Tax Quizzler

8/9/2019 Tax Quizzler

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1 | P I E R R E M A R T I N D L R E Y E S 2C

COURSE: TAXATION I

PROFESSOR: GRUBA

1stSemester AY 2010-2011

TAX QUIZZLERINCOMETAXATION

INSTRUCTIONS

This Tax Quizzler covers the study of the law on Income Taxation which

includes:

1. Title II of the National Internal Revenue Code (NIRC)

2. Statutes related or amending the NIRC

3.

Related Revenue Regulations, BIR Rulings and other

administrative issuances

4.

Cases decided by the Supreme Court

Study the Quizzler alongside the Tax Digests for Income Taxation. As a

complement to this reviewer, use any book containing the complete

codal provisions of the NIRC (either the green codal from Rex Bookstore

or the NIRC annotated codal by Casasola and Bernaldo. As for reference

books, use Income Taxation by Mamalateo or Tax Law and Jurisprudence

by Vitug and Acosta.

INCOME TAX

Q: What is an Income Tax?

A:Income Taxhas been defined as a tax on all yearly profits arising fromproperty, professions, trades or offices, or as a tax on a persons income,

emoluments, profits and the like.

As held in REPUBLIC OF THE PHILIPPINES VS.MANILA ELECTRIC COMPANY,Incometax is imposed on an individual or entity as a form of excise tax or a taxon the privilege of earning income. In exchange for the protection

extended by the State to the taxpayer, the government collects taxes as

a source of revenue to finance its activities. Hence, income should not be

included in the computation of operating expenses of a public utility as

they are not reasonably incurred in connection with business operations

to yield revenue or income.

An income tax is a national tax imposed on the net or the gross incomerealized in a taxable year. It is subject to withholding. A percentage tax isa national tax measured by a certain percentage of the gross selling price

or gross value in money of goods sold, bartered or imported or of the

gross receipts or earnings derived by any person engaged in the sale of

services. Unlike income tax, it is not subject to withholding. (see CIRVS.SOLIDBANK CORPORATION)

Q:When is income taxable?

A: Income, gain or profit is subject to income tax when the followingconditions are present:

1.

There is income, gain or profit

2. The income, gain or profit is received or realized during the

taxable year; and

3. The income, gain or profit is not exempt from income tax.

(see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULOand COMMISSIONER OF INTERNAL REVENUE VS.COURT OF APPEALS)

Q:What is the difference between income and capital?

A: Income is distinct from capital. Income means all the wealth whichflows into the taxpayer other than a mere return on capital. Capital is a

fund or property existing at one distinct point in time while income

denotes a flow of wealth during a definite period of time. Income is gain

derived and severed from capital. (see CHAMBER OF REAL ESTATE ANDBUILDERS ASSOCIATION,INC.V.ROMULO)

Income as contrasted with capital or property is to be the test. The

essential difference between capital and income is that capital is a fund;

income is a flow. A fund of property existing at an instant of time is

called capital. A flow of services rendered by that capital by the payment

of money from it or any other benefit rendered by a fund of capital in

relation to such fund through a period of time is called an income.

Capital is wealth, while income is the service of wealth. A tax on income

is not a tax on property. "Income," as here used, can be defined as

"profits or gains." (see MADRIGAL VS.RAFFERTY)

Illustration

Q: Are stock dividends income or capital?

A: Stock dividends, strictly speaking, represent capital and do not

constitute income to its recipient. Mere issuance thereof is not yet

subject to income tax as they are nothing but an enrichment through

increase in value of capital investment. Such are considered unrealized

gain and cannot be subjected to income tax until that gain has been

realized

Q: When can stock dividends be considered income?

A: Stock dividends which represent transfer of surplus to capital account

is not subject to income tax as a general rule. But if a corporation

redeems stock issued so as to make a distribution, this is essentially

equivalent to the distribution of a taxable dividend the amount so

distributed in the redemption considered as taxable income. (see

COMMISSIONER VS.MANNING)

The redemption converts into money the stock dividends which become

a realized profit or gain and consequently, the stockholder's separate

property. Profits derived from the capital invested cannot escape

income tax. As realized income, the proceeds of the redeemed stock

dividends can be reached by income taxation regardless of the existence

of any business purpose for the redemption. (see CIRVS.CA)

KINDS OF INCOME TAX SYSTEMS

Q: What are the different income tax systems adopted by thePhilippines?

A:The types of income tax systems adopted are as follows:

1.

Global Tax Systemwhere the taxpayer is required to lumpup all items of income earned during a taxable period and pay

under a single set of income tax rates on these different items

of income.

2. Schedular Tax System where there are different taxtreatments of different types of income so that a separate tax

return is required to be filed for each type of income and the

tax is computed on a per return or per schedule basis.

3.

Semi-Schedular or Semi-Global Tax System where the taxsystem is either (a) global (e.g. taxpayer with compensationincome not subject to final withholding tax or business or


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PROFESSOR: GRUBA


professional income or mixed income compensation and

business or professional income) or (b) schedular (e.g.taxpayer with compensation, capital gains, passive income, or

other income subject to final withholding tax) or (c) bothglobal and schedular may be applied depending on thenature of the income realized by the taxpayer during the year.

Q: How do you distinguish schedular treatment from globaltreatment as used in income taxation?

A: Under the schedular tax system, the various types of income (i.e.compensation; business/professional income) are classified accordinglyand are accorded different tax treatments, in accordance withschedules characterized by graduated tax rates. Since these types of

income are treated separately, the allowable deductions shall likewise

vary for each type of income.

On the other hand, under the global tax system, all income received bythe taxpayer are grouped together, without any distinction as to type ornature of the income, and after deducting therefrom expenses andother allowable deductions, are subjected to tax at a graduated or fixed

rate (see TAN VS.DEL ROSARIO)

Q: To which system does the method of taxation under theNIRC belong?

A: The current method of taxation under the NIRC belongs to semi-schedular and semi-global tax system.

PHILIPPINE INCOME TAX LAW

Q: Where is the Philippine Income Tax Law embodied?

A: It is embodied in Title II (Tax on Income) of the National InternalRevenue Code (NIRC)as well as in numerous (a) revenue regulationsand (b) BIR rulings and other administrative issuances (e.g. RevenueMemorandum Circulars or RMCs).

Q: What are the features of the Philippine Income Tax Law?

A: The features are as follows:

1.

Income tax is a direct taxbecause the tax burden is borne bythe income recipient upon whom the tax is imposed.

2. Income tax is a progressive taxsince the tax base increases asthe tax rate increases.

3. The Philippines has adopted the most comprehensive systemof imposing income taxby adopting the citizenship principle,resident principle and the source principle.

4. The Philippines follows the semi-schedular or semi-globalsystemof income taxation.

Q: What are the criteria in imposing Income Tax in thePhilippines?

A:The criteria are:1.

Citizenship or nationality principle A citizen of thePhilippines is subject to Philippine income tax (a) on his

worldwide income, if he resides in the Philippines (b) only on

his Philippine source income, if he qualifies as a non-resident

citizen where his foreign-source income shall be tax-exempt.

2. Residence or domicile principle An alien is subject toPhilippine income tax because of his residence in the

Philippines. A resident alien is liable to pay Philippine income

tax only from his income from Philippine sources but is tax-

exempt from foreign-source income

3.

Source of income principleAn alien is subject to Philippineincome tax because he derives income from sources within

the Philippines. Thus, a non-resident alien or non-resident

foreign corporation is liable to pay Philippine income tax on

income from sources within the Philippines.

Q: What are the types of Philippine Income Tax?

A:The types of Income tax under Title II of the NIRC are:1.

Graduated income tax on individuals

2. Normal corporate income tax on corporations

3. Minimum corporate income tax on corporations

4. Special income tax on certain corporations (e.g. private

educational institutions, FCDUs, and international carriers)

5.

Capital gains tax on sale or exchange of unlisted shares of

stock of a domestic corporation classified as a capital asset

6. Capital gains tax on sale or exchange of real property located

in the Philippines and classified as a capital asset

7. Final withholding tax on certain passive investment incomes

8.

Fringe benefit tax

9. Branch profit remittance tax; and

10.

Tax on improperly accumulated earnings.

DEFINITION OF TERMS (SECTION 22, NIRC)

NOTE: It is advisable that you memorize or at the very least familiarizeyourself with the following terms as you will encounter these terms in

the succeeding provisions. Understanding tax requires knowing the

definitions of the technical terms.

Person An individual, a trust, estate or corporation

Corporation Includes partnerships, no matter how createdor organized, joint-stock companies, joint

accounts, associations, or insurance companies

but does not include general professionalpartnerships and a joint venture or consortium

formed for the purpose of undertaking

construction projects or engaging in petroleum

and other energy operations pursuant to an

operating agreement under a service contract

with the Government

General ProfessionalPartnerships

Partnerships formed by persons for the sole

purpose of exercising their common profession,

no part of the income of which is derived from

engaging in any trade or business

Domestic When applied to a corporation, means createdor organized in the Philippines or under its laws

Foreign When applied to a corporation, means acorporation which is not domestic

Nonresident citizen The term means a citizen of the Philippines:1. who establishes to the satisfaction

of the Commissioner the fact of hisphysical presence abroad withintention to reside therein

2.

who leaves the Philippines duringthe taxable year to reside abroadeither as an immigrant or for

employment on a permanent basis

3. who works and derives income fromabroad and whose employmentthereat requires him to bephysically present abroad most of


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the timeduring the taxable year.4.

who has been previously considered

a non-resident citizen and who

arrives in the Philippines at any time

during the taxable year to reside

permanently in the Philippines withrespect to his income derived from

sources abroad until date of hisarrival in the Philippines

Resident alien An individual whose residence is within thePhilippines and who is not a citizen thereof

Nonresident alien An individual whose residence is not within thePhilippines and who is not a citizen thereof

Resident foreigncorporation

A foreign corporation engaged in trade or

business within the Philippines

Nonresident foreigncorporation

A foreign corporation not engaged in trade or

business within the Philippines

Fiduciary A guardian, trustee, executor, administrator,receiver, conservator or any person acting in

any fiduciary capacity for any person

Withholding agent Any person required to deduct and withhold taxunder the provisions of Section 57 (Withholding

of Tax at source)

Shares of stock Includes shares of stock of a corporation,warrants and/or options to purchase shares of

stocks as well as units of participation in a

partnership (except general professionalpartnerships), joint stock companies, joint

accounts, joint ventures taxable as

corporations, associations and recreation or

amusement clubs and mutual fund certificates

Shareholder Includes any holder of shares of stock andothers which are considered shares of stock

under this code (refer to definition of Shares of

Stock)

Taxpayer Any person subject to tax

Including and

includesWhen used in a definition, it shall not be

deemed to exclude other things otherwise

within the meaning of the termTaxable year Means the calendar year or the fiscal year

ending during such calendar year, upon the

basis of which the net income is computed

Fiscal year Means an accounting period of 12 monthsending on the last day of any month other than

December

Paid or incurred

and paid or

accrued

Shall be construed according to the method of

accounting upon the basis of which net income

is computed

Trade or business Includes the performance of the functions of apublic office

Securities Means share of stock n a corporation and rightsto subscribe for or to receive such shares

Dealer in securities A merchant of stocks or securities, whether an

individual, partnership or corporation, with anestablished place of business, regularly engaged

in the purchase of securities and the resale

thereof to customers

Bank Every banking institution as defined in RA 337as amended by RA 8791 (General Banking Act of

2000)

Non-bank financialinstitution

A financial intermediary as defined in RA 337 as

amended by RA 8791 (General Banking Act of

2000) authorized by the BSP to perform quasi-

banking activities

Quasi-bankingactivities

Means borrowing funds from 20 or more

personal or corporate lenders at any one time,

through the issuance, endorsement, or

acceptance of debt instruments of any kind

other than deposits for the borrowers own

account or through the issuance of certificates

of assignments or similar instruments, with

recourse, or of purchase agreements forpurposes of re-lending or purchasing

receivables and other similar obligations

Deposit substitutes An alternative form of obtaining funds from thepublic (the term public means borrowing from

20 or more individual or corporate lenders at

any one time), other than deposits, through the

issuance, endorsement, or acceptance of debt

instruments for the borrowers own account for

purposes of re-lending or purchasing

receivables and other similar obligations, or

financing their own needs or the needs of their

agent or dealer

Ordinary Income Any gain from the sale or exchange of propertywhich is not a capital asset or property

described in Section 39(A)(1) (which defineswhat capital assets are and those which are

not)

Ordinary loss Includes any loss from the sale or exchange ofproperty which is not a capital asset

Rank and fileemployees

Mean all employees who are holding neither

managerial nor supervisory position as defined

under existing provisions of the Labor Code

Mutual fundcompany

An open-end and close-end investment

company as defined under the Investment Code

Trade, business orprofession

Include performance of services by the taxpayer

as an employee

Regional or areaheadquarters

A branch established in the Philippines by

multinational companies

Long-term deposit orinvestment

certificate

Certificate of time deposit or investment in the

form of savings, common or individual trust

funds, deposit substitutes, investmentmanagement accounts and other investments

with maturity period of not less than 5 years,

the form of which shall be prescribed by the

BSP and issued by Banks only to individuals in

denominations of P10,000 and other

denominations as may be prescribed by the BSP

Statutory MinimumWage

Refers to the rate fixed by the Regional

Tripartite Wage and Productivity Boar, as

defined by the Bureau of Labor and

Employment Statistics (BLES) of DOLE

Minimum Wageearner

A worker in the private sector paid the

statutory minimum wage or to an employee in

the public sector with compensation income of

not more than the statutory minimum wage in

the non-agricultural sector where he/she is

assigned


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COURSE: TAXATION I

PROFESSOR: GRUBA


GENERAL PRINCIPLES OF INCOME TAXATION(SECTION 23, NIRC)

Q: What are the general principles of income taxation in thePhilippines?

A:Except as otherwise provided in this Code, the general principles are:1. A citizen of the Philippines residing therein is taxable on allincome derived from sources within and outside thePhilippines (Citizenship principle)

2. A non-resident citizen (of the Philippines) is taxable only onincome derived from sources within the Philippines(Citizenship principle)

3.

An individual citizen of the Philippines who is working andderiving income from abroad as an overseas contract worker

is taxable only on income from sources withinthe Philippines(Citizenship principle)

4. An alien individual whether a resident or not of thePhilippines is taxable only on income derived from sources

within the Philippines (Residence and source of incomeprinciple)

5.

A domestic corporationis taxable on all income derived from

sources within and outside the Philippines (Citizenshipprinciple)

6. A foreign corporation, whether engaged or not in trade orbusiness in the Philippines is taxable only on income derived

from sources within the Philippines (source of incomeprinciple).

In other words, under Title II, only resident citizens and domesticcorporations are taxable on their worldwide income while the othertypes of individual and corporate taxpayers are taxable only on incomederived from sources within the Philippines. (Remember this!)

KINDS OF INCOME TAXPAYERS

NOTE: Before we proceed to income taxation proper, it is important to

know the different kinds of taxpayers first. This is because in analyzingany problem involving income taxation, the first thing to do is todetermine who the taxpayer is.

The only two exceptionswhere knowing the taxpayer is immaterial arewhere the transaction involves sales of shares of stock of a domestic

corporation because it is subject to 1% of stock transaction tax or

5%/10% capital gains tax on net capital gain whether the seller is an

individual, citizen or alien or a corporation, domestic or foreign and (2)

where the real property sold is a capital asset located in the Philippines

which is subject to 6% capital gains tax.

Q: What are the kinds of income taxpayers?

A: The kinds of income taxpayers under Title II of the NIRC are:

A. Individuals

1.

Citizens (Section 24, NIRC)a. Resident Citizens

b.

Nonresident Citizens

2. Aliens

a. Resident Aliens (Section 24, NIRC)b.

Nonresident Aliens (Section 25, NIRC)i. Engaged in trade or business in the

Philippines

ii. Not engaged in trade or business in the

Philippines

3. Estates and Trusts (Section 60, NIRC)

a. Revocable trust

b. Irrevocable trust

B.

Corporations

1. Domestic Corporations (Section 27, NIRC)2. Foreign Corporations (Section 28, NIRC)

a. Resident foreign corporations

b. Nonresident foreign corporations

3.

Partnershipsa. Taxable partnership (Section 73(D), NIRC)b.

Exempt partnership

i. General Professional Partnership (Section 26,NIRC)

ii. Joint venture or consortium undertaking

construction activity or engaged in

petroleum operations with operating

contract with the government

(Note that the definitions of all the kinds of taxpayers mentioned abovecan be found in Section 22, NIRC. This is why it is important to memorize

them!)

INDIVIDUAL TAXPAYERS

Q: Who are the individual taxpayers?

A: They are:1. Citizens

a.

Resident Citizens

b. Nonresident Citizens

2. Aliens

a. Resident Aliens

b. Nonresident Aliens

i.

Engaged in trade or business in the Philippines

ii. Not engaged in trade or business in the Philippines

RESIDENT CITIZENS

Q: Who are citizens of the Philippines?

A:The following are considered Citizens of the Philippines:1. Those who are citizens of the Philippines at the time of the

adoption of the Constitution

2. Those whose fathers or mothers are citizens of the Philippines

3. Those born before January 17, 1973 of Filipino mothers, who

elect Philippine Citizenship upon reaching the age of majority;

and

4. Those who are naturalized in accordance with law

Q: What is meant by residence?

A:Residencerefers to an individuals habitual place of abode to whichwhenever absent, he has the intention of returning.

Q: Why is it important to determine whether a citizen is aresident or non-resident?

A: It is important because a person will be taxable on his worldwideincome if he is a resident citizen and he shall also be taxable on his

income from sources within the Philippines. If he is a non-resident, he

shall be exempted on his income from sources outside the Philippines.

Q: Why is there a distinction?


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A: A resident citizen is taxed on his worldwide income because hereceives protection from the Philippine government even outside the

country. As to a non-resident, the Philippines retains personal

jurisdiction over the person of the citizen no matter how long he lives in

a foreign country for as long as he remains a citizen.

NON-RESIDENT CITIZENS

Q: Who is a non-resident citizen?

A:The term means a citizen of the Philippines:1.

who establishes to the satisfaction of the Commissioner the

fact of his physical presence abroad with intention to residetherein

2. who leaves the Philippines duringthe taxable year to resideabroad either as an immigrant or for employment on apermanent basis

3. who works and derives income from abroad and whoseemployment thereat requires him to be physically presentabroad most of the timeduring the taxable year.

4. who has been previously considered a non-resident citizen

and who arrives in the Philippines at any time during thetaxable year to reside permanently in the Philippines withrespect to his income derived from sources abroaduntil dateof his arrival in the Philippines

Illustration

Q: A and B are Filipino citizens and employees of P&GPhilippines, a subsidiary of Procter & Gamble, a foreigncorporation based in the US. They were assigned for certainperiods to other subsidiaries of P&G outside the Philippines,during which they were paid US Dollars as compensation. Is theincome taxable?

A: YES. They are not exempted from this. Petitioners forget that they are

citizens of the Philippines, and their income, within or without, and inthese cases wholly without, are subject to income tax. Note that

although they worked abroad. It was for a certain period which did not

qualify them to be a non-resident as provided in the definition of a non-

resident citizen.

Q: Are non-resident citizens required to file income tax returnson their foreign income with the BIR?

A: NO. This is because their income without the Philippines is not

taxable. However, by virtue of RR 9-99, non-resident citizens, overseascontract workers and seamen must file information returns. Said form,

together with other relevant supporting papers, shall be filed to the

Foreign Post or the Revenue District Office which has jurisdiction over

the place of residence of the taxpayer

RESIDENT ALIENS

Q: Who is a resident alien?

A: A Resident alien is an individual whose residence is within thePhilippines and who is not a citizen thereof. He is taxed in the same

manner as a resident citizen, except that only his income from Philippine

sources is taxable. His income from foreign sources is not liable to

Philippine income tax.

Non-resident Aliens Engaged and Not engaged in Trade orBusiness

Q: Who is a non-resident alien?

A: A non-resident alienis an individual whose residence is not within thePhilippines and who is not a citizen thereof. A non-resident alien is

further classified into (a) engaged in trade or business in the Philippinesor (b) not engagedin trade or business in the Philippines. As provided inSection 25(A)(1), if the aggregate period of his stay is 180 daysduringany calendar year, he shall be deemed a non -resident alien doing

business in the Philippines (180-day Rule).

Illustration

Q: A, a non-resident citizen, was engaged by a domesticcorporation as a commission agent. It was agreed that A willreceive 10% sales commission on all sales actually concludedand collected through As efforts. A argues that the income is

not taxable as A does not reside in the Philippines and that theplace of payment of the income is outside the Philippines. Is As

contention correct?

A: NO. Pursuant to Section 25(A) (Nonresident Alien Engaged in Trade or

Business Within the Philippines) and Section 25(B) (Nonresident Alien

Individual Not Engaged in Trade or Business Within the Philippines), non-

resident aliens, whether or not engaged in trade or business, are subject

to Philippine income taxation on their income received from all sources

within the Philippines. Thus, the keyword in determining the taxability of

non-resident aliens is the incomes "source." In construing the meaning

of "source" in Section 25 of the NIRC, resort must be had on the origin of

the provision.

The source of an income is the property, activity or service thatproduced the income. With respect of rendition of labor or personalservice, as in the instant case, it is the place where the labor or serviceis performed that determines the source of income. There is therefore

no merit in petitioners interpretation which equates source of income inlabor or personal service with the residence of the payor or the place of

payment of the income (see CIRVS.BAIER-NICKEL).

Q: Is an heir of a deceased individual taxpayer liable for taxes?

A: YES. As an heir he is individually answerable for the part of the tax

proportionate to the share he received from the inheritance. His liability,

however, cannot exceed the amount of his share. As a holder of property

belonging to the estate, Pineda is liable for he tax up to the amount of

the property in his possession. The reason is that the Government has a

lien on the amount received by him from the estate as his share in the

inheritance, for unpaid income taxes for which said estate is liable. (see

CIRVS.PINEDA).

CORPORATIONS

Q: What is a corporation under the NIRC?

A: A corporation includes partnerships, no matter how created or

organized, joint-stock companies, joint accounts, associations, or

insurance companies but does not include:

a. general professional partnerships

b.

joint venture or consortium formed for the purpose of

undertaking construction projects or engaging in petroleum


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PROFESSOR: GRUBA


and other energy operations pursuant to an operating

agreement under a service contract with the Government.

OVERVIEW OF CORPORATIONS AS TAXPAYERS

Q: What are the kinds of corporate taxpayers?

A: They are:1.

Domestic Corporations (Section 27, NIRC)2. Foreign Corporations (Section 28, NIRC)

a. Resident foreign corporations

b.

Nonresident foreign corporations

Q: Differentiate the kinds of corporate taxpayers.

A: A corporation is itself a taxpaying entity and speaking generally, for

purposes of income tax, corporations are classified into (a) domestic

corporations and (b) foreign corporations. Foreign corporations are

further classified into (1) resident foreign corporations and (2) non-

resident foreign corporations. A resident foreign corporationis a foreigncorporation engaged in trade or business within the Philippines or having

an office or place of business therein while a non- resident foreign

corporation is a foreign corporation not engaged in trade or businesswithin the Philippines and not having any office or place of businesstherein.

A domestic corporation is taxed on its income from sources within andwithout the Philippines, but a foreign corporation is taxed only on itsincome from sources within the Philippines. However, while a foreigncorporation doing business in the Philippinesis taxable on income solelyfrom sources within the Philippines, it is permitted to deductions from

gross income but only to the extent connected with income earned in

the Philippines. On the other hand, foreign corporations not doingbusiness in the Philippinesare taxable on income from all sources withinthe Philippines, as interest, dividends, rents, salaries, wages, premiums,

annuities Compensations, remunerations, emoluments, or other fixed or

determinable annual or periodical or casual gains, profits and income

and capital gains. (see N.V.REEDERIJ AMSTERDAMVS.CIR)

RESIDENT FOREIGN CORPORATIONS

Q: Are foreign banks licensed to do business in the Philippinesconsidered residents of the Philippines?

A: YES. YES. Courts have held that "a domestic corporation is regarded ashaving a residence within the state at any place where it is engaged in

the particulars of the corporate enterprise, and not only at its chief place

or home office;" that "a corporation may be domiciled in one state and

resident in another; its legal domicile in the state of its creation presents

no impediment to its residence in a real and practical sense in the state

of its business activities." The foregoing propositions are in accord with

the dictionary concept of residence as applied to juridical persons, a

term which appears to comprehend permanent as well as temporary

residence (see STATE INVESTMENT HOUSE,INC.VS.CITIBANK,N.A.)

Q: ABC Airways is a foreign airline. ABC maintains a general sales agentof its tickets in the Philippines. Is ABC a resident foreign corporation? Isthe sale of tickets taxable as income from sources within thePhilippines?

A: In order that a foreign corporation may be regarded as doingbusiness within a State, there must be continuity of conduct andintention to establish a continuous business, such as the appointmentof a local agent, and not one of a temporary character. ABC maintained

a general sales agent and it was engaged in selling or issuing tickets,

which is considered the main lifeblood of an airline.

For the source of income to be considered as coming from thePhilippines, it is sufficient that the income is derived from activitywithin the Philippines.In ABCscase, the sale of tickets in the Philippinesis the activity that produces the income. The tickets exchanged hands

here in the country and the payments for fares were also made withPhilippine currency. The site of the source of payments is the Philippines.

The absence of flight operations to and from the Philippines is notdeterminative of the source of income/site of income taxation for thetest of taxability is the source. (see COMMISSIONER OF INTERNAL REVENUEVS.JAPAN AIRLINES and COMMISSIONER VS.OVERSEAS AIRWAYS)

NON-RESIDENT FOREIGN CORPORATIONS

Q: XYZ is a foreign shipping company. It does not have a branchoffice in the Philippines and it made only two calls in Philippineports. What kind of foreign corporation is XYZ?

A: XYZ is a foreign corporation not authorized or licensed to do business

in the Philippines. In order that a foreign corporation may be

considered engaged in trade or business, its business transactions mustbe continuous. A casual business activity in the Philippines by a foreigncorporation does not amount to engaging in trade or business in thePhilippines for income tax purposes. Accordingly, its taxable income forpurposes of our income tax law consists of its gross income from all

sources within the Philippines. (see N.V.REEDERIJ AMSTERDAMVS.CIR)

Q: Company A, a domestic corporation, entered into contractsin Tokyo. Company A made initial payments to the Japanesecompanies for the construction of vessels. CIR held Company Aliable for withholding tax. Company A argues that the Japanesecompanies were not liable on the tax because all the relatedactivities from the signing of the contract, payment to deliveryof the vessels were done in Tokyo. Is Company A correct?

A: YES. Company A should have withheld the tax because the tax oninterest received by foreign corporations not engaged in trade or

business within the Philippines is not conditioned on the fact that the

sale or activity from which the interest income came from took place in

the Philippines. The residence of the debtor who pays the interest is the

determining factor of the source of interest income. (see NATIONALDEVELOPMENT CO.VS.COMMISSIONER).

FOREIGN CORPORATION VIS--VIS BRANCH OFFICE IN THEPHILIPPINES

Q: ABC Corporation, a foreign corporation in Japan and licensedto do engage in business in the Philippines (hence, a residentforeign corporation) has equity investments in XYZ Company, adomestic corporation. XYZ declared and paid cash dividends to

ABC. XYZ directly remitted the cash dividends to ABCs headoffice in Japan net not only of the 10% final dividend tax butalso of the withheld 15% profit remittance tax based on theremittable amount after deducting the final withholding tax of10%. ABC argues that following the principal-agent relationshiptheory, ABC is a resident foreign corporation subject only to the10 % intercorporate final tax on dividends received from adomestic corporation. Is ABC correct?A: NO. The general rule that a foreign corporation is the same juridical

entity as its branch office in the Philippines cannot apply here. This rule is


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PROFESSOR: GRUBA


based on the premise that the business of the foreign corporation is

conducted through its branch office, following the principal agent

relationship theory. It is understood that the branch becomes its agent

here. So that when the foreign corporation transacts business in the

Philippines independently of its branch, the principal-agent relationship

is set aside. The transaction becomes one of the foreign corporation, not

of the branch. Consequently, the taxpayer is the foreign corporation, not

the branch or the resident foreign corporation. Corollarily, if the businesstransaction is conducted through the branch office, the latter becomes

the taxpayer, and not the foreign corporation. (see MARUBENICORPORATION VS.CIR).

NON-RESIDENT FOREIGN CORPORATIONS FORMING ACONSORTIUM IN THE PHILIPPINES

Q: The tax code provides that the recipient (doing businessoutside the Philippines) of services other than processing,manufacturing, or repacking of goods performed for personsdoing business outside the Philippines is subject to VAT at zeropercent. X, Y, and Z non-resident foreign corporation formedABC consortium to do business in the Philippines. ABC claimsthat its transactions are subject to VAT at zero percent. Is ABCconsortium correct?

A: NO. The legislative intent is that the recipient of services is doing

business outside the Philippines. The payer-recipient of services is the

Consortium which is a joint-venture doing business in the Philippines.

While the Consortiums principal members are non-resident foreign

corporations, the Consortium itself is doing business in the Philippines.

Hence, the transactions of ABC are not subject to VAT at zero percent.

(see CIRVS.BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO)

TAX ON INDIVIDUALS (SECTIONS 24-26, NIRC)

Q: What are the graduated income tax rates on taxable incomeof individuals?

A: In relation to Section 23 of the NIRC, the taxable income (i.e. thepertinent items of gross income less deductions and/or personal and

additional exemptions authorized for such types of income by the Tax

Code or other special laws) derived for each taxable year:

1. From all sources within and without the Philippines by

resident citizens;

2. From all sources within the Philippines only by a non-resident

citizen including overseas contract workers;

3. From all sources within the Philippines only, by a resident

alien or a non-resident alien engaged in trade or business in

the Philippines

Shall be subject to the graduated income tax in accordance with the

following schedule provided under Section 24:

Not over P10,000 5%

Over 10,000 but not over P30,000 P500 + 10% of excess over

P10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the excess

over P30,000


over P70,000


over P140,000


over P250,000

Over P500,000 P125,000 + 32% of the

excess over P500,000

Note the following:

1. The taxable income here does not include

a.

Tax on certain passive income under Section 24(B)b. Capital gains from sale of shares of stock not traded in

the Stock exchange under Section 24(C)

c.

Capital gains from sale of real property under Section

24(D)

(These are subject to preferential tax rates. See next

question)

2. For married individuals, the husband and wife shall compute

separately their individual income tax based on theirrespective total taxable income provided that if any income

cannot be definitely attributed to or identified as income

exclusively earned or realized by either of the spouses, the

same shall be divided equally between the spouses for the

purpose of determining their respective taxable income

3. Under RA 9504, minimum wage earners shall be exempt fromthe payment of income tax on their taxable income. Holiday

pay, overtime pay, night shift differential pay and hazard pay

shall likewise be exempt from tax.

Q: What are the incomes subject to final tax rates and what arethe tax rates applicable to each?

A: As a general rule, income, gain or profit derived by an individualduring the taxable year shall be subject to the graduated income tax

rates. As exceptions, certain income subject to tax are not subject to thegraduated tax rates stated previously and are subject to final tax rates.

They are:

1. Tax on certain passive income under Section 24(B)a. Interests, royalties, prizes and other winnings under

Section 24(B)(1)

b.

Cash and/or property dividends under Section 24(B)(2)2. Capital gains from sale of shares of stock not traded in the

Stock exchange under Section 24(C)3. Capital gains from sale of real property under Section 24(D)4. Compensation income of alien and Filipino employees of

a.

Regional or area headquarters and regional operating

headquarters of MNCs under Section 25(C)b. Offshore Banking Units under Section 25(D)c. Foreign petroleum service contractors and sub-

contractors under Section 25(E)

NOTE: See Income Tax Tablefor the final tax rates.

PASSIVE INCOME IN GENERAL

Q: What is passive income?

A: The BIR defines passive income by stating what it is not. If the income

is generated in the active pursuit and performance of the corporations

primary purposes, the same is not passive income. Generally, it is income

generated by the taxpayers assets. These assets can be in the form of

real properties that return rental income, shares of stock in a

corporation that earn dividends or interest income received from savings

(see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION,INC.V.ROMULO)

Q: Are passive incomes included in the computation of grossincome which determines taxable income?


8/16


COURSE: TAXATION I

PROFESSOR: GRUBA


A: NO. Since these passive incomes are already subject to different rates

and taxed finally at source, they are no longer included in the

computation of gross income, which determines taxable income ( seeCommissioner vs. PAL)

CAPITAL GAINS TAX IN GENERAL

CAPITAL GAINS WRT REAL PROPERTY

Q: Who files the capital gains tax return?

A: as provided in RR No. 8-98, the Capital Gains Tax (CGT) Return will befiled by the seller within 30 days following each sale or disposition of real

property. Specifically, Payment of the CGT will be made to an Authorized

Agent Bank (AAB) located within the Revenue District Office (RDO)

having jurisdiction over the place where the property being transferred is

located. Creditable withholding taxes, on the other hand, deducted and

withheld by the withholding agent/buyer on the sale, transfer or

exchange or real property classified as ordinary asset will be paid by the

withholding agent/buyer upon filing of the return with the AAB located

within the RDO having jurisdiction over the place where the property

being transferred is located.

Q: Seller (S) and Buyer (B) entered into a sale. B gave S a checkso that S could pay the CGT. The TCT was still registered in thename of S. B demanded that it be registered in his name beforeB pays the balance of the purchase price. S tore up the Deed ofSale. B stopped payment of the check for the CGT. B filed acomplaint for specific performance against S. Whether thewithholding of the payment of the balance on the part of B wasjustified by the circumstances?

A: NO. Customarily, in the absence of a contrary agreement, the

submission by an individual seller to the buyer of the following papers

would complete a sale of real estate:

(1) owner's duplicate copy of the Torrens title;

(2)

signed deed of absolute sale;(3)

tax declaration; and

(4) latest realty tax receipt.

The buyer can retain the amount for the capital gains tax and pay it upon

authority of the seller, or the seller can pay the tax, depending on the

agreement of the parties.

The buyer has more interest in having the capital gains tax paid

immediately since this is a pre-requisite to the issuance of a new Torrens

title in his name. Nevertheless, as far as the government is concerned,

the capital gains tax remains a liability of the seller since it is a tax on the

seller's gain from the sale of the real estate. Payment of the capital gains

tax, however, is not a pre-requisite to the transfer of ownership to the

buyer. The transfer of ownership takes effect upon the signing and

notarization of the deed of absolute sale. The recording of the sale with

the proper Registry of Deeds and the transfer of the certificate of title inthe name of the buyer are necessary only to bind third parties to the

transfer of ownership.As between the seller and the buyer, the transfer

of ownership takes effect upon the execution of a public instrument

conveying the real estate. Registration of the sale with the Registry of

Deeds, or the issuance of a new certificate of title, does not confer

ownership on the buyer. Such registration or issuance of a new

certificate of title is not one of the modes of acquiring ownership.

In this case, S was ready, able and willing to submit to B all the papers

that customarily would complete the sale, and to pay as well the capital

gains tax. On the other hand, Bscondition that a new TCT be first issued

in his name before he pays the balance is not customary in a sale of real

estate. (see Chua vs. Court of Appeals)

Q: A bought a land from ABC corporation with the condition that no lot

may be resold by the buyer unless a residential house has been

constructed thereon and upon full payment. A entered into a contract to

sell with B but B did not construct a house thereon. B decided to sell it to

C but was confronted with the conditions imposed by ABC. Hence, Bmade it appear that the property was sold directly by A to C. Did this

agreement violate the law as it deprived the government of capital gains

tax?

A: NO. The issue is wholly irrelevant. Capital gains taxes, after all, are

only imposed on gains presumed to have been realized from sales,

exchanges or dispositions of property. Having declared that the contract

to sell in this case was aborted by petitioners failure to comply with the

twin suspensive conditions of full payment and construction of a

residence, the obligation to pay taxes never arose (see TORCUATOR VS.BERNABE)

CAPITAL GAINS WRT SHARES OF STOCK

Q: Is an assignment of deposits on stock subscriptions subjectto capital gains tax?

A: YES. The assignment of the deposits on stock subscriptions results in a

net gain. A tax on the profit of sale on net capital gain is the very essence

of the net capital gains tax law. To hold otherwise will ineluctably deprive

the government of its due and unduly set free from tax liability persons

who profited from said transactions (see COMPAGNIE FINANCIERE SUCRES ETDENREES VS.CIR)

INTEREST DERIVED FROM FOREIGN CURRENCY DEPOSIT ANDOFFSHORE BANKING SYSTEMS

Q: Is interest from a depository bank under the expandedforeign currency deposit system and offshore banking systemsubject to final tax?

A: YES. Moreover, as provided in RR No. 10-98, interest income which is

actually or constructively received by a resident citizen of the Philippines

or by a resident alien individual from a foreign currency bank deposit will

be subject to a final withholding tax of 7.5%. The depository bank will

withhold and remit the tax. If a bank account is jointly in the name of a

non-resident citizen, 50% of the interest income from such bank deposit

will be treated as exempt while the other 50% will be subject to a final

withholding tax of 7.5%.

GENERAL PROFESSIONAL PARTNERSHIPS (GPPs)

Q: What is a general professional partnership?

A General professional partnership (GPP) are partnerships formed by

persons for the sole purpose of exercising their common profession, nopart of the income of which is derived from engaging in any trade or

business.

Q: Is a GPP liable for income tax?

A: No. A GPP is not considered a taxable entity for income tax purposes.

Section 26 of the NIRC provides that persons engaging in business aspartners in a GPP shall be liable for income tax only in their separate and

individual capacities computed on their respective distributive shares of

the partnership profit.


9/16


COURSE: TAXATION I

PROFESSOR: GRUBA


Q: Distinguish between a GPP and an ordinary businesspartnership?

A: A general professional partnership, unlike an ordinary business

partnership (which is treated as a corporation for income tax purposes

and so subject to the corporate income tax), is not itself an income

taxpayer. The income tax is imposed not on the professional partnership,which is tax exempt, but on the partners themselves in their individual

capacity computed on their distributive shares of partnership profits (see

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES VS. DEL ROSARIO,COMMISSIONER V.SUTER and TAN GUAN V.CTA)

Q: A and B, co-owners, bought 3 parcels of land in onetransaction and bought 2 more parcels of land in another. Theydecided to sell the 3 parcels to C and the 2 parcels to D. Theyrealized a net profit gain and paid CGT. CIR assessed them fordeficiency corporate income tax. Is the co-ownership taxable asa corporation?

A: NO. A Co-Ownership who own properties which produce incomeshould not automatically be considered partners of an unregistered

partnership, or a corporation, within the purview of the income taxlaw. The essential elements of a partnership are two, namely: (a) anagreement to contribute money, property or industry to a common fund;

and (b) intent to divide the profits among the contracting parties. Here,

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. (see

OBILLOS VS. COMMISSIONERand PASCUAL VS. COMMISSIONER).

Q: A group of insurance companies in the Philippines decided

to form a pool and entered into a reinsurance treaty with anon-resident reinsurance company. Is such a pool subject tocorporate taxes and withholding taxes on dividends paid to thenon-resident reinsurance company?

A: YES. Where several local insurance ceding companies enter into 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 a non-resident foreign reinsurance

company, the resulting pool having a common fund, and functions

through an executive board and its work is indispensable, beneficial and

economically useful to the business of the ceding companies and the

foreign firm, such circumstances indicate a partnership or an association

taxable as a corporation (see AFISCO INSURANCE CORPORATION VS.CIR)

TAX ON CORPORATIONS (SECTIONS 27-30, NIRC)

RCIT

Q: What is the regular corporate income tax (RCIT)?

A:Section 27(A)(1)and Section 28(A)(1)of the NIRC provide that, exceptas otherwise provided for in the Code, the rates of RCIT on taxableincome from worldwide sources of a domestic corporation or fromsources within the Philippines of a foreign corporation during thetaxable year are as follows:

1. 35% effective November 1, 2005

2. 30% effective January 1, 2009.

In case of corporations adopting the fiscal year accounting period, the

taxable income shall be computed without regard to the specific date

when specific sales, purchases, and other transactions occur. Their

income and expenses for the fiscal year shall be deemed earned and

spent equally for each month of the period. The reduced corporateincome tax rates shall be applied on the amount computed by

multiplying the number of months covered by the new rates within the

fiscal year by the taxable income of the corporation for the period

divided by twelve.

On the other hand, as provided in Section 28(B)(1), the rate of RCIT onthe gross income from all sources within the Philippines for a non-residence foreign corporationduring the taxable year are as follows:

1.

35% effective November 1, 2005

2. 30% effective January 1, 2009.

Q: What is meant by taxable income which is subject to RCIT?

A: As defined in Section 31,taxable income means the pertinent itemsof gross income specified in the Code, less the deductions and/or

personal and additional exemptions, if any authorized for such types of

income by the Code or other special laws. For corporations, taxableincome would mean net income. Net income and taxable income is usedinterchangeably when it comes to corporations.

Q: May the President allow domestic and resident foreigncorporations the option to be taxed on their gross income?

A: Yes. As provided under Section 27(A)(1) and Section 28(A)(1), the

President upon recommendation of the Secretary of Finance may allow

domestic and resident foreign corporations the option to be taxed at

15% of gross income after the following conditions have been satisfied:

1. a tax effort ratio of 20% of the GNP

2.

a ratio of 40% of income tax collection to total tax revenues

3.

a VAT tax effort of 4% of GNP4.

a 0.9% ratio of Consolidated Public Sector Financial Position

(CPSFP) to GNP

This option is available to firms whose ratio of cost of sales to gross sales

or receipts from all sources does not exceed 55%. Upon election of the

gross income tax option, it shall be irrevocablefor 3 consecutive taxableyears during which the corporation is qualified.

MCIT

Q: What is the minimum corporate income tax?

A: As provided in Section 27(E) and Section 28(A)(2), a minimumcorporate income tax of 2% of gross income shall be imposed on a

domestic corporation andresident foreign corporation beginning on thefourth taxable year immediately following the year in which suchcorporation commenced its business operations when the MCIT is

greater than the RCIT for the taxable year.

Q: What is gross income for purposes of applying the MCIT?

A: Gross income shall mean gross sales less sales returns, discounts,allowances and cost of goods sold.

Q: When is MCIT imposed?


10/16


COURSE: TAXATION I

PROFESSOR: GRUBA


A: As provided in RR No. 9-98, the MCIT will be imposed whenever (1)such operation has zero or negative taxable income or (2) whenever the

amount of MCIT is greater than the normal income tax due from such

operation.

Q: What is the purpose of MCIT?

A: The primary purpose of any legitimate business is to earn a profit.Continued and repeated losses after operations of a corporation or

consistent reports of minimal net income render its financial statements

and its tax payments suspect. For sure, certain tax avoidance schemes

resorted to by corporations are allowed in our jurisdiction. The MCIT

serves to put a cap on such tax shelters. As a tax on gross income, it

prevents tax evasion and minimizes tax avoidance schemes achieved

through sophisticated and artful manipulations of deductions and other

stratagems. Since the tax base was broader, the tax rate was lowered.


Q: What is the difference between RCIT and MCIT?

A: There is a distinction between taxable income, which is the basis for

basic corporate income tax); and gross income, which is the basis for the

MCIT under Section 27(E). The two terms have their respective technical

meanings, and cannot be used interchangeably. Hence, the basic

corporate income tax cannot cover MCIT since the basis for the first is

the annual net taxable income, while the basis for the second is gross

(see COMMISSIONER VS.PAL)

Q: What domestic corporations are subject to preferential taxrates and what are the tax rates applicable to each?

A: As a general rule, all domestic corporations are subject to the RCIT orMCIT. As exceptions, certain domestic corporations are subject to finaltax rates. They are:

1. Proprietary education institutions and hospitals

2.

Foreign currency deposit unit of a local universal or

commercial bank3. Firms that are taxed under a special income tax regime

4. Private educational institutions

5. Hospitals


Q: What resident foreign corporations are subject topreferential tax rates and what are the tax rates applicable toeach?

A: As a general rule, all resident foreign corporations are subject to theRCIT or MCIT. As exceptions, certain resident foreign corporations aresubject to final rates. They are:

1.

Regional or area headquarters (RHQ) (a branch established inthe Philippines by MNCs and which does not earn or derive

income from the Philippines and whose role is supervisory)

2.

Representative office (a branch in the Philippines of a MNC

whose activities are limited to information dissemination,

product promotion)

3. International carriers by air or water

4. Offshore Banking Units

5. Foreign Currency deposit Unit in the Philippines of a foreing

bank

6.

Regional Operating Headquarters (ROHQ)

7. Branch of foreign corporation with respect to profit

remittances to head office.

8.

Branch of foreign corporations registered with PEZA, SBMA,

CDA, CDJHA.

9. Qualified service contractor or subcontractor engaged in

petroleum operations in the Philippines


Q: What income of a domestic corporation or resident foreigncorporation is subject to preferential tax rates?

A: As a general rule, all taxable income of a domestic corporation orresident foreign corporation is subject to the flat rate tax of 30%. As

exceptions, the following are subject to final tax rates:

1. Certain passive incomes such as interests from deposits and

yield or any other monetary benefit from deposit substitutes

and from trust funds and similar arrangements and royalties

2. Capital gains from the Sale of Shares of Stock not traded in

the Stock Exchange

3.

Intercorporate dividends (dividends actually or constructively

received by a domestic corporation or resident foreign

corporation from another domestic corporation)

4. Capital gains realized from the sale, exchange or disposition

of lands and/or buildings.


Q: What income of a non-resident foreign corporation issubject to preferential tax rates?

A: As a general rule, the gross income of a non-resident foreigncorporation is subject to the flat rate tax of 30%. As exceptions, thefollowing are subject to final tax rates and final withholding taxes:

1. Income of a non-resident cinematographic film owner, lessor

or distributor

2.

Income of a non-resident owner or lessor of vessels charteredby Philippine nationals

3. Income of a non-resident owner of aircraft, machineries and

other equipment

4.

Interest income on foreign loans contract on or after August

1, 1986.

5. Intercorporate dividends received from a domestic

corporation

6. Capital gains from sale of shares of stock in a domestic

corporation not traded in the Stock exchange


CAPITAL GAINS TAX IN GENERAL

CAPITAL GAINS WRT REAL PROPERTY

Q: What was the previous treatment on corporations on thepayment of CGT for any sale, exchange or disposition of realproperty?

A: Under the 1977 Tax Code, corporations wre exempt from payment of

capital gains tax for any slae, exchange or disposition of property.

However, the 1997 Tax Code changed the rule. As it stands now, the

1997 Tax Code requires corporations to pay capital gains tax at rates

provided for (see VIVA EAGLE LAND,INC.VS.CA).


11/16


COURSE: TAXATION I

PROFESSOR: GRUBA


NOTE: Other Q&As, same as above under Individual Taxpayers

CAPITAL GAINS WRT SHARES OF STOCK

NOTE:Same Q&As as above under Individual Taxpayers

GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS

Q: Are GOCCs subject to corporate income tax?

A: As a general rule, YES. As provided under Section 27(C), t he provisionsof special or general laws to the contrary notwithstanding, allcorporations, agencies or instrumentalities owned or controlled by the

Government, except the GSIS, SSS, Philhealth, and the PCSO, shall paysuch rate of tax upon their taxable income as imposed by this section

upon corporations or associations engaged in a similar business, industry

or activity.

Q: Philippine Airlines, under PD 1590 (its franchise), is liableonly for basic corporate income tax or franchise tax, whicheveris lower and all other taxes, duties, royalties and other fees and

charges, except real property tax. Hence, it is not subject toMCIT. CIR contends that the NIRC of 1997 repealed or amendedsaid PD 1590 and thus, PAL may be subjected to MCIT. Is theCIR correct?

A: NO. It is true that when Presidential Decree No. 1590 was issued on 11

June 1978, PAL was then a government-owned and controlled

corporation; but when Republic Act No. 8424, amending the NIRC, took

effect on 1 January 1998, PAL was already a private corporation for six

years. The repealing clause under Section 7(B) of Republic Act No. 8424

simply refers to charters of government-owned and controlled

corporations, which would simply and plainly mean corporations under

the ownership and control of the government at the time of effectivity of

said statute. It is already a stretch for the Court to read into said

provision charters, issued to what were then government-owned and

controlled corporations that are now private, but still operating underthe same charters (see COMMISSIONER VS.PAL)

Q: MIAA, which operates the NAIA complex, was assessed bythe City of Pasay for realty tax. The City contends that theLocal Government Code withdrew the exemption frompayment of real property taxes granted to natural or juridicalpersons, including GOCCs and since MIAA is a GOCC, it followsthat its tax exemption has been withdrawn upon the effectivityof the Local Government Code. Is the City correct?

A: NO. The term government "instrumentality" is broader than the term

"government-owned or controlled corporation." Instrumentality refersto any agency of the national Government, not integrated within the

department framework, vested with special functions or jurisdiction by

law, endowed with some if not all corporate powers, administeringspecial funds, and enjoying operational autonomy, usually through a

charter. This term includes regulatory agencies, chartered institutions

and government-owned or controlled corporations. GOCCrefers to anyagency organized as a stock or non-stock corporation, vested with

functions relating to public needs whether governmental or proprietary

in nature, and owned by the Government directly or through its

instrumentalities either wholly, or, where applicable as in the case of

stock corporations, to the extent of at least 51% of its capital stock. MIAA

is a government "instrumentality" that does not qualify as a "GOCC."

First, MIAA is not a stock corporation because it has no capital stock

divided into shares. MIAA has no stockholders or voting shares. Second,

MIAA is also not a non-stock corporation because it has no members.

Third, the Corporation Code provides that non-stock corporations are

"organized for charitable, religious, educational,..." MIAA is not

organized for any of these purposes. MIAA, a public utility, is organized

to operate an international and domestic airport for public use. Since

MIAA is not a GOCC but a government instrumentality, its tax exemption

stands (see MIAAVS.CITY OF PASAY)

GROSS PHILIPPINE BILLINGS

Q: What is Gross Philippine billings?

A: The 2.5% tax on gross Philippine billingsis an income tax levied on thepresumed gain of the airline and shipping companies. It ensures that

they are taxed on the income they derive from Philippine sources. For an

international air carrier, Gross Philippine Billings refers to the amountof gross revenue derived from carriage of persons, excess baggage, cargo

and mail originating from the Philippines in a continuous and

uninterrupted flight, irrespective of the place of sale or issue and the

place of payment of the ticket or passage document. For InternationalShipping, Gross Philippine Billings means gross revenue whether forpassenger, cargo or mail originating from the Philippines up to final

destination, regardless of the place of sale or payments of the passage or

freight documents.

Q: ABC Shipping is a foreign corporation. XYZ chartered one ofABCs ships to load raw sugar in the Philippines. Upon arrivingat the port, the vessel found no sugar for loading. The shipsailed back without carrying any sugar. Is ABC Shipping liablefor gross Philippine billings tax?

A: NO. A resident foreign corporation engaged in the transport of cargo

is liable for taxes depending on the amount of income it derives from

sources within the Philippines. ABC derived no receipt from its charter

agreement with XYZ. The vessel arrived in the port on but found no raw

sugar to load and returned without any cargo laden on board (see CIR vs.Tokyo Shipping)

BRANCH PROFITS REMITTANCES

Q: Whether the 15% branch profit remittance tax should beassessed on the amount actually remitted and not on theamount before profit remittance tax?

A: The tax base upon which the 15% which the 15% branch profits

remittance tax shall be imposed is the profit actually remitted abroad

and not the total branch profits out of which the remittance is to be

made.

Q: What is the purpose of the branch profit remittance tax?

A: The purpose of a branch profit remittance tax is to equalize the tax

burden on foreign corporations maintaining on one hand, local branch

offices, and organizing, on the other hand, a subsidiary domestic

corporation where at least majority of all the latters stocks are owned

by such foreign corporation

IMPROPERLY ACCUMULATED EARNINGS TAX


12/16


COURSE: TAXATION I

PROFESSOR: GRUBA


Q: What is the income tax imposed on a corporation if itsearnings and profits are accumulated (undistributed) instead ofbeing divided and distributed to its stockholders?

A: Section 29(A)provides that, in addition to other taxes imposed underTitle II, an improperly accumulated earnings tax (IAET)equal to 10%isimposed for each taxable year on the improperly accumulated taxable

income of each corporation.

Q: What is the purpose of IAET?

A: The imposition of IAET discouraged tax avoidance through corporate

surplus accumulation. When corporations do not declare dividends,

income taxes are not paid on the undeclared dividends received by the

shareholders. The tax on improper accumulation of surplus is essentially

a penalty tax designed to compel corporations to distribute earnings so

that the said earnings by shareholders could, in turn, be taxed (see

CYNAMID PHILIPPINES INC VS.CA)

Q: What corporations are subject to IAET?

A: As a general rule, the IAET shall apply to every corporation formed oravailed for the purpose of avoiding the income tax with respect to itsshareholders or the shareholders of any other corporation, by permittingearnings and profits accumulate instead of being divided or distributed.

As exceptions, the IAET shall not apply to:1.

Publicly-held corporations

2. Banks and other non-bank financial intermediaries; and

3. Insurance companies

Q: How do you determine if a corporation is formed or availedfor the purpose of avoiding the income tax with respect toshareholders?

A: Section 29(C)(1)provides that the fact that any corporation is a mere

holding company or investment company shall be prima facieevidenceof a purpose to avoid the tax upon its shareholders or members.

Moreover, Section 29(C)(2) provides that the fact that the earnings orprofits of a corporation are permitted to accumulate beyond thereasonable needs of the businessshall be determinativeof the purposeto avoid the tax upon its shareholders or members unless the

corporation, by the clear preponderance of evidence shall prove the

contrary.

Note that under Section 29(E), the term reasonable needs of thebusiness includes the reasonably anticipated needs of the business.

Q: What is meant by improperly accumulated taxable income

in connection with the imposition of IAET?

A: Section 29(D) provides that the term improperly accumulated taxable

income means taxable income adjusted by:

1. Income exempt from tax

2. Income excluded from gross income

3.

Income subject to final tax; and

4. The amount of net operating loss carry-over deducted;

And reduced by the sum of:

1. Dividends actually or constructively paid; and

2. Income tax paid for the taxable year

EXEMPT CORPORATIONS

Q: What are the corporations exempt from tax?

A: Section 30of the NIRC provides that the following organizations shallbe exempt from tax:

1.

Labor, agricultural or horticultural organization not

organized principally for profit2.

Mutual savings bank not having a capital stock representedby shares and cooperative bank without capital stock

organized and operated for mutual purposes and without

profit

3. A beneficiary society, order or association, operating for theexclusive benefit of the members such as a fraternalorganization operating under the lodge system, or a mutual

aid association or a non-stock corporation organized by

employees providing for the payment of life, sickness,

accident, or other benefits exclusively to the members of such

society, order, or association, or non-stock corporation or

their dependents

4. Cemetery company owned and operated exclusively for thebenefit of its members

5. Non-stock corporation or association organized andoperated exclusively for religious, charitable, scientific,athletic, or cultural purposes, or for the rehabilitation ofveterans, no part of its net income or asset shall belong to or

inure to the benefit of any member, organizer, officer or any

specific person

6.

Business league, chamber of commerce, or board of trade,not organized for profit and no part of the net income ofwhich inures to the benefit of any private stockholder or

individual

7. Civil league or organization not organized for profit butoperated exclusively for the promotion of social welfare

8. A non-stock and non-profit educational institution9. Government educational institution10. Farmers or mutual typhoon or fire insurance company ,

mutual ditch or irrigation company, mutual or cooperative

telephone company or like organizstion of a purely localcharacter, the income of which consists solely of assessments,

dues, and fees collected from members for the sole purpose

of meeting its expenses; and

11. Farmers, fruit growers, or like association organized andoperated as a sales agent for the purpose of marketing the

products of its members and turning back to them the

proceeds of sales, less the necessary selling expenses on the

basis of the quantity of produce finished by them.

Note: Notwithstanding that they are exempt corporations, the income ofwhatever kind and character of the organizations mentioned above from

any of their properties, real or personal, or form any of their activities

conducted for profit regardless of the disposition made of such income

shall be subject to tax imposed under this Code. (Remember this!)

Q: How are tax exemptions on corporations construed?

A: Tax exemptions are construed strictly against the taxpayer (see PASEOREALTY VS.CA)

NON-STOCK NON-PROFIT EDUCATIONAL INSTITUTION

Laws allowing tax exemption are construedstrictissimi juris. Hence, for

the YMCA to be granted the exemption it claims under the aforecited

provision, it must prove with substantial evidence that (1) it falls under

the classificationnon-stock, non-profit educational institution; and (2)


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COURSE: TAXATION I

PROFESSOR: GRUBA


the income it seeks to be exempted from taxation is used actually,

directly, and exclusively for educational purposes. However, the Court

notes that not a scintilla of evidence was submitted by private

respondent to prove that it met the said requisites. (see CIR vs. CA).

TAXABLE INCOME DEFINED (SECTION 31, NIRC)

Q: What is taxable income?

A: As defined in Section 31, the term taxable income means thepertinent items of gross income specified in this Code, less the

deductions and/or personal and additional exemptions, if any,

authorized for such types of income by this Code or other special laws.

EO 37 changed all net income phrases appearing in Title II of the Tax

Code of 1997 to taxable income. Taxable incomeis the income subjectto tax less deductions, if any, authorized by such type of income. In

short, the term refers to the tax base. For individuals engaged in tradeor business or in the practice of their profession , it is the income afterdeducting exemptions and certain allowable deductions . Forcorporations and other juridical entities, taxable income would meannet income.

(see PIROVANO VS.COMMISSIONERand COLLECTOR VS.HENDERSON)

FWT vs. CWT

Q: What is the withholding tax system?

A: The withholding tax system is a procedure through which taxes(including income taxes) are collected. Under Section 57 of RA 8424, the

types of income subject to withholding tax are divided into three

categories:

(a) withholding of final tax on certain incomes;

(b) withholding of creditable tax at source and

(c) tax-free covenant bonds.

(seeCHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION,INC.V.ROMULO)

Q: What is the difference between final withholding tax (FWT)and creditable withholding tax (CWT)?

A: The differences are as follows:

FWT CWT

a) The amount of income tax

withheld by the withholding

agent is constituted as a full and

final payment of the income tax

due from the payee on the said

income.

a) Taxes withheld on certain

income payments are intended

to equal or at least approximate

the tax due of the payee on said

income.

b)The liability for payment of the

tax rests primarily on the payoras a withholding agent.

b) Payee of income is required to

report the income and/or paythe difference between the tax

withheld and the tax due on the

income. The payee also has the

right to ask for a refund if the tax

withheld is more than the tax

due.

c) The payee is not required to

file an income tax return for the

particular income.

c) The income recipient is still

required to file an income tax

return, as prescribed in Sec. 51

and Sec. 52 of the NIRC, as

amended.


FWT vs. GRT

Q: Should the 20% FWT on banks interest income forpart of

the taxable gross receipts for the purpose of computing theGRT?

A: YES. The 20% FWT on a bank's interest income forms part of the

taxable gross receipts for the purpose of computing the 5% GRT. Ascommonly understood, the term gross receipts means the entire

receipts without any deduction. Deducting any amount from the grossreceipts changes the result, and the meaning, to net receipts. Anydeduction from gross receipts is inconsistent with a law that mandatesa tax on gross receipts, unless the law itself makes an exception. (seeCIR VS. CITYTRUST INVESTMENT PHILS, INC, COMMISSIONER VS. SOLIDBANK CORPand CHINA BANKING CORP.VS.COURT OF APPEALS )

Q: Compare and contrast final withholding tax (FWT) fromGross receipts tax (GRT)?

A: The similarities and distinctions between FWT and GRT are:

FWT GRT

Subject matter passive income

generated in the form

of interest on deposits

and yield on deposit

substitutes

the privilege of engaging

in the business of banking

Scope national national

Taxing Authority National government National government

Taxing period deducted and

withheld as soon as

the income is earned,

and is paid after

every calendarquarterin which it is earned

GRT is neither deducted

nor withheld, but is paid

only after

every taxablequarter in

which it is earned

Kind/Character The FWT is an income

tax subject to

withholding

The GRT is a percentage

tax not subject to

withholding.

(see COMMISSIONER VS.SOLIDBANK CORP)

GROSS INCOME DEFINED (SECTION 32, NIRC)

Q: What is gross income?

A: As provided in Section 32(A), gross incomemeans all income derivedfrom whatever source, including, but not limited to, the following items:

1.

Compensation for services in whatever form paid, including,

but not limited to fees, salaries, wages, commissions and

similar items;

2. Gross income derived from the conduct of trade or business

or the exercise of a profession;

3.

Gains derived from dealings in property

4. Interests

5.

Rents

6. Royalties

7. Dividends

8. Annuities

9. Prizes and winnings


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COURSE: TAXATION I

PROFESSOR: GRUBA


10. Pensions; and

11. Partners distributive share from the net income of the GPP

Q: How does gross income differ from net income?

A: Simply put, Gross income means income, gain or profit subject toincome tax while Net income is gross income less the statutory

deductions and exemptions.

Q: What items are excluded from gross income?

A: As provided in Section 32(B), the following items shall not be includedin gross income and shall be exempt from taxation under Title II:

1.

Proceeds of life insurance, payable upon the death of theinsured to the heirs or beneficiaries, but mot the interest

payments thereon if such amounts are held by the insurer

under an agreement to pay interest (Note: It is considered as

indemnity rather than income)

2.

Amounts received by the insured as return of premiumspaidunder life insurance, endowment or annuity contracts, either

during the term or at the maturity of the contract or upon the

surrender thereof.

3. Gifts, bequests, and devises but not the income from suchproperty; if the amount received is on account of services

rendered whether constituting a demandable debt or not

such as remuneratory donations or the use or opportunity or

use of capital, the receipt is income. (Note: They are instead

subject to estate or gift taxes; See PIROVANO VS.COMMISSIONERabove.)

4.

Compensation for injuries or sickness whether by suit oragreement including amounts received through accident or

health insurance or under the Workmens compensation Act,

but notdamages or compensation recovered for loss of profitin loss or damage to property which would be taxable

5.

Income exempt under treaty binding upon the Governmentof the Philippines.

6. Certain retirement benefits, pensions, gratuities, moreparticularly:

a.

Retirement benefits received under RA 7641 and thosereceived by officials and employees of private firms ,whether individual or corporate, in accordance with a

reasonable private benefit plan maintained by the

employer provided:i. provided that the retiring official or employee has

been in the service of the same employer for atleast ten (10) years and is not less than fifty (50)years of age at the time of his retirement

ii. That the benefits granted shall be availed of by an

official or employee only once.(Note: Reasonable private benefit plan means apension, gratuity, stock bonus or profit-sharing plan

maintained by an employer for the benefit of some or all

of his officials or employees, wherein contributions are

made by such employer for the officials or employees,

or both, for the purpose of distributing to such officials

and employees the earnings and principal of the fund

thus accumulated, and wherein its is provided in said

plan that at no time shall any part of the corpus or

income of the fund be used for, or be diverted to, any

purpose other than for the exclusive benefit of the said

officials and employees.)

b. Any amount received by an official or employee or byhis heirs from the employer as a consequence ofseparationof such official or employee from the serviceof the employer because of death sickness or other

physical disability or for any cause beyond the control of

the said official or employee.

c.

The provisions of any existing law to the contrary

notwithstanding, social security benefits, retirementgratuities, pensions and other similar benefits receivedby resident or nonresident citizens of the Philippines or

aliens who come to reside permanently in the

Philippines from foreign government agencies and otherinstitutions, private or public.

d.

Payments of benefits due or to become due to anyperson (residing in the Philippines) under the laws ofthe United States administered by the United StatesVeterans Administration.

e. Benefits received from or enjoyed under the SocialSecurity System in accordance with the provisions ofRepublic Act No. 8282.

f.

Benefits received from the GSISunder Republic Act No.8291, including retirement gratuity received by

government officials and employees.

7.

Miscellaneous items, likewise exempt, including:a. Income of foreign governmentsor financing institutions

owned, controlled or enjoying refinancing from such

foreign governments and of international or regional

financial institutions established by foreign governmentsfrom their passive investments in the Philippines

b. Income of the Philippine government and its politicalsubdivisions derived from public utilities or in theexercise of essential governmental functions

c. Prizes and awards made primarily in recognition ofreligious, charitable, scientific, educational, artistic,

literary or civic achievement but only if:i.

The recipient was selected without any action on

his part to enter the contest or proceedings; and

ii. The recipient is not required to render substantial

future services as a condition to receiving the prize

or award

d. All prizes and wards granted to athletes in local andinternational sports competitions whether held in the

Philippines or abroad.

e.

Gross benefits received by officials and employees ofpublic and private entities provided, however, that thetotal exclusion shall not exceed P30,000 which shallcover:

i. Benefits received by officials and employees of the

national and local government pursuant to RA

6686

ii.

Benefits received by employees pursuant to PD

851

iii. Benefits received by officials and employees not

covered by PD 851

iv. Other benefits such as productivity incentives and

Christmas bonus provided that the ceiling of

P30,000 may be increased through the rules and

regulations issued by the Secretary of Finance,

upon recommendation of the Commissioner, afterconsidering, among others, the effect on the same

of the inflation rate at the end of the taxable year.

f. GSIS, SSS, Medicare and Pag-ibig contributions andunion dues of individuals

g.

Gains from the sale of bonds, debentures or othercertificate of indebtedness with a maturity of morethan 5 years

h. Gains from the redemption of shares of stock in amutual fund company


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COURSE: TAXATION I

PROFESSOR: GRUBA


Illustrations

Q: A, government employee, retired from service. Uponretirement, he received, among other benefits, terminal leavepay which the CIR withheld a portion allegedly representingincome tax thereon. Is terminal leave pay considered part of

gross income of the recipient?

A: NO. Terminal leave pay received by a government official or employeeis not subject to withholding (income) tax. The rationale behind the

employees entitlement to an exemption from withholding tax on his

terminal leave is that commutation of leave credits, more commonly

known as terminal leave, is applied for by an officer or employee who

retires, resigns or is separated from the service through no fault of his

own. In the exercise of sound personnel policy, the Government

encourages unused leaves to be accumulated. The Government

recognizes that for most public servants, retirement pay is always less

than generous if not meager and scrimpy. Terminal leave payments are

given not only at the same time but also for the same policy

considerations governing retirement benefits. In fine, not being p

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