TAXATION LAW REVIEW

ATTY. CAPUNO
2019-2020 (2ndsem)

Section 21 of the Tax Code enumerates the internal revenue taxes. Do you still remember what are
these? These are Income Tax, Estate Tax, Value Added Tax, Donors Tax, Excise tax, Documentary stamp
tax, and such other taxes as may be imposed by the BIR. So, only those taxes enumerated under Section
21 (S21) are considered internal revenue taxes( IRT). So all taxes which are not included in the
enumeration are not internal revenue taxes.

So local taxes, for example: real property taxes, and customs duties are not national internal revenue
taxes and these are not collectible by the BIR. So, if you’re not in the enumeration, the BIR cannot
collect from you. Other agencies, however, may collect from you. For example, customs duties, you will
pay to the Bureau of Customs (BOC). If its local taxes or real property taxes you will not pay to the BIR
but to the LGU. In the case of Hermelando Mandanas v Executive Secretary, G.R. no 199802 July 03
2018. In this case, the SC differentiates what is IRT and National Tax (NT) . When you say NT, these are
all tax collected by the national government (NG). When you say NG, it is any agency which collects tax
for the NG such as BIR and BOC.

But if we talk about IRT, these are taxes enumerated under S21 and only which BIR can collect. So all
IRT are NT because they are collected by the BIR which is part of the natl.govt. But not all NT are NIRT.
For ex: customs duties, this is NT, collected by BOC pero such is not NIRT because it is not one of those
enumerated under S21. In the Phils. there are three kinds of income tax system and these are global
tax systems(GTS), schedular tax system(STS), and semi-schedular tax system(SSTS) . If you are asked, “
what are the tax systems in the phils? what are the tax treatments in the Phils? or how do you tax an
income? You would answer the 3 systems above. So any questions among the three, you answer the 3.
So how do we differentiate one from the other? When you say GTS, we do not categorize income. All
income are treated as the same and since the income are not categorize they are subject to one kind of
tax. Again, under the GTS, incomes are not classified and categorized but they are group together in
one taxable income. So lahat ng uri ng income mo pinag sama sama molang siya into one kind of taxable
income. And since they are one kind, we will going to use a single or uniform tax rate. And lastly, GTS is
applicable to corporation.

How about STS? if in GTS we do not categorize an income, in STS , we categorize them into different
taxable income and because incomes are classified into different categories, there are different rates
applicable for every income and STS is usually applicable to individuals. So, in GTS there is only one kind
of income but are being merged, in STS they are being categorized, ginu grupo natin sila. Ex. passive
income, they are considered one group; active income, they are also considered one group. In STS there
are different rates which are applicable, in GTS only one rate. In GTS, it is usually applicable to
corporation, whereas in STS it is applicable to an individual. In the Philippines we are adapting two
(combination) systems GTS and STS.

In the Phil., we are using a comprehensive criteria in the imposition of income tax. The criteria will be :
1. Citizenship principle 2. Residency principle and 3. Source principle.
In no. 1, we look at the citizenship of tax payer. A taxpayer can be classified as citizens of the Phils. or a
non-citizen of the Phil. ( we call them aliens). So, a citizen of the Phil. residing in the Phil is taxable of its
income within or without. If you’re an alien, you are only taxable of your income derived within the Phil .

In no 2, all income, derived from sources within the Phil, by a person residing in the Phil,whether
citizen or not, are taxable or that is subject to income tax.

In no. 3, all income derived from sources within the Phil. are subject to income tax.

An IT may only be imposed if there is an income; and an income must be differentiated to a capital. We
do not tax a capital we only tax an income. We look at the case of Vicente Madrigal and James Raferty,
a land mark case that distinguished a capital from an income. Capital is an income while income is a flow
of a fund. Capital is a tree while income is the fruit of the tree. In S32 of NIRC it deals about GI and in (b)
it talks about exclusion. One of the reasons why there are exclusions in S32 (b) because the items
enumerated or some items are return of capital it is not an income thus not subject to tax.

When is an income considered within and when it is considered without? We go to situs of taxation in
S42 (a) NIRC, the first item here is interest. There are two kinds of interest :

1. Interest from bank deposits

2. Interest from loans or interest bearing obligations, such as bonds, promisory notes or other debt
instruments.

So, to determine whether an income is w/n or w/o, let’s first begin with no.1. Here you look at the
location of the bank. If the bank is located within the Phil., then the interest of that bank deposit is an
income w/n the Phils. Ex. If you have a bank deposit in Ayala, and it gained interests, then that income
is an interest w/n the Phil. bec the bank is located w/n the Phil. If you have BD at BPI branch in
Hongkong then that interest is an income from w/o bec. the bank is located outside the Phils.

Interest bearing obligation (utang). To determine if its w/n or w/o ,we look at the residence of the
obligor/debtor. If the residence of the debtor is w/n the Phils then the interest income of that loan is
within the Phils. If he does not reside w/n the Phil., then the interest income from that loan is not w/n
the Phils. We do not look at the place where the contract is executed; we do not look at the citizenship
of the debtor, nor at the place of payment of the obligation; and, we do not even consider what is the
currency that will be used to pay for the debt. We look only at the residence of the debtor.

Next is dividend. This is the declaration of dividend of a corporation. The shareholder is the income
earner of a stock dividend since he is the one who accepts dividend. If the dividend is declared by a
domestic corporation, then 100 % of that dividend you recieved is an income from w/n the Phils.

For dividends declared by a foreign corporation (FC means RFC or NRFC), one must inquire into the
gross income of that corporation for the last three yeats prior to the declaration of dividend. We look at
the income of the corporation for the last three years prior to the declaration of dividends. If at least
5O % of the gross income of the FC is derived from Phil. source, then, the dividend declared is
considered as an income w/n the Phils. but only up to the extent of the income earned w/n Phils. Ex.,
the GI of fc is 10M, having been derived from the Phil. and 4m from w/o. So, more than 50 % of its GI
is derived w/n the Phil. We have said that if more than 50 % of gi is derived w/n, we shall look at the
proportion of the income from w/n the Phil. compared to w/o. This GI is composed of GI in the Phil. and
GI outside Phl; assuming, GI w/n is 6m and Gi w/o is 4m the, total is 10m. How many percent is Ph?
Ph is 60 %. What is the threshold we are looking into? 50 % . If more than 50 % of the income is
from the Phil. then the dividend it declared, assuming 1m, this 1 m dividend declared is considered as
an income w/n the Phils only up to the extent of the percentage of the Phil. income. So out of 1M only
60%( Php 600,000.00) is considered as an income w/n the PH and this is only the dividend income that is
considered an income w/n th Ph amounting to Php 600,000.00. So how about the 400 k dividend? This
dividend is considered as an income from w/o. Assuming the Ph GI is only 3m and the GI w/o is 7m
with the total of 10 M. So, 30 % is the GI w/n the Ph w/c is below the threshold of 50 %; so, the full 1m
declared as dividend is an income from w/o. In other words if the GI declared isbelow the 50 %
threshold, then all the income dividend declared is from w/o. We only get the proportion of the income
of the dividend declared if atleast 50% of the GI is w/n the Phl.source.

With respect to services we look at the place(situs) of the service. If the service is performed w/n the ph
then the payment/ compensation for that service rendered is considered as income w/n the Ph.
Payment for services performed outside the ph are considered from w/o. If you are a manager
employed in Singapore as managing company and you stayed in abroad for the whole year and you
received your salary there for the services you have rendered, the compensation you received is an
income from w/o bec the service is rendered outside the PH.

In rentals and royalties, the payment , we look at the place where the property is used.If the property
rented or the property used subject to royalty is located w/n, then the rentals and royalties are income
w/n Ph. If the property is outside the Ph then its is an income from w/o.

In sale of real property we look at the place where the property is situated. If yung lupa na binenta mo
ay nasa Ph then if it gained any profit or income that profit or income is considered an income from w/n
and if it is outside Ph then an income from w/o because the land is located outside the Ph.

In case of personal property we look at the place where it is sold. The gain or income from sale of
personal property is based on the place or country of sale. So if you sell your personal property in the
Ph it is an income from w/n and if it is outside income from w/o. Exception to this is a sale of shares of
stocks of a domestic corporation. In case of sale of stocks of a domestic corporation, regardless of the
place of sale the income is considered an income w/n the Ph.

Now we come to different kinds of income taxes. The TRAIN law added other income taxes. The
following are the different kinds of income taxes :(1)Normal Income Tax (NIT) (2) 8 % income tax (3)
Gross income tax (4)Final Income Tax (5) Regular Corporate Income Tax (6) Minimum Corporate income
tax (7) Improperly Accumulated Earnings Tax (8) Optional Corporate Income Tax.
We have discussed before that the OCIT, which is based on 15 % is not yet applicable even if it is in the
tax code; and even if the requirements are satisfied, it is not yet implemented.

NIT. This is a Tax on citizen and normal individual. Citizen(C), Non-resident Citizen (NRC) and Non-
Resident alien engaged in trade or business w/n the Ph (NRAETB ). We mentioned Citizen, and there are
two kinds of Citizen: RC and NRC. There are also two kinds of resident : RC and RA. And the third group
NRAETB. These 3 groups are subject to NIT. The rate of NIT is 0 % to 35 % (schedular rate) and the tax
base of NIT is taxable income. To determine taxable income, S31 of NIRC says, TI means the pertinent
items of GI less the allowable deductions allowed by special law or by the tax code. So, GI less allowable
deductions is the TI and the TI, multiplied by the tax rate, is equivalent to NIT.

8 % Income tax introduce under TRAIN law. The tax base is the total gross receipts or gross sales, and
non-operating income in excess of Php 250,000.00. But there are instances that the 8 % multiplied by
the GR or GS and other NOI are not sometimes in excess of Php 250, 000.00 and sometimes in excess of
Php 250,000.00. What is the importance of 250 k threshold? Under the train law, the first 250k TI is now
exempt; so, if we are going to use this 8 % IT, shall be the amount in excess of 250k.

GIT. There are only two TPs who are subject to GIT :NRANETB and NRFC. If you are NRANETB, your GIT
is 25 % of your entire GI derived from w/n the PH. But if you are NRFC, your GIT is 30 % of the entire GI
derived from sources w/n the Ph. If you will be asked, “what is the difference between NIT and GIT?”
your answer will be , in GIT, deductions are not allowed whereas in NIT deductions are allowed. In NIT
your tax base is TI which is computed as GI less allowable deductions (AD) to arrive at the TI. But if we
talk about GIT, the rate of 25 % and 30% is multiplied directly on the GI without any allowed deduction.
So if you are NRANETB or NRFC all of your income w/n will be merged- except those which are subject to
Capital gains tax (CGT) and these will be multiplied with 25 % or 30 %.No decuctions allowed.

With respect to FIT, to be subject to fit, your income must be passive income and a passive income is an
in come which is not an active income, meaning to say, you do not exert effort to earn this income,
adyan lang siya, nakapark yung pera mo and yet kumikita. You have a money in a bank then earns an
interest, that is a passive income. You have investment in stocks, and the corporation declares
dividends, is also a passive income. When you win in a sweepstakes or lotto and you received a prize or
award, is also a passive income. In FIT deductions are not allowed.It is like a GIT multiplied by the rate.

This passive income, to be subject to FIT, it must be derived from sources w/n the Ph. So, the two
criteria for the imposition of FIT are : 1. Income is a passive income and 2. the income must be derived
from w/n the Ph source. If one the requirements is not present,the tax that he may pay is NIT.

RCIT , this is the same as NIT and set that tax payer in RCIT is a corporation. Their tax base are taxable
income same with NIT. An individual, the rate of NIT is a range of 0% - 35 %. If it’s corporation a fixed
rate of 30 % (beginning Jan.1, 2009)will apply. RCIT= GI less the Deductions to arrive at the TI multiplied
by the tax rate. Assuming you have a 1 million GI minus 400 k as deductions =600k TI(TAX BASE) x 30% =
180K RCIT.
MCIT, this is 2 % of your GI (TAX BASE). You are liable to pay MCIT 4 years from the commencement of
operation and only when it is higher than the RCIT. So, if we talked about corporations they are liable to
pay, whichever is higher between RCIT and MCIT. Liable are : DC and RFC.

IAET. This is 10 % of IAE of a domestic corporation. Only a DC may be subject to IAET, whereas with
respect to RCIT, dc and rfc are subject to it. NRFC pays GIT. In MCIT those liable are dc and rfc.

What is the difference between GIT and FIT? In GIT, only one rate ( 25 % or 30 % )will be applied to the
entire income, whether it is dividend, interest, rentals, annuities etc. But in FIT, in S24 (B), different
rates are applicable depending on the kind of passive income if you are FIT. In GIT you will merge all
kinds of your income and only one tax rate is applicable either 25 % or 30 %.

S25 (B) NRAINETB w/n the Ph is subject to GIT. Under S25 (B)the source of income which are taxable
are: interest, cash and/ or property dividends, rents, salaries, wages, premiums, annuities,
compensation, renumeration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax equal to 25 % of such income.

Different Kinds of Taxpayers

In general taxpayers are : Individual, corporation, estate, and trust

Individual taxpayers are: RC, NRC, RA, NRAETB, and NRANETB

RC are citizens of the Ph. residing in the Ph. So if there is a citizen went abroad with no intention to
reside there permanently remains to be a RC. And as RC you are taxable on your income from w/n and
from w/o.

S22 e enumerates who are the NRC. Lets see # 3. A citizens of the Ph who works an derives income from
abroad and whose employment thereat(employment abroad requires him to be physically present
abroad most of the time during the taxable year. The BIR defines most of the time during the taxable
year, as an aggregate stay outside the Ph of at least 183 days given in a taxable year. However in BIR
ruling no. 25-2011, to be considered as NRC you must be employed abroad; and, employment abroad
requires you to be physically present most of the time during the taxable year.

Resident Alien (RA) is an individual who is not a citizen of the of the PH but who resides in the Ph or an
alien who is actually present in the PH who MUST NOT be a mere transient or sojourner is a resident of
the Ph. Taxable on the income W/N the PH.

NRAETB. This taxpayer is not a Filipino, you are an alien, you are not residing in the Ph, but you are
engaged in trade or business here in the Ph. Also, a non-resident individual who comes to the PH and
stay here for at least 180 DAYS in a given CALENDAR YEAR, is considered as a Resident alien dong
business in the Ph.If you come to the Ph in the exercise of a profession, then you are also considered as
NRAETB in the PH. TAXABLE only for the income derived w/n the Ph.

NRAENETB. This are aliens, did not come to the Ph, not engaged on trade or business w/n the PH, and
yet they are still earns income.
Corporations maybe classified into DC, RFC, and NRFC. DC, organized under Ph laws just like RC they are
taxable on the income derived w/n and w/o Ph. The definition of corporation includes partnership no
matter how created or organized; and, we have two kinds of partnerships : general professional
partnership, and trade partnership. What is included in the definition of a corporation is a trade
partnership. Corporation by way of the definition does not include GPP.It does not also include join
venture or consortium for the purpose of undertaking construction projects or energy operation-
engaging in petroluem, coal, geothermal or any contract or service agreement with the govt.

Two kinds of Foreign Corporations : RC, RFC, and NRFC. A FC is a corporation organized using foreign
laws, if a FC is doing business here in the Phil, then it is resident FC. If the FC is not doing business here
in the Ph then it is not a RFC or NRFC.

Two kinds of partnership : GPP and Trade Partnership. If domestic corporation declares dividends to
shareholders the tax liability to the dividend (passive income) declaration is a FIT of 10 %. The analogy
is that a TP is the same as a DC . A DC is subject to RCIT a TP is also subject to RCIT because TP is treated
like a corporation.

TAX TREATMENT FOR THE ENTITY ITSELF

TP- treated as a DC subject to 30% RCIT or MCIT whichever is higher. RATIONALE : because TP is treated
like a corporation. Your treatment to a corporation is also your treatment to TP. Liability of the partner
on their share of the partnership’s profits are treated like a dividend since the treatment to it is like a
corporation. If a corporation declares dividends to its stockholder, it is subject to dividend tax. Thus if TP
distributes profits to the partners it also like dividend subject to 10 % FIT. FWT is applicable.

GPP- is a partnership formed for the exercise of a common profession; no part of the income is derived
from the conduct of trade or business. The GPP itself is exempt from tax, but if the GPP declares profit
to the partners, the partners under S26 who received an income have the duty to INCLUDE such income
in their GI and in their separate and individual capacity. They have to declare by themselves separately.
Hence the partner is subject to NIT. They will include such income in their return that’s why in S32
no.11,it says, the partners distributive share in their income in GPP are included in their GI.