition of Gains or
Loss). Ill discuss this after I complete the discussion on be ordinary assets only to a dealer in securities or a
Section 39 (Capital Gains and Losses) person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In
--------------------------------------------------------------- the hands, however, of another who holds the
shares of stock by way of an investment, the shares
(6) Income tax treatment of capital loss to him would be capital assets. When the shares
(a) Capital loss limitation rule held by such investor become worthless, the loss is
(b) Net loss carry-over rule deemed to be a loss from the sale or exchange of
--------------------------------------------------------------- capital assets.
Read Section 39(B), (C), (D), Tax Code The Court further stated that assuming that the
equity investment of CBC has indeed become
Q: Is the capital gain from the sale or "worthless," the loss sustained is a capital, not an
exchange of a capital asset always taxable ordinary, loss. The rule thus is that capital loss can
be deducted only from capital gains. The capital loss
in full? (Holding period) sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable
No. In the case of a taxpayer other than a
51 year that the securities have become "worthless.
corporation, the following percentages of the gain
upon the sale or exchange of a capital asset shall be
Note: The exception (where the capital loss limitation rule
taken into account in computing net capital gain: will not apply) If a bank or trust company incorporated
under the laws of the Philippines, a substantial part of
1. 100% if the capital asset has been held for not whose business is the receipt of deposits sells any bond,
more than 12 months debenture, note or certificate or other evidence of
2. 50% if the capital asset has been held for more indebtedness issued by an corporation with interest
than 12 months coupons or in registered form, any losss resulting from
such sale shall not be subject to the above limitations and
shall not be included in determining the applicability of
such limitation to other losses. See Section 39(C), Tax
_________________________________________ Code.
51
The holding period is material only if the capital asset is sold by
an individual. This does not apply to corporations.
Q: What is the net loss carry-over rule Read Section 24(D), Section 25(A)(3),
(NELCO)? Section 25(B), Section 27(D)(5), Tax Code
If any taxpayer, other than a corporation, sustains in Q: What is the rule on capital gains from
any taxable year a net capital loss, such loss (in an dispositions of real property?
amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year The rate of 6% shall be imposed on capital gains
as a loss from the sale or exchange of a capital presumed to have been realized by the seller from
asset held for not more than twelve (12) months. the sale, exchange, or other disposition of real
properties located in the Philippines classified as
Note: The capital limitation rule applies to both individual capital assets, including lacto de retro sales and
and corporate taxpayers while NELCO only applies to other forms of conditional sales based on the gross
individuals and cannot be availed of by corporate
selling price or fair market value as determined
taxpayers.
by the CIR, whichever is higher.
Q: Distinguish Net Loss Carry-over (NELCO)
The tax base shall be the entire selling price.
from Net Operating Loss Carry-Over
(NOLCO). The capital gains tax must be paid within 30 days
following each sale or disposition. In case of
NELCO NOLCO installment sale, the return shall be filed within 30
days following the receipt of the first down payment
NELCO is a concept in NOLCO is a concept in
capital gains taxation ordinary income taxation and within 30 days following the subsequent
installment payments.
NELCO is enjoyed only by NOLCO is enjoyed by
individuals, not corporations corporations, not Q: What are the transactions covered by the
individuals capital gains tax?
May be availed of only May be availed over a 1. Sale
during the succeeding year period three years
2. Exchange; or
3. Other disposition, including pacto de retro
--------------------------------------------------------------- sales and other forms of conditional sales
(7) Dealings in real property situated in the Note: (1) The phrase sale, exchange, or other
Philippines disposition includes taking by the government through
(8) Dealings in shares of stock of Philippine expropriation GONZALES V. CTA [121 PHIL. 861]
corporations
--------------------------------------------------------------- Q: What is the basis of the 6% capital gains
tax?
Note: Again, to reiterate, whether its real property or
shares of stock that is the subject of the sale, if it is an Whichever is the higher of:
ordinary asset, it forms part of the ordinary income which
shall be subject either to graduated income tax rates (if
1. The gross selling price; or
individual) or corporate income tax (if corporation). On the
other hand, if its a capital asset, it is subject to capital 2. Current fair market value as determined
gains tax. below:
a. The FMV of real properties located
--------------------------------------------------------------- in each zone or area as determined
by the CIR after consultation with
(7) Dealings in real property situated in the competent appraisers both from the
Philippines private and public sectors
(9) Sale of principal residence b. The fair market value as shown in
--------------------------------------------------------------- the schedule of values of the
provincial and city assessors
Note: In the next two questions, I will be discussing capital Note: (1) To summarize, no capital gains taxes if
gains taxation of foreclosed mortgaged real properties. foreclosed properties is redeemed. If there is non-
The relevant BIR issuances (RR 4-99) and relevant cases redemption, capital gains must be paid.
are outdated and do not reflect the changes introduced by
Section 47 of the General Banking Law. The most recent Q: ABC Company took out a loan from XYZ
case SUPREME TRANSLINER V. BPI FAMILY SAVINGS BANK
[FEBRUARY 23, 2011] involved a foreclosure sale which
bank and mortgaged one of its properties as
took place prior to the effectivity of the General Banking collateral. ABC was unable to pay so XYZ
Law. The updated BIR issuance on the matter is RMC 55- extrajudicially foreclosed the property and
2011 [November 10, 2011]. bought it. Before the expiration of the one-
year redemption period,57 the mortgagor
RMC 55-2011 provides that the 1-year period on the
foreclosed asset of natural persons and the period within notified the bank of its intention to redeem
which to pay CGT or CWT and DST on the foreclosure of the property. Is XYZ liable to pay the capital
Real Estate Mortgage shall be reckoned from the date of gains tax as a result of the foreclosure sale?
registration of the sale in the Office of the Register of
Deeds No. In foreclosure sale, there is no actual transfer of
the mortgaged real property until after the expiration
For juridical persons in an extrajudicial foreclosure,
Section 47 of the General Banking Law provides that its
of the one-year period and title is consolidated in the
right of redemption shall be until, but not after the name of the mortgagee in case of non-redemption.
registration of the certificate of sale with the Register of This is because before the period expires there is
Deeds, which in no case shall be more than 3 months yet no transfer of title and no profit or gain is realized
after foreclosure, whichever is earlier. (RMC No. 55-2011 by the mortgagor. SUPREME TRANSLINER V. BPI
[November 10, 2011]). The right of redemption shall be FAMILY SAVINGS BANK [FEBRUARY 23, 2011]
reckoned from the approval of the executive judge [CIR v.
UPCB [October 23, 2009]) Q: If title to property is transferred to one
spouse as a result of a court decision in an
Q: If a mortgagee foreclosed the mortgaged
annulment case, is the transfer subject to
property but the mortgagor exercises his
capital gains tax?
right of redemption within the applicable
period, will capital gains tax still be imposed No. In BIR Ruling DA-029-08 [JANUARY 23, 2008],
on the foreclosure sale? title to a house and lot was transferred to the
husband by virtue of a decision of the court
RR 4-99 [M ARCH 9, 1999] provides that in case the declaring his marriage with his wife null and void. In
mortgagor exercises his right of redemption within BIR Ruling DA 287-07 [M AY 8, 2007], title to a
one year from the issuance of the certificate of condominium unit was transferred to the wife as a
56
sale, no capital gains tax shall be imposed result of an agreement to distribute communal
because no capital gains has been derived by the property executed in the course of annulment
mortgagor and no sale or transfer of real property proceedings. In both BIR Rulings, the CIR held that
was realized. If the mortgagor does not exercise his the transfer of the title of the subject properties are
right of redemption, capital gains tax on the not subject to capital gains tax, as such transfers are
foreclosure sale shall become due. In such case, the equivalent to a conveyance but without monetary
capital gains tax due will be based on the bid price consideration, made in accordance with the Court's
of the highest bidder. Decision granting parties agreement for the
_________________________________________ distribution of communal property.
56
Note Section 47 of the General Banking Act, judicial persons
whose property is being sold pursuant to an extrajudicial
foreclosure shall have the right to redeem the property until, but _________________________________________
not after, the registration of the certificate of foreclosure sale with
57
the Register of Deeds which in no case shall be more than 3 The foreclosure sale in the case on which the question is based
months after foreclosure took place prior to the effectivity of the Act.
Q: Is the assignment and delivery of the Q: Who are liable for capital gains tax on
developed units to joint owners in a Build- shares of stock?
To-Own (BTO) scheme subject to capital
gains tax? 1. Individual taxpayer, whether citizen or alien
2. Corporate taxpayer, whether domestic or
In a BTO, the developer makes it appear that it foreign
merely manages the construction of the 3. Other taxpayers other than (1) and (2) such
condominium project, and that the funds as as estates, trusts, trust funds, and pension
contributed by the individual investors are pooled in funds,
a bank with the developer, as project manager,
receiving a project management fee, In that scheme, Q: Who are exempt from capital gains tax on
it is claimed that the assignment and delivery to the shares of stock?
individual investors of the developed units is not
taxable as it is merely a transfer of property held in 1. Dealer in securities
trust by the Trustee for the individual trustors. 2. Investors in shares of stock in a mutual fund
Previous BIR rulings have exempted the assignment company in connection with the gains
from capital gains tax. In In BIR RULING DA-455-07 realized by said investor upon redemption of
[AUGUST 17, 2007], the conveyance of the the said shares of stock
condominium units by the trustee to the individual 3. All other persons, whether natural or
trustors pursuant to the terms of the BTO contract juridical, who are specifically exempt from
and without consideration was held not subject to NIRC taxes under existing investment
capital gains tax. However, in RMC NO. 055-10 schemes and other special laws.
[JUNE 28, 2010], the CIR nullified all BIR Rulings
exempting the scheme from capital gains tax. Thus, Q: What is the rule on capital gains from
the present rule is that the assignment and delivery sales of shares of stock?
in BTO schemes are subject to capital gains tax.
Capital gains tax shall be imposed upon the net
--------------------------------------------------------------- capital gains realized during the taxable year from
(8) Dealings in shares of stock of Philippine the sale, barter, exchange or other disposition of
corporations shares of stock in a domestic corporation except
(a) Shares listed and traded in the stock shares, sold or disposed through the stock
exchange exchange.
(b) Shares not listed and traded in the stock
The final tax imposed shall be:
exchange
--------------------------------------------------------------- Capital gains not over P100,000 5%
Capital gains over P100,000 10%
Read Section 22(L), (T), (U), Section 24(C),
Section 25(A)(3), Section 25(B), Section The tax base shall only be the gain on the sale and
27(D), Section 28(A) and Section 28(B), Tax such sale will always be subject to capital gains tax
Code without any exemption.
Q: If the share of stock is traded through the 1. Gains derived by dealers in securities
stock exchange, what tax is applicable? 2. Gains from sales of stock to the extent invested
in new shares of stocks in banks, financial
A percentage tax of of 1% is imposed on the intermediaries, and corporations organized
gross selling price of shares of stock if they are listed primarily to hold equities in banks
and sold, exchanged or transferred through the 3. All other gains which hare specifically exempt
facilities of the local stock exchange.(see Section from income tax under existing investment
127(A) and RR 06-2008 [APRIL 22, 2008]) incentives and other special laws.
unduly set free from tax liability persons who profited (a) Meaning of merger, consolidation,
from said transactions (see COMPAGNIE FINANCIERE control
SUCRES ET DENREES VS. CIR [AUGUST 28, 2006]) securities
(b) Transfer of a controlled
Q: What is the effect of non-payment of corporation
capital gains tax on stock transactions? ---------------------------------------------------------------
As provided in Section 11 of RR 06-2008, no sale, Disclaimer: I would advise that you get a pack of tissue
exchange, transfer or similar transaction intended to and some pain relievers. You may experience headaches
convey ownership of, or title to any share of stock and nose bleeding in this part.
shall be registered in the books of the corporation
unless the receipts of payment of the tax herein ---------------------------------------------------------------
imposed is filed with and recorded by the stock (a) Cost or basis of the property sold
transfer agent or secretary of the corporation. (b) Cost or basis of the property exchanged
in corporate readjustment
RMC 37-2012 [AUGUST 3, 2012] clarified RR 06- ---------------------------------------------------------------
2008 in stating that a Certificate Authorizing
Registration [CAR] is still necessary before any Read Section 40(A), (B) (C)(5), Tax Code
transfer of shares of stock not traded in the Stock
Exchange may be transferred in the books of a
corporation. Q: How is gain from the sale or other
disposition of property computed?
---------------------------------------------------------------
The gain from the sale or other disposition of
(5) Computation of the amount of gain or
property shall be the excess of the amount realized
loss therefrom over the basis or adjusted basis for
--------------------------------------------------------------- determining gain.
Note: Section 40 (Determination of Amount and
Recognition of Gain or Loss) can be divided into two parts:
Q: How is loss from the sale or other
(1) Computation of Gain or Loss/Basis for Determining disposition of property computed?
Gain or Loss from Sale or Disposition of Property and the
more important topic (2) tax-free exchanges. The 2012 The loss shall be the excess of the basis or
Bar Syllabus broke down this topic. In the discussions adjusted basis for determining loss over the amount
below, I shall follow the said outline, to wit: realized.
was not acquired by gift except if (a) Where no gain or loss shall be
such basis is greater than FMV of the recognized
property at the time of the gift then,
for purpose of determining loss, the (2) Exceptions
basis shall be such FMV (a) Meaning of merger, consolidation,
control, securities
For less than the basis of such property is the (b) Transfer of a controlled
an adequate amount paid by the transferee for the
consideration
corporation
property
in money or ---------------------------------------------------------------
moneys worth
Tax-free a. Shares of stock received by Read Section 40(C)(1) to (3), Tax Code
exchanges transferor original basis less
the money received and fair Q: What is the general rule in the
market value of property
received, plus the amount recognition of gain or loss in an exchange
treated as dividend of the of property?
shareholder and the amount of
any gain that was recognized As a general rule, the entire amount of the gain or
on the exchange loss shall be recognized upon the sale or exchange
b. Property transferred in the of property. In other words, if there are gains, the
hands of the transferee same gains shall be taxable. If there are losses, the losses
as it would be in the hands of
shall be allowed as deductions.
transferor increased by the
amount of the gain recognized
to the transferor on the transfer Note: The phrase where no gain or loss is recognized
means that if there is an exchange of property and there is
a gain, the resulting gain is not subject to tax. If there is a
Stocks and The basis of the substantially
loss, the loss could not be used as a deduction from gross
Securities identical stock so sold or disposed of,
income. This does not refer to the general rule because in
acquired in increased or decreased, as the case
the general rule the gain or loss is recognized. The phrase
Wash Sales may be, by the difference, if any,
appropriately refers to Section 40(C)(2) (merger or
between the price at which the stock
consolidation and transfer of a controlled corporation)
or securities was acquired and the
price at which such substantially
identical stock or securities were sold Q: What are the exceptions to the general
or otherwise disposed of. [see rule?
Section 143, RR 2]
1. No gains or loss recognized if in pursuance
of a plan of merger or consolidation where
To be entitled to the computation of the gain or loss there is an exchange solely in kind (see
from the sale of an investment of a non-resident Section 40(C)(2))
stockholder using a functional currency other than 2. Gains recognized but loss not recognized in
the Philippine peso, the following elements must be transactions between related parties (see
present, to wit: (1) such non-resident stockholder Section 36(B))
made the said investment in such functional 3. Gains recognized but loss not recognized
currency, and not in Philippine peso; and (2) the where the exchange is not solely in kind
investee company in the Philippines uses a (see Section 40(C)(3))
functional currency other than the Philippine peso for
its financial statements. CE PHILIPPINES LTD. VS. CIR, Note: No. 2 will be discussed in Part 6 (Items not
CTA EB 770 (CTA 7688), SEPTEMBER 20, 2012 deductible) of the Syllabus. In this part, I will focus on
Items 1 and 3.
---------------------------------------------------------------
(c) Recognition of gain or loss in exchange
of property
(1) General rule
stock held in ABC. Is the exchange subject for he assets to be transferred. In effect, the transfer
to capital gains tax? takes the nature of a donation made by the
subsidiaries to their parent company contrary to
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It what is contemplated in Section 40(C)(2) of the
is well established that where stocks for stocks were NIRC. Also, the intended merger has the effect of
exchanged, and distributed to the stockholders of dissolving and liquidating the subsidiaries without
the corporations, parties to the merger or payment of corresponding taxes. BIR RULING NO.
consolidation, pursuant to a plan of reorganization, 614-12 [NOVEMBER 9, 2012]
such exchange is exempt from capital gains tax. The
basic consideration, of course, is the purpose of the Q: Filinvest Development Corporation
merger, as this would determine whether the (FDC), a holding company, is the owner of
exchange of properties involved therein shall be 80% of the outstanding shares of Filinvest
subject or not to the capital gains tax. The criterion Alabang, Inc. (FAI) and 67.42% of the
laid down by the law is that the merger" must be outstanding shares of Filinvest Land, Inc.
undertaken for a bona fide business purpose and (FLI). FDC and FAI entered into a Deed of
not solely for the purpose of escaping the burden of Exchange with FLI whereby the former both
taxation." It is clear, in fact, that the purpose of the
transfer in favor of the latter parcels of land
merger was to continue the business of the Old
Corporation, whose corporate life was about to in exchange for shares of stock of FLI. The
expire, through the New Corporation to which all the CIR argues that the taxable gain should be
assets and obligations of the former had been recognized for the exchange as FDCs
transferred. The exemption from the tax of the gain controlling interest in FLI was decreased as
derived from exchanges of stock solely for stock of a result of the exchange. Is the CIRs
another corporation was intended to encourage contention correct?
corporations in pooling, combining or expanding
their resources conducive to the economic No. The Supreme Court in CIR V. FILINVEST
development of the country. The merger in question DEVELOPMENT CORPORATION (JULY 19, 2011] stated
involved a pooling of resources aimed at the that the requisites for the non-recognition of gain or
continuation and expansion of business and so loss of a transfer of property for shares of stock are
came under the letter and intendment of the NIRC as follows: (a) the transferee is a corporation; (b)
exempting from the capital gains tax exchanges of the transferee exchanges its shares of stock for
property. property/ies of the transferor; (c) the transfer is made
by a person, acting alone or together with others, not
Q: A Corp, a domestic corporation, entered exceeding four persons; and, (d) as a result of the
into a merger with its wholly-owned exchange the transferor, alone or together with
domestic subsidiaries B Corp and C Corp. A others, not exceeding four, gains control of the
Corp is the surviving corporation. Pursuant transferee. Rather than isolating FDC, the shares
to the merger, B Corp and C Corp will issued to FDC should be appreciated in combination
with the new shares issued to FAI. Together, FDC
transfer all their assets and liabilities to A
and FAIs shares add to 70.99% of FLIs shares.
Corp. However, since B Corp and C Corp are Since the term "control" is clearly defined as
wholly-owned by A Corp prior to the merger, "ownership of stocks in a corporation possessing at
A Corp will not longer issue any shares of least fifty-one percent of the total voting power of
stock in consideration of the assets and classes of stocks entitled to one vote, the
liabilities transferred. Is the merger between exchange of property for stocks between FDC-FAI
A Corp, B Corp, and C Corp considered a and FLI clearly qualify as a tax-free transaction.
tax free merger under Section 40(C)(2)?
Q: ABC is a domestic corporation.
No. The intended re-organization is an upstream Shareholders transferred their real property
merger between a parent company and its in exchange for more shares in the
subsidiaries where the parent company will not be corporation. In effect, they gained control of
issuing any shares ot the subsidiaries in exchange more than 51% of the shares of the
corporation entitled to vote. Is the exchange transfer to the Transferee of all the rights, privileges,
tax-exempt? and liabilities of the Transferor in the case of de
facto merger.
58
It depends. In BIR Ruling 274-87, the CIR ruled
that no gain or loss would be recognized if property Q: What are the similarities and differences
is transferred to a corporation by a person in between a de facto merger and a transfer of
exchange for stock in such a corporation of which as property for shares under Section 40(C)(2)
a result of such exchange, said person alone or of the Tax Code?
together with others, not exceeding four persons,
gains control of said corporation. The term "control" De facto merger is in procedure similar to a transfer
shall mean ownership of stocks in a corporation to a controlled corporation under the same Section
possessing at least 51% of the total voting power of 40(C)(2) of the Tax Code of 1997, except that at
all classes of stocks entitled to vote. In determining least 80% of the Transferor's assets, including cash,
the 51% stock ownership, only those persons who are transferred to the Transferee, with the element
transferred property for stock in the same of permanence and not merely momentary holding.
transaction may be counted up to a maximum of
five. However, a de facto merger and a transfer to a
controlled corporation are different in that, (1) the
Q: What is a de facto merger? Transferor in a de facto merger is a corporation,
while in a transfer to a controlled corporation, the
To constitute a de facto merger, the following Transferors may either be a corporation or an
elements must concur: individual, and (2) in a de facto merger, there is no
requirement that the transferor gains control (that is,
1. There must be a transfer of all or 51% of the total voting powers of all classes of
substantially all of the properties of the stocks of the Transferee entitled to vote) of the
transferor corporation solely for stock, Transferee as a prerequisite to enjoying the benefit
and of non-recognition of gain or loss. What is essential
2. It must be undertaken for a bona fide in a de facto merger is that the Transferee acquires
business purpose and not solely for the all or substantially all of the properties of the
purpose of escaping the burden of Transferor. (see RMC 1-02 [April 25, 2002])
taxation. (see RMC 1-02 [April 25, 2002])
Q: What are the administrative requirements
Q: What is meant by substantially all? in case of tax-free exchanges?
As provided by RR 2, "substantially all" means the 1. The parties who are applying for confirmation
acquisition by one corporation of at least 80% of the that the transaction is indeed a tax-free
assets, including cash, of another corporation, which exchange shall submit the following:
has the element of permanence and not merely
momentary holding a. A sworn certification on the basis of the
property to be transferred
Q: What are the differences between a de b. Certified true copies of the TCT and/or CCT
facto merger and a statutory (ordinary) of real properties transferred
merger? c. Certified true copies of the corresponding
latest Tax Declaration of the real properties
In a de facto merger, the Transferor is not to be transferred
automatically dissolved unlike in the case of a d. Certified true copies of the certificates of
statutory merger. Likewise, there is no automatic stocks evidencing shares of stocks to be
transferred
_________________________________________ e. Certified true copy of the inventory of other
58
property/ies to be transferred/
Note that in this BIR Ruling, there were 6 transferors,
2. The BIR shall issue a certification or ruling amount of the gain recognized not in excess
confirming that an exchange of property for of his proportionate share of the
shares complies with the requisites for it to be undistributed earnings and profits of the
tax-free. The certification or ruling shall contain corporation; the remainder, if any, shall be
the substituted basis of the properties. treated as capital gain.
3. The Certificate Authorizing Registration (CAR) 3. If the transferor corporation receives money
or Tax Clearance (TCL) shall be issued by the and/or property in addition to the stock, then:
RDO/Authorized Internal Revenue Officer on the
basis of the BIR certification or ruling a. If the corporation distributes it in
4. The information that the transaction is a tax-free pursuance of the plan of merger or
exchange and the substituted basis of the consolidation, no gain shall be
properties shall be annotated in the TCT and/or recognized
CCT. b. If the corporation does not distribute it,
5. The applicant/taxpayer shall pay the processing the gain, if any, but not the loss shall be
and certification fee of P5,000 for each recognized but not in an amount not in
application not involving more than 10 real excess of the sum of such money and
properties and/or certificates of stock. An the fair market value of the property so
additional P100 shall be paid for every TCT/CCT received.
and/or certificate of stock in excess of 10.
6. Every official, agent, or employee of the Registry Q: What is the effect of the assumption of
of Deeds and corporate secretary or the duly the transferee of the liabilities of the
authorized officer of the corporation who fails to transferor in addition to the transfer of
annotate the information shall be subject to a property?
penalty.
Section 40(C)(4) provides that if the taxpayer
Q: Is there a prescriptive period for rulings receives the stock as if it were the sole
issued in connection to tax-free exchanges? consideration, and, as part of the consideration,
another party to the exchange assumes a liability of
Yes. RMC 40-2012 [August 3, 2012] provides that the taxpayer or acquires property subject to a
rulings issued under Section 40 (C) (2) of the NIRC, liability, such assumption or acquisition shall not be
as amended, shall be valid only for ninety (90) days treated as money and/or property and shall not
counted from the date of receipt of the ruling by any prevent the exchange from being tax-free.
of the parties to the exchange transaction. The
properties and shares of stocks involved in the However, if the amount of liabilities assumed plus
transfer should be conveyed to the transferee/s and the amount of liabilities to which the property is
transferor/s, respectively, within this period. subjected to exceed the total adjusted basis of the
property, then such excess shall be considered
Read Section 40(C)(3) to (4), Tax Code either a capital gain or ordinary gain, as the case
may be.
Q: What is the effect if the tax-free exchange
is not solely in kind? Note: Take a walk and have a break muna!
certain passive incomes are subject to final tax. The (4) Liquidating dividend
importance of knowing that an income is subject to final ---------------------------------------------------------------
tax is that it is no longer included in his gross income
reportable in the annual income tax return.
Q: What are dividends?
Q: Define passive income
The term dividends means any distribution made
Passive income is income derived from any activity by a corporation to its shareholders out of its
in which the taxpayer does not materially participate. earnings or profits and payable to its shareholders,
whether in money or in other property.
Q: What is the tax treatment of passive Note: To simplify matters If the distribution is in money,
income? it is called a cash dividend. If it is in property, it is called a
property dividend. If it is in stock, it is called a stock
Passive income may be subject to: dividend. If it results from the distribution by a corporation
of all its property or assets in complete liquidation or
1. Schedular rates (e.g. dividend income dissolution, it is called a liquidating dividend.
received by a domestic corporation from a
foreign corporation) Q: When is dividend income subject to tax?
2. Final tax (e.g. interest income from foreign
currency bank deposits by a resident citizen) It is taxable at the time of their declaration by the
corporation, and not at the time of actual payment of
--------------------------------------------------------------- dividends, since dividend income is taxable whether
(a) Interest Income actually or constructively received.
---------------------------------------------------------------
Q: Are property dividends taxable?
Q: Define interest income Yes. As provided in Section 251, RR No. 2,
dividends paid in securities or other property (other
Interest income means the amount of than its own stock), in which the earnings of a
compensation paid for the use of money or corporation have been invested, are income to the
forbearance from such use. recipients to the amount of the full market value of
such property when receivable by individual
Q: What is the tax treatment of interest stockholders.
income?
Q: Are stock dividends subject to income
Interests received or credited to the account of the tax?
depositor or investors are included in their gross
income, unless they are exempt from tax or subject No. As discussed earlier, a stock dividend only
to a final tax. represents the transfer of surplus to capital account
and, as such, is not subject to income tax.
Note: This will be discussed in greater detail later in the
taxation of individual and corporate taxpayers as I tackle Q: What are the exceptions to the rule that
the new BIR issuance on the matter - REVENUE
MEMORANDUM CIRCULAR NO. 77-2012 (Clarifying certain stock dividends are not subject to income
provisions of RR 14-2012 on the proper tax treatment of tax?
interest income on financial instruments and other related
transactions) 1. Change in the stockholders equity, right or
interest in the net assets of the corporation
--------------------------------------------------------------- 2. Recipient is other than the shareholder
(b) Dividend Income 3. Cancellation or redemption of shares of sock
(1) Cash dividend 4. Distribution of treasury stocks
(2) Stock dividend 5. Dividends declared in the guise of treasury
stock dividend to avoid the effects of income
(3) Property dividend
taxation all previous rulings to that effect. The rule now is that they
6. Different classes of stocks were issued. are subject to income tax.
---------------------------------------------------------------
Q: What is an annuity for purposes of Separation pay may or may not be taxable
income taxation? depending on the voluntariness or involuntariness of
the cause of separation.
An annuity refers to the periodic installment
payments of income or pension by insurance Note: The taxability of pensions, retirement benefit
companies during the life of a person or for a or separation pay will be discussed later in
guaranteed fixed period of time, whichever is longer, Exclusions from Gross Income
in consideration of capital paid by him. The portion
of proceeds from insurance that represent a mere ---------------------------------------------------------------
return of the premiums is not taxable while the (x) Income from any source whatever
portion that represents the interests is taxable. (a) Forgiveness of indebtedness
(b) Recovery of accounts previously written
Note: The taxability of proceeds from life insurance and off
returns of premiums from annuity contracts will be
discussed later in Exclusions from Gross Income
(c) Receipt of tax refunds or credit
(d) Income from any source whatever
--------------------------------------------------------------- ---------------------------------------------------------------
(viii) Prizes and Awards
Q: What is meant by the phrase all income
---------------------------------------------------------------
derived from whatever source"
Q: What are prizes and awards for purposes The phrase all income derived from whatever
of income taxation? source encompasses all accessions to wealth,
clearly realized, and over which the taxpayers have
It refers to the amount of money in cash or in kind complete dominion. A gain constitutes taxable
received by chance or through luck. Prizes and income when its recipient has such control over it
awards are generally taxable except if specifically that as a practical matter, he derives readily
mentioned under the exclusions from the realizable economic value from it.
computation of gross income
It includes all income not expressly excluded or
Note: The taxability of prizes and awards will be exempted from the class of taxable income,
discussed later in Exclusions from Gross Income and irrespective of the voluntary or involuntary action of
Taxation of Individual and Corporate Taxpayers the taxpayer in producing the income. GUTIERREZ V.
CIR [CTA CASE NO. 65, AUGUST 31, 1965]. The
--------------------------------------------------------------- source of the income may be legal or illegal.
(ix) Pensions, retirement benefit or
separation pay Q: May cancellation or forgiveness of
--------------------------------------------------------------- indebtedness amount to a gain subject to
income tax?
Q: What is pension for purposes of income
taxation? Yes. If, for example, an individual performs services
for a creditor, who, in consideration thereof cancels
It refers to the amount of money received in lump the debt, income to that amount is realized by the
sum or on staggered basis in consideration of debtor as compensation for his services. If, however,
services rendered given after an individual reaches a creditor merely desires to benefit a debtor and
the age or retirement. They are generally taxable to without any consideration therefor cancels the debt,
the extent of the amount received, except if there is the amount of the debt is a gift. If a corporation to
a BIR approved pension plan. which a stockholder is indebted forgives the debt,
the transaction has the effect of the payment of a to gross income in recognition of the intent of
dividend. (see Section 50, RR No. 2). Congress to tax all gains except those specifically
exempted.
Q: What is the Tax Benefit Rule in relation to
recovery of accounts previously written off? ---------------------------------------------------------------
(f) Situs of income taxation
Under the Tax Benefit Rule or Equitable Doctrine ---------------------------------------------------------------
of Tax Benefit, the recovery of amounts deducted in
previous years shall be included as part of the gross Note: The situs of income taxation refers to the
income in the year of recovery to the extent of the General Principles of Income Taxation. Just to
income tax benefit of said deduction. reiterate again Only resident citizens and
domestic corporations are taxable on their
If in the year the taxpayer claimed deduction of bad worldwide income (both income inside and
debts written-off, he realized a reduction of the outside the Philippines) while the other types of
income tax due from him on account of said individual and corporate taxpayers (i.e. non-
deduction, his subsequent recovery thereof from his resident citizen, non-resident alien, foreign
debtor shall be treated as a receipt of realized corporation) are taxable only on income derived
taxable income. Conversely, if the said taxpayer did from sources within the Philippines.
not benefit from the deduction if the said bad debt
written-off, then his subsequent recovery shall be Now, that we know who are the taxpayers that can
treated as a mere recovery or a return of capital, be taxed on income within, without or both. Let us
hence, not treated as receipt of realized taxable discuss when is income considered within the
income. Philippines and without the Philippines.
Note: However, taxes which are not allowable as The source of an income is the property, activity or
deductions, when refunded or credited, are not service that produced the income. It is the physical
declarable for income tax purposes (income tax, source where the income came from. (see CIR VS.
estate tax, donors tax, and special assessments) BAIER-NICKEL [AUGUST 29, 2006]).
Q: What are the source of income rules in Services Income from services is sourced in
the Philippines? (Section 42, Title II, NIRC) the country where the services are
performed. (place of performance
of the service)
Interests The source of an interest payment is
the place of residence of the person Thus, it is income within the
obligated to make that payment Philippines if the service is
(residence-of-the-obligor/debtor performed in the Philippines. It is
rule). income without the Philippines if it is
performed abroad.
It is income within the Philippines if
the residence of the obligor is in the Rents and The rental income and royalty
Philippines. Royalties income derived from the use of
property has its source in the
It is income without the Philippines if country where the property is used
the residence of the obligor is or located. (location of the
abroad. property or interest in such
property)
Dividends Generally, a dividend has its source Thus, it is income within the
in the country where the corporation Philippines if rents and royalties are
paying the dividend is incorporated. derived from property located in the
(residence of the corporation Philippines
paying the dividend)
Sale of Income from the sale of real
Real property is sourced in the country
Thus, if the dividend is received from Property where the real property is located.
a domestic corporation, it is income (location of real property)
within the Philippines. If the dividend
is from the foreign corporation, it is Thus, it is income within the
income without the Philippines. Philippines if the real property is
located in the Philippines. It is
The exception to the general rule income without if the real property is
that dividends paid by a foreign located abroad.
corporation are from sources without
the Philippines is when a foreign Sale of
corporation derives 50 percent of its Personal It depends:
gross income from sources within Property
the Philippines for a three-year 1. Personal property produced
period ending with the close of its (in whole or in part) by the
taxable year preceding the taxpayer within the
declaration of its dividends Philippines and sold without
or produced (in whole or in
part) by the taxpayer without
and sold within the
Philippines the income
shall be treated as derived
partly from sources within
and party from sources
without.
2. Purchase of personal
property within and its sale
without the Philippines, or
Q: In CIR v. MARUBENI [DECEMBER 18, 2001],61 Q: XYZ entered into reinsurance contracts
assuming that Marubeni was disqualified with foreign insurance companies not doing
from availing of the income tax amnesty, business in the Philippines. XYZ was to
would the income from the services cede portions of premiums underwritten in
rendered in connection with the turn-key the Philippines to the foreign corporations
projects constitute as income from in consideration for the assumption of risk.
Philippine sources? Is the cession of the premiums taxable as
income from sources within the
The answer is both yes and no. The answer is yes
Philippines?
with regard to those services performed in the
Philippines. The answer is, however, no with regard
Yes. Sources means the activity, property, or
to those services rendered in Japan. Such services
service giving rise to the income. The original
were rendered outside the taxing jurisdiction and
insurance undertakings took place in the Philippines.
thus constitute as income without the Philippines.
It is not required that the foreign corporation be
Marubeni, being a foreign corporation, is taxable
engaged in business in the Philippines. What is
only on income within the Philippines and, hence,
controlling is no the place of business, but the place
income from services rendered in the Philippines.
of activity that created the income. Thus, the income
is subject to income tax. (see PHILIPPINE GUARANTY
Q: ABC Airways is a foreign airline.62 While V. CIR [APRIL 30, 1965] and HOWDEN & CO. V. CIR
it did not carry passengers and/or cargo to [APRIL 14, 1965]).
or from the Philippines, ABC maintains a
general sales agent of its tickets in the
_________________________________________ Q: ABC, a domestic corporation, entered
into a Management Service Agreement
61
Remember that case I provided in General Principles. with XYZ, a non-resident foreign corporation
62
It is a resident foreign corporation. In order that a foreign under which the latter shall provide services
corporation may be regarded as doing business within a State,
there must be continuity of conduct and intention to establish a for ABCs US branch and advice on ABCs
continuous business, such as the appointment of a local agent, corporate structure, all performed abroad. Is
and not one of a temporary character. ABC maintained a general the compensation for services taxable as
sales agent and it was engaged in selling or issuing tickets, which
is considered the main lifeblood of an airline. income from sources within the
Philippines?
Yes. The services covered by the management has a licensed computer software program
service agreement fall under the meaning of that its customers in North Dakota use for
royalties. It is immaterial if the non-resident foreign checking Quills current inventories and for
corporation has no properties in the Philippines. The placing orders directly. North Dakota
test of taxability is the source and the source of an
attempted to impose a use tax65 on Quill.
income is that activity which produced the income. It
is not the presence of any property from which one Is Quill liable for the tax?
63
derives rentals and royalties that is controlling, but Yes. In QUILL CORP V. NORTH DAKOTA [504 US 298,
rather as expressed under the expanded meaning of M AY 26, 1992], the US Supreme Court ruled that
royalties, it includes royalties for the supply of there must be physical presence in a state for the
scientific, technical, industrial, or commercial, corporation to be liable for sales and use taxes. It
knowledge or information; and the technical advice, applied its ruling in NATIONAL BELLAS HESS V.
assistance or services rendered in connection with DEPARTMENT OF REVENUE OF ILLINOIS [386 US 753]
the technical management and administration of any where it held that a seller whose only connection
scientific, industrial or commercial undertaking, with customers in the State is by common carrier or
venture, project or scheme. (see PHILAMLIFE V. CTA the mail lacked the requisite minimum contacts with
[CA-GR SP. NO. 31283, APRIL 25, 1995]). the State. Thus, such vendors are free from state-
imposed duties to collect sales and use taxes.
Nevertheless, the US Supreme Court opined that if
Q: A, a non-resident citizen, was engaged by
interstate commerce would be subject to intolerable
a domestic corporation as a commission or undesirable burdens because of this, Congress
agent. A will receive a sales commission on has the power to legislate make such vendors liable
all sales actually concluded. A argues that for sales and use taxes.
66
hence, is not taxable. Which contention is generated from constructive trading and
correct? commission income derived from brokering activities
of Philippine branches of foreign corporations
The contention of VIH was held to be correct. In engaged in trading activities. RAMO No. 01-95
VODAFONE INTERNATIONAL HOLDINGS B.V. V. UNION [March 21, 1995] expanded RAMO No. 1-86 to
OF INDIA (SUPREME COURT OF INDIA, CIVIL APPEAL NO. cover taxation of Philippine branches of foreign
68 corporations engaged in soliciting orders,
733 OF 2012, JANUARY 20, 2012), the Indian
Supreme Court ruled that VIH had no liability to purchases, service contracts, trading, construction
withhold tax as the transaction was between two and other activities.
non-residents with no taxable presence in India.
Under Section 9(1) of the Income Tax Act of India, Q: ABC, a multinational company, claimed
all income accruing or arising, whether directly or as deduction from gross income its share of
indirectly through transfer of capital assets situated the overhead expenses of its foreign head
69
in India shall be deemed to accrue or arise in India. office. Can these overhead expenses of the
The Supreme Court stated that the section clearly foreign head office be deducted from the
applied to a transfer of capital asset situated in India gross income of the Philippine branch?
and could not be expanded to cover indirect
transfers of capital assets or property situated in It depends. Either it can be deducted in full or partly.
India. The words directly or indirectly go with the Where an expense is clearly related to the
70
income and not with the transfer of a capital asset. production of Philippine-derived income or to
Philippine operations (e.g. salaries of Philippine
Q: Is the gross income of branches of personnel, rental of office building in the
foreign corporations generated from Philippines), that expense can be deducted from the
solicitation of orders from local importers gross income acquired in the Philippines without
where the branches merely relay to its head resorting to apportionment. However, where there
office abroad said purchase orders and are items included in the overhead expenses
where the head office is the entity which incurred by the parent company, all of which cannot
actually consummates the sale liable for be definitely allocated or identified with the
income tax? operations of the Philippine branch, the company
may claim as its deductible share a ratable part of
Yes. By virtue of RAMO No. 1-86 [April 25, 1986], such expenses based upon the ratio of the local
an income tax is imposed on the gross income branch's gross income to the total gross income,
worldwide, of the multinational corporation. (see
_________________________________________ COMMISSIONER VS. CTA & SMITH KLINE [JANUARY 17,
68 1984]; see also RAMO 4-86 [April 5, 1986])
It is also important to note, that in this case, the Indian Supreme
Court stated that, on the context of taxation of a holding company
structure, the corporate veil may be lifted only if it is established ---------------------------------------------------------------
that the transaction was a sham or there was abuse. In this case, (g) Exclusions from gross income
the shares of CGP were transferred only for a commercial benefit
and not with the object of tax evasion. The structure was in (1) Rationale for the exclusions
existence over a decade, it was not created or used as an (2) Taxpayers who may avail of the
instrument for tax avoidance, VIH was not a short-time investor
and it did not introduce any new practice to grant itself a
exclusions
controlling interest. (3) Exclusions distinguished from
69
The Indian taxing authorities argued that this was a look- deductions and tax credit
through provision a look through provision so that if there was a
transfer, of a capital asset, situated in India, it meant income from (4) Under the Constitution
capital gains accruing or arising outside India would be fictionally (5) Under the Tax Code
deemed to accrue or arise in India. (6) Under Special laws
70
The Indian Supreme Court also noted that the existence of the
Direct Tax Code Bill of 2010 which expressly stated that income ---------------------------------------------------------------
accuring even from indirect transfer of capital assets situated in
India would be deemed to accrue in India but this is not yet in
force.
directly, actually and exclusively for educational amounts are held by the insurer under an
purposes shall be exempt from income taxation. agreement to pay interest.
(see Section 4(3), Article XIV, 1987
Constitution) 2. Amounts received by the insured as return of
premiums paid under life insurance,
Note: Although not expressly provided for, endowment or annuity contracts, either during
remember that the State as a general rule is exempt the term or at the maturity of the contract or
from taxation. It is an inherent limitation. Thus, the upon the surrender thereof.
income of the State are generally excluded from 72
gross income. As to GOCCs If they are performing 3. Gifts, bequests, and devises but not the
government functions, they are exempt unless income from such property; if the amount
expressly subject to tax; If they are performing received is on account of services rendered
proprietary functions, they are subject to tax unless whether constituting a demandable debt or not
expressly exempted. See discussions in General such as remuneratory donations or the use or
Principles and Exempt Corporations. opportunity or use of capital, the receipt is
income.
--------------------------------------------------------------- 4. Compensation for injuries or sickness
(5) Under the Tax Code whether by suit or agreement including amounts
(a) Proceeds from life insurance policies received through accident or health insurance or
(b) Return of premium paid under the Workmens compensation Act, but not
(c) Amounts received under life insurance, damages or compensation recovered for loss of
endowment, or annuity contracts profit in loss or damage to property which would
(d) Value of property acquired by gift, be taxable
bequest, devise or descent
(e) Amount received through accident or 5. Income exempt under treaty binding upon the
Government of the Philippines.
health insurance
(f) Income exempt under tax treaty 6. Certain retirement benefits, pensions,
(g) Retirement benefits, pensions, gratuities, gratuities, more particularly:
etc.
(h) Winnings, prizes, and awards, including a. Retirement benefits received under RA
those in sports competition 7641 and those received by officials and
--------------------------------------------------------------- employees of private firms, whether
individual or corporate, in accordance with a
73
Read Section 32(B), Tax Code reasonable private benefit plan maintained
by the employer provided:
Q: What are deemed excluded from (gross)
income under the Tax Code?
_________________________________________
As provided in Section 32(B), NIRC, the following
72
items shall not be included in gross income and shall They are instead subject to estate or gift taxes (see PIROVANO
VS. COMMISSIONER [JULY 31, 1965])
be exempt from income tax 73
Reasonable private benefit plan means a pension, gratuity,
71
stock bonus or profit-sharing plan maintained by an employer for
1. Proceeds of life insurance, payable upon the the benefit of some or all of his officials or employees, wherein
death of the insured to the heirs or beneficiaries, contributions are made by such employer for the officials or
but not the interest payments thereon if such employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus
accumulated, and wherein its is provided in said plan that at no
_________________________________________ time shall any part of the corpus or income of the fund be used
for, or be diverted to, any purpose other than for the exclusive
71
It is considered as indemnity rather than income benefit of the said officials and employees.
i. that the retiring official or employee has from their passive investments in the
been in the service of the same Philippines
employer for at least ten (10) years and b. Income of the Philippine government
is not less than fifty (50) years of age at and its political subdivisions derived
the time of his retirement from public utilities or in the exercise of
essential governmental functions
ii. That the benefits granted shall be c. Prizes and awards made primarily in
availed of by an official or employee recognition of religious, charitable,
only once. scientific, educational, artistic, literary or
civic achievement but only if:
b. Any amount received by an official or i. The recipient was selected without
employee or by his heirs from the any action on his part to enter the
employer as a consequence of contest or proceedings; and
separation of such official or employee ii. The recipient is not required to
from the service of the employer render substantial future services as
because of death sickness or other a condition to receiving the prize or
physical disability or for any cause award
beyond the control of the said official or d. All prizes and wards granted to
employee. athletes in local and international sports
c. The provisions of any existing law to the competitions whether held in the
contrary notwithstanding, social Philippines or abroad.
security benefits, retirement e. Gross benefits received by officials
gratuities, pensions and other similar and employees of public and private
benefits received by resident or non- entities provided, however, that the
resident citizens of the Philippines or total exclusion shall not exceed P30,000
aliens who come to reside permanently which shall cover:
in the Philippines from foreign i. Benefits received by officials and
government agencies and other employees of the national and local
institutions, private or public. government pursuant to RA 6686
d. Payments of benefits due or to ii. Benefits received by employees
become due to any person (residing in pursuant to PD 851
the Philippines) under the laws of the iii. Benefits received by officials and
United States administered by the employees not covered by PD 851
United States Veterans Administration. iv. Other benefits such as productivity
e. Benefits received from or enjoyed incentives and Christmas bonus
under the Social Security System in provided that the ceiling of P30,000
accordance with the provisions of may be increased through the rules
Republic Act No. 8282. and regulations issued by the
f. Benefits received from the GSIS Secretary of Finance, upon
under Republic Act No. 8291, including recommendation of the
retirement gratuity received by Commissioner, after considering,
government officials and employees. among others, the effect on the
same of the inflation rate at the end
7. Miscellaneous items, likewise exempt, of the taxable year.
including: f. GSIS, SSS, Medicare and Pag-ibig
contributions and union dues of
a. Income of foreign governments or individuals
financing institutions owned, controlled g. Gains from the sale of bonds,
or enjoying refinancing from such debentures or other certificate of
foreign governments and of international indebtedness with a maturity of more
or regional financial institutions than 5 years
established by foreign governments h. Gains from the redemption of shares
of stock in a mutual fund company
Note: As to 7(a) A financing institution wholly-owned and Q: What is the tax treatment of the interests
controlled by a foreign government is exempt from income paid on life insurance proceeds?
tax and final withholding tax with respect to its income
derived from investments in T-bonds. GOVERNMENT OF
SINGAPORE INVESTMENT CORPORATION PTE LTD. VS. CI, CTA If the amounts of life insurance proceeds are held by
8030, SEPTEMBER 5, 2012 the insurer under an agreement to pay interest
thereon, the interest payments shall be included in
--------------------------------------------------------------- the gross income. (see Section 32(B)(1), Tax Code)
(a) Proceeds from life insurance policies Note: Rationale The interests do not form part of the
--------------------------------------------------------------- indemnity but are earnings or income from the use of
capital which are taxable.
Q: What are the conditions for the exclusion
from gross income of life insurance Q: Is the concept of revocability or
proceeds? irrevocability in the designation of the
beneficiary relevant for purposes of
The proceeds of life insurance policies must be: exclusion?
1. Paid to the heirs or beneficiaries No. There is no need for the determination of the
2. Upon the death of the insured revocability or irrevocability in the designation of the
3. whether in a single sum or otherwise beneficiary for purposes of exclusion of the life
insurance proceeds from the gross estate. It is
Note: (1) Payment by reason other than death material only in determining whether the proceeds
Payment for reasons other than death are subject to tax form part of the gross estate or not.
up to the extent of the excess of the premiums paid.
Q: What are the conditions for amounts It is excluded from gross income and hence not
received by insured as return of premiums subject to income tax. However, the income from the
be excluded from gross income? property acquired and transfers of divided interests
shall be included in gross income. (see Section
1. The amounts are received by the insured 32(B)(3), Tax Code).
74
2. Under a life insurance, endowment, or
annuity contract
75 Note: Rationale The property is subject to donors or
estate taxes as the case may be. As to the income from
3. Either: the property, what is only excluded is the property itself
a. during the term or
b. at maturity of the term mentioned in
the contract or ---------------------------------------------------------------
c. upon surrender of the contract (e) Amount received through accident or
health insurance
(see Section 32(B)(2), Tax Code) ---------------------------------------------------------------
Note: The amount returned is not income but return of Q: What kinds of of compensation or
capital. They represent earnings which were previously damages for injuries or sickness are
taxed.
excluded from gross income?
Q: What is the tax treatment of proceeds
1. Amounts received through Accident or
received under endowment policies? Health Insurance or Workmens
Compensation Act as compensation for
1. If the insured dies, and the benificary recives personal injuries or sickness
the life insurance proceeds not taxable 2. Amounts of any damages received whether
and excluded from gross income by suit or agreement on account of such
2. If the insured does not die and survives the injuries or sickness
designated period the amount pertaining
to the premiums are excluded from gross Note: The above amounts are absolutely excluded from
income but the excess shall be considered gross income. Rationale they are mere compensation
part of his gross income for injuries or sickness suffered and not income
Q: What is the reason for the exclusion of 3. the retiring official or employee is not less
income exempt under treaty? than fifty (50) years of age at the time of his
retirement; and
Although it is income, it is excluded from gross 4. the benefit had been availed of only once
income by reasons of public policy which recognizes 5. The retirement plan must be submitted to
the principles of reciprocity and comity among and approved by the BIR (see
States. INTERCONTINENTAL BROADCASTING
CORPORATION VS. AMARILLA [OCTOBER 29,
Q: A domestic corporation entered into a 2006])
loan and sales contract with a foreign
Q: An employer maintains an employees
corporation where the latter shall extend a
trust to provide retirement, pension,
loan to the former and the former shall sell
disability benefits to its employees. The
to the latter all copper concentrates to be
trust made investments and earned
produced from the machine to be purchased
therefrom interest income. Is it proper to
using the loaned amount. The foreign
subject the interest income to withholding
corporation applied for the loan from one of
tax?
its government financing institutions. Is the
interest income from the loans automatically No. As held by the Supreme Court in CIR V. CA &
exempt from withholding tax? GCL RETIREMENT PLAN [M ARCH 23, 1992], said
retirement benefits received by officials and
No. As held in CIR V. MITSUBISHI METAL employees of private firms in accordance with a
CORPORATION [JANUARY 22, 1990], the burden of reasonable private benefit plan maintained by the
proof rests upon the party claiming an exemption to employer shall be exempt from all taxes
prove that it is in fact covered by the exemption. In
the said case, the Supreme Court found that the Q: What are the conditions in order that
foreign government financing institution had nothing
separation pay may be excluded from gross
to do with the sales and loans agreement. It is the
foreign corporation, not the foreign government income?
financing institution that is the sole creditor of the
domestic corporation 1. Amount received by an official, employee, or
by his heirs
2. From the employer
--------------------------------------------------------------- 3. As a consequence of separation of such
(g) Retirement benefits, pensions, gratuities, official or employee from the service of the
etc. employer
--------------------------------------------------------------- a. Because of death, sickness, or other
physical disability or
Q: What are the conditions to exempt b. For any cause beyond the control of
retirement benefits paid from an employer such official or employee , such as
maintained reasonable private retirement i. Retrenchment
plan from income tax? ii. Redundancy
iii. Cessation of business
For the retirement benefits to be exempt from
Note: In other words, the separation must be involuntary
income tax, the taxpayer is burdened to prove the in order for it to be excluded from gross income.
concurrence of the following elements:
Yes. Previously, SSS, GSIS, PHIC and Pag-Ibig Q: Is income earned by a contributor from
contributions in excess of the mandatory the investments and reinvestments of his
contributions were considered exempt from income Personal Equity and Retirement Act (PERA)
tax. However, because it was deemed to have been assets subject to income tax?
abused and the excess contributions are being
made as a form of investment, RMC No. 027-11 No. As provided in RR No 017-11 [OCTOBER 27,
[JULY 1, 2011] now considers the excess 2011], implementing the tax provisions of RA 9505,
contributions as not excludible from gross income otherwise known as the Personal Equity and
and not exempt from income and withholding tax. Retirement Account (PERA) Act of 2008, investment
income of a contributor consisting of all income
--------------------------------------------------------------- earned from the investments and reinvestments of
(h) Winnings, prizes, and awards, including his PERA assets in the maximum amount allowed
those in sports competition shall be exempt from the following taxes as may be
--------------------------------------------------------------- applicable:
Q: What are the requisites to be met before 1. Final withholding tax on interest from any
prizes and awards are excluded from gross currency bank deposit, yield or any other
monetary benefit from deposit substitutes and
income?
from trust funds and similar arrangements,
including a depository bank under the EFCDS;
The prizes and awards are:
_________________________________________
It is a reduction of wealth A person exemption is
which helped earn the the theoretical personal 76
As it requires that they be engaged in a trade, or business, or
income subject to tax, family and living profession, this excludes citizens and alien residents earning
such as ordinary and expense of an individual, purely compensation income.
necessary expenses such as the personal
Read Section 34(A), Tax Code Q: ABC Corp failed to claim expenses for
professional services that accrued in past
Q: What are the requisites for deductibility years. May ABC Corp still claim these
of business expenses?77 expenses as deductions?
The requisites are: No. In COMMISSIONER OF INTERNAL REVENUE VS.
1. The expense must be ordinary and ISABELA CULTURAL CORPORATION (FEBRUARY 12,
necessary 2007), Isabela Corp failed to claim the expenses for
2. Paid or incurred during the taxable year professional services that accrued in 1984 and 1985
3. In carrying on the trade or business of the during the said years. Instead, it sought to claim
taxpayer them as deductions during the taxable year of 1986.
4. It must be supported by adequate invoices The Supreme Court held that one of the requisites
and receipts for the deductibility of a business expenses is that it
5. Must not be against law, morals, public must have been paid or incurred during the taxable
78
policy, or public order year. Hence, the professional fees should have been
6. It must be reasonable claimed as deductions during the years where they
were paid or incurred.
expenditure. Expenses relating to the payments purely for the personal services actually
recapitalization and reorganization of the rendered.
corporation, promotion expenses and commission or
fees for the sale of stock reorganization are capital Q: What are some factors that may be
expenditures. considered in determining the
reasonableness of the compensation paid
Q: Are litigation expenses deductible as a for services?
business expense?
They are:
No. As held in ATLAS CONSOLIDATED MINING &
DEVELOPMENT CORPORATION VS. COMMISSIONER OF 1. The payment must be made in good faith
INTERNAL REVENUE (JANUARY 27, 1981), litigation 2. The character of the taxpayers business
expenses incurred in defense or protection of title 3. The volume and amount of its net earnings
are capital in nature and not deductible. 4. The locality in which the business is in
5. The type and extent of the services rendered
6. The salary policy of the corporation
Are police protection fees and gifts for an 7. The size of the particular business
exhibition for charitable purposes deductible as 8. The employees qualifications and business
a business expense? venture
9. The general economic conditions
No. In CALANOC VS. COLLECTOR OF INTERNAL
REVENUE [NOVEMBER 29, 1961], at issue in this case There is no fixed test in determining the
is the deductibility of the expenses incurred for reasonableness of a given bonus as compensation.
police protection and for gifts and parties in This depends on many factors and the situation
connection with the boxing and wrestling exhibition must be considered as a whole.
that Calanoc financed and promoted whose
proceeds would be given to the orphans and Q: Are salaries deductible?
destitute children of the Child Welfare Workers Club
of the Social Welfare Commission. The Supreme Yes provided that they comply with the following
Court held that the police protection fees were not requisites:
deductible as they are illegal since it was
consideration for the performance of functions 1. The salaries must be for personal services
required of policemen by law. As to the gifts and actually rendered
parties, they were deemed excessive considering 2. The salaries must be reasonable in amount.
that the purpose of the exhibition was for a
charitable cause. (see Section 70, RR No. 2)
relation to the business of the particular the deductibility of bonuses is that they are given for
taxpayer. personal services actually rendered.
(see KUENZLE & STREIFF V. COLLECTOR [106 PHIL. Q: ABC Corporation claimed as deductions
355]; C.M. HOSKINS & CO., INC. VS. COMMISSIONER OF bonuses it gave to its non-resident
INTERNAL REVENUE [NOVEMBER 28, 1969]) president and vice-president and the
bonuses it gave to its resident officers and
Q: A, an experienced realtor, was paid employees. The company gave its resident
supervision fees in the amount of P100,000 officers and employees much more. The
annually by XYZ Corporation for a three- deductions for bonuses given to resident
year project, an amount when combined officers and employees were disallowed for
with his salary and bonuses is double the being excessive and for no special reason.
XYZs income. Are the supervision fees Is the disallowance proper?
deductible?
It would depend on the nature, extent, and quality of
No. In C.M. HOSKINS & CO., INC. VS. COMMISSIONER the services actually rendered by the resident
OF INTERNAL REVENUE [NOVEMBER 28, 1969], officers and employees. In KUENZLE & STREIFF, INC.
Hoskins & Co. claimed as deductions the payment VS. COLLECTOR OF INTERNAL REVENUE [OCTOBER 20,
of P100,000 to its founder and controlling 1959], the Supreme Court held that the bonuses to
stockholder, Hoskins representing 50% of the 8% its resident officers and employees were reasonable
supervision fees the company received as managing taking into account the situation at the time when the
agent for Paradise Farms. In this case, the Supreme services were rendered: unsettling conditions after
Court held that such was not deductible for failing to the war, the imposition of controls on exports and
pass the reasonableness test. If allowed, Hoskin imports, and he use of foreign exchange which
would be receiving on his salary, bonus, and resulted in diminution of the amount of business.
supervision fees at total of P185,000 which is double
the companys reported net income. The Supreme
---------------------------------------------------------------
Court stated that if it was a one-time payment, it
could have been deducted since Hoskin was an (3) Travelling/transportation expenses
experienced realtor. However, the P100,000 ---------------------------------------------------------------
supervision fee was being paid every year (for three
years) for the entire duration of the companys Q: What are the requisites for deductibility
project with Paradise Farms. of travelling or transportation expenses?
Q: Can a bonus given to corporate officers 1. It must be paid or incurred while away from
be deducted from gross income from the home
sale of one of its properties on the 2. It must be incurred in the pursuit of the
representation that corporate officers, by taxpayers trade or business
virtue of their positions, contributed to the 3. It must be reasonable and necessary
consummation of the sale?
---------------------------------------------------------------
No. In AGUINALDO INDUSTRIES CORPORATION VS. (4) Cost of materials
COMMISSIONER OF INTERNAL REVENUE [FEBRUARY 25, ---------------------------------------------------------------
1982], Aguinaldo Industries sought to claim as
deductions the bonuses given to its corporate Q: What are the requisites for deductibility
officers from the sale of one of its properties.The of cost of materials?
Supreme Court held that the said bonuses cannot
be deducted because there is no evidence that the The charges for materials and supplies shall be only
said officers did any work which would be the basis to the amount that they are actually consumed and
of the grant of the bonuses. One of the requisites for used in operation during the year for which the
return is made, provided that the cost of such
materials and supplies has not been deducted in Q: What are the allowable deductions by a
determining the net income for any previous year lessee?
(see Section 67, RR No. 2-40)
The lessee may deduct the amount of rent paid or
--------------------------------------------------------------- accrued including all expenses which under the
(5) Rentals and/or other payments for terms of the agreement, the lessee is required to
use or possession of property pay to, or for the account of the lessor. If the
--------------------------------------------------------------- payments are so arranged as to constitute advance
rentals, such payment will be duly apportioned over
the lease term (see Section 3.01, RR No. 19-86)
Q: What are the requisites for deductibility
of rental expenses?
---------------------------------------------------------------
1. Made as a condition to the continued use or (8) Expenses for professionals
possession of property ---------------------------------------------------------------
2. Taxpayer has not taken or is not taking title
to the property or has no equity other than Q: What are the allowable deductions for
that of a lessee, use or possessor professionals?
3. Property must be used in trade or business
4. Subjected to withholding tax of 5%; 1. The cost of supplies used by him in the
otherwise, it shall be disallowed as a practice of his profession
deduction 2. Expenses paid in the operation and repair of
--------------------------------------------------------------- transportation equipment used in making
(6) Repairs and maintenance professional calls
--------------------------------------------------------------- 3. Dues to professional societies and
subscriptions to professional journals
Q: Discuss the deductibility of repairs 4. The rent paid for office rooms
expenses. 5. The expenses of the fuel, light, water,
telephone, etc. used in such offices; and
The cost of incidental repairs which neither 6. The hire of office assistants
materially add to the value of the property nor
appreciably prolong its life, but keep it in an ordinary ---------------------------------------------------------------
working condition, may be deducted as a business (9) Entertainment/Representation
expense. However, extraordinary repairs (those expenses
which prolong its life or add material value) are not ---------------------------------------------------------------
deductible
Q: What is the rule on the deductibility of
---------------------------------------------------------------
representation or entertainment, amusement
(7) Expenses under lease agreements
and recreation expenses?
---------------------------------------------------------------
Such expenses must:
Q: What are the allowable deductions by a 1. Must be paid or incurred during the taxable
lessor? year
2. be directly related to or in furtherance of the
Since the rentals are considered as income of the conduct of the trade, business or exercise of
lessor (owner of the property, such lessor may the profession
deduct all ordinary and necessary expenses paid or 3. not be contrary to law, morals, public policy
incurred during the taxable year which are or public order
attributable to the earning of the income. (see 4. does not constitute a bribe, kickback or
Section 2.01, RR No. 19-86) other similar payment
5. must be duly substantiated by adequate determine from all available data, the amount
proof properly deductible as representation expenses. In
6. The appropriate amount of withholding tax if view of this, the Supreme Court held CTA did not
applicable should have been withheld commit error in allowing as promotion expenses in
therefrom and paid to the BIR As income tax returns at merely one-half.
7. not exceed such ceilings prescribed by the
Secretary of Finance. ---------------------------------------------------------------
(10) Political campaign expenses
Q: Is there a ceiling on entertainment, ---------------------------------------------------------------
amusement and recreational expenses?
Note: I will use this as an opportunity to discuss the import
Yes. RR 10-2002 [JULY 10, 2002] provides that: of RR 8-2009 in relation to RMC 63-09 and RR 7-2011 in
relation to RMC 15-2013 which are recent BIR issuances
1. Sellers of goods or properties 0.5% of on the matter of political campaign expenses. We know (or
their net sales as representation expenses should know) that contributions given to candidates or
2. Sellers of services 1% of their net political parties are not subject to donors tax (see Section
revenues as representation expenses. 13, RA 7166). It may, however, be subject to income tax.
In order for the campaign expenditure to be tax-exempt, it
must be fully utilized. If it is not fully utilized, it is subject to
However, when supporting documents reflect a income tax (see Section 2, RR 7-2011). These
lower amount, then such lower amount shall be contributions are intended to finance the operation
used. expenditures of a candidate. Any unexpended balance
from any contribution to a candidate or party shall be
Q: A, a hotel owner, claimed as deduction subject to income tax. Further, if the candidate fails to
include certain campaign expenditures in the Statement of
promotion expenses incurred by his wife for Expenditures to be filed with the COMELEC, such
the promotion of the hotel. Half of the said amounts will be automatically subjected to income tax.
expenses were disallowed as deductions
because on the finding that his wife went RMC 15-2013 requires every candidate, treasurer of the
abroad on a combined business and party and person acting under authority of that candidate
or treasurer a) to keep detailed, full and accurate records
medical trip. Is the disallowance proper? of all contributions received and expenditures incurred; b)
to be responsible for the preservation of the records of
Yes. In ZAMORA VS. COLLECTOR OF INTERNAL contributions and expenditures together with all pertinent
REVENUE [M AY 31, 1963], Zamora, a hotel owner, documents, for at least three years after the holding of the
claimed as deduction promotion expenses incurred election to which they pertain and for the productions for
by his wife for the promotion of the hotel. On appeal, inspection by the COMELEC or its duly authorized
the CTA only allowed 50% of the promotional representative, or upon presentation of a subpoena duces
expenses as deductions because it was found in the tecum duly issued by the COMELEC.
Central Bank dollar allocation that his wife went Now, with that said, we now answer whether political
abroad on a combined business and medical trip. campaign expenses are deductible.
The Supreme Court stated that promotional Q: Are political campaign expenses
expenses are deductible but must be substantiated. deductible?
When some of the representation expenses claimed
by the taxpayer were evidenced by vouchers or We must distinguish between (1) the candidate,
chits, but others were without vouchers or chits, political party, or contributor and (2) the supplier of
documents or supporting papers; that there is no the goods and services pertaining to the campaign
more than oral proof to the effect that payments expenditures.
have been made for representation expenses
allegedly made by the taxpayer and about the As to the candidate, political party, or contributor, the
general nature of such alleged expenses; that political campaign expenses are not deductible. If
accordingly, it is not possible to determine the actual they are fully utilized, they are tax exempt and thus
amount covered by supporting papers and the theres no need for any deduction at all. If they are
amount without supporting papers, the court should
not fully utilized and hence subject to income tax, it Q: What are the requisites for the
is submitted that they cannot still be deducted either deductibility of interest expenses from
as a business expense or as a contribution. gross income?
MONTENEGRO V. COMMISSIONER, CTA CASE 695,
APRIL 30, 1965) The requisites are:
80
1. There must be indebtedness
However, as to the supplier of the goods or services, 2. There should be an interest expense paid or
he may avail of a deduction. RR 8-2009 subjects the incurred upon such indebtedness
following to a 5% creditable withholding tax: (a) 3. The indebtedness must be that of the
payments made by the political parties and taxpayer
candidates of local and national elections for their 4. The indebtedness must be connected with
campaign expenditures; and (b) payments made by the taxpayers trade, business or exercise of
individuals or juridical persons for their purchases of profession
goods and services intended to be given as 5. The interest expense must have been paid
campaign contributions to political parties and or incurred during the taxable year.
candidates. RMC 63-2009 provides that such 5% 6. The interest must be legally due
creditable withholding tax shall be allowed as a tax 7. the interest payment arrangement must not
credit or deduction against the total income tax be between related taxpayers
liability of the supplier of goods or services. 8. the interest must not be incurred to finance
petroleum operations
--------------------------------------------------------------- 9. in case of interest incurred to acquire
(11) Training expenses property used in trade, business, or exercise
--------------------------------------------------------------- of profession, the same was not treated as a
capital expenditure
Q: Discuss the deductibility of training 10. The interest must have been stipulated in
expenses as a business expense. writing
11. The allowable deduction have been reduced
by an amount equal to 33% of the interest
The training expenses must constitute ordinary and
income subject to final tax
necessary business expenses of a taxpayer.
(see RR 13-2000 [NOVEMBER 20, 2000])
---------------------------------------------------------------
(b) Interest
(1) Requisites for deductibility Q: When is interest expense not deductible
(2) Non-deductible interest expense from gross income?
(3) Interest subject to special rules
--------------------------------------------------------------- 1. an indebtedness on which an interest is
paid in advance through discount or
Section 34(B), Tax Code otherwise. Such interest shall be allowed as
a deduction in the year the indebtedness is
paid. If the indebtedness is payable in
---------------------------------------------------------------
periodic amortization, the amount of
(1) Requisites for deductibility interest which corresponds to the amount of
(2) Non-deductible interest expense the principal amortized or paid during the
--------------------------------------------------------------- year shall be allowed as deduction in such
taxable year.
_________________________________________
80
Indebtedness is something owned by one who is
unconditionally obligated or bound to pay
2. If both the taxpayer and the person to whom Such interest shall be allowed as a deduction in the
the payment has been made or is to be year the indebtedness is paid.
made are related persons specified
under Section 36(B). Q: What is the rule on interest periodically
3. If the indebtedness is used to finance amortized?
petroleum exploration.
4. Interest expense equal to 33% of the The amount of interest which corresponds to the
interest income subject to final tax amount of the principal amortized or paid during the
year shall be allowed as deduction in such taxable
Q: Enumerate the cases when no deduction year.
is allowed because the loan is between
related taxpayers. ---------------------------------------------------------------
(c) Interest expense incurred to acquire
1. Between members of the family (brother, property for use in trade, business,
sisters, ascendant, lineal descendant) profession
2. Between an individual and a corporation
where the individual paid interest on a loan
---------------------------------------------------------------
granted by the corporation more than 50%
of the capital stock of which is owned by the Q: May the taxpayer choose to treat
individual interest expense as capital expenditure?
3. Between two corporations where one
corporation owns more than 50% of the Yes. Section 34(B)(3) provides that at the option of
other the taxpayer, interest incurred to acquire property
4. Between a grantor and fiduciary of a trust used in trade, business or exercise of a profession
5. Between the fiduciary of a trust and the may be allowed as a deduction or treated as a
fiduciary of another trust with the same capital expenditure.
grantor
6. Between a fiduciary of a trust and a However, should the taxpayer elect to deduct the
beneficiary of such trust interest payments against its gross income, the
taxpayer cannot at the same time capitalize the
Read Section 36(B), Tax Code interest payments because that would constitute
double tax benefits which is not authorized by law
---------------------------------------------------------------
(3) Interest subject to special rules In PAPER INDUSTRIES CORPORATION OF THE
(a) Interest paid in advance PHILIPPINES VS. COURT OF APPEALS [DECEMBER 1,
1995], Paper Industries claimed as deductions
(b) Interest periodically amortized
against gross income interest payments on loans for
(c) Interest expense incurred to acquire the purchase of machinery and equipment. The CIR
property for use in trade, business, disallowed the deduction on the ground that
profession because the loans had been incurred for the
(d) Reduction of interest purchase of machinery and equipment, the interest
expense/interest arbitrage payments on the said loans should have been
--------------------------------------------------------------- capitalized instead and claimed as a depreciation
deduction taking into account the adjusted basis of
--------------------------------------------------------------- the machinery and equipment (original acquisition
(a) Interest paid in advance cost plus interest charges) over the useful life of
(b) Interest periodically amortized such assets.
---------------------------------------------------------------
The Supreme Court ruled that Paper Industries is
entitled to its claimed deduction for interest
Q: What is the rule on interest paid in payments on loans for, among other things, the
advance? purchase of machinery and equipment. The general
rule is that interest expenses are deductible against tax) thus benefiting by 12% representing the
gross income and this certainly includes interest difference the 32% deduction and the 20%
paid under loans incurred in connection with the withholding tax. It does not matter if the taxpayer
carrying on of the business of the taxpayer. In this actually intended to save taxes.
case, the CIR does not dispute that the interest
payments were made on loans incurred in In BIR RULING NO. 006-00 [JANUARY 5, 2000], PNB
connection with the carrying on of the registered requested the BIR to exclude the interest income
operations of Paper Industries, i.e., the financing of derived by it from treasury bonds in the
the purchase of machinery and equipment actually determination of the interest expense not allowable
used in the registered operations of Paper as deduction as gross income. PNB argues that the
Industries. Neither does the CIR deny that such said bonds were given by the Government for
interest payments were legally due and payment for its liabilities to PNB and hence, it has
demandable under the terms of such loans, and in not engaged in a tax arbitrage scheme.
fact paid by Paper Indusries during the tax year.
The CIR has been unable to point to any provision of Although as a general rule, the amount of interest
the Tax Code or any other Statute that requires the expense paid or incurred by a taxpayer within a
disallowance of the interest payments made by taxable year on indebtedness in connection with his
Paper Industries. The general rule that interest trade, business or exercise of profession shall be
payments on a legally demandable loan are allowed as a deduction from his gross income, the
deductible from gross income must be applied. said interest expense, however, shall be reduced if
the taxpayer has derived certain interest income
--------------------------------------------------------------- which had been subject to final withholding tax. The
(d) Reduction of interest CIR ruled that this limitation on the deductibility of
expense/interest arbitrage interest expenses applies whether or not a tax
arbitrage scheme was entered into by the taxpayer
---------------------------------------------------------------
Q: Do tax obligations constitute
Q: What is the limitation on the amount of
indebtedness?
interest expense allowed to be deductible?
Yes. In COMMISSIONER OF INTERNAL REVENUE VS.
The amount of interest expense paid or incurred by
VDA. DE PRIETO [SEPTEMBER 30, 1960], Vda. de
a taxpayer in connection with his trade, business, or
Prieto conveyed real property by way of gifts to her
exercise of a profession from an existing
four children. She was assessed for donors gift
indebtedness shall be reduced by an amount equal
taxes including interests due thereon. She claimed
to 33% of the interest income earned which had
as deduction the total interest on account of the
been subject to final withholding taxes.
delinquency. She contends that the interests due
from her tax obligations are deductible from gross
Q: What is interest arbitrage? income.
Interest arbitrage results in the reduction of the The Supreme Court held that although interest
interest expense by a percentage of the interest payment for delinquent taxes is not deductible as tax
income subject to final tax. It is also defined as a under Section 34(C) of the Tax Code, the taxpayer
circumstance which is presumed to exist because by is not precluded thereby from claiming said interest
putting excess funds in deposits/securities subject to payment as deduction under Section 34(B) of the
20% withholding, taxpayers are able to avoid the same Code. It is a well-settled rule that tax
32% tax which will happen if the same funds are obligations constitute indebtedness for purposes of
invested in revenue-generating activities. deduction from gross income of the amount of
interest paid on indebtedness.
Another illustration of this is when a taxpayer
borrows money from the bank (interest payments on
---------------------------------------------------------------
which can then be claimed as expense and thus a
32% benefit) then deposits it in a bank (and (c) Taxes
subsequently suffers only a 20% final withholding (1) Requisites for Deductibility
(2) Non-deductible taxes No. Section 34(C)(1) provides that all taxes,
(3) Treatments of national or local, paid or accrued during the taxable
surcharges/interests/fines for year in connection with the trade or business or
delinquency profession of the taxpayer are deductible from
gross income except:
(4) Treatment of special assessment
(5) Tax credit vis--vis deduction 1. Philippine income tax
--------------------------------------------------------------- 2. Foreign income taxes unless the taxpayer
does not make use of the tax credit privilege
Read Section 34(C), Tax Code under Section 34(C)(3).
3. Estate and donors taxes
--------------------------------------------------------------- 4. Taxes assessed against local benefits of a
(1) Requisites for Deductibility kind tending to increase the value of the
(2) Non-deductible taxes property assessed (special assessments)
5. VAT
---------------------------------------------------------------
Note: In the case of nonresident alien individual or a
Q: Who are entitled to deduct taxes from foreign corporation, deduction is only allowed if and to
gross income? the extent that the taxes for which deduction is claimed
are connected with income from sources within the
Taxes are deductible as such only by the taxpayer Philippines.
upon which they are imposed.
---------------------------------------------------------------
Q: What are the requisites for the (3) Treatments of
deductibility of taxes? surcharges/interests/fines for
delinquency
1. The payments must be for taxes (4) Treatment of special assessment
2. It must be paid or incurred within the taxable ---------------------------------------------------------------
year
3. It must be incurred in connection with trade, Q: Are surcharges, interest and fines for
business or profession delinquency deductible?
4. Tax must be imposed by law on and payable
by the taxpayer (indirect taxes not included) No. To allow them to be deducted defeats the
5. Taxes are not specifically excluded by law prescribed punishment. GUITIERREZ V. COLLECTION
from being deducted from the taxpayers [14 SCRA 33]
gross income
Note: However, as discussed, Interest on deficiency taxes
may be allowed as deduction (considered as interest on
indebtedness).
Q: What is the effect of a refund or credit of
deducted taxes? Q: Are special assessments deductible?
payments should be treated as capital Q: What are the remedies for a taxpayer who
expenditures and hence are not deductible has paid income taxes to a foreign country
for which he would also be liable for
(see Section 83, RR No. 2-40) Philippine income tax?
--------------------------------------------------------------- 1. Tax credit against the Philippine income tax
(5) Tax credit vis--vis deduction due;
--------------------------------------------------------------- 2. Deduction from gross income
Q: What is a tax credit? Note: Rationale for allowing tax credit for foreign
taxes to address indirect double taxation.
Note: Also important is this case is the statement made by (2) Other types of losses
the court on the exception: a taxpayer may only be (a) Capital losses
allowed to deduct from his gross income, taxes paid to a
foreign country when such taxpayer is entitled to a foreign (b) Securities becoming worthless
tax credit and he does not choose to exercise such right. (c) Losses on wash sales of stocks or
The right to deduct foreign tax paid is only an alternative to securities
the taxpayers right to the foreign tax credit. (d) Wagering Losses
(e) NOLCO
Q: What are the limitations on credit for
---------------------------------------------------------------
foreign taxes?
The amount of the credit shall be subject to the Read Section 34(D), Tax Code
following limitations:
Q: What are the conditions for deductibility
1. The amount of the credit in respect to the of losses?
tax paid or incurred to any country shall not
exceed the same proportion of the tax In order that losses may be allowed as deductions,
against which such credit is taken, which the the following conditions must concur:
taxpayers taxable income from sources
within such country under this Title bears to 1. The losses must actually be sustained and
his entire taxable income for the same charged off within the taxable year
taxable year. 2. Evidenced by a closed and completed
transaction
Note: For those who have not yet been rendered 3. Loss is not compensated by insurance or
mathematically impaired by law school, the formula is this: otherwise
4. In the case of an individual, the loss must have
been incurred in the business, trade or
profession of the taxpayer or incurred in any
transaction entered into for profit though not
connected with his trade or business
5. In the case of casualty loss, declaration of loss
2. The total amount of the credit shall not is filed within 45 days from the occurrence of the
exceed the same proportion of the tax casualty loss
against which such credit is taken, which the
taxpayers taxable income from sources Note: (1) Losses are deductible only by the person sustaining
them. They are purely personal and cannot be used as
without the Philippines taxable under this
deductions by another
Title bears to his entire taxable income for
the same taxable year. (2) The loss shall not be allowed as a deduction if such
loss was claimed as a deduction for estate tax purposes
Note: Again for the mathematically unimpaired, the (see Section 34(D)(1)(c))
formula is this:
(3) It is not required that the loss must be a result of
transactions in the taxable year only. The taxpayer need
only prove that a closed and completed transaction sets
the loss in the taxable year or in the year claimed and it is
not compensated by insurance or otherwise.
Note: Actually, mas madali naman i-memorize ang
formula instead of trying to memorize and make some Q: How shall the amount of the loss
sense out of those two sentences. deductible be determined?
These are losses that are incurred by a taxable RMO 31-2009 [OCTOBER 16, 2009] provides for
entity as a result of its day to day operations policies and guidelines for the reporting of casualty
conducted for profit or otherwise. losses.
Q: Discuss the deductibility of wagering The transferee or assignee shall not be entitled to
claim the same as a deduction from gross income
losses.
except when as a result of the said merger,
consolidation, or combination, the shareholders of
Losses from wagering transaction shall be allowed the transferor/assignor, or the transferor gains
only to the extent of the gains from such control of:
transactions.
(a) not less than 75% in nominal value of
outstanding issued shares or paid up capital of
Bad debts shall refer to those debts resulting from In both cases, requisites nos. 1-4 should still be complied
the worthlessness or uncollectibility, in whole or with.
in part, of amounts due the taxpayer by others,
arising from money lent or form uncollectable Q: What is meant by actually ascertained to
amounts of income from goods sold or services be worthless?
rendered.
The phrase means that a debt is not worthless
Q: How do you distinguish bad debts from simply because it is of doubtful value or difficult to
loss? collect. Conclusive evidence must be presented to
show that the taxpayers receivable from a debtor
Voluntary cancellation or forgiveness of a debt does has definitely become worthless.
not give rise to a deductible loss. However, if the
debt is actually worthless, there may be a bad debt Q: What is meant by actually charged off?
deduction. That deduction would be allowed
because the debt was worthless, not because it was The phrase means that the amount of money lent by
forgiven. the taxpayer to his debtor has been recorded in his
books of account as a receivable that has actually
Q: What are the conditions for bad debts to become worthless of as of the end of the taxable
year, that the said receivable has been cancelled
be deductible?
and written-off from the said taxpayers books of
account.
As provided in RR 5-99 [March 10, 1999], the
requisites for deductibility of bad debts are:
Q: ABC mining entered into a management
1. There must be an existing indebtedness due to contract with XYZ mining. ABC made
the taxpayer which must be valid and legally advances of cash and property. However,
demandable XYZs mine suffered continuing losses
2. The same must be connected with the which led to ABC;s withdrawal as manager
taxpayers trade, business or practice of and cessation of mine operations. ABC and
profession XYZ entered into two compromises: the first
3. The same must not be sustained in a transaction involved alleged indebtedness by XYZ from
entered into between related parties the advances of ABC and the second
4. The same must actually be charged-off within
involved long-term loans guaranteed by
the taxable year
5. The same must be actually ascertained to be ABC. ABC deducted the amounts as bad
worthless and uncollectible as of the end of the debt. Is the deduction proper?
taxable year.
6. The debts are uncollectible despite diligent No. In PHILEX MINING CORPORATION VS.
efforts exerted by the taxpayer COMMISSIONER OF INTERNAL REVENUE [APRIL 16,
2008], the Supreme Court held that Philex cannot
Note: RR 5-99 [March 10, 1999] provides for two deduct the amounts as bad debt. The agreement
exceptions to requisite no. 5, namely: provided for a distribution of assets of the mine upon
termination, a provision that is more consistent with
a partnership than a creditor-debtor relationship. In 30, 1969], the Supreme Court held that the
this connection, there is no contractual basis for the deduction was improper. The Court opined that
execution of the two compromise agreements in assuming that in this case there was a valid and
which Baguio Gold recognized a debt in favor of subsisting debt and that the debtor was incapable of
Philex. Philexs advances should be treated as paying the debt, the debt is still not deductible as a
investments in a partnership. The advances were worthless debt because the debtor was still in
not "debts" of Baguio Gold to Philex inasmuch as the operation. It has been held that if the debtor
latter was under no unconditional obligation to return corporation, although losing money or insolvent, was
the same to the former. still operating at the end of the taxable year, the debt
is not considered worthless and therefore not
As for the amounts that Philex paid as guarantor to deductible.
Baguio Golds creditors, the debts were not yet due
and demandable at the time that Philex paid the Q: What is the effect of recovery of bad
same. Philex cannot claim the advances as a bad debts?
debt deduction from its gross income. Deductions for
income tax purposes partake of the nature of tax The recovery of bad debts previously allowed as
exemptions and are strictly construed against the deduction in the preceding year or years shall be
taxpayer, who must prove by convincing evidence included as part of the taxpayers gross income in
that he is entitled to the deduction claimed. In this the year of such recovery to the extent of the income
case, Philex failed to substantiate its assertion that tax benefit of said deduction (equitable doctrine of
the advances were subsisting debts of Baguio Gold tax benefit or tax benefit rule)
that could be deducted from its gross income.
Consequently, it could not claim the advances as a
valid bad debt deduction. ---------------------------------------------------------------
(f) Depreciation
Is the declaration by the taxpayer that a debt is (1) Requisites of computing depreciation
worthless sufficient for it to claim a bad debt allowance
deduction? (2) Methods of computing depreciation
allowance
No. In PHILIPPINE REFINING COMPANY VS. COURT OF (a) Straightline method
APPEALS [M AY 8, 1996], at issue was PRCs (now (b) Declining-balance method
Unilever) claimed of bad debt deduction. On appeal, (c) Sum-of-the-years-digit method
the CTA disallowed the same as there was no iota of
---------------------------------------------------------------
documentary evidence to prove the worthlessness of
the debts sought to be deducted. The Supreme
Court stated that before a debt can be considered Read Section 34(F), Tax Code
worthless, the taxpayer must also show that it is
indeed uncollectible even in the future. PRC here ---------------------------------------------------------------
failed to prove the worthlessness of the amounts (1) Requisites of computing depreciation
receivable. allowance
---------------------------------------------------------------
Q: ABC, an investment company made
advances to XYZ under an agreement that a Q: What is depreciation?
portion of its net profits would go to ABC.
XYZ suffered substantial losses but Depreciation is the gradual diminution in the useful
83
continued to operate. ABC made a partial value of tangible property resulting from wear and
write-off of the losses and deducted the tear and normal obsolescense.
amount in its return. Is the deduction _________________________________________
proper? 83
Not all tangible property can be depreciated. Land, for example,
cannot be depreciated because its value continues to increase.
No. In FERNANDEZ HERMANOS, INC. VS.
COMMISSIONER OF INTERNAL REVENUE [SEPTEMBER
Q: What are the requisites for the The BIR found that ABC claimed excessive
deductibility of a depreciation expense? depreciation of its buildings. In its defense, ABC
Limpan argued that that some of its buildings
1. The allowance for depreciation must be are old and out of style; hence, they are entitled
reasonable to higher rates of depreciation than those
2. It must be for property used in the trade, adopted by the BIR in its assessment. On appeal,
business, or profession the CTA found that the depreciation was
3. It must be charged off during the taxable year; excessive. Should the findings of the CTA be
and affirmed?
4. A statement on the allowance must be attached
to the return Yes provided there no arbitrariness and abuse of
discretion on the part of the CTA. In LIMPAN
INVESTMENT CORPORATION VS. COMMISSIONER OF
Q: Can an asset be depreciated beyond its
INTERNAL REVENUE [JULY 26, 1966], the Supreme
acquisition cost? Court opined that depreciation is a question of fact
and is not measured by theoretical yardstick, but
No. In BASILAN ESTATES, INC. VS. COMMISSIONER OF should be determined by a consideration of actual
INTERNAL REVENUE [SEPTEMBER 5, 1967], Basilan facts. The findings of the tax court in this respect
Estates claimed deductions for the depreciation of should not be disturbed when not shown to be
its assets up to 1949 on the basis of their acquisition arbitrary or in abuse of discretion. Limpan has not
cost. In 1950, however, it changed the depreciable shown any arbitrariness or abuse of discretion on
value of the assets by increasing it to conform with the part of the CTA. In fact, the CTA applied rates of
the increase in cost of their replacement. depreciation in accordance with Bulletin F of the US
Accordingly, in 1950 to 1953, the company deducted Federal Internal Revenue Service, which the
from gross income the value of the depreciation Supreme Court, has pronounced as having strong
based on this reappraised value. persuasive effect.
The Supreme Court held that such value cannot be
deducted from gross income as it was beyond the
acquisition cost. Depreciation as a deduction is RR 12-2012 [OCTOBER 12, 2012] Deductibility
allowed so that the owner of the assets can set of Depreciation Expense as it relates to
purchase of vehicles
_________________________________________
84
Guidelines to claim depreciation as a deduction in
Like those with limited duration gross income:
1. Only one vehicle for land transport is allowed for in a constant charge over the useful
the use of an official or employee life.
2. The value of which should not exceed
P2,400,000 Declining- It is an accelerated method of
3. It must be substantiated with sufficient evidence, balance depreciation which writes off a
such as official receipts or other adequate method relatively larger amount of the
records; and assets cost nearer the start of its
4. There is a direct connection or relation of the useful life than does the straight
vehicle to the development, management, line. It results in a decreasing
operation, and/or conduct of the trade or charge over the useful life
business or profession of the taxpayer
Sum-of-the- It is an accelerated method of
Generally, no deduction in the gross income shall be years-digit depreciation that provides higher
allowed for depreciation of the following: method depreciation expense in the earlier
years and lower charges in the later
1. Yachts, helicopters, airplanes, and/or aircrafts; years.
and
2. Land vehicles with a value of more than
P2,400,000 ---------------------------------------------------------------
(g) Charitable and other contributions
Exception: the taxpayer is in the business of (1) Requisites for deductibility
transport operations or lease of transportation
(2) Amount that may be deducted
equipment and the vehicles purchased are used in
such operations. ---------------------------------------------------------------
In addition, the following shall be disallowed as Read Section 34(H), Tax Code
deductions in the gross income:
Q: What are the conditions for deductibility
1. All maintenance expenses on account of non- of charitable contributions?
depreciable vehicles;
2. Input taxes on the purchase of non-depreciable The requisites are:
vehicles and all input taxes on maintenance 1. Actually paid or made to the Philippine
expenses. Government or any political subdivision
thereof, or any of the domestic corporation
or association specified in the Tax Code
--------------------------------------------------------------- 2. Made within the taxable year
(2) Methods of computing depreciation 3. Not exceeding 10% (individuals) or 5%
allowance (corporations) of the taxpayers taxable
(a) Straightline method income before charitable contributions
(b) Declining-balance method 4. Evidenced by adequate receipts or records
(c) Sum-of-the-years-digit method
Q: What contributions are deductible in full?
---------------------------------------------------------------
Donations to the following institutions are deductible
Q: What are the methods of computing in full:
depreciation allowance and define each?
1. Donations to the Government, its entities,
Straight-line The annual depreciation charge is political subdivisions or fully owned
method calculated by allocating the amount corporations exclusively for undertaking
to be depreciated equally over the priority activities in accordance with the
number of years of the estimated national priority plan to be determined by
useful life of the property. It results NEDA
3. Republic Act 8525 (Adopt a school act) Section 34(L) provides that in lieu of the itemized
deductions, an individual subject to tax excluding a
The law provides for a deduction from the gross nonresident alien may elect a standard
income equivalent to fifty percent (50%) of expenses deduction of not exceeding 40% of his gross sales
incurred in connection with the said act. or gross receipts, as the case may be. In the case of
a domestic corporation and a resident foreign
4. Republic Act 9999 (Free Legal Assistance Act) corporation, it may elect a standard deduction in an
amount not exceeding 40% of its gross income.
The law provides that a lawyer or professional
partnerships rendering actual free legal services, as A non-resident alien (whether engaged or not) and a
defined by the Supreme Court, shall be entitled to an non-resident foreign corporation cannot claim OSD.
allowable deduction from the gross income, the
amount that could have been collected for the actual The election to use OSD when made in the return
free legal services rendered or up to ten percent shall be irrevocable for the taxable year for which
(10%) of the gross income derived from the actual the return is made.
performance of the legal profession, whichever is
lower Q: Who may avail of the OSD?
5. RA No. 9994 (Expanded Senior Citizens Act) in 1. A citizen, whether resident or non-resident
relation to RR 7-2010 [July 20, 2010] 2. Resident alien
3. Taxable estate or trust
The law provides that discounts given to senior
Note: A non-resident alien and a non-resident foreign
citizens on certain goods and services shall be
corporation cannot claim OSD.
deductible from gross income. Also, private
establishments employing senior citizens shall be
entitled to additional deductions from gross income Q: What are the rules in the determination of
equivalent to fifteen (15%) of the total amount paid the amount of OSD?
as salaries and wages to senior citizens.
RR 16-2008 [NOVEMBER 26, 2008] provides for the
following rules:
6. RA No. 7277, as amended (Magna Carta of
Disabled Persons) in relation to RR 7-2010 [July
1. For individuals
20, 2010]
a. If on accrual basis of accounting, the OSD
shall be based on gross sales
The law provides that sales discounts given to
b. If on cash basis of accounting, the OSD
persons with disabilities shall be deductible from
shall be based on gross receipts
gross income subject to certain conditions.
c. Cost of sales and cost of services are not
allowed to be deducted for purposes of
--------------------------------------------------------------- determining the basis of the OSD
(4) Optional Standard Deduction
(a) Individuals, except non-resident 2. For corporations
aliens a. It shall be based on gross income
(b) Corporations, except non-resident
foreign corporations
Note: The basis of the 40% OSD for individual taxpayers Q: What is the rationale behind personal and
shall be gross sales or gross receipts, not gross income, additional exemptions under the Tax Code?
because the cost of sales and the cost of services are
not allowed to be deducted for purposes of determining
the basis of OSD. Exemptions are fixed at arbitrary amounts intended
to substitute for the disallowance of personal or
Q: What are the rules in the determination of living expenses as deductible items from the taxable
income of certain individual taxpayers. The amounts
the amount of OSD of GPPs?
represent roughly the equivalent of the taxpayers
minimum subsistence and those of his
RR 2-2010 [FEBRUARY 18, 2010] amended Sections
dependents.(see PANSACOLA V. CIR [NOVEMBER 16,
6 to 7 of RR 16-2008 with respect to the
2006])
determination of the OSD of GPPs.
A GPP is not subject to income tax but the partners Q: Which kinds of individual taxpayers can
shall be liable to pay income tax on their separate avail of personal and additional
and individual capabilities for their respective exemptions?
distributive share in the net income of the GPP.
Citizens and resident aliens are allowed personal
For purposes of computing the distributive share of and additional exemptions; nonresident aliens
the partners, the net income of the GPP shall be engaged in trade or business in the Philippines
computed in the same manner as a corporation. The are entitled to personal exemptions only by way of
86
GPP may claim itemized deductions or in lieu reciprocity but not to additional exemptions.
thereof may opt to avail of the OSD allowed to
corporations. The net income determined by either Q: How should these exemptions be
claiming the itemized deductions or OSD from the credited?
GPPs gross income is the distributable net income
from which the share of each partner is determined. These exemptions must first be credited against
gross compensation income; the excess, if any, can
If the GPP availed of the itemized deductions in be used to offset taxable net income.
computing its net income, a partner may still claim
itemized deductions from his share in the net income Q: What is personal exemption allowed to
of the partnership. individual taxpayers?
However, if the GPP availed of the OSD in 87
All individual taxpayers, regardless of status, shall
computing its net income, the partner can no longer be allowed a basic personal exemption of P50,000.
claim further deduction from his share in the said net
income.
--------------------------------------------------------------- _________________________________________
(5) Personal and additional exemption (RA.
86
9504, Minimum Wage Earner Law) Thus, for a nonresident alien, his entitlement to personal and
additional exemption depends on whether he is engaged in trade
(a) Basic Personal Exemptions or business and his country of residence allows exemption to
(b) Additional exemptions for taxpayer Filipinos. If not engaged, he will not be allowed the exemption.
with dependents Note as well that employees of ROHQs, OBUs, and FCDUs are
not entitled to personal and additional exemptions as they are
(c) Status-at-the-end-of-the-year rule subject to tax on gross income without the benefit of deductions/
(d) Exemptions claimed by non-resident exemptions.
87
aliens Note that, previously, the amount of personal exemption
depended on the status of the individual taxpayer. It was P20,000
--------------------------------------------------------------- for single individuals, P32,000 for legally married and P25,000 for
head of a family. As amended by RA 9504, all individuals,
regardless of status, are entitlted to a basic personal exemption of
Read Section 35, Tax Code P50,000.
Q: Can a benefactor88 of a PWD whose civil Q: May parents and siblings be considered
status is single avail of the head of family as additional exemptions?
status to be entitled to personal exemption?
No. parents and siblings are considered dependents
It is no longer necessary. RA 9442, which amends only for purposes of qualifying an individual to
RA 7277 or the Magna Carta for Persons with become head of a family but not for purposes of
Disability, provides that a benefactor of a PWD additional exemptions.
whose civil status is single shall be considered as
head of family and, as such, shall be entitled to Q: Are senior citizens supported and living
personal exemption. However, the terms head of with a taxpayer considered as additional tax
family and his/her dependents for purposes of exemptions?
availing personal exemption have been eliminated in
view of an amendment brought about by RA 9504. No. The word dependent does not include senior
The rule is that individual taxpayers regardless of citizens.
status are entitled to the personal exemption. [see
RR NO. 001-09 [DECEMBER 9, 2008]. Q: Is a foster child considered a dependent?
Q: What is the rule for married individuals? Yes. RA 10165 or The Foster Care Act of 2012
amended the NIRC to include a foster child in the
In the case of married individuals where only one term dependent. Thus, foster parents may claim an
spouse is deriving gross income, only such spouse addition exemption of P25,000 for each dependent
shall be allowed the personal exemption. (which includes the foster child) not exceeding 4.
Q: What are the additional exemptions Q: What is the rule for spouses and legally
allowed to individual taxpayers? separated spouses?
There shall be allowed an additional exemption of The additional exemption for dependents can be
89
P25,000 for each dependent not exceeding four. claimed by only one of the spouses. In the case of
legally separated spouses, additional exemptions
Q: Who is a dependent under the Tax may be claimed only by the spouse who has custody
Code? of the child or children.
90
A dependent means a legitimate, illegitimate, or Q: What is the status-at-the-end-of-the-
legally adopted child chiefly dependent upon and year rule or the change-of-status rule
living with the taxpayer if such dependent is not with respect to personal and additional
more than 21 years of age, unmarried and not exemptions?
gainfully employed or if such dependent, regardless
of age, is incapable of self-support because of This means that whatever is the status of the
mental or physical defect. taxpayer at the end of the calendar year shall be
used for purposes of determining his personal and
Q: Are illegitimate children considered for additional exemptions.
additional exemptions?
Yes. By express wording of the law, a dependent As held in PANSACOLA V. CIR [NOVEMBER 16, 2006],
includes an illegitimate child. what the law should consider for the purpose of
_________________________________________ determining the tax due from an individual taxpayer
is his status and qualified dependents at the close of
88
A benefactor refers to any person, whether related or not to the the taxable year and not at the time the return is filed
person with disability, who takes care of him/her as a dependent
89 and the tax due thereon is paid.
Previously, the amount was P8,000.
90
Note that Illegitimate children are included in the definition of
dependents and in the entitlement for additional exemption.
A change of status of the taxpayer during the Read Section 36, Tax Code
taxable year generally benefits, but does not
91
prejudice him.
Q: What items are not deductible from
In the following cases, the rule is applied as follows: gross income?
1. If the taxpayer marries or should have additional A: No deduction shall in any case be allowed in
dependents during the taxable year, he may respect to:
claim the corresponding additional exemption in
full for such year. 1. Personal, living or family expenses
2. If the taxpayer dies during the taxable year, his
estate may still claim the personal and additional 2. Any amount paid out for new buildings or
exemptions for himself and his dependents as if for permanent improvements or
he died at the close of such year. betterments made to increase the value of
3. If the spouse or any of the dependents dies or if any property or estate. (Capital
any such dependent marries, becomes 21 years expenditures, see COMMISSIONER VS.
old or becomes gainfully employed during the SORIANO)
taxable year, the taxpayer may still claim the
same exemptions as if the spouse or any oth e 3. Any amount expended in restoring
dependents died, or if such dependents married, property or in making good the exhaustion
became 21 years old or became gainfully thereof for which an allowance is or has
employed at the close of such year. been made (capitalized interest, see
PAPER INDUSTRIES VS. CA).
---------------------------------------------------------------
(6) Items not deductible 4. Premiums paid on any life insurance
policy covering the life of any officer or
(a) General Rules
employee or of any person financially
(b) Personal, living or family expenses interested in any trade or business carried
(c) Amount paid for new buildings or for on by the taxpayer, individual, or corporate
permanent improvements (Capital when the taxpayer is directly or indirectly a
expenditures) beneficiary under such policy
(d) Amount expended in restoring property
(major repairs) 5. Losses from sales or exchanges of property
(e) Premiums paid on life insurance policy directly or indirectly between related
covering life or any other officer or persons
employee financially interested a. Between members of a family
b. Between an individual and a
(f) Interest expense, bad debts, and losses
corporation more than 50% in value of
from sales of property between related the outstanding stock of which is owned
parties by such individual (except in the case of
(g) non-deductible interest distributions in liquidation)
(h) non-deductible taxes c. Between two corporations more than
(i) non-deductible losses 50% in value of the outstanding stock of
(k) losses from wash sales of stock or each of which is owned by the same
securities individual if either one of the companies
--------------------------------------------------------------- is a holding company
d. Between the grantor and a fiduciary of
_________________________________________ any trust
91
e. Between the fiduciary of a trust and
The rule of thumb is that which will be beneficial to the the fiduciary of another trust if the
taxpayer.
same person is a grantor with respect to
each trust
f. Between a fiduciary of a trust and a true taxable income or to prevent evasion of taxes. RR 2-
beneficiary of such trust. 2013 [January 23, 2013] which provides the guidelines on
transfer pricing implements this authority of the CIR to
6. Non-deductible interest review controlled transactions among associated
enterprises and to allocate or distribute their income and
7. Non-deductible taxes deductions in order to determine the appropriate revenues
8. Non-deductible losses and taxable income of the associated enterprises involved
9. Losses from wash sales of stock or in controlled transactions
securities
Q: GSK purchased a pharmaceutical
Note: Since we mentioned related parties, I shall discuss
an important topic in light of RR No. 2-2013 [January 23,
ingredient from Adechsa, a related non-
2013] or the Transfer Pricing Guidelines. Previously, residency company for between $1,512 and
the Philippines does not have any guidelines on transfer $1,651 per kg. During the same period, two
pricing unlike in other jurisdictions. RMC 026-08 [March Canadian pharmaceutical companies
24, 2008] states that while the BIR is still revising the final purchase the same ingredient for between
draft of the RR on transfer pricing, the BIR as a matter of
policy subscribes to the OECD Transfer Pricing Guidelines $194 and $304 per kg from arms length
in the interim. Now, we have Transfer pricing guidelines suppliers. Canadas minister for internal
which give life to Section 50 of the Tax Code. revenue reassessed GSK because the
prices it paid for the ingredient were greater
Read Section 50, Tax Code than an amount that would have been
reasonable in the circumstances had they
Q: What is transfer pricing? been dealing at arms length. GSK argues
the License and Supply Agreement it
Transfer pricing is generally defined as the pricing of entered with Adechsa should be considered
cross-border, intra-firm transactions between related
in determining if it is an arms length
parties or associated enterprises. Typically, a
transfer price occurs between a taxpayer of a
transaction. Is GSKs contention correct?
country with high income taxes and a related or
Yes. As held by the Supreme Court of Canada in
associated enterprise of a country with low income
HM V. GLAXOSMITHKLINE [2012 SCC 52, OCTOBER
taxes.
18, 2012], a proper application of the arms length
.
principle requires that regard be had for the
While transfer pricing issue typically occurs in cross-
economically relevant characteristics of the arms
border transactions, it can also occur in domestic
length and non-arms length circumstances to
transactions. One context where transfer pricing
ensure they are sufficiently comparable. The
issue occurs domestically is where one associated
economically relevant characteristics of the
enterprise, entitled to income tax exemptions, is
situations being compared may make it necessary
being used to allocate income away from a company
to consider other transactions that impact the
subject to regular income taxes. is a domestic
transfer price under consideration. Such
transfer pricing issue when income are shifted in
circumstances will include agreements that may
favor of a related company with special tax
confer rights and benefits in addition to the purchase
privileges such as Board of Investments (BOI)
of property where those agreements are linked to
Incentives and Philippine Economic Zone Authority
the purchasing agreement. The objective is to
(PEZA) fiscal incentives or when expenses of a
determine what an arms length purchaser would
related company with special tax privileges are
pay for the property and the rights and benefits
shifted to a related company subject to regular
together where the rights and benefits are linked to
income taxes or in other circumstances, when
the price paid for the property. In this case, GSK was
income and/or expenses are shifted to a related
party in order to minimize tax liabilities (see RR 2- paying for at least some of the rights and benefits
under the Licence Agreement as part of the
2013 [January 23, 2013])
purchase prices for ranitidine from Adechsa. As
such, the Licence Agreement could not be ignored in
Note: Section 50 of the Tax Code refers to the power of
the CIR to distribute, apportion, allocate, and shift income
determining the reasonable amount paid to Adechsa
and expenses between related taxpayers to reflect their
which applies not only to payment for goods but also situations being compared can materially affect the
to payment for services. price or margin being compared, or
(2) reasonably accurate adjustments can be made to
eliminate the effect of any such differences.
Q: What is the arms length bargaining
standard with respect to the determination Step 2: Identify the tested party and the appropriate
of the taxable income on inter-company transfer pricing method.
loans or advances in relation to transfer
pricing? The tested party is the entity to which a transfer pricing
method can be most reliably applied to and from which the
most reliable comparables can be found. For an entity to
RMC 026-08 [M ARCH 24, 2008] adopts the arms become a tested party, the Bureau requires sufficient and
length standard as the ultimate test for determining verifiable information on such entity
the fairness of related party transactions. The
standard to be applied in every case is that of an The selection of a transfer pricing method is aimed at
uncontrolled taxpayer dealing at arms length with finding the most appropriate method for a particular case.
another uncontrolled taxpayer. Accordingly, the method that provides the most reliable
measure of an arms length result shall be used. (see
Thus, where a member of a group of controlled methods below)
entities makes a loan or advances directly or
Step 3: Determine the arms length results.
indirectly or becomes a creditor of another member
of such group and charges no interest, or chargest Once the appropriate transfer pricing method has been
interest at a rate which is not equal to an arms- identified, such is applied on the data of independent party
92
length rate, the CIR may make appropriate transactions to arrive at the arms length result.
allocations to reflect an arms length interest rate for
use of such loan or advance. In some cases, it will be possible to apply the arms length
principle to arrive at a single figure or specific ratio (e.g.
Note: RR No. 2-2013 [January 23, 2013] also adopted price or margin) that is the most reliable to establish
the arms length principle as the most appropriate whether the conditions of a transaction are arm's length.
standard to determine transfer prices of related parties However, it is generally difficult to arrive at a specific ratio
or range of deviation that may be considered as arms
length. More likely, the transfer pricing analysis would lead
to a range of ratios.
RR No. 2-2013 [January 23, 2013] Transfer
Pricing Guidelines 1. If the relevant condition of the controlled
transaction (i.e. price or margin) is within the
The Regulations prescribe the 3-step approach in the arms length range, no adjustment should be
application of the arms length principle: made.
2. If the relevant condition of the controlled
Step 1: Conduct a comparability analysis. transaction (e.g. price or margin) falls outside the
arms length range asserted by the Bureau, the
The arms length principle is based on a comparison of taxpayer should present proof or substantiation
the prices or margins adopted or obtained by related that the conditions of the controlled transaction
parties with those adopted or obtained by independent satisfy the arms length principle, and that the
parties engaged in similar transactions. For such price or result falls within the arms length range (i.e. that
margin comparisons to be meaningful, all economically the arms length range is different from the one
relevant characteristics of the situations being compared asserted by the tax administration).
should be sufficiently similar so that: 3. If the taxpayer is unable to establish this fact, the
Bureau must determine the point within the arms
(1) none of the differences (if any) between the length range to which it will adjust the condition of
_________________________________________ the controlled transaction.
92
The arm's length interest rate shall be the rate of interest which The Regulations also adopt the following arms length
was charged or would have been charged at the time the pricing methodologies to be used as appropriate:
indebtedness arose in independent transaction with or between
unrelated parties under similar circumstances. 1. Comparable Uncontrolled Price (CUP) Method -
The CUP Method evaluates whether the amount charged
in a controlled transaction is at arms length by reference
Section 27(B) of the Tax Code provides that they 1. Their exemption refers only to revenues
shall pay a tax of 10% on their taxable income derived from assets used actually, directly,
except: and exclusively for educational purposes
1. Certain passive incomes subject to final tax 2. Income from cafeterias, canteens and
2. If the gross income from unrelated trade, bookstores are also exempt if they are
94
business, or other activity exceeds 50% of owned and operated by the educational
the total gross income derived by such institution and are located within the school
95
proprietary educational institution and premises
hospital which are non-profit from all 3. However, they shall be subject to internal
sources, the tax shall be imposed on the revenue taxes on income from trade,
entire taxable income at 30% business or other activity, the conduct of
which is not related to the exercise or
Q: What is meant by the terms proprietary performance by such educational institution
and non-profit? of their educational purposes or functions
4. The interest income on bank deposits and
Proprietary means private while non-profit means no yields from deposit substitutes may be
net income or asset accrues to or benefits any exempt from income tax if there is showing
member or specific person, with all the net income that said income will be used actually,
directly, and exclusively for educational
_________________________________________ purposes.
94
Means any trade, business, or other activity, the conduct of Non-stock, non-profit corporations
which is not substantially related to the exercise or performance
by such educational institution or hospital of its primary purpose
or function.
While generally exempt, they remain liable for
95
Is any private schoolm maintained and administered by private
individuals or groups with an issued permit to operation from the 1. Income derived from any of their real
Department of Education or CHED, or TESDA, as the case may properties
be
2. Any activity conducted from profit regardless
of disposition thereof
3. Interest income from any bank deposits or hospital. For Section 27(B) to apply, the hospital
yield on deposit substitutes, including must be non-profit which means that no net income
foreign currency deposits. or asset accrues to or benefits any member or
4. They shall be withholding agents for their specific person and all the activities of the hospital
employees compensation income subject to are non-profit. On the other hand, Section 30(E) and
withholding tax. (G), while providing for an exemption is qualified by
the last paragraph which, in turn, provides that
Private educational institutions activities conducted for profit shall be taxable.
Section 30(E) and (G) requires that an institution be
They shall be exempt from VAT but must be operated exclusively for charitable purposes to be
accredited with either the DepEd or CHED. completely exempt from income tax. In this case,
however, St. Lukes is not operated exclusively for
1. However, income derived from trade, charitable purposes insofar as its revenues from
business or other activity is still taxable paying patients are concerned. Such revenue is
2. Bank deposits and foreign currency deposits subject to income tax at 10% under Section 27(B).
are exempt from withholding tax but they
must show proof that such income is used to Q: Reconcile the tax treatment of proprietary
fund proposed projects for their institutions educational institutions and hospitals which
improvement are non-profit under Section 27(B) and non-
3. They shall be withholding agents for their stock, non-profit charitable institutions
employees compensation income subject to
under Section 30(E) and (G).
withholding tax.
To be exempt from income taxes, Section 30(E)
Q: St. Lukes Medical Center is a hospital requires that the charitable institution must be
organized as a non-stock and non-profit organized and operated exclusively for charitable
corporation. It admits both paying and non- purpose. It is nevertheless allowed to engage in
paying patients. The CIR claimed that St. activities conducted for profit without losing its tax-
Lukes was liable for income tax at 10% as exempt status for its not-for-profit activities. The
provided under Section 27(B)96 of the NIRC. consequence, however, is that such income from
St. Lukes argues that it is a non-stock, non- activities conducted for profit, regardless of the
profit institution for charitable and social disposition made of such income, shall be subject to
welfare purposes exempt from income tax tax.
under Section 30(E) and (G) of the NIRC.97
For proprietary educational institutions and hospitals
Decide. which are non-profit to avail of the preferential tax
rate, no net income or asset accrues to or benefits
In CIR V. ST. LUKES MEDICAL CENTER [SEPTEMBER any member or specific person, with all the net
26, 2012], the Supreme Court ruled that St. Lukes income or asset devoted to the institutions purposes
cannot claim full tax exemption under Section 30 and all its activities.
because it has paying patients and this is
notwithstanding the fact that it is a non-profit Thus, in CIR V. ST. LUKES MEDICAL CENTER
[SEPTEMBER 26, 2012], while the St. Lukes did not
_________________________________________
qualify as a non-profit, non-stock charitable
96
Section 27(B) provides that proprietary educational institutions institution under Section 30(E) as it was not
and hospitals which are non-profit shal pay a tax of ten percent operated exclusively for charitable purposes, it
(10%) on their taxable income
97
remains to be a proprietary non-profit hospital under
Section 30(E), NIRC provides that a non-stock corporation or Section 27(E) as long as it does not distribute any of
association organized and operated exclusively for charitable
purposes is exempt from income tax while Section 30(G) provides its profits to its members and such profits are
that a civic league or organization not organized for profit but reinvested pursuant to its corporate purposes. St.
operated exclusively for the promotion of social welfare is likewise Lukes, as a proprietary non-profit hospital, is entitled
exempt. to the preferential tax rate of 10% on its net income
from its for-profit activities.
(iii) Exclusions Well, you should know by now that theyre not entitled to
(a) Fringe benefits subject to tax any deduction or exemptions.
(b) De minimis benefits ---------------------------------------------------------------
(c) 13th month pay and other benefits and c) Taxation of business income/income
payments specifically excluded from from practice of profession
taxable compensation income ---------------------------------------------------------------
---------------------------------------------------------------
Note: We already discussed this. What is important to
Note: We need not discuss this any further. Remember
note is that such income is subject to the graduated
our previous discussions.
income tax rates. The next part I will discuss extensively
and with the corresponding final tax rates.
---------------------------------------------------------------
(iii) Deductions
---------------------------------------------------------------
(a) Personal exemptions and additional
d) Taxation of passive income
exemptions
(i) Passive income subject to final tax
(b) Health and hospitalization insurance
(a) Interest income
(c) Taxation of compensation income of
(b) Royalties
a minimum wage earner
(c) Dividends from domestic
---------------------------------------------------------------
Corporations
Note: Again, we shouldnt dwell too much here especially (d) Prizes and other winnings
on personal exemptions and additional exemptions. Some (ii) Passive income not subject to final
points lang. As to (iii)(c) Id like to reiterate that the tax
exemption of the minimum wage is actually an exclusion,
not a deduction. It is tax-exempt! We have also discussed ---------------------------------------------------------------
that in the kinds of taxpayers. Also note that following
income of a minimum wage worker are also exempt from ---------------------------------------------------------------
tax: (a) Interest income
1. Holiday pay
2. Overtime pay
---------------------------------------------------------------
3. Nightshift differential; and
4. Hazard pay Read Section 24(B)(1), Section 25(A)(2),
Section 25(B), Section 27(D)(1), Section
Lets discuss briefly health and hospitalization insurance. (D)(3), Section 28(A)(7), Section 28(B)(1),
Section (B)(5), Tax Code
Read Section 34(M), Tax Code
Note: The relevant and recent BIR issuance on the matter
Q: May a taxpayer deduct from his gross is RR No. 14-2012 [NOVEMBER 7, 2012] which clarifies and
income premium payments for health and sums up the proper tax treatment of interest income
earnings on financial instruments and other related
hospitalization insurance? transactions. To simplify matters, I will include the tax
rates for all taxpayers instead of separating the
Yes. An individual taxpayer can claim as deduction discussion. This is to make it easier to memorize and so
from his gross income the premium payment for we can better highlight the differences in tax treatment.
health and/or hospitalization insurance for an
amount not exceeding P2,400 per family during the
taxable year provided the gross family income does
not exceed P250,000 for the taxable year. Only one
spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
REVENUE REGULATIONS NO. 14-2012 the form of savings, common or individual trust
[NOVEMBER 7, 2012] Proper Tax Treatment funds, deposit substitutes, etc evidences by
certificates in the BSP-prescribed form
of Interest Income Earnings on Financial d. The long-term deposits or investments must be
Instruments and Other Related Transactions issued by banks only;
e. The long-term deposits or investments must have
1. Interest from Philippine currency bank a maturity period of not less than 5 years
deposits and yield from deposit substitute f. The long-term deposits or investments must be in
and from trust funds or similar arrangements the denominations of P10,000 and other BSP-
prescribed denominations
a. Citizens 20% g. The long-term deposits or investments should not
b. Resident aliens be pre-terminated.
c. Non-resident h. Except those specifically exempted by law, any
aliens engaged other income such as gains from trading, foreign
in trade or exchange gain shall not be covered by income
tax exemption.
business
d. Domestic If the deposit or investment is pre-terminated, a final tax
corporation shall be imposed on the entire income.
e. Resident foreign
corporation Four years to less than five year 5%.
a. Non-resident 25% (flat tax rate Three years to less than four years 12%
alien not imposed on gross If less than three years 20%.
engaged in income)
Note: As clarified in RMC 77-2012 [November 22, 2012] -
trade or
Interest income derived by domestic and resident foreign
business corporations from long-term deposits NOT issued by
a. Non-resident 30% banks or investment certificates that are NOT considered
foreign deposits or deposit shall be subject to 30% regular
corporation corporate income tax. The interest payors in such a case
are required to withhold 20% creditable withholding tax
2. Interest income derived from government pursuant to section 7 of RR 14-2012
debt instruments and securities
4. Interest income derived from a depository
They are considered deposit substitutes. The same tax bank under the expanded foreign currency
treatment as above is applied. deposit system (EFCDS)
Note: As clarified in RMC 77-2012 [November 22, 2012] Derived from FCDUs:
The mere issuance of government debt instruments and
securities is deemed as falling within the coverage of
"deposit substitutes" irrespective of the number of lenders a. Citizens 7%
at the time of origination. Thus, subject to 20% final b. Resident aliens
withholding tax. The final withholding tax shall accrue, in c. Domestic
case of zero-coupon instruments and securities upon their corporation
original issuance. In case of interest bearing, final
withholding tax shall accrue upon payment of the interest.
d. Resident foreign
corporation
3. Interest derived from long long-term deposits a. Non-resident Tax-exempt
or investments alien
b. Non-resident
They are exempt from tax, provided the following foreign
requisites are met: corporations
a. Depositor is an individual citizen (resident or non-
resident), a resident alien or a nonresident alien Note: If the bank account is jointly in the name of a non-
engaged in trade or business in the Philippines; resident and a resident, 50% shall be treated as exempt
b. The long-term deposit or investment certificates and the remaining 50% shall be subject to the final tax of 7
under name of the individual; .
c. The long-term deposits or investments must be in
Any other debt instrument not within the coverage of Q: What is the proper tax treatment on
deposit substitutes shall be subjected to a creditable individual taxpayers of income derived from
withholding tax of 20%. royalties?
Note: As clarified in RMC 77-2012 [November 22, 2012] - Royalties (except 20% - Citizens, whether
The 20% creditable withholding tax (CWT) on interest books, literary works, resident or nonresident,
income derived from any other debt instrument shall be musical compositions resident aliens and
imposed on each Interest payment to be made beginning non-resident aliens
on November 23, 2012 (date of effectivity of RR 12-2012),
engaged in trade or
irrespective of the instruments and securities date of
issuance. This covers all interest income from current business and domestic
outstanding instruments, securities, or accounts as of corporations and
November 23, 2012. resident foreign
corporations
25% - Non-resident
Q: An individual depositor or investor (a aliens not engaged in
trade or business (shall
citizen, resident alien, or non-resident alien
form part of their gross
engaged in trade or business in the income)
Philippines) invests in a long-term deposit
or investment which has a remaining 30% - Non-resident
maturity period of less than 5 years and said foreign corporation
investor holds the said deposit or (shall form part of their
gross income
corporation, however,
Royalties from books, 10% - Citizens, whether are subject to the 15%
literary works, resident or nonresident, branch profit remittance
musical compositions resident aliens and tax
non-resident aliens a. Non-resident 1. Tax treaty rate, if
engaged in trade or foreign applicable
business corporation 2. 15% if no tax treaty
but satisfies the
25% - Non-resident tax-sparing
aliens not engaged in provision
trade or business (shall 3. 30% if no tax treaty
form part of their gross and does not
income) comply with the
tax-sparing
provision
---------------------------------------------------------------
(c) Dividends from domestic Q: What is the proper tax treatment on
Corporations dividends from foreign corporations?
---------------------------------------------------------------
The income shall form part of the gross income of
the corporation but the situs of the income becomes
Read Section 24(B)(2), Section 25(A)(2), material except for a resident citizen and domestic
Section 25(B), Section 27(D)(4), Section corporation which is taxed on worldwide income.
28(A)(7)(d) and Section 28(B)(5)(b), Tax
Code Note: In other words, only resident citizens and domestic
corporations would be subject to tax on dividends received
Note: Ill discuss the tax treatment of dividends of all kinds from foreign corporations as they taxable on income
of taxpayers here na so its simpler. Just the tax rates. I without the Philippines.
shall discuss later the topic of tax treatment on dividends
received from a domestic corporation by a non-resident ---------------------------------------------------------------
foreign corporation in relation to the tax-sparing provision (d) Prizes and other winnings
and tax treaties. For now, just the basics lang muna for
dividends received by corporate taxpayers.
---------------------------------------------------------------
Q: What is the proper tax treatment on Read Section 24(B)(1), Section 25(A)(2), and
dividends from domestic corporations? Section 25(B), Tax Code
However, he shall be exempt under the following Q: Define taxable income and gross income
cases: for purposes of corporate income taxes.
1. The returnable income is in the nature of Taxable Income means the pertinent items of gross
compensation income but he qualifies as a income specified in the Code, less the
minimum wage earner; and deductions and/or personal and
2. If the aggregate amount of gross income earned additional exemptions, if any
by the Senior Citizen during the taxable year authorized for such types of income
does not exceed the amount of his personal by the Code or other special laws. For
corporations, taxable income would
exemptions (basic and additional) mean net income. Net income and
taxable income is used
Note that the exemption of senior citizens from interchangeably when it comes to
income tax does not extend to all types of income corporations.
earned during the taxable year such as those
subject to final taxes. (see RR No. 007-10 [JULY 20, Gross Income Shall mean gross sales less sales
2010].) returns, discounts, allowances and
cost of goods sold.
---------------------------------------------------------------
13. Taxation of domestic corporations Q: Why is the distinction of the two relevant for
a) Tax payable purposes of corporate income tax?
b) Allowable deductions 1. For domestic corporations and resident foreign
c) Taxation of passive income corporations, Regular Corporate Income Tax
d) Taxation of capital gains (RCIT) is imposed on taxable income. For non-
e) Tax on proprietary educational resident foreign corporations, RCIT is imposed
institutions and hospitals on its gross income.
f) Tax on government-owned or controlled 2. When applicable, MCIT is imposed on the gross
corporations, agencies, or instrumentalities income of domestic and resident foreign
--------------------------------------------------------------- corporations.
Note: I will no longer discuss Items (b) to (e). We already Q: What is the regular corporate income tax
discussed those. Just refer to the previous discussions. (RCIT) imposed on corporations?
Lets focus instead on Item (a) so we can discuss the
normal corporate income tax rate and the minimum 101
The rate of RCIT imposed on corporations is 30%.
corporate income tax (MCIT).
2. Different rates of tax apply on certain passive (d) Corporations exempt from MCIT
incomes. (e) Applicability of the MCIT where a
corporation is governed both under the
For nonresident foreign corporations: regular tax system and a special income
tax system
1. The rate is imposed on gross income from all
sources within the Philippines. ---------------------------------------------------------------
2. The gross income includes those income
sourced from certain passive incomes including Section 27(E) and Section 28(A)(2), Tax
capital gains. Code
3. However, capital gains from sales of shares of
stock not traded in the stock exchange are, not
included in the gross income as well as interest Q: What is the minimum corporate income
from foreign loans and intercorporate dividends tax (MICT?)
which are subject to final tax rates.
A minimum corporate income tax of 2% of gross
Q: May the President allow domestic and income shall be imposed on a domestic
resident foreign corporations the option to corporation and resident foreign corporation
be taxed on their gross income? beginning on the fourth taxable year immediately
following the year in which such corporation
Yes. As provided under Section 27(A)(1) and commenced its business operations when:
Section 28(A)(1), the President upon
recommendation of the Secretary of Finance may 1. the MCIT is greater than the RCIT for the
allow domestic and resident foreign corporations the taxable year.
option to be taxed at 15% of gross income after the 2. such operation has zero or negative taxable
following conditions have been satisfied: income
1. a tax effort ratio of 20% of the GNP (see Section 27(E), Section 28(A)(2), Tax Code
2. a ratio of 40% of income tax collection to and RR 9-98 [August 5, 1998], as amended by RR
total tax revenues 12-2007 [October 10, 2007])
3. a VAT tax effort of 4% of GNP
4. a 0.9% ratio of Consolidated Public Sector Q: Which corporate taxpayers can be
Financial Position (CPSFP) to GNP subject to MCIT?
Q: What is the purpose of MCIT? tax cannot cover MCIT since the basis for the first is
the annual net taxable income; while the basis for
As held in the case of CHAMBER OF REAL ESTATE the second is gross. Thus, MCIT is included in all
AND BUILDERS ASSOCIATION, INC. V. ROMULO [MARCH other taxes from which PAL is exempted.
9, 2010]), the primary purpose of any legitimate
business is to earn a profit. Continued and repeated Q: For purposes of MCIT, what is gross
losses after operations of a corporation or consistent income?
reports of minimal net income render its financial
statements and its tax payments suspect. For sure, As provided in RR 9-98 [August 5, 1998], as
certain tax avoidance schemes resorted to by amended by RR 12-2007 [October 10, 2007]:
corporations are allowed in our jurisdiction. The
MCIT serves to put a cap on such tax shelters. As a For purposes of MCIT, the term "gross income"
tax on gross income, it prevents tax evasion and means gross sales less sales returns, discounts, and
minimizes tax avoidance schemes achieved through allowances and cost of goods sold, in case of sale of
sophisticated and artful manipulations of deductions goods, or gross revenue less sales returns,
and other stratagems. Since the tax base was discounts, allowances and cost of services/direct
broader, the tax rate was lowered. cost, in case of sale of services.
Q: Is MCIT a tax on capital and an additional Note: Cost of goods sold shall include all business
tax imposition? expenses directly incurred to produce the merchandise to
bring them to their present location and use while cost of
services shall mean all direct costs and expenses
The Supreme Court in CHAMBER OF REAL ESTATE necessarily incurred to provide the services required by
AND BUILDERS ASSOCIATION, INC. V. ROMULO [MARCH the customs and clients.
102
Q: What is the difference between RCIT and Q: What if apart from the income from core
MCIT? business activities, other items of gross
income are realized or earned by the
The tax base of RCIT is taxable income while the tax
corporation, are these items included as
base of MCIT is gross income.
part of gross income?
In COMMISSIONER VS. PAL [JULY 7, 2009], PAL under
PD 1590 (its franchise) was liable only for basic Yes. If apart from deriving income from these core
corporate income tax or franchise tax, whichever is business activities there are other items of gross
lower and this is in lieu of all other taxes, except real income realized or earned by the taxpayer during
property. The CIR contends that PAL is subject to the taxable period which are subject to the normal
MCIT while it was the contention of PAL that the corporate income tax, the same items must be
MCIT was included in the in lieu of all other taxes
provision. The Supreme Court noted there is a
distinction between taxable income, which is the
basis for basic corporate income tax; and gross _________________________________________
income, which is the basis for the MCIT under
102
Section 27(E). The two terms have their respective This only shows that deductions are not taken into account in
technical meanings, and cannot be used MCIT.
interchangeably. Hence, the basic corporate income
included as part of the taxpayer's gross income for Yes, the Secretary of Finance can suspend its
103
computing MCIT. imposition on any corporation which suffers losses
on account of
Q: Explain the carrying forward of excess
MCIT against normal income tax. Prolonged labor Defined as losses arising from a
dispute strike staged by the employees
Any excess MCIT against the normal income tax is which lasted for more than six
creditable within the next three (3) years from (6) months within a taxable
payment thereof. For the carry-over to apply, the period and which has caused
normal tax should be higher than the MCIT. To the temporary shutdown of
illustrate: business operations.
_________________________________________ ---------------------------------------------------------------
14. Taxation of resident foreign corporations
103
This means that the term "gross income" will also include all a) General rule
items of gross income enumerated under Section 32(A) of the Tax b) With respect to their income from
Code, as amended, except income exempt from income tax and
income subject to final withholding tax sources within the Philippines
104
105
This is the tax to be paid because MCIT > RCIT c) Minimum corporate income tax
This Is the tax to be paid because MICT < RCIT
d) Tax on certain income
Exclude:
1. "X" Foreign Corp. Tax Liability with no Q: Is it required that the foreign country
preferential rates must give a deemed paid tax credit for the
dividend tax waived by the Philippines
"X" Foreign Corporation income 400 making applicable the preferred dividend tax
109
Foreign Tax rate (50%) 200 rate of 15%?
110
RP Tax Rate (30%) 120
Foreign Tax Credit 120 As ruled in CIR V. PROCTER & GAMBLE PHILIPPINES
111
"X" tax payable to Foreign 80 [DECEMBER 2, 1999], the Tax Code does not require
"X" tax payable to RP 120 that the foreign countrys tax laws deemed the
parent-corporation to have paid the dividend tax
Here, the total tax payable of the foreign corporation waived by the Philippines. The Code only requires
is 200. that the foreign country shall allow the corporation a
deemed paid tax credit in an amount equivalent to
2. "X" Foreign Corp. Tax Liability with Preferential the percentage points waived by the Philippines.
Rate and without Tax Sparing
Q: When does a non-resident foreign
"X" Foreign Corporation income 400 corporation become entitled to the 15%
Foreign Tax rate (50%) 200
FWT?
RP Tax Rate (15%) 60
Foreign Tax Credit 60
In INTERPUBLIC GROUP OF COMPANIES, INC. VS.
"X" tax payable to Foreign 140
COMMISSIONER OF INTERNAL REVENUE [CTA CASE
"X" tax payable to RP 60
NO. 7796 DATED FEBRUARY 21, 2011], a US
Corporation, who owns 30% of the total and
Here, the total tax payable of the foreign corporation
outstanding voting capital stock of a Philippine
is still the same at 200.
advertising company filed a claim for the refund or
issuance of a TCC for overpaid FWT on dividends
3. "X" Foreign Corp. Tax Liability with Preferential
withheld and remitted by the Philippine company. In
Rate and with Tax Sparing
the administrative claim, the US corporation alleged
that, as a non-resident foreign corporation, it may
"X" Foreign Corporation income 400
avail of the preferential FWT rate of 15% on cash
Foreign Tax rate (50%) 200
dividends received from a domestic corporation
RP Tax Rate (15%) 60
112 during the taxable year 2006. The CIR, in response,
Foreign Tax Credit 120
raised the question of whether the US corporation is
"X" tax payable to Foreign 80
entitled to the FWT at the rate of 15% or the rate of
"X" tax payable to RP 60
20% in accordance with the RP-US Tax Treaty.
_________________________________________
108
The CTA, applying the ruling in CIR V. PROCTER &
The example provided in the case of CIR v. Procter & Gamble GAMBLE PHILIPPINES [DECEMBER 2, 1999], concluded
uses the old rates. This example modifies the example provided
in the case and uses the current rates effective January 1, 2009. that if the country of domicile of the recipient
Note that the foreign tax rate and the foreign corporation income corporation allows a credit against the tax imposable
113
are hypothetical. by it an amount equivalent to 20% of the
109
Income (400) x Foreign Tax Rate (50%) = 200
110 dividends remitted from a Philippine domestic
Income (400) x RP Tax Rate (30%) = 120
111
[Income (400) x Foreign Tax Rate (50%)] Foreign Tax Credit corporation to corporations domiciled therein, the
(120) = 80
112
The additional 60 will be considered as tax deemed paid or _________________________________________
also known as the phantom tax. It is the foreign jurisdiction that
113
will allow the deemed paid tax credit. Now, 15% effective January 1, 2009.
benefit which is more advantageous accorded to the Philippines as those allowed to their German
one country demandable. counterparts. Further, the RP-Germany Tax Treaty
allows for crediting against German income and
In ITAD RULING 102-02 [M AY 28, 2002], Energizer corporate tax of 20% of the gross amount of
Philippines claims that its royalty payments to royalties paid under the law of the Philippines. On
Eveready Battery are subject to the preferential tax the other hand, the RP-US Tax Treaty does not
rate of 15% pursuant to the MFN clause of the RP- provide for the similar crediting of 20% of the gross
US Tax Treaty in relation to the RP-Netherlands Tax amount of royalties paid. The similarity in the
Treaty. The CIR applied the ruling in CIR V. S.C. circumstances of payment of taxes is a condition for
JOHNSON AND SONS, INC. [JUNE 25, 1999], where the the enjoyment of most favored nation treatment
Supreme Court interpreted the MFN clause, or the precisely to underscore the need for equality of
phrase paid under similar circumstances as treatment. since the RP-US Tax Treaty does not
referring to the manner of payment of taxes and not give a matching tax credit of 20 percent for the taxes
the subject matter of the tax which is royalties. The paid to the Philippines on royalties as allowed under
CIR found that the RP-US and RP-Netherland tax the RP-West Germany Tax Treaty, XYZ cannot be
treaties show a similarity on the manner of payment deemed entitled to the 10 percent rate granted
of taxes, that is, the allowable foreign tax credit on under the latter treaty for the reason that there is no
both treaties is the amount actually paid in the payment of taxes on royalties under similar
Philippines. Thus, the royalty payments by Energizer circumstances.
to Eveready are subject to the preferential tax rate of
15% of the gross amount of royalties pursuant to the ---------------------------------------------------------------
"most-favored-nation" provision of the RP-US tax 16. Improperly Accumulated earnings of
treaty in relation to the RP-Netherlands tax. corporations
---------------------------------------------------------------
Q: XYZ Corporation is a domestic
corporation which entered into a license Read Section 29, Tax Code
agreement with ABC Corporation, a non-
resident foreign corporation based in the US Q: What is an improperly accumulated
pursuant to which the former was granted earnings tax?
the right to use trademark, patents and
technology owned by the latter. For such This is the income tax imposed on a corporation if its
use, XYZ paid royalties to ABC and earnings and profits are accumulated (undistributed)
subjected the same to the 25% withholding instead of being divided and distributed to its
tax on royalty payments. XYZ claimed for a stockholders.
refund and argues that the withholding tax
should only be 10% pursuant to the most- An improperly accumulated earnings tax (IAET)
favoured nation clause of the RP-US Tax equal to 10% is imposed for each taxable year on
the improperly accumulated taxable income of each
Treaty in relation to the RP-West Germany
corporation.
Tax Treaty. Is XYZs contention correct?
It is imposed on domestic corporations which are
No. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, classified as closely-held corporations.
116
1999], the Supreme Court held that the concessional
tax rate of 10% provided for in the RP-Germany Tax _________________________________________
Treaty could not apply to taxes imposed upon
royalties in the RP-US Tax Treaty since the two 116
Closely-held corporations are those corporations at least fifty
taxes imposed under the two tax treaties are not percent (50%) in value of the outstanding capital stock or at least
fifty percent (50%) of the total combined voting power of all
paid under similar circumstances and do not contain
classes of stock entitled to vote is owned directly or indirectly by
similar provisions on tax crediting. It is not proved or for not more than twenty (20) individuals. Domestic
that the RP-US Tax Treaty grants similar tax reliefs corporations not falling under the aforesaid definition are,
to residents of the US in respect of the taxes therefore, publicly-held corporations.
imposable upon royalties earned from sources within
Q: Define improperly accumulated taxable As a general rule, the IAET shall apply to every
income. corporation formed or availed for the purpose of
avoiding the income tax with respect to its
The term improperly accumulated taxable income shareholders or the shareholders of any other
means taxable income adjusted by: corporation, by permitting earnings and profits
accumulate instead of being divided or distributed.
1. Income exempt from tax
2. Income excluded from gross income As provided in RR 2-01, this refers to all domestic
3. Income subject to final tax; and corporations which are classified as closely held
4. The amount of net operating loss carry-over corporations. A closely held corporation are those at
deducted; and least 50% in value of the outstanding capital stock or
5. Reduced by the sum of: at least 50% of the total combined voting power of
a. dividends actually or constructively paid; and all classes of stock is owned directly or indirectly by
b. income tax paid for the taxable year not more than 20 individuals.
c. amount reserved for the reasonable needs of
117 As exceptions, the IAET shall not apply to:
the business
RR 2-01 adds three more instances, namely: Q: What is the Immediacy Test?
1. Investment of substantial earnings in The Immediacy Test is used to determine the
unrelated business or in stock or securities reasonable needs of business in order to justify an
of an unrelated business accumulation of earnings. Under this test, the term
2. Investment in bonds and other long term "reasonable needs of the business" are hereby
securities construed to mean the immediate needs of the
3. Accumulation of earnings in excess of 100% business, including reasonably anticipated needs.
of paid up capital The corporation should be able to prove an
immediate need for the accumulation of the earnings
and profits, or the direct correlation of anticipated
In CIR v. TUASON [M AY 15, 1989], the CIR assessed needs to such accumulation of profits. Otherwise,
Tuason, Inc. for IAET. The CIR presumed that when such accumulation would be deemed to be not for
Tuason, Inc. accumulated profits, the purpose was the reasonable needs of the business, and the
to avoid the income tax on its shareholders on the penalty tax would apply.
finding that it was a mere holding or investment
company. Tuason contended it was for the purpose In M ANILA WINE MERCHANTS V. CIR [FEBRUARY 20,
of expanding their business as a real estate broker. 1984], Manila Wine Merchants (MWM) invested in
The Supreme Court ruled that Tuason was liable for several companies and bought shares in Wack
IAET. Tuason was a mere holding company as it Wack Golf and Country Club and likewise acquired
was not involved itself in the development of the US Treasury Bills. CIR found that MWM had
subdivisions but merely subdivided its own lots and unreasonably accumulated a surplus. On appeal,
sold them for bigger profits. It derived its income the CTA ruled that the purchase of shares were
from interest, dividends, and rental from the sale of harmless. However, the CTA also ruled that the
realty. The touchstone of liability is the purpose purchase of US Treasury Bills was in no way related
behind the accumulation of the income and not the to the business of importing and selling wines and
consequences of the accumulation. The company's ordered MWM to pay IAET on the said treasury bills.
failure to distribute dividends to its stockholders was One of the contentions of MWM was that it will be
clearly for reasons other than the reasonable needs used to aid its importations The Supreme Court
of the business. ruled against MWM. It noted that the bonds were
bought in 1951 and until 1961; it was never used to
Q: What is meant by reasonable needs? aid MWMs importations. To justify an accumulation
of earnings and profits for the reasonably anticipated
Reasonable needs means the immediate needs of future needs, such accumulation must be used
the business. Examples of what can be considered within a reasonable time after the close of the
reasonable needs include: taxable year.
1. Allowance for the increase of accumulated In CYNAMID V. CA [JANUARY 20, 2000], Cynamid
earnings up to 100% of the paid-up capital argued that the increase of working capital by a
2. Earnings reserved for building, plant or corporation justifies accumulating income. It invoked
equipment acquisitions the Bardahl Formula which allowed retention, as
working capital reserve, sufficient amounts of liquid
assets to carry the company though one operating
cycle and pay all of its current liabilities and any non-resident foreign corporation. Abbot-
extraordinary expenses reasonably anticipated. The Phils claims that by virtue of this, it is
Supreme Court ruled that, as stressed by American exempt from the IAET. Is this contention
authorities, the formula is used only for correct?
administrative convenience and not a precise rule.
The Court found that in companies where the Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR
formula was applied, they had operating cycles ruled that Abbot-Phils was exempt from IAET. Since
shorten than that of Cynamid. The ratio of current Abbott-Phils. is a wholly-owned subsidiary of Abbott-
assets to current liabilities should be used to US, such shares will be considered as being owned
determine the sufficiency of working capital which proportionately by the Abbott-US shareholders. The
ideally should be 2:1. Cyanamids ratio is 2.21:1 ownership of a domestic corporation for purposes of
and, thus, there was no need to infuse working determining whether it is a closely held corporation
capital. or a publicly held corporation is ultimately traced to
the individual shareholders of the parent company.
Q: In determining if profits are reasonably Thus, where at least 50% of the outstanding capital
accumulated for business needs, the stock or at least 50% of the total combined voting
intention of the taxpayer is reckoned at what power of all classes of stock entitled to vote in a
time? corporation is owned directly or indirectly by at least
21 or more individuals, the corporation is considered
It is reckoned at the time of accumulation. In M ANILA publicly-held corporation. As of the year-end 2000,
WINE MERCHANTS V. CIR [FEBRUARY 20, 1984], one Abbott-US had 101,272 shareholders holding a
of the contentions of MWM was that it held on to combined 1,545,934,133 shares of common stock
said bonds for several years to wait for 60% of its and the twenty largest shareholders of Abbott-US as
stock to be owned by Filipinos so it can purchase its of September 30, 2001 own an aggregate of 30.1
own lot and building. The Supreme Court stated that percent of Abbott-US' issued and outstanding
to determine if profits are reasonably accumulated shares. Thus, Abbot-Phils is a publicly-held
for business needs, the controlling intention is that corporation exempt from IAET.
manifested at the time of accumulation and not later
ones. The second reason given by MWM was too ---------------------------------------------------------------
indefinite and was a mere afterthought. 17. Exemption from tax on corporations
---------------------------------------------------------------
Q: Are there ways by which to avoid liability
from IAET? Note: I have already discussed this. See exempt
corporations.
Yes, when the accumulation is justified by
reasonable needs of the business such as: ---------------------------------------------------------------
18. Taxation of partnerships
1. Accumulation up to 100% of the paid-up capital
---------------------------------------------------------------
2. For definite corporate expansion projects or
programs
Note: We already discussed this. To reiterate, all
3. For buildings, plants or equipment acquisitions partnerships si subject to income tax in the same manner
4. For compliance with a loan covenant or pre- and at the same rate as a corporation except:
existing obligation under a legitimate business a. GPP
agreement b. Joint venture of consortium formed for the
5. When there is a legal prohibition for its purpose of:
distribution i. Undertaking construction projects
6. In the case of Philippine subsidiaries of foreign ii. Engaging in petroleum, coal, geothermal
corporations, undistributed earnings intended or and other energy operations pursuant to
reserved for investments within the Philippines an operating or consortium agreement
under a service contract with the
government.
Q: Abbot-Phils, a domestic corporation, is a
wholly owned subsidiary of Abbot-US, a
Note: I already discussed GPPs. Just remember that The withholding agent is the one who has control,
these three points. First, the GPP as an entity is not liable custody, or receipt of the funds that is subject to
for income tax. However, the persons engaging in income tax and to be withheld and remitted to the
business as partners in a GPP shall be liable for income BIR. The withholding agent holds the amount
tax only in their separate and individual capacities for their
respective distributive share in the net income of the GPP.
withheld from the income of another person in trust
Second, the net income of the GPP shall be computed in for the government until paid.
the same manner as a corporation. Each partner shall
report as gross income his distributive share, actually or The duty to withhold is different from the duty to pay
constructively received, in the net income of the income tax. The obligation to withhold is imposed
partnership. Third, GPPs may claim OSD. upon the buyer-payor of income but the burden of
tax is really upon the seller-income earner.
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20. Withholding tax The obligation to withhold is compulsory as it makes
a) Concepts such withholding agent personally liable for payment
b) Kinds of the tax. Such liability of the withholding agent is
c) Withholding of VAT direct and independent from the liability of the
income recipient.
d) Filing of return and payment of taxes
withheld
Q: Who are required by law to withhold on
e) Final withholding tax at source
income payments?
f) Creditable withholding tax
g) Timing of withholding 1. Agents or employees of withholding agents
--------------------------------------------------------------- 2. Persons having control of the payment and
claiming the expense
Read Section 57 to 58 Tax Code 3. Payor having control of the payment where
payment is made through brokers
---------------------------------------------------------------
a) Concepts Q: When does the obligation to withhold
--------------------------------------------------------------- arise?
events have occurred that fix the taxpayers right to 1. The claim must be filed with the BIR within
receive the income and the amount can be the two-year period from the date of
determined with reasonable accuracy. Such method payment of the tax
is allowed by law in reporting incomes. 2. It must be shown on the return that the
income received was declared as part of the
Q: May a withholding agent file a claim for gross income
tax refund? 3. The fact of withholding must be established
by a copy of statement duly issued by the
Yes. Generally, the person entitled to claim a tax payor to the payee showing the amount paid
refund is the taxpayer. However, if the taxpayer and the amount of the tax withheld
does not file the claim, the withholding agent may
file the same. (see CIR V. MIRANT [JUNE 15, 2011])
In CIR V. SMART COMMUNICATIONS [AUGUST 25,
2010], it was submitted that rule allowing the ---------------------------------------------------------------
withholding agent to file the claim is applicable only b) Kinds
when the withholding agent and the taxpayer are (i) Withholding of final tax on certain
related parties. The Supreme Court disagreed and incomes
stated that such relationship is not required. A (ii) Withholding of creditable tax at source
withholding agent has a legal right to file a claim for
---------------------------------------------------------------
refund. First, he is considered a taxpayer under the
Tax Code as he is personally liable for the Q: What are the two kinds of withholding
withholding tax as well as for deficiency
tax?
assessments, surcharges, and penalties, should the
amount withheld be finally found to be less than the
1. Final withholding tax (FWT)
amount that should have been withheld. Second, as
2. Creditable Withholding Tax (CWT)
an agent of the taxpayer, his authority to file the
income tax return and remit the tax withheld to the Q: Differentiate final withholding tax (FWT)
government includes the authority to file a claim for
from creditable withholding tax (CWT).
refund and to bring an action for recovery of such
claim.
The differences are as follows:
Q: Is the withholding agent who filed the FWT CWT
claim for tax refund obliged to remit the
same to the taxpayer? The amount of income Taxes withheld on
tax withheld by the certain income payments
Yes. The right of the withholding agent to claim a withholding agent is are intended to equal or
refund of erroneously or illegally withheld taxes constituted as a full and at least approximate the
comes with the responsibility to return the same to final payment of the tax due of the payee on
the taxpayer.In CIR V. SMART COMMUNICATIONS income tax due from the said income.
[AUGUST 25, 2010], the Supreme Court ruled that payee on the said
while the withholding agent has the right to recover income.
the taxes erroneously or illegally collected, he
nevertheless has the obligation to remit the same;
otherwise, he would be unjustly enriching himself at The liability for payment Payee of income is
the expense of the principal taxpayer from whom the of the tax rests primarily required to report the
taxes were withheld, and from whom he derives his on the payor as a income and/or pay the
legal right to file a claim for refund. withholding agent. difference between the
tax withheld and the tax
Q: What are the requisites to be complied due on the income. The
with in a claim for refund of unutilized payee also has the right
withholding tax? to ask for a refund if the
tax withheld is more than
Q: What are the other obligations of the In RMC 39-2012 [August 3, 2012], the CIR
employer with respect to the withholding of answered this question in the affirmative. Persons
tax on wages? having control of the payment of wages or salaries
are authorized to deduct and withhold upon such
1. Every employer shall furnish to each such wages or salaries the withholding tax due thereon. In
employee a written statement confirming wages this case, the garnishees are the persons owning
paid by the employer during the calendar year debts due to the employer or in possession or
and the amount of tax deducted and withheld control of credits to which the employer are entitled.
Accordingly, they are in control of the payment of
2. Every employer shall submit to the CIR an backwages, allowances and benefits. Thus, in order
annual information return containing a list of to ensure the collection of the appropriate
employees, the total amount of compensation withholding taxes on wages, garnishees of a
income of each employee, the total amount of judgment award in a labor dispute are constituted as
taxes, accompanied by copies of the written withholding agents with the duty of deducting the
statements, and other information as may be corresponding withholding tax on wages due
deemed necessary. thereon in an amount equivalent to five percent (5%)
of the portion of the judgment award representing
the taxable backwages, allowances and benefits.
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Minimum wage earners are exempt from income tax.
The three types of creditable withholding taxes are: Thank you for using my reviewer. Again, if you
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