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INCOME TAX REVIEWER AND CASE DIGESTSPAGE- 1
MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2010
CHAPTER 1GENERAL PRINCIPLES
FEATURES OF PHILIPPINE INCOME TAXATION
TAX SITUS! Literally means the place of taxation, or the country that has
jurisdiction to levy a particular tax on persons, property, rights
or business
! The basis of tax situs is the symbiotic relationshipthe state or
unit that gives protection has the right to demand support
SITUS OF PERSONS IN INCOME TAXATION1. Nationality theorya citizen of the Philippines is subject to
Philippine income tax on his worldwide income, if he resides in
the Philippines; or only on his income from sources within the
Philippines if he qualifies as a non-resident citizenhence, hisincome from sources outside the Philippines shall be exempt
from Philippine income tax
2. Domicillary theorylegal residence; an alien is subject to
Philippine income tax because of his residence in the Philippines
3. Sourceplace where the income is derived (based on activity)
PROGRESSIVE V. REGRESSIVE SYSTEM OF TAXATION! Progressive system of taxationrate of tax increases as the tax
base or bracket increases
! Regressive systemthe rate of tax decreases as the tax base or
bracket increases
! Note that we dont have any regressive taxes in the Philippines
GLOBAL V. SCHEDULAR SYSTEM OF TAXATION! Individual income taxation adopted the schedular system of
taxation
! Global systemthe total allowable deductions as well as
personal and additional exemptions, in the case of individuals or
the total allowable deductions only, in the case of corporations,
are deducted from the gross income to arrive at the net taxable
income subject to the graduated income tax rates, in the case of
individuals, or to the 2-tiered income tax rates, in the case of
corporations (all items of gross income, deductions, and personal
and additional exemptions, if any, are reported in one income
tax return, and one set of tax rates are applied on the tax base)
! Schedular systema system employed where the income tax
treatment varies and made to depend on the kind or category ofthe taxpayers taxable income
CHARACTERISTICS OF SCHEDULAR SYSTEM OF TAXATION1. It accords different tax treatment on the income of the
individual taxpayer
2. It classifies income
GENERAL PRINCIPLES OF INCOME TAXATION
WHAT ARE THE GENERAL PRINCIPLES OF INCOMETAXATION?1. A citizen of the Philippines residingtherein is taxable on all income
derived from sources within and without the Philippines;2. A nonresident citizen is taxable only on income derived from sources
within the Philippines;
3. An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only
on income derived from sources within the Philippines: Provided,
That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade
shall be treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is
taxable onlyon income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derivedfrom sources
within and without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business
in the Philippines, is taxable only on income derived from sources
within the Philippines.
SCOPE OF INCOME TAXATION
DEFINITION OF TERMS
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PERSONS
! It means an individual, a trust, estate or corporation.
CORPORATION
!
It shall include partnerships, no matter how created ororganized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium
agreement under a service contract with the Government.
"General professional partnerships" are partnerships formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
DOMESTIC! The term "domestic", when applied to a corporation, means
created or organized in the Philippines or under its laws.
FOREIGN
! The term "foreign", when applied to a corporation, means a
corporation which is not domestic.
NONRESIDENT CITIZEN
1. A citizen of the Philippines who establishes to the satisfaction of
the Commissioner the fact of his physical presence abroad with
a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during
the taxable year to reside abroad, either as an immigrant or foremployment on a permanent basis.
3. A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines.
5.
The taxpayer shall submit proof to the Commissioner to showhis intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the case
may be for purpose of this Section.
RESIDENT ALIEN
! It means an individual whose residence is within the Philippines
and who is not a citizen thereof.
NON-RESIDENT ALIEN
! It means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
RESIDENT FOREIGN CORPORATION! The term applies to a foreign corporation engaged in trade or
business within the Philippines.
NON-RESIDENT FOREIGN CORPORATION
! The term applies to a foreign corporation not engaged in trade or
business within the Philippines.
FIDUCIARY
! The term means a guardian, trustee, executor, administrator,
receiver, conservator or any person acting in any fiduciary
capacity for any person.
WITHHOLDING AGENT! The term means any person required to deduct and withhold
any tax under the provisions of Section 57.
SHARES OF STOCK
! The term shall include shares of stock of a corporation, warrants
and/or options to purchase shares of stock, as well as units of
participation in a partnership (except general professional
partnerships), joint stock companies, joint accounts, joint
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ventures taxable as corporations, associations and recreation or
amusement clubs (such as golf, polo or similar clubs), and
mutual fund certificates.
SHAREHOLDER! The term shall include holders of a share/s of stock, warrant/s
and/or option/s to purchase shares of stock of a corporation, as
well as a holder of a unit of participation in a partnership
(except general professional partnerships) in a joint stock
company, a joint account, a taxable joint venture, a member of
an association, recreation or amusement club (such as golf, polo
or similar clubs) and a holder of a mutual fund certificate, a
member in an association, joint-stock company, or insurance
company.
TAXPAYER
! The term means any person subject to tax imposed by this Title.
INCLUDING OR INCLUDES
! The terms when used in a definition contained in this Title,
shall not be deemed to exclude other things otherwise within the
meaning of the term defined.
TAXABLE YEAR
! The term means the calendar year, or the fiscal year ending
during such calendar year, upon the basis of which the net
income is computed under this Title. 'Taxable year' includes, in
the case of a return made for a fractional part of a year under
the provisions of this Title or under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of
the commissioner, the period for which such return is made.
FISCAL YEAR
! The term means an accounting period of twelve (12) months
ending on the last day of any month other than December.
PAID OR INCURRED/PAID OR ACCRUED
! The terms shall be construed according to the method of
accounting upon the basis of which the net income is computed
under this Title.
TRADE OR BUSINESS! The term includes the performance of the functions of a public
office.
SECURITIES
! The term means shares of stock in a corporation and rights to
subscribe for or to receive such shares. The term includes bonds,
debentures, notes or certificates, or other evidence or
indebtedness, issued by any corporation, including those issued
by a government or political subdivision thereof, with interest
coupons or in registered form.
DEALER IN SECURITIES
!
The term means a merchant of stocks or securities, whether anindividual, partnership or corporation, with an established place
of business, regularly engaged in the purchase of securities and
the resale thereof to customers; that is, one who, as a merchant,
buys securities and re-sells them to customers with a view to the
gains and profits that may be derived therefrom.
BANK
! The term means every banking institution, as defined in Section
2 of Republic Act No. 337, as amended, otherwise known as the
General banking Act. A bank may either be a commercial bank,
a thrift bank, a development bank, a rural bank or specialized
government bank.
NON-BANK FINANCIAL INTERMEDIARY
! The term means a financial intermediary, as defined in Section
2(D)(C) of Republic Act No. 337, as amended, otherwise known
as the General Banking Act, authorized by the Bangko Sentral
ng Pilipinas (BSP) to perform quasi-banking activities.
QUASI-BANKING ACTIVITIES
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! The term means borrowing funds from twenty (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 borrower's own account, or
through the issuance of certificates of assignment or similarinstruments, with recourse, or of repurchase agreements for
purposes of relending or purchasing receivables and other
similar obligations: Provided, however, That commercial,
industrial and other non-financial companies, which borrow
funds through any of these means for the limited purpose of
financing their own needs or the needs of their agents or dealers,
shall not be considered as performing quasi-banking functions.
DEPOSIT SUBSTITUTES
! The term shall mean an alternative from of obtaining funds
from the public (the term 'public' means borrowing from twenty
(20) or more individual or corporate lenders at any one time)
other than deposits, through the issuance, endorsement, oracceptance of debt instruments for the borrowers own account,
for the purpose of relending or purchasing of receivables and
other obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include, but need
not be limited to bankers' acceptances, promissory notes,
repurchase agreements, including reverse repurchase
agreements entered into by and between the Bangko Sentral ng
Pilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with
recourse: Provided, however, That debt instruments issued for
interbank call loans with maturity of not more than five (5) days
to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shallnot be considered as deposit substitute debt instruments.
ORDINARY INCOME
! The term includes any gain from the sale or exchange of
property which is not a capital asset or property described in
Section 39(A)(1). Any gain from the sale or exchange of property
which is treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain from the sale
or exchange of property which is not a capital asset as defined in
Section 39(A)(1). The term 'ordinary loss' includes any loss from
the sale or exchange of property which is not a capital asset. Any
loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss'shall be treated as loss from the sale or exchange of property
which is not a capital asset.
RANK AND FILE EMPLOYEES
! The term shall mean all employees who are holding neither
managerial nor supervisory position as defined under existing
provisions of the Labor Code of the Philippines, as amended.
MUTUAL FUND COMPANY
! The term shall mean an open-end and close-end investment
company as defined under the Investment Company Act.
TRADE, BUSINESS OR PROFESSION! The term shall not include performance of services by the
taxpayer as an employee.
REGIONAL OR AREA HEADQUARTERS
! The term shall mean a branch established in the Philippines by
multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region
and other foreign markets.
REGIONAL OPERATING HEADQUARTERS
!
The term shall mean a branch established in the Philippines bymultinational companies which are engaged in any of the
following services: general administration and planning;
business planning and coordination; sourcing and procurement
of raw materials and components; corporate finance advisory
services; marketing control and sales promotion; training and
personnel management; logistic services; research and
development services and product development; technical
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support and maintenance; data processing and communications;
and business development.
LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES
!
The term shall refer to certificate of time deposit or investmentin the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other
investments with a maturity period of not less than five (5)
years, the form of which shall be prescribed by the Bangko
Sentral ng Pilipinas (BSP) and issued by banks only (not by
nonbank financial intermediaries and finance companies) to
individuals in denominations of Ten thousand pesos (P10,000)
and other denominations as may be prescribed by the BS.
TAXPAYER! Refers to any person subject to tax imposed by this Title.
PERSONS! It means an individual, a trust, estate or corporation
PERSONS LIABLE TO TAX
CIR V. PROCTER AND GAMBLE204 SCRA 378
FACTS:
PMC paid a 25-35% tax on its income for a relevant year. Thereafter,
deriving at its net income, it declared dividends for the benefit of PMC-
USA. From this declared dividends, it paid a 25% tax, as per taxation
laws. The company did the same for the next few quarters. Then,
contending that it is the withholding agent for the tax paid on thedividends paid to PMC-USA, it requested for the refund of its alleged
overpayments of taxes. The company was denied the refund and
coursing through the CTA, the latter ruled in its favor.
HELD:
The submission of the Commissioner of Internal Revenue that PMC-Phil.
is but a withholding agent of the government and therefore cannot claim
reimbursement of the alleged over paid taxes, is completely meritorious.
The real party in interest being the mother corporation in the United
States, it follows that American entity is the real party in interest, and
should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue ofwhether or not PMC-U.S.A. is a non-resident foreign corporation under
Section 24(b)(1) of the Tax Code (the subsidiary of an American) a
domestic corporation domiciled in the United States, is entitled under
the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at
least the 20 percentage paid portion (of the 35% dividend tax) spared or
waived as otherwise considered or deemed paid by the government. The
law pertinent to the issue is Section 902 of the U.S. Internal Revenue
Code, as amended by Public Law 87-834, the law governing tax credits
granted to U.S. corporations on dividends received from foreign
corporations, which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN
FOREIGN CORPORATION.(a) Treatment of Taxes Paid by Foreign Corporation - For purposes of this
subject, a domestic corporation which owns at least 10 percent of the
voting stock of a foreign corporation from which it receives dividends in
any taxable year shall-
(1) to the extent such dividends are paid by such foreign corporation out
of accumulated profits [as defined in subsection (c) (1) (a)] of a year for
which such foreign corporation is not a less developed country
corporation, be deemed to have paid the same proportion of any income,
war profits, or excess profits taxes paid or deemed to be paid by such
foreign corporation to any foreign country or to any possession of the
United States on or with respect to such accumulated profits, which the
amount of such dividends (determined without regard to Section 78)bears to the amount of such accumulated profits in excess of such income,
war profits, and excess profits taxes (other than those deemed paid); and
(2) to the extent such dividends are paid by such foreign corporation out
of accumulated profits [as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less-developed country corporation,
be deemed to have paid the same proportion of any income, war profits,
or excess profits taxes paid or deemed to be paid by such foreign
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corporation to any foreign country or to any possession of the United
States on or with respect to such accumulated profits, which the amount
of such dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined - For purpose of this section, the term
'accumulated profits' means with respect to any foreign corporation.
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
profits, or income computed without reduction by the amount of the
income, war profits, and excess profits taxes imposed on or with respect
to such profits or income by any foreign country.... ; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
profits, or income in excess of the income, was profits, and excess profits
taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been
paid from the accumulated profits of the preceding year or years (unless
to his satisfaction shows otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains,
profits, or earnings.
There is nothing in the aforecited provision that would justify tax return
of the disputed 15% to the private respondent. Furthermore, as ably
argued by the petitioner, the private respondent failed to meet certain
conditions necessary in order that the dividends received by the non-
resident parent company in the United States may be subject to thepreferential 15% tax instead of 35%. Among other things, the private
respondent failed: (1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A. on the
dividends received from private respondent; (2) to present the income tax
return of its mother company for 1975 when the dividends were received;
and (3) to submit any duly authenticated document showing that the
U.S. government credited the 20% tax deemed paid in the Philippines.
CHAPTER 2CLASSIFICATION OF INCOME TAXPAYERS
INDIVIDUALS
CITIZENS
Section 1. The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the adoption
of this 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 the accordance with law.
Section 2. Natural-born citizens are those who are citizens of the
Philippines from birth without having to perform any act to acquire or
perfect their Philippine citizenship. Those who elect Philippine
citizenship in accordance with paragraph (3), Section 1 hereof shall be
deemed natural-born citizens.
NONRESIDENT CITIZEN
1. A citizen of the Philippines who establishes to the satisfaction of
the Commissioner the fact of his physical presence abroad with
a definite intention to reside therein.
2.
A citizen of the Philippines who leaves the Philippines duringthe taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
year.
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall
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likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines.
5.
The taxpayer shall submit proof to the Commissioner to showhis intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the case
may be for purpose of this Section.
ALIENS
RESIDENT ALIEN
! It means an individual whose residence is within the Philippines
and who is not a citizen thereof.
NON-RESIDENT ALIEN
! It means an individual whose residence is not within the
Philippines and who is not a citizen thereof.
GENERAL PROFESSIONAL PARTNERSHIP! Are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
Definition Sourcerule
Individuals
Citizens: Residents Within,
without
Non-residents Sec. 22, E w/in
Aliens: Residents Sec. 22, F w/in
Non-
residents
Engaged in
trade or
business
w/in
Not
engaged
Section 25,
A
GPP Sec. 22, B It depends
Estate/trusts Depends
Corporations
Domestic w/in, w/out
Foreign Resident w/in
Non-
resident
w/in
TAN V. CIRGR L-109289, OCTOBER 3, 1994
FACTS:
This case seeks to assail the constitutionality of Republic Act No. 7496,
also commonly known as the Simplified Net Income Taxation Scheme
("SNIT"), amending certain provisions of the National Internal Revenue
Code and, in G.R. No. 109446, the validity of Section 6, Revenue
Regulations No. 2-93, promulgated by public respondents pursuant to
said law.
The several propositions advanced by petitioners revolve around the
question of whether or not public respondents have exceeded their
authority in promulgating Section 6, Revenue Regulations No. 2-93, to
carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional
partnership (GPP) and the partners comprising the GPP are covered by
R. A. No. 7496. Thus, in determining the net profit of the partnership,
only the direct costs mentioned in said law are to be deducted from
partnership income. Also, the expenses paid or incurred by partners intheir individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as
direct cost, are not deductible from his gross income.
The real objection of petitioners is focused on the administrative
interpretation of public respondents that would apply SNIT to partners
in general professional partnerships.
HELD:
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The Court, first of all, should like to correct the apparent misconception
that general professional partnerships are subject to the payment of
income tax or that there is a difference in the tax treatment between
individuals engaged in business or in the practice of their respective
professions and partners in general professional partnerships. The fact ofthe matter is that 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.
There is, then and now, no distinction in income tax liability between a
person who practices his profession alone or individually and one who
does it through partnership (whether registered or not) with others in
the exercise of a common profession. Indeed, outside of the gross
compensation income tax and the final tax on passive investment income,under the present income tax system all individuals deriving income
from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we
were to consider Republic Act No. 7496 as an entirely independent, not
merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as
only forming part of, and subject to, the whole income tax concept and
precepts long obtaining under the National Internal Revenue Code. To
elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive
taxable income. The law, in levying the tax, adopts the mostcomprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject
to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base
(that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2)
Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable
Trusts (irrevocable both as to corpus and as to income).
Partnerships are, under the Code, either "taxable partnerships" or
"exempt partnerships." Ordinarily, partnerships, no matter how createdor organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law
assimilated to be within the context of, and so legally contemplated as,
corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not
intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to
cover corporations and partnerships which are independently subject to
the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified
as corporations nor even considered as independent taxable entities forincome tax purposes. A general professional partnership is such an
example. 4 Here, the partners themselves, not the partnership (although
it is still obligated to file an income tax return [mainly for administration
and data]), are liable for the payment of income tax in their individual
capacity computed on their respective and distributive shares of profits.
In the determination of the tax liability, a partner does so as an
individual, and there is no choice on the matter. In fine, under the Tax
Code on income taxation, the general professional partnership is deemed
to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merelyconfirmed, the above standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all
individual income taxpayers on their non-compensation income. There is
no evident intention of the law, either before or after the amendatory
legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective
professions individually and of those who do it through a general
professional partnership.
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ESTATES AND TRUSTS
SEC. 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in
trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will or
trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is to
be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his
employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the
earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is
impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or diverted to,
purposes other than for the exclusive benefit of his employees: Provided,
That any amount actually distributed to any employee or distributee
shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the
case of two or more trusts, the creator of the trust in each instance is the
same person, and the beneficiary in each instance is the same, the
taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and such
proportion of said tax shall be assessed and collected from each trustee
which the taxable income of the trust administered by him bears to the
consolidated income of the several trusts.
SEC. 61. Taxable Income. - The taxable income of the estate or trust
shall be computed in the same manner and on the same basis as in the
case of an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate or
trust for the taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the income collected by
a guardian of an infant which is to be held or distributed as the court
may direct, but the amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether distributed to
them or not. Any amount allowed as a deduction under this Subsection
shall not be allowed as a deduction under Subsection (B) of this Section
in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during
the period of administration or settlement of the estate, and in the case
of income which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there shall be allowed as
an additional deduction in computing the taxable income of the estate or
trust the amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any legatee, heir or
beneficiary but the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
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(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall not
be allowed: Provided, That the amount of any income included in the
return of said trust shall not be included in computing the income of the
beneficiaries.
SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of
the tax provided for in this Title, there shall be allowed an exemption of
Twenty thousand pesos (P20,000) from the income of the estate or trust.
SEC. 63. Revocable Trusts. - Where at any time the power to revest in
the grantor title to any part of the corpus of the trust is vested (1) in the
grantor either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the corpus
or the income therefrom, or (2) in any person not having a substantial
adverse interest in the disposition of such part of the corpus or the
income therefrom, the income of such part of the trust shall be included
in computing the taxable income of the grantor.
SEC. 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the discretion of
the grantor or of any person not having a substantial adverse interest in
the disposition of such part of the income may be held or accumulated for
future distribution to the grantor, or (2) may, or in the discretion of the
grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor, or (3)
is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income
may be applied to the payment of premiums upon policies of insurance on
the life of the grantor, such part of the income of the trust shall be
included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the grantor'
means in the discretion of the grantor, either alone or in conjunction with
any person not having a substantial adverse interest in the disposition of
the part of the income in question.
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors,
administrators, receivers, conservators and all persons or corporations,
acting in any fiduciary capacity, shall render, in duplicate, a return of
the income of the person, trust or estate for whom or which they act, and
be subject to all the provisions of this Title, which apply to individuals in
case such person, estate or trust has a gross income of Twenty thousand
pesos (P20,000) or over during the taxable year. Such fiduciary or personfiling the return for him or it, shall take oath that he has sufficient
knowledge of the affairs of such person, trust or estate to enable him to
make such return and that the same is, to the best of his knowledge and
belief, true and correct, and be subject to all the provisions of this Title
which apply to individuals: Provided, That a return made by or for one or
two or more joint fiduciaries filed in the province where such fiduciaries
reside; under such rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall prescribe, shall be a
sufficient compliance with the requirements of this Section.
SEC. 66. Fiduciaries Indemnified Against Claims for Taxes Paid. -
Trustees, executors, administrators and other fiduciaries are indemnified
against the claims or demands of every beneficiary for all payments oftaxes which they shall be required to make under the provisions of this
Title, and they shall have credit for the amount of such payments against
the beneficiary or principal in any accounting which they make as such
trustees or other fiduciaries.
CIR V. VISAYAS ELECTRIC23 SCRA 715
FACTS:
Visayas Electric was given legislative franchise to operate and maintain
an electric light, heat, and power system in the City of Cebu, certain
municipalities in the Province of Cebu, and other surrounding places.
In a board of directors' meeting, respondent company established a
pension fund, known as the "Employees' Reserve for Pensions." Said fund
is for the benefit of its "present and future" employees, in the event of
retirement, accident or disability. Every month thereafter an amount has
been set aside for this purpose. It is taken from the gross operating
receipts of the company. This reserve fund was later invested by the
company in stocks of San Miguel Brewery, Inc., for which dividends have
been regularly received. But these dividends were not declared for tax
purposes.
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It was in a letter that the Auditor General gave notice that as the
company has retained full control of the fund, therefore, the dividends
are not tax exempt; but that such dividends may be excluded from gross
receipts for franchise tax purposes, provided the same are declared forincome tax purposes.
In pursuance of the above letter, the Provincial Auditor of Cebu allowed
the company the option to declare the dividends either as part of the
company's income for income tax purposes or as part of its income for
franchise tax purposes. The company elected the latter. However, as per
report of a revenue examiner, it was found out that the company was the
full custodian of the funds and thus, the corporate income tax was
imposed on the same.
HELD:
The disputed income are not receipts, revenues or profits of the company.
They do not go to the general fund of the company. They are dividendsfrom the San Miguel Brewery, Inc. investment which form part of and
are added to the reserve pension fund which is solely for the benefit of
the employees, "to be distributed among the employees."
Not escaping notice is that by the resolution of respondent company's
board and the setting aside of monthly amounts from its gross operating
receipts for that fund, said company was merely acting, with respect to
such fund, as trustee for its employees. For, indeed, the intention to
establish a trust in favor of the employees is clear. A valid express trust
has thus been created. And, for tax purposes, the employees' reserve fund
is a separate taxable entity. Respondent company then, while retaining
legal title and custody over the property, holds it in trust for the
beneficiaries mentioned in the resolution creating the trust, in theabsence of any condition therein which would, in effect, destroy the
intention to create a trust.
Given the fact that the dividends are returns of the trust estate and not
of the grantor company, we must say that petitioner misconceived the
import of the law when he assessed said dividends as part of the income
of the company. Similarly, the tax court should not have considered them
at all as the company's "receipts, revenues and profits" which are exempt
from income tax.
CIR V. CA, CTA, GCL RETIREMENT PLAN
207 SCRA 487
FACTS:
Private Respondent, GCL Retirement Plan (GCL, for brevity) is an
employees' trust maintained by the employer, GCL Inc., to provide
retirement, pension, disability and death benefits to its employees. The
Plan as submitted was approved and qualified as exempt from income
tax by Petitioner Commissioner of Internal Revenue in accordance with
Rep. Act No. 4917.
Respondent GCL made investsments and earned therefrom interest
income from which was witheld the fifteen per centum (15%) final
witholding tax imposed by Pres. Decree No. 1959.
Respondent GCL filed with Petitioner a claim for refund in the amounts
of P1,312.66 withheld by Anscor Capital and Investment Corp., and
P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed
a second claim for refund of the amount of P7,925.00 withheld by Anscor,
stating in both letters that it disagreed with the collection of the 15%
final withholding tax from the interest income as it is an entity fully
exempt from income tax asprovided under Rep. Act No. 4917 in relation
to Section 56 (b)of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the
matter to respondent Court of Tax Appeals (CTA). The latter ruled in
favor of GCL, holding that employees' trusts are exempt from the 15%
final withholding tax on interest income and ordering a refund of the taxwithheld.
HELD:
It is to be noted that the exemption from withholding tax on interest on
bank deposits previously extended by Pres. Decree No. 1739 if the
recipient (individual or corporation) of the interest income is exempt
from income taxation, and the imposition of the preferential tax rates if
the recipient of the income is enjoying preferential income tax treatment,
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were both abolished by Pres. Decree No. 1959. Petitioner thus submits
that the deletion of the exempting and preferential tax treatment
provisions under the old law is a clear manifestation that the single 15%
(now 20%) rate is impossible on all interest incomes from deposits,
deposit substitutes, trust funds and similar arrangements, regardless ofthe tax status or character of the recipients thereof. In short, petitioner's
position is that from 15 October 1984 when Pres. Decree No. 1959 was
promulgated, employees' trusts ceased to be exempt and thereafter
became subject to the final withholding tax.
To begin with, it is significant to note that the GCL Plan was qualified as
exempt from income tax by the Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917 approved on 17 June 1967. This law
specificallyprovided:
Sec. 1. Any provision of law to the contrary notwithstanding, the
retirement benefits received by officials and employees of private firms,
whether individual or corporate, in accordance with a reasonable privatebenefit plan maintained by the employer shall be exempt from all taxes
and shall not be liable to attachment, levy or seizure by or under any
legal or equitable process whatsoever except to pay a debt of the official
or employee concerned to the private benefit plan or that arising from
liability imposed in a criminal action; . . . (emphasis ours).
In so far as employees' trusts are concerned, the foregoing provision
should be taken in relation to then Section 56(b) (now 53[b]) of the Tax
Code, as amended by Rep. Act No. 1983, supra, which took effect on 22
June 1957. This provision specifically exempted employee's trusts from
income tax and is repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. !(a) Application of tax. !The taxes imposedby this Title upon individuals shall apply to the income of estates or of
any kind of property held in trust.
xxx xxx xxx
(b) Exception. ! The tax imposed by this Title shall not apply toemployee's trust which forms part of a pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from
any other kind of property held in trust, springs from the foregoingprovision. It is unambiguous. Manifest therefrom is that the tax law has
singled out employees' trusts for tax exemption.
And rightly so, by virtue of the raison de'etre behind the creation of
employees' trusts. Employees' trusts or benefit plans normally provide
economic assistance to employees upon the occurrence of certain
contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members
of the Plan may be exposed. It is an independent and additional source of
protection for the working group. What is more, it is established for their
exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in
order to encourage the formation and establishment of such privatePlans for the benefit of laborers and employees outside of the Social
Security Act.
It is evident that tax-exemption is likewise to be enjoyed by the income of
the pension trust. Otherwise, taxation of those earnings would result in a
diminution accumulated income and reduce whatever the trust
beneficiaries would receive out of the trust fund. This would run afoul of
the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax
exemption and preferential tax rates under the old law, therefore, can
not be deemed to extent to employees' trusts. Said Decree, being a
general law, can not repeal by implication a specific provision.
CORPORATIONS
SEC. 22. Definitions - When used in this Title:
xxx
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(B) The term "corporation" shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), association, or insurance companies, but does not include
general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or engagingin petroleum, coal, geothermal and other energy operations pursuant to
an operating consortium agreement under a service contract with the
Government.
xxx
DOMESTIC CORPORATIONS! Are those created or organized in the Philippines or under its
laws
AS DISTINGUISHED FROM CO-OWNERSHIP!
There is co-ownership whenever the ownership of an undividedthing or right belongs to different persons. Contrary stipulation
is void. (CC)
FOREIGN CORPORATIONS! Resident foreign corporationIt is a foreign corporation engaged
in trade or business within the Philippines! Non-resident corporationit is a foreign corporation not
engaged in trade or business within the Philippines.
OA V. CIR45 SCRA 74
FACTS:Petitioners were surviving heirs of Julia Baales. An action for partition
of estate was instituted wherein Oa was appointed as the
administrator. He was also appointed as the guardian of the minor
children. No partition took place however. Instead, the funds and
properties were used to increase income. It was invested in many things.
The income derived was then divided equally among the petitioners.
This prompted the Commissioner to hold that there was a formed
unregistered partnership and subjected them to corporate income tax.
HELD:
The petitioners pose for our resolution the following questions: (1) Under
the facts found by the Court of Tax Appeals, should petitioners be
considered as co-owners of the properties inherited by them from the
deceased Julia Buales and the profits derived from transactionsinvolving the same, or, must they be deemed to have formed an
unregistered partnership subject to tax under Sections 24 and 84(b) of
the National Internal Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense that they
invested as a common fund the profits earned by the properties owned by
them in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares in
the inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered partnership?
And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for
the same years 1955 and 1956 as individual income taxes on their
respective shares of the profits accruing from the properties they ownedin common be deducted from the deficiency corporate taxes, herein
involved, assessed against such unregistered partnership by the
respondent Commissioner?
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limit themselves to holding the properties inherited
by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and
that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the
purchase and sale of corporate securities. It is likewise admitted that all
the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the
inheritance. In these circumstances, it is Our considered view that fromthe moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oa as a common fund in
undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and,
in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.
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and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these
conditions to be present on the basis of the fact that petitioners
purchased certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitionerspurchased twenty-four (24) lots showing that the purpose was not limited
to the conservation or preservation of the common fund or even the
properties acquired by them. The character of habituality peculiar to
business transactions engaged in for the purpose of gain was present.
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.
In the present case, there is clear evidence of co-ownership between thepetitioners. There is no adequate basis to support the proposition that
they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They shared in the
gross profits as co- owners and paid their capital gains taxes on their net
profits and availed of the tax amnesty thereby. Under the circumstances,
they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets thatcan be held liable for said deficiency corporate income tax, then
petitioners can be held individually liable as partners for this unpaid
obligation of the partnershipIn the instant case, petitioners bought two
(2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of
land from one seller. It was only 1968 when they sold the two (2) parcels
of land after which they did not make any additional or new purchase.
The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.
AFISCO INSURANCE CORPORATION V. CIR
GR 112675, JANUARY 25, 1999302 SCRA 1
FACTS:
The petitioners are 41 non-life insurance corporations, organized and
existing under the laws of the Philippines. Upon issuance by them of
Erection, Machinery Breakdown, Boiler Explosion and Contractors' All
Risk insurance policies, the petitioners entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a
non-resident foreign insurance corporation. The reinsurance treaties
required petitioners to form a pool. Accordingly, a pool composed of the
petitioners was formed on the same day.
The pool submitted its financial statements and they were accordingly
assessed for deficiency corporate taxes to which they tried to opposed but
unfortunately was denied.
HELD:
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NIRC's inclusion of
such entities in the tax on corporations was made even clearer by the tax
Reform Act of 1997.
In the case before us, the ceding companies entered into a Pool
Agreement or an association that would handle all the insurancebusinesses covered under their quota-share reinsurance treaty 31 andsurplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. 33 This commonfund pays for the administration and operation expenses of the pool.
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(2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for
each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any
insurance policy; however, its work is indispensable, beneficial and
economically useful to the business of the ceding companies and Munich,
because without it they would not have received their premiums. The
ceding companies share "in the business ceded to the pool" and in the
"expenses" according to a "Rules of Distribution" annexed to the Pool
Agreement.
CHAPTER 3TAX BASE AND TAX RATES
TAX BASE AND TAX RATES: INDIVIDUALSIncome Source of income Tax rates Additional information
Resident Citizens and Resident Aliens
Taxable
Income
Liability for income tax
1.
Resident citizenwithin and withoutthe Philippines
2. Non-resident citizen including OFWs
within
3. Resident alienwithin
As of January 2000, graduated rate
of 5%-32%
Husband and wife, subject to the provision of
Section 51 (D) hereof, shall compute separatelytheir individual income tax based on their
respective total taxable income.
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.
N.B: given a basket of income, if it doesn't fallwithin the passive income, then it is taxable
income and the graduated rate of 5-32% will beapplied accordingly.
For example, a resident citizen derives interest
income from his bank deposit abroad. The
interest income shall be treated as regular
income. The interest income contemplated in
passive income is interest earned in bank
deposits in the Philippines.
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Interests, Royalties, Prizes and otherwinnings1. Interest on any currency bank deposit,
yield or other monetary benefits from
deposit substitute, trust fund andsimilar arrangement
2. Royalties in general
3. Prize exceeding P10,000
4. Other winnings except PCSO and lotto
sweepstakes
Final tax of 20%
*there is emphasis on the holding period and not
the maturity period.
Royalty from books, literary works, and
musical compositionsFinal tax of 10%
Prize less than P10,000 Regular income
Interest under the expanded foreign
currency deposit systemFinal tax of 7 ! %
There is a preference to promote the increase in
foreign exchange reserves
Dividends:
Dividend from a domestic corporation or
from a joint stock company, insurance or
mutual fund company, and regional
operating headquarters of multinational
company, or share in the distributable net
income after tax of a partnership (except a
general professional partnership), joint
stock or joint venture or consortium taxable
as a corporation
1998: 6%
1999: 8%
Current: Final tax of 10%
Dividend income from a foreign corporation doing
business in the country is considered as regular
income and would be taxed with the
corresponding graduated rate.
*Dividends don't stop with those coming from
shares of stock.
Passive Income
Capital gains on shares of stock
On sale of shares of stock of a domestic
corporation not listed and traded through alocal stock exchange, held as capital asset
On the net capital gain:
Not over P100,000---------------finaltax of 5%
On any amount in excess of
P100,000-------------------------------------
-----------final tax of 10%
Sale of shares of stock of a domestic corporation
through a local stock exchange or thru initial
public offering pays the stock transaction tax and
other percentage taxes, and having paid this tax,shall not be subject to the rules on income tax
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Capital gains on real propertyOn sale of real property in the Philippines
held as capital asset
Art. 415. The following are immovableproperty:
(1) Land, buildings, roads and constructions
of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while
they are attached to the land or form an
integral part of an immovable;
(3) Everything attached to an immovable in
a fixed manner, in such a way that it
cannot be separated therefrom without
breaking the material or deterioration of
the object;
(4) Statues, reliefs, paintings or other
objects for use or ornamentation, placed inbuildings or on lands by the owner of the
immovable in such a manner that it reveals
the intention to attach them permanently
to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which
may be carried on in a building or on a
piece of land, and which tend directly to
meet the needs of the said industry or
works;
On the gross selling price, or the
current fair market value at the
time of sale, whichever is higher---
final tax of 6%
~@~
(6) Animal houses, pigeon-houses,
beehives, fish ponds or breeding
places of similar nature, in case
their owner has placed them or
preserves them with the intention
to have them permanently attached
to the land, and forming a
permanent part of it; the animals inthese places are included;
(7) Fertilizer actually used on a
piece of land;(8) Mines, quarries, and slag
dumps, while the matter thereof
forms part of the bed, and waters
either running or stagnant;
(9) Docks and structures which,
though floating, are intended by
their nature and object to remain at
a fixed place on a river, lake, or
coast;
(10) Contracts for public works, and
servitudes and other real rights
over immovable property. (334a)
Exemptioncapital gain from the sale or
disposition of a principal residence of a natural
person, which is fully utilized in acquiring or
constructing a new principal residence, provided:
1.
The proceeds of the sale or disposition isutilized within 18 months from the date of
sale or disposition
2. The Commissioner of Internal Revenue is
notified by the taxpayer within 30 days from
the date of sale or disposition
3. Can avail of exemption once every 10 years
4. A deposit is made of the 6% capital gain tax
withheld by the buyer, in cash or managers
check, in interest bearing account with an
AAB, under an Escrow agreement between
the taxpayer and BIR that the same shall be
released to the seller when the proceeds of
the sale shall have been utilized as intended
Disposition of real property to the government:
you have option to be subjected to final tax of 6%
or graduated rate of 5-32%
Non-Resident AlienEngaged in
trade orbusiness in the
Taxable incomefrom within thePhilippines
Uniform rules of 5%-32% *The 180 days for one to be considered to be
engaged in trade or business is counted with
respect to each calendar year (Section 24 and 25)
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Passive income1. Interest
2. Royalties in general
3. Prize exceeding P10,000
4.
Other winnings except PCSO5. Dividends from a domestic corporation,
or from a joint stock company,
insurance or mutual fund company,
and regional operating headquarters of
multinational company, or share in the
distributable net income after tax of a
partnership (except general
professional partnership), joint stock or
joint venture or consortium taxable as
a corporation
Final tax of 20%
6. Royalties from books, literary works
and musical compositionsFinal tax of 10%
7.
Gross income from the Philippines
from cinematographic films and similar
works
Final tax of 25%
Philippines
8. Interest under the expanded foreign
currency deposit system
9. Interest on long-term deposit or
investment in banks (with maturity of
5 years or more)
Exempt
Not engaged intrade orbusiness
Gross income from within the Philippines
Final tax of 25%
They are not allowed any personal exemptions
Special aliens 1. Alien Individual Employed by Regional
or Area Headquarters and RegionalOperating Headquarters of
Multinational Companies.
2. Alien Individual Employed by Offshore
Banking Units.
3. Alien Individual Employed by
Petroleum Service Contractor and
Subcontractor.
Final tax of 15% of such gross
income
On all taxable income5%-32% as
a non-resident alien in the
Philippines
The preferential 15% rate refers to
compensation/wages related to their employment.Other than this compensation or wages, the
applicable rates would be the 5-32%.
There is an option available to a Filipino
occupying the same position as foreigner expat.
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TAX BASE AND TAX RATES: CORPORATIONS
Domestic CorporationsNet income within and without the Philippines
In general Taxable income derived from within andwithout the Philippines
Normal tax of 35%
Beginning 2009, 30%
But beginning with the 4th year of
operations, whichever is higher of
The normal tax of 35% and the
Minimum corporate income tax of
2%
The normal income tax is computed for each of
the first 3 quarters of the year. In an annual
return, the normal tax and the minimum
corporate income tax are computed.
Proprietary educational institutions and
non-profit hospitalon all taxable income
from all sources
10% If the unrelated income exceeds 50%, then this
premium wouldn't be applicable
Resident international carrieron gross
Philippine billings
2 !%
Non-resident owner or lessor of vesselgross income from the Philippines
4 !%
Non-resident cinematographic film owner,
lessor or distributorgross income from the
Philippines
25%
Non-resident lessor of aircraft, machinery
and other equipment
7 !% on gross rentals, charges, and
other fees from Philippine sources
Regional operating headquarters of
multinational corporation
10% on taxable income
Specialcorporations
GOCCs (they follow SEC registration
requirements as well)
Same rate as those engaged in
similar business, industry, oractivity
Except the GSIS, SSS, PHIC, and PCSO
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Interests and royaltiesInterest under the expanded foreign
currency deposit system
Interest on any currency bank deposit,yield or other monetary benefit from
deposit substitute, trust fund and similar
arrangement, and royalties
Final tax of 7 !%
Final tax of 20%
Depositor bank deposits with another banks
FCDU and it will earn interest income. This is
exempt.
Depositary bank who holds money fromdepositors and invests it to another as foreign
loans or whatnot is subject to 10%
Dividends Dividend from domestic corporation
intercompany dividend
ExemptPassive income
Capital gains On sale of shares of stock of a corporation
not listed and traded through the local
stock exchange held as capital assets
On sale of land and/or building held as
capital asset
On the net capital gain
Not over P100000final tax of 5%
Over P100000final tax of 10%
On the gross selling price or currentfair market value prevailing at the
time of sale, whichever is higher
final tax of 10%
Sale of shares of stock of a domestic corporation
through a local stock exchange or thru initial
public offering pays the stock transaction tax and
other percentage taxes, and having paid this tax,
shall not be subject to the rules on income tax
Resident foreign corporationwithin the PhilippinesIn general 2005-200835%
2008-after30%
Has the option of being taxed with 15% gross
income tax
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Branch profitremittance tax
Any profit remitted by a branch to its head
office
15% which shall be based on the
total profits applied or earmarked
for remittance without any
deduction for the tax component
thereof (except those activitieswhich are registered with the
Philippine Economic Zone
Authority).
The tax shall be collected and paid in the same
manner as provided in Sections 57 and 58 of this
Code: provided, that interests, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages premiums, annuities,emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income
and capital gains received by a foreign
corporation during each taxable year from all
sources within the Philippines shall not be
treated as branch profits unless the same are
effectively connected with the conduct of its trade
or business in the Philippines.
InterestInterest under the expanded foreign
currency deposit system
Interest under any current bank deposit,yield or other monetary benefit from
deposit substitute, trust fund and other
similar arrangement, royalties
Final tax of 7 ! %
Final tax of 20%
DividendsDividend from domestic corporation
intercompany dividend
Exempt
Passive income
Capital gainsOn sale of shares of stock of a domestic
corporation not listed and traded through a
local stock exchange, held as capital assets
On net capital gain
Not over P100000final tax of 5%
Over P100000final tax of 10%
Subsidiary v.Branch of
foreigncorporation
SubsidiaryEntity separate and distinct from its
stockholders (separate entity concept)
Tax treatment is that of a domestic
corporation
32% on net income from within and
without
Stockholders are liable only to the extent of their
subscription (parent company is the sole
stockholder)
If subsidiary remits to parent, subject to the 15%
(conditional) linkparent company
Parent may not be held liable for damages filed
against subsidiary
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Branch Merely an extension of the foreign head
office (single entity concept)
Tax treatment is that of a foreigncorporation
32% on net income from within The link is between the head office and home
office
If the branch remits to the head office, it is
subject to the branch profit remittance tax
Home is liable for all liabilities of the branch
Subject to the 10% improperly accumulated
earnings
Home office Parent (NRFC)
BPRT=15% Dividend=15%
Branch Subsidiary
RFC DC
35% TI (within) 35% TI (within/without)
Non-resident foreign corporationsWithin the Philippines
In general Foreign corporation not engaged in trade orbusiness in the Philippines
35%
Non-resident cinematographic film owner,
lessor, or distributor
25% Filipino industry would like to be protected
Non-resident owner or lessor of vessels
chartered by Philippine nationals
4 !%Special non-resident
Non-resident owner or lessor of aircraft,
machineries, and other equipment
7 !%
Interest on foreign loans Final tax of 20%Dividend from domestic corporations Final tax of 15% Conditioned at showing of proof of a tax pairing
provision.Passive incomeOn sale of shares of stock of a domestic
corporation not listed or traded through a
local stock exchange, held as capital assets
On net capital gain
Not over P1000005%
Over P10000010%
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IDENTIFY TAX TREATMENT(INTEREST INCOME EXERCISE)
Metrobank Bank of TokyoMr. Juandela Cruz
Mr.PedroPeduko
Capt.JohnSmith
Mr. MoriTanaka
Mr.ShijeruTakeshi
RBU(Peso)
FCDU(Foreign
Currency)
RBU(Peso)
FCDU OBU
BostonBank
ResidentCitizen
Non-ResidentCitizen
ResidentAlien
Non-Resident
AlienEngaged
Non-Resdient
AlienNot
Engaged
DomesticCorporation
Resident Foreign Corporation
Non-Reside
ntForeig
nCorporation
1
InterestIncome
receivedfrom aPesoSavingsAccountin MetroBank
20% FT 20% FT 20% FT 20% FT 25% FT 20% FT 35% FT
2
InterestIncomereceivedfrom aPesoSavings
Accountin Bankof Tokyo
20% FT 20% FT 20% FT 20% FT 25% FT20%FT
35% FT
3
InterestIncomereceivedfrom aPesoSavings
5 - 32% RTexempt(income
w/o)
exempt(income
w/o)
exempt(income
w/o)
exempt(income
w/o)
35%RT
exempt(income w/o)
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greater than the tax computed under Subsection (A) of this Section for the taxable
year.
Carry Forward of Excess Minimum Tax
!
Any excess of the minimum corporate income tax over the normal tax shallbe carried over and credited against the normal tax for the three
immediately succeeding taxable years. In the year to which carried
forward, the normal tax should be higher than the MCIT.
Relief from the Minimum Corporate Income Tax Under Certain Conditions.
! The Secretary of Finance is hereby authorized to suspend the imposition of
the minimum corporate income tax on any corporation which suffers losses
on account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
! The Secretary of Finance is hereby authorized to promulgate, upon
recommendation of the Commissioner, the necessary rules and regulation
that shall define the terms and conditions under which he may suspend
the imposition of the minimum corporate income tax in a meritorious case.
Gross income
! Shall mean gross sales less sales returns, discounts and allowances and
cost of goods sold.
Cost of goods soldshall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.
! For a trading or merchandising concern, "cost of goods sold' shall include
the invoice cost of the goods sold, plus import duties, freight in
transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
! For a manufacturing concern, cost of "goods manufactured and sold" shall
include all costs of production of finished goods, such as raw materialsused, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the
factory or warehouse.
! In the case of taxpayers engaged in the sale of service, 'gross income' means
gross receipts less sales returns, allowances, discounts and cost of services.
! Cost of servicesshall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients
including
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o Salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and
o Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, "cost of services"shall include interest expense.
Residentforeigncorporations
Gross income 2% Under the same conditions
Non-residentforeigncorporations
Exempt
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)Tax base Tax Rate Notes
Improperly accumulated
earnings
10% The improperly accumulated earnings tax imposed in the preceding Section shall
apply to every corporation formed or availed for the purpose of avoiding the incometax with respect to its shareholders or the shareholders of any other corporation, by
permitting earnings and profits to accumulate instead of being divided or
distributed.
Exceptions
a. Publicly-held corporations;
b. Banks and other nonbank financial intermediaries; and
c. Insurance companies.
Evidence of purpose to avoid incomec tax
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company
or investment company shall be prima facie evidence of a purpose to avoid the tax
upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of acorporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.
Improperly Accumulated Taxable Income means taxable income adjusted by:
(1) Income exempt from tax;
(2) Income excluded from gross income;
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(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.
Provided, however, That for corporations using the calendar year basis, the
accumulated earnings under tax shall not apply on improperly accumulated income
as of December 31, 1997. In the case of corporations adopting the fiscal year
accounting period, the improperly accumulated income not subject to this tax, shall
be reckoned, as of the end of the month comprising the twelve (12)-month period of
fiscal year 1997-1998.
Taxable income for the year
Add: income exempt from taxes
Exclusions
Income subject to final taxNOLCO (net operating loss carry-over)
Deduct: income tax for the year
Dividends paid
Reserves
Inappropriate accumulated earnings
Pxxx
xxx
xxxxxx
Pxxx
xxx
xxx
P xxx
xxx
xxx
Pxxx
RESIDENT FOREIGN CORPORATIONS
NV REEDERIT AMSTERDAM V. COMMISSIONER162 SCRA 487
FACTS:
HELD:
BRANCH PROFIT REMITTANCE TAX
MARUBENI CORPORATION V. COMMISSIONER177 SCRA 500
FACTS:
HELD:
BANK OF AMERICA NT AND SA V. CA AND CIR
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234 SCRA 302
FACTS:
HELD:
COMPANIA GENERAL DE TABACOS V. CTACTA 4451, AUGUST 23, 1993
FACTS:
HELD:
NON-RESIDENT FOREIGN CORPORATION
COMMISSIONER V. PROCTER AND GAMBLE160 SCRA 560, 204 SCRA 377
FACTS:
HELD:
COMMISSIONER V. WANDER PHILS.160 SCRA 573
FACTS:
HELD:
MARUBENI CORPORATION V. COMMISSIONER177 SCRA 500
FACTS:
HELD:
IMPROPERLY ACCUMULATED EARNINGS TAX
MANILA WINE MERCHANTS V. CIR127 SCRA 483
FACTS:
HELD:
CIR V. TUASON JR.173 SCRA 397FACTS:
HELD:
CYANAMID V. CA322 SCRA 639
FACTS:
HELD:
CHAPTER 4
INCOME
TAXABLE INCOME! The pertinent 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.
! Section 36-38, Regulations 2
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o The retiring official or employees must be in the service
of the employer for at least 10 years and isnt less than
50 years of age at the time of retirement
o The retiring official or employee shouldn't have
previously availed of the privilege under the retirement
benefit plan of another employer
Fixed or Variable Transportation, Representation, and otherAllowances
! In general, is subject to withholding, provided however, that
representation and transportation allowance granted to public
officers and employees under the General Appropriations Act
and the Personal Economic Relief Allowance which essentially
constitute reimbursement for expenses incurred in the
performance of government personnels official duties shall not
be subject to income tax and consequently to withholding tax
o Provided further that Additional Compensation
Allowance given to government personnel shall not besubject to withholding tax pending its formal
integration into the basic pay
o Consequently, and effective for the taxable year 2000,
ACA shall be classified as part of the other benefits
under the Tax Code which are excluded from gross
compensation income provided the total amount of such
benefits doesn't exceed P30000
! Any amount paid specifically either as advances or
reimbursements for traveling, representation, and other bona
fide ordinary and necessary expenses incurred or reasonably
expected to be incurred by the employee in the performance of
his duties are not compensations subject to withholding, if the
following conditions are meto It is for ordinary and necessary traveling and
representation and entertainment expenses paid or
incurred by the employee in the pursuit of the trade,
business, or profession
o The employee is required to account/liquidate for the
foregoing expenses in
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