--·,,,.: - ...

REVIEWER ON TAXATION
INCOME AND WITHHOLDING TAXES

340
Return of Capital and Deductions
341

Park, Inc. v. Department of Social Welfare

rax credit . Development, 711 SCRA 302 /2013]). and
. d f orn Tax Deduction
Distingu1she r
dit generally refers to an amount that is " abllity Rule
Tax ere , total tax liability." It is an "allowance su~tracted 1rrevoc . .
tly from one s h . ,, aga1n t Oration entitled to a tax credit or refund of the
dir , or "a deduction from w at is owed by a taxpa e s the A corp . . excess
taX itself t Examples of tax credits are withheld taxes Y r to the d uarterly mcome taxes paid has two options: (l) to
·mate q ) r h . , carry
gover~mend. t x and investment tax credits. ' PaYlllents est1 the excess cre?it or (2 to app 1y wr t e ISS~ance of a tax credit
of estimate a •
. to carry over th e
tificate or to claim .a cashhrefund. If the option
over
Taxer edi t should be understood. in relation to otherta
cer ere dit
excess . is exercised, t e same shall be irrevocable for that
One of these is tax deduct10n - defined as a subt . x
concep ts . ,, h . " ract1on tax able per10d.
"from income for tax purposes, or 3:n a~oun t t at is allowed by law
duce income prior to [the] apphcat10n of the tax rate to co I · exercising its option, the corporation must signify in its
tore . . d ,, An 1 of a tax deduct'mpute, nl corporate adjustment return (by marking the option box
e amount of tax which 1s. ue. examp
td' e S . 1on1s annua r ) ·t · ti ·h
th 'd d in the BIR 1orm i s mten on eit er to carry over the
any of the allowable deductions enumera e _m ect10n 34 of the Tax provi e . f d T r ·1·
Code. A tax credit differs from a tax deduct10n. On the one ha d
· 1u d'mg-w h enever applicable-thn 'a excess credit or to claim a re. un . dh o 1acih'
itate tax collection, these
tax credit reduces the tax due, me reme dies are in. the alternative C an t e. c oice
. of one precludes the
income tax that is determined after a~plying the corresponding~ other (Philippine Bank of ommunications v. CIR, 361 Phil.
rates to taxable income. A tax deduct10n, on the other, reduces the 916 /19991).
income that is subject to tax in order to arrive at taxable income. To This is known as the irrevocability rule and is embodied in the
think of the former as the latter is to avoid, if not entirely confuse, last sentence of Section 76 of the Tax Code. The phrase "such option
the issue. A tax credit is used only after the tax has been computed; a shall be considered irrevocable for that taxable period" means that
true deduction, before (CIR v. Central Luzon nru.g Corporation,
the option to carry over the excess tax credits of a particular taxable
G.R. No. 159647, April 15, 2005). year can no longer be revoked.

Bar Question (2016) The rule prevents a taxpayer from claiming twice the excess
quarterly taxes paid: (1) as automatic credit against taxes for the
Congress issued a law allowing a 20% discount on the purchases
taxable quarters of the succeeding years for which no tax credit
of senior citizens from, among others, recreation centers. This 20%
certificate has been issued and (2) as a tax credit either for which
discount can then be used by the sellers as a "tax credit." At the
a tax credit certificate will be issued or which will be claimed for
initiative of the BIR, however, R.A. 9257 was enacted amendmg
cash refund (Systra Philippines, Inc. v. CIR, G.R. No. 176290,
the treatment of the 20% discount as a "tax deduction." Equi~y September 21, 2007).
9257 15
Cinema filed a petition with the RTC claiming that R.A. .
th
u~consti~utional as it forcibly deprives sellers a part of e pnce . Once the option to carry over and apply the excess quarterly
without Just compensation. lllcome tax against income tax due for the taxable years of the
. . ? BrieBY
succeedi t · h 11 b
. ng axable years has been made, such option s a
(b) If you are the Judge, how will you decide the case. consider d · 1· · fi e
h e irrevocable
casrefud ·
for that taxable period and no app ication or
b 11 d
explain your answer.
th erefor. n or issuance of a tax credit certificate shall e a owe
Suggested answer:
(b) I · . . . • Of the /al))• ls/0 dIn Cornrnissioner
· n1. ·1 · ·
of Internal Revenue v. Bank ofthe rr£t ippine
will decide in favor of the Constitutionality eiS 0
The 20%0 discount
· Atann. s, the Court citing the pronounoement in Philam Asset
as well as the tax deduction schem ria I
· 0
clearagedlll
an uent, Inc., ~oints out tha t Section 76 of the NIRC of
• 1997 is
valid exercise of the power of the State (Manila fl{eTTI
nequivocal in providing that the carry-over opt10n, once
 REVIEWER ON TAXATION I NCOME AND WITHHOLDING T
sd Ret u rn of Capi tal and Ded AXJ!:S
uctiona
343

t ructively chosen by a corporate taxpa

•od co mp
rising the succeeding taxable y
act ually or cons
Th Court explains: . "H ence, th e controU- Yer ' b ecolll . . f, ears Se t ·
peri that no application or cash refund or iss~a c ion 76 further
. vocable. e b ·1· l . h ing fa •· ea
"re . f the irreuoca I ity ru e 1s t at the ta c""r fo 5tatefis te shall be allowed therefore referrin.g t hn.ce of a tax cred .
the o~rat1on/once it had already done so, it could no[aYer cho~ ca d" b otatt it
cer11 rising the succee ~ng taxa le years (Aaiaw O.Xable Period
an option; an Consequently, after the taxpayer opts tonger lllake corri_P• pine Corporation v. CIR, G.R '" orld Properti
another ontae. credit to the following taxable period tho carry.over phi 1,p • ao. 171766 J es
its excess x l •d ' e quest"1 2010). , uly 29,
not it actually gets to app Y sa-1 tax credit is . on of
whether or . 1. • . 1rrele
. of the NIRC of 1 997 1s exp 1c1t m stating th 8 t Vant.
Secbon 76
. to carry over has been ma d e , "no app 11cat1on- . for t once the
opt~on ce of a tax credit certificate shall be allowed a~ refund
o(Rrh1ssuab:S Energy Inc. v. CIR, G.R. No. 206362 A erefor•
om , "' [Ph ·z J E , ugust OJ
s, citing Republic v. .1. eam i s. nergy Corp . ,
201
(formerly Mirant [Phils.J Energy Corporation, G~.at~:
188016, January 14, 2015). .

Bar Question (2017)

Vanderful, Inc.'s income tax return for taxable your 2015
showed an overpayment due to excess creditable withholding taxes
in the amount of P750,000. The company opted to carry over th
excess income tax credits as tax cr_edit against its quarterly incom:
tax liabilities for the next succeeding years. For taxable year 2016
the company's income tax return showed an overpayment due~
excess creditable withholding taxes in the amount of Pl , 100,000,
which included the carry-over from year 2015 in the amount of
P750,000 because its operations resulted in a net loss hence, there
was no application for any tax liability. This time, the company
opted and marked the box ''To be refunded" in respect of the total
amount of Pl,100,000.
Vanderful, Inc. now files in the BIR a claim for refund of
unutilized overpayments of Pl, 100,000. Is the claim meritorious?

Suggested answer:
No, but only to the extent of the amount of !'750,000 which was
carried ouer from year 2015. Section 76 of the NIRC of J99 7 clear\Y,
Stotes: Once the option to carry-over and apply the excess quarterh)
. soft e
income tax against income tax due for the taxable quarter b
. · shall e
succeed mg taxable years has been made such optwn . ·
• ' ,nlication
cons idered irrevocable for that taxable period and no aPr ll be
for cash refund or issuance of a tax credit certificate _sha5hall
allowed. the re,or.
t S ection
• 76 expressly states tha t th e ontton
r. the
be considered irrevocable for that taxa ble p eriod referring to
 ! NCUMt,; AN D WITHHOLDING TAXES
Tax Bases and Rates
345
I
. d' .dual. In this connection, it can be st ted
1n iVI • t · a that ·
of an d passive mvestmen mcomes not subject to . capital
gain 8
8
8
f
withholding income tax shall be subject tocartal gains
CHAPTER VIII wdfin
income tax
or global tax system. t e regular

TAX BASES AND RATES

dividuals
:~ .Reform for Acceleration and Inclusion' (TRAIN)
Philippines has adopted the semi-schedular or semi-globa RA !0963 otherwise known as the TaxReformfiorA .
The tem For this reason, each type or group of in 1 . · ' cce1erat1on
Iusion (TRAIN), amended the rates of tax on taxabl .
income tax sys s~t of graduated income tax rates, or norm:~rne and Inc . . . d' 'd l . e income
. dividual c1t1zens, m 1v1 ua resident aliens a d
is subject to oonreate income tax rates, or preferential tax rates Theor of in . d. . d 1 d. ' n non-
minimumcorp . d'f~ b · se reSI
'dent alien 1n 1v1 ua s f~ engage
. m trade or businesS lll . th e
however, applied to 1 1erent tax ases depending
tax rates are, " b ,, . h 0n Philippines, among others, e 1ective _Ja~u_ary 1, 2018. The annual
oup of income. Tax ase 1s t e amount of taxable
t he type or gr taxa ble income not over 250,000
1

.
· 1· d . . md1V1dual citizens , 1·ndiVI'd ua1
of
income upon .mhich
..., the applicable tax rate 1s app 1e to arrive at the
sident aliens, and non-resident ahen individuals engaged int d
income tax due. re Ph'l ' . . ra e
or business in the 1 1ppmes 1s ~?w exempt from income tax. The
The tax bases can be grouped into the following general allowance for personal and additional exemptions for individual
categories: taxpayers under Sections 35 and 79(D) of the NIRC were, however,
repealed by R.A. 10963 (TRAIN).
1. Compensation income, business and professional income,
capital gains, passive income, and other income not
subject to final tax; The Tax Schedule effective January 1, 2018 until December
31, 2022 is as follows:
2. Capital gains subject to final withholding income tax at
Not over P250,000
preferential tax rates; and 0%
3. Passive investment income subject to final withholding Over P250,000 but not over P400,000
20% of the excess over
income tax at preferential tax rates. P250,000
Global tax system. - We follow the global tax system ins~far Over P400,000 but not over PB00,000
P30,000 + 25% of the
as compensation income, business and professional income, capital excess over P400,000
gains, passive incomes, and other income not subject to final tax. Over PBOO,OOO but not over P2,000,000
This means that allowable deductions under Sections 34, 37, _and P130,000 + 30% of the
38 of the Tax Code as well as personal and additional exemptions excess over P800,000
Over P2 000 00
under Section 35 of the Tax Code with respect to individuals, are ' ' O hut not over P8,000,000 P490,000 + 32% of the
deducted from the taxable gross i~come (except capital gains fro~ excess over P2,000,000
sale or exchange of shares of stock of a domestic corporation an~:~ g Over P8,000,000
property, and passive incomes that are subject to final withho 10 P2,410,000 + 35% of the
5
~es). The resulting figure is the net ''taxable income" (i.e. , grosd excess over PB,000,000
0
::~me l~sdallo~able deductions) (Sec. 31, NIRC). It muS t be; : e
allow: b elauctions (whether itemized or optional sta~da:ncome
Y w to be deducted from the gross compenr,;ation
~l\d aJCabJe inco d .
344 et Subsections me efined under Sec. 31, NIRC, other than income suhiect to tax
(B), (C), and (D) of Sec. 24, NIRC.
 REVJEWER ON TAXATIO N INCOME AND WITHHOLDING TAXES
Tax Bases and Rates
347
946

tt ctive January 1, 2023 and onward , VAT-registered taxpayers, regardless of the

The Tas
Schedule eue sis (b) A sales/receipts and other non-operating· in amount of
gross come;
as follows:
0% Non .VAT taxpayers whose gross sales/rece· ts
(c) . . ip and
Not over P250,000 other non-operatmg mcome exceeded the 3,000,000 VAT
t over P400,000 15% of the excess ov threshold;
Over P25 0•000 but no P250,000 er
Taxpayers who are subject to Othei; Percentage Taxes
000 but not over PS00,000 ' P22,500 + 20% of the (d) under Title V of t~e Tax Code, as amended, except those
Over P4 00 ,
excess over P400,000 subject under Sect10n 116 of the same title;
OverP800 ,000 but not over P2,000,000 Pl02,500 + 25% of the
(e) Partners of a <_;ern?al Professional Partnership (GPP)
excess over P800,000 since their distributive share from the GPP is already net
of costs and expenses; and
Over P2 ,000•000 but not over PS,000,000 P402,500 + 30% of the
excess over P2,000,000
(f) Individuals enjoying income tax exemption such as those
Over PS,000,000 P2,202,500 + 35% of the registered under the Baran gay Micro Business Enterprises
excess over PS,000,000 (BMBEs), etc., since taxpayers are not allowed to avail of
l 9•1 flat rate. - The following double or multiple tax exemptions under different laws
.
Optiona 1• h · individuais
1 have
· the unless specifically provided by law. '
• to avail of an eight percent tax
option . on t eir annua gross mcome
from business or practice of profession: Certain individuals are subject to 15% preferential tax._
(a) Purely self-employed individuals . and/or professionals However, there are certain alien individuals employed by regional or
whose gross sales or gross receipts and other non- area headquarters (RHQ), regional operating headquarters (ROHQ),
operating income do not exceed th~ value-added tax offshore banking units, and foreign petroleum service contractors
(VAT) threshold us provided in Section 109(BB) of the and sub-contractors, whose taxable base is their gross compensation
NIRC (now P3 000 000 under R.A. 10963 [TRAI~) _on income without any deduction of their personal and additional
'
their annual taxable' mcome
• · excess Of a250
m r ' 000
. m d lieu
and exemptions. The same tax treatment is accorded to Filipinos employed
of the graduated income tax rates above-prescribe and occupying the same positions as those of aliens employed by
the percentage tax under Section 116 of the NIRC. the RQHs and ROHQs (Sec. 25[CJ, [DJ and {EJ, NIRC). The citizens
(b) Mixed. income earners earnmg. both com pen sation . income
nual ~ot be treated less advantageously than their alien counterparts
and income from business or profession on th e~ a~on if m~he Philippines. However, the President exercised his veto power
gross income from business or practice of proieshsild in : er ~icle VI, Section 27(2) of the 1987 Constitution relative to
· · income does not exceed the VAT thres scribed e entitlement b p ·1· · h ·t· ·
such total 0
as alie Y i 1pmo employees occupying t e same pos1 10n
lieu of the graduated income tax r~tes abov~-r~: NfRC. on thens ~mp~oyed by RHQ or ROHQ 3 to the same tax treatment
and the percentage tax under Section 11 6 0 hall still rnuit·1nationss1income received by such
· aliens
·· employed by these
All compensation income in excess of 250,000j:ed. a companies under R.A. 10963 (TRAIN). · ·
be subject to the graduated rates above-prescr h
OCcup!e President also vetoed the entitlement by Filipino employ~es
. The following individuals are not qualified to avai
Optional 8% fiat income tax rate: 2
·1 oft e
c3ilJ)
lJnits
th
~ same Position as aliens employed by Offshore Banking ·
and Petroleum Service Contractor and Subcontractor6
(a) Purely compensation income earners;

3 - 2018.
•s:·24(C), NIRc.
aSe . 24(DJ, NIRc
2Sec. (C), Rev. Regs. No. 8-2018; Ql6, RMC No. 50-2018, May 11 '
c. 24(E), NIRc:
 REVIEW ER ON TAXATION I NCOME AND WITHHOLDJNO TAXES
348 Tax Bases and Rates
349
t on the gross income received b Tax Code is given only to newly formed .
th same tax treatBmUen and Petroleum Service Contracto~ such 0
21(B)(l) f the ·
. ting corporations corporations
,. an,·1a B anking Corpo .
toliense employed by O thesR.A. 10963 (TRAIN). • s and
a tors under dnot to exi~p No. 77177, May 11, 2005). ration v.
1111 CA-GR . . .
Subcontrac 1 2018, all Filipinos em.ployed b cf/l. t·c corporation that 1s registered with th C
domes
Effective Jan;~ry
'
8 and Petroleum Service Contractors Y
RHQs ROHQs, O ' enJ·oying preferential tax treatment pa·nd
former 1Y . l'lor
! y Development Aut
I h . . . e amp
or1t~ 1s not e~titled to the five percent
Johll n8 . 1 . come tax rate on tts gross income earned and th
Subcontractors J to regular mcome tax rates under Section
2018 are now su b'ect ~m . .~
referen h . normal corporate income tax rate 'on its net ta--bl
:(A){2){a) of the NIRC.s P · ttote pl . N "G.Aae
subJec worldwide sources . roe amat1on o. 420, which w
ineomed by t e President
fromh . of t h e Philippines
. . extended t:se
. and which
Domestic Corporations . .. . . issue rivileges enJoyed by enterpnses registered with the Subic Bay
A d c:it1c . corpora tion is sub1ect to Plu bppme. 1u1.-uu1~ l1tll Ill same P0 rtan
1 Authority (SBMA) unde r R.A. 7227 (otherwise known
( om t' ve J anuary 1, 2009) of its net taxable income from sources th 8 es Developme nt and Conversion Law) to enterprises
MetroP
30% _e ecndi . h0 t the Philippines (Sec. 27/AJ, NIRC), except in the as . e da:ith the other Freeport zones like the Camp John Hay
within a8 wit. ~ educational institution and hos pital which is gistere . . h. h .d h '
case of prohip~he 5 h 11 be subjecL Lu i11cum1:: lttx lit 10% of its taxable VJolated the· 1987 Constitution,d w· h1c prov1
th est. at now law granting
non-profit, w c a I d t d b · taXexemPtion s ha ll be passe wit/ -out h Re concurrence of a majority
income unless i·ts gro85 income from unre ate · d fro or
ra d e , · ustness, of all the members of Congress ,Jo n ay Peoplea Altematiue
other act1V1ty
' • • exceeds 60% of the total gross mcome er1ve m aU Coalition v. Lim, G.R. No. 119775, October 24, 2003). This legal
sources (Sec. 27/BJ, NIRC). ble m was solved when Clark and the other Freeport zones (Poro
.
Point and Camp John Hay) we re d eclared as s pecia l economic zones
.
A domestic corporation is subject to the corpora te income
under the a mendatory laws.
tax for the year, equal to the higher amount betw~ n the regular
corporate income
. tax (RCIT) • computed
. at ~0% nn 1t:R net taxable
However, proprietary edu ca tionaJ institu tions a.nd hospitals
income, and the minimum corporate mcome tax (MCI'I) computed
wh ich are non-profit s h all pay a tax of 10% on their taxa ble income,
at two percent of its gross income during the year. Therefore, then
except those covered by s ubsection (D) hereof, provided that if
will be two yearly computations of corporate inco~e taxes _for _e ve;
corporation subject to either the RCIT or MCIT, whichever JS highe · the gross income from unrelated trade, business or other acti vity
exceeds 50% of the tota l gross income de rived Crom alJ sources, the
The MCIT is one of the changes introduced by the 1997 _Tax tax prescribed in s ubsection (A) h e reof shall be imposed on the entire
Code, which primarily aims to forestall tax evasion by corporatio~ taxable income (Sec. 27/BJ, NJRC).
that declare losses despite their business operations. Thu~, :ve~ill
a corporation incurs net loss in its business operations, i~ ~s s e
Foreign Corporations
. to an MCIT of two percent of its
subJect . gross mcome.
. While it JS ears
tru
that MBC did not conduct business operations for almos~ 12 Yb ·ect The following are the differen t types of foreign corporations:
to ·h was placed under receivership
as it · · proceedings, i·t is still .su JNo
1. Res id e nt Foreign C orpornti o n - organized or existing
t e two percent MCIT for the year 1999. Hence, BIB Rubng . fthe· ~nder t he laws of any foreign country but is engaged
007-2001, which stated that the law allowing the suspenswn ?ting
. .. f d nd ex1s in trade or business in the Philippines (i. e., through a
unpositi~n o ~he ~CIT applied to both newly create_ a ·n Section branch). Genera lly. it is taxed s imilarly as a domeS t ic
corporations, 18 void. The four-year grace period provided 1
corporation at the r ate of 30% on its n e t income derived
frorn sourc · h' ·
2 es wit in th e Phi lippmes.
- - - -6 - - . y~ · Non- ·d .
. _r eg , e nt Forei gn Corporation - orgaruze
· d or
'Sec.
January • R.A. No. 10963; Sec. 4(C) ' Rev. Regs. No. 8 -2018; Ta x Advisor
31, 2018.
exJst1ng Und er the la ws of any foreign country and _not
engaged in trade or bu s iness in the Philippines but deri ves
 INCOME AND WITHHOLDING TAXES
REVIEWER ON TAXATION Tax Bases and Rates
351
350
TrTIK Corp. in ch_arge of preparing the an .
s within the Philippines. Gen of ru~ . c 2013 nua1 incorn
f source . erauy (YlploYee f the corporat10n ror , got confused on wheth e .
income rorn he rate of 30% on its gross income f ,
. . taxed at t rorn e " return o e payment for the regular corporate income t er she
1t 1s es tll Id prepar . ome tax ax or the
Philippine sourc . sbou corporate me .
corporations ·nimurn · h ·11
(YII As Ms. J's supervisor, w at w1 be your advice?
'dent Foreign . . .
Resl sident foreign corporation is subJ·e t d' . t ions
· between regular
As a genera1 rule, a ·tre sources wit
. hm
' th e Ph'l • .
i ippines at c350to ) Wh at are the istmc. . , corporate
. tax on i s bl . 1/o b .
inco me tax and mm1mum corporate incorne tax?. -
Ph'lippine income Z009) of its net taxa e mcome. Its inco
I . January 1' f PhT . . Ille
(30% effective hall be exempt rom i ippme income tax.
foreign sources s . ted answer:
sugges . .
from certain except10ns to the general rule .
Th ere are, however, d . a) A s Ms. J's supervisor, ..I will
h
advise that KKK C
orp.
. d hereun er.
These are d1scusse .. should prepare pay~~nt ,or t e regular corporate income
. cor porations that are exempt from Philippine
Resident foreign tax and not the minimum
. . corporate income tax. Unde r
income tax: the Tax Code,_ m~nimum corporate income tax is only
. 1 area headquarters (RHQ) shall mean a applicable beginning on th: fourth taxable year following
a. Regiona torbl' shed in the Philippines by multinational the commencement of business operation (Sec. 27/e][JJ,
branch es a I d NIRC). .
. d which headquarters o not earn or
companies an .. . d h' h
. mcome
derive • from the Phihppmes an d' w .ic act as b) The distinctions between regular corporate income tax and
• communications, and coor matmg center the minimum corporate income tax are the following:
supervisory, b h · h A·
h ·
for t eir a Iffil'ates ' subsidiaries, or ranc es Sm t e s1a-
1. As to taxpayer: Regular corporate income tax applies
. n and other foreign markets ( ec. 22{DDJ,
Paci'fi c Regio
NIRC and Art. 50, E. 0 . 226). to all corporate taxpayers; while minimum corporate
income tax applies to domestic corporations and
b. .. . of a
Represen tati·ve office is a branch in the Philippines resident foreign corporations.
foreign multinational corpor~tio1: whose actmties _are
limited to information dissemmation, product promotion, 2. As to tax rate: Regular corporate income tax is 30%;
and the performance of quality control of goods for export while minimum corporate income tax is two percent.
to its head office or affiliates. 3.
As to tax base: Regular corporate income tax is based
Regional area headquarters and represent a t'iv e officesfr of on the net taxable income; while minimum corporate
multinational corporations in the Ph i·1·ippmes
· a re exempt
Ph'l' ·nesom income tax is based on gross income.
· b ·
income tax since they are not engaged m usmess i · n the i ipp 1
. h' the 4.
. any active
nor denve . busmess
. .
mcome f~om sources ;k wit . mterest As to period of applicability: Regl,ilar corporate
Philippines. However, income from passive investments li_ i~ sis income tax is applicable once the corporation
income on bank deposits or deposit substitutes in the Philippine commenced its business operation; while minimum
subject to the final withholding tax. corporate income tax is applicable beginning on the
fourth taxable year following the commencement 01
Bar Question (2015) . business operation.
. . fro!Il the 5.
KKK Corp. secured its Certificate of Incorporation , rn
· enced As to imposition: The minimum corporate income tax
Secunties
.. and Exchange Commission on June 3, 201 3 · Itcom J an is imposed whenever it .is greater than the regular
business operations on August 12, 2013. In April 20l4, Ms, ' corporate income tax of the corporation (Sec. 27[AJ
and [EJ, NIRC; RR No. 9-98).
 INCOME AND WITHHOLDING T>.xES
REVIEWER ON TAXATION Tax Bases and Rates
353
352
. anY Philippine port to perform int .
Question (2001) in nsportation services/activities or fli ~r;iational. air
Bar . . ale of the law in imposing what is kn traywhere in the world. Offline carrie; ,.0 Perat1ons
· the ration . own an . . . h . re1ers to
What 1s te Income Tax on Domestic Corporatio as . ternationa1 air earner avmg no flight 0 . an
M . ·mum
101 Corpora ns? in d from the Philippines (Sec. 2, Rev. Regs ~;rations to
the . hich is exempted from t h e mm1mum
· · cor an 002•1 An . t t' . no. 15-2002
Is a co rporat1on tically
w f h Porat May 30, 2 I· m erna ional carrier doin b . ,
exempted rom t e regular corp e
. tax automa orate in the Philippines shall pay a tax of 2-1/2% on ~t ~~ness
~ncome ta ? Explain your answer. , Philippine Billings" (GPB). An off'line airlii s h r?ss
income x.
Suggested answer:
a branch office or a sales agent in the Philippi~:s ;~~f
sells passfafgl7 doflc~mhetntsf ~or co_m ~ensation or commission
.
The impost •
•t;on of the Minimum Corporate Income Tax (MC[T'l
·z · . f I
to cover o - me ig s o its principal or head offi £
. . d to 'orestall the prevai ing practice o corporatio• other airlines covering flights originating from Phcili~•-or. or
is designe ,, . . d t d th . . ..s 1. " h ts, is
fl 1g · not considered enga PPme
. • g deductions in or er o re uce eir income 1
of over claimin h . ax Ports or off- me . t· I .
d .
ge m
he filing of income tax returns s owing a tax los8 businesshas a;11nternta 10b~a air carrier in the Philippines,
payments. T . t' h' h •
es against the business mo we w ic impelled the and is, t ere1ore, no . s~ Ject tAnoG:PB tax nor to the three
every year go · Th· · h
stoc kh old ers to ,,'orm the corporation.
. . is is t e reason
. why percent common earner s tax.
. h . . . f
mternational air carr·
ier
domestic corporations (and resident foreign ~orporatwns), after havi_ng. fl 1g t~ ongma~mg rom any port or point in the
the recovery period of four ye~rs from the time they commence Phihppmes, irrespective of the place where passa
. d . ge
business operations, become liable t~ the MCIT whenever this documents are so Id or issue , is subject to the GPB ta
tax imposed at two percent of gross_ income exceeds t~e normal of 2.5%, unless subject to a different tax rate unde:
corporate income tax imposed on net income (~ponsorship Speech, the applicable tax treaty to which the Philippines is a
Chairman of Senate Ways and Means Committee). signatory (Sec. 28[AJ[3], NIRC). Philippine tax treaties
generally reduce the rate to 1.5%.
No. The minimum corporate income tax is a proxy for the
normal corporate income tax, not the regular income tax paid by a Under R.A. 10378, July 23, 2013, international air
corporation. For instance, a proprietary educational institution may carriers may be entitled to preferential income tax rate of
be subject to a regular corporate income tax of 10% (depending on 1.5% on GPB under the tax treaty, or even exempt from
its dominant income), but it is exempt from the imposition of MCI! Philippine income tax, subject to rules on reciprocity,
because the latter is not intended to substitute special tax rates. So ts on revenues from the transport of passengers from the
with PEZA enterprises, CDA enterprises, etc. Philippines to a foreign port.
[NOTE: If what is meant by regular income tax is the 32% The 2.5% tax on GPB under the 1997 Tax Code
tax rate imposed on net taxable income of corporations, the answe~ ~s an in~ome tax levied on the presumed gain of the
would be in the affirmative because domestic corporations an mternat1onal airline companies (and not a percentage
resident foreign corporations' are either liable for the two percent tax). The proviso in P.D. 69 and the definition of GPB
of gross income (MCIT) or 32% of net income (the normal corpora~e provided in P.D. 1355, now incorporated in Section 28(B)
income tax), whichever is higher.] (Beginning January 1, 200 ' of the 1997 Tax Code, ensured that international airlines
the applicable regular corporate income tax rate is 30%) are taxed on the income they derived from Philippine
;o urces (CIR v. American Airlines, Inc., 180 SCRA
Resident Foreign Corporations that are Subject to Preferential 74 [19891).
Tax Rates
• arrier" fl ' In the case of the passenger's passage documents or
a. International carrier. - "International air c_ ss in t~ghts from any port or point in the PhilipP.ines and back,
refers to a foreign airline corporation doing busine_ hts Ph~tyortion ofrevenue pertaining to the return trip to the
th e Philippines having been granted landing rig
ibppines shall not be included as part of GPB.
 REVIEWER ON TAXATION
INCOME AND WITHHOLDING TAXES
354 Tax Bases and Rates
355

h case of flights that originates f . . nal operating headquarters. _ Shall

Refi~ of their net taxable income from sourc!::~ t~x
In . t e but transs h 1pmen
' t of passengerroni the C,
Philippines go and/or mail takes place some~hexcess 0
baggage, ~ar af~ belonging to a different airline c ere in ~ Philippines (Sec. 28(A]{6J[bj, NIRC). Accor/t~in
other airer . f h oni.Pan t e e from sources outside the Philippines • ing Y,
an B h 11 be that port10n o t e revenue corresp ,Y, incomincome tax.
from is exempt
the GP s a · · h p .. 0 nd1n
to the leg flown .from any pomt m t e hihppines •- g
"'J the
pom. t of transshipment.
nch pro fit Remittance Tax on Philippine pranch of Forei gn
b. Offshore banking un_its. - T_he pi:Ovisions of any law ~!porations . .
h Contrary notwithstanding, income derived b
tote · h . db h
To equalize the tax burden
ffi on foreign corporations maintainin g,
Y
offshore banking umts aut ori~e Y t e Bangko Sentra/ d . .
Pil ·p;nas (BSP) from foreign currency transacti· d local branch o ces, an orgamzmg, on the other hand
ng i • b k . 1 d' ans ne han ' · t' h t1 · · '
with local commercial an s, me_ u mg branches of on obsidiary domestic corpora wnd~ ere ah £eas_t a maJonty of all the
. banks that may be authorized by the BSP t .. a su , h es of stock are owne y sue oreign corporations the
ioreign . r-c h b k' . . a ·, latter s s profit remittance tax is imposed on the profit act~ally
t nsact business with o 1s ore an mg units, including 15% branc ·· . b h t . h d
ra . d f -c •
.,, .. . ·tted by the Phihppme ranc o its . ea office (Bank of
interest income derive ram 1oreign currency loans
an:nted to residents, shall be subject to a final income tax · remi . NT and SA v. Court of Appeals and CIR, 234 SCRA
America h h h h
at the rate of 10% of sueh'mcome. . 2 {199 4]). It does not matter w et er t e ead office of the foreign
30 · t
corporati·on is located ma tax rea Y coun t ry, ma
t . tax haven or other
.
Income derived by an FCDU or an OBU from non-treaty country.
foreign currency transactions with ~esidents of the
Philippines, including local commercial b~nks, local Tax base. - Effective January 1, 1998, the tax base of the
branches of foreign banks, and other depository banks 15% branch profit remittance tax imposed on profit remitted by the
under the foreign currency deposit system, shall be Philippine branch to its foreign head office is the total profit applied
subject to a final withholding tax of 10%. Income from or earmarked for r e mit t ance without any deduction for the tax
foreign currency transactions shall include intere~t ~ram component thereof (except those activities which are registered with
lending operations, including bank charges, commiss1?ns, the Philippine Economic Zone Authority). Revenue Regulations No.
service fees and net foreign exchange transactions 2-98 also exempts from the branch profit remittance tax enterprises
gains. Income' from foreign currency transaction~
· wi'th registered with the Subic Bay Metropolitan Authority (SBMA) and
non-residents of the Philippines shall not be subiect to the Clark Development Authority (CDA) which are covered under
income tax by express provision of the law. The P?rson R.A. 7227. Prior to R.A. 8424 (January 1, 1998), only the amount of
making the income payment shall withhold and remit th~ profit actually remitted abroad was ruled by the courts subject to
th
tax pursuant to the provisions of Sections 57 and 58 ~ e l5% branch profit remittance tax. The tax was imposed on the
the Tax Code (Sec. 2.27, Rev. Regs. No. 10-98, August 2 ' :ou~t sent abroad and the law called for nothing further (Bank of
1998).
erica NT & SA v. Court of Appeals an_d CIR, ibid.).
Income derived by an FCDU or an OBU
. from
hall
activities other than foreign currency transactio~s 8 der ~come of Non-resident Foreign Corporation Subject to
referential Tax Rates
be subject to the pertinent income taxes prescribe un
Section 27 or 28 of the Tax Code.
sub· The foll · · · t·
th owing Incomes of a non-resident foreign corpora 10n a
re
. . ome from Ject to e Preferential tax rates:
. All items of income other than me . t to tax
international air transport services shall be subJeC No. n -~esident
·
under the pertinent provisions of the Tax Code.
1. cinematographic • film
· owner'. 1esso
· r' or
distributor shall pay a tax of 25% of its gross income from
sources within the Philippines (Sec. 28[BJ[2)], NIRC).
 REVIEWER ON TAXATION INCOME AND WITHHOLDING TAXES
Tax Bases and Rates
356 367

"d nt owner or lessor of vessels ch ...r t capital gains realized by a no .

2. Non-res1 e 11 b b" artered b 6 ,,,e d . h n-res1dent f,
Philippine nationals sha e su Ject to a tax of 4-1/ o Y • rporation · urmg t e taxable year fr oreign
2
. from leases Or ch art1/o of
gross re ntals , lease or charter fees c~change or other disposition of share omf the sale,
e t· s o stock .
Fil"pino citizens or corporations, as approv d b ers domestic corpora ion, except shares sold or . . 1n a
:arit:me Industry Authority (Sec. 28[B}{3], Nl~C). Y the through the stock exchange, shall be sub. disposed of
. t () Jecttothefi;.1
Non-resident owner or lessor of aircraft, machineries a tax at the £11
o owmg ra es: a five percent on n ~cu
3.
other equipment shall pay a tax Qf 7 -112% of their nd gains not over [P] 100,000;
1s
and (b) 10% on n t :t capital
, e capital gams ·
rentals or fees (Sec. 28[BJ[4}, NIRC). gross in excess of Pl00,000 I' ec. 28[Bl{5J[c], NIRC).

Interest income on foreign loans contracted on or f 'lure to strictly comply with Revenue u .
4.
August 1, 1986 shall be subject to a final withholdin a ;er Fai h. h .
No 1-2000, w ic requires the taxpayer to 8
,r.1.emorandum
•
of 20% (Sec. 28[BJ[5j[a}, NIRC). g ax ord:reat; relief from the BIR, will not deprive t ecure prior
tC:,X b:nefit of a tax treaty. - BIR issued Revenue ;exm:payerds of
5. Cash and/or property dividends
. received from a dorn est1c. t,.e • • h oran um
corporation shall be subJect to a final withholding t Order (RMO) No. 72- 20 10 requmn~ t at the t~x treaty relief (TTRA
at the rate of 15%, subject to the condition that t~x · ,,. st be filed before the transaction, and failure to do h )
mu . . so as the
country in which the non-resident foreign corporation _e ""ect of disquahfy:mg the TTRA. RMO No. 1-2000 further .
eu' . f h . reqllll'es
domiciled shall allow a credit against the tax due from t~s that:an~ avai!me nTtADo t e tax treaty relief must be preceded by an
non-resident foreign corporation taxes deemed to hav: application with 1 at 1east 15 days before the transact· ·
· h · f ion so as
been paid in the Philippines equivalent to 15%, which to streamline t e processmg o the application for tax treaty relief
represents the difference between the regular income tax and to prevent the consequences of an erroneous interp t t·
l° · f • . re a ion
of 30% on corporations and the 15% tax on dividends as and/or app ication o treaty provisions. Petitioner filed claim r, ta
provided in this subparagraph (Sec. 28[B}{5J[b], NIRC). · credit for overp aid br3:nch profit remittance tax at 15%, whe;; th:
When the country of residence of the non-resident foreign tax treaty mere 1 payment of such tax at lOo/co. BIR, relymg
. y reqmres
f ·
corporation does not impose income tax on dividends paid on the late fil mg o the application under RMO 1-2000 d h ·
by a domestic corporation, there is substantial compliance supreme Court,s mmute .
resolution on Mirant (Ph;ls ·) o
an ont e
t·
with the above condition on "deemed paid" tax credit, and C t· C • • pera ions
orpora ion v. IR (CTA EB No. 40 June 7 2005) affir db th
only 15% shall be withheld by the domestic corporation SC in GR N 16853 · . ' • , me Y e
paying the dividend to the foreign corporation (CIR v.
2007 dF b o. 1 :m Mmute Resolutions dated November 12
den· adnb he ruary 18 , 2008, denied the claim, which claim was als~
Wander Philippines, Inc., 160 SCRA 573 [19881). ie yt e CTA.
The BIR issued Revenue Memorandum Order No. The Supreme Co t ·d · • •
8:2~17 which requires the non-resident recipient of not a bindi ur sai its mmute resolution on Mi.rant is
diVIde~ds, interest, and royalties to file the Certificate Providers ~gJ;;cedent, as cl~ri~ed by it in Phtlippine Health Care
of_ Residence for Tax Treaty Relief Application (CORTI') general Pri . · Our Constitution provides for adherence to the
wi~h- t~e payor of income or withholding agent in ~he The time hncip 1es of international law as part of the law of the land.
Philippmes in order to avail of the automatic application dernands ·thonored inte rna t iona
· l prmc1ple
· · of pacta . sunt servanda
of treaty rates on dividends, interest, and royalties in lieu ?art of the s:apterfohrmance in good faith oftreaty obligations on the
of th e mandatory Tax Treaty Relief Application (TT~)- is b·Inding u es t ate n t er mto
· the agreement. Every treaty in 1orce
;0r ?ther type~ of income payments, a TTRA ~s. s~ill be PerforrnedPonb hthe Part'
. ies, an d obligations
. . under the treaty mu~ t
eTquired to be with the International Tax Affairs Division 1
(l AD) of the BIR. 1 :te:national e~ in g?od faith. A state that has contr~cted valid
0 1
·~ fications th gations 1s bound to make in its legislations those
0b
hgat1ons
· u d at maY b e necessary to ensure the fulfillment ofth e
7SeeRMON
os. 72-2010 and 1-2000. r Ii n ertaken. Thus, laws and issuances must ensure that
ranted under t s ar ace rd d the r i s
 REVIEWER ON TAXATION
INCOME AND WITHHOLDING TAX ES
358 Tax Bases and Rates
359

Th RIR must not impose a dditiona ~ -

. I d thernto __ e -- f h 1· f i d that the BIR should not impose additio .
~1t e g~te the availment o t e re 1e s prov~ r ,,~ reiterate ld negate the availment of the reliefs prna1.drequirements
wt would· alne_agreements-· -More so. when . . t he RP -G ,·no~
1n
~u e d . 11 y smce
the. t wou. nal agreements, especia . said taov1t ed .for un der
wernat!Qll provide for any pre-regulSlte for th ~ lm,,~ nat10 • · x reat1e d
'.D,:eaty does not - . t jnte~de for any prereqms1te at all for _the availment of th 8 o not
w benefits under said agreemen . . pro\11 .d agreements. Thus, t h e ava1lment of the e benefits
. . •t must be stressed that there 1s nothing • R drsa1 . . oree~
Likewise, I d . t; f in MO un e t und r x tr t1 s nt r d mt b th Ph·i· . 1 . x
tr t. . a d u on t h e fil.m . re\'I i f in . I t

tax treay r
hi h would indicate a epnva""°on o entitlement
1-2000, wt celief for failure to comply with the 15-day p a
. d h · . eriod
nd;t:Ower Company Limited
a rior t x r
v.
CIR, G.R. N~s
19 h ti n
S Court recogmze t e c1ear mtent1on of the BIR . · (CB l4 2 o15). · 3383-84,
'.fhe upret~neg RMO 1-2000, but the CTA's outright denial of tin JanuaT'Y ,
1mp1emen 1 . •h h a ax
treaty relief for failur_e to stnctl_y c~mp1y wit t e pres~ribed Period roperly Accumulated Earnings Tax (IAET)
t • hnrmnny with the obJechves lrnP . .
.
IR no ' m n d of the contractin,.
. b
e:tatc G to
that the benefits granted un er tax treaties are enJ·oyed by . · In addition to the other taxes imposed on income d h
ensure . B . . . dd . unerte
duly entitled persons or_corporat10 ~s. . ear~ng mh mmd _the rationale 1997 Tax Code,o as• amen e , an improperly accumulated
d th •
.
earmngs
x treaties the period of app 11cat1on 1or t e ava1lment of ta
·- •
0 f ta , d' .1 X
tax equal to 10 Yo 1s 1mpos~ on e improperly accumulated taxable
treaty relief sho~ld not o_perR_te to 1Vest entit e~ent to the relief •ncome of every. corporation formed
1 .
or availed of for the purpose
as it would constitute a v10lat1on of the duty reqmred by good faith of avoiding the income tax with re~pect to its shareholders or the
in complying with a tax treaty. At most, the application for a tax shareholders of any other .corporat10n by permitting 1·ts earnmgs ·.
treaty relief from the BIR should merely operate to confirm the and profits to accumulate mstead of being divided or dist ·b t d
entitlement of the taxpayer to the relief. The obligation to com!lly (Sec. 29, NIRC). The rationale is that if the earnings andn \~
8
with a tax treaty must take precedence over the objective of RMQ were distributed, the shareholders
. . . . would then be 11·able to mcome
_pro
1:.2QQ.Q. Non-compliance with tax treaties has negative implications tax thereon,. whereas 1f the
on international relations, and unduly discouragei:; fnrP.ign . d1str1bution were not made t o th em,
they wou ld mcur no tax 1? respect to the undistributed earnings
investors. While the consequences sought to be prevented by RMO and profits of the corporation. Thus, a tax is being imposed in the
1-2000 involve an administrative procedure, these may be remedied na~ure of a_penalty to the corporation for the improper accumulation
through other system management processes; e.g., imposition of a of its earnmgs, and as a form of deterrent to the avoidance of tax
fine or penalty. upo~ shareholders who are supposed to pay dividends tax on the
More importantly, treaties have the force and effect of law :~r~~n~~/is~ributed to them by the corporation. The touchstone of
in the Philippines. Tax t1·eaties are entered into "to reconcile the
national fiscal legislations of the contracting parties and, in turn,
\:Y
an: ~:t
18 th
e purpose behind the accumulation of the income
e consequences of the accumulation. 8
help the taxpayer avoid simultaneous taxations in two different Revenue Regul t. N
jurisdictions" (CIR v. S.C. Johnson and Son, G.R. No, .127J0S, 2001 P .d a ions o. 2-2001 issued on February 12
th
accumu~::de:a at t_he IAET shall be imposed on improper!;
June 25, 1999). Simply put1 tax treaties are entered into to
minimize, if not eliminate the harshness of international juridical domestic cor xabl~ mcome earned starting January 1, 1998 by
double taxation (Deutsche Bank AG Manila Branch v. CIR. are classifi d porations as defined under the Tax Code and which
G.R. No. 188550, August 19, 2013). corporation e as closely-held corporations defined as those
or at least ; ~t lea st 50% in value of the outstanding capital stock
The Supreme Court reiterated its ruling in the Deutsche 0 0
8
lock entitl / of th e ~otal combined voting power of all classes of
case that non-compliance with the prior application rule as req~ t
by _RMO No. 1-2000 should not operate to automatically div~s lllore than ; ~o ~o~e is owned directly or indirectly by or for not
th 0
enftihtlement to the tax treaty relief as it would constitute a violatio~ e aforesaid d~11':71~uals. Domestic corporations not falling_ under
o t e duty requir db d treatY an nition are, therefore, publicly-held corpo~at1ons.
would . . . e Ygoo faith in complying with a tax t also
impair th e value of the tax treaty. The Supreme Cour
ec. 2, Rev
·Regs.No. 2-2001.
 REVIEWER ON TAXATION INCOME AND WITHHOLDING TAXES
Tax Bases and Rates 361
360

l not apply to: (1) Publicly held corp al amount of the capital that persons (subs .
The IA ET shal fl . 1. orat' . the tot ) have agreed to take and pay for whi h cnbers or
d other non-bank nanc1a mtermediaries· lon.s;
(2) Banks an anies (Sec. 29{BJ[2], NIRC). Section 4 and (3) :barebol~er:e, and can be more tha~, the par v;lue 0 ~ thneed not
Insurance co;g1 further added the following entities of Rev. 11
ecessarilY ount that the corporation receives in 1 . e shares.
Regs. No. 2- f the IAET: (1) Taxable partnerships; (~s ~Utside rt is tbe aifJil anY in consideration of the origin~! isc usive of the
·ums , h I k' suance of th
the co~era~e ortnerships; (3) Non- taxable joint ventures· en.era] prellll pursuant to t e rue-ma mg power of the Sec ·r e
profess1~na pdauly remstered with the Philippine Econom' _and (4) shares, 12 Commission (SEC), 1s paid-in capital, in rela~n ies and
Enterpnses .,. 6 " . le Zo i;icbangfe stock corporation to declare divide~ds 14 iondto the
. (PEZA) under R.A. 791 , ana enterprises re . n.e ro a d. . I , was efined
Authontty to the Bases Conversion and Development Act ~fstered powe ount of outstan mg capita stock and addition 1 'd .
. 1992 the a!Il . 'd h a pa1 ·In
Pursuan h enterprises · d u1y registered as . (APIC) or premium pa1 over t e par value of the h
un der RA• · 7227 ' as well as ot er
d b 1 h ' h . Under 1ta1 d h ' d fi •t· f 'd s ares 11
. onomic zones dee1are Y aw w 1c enJoy payme ca~ BIR has adopte t is e m 10n o pa1 _-up capital by the SEc1s
specia1 ec . . d t' . .. nt of Th . ··t issued Revenue Memorandum Circular No. 35 _2011
. 1t rate on their registere opera ions or activities in 1.
specia ax f " . ieu of ·'until I . • t d fl . . on
es national or local. A branch o a 10re1gn corporation 1- 2011, givmg a con rary e mtion of paid-up cap'tal
other tax , b . 'd " . snot Marc h 14, 'b d th . 1 , as
covered by the IAET, the same emg a resi ent 1ore1gn corporation. unt contn ute to e corporation representing th
the am O k h e par
value of the shares of stoc , ence, any excess capital over and above
The corporations covered by the IAET are required to pay However, the Court of Tax Appea1s
issue dividends not later than one ~ear following the close of t~: the Par value shall be excluded. .
ruled that APIC, which forms
taxable year, otherwise, the IAET, 1f any, should be paid within has f h part
. of the company's e 't
qui Y,
15 days thereafter.9 However, said corporations are allowed to
represents the amount o money t at its shareholders pay in excess
of the par value of the shares. In other words, it is the amount over
accumulate earnings up to 100% of their paid-up capital as of
Balance Sheet date, inclusive of accumulations taken from other the par value that inve~tors are willing to pay for the stocks. Thus,
years. In excess thereof, the Rr.r.11m11 lat.ion of surplus or undistributed . the APIG are not earnmgs/profits of a corporation generated from
earnings or profits shall be subject to the IAET, unless used for the normal and continuous operations of the business (Cebu Ai~
the reasonable needs of the business w hid1 means used either Inc. v. CIR, CTA Case No. 9106, January 11, 2018). '
for the immediate needs of the business or reasonably anticipated
needs of the business.10 In order to determine whether profits are Bar Question (2010)
accumulated for the reasonable needs of the business as to avoid What is the "immediacy test"? Explain briefly.
the imposition of the improperly accumulated earnings tax, the
controlling intention of the taxpayer is that which is manifested Suggested answer:
at the time of accumulation, not subsequently declared intentions
which are merely the product of afterthought. A speculative and . t'fyTo determine the reasonable needs of the business in order to
indefinite purpose will not suffice. The mere recognition of a future ~us I an accumulation of earnings (and not impose the 10% tax on
problem or the discussion of possible and alternative solutions is not improperly accum l t d .
test" under a e _ea~nings of corporations), the "immediacy
~ufficient. Definiteness ofplan/s coupled with action/s taken towards Philip . American Jurisprudence has been adopted in the
its consummation is essential. 11 Pines. Thus, the term "reasonable needs of the business" is
Definition of Paid-up Capital. - Capital refers to the v~lu~
of th e property or assets of a corporation. The capital subscribe Lon n· at1ona! Telecom . . . . .. .
g istanceT h mumcationsComm1ss1onv. CourtofAppealsandPhilippme
13Sec. I
143 e ~P one ?ompany, G.R. No. 127937, July 28, 1999.
43 Co orpora_tion Code of the Philippines (B.P. 68).
11Sec. 2
8
9
Sec. 6, Rev. Regs. No. 2-2001. . rp_o:ation Code of the Philippines.
10
See Sec ,3 Re Re · of earnings 2008
£ th · • v. gs. No. 2-2001 for enumeration of accumulation · ' ecunties and Exchange Commission Memorandum Circular No. 11·
or e11reasonable needs of th e busmess.
. OS]
168
IR RuJ·
Sec. 7• Rev. Regs. No. 2-2001. 'October 20, A-(C-084) 266-08) , September 26, 2008; BIR Ruling [DA-432 ·
'BIR Ruling [DA-106-2003), April 3, 2003.
 REVIEWER ON TAXATION
INCOME AND WITHHOLDING TAXES
362 Tax Bases and Rates
363

. mediate needs of the business to ace,,

ean t he im . d . 'd d , rth is deemed a gift under Section l00 f th
construed to m
. d profits m d d
""lnttlate
(' stead of declaring wi en s to shareh ld
o ers)' molleYs tlwowever, this · not a b so 1ute. Sale, exchan
• is ° e 1997
earnings an bl anticipate nee s. or C de rio
including reasona y Ta" o .f operty ma d e m . th d.
e or mary course of bu .
ge or other
transfer o pwrhich is bona fide, at arm's length and free frsiness (a
Gain from Sale of Property . ction b .d d d ' om any
trans~ e intent), will e consi ere a~ ma e for an adequate and
1 the gain from the sale or other dispositio donatJV 'd ation in money or moneys worth (Sec. 100, NIRC
In generab, th excess of the amount,realized therefrorn n of fuJI coPSdI b;R.A. J0963 [TRAIN]). , ' as
ty shall e e h 1 h 11 b h over arnende
proper . r ad'usted basis, and t e oss s a e t e excess of the
the _basis Jd b sis for determining loss over the amount reaJiz d starting January 1, 2018, when shares of stock n t
t Thus, Id ,, 1 h . o
basis or adJuS e 1. aed from the sale or other disposition of prop/rt· . tock exchange are so 1or ess t an its fair market val
Th amount rea iz h f . k Y ded 1n s . k 1 h . ue,
e h of money received plus t e air mar et value of th trae excess of the fair
. mard et va, ue over . t e selhng price shall be
h
shall bet( ethsumthan money) received (Sec. 40[AJ, NIRC). e t d a mft subJect to onor s tax imposed by Section 100 of th
property o er treate ·as .,. d d t h · · Id e
1997 NIRC, as ~me~ e ' e(~ceph w ed~ it is so at arm's length, free
The basis of property shall be:
from anY donative mtent m h
t e or mary course of business) The
1 f h .
a. The cost thereof, if such property was acquired by ml.nation of whether t e sa e o s ares of stock not listed and
deter h . . ff d
purchase; or tra ded at arm's lengt . is a. quest10n. o act ff an . not of law. Since an
m's length transaction is a quest10n o act, It therefore behooves
b. The fair market price or value ahs o~ the date of acquisition, ar k' 1 h ·
upon the party see _mg to a~p Y t e except10n to prove that indeed
if the same was acquired by in entance; or
the sale involves no 1rregulanty between unrelated and independent
c. If the property was acquired by gift, the basis shall be parties (RMC 30-2019, February 28, 2019).
the same as if it would be in the hands of the donor or the
last preceding owner by whom it was not acquir~d by gift, In the case of Commissioner v. B.F. Goodrich Philippines (C.R.
except that if such basis is grP.at.P.r than the fair market No. 104171, February 24, 1999), the Supreme Court ruled that "It
value of the property at the time of the gift then, for t~e is possible that real property may be sold for less than adequate
purpose of determining loss, the basis shall be such fair consideration for a bona fide business purpose; in such event, the
market value; or sale remains as 'arm's length' transaction. In the present case, the
private respondent was compelled to sell the property even at a price
d. If the property was acquired for less than an adeq~ate l~ss than its market value, because it would have lost all ownership
consideration in money or money's worth, the basis of. nghts ov~r it upon the expiration of the parity amendment. In other
such property is the amount paid by the transferee for words, private respondent was attempting to minimize its losses. At
the property; or thesamet' ·t bl
£ th
ime, i was a e to lease the property for 25 years, renewable
e. The basis as defined in paragraph (C)(5) of Section 4~of tohre an? er 25. This can be regarded as another consideration on
Price" Th · . . . .
. the property was acquire
t he Tax Code, if .· d ma
• transaction
· h (C) Part 0f h us, since there IS no showmg of donative mtent on the
where gain or loss is not recognized under paragrap dear t e sel~er, there is no donation here. Although it is true that
(2) also of this section. rule d~ne In the ordinary course of business are not sufficient to
st
The term "adjusted basis" means the original cost to acqu~se intent exi ence of donative intent, it is equally true that donative
the propert Y P1us amounts spent for new buildings, im· provernenthe' Rulin.g io not synonymous with disparity in consideration (BIR
033 2
betterments, and other capital expenditures made to increase rtY · · 002, August 16, 2002).
value of any property or materially prolong the life of th e prope BarQ
uestion (1992)
less accumulated depreciation up to the date of sale.
T A a rule, . A.be, ad 0 . . .
t ransfer for inadequate consideration. - rnoneY Units of Le 1?estic corporation sold in 1989 two condonumum
rans ers for less than an adequate and full consideration 10
corporation g:spi Towers in Roxa~ Boulevard for P8,158,142. The
eclared in its income tax return for taxable year 1989
 REVI EWER ON TAXATION INCOME AND W ITHHOLDING TAXES
364 Tax Bases and Rates 365

. d from the sale of the two condominium . . however, not material with respect to c t .
its gains derive . units as asse t is, b. t fi 1 er a1n pass·
of the t ·ncomes su Ject o na taxes at preferenti 1t ive
follows: . qestmen 1 a ax rates.
UNIT A 1n Ordinary asset. - If the property sold is cl .
DNITB a
·
. d.
n ordinary asset, mcome tax ue 1s the normal
6
ass1edas
(316.5 sq.ft.) a d corporate
•ncome tax compute at 30 1/o of1ts net taxable •
0 •
(322~ .

---
=-- 1 . ) mcome (m
P3,933,679 t he case of corporat10ns , or the graduated ·nco
Proceeds from sale P4,224,463
rates rangmg · f rom fi ve percent to 32% applied1 on me hi tax
Less:
.
taxable mcome m c· th e case o m 1viduals other ths net
f . d. .
1,501,295 ·d 1· t
non-res1 ent a 1en no engage d m · trade or business inanthea

-
(a) Acquisition costs (Deed of 1,529,755
Sale 9/9/83) Philippines).
49,248 Actual income or gain: - The actual gain from
(b) Payments of Realty Tax 55,413
Total of (a)(b) 1,550,543 1,585,168 the sale of real property classified as an ordinary asset
2,383,136
by an individual or corporation is subject to income tax at
Gains 2,639,295-
the graduated income tax rates (in the case of individuals)
(Sec. 24[AJ and Sec. 25[AJ, NIRC), or at 30% of its net
Without going into computations, answer the following
taxable income (in the case of a corporation) (Sec. 27/AJ
question: and Sec. 28[AJ, NIRC). The gain is arrived at by deducting
Since ABC derived gains from the sale of the condominium the cost or adjusted basis of the property sold from the
units, should it pay the five percent capital gains tax, 35% corporate amount realized (i.e., amount of cash and/or fair market
income tax or none of the above because the corporation is not a real value of property received). As a general rule, the income
estate dealer? Discuss. tax law imposes the tax only when there is actual income
gain, or profit. '
Suggested answer:
b. Capital asset. - In general, if the real property sold
ABC Corporation must pay the 35% corporate income tax. is classified as a capital asset, the income tax due is the
The National Internal Revenue Code does not provide for the capital gains tax computed at six percent of the actual
payment by corporations of five percent (now six percent) capital gains consideration or fair market value of the real property
tax on the sale of real property, whether considered capital assets or s~ld as determined by the Commissioner, whichever is
not. Such income is included in the computation of net income (gross higher. If the shares of stock of a domestic corporation
taxable income less deductions) and is subject to the tax rate of 35%. sold are unlisted, or if the shares of stock of a domestic
corporation sold are listed but not traded in the local
[NOTE: Existing law imposes the final tax of six percent 0; stock exchange, and they are classified as capital assets,
the gain presumed to have been realized on the sale of lao d~~I
th
or buildings of corporations treated as capital assets. The applicRa: e income tax due is the capital gains tax computed at
corporate · five percent on the first PlOO 000 net capital gain and 10%
. mcome tax rate beginning January 1, 2000 under ··
·s 5%, on th e amount in excess of Pl00,000.
'
8424 18 32% and starting November 1 2005 under R.A. 9337 1 3
hut st arting January 1, 2009, the rat~ is 30%]. Presumed
corporaf . .
income or gain. - Where an m . diVI'dua1 or a
classifi dton sold real property or land and/or building, respectively,
Nature of Asset or Property . e as a .
capital . capital asset the law presumes that there was a
The kind · p_ercent gain rearize d , and the
' capital gains tax 1s
· computed e,t six
nsacuon
de d of mcome tax applicable on the property tra ture of
pen s on the na t ure of the property sold or exchange d· The 113 th
time of saJ e actual consideration or the fair market. value at th e
e of th e real property, whichever is higher (Sec. 24fD}[l},
 REVIEWER ON TAXATION
366

Sec. ZS(B}{3], and Sec. 27(D}{5], NIRC). In other words r

f whether or not the seller makes a profit or incurs 1' egardJes
o . 1 . t tb . a oss f s
transaction, the capita gams ax mus e paid thereo b roni th
However no donor's tax is due on the transfer of sai·dn Ythe selJere
' d . real •
for less than its full and a. equate
• consideration
. s
purs uant toProperty
100 of the Tax Co de..Th1s 1s an. except10n to the ge neral r l ection
there must be actua1mcome, gam or profit realized b th u e that
· b · d '
in order that mcome tax may e impose thereon.
Y eta Xpayer

Passive Investment Incomes

Passive investment incomes ~ubject to final withhol .
are taxed on the gross amount, without any deductio ding taxes
expenses of sale. n of cost and