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C.

CORPORATE INCOME TAXATION

Corporate Income Taxation


1. Definition – Sec. 22(B) of the NIRC
(B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General
professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.

2. Partnerships taxed as a corporation


i. Joint Ventures engaged in construction projects
1. Secs. 2 and 3 of RR No. 10-12 dated June 1, 2012
Section 2. BACKGROUND. Pursuant to Section 22(B) of the NIRC of 1997, as amended, the term
‘corporation’ shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the Government.
The tax exemption of joint ventures formed for the purpose of construction projects was pursuant to
Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors in achieving competitiveness
with foreign contractors by pooling their resources in undertaking big construction projects.
Section 3. JOINT VENTURES NOT TAXABLE AS CORPORATIONS. A joint venture or
consortium formed for the purpose of undertaking construction projects not considered as corporation under Sec
22 of the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that is, licensed as
general contractor by the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI)

Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if
the member foreign contractor is covered by a special license as contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); and the construction
project is certified by the appropriate Tendering Agency (government office) that the project is a foreign
financed/ internationally-funded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine Government and the foreign / international
financing institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise
known as Contractor’s License Law.
Absent any one the aforesaid requirements, the joint venture or consortium formed for the purpose of
undertaking construction projects shall be considered as taxable corporations.
In addition, the tax-exempt joint venture or consortium as herein defined shall not include those who
are mere suppliers of goods, services or capital to a construction project.
The member to a Joint Venture not taxable as corporation shall each be responsible in reporting and
paying appropriate income taxes on their respective share to the joint ventures profit.

CIR vs. Batangas Transportation Co., GR No. L-9692 dated January 6, 1958 (take note of the discussion of the Evangelista Case)
Ona vs. CIR, GR No. L-19342 dated May 25, 1972
Facts:
Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and her five children. A civil case was instituted for
the settlement of her state, in which Oña was appointed administrator and later on the guardian of the three heirs who were
still minors when the project for partition was approved. This shows that the heirs have undivided ½ interest in 10 parcels
of land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide the properties and they
remained under the management of Oña who used said properties in business by leasing or selling them and investing the
income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners’
properties and investments gradually increased. Petitioners returned for income tax purposes their shares in the net income
but they did not actually receive their shares because this left with Oña who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to the
corporate income tax, particularly for years 1955 and 1956. Petitioners asked for reconsideration, which was denied hence
this petition for review from CTA’s decision.

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

Held:
Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition, the heirs allowed their properties to remain under the management of Oña
and let him use their shares as part of the common fund for their ventures, even as they paid corresponding income taxes on
their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership
the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to
produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate
proceeding. The reason is simple. From the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to
be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document
or instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership is formed.

For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships —

The term “partnership” includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by
means of which any business, financial operation, or venture is carried on… (8 Merten’s Law of Federal Income Taxation,
p. 562 Note 63; emphasis ours.)

with the exception only of duly registered general copartnerships — within the purview of the term “corporation.” It is,
therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations. Judgment affirmed.

Obillos vs. CIR, GR No. L-68118 dated October 29, 1985


Facts:
In 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan. The next day, he transferred his
rights to his four children for them to build their own residences. The Torrens title would show that they were co-owners of
the two lots. However, the petitioners resold them to Walled City Securities Corporation and Olga Cruz Canda for P313k
or P33k for each of them. They treated the profit as capital gains and paid an income tax of P16,792.00

The CIR requested the petitioners to pay the corporate income tax of their shares, as this entire assessment is based on the
alleged partnership under Article 1767 of the Civil Code; simply because they contributed each to buy the lots, resold them
and divided the profits among them.

But as testified by Obillos, they have no intention to form the partnership and that it was merely incidental since they sold
the said lots due to high demand of construction. Naturally, when they sell them as co-partners, it will result to the share of
profits. Further, their intention was to divide the lots for residential purposes.

Issue:
Was there a partnership, hence, they are subject to corporate income taxes?

Court Ruling:
Not necessarily. As Article 1769 (3) of the Civil Code provides: the sharing of gross returns does not in itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which
the returns are derived. There must be an unmistakeable intention to form a partnership or joint venture.

In this case, the Commissioner should have investigated if the father paid donor's tax to establish the fact that there was
really no partnership.

Pascual vs. CIR, GR No. 78133 dated October 18, 1988


FACTS:
Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of land. Petitioners
subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding capital gains taxes were paid
by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years. However, the Acting BIR
Commissioner assessed and required Petitioners to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970. Petitioners protested the said assessment asserting that they had availed of tax
amnesties way back in 1974. In a reply, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National
Internal Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.

ISSUE:
Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes of income tax.

RULING:
The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.
By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves (Art. 1767, Civil Code of the Philippines). In
the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to
a common fund, and that they intended to divide the profits among themselves. The sharing of returns does not in itself
establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual
partners, and the freedom of each party to transfer or assign the whole property. Hence, there is no adequate basis to
support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they
purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross
profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the
circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate
income tax, as the respondent commissioner proposes.

AFISCO Insurance Corporation vs. CA, GR No. 112675 dated January 25, 1999
DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax purposes – Under the old internal revenue
code, “A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, no matter how created or organized, xxx.”
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as
unregistered partnerships and associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation – In the case at bar,
petitioners-insurance companies formed a Pool Agreement, or an association that would handle all the insurance businesses
covered under their quota-share reinsurance treaty and surplus reinsurance treaty with Munich is considered a partnership
or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same person twice by the same
jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince from the individual
corporate entities of the ceding companies. The tax on its income is obviously different from the tax on the dividends
received by the companies. There is no double taxation.

FACTS:
The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for machines. The
petitioners in 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation. The reinsurance
treaties required petitioners to form a pool, which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of Organization
Exempt from Income Tax” for 1975. On the basis of this, the CIR assessed a deficiency of P1,843,273.60, and withholding
taxes in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a corporation, and that the latter’s
collection of premiums on behalf of its members, the ceding companies, was taxable income.

ISSUE/S:
Whether or not the pool is taxable as a corporation.

HELD:
Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and separately,” and that their liability
was limited to the extent of their allocated share in the original risks thus reinsured. Hence, the pool did not act or earn
income as a reinsurer. Its role was limited to its principal function of “allocating and distributing the risk(s) arising from
the original insurance among the signatories to the treaty or the members of the pool based on their ability to absorb the
risk(s) ceded[;] as well as the performance of incidental functions, such as records, maintenance, collection and custody of
funds, etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable
net income received during each taxable year from all sources by every corporation organized in, or existing under the laws
of the Philippines, no matter how created or organized, but not including duly registered general co-partnership (compañias
colectivas), general professional partnerships, private educational institutions, and building and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such as
unregistered partnerships and associations. Interestingly, the NIRC’s inclusion of such entities in the tax on corporations
was made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

“SEC. 27. Rates of Income Tax on Domestic Corporations. --


(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”
“SEC. 22. -- Definition. -- When used in this Title:
xxx xxx xxx
(B) The term ‘corporation’ shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service
contract without the Government. ‘General professional partnerships’ are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or
business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual members.
Furthermore, Pool Agreement or an association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich may be considered a partnership because it contains
the following elements: (1) The pool has a common fund, consisting of money and other valuables that are deposited in the
name and credit of the pool. This common fund pays for the administration and operation expenses of the pool. (2) The
pool functions through an executive board, which resembles the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) While, the pool itself is not a reinsurer and does not issue any policies;
its work is indispensable, beneficial and economically useful to the business of the ceding companies and Munich, because
without it they would not have received their premiums pursuant to the agreement with Munich. Profit motive or business
is, therefore, the primordial reason for the pool’s formation.

ii. Income of partners in a regular partnership - Sec. 73(D)


(D) Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a
partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same
taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.