CIR v Solidbank Corporation (G.R. No. 148191)

Facts:Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v Commissioner, that the 20% FWT should not form part of its taxable gross receipts for purposes of computing the tax.

Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax credit. It also filed a petition for review with the CTA where the it ordered the refund.

The CA ruling, however, stated that the 20% FWT did not form part of the taxable gross receipts because the FWT was not actually received by the bank but was directly remitted to the government.

The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax. Solidbank says the CA ruling is correct.

Issue:Whether or not the FWT forms part of the gross receipts tax.

Held:Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a

separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized.

The Court  applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established.  The withholding process is one such act.  There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed.

 In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt.

The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon “receipt”, although it claims that it derives no pecuniary benefit or advantage through the withholding process.

There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed.

CIR vs. MARUBENI

11FEB

GR No. 137377| J. Puno

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income, branch profit remittance and contractor’s taxes from Marubeni Corp after finding the latter to have properly availed of the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly registered in the Philippines with Manila branch office. CIR examined the Manila branch’s books of accounts for fiscal year ending March 1985, and found that respondent had undeclared income from contracts with NDC and Philphos for construction of a wharf/port complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter

from CIR assessing it for several deficiency taxes. CIR claims that the income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit remittance and contractor’s tax assessments and second questioned the deficiency commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed on appeal.

 

Issue:

W/N Marubeni is exempted from paying tax

 

Held:

Yes.

1. On date of effectivity 

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx b)  Those with income tax cases already filed in Court as of the effectivity hereof;”

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already been filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been made before and as of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986. When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus, not disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s availment of the amnesty under EO 64, which expanded EO 41’s coverage. When EO 64

took effect on Nov 17, 1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this amendatory Executive Order shall remain in full force and effect.”

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general rule is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation 

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax because the income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It claims all materials and equipment in the contract under the “Offshore Portion” were manufactured and completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by supplier’s

credit. The Japanese Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly, respondent’s entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor’s tax (a tax on the exercise of a privilege of selling services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside Philippines’ taxing jurisdiction and are therefore not subject to contractor’s tax. Petition denied.

CHAMBER OF REAL ESTATE AND BUILDERS’ ASSOCIATION, INC. VS. EXECUTIVE SECRETARY- MINIMUM CORPORATE INCOME TAX

FACTS:CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of the due process clause as it levies income tax even if there is no realized gain. They also question the creditable withholding tax (CWT) on sales of real properties classified as ordinary assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2) the use of gross selling price or fair market value as basis for the CWT and the collection of tax on a per transaction basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real properties; (3) the government collects income tax even when the net income has not yet been determined; and (4) the CWT is being levied upon real estate enterprises but not on other enterprises, more particularly those in the manufacturing sector.

ISSUE:Are the impositions of the MCIT on domestic corporations and    CWT on income from sales of real properties classified as    ordinary assets unconstitutional?

HELD:NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Besides, there are sufficient safeguards that exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can suspend the imposition of MCIT in

justifiable instances.The regulations on CWT did not shift the tax base of a real estate business’ income tax from net income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance tax payments and they are thus just installments on the annual tax which may be due at the end of the taxable year. As such the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income and the use of the GSP or FMV is because these are the only factors reasonably known to the buyer in connection with the performance of the duties as a withholding agent.Neither is there violation of equal protection even if the CWT is levied only on the real industry as the real estate industry is, by itself, a class on its own and can be validly treated different from other businesses.

CIR VS PROCTER AND GAMBLE PHILIPPINE MANUFACTURING CORPORATION (204 SCRA 377)

DetailsCategory: Income Taxation

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder

corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points

FACTS:

Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%.

MAIN ISSUE:

Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:

YES. P&G Philippines is entitled.Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be

applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF  he country of domicile of the foreign stockholder corporation “shall allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

NOTES: Breakdown:

a) Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic corporation (owning 10% of remitting foreign corporation) shall be deemed to have paid a proportionate extent of taxes paid by such foreign corporation upon its remittance of dividends to domestic corporation.

b) 20 percentage points requirement: (computation is as follows)P 100.00 -- corporate income earned by P&G Philsx 35% -- Philippine income tax rateP 35.00 -- paid by P&G Phil as corporate income tax

P 100.00- 35.0065. 00 -- available for remittance

P 65. 00x 35% -- Regular Philippine dividend tax rateP 22.75 -- regular dividend tax

P 65.0ox 15% -- Reduced dividend tax rateP 9.75 -- reduced dividend tax

P 65.00 -- dividends remittable- 9.75 -- dividend tax withheld at reduced rateP 55.25 -- dividends actually remitted to P&G USA

Dividends actuallyremitted by P&G Phil = P 55.25---------------------------------- ------------- x P35 = P29.75Amount of accumulated P 65.00profits earned

P35 is the income tax paid.P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil corporate income tax ‘deemed paid’ by the parent company. Since P29.75 is much higher than P13, Sec 902 US Tax Code complies with the requirements of sec 24 NIRC. (I did not understand why these were divided and multiplied. Point is, requirements were met)

Reason behind the law:

Since the US Congress desires to avoid or reduce double taxation of the same income stream, it allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by

P&G Philippines but “deemed paid” by P&G USA.

Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,” the Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of  he gross amount of dividends paid to US parent corporations, and established a treaty obligation on the part of the United States that it “shall allow” to a US parent corporation receiving dividends from its  Philippine subsidiary “a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary].

Note:The NIRC does not require that the US tax law deem the parent corporation to have paid the 20 percentage points of dividend tax waived by the Philippines. It only requires that the US “shall allow” P&G-USA a “deemed paid” tax credit in an amount equivalent to the 20 percentage points waived by the Philippines. Section 24(b)(1) does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

Section 24(b)(1) of the NIRC seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation by allowing the investor additional tax

credits which would be applicable against the tax payable to such home country. Accordingly Section 24(b)(1) of the NIRC requires the home or domiciliary country to give the investor corporation a “deemed paid” tax credit at least equal in amount to the 20 percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR- SURTAX

DetailsCategory: Income Taxation

In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts.

Facts:

Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is

engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits were retained to increase petitioner’s working capital and it would be used for reasonable business needs of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioner’s purpose did not fall within such purposes. It found that there was no need to set aside such retained earnings as working capital as it had considerable liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTA’s decision.

Issue: Whether or not the accumulation of

income was justified.

Held:

In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the “Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The Tax Court opted to determine

the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioner’s failure to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.

CIR V. CA AND YMCA (TAX)

YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational, and charitable objectives.

In 1980, YMCA earned, among others, an income from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and income form parking collected from non-members.

In 1985, CIR issued an assessment to YMCA, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency withholding tax on wages. YMCA formally protested the assessment , which CIR denied.

Issue: Is the income derived from rentals of real property owned by YMCA - established as welfare, educational, and charitable non-profit corporation -

subject to income tax under the NIRC and the Constitution?

Petitioner argued that while the income received by the organizations enumerated in the NIRC is, as a rule, exempt from payment of tax, in respect to income received by them as such, the exemption does not apply to income derived from any of its properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income.

Petitioner adds that rented income derived by a tax-exempt organization from the lease of its properties, real or personal, is not therefore exempt from income taxation, even if such income is exclusively used for the accomplishment of its objectives.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.

Doctrine:- Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt from income taxation, even if such income is exclusively used for the accomplishment of its objectives.

- A claim of statutory exemption from taxation should be

manifest and unmistakable from the language of the law on which it is based. Thus, it must expressly be granted in a statute stated in a language too clear to be mistaken. Verba legis non est recedendum — where the law does not distinguish, neither should we.

- The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. It must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes.

- The Court cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation. The Court, given its limited constitutional authority, cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government.

COMMISIONER OF INTERNAL REVENUE VS. S.C. JOHNSON AND SON, INC.,July 11, 2009, 11:16 pm Filed under: PUBLIC INTL'L LAW, TreatyFacts:

          S.C. JOHNSON AND SON, INC., a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark,

patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A.

          The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064.For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00

          On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, “the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]” (Petition for Review [filed with the Court of Appeals]

The RP-US Tax Treaty states that:

1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may

be taxed by both Contracting States.

2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

          (i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State.

The RP-Germany Tax Treaty provides:

(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed:

b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

          For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the

Philippine competent authorities.

          The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA).The Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993.2

          The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision finding no merit in the petition and affirming in toto the CTA ruling.

Thus, this petition.

Issue:

          Whether the Court of Appeals erred in ruling that SC Johnson and Son, USA is entitled to the “Most Favored Nation” Tax rate of 10% on Royalties as provide in the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty?

 

Ruling:.

          Under Article 24 of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross

amount of such royalty. To illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the “matching credit” is to soften the impact of double taxation by different jurisdictions.

          The RP-US Tax Treaty contains no similar “matching credit” as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the “most favored nation” clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty.5

          The rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

          The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24

of the RP-Germany Tax Treaty expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid.

          Since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

 PLDT vs. CIRGR 157264                  January 31, 2008Carpio Morales;J.:FACTS:              PLDT terminated and compensated affected employees in compliance with labor law requirements. It deducted from separation pay withholding taxes and remitted the same to BIR. In 1997, it filed a claim for tax refund and CTA contended that petitioner failed to show proof of payment of separation pay and remittance of the alleged with held taxes. CA dismissed the same and PLDT^ assailed the decision arguing against the need for proof that the employees received their separation pay and proffers actually received by terminated employees.ISSUE:              Whether or not the withholding taxes remitted to the

BIR should be refunded for having been erroneously withheld and paid to the latter.RULING:              Tax refunds, like tax exemptions, are considered strictly against the taxpayer and liberally in favor of the taxing authority, and the taxpayer bears the burden of establishing the factual basis of his claim for a refund.              A taxpayer must do two things to be able to successfully make a claim for tax refund: a) declare the income payments it received as part of its gross income and b) establish the fact of withholding.              At all events, the alleged newly discovered evidence that PLDT seeks to offer does not suffice to established its claim for refund as it would still have to comply with Revenue Regulation 6-85 by proving that the redundant employees on whose behalf it filed the claim for refund, declared the separation pay received as part of their gross income. The same Revenue Regulation required that the facts of withholding is established by a copy of the statement duly issued by the payor to the payee showing the amount paid and the amount of tax withhold therefrom.

Atlas Consolidated vs. CIRATLAS CONSOLIDATED MINING DEVT CORP vs. CIR524 SCRA 73, 103GR Nos. 141104 & 148763, June 8, 2007

"The taxpayer must justify his claim for tax exemption or refund by the clearest grant of organic or statute law and should not be permitted to stand on vague implications."

"Export processing zones (EPZA) are effectively considered as foreign territory for tax purposes."

FACTS:  Petitioner corporation, a VAT-registered taxpayer engaged in mining, production, and sale of various mineral products, filed claims with the BIR for refund/credit of input VAT on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992. BIR did not immediately act on the matter prompting the petitioner to file a petition for review before the CTA. The latter denied the claims on the grounds that for zero-rating to apply, 70% of the company's sales must consists of exports, that the same were not filed within the 2-year prescriptive period (the claim for 1992 quarterly returns were judicially filed only on April 20, 1994), and that petitioner failed to submit substantial evidence to support its claim for refund/credit.    The petitioner, on the other hand, contends that CTA failed to consider the following: sales to PASAR and PHILPOS within the EPZA as zero-rated export sales; the 2-year prescriptive period should be counted from the date of filing of the last adjustment return which was April 15, 1993, and not on every end of the applicable quarters; and that the certification of the independent CPA attesting to the correctness of the contents of the summary of suppliers’ invoices or receipts examined, evaluated and audited by said CPA should substantiate its claims. 

ISSUE: Did the petitioner corporation sufficiently establish the factual bases for its applications for refund/credit of input VAT?

HELD:  No. Although the Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to PASAR and PHILPOS inside the EPZA are taxed as exports because these export processing zones are to be managed as a separate customs territory from the rest of the Philippines, and thus, for tax purposes, are effectively considered as foreign territory, it still denies the

claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales during the period claimed for not being established and substantiated by appropriate and sufficient evidence.     Tax refunds are in the nature of tax exemptions.  It is regarded as in derogation of the sovereign authority, and should be construed in strictissimi juris against the person or entity claiming the exemption.  The taxpayer who claims for exemption must justify his claim by the clearest grant of organic or statute law and should not be permitted to stand on vague implications.

Aguinaldo Industries Co. vs. CIRPost under case digests, Taxation at Sunday, February 19, 2012 Posted by Schizophrenic MindFacts: Aguinaldo Industries is engaged in the manufacture of fishing nets (a tax exempt industry), which is handled by its Fish Nets Division. It is also engaged in the manufacture of furniture which is operated by its Furniture Division. Each division is provided with separate books of accounts. The income from the Fish Nets Division, miscellaneous income of the Fish Nets Division, and and the income from the Furniture Division are computed individually. 

Petitioner acquired a parcel of land in Muntinlupa Rizal as site for its fishing net factory. The transaction was entered in the books of the Fish Nets Division. The company then found another parcel of land in Marikina Heights, which was more suitable. They then sold the Muntinlupa property and the profit derived from the sale was entered in the books of the Fish Nets Division as miscellaneous income to separate it from its tax exempt income. 

For 1957, petitioner filed 2 separate ITRs (one for Fish Nets and one for Furniture). After investigation, BIR examiners found that the Fish Nets Div deducted from its gross income PhP 61k as additional remuneration paid to the company’s officers. Such amount was taken from the sale of the land and was reported as part of the selling expenses. The examiners recommended that such deduction be disallowed. Petitioner then asserted in its letter that it should be allowed because it was paid as bonus to its officers pursuant to Sec.3 of its by-laws: “From the net profits shall be deducted for allowance of the Pres. - 3%, VP - 1%, members of the Board - 10%.” 

CTA imposed a 5% surcharge and 1% monthly interest for the deficiency assessment. Petitioner then stressed that the profit derived from the sale of the land is not taxable because the Fish Nets Div enjoys tax exemption under RA 901. 

Issues: (1) Whether the bonus given to the officers of the petitioner upon the sale of its Muntinlupa land is an ordinary and necessary business expense deductible for income tax purposes; and (2) Whether petitioner is liable for surcharge and interest for late payment. 

Held: (1) YES. These extraordinary and unusual amounts paid by petitioner to these directors in the guise and form of compensation for their supposed services as such, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of the law. This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its

claimed deductions clearly come within the language of the law since allowances, like exemptions, are matters of legislative grace. 

Moreover, petitioner cannot now claim that the profit from the sale is tax exempt. At the administrative level, the petitioner implicitly admitted that the profit it derived from the sale of its Muntinlupa land, a capital asset, was a taxable gain — which was precisely the reason why for tax purposes the petitioner deducted therefrom the questioned bonus to its corporate officers as a supposed item of expense incurred for the sale of the said land, apart from the P51,723.72 commission paid by the petitioner to the real estate agent who indeed effected the sale. The BIR therefore had no occasion to pass upon the issue. 

To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the court — which is supposed to review administrative determinations — would not review, but determine and decide for the first time, a question not raised at the administrative forum. The requirement of prior exhaustion of administrative remedies gives administrative authorities the prior opportunity to decide controversies within its competence, and in much the same way that, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal. Up to the time the questioned decision of the respondent Court was rendered, the petitioner had always implicitly admitted that the disputed capital gain was taxable, although subject to the deduction of the bonus paid to its corporate officers. It was only after the said decision had been rendered and on a motion for reconsideration thereof, that the issue of tax exemption was raised by the petitioner for the first time. It was thus not one

of the issues raised by petitioner in his petition and supporting memorandum in the CTA. 

(2) YES. Interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on the date fixed in the law for the payment thereof, which was, under the unamended Section 51 of the Tax Code, the 15th day of the 5th month following the close of the fiscal year in the case of taxpayers whose tax returns were made on the basis of fiscal years. A deficiency tax indicates non-payment of the correct tax, and such deficiency exists not only from the assessment thereof but from the very time the taxpayer failed to pay the correct amount of tax when it should have been paid and the imposition thereof is mandatory even in the absence of fraud or willful failure to pay the tax is full.

CIR vs. Isabela Cultural CorporationPost under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic MindFacts: Isabela Cultural Corporation (ICC), a domestic corporation received an assessment notice for deficiency income tax and expanded withholding tax from BIR. It arose from the disallowance of ICC’s claimed expense for professional and security services paid by ICC; as well as the alleged understatement of interest income on the three promissory notes due from Realty Investment Inc. The deficiency expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-withholding tax on its claimed deduction for security services. 

ICC sought a reconsideration of the assessments. Having received a final notice of assessment, it brought the case to CTA, which held that it is unappealable, since the final notice

is not a decision. CTA’s ruling was reversed by CA, which was sustained by SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled that the deductions for professional and security services were properly claimed, it said that even if services were rendered in 1984 or 1985, the amount is not yet determined at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR which overstate the interest income, when it applied compounding absent any stipulation. 

Petitioner appealed to CA, which affirmed CTA, hence the petition. 

Issue: Whether or not the expenses for professional and security services are deductible. 

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses is that it must have been paid or incurred during the taxable year. This requisite is dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using the accrual method of accounting. Hence, under this method, an expense is recognized when it is incurred. Under a Revenue Audit Memorandum, when the method of accounting is accrual, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed in the succeeding year. 

The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability of the reasonable accurate determination of such income or liability. The test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at its disposal the information necessary to compute the

amount with reasonable accuracy. 

From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm. They cannot give as an excuse the delayed billing, since it could have inquired into the amount of their obligation and reasonably determine the amount. 

Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9, July 7, 1989)Post under case digests, Taxation at Saturday, March 10, 2012 Posted by Schizophrenic MindFacts: In CTA Case No. 1251, Esso Standard Eastern Inc. (Esso) deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the Commissioner of Internal Revenue (CIR) on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. Esso then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. 

On August 5, 1964, the CIR granted a tax credit of

P221,033.00 only, disallowing the claimed deduction for the margin fees paid on the ground that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. 

Esso appealed to the Court of Tax Appeals (CTA) for the refund of the margin fees it had earlier paid contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. However, Esso’s appeal was denied. 

Issues: (1) Whether or not the margin fees are taxes. 

(2) Whether or not the margin fees are necessary and ordinary business expenses. 

Held: (1) No. A tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. The margin fee was imposed by the State in the exercise of its police power and not the power of taxation. 

(2) No. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Since the margin fees in question were incurred for the remittance of funds to Esso's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of Esso's business in the

Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of Esso's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Esso in New York, but certainly not in the Philippines. 

For an item to be deductible as a business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under law, otherwise, the same will be disallowed.

For an item to be deductible as a business expense, the expense must be ordinary and necessary; it must be paid or incurred within the taxable year; and it must be paid or incurred in carrying on a trade or business. In addition, the taxpayer must substantially prove by evidence or records the deductions claimed under law, otherwise, the same will be disallowed. There has been no attempt to define “ordinary and necessary” with precision. However, as guiding principle in the proper adjudication of conflicting claims, an expenses is considered necessary where the expenditure is appropriate and helpful in the development of the taxpayer’s business. It is ordinary when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer’s business; the expenditure, to be an allowable deduction as a business

expense, must be determined from the nature of the expenditure itself, and on the extent and permanency of the work accomplished by the expenditure. Herein, ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires; which is erroneous. Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations.

CIR vs Lednicky

Principle/s:- Alien resident’s deduction of Income Taxation from Gross Income paid in their home country- Double Taxation

Commissioner of Internal Revenue vs W.E. Lednicky and Maria Lednicky

GR Nos. L-18262 and L-21434, 1964

FACTS:Spouses are both American citizens residing in the Philippines and have derived all their income from Philippine sources for taxable years in question.

On March, 1957, filed their ITR for 1956, reporting gross income of P1,017,287.65 and a net income of P 733,809.44. On March 1959, file an amended claimed deduction of P 205,939.24 paid in 1956 to the United States government

as federal income tax of 1956.

ISSUE:Whether a citizen of the United States residing in the Philippines, who derives wholly from sources within the Philippines, may deduct his gross income from the income taxes he has paid to the United States government for the said taxable year?

HELD:An alien resident who derives income wholly from sources within the Philippines may not deduct from gross income the income taxes he paid to his home country for the taxable year. The right to deduct foreign income taxes paid given only where alternative right to tax credit exists.

Section 30 of the NIRC, Gross Income “Par. C (3): Credits against tax per taxes of foreign countries.

If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this shall be credited with: Paragraph (B), Alien resident of the Philippines; and, Paragraph C (4), Limitation on credit.”

An alien resident not entitled to tax credit for foreign income taxes paid when his income is derived wholly from sources within the Philippines.

Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity. In the present case, although the taxpayer would have to pay two taxes on the same income but the Philippine government only receives the proceeds of

one tax, there is no obnoxious double taxation.

COMMON ISSUE: WON a citizen of the US residing in Phils who derives income wholly from sources within the Phils may deduct from his gross income the income taxes he has paid to US gov’t for the taxable year?HELD/RATIO:

SC: CIR correct that the construction and wording of Sec. 30c(1)B of the Internal Revenue Act shows the law’s intent that the right to deduct income taxes paid to foreign government from the taxpayer’s gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxeso (B) – Income, war-profits, and excess profits taxes

imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have any extent the benefits of paragraph (3) of this subsection (relating to credit for foreign countries)

So that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income.

For it is obvious that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have any extent benefits of paragraph 3, the statute assumes that the taxpayer in question may signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be deductible and their mention in the list on non-deductible items in Sec. 30c might as well have been

omitted or at least expressly limited to taxes on income from sources outside the Philippine Islands

Had the law intended that foreign income taxes could be deducted from gross income in any event, regardless of the taxpayer’s right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayer’s waiving the deduction

No danger of double credit/taxation.o Double taxation becomes obnoxious only where the

taxpayer is taxed twice for the benefit of the same governmental entity

o The Philippine government only receives the proceeds of one tax

o Justice and equity demand that the tax on the income should accrue to the benefit of the Philippines

o Any relief from the alleged double taxation should come from the US since the former’s right to burden the taxpayer is solely predicated in is citizenship, without contributing to the production of wealth that is being taxed

o To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter the power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident.

CIR V GENERAL FOODS

14FEB

GR No. 143672| April 24, 2003 | J. Corona

 Test of Reasonableness

 

Facts:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction, among other business expenses, P9,461,246 for media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA dismissing the company’s appeal.

 

Issue:

W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible under the NIRC

 

Held:

No. Tax exemptions must be construed in stricissimi juris against the taxpayer and liberally in favor of the taxing authority, and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.

To be deductible from gross income, the subject advertising expense must comply with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.

While the subject advertising expense was paid or incurred within the corresponding taxable year and was incurred in carrying on a trade or business, hence necessary, the parties’  views conflict as to whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred and second, the amount incurred must not be a capital outlay to create “goodwill” for the

product and/or private respondent’s business. Otherwise, the expense must be considered a capital expenditure to be spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other factors and properly weighed, that will yield a proper evaluation.

The Court finds the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2) advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then, except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business

expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year under review. Petition granted, judgment reversed and set aside.

Philex Mining Corporation vs. CIR [G.R. No. 148187 (April 16, 2008)]Post under case digests, Civil Law at Tuesday, February 21, 2012 Posted by Schizophrenic MindFacts: Petitioner Philex entered into an agreement with Baguio Gold Mining Corporation for the former to manage the latter’s mining claim know as the Sto. Mine. The parties’ agreement was denominated as “Power of Attorney”. The mine suffered continuing losses over the years, which resulted in petitioners’ withdrawal as manager of the mine. The parties executed a “Compromise Dation in Payment”, wherein the debt of Baguio amounted to Php. 112,136,000.00. Petitioner deducted said amount from its gross income in its annual tax income return as “loss on the settlement of receivables from Baguio Gold against reserves and allowances”. BIR disallowed the amount as deduction for bad debt. Petitioner claims that it entered a contract of agency evidenced by the “power of attorney” executed by them and the advances made by petitioners is in the nature of a loan and thus can be deducted from its gross income. Court of Tax Appeals (CTA) rejected the claim and held that

it is a partnership rather than an agency. CA affirmed CTA 

Issue: Whether or not it is an agency. 

Held: No. The lower courts correctly held that the “Power of Attorney” (PA) is the instrument material that is material in determining the true nature of the business relationship between petitioner and Baguio. An examination of the said PA reveals that a partnership or joint venture was indeed intended by the parties. While a corporation like the petitioner cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture, which is akin to a particular partnership. The PA indicates that the parties had intended to create a PAT and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by the 50-50 sharing of income of the mine. 

Moreover, in an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it or the mutual interest of both principal and agent. In this case the non-revocation or non-withdrawal under the PA applies to the advances made by the petitioner who is the agent and not the principal under the contract. Thus, it cannot be inferred from the stipulation that it is an agency.

THURSDAY, APRIL 23, 2009BASILAN ESTATES V. CIR AND CTA (TAX)

The first question for resolution is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets.

DEPRECIATION is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the value of intangible assets, the use of which in the trade or business is definitely limited in duration. Depreciation commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. Accordingly, the law permits the taxpayer to recover gradually his capital investment in wasting assets free from income tax.

Precisely, Section 30 (f)(1) states:

In general - a reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, that when the allowance authorized under this subsection shall equal the capital invested by the taxpayer... no further allowance shall be made...

...allows deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated.

The income tax law does not authorize the depreciation of an asset beyond its acquisition cost.

Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law.

Moreover, the recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. for then what the taxpayer would recover will be, not only the acquisition cost but also some profit. Recovery in due time thru depreciation on investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.

Accordingly, the claim for depreciation has no justification in the law. The determination therefore, of the Commissioner disallowing said amount, affirmed by the CTA is sustained.

The second question for resolution is whether the miscellaneous expenses and officer's travelling expenses are allowable expenses as the same could not be supported by appropriate papers.

On this ground, the petitioner may be sustained for under Section 337 of the Tax Code, receipts and papers supporting such expenses need be kept by the taxpayer for a period of 5 years from the last entry. At the time of the investigation, said 5 years

have lapsed. Taxpayer's stand on this issue is therefore sustained.

The third question is on the unreasonably accumulated profits.

Section 25 of the Tax Code which imposes a surtax on profits unreasonably accumulated provides:

Sec. 25. Additional tax on corporations improperly accumulating profits or surplus - (a) Imposition of tax. - If any corporation, except banks, insurance companies, or personal holding companies, domestic or foreign, is formed or availed of for the purpose of preventing imposition of tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to 25% of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section 24, and shall be computed, collected, and paid in the same manner and subject to the same provisions of law, including penalties, as that tax.

Petitioner failed to provide sufficient explanation. In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time of the accumulation, not subsequently declared intentions which are merely the products of

afterthought. As correctly held by the CTA, while certain expenses of the corporation were credited against large amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation or surplus beyond the needs of the business.

SILVERIO v. REPUBLIC

July 14, 2012 § Leave a Comment

Silverio v. Republic

October 22, 2007 (GR. No. 174689)

 

PARTIES:

petitioner: Rommel Jacinto Dantes Silverio

respondent: Republic of the Philippines

FACTS:

On November 26, 2002, Silverio field a petition for the change of his first name “Rommel Jacinto” to

“Mely” and his sex from male to female in his birth certificate in the RTC of Manila, Branch 8, for reason of his sex reassignment. He alleged that he is a male transsexual, he is anatomically male but thinks and acts like a female. The Regional Trial Court ruled in favor of him, explaining that it is consonance with the principle of justice and equality.

The Republic, through the OSG, filed a petition for certiorari in the Court of Appeals alleging that there is no law allowing change of name by reason of sex alteration. Petitioner filed a reconsideration but was denied. Hence, this petition.

ISSUE:

WON change in name and sex in birth certificate are allowed by reason of sex reassignment.

HELD:

No. A change of name is a privilege and not a right. It may be allowed in cases where the name is ridiculous, tainted with dishonor, or difficult to pronounce or write; a nickname is habitually used; or if the change will avoid confusion. The petitioner’s basis of the change of his name is that he intends his first name compatible with the sex he thought he transformed himself into thru surgery. The Court says that his true name does not prejudice him at all, and no law allows the change of entry in the birth certificate as to sex on the ground of sex reassignment. The Court denied the petition.

Philam Asset Management, Inc. vs CTA G.R.156637 and 162004; December 14, 2005

Facts: Petitioner acts as investment manager of PFI &PBFI. It provides management &technical services and thus respectively paid for it’s services. PFI & PBFI withhold the amount of equivalent to 5% creditable tax regulation. On April 3, 1998, filed ITR with a net loss thus incurred withholding tax. Petitioner filed for refund from BIR but was unanswered . CTA denied the petition for review. CA held that to request for either a refund or credit of income tax paid, a corporation must signify it’s intention by marking the corresponding box on it’s annual corporate adjustment return.

Issue: Whether or not petitioner is entitled to a refund of it’s creditible taxes.

Ruling: Any tax income that is paid in excess of it’s amount due to the government may be refunded, provided that a taxpayer properly applies for the refund. One can not get a tax refund and a tax credit at the same time for the same excess to income taxes paid. Failure to signify one’s intention in Final Assessment Return (FAR) does not mean outright barring of a valid request for a refund

Requiring that the ITR on the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis in law and jurisprudence. The Tax Code likewise allows the refund of taxes to taxpayer that claims it in writing within 2 years after payment of the taxes. Technicalities and legalism should not be misused by the government to keep money not belonging to it,

and thereby enriched itself at the expense of it’s law-abiding citizens.

DELPHER TRADES CORPORATION vs. IACG.R. No. L-69259 January 26, 1988

Facts:

Delfin Pacheco and sister Pelagia were the owners of a parcel of land in Polo (now Valenzuela). On April 3, 1974, they leased to Construction Components International Inc. the property and providing for a right of first refusal should it decide to buy the said property.

Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of Delfin and Pelagia. In 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the Pachecos conveyed to the latter the leased property together with another parcel of land also located in Malinta Estate, Valenzuela for 2,500 shares of stock of defendant corporation with a total value of P1.5M.

On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of the lot.Trivia lang: Delpher Trades Corp is owned by the Pacheco Family, managed by the sons and daughters of Delfin and Pelagia. Their primary defense is that there

is no transfer of ownership because the Pachecos remained in control of the original co-owners. The transfer of ownership, if anything, was merely in form but not in substance.

Issue:

WON the Deed of Exchange of the properties executed by the Pachecos and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the Hydro Phil’s right of first refusal over the leased property included in the “deed of exchange”? NO

Held:

By their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

The “Deed of Exchange” of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.

CAVEAT: The case has not fully explained the difference between sale and barter. So here is a foreign decision.